Can you explain the distinction between a Contract for Sale and a Purchase Contract?  Stumped already?  Then you should read this article!  You should know what these documents are and the differences between them.  It’s not difficult.  Not only that, you will sound smart and feel good if you can knowledgeably discuss these documents.  So, read on.

First, let’s answer the question.  A Purchase Contract is like the document real estate agents use every day.  For residential property virtually every Realtor® agent uses the Arizona Association of Realtors Residential Resale Real Estate Purchase Agreement.  New home sellers generally have their own custom contracts as do commercial agents.  It is the basic document buyers and sellers use to agree upon the terms of purchase of real estate.  A Contract for Sale accomplishes the same purpose as a Purchase Contract, with the exception that the seller carries back a portion of the selling price.  When recorded a Contract for Sale creates a lien upon the title of the property.  So a Cont5ract for Sale does double duty – it is a both a purchase contract and also is a security document.  So why don’t we use the Contract for Sale more?  You will see if you read on.


You know what a “mortgage” is – right?  It is a legal document that provides the lender of money a secured position in real property.  If the borrower does not pay the obligation (usually memorialized in a promissory note) due the lender, then the lender (mortgagee) can foreclose on the borrower (mortgagor).  In other words the mortgage secures the promise to repay normally contained in the promissory note which the borrower has agreed to pay.  The promise to pay (in the promissory note) is then further “secured” by the recording of the Mortgage on the borrower’s real property.  Deeds of Trusts and Contracts for Sale do exactly the same thing as a mortgage.  They are all “security” documents.  They memorialize the pledge of real property to guarantee that the borrower performs the promise to pay the lender.  If the borrower does not pay the lender the lender can “take” the borrower’s real property which was pledged as security.  Naturally the lender hopes that if there is a default in payments by the borrower that the real property pledged as security is worth enough to pay the balance due on the obligation due the lender.  Are you with me so far?


As you can see the security documents we are discussing all do the same exact thing.  They protect the lender by giving the lender a lien or security in the borrower’s real estate.  Yes, they are the same in that they provide the lender security if there is a default in the lender’s obligation to repay the lender.  However, the similarities end there.  They have substantial differences.  So let’s examine the differences among the three security documents and attempt to determine why and when you would prefer one over the other.


The major distinction among the three documents is how efficiently the lender can get his/her security in the event of a breach of the promises of the borrower.  If the lender uses a mortgage and there is a default the lender must use a judicial foreclosure to get the security.  A judicial foreclosure means that the lender has to file a lawsuit in Superior Court alleging the default.  The borrower can object and file and answer and the matter can be tied up in court for a significant period of time.  Following the end of the lawsuit, assuming the lender is successful; the borrower has six months to redeem the property by bringing all the payments current together with a ten percent (10%) penalty.  So the property could be unavailable to the lender for perhaps eighteen (18) months to two (2) years.  That is not attractive to most lenders.  However, it used to be the primary security document that lender used until the later 1960s.  Then it tied for use with Contracts for Sale.  Then Deeds of Trust became popular for reasons we will discuss.  Contracts for Sale and especially Deeds of Trust provided speedier ways for the lender to obtain the security.  The distinction in the way the lender can obtain the real estate which is the security for the loan affects the decision of the lender as to what security document is best to use.  Knowing those differences will assist you in choosing the best security document to use for a given transaction.


A judicial foreclosure is the most cumbersome and probably the most costly method to use.  As noted, it involves a lawsuit.  That is the primary reason hardly anyone uses a Mortgage as the security document anymore.  While the terms “foreclosure” is the most widely used term for getting property back to the lender, it is the least utilized process for doing so.  The term “foreclosure” is not generally used to generically getting the secured property into the hands of the lender in the event of default by the borrower.  It does not necessarily mean that the lender used a mortgage.  So, if it takes a long time to foreclose a Mortgage and it is expense why would anyone consider using a Mortgage?  The answer is that once the foreclosure is filed then the debtor must pay the lender the entire loan balance or lose the property.  Often the borrower doesn’t have sufficient case to pay off the entire balance and may not have the credit to refinance so the lender will most likely lose the property.  If the borrower has some equity in the property over and above the loan balance a mortgagor may assess the situation and determine it may be better to accelerate the entire balance due the lender causing the borrower to lose the property and the lender may end up with a property worth more than the loan.


