In a broad sense, a “short sale” is any sale in which the proceeds are insufficient to cover the cost of closing the sale. This definition of short sale focuses attention on the problem with such sales: the seller’s lack of money at the closing table. In a short sale, the seller is said to be “upside down.”

In a short sale something has to give or the deal cannot close for want of clear title. The seller is going to have to put money into the sale, or transaction costs have to be reduced (e.g. commissions), or one or more creditors agree to reduce debt or some combination of these things has to happen. Debt reduction by the mortgage holder is what is usually meant when real estate agents talk about doing a “short sale.” Doing a “short sale” sounds simple. It is not.

What follows is an explanation of the process involved. It begins with Do the Numbers so you, your client and eventually the lender will understand the exact financial situation. Part of doing a short sale is having a serious Talk with the Client about their financial condition. Once you have the numbers and know your client’s financial condition, you can Contact the Lender, Market the Property, Write the Deal and, finally, Get Paid.

Short sales are driven by the threat of foreclosure. Most lenders will not consider a short sale until foreclosure has become a real possibility. That means missed payments and financial distress. Foreclosure also drives short sales because lenders, as a rule, will consider a short sale only when they will make more on the short sale than they would make in a foreclosure. Click here for an explanation of Oregon foreclosure laws.

Agents sometimes consider a short sale for the first time when the seller accepts an offer that will not generate enough money to clear title. This is an extremely poor practice. If the seller has not missed any payments, and is not otherwise in serious financial distress, the lender is probably not going to be interested in a short sale. Lenders are simply not interested in protecting the seller’s other assets or, for that matter, real estate commissions and other closing costs.

What lenders want to know in a short sale situation is what business people always want to know: what’s in it for me? Do not make the mistake of approaching a lender with what is in it for the seller, the buyer or for you. Instead, to be successful in a short sale situation, you must be prepared to show the lender that approving this sale at this time for this amount of money is in their best interests. To do that, you have to know the numbers.
Back to Top

Formal dispute resolution in residential real estate in Oregon usually means being involved in a Mediation/Arbitration process. If, however, the dispute involves a claim for $5000 or less, the dispute is heard in a small claims court. Disputes between buyer and seller are treated differently for dispute resolution purposes than disputes involving licensees and firms. This is the case because the vast majority of residential real estate transactions in Oregon are accomplished using the same REALTOR®-developed sale agreement forms.

The commonly used residential sale form contains five clauses that apply to dispute resolution involving seller and buyer only. A single additional clause is provided for dispute resolution involving licensees or firms. The first of the five clauses dealing with buyer/seller disputes defines the disputes subject to the dispute resolution provisions of the contract. This clause, in effect, contains the parties’ agreement to forego their existing legal rights in favor of those contained in the contract. With the exception of a few narrowly defined disputes involving mortgages and landlord/tenant actions, the parties agree that all disputes will be resolved using the procedures and processes set out in the contract.

The first of the procedures and processes dictated by the contract is that all disputes within the jurisdiction of the Small Claims Court “shall be brought and decided there, in lieu of mediation, arbitration or litigation in any other forum.” Essentially, the parties agree that any dispute involving a claim of damages of $7500 or less will not be mediated or arbitration or litigated. Instead, it must be heard in a Small Claims Court. Small Claims Courts are state courts controlled by state statute.

Small Claims Courts are divisions of state Circuit Courts. They are authorized and controlled under chapter 46 of the Oregon Revised Statutes. Small Claims Courts are intended to be inexpensive and efficient. Not surprisingly, lawyers are banned from Small Claims Courts except by leave of the court. The cost of pursuing a small claims action is modest compared to filing suit in Circuit Court actions. Small Claims procures are specifically designed for use by ordinary citizens.

Buyer/Seller disputes beyond the jurisdiction of Small Claims Courts are subject to mediation as set out in the third clause of the dispute resolution provisions of the sale agreement. The mediation provision is a source of considerable confusion, especially among lawyers unfamiliar with its provisions. The mediation clause says that mediation must be in accordance with the procedure of a Home Seller/Home Buyer Mediation Program established by the National Association of REALTORS® or “other organization-adopted program” if the buyer or seller was represented by a REALTOR® and such a mediation program is available through the REALTOR’S® local board or association.

