Contract provisions

The conventional transfer of real estate ownership takes place in three stages. First, there is the negotiating period where buyers and sellers exchange offers in an effort to agree to all transfer terms that will appear in the sale contract. Second, when both parties have accepted all terms, the offer becomes a binding sale contract and the transaction enters the pre-closing stage, during which each party makes arrangements to complete the sale according to the sale contract’s terms. Third is the closing of the transaction, when the seller deeds title to the buyer, the buyer pays the purchase price, and all necessary documents are completed. At this stage, the sale contract has served its purpose and terminates.

Other names for the sale contract are agreement of sale, contract for purchase, contract of purchase and sale, and earnest money contract.

Legal characteristics  

Executory contract. A sale contract is executory: the signatories have yet to perform their respective obligations and promises. Upon closing, the sale contract is fully performed and no longer exists as a binding agreement.

Signatures. All owners of the property should sign the sale contract. If the sellers are married, both spouses should sign to ensure that both spouses release homestead, dower, and curtesy rights to the buyer at closing. Failure to do so does not invalidate the contract but can lead to encumbered title and legal disputes.

Enforceability criteria. To be enforceable, a sale contract must:

  • be validly created (mutual consent, consideration, legal purpose, competent parties, voluntary act)
  • be in writing
  • identify the principal parties
  • clearly identify the property, preferably by legal description
  • contain a purchase price
  • be signed by the principal parties

Written vs. oral form. A contract for the sale of real estate is enforceable only if it is in writing. A buyer or seller cannot sue to force the other to comply with an oral contract for sale, even if the contract is valid.

Assignment. Either party to a sale transaction can assign the sale contract to another party, subject to the provisions and conditions contained in the agreement.

Who may complete. A broker or agent may assist buyer and seller in completing an offer to purchase, provided the broker represents the client faithfully and does not charge a separate fee for the assistance. It is advisable for a broker to use a standard contract form promulgated by a state agency or real estate board, as such forms contain generally accepted language. This relieves the broker of the dangers of creating new contract language, which can be construed as a practice of law for which the broker is not licensed.

Contract creation       

Offer and acceptance. A contract of sale is created by full and unequivocal acceptance of an offer. Offer and acceptance may come from either buyer or seller. The offeree must accept the offer without making any changes whatsoever. A change terminates the offer and creates a new offer, or counteroffer. An offeror may revoke an offer for any reason prior to communication of acceptance by the offeree.

Equitable title. A sale contract gives the buyer an interest in the property that is called equitable title, or ownership in equity. If the seller defaults and the buyer can show good faith performance, the buyer can sue for specific performance, that is, to compel the seller to transfer legal title upon payment of the contract price.

Earnest money escrow                         

The buyer’s earnest money deposit fulfills the consideration requirements for a valid sale contract. In addition, it provides potential compensation for damages to the seller if the buyer fails to perform. The amount of the deposit varies according to local custom. It should be noted that the earnest money deposit is not the only form of consideration that satisfies the requirement.

The sale contract provides the escrow instructions for handling and disbursing escrow funds. The earnest money is placed in a third party trust account or escrow. A licensed escrow agent employed by a title company, financial institution, or brokerage company usually manages the escrow. An individual broker may also serve as the escrow agent.

The escrow holder acts as an impartial fiduciary for buyer and seller. If the buyer performs under the sale contract, the deposit is applied to the purchase price.

Strict rules govern the handling of earnest money deposits, particularly if a broker is the escrow agent. For example, Florida law directs the broker when to deposit the funds, how to account for them, and how to keep them separate from the broker’s own funds.

Contract contingencies             

A sale contract often contains contingencies. A contingency is a condition that must be met before the contract is enforceable.

The most common contingency concerns financing. A buyer makes an offer contingent upon securing financing for the property under certain terms on or before a certain date. If unable to secure the specified loan commitment by the deadline, the buyer may cancel the contract and recover the deposit. An appropriate and timely loan commitment eliminates the contingency, and the buyer must proceed with the purchase.

