Even as an experienced buyer or seller of real estate, the laws governing real estate transactions in Washington can be perplexing. This article reviews general considerations to make before buying or selling real estate in Washington.
A. Contract Interpretation. In reviewing a real estate purchase and sale agreement, you should assume nothing and check everything. Washington follows the “objective” theory of contract interpretation, where courts look to the language of the contract to determine the parties’ intent. Most real estate purchase and sale agreements in Washington will have standardized provisions, changes to which can be negotiated by the parties.
Although Washington courts may consider evidence outside the contract to determine the meaning of language in the contract, they will not use outside evidence to infer a meaning independent of the contract language. So you should make sure the language of the contract precisely reflects your understanding of the deal. You do not want to have to explain in court what you thought a contract provision “really” meant.
B. Buyer Beware. Although Washington requires that sellers make substantial disclosures before selling real estate (as discussed below), the buyer must still be diligent in investigating potential issues with the property. If the buyer has even some idea of a possible problem but fails to investigate, the seller will probably win a subsequent lawsuit.
For example, the Washington Court of Appeals recently held that even where the seller of a residential property both failed to disclose rot and decay to the house on the disclosure form and directed a hired laborer to cover it up, the buyer could not recover damages and still owed the seller on the promissory note. Douglas v. Visser, 173 Wn.App. 823, 295 P.3d 800 (2013). The court based its holding on the fact that the buyer’s own inspector had alerted him to a “small area of rot and decay near the roof line” and a “rotted sill plate.” Because the buyer did not investigate this further before completing the purchase, the court held that he could not recover from the seller and still had to pay the seller on the note.
In light of this case, Washington buyers must be very careful about what they are buying. If you are a buyer and you receive any indication of a defect in the property, you must affirmatively investigate the matter before closing the sale. Failure to do so will likely bar you from suing the seller in the future.
C. Required Seller Disclosures: Washington requires relatively extensive seller disclosures before any sale of real property—whether the property is residential or commercial. The disclosure form required depends on whether the property is commercial, “improved residential,” or “unimproved residential.”
NOTE: The Revised Code of Washington defines “improved residential real property” as real property with one to four residential dwelling units, certain residential condominiums, residential timeshares (unless subject to written disclosure by law), and mobile or manufactured homes. RCW § 64.06.005(2). “Unimproved residential real property” is property zoned for residential use that is not improved by any of the above. RCW § 64.06.005(5).
The seller disclosure form for commercial property must contain, at a minimum, the information listed in Revised Code of Washington section 64.06.013. The disclosure forms for unimproved residential property and improved residential property must contain the information listed in Revised Code of Washington sections 64.06.015 and 64.06.020, respectively. The seller must deliver the disclosure statement to the buyer within five business days after the parties’ mutual acceptance of a contract to sell the land. The buyer then has three business days from the date the seller delivers the disclosure statement to rescind the contract (unless the seller corrects the issue at least three business days from the closing date).
Although a comprehensive discussion of the contents of these forms is beyond the scope of this article, some of the important points can be summarized here. To begin with, each disclosure form requires sellers to state whether they have title to the property, and whether the title is subject to any adverse interests, such as a right of first refusal, an option, a lease, or a life estate. Encroachments, boundary agreements, and easements must also be disclosed.
These forms also require disclosures related to water. For residential properties, sellers must disclose—among other items—the source of water, the existence of any easement(s) for access to or maintenance of the water source, and whether any repairs to the water system are needed.
For improved residential and commercial properties, the seller must make disclosures about any structural issues. This includes disclosure of whether the roof has leaked in the past five years. It also includes disclosure of whether there have been any additions, conversions, or remodeling and, if so, whether all permits were obtained and final inspections conducted. And the seller must disclose whether there are any defects with various parts of the structure, such as the foundations, the ceilings, or the walls.
Each of the required disclosure forms also has an “Environmental” section. This section requires disclosure of any flooding, standing water, or drainage problems on the property affecting the property itself or access to the property. The seller must also disclose any substances, materials, or products in or on the property that could be environmental concerns—such as asbestos, formaldehyde, radon gas, lead-based paint, fuel or chemical storage tanks, or contaminated soil or water. Disclosure of any soil or groundwater contamination is also required, as is disclosure of whether the property has ever been used as a dumping site.
Washington law allows the buyer to waive receipt of the disclosure form. RCW § 64.06.010(7). However, if the answer to any question on the “Environmental” section of the disclosure form would be “Yes,” then the buyer cannot waive receipt of the disclosures. Id. Moreover, the disclosure requirements do not apply to certain transfers of land, including: foreclosures or deeds in lieu of foreclosure; gifts between close family members; transfers between spouses in connection with martial dissolution; transfers where the buyer had an ownership interest in the property within two years of the date of transfer; transfers of life estates or other interests less than fee simple; or transfers made by the personal representative of an estate or a trustee in bankruptcy. RCW § 64.06.010(1)-(6).The above discussion covers only some of the required disclosures. For complete information about the required disclosures for each type of real property, you should consult Revised Code of Washington sections 64.06.013, 64.06.015, and 64.06.020.
