Is a Purchase and Sale Agreement Still Valid After the Closing Date Has Passed?
In most cases, the answer is YES! The contract is still valid, but one of the parties is likely in breach of the agreement.
In Georgia, the Purchase and Sale Agreement (PSA) does not automatically expire if the sale does not close on the stated closing date, even if there is a “Time is of the Essence” clause in the contract. To effectively terminate, the non-breaching party must serve a notice of termination on the breaching party. The non-breaching party then has the remedies provided in the law and the PSA. (Note that the GAR PSA Remedies clause limits the remedies.)
When a PSA is not automatically terminated and is still valid, a fully executed amendment to extend the closing date would also be valid. Once the date is extended, the defaulting party is no longer in default.
Automatic Termination is Possible
If the parties wish to provide for automatic termination when a closing date passes, additional contract language would need to be added as a special stipulation.
“ In the event that a closing does not occur on or before the closing date as set forth in this Agreement, including any permitted extensions, then this Agreement shall automatically terminate and the non-defaulting party shall have the right to pursue all available claims at law or in equity against the defaulting party.”
GAR 290 Agreement to Reinstate Contract.
GAR recently added a new form to its arsenal that has created some confusion. GAR 290, Agreement to Reinstate Contract is to be used when the PSA was terminated by one or both of the parties and the parties now want to reinstate the Agreement. Accidental terminations happen. The above situation is a good example. Another example is including an automatic termination clause in an Amendment to Address Concerns. The parties may still be negotiating past the time to respond and, whoops, the automatic termination happens. Or the parties can intend a termination, later change their position and want to reinstate the PSA. In these cases, go to the Agreement to Reinstate Contract.
The Fair Housing testers are out looking for violators in Georgia. Testers are often sent out in pairs – a white tester and, later, a minority tester. Both will be looking for housing with the same criteria and must be treated equally. Don’t be one of the unfortunates that gets tested and fails! If you fail the fair housing test, you could lose your license to sell real estate!
Fair Housing laws make it illegal to steer buyers to or away from given areas based on race, religion, nationality, sex, color, handicap and familial status.
Ask safe questions! A few examples:
Do you prefer a single story or a two-story home? A new home or an existing home?
A detached home or a townhome?
What home features are you looking for?
How many bedrooms? A yard? A pool? An open floorplan? A basement?
What neighborhood features are you looking for?
Nearby your work, medical, recreation, extended family? School districts? Walkability?
There are many, many questions to be asked. Make sure they are about the property and the buyer’s stated needs and you won’t get into trouble. Stay safe out there!
More and more, we are seeing Temporary Occupancy Agreements (GAR F219) so sellers can remain in their properties post-closing. Here are a few tips for navigating the form.
Maximum Temporary Occupancy is 60 Days
The GAR Temporary Occupancy Agreement is designed to cover the Seller remaining in the property for up to 60 days. If the Seller needs longer than 60 days, a lease should be used. The reason is that, if the buyer has purchased as an owner occupant, lenders consider 60 days the cut off for determining whether the owner is an owner occupant or an investor. If the lender determines that the new owner is actually an investor, the new owner would be in default of the loan. The interest rate could increase or, worse, the owner could be accused of mortgage fraud.
Tip: Don’t allow a post-closing occupancy to be more than 60 days. Use a lease form if the seller requires more than a 60 day occupancy. More than 60 days may not work if the new owner will be an occupant.
Watch Out for Insurance Issues
Once ownership of a property changes, insurance coverage changes too. The seller’s owner occupant policy no longer covers the seller. The buyer is now the owner. If there is a flood or a fire, the new owner’s policy covers the real estate, but not the seller’s personal property.
Tip: Make sure the seller contacts his insurance carrier for advice regarding personal property coverage during the temporary occupancy.
The New Owner is Responsible for Maintenance and Repairs
Once the closing takes place, the new owner is responsible for the maintenance and repair of the property. The previous owner is not. The old owner is just a tenant. Unless the old owner has damaged the property beyond normal wear and tear, they are only responsible for their own personal property.
Tip: Advise your buyers, before they agree to a seller remaining in the property post-closing, that they are responsible for the maintenance and repair of the property post-closing.