It is possible for both buyers and sellers to abuse contingencies in order to leave themselves a convenient way to cancel without defaulting. To avoid problems, the statement of a contingency should

  • be explicit and clear
  • have an expiration date
  • expressly require diligence in the effort to fulfill the requirement

A contingency that is too broad, vague, or excessive in duration may invalidate the entire contract on the grounds of insufficiency of mutual agreement.

Default                          

A sale contract is bilateral, since both parties promise to perform. As a result, either party may default by failing to perform. Note that a party’s failure to meet a contingency does not constitute default, but rather entitles the parties to cancel the contract.

Buyer default. If a buyer fails to perform under the terms of a sale contract, the breach entitles the seller to legal recourse for damages. In most cases, the contract itself stipulates the seller’s remedies. The usual remedy is forfeiture of the buyer’s deposit as liquidated damages, provided the deposit is not grossly in excess of the seller’s actual damages. It is also customary to provide for the seller and broker to share the liquidated damages. The broker may not, however, receive liquidated damages in excess of what the commission would have been on the full listing price.

If the contract does not provide for liquidated damages, the seller may sue for damages, cancellation, or specific performance.

Seller default. If a seller defaults, the buyer may sue for specific performance, damages, or cancellation.

Contract provisions   

Sale contracts can vary significantly in length and thoroughness. They also vary according to the type of sale transaction they describe. Some of the varieties are:

  • Residential Contract of Sale
  • Commercial Contract of Sale
  • Foreclosure Contract of Sale
  • Contract of Sale for New Construction
  • Contract of Sale for Land
  • Exchange Agreement

As the most common sale transaction is a residential sale, a Residential Contract of Sale is the type with which a licensee should first become familiar. A typical residential sale contract contains provisions of the following kind.

Parties, consideration, and property. One or more clauses will identify the parties, the property, and the basic consideration, which is the sale of the property in return for a purchase price.

There must be at least two parties to a sale contract: one cannot convey property to oneself. All parties must be identified, be of legal age, and have the capacity to contract.

The property clause also identifies fixtures and personal property included in the sale. Unless expressly excluded, items commonly construed as fixtures are included in the sale. Similarly, items commonly considered personal property are not included unless expressly included.

Legal description. A legal description must be sufficient for a competent surveyor to identify the property.

Price and terms. A clause states the final price and details how the purchase will occur. Of particular interest to the seller is the buyer’s down payment, since the greater the buyer’s equity, the more likely the buyer will be able to secure financing. In addition, a large deposit represents a buyer’s commitment to complete the sale.

If seller financing is involved, the sale contract sets forth the terms of the arrangement: the amount and type of loan, the rate and term, and how the loan will be paid off.

It is important for all parties to verify that the buyer’s earnest money deposit, down payment, loan proceeds, and other promised funds together equal the purchase price stated in the contract.

Loan approval. A financing contingency clause states under what conditions the buyer can cancel the contract without default and receive a refund of the earnest money. If the buyer cannot secure the stated financing by the deadline, the parties may agree to extend the contingency by signing next to the changed dates.

Earnest money deposit. A clause specifies how the buyer will pay the earnest money. It may allow the buyer to pay it in installments. Such an option enables a buyer to hold on to the property briefly while obtaining the additional deposit funds. For example, a buyer who wants to buy a house makes an initial deposit of $200, to be followed in twenty-four hours with an additional $2,000. The sale contract includes the seller’s acknowledgment of receipt of the deposit.

Escrow. An escrow clause provides for the custody and disbursement of the earnest money deposit, and releases the escrow agent from certain liabilities in the performance of escrow duties.

Closing and possession dates. The contract states when title will transfer, as well as when the buyer will take physical possession. Customarily, possession occurs on the date when the deed is recorded, unless the buyer has agreed to other arrangements.

