The Title Company “Represents the Contract”

If you’ve been a real estate agent or mortgage lender for any length of time, you’ve no doubt heard it uttered that the title company’s role is to “represent the contract.” But what is the meaning of this? Surely, the title company cannot represent a thing.

The expression is most often used to assure homebuyers and sellers that the title company will not take sides and will act in the best interests of all parties. In other words, the title company is acting as a neutral party. In fact, the GCAAR escrow agreement (form #802) explicitly states that the “escrow agent is an impartial fiduciary.” But is it? Do the assurances given to homebuyers and sellers really hold true?

Why Every Agent Should Refer Clients to an Independent Title Company

What if the real estate agent representing the seller has an ownership interest in the title company selected by the parties? Can that title company still claim to be a neutral party or an impartial fiduciary? Could the interests of the homebuyer be compromised by this fact?

Avoid Conflicts of Interest by Choosing an Independent Title Company

Would a buyer’s agent permit the listing agent to hold the earnest money deposit or a post-settlement occupancy deposit for any given transaction? Probably not. Then why should it be acceptable to the buyer’s agent for a title company that’s owned by the listing agent to hold deposits?

Independent Title Companies Offer Better Products & Service, Says Agent

Would it be acceptable to the buyer’s agent for the listing agent to potentially be the final arbiter in a dispute over funds withheld for a repair escrow? Probably not. Then why should it be acceptable to the buyer’s agent for a title company that’s owned by the listing agent to potentially play the role of final arbiter?

All of these questions have recently been raised by real estate agents and brought into focus with a wave of newly formed agent-owned title companies. Is a title company that is owned by a real estate agent, who is also representing a party in the transaction, acting as a neutral party and impartial fiduciary?

Most of a title company’s duties flow from the common law developed by the courts and courts have generally implied an escrow agency relationship by its activities absent a formal escrow agreement where the third party accepts documents, funds, or property for disbursement at closing.[1] An escrow transaction is a fiduciary relationship that imposes “special duties” in common law for the escrow agent. [2] Unlike other fiduciary relationships, an escrow agent owes fiduciary duties to all parties to the transaction.[3] The duty to all parties exists regardless of whether all parties pay the escrow agent for its services. [4]

As you can see, it is well-established that the role of a title company is expected to be that of a neutral party and impartial fiduciary. Thus, homebuyers and sellers should reasonably expect that the title company they have engaged fulfills that role and the obligations that come with it.

Real estate agents have also questioned whether, as owners of a title company, they might be challenged in the face of the NAR Code of Ethics? While certain disclosures may be presented to the agent’s own client, are those same disclosures being made to the other party to the transaction? For example, if a listing agent urges the homebuyer to select a title company from which the listing agent may profit, are proper disclosures being presented in a timely manner, or at all, to that homebuyer. Article 6 REALTORS® shall not accept any commission, rebate, or profit on expenditures made for their client, without the client’s knowledge and consent. When recommending real estate products or services (e.g., homeowner’s insurance, warranty programs, mortgage financing, title insurance, etc.), REALTORS® shall disclose to the client or customer to whom the recommendation is made any financial benefits or fees, other than real estate referral fees, the REALTOR® or REALTOR®’s firm may receive as a direct result of such recommendation. (emphasis added) (Amended 1/99) • Standard of Practice 6-1 REALTORS® shall not recommend or suggest to a client or a customer the use of services of another organization or business entity in which they have a direct interest without disclosing such interest at the time of the recommendation or suggestion. (emphasis added) (Amended 5/88)

Are the disclosures presented in such a way that the homebuyer and seller clearly understand the implications and potential for compromising their own interests? Are electronic disclosures being presented in accordance with NAR Code of Ethics?  Standard of Practice 9-2 reads: When assisting or enabling a client or customer in establishing a contractual relationship (e.g., listing and representation agreements, purchase agreements, leases, etc.) electronically, REALTORS® shall make reasonable efforts to explain the nature and disclose the specific terms of the contractual relationship being established prior to it being agreed to by a contracting party. (Adopted 1/07) (emphasis added)

Is the real estate agent really explaining to homebuyers and sellers that the agent stands to profit from the selection and use of a certain title company? Are the homebuyers really being encouraged to exercise their legal right to shop and choose a title company? Do they even know they have a right to shop and choose their own title company?

If we, as industry participants, are going to continue to tell homebuyers and sellers that the title company “represents the contract” to assure them that their best interests are being served, then let’s mean what we say and work together to protect the interests of our consumers.

[1] See, e.g., City of Fort Worth v. Pippen, 439 S.W.2d 660, 665 (Tex. 1969) (escrow relationship created where agent accepted funds for purchase of real property with specific instructions on how funds to be applied, despite no written escrow agreement); Albright v. Lay, 474 S.W.2d 287, 291 (Tex. Civ. App.—Corpus Christi 1971, no writ) (agent’s acceptance of earnest money and real estate sale contract created escrow relationship between agent, buyer and seller); Boatright v. Tex. American Title Co., 790 S.W.2d 722, 728 (Tex. App.—El Paso 1990, writ dism’d) (escrow relationship established when escrow agent accepted funds, prepared closing documents and performed other essential escrow functions); Home Loan Corp., v. Tex. American Title Co., 191 S.W.3d 728, 731 (Tex. App.—Houston [14th Dist.] 2006, pet. denied) (agent’s acceptance of loan proceeds for disbursement created escrow relationship between agent and lender).

[2] Bell v. Safeco Title Ins. Co., 830 S.W.2d 157, 161 (Tex. App.—Dallas 1992, writ denied); Wilson v. Carver Fed. Sav. & Loan Ass’n, 774 S.W.2d 106, 107 (Tex. App.—Beaumont 1989, no writ).

[3] See, e.g., Zimmerman v. First American Title Co., 790 S.W.2d 690, 695 (Tex. App.—Tyler 1990, writ denied); Capital Title Co. v. Donaldson, 739 S.W.2d 384, 389 (Tex. App.—Houston [1st Dist.] 1987, no writ); Trevino v. Brookhill Capital Res.,Inc., 782 S.W.2d 279, 281 (Tex. App.—Houston [1st Dist.] 1989, writ denied).

[4] Martin v. Lou Poliquin Enterprises, Inc., 696 S.W.2d 180, 183–85 (Tex. App.—Houston [14th Dist.] 1985, writ ref’d n.r.e.); Reuben H. Donnelley Corp. v. McKinnon, 688 S.W.2d 612, 616 (Tex.App.—Corpus Christi 1985, writ ref’d n.r.e.); Waters v. Hollie, 642 S.W.2d 90, 92 (Tex.App.—Fort Worth 1982, no writ).