Special Stipulations and Other Clauses in the Sales Contract
A real estate sales contract contains numerous stipulations and clauses which expand the agreement between the seller and the buyer into concerns that go beyond the financial negotiations and the various contingency agreements. This chapter focuses on some of those clauses.
WARRANTY OF TITLE
The seller warrants that he or she has title to the property and will deliver a “good and marketable” title to the buyer at the closing by means of a general warranty deed, unless the contract specifies another type of deed. In this context, a “good and marketable” title is ownership (title) that is free from doubt and that a reasonably prudent person would accept when purchasing property or using the property to secure a loan.
A real estate sales contract typically includes a clause giving the buyer the means to notify the seller of any problems with the title and giving the seller a reasonable amount of time to resolve any problems. If the seller cannot resolve the problems within a reasonable time, or prior to closing, then the buyer has the option to make the contract null and void.
This clause also usually refers to a “good and marketable” title, defined in this context as title that a title insurance company licensed to do business in Georgia will insure at its regular rates subject only to standard exceptions and any other exceptions specified in the contract. This definition of “good and marketable” title does not provide any warranty regarding the ability to sell the property in an open and competitive market.
DESTRUCTION OF PROPERTY (RISK OF LOSS STIPULATION)
A typical risk-of-loss clause states that if the property is destroyed or substantially damaged before the closing, the buyer at his or her option has the right either to cancel the contract and receive a refund of the earnest money, or to close the transaction and receive the insurance proceeds.
CONDITION OF IMPROVEMENTS
A general warranty deed only addresses problems with title to the property. The condition of improvements clause in a sales contract, in the case of resales, warrants that the seller will deliver the property at closing in the same physical condition the buyer saw at the signing of the contract with the exception of normal wear and tear. For new construction, the seller might warrant the same, or may certify that the improvements will be constructed according to state and local minimum standard building codes.
Whether the contract is a resale or new construction, this clause also often contains statements requiring the seller to transfer to the buyer any remaining interests in manufacturing warranties, service contracts, termite bond or treatment guarantee, and other warranty agreements that are transferable to the purchaser. The clause may also address the status of the Seller’s Property Disclosure Statement, either by indicating when the buyer will receive it, or by indicating that the buyer has in fact received it.
The inspection clause for new construction and for resales usually gives the buyer and his or her representatives the right to enter the property during a specified time after signing the contract, or a specified time before closing, to inspect the structural components, mechanical systems, appliances, fixtures, and other improvements, and the conditions of the site in general, and to conduct inspections and surveys.
The inspection clause usually provides a list of options available to the seller if the inspection identifies the need for repairs or replacements, and also gives the buyer a set of options if the seller refuses to make the repairs. If the contract includes a right of inspection, the buyer has a duty to perform a reasonable inspection of the property. Failure to do so may free the seller from any liability for deficiencies which the buyer could have detected by a visit to and an inspection of the property.
WOOD INFESTATION REPORT
The wood infestation clause of a contract may require the seller to provide the buyer a report from a licensed pest control operator, on a standard form that complies to the regulations and requirements of the Georgia Structural Pest Control Commission. The report should state that the main structure or dwelling is free of evidence of active infestation by termites or other wood destroying organisms. If the inspection reveals that active infestation exists or that previous infestation occurred, the seller needs to provide documentation of the treatment of the active infestation and of the fact that structural damage does not exist or that repairs corrected any current or previously existing structural damage. As part of this clause the seller may want to place an upper limit on the amount of repair expenditure that he or she will make.
Some sales contracts include a clause specifically identifying the nature of the water and sewer service to the property, whether the property receives water from a public water system, private water system, or on-site well, and whether the property handles waste disposal by public sewer, private sewer, or septic tank. For undeveloped land or commercial property, the clause would identify all available utilities, including electricity, natural gas (if the buyer requires), water, sewer, and telephone. Availability of utilities is usually assumed in residential transactions but is often a requirement in commercial loans.
HOME WARRANTIES AND BUYER PROTECTION PLANS
Some sales contracts, particularly for new construction, provide either that the buyer can purchase or that the builder/seller will provide a home warranty. A home warranty is an agreement that the builder/seller or the company issuing the home warranty will repair structural problems with the house, appliances, mechanical systems and interior finish problems, for a fixed period of time which can vary depending on the type of warranty and the issues covered. The home warranty documents may also identify standards of acceptability for construction details.
On resales, the seller might offer a buyer protection plan, often obtained through the seller’s broker. If this clause appears in the sales contract, the seller usually agrees to provide a third party home warranty to the buyer at a not-to-exceed cost to the seller, with coverage to extend for a period of time (usually one year) after the closing.
BROKERAGE AND AGENCY DISCLOSURES
Two related clauses usually appear in this section of the contract. The first clause specifies:
|(a)||the negotiated commission rate between the seller and the broker;|
|(b)||the split of this commission between the listing and the selling brokers, or between the listing broker and the buyer’s broker, perhaps a 50/50 split of the total commission, or a larger share to the listing broker if he or she has incurred an extraordinary level of expenses to market the property; and|
|(c)||the seller’s and the buyer’s responsibility to pay the commission if the seller or the buyer does not honor the signed contract.|
The second clause is an acknowledgment by the parties that they understood the agency responsibilities of the listing and selling brokers and their sales associates. This clause may specify simply that the listing broker represented the seller and the selling broker represented the buyer, or that one or more brokers represented the buyer as a buyer’s agent, the seller as a subagent, both the buyer and seller as a dual agent, or acted as a transaction broker, represented neither the seller nor the buyer. Often the selling broker’s relationship with the parties is detailed in a separate exhibit to the contract.
