CONTRACTS 101

Winter Park Home, Volume 5 / Issue 4, 2007

Except for transfers by gift or inheritance, a Real Estate Purchase and Sale Agreement, or Contract, is the primary tool used to acquire real property. The Contract defines the purchase price, deposit amount, costs, and all relevant terms by which the Seller agrees to transfer the property, and by which the Buyer agrees to be governed. Under Florida law, these Contracts must be in writing to be enforceable. This article highlights certain salient provisions of these Contracts.

Once the Seller and Buyer have agreed in principle to the sale, the terms must be reduced to a written document. First–the identity of the Seller must be confirmed. The individual selling the property is often not the record owner. Unless that person holds a power of attorney from the Seller, or is an authorized representative of the legal entity selling the property, a prospective purchaser should only deal with the record title holder. A review of the property appraiser’s records and the vesting deed into the Seller usually provides the necessary information. Failure to include the identity and signature of all record owners may make the contract unenforceable–costing the Buyer both time and expense.

If Mike Johnson and Mary Johnson own property as husband and wife and only Mike signs the contract, the agreement is non-binding since the property is owned as tenants by the entirety. If Mike and Mary are brother and sister, each owns one-half of the property, and only Mike signs the Contract, then the sale of Mary’s interest is not enforceable. Furthermore, if Mike, the sole owner of homestead property, is married to Mary, and only Mike signs the Contract, the agreement is unenforceable since the homestead laws require Mary’s joinder on the Contract and on the vesting deed. All those having an ownership interest in the property must sign the Contract. Although the Contract can be amended later to include additional owners, there is never a guarantee that these individuals will cooperate.

Probated estates also create Seller identification issues. If Michael Jones is the sole owner of homestead property and dies leaving a will, the personal representative may not have the authority to sign a Contract on behalf of the estate. As discussed in previous articles, an analysis of the decedent’s will and probate proceedings must then be undertaken to determine who has authority to sell the property.

In representing a prospective Buyer, the identity of each individual or entity purchasing the property should be confirmed. This becomes especially critical in the event that the Contract is not assignable. (Standard Contract forms include a provision whereby the Buyer will either be permitted or denied the right to assign the contract to another party.)

Each Contract must also include a description of the property to be purchased. Street addresses are helpful, but should not be relied upon as the sole method of identifying the property. The physical description found in the vesting deed into the Seller should be inserted into the Contract. When legal descriptions are abbreviated–typically for space considerations–mistakes often occur. Lot 1 of XYZ Subdivision is straightforward and easy to identify. Metes and bounds descriptions, however, can be very lengthy and difficult to reflect in the limited confines of a standard form contract, and are best reflected as an Exhibit. New legal descriptions, which add land or less out land from that shown in the most recent deed into the Seller, should always be provided by a surveyor. The new legal description can then be inserted into the Contract before it is signed. A complete legal description is therefore a critical element of the Contract. Imagine sitting at a closing table in which the Contract and the title commitment did not include an intended additional 20-foot strip. In reviewing the survey you discover that an extension of the house sits on 20 feet of land not shown on the Contract. That closing will (of course) come to a sudden stop.

Paramount in any sale is the purchase price. It is a business, not a legal, calculation, and each party should independently determine its accuracy. The parties can obtain an appraisal, examine the property appraiser’s records to determine sales history, or otherwise confirm the value of the property. In those situations where lender financing is included in the Contract, the lender typically requires the property appraisal. In a cash transaction, however, if the Buyer is unsure as to the value of the property, his attorney can add a provision that the appraised value of the property must be equal to, or greater than, the purchase price.

The parties then need to determine the amount of the deposit to be held in Escrow. The general standard of five to ten percent of the purchase price, like all contract terms, is negotiable. Occasionally a Seller indicates that a deposit is not necessary since it is a friendly transaction. The monetary deposit is the consideration necessary to make the contract legally binding. Not surprisingly, in many of these friendly situations the closing does not take place, and the parties vigorously dispute the ownership of the deposit money.

Real Estate Contracts are technical instruments which require specific attention to detail. Although Contracts are sometimes prepared by the Seller, typically they are prepared by the Buyer’s agent. Conceptually, the Buyer makes a written Offer to the Seller by delivering the signed Contract Offer to the Seller, while submitting the deposit to a neutral party (the Escrow Agent).

The Offer provides the last date on which the Seller can accept the Offer by signing and returning an executed copy of the Contract to the Buyer. If the Seller does not sign and deliver to the Buyer the signed Contract by the date shown in the Contract, the Offer is automatically withdrawn and considered void. If the Seller signs the Offer, but only after inserting additional terms by which the Seller is willing to be bound, the Buyer is not obligated to sign the Counteroffer. The Buyer will then have the time period shown in the Contract to determine whether the Buyer wishes to proceed under those revised terms. Critical to the concept of Offer and Acceptance is time – those periods shown in the Contract during which the other party can accept or reject the offer or counteroffer. These dates are legally binding, and the failure to respond within the stated time periods effectively withdraws the offer or counteroffer.

This discussion of basic contract strategy will continue in the next issue.

Visit our website for more information on this subject.

Frank Pohl founded Pohl & Short, P.A. based upon the belief that a high quality small commercial law firm was needed in the Orlando, Florida area as an alternative to the large commercial law firms. He still believes that client responsiveness and satisfaction has a place in a fast changing legal profession. Frank has been involved in the Central Florida community for more than twenty-five years. He has been a dedicated past board member of many local organizations over the years. Frank graduated magna cum laude with a B.G.S. Degree from the University of Miami in Coral Gables, Florida; attended the University College at the University of London as an undergraduate studying British literature and British history; obtained his Juris Doctorate Degree in 1979; and obtained a Masters of Law and Letters Degree (LL.M.) from New York University School of Law in 1980. Frank is a member of The Florida Bar, the California Bar, and the District of Columbia Court of Appeals. He is also admitted to the U.S. Supreme Court. He has served on the Orange County Bar Association Real Estate Committee and is a member of the The Florida Bar’s Real Property and Corporation and Business Law Section. He has also served on the Florida Bar Grievance Committee.