If the local board or association does not have a Home Seller/Home Buyer Mediation Program (and most don’t), the person filing for mediation can choose a state-wide real estate mediation program developed by Arbitration Services of Portland or “any other impartial private mediator(s) or program(s)” available in the county in which the property is located. Information on the Arbitration Services of Portland program can be found on their webpage at:www.arbserve.com. Just click on Real Estate Sales (in REALTOR® printed forms). The form for filing for mediation can be had by clicking on Request for Mediation.

Arbitration between buyer and seller is detailed in the fourth of the buyer/seller dispute resolution clauses found in the sale agreement. The clause requires that “[a]ll Claims between Seller and Buyer that have not been resolved by mediation, or otherwise, shall be submitted to final and binding private arbitration in accordance with Oregon Laws.” Oregon laws dealing with private arbitration are found in chapter 36 of the Oregon Revised Statements.

There are no board or association managed arbitration programs for buyers and sellers. That being the case, the parties are given the choice of either using the Arbitration Services of Portland or “any other professional arbitration service that has existing rules of arbitration, provided that the selected alternative service also uses arbitrators who are in good standing with the Oregon State Bar, with expertise in real estate law and who can conduct a hearing in the county where the property is located.” Information of the Arbitration Services of Portland program can be found on their webpage at: www.arbserve.com. Just click on Real Estate Sales (in the section REALTORS® printed forms).

Private arbitration is intended to be faster, less formal and less expensive than civil litigation. Arbitration advocates also point to the use of arbitrators with specific industry or legal expertise as a significant plus. In recent years, private arbitration detractors, have cast doubt on each of these claims. In addition to concerns about the speed, cost and efficacy of private arbitration some challenge the fairness of arbitration programs. They point to the difficulty of appealing arbitration decisions as evidence of the unfairness of the system.

Concerns with the efficacy and fairness of consumer contract mandated arbitration have lead to disclosure concerns. Many, including at one time the Real Estate Agency, believe that existence of a private arbitration clause in a consumer contract must be disclosed to the consumer before they enter into the contract. As the consumer’s agent, disclosure falls to real estate licensees. To meet disclosure concerns, the arbitration clause in the sale form contains the following all caps disclosure: 

“BY CONSENTING TO THIS PROVISION SELLER AND BUYER ARE AGREEING THAT DISPUTES ARISING UNDER THIS AGREEMENT SHALL BE HEARD AND DECIDED BY ONE OR MORE NEUTRAL ARBITRATORS AND SELLER AND BUYER ARE GIVING UP THE RIGHT TO HAVE THE MATTER TRIED BY A JUDGE OR JURY, THE RIGHT TO APPEAL AN ARBITRATION DECISION IS LIMITED UNDER OREGON LAW.”

It is a good practice for agents to point out the dispute resolution clauses to their clients and have the client read the disclosure. Some companies go as far as having the client initial the arbitration disclosure clause in the margin of the contract.

The final clause in the buyer/seller dispute resolution provisions deals with attorney fees. Under Oregon law, attorney fees are available in a contract dispute only if the parties have agreed they will be available. It is in this fourth clause that the buyer and seller agree the prevailing party in any “suit, action or arbitration (excluding those Claims filed in Small Claims Court)” will be entitled to attorney fees and costs. There is, however, a catch. The catch is the prevailing party must prove to the satisfaction of the judge or arbitrator that they “offered or agreed in writing to participate in mediation prior to, or promptly upon, the filing in arbitration or court.” Thus, attorney fees are used to encourage the parties to engage in mediation.

Until recently, the buyer/seller dispute resolution procedures (Small Claims Court, mediation, arbitration and attorney fees only if the party agreed to mediation) applied to all disputes, including those involving the agents or their firms. Under the current version of the sale agreement form, disputes involving licensees or firms are subject to different procedures. Such disputes are still required to go to Small Claims if the dispute is within the jurisdiction of that Court; mediation is not, however, required.

Arbitration of disputes involving licensees or firms is required using the same arbitration procedures as buyer/seller disputes. Arbitration must be used in lieu of litigation in any other forum. This arbitration requirement does not apply to REALTOR®/REALTOR® disputes covered by the Code of Ethics. It also does not apply if the licensee or firm has agreed to some other process in a listing or buyer service agreement or the licensee is the buyer or seller.

The new licensee or firm dispute resolution clause expressly replaces and supercedes the alternative dispute resolution and attorney fee provisions that apply to buyer/seller disputes. What that means is that the prevailing party in a suit against a licensee or firm is not entitled to attorney fees or costs. The provision replacing and superceding the provisions of the buyer/seller dispute resolution procedures is in bold print. There is, however, no express disclosure or warning regarding the consequences of the clause.

