InfoBase – Chapter 19

Real Estate Commission

InfoBase - Chapter 19

Chapter 19

Georgia Law for the Real Estate Sales Contract

INTRODUCTION

As discussed in the previous chapter, one of the most important requirements of a real estate sales contract is that it must be “definite and complete” in all material respects.  Under Georgia law, the most important elements that make a contract complete are the following:

(a) the names of the parties to the contract—the buyer, the seller, and if desired, the listing and selling brokers;
(b) the agreement between the buyer and the seller;
(c) a sufficient legal description of the property;
(d) the purchase price and terms of payment;
(e) the closing date;
(f) miscellaneous conditional clauses;
(g) stipulations concerning the broker and the brokerage fee or compensation; and
(h) signatures of all parties to the agreement.

This list of items is only a general outline for purposes of discussion in this chapter and is designed to meet the needs of the real estate licensee rather than an attorney.  In addition to this list of items, the Brokerage Relationships in Real Estate Transactions Act (BRRETA) and the License Law require licensees to disclose their agency and non-agency relationships to the parties to the real estate contract.  Sometimes this disclosure is included as part of the real estate sales contract; other times it is in a separate document.  (This guide discusses BRRETA in Chapter 8.)  The Rules of the Commission require that licensees disclose in writing to the parties to a transaction the licensee’s agency relationship, if any, and the party or parties paying the licensee a commission no later than the time that one of the parties makes an offer to purchase, sell, to lease, or to exchange property.

THE NAMES OF THE PARTIES TO THE CONTRACT

The real estate sales contract must clearly and definitely identify the buyer and the seller.  The identification can be specific in the text of the contract by using the names of the parties, or it can be accomplished by using the phrases “the undersigned buyer” and “the undersigned seller” in the contract.  The first method offers greater clarity.  If the contract uses the second method, as in the preprinted forms used by many real estate firms, the contract is valid if it clearly identifies the parties as the buyer and the seller by placing these titles below the signature lines at the bottom of the contract.

If two or more people own the property, the contract must clearly identify each owner as a seller by providing a separate signature line.  If two or more people are purchasing the property, the contract must clearly identify each owner as a buyer by providing separate signature lines.

THE AGREEMENT

The fundamental element of agreement in a real estate sales contract is the requirement that there be mutual intent by the buyer and seller to enter a binding contract.  If a party to a contract can show that his or her actions were clearly “just a joke,” there is no contract.  However, if the person’s actions, conduct, and words would lead a reasonable person to believe that the intent was to form an agreement, a valid contract exists.

There are two methods generally used to reach an agreement.  The first method of reaching an agreement has all the parties to the contract present when the buyer and the seller sign the contract.  The second method has the buyer submitting an offer to the seller who signs it at a different place and time.  This second method is the procedure typically used in real estate transactions.
Regarding the second method, there are several important points to consider.

(a) If the offer does not stipulate a definite time to accept the offer, the seller has a reasonable amount of time to accept.
(b) If the offer stipulates a definite time to accept the offer, and there is no acceptance during this time, there is no agreement.  However, two occurrences can come into play in this situation.  First, the buyer (the offeror) can grant an extension of time to allow for the acceptance of the original offer.  Second, the buyer can agree to an acceptance even if the acceptance is late.
(c) If the offer requires a written acceptance, an oral acceptance is not sufficient to form the agreement.  If the offer does not require a written acceptance, an oral acceptance is sufficient to form an agreement, but the oral real estate sales contract created thereby will be unenforceable in the courts.
(d) A buyer can withdraw the offer prior to acceptance and before the stipulated expiration date for the offer.  If the seller wants to make an offer irrevocable during the stated time period for the offer, some form of consideration (financial compensation by the seller to the buyer) must be included in the original offer.  The consideration only needs to be a token amount to make the offer irrevocable..  The clause might state as follows:
For One Dollar and other valuable consideration, the Buyer agrees not to withdraw this offer before                        (A.M. or P.M.) on the         day of                       , 20      .

The wording of this and other contract provisions included in this manual are examples only.   Different transactions demand different language. Sales associates must seek the approval of their brokers before using a stipulation from this manual in an actual contract.

The agreement is enforceable even if the $1.00 does not change hands.
(e) If the buyer sends the offer by mail and permits a return by mail, the written acceptance takes effect when the seller places it in the mail.  The agreement occurs even if the mailed acceptance never reaches the buyer.

