A Contract Series – Part 2: The Arizona REALTORS® Residential Resale Purchase Contract - Property Section

 

This is Part 2 of a series of articles discussing the major provisions in each of the sections of the Arizona REALTORS® Residential Resale Real Estate Purchase Contract (10/22) (“Contract”).  The previous article in this series can be located at Arizona Real Estate – A Professional’s Guide to Law & Practice. (arizonarealestateprofessionalguide.blogspot.com)

The Property Section of the Contract contains the major terms of the agreement and will likely be the focus of most buyers and sellers. 

 PROPERTY SECTION

Buyer & Seller

Both the buyer and the seller are identified at the beginning of the Contract and the agreement to buy and sell is spelled out. If the buyer’s broker does not know the seller’s name when writing the offer, the buyer’s broker can simply check “□ as identified in section 9c,” which is the acceptance section.

 ·         If the buyer(s) is married, both spouses must sign the Contract for the community property to be obligated. 

 ·         If one spouse is not available to sign, either may authorize the signature of the other by executing a Power of Attorney.  Alternately, you may insert the clause from the Additional Clause Addendum that the signing buyer has five days to obtain the signature of the absent buyer spouse or deliver a disclaimer deed that eliminates the need for the signature of the absent spouse.  

 ·         If either party is a legal entity (corporation, limited liability company or trust) all pertinent information should be included, including the authority of the individual signing on behalf of the entity. 

Premises

The description of the property to be conveyed is defined as the “Premises.”  The Premises can be identified by address or legal description, as long as it is identified sufficiently to be ascertained. 

 ·      If you are describing the Premises by legal description, consider attaching a copy of the legal description to the Contract as an exhibit and referencing the exhibit as “See Exhibit A” on the legal description line to avoid any errors in writing it out by hand.

 ·         The Contract also prompts for the Assessor’s number which can be found on the county assessor’s website if not otherwise available. 

Full Purchase Price and Earnest Money

The full purchase price, earnest money, down payment, and any other payment terms are indicated in this section. The form of earnest money – personal check, wire transfer or other form of payment must be identified.  The byer should also indicate whether funds will be deposited with the Escrow Company or in the Broker’s Trust Account upon acceptance. 

 Regarding the earnest money, be aware that:

 ·      The earnest money will serve as liquidated damages in the event of a breach.

 ·      If there is an unreasonably large amount of earnest money, the court may refuse to enforce the liquidated damages clause and deem it an unenforceable penalty. 

 All Cash Sale

If the sale is an all-cash sale, attach documentation such as a letter of credit or a source of funds from a financial institution showing that the buyer has the funds available to close escrow.

Close of Escrow

The Close of Escrow (COE) is defined as when the deed is recorded at the appropriate county recorder’s office. In the event that either the escrow company or the recorder’s office is closed on the COE Date, COE will occur on the next day that both are open for business.

 ·         This provision applies to a cure notice as well.  For example, in a situation where the COE Date is Wednesday, and the buyer fails to deliver funds on Wednesday and the seller issues a cure notice on Thursday. The cure period (three days after delivery of the cure notice) ends on Sunday. The contract has been interpreted to allow for the extra day under these limited circumstances due to lines 24-25, which state that if the escrow company or recorder’s office is closed on the COE Date that COE shall occur on the next day that both are open.   

The buyer and seller agree to comply with all terms and conditions, execute and deliver to the escrow company all closing documents, and take all other necessary actions in sufficient time to allow COE to occur on the COE Date.

The buyer is obligated to deliver to the escrow company a cashier’s check, wired funds or other immediately available funds to pay any down payment, additional deposits, or buyer’s closing costs, and to instruct the lender to deliver immediately available funds to the escrow company, in a sufficient amount and in sufficient time to allow COE to occur on the COE Date. If the Buyer fails to do so, if not cured after a cure notice is delivered, the buyer is in material breach and the buyer’s earnest money is subject to forfeiture. 

 ·         Educate the buyer about wire fraud with the Wire Fraud Advisory  and Wire Transfer Fraud Flyer.

 ·         The failure to close escrow on the COE date has been determined by several court cases to be a material breach due in part to the “time is of the essence clause” in the Contract.  However, the Contract requires the non-breaching party to issue a notice and opportunity for the potential breaching party to cure the potential breach before declaring a breach. 

