Another New Contract, Part 2
Originally appeared in Hills Publications, May 24, 1996
It is crucial for you to know exactly what you are taking on when you sign a contract. As a buyer or seller, you may be presented with one of the two California Association of Realtors (CAR) contracts concurrently in use.
In part one of this series, I compared and contrasted some aspects of the previous eight-page and what is referred to as the new “four-page” (actually, seven pages) CAR purchase contract for residential properties, one to four units. This article will look at some other important contract issues you should consider.
Known or discovered
In late 1994, when CAR expanded the six-page contract to eight pages, the words “or discovered” were added to the word “known” when describing what the seller will “warrant” regarding condition of the property. This language falls into the category of “blank check” verbiage, i.e., if the seller agrees, he is accepting unknown and unlimited liability for that problem.
For example, if the seller knows of no problems with the roof, he might not feel concerned that this will come up as an issue for the buyer, even if the roof is old. What if the buyer has a roof inspection, a roofer determines it has been leaking into the attic, and it is at the end of its useful life? If the seller has warranted the roof to be free of leaks, he is obligated to provide the buyer with a new roof. The type and cost of the roof would be undetermined. If the existing roof is an expensive cedar shake, current code will not allow it to be replaced with the same fire-prone materials. The buyer may want to maintain the same look, however, with a costly, fireproof, simulated shake roof. The seller, conversely, would likely opt for a more modest composition shingle roof. This is a typical “blank check” scenario which can become a major disruption in the escrow.
Because this clause is potentially detrimental to the seller, he could have minimized his liability by deleting the word “discovered” from the warranty section, or adding the words “discovered by seller.” Had he done so, he would now have the choice of how much, if anything, to contribute to a new roof. Obviously, if the buyer was not satisfied with the seller’s response, he could decide not to waive his inspection contingency, thereby rescinding the contract.
The example above illustrates why it is usually wise for the seller to get a pre-sale home inspection. Had the seller done this, he could have replaced the shake roof with a roof of his choosing before marketing. This would have saved him money and avoided the mid-sale roof controversy.
As a listing agent representing the seller, my approach is to add language in a counteroffer which indicates that the cost of any work requested by the buyer is contingent upon the seller’s written approval. Sometimes, this is written with a dollar limitation, e.g., “Seller agrees to pay a maximum of $1000 for the cost of work requested by Buyer; any additional costs are contingent upon Seller’s written approval.”
Pest control peccadilloes
Although the Pest Control language in the four-page contract has been tightened up and shortened, the wording that has been carried over remains a possible headache for both buyers and sellers. Despite the fact that buyers and agents often give this little thought, it is precarious for a buyer to allow a seller to do the pest control work. Contract language in both the four and eight-page contracts give sellers this right. I routinely amend this on an addendum when representing buyers. Another buyer booby-trap is accepting responsibility for Section 2 pest control work. My reasoning behind both is discussed at length in my article, Not Just Termites, Parts 1 and 2.
On the other hand, the seller may be vulnerable when he agrees to provide a pest control certification before close of escrow. Unless deleted or modified in a counteroffer, the seller is agreeing to this when he signs the contract (either the four or eight- page). This is also discussed in Not Just Termites.
Active vs. passive removal
A contingency reserves the right to rescind the contract; it is a way out of the agreement. “Active” removal of contingencies means the buyer must remove or waive his contingencies in writing within the time periods specified in the contract. This is the safest route for a buyer and gives him more control than the alternative, “passive” removal.
As the word suggests, passive removal of contingencies is an automatic process. The contingency disappears unless the buyer disapproves in writing within the stated time periods. The danger for a buyer is that his contingency could be automatically waived before he realizes it. He would then be obligated to continue with the contract, even if there was something he wanted to negotiate.
Both the new and old contract state that passive removal shall apply unless the active box is checked. It could be confusing to agents using both contracts that the passive method is listed first in the eight-pager and the active method is first in the four-pager. Even though it is first in the new four-page contract, the active box must be checked for it to be in effect.
Destruction or damage
The eight-page contract has a “Property Destruction or Damage” clause which “applies only to destruction or damage that occurs after acceptance of the offer.” It specifies what will happen in the event of damage to the property while in escrow.
The four-page contract omits this clarification. Although there are rules of common law which govern this type of situation, the eight-page contract language leaves fewer loose ends.
Mediation
Both the new and old contracts include a clause mandating mediation in the event of an unresolved dispute between buyer and seller. The new four-pager, however, omits an explanation of the mediation process. Make sure you understand the differences between mediation, arbitration and going to court.
Short sales
A “Short Pay” clause is an addition to the four-page contract not found in previous versions. There are numerous instances in our area where the equity in the property is less than the loan amount. In these cases, the lender may be asked to accept less than a full payoff of the loan. This is called a “short sale.” This clause makes the contract contingent on the written approval of all lenders to a short sale.
Final Thoughts
It is difficult to keep track of all the nuances, and their ramifications, in repeated revisions to the CAR purchase contract. I share this problem with my real estate colleagues. It is easy to imagine the increased confusion which might ensue if future generations of both the four and eight-page contracts undergo “slight” modifications. As time goes on, the confusion could intensify. Add to the mix the fact that some agents use a contract form that is many years old, and you have more potential for turmoil.
It is possible that CAR might go back to the use of only one version of the contract. In the meantime, if you find yourself in the role of buyer or seller, choose to work with a technically adept professional and read your contract carefully.
Related Articles:
Another New Contract, Part 1
Contract Revised Again
Understand Before You Sign
Not Just Termites, Part 1
Not Just Termites, Part 2