BROKER RISK MANAGEMENT
WEEKLY PRACTICE TIP
Drafting Contract Clauses
Q: As a buyer’s agent, I wrote an offer paragraph that read: “Seller to provide a certificate of occupancy prior to close of escrow.” This was a property where the seller was getting close to finishing a substantial remodel. Now, seller has a problem with the city inspector who is making seller re-do a major portion of the work, and the close of escrow is going to be delayed several weeks. Seller’s attorney now says that clause is a contingency and, because seller cannot comply, seller can cancel the contract. My buyer, and her attorney, say this is a contractual obligation of the seller and they can’t cancel. Who is right? Could I have done anything differently?
A. This contract clause demonstrates the problem that occurs when a contract clause is not drafted with enough precision to know what the parties meant. Likely, when this dispute is resolved there will be no clear resolution as to what was meant by that clause, since most of these disputes end up settling.
When preparing a contract offer form, filling in the blanks is the easy part. But, as soon as you start drafting sentences and paragraphs in the Purchase Agreement, Addendum or Counter-Offer forms, it is essential that you follow certain rules to avoid these types of ambiguous problems.
Here are some rules for drafting these clauses:
1. DOES IT MAKE SENSE? Before you have your client sign a contract document, take a moment to re-read what you wrote. Do not write using shorthand terms or phrases; write complete sentences with enough detail to make clear your client’s intention. Ask yourself “Would this make sense to someone who was not involved in the negotiations? Is it easy to understand who has to do what, and when it must be done?” If it is not clear, re-write it asking your clients if they understand it to mean what they want to happen. Perhaps work with your manager to achieve greater clarity.
2. DO A FINAL CHECK: Before you do the final, final signature to create the contract, read through all of the previous Addenda and Counter-Offers to make sure there is no ambiguity. Check whether something has been dropped out, or is left hanging and not clear if it is in or out of the contract.
For example, if a paragraph in a prior counter-offer from buyer required the seller to repair the deck and also to credit the buyer with $1,000 for closing costs, and the next counter-offer only referenced that the seller will credit $500 to buyer, does this mean that this credit is all the seller will do, or is the seller still obligated to make the repairs to the deck. Not clear, is it? Make sure the documents reflect whether the deck work by seller is in or out.
3. CONTINGENCY OR OBLIGATION: It has become a common practice for agents to start sentences with “Seller to…” do something, or “Buyer to…” do something.
You should avoid starting contract paragraphs with the words “Seller to…” or Buyer to…” because it is often difficult to determine if such a paragraph is a contingency (for which a party can cancel without penalty) or an obligation or promise (for which a party will be in default if they don't do it).
If you want it to be a contingency, start the sentence with “This contract is contingent upon…” or “Subject to….” If you want it to be a promise or obligation, start the sentence with “Seller will…” or “Buyer shall…”
For example, in the above question, the buyer agent could have made that paragraph a promise or obligation of the seller by writing: “Seller shall provide buyer with a certificate of occupancy prior to close of escrow.” In that way, it is clear that the seller is required to provide the COO before the close of escrow or be in default.
Seller, on the other hand, might want to have this be a contingency if, for example, seller anticipates a problem. Listing agent could then have countered the above clause to make it a contingency, as follows: “This contract is contingent upon seller’s ability to deliver a Certificate of Occupancy prior to the date for the close of escrow, or either party may cancel the contract.”
4. WHAT THEN: If you prepare a contract contingency, ask yourself what happens if that contingency is not removed. Then what happens?
There are a number of possibilities. For example, you could write that if the contingency is not removed then either the seller or the buyer may have the right to cancel. Or you could write that, in that case, either party will have the right to cancel. Or you could give other options. For example, buyer’s agent could have written the above clause as follows:
“Seller shall complete the remodel prior to close of escrow and provide Buyer with a Certificate of Occupancy. Should Seller be unable to complete this work prior to the time scheduled for the close of escrow, Buyer and Seller agree that the escrow will be extended for an additional thirty (30) days upon written notice of either party to the other. If Seller is unable to complete the work within that time, Buyer may terminate this Agreement and have all deposits returned.”
5. COUNTER-OFFER DRAFTING: When preparing a counter-offer, do the following:
A. First, review the contract, addenda and any previous counter-offers. Be sure that you are countering ALL of the previous clauses that need to be addressed in your counter-offer.
B. Reference the paragraph number and changes to be made to that paragraph. It is a good idea to start the counter-offer paragraph with the word “Regarding…”
For example, “Regarding paragraph 3 of Counter-Offer 2…” Now the reader can easily tell what it is that you are trying to change.
C. Reference what will happen to the clause you are changing. Next, state whether that clause be deleted in entirety or modified? So if you do not like a clause at all, write: “Regarding paragraph 3 of Counter-Offer 2, that paragraph is deleted.” Now the reader knows that clause is entirely gone.
For example, if the seller in the example in Paragraph 2, above, does not want to complete the deck work and only credit buyer $500, then the listing agent could write: “Regarding paragraph 3 of Counter-Offer 2, that paragraph is deleted. Seller shall credit buyer only $500.” Now it is clear that the deck work will not be completed by seller.
But, if you only want to modify a paragraph you could write “Regarding paragraph 3 of Counter-Offer 2, that paragraph is changed only as follows: __________________.” Now the reader knows that the paragraph is still in effect except for the language you have changed.
In the example above, if the seller was willing to complete the deck work but is just countering the cash credit, the listing agent could write: “Regarding paragraph 3 of Counter-Offer 2, that paragraph is changed only as follows: Seller shall credit buyer $500.” Now the reader knows that the seller will still complete the deck work.
It is important that agents draft clearly understandable contract clauses. Follow these tips and you will avoid confusion, and a possible claim later.
WEEKLY PRACTICE TIP: DO NOT FORWARD TO CLIENTS. 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 2012 04/20/12