Offers, counter-offers and contingencies

The process of forming a real estate generally involves offers, counter-offers, and contingencies. Here are the basic legal rules.

Offers

Offers. An offer should identify the property to be purchased, the purchase price, whether the offer is contingent upon a loan being obtained or another property sold and any other terms relevant to the buyer.   When making an offer, it is critical that you include all of the deal points that are important to you; if the other side accepts your offer, it may become a binding contract, with no further negotiation.

Counter-offers

Counter-offers.  A counter-offer is when the other party is interested in entering the transaction, but upon different terms than the offer, such as higher price, shorter escrow or other different terms.   Again, when making a counter-offer be sure to include all terms that are important to you; if your counter-offer is accepted, you may have entered into a binding contract, with no further discussion.

Contract Formation

A contract is not actually formed until the two parties agree upon all of the material terms of the agreement.  As a rule, the contract is formed, in a legal sense, when one of the parties signs off on an offer or a counter-offer, which the other side has made.  Bear in mind that a binding contract may have been formed, even if all of the terms of the deal are not spelled out; the legal rule is that all “material” terms need to be stated, and it is hard to predict what terms a court will consider to have been “material.”

If you are using a broker, he or she will usually have you make offers and counter-offers on pre-printed forms that are prepared by the California Association of Realtors.  These forms are useful.  Bear in mind, however, that any type of writing may be considered to be an offer or counter-offer by a court.

Contingencies

Real estate contracts commonly contain “contingencies.”  As a legal matter, if a contingency does not occur, then the contract is not enforceable and the transaction will not be completed.

There is a distinction between a contingency and a covenant or promise in a contract.  If a contingency does not occur, then the contract is not enforceable, and neither side has any liability to the other.  If a covenant or promise does not occur, however, then, the party who made the promise may have breached the contract and may have liability to the other side.  It is thus important, in drafting real estate contracts, to be clear about whether a particular aspect of the agreement is a contingency or a covenant.

Common contingencies include:

– Loan contingency. The buyer will not purchase the property unless he or she can get a loan to do so.

– Inspection contingency.  The buyer has a certain number of days in which to inspect the property, and to reject it, if the condition is poor.  Most inspection contingencies say that the buyer can reject the property for any reason, during the inspection contingency period.  Sometimes, however, the buyer will be able to back out of the contract only if the property does not meet certain specified conditions.

– Sale contingency.  If the buyer can not afford this property, without selling his or her current property, a purchase offer will sometimes be contingent upon selling another property.