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SUMMARY OF THE 2005 RESIDENTIAL RESALE REAL ESTATE PURCHASE CONTRACT REVISIONS By K. Michelle Lind Posted: June 2005 |
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The Arizona Association of REALTORS® (“AAR”) Residential Resale Real Estate Purchase Contract (“Contract”) has been revised by several workgroups led by Chairperson Laura Mance. Several specialized groups, including the Lenders Group, the Title/Escrow Group, the Home Inspectors Group, and the Attorneys Group provided recommendations to the Forms Steering Group concerning the areas of the Contract affecting those industries. The following is a summary of some of the major changes from the 5/00 contract. FORMAT The Contract format was changed in an attempt to make the form more “readable.” The Receipt section was omitted and the Offer section is now entitled Property. The Warranty section was separated from the Inspection section. The Inspection section is now called Due Diligence to reflect the fact that investigations are performed in addition to physical inspections of the property. CURE PERIOD If a party fails to comply with any provision of the Contract, the other party must deliver a notice to the non-complying party specifying the non-compliance. If the non-compliance is not cured within three days after delivery of the notice (“Cure Period”), the failure to comply becomes a breach of Contract. In some cases, if the cure notice is not immediately delivered, the Cure Period may delay COE for up to three days. FINANCING SECTION The Financing section was revised to obligate the buyer to take specific steps to obtain a loan and to clarify the financing contingency. The Contract is contingent upon the buyer obtaining loan approval for the loan described in the AAR Loan Status Report without conditions no later than the COE Date. If the loan contingency is unfulfilled, the Contract is terminated. The buyer is obligated to deliver a notice of the inability to obtain loan approval to the seller or the escrow company no later than the COE Date. If the buyer fails to deliver this notice by the COE Date, the seller must give the buyer cure notice and a three-day opportunity to deliver the notice of the unfulfilled contingency. If the buyer fails to deliver the notice, the buyer is in breach for failure to deliver the notice, and the seller agrees to accept the earnest money as damages. The Contract is cancelled for an unfulfilled contingency if, after diligent and good faith effort, the buyer is unable to obtain loan approval without conditions by the COE Date. The inability to obtain loan approval by the COE Date is not a breach of contract; therefore, the Cure Period does not apply to extend COE. The contract is contingent upon an appraisal of the Premises for at least the sales price. If the Premises fail to appraise for the sales price, buyer has five days after notice of the appraised value to cancel the Contract or the appraisal contingency is waived. If the buyer is unable to obtain the loan and close escrow after waiving the appraisal contingency, the seller should deliver the cure notice to the buyer. If the buyer fails to close within the Cure Period, the buyer has breached the Contract and the seller agrees to accept the earnest money as damages. The AAR Loan Status Report (“LSR”) must be attached to every offer and must have, at a minimum, the Buyer’s Loan Information section completed, describing the current status of the buyer’s proposed loan. The requirement that the LSR be attached to every offer does not necessitate that the buyer obtain pre-qualification from a lender prior to submitting an offer; the buyer can simply indicate on the LSR that the buyer has not yet had the opportunity to visit a lender. Unless the buyer has previously completed the loan application and related actions, the buyer is obligated to complete a loan application, grant the lender permission to access buyer’s credit report, and pay all loan application fees within five days after Contract acceptance. The buyer is required to sign all loan documents three days prior to the COE Date to allow the funds to be ordered and escrow to close as agreed. If documents are not available for signature by the COE Date because the buyer has not obtained loan approval, the loan contingency is unfulfilled and the Contract is cancelled. If the buyer has obtained loan approval but does not sign the loan documents within three days after receiving the cure notice, the buyer is in breach of contract and the seller may pursue the remedies for breach. DISCLOSURES SECTION The Disclosures section has been reduced and simplified. The seller is obligated to deliver a written insurance claims history from the seller’s insurance company, an insurance support organization (such as the Comprehensive Loss Underwriting Exchange “C.L.U.E.”), a consumer reporting agency, or if unavailable from these sources, from the seller, within five days after Contract acceptance. The seller agrees to immediately notify the buyer of any changes in any of the seller’s disclosures. Unless the seller is already obligated