Editor’s Note: Starting last week and continuing over eight weeks, The Edge is serializing an as yet unpublished book by Great Barrington attorney David M. Lazan. Last week, we had the Introduction and Chapter One: Real Estate Agents and Lawyers. This second installment is Chapter Two: The Purchase and Sales Agreement. Future installments will cover The Title,Title Insurance, Plot Plans and Surveys; Financing Real Estate; The Closing; Condominiums; Buying Land and Building a Home; The Massachusetts Homestead Act; Nominee Trusts; and Short Sales.
Chapter Two: The Purchase and Sale Agreement
The documents used in entering into a contract for the sale of property in Berkshire County are somewhat different from in other counties in Massachusetts and elsewhere. Outside of Berkshire County, a document entitled an “Offer to Purchase” is preliminarily used between a Buyer and Seller prior to the signing of a final sales document. That is not the case in Berkshire County. Here, most residential sales begin with the Buyer and Seller entering into the “Standard Berkshire County Multiple Listing Service Purchase and Sale Agreement”, a form developed by the Berkshire County Board of Realtors.
In spite of the fact that there is a form that is typically used by our real estate agents, a Purchase and Sale Agreement is not merely a formality. It is a detailed and technical document that often must be tailored to fit the transaction at issue. Mistakes or misunderstanding can cost a Buyer or Seller thousands of dollars, problematic delays or (in a worst-case scenario) years of litigation.
Although it is beyond the scope of this book to discuss all of the terms in the Purchase and Sale Agreement, I have addressed certain basic provisions that I think are essential for you to understand, in order to communicate effectively and intelligently with your real estate agent, attorney and the other real estate professionals.
In Massachusetts, unlike many other states, a Seller is generally not liable for failing to disclose problems with a home, provided the Seller is not a builder or in the business of selling homes. Before listing a home for sale, a Seller should seek the assistance of a lawyer to determine what must be disclosed to avoid liability. For the same reason, a Buyer should consult a lawyer to know what questions to ask of the Seller to avoid ending up with problems that may be avoidable.
If a Buyer asks a specific question about the condition of a property, the Seller must answer the question truthfully and completely, to the best of the Seller’s knowledge. If a Seller fails to do so, the Buyer may have a claim against the Seller. The same rules apply to agents of the Seller, such as the realtor.
A different and higher standard applies to disclosures by Sellers who are in the business of selling homes. In Massachusetts, there is a consumer protection statute that places a higher burden on businesses dealing with consumers. Although it is unlikely that a consumer-protection claim can be maintained in a deal between individuals who are not in the business of buying and selling property, it may apply when an unfair or deceptive practice is perpetrated by a broker, contractor or developer.
B. The Deposit
In most Berkshire County real estate transactions, upon signing the Purchase and Sale Agreement, the Buyer delivers a deposit to his or her real estate agent in the form of a personal check equal to 1% of the purchase price of the property. This check is then delivered to the listing agent, along with the signed Purchase and Sale Agreement, and is deposited in the escrow account of the listing agent or of the Seller’s attorney. The Buyer is typically required to make an additional deposit after the home has been inspected (which we discuss below). The total money deposited, including both the initial deposit and the additional deposit, will usually be equal to between 5% and 10% of the purchase price. The total amount of the deposit depends on the negotiating ability of the parties and on the amount of the purchase price. As the price of the property increases, the deposit, as a percentage of the purchase price, often decreases.
The ostensible purpose of the deposit is to ensure that the Buyer will complete the transaction. If the Buyer wrongfully fails to purchase the property, the Seller is entitled to retain the deposit. In practice, however, the issue of whether all or some of the deposit is returned to the Buyer in a failed transaction is often resolved by reasonable compromise. However, a Buyer should be aware that a Purchase and Sale Agreement is a binding contract and, therefore, there is always the risk of loosing the entire deposit. Because of its importance to both parties in the transaction, the size of the deposit that the Seller is willing to accept and the Buyer is willing to provide should be carefully considered.
