We have seen that for the most part the agent’s duty to the client during the client’s performance of the contract is one of using the agent’s training and experience to “give his principal information which is relevant to affairs entrusted to him and which, as the agent has notice, the principal would desire to have.” Click here for a more detailed discussion of the Scope of Agency. To fulfill that duty, it is necessary for the agent to understand something of the client’s legal duties when performing a contract.

The parties to a contract must perform the promises contained in their agreement or risk liability under the contract. Failure to perform as promised under contract is called “breach.” Click here for a detailed discussion of breach of contract. Whether some action or inaction is or isn’t a breach can be a complicated legal matter well beyond the scope of agency of a real estate licensee. It follows that advice on whether a contract has been breached or the consequences of that breach is not something real estate licensees would normally be involved in.

That is not to say real estate agents should know nothing of the law of breach or that they never base business advice to clients on that knowledge. Rather, it is to say that an agent should never presume to advise a client that some action or inaction is or isn’t a breach of the contract. Instead, the agent should limit advice to an explanation of what the contract actually says or a simple explanation of the duties the law imposes on the parties to a contract. In addition to performing the promises contained in the contract, that mostly means explaining the related duties of good faith performance and best efforts.
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The time from acceptance to closing can be a difficult time in a real estate transaction. It is during this time that problems with the deal or the property usually arise. It is during this time that both buyers and sellers can have doubts about the wisdom of their undertaking. It is during this time that real estate agents, in a very real sense, earn or lose their commission.

The role an agent plays in contract performance depends on a number of variables. First among these are the wants and expectations of the parties. Some people want to be in charge and do it all themselves. Others expect the whole thing to be handled for them by the agents without any personal inconvenience. Most clients and deals fall somewhere between these extremes.

Where, between these extremes, the actual services delivered by a real estate agent falls, is mostly a matter of business practices. An agent is, however, at a minimum required to make reasonable efforts to provide the client with information that is within the scope of the agency relationship. To determine what information that might be, you have to know something about how real estate licensees are trained and what, as a group, they normally do. These two things, more than anything else, will determine the role an agent plays in aiding contract performance.

Real estate licensees are not lawyers, but they do have training in real estate contracts and real property law. Oregon courts have used this fact to hold that ” the ordinary layman dealing with a real estate or insurance agent may be justified in relying upon the latter to know enough in regard to real estate and insurance law to give reliable opinion on the simpler problems arising therein? Helping the client with the “simpler problems” regarding real estate law is within the scope of agency for real estate licensees.

The “simpler problems” in real estate law are those that come up all the time and do not require a law degree to understand. For instance, explaining the operation of the standard clauses in a pre-printed sale form provided by the agent is going to be within the scope of the agency created. An agent wouldn’t be expected to explain the legal ramifications of failure to fully satisfy the terms of a condition precedent, but would be expected to let the buyer know how many days they have to satisfy the condition and what the contract says with regard to satisfaction. Similarly, an agent doesn’t have to know the legal ramifications of a title exception, but could be expected to bring the existence of an unusual exception to their client’s attention.

One way to think about what is within the scope of agency when aiding in contract performance is to think in terms of real estate business, not law. Certainly, law underlies the business of buying and selling real property, but ordinary people make and perform real estate contracts everyday without being lawyers. They do that by reading what is said in the contract and bringing common sense experience to bear if there is a problem.

Agency is really just about the agent using their training and experience to augment the principal’s common sense and experience. In that regard, it is helpful as an agent to ask: what would I do given what I know about real estate if I were buying or selling this home for myself and my family to live in for the rest of our lives? Do that and you are likely to stay within the scope of your agency. You are also a lot more likely to provide quality professional services to your clients and customers.

Giving your client the benefit of what you know about real estate contracts and their performance based on your training and experience as a real estate licensee is but one part of aiding in contract performance. Another part is helping the client with the investigations necessary to fulfill the terms of the contract and satisfy themselves as to the wisdom of the purchase. In Oregon, by statute, real estate licensees have no “duty to investigate matters that are outside the scope of the real estate licensee’s expertise, including but not limited to investigation of the condition of property, the legal status of the title or the owner’s past conformance with law, unless the licensee or the licensee’s agent agrees in writing to investigate a matter.”