Make a Hold Over Period Hurt
Once the agreed upon temporary occupancy has terminated, a seller that remains in the property is holding over. If the seller doesn’t leave voluntarily, the new owner may have to evict. Evictions cost time and lots of money. Therefore, make the daily cost of holding over a significant one. If the daily cost is minimal, the seller has no incentive to leave.
Tip: Include a large per day hold-over fee. Make it hurt. $500 or $1000/day would incentivize a seller to leave on time a lot more than a small fee.
Lately, we have been seeing sellers that want to terminate a binding contract that should be headed for a closing. If it happens to you, this is good information to point out to your sellers. Remember, don’t give legal advice. Just point out the contract provisions below.
There are, indeed, substantial risks to the seller. The GAR Purchase and Sale Agreement, once fully executed and binding, is a firm contract with clear terms, duties and performance responsibilities of both parties. If there are no remaining contingencies or conditions that would prevent closing, the seller is obligated to sell and the buyer is obligated to buy. A seller who then chooses to terminate, is in default of the Agreement.
The consequences of a default by a seller are detailed in the GAR Purchase and Sale Agreement on page 5, Paragraph 2. Default. There are include Buyer Remedies, Broker Remedies and Attorney’s fees. The relevant language is copied here.
Paragraph 2. Default
b. Remedies of Buyer: In the event this Agreement fails to close due to the default of Seller, Buyer may either seek the specific performance of this Agreement or terminate this Agreement upon notice to Seller and Holder, in which case all earnest money deposits and other payments Buyer has paid towards the purchase of the Property shall be returned to Buyer following the procedures set forth elsewhere herein.
c. Rights of Broker: In the event this Agreement is terminated or fails to close due to the default of a party hereto, the defaulting party shall pay as liquidated damages to every broker involved in this Agreement the commission the broker would have received had the transaction closed. For purposes of determining the amount of liquidated damages to be paid by the defaulting party, all written agreements establishing the amount of commission to be paid to any broker involved in this transaction are incorporated herein by reference. The liquidated damages referenced above are a reasonable pre-estimate of the Broker(s) actual damages and are not a penalty.
d. Attorney’s Fees: In any litigation or arbitration arising out of this Agreement, including but not limited to breach of contract claims between Buyer and Seller and commission claims brought by a broker, the non-prevailing party shall be liable to the prevailing party for its reasonable attorney’s fees and expenses.
The potential costs of a seller default are significant.
In this very strong seller’s market, a buyer has multiple reasons to elect to sue for specific performance: the uniqueness of the property, low inventory of similar homes in the market, difficulty of winning another house and rising home prices. Should an action for specific performance be successful, not only would the seller be forced to sell, the seller would also be required to pay the buyers’ attorney fees and expenses of litigation. Fees for both the seller’s and the buyer’s attorney fees can be extremely enormous. Litigation counsel can charge $500 or more per hour. If the parties decide to settle rather than litigate, the settlement can be extremely high as well. We recently had a seller termination in which the buyers and sellers settled in lieu of a suit for specific performance for $200,000.
In this market, it is unlikely that the buyer will walk away with only the return of earnest money.
As stated in Paragraph c. (above), full listing and seller broker fees are also owed by the seller that defaults.
Seek the Advice of Outside Counsel
Always encourage a seller considering a default by termination to seek their own legal advice before moving forward. Our experience is that outside counsel will agree and help you get the transaction back on track!
Scenario 1: The Sellers anticipate that their listing will generate multiple offers. To be fair, the Seller instructs the listing agent to tell showing agents and prospects that the Seller will review all offers at the end of the weekend, on Sunday at 6:00 pm. On Saturday, the Seller receives an all cash offer $100,000 above the list price with no additional terms or contingencies, but the time limit for acceptance of the offer is Saturday night at 6:00 pm. The Seller wants to accept it asap.
Is the Seller obligated to wait until Sunday at 6:00? Would it be a violation of Article 3 of the Realtor Code of Ethics to accept the earlier offer? Article 3 of the Code of Ethics says “Realtors shall cooperate with other brokers except when cooperation is not in the client’s best interest…”
We haven’t seen any case law on this, but the general consensus is that the Seller can accept a contract at any time, even if the Seller has previously instructed the listing agent otherwise. Article 3 of the Code of Ethics does allow the exception of when cooperation is “not in the client’s best interests.” So long as the client is calling the shots and not the Realtor®, and there are no Fair Housing issues, the client’s wishes prevail.
