PERSISTENT PROBLEMS
IN THE PREPARATION OF PURCHASE CONTRACTS

By Miriam J.Baer
Assistant Legal Counsel

Have you ever been in the middle of a dispute between a buyer and seller over the terms of their purchase contract? Although some disputes between buyer and seller are unavoidable, many of the questions that arise over the meaning of the purchase contract are the result of improper use or preparation of the contract form, and insufficient understanding of its terms. Therefore, it is important for every real estate agent involved in residential sales to understand the Offer to Purchase and Contract form, and to make sure that the buyers and sellers also understand its terms.

Commission Rule A.0112 requires real estate licensees to use an offer to purchase form which contains the eighteen (18) separate provisions listed in the Rule. These include the names of the buyers and sellers, a legal description of the real property, a detailed description of any personal property being sold, details of the financial terms of the transaction, the criteria for determining the disposition of earnest money (including disputed deposits) and numerous other terms. Use of any form which does not include all the provisions required by Rule A.0112 can be the basis for disciplinary action.

The Commission strongly encourages its licensees to use the "Offer to Purchase and Contract" (Standard Form No. 2) jointly approved by the N.C. Association of REALTORS and the N.C. Bar Association. This form includes all the required provisions and should not be confused with the "No. 2 Digest Publishing Company" form, which does not. An added benefit to Standard Form No. 2 is that it is accompanied by "Guidelines" which provide detailed instructions on its use. The Guidelines give step by step instructions on how to complete Standard Form No. 2 and are useful both as a teaching tool for new agents and as a review for more experienced real estate professionals.

Standard Form No. 2 is designed primarily for existing single family residential properties, but it can also be adapted to situations involving new construction by attaching a "New Construction Addendum" (Standard Form No. 2-A-3). This addendum should be referenced in Paragraph 6 of the Offer to Purchase and Contract by stating, "See attached New Construction Addendum."

Do not use Standard Form No. 2 as a substitute for any other type of contract -it is not an option form or a lease form, or an installment sale form. There are many forms available for these and other types of transactions. For more information on where to obtain standard real estate forms, contact the North Carolina Association of REALTORS., the N.C. Bar Association, or your own attorney. Many printing companies also sell the forms in large quantities.

In specialized transactions where standard forms are not available, direct the parties to their own attorneys rather than attempting to modify the Offer to Purchase form or drafting a contract yourself. Agents who draft legal documents for clients or customers may be charged by the Commission and/or the State Bar with the unauthorized practice of law.

When completing offer to purchase forms,

1. Type or print clearly so that the contract is completely legible.

2. Fill in all the blank spaces. Write "N/A" or "none" in those spaces which are not applicable. This will prevent anyone from filling in blank sections later and thereby changing the meaning or terms of the contract.

3. Avoid jargon or abbreviations such as MLS abbreviations from property data sheets They may be meaningless to one or both parties.

4. Initial and date all changes. This creates a chronological record of the negotiations between the parties including their offers and any counter-offers.

5. Transcribe the latest counter-offer onto a "clean" contract form when numerous changes on the form make it difficult to read. Preserve the original form for your records.

6. Review the whole contract with the parties, including the Standard Provisions.

In the course of reviewing consumer complaints, the legal staff has noted a variety of ongoing mistakes that are commonly made in the preparation of Standard Form NO 2. A detailed discussion of these typical errors may be found in Real Estate Bulletin, Vol. 20i, No. 3. The following five problems are among the most persistent and egregious.

Many agents improperly use the phrase "owner of record" when drafting the buyer's initial offer, because they do not know the identity of the property owner. Failure to include the actual name(s) of the seller(s) can result in the failure of the contract for lack of proper identification of the parties. Therefore, agents should always include the full names of the sellers on the offer to purchase form. The name(s) of the seller(s) can be easily obtained from the listing company with one telephone call.

Standard Form No. 2 includes a space for both a street address and a legal description. Be sure to fill in the legal description even though it may seem superfluous. Disputes can arise over the boundaries of the property to be conveyed when only a street address is included on the contract The legal description need not be a full metes and bounds. Reference to a recorded plat or map (e.g. "lot 12, block 1, Greenacre subdivision, Book 2744, pg 190, Wake County Register of Deeds") or to the book and page number of the seller's recorded deed to the property is sufficient.

Note in the Guidelines the "caution" that a reference to a tax map alone is generally not an adequate legal description.

Mistakes are also commonly made in the personal property section of the contract where you are to describe any personal property that remains with the property. The Guidelines provide some examples of typical personal property items which should be specifically noted if they are to be sold with the house, including curtains, free-standing fireplace tools and window air conditioners.

You should also note on the contract any fixture or item of real property that is not to be sold; e.g. ceiling fans, built-in appliances, towel racks and TV antennae. The best place to list them is in Paragraph 6 ("Other Provisions and Conditions").

When describing personal property and fixtures, be specific! By writing "18 cubic foot deluxe Frigidaire refrigerator/freezer", an unscrupulous seller would be prevented from removing his "deluxe" Frigidaire and leaving a 6 cubic foot "student" model in its place.

The phrase "72 hour right of first refusal" sometimes is included in the offer to purchase form when a buyer must sell his house before purchasing the seller's property. Use of this phrase is improper because it is not a sufficient expression of the parties' intentions, nor is it a legally correct usage of the phrase. Such language does not address such crucial issues as when the 72 hours begin, the obligation of the buyer during that time period, the status of the second offer during that same period, etc.

When a buyer must sell his own house before being obligated to purchase the seller's, the agent should instead include in Paragraph 6 the phrase, "See attached Contingent Sale Addendum" (Standard Form No. 2-A-2), and he should fill out and attach that addendum to the purchase contract. The addendum allows the seller to keep the property on the market while the buyer tries to sell his own property, and sets out the procedure to be followed should the seller receive another offer before the buyer has sold his own property.

Many agents continue to place provisions in the purchase contract relating to the payment of their commissions. Commission Rule A.0112(b), which has been in effect since 1988, prohibits agents from including a commission or other compensation provision in standard form purchase contracts. Agents who feel that they need additional protection with respect to the payment of their commissions should formalize their agreements with the necessary parties in a separate document. As with the preparation of any specialized legal document, the services of an attorney for assistance in drafting may be required.

Although the proper completion of Standard Form No. 2 may take a little extra time and effort at the outset of the transaction, it can save significant time, effort, and perhaps expense later. When a contract clearly sets forth the obligations of the parties and avoids confusing the improper language, smooth transactions are generally the rule, rather than the exception.