The seller must accept the offer unconditionally, unequivocally and without any changes to its provisions.  If the seller makes any change or amendment to the offer, it is a conditional acceptance or counteroffer.  A counteroffer accepted unconditionally, unequivocally and without any changes to its provisions, creates a formal acceptance and forms the agreement.  A real estate transaction can involve several counteroffers before there is a meeting of minds between the buyer and the seller.

Two important issues relate to the counteroffer in Georgia.  First, unless the counteroffer includes a clause requesting a written acceptance of the counteroffer, the other party can accept it orally.  However, the valid contract based on this agreement is enforceable in the court against the person who made the written counteroffer, but not against the person making the oral acceptance.  Second, counteroffers that are part of the negotiation process do not require any separate form of consideration (separate from the consideration in the contract itself).

The ideal legal situation occurs when the buyer and seller sign the same original copy of the agreement.  However, a valid agreement exists even under the following variations:

(a) the buyer and seller both sign a photographic or a carbon copy of the agreement;
(b) the buyer signs one copy of the agreement, the seller signs another copy of the agreement, and they exchange copies; or
(c) one party signs a handwritten copy of the agreement, while the other party signs a typed copy of it.  The objection to this procedure is the possibility for unintentional clerical error on the one hand and intentional altering of the document on the other hand.

THE LEGAL DESCRIPTION OF THE REAL PROPERTY

All contracts must contain some form of consideration.  Since real property is part of the consideration in a real estate sales contract, the law requires a precise description.  Each contract must contain a legal description of the property that provides an unambiguous statement of the dimensions and location of the property.  Legal description methods used in Georgia appear in Chapter 27.

THE PURCHASE PRICE

The purchase price stated in the offer and in the subsequent contract must be a definite amount or be stated in a manner that can lead to the calculation of a definite amount.  Two legally acceptable calculation procedures appear below.

(a) The price will not exceed $200,000.00 and it will be determined by an appraisal performed by John Doe.  A phrase such as “a state certified appraiser,” or “an MAI” could be substituted for a specific individual.
(b) The price will be $2,000.00 per acre with the acreage to be determined by a survey performed by a specific person or a person who possesses the necessary skills ordinarily required to perform the task.


THE TERMS OF PAYMENT

The terms of payment for the purchase price offered by the buyer (offeror) to the seller (offeree) in exchange for the real property may consist of some combination of the following:

(a) all cash with no loan involved;
(b) cash which includes a loan from a bank or other third party;
(c) deferred payment that involves a purchase money mortgage (seller financing);
(d) loan assumption or taking the property subject to an existing loan if permitted in the security deed; or
(e) other real or personal property.

Georgia courts strictly require a definite and complete statement of the terms of payment.

TERMS OF PAYMENT — ALL CASH, NO THIRD PARTY LOAN

If the offer is all cash and there is no provision for a third party to lend money to the prospective buyer, the offer and the subsequent agreement must clearly state this intention.  If the contract does not mention a loan, the courts will assume that the parties negotiated an all-cash transaction.  If the contract is specific about an all-cash transaction, the legal interpretation is that the buyer will pay the purchase price in cash at closing.   If the parties to the contract intend the payment at any other time, they must specify a date.

TERMS OF PAYMENT — CASH WITH A THIRD PARTY LOAN

In most real property transactions, residential and commercial, the buyer promises to pay cash in part from his or her own resources and additional cash from a third party through a new loan secured by the property.  In this situation, the buyer should make the contract contingent upon approval of the loan.  When the offer and the contract mention the loan, the Georgia courts have ruled that the contract must set out the terms of the loan in a “definite and complete” manner.

(a)  SPECIFICATION OF THE LOAN TERMS – The requirement for setting out the terms of the loan involves clear statements of the amount of the loan, the interest rate and period for the application of that interest rate (e.g., percent per annum), and the term of the loan.  The interest rate and the term of the loan can be ranges, upper limits or explicit numbers.

The following examples taken from Georgia cases reveal the intent of the legal requirement.  These examples are acceptable approaches:

(1) A loan of $37,000.00, reducible $1000.00 annually, loan to bear 6 percent interest payable semiannually;
(2) A loan of $72,000.00 at no more than 5 ½ percent and not less than a ten-year loan;
(3) A first mortgage in the sum of $29,400.00 at no more than 5 3/4 percent interest amortized over a thirty-year period with monthly payments; and
(4) A two-thirds first mortgage loan with interest at the current prevailing rate, principal and interest payable monthly for two years.
These examples are unacceptable:
(1) Obtaining necessary loan of $5,000.00;
(2) Getting a $40,000.00 loan; and
(3) A mortgage of two-thirds of purchase price at 5 ½ percent interest.
 

