I Promised What? Sellers of Real Estate, Beware! (Buyers too)

November 14, 2011 at 12:46 pm | Latest News | No comment | By Bill Kessler

Sellers of real property sign a Statutory Warranty Deed (“SWD”) at the closing of the vast majority of residential real estate transactions.  This is the document that actually transfers title from seller to buyer.  If you sell a piece of real estate and give your buyer a SWD, you are promising a lot more than you might think.

In the 2011 case Edmonson v. Popchoi, the Washington Supreme Court clarified and reaffirmed a seller’s duty under a SWD to defend claims brought against the buyer for “adverse possession.”  In short, adverse possession is the legal premise that neighbor N automatically takes title to portion P of a person’s land when N uses P in the manner of a reasonable true owner, and that use is (a) open/obvious, (b) continuous for 10 years and (c) exclusive, i.e. the true owner does not also use the land.

Edmonson is a good illustration of how easily an adverse possession claim can arise: There, after the sale of the house closed, Neighbor claimed that (a) a fence separating his property from Buyer’s property was several feet inside Buyer’s property line and (b) the fence had been there more than 10 years.  This means Neighbor (and Neighbor alone) occupied a “strip” of land which the SWD says Buyer owns.  Next, Neighbor filed a lawsuit claiming adverse possession, asking the court to declare that he (Neighbor) owned Buyer’s “strip” located on Neighbor’s side of the fence.  The Supreme Court said Seller had the duty to pay a lawyer to represent Buyer in defending against Neighbor’s claim.  Seller was not entitled to condition his duty on retaining the right to settle Neighbor’s claim.  Because Seller did not defend against Neighbor’s claim, Seller had to pay Buyer all the attorney fees Buyer spent defending against the claim.  Even worse for Seller, Buyer had a survey of Seller’s property before the sale and thus knew about Neighbor’s potential adverse possession claim.  But the Supreme Court said Buyer’s knowledge did not matter; Seller still had the “duty to defend” under the SWD.  See also RCW 64.04.030.

Why is this case important to sellers and buyers in Washington?  Mainly because only rare and expensive “extended” title insurance policies insure buyers against adverse possession claims.  Very few homeowners own such extended policies.  Thus, if you end up in the shoes of the Edmonson Seller, you will be personally on the hook to pay a lawyer to defend a neighbor’s adverse possession claim, with no insurance to pay that lawyer.  Worse for sellers, buyers have six years after closing to tender defense of a neighbor’s adverse possession claim.

So what should buyers and sellers do?

First, sellers can give buyers a Bargain and Sale Deed (“BSD”) instead of a SWD.  However, because a BSD contains fewer promises to the buyer and is not typical, the buyer (or his agent) might become suspicious or want a reduced purchase price.  Furthermore, real estate agents, title companies and escrow companies are often not familiar with the BSD.

Second, sellers might want to have the property surveyed before closing.  This will likely reveal any encroachment and allow for resolution of the issue before closing.  But beware, simply revealing the fact of the encroachment to the buyer (whether in the Form 17 or otherwise) will not get the seller off the hook if he gives the buyer a SWD.

Third, buyers can obtain the aforementioned “extended” title insurance policy that covers adverse possession claims.  However, such policies are usually far more expensive than a regular title policy, and buyers will want a real estate lawyer to review the extended policy to make sure it actually does cover adverse possession claims.  Of course, buyer and seller can negotiate who pays the cost of the extended policy and/or the lawyer’s review.

In the end, people should be aware of their rights and responsibilities when giving a SWD, including liability for an adverse possession claim.  Buyers and sellers alike should consult a real estate lawyer to analyze their particular transaction well in advance of closing.

Avoiding Death Taxes – It’s Not Just for the “Rich”

August 11, 2011 at 11:41 am | Latest News | No comment | By Bill Kessler

Most people do not like the idea of the government taking their money after they die.  But many people are unaware that: (a) if they died today, their heirs would be forced to pay state and federal estate taxes (“death taxes”), even if the deceased person is far from the typical definition of “wealthy;” and (b) for most married people with potential estate tax issues, their lawyer can help them avoid estate taxes completely and relatively inexpensively.

