DOING BUSINESS
The Law &You
Contract Clauses: friend or foe?
By Dave Schloss
The success or failure of a real estate transaction often rests on the language of the sales contract. A well-structured contract can expedite a closing and leave everyone happy. A poorly written contract can land you in court.
Fortunately, in most areas of the country, form contracts have been developed by state or local REALTOR® association attorneys that clearly spell out the agreement between parties. But what happens when clauses are written in by buyers, sellers, or their agents? It becomes critical that the wording means the same thing to all parties. Many times, problems arise when language can be interpreted in two different ways.
It’s important to remember that, in many states, changing a contract constitutes the unauthorized practice of law. Attorneys recommend that you not attempt to draft contracts or contract clauses without consulting a qualified real estate attorney. Still, it’s good to be aware of the types of pitfalls you could encounter with a poorly written contract.
Let’s say, for example, a buyer inserts the following clause: “This contract is contingent upon attorney’s review within five business days.”
This statement seems straightforward, but at least two areas could cause problems. First, suppose that three days after this clause is inserted, the buyer’s attorney voids the contract. The seller could assert that since it wasn’t specified which attorney was to review the contract, the contract is still valid, because the seller’s attorney thinks it looks just fine. Second, the clause allows only for the attorney’s review, not necessarily the attorney’s approval.
Let’s look at another common clause: “This contract is contingent upon the buyer selling his current property.”
There are a few problems with this vague language. First, which property is the buyer referring to? A buyer who owns multiple properties could use this wording to try to escape the contract. Even if one of the buyer’s properties sells, the buyer could claim that it wasn’t the property referred to in the contract.
Second, the contract doesn’t specify a date by which the property must sell. This omission could enable the buyer to tie up the seller’s property indefinitely.
Third, what does “selling” the property mean? Closed and funded? Under contract? The seller might contend that once the buyer’s property is under contract, the contingency is met, but the buyer probably needs the property to close to generate the funds to complete the purchase.
Finally, consider the statement, “The buyer agrees to buy the subject property in ‘as is’ condition.”
This clause leaves many unanswered questions. Two of the most important: (1) Can the sale still be contingent on inspection? (2) If so, by when must the inspection be completed? (Note: Even if properly drafted and interpreted, an “as is” clause may be negated by state lawif there are latent property defects known by the seller.)
Well-drafted contract clauses can be our best friends, keeping us out of trouble by eliminating loopholes. But when vague, they can also be our worst enemies. That’s why it’s best to seek legal expertise to find the language that protects everyone involved.
Schloss operates www.14houronline.com,which enables Florida real estate licensees to take continuing education requirements online. He has been a licensed real estate instructor for 20 years and has taught real estate law and contracts.
