This document outlines the key elements that should be included in a real estate contract, including the parties, property description, price, payment terms, contingencies, warranties, default remedies, and other standard provisions. It emphasizes that real estate contracts must clearly address issues like title, possession, closing procedures, prorations, and contingencies to protect both the buyer and seller. Commercial contracts require additional special considerations regarding property descriptions, leases, environmental issues, and other complex matters. Overall, the document provides guidance on preparing thorough and legally compliant real estate contracts.

1. Chapter 7
Preparation and Review of a
Real Estate Contract

2. Objectives
• After reading this chapter, you should be able
to
– Review a real estate contract for the sale and
purchase of a home and understand its contents.
– Prepare a real estate contract for the sale and
purchase of a home.

3. Objectives
• After reading this chapter, you should be able
to
– Review a real estate contract for the sale and
purchase of commercial real property and
understand its contents.
– Prepare a real estate contract for the sale and
purchase of commercial real property.

4. Elements of a Real Estate Contract
• Parties
– Seller
• Grantor
– Buyer
• Grantee
– Other parties
• Broker
• Agent

5. Elements of a Real Estate Contract
• Consideration
– Must state the consideration flowing from one
party to the other or from each to both
• Agreement

6. Elements of a Real Estate Contract
• Property
– Legal description must be clear and distinct, and
include the following:
• Improvements
• Tangible personal property
• Intangible property
• Easements
• Rights
• Appurtenances

7. Elements of a Real Estate Contract
• Price
– Fixed price
– Exact method by which the purchase price can be
computed
• If commercial, can be dollars per square foot
• If undeveloped acreage, can be dollars per acre

8. Elements of a Real Estate Contract
• Method of payment
– Cash
– Seller financing
– Buyer assumes preexisting obligations
• Loan assumption
– Tax-free exchanges

9. Elements of a Real Estate Contract
• Quality of title
– Marketable title
– Insurable title
– Title exceptions must be clearly set forth
• Possession of property
– Definite date and time

10. Elements ofa Real Estate Contract
• Closing or settlement
– Closing is the date on which the parties agree to
perform all their promises under the contract
• Closing or settlement documents
– Contract should list the documents that the
parties will be expected to sign at closing
• Including both seller and purchaser obligations

11. Elements of a Real Estate Contract
• Proration, closing costs, and financial
adjustments
– Insurance premiums, taxes, rents, other expense
prorations, security deposits, and leasing
commissions
• Condition of the property and risk of loss
– Inspection and warranty until closing

12. Elements of a Real Estate Contract
• Earnest money
– Held in escrow
• Brokers
– Commission

13. Elements of a Real Estate Contract
• Merger
– Generally, all promises, conditions, and covenants
contained in a contract merge into the deed of
conveyance at the time of closing
• Assignment of contract
– Permissible unless prohibited in contract
• Time is of the essence
– Required for time limits to be strictly enforceable

14. Elements of a Real Estate Contract
• Warranties of the seller
– Seller holds title to real property of equal quality
– Seller will perform all duties and obligations
– Seller has the right and full authority to enter into
the contract
– Seller is unaware of any claims or governmental
actions against the property

15. Elements of a Real Estate Contract
• Warranties of the seller
– Seller will make no change in zoning of real
property
– Utilities are available to real property
– Real property accessible by way of public roads
– Real property contains a minimum number of
acres or square feet or has a minimum amount of
frontage on a public street

16. Elements of a Real Estate Contract
• Warranties of the purchaser
– Purchaser has the right and authority to enter into
the agreement
– Purchaser has the financial resources to meet the
financial obligations required under the contract
– Purchaser will perform duties in accordance with
the agreement

17. Elements of a Real Estate Contract
• Warranties of the purchaser
– No parties have initiated or threatened any action
that might affect the purchaser’s ability to
perform
– Purchaser will take no action that would diminish
the quality of the seller’s title before closing

18. Elements of a Real Estate Contract
• Contingencies
– Conditions precedent
• Definitions
• Default
• Notice

19. Elements of a Real Estate Contract
• Entire agreement
– Parol evidence rule
• Applicable law
• Additional provisions
• Offer and acceptance
• Execution