D. Due Diligence issues:
(1) The Land: Within a municipality with residential one- to four-unit zoning for parcels created by a platted subdivision, easements are typically referenced, access by public or private road is required, zoning is well-defined, and water, sewer, and power are usually provided. Buyers typically do not have problems with real property purchases of this type.
Outside of a municipality, perform your due diligence:
Survey. Unless there was a subdivision of a larger parcel and you can find the monument corners for your subject parcel, a ground survey or drone mapping flyover is recommended as a contingency of a purchase contract. A ground survey will determine the true boundaries of the parcel, rather than relying on alleged markers like hedges or fences, which frequently are not accurate representations. A drone mapping flyover will allow analysis of topographic and other features.
Zoning. Regardless of the parcel’s zoning, you need to know what is allowed, including conditional uses, and whether a variance may be required for your planned use. Visit your county planning department for zoning information.
Septic. If your parcel needs septic wastewater treatment onsite, you may need percolation testing. If there are significant rock outcroppings or other obstructions to provision of an underground septic system, particularly with drainage fields (primary and backup) but also with piping, significant additional expense may be determinative of your purchase decision. It may help to check with your potential neighbors for their experience with their land. Oral representations should be gathered as a first step, but never should be the deciding factor in your purchase decision.
Water. Water rights in Washington are gained by diverting water from a natural source to a beneficial use, and whether diversion is from surface water or from a well a permit is required from the Washington State Department of Ecology (DOE). If there is a well on your prospective parcel, you will need to contact DOE for the well driller’s information. The priority of use in Washington is “first in time, first in right.” In Washington, water shortages have been more visible recently as drought conditions have affected the state. Vacant parcels not served by an existing diversion will likely have no water rights, so don’t look for or expect them.
Special needs. Be sure to account for special needs for your planned use, such as physical accommodations for handicapped persons or assessment of public school education.
(2) The Paperwork: The primary types of paperwork affecting the purchase of real property are documents found in the public record as listed in your preliminary title report, and any private equitable servitudes, conditions, restrictions, or rules and regulations governing the parcel’s use.
Deeds. Conveyances of real property in Washington are required to be by deed; the only exception is for certain transfers of real property owned by a trust. RCW § 64.04.010.
Title Report I. A preliminary title report is critically important because that is where you find the list of documents in the public record that might affect title to or use of the land. The Northwest Multiple Listing Service (NMLS) Form 21 (Residential Real Estate Purchase and Sale Agreement) is often used for residential real estate sales in Washington. Paragraph (d) of Form 21 provides that unless the agreement otherwise specifies, title to the property must be marketable at closing.
Title Report II. The contract may also contain the NMLS Form 22T Title Contingency Addendum. This Addendum gives the buyer a specified number of days (five days unless otherwise stated) from either mutual acceptance of the agreement or the date the buyer receives the preliminary title commitment to give written notice of the buyer’s disapproval and the reasons for the disapproval. The seller then has a time period (five days unless otherwise stated) in which to give the buyer written notice that the seller will clear all disapproved encumbrances on the property. The seller has until the closing date to do so, or the agreement may be terminated.
Title Report III. Due to differences in different types of residential and commercial contracts, we suggest you modify your contract to make acceptance of and approval of the preliminary title report and the documents identified in it a contingency of the contract, if it is not already. Require a minimum of ten (10) days for legal review and evaluation of those listed documents. As in most jurisdictions, Washington title insurance will not cover any negative impacts that public documents may have on the title or the use of land. Review the preliminary title report and the public record documents prior to undertaking other due diligence. Your real estate purchase and sale agreement calendar of performance must account for this document review, along with review of necessary environmental reports, estoppel certificates, and other contingent documents such as may be used in commercial, industrial, or agricultural land purchase contracts.
Covenants, Conditions and Restrictions (CC&Rs). CC&Rs are equitable servitudes, which are private, contract-based land-use rules imposed upon all parcels in a residential or commercial subdivision. Equitable servitudes “run with the land,” meaning that, regardless of whose name is on title, the land-use restrictions survive any subsequent owner’s conveyance to a successor owner. Homeowner and condominium associations in Washington are generally subject to equitable servitudes. Within the world of governing documents, only the CC&Rs “run with the land.”
Articles of Incorporation. The Articles of Incorporation are filed with the Secretary of State by incorporated, private non-profits (homeowner association or condominium) set up pursuant to Chapter 24.03 of the Revised Code of Washington. Chapter 24.03 of the Revised Code of Washington is a general private non-profit corporation statute. Homeowner associations in Washington are additionally governed by chapter 64.38 of the Revised Code of Washington, while condominiums created after July 1, 1990 are governed under Revised Code of Washington chapter 64.34. Condominiums created before July 1, 1990 are governed by Revised Code of Washington chapter 64.32.
Bylaws and Rules and Regulations. Applicable bylaws and rules and regulations of a homeowner or condominium association are other documents you may encounter.