If the lender elects to secure the obligation due him or her with a deed of trust then the lender can pursue a foreclosure process (more appropriately referred to as trustee’s sale) without a lawsuit.  The process involves giving the borrowed a ninety (90) day notice during which specific notices must be mailed, posted and published, giving interested parties notice of the proceeding.  During that time the borrower can cure the deficiency by paying the past due amounts owned, plus certain allowable costs up to 5:00 PM of the day before the sale of the secured property is scheduled to occur.  If the borrower can pay up the deficient amount (not the entire unpaid principal balance like with a Mortgage) the borrower’s position is reinstated and the trustee’s sale will be cancelled.  So, while non-judicial foreclosures are much quicker and less expensive than judicial foreclosures, they permit debtors to continually fall behind in their payments, curing their defaults each time that a trustee’s sale is commenced.  However, since additional costs and attorney fees get added to the reinstatement it acts as a deterrent to borrowers letting the loan get into default too many times.  It becomes too costly.  Today, probably ninety nine percent (99%) of all loan transaction on real estate are done with Deeds of Trust.


If the lender utilizes a Contract for Sale he/she has the option to foreclose like with a mortgage (see above) or affect forfeiture so long as the account is placed with a servicing agent (like at an escrow company which services loans).  The remedy for a default by the borrower is known as a forfeiture action.  Forfeiture actions involve providing specific notices to all parties who show an interest in the real property according to the public records.  The time period for completion of a forfeiture action can take anywhere from thirty (30) days to one hundred and eighty (180) days, depending on how much of the purchase price has been paid as of the date of the default.  Thus depending on how much of the loan the borrower has paid off, the time for the borrower can be very short or very long.  If the lender is skittish about the borrower and is afraid (s)he may default right up front it would be good reason to consider using a Contract for Sale.  If the borrower defaults after a considerable time then it will take much longer for the lender to get the property back.  In the interim the borrower can pay up the deficiency and continue with the Contract for Sale.


Unlike Mortgages and Deeds of Trust, with Contracts for Sale, title does not pass to the purchaser until all amounts owed have been paid in full.  There is often confusion associated with this fact.  People believe they like the Contract for Sale since, unlike with Mortgages and Deeds of Trust, when the loan is being made at the time of acquisition of the real property, title does not pass to the buyer until the entire obligation is paid in full.  That is a mere technicality today and it does not have any particular benefit.  Today the Contract for Sale is only a security document just like a Mortgage or deed of Trust.  With a Contract for Sale the agreement of the lender and borrower are spelled out in the security document whereas with a Deed of Trust and Mortgage there is a promissory note separate from the security document.

The other area of confusion is that those unfamiliar with Contract for Sale often confuse the terminology of a Contract for Sale versus a purchase contract.  As noted above a purchase contract is just that – it is used to memorialize the terms of agreement between a buyer and seller whereas the Contract for Sale can include both the element of being a purchase agreement as well as a security document all in one document.


So now you know all about the similarities and differences in Mortgages, Deeds of Trust and Contracts for Sale.  Now that you know all about these security documents you can see that it is not that difficult to understand the similarities and differences.

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Transferring Rental Property to an LLC

Attorneys typically recommend that investors hold rental properties in limited liability companies.  A limited liability company (“LLC”), maintained properly as a separate entity, limits the investor’s liability to the assets held in the LLC and protects other assets, such as the investor’s own home and savings.  For example, if a tenant’s guest slips and falls in the rental property, the guest’s personal injury attorney will sue the homeowner along with the tenant.  The primary protection is homeowner’s insurance, which, for a rental property, the owner must advise the insurance company that it is a rental or coverage may be denied.  If the insurance policy denies coverage or the coverage is insufficient, the investor may face liability.  However, if the owner is an LLC, the liability is limited to the assets owned by the LLC.  That is also the reason it is recommended that each rental property be held in a separate LLC, so that liability arising from one property does not impact the investor’s equity in other properties.

While generally there are no tax benefits to holding the rental property as an LLC over direct ownership, there are tax benefits to holding property as an LLC rather than a corporation, as any income can be passed through to the owners and not subject to corporate taxes, thereby eliminating double taxation.