 Possession

The seller agrees to deliver possession, occupancy, existing keys and/or means to operate all locks, mailbox, security system/alarms, and all common area facilities to the buyer at COE or as otherwise indicated.

 ·         Prepare the seller to vacate the property and leave all keys by the time that the deed is recorded at COE. 

 ·         Avoid pre-possession or post-possession agreements if at all possible

The advisory required by the Arizona Administrative Code, also known as the ADRE Commissioner’s Rules, regarding the risks of pre-possession or post-possession agreements is included in the Contract.  The parties are advised to seek independent counsel from insurance, legal, tax, and accounting professionals regarding those risks.  See, Arizona Real Estate – A Professional’s Guide to Law & Practice.: The Risky Facts of Real Estate Life – Pre and Post Possession Agreements (arizonarealestateprofessionalguide.blogspot.com)

 Addenda Incorporated

The listed addenda include:

• Additional Clause
• Buyer Contingency
• Domestic Water Well
• HOA
• Lead-based Paint Disclosure
• Loan Assumption
• On-site Wastewater Treatment Facility
• Seller Financing
• Short Sale, and
• Solar Addendum

Each of these addenda should be carefully reviewed prior to use.

 ·         These Addenda can be critical depending upon the transaction.  Make sure you identify and include all Addenda applicable to the transaction. 

 ·         You can find language on a variety of other issues that you may want to address in the Contract in the Additional Clause Addendum, such as:

        o   Back-up Contract -- Contingent upon Cancellation of Prior Contract

o   Signature of Absent Buyer Spouse or Co-buyer

o   Corporate Relocation Approval

o   Nonrefundable Earnest Money

o   Waiver of Appraisal

o   Appraisal Shortfall

o   All Cash Sale Appraisal Contingency

o   Survey

o   Tax-Deferred Exchange

o   Water

Fixtures and Personal Property

The fixtures and personal property to be included in the sale are listed in this section.

 ·      Urge the seller to review this list of Fixtures and Personal Property before receiving an offer and advise the seller to let you know if they do not want an item(s) included in the sale.  If the seller receives an offer including an item that the seller does not want to transfer, a counteroffer excluding that item will be necessary. 

Additional personal property, such as the refrigerator, washer and dryer, and above-ground spa/hot tub, which are commonly included in the sale, are to be included if checked.

 ·     A line is provided to describe or include the model number of the appliance.  Describing the appliance and taking photos can resolve disputes, for example if the buyer alleges that the seller replaced the appliance with a different model prior to COE or the seller moves a refrigerator from the garage into the kitchen because the Contract stated: “refrigerator as seen on Contract date.” 

The refrigerator, washer, dryer, and any other specified additional existing personal property included are not considered part of the premises and are transferred with no monetary value, free and clear of all liens or encumbrances.

The seller warrants that all additional personal property included in the sale will be in substantially the same condition as on the date of Contract acceptance.

 ·         The seller can document the condition of the personal property in the Contract, on the Seller’s Property Disclosure Statement (SPDS) or in some other contemporaneous writing. For example, if the refrigerator is included in the sale and the ice maker does not work, the seller can note the nonworking ice maker in the “Other Conditions and Factors” section of the SPDS.

Leased items are not included in the sale and are to be disclosed within three days after Contract acceptance.  The Buyer must provide notice of any leased items disapproved within the Inspection Period or five days after receipt of the seller’s notice, whichever is later. 

 Conclusion

The Property Section contains some of the most critical terms in the Contract to the buyer and seller.  Ensure that both you and your client have reviewed and discussed this section thoroughly before making or accepting an offer. 

 

Next Article – Financing Section

K. Michelle Lind, Esq. is an attorney who currently serves Of Counsel to the Arizona REALTORS®.  She is also the author of the book - Arizona Real Estate: A Professional's Guide to Law and Practice (3rd Ed.)  

For more real estate related articles, visit Michelle’s Blog at Arizona Real Estate – A Professional’s Guide to Law & Practice. (arizonarealestateprofessionalguide.blogspot.com)

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.  3/10/23

A Contract Series – Part 1: The Arizona REALTORS® Residential Resale Purchase Contract - Buyer Attachment

 

This is Part 1 of a series of articles discussing the major provisions in each section of the Arizona REALTORS® Residential Resale Real Estate Purchase Contract (10/22) (“Contract”). The articles are intended to give practical guidance on advising your client, writing an offer, evaluating an offer, and navigating contingencies.  It is vital for everyone involved in a residential transaction to understand the terms of the Contract, how those terms are generally interpreted, and be aware of potential issues.

