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.
b.
Conditions.
(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.
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