Home Buyers
The contingency clauses in the sales contract
By
Feb 20, 2006, 00:03

National broker associations can help you get your deposit back. If possible, retain the right to get your deposit yourself. Slate somewhere in the contract that all monies will be refunded out of escrow if the sale in not consummated within, for example, 30 days of the scheduled closing. If the escrow arrangement is being used, have the "subject to" clauses in the contract tied to the refund from escrow within a stipulated time period. In this way, you will be assured that you will get your deposit back if anything goes wrong.

Your lawyer should include the following contingency clauses in the contract:

1. Violation of ordinances. The seller should maintain the property until closing. Itemize violations of building, electrical, and plumbing codes in the contract. Whether you can get the seller to pay for these repairs will depend on how serious they are and how candid he has been with you about them. Contracts often require the seller lo deliver the title free of such violations. It may provide that he deposit cash to correct the violations.

2. Inspection. Make a complete inspection of the structure, lot, and all subsystems. Check for land slippage, soil conditions, health of the grass and shrubbery, city encroachments or easements, and the building's shell, foundation, roof, frame, plumbing, wiring, heating, and cooling. Get a termite inspection and pest report. If the seller has used low utility or tax bills as a selling point, have him guarantee those figures for a year or so, or make up the difference. It's difficult to get warranties for an old house. But it's sometimes equally hard for a seller to unload an old house. You should at least insist on a warranty that makes your agreement to buy contingent upon a satisfactory inspection, with a clause like this:
Subject to inspection by a licensed inspector, such inspection to meet the buyer's approval.
With your agent's help, you should verify that all utility bills are real and that the firms have been paid. This is especially true with water bills. They are usually billed to residents although the charges may have been incurred for a time during which you weren't in possession of the property.

You should walk the boundary of the property to see if any fences or structures overlap onto your neighbor's property or if any of the neighbor's improvements seem to encroach on yours. You may consider making a stake survey, to mark out the angles of your lot.
On the same day, just before closing, you should again inspect the property. This inspection will ensure that the premises are in the same condition as when you made the offer to buy. The time for the buyer to inspect and note defects for correction by the seller is during the contract negotiations and before the sales agreement. Note repair or replacement items in the contract. Most resale properties are sold in "as is" condition. It's up to the buyer to perform the inspection, not the seller. Verify that all utilities are working and that all items of personal property that were listed on the broker's listing sheet are still on the grounds. If you don't make a comprehensive inspection, it's unlikely that personal property that was improperly removed or structural damage can be compensated for after the closing. It's often an expensive and time-consuming matter to seek recovery from the seller. Accordingly, any questions about the condition of the property must be raised before closing. All deficiencies should be noted, and funds may be withheld at the settlement for repairs if the seller doesn't correct those problems. Upon receipt of bills indicating that repairs are complete, your attorney will release the balance of the funds to the seller.

3. Lawyer. The sale should be subject to your attorney's approval. This catchall escape clause will let you back out of the deal without having to make elaborate explanations or meet conditions set by the other side.

4. Records. Make sure your offer to buy is contingent on reviewing certified copies of [he property's tax records, leases, and rent records. If they don't tally with the alleged total income from rents, the deal should be renegotiated. A fraudulent representation of rents, income, and profits from the properly is grounds for canceling the contract. You should be able to tell how much income an apartment property brings in based on the number and size of the units, the property's location, and the condition of the property. For commercial and office property, this information is more difficult to estimate.

5. Financing. The agreement should specifically state that the sale is subject to your obtaining whatever terms of proposed financing are specified. The contract becomes void if you cannot qualify for a loan at those terms. The seller may try to offer you those terms himself, rather than see the deal collapse. Always insist that a specific interest rate be given in your contract. Don't use phrases such as "at market rate" or "best available." The contract probably provides that, if you cannot get that mortgage commitment, you must notify the seller as specified or you will be stuck with the contract. The contract often provides that the seller, once notified, can get the mortgage for you or provide equivalent seller financing.