Embedding dispute resolution clauses that concern licensees and firms in a contract between a buyer and seller raises difficult legal issues. First, there is the problem that ordinarily agents are not parties to their client’s contracts. Fortunately, arbitration laws are written broadly enough that a formal contractual relationship may not be needed to support an agreement to arbitrate. Nevertheless, agents should keep in mind that any provision defining their rights in a contract of which they are not party to, has the potential to create legal issues.
Back to Top

 

Early principal broker involvement is absolutely critical at the first signs of a dispute involving an agent. The first thing that must be done is an objective risk assessment. That means understanding that disputes aren’t just about who is right and who is wrong. Getting to right and wrong costs money whether you turn out to be right or wrong. Every post-closing dispute raises the issue of negotiating against transaction costs. Negotiating against transaction costs means a rational objective assessment of the difference between the cost of resolving the dispute through arbitration, court action or administrative investigation and the cost of settlement.

There is no pat answer to settlement questions. What is it worth in a particular case to maintain a good relationship with a former client or customer? What is it worth to protect your license even if you believe you have done nothing wrong? How much less will it cost to settle now before going to the expense in time, money and stress necessary to prove you did nothing wrong? These are questions that need to be answered in each individual case in close consultation between principal broker and agent.

Negotiating against the transaction costs associated with formal dispute resolution feels a lot like being blackmailed but that doesn’t change the costs associated with dispute resolution. Fighting about the cost of a used refrigerator, a hot water heater or new bedroom carpeting is probably going to be a fool’s errand if fighting means a Real Estate Agency investigation and dealing with judges or arbitrators. Other claims may be too expensive or too frivolous for there to be much choice. Being able to tell the difference between the two is what early principal broker involvement and negotiating against transaction cost is about.
Back to Top

Disputes between clients that arise after closing can be difficult to resolve without legal help. Agreements resolving after-closing disputes, because they often involve giving up legal rights, almost always involve the practice of law and require legal advice. That is not to say, however, that real estate agents do not or should not play a role when disputes between the parties arise after closing.

It is first important to understand that as a general rule the agency relationship between a real estate licensee and a client ends with the closing of the sale. That is the case because the object of the agency has been completed. Click here for a detailed discussion of termination of agency relationships. This is important because it means an agent is not legally obligated to help a former client resolve a post-closing dispute and, if they do, their authority will be extremely limited.

Agents involve themselves in post-closing disputes as a matter of good business practices, not legal obligation. It is always good business to have satisfied and happy ex-clients out in the world singing your praises. It is perhaps even more important not to have disgruntled ex-clients out there making complaints to the Real Estate Agency and filing lawsuits. It is a short step from “the seller took advantage of me” to “his agent took advantage of me” to “why did my agent let these crooks take advantage of me.” A buyer’s agent who eggs his buyer client on by suggesting fraud and deceit may find themselves named in the lawsuit that results once their client hires a lawyer.

Although not every post-closing suit can or even should be resolved – frivolous claims and unreasonable people do exist – it is a foolish agent (whichever side they were on) who does not first explore business solutions to disputes that arise after closing. The most common post-closing dispute, of course, is one over the condition of the property. This simple fact makes agent or company provided home warranties among the most cost effective risk management tools available. Click here for a discussion of the commission sharing issue associated with agent provided home warranties.

When there is no insurance, a defect discovered after closing is very likely to mean the buyer calling their agent to call the seller’s agent to seek redress. The tendency at that point is for everyone to point fingers at everyone else. That is a foolish approach. There will be plenty of time for finger pointing later on. Rather than pointing fingers and assessing blame, the first step, just like with a pre-closing problem, is to carefully define the problem.

Suppose, for instance, the problem is that the buyer has no hot water when they move in. The first step is for someone to determine what exactly is wrong and what it will take to fix it. This sounds basic but it is all too often overlooked. Helping a former client get a problem correctly diagnosed by recommending repair people you know to be honest and competent is the kind of service that wins life-long clients, helps defuse potentially unpleasant situations and marks you as a true real estate professional. More importantly, to paraphrase a former U.S. Secretary of Defense, it is much easier to see solutions to known problems than unknown ones.

Once a post-closing problem is understood, it is time to talk to the client about solutions. This is basically beginning the same process as that used for finding resolution to pre-closing disputes. If the client feels no obligation and is unwilling to participate in any resolution, and the problem is one that could result in a significant claim, it is time to recommend they seek legal advice. If not, it is time to negotiate a resolution and to not forget about fail-safe provisions.

