Crash Course in Contracts and Real Estate (Part 2)

Have you heard the saying, “Let me get that in writing?” This comes from contracts, real estate, and any sort of legal issues. Practicing law is not just limited to conducting litigation. The term “practicing law” includes giving out legal advice and counsel rendering a service that requires legal knowledge.

Consideration Stated in Contract

The Purchase Price

The purchase price is one of the most important provisions of any real estate sale contract. In Illinois, an enforceable real estate sale contract must include the purchase price and manner of payment. The use of earnest money, the handling of the balance of the purchase price, and the allocation of the purchase price between real and personal property are aspects of the purchase price that are often addressed in some detail in real estate sale and purchase contracts.

Calculating Purchase Price

In most instances, the purchase price will be stated as a fixed dollar amount; however, in some cases the parties may wish to use a formula to calculate the purchase price, e.g., a purchase price based on dollar amount per square foot of the property.

Clauses

In contracts, you have to ensure that you have these clauses:

• Governing Law
• Indemnification
• Attorneys’ fees
• Liquidated damages



An example of this consists of, “This agreement shall be governed by, construed, and interpreted in accordance with the laws of the state in which the Project is located, without giving effect to principles of conflicts of law or choice of law.

Liquidated Damaged Clause

The buyer and seller may agree to pay only a certain amount of money in damages if one party sues. This caps the amount payable to an opposing party who prevails to the specified “liquidated damages.” This does not wave your right to seek specific performance but limits your money damages. If all formalities are met, the clause is typically enforced. If the amount of the liquidated damages exceeds what is reasonable, the clause is void against public policy as a penalty.

Indemnity Provisions

In real estate contracts, they often require the purchaser to provide an indemnity in favor of the seller as to its due diligence activities as the property (in addition to the benefit of an insurance policy). With an environmental issue may be identified in connection with the purchaser’s environmental investigation. In a landlord situation, potential disputes with a tenant may come to light in and the seller may propose to indemnify the purchaser as a way to address the particular issue and any future liability or loss that the purchaser may have in connection within.

Due Diligence

The term “due diligence” means a reasonable steps taken by a person in order to satisfy a legal requirement. There are different types of looks when it comes to due diligence.

• Free look- The buyer has x number of days to decide if he wants to buy the property. This does not obligate the buyer to anything.

• Standard look- The buyer can only reject purchase at the end of the due diligence period on reasonable grounds.

In Illinois, sellers are typically allowed to cure upon default. Some forms allow cure within reasonable time and release the seller from liability. In other forms, sellers retain liability on various grounds regardless of whether the seller returns the earnest money or not.

Financing

A buyer has a certain amount of time to find a loan to fund the purchase price. It is important for the buyer to put in the agreement that finding financing is a contingency to close. The buyer has an obligation to apply for a loan in good faith.

Closing

When the real estate property has sold, the closing date can be listed as a specific date or a number of days after the deposit. The seller wants to have a time of the essence clause, this way after the closing date the seller can kill the deal and keep the deposit.

When closing the seller needs:

• The Deed
• Bill of sale – Transfers any personal property involved in the deal
• Assignment and assumption of contracts – Seller assigns all contracts that have to do with the property
• Assignment and assumption of leases
• Estoppel Certificate
• Fees and Prorations – Seller pays for the owner’s title insurance policy, splits the escrow fees, pays the transfer taxes, and the brokers commission.

The buyer needs:

• Money (also comes from the lenders)
• Assumption of contracts
• Assumption of leases
• PCOR – Preliminary change of ownership report: This document is sent to the tax assessor’s office describing the property and purchase price and used to determine the value for tax purposes.
• Fees and Pro-rations

Residential Real Property Disclosure Act

This Act holds seller liable for any error or omission of information delivered IF:

• Seller had knowledge of error, inaccuracy or omission.

• There was no reasonable belief that a material defect or other matter not disclosed had been corrected; or



• A seller is not liable if the error was based on information provided by a public agency or other engineer, surveyor, or contractor.

Inspections

Radon- The EPA recommends but does not require that all home buyers test for the presence of radon hazards. Radon is a colorless, odorless gas given off by the earth, which has proven to be carcinogenic. In some areas, it has become customary for the buyer to have the property tested for the presence of excessive amounts of radon. Although by state statute a seller is required to give to a buyer information the seller has on radon testing and an informational brochure on radon, the seller is not required to test for radon or to cure or remediate any radon problems. A state-licensed inspector will perform a radon inspection for a fee.

Wood infestation- These disclosures are required in most Real Estate Disclosure Statement forms. In a few cases the courts have held or recognized that a vendor of real estate owes his purchaser the duty to disclose a termite infestation in the property known to him, but unknown to, and not readily observable upon reasonable inspection by the purchaser.

Lead-based paint- Seller should indicate on disclosure form that he has no knowledge of lead-based paint and/or lead-based paint hazards in the housing. The seller is required to provide the buyer with any information on lead-based paint hazards from risk assessments or inspections in the seller’s possession and notify the buyer of a known lead-based paint hazards. A risk assessment for possible lead-based paint hazards is recommended prior to purchase.

Physical inspection- Physical inspection (can be small or huge, depending on what you are buying). Make sure that the inspectors are licensed, make sure they are insured, and make sure you have a binding contract with them. If there is a problem, get an estimate.

Other disclosures- If, prior to closing, the seller has actual knowledge of an error, inaccuracy, or omission in a prior disclosure document after delivery of that disclosure document to the prospective buyer, the seller must supplement the prior disclosure document with a written supplemental disclosure. A seller who knowingly violates or fails to perform any duty prescribed by any provision of the Act or who discloses any information on the disclosure report that he or she knows to be false is liable for the amount of actual damages and court costs, and the court may also award reasonable the attorney fees incurred by the buyer.



Other inspections

• Environmental inspection
• Phase I – This is a non intrusive inspection. If there may be a problem then go to a phase II.
• Phase II – Targeted review of the problem
• Remediation – This should be supervised by a proper agency
• NFA – Get a no further action necessary letter from the proper agency.

Existing Leases and Tenancy Statements

Attach an estoppel certificate to the lease when you give it to the tenant. If the certificate sets forth all the material terms of the lease, the buyer may rely upon it. Who are the lease parties?

The Certificate should put forth:

• What is the leased space?
• What is the lease term?
• What is the rent?
• What is the security deposit?
• What are the landlord’s duties?

If a tenant refuses to provide an estoppel certificate, then the seller should complete and execute an estoppel certificate for that tenant. The problem is that it does not mean anything down the road other than that you can sue the seller.

Possessions

In addition to the agreement as to the closing date, the seller and the purchaser should agree on the date that possession will be delivered to the purchaser. There may be circumstances in which a seller needs to close quickly but is unable to vacate the premises on or before the closing date and therefore requests a possession date sometime after the closing date. If the parties agree that the seller may retain possession after the closing date, the purchaser may require an indemnification agreement and evidence of insurance from the seller. A purchaser might also require the seller to execute a post-possession agreement akin to a lease.

Interested in Working Together?

If you need any help regarding your business or other legal matters please reach out to us directly here and schedule a call with one of our paralegals on our scheduling page here.