What is a Settlement Agreement in Real Estate?
Real estate settlement agreements, also called a settlement agreement, are documents that are used to settle a dispute between the buyer and seller of real estate. Whether the seller has committed fraud, a title defect, or something else it typically makes economic sense for the buyer to stand behind their purchase contract, and obtain money from the seller, rather than sue the seller .
These agreements almost always contain a confidentiality clause, an admission of liability provision, and an obligation for the seller to cooperate. Real estate settlement agreements are contracts. Like other contracts the courts will enforce these contracts and award attorneys if either party breaches the agreement.
Provisions of a Settlement Agreement
A real estate settlement agreement applies to real and personal property. It is an outgrowth of a divorce proceeding that recognizes the interests of the parties and is intended to settle all disputes regarding the distribution of property. This agreement then becomes final and binding upon the parties once the divorce court incorporates its terms into an order or judgment of divorce.
The essential elements of a settlement agreement include: (i) the parties and where the parties reside, (ii) if they are married or single, (iii) if they have been living separate and apart for more than 12 months, (iv) facts that will permit the Court to acquire jurisdiction over the parties, (v) the issues that are being settled and whether any exist, (vi) the terms of the settlement including who receives or pays for real or personal property or other assets, and (vii) what the parties’ relationship is after the agreement is signed (e.g., a complete marriage dissolution again, or something less like a "legal separation").
Parties may consider inserting a clause requiring each to file income tax returns accurately identifying any losses or gains of others as they apply to the marital property, and each party must file an individual income tax return as required under state law. The parties should also agree to sign IRS 8821s to authorize release of returns upon requests by other parties.
Advantages of a Settlement Agreement
A primary benefit of the real estate settlement agreement is that it should set out a clear understanding among the parties as to the parties’ respective and collective obligations. Oftentimes, this is particularly important because a real estate transaction often involves a group of parties with differing needs. It may be difficult (or even impossible) to meet all the parties’ needs to their satisfaction, particularly in the event of a default. A settlement agreement should help to establish a clear understanding among the parties who will finance or participate in the completion of the project and in what manner. For example, a development may be financed by several investors and the settlement agreement should clearly allocate ownership interests in the development and any return on investment.
The real estate settlement agreement can also be beneficial in the event of a dispute after closing (whether a default or otherwise), because it should spell out any approval requirements for actions taken outside the ordinary course of business. So-called approval rights and consent requirements are particularly common when one party has management control over a project but other parties have a vested interest in what happens to the project.
Another benefit of a real estate settlement agreement is that it should describe and establish the procedure by which the parties can obtain the release of conditions to closing. For instance, a developer may agree to continue negotiations with a local government to obtain a necessary development permit even after closing. In that event, a clear understanding between the developer and any unaffiliated owners would be advisable.
Generally, the most critical and substantive benefits of the real estate settlement agreement are that the parties are able to allocate risk and assign responsibilities to each other and preserve each party’s respective interests. The real estate settlement agreement should, among other things:
Common Issues and Remedies
Here are some of the more common issues that can arise during a real estate settlement.
Improper Title
The seller of the property has an obligation to convey clear title to the property, that is, interest in the property that free of any liens that would interfere with the ability of the buyer to use or sell the property in the future. If the title is not clear (that is, includes a lien), then the title company can refuse to issue a title policy to the buyer of the property until the title issue is resolved. Title insurance is an indemnity contract that protects the insured against loss or damage resulting from claims against the property title. The title company would only be willing to issue a title insurance policy if the lender is willing to make a loan that is secured by a lien on the property, insuring the lender’s security interest. If the title company believes that it is exposed to a claim to its title policy, it will not issue the policy. The title company can often insist that the lien be paid off before it will issue the title insurance policy. Depending on the circumstances, the lien can be paid off through escrow; a closing statement can be prepared which sets aside funds out of escrow to pay the lien after closing; and/or a draft release and waiver of lien can be executed by the claimants in favor of the buyer, subject to certain conditions being met, such as payment of the "next day settlement funding". In some circumstances, it would be appropriate for the parties to enter into a real estate settlement agreement to memorialize the terms of resolving the title issue.
Breach of Contract
Sometimes, despite the best intentions of the parties, one or both of the parties find that they cannot meet the requirements of the contract. This can be because of the buyer being unable to obtain financing, the buyer not exercising his "due diligence" within the time period set forth in the contract, or the failure of the seller to meet the seller’s obligations in the contract. In such circumstances, the parties can indicate their intent to terminate the contract and can agree on how the earnest money deposit should be disbursed, or continued in the contract if it is a mechanical problem (such as a requirement of an inspection to be conducted and finalized). Making a decision as to whether the deal can go through should be made as soon as possible as it may be necessary to enter into an amendment or novation of the contract, or even a new contract, whether it be a normal real estate purchase agreement, a real estate settlement agreement or an addendum to the existing contract. The real estate settlement agreement, in particular, is used to clarify the rights and responsibilities of the parties in a manner that may be different than the existing contract.
Drafting a Settlement Agreement
In the best-case scenario, a real estate deal closes without issues, and the parties have a successful outcome. Unfortunately, that is not always possible. As a result, we have real estate settlement agreements.
Typically, a settlement agreement is easier than filing a lawsuit over real estate matters. Lawsuits can cost tens of thousands of dollars and may take years to come to a conclusion. Especially with the current state of the court system, it may take up to 3 years to resolve a lawsuit. The downside to this is that the buyer or seller may realize they never should make an offer or buy a piece of property.
Getting the right legal advice is critical to ensure that the sale or purchase is finalized. For example, filing for a lis pendens on real property provides public notification to those interested in the property that a lawsuit affecting the property has been filed. However, simply filing a lis pendens can result in liability, especially if the owner’s rights were not done in good faith.
