Publications

Phillip C. Querin
Partner - Portland, Oregon Office

philquerin@dwt.com
(503) 241-2300

THE 2006 OREF REAL ESTATE SALE AGREEMENT
Tips and Traps

Although there were not any major substantive changes in OREF’s 2006 Residential Real Estate Sale Agreement, the start of the new year is an appropriate time to re-visit some of the Tips and Traps that Realtors® and their clients should remember when using the form in their residential transactions.

Counting Days. With the exception of the Lead-Based Paint Inspection clause (Section 14)¹ and the date of possession provision (Section 17) all time-frames in the Sale Agreement are calculated in business days. A “business day” does not include weekends or holidays.² When counting business days, one should begin on the next full business day and end at Midnight on the last full business day. For example, if the Sale Agreement was signed by the seller and buyer on Monday, May 1, 2006, and the parties agreed that the Inspection Period³ was going to be 12 business days, then counting would commence on the next full business day, Tuesday, May 2. The last full business day (i.e. the 12th business day) would be Wednesday, May 17 and the Inspection Period would end at Midnight on that day.

It is suggested that Realtors® diary the commencement and ending dates of all relevant time periods agreed upon in the Sale Agreement. If there is any question or confusion about deadlines, the listing and selling agents should make sure they – and their clients – are all in agreement. If an extension of time is necessary, it should be sought well before the deadline, and should be confirmed in a written addendum, signed by seller and buyer. The Sale Agreement provides at Section 16 (Closing), that “ TIME IS OF THE ESSENCE, ” which is legally significant, since it can mean that a buyer’s failure to meet a stipulated deadline may result in the loss of certain legal rights. When the real estate market is hot, and there is an opportunity for back-up offers being taken – perhaps at a higher sale price, or for better terms – the seller may be looking for an excuse to declare a breach by the buyer.

The Professional Inspection Protocol. Perhaps no other section of the Sale Agreement receives greater attention than Section 13 (Inspections). Although some Realtors® may have differing opinions about how to interpret and apply this section, much confusion is self-imposed by the parties and their agents. Here are some simple rules to remember:

(1) The Sale Agreement does not require that a buyer must establish the existence of a “substantial” or “material” defect in the property in order to terminate the transaction under the Professional Inspections portion of Section 13.

(2) To terminate a transaction, it is sufficient for the buyer or the buyer’s agent to timely notify the seller or listing agent, in writing, of buyer’s unconditional disapproval⁴ of the property based upon a professional inspection report.

(3) A buyer’s attempt to negotiate certain repairs during the Inspection Period⁵ should not be treated as a “counter-offer” or “rejection” of the original transaction – it is nothing more than an offer to open negotiations on the issue of repairs.

(4) However, all inspections and negotiations regarding repairs must be completed by or before the end of the Inspection Period.⁶

(5) A seller is free to accept or reject some, or all, of a buyer’s written proposals during the Inspection Period.

(6) If the buyer and seller cannot agree upon the repair issue during the Inspection Period, the buyer is faced with a choice of either terminating the transaction before midnight of the final day of that period, or remaining in the transaction and accepting the property without any seller-concessions for repairs.

(7) If the buyer tries to terminate the transaction based upon an inspection report after the Inspection Period has already lapsed (assuming that the adverse condition was not intentionally concealed by the seller), the buyer may be at risk of losing their earnest money deposit.

Does The Buyer Have Sufficient Funds? Pursuant to Section 3 of the Sale Agreement (Buyer Representations/Loan Contingency), the buyer represents that unless it is disclosed in the written offer, he or she is not relying upon any contingent source of funds to close the transaction. Examples given in Section 3 of contingent sources of funds include “loans, gifts, sale or closing of property, 401K disbursements, etc.”⁷

This section applies “As of the date of signing this Agreement….” This means that when the buyer first submits their written offer to the seller, he or she is representing that they are financially capable of closing, subject only to the financing contingencies disclosed in the Sale Agreement. If the buyer does not actually have the necessary downpayment at that time, for example, and intends to acquire it from a parent, or from the proceeds of a bridge loan, or any other contingent event before closing, these facts must be disclosed to the seller as a part of the written offer.

The Amount of Earnest Money. In many transactions, too little attention is paid to the amount of the earnest money deposit. While some may regard the deposit merely as evidence of “good faith,” it is much more than that. The smaller the deposit, the easier it is for the buyer to walk away if they find another property, or simply get “cold feet.” And the later in the transaction this happens, the greater the damage the seller may incur.⁸

According to the last sentence of Section 23 of the Sale Agreement (Earnest Money Payment/Refund), in the event of a buyer’s failure or refusal to perform, retention of the earnest money deposit is the seller’s sole remedy. When reviewing a written offer with their seller, the listing agent should ask: “Will the deposit be sufficient in this transaction.” If the offer proposes $3,000 in earnest money, but the buyer wants early possession, or the seller will be relocating to another state after closing, one must ask whether $3,000 will be adequate compensation in the event of the buyer’s nonperformance. If the answer is “No,” then perhaps a larger deposit should be sought from the buyer.⁹

Oregon law requires that the amount of earnest money should be a genuine pre-estimate of the seller’s actual damages should the buyer default; not just a “rule of thumb” or other formulaic approach. In order to establish this sum, listing Realtors® are encouraged to have a conversation with their seller-clients about their plans once the property goes “pending” in the local MLS A sale-fail late in the transaction could mean several more months of additional mortgage payments and other carrying costs for the seller, while the home is re-marketed. This is relevant information for the seller’s agent when arriving at an appropriate amount of earnest money, and should occur early on – perhaps before an offer is even received on the property.