The closing clause generally describes what must take place at closing to avoid default. A seller must provide clear and marketable title. A buyer must produce purchase funds. Failure to complete any pre-closing requirements stated in the sale contract is default and grounds for the aggrieved party to seek recourse.

Conveyed interest; type of deed. One or more provisions will state what type of deed the seller will use to convey the property, and what conditions the deed will be subject to. Among common “subject to” conditions are easements, association memberships, encumbrances, mortgages, liens, and special assessments. Typically, the seller conveys a fee simple interest by means of a general warranty deed.

Title evidence. The seller covenants to produce the best possible evidence of property ownership. This is commonly in the form of title insurance.

Closing costs. The contract identifies which closing costs each party will pay. Customarily, the seller pays title and property-related costs, and the buyer pays financing-related costs. Annual costs such as taxes and insurance are prorated between the parties. Note that who pays any particular closing cost is an item for negotiation.

Damage and destruction. A clause stipulates the obligations of the parties in case the property is damaged or destroyed. The parties may negotiate alternatives, including seller’s obligation to repair, buyer’s obligation to buy if repairs are made, and the option for either party to cancel.

Default. A default clause identifies remedies for default. Generally, a buyer may sue for damages, specific performance, or cancellation. A seller may do likewise or claim the earnest money as liquidated damages.

Broker’s representation and commission. The broker discloses the applicable agency relationships in the transaction and names the party who must pay the brokerage commission.

Seller’s representations. The seller warrants that there will be no liens on the property that cannot be settled and extinguished at closing. In addition, the seller warrants that all representations are true, and if found otherwise, the buyer may cancel the contract and reclaim the deposit.

A sale contract may contain numerous additional clauses, depending on the complexity of the transaction. The following are some common additional provisions.

Inspections. The parties agree to inspections and remedial action based on findings.

Owner’s association disclosure. The seller discloses existence of an association and the obligations it imposes.

Survey. The parties agree to a survey to satisfy financing requirements.

Environmental hazards. The seller notifies the buyer that there may be hazards that could affect the use and value of the property.

Compliance with laws. The seller warrants that there are no undisclosed building code or zoning violations.

Due-on-sale clause. The parties state their understanding that loans that survive the closing may be called due by the lender. Both parties agree to hold the other party harmless for the consequences of an acceleration.

Seller financing disclosure. The parties agree to comply with applicable state and local disclosure laws concerning seller financing.

Rental property; tenants’ rights. The buyer acknowledges the rights of tenants following closing.

FHA or VA financing condition. A contingency allows the buyer to cancel the contract if the price exceeds FHA or VA estimates of the property’s value.

Flood plain; flood insurance. Seller discloses that the property is in a flood plain and that it must carry flood insurance if the buyer uses certain lenders for financing.

Condominium assessments. Seller discloses assessments the owner must pay.

Foreign seller withholding. The seller acknowledges that the buyer must withhold 15% of the purchase price at closing if the seller is a foreign person or entity and forward the withheld amount to the Internal Revenue Service. Certain limitations and exemptions apply.

Tax deferred exchange. For income properties only, buyer and seller disclose their intentions to participate in an exchange and agree to cooperate in completing necessary procedures.

Merger of agreements. Buyer and seller state that there are no other agreements

between the parties that are not expressed in the contract.

Notices. The parties agree on how they will give notice to each other and what they will consider to be delivery of notice.

Time is of the essence. The parties agree that they can amend dates and deadlines only if they both give written approval.

Fax transmission. The parties agree to accept facsimile transmission of the offer, provided receipt is acknowledged and original copies of the contract are subsequently delivered.

Survival. The parties continue to be liable for the truthfulness of representations and warranties after the closing.

Dispute resolution. The parties agree to resolve disputes through arbitration as opposed to court proceedings.

