Wisconsin Lawyer
Vol. 83, No. 3, March 2010

• Response from Secretary Celia M. Jackson, Department of Regulation and Licensing

Effective Nov. 1, 2009, Department of Regulation and Licensing (DRL) Secretary Celia Jackson authorized real estate licensees to use the 2010 WB-11 residential-offer-to-purchase form (the Offer). Many real estate licensees began to use the Offer in early 2010 in anticipation of its mandatory use date of March 1, 2010. The Offer is more than an updated version of previous offer forms. As would be expected, some new content was added and some existing provisions were revised to reflect current market and legal issues. However, unlike all previous offer forms developed over the last 40 years, this Offer was developed without consultation with the State Bar of Wisconsin Real Property, Probate and Trust Law Section (RPPT Section) or forms publishers such as Wisconsin Legal Blank. This article examines some of the substantive drafting errors in the Offer. Ultimately, users of the form and their legal counsel will need to decide if the Offer is so flawed as to require a recall of the Offer and a reexamination of the process under which these forms are promulgated.

Two examples illustrate problems with the new Offer that likely would not have occurred had the form been developed with collaboration from the RPPT Section or outside forms experts. First, the Offer’s formatting appears unfinished. Some sections are structured carelessly, and seven of the nine pages contain unnecessary empty areas. A professional forms publisher would have properly formatted the form. Second, and much more important, the Offer includes many substantive errors that could negatively affect the enforceability of transactions based on the Offer or otherwise negatively affect the rights of parties to an offer. An example of these substantive errors is a provision that permits a buyer to terminate the offer if the buyer does not receive a “gap” endorsement from the seller. The problem (discussed in more detail below) is that the gap endorsement defined in the Offer is not generally available in the marketplace.

Unfortunately, a detailed analysis of a nine-page contract is beyond the scope of a Wisconsin Lawyer article. Instead, this article focuses on illustrating the types of issues attorneys will need to consider as the new Offer begins to appear in the marketplace. Issues are addressed in order of increasing complexity. Samples of the old and new offers and an analysis of the changes in the Offer that are not addressed in this article are available with the electronic version of this article and at http://www.rickstaff.com.

Closing Prorations

Lines 117-137. The first problem with the proration language in the Offer is the DRL’s decision to have prorations “based upon date of closing values.” Certainly there are benefits in identifying a date certain for determining proration values. Although many values used in prorations do not change on a daily basis, there are prorations that do (for example, fuel prorations or private or municipal charges based on usage such as water and sewer fees). Attorneys who regularly participate in closings know that it is not practical to have to wait until the day of closing to calculate prorations. Attorneys who work in markets that prorate these types of charges (for example, water and sewer charges currently based on the prior billing cycle) will need to revise the Offer to identify an earlier valuation date or eliminate these prorations in favor of setting “final readings” and paying account balances when the parties close.

The second problem with the proration provisions is the property-tax-proration language, which now provides the parties with three alternative formulas: 1) net general taxes, which is the traditional formula; 2) a formula based on assessment value multiplied by mill rate; and 3) a formula based on sales price multiplied by municipal fair-market values. Unfortunately, a drafting error makes use of the second and third options problematic. The sentence preceding the three alternatives states that “net general taxes shall be prorated at closing based on: ….” How does one prorate “net general taxes” using “current assessment times current mill rate” or “sales price times fair market value”? Attorneys advising clients who wish to use the second or third alternative will need to rewrite the introductory sentence to avoid this conflict.

