Contract Drafting and Negotiation. Karl B. Holtzschue, Esq. New York, New York

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1 Contract Drafting and Negotiation by Karl B. Holtzschue, Esq. New York, New York 25

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3 3. Contract Drafting and Negotiation by Karl B. Holtzschue, New York, NY A. Contract of sale forms Downstate (NYC, LI and Westchester) (NLW): Residential Contract of Sale - RPLS of NYSBA, NYSLTA, ABCNY and NYCLA (see online materials). See Holtzschue 2000 NYSBA Residential Contract of Sale: Mortgage Commitment Contingency Clause and Other Changes, 28 N.Y. Real Prop. L.J. 107 (Fall 2000) (online materials). Rockland County uses a form with similar provisions. Capital Region (CR): Standard Form Contract for Purchase and Sale of Real Estate - Capital Region Multiple Listing Service, Inc. (see online materials). Syracuse (S): Contract to Purchase - Central New York Information Service, Inc. Rochester (R): Purchase and Sale Contract for Residential Property - Greater Rochester Association of Realtors, Inc. and Monroe County Bar Association (see online materials). Buffalo (B): Residential Contract and Additional Terms and Conditions (ATC) - Buffalo Niagara Association of Realtors and Bar Association of Erie County (online materials). Some other approved forms are used in other areas NYSBA s Residential Real Estate Forms on HotDocs has forms and related documents that can be prepared electronically Nassau Co. Ethics Opinion states that an attorney may not use an altered bar association form without notice to the opposing attorney For electronically prepared contracts, add a rider that any deviation from the bar associationapproved form shall be deemed replaced by the approved form B. Preparation of contract Downstate the seller s attorney usually prepares the contract, and the purchaser s attorney negotiates changes Upstate the brokers usually fill in the blanks in a bar association-approved contact (doing more may constitute the unauthorized practice of law), and the attorneys for one or both parties have a short time to review and approve the contract or negotiate changes C. Contract issues (SA: seller s attorney; PA: purchaser s attorney): 1. Date of contract: note that most contracts contain references to the date of the contract in provisions such as as is clause, seller s representations, and permitted exceptions 2. Parties SA should insert the names on the deed to the sellers PA should confirm names to be used on deed (e.g. H&W as husband and wife ) 3. Real property (premises) description SA insert street address, tax map designation and approximate lot size, if required SA copy and attach Schedule A from seller s title insurance policy SA add easements, etc from prior deed 27

4 4. Personal property SA and PA carefully review list with clients SA and PA add or delete/exclude items as necessary to avoid misunderstandings 5. Price and down payment (deposit) SA insert purchase price and down payment (deposit) Any seller s concession to the price must be stated in the contract (CR 8B), (S 2) (R 3a) (B 4A) Downstate down payment is usually 10% in ordinary sales; upstate usually less The Capital Region contract allows for an additional deposit (CR 5B) PA advise purchaser of risk of forfeiture if purchaser defaults 6. Take over of seller s existing mortgage All contracts have provisions if purchaser takes over seller s existing mortgage (NLW 4) (CR addendum) (S 2) (R 3c addendum) (B 10C rider) 7. Purchase money mortgage from seller all contracts have provisions for purchase money mortgage from seller (NLW 5) (A addendum) (S 2) (R 3d addendum) (B 10D rider) 8. Escrow of down payment (deposit) Downstate contract provides for seller s attorney to be the escrow agent (NLW 6) Some upstate contracts provide for the listing broker to be the escrow agent (CR 16) (R 15). If there are no brokers, the seller s attorney is the escrow agent. SA and PA ask clients if account is to be interest-bearing If the account is not interest-bearing, interest goes to the IOLA fund If there is a dispute, release of the down payment requires consent of both parties The Buffalo Contract has several mechanisms to force release of the deposit (B ATC10, ATC11(D)) 9. Acceptable funds All contracts specify how closing payments are to be made (NLW 7) (CR 5) (S 3) (R 3) (B 7, ATC9) 10. Mortgage/Financing commitment contingency All contracts condition the sale on issuance of a mortgage commitment (not on funding of the mortgage loan at the closing) (NLW 8) (CR 8) (S 2) (R 4a) (B 10B) The downstate and Albany contracts expressly allow application to a mortgage broker (NLW 8c) (CR 6A) All contracts allow the purchaser to cancel if the commitment is not issued by a stated date (the attorneys must calendar this date) Some courts have allowed purchasers to cancel even when the contract did not. Holtzschue, Mortgage Contingency Clauses, 26 N.Y. Real Prop L.J. 53 (Spring 1998) (see online materials); Holtzschue, Responses of the Legislature and the Bar Associations to Court Decisions on Sales of Residences, 33 N.Y. Real Prop. L.J. 78 (Spring 2005) (discussing 28