C.L.U.E. Report. CLUE (Comprehensive Loss Underwriting Exchange) is a claims history database used by insurance companies in underwriting or rating insurance policies. A CLUE Home Seller’s Disclosure Report shows a five-year insurance loss history for a specific property. Among other things, it describes the types of any losses and the amounts paid. Many home buyers now require sellers to provide a CLUE Report (which only the property owner or an insurer can order) as a contingency appended to the purchase offer. A report showing a loss due to water damage and mold, for instance, might lead a buyer to decide against making an offer because of the potential difficulty of getting insurance. A report showing no insurance loss within the previous five years, on the other hand, is an indication that the availability and pricing of homeowner’s insurance will not present an obstacle to the purchase transaction, and also that the property has not experienced significant damage or repair during that time period.

Addenda. Addenda to the sale contract become binding components of the overall agreement. The most common addendum is the seller’s property condition disclosure. Examples of other addenda are:

agency disclosure         asbestos / hazardous materials

liquidated damages       radon disclosure
flood plain disclosure    tenant’s lease

Required disclosures                 

To ensure that a seller complies with all Florida disclosure requirements when selling a property, Florida Realtors® provides the Sellers Real Property Disclosure form online at http://www.unlimitedmls.com/forms/Property-Disclosure-Form.pdf. The form gives the buyer an opportunity to evaluate the property in detail prior to signing a purchase contract. Following are disclosures required by Florida laws:

Radon. This is the easiest hazard to detect and mitigate. It is an odorless, colorless, tasteless, and radioactive gas that is created in the ground where uranium and radium exist. Prolonged exposure to radon can cause lung cancer. It can enter the home through any cracks, gaps, or cavities, including crawl spaces and openings around pipes. It can be easily detected by a radon test, so home inspections should include this test.

Florida statute requires real estate professionals to disclose the dangers of radon gas in writing and include the following required language:

RADON GAS: Radon is a naturally occurring radioactive gas that, when it has accumulated in a building in sufficient quantities, may present health risks to persons who are exposed to it over time. Levels of radon that exceed federal and state guidelines have been found in buildings in Florida. Additional information regarding radon and radon testing may be obtained from your county health department.

Energy efficiency disclosure. The Florida Building Energy-Efficiency Rating Act provides a statewide uniform energy efficiency rating system for new and existing residential, public, and commercial buildings. The Act requires sellers to provide an information brochure to the buyer either prior to or at the time of  the buyer’s execution of a purchase contract.

The brochure lets the buyer know there is an option for an energy-efficiency rating on the building and includes information about the class of the building as well as how to analyze the building’s energy-efficiency rating, methods for improving the building’s rating, and a notice to residential buyers that the rating may qualify them for an energy-efficient mortgage from a lender.

Lead-based paint. This hazard cannot be absorbed through the skin, but it becomes dangerous when it is ingested or inhaled. It can be found in most homes built before 1978 and can be present in the air, drinking water, food, contaminated soil, deteriorating paint, and dust from the paint. Children are particularly susceptible because young children are known to eat chips of the paint, allowing the lead to enter their bloodstreams. Homebuyers and renters are required to be given the EPA-HUD-US Consumer Product Safety Commission’s booklet, “Protect Your Family from Lead in Your Home” and must be informed if lead-based paint is present in the home. Buyers may have a risk assessment performed prior to purchasing the home.

Homeowners’ association. Florida law requires owners of real property subject to a homeowner’s association to provide potential purchasers with a disclosure of the fact prior to contract execution. The form of the disclosure must be substantially in the form identified in the statute. The statute mandates disclosure of mandatory HOA membership and the associated assessments and fees. Failure to provide this disclosure can result in the sale being voided.

