As discussed in other articles for
this Blog, under the heading, “If the
Form Does Not Fit You Must Alter It,” the real estate attorney’s optimal
role can be analogized to that of a
department store tailor. Sometimes, parties cannot afford custom made “suits”
(contracts) from an expensive boutique “store” (law firm). Or, custom dictates that
the off the rack “suit at a department store” (standard form) be used. The
problem is that the off the rack suit rarely fits all “body types”
(transactions). Consequently, if the off the rack suit (form) does not fit, you must
alter it. Inapplicable clauses of a contract can be crossed out and
initialed by the parties on the form. Small insertions can be written in and
initialed, and large insertions can be added by way of addendum.
In the world of
residential real estate, however, where custom dictates that the real estate
broker form be used, attorneys are sometimes as welcome to tailor make real
estate transactions as a band of desperadoes is to a small western town without
a sheriff.
We have had clients come to us reporting verbiage from
residential brokers to the effect:
“It’s the ‘standard contract’ we use it in all of our
sales;”
“You don’t need a lawyer; the
contract was drafted by lawyers;”
3 “We cannot make any changes to the forms;” and
4 “Our Docu-sign
program does not allow you to make any changes; just fill in the blanks and sign.”
All of the above statements are
essentially true, except the second statement.
While the broker form contracts are indeed drafted by lawyers, those
lawyers represent the brokerage companies. That is why you will see several
clauses that begin with language to the effect: “broker shall not be
responsible for” or “broker has not made any warranties.” Much of the form is
actually fairly balanced between buyer and seller (except for some standard forms that
still have somewhat of a seller slant, originating with language that pre-dates
the advent of buyer brokers and dual agency). Nevertheless, there are many legitimate
reasons a buyer or seller may need an attorney to help weigh the balance in
their favor (e.g., a buyer’s need for a contingency on the sale of its existing
home, or a seller need for a quick, cash only deal). Additionally, there are
some troublesome clauses we have seen (discussed below) that only a lawyer
can/should modify. Finally, there are potential survey, title and other matters
that are often glossed over in the standard contract.
Regarding the other statements
above, it is true that virtually all brokers use the standard contracts, and that
brokers cannot make any changes to them, other than fill in the blanks.
The reason that standard forms
are used and are not to be changed by brokers is that Ohio
law prohibits individuals not
licensed as an attorney from holding themselves out as an attorney or
committing any act prohibited by the Ohio Supreme Court as the unauthorized
practice of law. The Ohio Supreme Court has defined what constitutes rendering
legal services as: (1) giving legal advice; (2) preparing legal documents,
including contracts and (3) appearing in court proceedings on behalf of another
person.
As a general matter, however, it
is acceptable for real estate professionals to “fill in the blanks” on lawyer prepared
documents. The Ohio Supreme Court has held that “the supplying of simple,
factual material such as the date, the price, the name of the purchaser, the
location of the property, the date of giving possession and the duration of the
offer requires ordinary intelligence rather than the skill peculiar to one
trained and experienced in the law”, and consequently, is not the unauthorized
practice of law. A good, plain language summary of the law in this regard can
be found on the Ohio Board of Realtor’s website entitled: A Good Broker Toolkit:
Unauthorized Practice of Law, at: http://ohiorealtors.org/legal/brokers-legal-toolkit/unauthorized-practice-of-law/.
Just because a broker cannot make
any substantive changes to their standard form, does not mean an attorney or
one of the direct parties cannot insist upon modifications. While the vast
majority of realtors we have dealt with understand this, the few that advise
changes cannot or should not be made at all to the forms are in fact engaged in
the unauthorized practice of law. Stating that legal advice is not needed, or
that particular changes should not or cannot be made is in effect, legal advice.
Among the provisions we think should be altered, especially when
“outfitting” a buyer are the following:
“AS IS”-Most sellers of
residential real estate want to sell, on an AS IS basis, and most buyers, if
they want to buy a home, will have to buy on that basis. However, the buyer
should not have to agree to buy, “AS IS” until after their inspections, and
final walk thru have occurred and they have waived their rights to terminate the
contract. The standard forms, however contain premature language in this
regard. For example, consider this language from a major brokerage company’s
form: “The Property, which Buyer has
examined and accepts in its present AS IS physical condition shall include the
following…” An easy fix here is to use the following, alternative language: The property, which seller is selling in
its present AS IS physical condition shall include the following…”
“…then, this Agreement shall be null and
void”- This language usually follows a certain condition that
must occur, or not occur in the contract. The problem is that null and void literally
means “all bets are off”, “case closed” and “game over.” We see this language
most often, in the financing contingency and inspection sections of the standard
contract. The contract language in the financing contingency provision usually provides,
to the effect, “if a commitment is not
received within __ days, then this Agreement shall be null and void.” The
problem with this wording is that delays usually occur, and often, not the
fault of the buyer. A short, built in extension period could easily solve this
problem. Also, there are times when a Buyer prefers to finance, but may
actually be able to pay in cash and not want the contract to expire if it
cannot get its commitment. Making the contract voidable, at the option of the buyer
vs. automatically void can solve this problem.