 The state of Washington taxes every dollar in an estate above the state’s $2 million trigger, e.g. if an estate is worth $3 million, the third million faces tax.  $2 million has been Washington’s triggering level for several years and may or may not change in the near future.  The federal government’s triggering level is a moving target, reset by the legislature every few years.  In 2011 and 2012, the triggering level is $5 million, but there is no way of knowing where the legislature will peg that figure in future years.  In the last decade, the triggering level has been as low as $675,000.  The state and federal estate taxes usually combine to take about half of every dollar in an estate in excess of the triggering level.

 Many people may initially think they need no estate tax planning because their net worth is well under $1 million.  However, some categories of unobvious wealth will be considered part of a person’s estate for purposes of calculating estate tax.  The most common of these is (a) the life insurance death benefit and (b)retirement accounts such as an IRA and 401(k).  For example, the Smiths have two college-age children and believe their net worth is $700,000.  In that figure, they do not include life insurance and retirement.  Believing they will not approach $2 million in the foreseeable future, they execute simple Wills.  Husband dies in 2013 and wife receives a death benefit of $2 million from Husband’s no-cash-value term policy.  She also receives $500,000 from his 401(k).  Wife dies not long after, with the same simple Will and with an unanticipated net worth of $3.2 million.  Even if the federal government has not reduced the triggering level of estate tax (which it may), and even if Washington’s estate tax trigger stays at $2 million (with the current budget, the state may reduce it), the estate executor (most likely one of the two children) must cause the estate to pay hundreds of thousands of dollars in taxes.  If the federal government had reduced its triggering figure in the meantime, the estate could owe far more in taxes.

 Luckily, many people like the Smiths can completely avoid estate taxes with a Disclaimer Trust.  This is a trust inserted directly into the Wills of married couples.  It requires no additional “trust document” separate from the Will.  In short: If drafted properly, the Disclaimer Trust Will allows a surviving spouse to double the triggering level for estate taxes.  In the Smith example, if Husband’s Will had contained a Disclaimer Trust, it is very likely Wife could have utilized that Disclaimer Trust to raise the Washington state triggering level to $4 million (a combination of Wife’s $2 million “tax shield” plus Husband’s $2 million “tax shield”).  Wife’s estate would pay no taxes, and a couple who thought they were worth only $700,000 would have just saved their children hundreds of thousands of dollars.

             Please call Bill Kessler at (425) 776-4100 if you would like to discuss your estate plan and your options.

New Hope for Tort Claims in Contract Litigation

May 19, 2011 at 7:50 pm | Latest News | No comment | By Bill Kessler

Since the Washington Supreme Court’s decision in Alejandre v. Bull in 2007, a plaintiff was generally prohibited from recovering money damages in tort (e.g. a claim based on negligence) if (a) the plaintiff and defendant had a contract and (b) the tort arose out of the subject matter of that contract.  Dubbed the “Economic Loss Rule,” the logic was to encourage parties in a contractual relationship to allocate the risk of loss in the contract.  For example, in Alejandre, the Supreme Court precluded homebuyers from pursuing a negligence claim against their seller when the septic tank turned out to be defective.  Instead, the buyers were limited to whatever claims they had under their contract with the sellers.

 However, in November 2010, the Washington Supreme Court replaced the Economic Loss Rule with the “Independent Duty Doctrine” in deciding Eastwood v. Horse Harbor Foundation and Affiliated FM Ins. Co. v. LTK Consulting.  Under the Independent Duty Doctrine, “the availability of a tort remedy depends on the existence of a tort duty arising independently of a contract’s negotiated terms, not on whether an injury can be labeled an economic loss.”  In Eastwood, a landlord brought claims against his tenant for breach of contract (i.e. breach of the lease), but also brought a claim for the tort of waste.  The Supreme Court allowed the landlord to go forward with the tort claim because it found the tenant owed the landlord a duty not to commit waste which was independent of the parties’ duties to each other under the lease.

 In conclusion, plaintiffs should generally bring any tort claim they might have, even if they are also bringing contract claims.  Under the Independent Duty Doctrine, those tort claims have a better chance succeeding than they did under the Economic Loss Rule.