Contracts and Clarity
May 1, 2022
Laura Kelly Mance
CRB, REALTOR® / President
Rather than step outside of my area of expertise and discuss property management, I’m going to stick with a topic I know something about and depart from this this month’s theme. I’m going to talk about contracts and clarity.
John Wayne said, “tomorrow hopes we have learned something from yesterday.” For me, that wisdom became the often repeated phrase, “I never repeat mistakes but I haven’t run out of new ones to make.” Here’s an example. Someone was coming to my house to pick up a piece of furniture we were donating. I knew and trusted them, so I left the front door unlocked and a note on the donated item. It read “There’s also a cardboard box of clothes at the base of the garage stairs if they’ll take them.” A few days later my husband said, “What ever happened to the wardrobe box filled with all my winter suits that was in the garage?” That’s right, they had taken all my husbands stored suits. They were in a large cardboard wardrobe at the base of the garage stairs…next to the small box of old clothes. That was my first big lesson in clarity, and I have applied that lesson to our business many times since.
For those of you who have been working with escalation clauses lately you already know where I’m going. Many of those clauses can be read to mean multiple things to multiple people depending on their perspective. Let’s say there’s an escalation clause in what is accepted as a back-up offer. The offer is for $375,000 but it says it escalates to $1,000 above the highest bon a fide offer, with a cap of $425,000. The contract in primary position is for $424,000. That offer cancels during Due Diligence and the back up Buyers are told they are now in first position. The Sellers believe that they have now sold their property for $425,000 and the Buyers believe they bought the property for $375,000…because there are no longer any other bon a fide offers. Who’s right? More importantly, who’s wrong? The agents of course. No one created an addendum that specified the purchase price for the back-up offer. John Wayne also said, “I’m responsible only for what I say, not what you understand.” I wish it were that simple!
Just because the words we used support what we intended doesn’t mean they don’t also support someone else’s belief just as well. A handy trick? Read it as if you’re on both sides of the question. Look for the possibility that it could mean something different to each party. Drive it down the road and see if the wheels fall off. When it comes to contract language, we can’t be too clear.
What are some other examples of language that isn’t complete? “Buyer accepts the property as-is and will not request repairs.” Do they get to inspect? Do they get to cancel based on the results? That depends on what language the agent added to that statement and if they took out the Buyer Disapproval provisions doesn’t it? But do we really expect our Buyers and Sellers to understand that? The judge won’t.
Every time AAR puts together a forms task force to revise the contract it takes thousands of hours to do. Every line is poured over by a group of people representing, brokerage, title, escrow, lending, law and more. There is thought put into every word and whether or not it’s bolded or underlined or all caps or all 3. Let’s take the last paragraph of the Warranties section which reads in part, Buyer warrants that Buyer has disclosed to Seller any information that may materially and adversely affect Buyer’s ability to close escrow or complete the obligations of this Contract. What does that line really mean? Does it mean that if he didn’t tell you he was married, and his spouse refuses to sign the disclaimer deed there may be a problem? Yes. Does it mean that if he doesn’t tell you the “cash” needed to close the transaction is going to come from an equity line on another property he could have a problem if he doesn’t get that credit line approved? Yes.
These days, people are selling a lot of real estate and that means they’re also doing a lot of multi-tasking. When it comes to the contract, addendums and clauses SLOW down. Have someone else read what you wrote and ask them what they think it means. Ask your clients what they think they’ve agreed to and make sure it says it there. “This is to reiterate; purchase price shall be $425,000.” Being deliberate and precise will save you a lot of angst and money one way or another. John Wayne didn’t say that.
Laura Kelly Mance, CRB
President, Long Realty Company