Lessons Learned: Tips for Avoiding Litigation in Real Estate Contracts

The heated real estate market that existed over the past few years brought numerous specific performance lawsuits to our litigation department. A suit for specific performance is one in which a party to a contract demands that the opposing party continue with the contract and asks the court to force the opposing party to sell/buy the property. While some of those suits settled, four of them made their way to trial. Such a lawsuit can be an expensive and time-consuming proposition.

The media tells us on a daily basis that the market has hit a speed bump. In this time of transition, buyers and sellers may still be looking for ways to get themselves out of contracts because of market changes and fluctuating prices.

The purpose of this article is to share lessons learned so that buyers and sellers can avoid a legal tangle in the courtroom by having clear, enforceable real estate contracts. Consider the following practical points.

Make sure the terms of your contract are clear and complete.

When a party wants out of a contract, that party will not only look to the dealings between the parties as a way out, but will examine the written contract for a window of opportunity. This is why having a clear, concise and complete contract, one without ambiguity, is of the utmost importance. Many contracts will intentionally include provisions that could potentially lead to a valid termination of the contract. These provisions include financing contingencies, inspection clauses, and appraisal requirements. But the idea here is not to leave ambiguities that create unexpected or unintentional opportunities for termination.

It is disconcerting to see the number of signed contracts where improper or insufficient form contracts are used, form contracts are not completely filled out are improperly executed, or which employ ambiguous terms. It is impossible to ascertain the intent of the parties from the face of such a document, and sometimes it is questionable whether the contract is enforceable.

For example, consider this clause: “Buyer may obtain an acceptable appraisal of the property.” Does this mean that the Buyer can get out of the contract if he doesn’t like the results of the appraisal? Or does it merely mean that the Seller will allow an appraiser access to the property to obtain an appraisal? If the clause is construed as a contingency, is there a time limit? Could the Buyer produce an appraisal the day before closing and use it as an excuse to get out of the contract? What is the standard for determining whether the appraisal is acceptable? Must the appraisal be equal to, or greater than, the sales price, or some other higher figure that buyer was hoping for – or would it be sufficient if it merely supported the loan that the buyer was getting? The intent of the parties is not made clear in a clause such as this. This leads to the next point.

Hire a real estate attorney before the contract is negotiated, drafted and signed.

If you are contracting to buy or sell real estate, no matter how reputable the other party is, it is strongly recommended that you use an attorney beginning at the negotiation stage of the contract. Seek the advice of a lawyer who is trained in drafting, negotiating and interpreting real estate contracts.

To someone not trained in this area, reading the language of a real estate contract can be like reading a foreign language. You might not be clear about your own rights and obligations, making it impossible for you to perform in a timely and diligent manner. Understanding the other side’s rights and obligations is equally important.

The attorney will assure that the contract is written in clear terms with respect to the rights and obligations of the parties as well as address when a party can terminate the contract. Problems in contracts arise when language is not clear and specific. Vague language may provide a termination right that was not intended.

Too often, a party seeks legal assistance regarding contract terms after the deal is made, after contract is signed. By that time the parties are already obligated to perform.

Live by the terms of the written contract.

Avoiding a legal tangle when performing under a real estate contract means living by the terms of that contract. When you understand the terms of your real estate contract, it makes it easier to live by them. Abiding by deadlines is key, and common deadlines that parties miss include deadlines to pay money, obtain a professional inspection and appraisal, secure financing, and identify or cure title defects. The goal is to avoid giving the other side that window of opportunity to get out of the contract due to your inattention to deadlines.

Equally important is notifying the other party when you become aware that he is not abiding by the terms of the contract. In this instance it is essential to communicate promptly, professionally, and in writing. Again, the assistance of an attorney can be significant in both spotting an issue and communicating effectively.

Amendments to the contract should be in writing.

If it is your desire, or that of the other party’s, to tinker with the terms of the contract after it is signed, it is crucial that amendments or extensions be in writing and in a manner contemplated by the terms of the contract. Your money is on the line. And, if problems or disagreements arise, a written record will help you to avoid litigation, or, if litigation becomes necessary, prevail.

If you haven’t already, consult a real estate attorney before you take action.

If your contract has been negotiated and signed without legal counsel, and problems subsequently arise in the performance of the agreement, contact a real estate attorney to evaluate your situation before taking any action that might place you in jeopardy. A purchase agreement is intended to be a legally binding document; backing out of a fully executed one without good cause can have very serious consequences. Legal advice at this point could save you from costly and messy litigation.

For further information about real estate litigation or if you have questions about a dispute arising out of your real estate contract, please contact Bonnie Polk at  941-552-5548 or bpolk@williamsparker.com.