Real Estate 101-Purchase and Sale Agreements

            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title, occupancy, possession, enjoyment and quantity of land conveyed will “merge” into the deed (in other words, be superseded by deed language regarding these issues), the bulk of the contract, and its representations, warranties and covenants will live on, post closing, absent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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