Thoughts on the New
Offer to Purchase and Contract
know many of you have been attending continuing education classes on
the new Offer to Purchase and Contract that will be released on January
1, 2011. I write now to offer some thoughts from the legal
perspective on the new form.
Under the new contract, the buyer conducts all inspections during a due
diligence period, and has the right to terminate the contract for any
reason or no reason during that period. The contract contemplates
that buyer may, but is not required, to pay a due diligence fee.
In my opinion, the parties risk having their contract declared
unenforceable if the buyer does not pay a due diligence fee. Under
a longstanding legal principle, each party to a contract must provide,
or forego, something of value for a contract to be enforceable.
Failure of a buyer to pay a due diligence fee arguably means the buyer
did not provide something of value for the right to conduct due
diligence. Paragraph 1(i) of the new contract atttempts to address
this issue by stating the parties intend to be legally bound even if
the buyer pays no due diligence fee, but under North Carolina law, this
clause is of questionable effectiveness. This is a complex legal
area with many possible arguments and counterarguments. The safest
approach is to include due diligence fees in your contracts.
Another change is the provision that the prevailing party in a lawsuit
over the earnest money shall recover its attorney's fees. The
clause is intended to discourage frivolous disputes over earnest money;
however, this clause will be of limited effect. In North Carolina,
contracting for the payment of attorney's fees for breach of a contract
is not automatically enforceable unless there is an independent legal
rule for awarding attorney's fees. I caution relying on this
clause in suits over earnest money.
One final notable change is that title defects that prevent closing on
time now result in a breach of contract by the seller. Under the
previous form, title defects were a pre-condition to the seller's duty
to close. When you are preparing listings, I recommend you advise
your sellers specifically of this provision so that they can make sure
they have title insurance from their purchase and take any actions they
wish to satisfy themselves about the status of their title.
If you have any questions as you begin using the new form, I suggest
you consult your brokers in charge, local real estate attorneys, and
other available resources. Good luck with the new contract.
not hesitate to contact me to receive more information on this topic or
to suggest topics for future editions of 'A Legal Moment'. You may not
rely on this content as legal advice for any specific situation, but
should instead contact an attorney for specific advice.