This series of articles will cover the Contract Property Section; Financing; Title & Escrow; Disclosure; Warranties; Due Diligence; Remedies; Additional Terms and Conditions; and Seller Acceptance.  The articles will also address other forms related to the Contract such as the Pre-Qualification form, Loan Status Update, Seller’s Property Disclosure Statement, and the Additional Clause Addendum.

As an initial comment, educate your clients about the Contract, help them anticipate issues, and manage their expectations, which will help you manage your risk.  Provide your clients, both buyers and sellers, with a copy of the Contract[1] before an offer is written or submitted, which will allow your clients the opportunity to become familiar with the form and ask any questions before their focus becomes their dream home or the terms of an offer.

 BUYER ATTACHMENT

The Buyer Attachment is an important risk management tool – don’t overlook utilizing it.  The buyer acknowledges the receipt of the Attachment just above the buyer’s signature in Section 8. 

 

Client education and managing expectations is critical for reducing risk and a smoother transaction.  When you provide the buyer with a copy of the Contract, review the Buyer Attachment with them and discuss the Attachment Check list.  In doing so, you will prompt discussion and can address any questions or concerns. 

 Buyer Attachment Checklist:  During the review of the Buyer Attachment Checklist, consider discussing the following items. 

 1.      Encourage the buyer to read the entire contract before they sign it and to ask questions if they need help understanding any of the terms. 

 2.      Give the buyer a blank copy of the Seller’s Property Disclosure Statement (“SPDS”) form before they submit an offer. Advise them that they can and should utilize the SPDS as a checklist in conducting desired inspections and investigations. Once they receive the completed SPDS from the seller explain that they should review it carefully, investigate any blank spaces, unclear answers, or other important information.  Additionally, keep in mind that a buyer should never waive a SPDS without first seeing the form. 

 3.      Prepare the buyer for the inspection period and make sure that they understand that all inspections must be completed within 10 days, or the time otherwise agreed upon.  Assist them in locating qualified inspectors and discuss how they can verify square footage and sewer/septic.

 4.      Although the buyer will not be able to obtain an insurance quote until they have identified a property, suggest that they contact their insurance agent about homeowners’ insurance early in the process.  Flood insurance, if necessary, can be very costly.

 5.      If the buyers have not started the loan process, encourage them to do so immediately and start gathering all necessary loan information, such as W-2s, pay stubs, tax returns, etc.  Also, advise the buyer to make sure their down payment and closing cost funds are liquid and available. 

6.      Explain the importance of reviewing the title commitment within five days after receipt, especially Schedule B, which lists exceptions from coverage and the Requirements to close escrow.  Encourage them to ask questions. 

 7.      Explain the importance of reviewing any CC&Rs or homeowner’s association governing documents within five days after receipt.  CC&Rs generally empower a homeowner’s association to control certain aspects of home’s use. The CC&Rs may be very strict, especially those addressing landscaping, RV parking, and play equipment.

 8.      Make sure that the buyer will be available to conduct their pre-closing walkthrough. A prudent buyer should conduct their pre-closing walkthrough at least three days prior to the scheduled date for close of escrow and utilize the  Buyer Pre-Closing Walkthrough form.

 Buyer Advisory:  The Buyer Attachment also encourages the Buyer to review the Buyer Advisory, (which is also available in Spanish) consult with other advisors, and verify anything that they deem important.  Many of the more common issues that a buyer may decide to investigate or verify are summarized in the Buyer Advisory. 

Real Estate Agent’s Duty to Assist the Buyer in Verifying Information:  The Arizona Department of Real Estate (ADRE) Commissioner’s Rule A.A.C R4-28-1101(I) requires that a real estate agent take reasonable steps to assist a client in verifying the accuracy of information relevant to the transaction.  The related ADRE Substantive Policy Statement (SPS) SPS 2005.13 clarifies the Commissioner’s Rule and states that an agent is expected to take reasonable steps to assist their client in verifying information when a reasonably prudent real estate professional has reason to question the accuracy of the information being provided, or where the client has questioned the accuracy of the information.   

