Nikki J. Salgat, Esq.
(Reprint: updated June 2020)
The purpose of an addendum is to include additional terms and conditions to a contract. More specifically, an addendum may accomplish the following: (1) provide further explanation to the terms in the contract; (2) modify existing terms in the contract; or (3) present new considerations to the contract.
While an addendum should only affect those items addressed in the addendum, an ambiguous addendum may lead to a variety of problems such as creating loopholes or unintended consequences. Additionally, a poorly drafted addendum may fail to take into consideration other issues surrounding the new or modified terms. These problems may lead to potential liability for the drafter. Accordingly, real estate agents should strive to clearly and concisely draft addendums.
Drafting an Addendum
If an addendum is properly drafted, the parties’ rights and obligations are clear to anyone that reads the addendum. Put differently, the addendum does not create questions as to what the parties intend to occur. As a result, this enables agents to manage their clients’ expectations and the transaction to progress smoothly.
When drafting an addendum make sure to do the following:
- Refer the addendum back to the original contract and specify the effective date of the addendum;
- Confirm the new verbiage does not already exist in the contract as adding verbiage will supersede the pre-printed portion of the contract;
- Be as specific as possible by referencing parts of the contract that are changing, what the changes are and when the changes are to occur (if necessary); and
- Make sure all parties sign the addendum.
Good practices for drafting addendums are:
- Have a third-party read the addendum to see if they understand what the parties are agreeing to;
- Look for loopholes – read the addendum as if you are on the other side and trying to get out of the contract;
- If there are multiple addenda, re-draft the addenda into one addendum; and
- Consider consulting an attorney.
AAR Offers Pre-Printed Addendums
Don’t reinvent the wheel! AAR offers addendums that address many different incidents in a transaction. One addendum that addresses many common transactional occurrences is the Additional Clause Addendum (ACA). More specifically, the ACA considers the following: (1) back-up contracts; (2) signature of absent buyer; (3) relocation; (4) non-refundable earnest money; (5) appraisal waiver; (6) appraisal contingency for a cash sale; (7) surveyed property; (8) tax-deferred exchange; and (9) water rights. Because these are common occurrences, a real estate agent does not need to draft an addendum. Rather, the agent can use the pre-printed form which thereby lessens the agent’s chances of drafting an ambiguous addendum.
Alternatively, if the real estate agent does not want to use the ACA in its entirety, the agent can utilize that portion of the ACA that is specific to their transaction by lifting the verbiage from the ACA and drafting it into a separate addendum. Not only can this same technique be used with the ACA, but it can also be used with verbiage from other pre-printed AAR addendums. However, the agent should be cautious to make sure the agent is utilizing the verbiage correctly and may want to have their broker review the verbiage before the addendum is signed by the parties.
All Interested Parties Should Receive a Copy
Addendums are invaluable if properly drafted/used and submitted to the appropriate parties. In determining who the appropriate parties are, you should consider who the interested parties are by who the addendum directly affects. For the most part, the interested parties tend to be the buyer, seller and their agents, the Title Company, escrow, the lender (if any) and appraiser. Because these parties are usually directly involved in the transaction, they should receive a copy of any addenda incorporated into the contract.
Nikki J. Salgat, Esq. is assistant counsel to the Arizona Association of REALTORS®. This article is of a general nature and reflects only the opinion of the author at the time it was drafted. It is not intended as definitive legal advice, and you should not act upon it without seeking independent legal counsel.