General Notes: The purchase/sale agreement is
probably the most misunderstood, but most important document utilized in a real
estate transaction. Some of the unwary mistakenly refer to the agreement as
merely an “offer”, not understanding that if signed by (accepted by) the
seller, it becomes a binding contract. Others, usually to justify not obtaining
a lawyer, fool themselves into believing that they only signed a standard form
with unenforceable “boilerplate” (one-sided, protective) language. Whether the
agreement is contained on a “standard,” printed form, is replete with numerous
protective provisions, or is entitled “offer to buy real estate and
acceptance,” it will be held to be a binding, enforceable agreement to
purchase/sell real estate with rights and obligations of the parties arising
thereto (absent contract law-type defenses – i.e. no offer, acceptance, consideration; illegal; contrary to
public policy).
It is true that title cannot
transfer without a deed and a closing. The closing however, merely carries out
the provisions of the agreement. The agreement is of paramount importance as it
creates the interest of the buyer to be conveyed by deed and determines the
rights and obligations of the parties, some of which may remain in play well
past the closing. While provisions concerning title, occupancy, possession,
enjoyment and quantity of land conveyed will “merge” into the deed (in other
words, be superseded by deed language regarding these issues), the bulk of the
contract, and its representations, warranties and covenants will live on, post
closing, absent language in the contract to the contrary.
Types
of Purchase and Sale Agreements: There are many different types of
purchase/sale agreement forms in use. Real estate broker or legal stationary
company “standard” forms are used in most residential and simple commercial
deals. For sophisticated, commercial deals, most attorneys will open with their
“Seller form template” or “Buyer form template”, depending, of course on who
they represent, with such forms typically ranging from ten to fifty pages. The
inherent problem is that there is little that is standard about a real estate
transaction. Every purchase/sale is unique since there are different types of
property, different buyers and sellers (with different motivations and levels
of sophistication) and different potential liability in each transaction. This
author, however, is not advocating abolishment of standard forms.
The
Attorney’s (Tailor’s) Role: Obviously, the attorney looking to change
custom, and prepare twenty page contracts for small, “brokered” single family
house deals will not generate a lot of business. The real estate attorney’s
optimal role can be analogized to that of a clothing store tailor. If the off
the rack suit (contract form) does not fit, you must alter it. On
residential/simple commercial forms, inapplicable clauses can be crossed out
and initialed by the parties, small insertions can be written in and initialed,
and large insertions can be added by way of addendum. When larger, commercial
forms are being used, the attorney on the other side will typically “redline”
(by way of Microsoft “track changes” or similar software) the document to add,
important, protective clauses to the document, and delete provisions which are
thought to present too great a risk of unbudgeted-for expenses and potential
liability. Usually, a number of renditions by both attorneys will be necessary
until a more fairly balanced, negotiated agreement is settled upon.
Broker
Note: Please note that brokers crossing out contract provisions and
substituting new language may be crossing the line into “unauthorized practice
of law.” Contract modification should not be attempted without advice of
counsel.
Required Elements for
Enforceability: Even before the minutiae within
the agreement form is analyzed and such issues as representation and warranty provisions
are debated, covenants on how the property is to be operated between signing
and closing are discussed and title and survey provisions are negotiated, you
must ensure that your real estate contract will be enforceable. A real estate
contract, like any contract is generally defined as a binding agreement or
promise to do something. Basically, to be a valid, enforceable legal contract,
five elements must be present:
1. Meeting of the Minds /Agreement. Agreement occurs when
one party to a contract makes an offer or promises to do something and the
other party accepts. For example,
suppose a person offers to buy a property you have advertised by virtue of sending
you a contract “containing the terms upon which they would be willing to buy”. There is no contract until the offer is
accepted and signed by both the buyer and the seller. If the seller should choose to change any of
the terms of the offer, a counteroffer has been created, which must then be
accepted by the buyer to constitute an agreement.
2. Consideration. Consideration is anything of value
promised to another when making a contract.
It is a detriment incurred by the promisee and/or a benefit to the
promisor. The money the buyer gives as a deposit and the terms for payment in
the purchase agreement are valuable consideration on the part of the buyer; and
the property, as well as the promise to deliver possession of the property upon
receipt of the purchase price are valuable consideration on the part of the
seller. Payment, however, does not need
to be in the form of money; it may be a trade of other real property or
personal property, or a promise to perform an obligation.
3. Capacity. Capacity means that one is legally able to
enter into a contractual agreement. As a
general rule of law, minors, intoxicated persons, and mentally incompetent
persons cannot legally enter into valid contracts. If they do make themselves parties to contracts,
the agreements are typically voidable.
4. Legality. For a contract to be valid, it must be for a
legal purpose.
5. Definiteness. The terms of the contract, especially basic
terms such as price, legal description, and closing date must be reasonably
certain. A court must be able to look at the agreement and determine the
parties' obligations from within the “four corners of the document”.
6. Writing. All contracts dealing with the purchase or
sale of real property must be in writing for a contract to be enforceable. (Note: contracts for the purchase or sale of
personal property must be in writing if for more than $500).
Cautionary
Note: Whether
you are buying, or selling, the best time to consult an attorney is before
the purchase agreement is signed. The disgruntled suit buyer can insist that
the seller re-alter or accept the return of an ill-fitted suit. The disgruntled
property buyer (or seller) however, is under no obligation to accept changes to
the contract after it is signed.
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