 Wire Transfer Fraud Warning:  Finally, the Buyer Attachment warns the buyer about wire transfer fraud and advises them to always confirm wiring instructions independently prior to wiring any money.  And advise the buyer that if they receive a request for contact information during the transaction to make sure that the request is from the escrow agent, not a third party attempting to perpetrate wire fraud. Consider providing the buyers with the Wire Transfer Fraud Advisory as well.  

 Conclusion:  The Buyer Attachment is not a part of the Contract between the parties, it is an advisory designed to alert the buyer to some of the major provisions in the Contract. The Buyer Attachment is an excellent buyer education and risk management tool.  Its proper use will benefit everyone in the transaction.

 Next Article – Property Section

K. Michelle Lind, Esq. is an attorney who currently serves Of Counsel to the Arizona REALTORS®.  She is also the author of the book - Arizona Real Estate: A Professional's Guide to Law and Practice (3rd Ed.) . 

For more real estate related articles, visit Michelle’s Blog at Arizona Real Estate – A Professional’s Guide to Law & Practice. (arizonarealestateprofessionalguide.blogspot.com)

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.  2/24/23

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[1] The Arizona REALTORS® offers Spanish translations of the most often used residential transaction forms.  These translations are not to be signed as transaction documents but used as companion translations to assist Spanish-speaking clients. 

Real Estate Salespersons - Independent Contractors or Employees? The Answer is Not as Simple as You Might Think.

 

Are you as a real estate salesperson an independent contractor or an employee?  Or, perhaps, a little of both? 

 Independent Contractors:  An independent contractor is a person who contracts with another to do something but is not controlled by the other or subject to the other’s right to control with respect to the performance of the undertaking. An independent contractor is responsible only for the goal to be achieved, not how the goal is accomplished.

 Employees:  An employee must comply with another’s instructions about when, where, and how to work.  The Arizona Supreme Court has held that the agreement between two people does not determine whether a person is an independent contractor or employee, rather the nature of the relationship is determined based upon the facts and circumstances.  The courts use a variety of factors in determining whether an employer/employee or independent contractor relationship exists, such as the extent of control exercised by the broker over the details of the salesperson’s work and the degree of supervision.

 The Independent Contractor Agreement

Most real estate salespersons enter into independent contractor agreements with their employing broker. An independent contractor agreement (commonly known as an “ICA”) may address:

 

• Obligations of the salesperson to:
• Remain licensed
• Maintain REALTOR^® membership
• Abide by all laws and rules
• Abide by broker’s policies and procedures
• Pay any amounts due to the broker as set forth
• Work diligently

• Obligations of the broker to:
• Remain licensed
• Compensate the salesperson in the manner set forth
• Provide office space

 

• Other important terms, such as:
• Independent contractor status
• E&O insurance
• Allocation of expenses
• Teams
• Payment of commissions on pending transactions upon departure of the salesperson
• The files and documents that the salesperson may take upon departure
• Dispute resolution between broker and salesperson as well as between two salespersons within the brokerage
• Liability and indemnification

 However, an independent contractor agreement stating that a real estate salesperson is an independent contractor does not necessarily determine the relationship in all situations.

 Salespersons are Often Considered “Employees” for Regulatory and Civil Liability Purposes

Despite entering into an independent contractor agreement, salespersons are often considered “employees” for regulatory and civil liability purposes.

Regulatory Liability:  For regulatory purposes, the Arizona Department of Real Estate Rules require the broker to maintain close supervision and control over salespeople. R4‑28‑1103(A).   Further R4‑28‑1103 (D) provides: “An employing broker is responsible for the acts of all associate brokers, salespersons, and other employees acting within the scope of their employment.”  Therefore, an employing broker can be sanctioned by the ADRE for the failure to exercise reasonable supervision and control “over the activities of salespersons . . . under the broker’s employ . . ..”  A.R.S. §32-2153(21). 

Civil Liability for Negligent or Fraudulent Conduct:  As a result of the right to control, the employing broker is held liable for the acts of salespersons in court lawsuits under the doctrine of “respondeat superior” which literally translates to “let the master answer.”  This court doctrine dating back to the 17^th century, provides that an employer can be held liable for damages caused by the employee acting within the scope of employment.  Thus, a broker is generally held liable for damages resulting from the negligent or fraudulent conduct of the broker’s salespeople acting within the scope of their “employment”.

