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Phillip C. Querin, Partner
Partner - Portland, Oregon Office
philquerin@dwt.com
(503) 241-2300
The Statewide Sale Agreement form - Tips and Traps
[April 2003]
Does the Buyer
Actually Have the Money?
Rather than use a personal check, buyers frequently fill out a
promissory note for the earnest money, and submit it to the seller
along with their offer.1
The note is normally required to be redeemed within a short period
of time after the offer is accepted. Additionally, if financing
is made a contingency, most such offers provide that at the time
of closing, the buyer will pay the necessary down payment, to supplement
the loan.
For example, if the Sale Agreement calls for an 80 percent loan,
this means that the buyer’s down payment, together with the
earnest money, must equal at least 20 percent. However, Lines 37-39
of the statewide Sale Agreement form provides that “As of
the date of signing this Agreement, Buyer has sufficient funds available
to close this transaction in accordance with the terms proposed
herein, and is not relying on any contingent source of funds…unless
otherwise disclosed in this Agreement.” This means that
unless the buyer’s offer indicates another contingent source
of funds, the buyer is representing that as of the time the offer
is being submitted, he or she actually has the necessary funds to
close the transaction, subject only to the 80 percent loan contingency.
Thus, if, at the time the offer is signed and submitted to the seller,
the buyer does not actually have the necessary earnest money immediately
available (e.g. he intends to borrow it from his parents) or he
does not have the down payment (e.g. it is all in the form of stock,
and will have to be liquidated at a certain price in order to be
available at closing), then the buyer’s representation made
at Lines 37-39 is false, and the buyer is in immediate breach under
the Sale Agreement.
If sellers are going to take their property off the market, they
have the right to believe that their buyer actually has the necessary
funds to close the transaction, contingent upon a third party loan
for the balance of the purchase price. For this reason, it is critical
for Realtors® to make sure their buyer fully discloses in the
Sale Agreement the source of all contingent funds.2
Only in this way can a seller make an informed decision about whether
to accept the offer. If a buyer concealed that he or she intended
to borrow the down payment funds from a retirement account, and
then failed to get the loan within time to close, the seller would
have a fairly compelling argument that the earnest money should
be forfeited due to a breach of the buyer’s representation
contained at Lines 37-39 of the Sale Agreement.
When is the “Real” Closing Date?
Lines 126-128 of the Sale Agreement allows for the parties to insert
a specific closing date, but adds, “…or as soon thereafter
as financing documents can be prepared and marketable title delivered,
but not to exceed ____ business days (zero (0) if not filled in).”
Clearly, if a figure, say “5” or “10” is
not inserted, then the identified closing date is the final, outside
date that the transaction may be closed. If the parties cannot mutually
agree upon an earlier date, then that date – and
not one day later – is the final date for closing to occur.
There are three issues that arise from this provision that have
caused problems for Realtors®: (1) Can one of the parties “force”
the other to close earlier? This is doubtful, since the scheduled
date is “on or before X date.” This means that the seller
and buyer default to the “X” date if the parties can’t
agree upon an earlier date. (2) Buyer agents must make sure that
their buyer’s lender does not assume it has an extra few days
to complete the loan papers, if the Sale Agreement does not contain
additional time in the blank space at Line 127. The Sale Agreement
expressly provides that “time is of the essence”3
and this phrase has legal significance, meaning that dates and
deadlines do matter. (3) If the original Sale Agreement does
contain an extension of time for the lender to complete its paperwork,
and the parties agree in a written addendum to extend the closing
date, does the extra time provided at Line 127 still apply –
or is the new closing date the absolute, final and outside time
the transaction may close? There are arguments both ways, depending
upon how the addendum is written.4
For that reason, if the parties do agree to an extension of the
closing date, it may be helpful to specifically state whether the
extension period the parties originally agreed upon at Line 127
will also apply to the new date.
What if the Buyer Fails to Redeem the Promissory Note on
Time?
