by Art Macomber, Managing Attorney
September 18, 2017
Even if you are an experienced buyer or seller of real estate, the laws governing real estate transactions in Montana can be perplexing. This article reviews general considerations to make before buying or selling real estate in Montana. The duties of a buyer or seller in Montana vary based on whether the property is residential or commercial, but generally the rights and duties are defined better for one-to-four unit residential than for commercial property.
I. General Tips
A. Contract Interpretation. In reviewing a real estate purchase and sale agreement, you should assume nothing and check everything. Montana courts interpret contractual provisions according to their plain, ordinary meaning. See section 1-4-101 of the Montana Code Annotated (“M.C.A.”). Generally, a Montana court will consider evidence outside the contract to interpret its language only if it determines the contract language is ambiguous. However, Montana courts may consider evidence outside the contract in making the initial determination whether the language is ambiguous. See Mary J. Baker Rev. Tr. v. Cenex Harvest States Coop., Inc., 338 Mont. 41, 56, 164 P.3d 851, 866 (2007).
Therefore, you should make sure the language of the contract precisely reflects your understanding of the transaction. This is the best way to avoid explaining in court what you thought a contract provision “really” meant.
- Get it in writing. Require written documentation to substantiate oral representations prior to purchase. Oral contracts to convey interests in real property are invalid in Montana. M.C.A. § 70-20-101. Montana courts will not typically enforce oral agreements to convey interests in real estate.
- Be specific. Be prepared to identify and clarify vague, ambiguous, or overbroad contract wording. Montana courts will not enforce any implied meanings or assumptions you had going into the purchase. Get specific before you buy. Be specific about what performance is expected, the timeframe within which the performance must be completed, and the remedies each party has if the other party does not perform on time.
B. Buyer Beware. Although Montana requires some disclosure to buyers (as discussed below), the buyer must still be diligent in investigating potential issues with the property. Montana courts usually uphold caveat emptor (“buyer beware”) clauses in sales contracts; they will not award damages to buyers who discover defects in the home after buying it. There are two notable exceptions to this rule.
The first exception to caveat emptor is if a seller actively prevented a buyer from inspecting the house to discover defects. An act of this type by a seller is known as fraud or misrepresentation. M.C.A. §§ 27-2-102(3)(b) (claim accrues when buyer finds out about the defect); 27-2-203 (two year statute of limitations to make a fraud claim). See Durbin v. Ross, 276 Mont. 463, 469, 916 P.2d 758, 764 (1996); citing Lee v. Armstrong, 244 Mont. 289, 293, 798 P.2d 84, 87 (1990) (nine elements of a fraud claim).
The second is the implied warranty of habitability. In 1982 the Montana Supreme Court adopted the implied warranty of habitability. This means that when a buyer purchases a newly built home the builder guarantees the home was “constructed in a workmanlike manner and is suitable for habitation.” Chandler v. Madsen, 197 Mont. 234, 239, 642 P.2d 1028, 1031 (1982). In Chandler, the buyer sued the builder for problems caused by an underlying soil condition. These problems included inoperable doors and locks, cracked walls, bulged floors, broken windows, bent plumbing, and separated walls and fixtures. Further, the foundation was lowered by up to 3.6 inches in spots. Id. at 236-237, 642 P.2d at 1030. The Court reasoned that the builder is in a better position to discover and prevent the harms; therefore, he should be liable under an implied warranty of habitability. Id. at 240, 642 P.2d at 1032. The implied warranty of habitability is limited to defects that make a house uninhabitable. Satterfield v. Medlin, 312 Mont. 234, 237-238, 59 P.3d 33, 36 (2002).
For a newly constructed residence that has not been previously occupied and where the seller is the builder or a developer who has built or had the residence built for the purpose of resale, Montana Code requires the provision of a warranty from defects that is at least one year long. M.C.A. § 28-2-2202.
While these exceptions provide buyers some recourse, the remedies are very limited. Most sellers will allow buyers to inspect the premises, and the implied warranty only covers defects that make a new house uninhabitable. Therefore, a buyer should carefully investigate any property before purchasing it. After the sale closes, a buyer has limited recourse to having the seller cure defects. If you are not careful you could end up with a property that is very expensive to fix and maintain.
C. Required Seller Disclosures: Montana law requires a “seller[’s] agent,” defined at M.C.A. 37-51-102(23), to disclose to the seller all relevant and material information the seller’s agent knows concerning the transaction that is not known or discoverable by the seller. M.C.A. 37-51-313(2)(c). Further, the seller’s agent must disclose to the buyer any “adverse material facts” the seller’s agent knows about the property. M.C.A. § 37-51-313(3)(a).
An “adverse material fact” is “a fact that should be recognized by a broker or salesperson as being of enough significance as to affect a person’s decision to enter into a contract to buy or sell real property.” MCA § 37-51-102(2)(a). This may include facts that materially affect the property’s value or structural integrity, presents a health risk to occupants, or affects the buyer’s ability or intent to perform his contractual obligations. Id.
For habitable structures, regardless of the number of units, a sale of a residential unit may be accompanied by a disclosure related to mold. M.C.A. § 70-16-703. “Whenever a seller or landlord or an agent of either has knowledge that a building has mold present, the seller, landlord, or agent of either shall, prior to or upon entry into a contract for the purchase, rent, or lease, disclose to the buyer or renter the presence of the mold.” M.C.A. § 70-16-703(2). If a test of the premises for mold has been done, a seller must provide to a buyer, or a landlord must provide to a tenant a copy of the test. Id. However, no buyer or tenant should depend on the results of a seller’s or landlord’s test to satisfy themselves about the presence or non-presence of mold, but should always procure their own testing, because seasonal or other conditions may be present or may have occurred that would alter the results as presented in the test provided by a seller or landlord.
