BROKER RISK MANAGEMENT
WEEKLY PRACTICE TIP
Back-Up Offers
Q: I am a listing agent and we have a buyer in contract. Now, a second offer has come in for a higher price and that buyer is more qualified. I wrote in a counter-offer that, “This contract is in back-up position.”
The first buyer was not removing contingencies on time, so we cancelled the buyer after having given the buyer a Notice to Buyer to Perform. Just as we did that, the back-up buyer cancelled his contract with no money in escrow. Can he do that? Does my seller have any recourse against the back-up buyer?
A: That is a good question for which there is no good answer because that situation was not covered by the language that you wrote into the counter-offer. You would have to send your seller to an attorney to get advice as to whether they can proceed against the back-up buyer and how to do so.
There are several problems with just writing, “This contract is in back-up position” because that language does not answer the following questions:
1. Can the buyer cancel until they have been placed in primary position?
2. Under what circumstances does the back-up buyer become the primary buyer?
3. May the seller and primary buyer amend or modify the existing purchase agreement without giving the back-up buyer rights to claim that they are in first position?
4. When will back-up buyer's deposit be required to be placed into escrow?
5. Is it clear that the timeframes for performance in the back-up contract do not begin until the back-up contract has been elevated to first position?
PRACTICE TIPS:
LISTING AGENTS:
1. Do not write back-up language on your own. Use pre-printed back-up clauses or forms such as CAR Back-up Offer Addendum (zipForms form BUO); PRDS Back-Up Contract Addendum or SFAR Back-Up Offer Addendum. These pre-printed clauses address the issues left unresolved by the simple language drafted by most agents.
2. Do not move a back-up contract into primary position until you have a signed cancellation of the CONTRACT by both buyer and seller. It is not sufficient, for example, if one party signs cancellation of ESCROW on a form prepared by the escrow company.
See Weekly Practice Tips: “Cancellation of Contract” and “Re-Selling
Property with Prior Escrow Uncancelled”
3. When countering an offer to place it in back-up position, use a Counter-Offer form with the Back-Up Addendum attached. Do not just use the back-up addendum. Never use an addendum alone when creating a contract; always use a counter-offer form.
See Weekly Practice Tip: “Use Counter-Offer Forms, Not Addendum
Forms, to Create Contracts”
4. When countering to place an offer in back-up position, counter out any calendar days for contingency removal or close of escrow. Instead, change all dates to “days after” e.g., “17 days after acceptance” for removal of contingencies, or “45 days after acceptance” for close of escrow. Failure to do so could result in a reduced number of days remaining, after the back-up contract is elevated into first position — for contingency removal and the date for COE.
BUYER'S AGENTS:
5. It is a good idea for buyer's agents to also use one of the above forms for back-up if you know that your offer is going to be in back-up position. That way you have certainty about when the buyer’s initial deposit must be placed into escrow; when the timeframes commence; and whether or not your buyer may cancel until they have been placed in primary position. You also avoid requiring seller to issue a counter-offer and probably delaying contract ratification.
6. If you know or suspect that your offer will be in back-up position, do not use calendar days for contingency removal or close of escrow. Instead, use “days after” e.g., “17 days after acceptance” for removal of contingencies, or “45 days after acceptance” for close of escrow.
7. Read and understand the back-up addendum which will govern your buyer's rights. Advise your buyer also to read and understand their rights as specified in the back-up addendum.
DO NOT FORWARD TO SELLERS OR BUYERS. This Weekly Practice Tip is for the exclusive use of clients of Broker Risk Management and their agents. It may not be reproduced or distributed without the express written consent of Broker Risk Management. The advice and recommendations contained herein are not necessarily indicative of standards of care in the industry, but rather are intended to suggest good risk management practices.
© Copyright Broker Risk Management 2015 02/06/15