To cover ourselves and avoid disappointed, angry selling agents and liability for license law and Code of Ethics violations, we should, as Listing Agents, include a statement in private remarks that “The Seller reserves the right to accept offers at any time.”
You list a property as “Coming Soon” with no showings available on the property until the commencement date.
The day before the marketing commencement date, a potential buyer without a cooperating agent reaches out to you wanting to see the house ASAP, because they are headed out of town that night. You’d love to earn both sides of the transaction, so you contact the prospect and let them see the property a day before the marketing commencement date. The early prospect’s offer is accepted.
You have just violated both the NAR Realtor Code of Ethics and the rules of FMLS. It’s Article 3 again, but in Scenario 2, it is read against the Listing Agent. Realtors are obligated under the Realtor Code of Ethics to cooperate with other brokers, unless it’s not in their client’s best interest.
By showing the home yourself a day before publicly stating when it would be available to see, you’ve misrepresented the availability of access to the property and violated the obligation to share information about the property and make it available to other brokers. You’ve also limited the period of marketing of the property, possibly shutting off other, better offers. There is also a truth in advertising component. State law, NAR Code of Ethics and Georgia License Law can all come into play.
Both Buyers and Sellers can benefit from a back-up contingency.
For the buyer, it’s a low-risk, high reward situation. The buyer in 1st position may fall out and the property becomes primary. In the meantime, the buyer can continue to look for other property. If another property is located, so long as the Seller has not notified the buyer that the back-up has become primary, the buyer just has to send notice to the Listing Agent of the back-up property that they are terminating and pay the Seller $10.00. (Don’t forget to pay the Seller the $10.00. It’s required.)
For the seller, a back-up is insurance that they won’t have to re-market or scramble for a new contract if the first one falls through. Remember that the seller, not the listing agent, must send the notice to the back-up that the contract has become primary. A notice sent by the listing agent is not effective.
Remember, too, that before a seller sends notice to the back-up, the seller must be certain that the first contract has been properly terminated. If it has not and notice is sent to the back-up that it is now primary, the seller may find that they are under contract to 2 different buyers.
Earnest Money Due Date in a Back-Up Contingency
It bears repeating at earnest money delivery is controlled by the purchase agreement. The purchase agreement is a binding agreement, even though it may have a back-up contingency. So, if the agreement says the earnest money is due a certain number of days after binding, then it is due at that time. On the other hand, the buyer can opt for language that earnest money is due after the contract becomes the primary contract. That way, funds are not tied up with a secondary contract. Delivery of earnest money is a point of negotiation, so a seller may require it at binding date. However, delivery at the time a contract becomes primary is not unreasonable.
The NAR Code of Ethics, Article 11, states that REALTORS® shall not provide specialized professional services that are outside their field of competence, unless they engage the assistance of one who is competent on such types of property or service, or unless the facts are fully disclosed to the client.
What is a licensee’s field of competence?
Consider the boundaries of your own field of competence and experience. Certainly, real estate licensees are trained to assess property values. But are we trained to assess all property values? An opinion by a licensee with residential experience may be quite valid for a residential property but valuing a commercial or an industrial property is very different. Likewise, an agent may have ample experience listing properties for rent and preparing lease agreements but no experience in property management. Most frequently, we see agents who do not have experience or education and are presented with opportunities in commercial real estate, multi-family and property management.
A licensee must be careful to not present a value opinion as an appraisal. It is a violation of license law to indicate that an opinion given to a potential seller, purchaser, landlord, or tenant regarding a listing, rental, or purchase price is an appraisal unless such licensee holds an appraiser classification in accordance with the Georgia Real Estate Commission.
Every licensee has their own unique experience. If you are asked to perform a service that is not within your own experience, remember that the Code of Ethics, Article 11, requires you to get assistance from someone that is competent in the field or to disclose the fact of your inexperience to the client (in writing). The client can then decide if an assignment should be yours despite inexperience.
Keep in mind, you can always refer business and collect a referral fee. Focus on what you know, and if you want to expand your expertise, be sure to get proper training so that you can best represent your client.
Yikes! We weren’t told about the bats in the attic!
What do we do now?