Agents, however, should not draft agreements to resolve disputes that arise after closing. Such an agreement will be considered a settlement agreement and as such can affect legal rights. Drafting such agreements is the work of attorneys. If a problem is big enough or complex enough to require a written agreement to resolve, it is time to get lawyers involved. Agents should, therefore, make it clear from the outset that their efforts to help former clients resolve post-closing disputes do not include legal advice or drafting settlement agreements.

If the former clients cannot or will not resolve a post-closing problem, it is time to assess the agent’s own potential exposure. Unhappy people are bad for business and can even be a threat to your license. Sure, that can seem, and maybe even is, unfair but it is reality. If someone is unhappy with your client because of a real estate transaction in which you represented that person, you need to assess the risk of that unhappiness extending to you. Their own agent should be doing the same thing.
Back to Top

As a rule, the kinds of unanticipated circumstances that precipitate pre-closing disputes are matters for negotiation. For instance, suppose it comes to light during a transaction that a prior owner converted the garage to a family room without benefit of a building permit. If this were discovered on an inspection report, it would be grounds for the buyer’s disapproval of the condition of the property based on the report. If otherwise discovered and disclosed as a latent material defect, it would certainly be grounds for rescission of the contract based on a mutual mistake. Either way, the deal is going to die unless the parties can negotiate around the problem.

The seller may not see the problem as theirs alone if they did not do the remodel. That, however, is not relevant. As between this buyer and this seller, the problem is the seller’s because the buyer can walk away from the deal based on the discovery of the problem. Allowing this buyer to walk away does nothing for the seller because once the problem is known it must be remedied or disclosed to all potential buyers. The seller, therefore, is going to have to deal with the issue.

One potential solution is for the seller to obtain the necessary permits prior to close. Who pays the cost of obtaining the permits is a matter of negotiation, but the seller has little to bargain with given that the purchase price assumed a legal family room. Still, costs are always negotiable. However the negotiations come out, it is usually the agent’s job to reduce the agreement to writing. This is where real estate agents often come to grief.

The tendency once agreement has been reached regarding a dispute is to scribble out something like “Seller to obtain permits for family room” and let it go at that. This manner of resolving pre-closing disputes is a great disservice to clients. Agents are not lawyers, but they can learn to draft simple agreements that make clear the actual resolution of the dispute.

An agreement resolving a pre-closing dispute should start with a simple statement of the purpose of agreement. Second, the resolution of the dispute should be set out in clear terms of what each party has agreed to do and when they agree to do it. Finally, and this is where real estate agents almost always fall short, fail-safe mechanisms should be included so that if things do not go as planned future disputes are avoided.

Fail safe mechanisms are based on a close examination of the promises made in the agreement resolving the pre-closing dispute. For instance, if the seller has agreed to obtain the necessary building permits at their sole expense prior to the closing date, three potential problems are immediately apparent. The seller may find they cannot get the permit at all, they may find they can get them but at too great a cost, or they may find they can get them at an acceptable cost but not before the closing date. Each of these potential problems should be anticipated and the resolution for each potential problem included in the addendum resolving the problem.

An agreement to resolve a potential dispute over a family room having been built without a permit might look something like this:

“The parties to this agreement have discovered that unbeknownst to either party a prior owner converted the garage to a family room without obtaining building permits. To resolve this problem, the parties agree that the seller will use their best efforts to obtain the required permits prior to the closing date. The costs of obtaining the necessary permits, not to exceed $______ , will be paid by the seller. Should the regulatory authority refuse to issue the permits or it otherwise becomes impossible to establish the legality of the family room prior to the closing date, or any extension thereof agreeable to the parties, the transaction shall terminate and all earnest money be refunded to the buyers. If the cost of obtaining the necessary permits exceeds the amount specified above, the buyer, upon notice of the true cost, may elect to pay the difference and proceed to closing or terminate the transaction and have all earnest money refunded. If the permits are not obtained prior to the closing date, the closing date shall be automatically extended for _____ days. Thereafter, the closing date shall be extended only by mutual agreement of buyer and seller and if not so extended, the transaction shall automatically terminate and all earnest shall be refunded to the buyer.”

