Important Contract Considerations to Protect You and Your Client

 The contract in a real estate transaction can prevent problems or cause disputes.  The Arizona REALTORS® standardized contract forms reduce risk, but the forms must be completed and utilized correctly.  Unfortunately, that is not always the case, and contract disputes result in the majority of the calls to the Arizona REALTORS® Legal Hotline.  Many of these disputes can be avoided by following basic contract law. 

 

Contract Legal Requirements

For any valid contract to exist there must be an (1) offer, (2) acceptance, (3) consideration, and (4) sufficient specificity so that the obligations involved can be ascertained.

 

1.       Offer:  An offer creates a power of acceptance, permitting the offeree - usually the seller - to accept and transform the offer into a contract.  Remember, when an offer (or counteroffer) is not supported by independent consideration (which it generally is not), the offer can be withdrawn at any time prior to acceptance.

 

2.       Acceptance:  If the offer specifies the time and manner for acceptance, like the terms in the Arizona REALTORS® contract forms, those provisions will control.  For example, if the contract must be accepted by a specific date and time, the offer expires thereafter and cannot be accepted.  And any attempt to change the terms of the offer, such as a change in escrow/title company or the close of escrow date, constitutes a counteroffer, which rejects the offer.

 

3.       Consideration:  Although consideration is necessary to a valid contract, consideration is easily demonstrated. Consideration need not be money but may involve a promise for a promise, which is the case in the Arizona REALTORS® contract forms. 

 

4.       Sufficient Specificity:  The contract must be sufficiently specific and contain all the material legal rights and obligations regarding the transaction. For example:

o   The Parties:  The identity of the buyer and seller should be set forth with specificity. If either party is a corporation, limited liability company or partnership, all pertinent information about the entity should be included, such as the entity’s name, address, and state of formation. And the signer’s authority to bind the entity should be confirmed and documented in writing. 

In addition, to prevent a voidable contract, both parties must be adults – 18 years or older.  The parties must also be competent. Competency may be an issue if dealing with an elderly or infirm buyer or seller, or a party with a mental disability or incapacity.  However, to invalidate a contract based on incompetency, the party must have been incompetent at the time of the execution of the contract – not at some time thereafter.

o   The Property:  Identifying the property must be done with specificity. Generally, the property’s street address is legally sufficient to identify the property.  However, if the property is identified by legal description, it is best to simply attach the legal description obtained from the title company as an exhibit and reference the exhibit on the line indicated on the Arizona REALTORS® form, rather than to rewrite the description and risk typographical errors.

o   Contingencies:  A contingency is a clause that requires the completion of a certain act before the parties are obligated to perform their contractual obligations, such as obtaining financing.  Contingency clauses must be drafted precisely because contingencies frequently become the subject of dispute. When trying to write a contingency that has not been standardized in the Arizona REALTORS® Additional Clause Addendum, consult with your broker or manager to make sure that the clause is sufficiently specific, clear, and complete.  Remember, if any handwritten provisions in the contract are inconsistent with the printed, boilerplate provisions on the standardized form, the handwritten provisions will prevail.

Additional Legal Requirements Specific to Real Estate:

Real property contracts must meet certain additional requirements to be valid. 

 

o   Signed Writing:  While some verbal contracts are valid (although difficult to prove), a contract for the sale of real property must be in writing and signed by the party to be charged to be enforceable (Statute of Frauds - A.R.S. section 44-101(6)).  All material modifications and amendments must also be evidenced by a signed writing.

o   Both Spouses Must Sign:  Both husband and wife must sign a real estate contract for the community property to be obligated. Therefore, both husband and wife must sign the contract and any modifications and amendments to the contract as well.

Arizona REALTORS® Standardized Contract Forms

The Arizona REALTORS® maintains transaction forms produced by the Association that have been adopted for use by members statewide. The Arizona REALTORS® currently has 70+ forms that are often revised or supplemented to address new legal issues, market changes, or simply to clarify a provision.  Several forms are currently being revised, including the SPDS and the BINSR. 

 

There are numerous benefits of the Arizona REALTORS® standardized forms, such as:

o   Prompts in the forms to ensure all the contract law basics are covered.

o   Uniformity of practice, which reduces ambiguity and disputes.

o   Regular updates to comply with state and federal law/regulations.

o   Increasing the value of being represented by a REALTOR®.

o   Eliminating the need of the broker to review boilerplate language of each form during the 10-day broker review required by statute.

o   Eliminating the need of salespersons to read each form’s boilerplate provisions when writing or reviewing an offer.

 

It is critical that REALTORS® understand all the terms of the Arizona REALTORS® forms they are using in a transaction and how they are interpreted.  But it is also important to remember to cover all the contract law basics. 

Michelle Lind is Of Counsel to the Arizona REALTORS® and the author of Arizona Real Estate: A Professional’s Guide to Law and Practice.  This article is of a general nature and may not be updated or revised for accuracy as statutory or case law changes following the date of first publication. Further, this article reflects only the opinion of the author, is not intended as definitive legal advice and you should not act upon it without seeking independent legal counsel.