Friday, June 21, 2013

Contingencies, Counter-offers, Concessions and Other Addendums: A Recipe for Disputes

People tend to believe that a typical residential real estate sales agreement--the kind that Realtor associations generate for their members--are binding contracts. Technically, they are, but they're so they're so full of weasel clauses and poorly-worded addendums that virtually anyone can get out of one. Moreover, the penalties for non-performance only deal with earnest money disposition and arbitration. My real estate attorney in California used to to call these "agreements" as "deposit receipts."

What's a concession? Simply, someone agrees to give up something. A seller agreeing to pay some closing costs is a concession. A buyer agreeing to give up the refrigerator is a concession.

What's a contingency? It's a condition that needs to be met before the contract becomes binding. Clear title is a contingency. So's a home inspection. Financing almost always is as well.

What's a counter-offer? It's a reply with modifications in response to an offer. A buyer offers $270,000 for the house. The seller counters with $280,000.

An Addendum is an attachment to the Sales Agreement, signed by both parties, altering the original terms. "The parties agree that Close of Escrow will be June 30, 2013," for example, if the original closing date was June 25. Many contingencies, concessions and counter-offers occur using an Addendum.

Wording is not always clear. On one of my listings, for example, the buyers' offer was "subject to" the sale closing of their existing home. My client- seller accepted. But the buyer's agent got annoyed with me for not placing my listing into "pending" status. I wouldn't do it because the sale of the buyers' existing home still had a home inspection contingency. To me, that meant it could fall through, and I didn't want my client's home to not be an "active" listing.

The buyer's broker pointed out that our MLS rules considered a home with an accepted offer, contingencies or not, as a sale, not a "contingent sale." In other words, "subject to closing" didn't mean it was contingent. If that sale was part of an offer on a new home which the seller accepted, then that seller's home, i.e. my listing, had to be shown in MLS as "pending" and not, as I thought, a "bumpable" (contingent) offer.

As things turned out, everything turned out fine and everyone ended up happy. But what would have happened if my client had gotten cold feet and terminated the offer, even if it were shown on MLS as "pending for a week or more? 

Probably nothing, except a really angry buyer and their super ticked off broker. They could have sued, I suppose, but it was unlikely any court--or mediator--would have awarded them anything. The language just wasn't clear.

That's an unusual illustration. Home inspection contingencies are common and offer better examples. Most sales agreements specify the type of inspection (whole house, roof, pest and dry rot, etc.) and create deadlines, first for the parties to agree on repairs and second, a date certain by when repairs should be made.

For example, the Agreement might say, "Buyer and Seller have ten days from the date both parties signed this Agreement to complete repair negotiations..." The legalese will be more detailed, but you get the drift. The date for completion of repairs will be in the Buyer's Repair Addendum.

Here's an example of poor language in a Repair Addendum: "Seller to repair water damage in living room window." What if the seller doesn't do it? What if the seller scrapes and paints the window sill, but the damage resulted from poor installation and recurs? Unfortunately, this kind of language error brokers make is very common, causing angst, stress, and even killed deals.

Language has to be very clear and should always contain "if-then" clauses. The above example might better say, "Seller to retain licensed contractor to inspect window damage and its cause within two days. Repairs to be performed by licensed contractor and must be completed on or before March 3, 2013, when Buyer will perform a reinspection. If repairs have not been made, or if they have not been made in a workmanlike manner, then Buyer, at Buyer's sole option, may terminate this Agreement." This wording is much clearer, in that it says who determines the cause, who repairs it, a deadline for completing the work, and what happens if the repairs are not complete and/or properly performed (the "if-then").

The above example points out the major weakness in how real estate transactions are commonly conducted with respect to counter-offers and contingencies with addendums. In filling in blank spaces and writing addendums, real estate brokers are, I believe, practicing law. Without a license. Realtor associations seem to understand this weak spot and their attorneys work very hard to keep the pre-printed language concise and up-to-date.

It's very important for all parties to a real estate transaction carefully read and understand what's written. And it never hurts to consult an attorney if anything is unclear.

(Note: As a four-year Latin student, I realize the plural of "addendum" is "addenda." But I'm using the English plural, which seems more common.)