Introduction

Most real estate transactions are not reviewed, negotiated, or documented by attorneys. This is particularly true in the context of residential transactions where brokers are involved. Buyers and sellers are, thus, largely isolated from the process. The normal procedure is for a broker to use a standard Arkansas Realtors real estate contract and insert handwritten notes where necessary to document the deal.

The Standard Forms and the Role of the Attorney

Many buyers and sellers never consider retaining an attorney in a real estate transaction. A knowledgeable real estate lawyer, however, can assist in closing an otherwise dead-end deal. While an attorney is not necessary in all real estate transactions, there are times when a broker should consider referring the buyer and/or seller to an attorney. Some of these instances include the following:

  1. The Buyer expresses concerns with the manner in which title will be held.
  2. The Seller has disclosed or mentions issues that might pose a title, environmental, or other concern. (Examples: (i) Seller indicates a neighbor’s fence is not on the stated boundary line, (ii) Seller indicates chemicals have been located on or disposed on the property, (iii) Seller indicates the mortgage on the property is in default or Seller has filed or is about to file bankruptcy, or (iv) Seller indicates access to the property may be limited).
  3. Either Buyer or Seller appear to suffer from mental incapacity.
  4. Either Buyer or Seller express concern over income tax treatment of the
    transaction.
  5. The title work does not show title in the Seller’s name.

When attorneys are involved in real estate transaction, they should realize a number of provisions in the Purchase Agreement are important and should be carefully considered, negotiated, and drafted, especially in the context of a large and/or complex commercial real estate transaction.

  1. Title Review Contingency.

     

    1. Residential Real Estate Contract. In connection with title review contingencies, the Standard Form for Residential purchases simply states, "unless otherwise specified, the Seller shall furnish, at Seller's cost, either: (i) a complete abstract reflecting merchantable title satisfactory to Buyer or Buyer's attorney; or (ii) title insurance in the amount of the Purchase Price. If objections are made to Title, Seller shall have a reasonable time to cure the objections."

       

      1. Opportunity to Review Title?
      2. Reasonable Time to Cure Defects?
    2. Commercial Real Estate Contract. The title review contingency clause in the commercial Standard Form is somewhat expanded and more definite with regard to title review, but still leaves room for questions. An experienced real estate attorney can help you identify these issues and propose more definite title review procedures that a party (usually the buyer) may have in mind.
  2. Survey Review Contingency.
    1. Residential Real Estate Contract. The 2001 residential standard form permitted a Buyer three choices in relation to surveys: (i) no survey; (ii) "A current survey, in a form satisfactory to Buyer (and Buyer's lender, if applicable), certified within ___ days prior to closing by a registered land surveyor, will be provided and paid for by Buyer/Seller"; or (iii) a blank
      line.

       

      1. Opportunity to Review Survey?
      2. Permitted Encroachments?
      3. Opportunity to Object?
      4. Contingency?
    2. Commercial Real Estate Contract. The 2001 commercial standard form permits the Buyer three choices in relation to surveys: (i) no survey; (ii) "A current survey, certified subsequent to acceptance by a registered land surveyor, will be provided to Buyer by Seller in a form satisfactory to Buyer (and Buyer's lender, if applicable), certified within ___ days prior to closing by a registered land surveyor, will be provided and paid for by Buyer/Seller"; or (iii) a blank line.
      1. Opportunity to Review Survey?
      2. Permitted Encroachments?
      3. As-Built Surveys.
      4. Relationship to Due Diligence.

    As with the title review clause, a real estate lawyer can help you button down loose ends here as well.

  3. Other Purchase Agreement Clauses
    1. Due Diligence

       

       

