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Legal Matters
Best of the Legal Hotline - Environmental Issues
by Debbi Conrad &
Tracy Rucka
The following questions concerning methamphetamine labs, radon,
asbestos and other environmental testing issues were recently asked of
the Legal Hotline.
Methamphetamine Labs
| Q. What disclosures are necessary for
properties that have been used as methamphetamine labs? What are
the proper clean up procedures? |
| A. Methamphetamine (meth) is a man-made
amphetamine, produced and sold illegally in the form of pills,
powder or chunks. Meth, like cocaine and other amphetamines, has
affects on the central nervous system like those of adrenaline,
and is extremely addictive. Common street names for
methamphetamine include: speed, crank, ice, glass and crystal.
Possession of methamphetamine is a felony offense in Wisconsin.
According to the Wisconsin Department of Justice, the incidence
of meth production in meth labs is relatively low in Wisconsin
when compared to other states, but it is on the rise. Homemade
meth is produced in makeshift labs set up in homes, apartments,
hotel rooms, mobile homes or other buildings. Although the
ingredients used to produce meth are readily available products,
the chemical "cooking" process to make meth may release toxic
gases and residual hazardous waste materials in the lab and
throughout the building.
There have been reported cases of illness resulting from lab
residue and some reports of structural property damage have been
documented. The health effect resulting from chemical exposure
depends on the quantity and nature of chemicals, the length of
exposure, and the personal health of the person exposed.
Exposure to meth chemicals and the residues remaining in a meth
lab may cause health problems such as nose and throat
irritation, headaches, dizziness, nausea, vomiting, decreased
mental function, lung damage, severe eye damage, anemia and
kidney damage. Children are generally at higher risk than
adults.
Because of the potential health implications, REALTORS
generally should disclose the current or prior presence of a
meth lab on the premises as information suggesting the
possibility of a material adverse fact. Wis. Admin. Code § RL
24.07(3) states that a licensee is practicing competently if he
or she makes timely written disclosure of the information
suggesting the material adverse fact to all parties to the
transaction. This rule also recommends that the parties obtain
expert assistance to inspect or investigate for the possible
material adverse fact, and, if directed by the parties, the
licensee should draft appropriate inspection or investigation
contingencies.
The Wisconsin Department of Public Health (DPH) is developing
guidelines and regulations for meth lab clean ups. In the
meantime, the DPH recommends the "Cleaning Up Hazardous
Chemicals at Former Meth Labs" fact sheet at
www.dhfs.state.wi.us/eh/ChemFS/fs/MethClnUp.htm as a useful
resource. The DPH recommends that any meth lab remediation be
undertaken by environmental companies that specialize in
hazardous material cleanup.
Additional information concerning methamphetamine and meth
lab clean up may be found at
www.kci.org/meth_info/meth_cleanup.htm. The Minnesota
Department of Health also has extensive materials concerning
methamphetamine and meth labs at
www.health.state.mn.us/divs/eh/meth/. |
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Phase I and Phase II Environmental Assessments
A Phase I Environmental Assessment is an audit of a site to
identify all potential or known areas of environmental contamination.
A Phase I is an "above ground" assessment, with no intrusive
investigation into subsurface soils or groundwater. A Phase I
assessment may include, but is not limited to, reviewing records,
interviewing persons, and conducting inspections of the site. See
Legal Update 95.10 for
further discussion of Phase I Environmental Assessments. The American
Society of Testing and Materials ("ASTM") has developed guidelines in
an attempt to standardize the elements of a Phase I.
By comparison, a Phase II Environmental Assessment consists of a
"below ground" investigation using techniques such as soil borings and
monitoring wells. A Phase II assessment is conducted to physically
confirm the presence or absence of environmental contamination in all
potential or known areas identified in a Phase I Assessment. A Phase
II assessment, however, does not necessarily determine the nature and
extent of contamination. This assessment may include a field sampling
of media, laboratory analysis of samples and visual confirmation of
environmental contamination of the site.
| Q. Re: Phase I & II
environmental assessments on a commercial property. There is no
testing contingency in the offer to have the assessments done.
The environmental assessments are required for final loan
approval. Must the seller allow this? |
| A. Phase II environmental audits of real estate are
performed if a Phase I audit shows the presence or likely
presence of a hazardous substance or pesticide. Phase II
environmental site assessments are primarily employed after
evaluation of the Phase I audit results to acquire and measure
contaminant levels at the site and to help define the cost and
extent of possible future clean-up.
