Jorge Hernandez, Weekly Newsletter 12-04-2020

Dated: December 4 2020

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Jorge Hernandez

Your Real Estate Consultant for Life! 

 

 

 

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Why Detail Matters when Reading and Writing Contracts

 

Joel Maxson

 

People who focus on a handful of summary milestones in the contract can miss critical details that cost them dearly.

 

ORLANDO, Fla. – Many people look at a contract as a forward-looking set of summarized milestones. For example: First, the buyer makes a deposit. Second, the buyer makes loan application. Third, the buyer orders a home inspection, and so on.

 

But those who constantly read and re-read sections of the contract (instead of relying on a paraphrased summary) should know where to find answers to whatever issues the transaction throws at them, like where do both parties stand if the deposit check is lost in the mail? What if the lender goes out of business? What if the home inspector’s report is inaccurate?

 

Reading contracts

One advantage to closely reading a contract is that a party will be prepared to take timely action to keep themselves safe. Here’s a common example: Imagine a buyer who views the financing contingency as a series of milestones – apply for the loan, provide documents to the lender, receive loan commitment/approval so the funds show up at closing.

 

This “milestone” perspective can miss the central feature of the financing contingency – if not approved, the buyer can cancel the contract before loan approval deadline. If they don’t properly cancel, the deposit could be at risk. This article about a 2009 case shows what happened to a buyer who failed to carefully follow all steps described in a financing contingency to safely terminate by a deadline. Specifically, they overlooked the step that required them to send a written notice by a deadline if they wanted to cancel. (See “What’s Contractual Notice – and Why Is It Important?”)

 

Writing contract clauses

Writing contract clauses is difficult. A well-thought-out clause will provide answers to as many future scenarios as possible. It requires an accurate ability to forecast common (and not-so-common) outcomes and decide where the parties will stand in each of them. What if there’s a hurricane? What if a fire breaks out? What if there’s a new special assessment created between contract and closing?

 

The contract drafters thought through each of these questions and drafted clauses that provide answers for each scenario.

But when buyers and sellers choose to do their own legal drafting, they often fail to address “what ifs” like these. Here’s just one example: Let’s say a buyer is concerned about a low appraisal. The buyer decides to write a simple clause in additional terms “property must appraise at the purchase price.” The buyer looks at that sentence and thinks – great! I’m protected if the appraisal comes in low.

 

But, since the clause lacks detail, it fails to answer important questions of who, what, when, and how. This could cause issues for both a buyer and seller if they fight over it later, since there are no clear answers to any of the following questions:

Who has the right to cancel? Is it the buyer, seller, or both?

What counts as an appraisal? Must it be done by a licensed appraiser or might something else work?

 

What if there are two appraisals – one that is above purchase price and another slightly below?

 

When must this be done – is there a deadline?

How is the contingency triggered – does it happen automatically any time a low appraisal is made, or must one side or the other send a written notice to the other side to opt for cancellation?

 

As you can see, there are no answers to any of these questions, so if the parties chose to fight over this specific clause, it would be difficult to forecast how a court would rule.

That said, if a buyer wants to buy, a seller wants to sell, and they are very confident that they will continue to negotiate in good faith and iron out any issues that arise, I wouldn’t fault a party who chooses to put their own clause together rather than hire a lawyer. But it sure would help if they understood that a thin clause like this may not be a good one to fight over in the future. It’s also very helpful for any Realtor involved to ensure the party understands there’s a limit to the amount of assistance the Realtor can provide, and that both parties should take ownership of any clause they choose to sign, whether they do it with or without the help of an attorney.

 

 

Joel Maxson is Associate General Counsel for Florida Realtors

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