However, most home loans are packaged and sold to Fannie Mae (Federal National Mortgage Association) or Freddie Mac (Federal Home Loan Mortgage Corporation), which together create the secondary market for home loans to provide local banks with more money to lend to homeowners.  Fannie Mae and Freddie Mac are targeted for homeowners rather than investors.  Fannie Mae requires a borrower to be a natural person or revocable trust with a beneficiary who is an individual.  Freddie Mac also prohibits refinancing a property that has been held in an LLC for the past six months.  If a lender cannot package and sell the conventional residential loan to Fannie Mae or Freddie Mac, the loan is less desirable to the lender.  Thus, commercial loans generally have higher interest rates and tougher terms.

So, when a homeowner moves and chooses to rent rather than sell and wants to transfer the now-rental property to an LLC, can they do it?  Can an investor purchase a rental home as an individual (with lower rates and better terms than for a commercial loan) and then transfer the property to an LLC?  The answer to both questions is, if the property is encumbered by a conventional residential loan, the investor does so at his own risk.  The terms of the loans specify that the loan is due on sale and a transfer to an LLC may trigger the due on sale clause.  In reality, many, many investors do it anyway and figure that, as long as they keep up the payments, the lender will not call the loan.  Still, it can happen.  The loan servicing company picks up changes in title that result in changes to the homeowner’s insurance policy. Thus, if the investor updates the insurance policy to protect the coverage, the loan servicing company may see the change in title and call the loan due.  Some investors take the risk anyway and figure, if the lender questions the transfer, the investor can transfer the property back to himself as an individual.  Actually, the lender may consider that a second transfer in violation of the due on sale clause.  So, is it worth the risk?  Only if you can get away with it!

Owning rental property in an LLC is the best solution from a liability perspective; however, it may only be feasible if you do not need conventional financing.

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What’s a Lawyer’s Time Worth

Arizona Court of Appeals Rules that a Lawyer’s Time is not Inherently More Valuable than a Layman’s

In Munger Chadwick v. Farwest Pump 235 Ariz. 125, 329 P.3d 229 (Ariz.App. Div. 2, May 07, 2014), the Arizona Court of Appeals overturned an award of attorney fees to the law firm of Munger Chadwick. Munger Chadwick had sued Farwest for unpaid fees and won an award. Munger Chadwick asked the trial court for additional fees for having to bring the lawsuit and take it to trial.

The trial judge awarded Munger Chadwick an additional $91,000.00 in attorney fees. On appeal, the Court of Appeals ruled that Munger Chadwick did not qualify for an award of attorney fees because it had represented itself.

The law in Arizona has always been that a layman who takes time off from his work in order to represent himself in Court is not entitled to compensation for his lost income. The Court of Appeals rejected the idea that somehow the time of an attorney was more worthy of being compensated when the attorney is representing himself or itself.

Additionally, the Court of Appeals also scoffed at the idea that Munger Chadwick could get around this rule by the subterfuge of claiming that it had not been representing itself; that the lawyers who worked for Munger Chadwick who appeared in the case and at trial, were doing so in their “spare time”, so that Munger Chadwick was obliged to compensate them in addition to their regular salaries, just as though they were an entirely separate law firm hired to represent Munger Chadwick.

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As the Fall season starts, we are looking forward to annual meetings and elections of boards of directors. Many HOA boards face the grim reality that there are not enough owner volunteers willing to fill the open seats on the board. The board members ask, cajole, beg, and guilt trip their neighbors to be on the board during the coming term, only to learn that many owners believe that serving on their HOA board is akin to having a monthly appointment at the dentist with the drill running non-stop for a long time.

The owners I am speaking about are not bowing out because they don’t have the time or availability to serve on the board. These are the owners who believe that the experience of being on the board will not be a pleasant or satisfying volunteer opportunity. Why is this?

Homeowners associations are microcosms of our democratic government: the administration is elected and can be removed by the members, and has to get the approval from the members before undertaking certain actions like raising assessments above a specified limit and amending the governing documents. And, like our national government, the constituents do not always approve of the way the administration is governing their property and their community. The difference is, on the small scale of most HOAs, the dissidents and self-appointed monitors in an HOA can strongly impact and affect community dynamics.