Certainly, it is easier to write “Seller to obtain permits for family room” than draft a whole paragraph. But scribbling a “seller to” sentence does not really define or handle the potential dispute. Some may object that so detailed an agreement is practicing law, but they miss the point. What is written above is a negotiated business solution to a known problem. All that is addressed are business problems raised by the lack of permits, not the legal consequences of not having the permits or the legal effect of closing without them.

Business expertise includes assessing a problem and helping the parties find a business solution. The actual terms of the solution, for instance, whether the buyer can elect to pay the difference if the permits cost more than expected, does not require legal analysis. It is simply the result of the business negotiations. The agent’s role is to help the parties by anticipating real world, not legal, problems. It is the parties who, with that help, find the solutions. Writing the document that memorializes the solution found by the parties is easy once the parties have decided how they want to handle the situation.

This manner of doing business traditionally is not taught, or even supported, in the industry. That is a consequence of the “sales” origin of the business. A modern professional services approach, however, demands more than simply filling in the blanks of a one-size-fits-all form. Professional service means bringing training, expertise and experience to bear on the client’s undertaking. When that undertaking is closing a real estate transaction, the ability to help the parties negotiate around problems is going to be critical.

A professional service approach means helping the parties understand the problem. For instance, understanding that an un-permitted addition can mean expenses and difficulty in the future if not corrected. That knowledge requires no legal training or analysis. It is something known to anyone familiar with real estate. It is the agent’s duty to share business knowledge. Once it is shared, it is the parties, with their agents’ help, who must decide on the solution.

It is real estate training, expertise and experience that are needed to help parties find potential solutions. This is done by helping them understand the business, not legal, ramifications of the various possible solutions. Dispute resolution is first a matter of negotiation, not the assertion of legal rights. As long as the parties are seeking business solutions by negotiation, the agents are within the scope of their agency and expertise.

Pre-closing disputes follow a predictable pattern. First, some problem arises prior to closing. The problem can be as simple as a misunderstanding over a document or as serious as an anticipatory breach by the other party. Whatever the problem, the first decision is always: do the parties want to continue? If they do not want to continue, it is time to advise legal consultation. If they do, it is time to negotiate a solution.

Once a pre-closing problem is defined and a solution is negotiated, it is time to memorialize the solutions. Real solutions require “fail-safe” provisions so that if the solution proves impossible or more burdensome than anticipated, the parties know what happens next. It is really quite simple if the real estate professionals involved approach the problem as a business problem amendable to rational deconstruction and resolution.
Back to Top

Disputes are unfortunately, and all too commonly a part of real estate transactions. It is worth keeping in mind, however, that in the overwhelming majority of transactions the disputes are minor and the parties do not resort to formal dispute resolution processes. That is not, however, to say that disputes are not important or can be ignored. Quite the contrary is true. A smart agent will be alert to the potential for disputes and strive to resolve them before they become serious enough to threaten the transaction or create liability.

Real estate transactions generate two kinds of disputes. The first is disputes between the parties. Such disputes are deal killers and lawsuit generators. They can also result in the second type of dispute: disputes that involve agents. A dispute between the parties means negotiating a business solution if possible. If not, it means advising your client to seek legal advice. A dispute involving agents means self-preservation.

Disputes involving agents are dangerous and stressful. Early principal broker involvement is absolutely critical at the first sign of a dispute that involves you as an agent. Because the broker is not personally involved with the client, they may be able to provide a more objective risk assessment. When clients stop fighting among themselves and start to point a finger at you, protecting your license needs to be foremost in your mind. That means getting your principal broker involved immediately.

Buyer/Seller Disputes
Disputes between the parties to a real estate transaction come in two types: Those that arise before closing and those that arise after closing. Disputes that arise before closing generally fall into two categories. One is disputes involving unanticipated circumstances. The other is disputes involving the terms of the contract. These are, of course, not mutually exclusive categories. An unanticipated circumstance can lead to a dispute about the terms of the contract. For instance, finding a roof leak can lead to a dispute about the operation of the inspection clause.
Back to Top

An anticipatory breach of contract occurs when one party to a contract, without justification, makes a positive statement indicating they will not or cannot perform the contract. An anticipatory breach may excuse the other party’s performance. Anticipatory breach is important in real estate because when a buyer tells the seller they cannot or will not be able to close, the seller does not want to wait until closing to declare the contract terminated. Obviously, an anticipatory breach is a serious matter. For that reason, Oregon courts have ruled that “before a party to an executory contract may be said to have anticipatorily breached the same he must refuse by acts or deeds to perform his obligations under the contract positively, unconditionally, unequivocally, distinctly and absolutely.”

