Blog Ohio Real Estate Law / 02.15.2016

IF THE FORM DOES NOT FIT, YOU MUST ALTER IT (#4)

There are many different types of purchase/sale agreement forms in use, varying in type, complexity and standardization. Real estate broker or legal stationary company “standard” forms, for example are used in most residential deals. The inherent problem with the “standard form”, however is that there is little that is standard about a real estate transaction. Every purchase/sale is unique because there are different types of property, different buyers and sellers (with different levels of motivation and sophistication) and different potential liability in each transaction. In commercial transactions, standard forms can rarely be relied upon, since the commercial transaction usually involves more dollars and more complexities. Custom made forms by a law firm are the norm for commercial transactions which forms typically include representations and warranties, covenants, multiple contingencies and extensive diligence periods. Occasionally, a party to a “simple” commercial deal will be presented with a broker form contract designed more for residential than commercial transactions.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”. On the other hand, the off the rack suit at a department store (“standard form”) 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. Please note that brokers crossing out contract provisions and drafting new language may be crossing the line into the “unauthorized practice of law.” Contract modification is best effected with advice of counsel.

We recently had occasion to tailor a residential broker form for the purchase of a small commercial building to be used as a restaurant.  While a new, custom made agreement was initially advised (and actually, would not have been more costly for our client), the Seller was insisting we use his broker’s “standard form” and our client did not want to lose the deal. So, we got out our “needle and thread” and went to work. After crossing out inapplicable provisions such as home warranties and Ohio Residential Disclosure Form disclosures, we found the following major provisions conspicuously absent, most of which are not found in standard, off the rack forms, and incorporated them into a short addendum. (Of course, each transaction is different, and we are not advising the following are appropriate or comprehensive enough for every transaction).

 

1.         Due Diligence.  There are various inspections in the residential form (e.g. pest, septic) but no mention of surveys, environmental audits and other reviews typically recommended in a commercial transaction. Buyers in such a situation may want to consider a provision comparable to the following, sometimes referred to as a “free look”:
“Buyer shall have a period of sixty (60) days (the “Due Diligence Period”) from the latest date the mutually signed Agreement and this Addendum were signed by a party hereto (the “Effective Date”) to inspect the Property and to perform such investigations, environmental audits, review of title, zoning and survey and otherwise engage in such inspections and investigations as desired by the Buyer.  Seller agrees to cooperate with Buyer to allow Buyer and its agents to enter the Property for such inspections and investigations and to assist (without expense to Seller) in obtaining information requested by Buyer.  Should Buyer determine that the Property is not suitable for any or no reason in Buyer’s sole and absolute discretion, Buyer may terminate the Agreement by providing written notice thereof to Seller no later than the last day of the Due Diligence Period.  Upon such termination, all earnest money deposits plus interest earned thereon will be promptly returned to Buyer (without further action of the parties), and the parties will have no further obligations hereunder.  Should Buyer fail to timely terminate the Agreement as described above, Buyer shall no longer have the right to terminate the Agreement under this provision.  The inspections set forth in this Paragraph 1 are in addition to, and not in lieu of, the other inspections of Buyer under the Agreement, and in the event of conflict (between any provisions of the Agreement and this Addendum concerning timing, rights of the parties and otherwise re: inspections), this Addendum shall control.
            2.         Warranties.      Seller represents and warrants to Buyer as of the Effective Date and as of the Closing Date, as follows:
a)  No party other than Buyer has any claim to the Property by reason of any purchase agreement, option to purchase, right of first refusal, land installment contract, lease or other similar agreement or instrument;
b) There are no suits, actions or proceedings pending or, to Seller’s knowledge, threatened against or concerning any of the Property, or against Seller with regard to the Property;
c) There are no encroachments and there are no boundary disputes with owners or tenants of adjacent properties;
d) The Property complies with all applicable zoning, building, health, safety, environmental, and all other applicable laws, ordinances and regulations (collectively “Legal Requirements”). Seller has not received notice from any governmental authority advising or alleging that the Property is in violation of any such Legal Requirements; and
e)   No Hazardous Substances  (as defined by the Legal Requirements) have been used, generated, released, spilled, leaked, stored, or disposed of beneath, on or at the Property by Seller (or to Seller’s knowledge, by any predecessor in interest or any other person).
3.         Covenants. Between the Effective Date and the Closing Date, Seller agrees that: a) it will manage and operate the Property in compliance with the Legal Requirements and maintain the Property in good working condition (including making all customary and necessary repairs and replacements to the Property), ordinary wear and tear excepted; and b) it will not create any lien, encumbrance, easement, covenant or restriction upon the Property or voluntarily take or permit any action adversely affecting the title to the Property as it exists on the Effective Date of this Agreement, without Purchaser’s consent.
            4.         Conditions.      Anything herein contained to the contrary notwithstanding, the obligations of Buyer under this Agreement are subject to and conditioned upon the following, unless waived in writing by Buyer: (a)  All of the representations and warranties set forth herein shall be true and correct as of Closing; (b) the Agreement shall not have been terminated pursuant to any right to terminate granted to a party under the Agreement; (c)  the Title Company shall be in a position to issue the Title Policy to the Buyer as required in Section __ of the Agreement; (d) there shall have been no material adverse change in the condition of the Property; (e) the Seller shall have delivered all items required by this Agreement to be delivered by it; and (f) the Seller shall have complied, in all material respects with Seller’s covenants prior to Closing, in accordance with Section 3 of this Addendum II. In the event any of the above conditions is not satisfied by the Closing Date, Buyer may terminate this Agreement by written notice given to Seller on the Closing date.  In the event of such termination, the Earnest Money and all funds and documents deposited by Buyer shall be returned to Buyer and thereupon the parties shall be fully released from any further obligations to the other under this Agreement
While form is important, don’t forget that “timing is everything”. Consult an attorney before the purchase agreement is signed. The disgruntled suit buyer can insist that the seller re-alter or accept the return of an ill-fitted suit. The disgruntled property buyer (or seller) however, has no legal grounds to insist that the other party accept changes to the contract after it is signed.