In part one of this series on January 23, 2018, we introduced the series on Understanding the CAR Residential Contract Series. The idea behind the series is to give a behind the scenes look at the legal workings of a residential transaction from the legal perspective. Many buyers and sellers don’t understand the complexities that these contracts provide or why certain provisions exist. Today, we begin our journey to unpack the complexities of the Residential Purchase Agreement, generally referred to as the RPA.
The RPA is a complex document that governs both the contractual relationship between buyer and seller but also provides the basic instructions to the escrow services provider.
It is generally easy to understand many of the initial terms, such as price, down payment and financing, but what about the rest of the document. What about contingencies, disclosures, and default remedies. Often we get parties and real estate professionals in our office trying to understand their relative rights related to another’s alleged breach. These questions are not that simple and so today we will focus on a significant topic we are routinely presented with –how does the contingency period really work?
Contractual contingencies contained in the RPA are an intricate web of rights and obligations for a buyer and seller. Included in the main contingencies we often deal with in the RPA are the appraisal contingency (Section 3I) the loan contingency (Section 3J), the title contingency (Section 13 – although this is more frequently dealt with in commercial contracts) and the inspection contingencies (Section 14).
The appraisal contingency is very straight forward. The contract either is or is not contingent on a written appraisal at no less than the purchase price. Every contract generally has such a requirement especially when a loan will be needed. This is a one-sided contingency. If the property appraises for less than the purchase price the buyer can effectively either renegotiate the price. However, if the property appraises for a higher price, the seller does not have the ability to negotiate a higher price. The seller is stuck with the contract terms.
The loan contingency, when done properly usually remains until the property transaction closes. The idea is that the buyer should not be penalized if at the last minute the lender backs out. This can leave the seller in a lurch if they have purchased a replacement property but a the buyer backs out at the last minute because of a failure of the loan to fund. The key to understand is that the failure of the loan has to be based upon lender determination, not based on a buyer backing out. In reality, this is hard to prove, but some of the best evidence a seller can obtain is to require a prequalification letter or better yet, a preapproval letter for the amount of the purchase price.
Title contingencies come up when condition of title is an issue. Are there wild deeds, uninsured quit claims between family members, liens, or easements affecting the property. This contingency allows the buyer to review the condition of title to insure that clean title free of defects will be passed to the buyer.
Lastly, there is the inspection contingency that allows the buyer to engage in physical inspection of the property to determine the property’s fitness for purchase. It is imperative to understand just exactly how the contingency works. Section 14 gives the buyer a period of time to complete all of their inspections to determine the condition of the property. This includes, roof inspections, home inspections, septic and well inspections (if necessary), and pool inspections if needed, just to name a few and buyers should take every opportunity to inspect any and all features of a property to satisfy any concerns.
While the contract contains default timing language it is not an automatic expiring timeframe. Often times, sellers will consult with our firm after a buyer has gone past their inspection contingency period without removing the inspection contingency. The seller almost always wants to immediately cancel the contract and keep the earnest money deposit. However, this is not what the contract states. It is imperative to understand how the cancellation process works related to contingencies.
I have worked with many buyers in recovering well over one hundred thousand dollars of earnest money deposits by simply understanding the terms of the contract. Section 14B.(4) of the RPA states that even if the expiration of the contingency period has ran, if the contingency has not been removed in writing the contingency remains in effect. What that means if that if the buyer has 17 days to do inspections and on day 20 they have find something they don’t like and they have not removed their contingency in writing, they still have an inspection contingency and may cancel the contract without penalty. This simple provision has saved many thousands of earnest money dollars for buyers.
If a buyer or seller default on a term in the contract (say a performance term with timeframe like inspection contingencies) how does the non-defaulting party compel performance. In the next installment of this series we will look at the proper steps to cancelling an RPA, requiring performance and navigating the close of escrow under the terms of the RPA.