Suppose the buyer’s agent calls the seller’s agent three weeks before closing to say it looks like the buyer will not be able to come up with funds necessary to close. Is this an anticipatory breach? Probably it is not because the statement is not a positive, unconditional, unequivocal, distinct or absolute refusal to perform. How about if a few days later the buyer’s agent sends over a signed termination agreement stating that the earnest money is to be returned? Is that a refusal to perform? Again, probably it is not because most termination forms do not contain a refusal statement; they just ask if the other side will agree to mutual rescission of the contract.

If a buyer has not committed an anticipatory breach, and the seller is unwilling to agree to mutual rescission, the seller is stuck. Unless something more is done, the seller can end up having to wait until the closing date to declare the contract terminated. Sometimes waiting for the closing date is the best approach but it is also possible, once the buyer’s performance is reasonably in doubt, for the seller to force the buyer to declare their intentions. This is done by the seller seeking written assurance the buyer will perform.

Written assurance means a notice from the seller to the buyer stating clearly the reason the other party’s performance is in doubt and asking that the buyer give assurance that they will perform and how. For instance, in our example, the seller would send the buyer a notice stating that the seller has learned through the buyer’s agent that the buyer will not be able to come up with the funds necessary to close. The letter would then state the seller’s intent to enforce the contract according to it terms and ask the buyer to provide the seller with assurances that the buyer will perform as required by the contract. A short deadline (a day or two) for receipt of the buyer’s assurance is given.

If no assurances are forthcoming by the deadline, the seller is in a much better position to declare an anticipatory breach than they were. The trick when dealing with anticipatory breach (really any breach that comes before closing) is caution. A seller too quick to declare the buyer in breach can find that they, not the buyer, is the one who has breached. This is what makes the concept of “out of contract” so dangerous.

Take, for instance, a dispute over whether the buyer has applied for a loan on time or used best efforts to obtain the loan. If, based on their own assessment of the situation, the seller declares the buyer “out of contract,” the seller may themselves unwittingly commit an anticipatory breach. If it turns out the seller was wrong about the missed deadline being material, the seller’s attempt to terminate will turn out to be unjustified and risk being a material breach that excuses the buyer’s performance. Oh, what a tangled web!

Anticipated breach can trigger emotional responses. As the professional involved, resist the urge to respond emotionally and counsel your client against it. If the other side is talking about getting out of the contract and you don’t agree, stop and think about how to clarify the situation. Sending around a termination agreement that never gets signed by the other side doesn’t accomplish anything. What is needed is a document that states your position clearly and demands the other side do the same.

Stating your position clearly and demanding the same of the other side gives your client information they can use to make a rational decision. At a minimum, your efforts to clarify the situation will prevent the other side from later changing their story. More to the point, it will prevent them from claiming surprise or mistake when your client declares the contract terminated. Take, for instance, a situation in which a buyer sends over a termination agreement saying they haven’t been able to obtain a loan and demanding return of the earnest money. The seller believes the buyer has not used best efforts and refuses to sign the termination agreement because they want the earnest money. With no termination agreement and no positive refusal to perform, the deal goes into limbo.

This scenario is repeated every day in real estate, but there is no need for it. Refusing to sign a request from the other side asking for mutual rescission of the contract just keeps the existing contract in place. In other words, it does nothing. What is needed is for one side or the other to declare the contract terminated. Only once it is clear the buyer will not seek to perform the contact can the property safely go back on the market while the parties fight over the earnest money. Unsigned termination agreements are a prescription for disaster.

Rather than just refusing to sign, the seller should give the buyer notice that unless the seller hears otherwise within a very short time (24 or 48 hours) they will consider the buyer to have unilaterally terminated the contract. Then, at the end of the deadline, if the buyer’s response is anything other than we are going to perform, the seller can give final notice that they consider the buyer to have terminated due to buyer’s non-performance. At that point, it is much safer to move on to find a new buyer.

Terminating a contract is always a risky business if the parties cannot agree to the termination. Mutual rescission agreements (termination agreements in the parlance of the trade) are always the preferred means of terminating a contract because they leave no doubt. When, however, there is a dispute about terminating the contract, an unsigned termination agreement is simply too ambiguous to rely on. In such situations, it is wise to clarify the situation in writing and give the other side a short time to respond before unilaterally declaring the contract terminated by the non-performing party and moving on.