6. Taxes. The seller must give the buyer a good title free and clear of any liens not mentioned in the contract. Unless the contract provides otherwise, the seller must give the buyer a title free of taxes, which were a lien at the time the contract was made. The contract usually specifies the taxes to which the property will be subject when the deed is made. The contract often provides for apportionment of the current year's taxes. You should insert into the real-estate sales contract a provision requiring the seller to escrow, either with the broker, his lawyer, or yours, a sum that you feel is sufficient to cover the payment of any potential increase in taxes for this year.

7. Personal property. Problems often arise over what personal property is to be included in the sale. The strict legal definition of this doesn't seem to stop sellers from removing anything they consider theirs. Have a general inclusion clause drafted that enumerates everything that you care about¡ª refrigerators, stoves, carpeting, and so on. Also try for a guarantee that all appliances are in working order. Don't sabotage the sale over a birdbath. At the same time, remember that sellers have been known to rip out the plumbing, light fixtures, stained glass windows, and paneling. It's a good idea to take photographs of the property as it looks when the agreement is signed. Have the date certified and keep copies. This gives you conclusive evidence if there is a dispute later.

8. Time. The phrase "time is of the essence" often appears on standard contract forms. Either party may insist on it. Courts interpret this phrase to intermediate deadlines. Otherwise, you could find the contract voided and the seller suing you for damages. With a structure that is undergoing construction or rehabilitation, expect the worst. Builders often fail to complete by the promised date. Provide for cash damages if there are delays. The contract specifies the time and place of settlement. If you think you need more time, add a clause that provides for an extension for a reasonable cause. The sale of property that often untrue statements are made. An untrue statement is a misrepresentation. The law has started to recognize that nondisclosure is also misrepresentation. Even if the seller is not aware of a defect, the law may obligate the broker to reveal the defect. Misrepresentations won't affect the contract if they concern a trivial matter. An important misrepresentation doesn't necessarily make the contract void. The party who was deceived may still want to enforce the contract. A buyer may be able to get out of the contract if the seller has misrepresented the property with legal or structural defects.

9. Default. If the seller refuses to perform, the buyer can pursue one of the following courses:
a. He may rescind the contract and recover his deposit. This is the buyer's normal remedy where the property has decreased in value.
b. He may sue to compel specific performance of the contract, such as compelling the seller to give him a deed on receiving payment of the purchase price. The buyer will use this remedy when he wants the property for a particular purpose or when he anticipates that it will appreciate in value. This remedy is more effective than a suit for damages, since damages are hard to prove and personal judgments are hard to collect.
c. He may sue the seller for damages. This remedy is used when the buyer is content with a personal judgment against the seller for the amount of the profit he would have made had he acquired the property at its contracted price and resold it at its market value. Obviously, this remedy shouldn't be used where the property has declined in value.

When the owner accepts your offer and complies with all the protective clauses that you have inserted, your attorney can draw up the deed. A deed describes the property in detail and formally conveys title of the property from and the title that he is passing to you. With a quitclaim deed, the seller doesn't establish his rights or interest in the property. He merely says that whatever he does have, he is passing it to you. You may need to deal with former owners who had no pan in the contract for sale. A quitclaim deed conveys title with no warranties. The limited warranty deed is also known as a quitclaim deed with covenant. The grantor conveys whatever present interest he has in the property and promises that he has done nothing to impair the title during his ownership of the property. The grantor doesn't make any promises to the grantee concerning previous owners, who may make a claim to the property, alleging to have a better title. The best deed you can get is a general warranty deed with full covenant. A general warranty deed is a deed in which the seller agrees to protect and defend you against rightful claims to the deed as long as the basis of the claim originated before the title was transferred to your name. It guarantees that the seller will defend the title against anyone who may claim an interest.

Two steps must be taken before the deed can change hands at the closing. Execution occurs when the seller fills in the appropriate blank spaces in the deed and then signs it. Delivery takes place when he turns the deed over to you. This gives you ownership and possession of the property. When you get the deed, make certain that it's properly recorded in town or county records. Deeds require federal revenue stamps, for which the seller must pay. You will get the receipt of the recorded deed and the title insurance policy about 6 weeks after closing.