Contracts are a huge part of your business day in and day out.
On Tuesday, PAR’s Legal Hotline attorneys presented Contracts 101, a webinar in which they went over frequently asked questions and common problems they hear about contracts daily on the hotline.
Assistant General Counsel Desiree Brougher kicked off the webinar by discussing the first step, forming a contract. This includes the offer, consideration and acceptance. An offer is a demonstration of someone’s wish to enter into a bargain, which is made in the Agreement of Sale, said Brougher. The Agreement of Sale is the buyer’s demonstration they want to enter into an agreement with the seller.
However, written acceptance has a deadline in the agreement. If there is no acceptance by that date in the contract, the contract naturally expires, said Brougher. “If a seller signs the contract after the date, it is not binding and the seller can’t lock the buyer into the contract if it is expired. If both parties are willing to continue, it makes sense to modify the acceptance deadline. It’s essentially a counteroffer by the seller,” she added.
For consideration, it is something for something, she said. “What many people get wrong is what consideration can be. The buyer promises to buy a property and the seller promises to sell the property all with terms and conditions. Valid contracts are typically not one-sided,” said Brougher. “Consideration is not a monetary deposit. There can be contracts with no exchanges of money.”
Finally, there is acceptance, in which both parties agree to the terms and they act by the seller signing.
Associate Counsel Paige Perrucci discussed legally binding contracts. Legally binding contracts are between two parties. If one party fails, the other party can take legal action, said Perrucci. “A legally binding contract needs offer and acceptance, consideration, intention, legality and capacity.”
What if both parties want to change the terms? “Speak to the other party and ask. Changing terms without consent from the other party can bring a lawsuit. Both parties must sign to change or amend the terms. Inform your clients of all possibilities. Remember you are the licensed professional,” said Perrucci.
Terminating contracts is another topic the Legal Hotline receives calls about, said Chief Legal Officer Hank Lerner. It is important to understand what is in the contract, said Lerner.
“Buyers cannot terminate a contract because they did not get financing,” he said. “And sellers cannot terminate because they did not find another house. If a buyer or seller decides they don’t want to buy or sell anymore, they cannot just decide to terminate the contract.”
As usual, there is a form to formally terminate the contract (Form TER).
As a reminder, if a contract expires, there is no need to terminate. “If you get to the closing date and parties are unable to close, the contract is over. It may be helpful to communicate. Just because the contract expires does not mean no one is at fault. If the contract expires because the buyer didn’t have financing, that doesn’t mean the buyer is off of the hook,” he added.
Finally, Associate Counsel Kacy Clouser discussed the release of contracts. “The release is both for negotiating the release of any deposits that have been made and also for the parties to release each other and their brokers and agents from liabilities related to the contract.”
If there is no deposit money, parties can still execute the release with zero dollars in the amount and can fully release the parties from the contract. “Please double check your work. We have had instances where one agent puts the distribution of the deposit money to the wrong party. Once the other party signs it, the contract is fully released and the deposit is returning to the wrong party,” she said.
If you want to terminate and release, there is a form for that (Form TERAREL). However, if you just need a release, for example, if the contract expired, there is a form for that (Form AREL). “The release must be fully executed by both parties in order to be valid,” said Clouser. “Once it is fully executed, the contract is over. But if an agent just sends the release form without the termination, then the parties don’t agree to the release then technically, the contract has never ended if it is before the expiration date. Simply sending the release is not the same as ending the contract.”
“If the release is fully executed by both parties, there is no need for a termination,” she added.
If there is no release, after a certain number of days, the default is 180, the buyer can request back the money from the broker holding the funds. They have 30 days to return the money. If a title company is holding the deposit money, they are not held to the same standards as Realtors®.
Moving forward, new forms will be released Feb. 1 and Aug. 1. As of press time, there are no new forms scheduled to be released Aug. 1.