Your buyers have closed on the property and moved in. The water pressure is low. There are termites. The attic has bats. The foundation has a hidden crack that your inspector didn’t see and the seller didn’t disclose.
Can the Buyer Sue?
Maybe, but first, what you can and cannot say.
Real estate agents are (generally) not lawyers and do not have the expertise or the license to provide legal advice to a client. The information in this article is for your knowledge. Always recommend that a client seek advice from their legal counsel.
The Seller Must have known about the defect.
Georgia is a Caveat emptor or Buyer Beware State. The legal rule caveat emptor basically means that once you buy the home, whatever you paid for is what you got, and buyers have a limited ability to sue the seller for any defects discovered.
Under Georgia law, the Seller is obligated to disclose material facts that 1) he is or should have been aware of, 2) could not be discovered by the buyer’s exercise of due diligence, and 3) the seller knows the buyer is unaware of and would be important to the buyer’s decision to buy or the price the buyer would pay. These 3 elements are fact-intensive and, if your buyer wants to sue, could be very expensive to prove.
The defect must be a “material” defect. That is, an item that would have been important to the buyer in making a decision of whether or not to purchase or how much the buyer would have been willing to pay or that poses a safety risk.
Bottom line, unless the seller intentionally tried to conceal a defect, for example, by lying or hiding it, buyers often cannot get relief.
The Buyer has responsibility too. If defects could have been discovered by the exercise of reasonable due diligence by the buyer, the buyer generally can’t get relief. At a minimum, the buyer should have an inspection by a professional inspector. However, generally, home inspectors have minimal liability for missed conditions or items. What responsibility they do have is typically capped at the cost of the inspection.
If there is a unique condition or feature in the home, it is recommended that the buyer hire an inspector that is a specialist in addition to the general inspector. Think septic, pool, radon, etc.
The Four Corners Rule and Merger Doctrine
Any conversation or any information stated outside the “Four Corners” of the contract cannot be relied upon in litigation. Merger Doctrine in Georgia says that, generally, the Deed at closing merges with the contract and extinguishes the terms of the PSA. If you want terms to survive the closing, state that specifically in the Special Stipulations.
Bottom line: If information from the seller is important, include it in the contract. (All parties acknowledge and agree that..). If you want to rely on it after closing, state that the term survives the closing of the contract.
Fraud is an exception to the four corners rule and the merger doctrine. However, fraud is very hard to prove. Facts must be gathered by the Plaintiff, which is expensive. The Buyer must prove justifiable reliance on a misrepresentation of the seller (or the listing agent), that the misrepresentation was meant to induce the buyer to purchase the property and that the buyer was damaged by that reliance.
Builder Liability for Post-Closing Defects
Builder contracts in Georgia generally include reference to the Right to Repair Act. Georgia is a contractor friendly dispute resolution statute. Under the terms of the Act, the Builder cannot be sued until the buyer goes through a specific resolution process. The process takes months and gives the builder the option to offer to repair.
Litigation is a last resort.
Before considering undisclosed material defect litigation, consider negotiation. Litigation is a last resort to resolving conflict. It is expensive, uncertain and time consuming.
We are seeing more and more Temporary Occupancy Exhibits in this Seller’s market. Consider the following scenario:
The Owner of a property sells and includes a 60-day temporary occupancy in the purchase agreement. The Property closes. The old owner is still in the house and the new owner has not yet moved in.
Yikes! The property burns down! Yikes, a tree falls on the roof! Yikes, a guest slips and falls!
Whose Insurance Pays?
Whose insurance pays for the damage to the real property? Whose insurance pays for the loss of the former owner’s personal property? Whose insurance pays for the slip and fall?
Not the former owner’s policy. They are no longer an owner occupant. Their policy is no longer valid for any of it.
Not the new owner’s policy. The new owner was not occupying the property when it burned. Their policy would not cover either.
Reviewing the language of the GAR F219, Temporary Occupancy for the Seller, the Seller has agreed to hold the other parties harmless from liability to people and property.