A typical HOA disclosure package also includes

  • declarations
  • articles of incorporation
  • bylaws
  • articles of organization
  • operating agreements
  • rules and regulations
  • party wall agreements
  • minutes of annual owners’ meeting
  • minutes of directors’ or managers’ meetings
  • financial documents: balance sheet, income and expenditures, budget, reserve study, unpaid assessments, audit report, list of fees and charges
  • list of insurance policies
  • list of assessments by unit type

The seller is responsible for making the disclosures, but the buyer must exercise due diligence in the reading and understanding of them. The agent’s responsibility is to make sure the disclosures are made.

Flood insurance. The Natural Hazards Disclosure law requires sellers to disclose if the property is located in a flood zone and whether flood insurance will be required. While there is no mandated language for the disclosure, it should notify the buyer that a mortgage lender may require flood insurance and that the National Flood Insurance Program provides flood insurance at premiums based on the risk of flooding where the property is located. It should also state that the buyer should not rely on the premium amounts paid by the seller as an indication of the premium the buyer will pay.

Condominium and cooperative. A developer or seller of a condominium in Florida must disclose certain condominium specifics, including the buyer’s right to review the bylaws and association documents, property management details, recreational leases, and proof of the seller’s legal ownership. Disclosure must also be made if the condos include time shares. The disclosure must include language mandated by F.S. 718.503.

Property tax. Florida statute 689.261 requires inclusion of a property tax disclosure summary with the standard disclosure form, inserted in the contract or as a separate document. Statute mandates the language:

Buyers should not rely on the seller’s current property taxes as the amount of property taxes that the buyer may be obligated to pay in the year subsequent to purchase. A change of ownership or property improvements triggers reassessments of the property that could result in higher property taxes. If you have any questions concerning valuation, contact the county property appraiser’s office for information.

Building code violation. In Florida, if a property owner has been cited for a code violation and sells the property before the citation is settled in court, the owner must disclose the citation in writing to the buyer and provide the buyer a copy of all related materials, notify the new owner of the requirement to comply with the code, and notify the code enforcement official of the property transfer.

Known hazardous substances on the property. Florida requires the seller to disclose any known environmental contamination or hazards on the property, such as underground fuel or heating oil tank that is known to have leaked.

Transfer Disclosure Statement (TDS) – Florida law requires sellers to provide buyers a written statement disclosing items such as appliances, structural defects and modification, possible easements, neighborhood problems, and other material facts that may impact the buyer’s decision to close the transaction.

Inundation zones.  If the property is located near a dam, the seller should disclose that the property is subject to potential flooding in the event of a dam failure.

Very high fire hazard severity zones.  A Florida seller must also disclose if the property is in an area where property owners may be obligated to undertake specific maintenance duties for fire prevention.

Wildland fire areas.  The seller is to disclose if the property is in an area wherein the state has responsibility for fire suppression.

Coastal property.  If the property is located near the coast, Florida statute requires disclosure of potential coastal erosion and that the property is subject to federal, state, and local construction limitations. An affidavit or survey must be provided indicating the location of the coastal construction control line.

Community development district.  Florida statute requires that each contract for the initial sale of a parcel of land or a residential unit within a community development district include the following disclosure immediately above the buyer’s signature in a boldface type larger and more conspicuous than the rest of the contract text:

The   (name of district)   community development district may impose and levy taxes or assessments, or both taxes and assessments, on this property. These taxes and assessments pay the construction, operation, and maintenance costs of certain public facilities and services of the district and are set annually by the governing board of the district. These taxes and assessments are in addition to county and other local governmental taxes and assessments and all other taxes and assessments provided for by law.

Megan’s Law.  Purchase contracts and leases are required to include notice that a sex offenders database is available for public review to learn about the proximity of registered sex offenders.

FAR/BAR contract forms            

The FAR/BAR Contract is a residential contract for sale and purchase issued by the Florida Realtors (formerly known as the Florida Association of Realtors) and the Florida Bar. The contract form is officially licensed for use by real estate brokers, attorneys, investors, or property buyers and sellers. The contract contains many standard provisions and allows the user to simply fill in the blanks. Non-standard clauses or provisions may be attached as an addendum, or the user may attach any of the available standardized addenda for common situations. An example would be the condominium addendum that provides disclosures required when selling a condominium. The latest version of the form is known as the FAR/BAR contract and can be used by the general public.