Although the buyer may not be able to obtain this financing,
the seller is not required to allow the testing that would
likely be needed to complete a Phase II environmental audit. The
offer to purchase dictates the agreement between the buyer and
seller, so the buyer would have to ask for an amendment to the
offer to authorize the assessments. |
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| Q. Re: Phase II
Environmental Assessment where formaldehyde is found in the
soil. The property was previously used for research on frogs and
the researchers apparently used the floor drains of the
outbuildings to pour out formaldehyde. What liability do the
buyers take on if they buy the property? |
| A. The parties should be referred to environmental
experts specializing in environmental spills and remediation to
analyze the Phase II reports and advise the buyer on remediation
options and funding. This is a legally complex area because both
state and federal law regulate environmental contamination. The
parties should confer with environmental attorneys for a
complete analysis of the potential liability involved and for a
determination of whether an acceptable allocation of risk can be
arrived at by negotiation. |
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| Q. Re: Phase I
environmental assessment on a commercial building. Is this
something that is automatically given upon an accepted offer, or
is it something the buyer is allowed to review prior to writing
an offer? |
| A. There are no laws as to when a Phase I
Environmental Assessment report must, or even will be,
furnished. The seller is not required to provide a Phase I
before or after the offer is accepted. The buyer may want to
address this issue as a review contingency in the offer. An
agent is writing an offer on vacant land that was originally a
junkyard and wants to put a Phase II environmental assessment
provision into the offer. Where would the agent put this?
Such a provision would have to be written in as an additional
provision or on an addendum. No specific standards have been
established for Phase II audits - the nature and extent of the
audit will be determined by the specific facts related to the
site. Accordingly, it is prudent for the buyer to consult with
an environmental attorney who can help develop the appropriate
parameters for the assessment and properly draft a contingency
for the Phase II, including the standards that will be
acceptable.
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Radon
| Q. The buyer did a radon
test and the radon level was found to be 6.2 picocuries per
liter of air (pCi/L), which is higher than the EPA standard of
4.0 pCi/L. The seller does not want to put a mitigation system
in. The buyer has a bid of $800 for mitigation. If the buyer
does not purchase the home, does the seller or broker have to
disclose that there was a high radon reading? Does the seller
have to mitigate if the buyer does not purchase the property?
|
| A. Wis. Stat. § 709.035 requires sellers to amend the
real estate condition report (RECR) prior to the acceptance of a
contract when they obtain information or become aware of any
condition that would change a response on the RECR. Provided
that the seller amends the RECR and any new prospective buyer
receives that report, the broker would not need to make
additional disclosures about the test showing the elevated radon
level. The seller would not be required to mitigate, unless a
subsequent offer to purchase is accepted which requires
mitigation. |
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| Q. A broker who was working
with the buyer was at the inspection when the inspector
convinced the buyer to test for radon. There was no radon
testing contingency in the offer. The seller was there and
signed a letter promising to not open the doors and windows to
the basement more often than normal. Now the inspector says the
test result is 5.9 pCi/L and the buyer is demanding that the
seller do remediation, which will cost about $800. The deadline
for the contingency has expired. How should the broker proceed?
|
A. Unless a testing contingency was included, the
offer to purchase does not grant the buyer, or his home
inspector, authority to test for radon. Because the test was
conducted without a radon testing contingency, and tests are not
within the scope of the home inspection, the results would
arguably not be the basis for a notice of defects. The parties
should consult with legal counsel for advice regarding their
rights under the terms of the offer.
The elevated radon level might be treated
s a mutual mistake of fact. When both parties are mistaken as
to a basic factual assumption on which the contract was made and
the mistake has a material effect on their performances, the
contract is voidable by the party adversely affected. Under this
theory, both parties must have been mistaken about a present or
past fact. A mistake by only one of the parties makes a contract
voidable only if the party who causes the mistake has reason to
know the other party is proceeding based on that mistake. |
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| Q. A new construction home
in a new subdivision registered positive for radon in excess of
an allowable 4.0 pCi/L. Is a REALTOR then obligated on any other
new construction homes to disclose to prospective buyers that
other homes in that area have tested positive? |
| A. Pursuant to EPA booklet "Home Buyer's and Seller's
Guide to Radon" [online at
www.epa.gov/iaq/radon/pubs/hmbyguid.html], radon levels vary
from home to home. A radon myth is that the neighbor's test
results are an indication that your home will also have radon.
Each home should be independently tested for radon. Radon
information may be found at
www.epa.gov/iaq/radon/index.html and in
Legal Update 01.04.
|
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Asbestos
| Q. Some small pipes in the
basement are wrapped in a material that an agent believes may
contain asbestos. How should this be addressed when selling the
property? |
| A. If this issue is not addressed by the seller in
the RECR, the agent arguably should disclose any features
potentially containing asbestos, like pipe insulation, as
potential material adverse facts. The agent may direct the
parties to the appropriate experts for further information and
investigation, as required by § RL 24.07(3). Asbestos cannot be
identified simply by looking at it, unless it is labeled, so the
only way to know for sure is to get a sample analyzed. Generally
only asbestos material that is damaged or will be disturbed need
be tested. If the buyer wants to test for asbestos, a testing
contingency will be needed in the offer to purchase.
