This article addresses one of the most common, and least understood, closing snags – the absent party. With preplanning an absent party is no big deal. Without preplanning and proper documentation, the absence will delay the closing and could cost you the deal.
The Power of Attorney
Most people have heard about Powers of Attorney (POA). This document allows an individual, referred to as the principal, to give someone else, their attorney-in-fact or agent, the power to act on the principal’s behalf. It’s pretty simple really. The principal signs the POA in advance and then the agent signs all the closing documents on behalf of the principal.
POAs are for Individuals
POAs work for individuals that sign in their individual capacity.
POAs should not be used by a company officer or trustee of a trust to nominate someone to act on behalf of the company or trust in that person’s fiduciary capacity. So, if your LLC is buying the property and you, as the Manager, can’t attend the closing, you cannot give someone else your corporate powers to sign on your behalf with a power of attorney.
The same holds true if you’re a trustee of a trust, general partner to a partnership, or personal representative of an estate. Since you would be acting in a fiduciary capacity to the entity, you cannot delegate those fiduciary responsibilities by POA. Instead, you need to use a corporate resolution or similar document whereby the entity nominates someone to act on its behalf in an official capacity.
The principal must also be competent
I’ve had occasions where someone wants to use a POA for the seller because the seller can’t attend the closing because the seller is in a nursing home – being treated for dementia. The problem is that the seller did not sign the POA BEFORE the illness. If the principal is not competent to sign the closing documents s/he is not competent to sign a POA.
We’ve encountered several occasions where an agent wanted to use the POA after the principal died. This doesn’t work. If you’re dead, you don’t have any power left, therefore, your agent doesn’t either. The personal representative of the estate will have to sell the property..
Does the POA Authorize the Necessary Action?
One must also know what powers are being conveyed by a POA because POAs come in a variety of forms and give different powers to the agent. Some allow the agent to make medical decisions, some financial decisions, some both. POAs are often property specific as well, allowing the agent to sign documents only for the closing on a specific property.The agent’s authority under some POAs (durable) continue even though the principal becomes mentally incompetent, while others automatically terminate upon disability. If your POA form does not state that the agent can buy or sell real property, it’s not going to work at a closing.
Has the POA Been Revoked or Terminated?
Some POAs automatically terminate when the specific purpose is concluded, or upon the happening of some event or date. If your POA is over 30 days old most title companies will require that the agent sign an affidavit that the POA is still in force. The agent will affirm that s/he has no knowledge of the revocation or termination of the POA by death, disability, or incompetence of the principal
You Need an Original
When a POA is used by an agent to convey or encumber property the title company will need the original signed and notarized document so that it can be recorded with the conveyance deed or deed of trust. Make sure you don’t show up at closing with just a photocopy.
You Need Lender Approval
If the transaction involves a POA for the borrower, the lender will want to approve the form. In fact, sometimes the lender won’t even agree to have the borrower sign via POA. Likewise, your lender may dictate a particular manner in which the agent must sign. Make sure to get the POA to the lender well in advance.
POAs can pose serious pitfalls if not used correctly. If you’re a buyer, and you have POA from the seller you obviously have conflicting interests that may give your seller reason to challenge your authority at a later date.
Don’t use a POA unless absolutely necessary, and always have a third party, or party aligned with the principal, act as the agent. Expect the title company to want to contact the principal to confirm that the principal is aware of the transaction. There are certain transactions, like short sales, where the title company may refuse to accept a POA on behalf of the seller. Find this out when you order title, not when you’re at the closing table.