A Contract Series – Part 4 The Arizona REALTORS® Residential Resale Purchase Contract - Title and Escrow

 

This is Part 4 of a series of articles discussing the major provisions in each of the sections of the Arizona REALTORS® Residential Resale Real Estate Purchase Contract (10/22) (“Contract”).  The previous articles in this series can be located at Arizona Real Estate – A Professional’s Guide to Law & Practice. (arizonarealestateprofessionalguide.blogspot.com)

An escrow is primarily a conveyance device designed to carry out the terms of a binding contract of sale previously entered into by the parties.

TITLE AND ESCROW SECTION

This section sets forth the instructions to the escrow/title company. All pages of the Contract, any addenda, and any other agreements that change the original Contract terms should be sent to the escrow/title company.[1] 

Escrow

The Contract is to be used as escrow instructions.  The escrow company employed by the buyer and seller to carry out the terms of the Contract is identified in this subsection.

•  Identify the escrow/title company – not just the escrow agent.

• Escrow and title are not interchangeable.  The escrow company acts as a neutral third party to make sure the terms of the Contract are fulfilled, and the funds are held and distributed as instructed.  The title company researches the property to be transferred and issues the title insurance policies to the buyer and lender. 

• Ensure that the escrow/title company has all buyer’s and seller’s contact information early in the transaction – fill out Section 9 of the Contract completely to avoid unnecessary delays.  The escrow company will want to confirm the identity of the seller early in the transaction due to the increase in number of deed fraud cases.

• If you receive a request for client contact information late in the transaction – make sure that the request is from the escrow agent, not a third party attempting to perpetrate wire transfer fraud.   

• The escrow company often requests the parties to execute supplemental instructions.

Title and Vesting

The buyer will take title as determined before close of escrow (“COE”). The buyer is advised that a disclaimer deed may be required if buyer is married and intends to take title as his/her sole and separate property. The buyer is further advised that taking title may have significant legal, estate planning, and tax consequences; therefore, the buyer should obtain legal and tax advice. The common ways to hold title are summarized below.

•  Tenancy in Common: Co-ownership where the parties have no survivorship rights. All grants of real property made to two or more persons create estates in common and not in joint tenancy, except grants or devises in trust, or to executors, or to husband and wife.
• Joint Tenancy with Right of Survivorship: Co-ownership in which upon the death of one co-owner the title automatically conveys to the surviving co-owner.

• Community Property: Co-ownership by married persons. Upon the death of one spouse, the deceased spouse’s interest may be conveyed by will or intestate succession.

• Community Property with Right of Survivorship: Co-ownership by spouses in which upon the death of one spouse, title to the property is vested in the surviving spouse.

• Sole and Separate: Sole ownership of a property. A spouse may hold title as his or her sole and separate property, however, the spouse not on title must generally execute a disclaimer deed evidencing their consent. 

• Entities: A properly formed trust, partnership, corporation, or limited liability company may also hold title to real property. 

Title Commitment and Title Insurance

The escrow company is instructed to deliver a commitment for title insurance together with complete and legible copies of all documents that will remain as exceptions to the title insurance or title commitment to the buyer. The title company is instructed to send the title commitment directly to the buyer and the seller, with copies to be sent to the broker(s).

The buyer has five days after receipt of the title commitment and after receipt of notice of any subsequent exceptions to provide notice to the seller of any items disapproved.

The seller agrees to convey title by “warranty deed, subject to existing taxes, assessments, covenants, conditions, restrictions, rights of way, easements and all other matters of record” and provide the buyer with the best title policy available.

• Before issuing the title commitment, the title company issuing the title insurance policy will perform a title search on the property. The results of the title search that may be an issue in the transaction will be included in the title commitment. Thus, the title commitment may contain important disclosure issues, such as:

o    easements

o    CC&Rs and other deed restrictions

o    access problems

o    whether the property is in the vicinity of a military airport

o    prior leases

The title commitment may also reveal problems that could delay the close of escrow, such as: 

o    court orders/divorce decrees

o    probate issues

o    foreclosures

o    bankruptcies

o    judgment liens

o    state and federal tax liens

o    environmental liens

o    other matters of record affecting title

• The title commitment is divided into several sections: Schedule A, Schedule B Requirements and Exceptions, and exceptions/exclusions, and should be accompanied by the “underlying documents.” The underlying documents are copies of the actual documents referred to in Schedule B.

o   Schedule A: Schedule A sets forth the search date, the amount of insurance coverage, the name of the insured, and the legal description of the property being insured. Check the policy to be issued in Schedule A of the title commitment to ensure that the best policy type available will be issued. The American Land Title Association (ALTA) Homeowner’s Title Insurance Policy is generally considered the best available for residential transactions.

o   Schedule B (part 1) - Requirements: The requirements section lists what things must be done before escrow can close and title insurance will be issued. If a requirement cannot be met, close of escrow may be prevented or delayed. The common requirements include the payment of taxes, HOA assessments, recording a release and reconveyance of the deed of trust currently encumbering the property, recording the deed, and recording the deed of trust securing the new loan.  Talk to the escrow officer about fulfilling any unusual requirements as soon as possible to avoid a delay in close of escrow.

