Five Fixes for Contract Dealbusters A Realtor®’s skill and knowledge base can truly be put to the test when they engage, on behalf of their customers, in contract preparation. Here’s how to avoid potential mistakes.
For many real estate licensees, keeping up with the plethora of federal and state laws, rules and regulations affecting the real estate profession is a daunting task. There seems to be no shortage of regulatory hurdles waiting to trip up even the most diligent real estate licensee. From numerous rules affecting brokerage escrow accounts to lead paint disclosures mandated by federal law, a Florida real estate licensee must be cognizant not only of the Florida real estate license law but also of many other state and federal regulations.
Mistakes in contract preparation can be extremely detrimental to both you and the parties to the transaction. Mistakes not only can affect the formation of an enforceable contract, but also can lead to closings falling through and to costly litigation. This article touches on some common contract preparation miscues and attempts to provide guidance on avoiding these potential problems. 1. Be careful when “re-creating the wheel.”
You represent a buyer who’s decided to make an offer to purchase a home. You sit down, contract form in hand, and begin preparing her offer. For most real estate licensee, the contract form at issue is either a local Board/Association of Realtors form, the FAR/BAR Contract for Sale and Purchase (FAR/BAR contract) or the FAR Residential Sale and Purchase Contract (FAR contract).
Let’s assume that the buyer says she would like the offer to say that she can cancel the contract if she’s not satisfied with the results of a home inspection. This type of provision can clearly be added to the contract. And oftentimes, the real estate licensee involved in the transaction will simply add a handwritten provision to this effect to the contract form. But, why should you attempt to do so when the contract form at issue (i.e., either the FAR/BAR or the FAR contract) has a “right to inspect/right to cancel” rider in the respective form’s comprehensive addendum?
The point is not that you would be unable to craft the language in a manner that would clearly express the customer’s intent. However, a more efficient, and potentially less risky approach, especially if the handwritten provision is found to be ambiguous, would be to use the applicable preprinted contract form addendum. 2. Errors in mismatching forms.
A mistake that can be made in contract preparation, and one that is easily avoidable, concerns the mismatching of contract forms.
Again using the FAR/BAR and FAR contract forms to illustrate, imagine what could happen if you were to take the FAR contract and attach, as an addendum, the “As Is” rider to the FAR/BAR Comprehensive Rider. This would be problematic for a number of reasons.
First, the header section to the FAR/BAR “As Is” rider states that the rider is being “incorporated into the FAR/BAR Contract for Sale and Purchase” rather than to the FAR contract. Second, the FAR/BAR “As Is” rider references provisions in the FAR/BAR contract that don’t exist in the FAR contract.
This type of mistake could lead to much confusion and uncertainty in interpretation of the rider’s effect, and the real estate licensee involved in the contract preparation could obviously be exposed to liability (certainly from a Florida Real Estate Commission disciplinary standpoint). Understanding the contract form that you and your firm use and the appropriate rider/addendum forms that can be used in connection with that form is something that cannot be overlooked or underemphasized. 3. Time is on my side.
Or is it? The answer typically lies in understanding the way time periods are computed in the particular contract form that you use. As a general rule, a sale and purchase contract’s time periods for performance will be calculated in calendar days unless the contract specifies otherwise.
This is the case with the FAR contract. It provides that all time periods are to be computed in “business days” (defined in the contract as every calendar day except Saturday, Sunday and national legal holidays). The FAR/BAR contract, on the other hand, uses a hybrid computation. It provides that Saturdays, Sundays and state and national holidays are excluded only in computing time periods of less than six days.
Additionally, a contract could, as the FAR/BAR form does, also provide that any time period for performance that ends on a Saturday, Sunday or legal holiday will extend to the next business day, even if it’s to be calculated in calendar days. Bottom line: your knowledge of the way time periods for performance are computed in the particular contract form that you use is integral to effective contract preparation. 4. Did the parties intend to do that?
Understanding the way your contract form computes time periods for performance is critical. However, it’s only half the battle. Disputes and uncertainty can arise when it’s discovered that time periods for performance inserted in the contract conflict with each other.
For example, the time period inserted in a contract for the buyer to obtain financing could actually extend beyond the agreed-upon closing date. It’s possible that the contract form being used addresses this potential problem; for example, the form’s financing provision or the closing date provision may provide that regardless of the time period agreed upon for financing, the closing date prevails where a conflict exists. However, the point of emphasis here is to avoid inadvertently creating the conflicts and then being surprised at the consequences when they’re discovered. 5. Preparing a “clean” copy after contract formation.
After weeks of negotiation, involving the faxing of multiple offers and counteroffers, the buyer and seller finally come to a meeting of minds. The contract form has gone back and forth between the parties so many times that it’s a fairly messy document—provisions have been lined out and the form is covered with handwritten terms. So, you decide to take a new, clean copy of the contract form that was used and put the final terms on it.
Then you send this “new” copy to the parties for their signatures. No problem, right? Well, not quite. This practice should be avoided for a number of reasons. First, errors can be made in preparation of the new copy—terms could be omitted—so that the new copy does not mirror the parties’ agreement. This could lead to a dispute where one of the parties decides that he or she likes the new version better.
Second, even if the new copy mirrors their agreement, the date both parties sign the new copy could be different from the effective date of their existing agreement. This, in turn, could result in a dispute over the effective date of the contract, and thus affect many time periods for performance that commence from that date. So, it’s better to stick with the original, no matter how messy.
Preparing clear and effective contracts is a fundamental skill that can be challenging for even the most astute real estate professional. Mistakes and miscues made in contract preparation can be fatal to the formation of an enforceable contract and can expose you to liability. These are just a few of the common contract preparation problem areas. There are, of course, many other potentially problematic areas that weren’t covered here. For questions on all matters relating to contract preparation, feel free to call the FAR Legal Hotline at (407) 438-1409. The Legal Hotline is open from 9 a.m. to 5 p.m., Monday through Friday. Please have your real estate license number available when you call.
This article was written by FAR’s Law & Policy department.