For example, if the purchase was made through fraud, and a settlement agreement is signed, the fraud can make the agreement void. This is why consulting with an attorney to review every clause and detail of the settlement agreement is critical. You want to be sure you are protected from fraudulent claims.
There are various steps for creating a real estate settlement agreement . First, the parties will update all information provided by both parties. The closing agent prepares the settlement statement and this is sent to both parties. Then, closing occurs, and the numbers from the settlement statements are lodged into the closing documents. In this step, it is critical that both parties understand what they are signing.
The next step is the review of the contracts. Real estate contracts can be 10 to 20 pages, so a closing document that is 2 to 5 pages is a minimal investment in the property. There are two different templates that can be used for real estate settlement agreements. Florida law has different types of agreement for different types of sales. The first template is for a "fixed sale price" and the second template is for "financed" sales. Each type of sale agreement will have specific details filled in, including items such as:
It is also important to remember that a real estate settlement agreement must be notarized when all the parties have signed it. For these reasons, whether you are a buyer or seller it is important to work with knowledgeable and experienced professionals. At the very least, it is best to get a real estate lawyer to review your settlement agreement before you sign it. There are many pitfalls that an attorney will be able to help you avoid.
Issues to Consider and Follow
Given the regulatory environment in which real estate professionals operate, it is important to navigate carefully when drafting and executing settlement agreements. Both state and federal regulations can impact the terms of the settlement, as well as how they are implemented and enforced.
The most critical legal consideration is whether the state real estate commission or regulatory agency must be notified of the agreement, and depending on circumstances, whether it must approve the agreement before it is finalized. The issue of notifying the real estate commission can be especially tricky for a broker, in the event that the agreement must specifically name the broker in the context of the settlement. A broker entering into a settlement agreement must ensure that his or her duties to all clients have been fulfilled, including that all parties to the transaction have received any funds to which they may be entitled under the agreement. Abstracting from any duty to clients, brokers must also be careful to preserve the company’s right to claim compensation under the settlement agreement. To this end, it may be advisable to recite in the settlement agreement that the document is a settlement of a claim made by the broker, in addition to other parties. Brokers are also cautioned to ask what role, if any, the real estate commission intended the broker to play in the settlement itself. Although a broker may not have played any meaningful role, i.e., failing to disclose the existence of the escrow account, a court may nevertheless hold that the broker was a necessary party to the dispute over the escrow disbursement, and that the broker’s signature was required to finalize the settlement.
With respect to the requirements of the Federal Trade Commission, real estate agents and brokers must take care to comply with applicable rules, including but not limited to: The FTC has adopted a broad definition of the term "advertisement," which "includes any material that is designed to induce directly or indirectly the purchase of goods or services." On its face, this definition includes virtually any communication that is intended to persuade anyone to do business with a particular real estate agent or broker.
The FTC’s rules also require that "advertisements" be truthful, non-deceptive and for lawful purposes. Agents and brokers should craft settlement agreements with this principle in mind. If an agreement contains any of the five advertising terms listed under FTC rule 435.2(8), the agreement must also reflect whether the term "contributes to successful performance," "is reflective of successful performance," or "based on successful performance," as those terms are further defined in the regulations, so that the full meaning of the agreement is conveyed.
After the agreement is drafted, brokers should execute the agreement via electronic signature, where possible. Because these laws were enacted relatively recently, guidance from the FTC regarding electronic signatures is limited. However, the FTC has stated that unless required by other federal statute, electronic signatures should be given the same effect as handwritten signatures, provided that the signed document is retained by the broker for at least three years.
Irrespective of the issue of electronic signatures, regardless of whether it is enforceable or not, an executed settlement agreement is a record that can be discovered in litigation. Because it is not privileged from discovery, brokers may want to maintain tight control over executed copies of the agreement, or even consider having all parties maintain possession of an original copy, so they can avoid any fingerprints on the agreement.
Examples of Settlement Agreements
The use of real estate settlement agreements in divorce and other types of ancillary litigation may not be ubiquitous, but when done, an effective real estate settlement agreement can save the parties, or a single party substantial grief as well as save substantial fees for divorce litigation.
Because real property is often a major asset and often requires the assistance of a real estate expert to appropriately value the property, the stake the parties have in their real property assets often gives rise to contentious litigation. Where real estate is not necessary for the affordability of the other party’s residence, it is often the case that parties in a litigated divorce will begrudgingly list the property for sale with a third-party realtor on the presumption that the other party will temper their expectations and come to the table so that each party can receive their fair share of the equity.
Often, however, discovery is required by the selling spouse as the selling spouse contemplates listing and selling the property. Such discovery can include disclosure of appraisals obtained by a party before the commencement of litigation , "cursory" broker price opinions and other valuations of the property.
Such is the case with Jacquelyn DiGerolamo v. Paul DiGerolamo, a case that was recently decided by the Appellate Division of the Superior Court in New Jersey. In DiGerolamo, each party claims the other spouse was obstinante and unreasonably delaying the sale of the marital home. What was clear was that selling the marital home was a necessity consistent with the parties’ existing income. To assist in reaching an agreement as to the sale of the property, the parties commenced the services of Anthony Susi Jr., a local real estate agent.
Susi, with input from both parties / their attorneys, designed a strategy for marketing and selling the marital home at a gradual price reduction. The strategy included a significant marketing campaign for a 30-day period in which the property’s price would drop every 10 days until the price reached what the realtor believed to be the "bottom price." Ultimately, the realtor was successful, and the house was sold for a price the parties were satisfied with.