      1. Residential Real Estate Contracts
        1. InspectionClause
        2. Repair Limit Clause
      2. Commercial
        1. FeasibilityStudy
        2. EnvironmentalStudies
        3. ZoningIssues
        4. Certificates of Occupancy
        5. Financial Due Diligence
        6. Miscellaneous
    2. Property Description. The property description should be as complete as possible. It is a good idea to review the descriptions before the contract
      is signed to insure correctness. This is particularly true of metes and bounds descriptions.
    3. Conveyance Issues. Most conveyances are by the transfer of a fee simple interest in a general warranty deed. There are however, a number of other ways real property can be transferred (e.g. special warranty deed, quitclaim deed, leasehold interests, and life estates).
    4. Earnest Money. Earnest money represents a good faith deposit by the Buyer which is refundable if the contract terms are not met by the Seller and usually, forfeited as liquidated damages on default by the buyer or applied in partial payment of the purchase price if the sale closes. There are a number of considerations in drafting the earnest money provisions, including: (i) the amount to be required; (ii) the party to serve as the depository; (iii) whether interest will accrue on the deposit and, if so, who receives the interest earned; and (iv) the form of the deposit.
    5. Prorations. Although there are certain customs dealing with prorated items, those customs vary in different parts of the country and can be significantly altered by the parties' agreement.
    6. Fixtures and Attachments. In Arkansas, the test for determining whether an article remains personal property or becomes a fixture is: (1) whether the items are annexed to the realty; (2) whether the items are appropriate and adapted to the use or purpose of that part of the realty to which the items are connected; and (3) whether the party making the annexation intended to make it permanent. Of these factors, the third is the most important. Pledger v. Halvorson, 324 Ark. 302, 921 S.W.2d 576 (1996).
    7. Risk of Loss. As a general rule, the Seller will bear the risk of casualty loss to the property prior to closing. The risk of loss shifts to the Buyer at closing. In certain cases, however, the Seller may ask the Buyer to bear this risk. The attorney should make sure the person bearing the risk of loss has insurance in force to cover the property prior to, on, and after closing.
    8. Warranties

       

      1. Implied Warranties.
      2. Contractual Warranties. A number of commercial real estate Purchase Agreements include express representations and warranties about the property. Presumably, if a breach of a representation or warranty occurs before closing, the buyer's remedies are either: (i) to refuse to close the purchase, obtain a refund of any earnest money deposit and sue for damages resulting from breach; (ii) to demand specific performance, tender the purchase price and require the seller to make the representations and warranties true; or (iii) to renegotiate the purchase price based on the reduced value of the misrepresented property. Assuming the Seller permits the representations and warranties to survive closing, the Buyer can (at least theoretically) rescind the transaction based on the misrepresentations or seek damages incurred by failure of the warranties.
      3. "AS-IS" and "WITH ALL FAULTS" clauses. Under this approach, the seller makes no warranties as to the Property’s condition and, in extreme cases, makes no warranties of title. The Buyer is left wholly to the buyer's own devices to determine the existence, ownership and condition of the property being purchased. Arkansas has upheld the use of these clauses and determined that the use of this language can, under certain circumstances, exclude all warranties including the implied warranties. O'Mara v. Dykema, 328 Ark. 310, 942 S.W.2d 854 (1997).
    9. Default and Remedies. Many Purchase Agreements do not adequately address default and remedies. If possible, the contract should contain provisions dealing with default and seek to define remedies. It is best to ask for formal written notice of default with some time to cure in lieu of telephoned demands for immediate action. As a general rule, Buyer's remedies for a Seller's default are: (i) termination of the Buyer's obligation to purchase; (ii) return of any earnest money deposit; (iii) recovery of damages measured by the lost bargain, out-of-pocket expenses or liquidated damages; (iv) specific performance; (v) rescission of the contract or completed sale; or (vi) any one or more of the above. Assuming the application of the doctrine of mutuality of remedies, the Seller would have the same remedies in the event of the Buyer's default. To avoid the difficulties inherent in litigation, most attorneys use the earnest money deposit as a device to assure performance by the Buyer or provide a "walk away" option to the Seller by incorporating liquidated damage provisions in the sale agreement.
    10. Seller Disclosures. Many times in the context of a commercial transaction, Sellers provide disclosure about the property in schedules that are attached to the Agreement.
    11. Assignment Issues. As a general rule, the Purchase Agreement may be assigned by the Seller unless expressly prohibited. If the Seller intends to finance any or all of the transaction, the identity of the Buyer and his financial strength will form an important part of the consideration for the sale. Likewise, it is not unusual for the Buyer to act in a nominee capacity or transfer his rights to a fictitious entity. In either event, the assignability of the contract rights of the Buyer (and in some cases, the Seller) should be a matter discussed by the parties and dealt with by the Purchase Agreement.
    12. Rights of First Refusal. Rights of refusal are specialized clauses and sometimes created as separate agreements and are used when there is a business reason to restrict resale or when the parties are unable or unwilling to reach agreement on the business terms of the sale. Ordinarily no purchase price is specified and the parties rely on a determination of market value at the time the option is exercised. The market value can be established by the offer of a third party, the establishment of an asking price by the Seller, appraisal or arbitrated agreement. The timing of the exercise is important because the right of refusal has a chilling effect on sale to a third party. Therefore, a "time is of the essence" clause should probably be inserted in Rights of First Refusa