A real estate agent should, of course, always be careful about not practicing law. That means not making positive statements about legal consequences. An agent should always state facts, not consequences. It is not the practice of law to send a notice to the buyer saying the seller is in receipt of their termination agreement and has not signed it because the seller does not believe the buyer has used best efforts to obtain the loan. It is not the practice of law for the seller to give the buyer 24 hours in which to either assure the seller they will perform the contract or state clearly their grounds for refusing to perform. These are just facts. If a statement of consequences is needed, it should come from an attorney not a real estate agent.
Back to Top

Under Oregon law, a material breach of contract is one that “goes to the very substance of the contract and defeats the object of the parties entering into the contract.” Material breaches are important because a material breach excuses the other party’s performance. Thus, if the buyer fails, without excuse, to perform a promise that “goes to the very substance of the contract and defeats the object of the parties entering into the contract,” the seller can refuse to sell. Similarly, a material breach by the seller would excuse the buyer’s obligation to purchase.

Whether a particular breach is material is a question of fact and depends on the circumstances in which the breach takes place. This makes predicting whether a breach is material or not complicated and difficult. It is for that reason that real estate agents should never offer an opinion on whether some failure to perform is or isn’t a material breach.

Unfortunately, agents offer such opinions all the time. Worse, they often do so without understanding the difference between material and non-material breaches. Evidently, somewhere in the distant past some lawyer taught real estate agents that the buyer’s failure to perform strictly as required by the contract meant the buyer was “out of contract.” According to the myth thus created, being “out of contract” excused the other party’s obligation to perform.

There is no such thing as “out of contract” as far as the law of contracts is concerned. There is just breach. Thinking in “out of contract” terms can cause great harm if you believe “out of contract” automatically means material breach. That is not the case.

Real estate sale contracts contain dozens of promises. Few are material. That is the case because a real estate contract is performed over weeks or even months. A simple missed deadline (in circumstance where performance is not due for weeks or months) will not usually defeat the purpose of the contract. Take, for instance, the buyer’s promise to make the loan application within three days of acceptance. No reasonable person would believe that a delay of a few days in making a loan application “defeats the object of the parties entering into the contract.” It follows that the buyer’s breach of the promise to make application within three days would not be considered material unless application was so delayed as to actually affect the closing date.

This result is often startling to real estate agents but it is the law. One of the consequences of the way the law treats breach is that form contracts often contain “time is of the essence” clauses. A “time is of the essence” clause is used to make a deadline material. As of January 2008, Oregon residential real estate forms make not only the closing date but all of the deadlines “of the essence.” Courts, however, are quick to find a “time is of the essence” clause waived if not enforced. Once waived, a deadline can be reinstated only by giving the other party notice and a reasonable time in which to perform.

All of this causes the more literal of agents to complain that deadlines don’t mean anything. That, however, is not the case. Courts are very interested in enforcing the intent of the parties as expressed in the contract. They are far less interested in technicalities or loopholes that one party might later try to use to “get out of the deal.” When parties enter into a contract for the sale and purchase of real property, their object is to transfer title, not assure every ancillary step required to accomplish that end. Courts will enforce the original intent to transfer unless something happens that defeats that purpose.

A real estate licensee should never counsel a client on how to get out of a contract or offer an opinion on whether a party has materially breached or the other party is entitled to terminate. Real estate licensees are employed to aid in performance, not to give advice on non-performance. When a client starts talking about non-performance of the contract in circumstances that raise issues of breach, it is time to advise the client to seek legal advice. Clients have to understand that there is no such thing as a weasel clause under Oregon law even if sometimes, like cheating on taxes, people do weasel out of contracts.
Back to Top

Breach of contract has specific legal meaning. That meaning is: “Failure, without legal excuse, to perform any promise which forms the whole or part of a contract.” This legal definition raises a number of issues important to real estate agents who aid their clients in performing contracts. Notice first that the definition applies to the failure to perform “any promise” whether that promise forms the “whole or part” of the contract. This manner of defining breach of contract is necessary because the law distinguishes among types of breaches when assessing remedies.

The failure, without legal excuse, to perform the whole of a contract is called a material breach. A failure to perform only a part of a contract may not be material to performance of the whole. That is the case because minor or easily corrected breaches do not defeat the purpose of the contract or deprive the other party of the substantial benefit of the bargain. Non-material breaches may result in an award in damages, but they do not excuse the other party from performing their side of the contract. Only a material breach can excuse performance. This issue of material breach is discussed in detail shortly.