C. The Closing Date
The “closing date”, sometimes referred to in other states as the “settlement date”, is the date chosen by the parties to transfer ownership and possession of property in exchange for payment of the purchase price. It is also the time that a Buyer who is borrowing money from a lender to buy the property closes his or her loan and gives a mortgage to the bank to secure the loan.
In the rush to enter into a deal, the parties sometimes choose a closing date without reflection on their own availability and whether the date is realistic. In choosing a closing date, both Buyer and Seller need to consider what they must accomplish prior to the closing. The Seller needs to have time to remove items from the property being sold, clean the house, and, if necessary, arrange for new accommodations. The Buyer needs to have sufficient time to consult with professionals such as home inspectors, contractors, architects and engineers; to arrange financing and the transfer of funds necessary to complete the purchase; and may need to arrange for the transportation or purchase of furnishings. Because of the differences in the needs of Buyers and Sellers, the date for closing a transaction is often a subject of negotiation. Once the date is selected, in most cases, it can only be changed by agreement of both parties.
Prior to the actual closing, unless the parties agree otherwise (which is rare), the Seller must remove from the property all items that are not included in the sale to the Buyer. The property must also be left in the condition specified in the Purchase and Sale Agreement – usually, the property must be left “broom clean” and free of tenants.
D. The Mortgage Contingency Provision
If a Buyer needs to borrow money from a lender to purchase the property, a Purchase and Sale Agreement will contain a mortgage contingency provision. The purpose of this provision is to make certain that the Buyer can get out of the deal if she or he cannot borrow sufficient money on acceptable terms to the Buyer to be able to purchase the property.
When the Purchase and Sale Agreement contains a mortgage contingency provision, the agreement will provide that the Buyer must apply for a mortgage within a certain time period after the contract has been executed by the parties. This time period, usually 5 to 7 days, is called the “mortgage application period”.
The mortgage contingency provision also provides that if the Buyer fails to obtain a commitment from a lender for a mortgage within a certain time period, typically 30 to 45 days, the Buyer can cancel the agreement and obtain the full return of the deposit. Therefore, the mortgage contingency date must be carefully monitored by the Buyer.
If the Buyer is unable to obtain the necessary financing as set forth in the mortgage contingency provision, it is essential that he or she obtain some form of proof of that fact. Usually, this documentation will consist of the lender’s denial of the mortgage application. If there is a question as to whether the Buyer’s application was denied, a letter from the potential lender may avoid a dispute over whether the Buyer properly cancelled the contract and is entitled to a return of the deposit.
A Buyer may request an extension of the mortgage contingency date from the Seller. The Seller has no obligation to agree to an extension, but often does so. The Buyer may also waive the mortgage contingency date if he or she has the ability to purchase the property without a mortgage.
E. The Inspection Contingency Provision
In Berkshire County, our Purchase and Sale Agreements almost always provide the Buyer with a certain period of time within which to have the property inspected. The purpose of the inspection is to determine whether the house and any other structures on the property are sound and free of visible defects. This time period is called the “inspection contingency period” and is usually 14 days, but can be longer or shorter, as the parties agree.
In order to make this determination, a Buyer normally hires consultants such as a home inspector, and if warranted, an environmental engineer, architect or builder, to inspect the property, to see what would be required to remedy any problems that are identified and the cost of such remedy. In the event the property does not meet the Buyer’s needs, the Buyer typically has the right under the Purchase and Sales Agreement to terminate the transaction during the inspection period and obtain the return of the deposit.
The Buyer will thus have to locate and retain a home inspector. In Massachusetts, a home inspector must be licensed by the Board of Registration of Home Inspectors. When your home inspector performs the inspection, he or she will observe the areas of the building that are accessible, and will prepare a written report identifying problems that require attention or correction. The best way to select a home inspector is by recommendation. Realtors other than a Buyer’s agent do not refer Buyers to a particular home-inspection service, but a realtor may give a list of home inspectors prepared by the Board of Registration of Home Inspectors.
