Blog Ohio Real Estate Law / 09.12.2016

If the Form Does Not Fit, You Must Alter It (#5)

By Stephen D. Richman

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.”