Real estate purchase and sale agreements typically contain covenants and conditions. They both start with “c” and are typically found in real estate agreements, but that is where the similarities end. A covenant is an agreement or promise to do or refrain from doing something. A condition is a future, uncertain event, the occurrence or non-occurrence of which will determine whether or not contractual obligations (i.e. to buy or sell) must be performed. You need to care because there is a vital difference between the legal effect of a condition that does not occur vs. a promise that is not performed. The breach of the promise renders the non-performer liable for damages (or, where proper, specific performance). On the other hand, the non-occurrence of a condition does not give rise to a cause of action for damages, but typically excuses performance obligations.
a. Covenants. Typical covenants found in a purchase and sales agreement are: (i) buyer’s promise to pay; (ii) seller’s promise to convey marketable title, deliver the deed and procure title insurance for the buyer; (iii) seller’s obligation to repair defects/remediate environmental problems; and (iv) seller’s promise to convey fixtures and certain items of personalty along with the realty. Buyers in commercial transactions often require additional covenants to be made by the seller, with regard to operating the property between the signing of the agreement and the closing. Such customary, commercial covenants include: (i) a promise to manage and operate the property in the ordinary and usual manner, (ii) keeping in effect all service contracts; (iii) the promise to allow buyer access to the property for diligence; and (iv) the promise not to grant/permit to exist any lien, lease, easement or other action adversely affecting title.
(i) In General. The fact that a contract is intended to be conditional is generally indicated clearly by use of the words “subject to,” “contingent upon” or “if.” See generally Scafidi v. Puckett, 578 P. 2d 1018 (1978) (“subject to” indicates a condition to one’s duty to perform and not a promise by the other). Absent such language, the intention may be doubtful. See, e.g., Soloman v. Western Hills, 276 N.W. 2d 577 (1979) (closing of sale “when plat is recorded,” held to fix time for purchaser’s performance versus condition the sale). In addition to the above conditional language, contingencies should also provide: 1) a specific date or time period (for the occurrence/non-occurrence of the event); 2) a statement that the contingency is automatically waived or requires notice, after expiration of the time period; 3) a statement that performance is excused (and the agreement void and of no effect) if the condition occurs/does not occur; 4) statement re: return of earnest monies (if so negotiated); and 5) a good faith obligation to cause the conditional event to occur.
(ii) Typical Contingencies (residential).
· Satisfaction with Inspections.
· Financing. Since buyers rarely can afford to purchase a house without borrowing funds from a lending institution, they need to protect themselves with the right to “call the deal off” if they do not receive a commitment from the bank to loan them the required funds. A financing contingency clause can provide that right. Sellers that wish to minimize the risk of buyers “taking easy ways out of the contract,” or having unreasonable expectations of qualifying for a loan, should insist upon limits in the financing contingency such as specifying the percentage of the purchase price to be financed and the maximum interest rate sought by buyer.
· Sale of Residence. Many buyers of a new home will not be able to qualify for a loan, if they still own (and owe money on) their existing house. Making their purchase obligations conditional on the sale of their existing house can solve the problem. Sellers are often reluctant to grant this contingency, however, for fear of foregoing a better deal without contingencies. In such event, the parties may want to consider a seller’s “right to market the property” clause, with a “Put” to buyer to either advance the Closing Date, or allow Seller to make a deal with an alternate buyer.
· Title. Most title provisions contain seller’s covenant to convey marketable title to the property. Title provisions that permit buyer to terminate the contract if the marketable title promised is not delivered are considered to contain conditions as well as covenants.
(iii) Typical Contingencies (Commercial). In addition to financing, inspection and title contingencies, typical contingencies in a commercial real estate contract generally include: 1) formal approval of the purchase/sale by a board of directors or other governing body; 2) confirmation of zoning conformance or receipt of a zoning variance; 3) receipt of tax abatement; 4) all representation and warranties made by seller/buyer being true and correct as of the date of signing of the agreement and the closing date; 5) the buyer completing due diligence and having approved of the results of same; 6) the title company issuing the title policy subject only to permitted exceptions; and 7) review and approval of any leases in effect.
The moral of this story? Know the difference between conditions and covenants. Use “words of condition” when creating a condition. Proper drafting can mean the difference between having a remedy for the other party’s walking away from your contract and having a sad story to tell without any recourse.