Before putting a home on the market, it may be a good idea for Sellers to invest in their own professional home inspection, in order to determine what problems may exist, and whether those problems can or should be remedied before listing the house for sale. In this way, problems can be eliminated before they can disrupt a deal, or at least such problems can be factored into the selling price and disclosed to a potential Buyer.
The home inspection should be scheduled by the Buyer as soon as a Purchase and Sale Agreement has been executed by the parties. Timing is especially critical during busy home-buying seasons, as there are a limited number of inspectors in our area. It is always valuable for the Buyer to be present during the home inspection in order to fully appreciate the inspector’s advice and to learn about the property being purchased. Home inspectors generally appreciate sharing their knowledge and experience with Buyers during the inspection, including how to operate systems within the property.
A home-inspection report should provide a client with a complete and detailed description of the building being inspected. This includes the structure, the roof system, windows, siding, flooring, heating and cooling systems, and the plumbing and electrical systems. Often, inspectors include pictures of the conditions described in their report. The inspector should also identify any concerns, including safety issues, building-code violations and problems such as rotted wood, inadequate or dated wiring, worn-out roofing materials and the like. The inspector will indicate any areas in the house that he was not able to inspect due to inaccessibility, as well as items the inspector feels should be further investigated, such as a furnace or well. Also, the report should note whether there is evidence that there may be an underground fuel tank or the presence of potentially-toxic mold.
I am often reminded by my clients that in many states, Purchase and Sale Agreements provide Sellers with the right to remedy defects found by home inspectors and thus prevent Buyers from withdrawing from the contract due to the presence of a defect. This is generally not the case in Berkshire County. Here, at least as per the standard form Purchase and Sales Agreement, the Buyer may cancel the transaction based on the inspection if the condition of the house is not satisfactory to him or her.
Members of our law firm have often debated the question of whether a Buyer can obtain the return of a deposit where the contract merely calls for a home inspection and the home inspection report indicates there are no defects or minimal defects, or if the Seller volunteers to completely repair the defect before the Closing. As of this date, that question has not been adjudicated by any court in the Commonwealth, but the parties should treat the inspection contingency as significant.
Both parties need to understand the nature and timing of the inspection contingency and should be confident that it is carefully worded. As in the case of the mortgage contingency provision, it is essential that both parties carefully monitor the inspection contingency date.
F. The Septic System Inspection Provision
Although some properties in Berkshire County have municipal sewage disposal systems, a large number are serviced by private septic systems. When a property has a septic system, most Purchase and Sale Agreements provide that the Seller (not the Buyer) must have the system inspected by a Massachusetts licensed septic system inspector within a certain time period after the execution of the Purchase and Sale Agreement (usually 15 to 20 days) if the system hasn’t been inspected within 2 years prior to the time set for transfer or title (with certain exceptions).
Because of weather conditions or scheduling, inspections are often not completed during the septic-system contingency. It is my experience that the parties typically ignore the time frame for completing the inspection, recognizing the realities of getting a septic system inspection done. However, Sellers must be sure that any extension of the septic system contingency deadline is documented in writing.
As in the case of the mortgage and inspection contingency, the septic system contingency allows a Buyer to terminate the transaction and obtain the return of the deposit under certain conditions. If the report (called the “Title 5” inspection report) issued by the septic system inspector indicates the system is a “failed” system, the standard Purchase and Sale Agreement provides that the Buyer may terminate the contract within three days of receiving that report. Unfortunately, the standard form does not address many of the problems that can confront the parties if a septic system must be replaced or if it receives a “conditional pass”. Therefore, language addressing these possibilities should be added by the parties’ attorneys during the initial drafting of the Purchase and Sale Agreement.
If a septic system passes inspection, the Buyer should receive a copy of the Title 5 report or, in the case of new construction, a copy of the septic system plan as approved by the town Board of Health, as well as a Certificate of Compliance demonstrating that the system complies with applicable law. The Title 5 inspection is an expense borne by the Seller and, at this time, typically costs between $800 and $1200.
