Monday, June 20, 2011

The Elements of an Effective Purchase and Sale Agreement

When you prepare to buy a new home or commercial property, the first step will be often referred to as "making an offer," because the formation of every contract requires two elements: offer and acceptance.  Either the seller or buyer will prepare a document that sets forth the terms and conditions upon which that person desires to purchase or sell the property.  That party will then submit that document to the other party.

In legal effect, the submitting party has made an offer, which the other party may accept in order to form an agreement.  The goal, of course, is to create a legally enforceable contract that will allow the transaction to close and title to the land to transfer in conformance to the expectations of both parties.

Most people are generally familiar with this process.  What many people do no know is what must be included in that contract in order to make it enforceable.

The answer, in Washington, is that the purchase and sale agreement (also referred to as the "PSA" or "earnest money agreement") must include the following: (1) consideration; (2) adequate description of the property; (3) specification of total purchase price; (4) specification of the method of payment of principal and interest; (5) provision for prorating taxes, insurance, and liens; (6) provision for payment of water and other utilities; (7) provisions for possession; (8) provisions for the deposit in escrow of the balance of the down payment by the purchaser; (9) provisions for delivery of a deed by the seller.

If those elements are included, a court will award damages to the non-breaching party if the breaching party refuses, without legal excuse, to close the transaction.  If any one of those elements is missing, either party may (absent other legally significant circumstances) ignore the agreement and refuse to perform it, without legal consequence.  

If one party breaches the agreement and the other party wants to specifically enforce the agreement - that is, get a court to order the other party to close the transaction - each of the elements (and any other terms the parties include) must be defined clearly and proven unequivocally, so that there is no doubt as to the parties' intent with regard to each term.  So, as a buyer, if you want the ability to compel the seller to perform the agreement, rather than just ask a court to award cash for the seller's failure to do so, the purchase and sale agreement must be drafted with a greater level of specificity.

While the forms available for use by real estate professionals, if filled out completely, are typically suitable for a transaction, problems most often arise when parties attempt to draft their own non-standard terms into an agreement, either by crossing out standard terms of the agreement or by including their own self-drafted addendum.  Doing so can undermine the effectiveness of the form.  Real estate agents, even those that are very knowledgeable about these types of transaction, are legally prohibited from drafting these non-standard terms into agreements.  Accordingly, parties may try to draft these terms themselves and, accordingly, it is from these non-standard terms that a large number of disputes arise.

A real estate attorney can often provide a quick solution by preparing a specially tailored addendum that will set forth the non-standard terms desired by the parties, without risking the signing of a document that will be unenforceable.  For most people, real estate transactions are too important, and litigation is too expensive, to risk using a faulty contract that may become the subject of a later dispute or be ruled unenforceable.

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