By RVAR Counsel David Bullington

Our RVAR standard form contract provides in paragraph 18 that “settlement” will occur on or about the date specified and that possession of the Property will be given to the buyer at “settlement” unless the parties otherwise agree in writing.  It is often customary in our area for possession of the property to be given to the buyers when all closing papers have been signed.  “Settlement” is not a defined term under the contract.  So when does “settlement” really occur?  

On the day scheduled for settlement, the parties sign all the necessary legal papers, including the deed, settlement statement, loan documents, and related papers, typically at scheduled times at the attorney or other settlement agent office.   We generally (and perhaps loosely) refer to this as the “closing.” While the terms “closing” and “settlement” are generally used interchangeably, the legal meaning of these terms is not the same as this general reference to signing papers. 

After all the papers have been signed, all required funds must be received in “liquid” form before the deed may be recorded and payments disbursed.   This means that all buyer and lender funds must be received by wire or by cashier’s check drawn on a bank within our federal reserve district.  The basic idea behind this requirement is to make sure the settlement agent has good and irreversible funds before transferring title and disbursing.

Often, the lender’s funds have not been received by the settlement agent when the closing is scheduled for papers to be signed.  A wire may have been sent by the lender but not credited into the escrow account of the settlement agent at the time of closing.  Some lenders require that signed settlement statements and key loan documents be faxed to the lender before they will issue a “funding number” authorizing the wire to be sent.  In addition, wires are not instantaneous, but can take hours and are often routed through intermediary or “correspondent” banks before arriving in the account of the settlement agent. 

Once liquid funds are received, the title must be updated from the date of the initial title exam until the time of recordation.  This is required where lenders are involved, and clearly is the standard of care for attorneys in all cases, and almost certainly for lay settlement agents under CRESPA.  The initial title exam may have been done days, weeks, or even months prior to recordation of the deed.  A judgment, lien, easement, or other encumbrance could be placed against the seller or property in the interim period.  If no adverse changes are found in the title update, the deed is then recorded and funds disbursed per the settlement statement.   

From a legal standpoint, “settlement” does not occur until recordation of the deed (unless the parties otherwise agree in a cash transaction), because the status of the title could change between the title exam and recordation.  For example, if the title update discloses that a judgment has recently been recorded that attaches to the property, or that the seller has recently granted an easement on the property, the buyer cannot be required under the contract to accept these new title defects, and the buyer would not have title insurance coverage for these defects.  Also, mortgage lenders typically require a first lien position.  Legally, a deed must not only be delivered, but must be accepted by the buyer, and recorded to protect the buyer’s interests against third parties.  A deed is generally considered delivered into escrow and not accepted until the status of title is confirmed at update. 

While generally settlement does not legally occur until recordation, that does not mean that possession should be withheld until recordation of the deed.  In my next article I will discuss the issue of when possession should be granted and the risks involved.