20. Elements of a Real Estate Contract
• Caveat emptor and seller disclosure form
– Let the buyer beware
– In residential property, sellers have a duty to
disclose defects

21. Elements of a Real Estate Contract
• Short sales
– “Under water”: owner owes more than a home is
worth
– Short sale: lender agrees to take less than what is
due on a mortgage
– Contract contains all provisions normally found in
a residential sale contract
• Addendum

22. Special Commercial Contract Issues
• Description of property
– Always includes more than land
– May include personal property
• Representations, warranties, and covenants
– Warranties regarding leases
– Service contracts
– No litigation affecting the seller or the property

23. Special Commercial Contract Issues
• Purchaser’s inspection or “free look”
– Period after a commercial closing to inspect the
property
– If unacceptable, buyer has the right to terminate
the contract
– Buyer can also make requests
• E.g., all leases, service contracts, tax notices

24. Special Commercial Contract Issues
• Closing documents
– Estoppel letter
• May be required by the buyer for each tenant to sign
– Lender’s estoppel
• Requires lender to attach a copy of the note and
mortgage
• Must certify that the attachments are true copies
– No amendments or modifications to the note and mortgage

25. Special Commercial Contract Issues
• Rent prorations
• Lease commissions
• Security deposits
• Seller’s covenants regarding operation of the
property

26. Special Commercial Contract Issues
• Hazardous materials
– Can pose serious problems for the seller, buyer,
and lender
– Purchasers should not purchase commercial
property without professional environmental
inspection

27. Special Commercial Contract Issues
• Indemnification
– From seller to purchaser for any obligations prior
to the closing date
• Seller’s disclaimer of warranty

28. Options
• An option is a contract in which an optionor
(owner) agrees that the optionee has the right
to buy the owner’s real property at a fixed
price within a certain time on agreed terms
and conditions
• Owner is bound to sell the property when the
optionee elects to purchase it as set forth in
the option contract

29. Contracts and Computers
• Most law firms have abandoned preprinted,
fill-in-the-blank contracts in favor of
computer-generated contracts
• Word processing technology creates flexibility
in the drafting and redrafting of contracts
• Most states authorize electronic signatures on
real estate documents

30. Contracts Checklist
• Parties to contract
– Seller should be the current owner of the property
– Purchaser should sign the contract in the exact
same form in which he or she wants to obtain the
title
– Brokers and agents usually are made a party to
the contract to enforce commission rights

31. Contracts Checklist
• Description of property to be purchased
– Adequate description of real property and
associated personal property
– Includes easements appurtenant to the property
• Cross-easement agreements
• Off-site utility easements
• Access easements

32. Contracts Checklist
• Earnest money and purchase price
– Earnest money
• Specify amount and who holds
• Additional earnest money payments for extensions of
time to close
• What happens to any interest earned
• Application to the purchase price
• Application in the event of default under contract

33. Contracts Checklist
• Earnest money and purchase price
– Purchase price
• Calculation of purchase price
– Predetermined fixed amount
– Amount to be determined based on amount of acreage or
square footage of property

34. Contracts Checklist
• Title examination
– Which party conducts examination
– Quality of title to be delivered by seller
• Marketable
• Insurable
• Free and clear of all matters of record
– Obligation of seller to correct title objections
• Defects curable by payment of money
• Other defects

35. Contracts Checklist
• Closing
– Which party establishes closing date
– Minimum or maximum periods to close
– Right to extend closing date
• Purchaser’s right to extend closing by payment of
money
• Seller’s right to extend closing by reason of acts of
purchaser

36. Contracts Checklist
• Closing
– Who bears closing cost
– Prorations
• Rent
• Interest on existing debt
• Utilities and taxes
• Credits to purchaser for prepaid rents and security
deposits

37. Contracts Checklist
• Possession of property
– Normally delivered at closing
– When possession is delivered to purchaser before
closing
– When possession is delivered to purchaser after
closing

38. Contracts Checklist
• Documents to be delivered at closing
– Warranty deed
– Assignment of leases
– Bill of sale of personal property
– Owners affidavit
– General assignment of warranties

