November 6th - 2005

Be clear with OREA Standard Clauses

Standard clauses can mean the difference between a smooth real estate transaction and a deal gone wrong.

Standard clauses can mean the difference between a smooth real estate transaction and a deal gone wrong. They are used by members on a daily basis and OREA is frequently called upon to explain or comment on them. Although the thought of curling up with a good standard clause to read may not sound exciting, educating yourself on how to use these vital business tools will help you to avoid plenty of hidden pitfalls.

For example, you’re faxing a waiver for one of your transactions and the form makes reference to the Agreement of Purchase and Sale “dated the……..day of …………….., 20……”. Which date do you insert in the form? The date the seller signed the offer? The date in the Confirmation of Execution? The date the Acknowledgement was signed? The answer? None of the above!

The waiver form makes reference to when the Agreement of Purchase and Sale was dated. In legal circles, this is generally considered to be the date inserted in the line above the buyer’s signature.

Another topic that comes up regularly relates to the time frames referred to in conditions. The offer reads “the buyer shall have 10 days from acceptance of this offer by the seller to remove this condition, failing which….” But what counts as a day? Does it include the day the offer was signed? After all, this offer was signed at 1:00 in the morning, so there is almost a full day ahead. What about Saturdays and Sundays? Does it include Thanksgiving, a legal holiday, or Christmas day?

According to the clause, the 10 days begins with the “acceptance of this offer by the seller.” But this agreement was not even accepted by the seller. There was a counter-offer and it was accepted by the buyer! By now you are probably starting to think you might need a course on forms and clauses.

There is a simple answer to the condition question. Don’t use “the buyer shall have 10 days from acceptance” in your agreements. Many years ago, OREA eliminated this phrase from the standard clauses and replaced it with a specific time and date; “the buyer gives notice to the seller not later than 6:00 p.m. on the 30th day of November, 2005, that this condition is fulfilled….”

But, this brings up another issue: this clause states “that this condition is fulfilled,” therefore, why have you never received a Notice of Fulfillment form for any of your transactions? Maybe the Waiver gets the job done , but in most situations a waiver is not the appropriate form to use.

A carefully worded clause
Another topic that generates a lot of questions is the wording of the standard warranties, and the comment is usually, “Why do we have to have so much legal jargon in the clauses?” A warranty usually ends with the statement: “The parties agree that this representation and warranty shall survive and not merge on completion of the transaction, but apply only to the state of the property on completion of the transaction.”

What on earth does that mean? If the furnace breaks down three months after closing, is the seller still liable? No, not likely, unless it can be proven that it was defective at the time of closing.

Sometimes it is difficult to avoid the legalese. There is a principle under the law of contract that has been around for hundreds of years that states once a contract has been performed, it is terminated. The contract no longer exists and any legal obligations under the contract are therefore at an end. When the buyer includes a warranty in the agreement, the buyer does not want the seller to argue that the carefully worded warranty no longer exists because the contract has been completed. The clause means exactly what it says: the warranty will survive the completion but will only apply to the condition of the property on completion, not for things that happen after completion.

A clause for all reasons?
Although there are many clauses, there really are no “standard” clauses. Often situations are unique and require the clauses and conditions to be modified. For example, you may have a buyer who wants to confirm that they can get their grand piano into the living room at a cost that is not prohibitive. OREA does not have a standard clause for that. When the standard wording of a clause does not fit the situation you may need assistance from your broker or lawyer to help you create one for the situation.

The OREA Standard Forms Committee has provided these suggestions. It is ultimately the responsibility of every member to ensure that the clauses in their agreements are adequate for the situation and, if there is any doubt, legal advice should be sought. The benefit, of course, is that members who take an interest in these topics and learn as much as they can will be better prepared to avoid costly mistakes.

While many of these issues may ultimately have to be resolved by a judge in a court of law, members may want to learn more about the standard forms and clauses and at the same time help to fulfill their CE requirements by taking an OREA College course offered on this topic. The three-hour, three-credit OREA Standard Forms Course, is offered in the classroom and on-line.

For more resources, many questions and answers on clauses are dealt with in the Legal Forum section of the OREA website(www.orea.com) under Topic – Offers, Subtopic – Conditions & Other Clauses. Members can refer to those Q & As as well as the Legal Pamphlet called Conditions – Tips and Traps, in the Legal Pamphlet area of the Web site.

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For more information contact

Ontario Real Estate Association

Jean-Adrien Delicano

Manager, Media Relations

JeanAdrienD@orea.com

416-445-9910 ext. 246

Ontario Real Estate Association
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