This statutory provision is essentially a limit on the scope of a real estate licensee’s agency. It defines what is and isn’t expected of a licensee when it comes to investigation of the condition of the property, the legal status of the title and the seller’s past (not present) conformance with law. That doesn’t mean that property inspection, title and conformance with law are not important or that an agent has no duty with regard to these subjects. Instead, it means that the agent doesn’t themselves have to investigate to find out if there are problems with the condition of the property, the title or the seller’s past conformance with law.

An agent cannot ignore problems in these areas that would be obvious to other agents in the same circumstances. That is, they cannot turn a blind eye to what a reasonable agent in the same circumstances would see or know. The law doesn’t require the agent to go looking for problems where none are apparent.

Take, for instance, the famous California case where a listing agent was held potentially liable for not disclosing to the buyer the risk that a landslide might destroy the house. Although widely believed in the industry to create some “duty to investigate,” the ruling actually turned on whether in the circumstances a reasonable real estate licensee in process of listing, marketing and showing the property would have become aware of the slide potential because there were a number of “red flags” that would be obvious to the ordinary, prudent agent without the need to investigate. It was the agent’s failure to respond to the red flags that created the potential liability, not a separate duty to “investigate.”

Identifying “red flags” during contract performance has always been within the scope of agency for a real estate licensee. That duty, like the duty to provide relevant information to the client, is limited to those things entrusted to the agent. What Oregon state law says is that investigation itself is not entrusted to the agent. That doesn’t mean the agent can ignore obvious problems and it doesn’t mean recommending that the client investigate is not within the scope of the agency. It obviously is. If it weren’t, commonly used sale agreement forms would not contain the warning that “Buyer’s election to waive the right of inspection is solely Buyer’s decision and at Buyer’s own risk.”

Other than not ignoring “red flags,” the key to handling investigation of property condition, title status and the seller’s conformance with law is advising the use of third-party experts. Advising agents to recommend to their clients consultation with third-party experts is common, and, in some regards, glib risk management advice. Such advice isn’t usually seen as helpful by agents because everyone knows that buyers and sellers do not want to spend money on third-party experts. Keep in mind, however, that while giving information and advice is often within the scope of agency for real estate licensees, making the client accept or follow that advice is not.

Take, for example, an addition or remodel done without a building permit. Such things can be real deal killers if discovered during contract performance. If not discovered until after closing, they are likely to lead to ugly lawsuits. We know that Oregon law says an agent doesn’t have to investigate whether the seller got the proper permits (past conformance with law). But, that doesn’t mean the listing agent can ignore an obvious addition or remodel or turn a blind eye to a discrepancy between what they see and the assessor’s data. It certainly doesn’t mean a buyer’s agent can ignore these things or fail to explain to their client the potential for problems if it turns out there were no permits.

An agent’s duty, according to Oregon courts, is to “give his principal information which is relevant to affairs entrusted to him and which, as the agent has notice, the principal would desire to have.” Give the advice you give based on training and experience as a real estate agent, not as a home inspector or surveyor or lawyer. Then, and this is critical if the client rejects the advice, follow up with a letter or email stating the advice given, the reason it was given, and the client’s decision with regard to the object of the advice. In other words: give the advice your training and experience tells you is relevant to the client’s performance of the contract and then document that advice.
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Aiding a client or customer in performing the sale contract is a big part of being a REALTOR®. In Oregon, as in most states, no commission is earned until and unless the buyer consummates the transaction by closing. It is hardly surprising then that much of the work of a REALTOR® takes place between acceptance and closing.

Aiding contract performance means understanding the Agent’s Role in Contract Performance. The responsibilities of an agent in aiding contract performance depends to a large extent upon the Client’s Contract Performance. The client’s contract performance is dictated by the law of contract, not real estate license laws.

Oregon courts have imposed a duty of Good Faith Performance of Contracts. Real estate agents should understand contract performance at least enough to know when to advise the client to see an attorney. It is for that reason that no discussion of contract performance would be complete without some mention of non-performance or, in legal terms, Breach of Contract.

Breach of contract is a more complicated subject than most REALTORS® believe. Some breaches of contract are material and some are not. A Material Breach is, of course, more serious than a non-material breach, but few REALTORS® can tell the difference between the two or what that difference means to contract performance. As if material and non material breaches of contract were not enough, every agent should have at least some understanding of the difficult subject of Anticipatory Breach.

