How to Handle Mental Incapacity, Trust Sales, Divorcing Parties and POA’s During Escrow
- IN GENERAL
A Power of Attorney (“POA”) is a written instrument, executed by a natural person (who has the capacity to contract), known as the “Principal,” who grants authority to act as an “Attorney-in-Fact” (“AIF”), and is sometimes referred to as the “Agent” of the Principal
In California, POA’s are governed by the Power of Attorney law (Probate Code 4000-4545).
TYPES OF POWERS OF ATTORNEY: A POA can be a General POA, granting broad powers, or a Specific POA, granting only power for a specific act such as selling a parcel of real Property. A General POA grants to the AIF all the authority to act in all legal matters that the Principal would have.
If the Principal dies or becomes mentally incapacitated, then the POA becomes void.
However, a POA can also be a Durable POA, meaning that it survives the mental incapacity of the Principal. A Durable POA is valid if:
- The Principal had the mental capacity to enter into the POA at the time it was created; and
- It meets the criteria of the Durable Power of Attorney law (Probate Code 4124).
TERMINATION OF A POWER OF ATTORNEY: A POA may be terminated by:
- The death of the Principal
- The mental incapacity of the Principal unless it is a Durable POA
- The revocation of the POA by the Principal
- The resignation of the AIF
- The mental incapacity of the AIF
- The death of the AIF
- The term specified in the POA if there is a time limit
- The subject of the POA is extinct (e.g., the principal no longer owns the
Property that the AIF was authorized by the POA to sell)
UNIFORM STATUTORY POWER OF ATTORNEY: The Probate Code provides for a uniform form for a POA (Probate Code 4401-02). These forms are often available from an escrow company.
- FOUR TROUBLESOME SCENARIOS
- MENTAL INCAPACITY:We work with many elderly people and we often cannot close because their physical or mental status has changed during escrow. If a Principal (Seller or Buyer) has personally signed all of the transaction documents but becomes mentally or physically incapable of signing off on the escrow closing documents, should we obtain a Power of Attorney from the Principal?
ANSWER. NO. If a person cannot sign escrow instructions (either due to mental or physical incapacity), then they are not legally able to sign a POA. Even if there is an existing POA, the incapacity of the Principal may terminate the POA depending upon whether the POA is a “Durable Power of Attorney.”
- TRUSTEES: I am representing a buyer and we just ratified a contract where the purchase agreement was signed pursuant to a POA by the daughter who is signing on behalf of her mother who is on title. When the Preliminary Title Report was received, I see that the Property is held in trust. Can the daughter sign for her mother using the POA? Do we have a valid contract?
ANSWER. A trustee CANNOT delegate their trustee powers by way of a POA to another person unless there is specific authority to do so in the trust document itself. If you are dealing with an AIF under a POA and the Principal is a trustee of a trust selling a Property held in the trust, immediately take the POA and trust document to the escrow officer. Most often you will find that escrow will not accept the POA, and the trustee must sign the contract and closing documents.
- DIVORCING CLIENTS: We have just taken a listing on a home; we have only met with and spoken to the wife. She has provided us with a ten-year old POA that her husband signed so that she could handle all of their banking and real estate matters while he is travelling across the country. We have been advised by the Escrow Officer that her POA cannot be used to transfer title because she has filed for divorce. What to do?
ANSWER. If the POA is not acceptable to Escrow and/or Title to transfer title, then it cannot validly be used to sign any documents including Listing Agreements and Purchase Agreements. If the owners are going through a divorce, it is highly probable that the husband has or soon will terminate the POA. If you wish to list Property for sale during a pending divorce, you will either need to have both owners sign the Listing Agreement and all other transaction documents or you will need to wait until there is an agreement signed by the owners or a court order allowing only one spouse to sign.
- POA DURING ESCROW: We are in escrow representing Sellers. Both Sellers signed the Purchase Agreement, the initial transaction documents and all required Disclosures. They did not check the box in the offer indicating that they were signing in a representative capacity because that was not true at the time. The Sellers have now left the country just before COE and signed a POA naming their business manager to act for them and close the sale. The Escrow has confirmed that they are okay with that arrangement. Agent for the Buyer is insisting that as a result we do not have a valid Agreement. Is that true? If it is true, do we need to do the same thing for our Listing Agreement?
Note: The CAR and SFAR Purchase Agreements specify the CAR RCSD forms as the forms for specifying that the party is signing in a representative capacity. The PRDS Purchase Agreement form handles that within the form itself in Paragraph 32.
ANSWER. No, neither the Purchase Contract nor the Listing Agreement needs to be changed or re-signed by anyone simply because, after the creation and signing of those documents, the Sellers are now going to use a POA to sign the closing documents. The Sellers properly signed the documents in the correct capacity at the time of the Acceptance of the Listing and Purchase Agreements and there is nothing that needs to be “corrected.”
PRACTICE TIPS:
- At the initial stages of your agency relationship with a client, ask the client if they intend to use a Power of Attorney at any time during the transaction or if there is any possibility that they may need to use an existing Power of Attorney to close escrow.
- If a Seller or Buyer is going to be signing any or all documents using a POA, always obtain a copy of that POA before any documents are signed. The Title Officer/Escrow Officer should determine whether or not they will accept the documents signed under the authority of a POA to transfer title.
- Some escrow companies will not accept an older POA because it may have been terminated for one of the reasons specified above and thus will require that a new one be executed.
- If Property is held in Trust, unless the Trust Documents allow for use of a POA, the Trustee cannot use a POA for any purpose and the Trustee will need to sign the transaction and disclosure documents.
- Sellers cannot use any means to avoid their statutory and common law disclosure duties; those duties cannot be delegated to anyone by means of a POA. The Disclosure Documents must be completed and signed by the Seller and not by anyone else.
- If a Seller owns title in their individual name (as opposed to a trust) and is adjudged to be mentally incapacitated, that seller cannot sign a POA at that time as it would be invalid. There will have to be a Conservator appointed for the seller. This can take weeks; therefore, it is essential to have this taken care of before taking any steps to list and market the Property.
- Regardless of a real estate licensee’s relationship with the clients and regardless of the clients’ particular circumstances, real estate licensees should NEVER agree to serve as the “Attorney in Fact” to act on behalf of the client under the authority of a POA or under any other basis.
DO NOT FORWARD TO CLIENTS. 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.
© Copyright Broker Risk Management 2018 04/20/18