Over my 27 years in representing homeowners associations, I have encountered at least 20 instances where there is a homeowner or group of owners who do not trust or agree with the Board on most of its decisions. Such owners have their own ideas about the way the association should be operated, including the degree of perfection and vigilance expected or required from the board, the manager, and the service providers. And, in some of these cases, the concerned homeowner(s) becomes a watchdog, going to every board meeting, asking often to see a number of the documents that pertain to the business of the association, and questioning in lengthy and frequent emails and presentations at meetings, the wisdom or propriety of the board’s actions and decisions. If this becomes a regular dynamic, the result is growing disinterest by other homeowners in volunteering to sit on the board, serve on a committee, or simply attend an occasional board meeting.

How can the current board encourage participation from other homeowners? Generally, Board meetings need to be well-organized and tightly run. For example, the board could establish a policy that no meeting will exceed 2 hours in length unless the board agrees at the outset that the agenda will require more than 2 hours, and will set an alternative time limit. This will require the Board to stay focused to get through the agenda in a specified timeframe. To this end, the open meeting law in the Arizona Planned Communities Act [A.R.S. §33-1804] and Arizona Condominium Act [A.R.S. §33-1248] allows members to speak during board meetings, but permits the board to place restrictions on when and how long owners have to address the board. In addition, the board should adopt and enforce ground rules and structure for meetings. These rules would outline procedure for board or association meetings, and would have provisions describing the civil behavior that is required, partially by giving some detail on behaviors that will not be tolerated and could result in the adjournment of the meeting.

What happens if there are no willing volunteers to replace current board and committee members who want to retire (usually after many years of uninterrupted service)? Some people think that there is a government agency that will come in and assume control of the association if the current board wants to retire and there are no replacements—there is not. Other association members believe that the community management company can operate the association without a board, but this is not the case. Arizona law, most governing documents, and best practices require a non-profit corporation to have a board of directors. Thus, a current director’s term does not end until there is a qualified successor to take his/her place. Rather, in the worst case scenario (which I have yet to see in Tucson), the exiting board or other affected party would have to file a lawsuit to get a receiver appointed to run the association. The receiver reports back to the assigned Judge periodically and has broad powers and authority to control the operations of the association, usually resulting in increased assessments for the homeowners.

Thus, if there is ongoing dissension or dissatisfaction continually expressed by one or more homeowners, it is important to contain and control this dynamic so that service on the board does not become an unpleasant proposition for current and prospective board members.

This article presents one perspective on one aspect of association governance and participation, and is not intended to fully address the multi-layered issue of volunteerism in HOAs.

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There have been many court cases dealing with this subject.  So then, does it matter whether a breach of contract is a trivial breach or a material breach and if so what difference does it make?  The simple answer is that “Yes”, it does matter a lot whether a breach is a material (substantial) breach or a trivial (small) breach of a contract.    This is particularly true when it comes to real estate transaction because there can be so many dollars at stake.

Almost all real estate sale contracts have language which creates a cancellation option for the seller if the buyer is late in closing, even if the buyer is unavoidably delayed.  You know those provisions as “time of the essence” clauses.  Courts do not like time is of the essence clauses since they attempt to make any infraction grounds for cancellation of the contract.  Perhaps that is the reason the Arizona Association of Realtors altered their form purchase agreement by providing for a three day notice provision in the Arizona purchase contract requiring the non-defaulting party to give a three day written notice to the defaulting party to perform so as to avoid unnecessary lawsuits being filed.

There are many situations that can arise when this distinction between trivial and material breaches become important.  In one Arizona case a couple contracted for a new home.  When the house was completed but before closing the purchasers noticed a small scratch in the bathtub.  The contractor had it repaired but it was still slightly noticeable.  The buyers claimed entitlement to a new tub or in the alternative they were entitled to walk from the contract because of the breach by the contractor.  The court determined that to replace the tub required that the contractor knock out the bathroom wall to the outside to get the old tub out and a new tub in.  The cost would be exceptional given the effect of a minor scratch which was barely visible.
The court resolved that dispute by determining that the scratch did, in fact, create a breach of the contract.  However, the court found it was a trivial breach – not a material breach.  Therefore, the court found the owners were not entitled to a new tub or to walk from the contract but were required to close escrow and purchase the house but the owners retained the right to sue the contractor for damages.  The court noted that the measure of damages was to have the house appraised assuming it had a tub without a scratch and then perform a second appraisal valuing the house with the tub with the barely-visible scratch.  I suspect the owners quickly settled with the contractor.

