Clients want to add a simple clause to a contract? It isn’t always simple. When parties add short clauses to their contracts, there can be pitfalls if the clause lacks detail.
ORLANDO, Fla. – When I was in elementary school, I learned about the 5 W’s. It’s a tool to help ensure a message is clear. Does the message answer any questions a reader might have about Who, What, When, Where, and Why? If not, the writer should add detail.
When it comes to legal clauses in a contract, if there’s no clear answer to the W’s, it will be very hard to predict how a court would interpret a clause. Also, if there aren’t enough details spelled out, both sides of a contract could have wildly different interpretations about what the clause does (or doesn’t) do.
Parties to real estate contracts have three main choices when it comes to contracts or clauses within a contract:
- Option one: hire a lawyer to draft the legal language.
- Option two: use a form contract and fill in the blanks.
- Option three: write their own language.
Based on the number of times members access Florida Realtors®’ blank addendum (it’s our No. 1 most accessed form), many buyers and sellers go with option three, often writing short, simple clauses to change aspects of the underlying form contract.
Some additional clauses are indeed quite simple. If the parties want to extend a deadline, for example, that should be an easy enough clause for a buyer or seller to prepare. We hear about extensions frequently, but they’re rarely at the center of a dispute. Simple clauses can also work fine for low-cost, routine issues where the parties just want to see something in writing.
However, we also hear about parties writing simple clauses – often just a sentence or two – to address complex, contentious, or costly issues. If the parties disagree about what these clauses mean, it can be very challenging to predict how a court might interpret them.
Here’s one example of a brief clause we heard about recently. During our recent hot seller’s market, some loans would get denied when a lender’s appraisal came in lower than the purchase price. To address this possibility, some buyers and sellers negotiated a clause that would obligate a buyer to bring cash to cover the difference. Let’s see how one of these simple clauses holds up when we ask if it answers the 5 W’s.
The clause: “Buyer agrees to pay $10,000 over appraised value not to exceed the purchase price.”
- Whose appraisal are we talking about? The lender? What if the buyer obtains their own appraisal? What about an appraisal from former buyer whose deal fell through? This clause doesn’t identify a “Who,” so there’s no clear answer.
- What if the appraisal amount + $10,000 is well under the purchase price? Is the seller obligated to reduce the negotiated purchase price since the simple clause says nothing about purchase price? What if the lender denies the loan – is the buyer still entitled to back out penalty-free, since the clause says nothing about the financing contingency? What if there are two appraisals – which one controls? The one-sentence clause doesn’t specifically answer any of these questions.
- Where must the appraisal be done? In the office of a licensed Florida appraiser? Or can the appraisal come from some other source?
If we contrast this simple clause with the Florida Realtors/Florida Bar Rider F Appraisal Contingency (see below for the full clause), you can see how additional detail makes the 5 W’s much easier to field.
- Who gets to order an appraisal under Rider F? The buyer.
- What price must the appraisal hit? The amount written in the blank (or purchase price, if left blank).
- What happens if the appraisal is low? The buyer has the option to cancel.
- When can the buyer cancel? During a three-day window after the date the parties put in the blank.
- Where must the appraisal come from? The office of a licensed Florida appraiser.
- Why is this clause here? To give buyer an option to cancel if an appraisal comes in lower than a specific amount.
F. APPRAISAL CONTINGENCY
This Contract is contingent upon Buyer obtaining, at Buyer’s expense, a written appraisal from a licensed Florida appraiser, on or before __________________________ (if left blank, then at least ten (10) days prior to Closing), stating that the appraised value of the Property is at least $_______________ (if left blank, the Purchase Price). If the appraisal states that the appraised value of the Property is less than the above value, Buyer shall deliver a copy of such appraisal to Seller within 3 days after the above date and deliver written notice to Seller, either: a) terminating this Contract in which event the Deposit paid shall be refunded to Buyer, thereby releasing Buyer and Seller from all further obligations under this Contract; or b) waiving and removing this contingency and continuing with this Contract without regard to the appraised value of the Property, except as provided in Paragraph 8(b) if it is checked.
If Buyer fails to timely obtain an appraisal, or having timely obtained such appraisal fails to timely deliver notice of Buyer’s exercise of the right to terminate granted above, this contingency shall be waived and removed, and Buyer shall continue with this Contract, without waiving any of Buyer’s rights in Paragraph 8(b) if it is checked.
Joel Maxson is Associate General Counsel for Florida Realtors
Note: Information deemed accurate on date of publication
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