Commission cautions against adding vague contingencies to contracts.
By: Marilyn E. Tomei, Assistant Legal Counsel
Licensees continue to grapple with the question, "What provisions can I draft and add to standard form purchase contracts?" By Commission rule, real estate agents may "complete" (i.e., "fill in the blanks") certain pre-printed forms, including purchase contract forms. But the Commission cautions against drafting additional terms because it could lead to at least two potential problems- It could constitute the unauthorized practice of law, and it could result in the use of vague terms which may confuse the parties. This issue is addressed in the "Guidelines" for use with the North Carolina Association of REALTORS®/North Carolina Bar Association Standard Form Number 2.
The "practice of law," as determined by statute and court decisions, includes the drafting of documents which define the rights of others. "Drafting" means composing phrases and sentences to convey an intended meaning by choosing which words to use and the order in which to use them. Therefore, although licensees may be capable of competently drafting contract terms, they are not authorized to do so unless they are also licensed attorneys.
Vague Contingencies
Drafting contract provisions could also increase the possibility of vague terms being used which might confuse the parties as to their contractual obligations and/or inadequately protect their interests.
A common type of vague contract term is a contingency whereby parties to the transaction condition their contractual obligations upon their "satisfaction" with specified circumstances or occurrences.
Perhaps the most common such contingency is where a buyer's purchase of property is "contingent on satisfactory inspection" of the property. How is the contingency fulfilled? Who is the party whose satisfaction will fulfill the contingency? Who determines the standard of of satisfactory"? The buyer? The seller? The inspector?
A provision drafted and added to the contract is especially problematic if it conflicts with some other term of the contract, such as one pre-printed on the contract form. In the example above, what happens if the inspector notes a defect in some item not addressed by the pre-printed inspection term? Does the seller have an obligation to fix the defect? If the buyer is It satisfied" with the inspector's other findings, does the pre-printed term control?
Suppose the inspector comments that a system addressed by the preprinted contract terms will likely require replacement within a specified time? If the system is currently operational, is it "satisfactory"? Is an air conditioning unit "satisfactory" if the inspector finds that it is cooling a house which has more square feet than the unit is designed to cool?
Another common vague contingency is a statement such as, "contingent on the sale of the buyer's property at . . ." This simple provision may not constitute complex drafting of a legal document, but neither does it clearly define the parties' obligations. Can the buyer reject an offer on her own property because she has changed her mind about purchasing the seller's property? Can she buy the seller's property if her own property does not sell? Can the buyer remove the contingency without the seller's concurrence? What if the seller wants to invoke the contingency and sell the property to someone else?
At what point in the transaction is the contingency considered fulfilled? Is the buyer's property considered if sold" when it goes under contract? If so, what happens if the contract falls through? What if the buyer's property is under contract, but the sale is not due to close until after the scheduled closing on the seller's property? All of these and perhaps other questions are left unanswered by the simple contingency.
Parties sometimes disagree over the meaning of a contractual term, and its interpretation is then ultimately determined by the courts. When a court considers a term to be so vague that it can be interpreted two ways, the court will interpret it in favor of the party who did not draft it. Therefore, an agent who drafts vague terms does so to the detriment of his or her own client, and risks disciplinary action by the Real Estate Commission.
The Bottom Line
Avoid drafting contractual terms. In transactions where the parties want a contingency concerning sale of the buyer's property, use the standard form "Contingent Sale Addendum" which the North Carolina Association of REALTORS® and North Carolina Bar Association have approved for this purpose. If the language supplied by this addendum does not appropriately address the issues, refer the parties to their attorneys.
If another agent or a party to the transaction or even an attorney drafts a contractual term, review it carefully. Beware of any provision which includes a subjective standard (such as "satisfactory") or is otherwise vague as to fulfillment, or does not set a deadline for fulfillment, or does not specifically require notice to the other party and specify how parties are to notify each other of fulfillment.
To ensure that you are protecting the rights of your clients and treating your customers fairly, be sure that the rights and obligations of all the parties to the transaction are clearly spelled out in the purchase contract.