Drafting - When is a Provision Ambiguous? Ambiguity invites controversy. When language in an agreement is capable of more than one reasonable interpretation or meaning, it is ambiguous. Good drafting is everyone’s responsibility - the parties and their Realtors®. When evaluating whether a provision is free from ambiguity, ask yourself whether its meaning is clear on its face. Would a stranger to the transaction understand it? If the language needs clarification by one of the parties or their agents in order to convey the full intent, it could be ambiguous. A provision will most likely be found to be clear and unambiguous if (a) it can “stand on its own,” i.e. it can be understood without looking beyond the four corners of the document itself, and (b) it’s meaning is capable of only one reasonable interpretation.

Conclusion. Realtors® should become intimately familiar with the 2006 OREF Residential Real Estate Sale Agreement. This means reading and understanding the language contained in each of the clauses. Equally important, however, is reviewing the document with your clients. Providing them with a sample of the form, even before an offer is made, can be a useful risk management tool, since it gives the seller and buyer an opportunity to privately review the document without the pressure that accompanies the preparation or evaluation of a pending offer. When an offer is first written up, verify that before signing, your buyer fully understand all applicable time frames, the importance of meeting deadlines, and the legal consequences of nonperformance. This applies equally well for your seller-clients, before they respond to a pending offer. It is this knowledge, skill and understanding that distinguishes you from the competition, and is the real value that you bring to your transactions.

FOOTNOTES

1 The lead-based paint clause is based upon federal law, which mandates that, unless they agree to a different period of time, buyers shall have at least ten (10) calendar days within which to conduct a lead-based paint inspection or assessment. A calendar day is any day of the week, i.e. it includes weekends and holidays.

2 ORS 187.010 defines legal holidays to include (a) Each Sunday. (b) New Year’s Day on January 1.(c) Martin Luther King, Jr.’s Birthday on the third Monday in January. (c) Presidents’ Day, for the purpose of commemorating Presidents Washington and Lincoln, on the third Monday in February. (d) Memorial Day on the last Monday in May.(e) Independence Day on July 4. (f) Labor Day on the first Monday in September. (g) Veterans Day on November 11. (h) Thanksgiving Day on the fourth Thursday in November. (i) Christmas Day on December 25. Each time a holiday falls on Sunday, the succeeding Monday shall be a legal holiday. Each time a holiday falls on Saturday, the preceding Friday is a legal holiday.

3 Defined in the Professional Inspection portion of Section 13.

4 An “unconditional disapproval” is one that is not subject to any other conditions. Examples of conditional disapprovals would be “I revoke unless you agree to make the following repairs,” or “If you do not agree to make the following repairs, I revoke.” An example of an unconditional disapproval would be “I revoke the transaction based upon the XYZ Inspection Report.” A Realtor® who instructs their buyer to make a conditional disapproval creates a potential risk that the seller may regard it as ineffective and make a claim for the earnest money deposit after the buyer withdraws from the transaction.

5 The Inspection Period is the time-frame agreed upon by seller and buyer in the Professional Inspection portion of Section 13 (Inspections). Assuming the Professional Inspection box is checked, the Inspection Period is automatically ten (10) business days, unless a different period is inserted into the blank line. If another inspection addendum is used, the calculation of times may be different.

6 Some Realtors® have been under the mistaken impression that it is enough to complete only the inspections by or before the end of the Inspection Period. This is not correct. It is for this reason that Section 13 of the 2006 version of the Sale Agreement was amended to read “Buyer shall have ___ business days (ten [10] if not filled in), after the date Seller and Buyer have signed this Agreement (hereinafter “the Inspection Period”) in which to complete all inspections and negotiations with Seller regarding any matters disclosed in any inspection report. (Bolded language is new.)

7 The term “contingent source of funds” is not defined in the Sale Agreement. Instead, examples are used to clarify the intent of the sentence. In its simplest sense, something is contingent if the outcome depends upon some other event. If the buyer does not actually have the downpayment, and getting it depends upon the buyer being able to secure another loan, or selling some other property, this is information that should be disclosed to the seller at the time of making the offer. Only then can the seller fully evaluate the buyer’s true financial capacity to close the transaction.

8 This is not to say that a sizeable earnest money deposit is the sole consideration when deciding whether to accept an offer. Insisting upon evidence of pre-approval from a reliable lender is also critical.

9 However, the amount of the deposit is also a function of the marketplace. In a sellers’ market, where (a) there is rapid appreciation, (b) inventory is in short supply, and (c) there are more buyers than available sellers, the amount of the deposit is usually dictated by the seller. In a buyers’ market, where these conditions are reversed, the buyer may have more control over determining the amount of the deposit.

Phil Querin is an Oregon real estate attorney, and legal counsel for Oregon Real Estate Forms, LLC, the statewide real estate forms provider to Realtors®. He also represents the Portland Metropolitan Association of Realtors® and real estate companies, brokers, sellers, buyers and builders throughout the State. He is a frequent speaker, writer and trainer on matters affecting the Oregon real estate industry and the brokerage community. He may be reached at (503) 778-5231 or philquerin@dwt.com.

© Copyright 2006. Phillip C. Querin, Davis Wright Tremaine. No part may be reproduced without the author’s express written consent.