From that case we see the difference in the effect of a small or trivial breach and a material breach.  With a trivial breach the injured party’s remedy is to sue for damages but is required to perform on the contract.  If the breach is a material breach the injured party would be free to not perform its contractual obligations and may also be entitled to damages as a result of the other party’s breach of the contract.
What about the situation where the seller contracts with a buyer to sell a home to the buyer and then refuses to close escrow?  Assume all the inspections were performed and the buyer is ready, willing and able to close.  Buyer gives seller a three day notice and seller still won’t close.  Perhaps seller has received a much higher offer from another party or simply has seller’s remorse.  No doubt a court would look at that as being a material breach.  However, in a given situation, how do we know if a breach is a substantial breach or not?

A material breach is defined as a violation of a contract that so substantially affects the contract that the injured party can cancel the transaction.  That definition is nice but it does not offer a bright line distinction between a small, trivial breach and a material breach.    For instance, what if a buyer learns, just before close of escrow, that contrary to what the seller represented, there are termites and they have done a thousand dollars’ worth of damage to the house buyer is purchasing.  Is that significant enough to permit buyer to walk from the transaction?  What if it is five thousand dollars’ worth of damage?  At some point it would be clear that it is a material breach of the agreement.  Many cases fall in the “gray” area where it is difficult to say whether it is trivial or material.

When the matter is unclear the court is going to look at a number of matters.  First and foremost, did the parties contract that the particular item was a very important matter?  For instance, some people have a chemical sensitivity handicap.  Those persons are apt to want a clause that there has been no use of certain types of chemicals at or in the home they are acquiring.  If the seller indicates to the negative and the buyer later learns that is untrue and the buyer is experiencing physical reactions to what would not bother any person without such a sensitivity, it could well be a material breach.  In such a case a buyer should put in a specific clause that it is extremely important to the buyer that no such chemicals were used at the residence and that is a matter of extreme importance to the buyer.  Then the court can look at that language and easily find that the breach was material.

Time is another factor.  As mentioned above court view ‘time of the essence’ clauses as mere boilerplate language unless the parties do really consider certain times for performance to be critical and so state in the agreement.  Then a court is apt to view a breach of such a provision as material.

So is there any test to apply?  Courts will look at certain factors to determine whether a breach is material or not.  Some of those factors are:  1)  the extent to which the injured party will be deprived of the benefit which he reasonably expected;  2)  the extent to which the injured party can be adequately compensated for in money for the part of that benefit of which he will be deprived;  3)  the extent to which the party failing to perform or to offer to perform will suffer forfeiture;  4)  the likelihood that the party failing to perform or offer to perform will cure his failure, taking into account all of the circumstances, including any reasonable assurances; and 5)  the extent to which the behavior of the party failing to perform or to offer to perform conforms with standards of good faith and fair dealing.  So, the bottom line is that courts tend to look to what really happened and decide whether certain actions should be penalized or not.  The mere recital that, say, ’time is of the essence’ in a contract, is not likely to transform trivial actions into a material breach.

So, as usual, the law does not provide us with an exact guideline to follow in all cases.  One has to view the situation and analyze all the circumstances and attempt to divine what a judge might say and do under the facts presented.  The one rule we can walk away with here is that if something is very important to you or to your client then spell it out and note in the contract that it is a material provision and but for that matter you or your client would not even have entered into the contract.  That would be a strong signal to a judge, in the event of breach by the other party, that the breach is a material breach.  Good luck!

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Franchisors as Co-Employers?!

The National Labor Relations Board (“NLRB”) announced last week that their General Counsel found merit in charges made by McDonalds’ employees regarding employee protests. The momentous impact of the announcement is that the finding was against both the McDonald’s franchisee and McDonald’s USA, LLC, franchisor, as co-employers.

McDonald’s intends to fight the decision, with the concurrence of the International Franchise Association, emphatically taking the position that franchises are small, independently run businesses and not run by the franchisor. Franchisees typically create their own legal entities, pay taxes, hire and fire their own employees, create their schedules, manage their payroll, pay their own bills and other such business activities. This is the first time the agency is “piercing the corporate veil” to find potential for liability in the franchisor for actions impacting employees.