No discussion of aiding the parties in the performance of their contract would be complete without some discussion of Handling Client Disputes. Client disputes include Pre-Closing Disputes as well as Post-closing Disputes. Post-closing disputes raise the possibility of Disputes Involving the Agent.

Finally, no discussion of real estate disputes would be complete without some discussion of Formal Dispute Resolution processes. Dispute resolution in residential real estate transactions usually means being involved in a mediation/arbitration process of some kind. If the dispute is strictly over money and the amount is not large, the dispute may end up in a Small Claims Court. REALTORS®, of course, are not expected to act as lawyers when a dispute arises. It is, however, important that REALTORS® know enough about formal dispute resolution processes to point their clients, or themselves, in the right direction should a dispute be unavoidable.
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The closing provisions found in standard real estate sale agreement forms are usually quite simple. Generally, the closing clause itself does little more than establish a closing date. This simplicity belies the fact that closing clauses are among the most misunderstood and abused clauses found in real estate form contracts.

Strictly speaking, a “closing date” is not required in the sense that a date certain must be stated in the contract. Click here for a detailed discussion of the material terms of a real estate contract. Form real estate contracts, however, universally provide for a date certain for closing the transaction. This, of course, is very helpful if the parties actually close on that date. When they don’t, a not uncommon occurrence in residential real estate, you may find out just how misunderstood and abused a closing clause can be.

Contrary to popular belief, there is nothing special or magical about the closing clause. All things being equal, the closing clause, and the date it contains, is just another provision of the contract no more or less important than other clauses in the contract. That is not to say the closing date is unimportant, just that it is not unique or special in the eyes of the law. The parties simply agree at the time they enter the contract to conclude the contract not later than a certain date. It is no different in that respect than agreeing when to make the loan application or conduct the inspections or provide the preliminary title report or any of the host of agreed-to actions that go into a real estate transaction.

The closing clause in a form real estate contract is a sequencing provision. Like any number of clauses, the closing clause orders the parties performance by setting deadlines for performance. The closing deadline takes on importance only because it sets the time for the final performance of both parties. Closing dates matter because failure to perform the entire contract by that date is a breach of contract.

Breach of contract, though certainly serious, is less than half the story. It is a rare contract indeed that is performed exactly according to its express terms. Courts understand this and differentiate between those breaches which matter and those that don’t. A breach of contract that matters is considered a “material breach.”

A material breach is one that deprives the other party of an essential benefit of the bargain. Because it deprives the other party of the benefit of the bargain, a material breach excuses the performance of the non-breaching party. It is this little understood principal of contract law that gives closing dates their mythic quality. If the closing date is material, the buyer’s failure to close on time is a material breach which will excuse the seller’s performance. The seller can refuse to sell to a buyer who does not close the transaction on the required date – assuming, of course, that the closing date is “material.”

There are a variety of ways real estate forms make the closing date material. The old fashioned way, and the one still used in Oregon, is to preface the closing clause with the phrase “time is of the essence.” “Time is of the essence” is a legal term of art. Deadlines prefaced with the phrase are considered material. A more modern approach is to spell out the exact consequences of failing to close right in the closing clause. For instance, the closing clause used in the Arizona residential forms contain the following: “The parties to this Contract expressly agree that the failure of any party to comply with the terms and conditions of this Contract by the scheduled Close of Escrow will constitute a material breach of this Contract rendering the Contract subject to cancellation [under the cancellation provision of this Contract].”

In Oregon there is a common belief that the buyer’s failure to close by the date stated in the contract automatically cancels the contract. This virulent Oregon real estate myth is often expressed by saying the buyer is “out of contract.” “Out of contract” has no legal meaning. It is just slang. To the extent it is used to say one party thinks the other party is in breach, “out of contract” adds nothing. To the extent it is used to say the contract has somehow automatically terminated, it is mistaken and dangerous. The situation when it comes to the buyer missing the closing date is far more complex.

Using “time is of the essence,” instead of an express statement of materiality and cancellation, puts the burden on the seller to enforce the closing date. This is the case because courts are quick to find a seller who has not enforced the closing date has waived it. When, as is not infrequently the case, the buyer finds they cannot obtain the loan or clear a contingency by the closing date, they often ask for more time. Sometimes this is done in the form of an extension addendum. Other times, the buyer’s agent simply calls the listing agent and says the buyer is having some problem but will close as soon as the problem is solved. Either way, what has to happen, but usually isn’t happening, is the seller communicating an unequivocal intent to enforce the contract.