The Offer’s language concerning re-proration of taxes also is problematic. The DRL has provided an option for re-proration of taxes at lines 134-137. The first problem with the re-proration paragraph is the idea that the parties are going to manage the re-proration themselves. It is understandable that brokers would not want to participate in this process, but how many thousands of disputes will arise each year because the parties fail to agree whether, when, and how they will re-prorate? The “when” is the least problematic issue because the offer states that re-proration is to be conducted within 30 days after the actual tax bill is received for the year of closing. But the seller, who is likely to be the party writing the re-proration check, will not get a tax bill unless the buyer forwards it (and the Offer does not specify a means for learning the seller’s forwarding address). One might assume that the Offer provides a formula for re-proration, but it does not. Most people also would assume the formula for re-proration should have something to do with the final tax bill. The re-proration paragraph speaks in terms of “re-prorating the real estate taxes.” Unfortunately, the only defined term in the section is “net general real estate taxes,” which are altogether different than “real estate taxes.” Attorneys are advised to start from scratch if they want to have a re-proration provision in the offer.

Offer Not Contingent on Financing

Lines 259-265. The Offer requires buyers not using a financing contingency to deliver “written evidence from a financial institution or a third party in control of the funds, that Buyer shall have the required funds available at closing.” Few financial institutions will be willing to predict what funds a buyer will have in the future – in this case, at the time of closing. Attorneys representing parties in a transaction who want proof of a buyer’s funds will need to rewrite this provision.

‘Gap’ Endorsement

Lines 346-350. The Offer provides that the seller shall provide a gap endorsement or equivalent gap coverage as part of the title insurance. The form describes this gap endorsement as “providing coverage for any liens or encumbrances first filed or recorded after the effective date” of the commitment and before recording of the deed. (This period is the gap.) If this gap endorsement or equivalent gap coverage is not available, the Offer states that the buyer may give written notice that title is not acceptable for closing. If the seller is still unable to provide this gap endorsement, the buyer has five days to waive the objection. If the buyer does not waive the objection, the offer will be void.

Unfortunately, gap endorsements that insure over all liens and encumbrances are generally not available in the marketplace. Although a comprehensive discussion of gap endorsements is beyond the scope of this article, gap endorsements generally contain a variety of exclusions and conditions that result in their failing to meet the standard set forth in the Offer. Furthermore, beginning with the 2006 ALTA model forms, title-insurance policies provide limited coverage over the gap between closing and the recording of the deed, making the new requirement to provide a gap endorsement at least somewhat unnecessary and potentially an avoidable expense for the parties. Buyers’ and sellers’ attorneys should consider revising this section of the Offer after discussing gap coverage issues with counsel for local title companies.

Conveyance of Title

Lines 328-362. The DRL redrafted the conveyance-of-title section to address an issue regarding the definition of merchantable title found in earlier forms. The 1999 WB-11 provided:

“CONVEYANCE OF TITLE: Upon payment of the purchase price, Seller shall convey the property by warranty deed (or other conveyance as provided herein) free and clear of all liens and encumbrances, except: municipal and zoning ordinances and agreements entered under them, recorded easements for the distribution of utility and municipal services, recorded building and use restrictions and covenants, general taxes levied in the year of closing and ___ (provided none of the foregoing prohibit present use of the Property), which constitutes merchantable title for purposes of this transaction.”

The issue presented by the emphasized language of the 1999 offer was that the merchantable-title warranty required sellers to not only disclose “prohibited present uses” (such as illegal bedrooms) to avoid misrepresentation claims but also to exclude these prohibited present uses from the merchantable warranty found in the DRL-approved offers or risk being sued by the buyers for breach of warranty. Other prohibited present uses include such things as fences erected in violation of subdivision restrictions and residences zoned as single family but being used as duplexes. In practice, sellers routinely disclosed prohibited present uses, but the 1999 offer did not instruct sellers to modify the seller’s merchantable-title warranties to exclude the disclosed prohibited present uses.

In the new Offer, the DRL attempted to fix the problem in two ways. First, it removed the phrase “provided none of the foregoing prohibit present use of the Property” from the definition of merchantable title. Second, it added the following phrase to the list of acceptable liens and encumbrances under the definition of merchantable title: “present uses of the Property in violation of the foregoing disclosed in Seller’s Real Estate Condition Report and in this Offer.”