The General Counsel apparently agreed with the employees’ position that, with the technological advances, the franchisor can monitor and control the franchisees’ operations to such an extent that it goes beyond protecting its brand to being jointly responsible for alleged labor law violations. This decision departs from the long-established legal standard that typically shields franchisors from liability for franchisee action.

One advantage to the franchise business model has been to insulate the franchisees as employers from labor and employment laws affecting employers with a minimum number of employees. For example, the Family and Medical Leave Act applies only to employers with at least 50 employees within a 75 mile radius. Many one-location franchisees do not reach the coverage threshold. Yet, if the franchisees are considered co-employers with the franchisor, the minimums may be reached.

The NLRB decision, if upheld, could have a widespread impact on franchises in a variety of industries beyond restaurants. Real estate franchises, including Re/Max, Century 21, ERA and Keller Williams may have to re-evaluate the manner and extent to which they monitor and control their franchisees.

The NLRB has been quite liberal in recent years, extending their own authority beyond the realm of labor unions. Decisions have involved employees’ rights to gather and discuss working conditions – with or without a union – including decisions on the use of social media and prohibiting employee discipline for certain anti-employer Facebook posts.

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Reverse mortgages are a fairly new financing tool for homeowners. In FHA terms, reverse mortgages are Home Equity Conversion Mortgages (HECM). Owners of single-family homes, 2-4 unit properties, post-1976 manufactured homes, condominiums, and townhouses are eligible for an HECM. Co-ops do not qualify. Basically, HECMs are designed to pay the borrower the remaining equity in his/her home and, if the loan is not repaid when the owner dies or abandons the property, the property is foreclosed to repay the lender.

In order to qualify, the homeowner must be at least 62 and have enough equity in the property. Until this year, these were the only underwriting requirements. Lenders now will conduct financial review of every reverse mortgage borrower to assure that he/she has the financial wherewithal to continue paying mandatory obligations, such as property taxes, insurance and HOA assessments, as required in the Loan Agreement. If a lender determines that a borrower may not be able to keep up with property taxes and insurance premiums, it will be authorized to reserve a portion of the loan proceeds to cover these charges in the future. Generally, none of the reserve funds will be allocated to cover unpaid HOA assessments. (This is in alignment with current practices that exclude HOA assessments from monthly impound payments with home loans.)

A borrower can choose to receive reverse mortgage proceeds all at once as a lump sum, in fixed monthly payments, as a line of credit, or a combination of these. The amount of funds a borrower can receive depends on his/her age (or the age of the youngest spouse when there is a couple), appraised house value, interest rates, and in the case of the government program, the FHA lending limit, which is currently $625,500. In general, the older one is and the more equity in the property, the more money will be loaned.

The proceeds from a reverse mortgage can be used for anything, including additional income for daily living expenses, home repair or modification, health care, debt reduction, etc.

Interest is not paid out of the loan proceeds, but instead compounds over the life of the loan until repayment occurs. A HECM will be in first position, meaning that it is superior to all other liens (including the Association’s lien for unpaid assessments) except governmental liens (e.g., for property taxes or federal taxes).

Many borrowers immediately draw all of the available loan funds after closing, and there will be no further payments from lender to borrower. Thus, unless a reserve fund is established, there may be no proceeds available for property expenses, especially if there are other liens. If the borrower has fully drawn the loan proceeds and does not pay taxes/insurance/ HOA fees, the loan is in default under the HECM security instruments and the lender many times will place insurance on the property and will pay property taxes to avoid a tax lien foreclosure. If there is a delinquent HOA assessment account, the loan servicer should be informed (in writing) and asked to pay the assessments due on the borrower’s account or, at the very least, to pay the full account from the escrow that will occur after the lender takes possession and then sells the property. Such requests are handled on a case-by-case basis. If a lender who is eligible to foreclose delays the foreclosure sale, this should be pointed out since the delay is prejudicing the Association.

If the lender does not voluntarily pay assessments before it finalizes its foreclosure sale (i.e., the trustee’s sale), a homeowners association typically has no legal basis to require the lender to cover the assessments or to hasten the foreclosure sale. The homeowner remains personally liable, however, and a judgment for assessments can be obtained and collected from the borrower’s assets. All too often, there are no assets and, in some cases, the borrower has left Arizona, leaving the association with no affordable recourse to pursue payment of a judgment.

