For Neal Graham's Real Estate Class (LEGL 3485) at the University of Memphis. Copyright Cengage Learning.

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