Generally, undisturbed asbestos which is in good condition
will not release asbestos fibers and may best be handled by
leaving it alone. Problems with friable or damaged asbestos may
be treated by either repair or removal. Repair usually consists
of sealing or covering the asbestos material. See Legal Update
92.08 and Legal Update 01.04 or contact the local health
department (see directory at
www.dhfs.state.wi.us/dph_ops/lhdl.htm) for further
information about asbestos.
|
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| Q. There are
asbestos-wrapped heating pipes in basement of a two-unit. Can
the seller remove these himself or must it be professionally
done? |
| A. Certified workers are required for asbestos
abatement or asbestos management activities in a school building
and several other types of public or private buildings. In an
owned or leased residential building of fewer than 10 units, the
owner, the owner's employees, the lessee or lessee's employees
may be used to abate or manage asbestos. For a list of
state-certified contractors, consultants and labs, call the DHFS
Asbestos and Lead section, (608) 261-6876, or go to
www.dhfs.state.wi.us/dph_boh/Asbestos/CompanyList/index.htm. |
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| Q. Re: Asbestos removal.
There is a small amount of asbestos in a home. The buyer wants
it removed. The broker is trying to explain that part of this
can be either be encapsulated or enclosed. What are the
resources on asbestos remediation? |
| A. The EPA's "Asbestos in Your Home" brochure at
www.epa.gov/oppt/asbestos/pubs/ashome.html is a helpful resource for
REALTORS and consumers. Additional asbestos resources are
available online at
www.dhfs.state.wi.us/dph_boh/Asbestos/index.htm (Wisconsin
Department of Health and Family Services);
www.epa.gov/asbestos (EPA); and
www.atsdr.gov
(Agency for Toxic Substances & Disease Registry). Asbestos
inquiries from homeowners, apartment residents, and other real
estate professionals should be directed to the EPA's Toxic
Substances Control Act Hotline, at 202-554-1404. Homeowners can
obtain a copy of the pamphlet "Asbestos in the Home" from this
source. The broker may direct the buyer to one or more of
these resources, and should not give legal advice or an opinion
on asbestos. |
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Selling
Co-op Units
by Debbi Conrad
Ownership of a unit in a cooperative community is not an interest
in real estate. Instead, a consumer who buys a cooperative unit
actually purchases a share in the housing cooperative (typically a
corporation), similar to a share of stock. The cooperative owns the
real estate and each owner of a share in the cooperative is entitled
to enter into an occupancy agreement for the use of a unit in the
cooperative buildings. In other words, owning a unit in a cooperative
is like being a shareholder in a corporation which owns an apartment
complex where each shareholder has exclusive rights to live in one of
the apartments.
Although some believe that cooperative ownership is similar to
condominium ownership, there are some fundamental differences. In a
condominium, the unit owner owns the condominium unit as a fee simple
interest and owns the common elements of the condominium as tenants in
common with the other unit owners. A condominium unit owner owns an
interest in real estate. In a housing cooperative, on the other hand,
the cooperative corporation holds title to the real estate and a
cooperative owner owns a share in the cooperative, which entitles him
or her to occupy a unit in the cooperative housing. A share in the
cooperative is personal property.
Selling. Can a broker help an owner sell his or her interest in
a cooperative?
Generally, the sale of a membership in a cooperative is not the
sale of real estate, but rather the sale of personal property. The
safest procedure is to have the project documentation reviewed to make
sure the property is really a cooperative.
If the cooperative share offered for sale is personal property, the
sale of the cooperative unit will not be a real estate transaction. It
will be similar to a commercial transaction where corporate stock is
sold instead of selling the actual real estate owned by the
corporation. Wis. Stat. § 551.02(3)(f) permits a person licensed as a
real estate broker, and whose transactions in securities are isolated
transactions incidental to his or her real estate business, to engage
in limited transactions that otherwise would require a securities
broker-dealer license.
It is important that a broker not handle a sale of a cooperative
unit unless the broker understands cooperative housing and the
components involved in the sale. § RL 24.03(2)(a) requires that
licensees act competently, "licensees shall not provide services which
the licensee is not competent to provide unless the licensee engages
the assistance of one who is competent. Any person engaged to provide
such assistance shall be identified and that person's contribution
shall be described."
What forms should be used for the sale of the cooperative?