o   Schedule B (part 2) - Exceptions: This may be the most important part of the title commitment because it lists the items that the title company will not insure and buyers are often unaware that they need to read the exceptions to coverage.  This section lists the specific exceptions from coverage that the title company discovered during its title search. Buyers should carefully review the exceptions of the title commitment for disclosure items and for restrictions on the use of the property. The buyer’s agent should refer the buyer to the escrow officer or an attorney if there are questions or concerns about the exceptions in Schedule B.

o   Exceptions/Exclusions: There are also standard exclusions from the title insurance policy, generally including those listed below.

o   Any law, ordinance or governmental regulation relating to the use of the property.

o   Any governmental police power, unless recorded.

o   Rights of eminent domain, unless recorded.

o   Defects, liens, encumbrances, adverse claims or other matters agreed to by the buyer.

o   Claims arising from bankruptcy or other creditors’ rights laws

The title insurance policy will be issued as of close of escrow. Title insurance does not insure that a title defect will not occur; it insures that if a defect that occurred prior to the policy date is discovered after COE, the buyer will be indemnified if the defect cannot be cured. A standard policy generally insures against the title to the property being vested other than stated in the policy; any defect in, or lien or encumbrance on the title; unmarketability of title; and lack of a right of legal (not necessarily physical) access. The ALTA Homeowner’s Title Insurance policy provides coverage for additional defects.

Additional Instructions

The additional escrow instructions require the escrow company to:

• Furnish a notice of the pending sale that contains the name and address of the buyer to any homeowner’s association in which the premises is located.

·     Deliver to the buyer and the seller, upon deposit of funds, a closing protection letter from the title insurer indemni­fying the parties for any losses due to fraudulent acts or breach of escrow instructions by the escrow company, if the escrow company is also acting as the title agency but is not the title insurer issuing the title insurance policy.

o   Often the escrow company may be only the agent for the actual title insurer, who is liable for the financial backing for the title insurance. This is often the case when the escrow company name includes the term “agency.” The Contract requires that if the escrow company is not the title insurer, that the title insurer provide a closing protection letter indemnifying the parties for any losses due to fraudulent acts or breach of escrow instructions by the escrow company.

·      Modify its standard documents to the extent necessary to be consistent with the Contract.

·       Allocate escrow company fees equally between the seller and the buyer, unless otherwise stated.

·        Send copies of all notices and communications pertaining to the transaction to the seller, buyer and broker(s).

·          Provide the broker(s) access to escrowed materials and information regarding the escrow.

·           Record the Affidavit of Disclosure at COE, if applicable.

o   An Affidavit of Disclosure is required if the seller is transferring five or fewer parcel of land, other than subdivided land, in an unincorporated area of a county. 

Tax Prorations

Real property taxes payable by the seller are prorated to COE based upon the latest tax information available.

 Release of Earnest Money

In the event of a dispute between the buyer and seller regarding any earnest money deposited with the escrow company, the parties authorize the escrow company to release the earnest money pursuant to the terms and conditions of the Contract at its sole and absolute discretion. The parties agree to hold harmless and indemnify the escrow company against any claim or loss arising from the release of the earnest money.

 Proration of Assessments and Fees

All assessments and fees that are not a lien as of the COE, including homeowners’ association fees, rents, irrigation fees, and, if assumed, insurance premiums, interest on assessments, interest on encumbrances, and service contracts are to be prorated as of COE unless otherwise indicated. 

 Assessment Liens

The amount of any assessment, lien or bond including those charged by a special taxing district, such as a Community Facilities District, shall be prorated as of COE. 

 Escrow Donation to Build Permanent, Affordable, Supportive Housing for Those in Need

Consider asking your client to make a $25 donation at COE to the Arizona Housing Fund (“AHF”) by filling out the AHF Escrow Donation Form  and delivering it to the escrow agent.  The donation will be reflected on the settlement statement and the donation will be sent directly to the AHF from escrow.  The donation is tax deductible and 100% of the donation goes to build permanent, affordable, supportive housing for those in need across the state. 

For more information on the AHF go to:  https://arizonahousingfund.org/

Conclusion

At COE, make sure the client carefully reviews the settlement statement provided by the title/escrow company at COE to ensure all the fees are accurate.  Additionally, encourage the client to ask the title/escrow agent any questions that they may have. The title/escrow agent is there to make sure that the terms of the Contract are carried out and that escrow closes smoothly. 

 Next Article – Disclosure Section

K. Michelle Lind, Esq. is an attorney who currently serves Of Counsel to the Arizona REALTORS®.  She is also the author of the book - Arizona Real Estate: A Professional's Guide to Law and Practice (3rd Ed.) . 

For more real estate related articles, visit Michelle’s Blog at Arizona Real Estate – A Professional’s Guide to Law & Practice. (arizonarealestateprofessionalguide.blogspot.com)

This article is of a general nature and may not be updated or revised for accuracy as statutory or case law changes following the date of first publication. Further, this article reflects only the opinion of the author, is not intended as definitive legal advice and you should not act upon it without seeking independent legal counsel.  3/28/23

_________________________________________________________

[1] Thank you to Christin Mack for her input on this article.