6. Seller hereby expressly releases Buyer, Seller’s Broker, Buyer’s Broker and their Affiliated Licensees from any and all liability of any nature whatsoever which may arise as a result of the Seller’s acts or the acts of anyone else entering the Property, including, but not limited to, liability for injury to persons and/or damage to personal property resulting from or in any manner occasioned by such
occupancy. Seller further agrees to hold harmless and indemnify the Buyer, Seller’s Broker, Buyer’s Broker and their Affiliated Licensees from any claim or loss arising out of or occasioned by the Seller’s occupancy of the Property.
7. It is specifically understood that should the Property be destroyed by fire or other occurrence, Seller shall bear the risk of loss to Seller’s personal property.
Buyer’s Temporary Occupancy Prior to Closing
The reverse situation is true. Consider a buyer’s temporary occupancy prior to closing. The Buyer has agreed to hold the seller harmless from liability and loss of personal property.
9. Seller shall, at Seller’s expense, retain fire and extended insurance coverage on Property until the date of closing. Buyer acknowledges
that such insurance coverage does not cover Buyer’s personal possessions and that Buyer shall bear the risk of loss on Buyer’s personal
property or for injuries sustained should Property be destroyed by fire or any act of nature during the time that the Buyer is in possession.
12. Buyer agrees to indemnify and hold Seller harmless from any claim or loss which results from the actions of Buyer or anyone else
entering Property while Property is occupied by Buyer under this Exhibit.
Recommendations in a Temporary Occupancy Situation
First, we recommend that there be a Special Stipulation in the Purchase Agreement for either situation as follows:
The Temporary Occupant
Inquiries as to the best way to handle the temporary insurance should be directed to the insurer. Real estate agents are not qualified to answer that question.
The New Owner
If there is a loan on the property, the lender would have required property insurance. However, unless the property was an investment property, it would have been an owner’s policy. The buyer/new owner should get a rider to their policy to cover during the time the Seller is maintaining possession of the Property or confirm in writing from their insurance company that none is required because it is considered short-term (typically 60 days). Alternatively, if the insurance company will not use a rider or will not confirm that none is required, the buyer/new owner should take out a temporary landlord’s policy. Again, that question must be directed to the buyer’s insurer.
What if the Occupancy is for days, not for weeks or months?
A shorter time period is less risky, but it really doesn’t change the situation. Although a period of days might be overlooked by an insurer, it can’t be assumed. It’s up to the insurer. The buyer and the seller should consult with their insurers, weigh their risks and make their own decisions. We can only make them aware of the risks.
Time Limit of Offer and Notice to Withdraw
This super-hot seller’s market just keeps offering challenges.
Here’s a new example we should be watching:
Trying to be the offer that gets accepted, a Buyer makes an offer with no due diligence and no time limit for acceptance of the offer. The Buyer did not win the multi-offer situation initially and went under contract on another house. Three weeks later, the listing agent sent over an acceptance of offer. The Buyer had to cough up earnest money on that deal which, of course, the Buyer lost when they couldn’t perform on both deals.
No Time Limit for Acceptance of Offer
The mistake? The time limit of the offer was open and the offer was not
withdrawn. Under contract law, an open time allows an acceptance for a
reasonable time period. Whether or not the time period is reasonable, however,
is a question of fact for a judge or jury. It depends on the situation. Had the
buyer sent a Notice to Withdraw Offer prior to submitting another offer to another
seller, the buyer would have been protected against acceptances on 2 contracts.
(Guess who the Buyer is going to be pointing the finger toward?)
Time Limit Not Expired
The same holds true even if there is a time period for acceptance in the Offer, but
the time period has not expired. Again, send the Notice to Withdraw Offer before
a second offer is made.
Time limit Expired
Of course, if the time limit for acceptance of the offer has expired, the offer is no
longer open for acceptance. Any acceptance after the time limit has expired is
legally a counter-offer. There is no need for a Notice to Withdraw Offer, if the
offer has expired.
Moral of the story: If your buyer has made an offer with no time limit for acceptance or has made an offer with a Time Limit that has not expired, send a Notice to Withdraw Offer prior to the Buyer is making an offer on another property.
The form is GAR F285 Notice to Withdraw Offer and the content is:
Buyer hereby gives notice to all parties of the immediate withdrawal of the signer’s last offer or counteroffer to purchase the above referenced Property. It is the intent of the signer(s) that upon the delivery of this notice to the other parties, no offer(s) or counteroffer(s) of Buyer to purchase the Property shall remain open for acceptance.