In a recent review of contracts for the sale of real estate in Maryland, 42% of the contracts were found not to comply with law.

In the majority of instances, the defect in the contract made it voidable by the purchaser, but in nearly half of the defective contracts, the seller may have been “guilty of a misdemeanor and on conviction is subject to a fine not exceeding $1,000 or imprisonment not exceeding 30 days or both.”

Recognizing that real estate is among the most heavily regulated industries, there are federal, state, and local government requirements for notices and disclosures that must be contained within a contract of sale for real property, and in particular in a contract involving residential property. But it is clear that in many instances, to the peril of the parties (and in most instances to the real detriment of the seller), those government requirements are not being complied with.

The Methodology

100 contracts for real estate that were settled in August, 2006 were reviewed for compliance with laws. The review was admittedly unscientific, if only in that the sample was too small in light of the fact that there were more than 7,155 real estate transactions in Maryland during that month (according to the Maryland Department of Housing and Community Development).

In an effort to consider as representative a sample as possible, 60 contracts were randomly selected from the files of a large title company, 35 from a mid size title company, and 5 from an attorney who has a modest settlement practice. Contracts that were presented as an offer, but not accepted, or otherwise were executed but did not settle (because of the failure of a contingency or otherwise) were not included in this sample; likely inflating the quality of the contracts reviewed.

93 of the contracts were for residential transactions and 7 involved commercial property.

The properties were located in different jurisdictions with varying statutory requirements: 51 in Baltimore County, 20 in Baltimore City, 12 in Anne Arundel County, 9 in Harford County, 4 in Carroll County, 3 in Howard County, and 1 in Prince George’s County.

Of note, this review was not looking for and did not compile missed signatures or other clerical errors. But rather, this review was an effort to identify substantive errors in contracts that could place a party or the transaction in jeopardy.

Professionals Didn’t Help, Much

Curiously, the involvement of a licensed real estate agent actually decreased the statistical likelihood that the contract would comply with the law. That is, there was at least one licensed real estate agent in 77% of the transactions reviewed and while the overall rate for failure to comply with law was 42%, that rate of failing contract increased to 46% when a real estate agent was involved.

But the assistance of an attorney did not improve the situation. In half of the 8% of contracts reviewed where an attorney was identified in the body of the contract, those contracts failed to satisfy the legal requirements. This is a lower compliance rate then when a real estate agent, alone, was involved.

It wasn’t just residential contracts (that admittedly require more disclosures and notices); but not one of the commercial contracts reviewed (each of which involved the services of a real estate agent or an attorney or both) satisfied the legal minimums.

The Forms

It is of interest that although only 77% of the contracts identified a real estate agent, 81% of the contracts utilized at least a portion of preprinted Maryland Association of Realtors forms; although several were copies of older, out of date, versions. When used correctly, the current MAR forms do comply with law. Other contracts used forms available from a popular big box retailer and a commonly utilized ‘legal’ software package; neither of which satisfied Maryland law.

The Errors

The errors, most simply put, were all over the board. Ranked from the most common error:

The single most common error can be characterized as improperly using the preprinted MAR contract form set, by not attaching required addenda to the ‘base’ contract. That is, those forms contemplate the use of one or more sets of preprinted addenda, but in some instances of the contracts reviewed, no addenda, at all, were attached to the base contract, or less than all of the required addenda were attached, or the wrong addenda were attached. This is a significant set of errors when these forms were used in more than 80% of the contracts reviewed and the failure to append the correct addenda leaves the writing without statutorily required disclosures and notices.

Federal and state law require certain disclosures related to lead based paint, but the second most common failing in the contracts reviewed was not properly giving these disclosures. Many parties attached a form to their contract that contained the disclosures, but the use of that form requires that the seller complete certain blanks and that the parties initial and sign the form, however, over 50% of the failing forms were either incorrectly completed or all together left blank.

Interestingly, again related to the improper use of preprinted forms, the failure to ‘check the box’ or check the box correctly, as to whether a property located in Baltimore County is historic, was a major problem. The error was identified in more than 20% of Baltimore County contracts reviewed.

Related to the failure to ‘properly’ give the disclosure of lead based paint in residential contracts (described above), the next most common error was the total disregard of the mandates to make lead based paint disclosures.

Statistically, the next most common failing was the failure in Baltimore City contracts to properly address a tenant’s right of first refusal. The notice was either not given or on the face of the contract could be determined to have been improperly given.

In another error in using preprinted forms, the Prince George’s County contract failed to satisfy the minimum statutory requirements when a preprinted set of addenda from Anne Arundel County (i.e., the wrong county) was attached.

Even contracts for new construction were not exempt from errors. 100% of the Howard County contracts reviewed contravened local law by failing to include the new construction notices and rights of inspection.

More than half of the Harford County contracts did not include the mandatory notice about roadway improvements and land use.

Carroll County local law is fairly easy to comply with, but 50% of the Carroll County contracts reviewed failed by not including the mandated ‘right to farm’ notice, including one instance in which a contract included a right to farm disclosure from another County that did not satisfy the Carroll County code requirement.

And 100% of the Baltimore City contracts that were required to include (or at least reference the later delivery of) a City issued Transfer Certificate failed to do so.

Solutions

Arguments could be made that the Maryland Real Estate Commission education requirements are not properly equipping real estate agents to deal with the ever increasing regulatory scheme. One could also conclude that the large real estate brokerage firms do not properly manage their agents (or, for that matter, their form systems). Or, possibly, local governments should do a better job of making the requirements accessible to the public (e.g., having the requirements located at a single place in the code or on the local government website). In the alternative, modeled after the practice in New York, the legal profession in Maryland should insert itself into real estate transactions. Whatever the solution, it is today difficult to comply with this collection of laws.

Jeopardy for Failure to Comply

There are federal notices on the thickness of insulation in a new house, federal and state lead paint disclosures and warnings, state disclaimers or disclosures with respect to the condition of a property, state forest conservation notices, and a host of other state notices and statements that may be required within a particular contract of sale for real estate. Additionally, most local governments within Maryland impose requirements on sellers of real estate, including mandates to incorporate specific notices within a contract of sale. In fact, the article Checklist of Required Real Estate Contract Provisions in Baltimore County is among the most popular articles on this firm’s website.

There is no single penalty for the failures described above and such should not be a surprise when the laws of so many overlapping governmental bodies can be involved in a single contract. The most common penalty for failing to comply with the law in this area is that the contract will be voidable (most often by the purchaser). In some instances the execution of a deficient contract may be a misdemeanor (i.e., Baltimore County has criminalized the failure to comply with its local real estate contract disclosure laws). And other local governments have prescribed their own remedies, including, for example, if a seller does not provide a Transfer Certificate in Baltimore City that seller “warrants” the property is being used in compliance with zoning regulations.

It is sellers who are greatly disadvantaged because, in almost all instances, it is the purchaser who may void a deficient contract and it is the seller that faces the civil and (admittedly very rare, if ever) criminal penalties. Moreover, that a contract is not in compliance with the law may be used against a seller in an effort to ‘re-negotiate’ business terms, including post settlement re-negotiation.

Given that there is real jeopardy for failing to comply with the laws in this heavily regulated industry, sellers and purchasers of real estate are advised to consult with a real estate attorney.