A few days ago, I wrote a blog about the four reasons why lender restrictions in short sale addenda are unenforceable. To recap, they are:
The Four Components
1. The restrictions are required without legal “consideration” and are therefore invalid;
2. The restrictions are voidable because there is no “privity” of contract;
3. The restrictions cloud title (some states formally prohibit the restrictions);
4. The restrictions violate the spirit and intention of Uniform Commercial Code.
Today, I will discuss the third component in the four part series. Many if not most of the restrictions placed upon a subject short sale property are unenforceable because they cloud title. Real estate agents, attorneys, title underwriters and title agents are all put in an uncomfortable position because of these restrictions. The restrictions place liability upon all of these real estate professionals because they may be placed in a position of being deemed to know details about a prior or up-coming transaction. Real estate agents are being placed in a challenging position as their duty to their client (unless it is a REO property) is being jeopardized by the restrictions. Honoring the restrictions may violate the contractual duties of a client.
Additionally, such restrictions place a cloud on the title and the short selling lender does not have the legal capacity to cloud title after the sale. Several states have regulations against such activity as well, and despite this, lenders continue to place restrictions on future sale. I have experienced this first handed on a transaction in North Carolina. The closing attorney indicated to Wells Fargo that North Carolina has a law that prohibits restriction on sale (clouding of title). Wells’ response was that they do not care about the North Carolina law because the investor (Freddie Mac) indicated that the closing attorney must honor the prior short sale restrictions or the transaction is void. Pretty nasty, huh??
It took several calls to closing attorneys to get escrow closed because none of the closing attorneys would sign the required affidavit.
Padraic Deighan, Esq
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