5 amendment of the contract language by the bar associations in reaction to the decisions, as well as the reluctance of judges to require forfeiture of the purchaser s downpayment, the Maxton effect ) (see online materials) The downstate, Buffalo and Syracuse contracts also allow the seller to cancel The Syracuse contract requires the purchaser to furnish a credit report to the seller and allows the seller to cancel if it is not satisfied (S 2) The Syracuse contract has a Home Equity Theft Prevention Act disclosure (S 29) 11. Title and exceptions to title Downstate contract requires the seller to deliver insurable and fee simple title (NLW 13 and 14) Upstate most contracts require the seller to deliver marketable title ( S 7) (R 8) (B ATC5(A) marketable or ATC5(B) insurable) The downstate contract provides that title is subject to listed permitted exceptions (NLW 9e) The downstate contract requires the purchaser to take title subject to any facts shown on a named survey (NLW 9e) (PA should insist on seeing and carefully reviewing it; see the survey reading in the title report) Most upstate contracts call for the seller to deliver a title abstract, a tax search and an up-todate survey (S 6) (R 7B) (B ATC2) The Capital Region contract calls for a title abstract or a fee title insurance policy at the expense of the purchaser or seller, as indicated (CR 9) The downstate and Albany contracts require the purchaser to accept the property subject to all covenants, conditions, restriction and easements of record so long as the property is not in violation and they do not prevent the intended use (NLW 9a) (CR 10) The Syracuse contract requires that Indian Land Claims may not be raised as an objection to title (S 7) 12. Compliance with law Many contracts provide that the sale is subject to zoning (and similar) laws, provided they are not violated by existing building and use (NLW 9a) (CR 10) (B 12) The downstate contract states that the seller is responsible for governmental violations issued as of the date of the contract (NLW 10); the Buffalo contract extends that to the date of the closing (B 12) Some contracts require delivery of a certificate of occupancy (NLW 16b) (R 11) (B 12B for other than a one or two family dwelling) 13. Property condition ( as is ) The downstate contract provides that the purchaser is relying solely on its own inspection of the premises (NLW 12), so the purchaser must have the property inspected. PA should advise the purchaser to be present at the inspection. Cases place a heavy duty on the purchaser to have an inspection, make inquiries and check records. Many contracts expressly provide for the purchaser to take the premises as is at the time of the contract, subject to reasonable use, wear, tear, and natural deterioration to the closing (NLW 12) (CR 20) (R 13). The Buffalo Contract makes the date that of the Property Inspection or, if none, the date of the Contract (B 5). 29

6 The downstate and Buffalo contracts also provide that the purchaser is not relying on prior oral or written representations (NLW 12) (B 5B). If the purchaser wants to rely on such, they must be added to the contract. If they are to survive the closing, the contract must so state. Some upstate contracts provide for the seller to deliver to the purchaser a Property Condition Disclosure Statement or a $500 credit (S 20) (R 21) (B 5B) 14. Inspection and other contingencies Many contracts give the purchaser the right to inspect the condition of the premises (CR 14) (R addendum) (B 9A), and to inspect again before the closing (NLW 12) (S 12) (B ATC7) PA should encourage the purchaser to have a professional inspection before the contract is signed. If not, the contract should be conditioned on obtaining an inspection. S 21 (satisfactory to P); R 4e, Property Inspection Addendum (satisfactory to P); B 9 (satisfactory to P), B PINA2 (if unsatisfactory, S to pay $ to cure or cancel). As every inspection finds defects, the test of satisfactory to P in effect gives P an option to renegotiate the price, unless the seller is required to spend up to a stated amount to cure any defects; if S refuses to spend more, S may cancel. Some contracts, such as the Capital Region contract, substitute objective standards for judging the inspection results as to structure, wood destroying organisms, septic system, well water flow and/or quality, and radon (CR 21) (S 22 radon, 23 well/septic) Most upstate contracts/riders are made contingent on the purchaser entering into a contract to sell the purchaser s existing property (CR addendum) (S 24 future contract; 25 existing contract) (R 4b, addendum Bump Period ) (B 7B and Sale Contingency Rider, 7C: Closing Contingency) 15. Deed The downstate contract calls for the type of deed to be inserted (usually a bargain and sale deed with covenant against grantor s acts) (NLW 14) All upstate contracts often call for a full warranty deed (CR 11) (S 9) (R 7A) (B ATC6 for individuals, bargain and sale deed for those who are not natural persons, and fiduciary deeds for fiduciaries) 16. Closing date and place An estimated date and time of closing should be inserted (NLW 15) Time is not of the essence unless that is so stated in the contract Either party may make time of the essence by sending a proper notice giving the other party a reasonable time to perform (B 14B) Downstate and in the Capital Region and Syracuse the closing is usually as the office of SA or P s lender (NLW 15) (CR 15) (S 8) In western New York, the closing may be specified as at the office of SA or the county clerk (R 5) (B 14A county clerk) (In Monroe, Wayne and Livingston Counties, the closing is usually held at the office of the attorney that represents P s lender, or PA s office for a cash deal) 17. Seller s representations/disclosures/conditions to closing Many contracts contain some representations or disclosures by the seller. (NLW 11 has 5 representations) (S 5 has 6). The Buffalo contract has 23 disclosures (B 6). 30

