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Phillip C. Querin, Partner
Partner - Portland, Oregon Office
philquerin@dwt.com
(503) 241-2300
The Real Estate Sales Agreement - Tips and Traps
[May 2004]
Counting Days. With the
exception of the Lead-Based Paint Inspection clause (Section 14)1
all time-frames in the Sale Agreement are calculated in business
days. A “business day” would not include weekends or
holidays.2
When counting business days, one should begin on the next
full business day and end on the last full business day. For example,
if the Sale Agreement was signed by the seller and buyer on Saturday,
May 1, 2004, and the parties agreed that the Inspection Contingency
Period (Section 13) was to be 12 business days, then the first full
business day would be Monday, May 3. The last full business day
(i.e. the 12th business day) would be Tuesday, May 18. If the Sale
Agreement was signed by the seller and buyer on Monday, May 3, the
Inspection Contingency Period would commence on Tuesday, May 4 and
end on Wednesday, May 19.
Realtors® are cautioned to 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. The Sale Agreement provides
that “TIME IS OF THE ESSENCE”3
which is legally significant, since it can mean that a party’s
failure to meet a stipulated deadline could result in the loss of
certain legal rights.
The Professional Inspection Protocol.
Perhaps no other section of the Sale Agreement receives greater
attention than Section 13 (Professional Inspections). Although the
industry is rife with opinions about how to interpret and apply
this section, much of the 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. (2)
To terminate the transaction, it is sufficient for the buyer or
the buyer’s agent to timely notify the seller or listing licensee,
in writing, of buyer’s disapproval of a professional inspection
report. (3) A buyer’s attempt to negotiate certain repairs
during the Inspection Period4
should not be treated as a counter-offer or rejection of the original
transaction – it is nothing more than an offer to open up
negotiations on the issue of repairs. (4) A seller is free to accept
or reject some or all of a buyer’s written proposals during
the Inspection Period. (5) 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 the period, or remaining in the transaction
and accepting the condition of the property without any seller-concessions
on repairs. (6) If the buyer terminates the transaction after the
expiration of the Inspection Period based upon the property’s
condition, he or she will be at risk of losing their earnest money
deposit.5
Assuring That The Buyer Has Sufficient
Funds. Pursuant to Section 3 of the Sale Agreement,
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 of contingent sources of funds
are provided at line 38 – “loans, gifts, sale or closing
of property, 401K disbursements, etc.”
This section makes it clear that it applies “as
of the date of signing this Agreement….” This means
that when the buyer first submits the written offer, he or she represents
that they are financially capable of closing, subject only to those
financing contingencies disclosed in the Sale Agreement. If the
buyer does not actually have the necessary downpayment, and intends
to acquire it from a parent, or from the proceeds of a bridge loan,
or any other contingent event, it 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
simply as evidence of “good faith,” it is much more
than that. Pursuant to lines 162 & 163 of the Sale Agreement,
in the event of the buyer’s failure or refusal to perform,
retention of the earnest money deposit is the seller’s sole
remedy. If the parties have agreed upon a $5,000 deposit, but the
purchaser wants early possession, or the seller intends to buy another
home (for which an earnest money deposit will, no doubt, be necessary)
one must question whether $5,000 will be adequate in the event of
the buyer’s nonperformance. In other words, will the $5,000
be sufficient to fully compensate the seller if the transaction
should fail at the last minute?
The amount of the deposit 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 assist the seller in accurately evaluating his or her plans once
the property comes off the market. For example, if the seller is
planning a move out of state to a new job in October, and the closing
is scheduled for the end of September, a sale-fail late in the transaction
could be devastating, since the prime selling season will have been
lost. This could mean several months of additional mortgage payments
and other carrying costs, while the home is being re-marketed.6
Conclusion. Realtors®
need to become intimately familiar with the 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 the client. Providing clients 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 closely review the
document much more leisurely than under the time pressure that can
accompany the submission of an offer. And once a written offer is
drawn up, agents should make sure – before signing - that
their respective clients fully understand the applicable time frames,
the importance of meeting deadlines, and the legal ramifications
of nonperformance by each side. These responsibilities can best
be met by being familiar with the Sale Agreement and willing to
invest the necessary time with the client in order to assure that
he or she has a good understanding of the legal duties created by
the terms of the document.
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. (d) Presidents Day, for
the purpose of commemorating Presidents Washington and Lincoln,
on the third Monday in February. (e) Memorial Day on the last Monday
in May.(f) Independence Day on July 4. (g) Labor Day on the first
Monday in September. (h) Veterans Day on November 11. (i) Thanksgiving
Day on the fourth Thursday in November. (j) Christmas Day on December
25. Each time a holiday, other than Sunday, listed above falls on
Sunday, the succeeding Monday shall be a legal holiday. Each time
a holiday listed above falls on Saturday, the preceding Friday shall
be a legal holiday.
3
Line 132.
4
The Inspection Period is the time-frame agreed upon by seller and
buyer in the Sale Agreement. See, Line 109. If no other period is
agreed upon (assuming the Professional Inspection box is actually
checked) the Inspection Period is ten (10) business days.
5
This assumes that the adverse condition upon which the buyer is
basing his or her termination was not knowingly concealed by the
seller.
6
This does not mean that a sizeable earnest money deposit is the
sole consideration when deciding whether to accept an offer that
may, in price and terms, be otherwise acceptable. Insisting upon
evidence of pre-approval from a reliable lender is critical.
© Copyright 2004. Phillip C.
Querin, Davis Wright Tremaine. No part may be reproduced without
the author’s express written consent.
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