These acceptable and unacceptable versions of the terms of payment illustrate that the necessary requirements for a legally acceptable method of payment are a definite and clear statement of the loan amount, the periodic interest rate, including the period of time to which the interest rate applies [monthly, quarterly, semiannually or annually], and the term of the loan.

(b)  BUYER’S CONTINGENCY REGARDING THE LOAN – The form or wording of the contingency clause regarding the third party loan is very important.  The best form for the clause from the perspective of the seller is to obligate the buyer to apply for the loan, pursue it with due diligence in good faith, and accept it if it is obtainable or offered by the lender.  This wording eliminates the buyer’s right to refuse the properly described loan when offered; and it eliminates the buyer’s right to withdraw from the transaction at any time before obtaining the loan.
If the contingency clause only refers to the buyer’s “obtaining” a properly described loan, the buyer can withdraw before obtaining the loan, refuse it if offered, and not even attempt to obtain the loan.  However, if the contingency clause refers to the buyer’s “ability to obtain” the loan, the buyer must make a good faith effort to seek and obtain the loan.  The buyer cannot withdraw from the search for the loan and thus the contract, and the buyer must accept it if offered.
Contract law and judicial rulings are not explicit about a “good faith” effort to obtain a loan, but submitting only one loan application is not likely to be deemed a good faith effort.  One judicial ruling in Georgia stated that a buyer made a good faith effort by applying to two lenders, an insurance company and a bank.
(c) OTHER ASPECTS OF THE CONTINGENCY CLAUSE – The form or wording of the contingency clause regarding a third party loan must address several other important factors.
(1) The contingency clause should contain a statement regarding the time limit for obtaining the loan and provide that “time is of the essence.”  If the contract does not contain the “time is of the essence” clause, the buyer will have a reasonable, additional amount of time to pursue a loan even if there is a stated date or time limit in the contract.  If the contract contains a “time is of the essence” clause, the courts will interpret the dates and time limits strictly.
Therefore, most contingency clauses regarding a third party loan contain a time limit and either the “time is of the essence” phrase or an explicit statement that the contract is null and void unless the loan closes by a certain date.
(2) A contingency clause can allow the seller or the broker to assist in the process of finding a loan for the buyer on a specified set of terms and require the buyer to accept that loan if he or she is approved by the lender.  This provision allows the seller to overcome any deliberate attempts by the buyer to avoid loan approval or other half-hearted efforts to obtain a loan.
(3) The seller may want to state the extent to which he or she will pay loan discount points as part of seller-paid closing costs.  For example, the seller may be willing to pay half of the total points, or only willing to pay two points or one point (or no points).  Otherwise, the buyer could have an incentive to “spend” unused seller-paid closing costs to buy down his or her interest rate.

TERMS OF PAYMENT — PURCHASE MONEY MORTGAGE

purchase money mortgage (PMM) is a loan by the seller of the property to the buyer.  Here, “mortgage” is a generic term (the lending document used in Georgia would be a security deed).  A third party lender, such as a credit union, a commercial bank or another individual, typically is not part of the loan process if a PMM loan is the first mortgage loan.  However, PMM’s frequently are second loans that allow the buyer to obtain the additional funds to add to the down payment and the proceeds from the first loan so that he or she has the sum of money for the purchase price.

The PMM is subject to the same legal terms of payment requirements as a third party loan.  The previous discussion concerning the requirements of a third party loan is also applicable for a PMM.

TERMS OF PAYMENT — ASSUMPTION OF EXISTING LOAN OR TAKING PROPERTY SUBJECT TO THE LOAN

An assumption of an existing loan as part of the purchase of property means two things.  First, the buyer agrees to make the mortgage payments as prescribed in the original loan agreement between the seller and the lender.  Second, the buyer accepts the legal responsibility for the repayment of the loan balance.  However, even given this legal responsibility for the debt accepted by the buyer, the original borrower [i.e., the seller] still remains liable for debt.  If there is a default on the loan, the lender will first attempt to get repayment of the loan balance from the sale of the property. If this does not yield enough to cover the unpaid debt, the lender will seek the difference from the buyer who assumed the loan.  If this person is unable to pay the difference, the lender will seek the money from the original borrower who is the former owner of the property.