to correct or repair the changed item, the buyer has five days to provide notice of disapproval. In addition to the warranties in the 5/00 contract, the seller warrants that, at the earlier of possession or COE, all agreed upon repairs and corrections will be completed and all personal property not included in the sale and all debris will be removed from the Premises. DUE DILIGENCE SECTION The Inspections section is now entitled “Due Diligence” to reflect the fact that both inspections and investigations of the home should be performed. The “laundry list” of possible inspections and investigations has been omitted and replaced with general categories of inspection and investigation items. The buyer is advised to consult the Buyer Advisory to assist in the due diligence inspections and investigations. Prior to expiration of the Inspection Period, the buyer may deliver notice of any items disapproved. The disapproval process is essentially unchanged from the 5/00 contract, but the language was clarified and several issues that had caused disputes are specifically addressed. Notably, the buyer’s disapproval no longer must be reasonable. AAR’s Buyer’s Inspection Notice and Seller’s Response form (“BINSR”), which was revised in conjunction with the Contract, is available for the disapproval notice. The BINSR now contains provisions for the buyer’s notice, the seller’s response, and the buyer’s election, as well as a space for notice of non-working warranted items. All desired inspections and investigations must be conducted prior to delivering the notice and all due diligence items disapproved are to be provided in a single notice. If the seller agrees in writing to correct any items disapproved, the corrections must be made, any repairs completed in a workmanlike manner, and any paid receipts evidencing the corrections and repairs delivered to buyer three days prior to the COE date. If the seller fails to complete the repairs three days prior to the COE Date and the buyer immediately delivers the cure notice, the seller will be liable for breach of contract and breach of warranty if the repairs are not complete by COE. REMEDIES SECTION The remedies provisions have been revised in two primary respects. First, as previously discussed, the parties are given an opportunity to correct or “cure” potential breaches of the Contract. Secondly, the Contract defaults to binding arbitration to settle disputes not resolved in mediation, unless one of the parties opts out. Breach: If after receiving the notice of non-compliance the party does not perform the specified obligation during the Cure Period, the non-complying party is in breach of Contract. In the event of buyer’s breach arising from the failure to deliver the notice of the inability to obtain loan approval or the inability to obtain loan approval due to the waiver of the appraisal contingency, the seller agrees to accept the earnest money as the sole right to damages. Alternative Dispute Resolution (“ADR”): The buyer and seller agree to mediate disputes. If mediation does not resolve the dispute, the unresolved dispute must be submitted to binding arbitration unless either party opts out within thirty days after the conclusion of the mediation conference by notice to the other. If a party opts out of arbitration, either party has the right to resort to court action. ADDITIONAL TERMS AND CONDITIONS SECTION Calculating Time Periods: This provision explains how time periods in the Contract are to be calculated. The day of the act or event from which the time period begins to run is not included (i.e., the date of Contract acceptance), and the last day of the time period is included. Acts that must be performed three days prior to the COE Date must be performed three full days prior; for example, if the COE Date is Friday, the act must be performed by 11:59 p.m. on Monday. Notice: Unless otherwise provided, delivery of all notices and documentation required or permitted in the Contract must be in writing, addressed as indicated in the referenced sections, and are deemed delivered and received when hand-delivered, faxed, emailed if email addresses are provided, or sent by overnight courier. Broker on Behalf of Buyer or Seller: The broker and salesperson contact information is included in these paragraphs for addressing notice to the buyer or seller and for agency confirmation. CONCLUSION The new AAR Contract attempts to address many of the issues in the 5/00 contract that caused confusion and disputes. The revisions in this Contract should make transactions proceed more smoothly and reduce liability for the parties and the brokers. K. Michelle Lind, Esq. Michelle is general counsel to the Arizona Association of REALTORS® (“AAR”) and a State Bar of Arizona board certified real estate specialist. She serves as the primary legal advisor to the association, provides legal direction in the development of standard forms, is involved in legislative advocacy, and assists in the association’s educational efforts. Please note that 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. |
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