Absent an unequivocal intent to enforce the contract, the closing date can quickly become ambiguous. In the well known case of Tarlow v. Kelly, a jury found the seller had waived the “time is of the essence” clause simply because the seller allowed the buyer to continue efforts to find financing for some fifteen days after the closing date. According to the court, evidence that the seller did not demand timely performance and knew the buyer was continuing efforts to purchase after the closing date had passed, was sufficient to present a question of fact for the jury. The jury, the court ruled, “could conclude from them [the facts] that both parties proceeded after August 15 as though that date had no affect on the validity of their agreement and that [the seller] thereby voluntarily tolerated plaintiff’s late performance.” Click here to read the court’s full decision in the Tarlow case.

Enforcing a closing date, even with a “time is of the essence” clause, is about not tolerating late performance. The easiest way to create evidence that late performance was not tolerated is to give notice of the intent to enforce and then, based on that notice, enforce the deadline. Click here to view a sample notice of intent and notice of termination clauses. The only viable alternative to notice and enforcement, is a mutually agreed to written extension of the closing date. Anything less creates ambiguity.

Ambiguity can be avoided when the closing date approaches by explaining to the seller that there are only three possible outcomes on that date. The first, and by far the preferable one, is that the buyer performs the contract. The second is a mutually agreed upon written extension. The third is that the seller terminates the contract if the buyer fails to perform as required. It is in the exercise of the third option that real estate licensees have trouble.
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Standard real estate forms sometimes contain private dispute resolution clauses. Such clauses dictate the process to be used if there is a dispute over the transaction. Common forms of private dispute resolution are mediation and arbitration. Mediation is assisted negotiation with the mediator acting as a facilitator for the parties’ attempt to resolve their dispute by mutual agreement. In arbitration, the arbitrator is the decision maker and decides the resolution of the dispute after a hearing in which each party presents their evidence and arguments.

Dispute resolution clauses that dictate private arbitration limit the parties’ access to civil courts, including the ability to appeal adverse decisions. As a result, arbitration clauses in real estate contracts are somewhat controversial. In Oregon, the most commonly used real estate sale agreement form contains the following all-caps warning:

“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 THEIR RIGHT TO HAVE THE MATTER TRIED BY A JUDGE OR JURY. THE RIGHT TO APPEAL AN ARBITRATION DECISION IS LIMITED UNDER OREGON LAW.”

In actuality, there is no right to appeal an “arbitration decision” at all if what that is understood to mean is an appeal on the merits of the decision itself. An arbitrator’s decision, whether right or wrong, cannot be appealed. Instead, Oregon law allows challenges to enforcement of an arbitration decision only if the process used was patently unfair or the arbitrator clearly biased. Such a procedural challenge is not an “appeal” of the “decision” in the ordinary sense of these words.

Although Oregon law favors the use of private dispute resolution, courts do sometimes refuse to enforce arbitration clauses in form contracts. They do so when they believe the clause is “unconscionable” because of “substantial disparity in bargaining power, combined with terms that are unreasonably favorable to the party with the greater power.” Generally, arbitration clauses in standard real estate contracts survive judicial scrutiny. There are some caveats.

At least one Oregon court has struck the arbitration clause from a standard form contract where the form was used by a builder. Because the form was provided by the builder, not an agent in an existing home transaction, the disparity between the buyer and the builder was a major factor. Also taken into consideration was the fact that the consequences of the clause were not explained to the buyer. This case, however, was decided prior to the all-cap warning being included in the commonly used Oregon forms.

Whether the dispute resolution clauses found in common Oregon real estate forms are subject to challenge today is an open question. Certainly, the warnings now found in the form itself are helpful. Agents should, at a minimum, point out to clients the existence of the dispute resolution clauses in the contract. Although an agent cannot practice law by explaining the legal consequences of the clauses, they can point out to the client the functional provisions of the clause.

