1285448634 409704

Chapter 7

Preparation and Review of a

Real Estate Contract

Objectives

• After reading this chapter, you should be able to– Review a real estate contract for the sale and

purchase of a home and understand its contents.– Prepare a real estate contract for the sale and

purchase of a home.

Objectives

• After reading this chapter, you should be able to– Review a real estate contract for the sale and

purchase of commercial real property and understand its contents.

– Prepare a real estate contract for the sale and purchase of commercial real property.

Elements of a Real Estate Contract

• Parties– Seller• Grantor

– Buyer• Grantee

– Other parties• Broker• Agent


• Consideration– Must state the consideration flowing from one

party to the other or from each to both

• Agreement


• Property– Legal description must be clear and distinct, and

include the following:• Improvements• Tangible personal property• Intangible property• Easements• Rights• Appurtenances


• Price– Fixed price– Exact method by which the purchase price can be

computed • If commercial, can be dollars per square foot• If undeveloped acreage, can be dollars per acre


• Method of payment– Cash– Seller financing– Buyer assumes preexisting obligations• Loan assumption

– Tax-free exchanges


• Quality of title– Marketable title– Insurable title– Title exceptions must be clearly set forth

• Possession of property– Definite date and time

Elements ofa Real Estate Contract

• Closing or settlement– Closing is the date on which the parties agree to

perform all their promises under the contract

• Closing or settlement documents– Contract should list the documents that the

parties will be expected to sign at closing• Including both seller and purchaser obligations


• Proration, closing costs, and financial adjustments– Insurance premiums, taxes, rents, other expense

prorations, security deposits, and leasing commissions

• Condition of the property and risk of loss– Inspection and warranty until closing


• Earnest money– Held in escrow

• Brokers– Commission


• Merger– Generally, all promises, conditions, and covenants

contained in a contract merge into the deed of conveyance at the time of closing

• Assignment of contract– Permissible unless prohibited in contract

• Time is of the essence– Required for time limits to be strictly enforceable


• Warranties of the seller– Seller holds title to real property of equal quality– Seller will perform all duties and obligations– Seller has the right and full authority to enter into

the contract– Seller is unaware of any claims or governmental

actions against the property


• Warranties of the seller– Seller will make no change in zoning of real

property– Utilities are available to real property– Real property accessible by way of public roads– Real property contains a minimum number of

acres or square feet or has a minimum amount of frontage on a public street


• Warranties of the purchaser– Purchaser has the right and authority to enter into

the agreement– Purchaser has the financial resources to meet the

financial obligations required under the contract– Purchaser will perform duties in accordance with

the agreement


• Warranties of the purchaser– No parties have initiated or threatened any action

that might affect the purchaser’s ability to perform

– Purchaser will take no action that would diminish the quality of the seller’s title before closing


• Contingencies– Conditions precedent

• Definitions• Default• Notice


• Entire agreement– Parol evidence rule

• Applicable law• Additional provisions• Offer and acceptance• Execution


• Caveat emptor and seller disclosure form– Let the buyer beware– In residential property, sellers have a duty to

disclose defects


• Short sales– “Under water”: owner owes more than a home is

worth– Short sale: lender agrees to take less than what is

due on a mortgage– Contract contains all provisions normally found in

a residential sale contract• Addendum

Special Commercial Contract Issues

• Description of property– Always includes more than land– May include personal property

• Representations, warranties, and covenants– Warranties regarding leases– Service contracts– No litigation affecting the seller or the property


• Purchaser’s inspection or “free look”– Period after a commercial closing to inspect the

property– If unacceptable, buyer has the right to terminate

the contract– Buyer can also make requests• E.g., all leases, service contracts, tax notices


• Closing documents– Estoppel letter• May be required by the buyer for each tenant to sign

– Lender’s estoppel• Requires lender to attach a copy of the note and

mortgage• Must certify that the attachments are true copies

– No amendments or modifications to the note and mortgage


• Rent prorations• Lease commissions• Security deposits• Seller’s covenants regarding operation of the

property


• Hazardous materials– Can pose serious problems for the seller, buyer,

and lender– Purchasers should not purchase commercial

property without professional environmental inspection


• Indemnification– From seller to purchaser for any obligations prior

to the closing date

• Seller’s disclaimer of warranty

Options

• An option is a contract in which an optionor (owner) agrees that the optionee has the right to buy the owner’s real property at a fixed price within a certain time on agreed terms and conditions

• Owner is bound to sell the property when the optionee elects to purchase it as set forth in the option contract

Contracts and Computers

• Most law firms have abandoned preprinted, fill-in-the-blank contracts in favor of computer-generated contracts

• Word processing technology creates flexibility in the drafting and redrafting of contracts

• Most states authorize electronic signatures on real estate documents

Contracts Checklist

• Parties to contract– Seller should be the current owner of the property– Purchaser should sign the contract in the exact

same form in which he or she wants to obtain the title

– Brokers and agents usually are made a party to the contract to enforce commission rights

Contracts Checklist

• Description of property to be purchased– Adequate description of real property and

associated personal property– Includes easements appurtenant to the property• Cross-easement agreements• Off-site utility easements• Access easements