7 Downstate contract also has 7 conditions to closing (NLW 16) Some contracts provide that they do not survive the closing (NLW 28a)(S 16d). Specified provisions survive closing in the Buffalo Contract (B ATC14(G)) The downstate and Rochester contracts require delivery of systems and equipment in working order at the closing (NLW 16e) (R 6a) 18. Smoke and carbon monoxide (c.o.) detectors: some contracts or riders provide for the seller to deliver smoke and c.o. detectors required by law (NLW 16f) (S 9) 19. Transfer taxes: all contracts require the seller to pay all transfer taxes except for the 1% Mansion Tax (NLW 17) (CR 12) (S 11) (R 10) (B ATC3) 20. FIRPTA: some contracts require delivery of a non-foreign status affidavit (NLW 16c) (S 2, withholding) (B 6W) 21. Apportionments (adjustments) Taxes, water charges, sewer charges, fuel, assessments and other on-going expenses are to be apportioned between the parties at the closing (NLW 18) (CR 13) (S 10) (R 10) (B 15) In the downstate contract, the duty to correct errors in apportionments survives the closing In Buffalo, errors greater than $100 survive (B 15(E)). 22. Lead paint: For homes built before 1978, federal law requires giving the purchaser an informational pamphlet and a lead-based paint disclosure (allowing the purchaser 10 days to inspect and cancel, which may be waived or shortened) (NLW 28i) (CR addendum) (S 22) (R addendum) (B 8) 23. Broker The broker(s) who brought about the sale are usually named in the contract, with the seller obligated to pay the commission(s) (NLW 27) (CR 18A) (S 4) (R 16) (B 19) The Capital Region contract provides for a cooperating broker (CR 18B) The Buffalo contract lists the listing and selling brokers (B 19) 24. Statutory disclosures R.P.L 242 requires the seller to provide written notice to a purchaser of (1) a lack of electric service and (2) any electric or gas utility surcharges for line extensions prior to accepting a purchaser offer. (S 19) (B 6C) R.P.L. 333-c requires delivery of notice of farming activity in an agricultural district (CR addendum) (S 17) (B ADR1) 25. Federal Housing Administration (FHA) and Veterans Administration (VA) clauses: For an FHA or VA mortgage deal, the contract may provide that the purchaser is not obligated unless given an official statement setting forth an appraised value of not less than a specified amount (CR addendum) (S 16e repair costs allocated, addendum) (R addendum) (B FHA/VA Option Clause Rider) For an FHA mortgage deal, the purchaser may not legally pay points, charges expressed as a percentage of the loan 31

8 26. Offer The Capital Region and Rochester contracts are styled as an offer by the purchaser that must be accepted by the seller by a stated date (CR 17) (R 17) and Buffalo has that option (B 17). 27. No assignment of contract Many contracts expressly prohibit assignment by the purchaser (NLW 26) (S 14) (R 18) 28. Risk of loss: a few contracts address the issue. G.O.L applies if there is no provision made. But see the Syracuse contract (S 15), Rochester contract (R 12) and Buffalo contract (B 12(D)). 29. Possession at closing; before or after closing Some contracts expressly require the seller to deliver possession at the closing (NLW 16d vacant with keys) (S 12 or within 24 hours) (B 13 and ATC8). Most contracts expressly require deliver of possession in a broom clean condition (NLW 16d) (S 13) (R 6a) (B 5D) SA and PA should discourage giving possession to the purchaser before the closing or by the seller after the closing If the purchaser is to take possession before the closing, a rider must be added to require payment of an amount to cover the seller s carrying costs and provide for insurance, among other things (R 6c) If the seller is to retain possession after the closing, a rider must be added to require payment of an amount to cover the purchaser s carrying costs and provide for insurance, among other things (R 6b) The Rochester contract has provisions for seller to retain possession or the buyer to take early possession, requiring use of a written possession agreement (R 6) 30. Breach of contract and remedies Some contracts expressly provide that the seller may cure title or legal objections (R 9) (B 12D and ATC5). The downstate contract provides that the seller may adjourn the closing for up to 60 days to cure defects (NLW 21) The downstate contract provides that the seller s sole remedy for default by the purchaser is to retain the down payment (but note that release of the down payment from escrow probably requires consent of both parties) (NLW 23) The downstate contract provides that the purchaser has all remedies, but if the seller is unable to transfer title as required, the seller may refund the down payment unless the purchaser elects to take title without reduction of the price (NLW 23) 31. Tenants. The Buffalo contract has provisions relating to tenants (B rider) 32. Subject to Attorney Approval. Most upstate contracts, having been filled in by brokers, are subject to approval by one or both attorneys (CR 19) (S last ) (R 4c) (B ATC1) The Court of Appeals has held that the attorney may disapprove for any or no reason, which will not be subject to review. Moran v. Erk, 11 N.Y.3d 452 (2008). See discussion in Recent Contract Developments 13 (following). D. Contract riders/addenda 32

9 Downstate attorneys draft their own riders to the approved form contract 1. Seller (see handout) 2. Purchaser (see handout) All upstate contracts have approved standard riders/addenda (see handouts) E. Checklists 1. Seller (see online materials) 2. Purchaser (see online materials) F. Note any Recent Contract Developments (see following) G. Note any Recent Financing Contingency Developments (see following) 33