Homeowner Association Records and Budgets. Financial or other governing entity documents include meeting minutes of boards of directors and members, and financial statements of account. HOA boards in Washington are required to mail to all owners a summary of any proposed regular or special budget within 30 days after the board adopts the budget and 14-60 days before the owners consider ratification. This summary must include detailed information about current and future assessments and reserve account balances, as well as the recommended future funding levels for the reserve account. As a result, HOA members in Washington have a greater ability than ever before to monitor and evaluate expenses in the association.
Homeowner Association Reserve Accounts. Washington law encourages, but does not require, HOAs to have a reserve account with a financial institution to fund major maintenance, repair, and replacement of common areas. This means associations with physical assets to maintain, be they land or mechanical in nature are better served with a portion of association dues going toward a reserve account in an amount sufficient to service the land or replace the physical asset at its projected end of life.
Homeowner Association Reserve Studies. Washington HOAs with “significant assets” are required to have a “reserve study” completed and, upon completion, updated annually. A “reserve study” is a long-term (30 years) budget planning tool where an independent third party analyzes both the physical inventory and financial records of an HOA to determine how best to plan for expected future expenditures (such as future capital expenditures for maintenance of common areas). An HOA has “significant assets” under Washington law if the current replacement value of its major reserve components is at least 75% of the gross budget of the HOA (excluding the HOA’s reserve account funds).
Hierarchy of documents. If you purchasing in a homeowner or condominium association, look for an explicit explanation in those documents about which document controls in case of a conflict between documents. For example, it may be the case that the CC&Rs will control over the Articles of Incorporation, which will in turn control over the Bylaws, etc.
E. Enforcing Purchase and Sale Agreements:
(1) Earnest monies. The Northwest Multiple Listing Service Form 21 (Residential Real Estate Purchase and Sale Agreement) states in paragraph (b) that the buyer must either: (i) deliver the earnest money within two days of mutual acceptance of the agreement to the selling broker, who will deposit any check with the selling firm; or (ii) deliver any earnest money to be held by the closing agent within three days of receipt or mutual acceptance of the agreement (whichever occurs later).
Although there is a common-law-based fiduciary duty owed to someone for whom monies are being held by another for safekeeping, you don’t want to have to appear before a judge to have this affirmed. It is the preferred practice to deposit earnest monies for a real estate purchase and sales agreement with a neutral third party, usually the title company that is also performing escrow services. Some real estate companies and contracts still allow the buyer’s or seller’s broker to hold earnest money funds prior to close of escrow. Even though statutory requirements applicable to how a real estate broker accounts for earnest money are relatively precise, when a neutral third party holds the funds a signed release by both parties usually facilitates contract termination without litigation.
If the buyer fails to close, the seller can keep as earnest money an amount up to five percent of the purchase price. RCW § 64.04.005(1).
(2) Specific performance. While the seller can get up to five percent of the purchase price in earnest money if the buyer fails to close, the buyer will want the land sale contract to contain a “specific performance” provision. “Specific performance” means that a court can order the seller to sell the property to the buyer as contracted. In most breach-of-contract cases, money damages are the only remedy available. But courts, including Washington courts, have long held that an order of specific performance is appropriate when a seller breaches a contract to sell real property. As a result, the buyer should make sure the contract allows specific performance if the seller breaches.
F. Real Estate Brokers and Property Managers:
(1) Real Estate Agents. Washington statutes delineate a real estate licensee’s obligations to a buyer or a seller. These statutory agency requirements are spelled out in a pamphlet in the form required under RCW 18.86.120. As is the case in other jurisdictions, allowing a real estate agent to represent both buyer and seller can be problematic, and in many cases presents an insurmountable conflict of interest.
Property Managers. In Washington, property management is classified under “real estate brokerage services.” As a result, property managers in Washington are required to have a broker’s license.
Make sure you verify the licenses of any real estate agents, brokers, or property managers you deal with. License information can be found by calling the Washington State Department of Licensing at (360) 664-6505. To verify the license for a mortgage broker or lender, you can call the Washington State Department of Financial Institutions at 1-877-RING-DFI.
(2) Real Estate Excise Tax: Washington State imposes a tax on the sale of real property. The State tax rate is .0128%, although counties or municipalities may impose additional taxes. The tax applies to the seller, but the buyer may be held liable for the tax if it cannot be collected from the seller. The tax is usually collected by the county upon presentation of the documents of sale for recording in the public records.
Washington State also applies the real estate excise tax to sales of “controlling interests” in business entities that own real property in the State. For a corporation, a “controlling interest” means 50% or more of the total voting stock or 50% or more of the of the capital, profits, or beneficial interest in the voting stock. For business entities besides corporations, a “controlling interest” is 50% or more of the capital, profits, or beneficial interest in the entity.
There are a number of exceptions to the real estate excise tax. Among others, these include: gifts, inheritances, or devises; foreclosure sales or deeds in lieu of foreclosure; and transfers to beneficiaries of an irrevocable trust.
Good luck with your purchase. Welcome to Washington!
Note: This post is not legal advice, and should not be relied upon as such. Different sets of facts will likely lead to different legal conclusions. If you need assistance with real property matters, call Bristol George, PLLC for a forty-five minute, no charge consultation to see if we can help.
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