BROKER RISK MANAGEMENT
WEEKLY PRACTICE TIP
HANDLING 1031 EXCHANGES
Q: I am a listing agent on a rental property which the seller wishes to exchange. We are in escrow and the date for COE is rapidly approaching. My seller is having trouble finding an up-leg exchange property. The Purchase Agreement provides: “Buyer to cooperate in seller’s 1031 exchange at no cost or liability to buyer.” My seller now says he doesn’t have to close because he can’t find a suitable exchange property. Buyer has an attorney who says seller must close or be in default. What do we do?
A: This is a common problem which arises when seller is engaging in a tax-deferred exchange and the above clause is used. Is this clause a contingency? Or, is it just an agreement binding buyer to cooperate if seller’s exchange is completed? What if seller can’t find an exchange property or the up-leg escrow cancels? Unfortunately, the clause as written in the Purchase Agreement does not address these important issues.
The situation is the same for buyers who are engaging in an exchange and a similar clause is used for seller to cooperate in buyer’s exchange. What if buyer can’t sell buyer’s down-leg property? What if buyer’s down-leg escrow cancels? Can buyer therefore cancel the subject escrow?
Such ambiguity created by the above language could even lend itself to an argument by one of the parties that the contract is uncertain and therefore unenforceable. It is important to address all of these issues up front, in writing, and at the time the contract is ratified so as to avoid conflicting expectations later.
FORMS: There are two excellent forms for this purpose:
Buyer’s Intent to Exchange Supplement (CAR Form BES).
Seller’s Intent to Exchange Supplement (CAR Form SES)
PRACTICE TIPS:
A. As a buyer’s agent:
1. Use Form BES if your buyer wishes to engage in an exchange.
2. Counter with Form SES if seller counters that he/she is engaging in an exchange and has not used this or a comparable form.
B. As a listing agent:
1. Counter with Form SES if your seller desires an exchange.
2. Counter with Form BES if buyer is exchanging and the above language or
some variation was used in the offer.
DO NOT FORWARD TO CLIENTS OR THIRD PARTIES. This Weekly Practice Tip is for the exclusive use of clients of Broker Risk Management and their agents. It may not be reproduced or distributed without the express written consent of Broker Risk Management. The advice and recommendations contained herein are not necessarily indicative of standards of care in the industry, but rather are intended to suggest good risk management practices.