 Scope of Civil Liability - Wrongful Death:  The issue of scope of employment was addressed by the court in the wrongful death case of Santorii v, MartinezRusso, LLC, 240 Ariz. 454, 381 P.3d 248 (App. 2016).  In this case, a real estate salesperson returning from a real estate sales appointment crossed the center line in the car he was driving and struck the Plaintiff’s husband’s vehicle – unfortunately, both men died in the accident. 

 In the resulting lawsuit against the salesperson’s broker, the Court considered whether Arizona's real estate statutes and regulations established as a matter of law that the relationship between the broker and their salesperson was one of employer and employee. If the salesperson was an employee in the course of employment, the broker could be held liable for the alleged wrongful death. 

 In the case, the Court noted that:

·         The salesperson was a licensed professional who had nearly complete discretion in the time, manner, and means in which he traveled to meet clients.

·         The ICA expressly characterized the salesperson as an independent contractor who was “free to devote” his time, energy, effort, and skill as he saw fit.

·         The salesperson “was not required to keep specific hours, attend sales meetings, or meet any sales quotas.

·         Although the broker “provided optional office space, administrative services, sales leads, and training,” the salesperson was charged a monthly fee for these services.

·         The salesperson “chose the territory where he worked, created his own advertisements, prospected for clients, drove his own car, worked from his home office, worked purely for commission, and set up his own appointments.” 

The defendant broker “had a degree of control” over the salesperson but only as it related to real estate transactions, which were not at issue in the wrongful death auto accident case. And although the defendant broker required the salesperson to carry auto insurance, that requirement did not dictate a right to control his driving and the defendant broker did not tell the salesperson “which houses to visit, what routes to take, or when to meet clients.”

 Thus, the Court concluded that “although the statutes and regulations impose on a broker the responsibility to closely supervise a real estate transaction and the documentation of that transaction, they do not establish the requisite control over other aspects of a salesperson's activities (such as driving to and from sales appointments), and thus do not dictate an employer-employee relationship as a matter of law.”  In other words, whether a salesperson is considered an employee or independent contractor for civil liability depends upon the facts of the case. 

 

Salespersons are “Statutory Non-employees” for Tax Purposes

The Internal Revenue Code provides a statutory classification for real estate salespersons as “statutory non-employees” for federal income and employment tax purposes. To qualify for “statutory non-employee” status, the real estate salesperson must:

• Be licensed as a real estate agent.      
• Receive substantially all compensation based on sales or other output, rather than the number of hours worked.
• Have a written contract with the brokerage firm that provides that the salesperson will not be treated as an employee for federal tax purposes. 

I.R.C. §3508

Additionally, real estate brokers are exempt from Arizona withholding tax requirements. Since the federal tax code does not require withholding of income taxes, the Arizona withholding statute does not require withholding either. A.R.S. §43‑401.

The Workers’ Compensation Act exempts real estate salespersons from its provisions when:

·         Substantially all income received for services is directly related to sales rather than the number of hours worked.

·         The services performed by the salesperson are performed pursuant to a written contract between the salesperson and broker.

·         The contract specifically provides that the salesperson is not treated as an employee for federal tax purposes or for the purposes of the Workers’ Compensation chapter.

A.R.S. §23‑910.

 The Employment Security Act exempts real estate salespeople from its provisions if all income is received solely by way of commission. A.R.S. §23‑617(14). 

 Therefore, most real estate salespersons are treated as “statutory non-employees,” i.e., independent contractors, for tax purposes. 

 Conclusion

Because of statutory exemptions, if there is a properly drafted independent contractor agreement, the broker/salesperson relationship is not treated as an employment relationship for the purposes of federal and state tax withholding, unemployment compensation contributions or workers’ compensation insurance. However, for regulatory and civil liability purposes the real estate broker/salesperson relationship may be one of employer/employee depending upon the facts and circumstances.   

 

K. Michelle Lind, Esq. is an attorney who currently serves Of Counsel to the Arizona REALTORS®.  She is the author of the book - Arizona Real Estate: A Professional's Guide to Law and Practice (3rd Ed.) . 

For more real estate related articles, visit Michelle’s Blog at Arizona Real Estate – A Professional’s Guide to Law & Practice. (arizonarealestateprofessionalguide.blogspot.com)

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.  1/24/23