Language in Written Agreement Controls Handling of Real Estate Taxes

In Iowa, the county assessor values each item of taxable property in the county. Property taxes are assessed on January 1st for taxes for the fiscal year starting July 1st and ending June 30th of the following year. For example, a January 1, 2010 assessment date is for the 2010-2011 fiscal tax year, which starts July 1, 2010, and ends June 30, 2011. Real estate taxes are assessed in arrears, meaning that taxes for the previous fiscal year become due on the first day of the current fiscal year. After the assessment, the taxpayer has an opportunity to protest in front of the board of review. Next, the Iowa Department of Revenue equalizes the assessments, and taxing authorities establish their budgets based upon the valuations and determine the rate of tax they need to fund their budgets. The county auditor delivers this information to the county treasurer to collect the taxes. In the event of a sale of the property, it is customary for the taxes to be paid by the seller before closing or if not paid that the buyer be given credit against the purchase price for the amount of the taxes. All of these procedures were involved in this case where the sellers entered into a purchase agreement for the sale of an apartment building. 

In August of 2009, the title insurance company’s escrow officer emailed a proposed settlement statement to the parties for their review. The settlement statement indicated a credit to the buyers and a charge to the sellers for real estate taxes estimated between July 1, 2005 and June 30, 2006. An additional amount was charged to the sellers for the estimated 2006/2007 taxes between July 1, 2006 and the time of closing in August of 2006.  The sellers’ real estate broker contacted the escrow officer and informed her that, according to the purchase agreement, the buyer was to assume responsibility for real estate taxes assessed in 2005/2006.  So, the escrow officer amended the settlement statement to reflect the sellers’ understanding.  Days later, the buyer’s attorney emailed the escrow officer, indicating that the buyer had not received a copy of the proposed closing statement. Without informing the buyer’s attorney of the change in proration, she emailed the document. The parties closed in August of 2006. 

Later that year, the buyer received a notice from the county treasurer of delinquent real estate taxes for 2005/2006. Caught off guard, the buyer’s attorney wrote a letter to the title insurance company’s escrow officer indicating that the buyer assumed that the 2005/2006 real estate taxes had been paid in full (from the seller’s sale proceeds) and requested that the title insurer advance and pay the taxes and seek recovery from the seller. The title insurer denied the claim and the buyer filed suit alleging that the sellers breached their warranty of title, the title insurer acted negligently in failing to disclose that it had revised the settlement statement upon the sellers’ request, and that they acted negligently in drafting the real estate tax proration language. The trial court dismissed the buyer’s claims. 

On appeal, the buyers claimed that the multiple sellers breached the warranty of title by failing to satisfy the 2005-2006 real estate tax lien based upon the language in the parties’ purchase agreement. The purchase agreement provided that the “seller shall cause all mortgages or other liens (excepting future installments of special assessments) to be paid and satisfied and released of record prior to or at Closing.” However, the sellers argued that the buyers disregarded another clause in both the purchase agreement and the special warranty deed conveyed by the sellers that stated that the property was sold subject to the lien of any real estate taxes. The buyers claimed that these provisions were ambiguous and that “a lien based on real estate taxes is always due and payable once it becomes a lien and… there is no such phenomenon as a real estate tax lien that is ‘not yet due and payable.’” 

The Iowa Court of Appeals after giving a brief explanation of Iowa’s real estate tax structure agreed with the buyer that the contract provisions in the settlement statement were ambiguous. Here, the sale closed on Aug. 17, 2006. The taxes due July 1, 2006, which became a lien on the property June 30, 2006, were for the fiscal year of 2005/2006. The sellers were in possession of the real estate during this time. The buyer even argued that “it was totally nonsensical that the buyer would have agreed to be responsible for all taxes.” The appellate court agreed, stating that “it is the universal rule in Iowa that the holder of the legal title in the actual occupancy and possession is duly bound to pay the taxes accruing during such possession, and, in the absence of some agreement to the contrary, he cannot shift the burden to the shoulders of another.” Since the settlement statement was ambiguous, the appellate court reversed the trial court’s ruling. 

The appellate court next addressed the buyer’s claim of negligence and breach of fiduciary duty on the part of the title insurer and escrow agent. Generally, the escrow agent owes a fiduciary duty to all parties of an escrow agreement. However, there is no duty to disclose information, unless it is has knowledge that another party is committing a fraud. This was not the circumstance here. The buyer approved the final settlement statement and a party is usually bound by the document they sign. There was no known fraud for the escrow agent to disclose. 

The buyer further alleged that the sellers’ real estate agent negligently drafted the tax proration clause language in the purchase agreement and that he conspired with the title insurer to defraud the buyers. Again, the appellate court found that the buyer was unable to prove that the real estate agent owed them a duty or that there was intentional misrepresentation. 

There was a strong partial dissent in this case by Chief Justice Sackett. She concurred with the appellate court’s ruling, except on the issue of the title insurance company’s handling of the transaction. The buyer argued at trial that, “if there was a case that illustrates just how worthless title insurance is, this is it. First American knew that it was not handling this transaction correctly, but went ahead and closed it anyway, and in the process, left unpaid real estate taxes in excess of $130,000.”  The Chief Justice indicated that the purchase agreement was confusing, that the escrow agent made no attempt to alert the buyers of changes that would substantially affect them and she accepted the seller’s position on taxes even though she knew this was not a customary arrangement. Therefore, she believed that the title insurer and escrow agent were clearly negligent in this transaction and that there is a need for regulation of “so-called ‘closers’… so they do not escape liability for what I see as negligence in closing a transaction.” Wildcat Inns vs. First American Title Ins. Co., et al., No. 0-180/09-1195, 2010 Iowa App. LEXIS 392 (Iowa Ct. App., May 12, 2010).