By Justin M. Lewis, Ward and Smith, P.A.

Editor’s Note: Justin M. Lewis is a member of the Real Estate Practice Group at Ward and Smith, P.A.

Early in the process of buying real property, a buyer often consults realtors, loan officers, and contractors, focusing on the location and price of desired property. But then, after all of the painstaking effort and care, many buyers will not hesitate to sign a "standard form" contract presented by the seller or the seller’s real estate broker (perhaps one the seller has downloaded from the Internet), as long as it identifies the right property and lists the right price.

The purchase contract is the fundamental agreement that allocates rights and obligations between the parties and establishes each party’s responsibilities at closing. However, there is a tendency by many to think that if a contract is on a "standard form," it must be good for every party and every transaction. The "fine print" is considered lightly and negotiated rarely, if at all. It’s even possible that a commercial contract was used for a residential purchase or vice versa. A standard form contract should be considered only a beginning point and usually will not be the best "fit" for an individual buyer’s needs. By considering the proposed contract carefully before signing it and by consulting with an experienced real estate attorney, a buyer may be able to avoid many common pitfalls confronted by buyers after it is too late to do anything about them. A summary of some of these pitfalls is included below.

Limitation on Sellers’ Liability

In the event of the seller’s breach of a purchase contract, a buyer’s usual remedies fall into three basic categories: (i) money damages, (ii) requiring the seller to specifically perform the contract, and (iii) recovery of the deposit. However, these remedies and the extent of a seller’s liability often are removed or limited by standard form contracts. Furthermore, sellers often will prepare the contract or amend a standard form contract to limit their liability to the return of the buyer’s earnest money deposit in the event of the seller’s breach. Buyers who agree to such terms are giving away all meaningful legal remedies. A buyer is likely to suffer damages and losses due to a seller’s breach for which the buyer cannot be truly and fully compensated just by the return of the earnest money deposit. Such losses usually include considerable expenses incurred in investigating the condition of the property and what the buyer will be allowed to do with it, obtaining a loan, contracting for construction or improvements, and preparing to relocate. Therefore, a buyer should preserve as many legal remedies as possible in the event of the seller’s breach. In the course of negotiating a purchase contract, a buyer may choose to make some concessions in exchange for similar concessions from the seller, but a buyer should never give up legal remedies without first consulting an attorney.

Earnest Money Deposit

Standard form contracts often provide for the seller’s broker to hold the earnest money deposit paid by the buyer until closing. In the event of an argument between the buyer and the seller, the broker will be required to hold the deposit in a trust account until the dispute is resolved unless the broker deposits it with the clerk of court. This can tie up the buyer’s money for quite some time, and the expense of litigating the return of the deposit easily can be greater than the deposit itself. Therefore, it is important for the buyer to understand the consequences of a dispute and to prepare the contract to account for the distribution of the earnest money deposit in as many foreseeable scenarios as possible. A purchase contract with clear provisions regarding the return of earnest money may save a buyer time, money, and, at the very least, a very big headache.

Time Is of the Essence

Certain provisions in standard form contracts may include the term "time is of the essence." This means that a party who does not perform on or before the date specified in the contract will be in breach of the contract, regardless of the reason for the delay. Because the purchase of real estate can be a very complicated transaction and unforeseen delays often occur, strict "time is of the essence" clauses can lead to disastrous results. When the term is not included, most contractual requirements must be performed only within a reasonable time, which is usually more appropriate in real estate transactions. Buyers need to understand the meaning and consequences of "boilerplate" legal terms such as "time is of the essence" before signing a purchase contract containing them.

The Buyer’s Plans for Use and Construction

Buyers often purchase real property with the intention of using the property for a specific purpose, making additions to existing structures, or adding new structures. However, zoning ordinances or restrictive covenants may prevent such use or construction. Usually, a careful investigation into the relevant zoning limitations and restrictive covenants, including a review of the specialized terms generally found in them, does not occur until, at best, after a purchase contract is signed. If the buyer’s obligation to close is not conditioned on the buyer’s ability to use the property as intended, the buyer well may be out of luck if the restriction or zoning ordinance is discovered after the contract is signed because the buyer may not be able to terminate the contract. There also may be no recourse against the seller if the seller made no representations concerning zoning or restrictions. Buyers, therefore, should include appropriate provisions in the purchase contract regarding seller representations, allowing for a reasonable due diligence period to investigate the property’s use and construction possibilities, and allowing the buyer to terminate the contract without obligation if the buyer’s expectations for use of the property cannot be met.

Type of Deed

Contracts for the purchase of land typically require the seller to provide the buyer with a "general warranty deed," but contracts can be revised to require only a special warranty deed or even a non warranty deed. By conveying property through a general warranty deed, the seller is warranting to the buyer that the seller: (1) owns the property, (2) has the right to convey it "free and clear" "subject to" encumbrances that are specifically noted on the deed (see below for more on this), and, (3) will warrant and defend the buyer against all lawful claims to the property. In contrast, a seller provides no warranties through a non warranty deed (the buyer gets title "as-is") and provides only limited warranties with a special warranty deed. Not all transactions require a general warranty deed, but a buyer should be aware of what warranties the seller is proposing to give before signing a contract and agreeing to accept those warranties.

"Subject To" What?

Real property often is conveyed "subject to" certain restrictions such as easements, property taxes, homeowner association dues, leases, and restrictive covenants, among others. While any real property necessarily will be subject to some restrictions (such as property taxes and prior easements of record), the contract, regardless of the language in the deed, should provide that the buyer is not obligated to accept the deed or buy the property if the property is subject to restrictions which are unacceptable to the buyer. The buyer can draft the purchase contract to dictate what exceptions will be acceptable and allow the buyer to terminate the contract if there are others.

Loan Conditions

With the exception of the few buyers fortunate enough to be able to purchase real property with cash, most buyers will need financing. The contract should include a provision conditioning the buyer’s obligation to purchase the property on the buyer’s ability to obtain a loan with conditions acceptable to the buyer. Without such a provision, the buyer could be required to purchase the property as long as the buyer is approved (or could be approved) for any loan, regardless of the terms.

Conclusion

The purchase of real property is a complicated transaction to acquire a unique asset. It is important that the purchase contract reflect the buyer’s wishes and protect the buyer’s interests, and careful consideration and negotiation of not only location and price, but also the "fine print" of the purchase contract, will help the buyer meet these goals.

© 2009, Ward and Smith, P.A.

Ward and Smith, P.A. provides a multi-specialty approach to the representation of technology companies and their officers, directors, employees, and investors. Justin M. Lewis practices in the Real Estate Practice Group where he concentrates his practice in commercial real estate, leasing, and community association law. Comments or questions may be sent to jml@wardandsmith.com.

This article is not intended to give, and should not be relied upon for, legal advice in any particular circumstance or fact situation. No action should be taken in reliance upon the information contained in this article without obtaining the advice of an attorney.