The second place
the null and void language usually occurs is in the inspection section. The
standard contract inspection provision usually gives a Buyer three choices if its
inspections indicate problems. The buyer can: 1) terminate the contract; 2)
accept the problems and close; or 3) accept the property subject to an agreement
with the seller on the amount and timing necessary to fix the problem(s). If a
buyer chooses option three, however, the contract only gives the parties a
short period of time to agree, and if there is no agreement, the contract is automatically
deemed null and void. Again, making the contract voidable, at the option of the
buyer vs. automatically void will allow the buyer to stay in the deal if it
wants, if it cannot agree with seller. While seemingly important at first,
trying to avoid a $500 drywall repair could cost the buyer its dream house.
Material Defects -Most of the
standard forms only allow the buyer to terminate the contract if its
inspections reveal “material
defects not previously disclosed. “Maybe a U.S. Supreme Court justice or
two knows a material defect when he/she sees it, but for the rest of us, this
language is almost meaningless. It would be so much easier, prior to contract
signing for buyer and seller to choose a number both parties can live with as
the definition of material. In other words, language such as “Material Defect” shall mean a defect that
costs $_____ or more to repair” could easily transform a potential contract
dispute into an easy contract resolution.
“…then Buyer and Seller shall mutually agree,
or sign a mutual release, and thereafter the escrow agent shall refund the
Earnest Money.” Language like this is usually found in connection with
termination provisions of the standard contract. The problem with this language
is that if the buyer is attempting to exercise a termination right, seller and buyer
will be hard pressed to mutually agree upon anything. Without such a release, buyer
and seller will find themselves in “legal limbo” and the buyer will not likely see
its earnest money until after a successful court battle.
The best example
of this issue can be found in a major brokerage company’s walk-thru addendum
form. This form allows a buyer to walk thru the property it is buying a couple
of days before closing, and if the walk-thru evidences a “material adverse change in the Property”, buyer is to notify seller
and then buyer and seller are to mutually agree upon an amount to be withheld
from seller’s proceeds (and held in escrow until repairs are made), or an
amount to be credited to Buyer. The problem occurs when buyer and seller cannot
agree. If there is disagreement as to whether there is a material change, you
can bet there will be no inclination on seller’s part to agree on an amount to
remedy the change in the property. Quantifying “material adverse change” and adding a cause allowing termination of
the contract if the parties cannot agree on the amount to be withheld/credited
could easily prevent potential litigation. Sellers should be equally concerned
here because “contract purgatory” would seriously hamper their efforts to sell
their property to a new buyer.
Title & Survey- One standard
brokerage form we reviewed merely stated that the “Buyer is encouraged to obtain an Owner’s Title Insurance Policy”.
It did not provide language giving buyer the option to receive a “Title
Commitment”, which is basically the title company’s offer to provide a buyer
with title insurance, together with a report of any liens, encumbrances,
easements…currently against the title. In virtually all commercial contracts,
and many residential contracts, the buyer has a right to terminate the contract
if the Title Commitment shows encumbrances that are troublesome to the buyer.
Few standard residential contracts even mention the word “survey”. However, we
know of numerous disgruntled buyers who found out, after they bought their
properties that their neighbors driveway, or retaining wall or flower beds
encroached on their property
An “ALTA Survey”
would have disclosed the encroachments. Moreover, an ALTA Survey would have
been all that was needed in these situations for the title company to delete
its exception for survey matters, and cover the legal and survey expenses. The
broker in one of these situations told the buyer they did not need an ALTA
Survey, or an attorney.
What is the moral of this story? Brokers
cannot “tailor-make” their contract forms-it is against the law in Ohio; and
while the buyer and seller can represent themselves, the old adage usually
rings true-“those that represent themselves have a fool for a client.” That
leaves one option- have a lawyer review your real estate contract. You are the
customer, you can specify that you don’t want a new, tailor made suit, that the
pants don’t need hems and that you just want basic alterations such that the
odds of there being a wardrobe malfunction are greatly reduced.
If a broker,
seller, buyer or other party is telling you that you don’t need a lawyer, and
you can’t make any alterations--- it is time
to look for another “suit”. As this author’s father used to say, “Sometimes the
best deals are the ones you don’t make.”
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