39. Contracts Checklist
• Documents to be delivered at closing
– Certified rent roll
– Termite bond
– Foreign person affidavit
– Escrow agreements for tenant work and tenant
allowances

40. Contracts Checklist
• Documents to be delivered at closing
– Covenant not to compete
– Prior lender and tenant estoppel letters
– As-built survey
– Notice to tenants
– Copies of leases
– Evidence of payment of brokerage commission

41. Contracts Checklist
• Covenants and warranties of the parties
– Purpose of warranties is to ensure accuracy of
information on property
– Typical issues covered by warranties
• Seller’s title to property
• Seller’s authority to sign and carry out contract
• Removal of encumbrances
• Compliance of property with laws and ordinances

42. Contracts Checklist
• Covenants and warranties of parties
– Typical issues covered by warranties
• No condemnation suits pending
• Right to possession
• True and correct copies of leases and agreements
delivered to purchaser
• Accuracy of rent roll and expense statements
• Absence of mechanics’ and materialmen’s liens

43. Contracts Checklist
• Covenants and warranties of parties
– Typical issues covered by warranties
• No litigation against seller or property
• Condition of property
• No encroachments
• No prior use from manufacture or storage of toxic or
hazardous waste

44. Contracts Checklist
• Covenants and warranties of parties
– Limitations on warranties
• Best of knowledge
• Materiality
• Limited period of survival after closing

45. Contracts Checklist
• Conditions to closing
– Purpose
• Limitation on purchaser’s obligation to close until seller
completes certain items
• Substitute for complete warranties of seller
– Which parties have right to waive conditions

46. Contracts Checklist
• Conditions to closing
– Typical conditions
• Satisfactory inspection of property
• Satisfactory inspection of records involving property
• Ability to obtain new loan
• Approval of board of directors of purchaser
• Receipt of estoppel certificates from lenders and
tenants
• Truth and accuracy of seller’s warranties on closing
date

47. Contracts Checklist
• Inspection by purchaser
– Right to inspect physical condition of property
• Time in which to exercise inspection
• Right to terminate after inspection
– Right to inspect seller’s books and records related
to property
• Place of inspection
• Right to copy records
• Permitted use of materials inspected

48. Contracts Checklist
• Inspection by purchaser
– Right to inspect property for possible
environmental contamination
• Phase I examination
• Phase II examination
– Enforceability of free-look cancellation clauses

49. Contracts Checklist
• Casualty and condemnation
– Purchaser’s options on casualty or condemnation
• Materiality limitation on purchaser’s right to terminate
• Time limits on exercise of option to terminate by
purchaser

50. Contracts Checklist
• Casualty and condemnation
– Seller’s obligations on casualty or condemnation
• Timely notice to purchaser of event of casualty or
condemnation
• Whether seller is obligated to restore premises
– Whether seller should be required to carry
insurance

51. Contracts Checklist
• Remedies on default
– Default by seller or purchaser
• Suit for damages or specific performance
• Liquidated damages

52. Contracts Checklist
• Brokerage
– Obtain warranties from each party as to brokers
involved
– Specify which party pays brokerage commissions
– Cross-indemnity for brokerage claims

53. Contracts Checklist
• Confidentiality
– No recording of contract
– All information delivered to purchaser shall be
kept confidential or delivered to other people only
with seller’s consent

54. Contracts Checklist
• Miscellaneous provisions
– Right to sign a contract
– Provisions for date and manner of delivering
notices
– Time is of essence
– Survival of contract provisions
– Contract represents entire agreement between
parties

55. Contracts Checklist
• Miscellaneous provisions
– Severability of contract provisions
– Method of offer and acceptance
– Provide for approval and counterpart form

56. Ethics: Illegal or Fraudulent Activity
• Paralegal should never be involved with
misrepresentations
– Violation of ethical standards
• Preparing a fraudulent document can be a
criminal act when submitted to a government
authority
– Even if at the direction of a supervising attorney

57. Summary
• Both purchasers and sellers have legal issues
that must be adequately addressed in real
estate contracts
• Real estate contract represents mutual
promises regarding future transfer of real
property
• At closing, transfer is completed using a deed