Contracts Checklist

• Earnest money and purchase price– Earnest money• Specify amount and who holds• Additional earnest money payments for extensions of

time to close• What happens to any interest earned• Application to the purchase price• Application in the event of default under contract

Contracts Checklist

• Earnest money and purchase price– Purchase price• Calculation of purchase price

– Predetermined fixed amount– Amount to be determined based on amount of acreage or

square footage of property

Contracts Checklist

• Title examination– Which party conducts examination– Quality of title to be delivered by seller• Marketable• Insurable• Free and clear of all matters of record

– Obligation of seller to correct title objections• Defects curable by payment of money• Other defects

Contracts Checklist

• Closing– Which party establishes closing date– Minimum or maximum periods to close– Right to extend closing date• Purchaser’s right to extend closing by payment of

money• Seller’s right to extend closing by reason of acts of

purchaser

Contracts Checklist

• Closing– Who bears closing cost– Prorations• Rent• Interest on existing debt• Utilities and taxes• Credits to purchaser for prepaid rents and security

deposits

Contracts Checklist

• Possession of property– Normally delivered at closing– When possession is delivered to purchaser before

closing– When possession is delivered to purchaser after

closing

Contracts Checklist

• Documents to be delivered at closing– Warranty deed– Assignment of leases– Bill of sale of personal property– Owners affidavit– General assignment of warranties

Contracts Checklist

• Documents to be delivered at closing– Certified rent roll– Termite bond– Foreign person affidavit– Escrow agreements for tenant work and tenant

allowances

Contracts Checklist

• Documents to be delivered at closing– Covenant not to compete– Prior lender and tenant estoppel letters– As-built survey– Notice to tenants– Copies of leases– Evidence of payment of brokerage commission

Contracts Checklist

• Covenants and warranties of the parties– Purpose of warranties is to ensure accuracy of

information on property– Typical issues covered by warranties• Seller’s title to property• Seller’s authority to sign and carry out contract• Removal of encumbrances• Compliance of property with laws and ordinances

Contracts Checklist

• Covenants and warranties of parties– Typical issues covered by warranties• No condemnation suits pending• Right to possession• True and correct copies of leases and agreements

delivered to purchaser• Accuracy of rent roll and expense statements• Absence of mechanics’ and materialmen’s liens

Contracts Checklist

• Covenants and warranties of parties– Typical issues covered by warranties• No litigation against seller or property• Condition of property• No encroachments• No prior use from manufacture or storage of toxic or

hazardous waste

Contracts Checklist

• Covenants and warranties of parties– Limitations on warranties• Best of knowledge• Materiality• Limited period of survival after closing

Contracts Checklist

• Conditions to closing– Purpose• Limitation on purchaser’s obligation to close until seller

completes certain items• Substitute for complete warranties of seller

– Which parties have right to waive conditions

Contracts Checklist

• Conditions to closing– Typical conditions• Satisfactory inspection of property• Satisfactory inspection of records involving property• Ability to obtain new loan• Approval of board of directors of purchaser• Receipt of estoppel certificates from lenders and

tenants• Truth and accuracy of seller’s warranties on closing

date

Contracts Checklist

• Inspection by purchaser– Right to inspect physical condition of property• Time in which to exercise inspection• Right to terminate after inspection

– Right to inspect seller’s books and records related to property• Place of inspection• Right to copy records• Permitted use of materials inspected

Contracts Checklist

• Inspection by purchaser– Right to inspect property for possible

environmental contamination• Phase I examination• Phase II examination

– Enforceability of free-look cancellation clauses

Contracts Checklist

• Casualty and condemnation– Purchaser’s options on casualty or condemnation• Materiality limitation on purchaser’s right to terminate• Time limits on exercise of option to terminate by

purchaser

Contracts Checklist

• Casualty and condemnation– Seller’s obligations on casualty or condemnation• Timely notice to purchaser of event of casualty or

condemnation• Whether seller is obligated to restore premises

– Whether seller should be required to carry insurance

Contracts Checklist

• Remedies on default– Default by seller or purchaser• Suit for damages or specific performance• Liquidated damages

Contracts Checklist

• Brokerage– Obtain warranties from each party as to brokers

involved– Specify which party pays brokerage commissions– Cross-indemnity for brokerage claims

Contracts Checklist

• Confidentiality– No recording of contract– All information delivered to purchaser shall be

kept confidential or delivered to other people only with seller’s consent

Contracts Checklist

• Miscellaneous provisions– Right to sign a contract– Provisions for date and manner of delivering

notices– Time is of essence– Survival of contract provisions– Contract represents entire agreement between

parties

Contracts Checklist

• Miscellaneous provisions– Severability of contract provisions– Method of offer and acceptance– Provide for approval and counterpart form

Ethics: Illegal or Fraudulent Activity

• Paralegal should never be involved with misrepresentations– Violation of ethical standards

• Preparing a fraudulent document can be a criminal act when submitted to a government authority– Even if at the direction of a supervising attorney

Summary

• Both purchasers and sellers have legal issues that must be adequately addressed in real estate contracts

• Real estate contract represents mutual promises regarding future transfer of real property

• At closing, transfer is completed using a deed

1285448634 409704

Education