However, a seller’s agent is not required to verify any statements made by the seller or to inspect the property. M.C.A. § 37-51-313(3)(a); see Watterud v. Gilbraith, 381 Mont. 218, 224, 358 P.3d 891, 897 (2015). Both seller agents and buyer agents must disclose when they have no personal knowledge of the veracity of information about adverse material facts concerning the property. M.C.A. §§ 37-51-313(3)(b); 37-51-313(5)(b). Although many sellers will complete a property disclosure form to address the range of potential issues, Montana does not require it.
Therefore, Montana law provides relatively few protections to buyers regarding seller disclosures. As a result, buyers of real property in Montana are well advised to have their own inspections completed within a timeframe allowing a written objection be made to the seller to require cure of poor physical conditions or defects before closing escrow.
II. Due Diligence
A. 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. Diligence that is due is the care a reasonable person would undertake to determine the property attributes.
- 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 should never be the deciding factor in your purchase decision.
- Water. A person acquires water rights in Montana by diverting water to a beneficial use. Whether diversion is from surface water or from a well, a permit is required from the Montana Department of Natural Resources and Conservation, Water Rights Bureau. If there is a well on your prospective parcel, you will need to contact the Montana Ground Water Information Center for the well driller’s information. The priority of use in Montana is “first in time, first in right.” If drought conditions occur, water shortages could intensify. In that situation, vacant parcels not served by an existing diversion will likely have no water rights.
- 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.
B. The Paperwork: The primary types of paperwork affecting the purchase of real property are documents found in the County Recorder’s office as listed in your preliminary title report, and any private equitable servitudes, conditions, restrictions, or rules and regulations governing the parcel’s use. Beyond the County Recorder’s office, there may be other public agencies that have records involving a parcel of property, such as the local building and planning office, or other local, state, or federal agencies.
- Writing. Conveyances of real property in Montana are required to be in writing. M.C.A. § 70-20-101. A grant of real property must be substantively in the form prescribed in Montana Code Annotated section 70-20-103. The Montana Association of Realtors has developed a set of forms for real property transactions, although no specific forms are legally required.
- 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. Even without a homeowners’ association, a simple three-member road or septic or water system maintenance agreement should have financial records related to that maintenance. You need to ask for those records for your review and approval within the due diligence period negotiated in your real estate purchase contract, or be ready to live with the results after close of escrow. Look for financial records of funds held in reserve to assure capital maintenance can be completed without surprise special assessments. Monetary reserves for capital asset maintenance or replacement are not required in Montana. 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.
- Bylaws and Rules and Regulations. Applicable bylaws and rules and regulations of a homeowner or condominium association are other documents you may encounter. Montana Code Annotated section 70-23-307 requires condominium associations to record their bylaws along with any amendments.
- Articles of Incorporation. Articles of Incorporation are filed with the Secretary of State by incorporated, private non-profits (homeowner association or condominium) set up pursuant to the Montana Nonprofit Corporation Act, located in Montana Code Annotated (M.C.A.) title 35, chapter 2.
- 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 Montana are generally subject to equitable servitudes.
- Title Report Tip #1. 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. These documents can include deeds, easements, surveys, plat maps, covenants, conditions, and restrictions.
- Title Report Tip #2. The contract may also contain a Title Contingency Addendum. This Addendum gives the buyer a specified number of days 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 certain amount of time 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 Tip #3. 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, Montana title insurance will not cover any negative impacts that public-record 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, or hire a professional to provide a written legal opinion on those public record documents, see http://timelycontract.com. 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.
- Hierarchy of documents. If you are 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.
III. Enforcing Purchase and Sale Agreements
A. Earnest monies. A seller may retain the earnest money he received in the event the buyer does not close.
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. This third party is usually the title company 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.
B. Specific performance. The buyer will want the purchase contract to contain a “specific performance” provision. “Specific performance” means that a court can impose an equitable remedy through a court order to force the seller to sell the property to the buyer as contracted. In most breach-of-contract cases, money damages are the only remedy. But Montana courts have long held that an order of specific performance is appropriate when a seller breaches a contract to sell real property, because each real property parcel is unique and money damages do not adequately compensate a buyer. See, e.g., Boyne USA, Inc. v. Spanish Peaks Dev., LLC, 368 Mont. 143, 158, 292 P.3d 432, 444 (2013); see also C.A. §§ 27-1-411, 27-1-419.
IV. Real Estate Brokers and Property Managers
A. Real Estate Agents. Montana Code Annotated section 37-51-313 lists a real estate licensee’s obligations to buyers and sellers. As is the case in other jurisdictions, allowing a real estate agent to represent both buyer and seller can be problematic, and in some situation presents an insurmountable conflict of interest.
B. Property Managers. Montana requires property managers to be licensed. M.C.A. § 37-51-601. Make sure you verify the licenses of any real estate agents, brokers, or property managers with which you deal. License information can be found by contacting the Montana Depart of Labor & Industry. You can also search for a Licensee online at https://ebiz.mt.gov/pol/.
Many non-investors purchase real property less than four times in their life. Buying property is usually the largest investment a person will ever undertake, and so good planning is mandatory. An old adage is that when purchasing property the sale of it should be contemplated in order to fully understand the ramifications of the purchase. It is important to get representations about the condition of real property in writing. If someone is not willing to commit to a representation in writing, that should be an immediate red flag recommending caution.
NOTE: This posting is not legal advice. This information is general in nature. Legal advice is based on specific facts. Contact Macomber Law if you have a specific concern about a particular parcel of land.