Material defects affecting residential property value            

For many years, the rule utilized in property sales was caveat emptor, known as “let the buyer beware.” The gist of this rule was that the seller had no obligation to let buyers know about any defects in the property that would affect its value, no matter how serious the defect might be. If the buyer asked, the seller could not lie; but if the buyer didn’t ask, then the seller didn’t tell.

Johnson v. Davis. This practice changed in 1985 because of the Johnson v. Davis case in which the Florida Supreme Court ruled that “where the seller of a home knows of facts materially affecting the value of the property [that] are not readily observable and are not known to the buyer, the seller is under duty to disclose them to the buyer.” Sellers must now disclose the defect or provide the following statement:

Seller knows of no facts materially affecting the value of the Real Property which are not readily observable and which have not been disclosed to Buyer.

This disclosure is known as the Johnson v. Davis duty to disclose.

As a result of this case, buyers of residential property are not required to prove fraud or negligence when they are seeking relief for damages resulting from the seller’s failure to disclose defects. Buyers need only prove that the seller knew of a latent, material defect and failed to disclose it, and thus, the buyer sustained damages. Latent defects are those that are not visible, obvious, or readily observable. Buyers are not obligated to search for latent defects. The Johnson v. Davis case concluded that “one should not be able to stand behind the impervious shield of caveat emptor and take advantage of another’s ignorance.”

“As is” provision. Standard purchase contracts include terms requiring sellers to make certain types of repairs to the property up to a specified dollar amount. However, “As Is” contracts allow the buyer to look at the property through an inspection with no repair obligations on the seller. During the 15-day inspection period, if the buyer does not agree with the seller’s not repairing any discovered defects, the buyer can cancel the contract without penalty. A buyer who signs the “As is” contract is waiving any claims against the seller and the seller’s agent for any defects that existed at closing but were not discovered until after closing.

However, the “As is” contract is not exempt from the Johnson v. Davis disclosure requirement. Not only must the seller disclose any known defect, but he or she must include additional language in the contract stating that other than the duty to disclose, the seller “extends and intends no warranty and makes no representation of any type, either express or implied, as to the physical condition or history of the property.”

Licensee’s duty to disclose.  An agent has the duty to inform the client of all material facts, reports, and rumors that might affect the client’s interests in the property transaction. A material fact is one that might affect the value or desirability of the property to a buyer if the buyer knew it. Material facts include

  • the agent’s opinion of the property’s condition
  • adverse facts about property condition, title defects, environmental hazards, and property defects

In recent years, the disclosure standard has been raised to require an agent to disclose items that a practicing agent should know, whether the agent actually had the knowledge or not, and regardless of whether the disclosure furthers or impedes the progress of the transaction.

Facts not considered to be material, and therefore not usually subject to required disclosure, include such items as property stigmatization (e.g., that a crime or death occurred on the property) and the presence of registered sex offenders in the neighborhood (in accordance with Megan’s Law, federal legislation that requires convicted offenders to register with the state of residence; in Florida, agents must provide registry information to buyers).

The agent may be held liable for failing to disclose a material fact if a court rules that the typical agent in that area would detect and recognize the adverse condition. There is no obligation to obtain or disclose information that is immaterial to the transaction, such as property stigmas.

An agent who sees a “red flag” issue such as a potential structural or mechanical problem should advise the seller to seek expert advice. Red flags can seriously impact the value of the property and/or the cost of remediation.  In addition to property condition per se, they may include such things as

  • environmental concerns
  • property anomalies, such as over-sized or peculiarly shaped lot
  • neighborhood issues
  • poor construction
  • signs of flooding
  • poor floorplan
  • adjacent property features