The warranty-of-title section (essentially the definition of merchantable title) now reads:

“Upon payment of the purchase price, Seller shall convey the property by warranty deed (or other conveyance as provided herein) free and clear of all liens and encumbrances, except: municipal and zoning ordinances and agreements entered under them, recorded easements for the distribution of utility and municipal services, recorded building and use restrictions and covenants, present uses of the Property in violation of the foregoing disclosed in Seller’s Real Estate Condition Report and in this Offer, general taxes levied in the year of closing and ___ which constitutes merchantable title for purposes of this transaction.”

The difficulty with this formulation is that present use of a property is not, in and of itself, a lien or an encumbrance. The 1999 offer defined merchantable title by permitting as an acceptable lien or encumbrance most ordinances, building codes, and subdivision restrictions. The 1999 offer then removed from the broad list of acceptable liens and encumbrances (which were allowed under the definition of merchantable title) certain ordinances, building codes, and subdivision restrictions, and so on, if the property’s present use violated those ordinances, building codes, or subdivision restrictions. Thus, the old offer used the present-use standard as a method of identifying which liens and encumbrances would be permitted under the definition of merchantable title. In simpler terms, if a present use of the property violated an ordinance, building code, or subdivision restriction, then the violated ordinance, building code, or subdivision restriction was removed from the list of acceptable liens and encumbrances, and the seller likely would be considered to have failed to convey merchantable title.

The DRL attempted to avoid the situation in which a disclosed improper present use could still constitute a breach of the warranty of merchantable title by eliminating the present-use standard as a means of determining which liens and encumbrances are acceptable within the definition of merchantable title. All municipal and zoning ordinances (and agreements entered under them), recorded easements for the distribution of utility and municipal services, and recorded building and use restrictions and covenants are acceptable liens and encumbrances for the purposes of the warranty of merchantable title in the new Offer. The new Offer takes the issue a step further by then defining an additional class of acceptable liens and encumbrances: present uses of the property that violate zoning ordinances, building codes, subdivision restrictions, and so on, if they were disclosed in the seller’s condition report or in the offer. The difficulty with this is that these present uses were never liens or encumbrances in this Offer and so did not need to be excepted from the seller’s warranty of merchantable title.

A more serious problem is the fact that because the present-use standard has been removed in the new Offer, the seller no longer effectively warrants that there are no present uses prohibited by zoning ordinances, building codes, subdivision restrictions, and so on. Therefore, sellers who do not disclose illegal present uses of the property are no longer violating the warranty of merchantable title. Attorneys representing buyers, particularly buyers purchasing real estate “as-is,” should consider using the warranty of title found in the 1999 residential offer to purchase.

Conclusion

Careful examination of the new Offer suggests the DRL ought to enlist assistance from outside experts when developing approved forms for use by real estate licensees. Reasonable people may have differing opinions regarding the magnitude of the problems in the Offer, but it is this author’s opinion that the Offer is not adequately drafted, given the extremely important role the Offer plays in Wisconsin real estate transactions. Attorneys representing clients in transactions based on the Offer will likely need to make multiple substantive revisions to the Offer to protect their clients’ rights. It is not known what parties not represented by attorneys will do to address these issues.

The most effective way to protect the interests of consumers may be for the DRL to recall the Offer and then redraft it with assistance from the RPPT Section. The RPPT Section already drafts several real estate conveyance forms approved by the DRL for use by real estate licensees. It would be logical that the two organizations charged with drafting DRL-approved real estate forms work cooperatively on the redraft of the Offer and the future drafting of other DRL-approved real estate forms. What should be done if the DRL is not willing to recall the Offer and collaborate with the RPPT Section? The DRL’s authority to approve forms for use by real estate licensees is granted by the legislature¹ but the final arbiter of disputes regarding the DRL’s role in drafting and approving contracts for use by real estate licensees is the Wisconsin Supreme Court.² As a last resort to ensure the form is redrafted, it may be necessary for the RPPT Section and other real estate professionals to ask the legislature or the court to reexamine the roles of the DRL and the RPPT Section in drafting forms approved for use by real estate licensees.

Endnotes

Wisconsin Lawyer