It is always frustrating to a Board of Directors to have an uncollectible assessment account, and I have to take this opportunity to say that our excellent HOA collection team often succeeds where others have failed to get difficult accounts paid.

Note that some of the information for this article is from the National Reverse Mortgage Lenders Association [reversemortgage.org].

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How You Sign Makes a Difference

In Focus Properties v. Cleo Johnson Division One of the Court of Appeals considered the Appeal of Cleo Johnson, who, in her capacity as Trustee of Oak Acres Trust had hired Kantor of Focus Properties to lease/sell her commercial property in Apache Junction. Kantor had put in many hours to aid Johnson in rehabilitating the property and finding tenants/buyers. After Johnson failed to attend a meeting with a prospective buyer, Johnson entered into a lease without informing Kantor, prompting him to file suit for his commission. A jury found in favor of Kantor and awarded him his commission.

On Appeal, Johnson argued that Kantor had committed acts, which had the Real Estate Department known of the acts, would have lost his license, so he ought to be barred from recovering a commission. The Court of Appeals rejected the argument, ruling that it is up to the Real Estate Commissioner to decide whether or not to suspend or revoke a license, not up to the Superior Court.

However, the Court of Appeals did grant Johnson some relief, agreeing that since she had signed the commission agreement on behalf of the Trust and had not personally guaranteed the Trust’s performance, she could not be held personally liable for the commission.

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As the saying goes; I wish I had a dollar for every client I had over the past many years who came in with a contract seriously asking “How can I get out of this contract”.   If I did get a dollar each time, I might be driving a Lamborghini – they are very nice cars!.  It is a common occurrence for a buyer(s) to sign on for their dream home, time share or whatever he, she or they committed themselves, only to realize that they made a mistake and want “out”.  Perhaps the buyer now believes the house will cost too much, the house is too small or the buyer just got offered a great job in Missoula, Montana and has to leave town right away.  The reasons are endless.

What do you say when a buyer or buyers decides after agreeing to acquire the most expensive purchase in their life that they don’t want to go through with the transaction?  This assumes the seller has performed, contingencies have been met and all requirements of the contract have been met.  Everything is ready to “go” except the buyer.  In a transaction involving the Arizona Association of REALTORS’® contract form if the buyer does not perform the seller must give the buyer a three day written notice to perform or be in default.

The simple answer is that a mere change of one’s perspective or desire to go through with the contract (what is often referred to as buyer’s remorse) is insufficient to get out of a contract.  To not close or go through with the contract would be a breach of the contract leaving the buyer susceptible to losing the down payment, or liable for potentially substantial damages, or susceptible to a suit for specific performance whereby the seller obtains a court order that the buyer must perform on the contract.  Buyer’s remorse is simply not grounds to walk away from a contract.

So, are there defenses which a buyer could rely upon to not perform?  The simple answer is “Yes”.  But, the defenses are very few in number and usually not ones available in the case of true buyer’s remorse.  Those defenses are:

(1) Statute of Frauds – A contract for the sale of real estate must be in writing.   If the contract was not reduced to writing the buyer may be entitled to ignore the agreement to purchase.

(2) Contract is Illegal – Courts will not place themselves in a position to enforce a contract made for an unlawful purpose.  Consequently, if the contract is to pursue an unlawful purpose there are no legal ramifications if a buyer backs out of it.

(3) One of the Parties to the Contract is Incapable of Making the Contract –  Contracts made where one of the parties is incapable of doing so, such as by reason of insanity, will not be enforced by the courts.

(4) Mistake By All Parties – If all parties enter into a contract but the contract does not express what the parties agreed upon then any of the parties may avoid the contract.

(5) Unconscionability/Duress – If the contract was induced by force or may be so one-sided that a court could not in good conscience enforce it, then the victim of the duress or unconscionability could walk from the contract.  Naturally what would constitute unconscionability can be very difficult to define in advance of a judge making that determination after a trial on the issue.

(6) Fraud – If the execution of a contract is obtained through fraud, deceit, or misrepresentation, the contract may be cancelled.