Line 155 of the Sale Agreement provides that it is an event of
default if the buyer fails to redeem, when due, any note given as
earnest money. As discussed above, Line 126 of the Sale Agreement
says that “time is of the essence.” The combined legal
effect of these clauses means that a seller –who already may
be looking for a way out because a better offer is coming in –
can legitimately seize upon the failure to timely redeem the promissory
note as a basis for terminating the transaction. If the listing
agent knows a better offer is coming in and the date of redemption
is fast approaching, he or she may be poised to immediately declare
the first buyer in default. For this reason, buyer agents must be
extremely vigilant, making sure that their clients redeem the earnest
money on time. If the buyer will be unable to redeem the promissory
note on time,5
their agent should attempt to secure a written extension of time.
Since personal checks do not need to be “redeemed” –
only cashed – Realtors® may wish to consider the use of
checks rather than promissory notes, for the earnest money deposit.
Multiple Home Inspections
Lines 102 – 103 of the Sale Agreement states that “Buyer
must specifically identify in this Agreement any desired inspections
which may include testing or removal of any portion of the Property.”
Recently there have been reports of disputes that have arisen between
sellers and buyers regarding whether certain types of inspections
(e.g. video taping of old sewer lines) must be specifically identified
in the offer. Without addressing the merits of the argument, suffice
it to say that buyer agents may wish to identify in the Sale Agreement
any and all specialty inspections their client would like
to have – even if doing so may not be specifically required
by the express language of Lines 102 – 103. This not only
avoids an argument later, but also gives advance notice of the buyer’s
intentions, so the seller will not be surprised by a series of successive
inspections.
FOOTNOTES
1
Previously, the Oregon Administrative Rules required that personal
checks be deposited into escrow or trust within the third banking
day following receipt. This meant that sometimes, if there was a
delay in obtaining the seller’s acceptance, a check would
need to be deposited before confirmation that the seller
accepted the offer. If the seller did not accept the offer, getting
the check back to the buyer meant further delay until the check
cleared the bank. As a result, the use of earnest money promissory
notes has become a standard practice. However, Oregon Administrative
Rule 863-015-1255(3) went into effect last year, which permits the
buyer’s agent to hold an earnest money check,
until the offer is accepted or rejected. This means that if
the parties agree (see Lines 219-220 of the Sale Agreement) earnest
money checks need not be deposited until the seller accepts
the offer, and if it is rejected without a counteroffer, the
check may be promptly returned to the buyer. Accordingly, the need
to use promissory notes in lieu of personal checks has largely disappeared.
Today, brokers should consider reserving the use of promissory notes
to special instances (e.g. the funds are in an account not immediately
accessible), and obtain personal checks for the deposit. If promissory
notes are used by a company’s agents with any frequency, the
principal broker should make sure that the Real Estate Agency’s
rules are followed documenting the return of the note once
it has been redeemed by the buyer. OAR 863-15-255 (11) The prompt
return of a redeemed promissory note and the proper documentation
in the file are easily overlooked by busy Realtors®, and can
result in Agency sanctions for negligence. For this reason, the
use of personal checks may be a safer and easier practice.
2In
an effort to “prompt” buyers and their agents, Line
38 of the Sale Agreement gives examples of contingent sources of
funds, e.g. “loan funds, gifts, sale or closing of property,
401K disbursements, etc.”
3Line
126.
4For
example, if the addendum simply says, “the closing date at
line 126 shall be amended to be June 15, 2003,” the extension
period would likely still apply. But if the addendum states, “the
parties agree that the new closing date shall be no later than June
15, 2003,” there is an argument that this is a final deadline
and the extension will not apply.
5One
must wonder why a buyer would be unable to redeem on time if, in
fact, the earnest money was actually available as represented at
Lines 37-39 of the Sale Agreement.
© Copyright 2003. Phillip C. Querin,
Davis Wright Tremaine. No part may be reproduced without the author’s
express written consent.
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