No discussion of contract breach would be complete, because it happens all the time in real estate, without at least a mention of Anticipatory Breach. Anticipatory breach occurs when one party, without legal excuse, makes a positive statement to the other party that they will not perform. This can happen when one party believes, erroneously, they have a legal excuse not to perform. It can happen when one party finds they cannot or do not want to perform as promised. Whatever the situation, a real estate agent should know enough about material and anticipatory breach to advise their client to seek legal counsel when non-performance occurs or is anticipated.
Back to Top

In Oregon, all contracts include an implied covenant of good faith and fair dealing. The law imposes this duty of good faith and fair dealing to facilitate performance and enforcement of contracts. According to the courts, however, the duties of good faith and fair dealing must be consistent with, and in furtherance of, the agreed-upon terms of the contract or effectuate the parties’ objectively reasonable expectations under the contract. The implied covenant of good faith and fair dealing cannot be used to vary the substantive terms of the contract or impose obligations inconsistent with the terms of the contract.

According to Oregon courts, the duty of good faith and fair dealing does not “provide a remedy for an unpleasantly motivated act that is permitted expressly by contract.” Contrary to popular belief, Oregon courts will not examine the motives of a party who exercises rights under a contract in order to escape its legal obligations. This somewhat startling result is probably best illustrated by the famous Oregon real estate case of Zygar v. Johnson. Click here for a copy of the case.

Zygar listed his property for sale and soon attracted the attention of Johnson, a young man who was soon to be married. Johnson, looking for a home for himself and his bride-to-be, liked the Zygar property and made an offer which Zygar accepted. The young, and some would say foolish, Johnson did not consult his bride-to-be on the purchase.

One of the provisions of the contract was that Johnson had the right to approve of a pest and dry rot inspection. Johnson ordered the inspection which showed some dry rot under the house caused by an unknown source of water leakage. About the time Johnson received the inspection report, his would be bride viewed the house and informed him she hated it. Accordingly, Johnson disapproved of the dry rot inspection in order to get out of the deal and save (at least temporarily) his marriage.

Rather than let it go at “my client disapproves of the dry rot report,” Johnson’s agent evidently told the listing broker that Johnson’s real motive was his fianc?’s dissatisfaction with the house. When Zygar learned this he sued, claiming Johnson’s disapproval was a pretext and, therefore, Johnson breached the implied covenant of good faith and fair dealing.

The Oregon Court of Appeals disagreed with Zygar’s understanding of good faith and fair dealing holding that “a purchaser does not breach his contractual duty in refusing to proceed with a real estate purchase when the purchase was conditioned on the purchaser obtaining a satisfactory dry rot report and the purchaser was not satisfied with the dry rot report, even though he may have had other reasons for repudiating the agreement.” According to the court, “whatever reasons the purchaser may have had for wanting out of the transaction were immaterial to the question of whether he, in fact, was dissatisfied with the dry rot report.” Johnson, the court held, had a reasonable basis for disapproving of the inspection report and, therefore, the contractual right to do so as long as there was some reasonable basis for the disapproval.

Zygar, and its progeny, should not be taken to stand for the proposition that “weasel” clauses are ok in Oregon. Other than in circumstance where one party has a clear right to avoid the contract under a contingency, Oregon courts frown on bad faith performance of contracts. For instance, a buyer who enters several contracts with the intent to perform only one is acting in bad faith. That is the case because the intent not to perform precedes any contractual right not to perform. Motive isn’t always irrelevant to good faith, it is just irrelevant when a separate legitimate right exists under the contract.

What all this means to a real estate agent is that extreme care must be taken when clients start asking about “getting out of the contract.” What the law requires is good faith and fair dealing to facilitate performance. That means not misleading or trying to trap the other party into a breach or trying to trick them into foregoing a contractual right. It means, in short, applying the same willingness to perform as promised at the beginning of the contract as at the end.

The implied covenant of good faith and fair dealing is not the kind of thing a real estate agent discusses in depth with their client. Instead, it is the kind of thing that can cause a good agent to advise their client to be cautious and seek legal advice before taking some action implicating contract performance. The law favors performance of contracts. It does not favor technicalities or arbitrary performance. Do not get pushed into discussions about getting out of contracts and never, under any circumstance, make predictions about what is or isn’t allowed under a contract. Real estate agents have no duty whatever to assist clients in avoiding legal obligations. If someone wants out of a contract or advice on enforcing one, they need to talk to a lawyer.
Back to Top