For instance, common Oregon forms require any dispute within the jurisdiction of small claims courts to be brought there exclusively. Small claims jurisdiction in Oregon is a dispute involving a claim for $7500 or less. Dispute resolution clauses in Oregon forms often require mediation between buyer and seller if there is a dispute that is not within small claims jurisdiction. Recently, the form most in use by REALTORS® has adopted separate provisions for disputes between buyer and seller and those involving real estate licensees or firms. These separate licensee or firm provisions, unlike the buyer/seller provisions, do not include mandatory mediation and do not allow the client attorney fees if they prevail in the dispute.
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A buyer who does not have a house inspected is taking a serious risk. For that reason, all real estate sale forms contain inspection clauses. Typically, the transaction is made contingent on the buyer in some way “approving” of the condition of the property as revealed in an inspection report or after a “due diligence” period during which the buyer is allowed to satisfy himself as to the condition of the property.

Residential real estate forms tend to use inspection contingencies that demand “professional inspections,” establishes strict disapproval criteria and requires formal affirmative disapproval by the buyer. Commercial transactions, on the other hand, tend to use general “due diligence” provisions that basically allow the buyer a specified period of time in which to satisfy themselves as to the desirability of the property. Because the residential approach to inspections is formal, expensive and strict, it is the source of a good deal of strife.

The inspection clauses used today in residential real estate forms evolved from simple “material defect” and “required repair” provisions. Historically, a residential purchaser could terminate a transaction on the basis of an inspection only if the inspection revealed “material defects.” As a result, termination under the inspection contingency was a rare and, for the most part, uncontested event.

What was less rare, historically, in residential transactions was the lender demanding certain “repairs” as a condition of making the loan. If the seller was unable or unwilling to make the lender-required repairs, the deal would fail on the loan contingency, not the inspection contingency. Standard forms from that era anticipated lender-required repairs by containing provisions for the seller to agree upfront to the amount of money they were willing to spend on “required” repairs. Thus, inspections and repairs were related but still separate provisions. Click here for a detailed discussion of the evolution of inspection clauses in residential contracts.

Modern inspection contingencies typically combine inspections and repairs in one clause. The most common way that is done in other states is to give the buyer an express right to propose repairs and then approve, or not, of the seller’s response to the repair request. Under such clauses, the buyer always has the last say on whether to go forward based on the seller’s response (or lack of response) to their repair request. Oregon does not use this approach to inspections or repairs.

In Oregon, common inspection contingencies propose an “inspection period” during which the buyer and seller may negotiate over “matters disclosed in any inspection report.” If the buyer and seller do not reach agreement on matters disclosed in an inspection report, the buyer can terminate the transaction by unconditionally disapproving of the property based on any inspection report(s). Such disapproval must be made prior to the end of the inspection period.

To place pressure on the seller, some buyer agents use “repair” addendums that say the buyer will not approve of the inspections unless the seller repairs the items listed in the addendum. This an old way of dealing with repairs and should not be used with modern inspection clauses. You will also sometimes see contingent disapproval addenda in which the buyer unconditionally disapproves, but agrees to proceed if the seller agrees to the included list of repairs. There are also homemade repair addenda out there that list the repairs desired and “disapprove” as of the last date of the inspection period if the seller has not first signed the addenda.

The problem with contingent disapproval approaches is the risk of the contract automatically terminating if the seller does not respond to the addendum. It is either that or run the risk of the buyer accepting the condition of the property without repairs by failing to disapprove within the inspection period. Standard “buyer’s repair addendum” forms used in Oregon avoid the contingent disapproval problem by simply requesting repairs without any disapproval, contingent or otherwise. The forms do, however, contain the follow warning: Warning: If the Inspection Period specified in the Sale Agreement is not properly extended, Buyer failure to provide written disapproval of the Buyer’s inspection report(s) by midnight on the last day of the Inspection Period could be deemed acceptance of the condition of the property.

The Buyer’s Repair Addendum warning is well taken. Unless the repair addendum is signed or the Inspection Period extended, the buyer must separately disapprove of the property condition based on an inspection report or accept the condition of the property. This, of course, make the Inspection Period deadline a critical date. On that date, without fail, the agent must have a copy of a signed repair addendum in their possession or a written extension of the inspection period or the buyer’s decision on whether to unconditionally disapprove or accept the condition of the property. There are no other viable alternatives.
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The object of a real estate transaction is the transfer of legal title to the property. This is done by a “deed” from the seller to the buyer. There are a number of different kinds of deeds depending on the title warranties the seller can or is willing to make. Generally, residential real estate is transferred with what is called a “statutory warranty deed.” If something less that a statutory warranty deed (quit claim, bargain and sale, special warranty deed, trustee deed, etc.) is proposed, the buyer should be advised to seek legal counsel.