(7) Breach by the Other Party – Where the other party breaches the contract first, the non-breaching party may cancel the contract.  This raises two separate issues which are too long to discuss in detail in this article.  However, what if the other party merely claims they will not perform as agreed upon.  This is called an anticipatory repudiation of the contract.  That requires a separate article to discuss.  The other is what if the other party breaches but it is just a minor breach – like the seller indicating the seller won’t leave the garage clicker on a $400,000.00 sale?  That example is probably not a material breach which would not permit the buyer to cancel.  But the buyer would have a claim for damages.  If it is discovered the seller knew the foundation had structural cracks but covered them up and did not disclose them as required then that could be a material breach.  With a material breach the buyer may walk from the contract.  That is the issue of a minor breach versus a substantial breach of contract.    As one can imagine it may be difficult in a given situation to know which type of breach it is.

As briefly mentioned above, if the buyer does decline to perform and none of the above defenses are available to the buyer, then the seller can sue the buyer for “specific performance” to obtain a court order requiring the buyer to proceed with the contract and pay the contracted for consideration.  This remedy is rarely utilized but, is available.

The seller may demand the earnest money be defaulted to the seller.  This remedy must be provided for in the contract.  If the seller takes the earnest money as damages upon a breach by the buyer, then the seller has agreed to accept the earnest money deposit as its sole remedy and may not also sue for damages.  In some situations the earnest money may be sufficient to cover the seller’s damages and in other situations it may be woefully inadequate.

The other remedy is for the seller to sue for damages which were incurred by reason of buyer’s refusal to perform.  Thus, the seller can sue to recover those losses incurred as a consequence of the buyer’s breach or failure to perform the contract as agreed.

A caveat to real estate agents is that they should be extremely cautious about ever advising a buyer not to perform their contract.  If an agent does so and the seller suffers damages, the seller may sue both the buyer and the buyer’s agent.

Yes, it may be painful in a given situation but once a contract has been finalized a buyer must go through with the contract or there will most likely be financial consequences.  After reading this you may feel that this is elementary advice, but, I again say, Lamborghinis are very nice cars!

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Hoarding – Not just a television show!

Landlords and homeowners associations have long been concerned with health and safety conditions.  So what can they do when a tenant or owner is discovered to be a hoarder?

Hoarding has been defined as including three main characteristics:”(1) the acquisition of, and failure to discard a large number of possessions that appear to be useless or of limited value; (2) living spaces sufficiently cluttered so as to preclude activities for which those spaces were designed; and (3) significant distress or impairment in functioning caused by the hoarding.” This definition distinguished hoarding from the collecting of objects generally considered interesting and valuable. Frost and Hartl (1996).  When the clutter includes excessive numbers of pets without keeping up with cleaning, pest infestations or inability to properly use kitchens or bathrooms, hoarding becomes a health issue.  When the clutter reaches the point that hallways and exits are blocked, hoarding becomes a safety issue.

In May 2013, the American Psychiatric Association declared hoarding a mental disability.  This strengthened the protection for hoarders under the federal Fair Housing Act.  Thus, landlords and homeowners associations must tread delicately when addressing hoarding rather than jumping directly to eviction or assessments.  While the hoarder has the legal obligation to request reasonable accommodation, as many hoarders are secretive about or do not recognize their compulsion, the landlord or homeowners association is encouraged to initiate the discussion of accommodation.  The primary accommodation is a written plan for clean-up with specified reasonable time lines, which the landlord or homeowners association monitors in writing for compliance.  The plan should include future monitoring after the initial clean-up, as hoarders are likely to return to the hoarding behaviors, and may also include the requirement for counseling.   Having the hoarder responsible for his or her own clean-up can result in significant savings for the landlord or association, who otherwise would need to engage HazMat (hazardous materials) teams to clean, as well as the landlord’s costs of eviction and securing a new tenant or the associations costs for assessment and collections.

Despite the recognition of hoarding as a mental disability, Houston City Council passed an ordinance in April 2014, making hoarding illegal in an apartment, townhouse or condominium.  The concept is the initial report that will allow the City to make a welfare check and fine the hoarder per day until clean-up.  Thus the ordinance transfers the responsibility for rectifying the resulting health and safety concerns to the government.  It will only be a matter of time until this law is challenged on the basis of criminalizing a disability.  If the challenge is successful the obligation to deal with the hoarding will remain with the landlords and homeowners associations.

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