If a broker is going to assist with the sale of a cooperative
share, this will technically be outside of the realm of real estate
practice. There are no approved forms for selling an interest in a
cooperative, so the broker may contact the cooperative or the seller
to get an idea of the appropriate documentation, including disclosure
documents, that will be needed for the transaction. The seller may
work with the cooperative association, his or her attorney, or the
title company to arrange for the drafting of any purchase contract
that may be needed, as well as the transfer the cooperative share
certificate and occupancy agreement representing the seller's interest
in the cooperative. Real estate brokers generally cannot draft
cooperative transaction documents, nor can they complete any documents
provided by the cooperative - this would be the unlicensed practice of
law.
How can a broker advertise the sale of an interest in a
cooperative? Can it be advertised in the MLS?
A broker may advertise the sale of a cooperative unit in newspaper
ads and in other advertising media provided the broker makes it clear
that the share in the cooperative is not real estate. Brokers should
contact their MLS to see if the MLS will accept cooperative unit
listings.
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Member
Letters - Predatory Lending - You Don't Know the Half of It!
When reading the June 2003 Wisconsin REALTORŪ article entitled "Look
Out for Predatory Lending", I particularly agreed with the
sentence which read, "Predatory lending involves deception or fraud,
manipulating the borrower through aggressive sales tactics, or taking
unfair advantage of a borrower's lack of understanding about loan
terms and their consequences."
As a certified appraiser for over 20 years, I have seen sales price
manipulation by mortgage bankers and others. Years ago creative
financing used to mean arranging a land contract or second mortgage,
but now it means increasing the sales price to whatever level is
required to cover the points, closing costs and down payment, and then
find your favorite appraiser to support the price. As if by magic, we
have a closing.
I find this practice of raising sales price to whatever level
needed (particularly regarding FHA loans) troubling for two reasons.
First, when appraisals are done for single-family mortgage loans,
lenders generally request an appraisal opinion of market value,
unaffected by special financing or sales concessions. Purchase price
is to be determined by the buyer and seller in an arm's length
transaction, not by a lender who may be only concerned about how much
they have to raise the purchase price to put the deal together.
The second problem in these situations is disclosure. Brokers
should explain to the buyer that he or she may be paying more for the
property than the seller would require from any other buyer with
typical financing. If the buyer is paying more than a typical buyer
and has a higher loan amount, the buyer likely will pay additional
interest, their real estate taxes may increase to the higher levels,
and these buyers may also lose money if they are forced to sell
quickly because of the artificially increased the purchase price.
To be sure, the industry is full of good, ethical lenders, brokers
and appraisers who abide by the rules, fully inform their clients and
customers about the consequences of higher loan amounts, and avoid
situations involving ethical conflicts or possible fraud, but
unfortunately there are many who do not.
The idea that the loan value for refinancing is computed using the
amount of the existing mortgage, plus credit cards and car loan
balances, divided by 80% has made many lenders feel they can ask for
whatever appraised value they want. If the lenders can manipulate the
purchase price to whatever level is required and can dictate the
appraised value to the appraisers, it becomes apparent that we really
don't need appraisals because the appraised value is just a government
requirement that is more of an obstacle for lenders than a safeguard
for consumers.
To be sure, there is no one set value for real estate-appraisals
are value opinions--but there is an appraisal process that needs to be
followed. If appraisers allow lenders and brokers to determine
purchase prices and property values, instead of the buyer and seller,
we not only disregard the proper process, but we make appraisals and
appraisers irrelevant.
Many lenders and brokers don't believe there is a problem. Their
attitudes range from, "what's a few thousand dollars," to actually
canceling an FHA case number and telling the FHA that the appraiser
was on vacation in order to get a different appraiser who would
deliver the requested value. Lenders are content to raise the purchase
price as long as they can get an appraiser to comp it. These are the
same lenders who when asked how they would feel about manipulating a
credit report--just take out a couple of lines--say that such
manipulation would be misleading and they would get in trouble. They
are willing to trample the appraisal process and appraiser ethics but
are unwilling to violate their own code.
The Uniform Standards of Professional Appraisal Practice (USPAP)
provides that it is unethical for an appraiser to accept an appraisal
assignment contingent upon the appraiser reporting a predetermined
value. When a purchase price is changed to cover special financing by
the lender, or by the broker after discussion with the lender, it is
no longer a market price determined by buyer and seller. It becomes a
predetermined value that must be met to put the transaction together.
Appraisers who satisfy these lenders by delivering appraisal reports
at these predetermined values are in violation of USPAP.
It should be clear that artificially increasing sales prices to
cover points, closing costs, and downpayments presents many problems,
most of which are difficult to solve. It is my hope that all
REALTORSŪ, lenders and appraisers will take a stand against
artificially engineered purchase prices and appraisals.
Gordon A. Meyer
Meyer Appraisal Service
Weston, WI
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