A “warranty deed” is a deed in which the seller guarantees (warrants) the chain of title and their ability to transfer full rights in the property. In a statutory warranty deed, the warranty is set out in statute and, therefore, clearly defined. In Oregon, as in the rest of the Western United States, the title to real property is usually insured at the time of transfer. Title insurance protects both the buyer and the seller.

Standard real estate forms contain “title insurance” clauses. For the most part, these clauses contain “contingencies with cure” provisions. A contingency with a cure provision is one in which the buyer can object to the state of the title but cannot cancel the contract if the objections can be cured by the seller. Objection and cure deadlines are common and must be understood and met. An agent should always know and explain these deadlines to their client.

In order to object to the state of the title, the buyer must know the state of the title. That is the purpose served by the preliminary title report issued by the title insurer named in the contract. The seller’s prompt delivery of a preliminary title report and copies of any covenants, conditions or restrictions (CC&Rs) is an important term of any title contingency clause. The report and CC&Rs will tell the buyer of any defects, exceptions or limitation affecting the seller’s title to the property.

For the most part, the legal affect of title defects, exceptions and limitations are beyond the scope of the real estate licensee’s expertise. By statute, a real estate licensee has no duty to investigate “the legal status of the title.” That does not mean a licensee can simply ignore the preliminary title report. What it means is that the agent is not required to have legal knowledge. Most title contingency clauses have an express provision stating that agents are not qualified to advise clients on the legal status of title. Such clauses can be very helpful when reviewing the title report and CC&Rs with clients.

Title contingencies in a residential real estate sale forms are usually “review and approval” type contingencies. Such contingencies allow the buyer to object to anything in the report or CC&Rs the buyer finds “unacceptable.” This manner of handling title objections allows the buyer great latitude to object to anything found in the report or CC&Rs, but does not allow the buyer to use the title contingency as a “weasel clause.” That is the case because of the duty to perform contracts in good faith. Click here for a detailed discussion of the obligation of good faith in contract performance.

Good faith performance limits the buyer’s ability to terminate the contract based on the preliminary title report or the CC&R’s. Title and CC&R objections must be “reasonable.” Reasonableness in the law is judged on an objective standard. An objection is reasonable if a hypothetically reasonable person in the same circumstances might object to the same thing. Thus, an easement for a 5KMV interstate electrical transmission line might reasonably be objected to, but a common utility easement for the house or even the subdivision would not.

CC&R provisions are fertile grounds for objections under title contingencies. That is the case because they limit the owner’s use of their own property. So, for instance, a CC&R provision demanding review and approval by an architectural control panel might, at the preliminary title stage, be reasonably objected to by a buyer who intends extensive remodeling. The same would be true of pet restrictions, RV parking bans and any of a host of other common limitations found in CC&Rs.

Objections to preliminary title reports and CC&Rs often cannot be cured and, therefore, can cause deals to fail. It is for that reason that title objection deadlines are typically very short – often as little as five days. The short deadline puts pressure on title report and CC&R review. Although failure to object to specific items usually results in waiving the objection, it does not relieve the seller of the obligation to convey “marketable title.” That obligation – to deliver marketable title – is usually contained in a separate “deed” clause, independent of the title contingency clause.

Marketable title is a term of art. Courts understand that the title to real property is rarely, if ever, perfect. Prior conveyances, divorces, deaths, conflicting descriptions, misspellings and a host of other defects make the state of legal title less than completely certain. To compensate, courts demand that the seller convey marketable title. Marketable title need not be free of all defects. Instead, the title must be “free of all reasonable risks of attack.” Obviously, such an assessment is far beyond the expertise of a real estate licensee. A claim of unmarketable title is, therefore, always a matter for attorneys.
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Financing is at the heart of the real estate business. Indeed, it is fair to say that without modern real estate financing, the real estate industry simply would not exist as it does today. It is the leverage financing provides that makes it possible for a significant percentage of the population to own their own homes. Accordingly, financing is a critical part of almost every residential real estate purchase.

The central and critical nature of financing is usually reflected in real estate forms. In California, for instance, the residential real estate form used by REALTORS® contains more than two pages of financing provisions. In Arizona, the REALTOR® sale form is supplemented by a standard Financing Options Addendum that covers everything from a new conventional first loan to seller financing. Whether in the form of a separate addendum or not, real estate finance provisions tend to be pretty standardized.