In the real estate sales contract, the terms of payment under a loan assumption must be definite and complete.  The best situation for the buyer would be to obtain the exact amount of the loan balance at the time of the closing directly from the lender (rather than relying on the accuracy of the seller’s records).  In addition to the terms of payment, the sales contract must specify the loan amount, interest rate, and term of the loan.

Taking property subject to an existing loan as part of the purchase of property, as with an assumption, means the buyer agrees to make the mortgage payments as prescribed in the original loan agreement between the seller and the lender.  However, the buyer does not accept legal responsibility for repayment of the loan balance.  The original borrower (i.e., the seller) remains solely liable for the debt.  In case of a default, the lender will first attempt to get repayment of the loan balance from the sale of the property.  If this does not yield enough to cover the unpaid debt, the lender will seek the difference from the original borrower who is the former owner of the property.  The previous discussion concerning loan assumptions and the requirements for the sales contract applies also to taking the property subject to the loan.

EARNEST MONEY

An earnest money deposit is not a legal requirement for a valid contract.  The signed offer to purchase delivered to and accepted by the seller is sufficient to form a valid contract.  However, payment of an earnest money deposit is required by most sellers and is customary in Georgia and most other states.

(a) SELLER’S DESIRE FOR EARNEST MONEY – The seller asks for an earnest money deposit as protection in case the buyer does not fulfill his or her obligations as agreed upon in the contract.  If the contract so provides, the money becomes “liquidated damages” and is the compensation due to the seller and, perhaps, his agent, the listing broker.  The ideal amount of earnest money deposit from the seller’s point of view is a sum that covers all expenses and any potential financial loss which would be suffered as a consequence of the buyer’s breach of contract.  From the broker’s perspective, this would include the commission fee in addition to the seller’s other expenses.
(b) BUYER’S VIEW OF EARNEST MONEY – The ideal amount of earnest money from the buyer’s perspective is zero!  When the buyer places funds into an escrow account, the buyer loses the use of and/or interest on these funds for the entire period of time from the signing of the offer to the closing.
(c) EARNEST MONEY NEGOTIATION – The actual amount of earnest money is a matter of negotiation between the seller and the buyer as they reach an agreement.  The seller wants a large sum of money, and the buyer wants to provide as little as possible.  For a contract to be formed, they must settle on a sum within that range, so bargaining strength or position ultimately will decide the actual amount within that range.
(d) THE USUAL EARNEST MONEY CLAUSE – The usual earnest money clause in a real estate sales contract is an acknowledgment of the receipt of earnest money from the buyer, along with a statement that the funds will be applied to the purchase price at the closing.  If a broker is holding the funds, the earnest money clause instructs the broker when and where to deposit them, when and how to disburse them, and whether the broker can deposit them in an interest-bearing account and to whom the interest belongs.

The clause must also address the disposition of the earnest money under all contingencies.  It can provide that if the seller fails to close the transaction, the money returns to the buyer; or it might specify that the earnest money becomes liquidated damages if the closing does not occur because of the buyer’s default.

(e) EARNEST MONEY AS LIQUIDATED DAMAGES – The contract might specify that if the buyer fails or refuses to close the transaction, the earnest money becomes compensation to the seller and/or seller’s agent, the listing broker.  The earnest money clause in the contract might also identify the earnest money as funds that the seller may retain as partial liquidated damages while maintaining the right to pursue seller’s other remedies at law or equity.  Georgia court rulings have held that for this forfeiture of earnest money funds from the buyer to the seller to be valid liquidated damages:
(1) actual damages must be difficult or impossible to estimate;
(2) there must be a mutual intention to make a bona fide provision for determining damages rather than merely to impose a penalty; and
(3) the amount of earnest money must be a reasonable estimate of a probable future loss.
(f) FORM OF THE EARNEST MONEY DEPOSIT – An earnest money deposit in cash or certified funds does not present a problem.  However, a personal check does present problems.  First, the buyer could stop payment or the bank could return the check for lack of funds in the account.  If the earnest money deposit is a personal check and the buyer stops payment on the check, or the bank returns the check for lack of funds, the contract is still enforceable according to Georgia law.  The seller can protect against these two events by simply stipulating that the contract is voidable at the seller’s option if payment is stopped or if the check is not paid when it is presented to the buyer’s bank.