“TIME IS OF THE ESSENCE”
All sales contracts should state that “time is of the essence” in the performance of the contract. This clause makes the dates stated in the contract strictly enforceable. In a contract with this clause, a closing date of June 1 is a fixed date, and there is no expectation that closing can occur on June 2. However, if the time is of the essence clause is not in the contract, the dates stated in the contract become “reasonable expectations,” so a closing on June 4 or 5 could be reasonable even though the contract specified June 1.
BINDING ON HEIRS, SUCCESSORS, AND ASSIGNS
Most sales contracts include a clause which makes the contract signed by the buyer and seller binding upon their heirs, administrators, and executors if either party dies, so that the party who has not died is not at risk of losing the transaction. A similar clause binding “successors and assigns” will maintain the enforceability of the contract after a transfer of the contract by one of the parties.
TRANSFER AND ASSIGNMENT
Unless a contract says otherwise, each party has the legal right to assign his or her interest in the contract to another person who will complete the specifics of the contract. Most real estate sales contracts include a clause limiting that right by requiring the agreement of all parties to the contract if one party wants to assign his or her interests.
The possession clause in a sales contract obligates the seller to deliver possession of the property at a specified time. The transfer of possession from the seller to the buyer typically occurs on the closing date, but not always.
If the seller wants to retain possession after the closing, the contract should still state a definite date for the transfer of possession. It might also specify a rental rate and require a security deposit and the seller’s guarantee that the property will be in the same condition as it was in at closing and at the time of signing of the contract. The buyer could execute a formal lease with the seller who will be a tenant after the closing. If the seller/tenant does not vacate the property at the designated date, the buyer will have to go to court for a dispossession proceeding to remove the tenant.
Sometimes the buyer may feel a pressing need to occupy the property before closing. For example, the buyer’s lease ends two weeks before closing and the landlord will not agree to an extension, or the buyer is transferring from another city prior to closing and must start a new job, or the buyer has sold his or her home and must move out prior to closing.
However convincing is the buyer’s need for early occupancy of the property, the licensee has an obligation to make the seller aware of potential problems, should the transaction not close, in getting the buyer out of the property and perhaps in having to repair damages to the property if the purchaser is negligent or malicious.
If the seller agrees to give the buyer possession prior to closing, a move-in agreement can define the rights and obligations of the parties and provide for the possibility of the buyer’s not closing the transaction. If a tenant or third party is occupying the property, the buyer takes possession subject to the existing rights of the tenant. In this situation the buyer can learn what legal rights to the property the tenant holds by reviewing a copy of the existing lease.
The closing clause explicitly states the date by which the closing must take place and any conditions for extending the closing date. Most preprinted forms identify two situations for such an extension. First, the buyer’s loan is still in the approval process. Second, the seller has not responded to objections concerning the title to the property. Most preprinted forms also state a definite number of days for such an extension of the closing.
SURVIVAL OF THE AGREEMENT
As a general rule, the parties’ contractual obligations cease upon the closing of the sale. The obligations are said to have been “merged into” the deed of sale. If any unfulfilled obligation in the contract remains, it “survives the closing” until the responsible party completes the conditions or promises only if the contract specifies that “this obligation shall survive the closing” or words to that effect.
Most sale contracts contain an arbitration clause, which is an acknowledgment that the parties to the contract are aware of a voluntary binding arbitration procedure. An arbitration clause is binding and enforceable provided that the parties to the contract agree in writing to abide by arbitration and waive their rights to a judicial or court resolution.
BROKER DISCLAIMER CLAUSES
A real estate sale contract should include several standard broker disclaimer clauses. One disclaimer is an acknowledgment that the buyer and the seller sought their own information and did not rely on any advice or representations made by the broker or salespeople regarding a variety of issues, including the following: legal issues and tax consequences of the sale; terms and conditions of financing; structural and operating condition of the property; investment potential or resale potential of the property; restrictive covenants, easements and architectural controls; and availability of utilities.
A second disclaimer regarding hazardous and/or toxic materials also appears in many preprinted forms. The disclaimer frees the broker from any and all responsibility regarding the identification of such substances and their impact on the parties to the contract.
A third disclaimer is by the seller denying, unless otherwise noted in the contract, knowledge of the presence of hazardous or toxic conditions, encroachments, zoning or code violations, restrictive covenants, or notice of any government action against the property.
SALE OF BUYER’S PROPERTY CONTINGENCY
It is not always advisable for a seller to accept a contract from a buyer contingent upon the sale of property that the buyer currently owns. It is up to the licensee to provide the seller with sufficient information about sales in the neighborhood of the buyer’s property so that the seller can make an informed decision on whether to accept such a contingency in the contract. If the seller decides to accept the sale contingency, the parties can agree to give the buyer a specific amount of time to sell, after which the contract becomes null and void and the buyer receives a refund of the earnest money. As an alternative, the seller can retain the right to continue to offer the property for sale; and if the seller receives an acceptable offer, the buyer will have a specified amount of time either to remove the sale contingency and go forward with the purchase or to allow the agreement to become null and void allowing the seller to accept the second offer.
ACCESS TO PUBLIC STREETS OR HIGHWAYS CLAUSE
An access clause expresses the buyer’s desire to have adequate access to the property and to bind the seller legally to provide it. In an urban area with paved streets and frontage along those streets, this clause is not necessary. In rural areas and in sales of undeveloped land, this clause is important. The buyer wants to be certain that the property has access to a public street or highway. Limited access highways can be in close proximity, but there may still be no access to the property. A dirt road leading to and abutting the property may be a public street, but it also could be merely a neighbor’s private road, a cleared and graded strip of land on the neighbor’s property, or a trespasser’s path across the property.