Anticipatory Contract Writing

Published in the Arizona REALTOR’s Voice

by Fletcher R. Wilcox on September 9, 2016 

There are 30 blank lines at the beginning of Section 8, Lines 311-340, Additional Terms and Conditions in the AAR Residential Resale Real Estate Purchase Contract (Contract). The purpose of these lines is for the buyer, before presenting an offer to the seller, to put in language that changes, adds to, or subtracts provisions in the body of the Contract.

The key to writing provisions language in the Additional Terms and Conditions section is to do so in clear and understandable terms. Knowledge of the Contract and its timelines is essential in constructing good language.

There are times when a buyer places language into the Additional Terms and Conditions Section in anticipation of situations that may occur in a transaction. The buyer wants the property. Emotions are high. This is when mistakes may be made. In the two scenarios below, a buyer makes the earnest money nonrefundable to present a better offer to the seller. Is the language clear and understandable?

You be the judge.

Scenario One
Language written in the Additional Terms and Conditions section reads, “Earnest money to be nonrefundable after ten day inspection period.”

On day seven after Contract acceptance, the Buyer’s Inspection Notice and Seller’s Response (BINSR) was delivered to the seller giving the seller the opportunity to correct five disapproved items. According to the Contract timeline, the seller then has five days to respond to the buyer. In this situation, the seller responded to the buyer on the fifth day, which was day twelve after contract acceptance. The seller checked the box on the BINSR stating, “Seller is unwilling or unable to correct any of the items disapproved by the Buyer.”

At the beginning of the transaction the buyer was hot for the property. Fifteen days later, upon receiving the seller’s response declining to fix the five requested items, the buyer’s emotions toward the property have cooled. The buyer then canceled the Contract and demanded a return of the earnest money. The seller argued that the buyer can cancel, but the buyer doesn’t get the earnest money, they do. Seller argued the 10 day inspection period ended when the BINSR was delivered and that the buyer canceled after this period. The buyer countered that the 10 day inspection period includes the entire buyer disapproval process in section 6J.

We have an escrow dispute. Is the language written in Section 8 clear and understandable?

Clearer language on behalf of the buyer addressing when the earnest money would be nonrefundable may be, “Buyer’s earnest money shall be nonrefundable unless Buyer elects to cancel pursuant to Section 6J.” Section 6J includes the BINSR timeframes for both buyer and seller responses.

Scenario Two
Language in the Additional Terms and Conditions section reads, “Earnest money to be nonrefundable and released to seller on the twenty first day after contract acceptance.” The buyer wanted 20 days for due diligence and was willing to make the earnest money nonrefundable after this time.

On day 21 after contract acceptance, the seller requested and received the earnest money from the escrow company. Fifteen days later when the close of escrow date came, the transaction did not close and could not close due to an I.R.S. lien attached to the property. For the transaction to close, the seller either had to have the lien paid at close of escrow or obtain a waiver from the I.R.S. The seller was unable to perform either. The buyer delivered a Cure Period Notice to the seller for seller’s failure to close escrow.

On the fourth day after delivery of the Cure Period Notice the seller was in breach, so the buyer canceled the transaction and demanded a return of the earnest money which, according to the language written in Section 8, was now in the seller’s possession.

Will the buyer be able to get the earnest money from the seller? Is the language written in Section 8 clear and understandable?

The buyer and their agent, in making the earnest money nonrefundable and released to the seller, did not anticipate what happens if the seller breaches the Contract. Clearer language on behalf of the buyer may be, “On the twenty first day after contract acceptance, earnest money shall be nonrefundable. However, in the event seller breaches the Contract, buyer is entitled to a return of the earnest money.”

Conclusion
Whether representing a seller or buyer, anticipatory contract writing is first thinking through possible scenarios that might arise based on the market or situation of the buyer, seller or home and addressing those situations with clear and understandable language. This type of writing is enhanced with a strong knowledge of the Contract and its timelines.

This article is not intended as legal advice. Consult your designated broker and legal counsel.


Fletcher WilcoxFletcher R. Wilcox is V.P. of Business Development for Grand Canyon Title Agency. He teaches contract law renewal hours and is author of The Wilcox Report.

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