THE CLOSING

Real estate sales contracts refer to a closing date by stating (a) a definite or fixed date, or (b) a date on or before which the closing must occur.  In both situations, the contract can allow an extension of time for completion of necessary conditions such as the loan approval.  If the contract does not specify a closing date, the courts may allow a “reasonable” amount of time for the closing to occur.

OTHER CONDITIONAL OR CONTINGENCY CLAUSES

As discussed earlier in this chapter, the buyer will usually insist on a contingency clause regarding a loan from a third party source.  In addition to the loan contingency, other contingencies can arise out of the negotiations and appear in the agreement between the buyer and the seller.  Some of the more common contingencies include those discussed below.

(a) SALE OF PRESENT PROPERTY – The buyer may require that a presently owned property sell before the buyer becomes obligated to purchase the seller’s property.  Satisfying the needs of both buyer and seller in this contingency clause is very difficult.  The first point of concern is the issue of when the property is “sold.”  The Georgia Court of Appeals has defined a property as sold when the sales transaction has closed.  Therefore, the seller might prefer that this contingency clause specify instead that the buyer’s property be currently under contract rather than “sold” or “closed.”
The second point of concern is whether to state a specific sales price for the buyer’s property in the contingency clause.  The buyer may not want to set a definite price because it might be too low and the buyer would have to accept it if offered.  On the other hand, if a sales price is not set or if the sale is to be “at a price satisfactory to the buyer” or words to that effect, the performance of the condition is totally in the hands of the buyer.  This situation is typically unacceptable to the seller.The seller’s protection generally lies in a clause that requires the buyer to perform or step aside if the seller receives a satisfactory third party offer while the contingency is in effect.  If the seller receives such an offer, the contingency clause expires and the buyer would have to either close or allow the original contract to terminate.  This clause usually will contain a specified time during which the buyer must make the decision to close or to let the contract terminate.
The seller continues to protect his or her interests at this point by also inserting the statement that all financing contingencies terminate at the time the contingency on the sale of present property terminates.  In other words, the buyer would have to move to a cash sale. This eliminates the possibility that the prospective buyer will not qualify for a loan because the house does not sell.
(b) ACQUISITION OF OTHER PROPERTY – This contingency arises when the buyer is trying to assemble two or more separate parcels for a single, larger parcel of real property.  The point of concern about what constitutes a sale discussed in the previous section is also present in this situation.  However, the issue is even more complex because the buyer will not want to close on one property if the other property or properties are not available for acquisition.  Thus, the contingency might contain words to the effect of “this contract is conditioned upon the buyer’s ability to purchase and acquire good title to one or more other properties as specified herein.”  Also, the buyer will not want to reveal to one seller any information about an offering price to the owner of another parcel of property in a contingency clause.
(c) OBTAINING A REZONING, VARIANCE, OR SPECIAL USE PERMIT – The first step in drafting this type of contingency is to discover what regulatory changes would allow the prospective buyer to do what he or she wants to do with the property.  Depending on the circumstances, a variance from an existing set of regulations affecting the property may be all that is necessary; or a special use permit within the existing land use category may accomplish the desired end.  On the other hand, a rezoning request to change the land use classification of the property may be necessary.  Whether the contingency is for a rezoning request, a variance, or a special use application, the contingency clause must contain several provisions.
(1) The clause must designate the party charged with making the request and the party who will pay for the expenses of the procedures.
(2) The clause must state a time limit for making the request and that “time is of the essence.”
(3) The clause must state the expected land use classification or change.
(4) The clause must define or specifically identify the conditions necessitating the change.  In this way the parties can make a comparison and evaluation of the exact nature of the new conditions that the change would allow.
(5) The clause must state the rights and responsibilities of the parties to the contract if the request is denied.

PROBLEMS IN DRAFTING CONTINGENCY CLAUSES

Contingency clauses present several problems to the agent attempting to draft them for inclusion in the sales contract.

(a) The wording must be definite enough for the parties to know whether and when fulfillment of the contingency or the condition occurs. For example, “fix the leak in the roof” is specific enough. It could say “by replacing all damages shingles with new shingles that match the original color” as opposed to “slap some tar on the spot”. These statements lead to two different results.
(b) The clause must identify clearly the party to the contract with the responsibility to perform each act that is the subject of the contingency clause.
(c) There must be a clear indication of the right to waive the contingency.
(d) The wording of the contingency must offer protection to each party to the contract.