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Considerations on Legal Due Diligence in Washington

The primary source of legal risk affecting the value of real property are documents found in the public record, primarily those listed as exceptions documents in a preliminary title report. In addition, private equitable servitudes, conditions, restrictions, or rules and regulations may govern the parcel’s use affecting the enjoyment and value of the land.

The following is a partial list of the types of documents affecting the use and enjoyment of the parcel that you will want to be aware of:

  • Deeds. Conveyances of real property in Washington have to be by deed. The only exception is for certain transfers of real property by trust. RCW § 64.04.01.
  • Marketable title. Paragraph (d) of The Northwest Multiple Listing Service Form 21 “Residential Real Estate Purchase and Sale Agreement” provides that, unless the agreement otherwise specifies, title to the property must be marketable at closing.
  • Title Contingency Addendum. The Northwest Multiple Listing Service Form 22T, “Title Contingency Addendum” gives the buyer five days from either mutual acceptance or the date the buyer receives the preliminary title commitment to give written notice of the buyer’s disapproval and the reasons for the disapproval. The seller then has five days to give the buyer written notice that the seller will clear all disapproved encumbrances on the property. The seller has until the closing date to do so, or the agreement may be terminated.
  • Title contingency clause. If your contract does not contain a contingency for clearing disapproved encumbrances on the parcel, it is suggested you modify it to incorporate such a contract term. Require a minimum of ten days for legal review and evaluation of the listed documents. As in most jurisdictions, Washington title insurance will not cover any negative impact that public documents have on title or the use of land. Review the preliminary title report and the public record documents prior to undertaking other due diligence. Your real estate purchase and sale contract’s calendar of performance must account for this document review, along with review of necessary environmental reports, estoppel certificates, and other contingent documents such as may be used in commercial, industrial, or agricultural land purchase contracts.
  • Covenants, Conditions and Restrictions (CC&Rs) CC&Rs are equitable servitudes. Equitable servitudes are private, contract-based, land-use rules imposed on all parcels in a subdivision. Equitable servitudes “run with the land,” meaning that, regardless of whose name is on title, the land-use restrictions survive any subsequent owner’s conveyance to a successor owner. Within the world of governing documents, only CC&Rs “run with the land.”
  • Articles of Incorporation. The Articles of Incorporation are filed with the Secretary of State by incorporated, private non-profits (homeowner association or condominium) set up pursuant to Chapter 24.03 of the Revised Code of Washington. Chapter 24.03 of the Revised Code of Washington is a general private non-profit corporation statute. Homeowner associations in Washington are additionally governed by chapter 64.38 of the Revised Code of Washington, while condominiums created after July 1, 1990 are governed under Revised Code of Washington chapter 64.34. Condominiums created before July 1, 1990 are governed by Revised Code of Washington chapter 64.32.
  • Bylaws and Rules and Regulations. Applicable bylaws and rules and regulations of a homeowner or condominium association are other documents you may encounter.
  • Homeowner Association Records and Budgets. You’ll want to review the boards of directors meeting minutes and the financial statements. HOA boards in Washington are required to mail to all owners a summary of any proposed regular or special budget within 30 days after the board adopts the budget and 14-60 days before the owners consider ratification. This summary must include detailed information about current and future assessments and reserve account balances, as well as the recommended future funding levels for the reserve account. As a result, HOA members in Washington have a greater ability than ever before to monitor and evaluate expenses in the association.
  • Homeowner Association Reserve Accounts. Washington law encourages, but does not require, HOA’s to maintain a reserve account to fund maintenance, repair, and replacement of common area assets. This means associations with physical assets to maintain, be they land or mechanical, should allocate a portion of the association dues to a reserve account sufficient to service the land or replace the physical asset at its projected end-of-life.
  • Homeowner Association Reserve Studies. Washington HOAs with “significant assets” are required to have a “reserve study” completed and, upon completion, updated annually. A “reserve study” is a long-term (30 years) budget planning tool where an independent third party analyzes both the physical inventory and financial records of an HOA to determine how best to plan for expected future expenditures (such as future capital expenditures for maintenance of common areas). An HOA has “significant assets” under Washington law if the current replacement value of its major reserve components is at least 75% of the gross budget of the HOA (excluding the HOA’s reserve account funds).
  • Hierarchy of documents. If you purchasing in a homeowner or condominium association, look for an explicit explanation in those documents about which document controls in case of a conflict between documents. For example, it may be the case that the CC&Rs will control over the Articles of Incorporation, which will in turn control over the Bylaws, etc.

This posting is not legal advice. Legal advice is based on specific facts. This information is necessarily general in nature.

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