I would note that certain transfers of real estate are not considered transfers of title that trigger the requirement of a Title 5 inspection. These include granting a mortgage, certain changes in the form of ownership (such as placing it in a family trust in which the owners are the beneficiaries), adding or deleting a spouse from title to the property, and certain other transfers.
G. Hazardous Materials
If you are purchasing or selling an existing home or unimproved property and there is any sign of, or reason to believe there may be, hazardous material contamination, it is essential to consider obtaining the advice of an environmental consultant. If a property has been used for commercial purposes or is adjacent to or near a property used for commercial purposes, it is prudent to consult with a hazardous materials expert called a Licensed Site Professional (“LSP”) to determine whether an investigation should be performed and, if so, the extent of such an investigation.
The types of hazardous materials that are most commonly encountered are: asbestos siding or pipe insulation, lead paint, radon, a past or ongoing oil spill or an activity that was conducted on or near the property which may have caused it to be contaminated (such as dry cleaning or auto repairs). An environmental consultant can examine the property and provide advice as to whether these hazards exist. If contamination exists, the consultant can determine what remediation would entail, including cost. While some conditions are easily dealt with, many others may require legally mandated and expensive solutions. A simple investigation can cost between $1,200 and $2,400 as of this writing. A more thorough investigation including monitoring wells can cost in excess of $7,500. If there is a question regarding contamination, hiring an LSP and obtaining his or her opinion is well worth the money.
H. Tree removal or Vegetation Clearing
Where trees must be removed to provide a view, create more open space, allow for building or to eliminate hazards, a lawyer, surveyor and a tree removal expert should be consulted to determine whether such removal is legally permissible as well what it would cost. Occasionally, property restrictions have “no-cut zones” where trees may not be disturbed. A town may have adopted the Massachusetts Scenic Mountain Act, which may prohibit the removal of trees to protect a ridgeline and to prevent soil erosion. A Buyer should be aware that there may be costly consequences to removing trees if such removal is prohibited or if they are located on a neighbor’s property.
I. Ascertaining Legal Use Limitations Including Zoning
As a Buyer, your Purchase and Sale Agreement should state that your obligation to purchase a property is conditioned upon the fact that the property can be used in the manner and for the purposes you contemplate.
In our county, much of which is quite rural, we have wetlands, ponds, rivers, streams, protected species and ridgelines, as well as an abundance of laws and regulations to protect them. In addition, many of our properties are affected by private restrictions created by landowners to govern or restrict use, provide access, allow access to adjacent property or limit development in a certain manner. Also, natural restrictions such as rock formations, setback requirements and hillside locations can make development challenging. For these reasons, it is essential that the right professionals be consulted during contingency periods, to avoid finding out after a purchase that a planned use cannot be accomplished.
Neither the fact that a property has been used in a certain way in the past, or the fact that a building inspector has given his or her assurance that there are no zoning problems, eliminates the possibility that the present use of the property may be illegal or a contemplated use not permitted. The only way to be assured that you may use property in a certain way is by obtaining a zoning opinion from your lawyer.
Zoning is the process by which our local governments regulate the use of privately owned land within their jurisdiction. Each of our thirty-two municipalities in Berkshire County has a different zoning scheme. Some of the municipalities’ zoning laws are quite simple (which creates its own problems) and others are more complex. If you or your lawyer believes zoning may be an issue regarding your contemplated use of a property, the failure to obtain a zoning review can be expensive as well as frustrating.
An example of this point, which may not be obvious, is where you are buying vacant land in order to construct a home. In that situation, you must be very sure that the property conforms to local and state (and in some case, Federal) law so that your contemplated construction will be legal. Additionally, in Massachusetts, we have a doctrine called “infectious invalidity” which can effectively destroy the ability of a lot to be built upon as a consequence of being owned by the owner of an adjacent property and in spite of the fact that the lot had been buildable in the past. Making such a determination requires a careful title review by an experienced real estate lawyer. Failure to obtain such a title review can lead to costly and disappointing consequences.