Finance provisions typically benefit the buyer by protecting them from being required to perform the contract if they cannot obtain the necessary financing prior to the closing date. Sellers, however, are as interested in the financing provisions as are buyers. It is for this reason financing provisions are usually written to address both the concerns of the buyer and the concerns of the seller. Buyers tend to be concerned about the details (interest rate, points, etc.) of the loan. Sellers, on the other hand, are usually more interested in the loan process than details of the loan.

To protect the buyer, financing provisions in form contracts usually specify the amount of money the buyer wants to borrow, the term of the loan, the type of loan (fixed, adjustable, conventional, VA, etc.) and the maximum interest rate and points. To protect sellers, financing provisions typically specify that the buyer must apply for the loan within a fairly short period of time following acceptance, use best efforts to obtain the necessary loan and notify the seller of conditional approval of the loan within a specified period of time. A simple way to accomplish seller notification of loan status is to require the buyer to provide the seller with a loan application status form. The Oregon Residential Loan Application Status form, developed by Oregon lenders and the Oregon Association of REALTORS®, is such a form. Click here to download a copy of the loan status form. It is the felt need to balance the interests of the buyer and the seller that makes finance contingencies both lengthy and important.

Whether representing the buyer or seller, an agent should be familiar with and able to explain to their client the finance provisions of the form contract they use. Most form contracts make the entire transaction contingent upon the buyer obtaining “the loan” they need to meet the purchase price. For that to work, the details of “the loan” must be spelled out in the financing provisions. If not, bitter fights over earnest money (when the buyer fails to close for want of financing) are inevitable.

A seller, off the market for months while waiting for word that the buyer has the money they agreed to pay as the purchase price, will usually not be very understanding when, on the day of closing, the buyer announces they couldn’t get a loan after all. It is to prevent these kind of late-in-the-day surprises that most finance provisions in form contracts spell out the exact terms of the loan sought, require early loan application, best efforts and some sort of conditional approval letter from the buyer’s lender prior to closing. Where the form contract does not spell out financing details, agents should consider a separate standard financing addendum that does.

The failure to spell out financing details in the contract may disadvantage the buyer or the seller or both. For instance, if the contract is made contingent on the buyer obtaining a loan without regard to amount, type, interest rate, points or other factors, a seller may claim the buyer’s withdrawal in bad faith because a loan could have been obtained by simply paying more. On the other hand, if the transaction is made contingent on the buyer obtaining a loan “satisfactory to buyer” or one of “buyer’s choice,” the seller may find they have been off market with no recourse if the buyer simply changes his mind. Financing provisions in form contracts are about balancing these needs.
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Real estate sale forms typically begin with a statutorily required Final Agency Acknowledgment form. The acknowledgement is strictly a creature of statute. The statute, ORS 696.845, reads as follows:

696.845 Acknowledgment of existing agency relationships form; rules. When signing an offer to purchase, each buyer shall acknowledge the existing agency relationships, if any. When a seller accepts or rejects an offer to purchase in writing, each seller shall acknowledge the existing agency relationships, if any. An agent to the real property transaction shall obtain the signatures of the buyers and the sellers to the acknowledgment, which shall be incorporated into or attached as an addendum to the offer to purchase or to the acceptance. The Real Estate Agency shall prescribe by rule the form and content of the acknowledgment of existing agency relationships.

As required by ORS 696.845, the Real Estate Agency has developed a form for final agency acknowledgement. The acknowledgment appears at the top of most standardized real estate contracts. If acknowledgement is not incorporated into the sale form itself, it must be appended to the contract as an addendum. Whether incorporated or appended, the acknowledgement must be in substantially the following form:

 

(1)___________(Name of Selling Licensee) of ______________ (Name of Real Estate Firm) is the agent of (check one) __ The Buyer exclusively. __ The Seller exclusively (“Seller Agency”). __ Both the Buyer and the Seller (“Disclosed Limited Agency”).

(2) ____________________ (Name of Listing Licensee) of ______________ (Name of Real Estate Firm) is the agent of (check one) __ The Seller exclusively. __ Both the Buyer and the Seller (“Disclosed Limited Agency”).

(3) If both parties are each represented by one or more licensees in the same real estate firm, and the licensees are supervised by the same principal broker in that real estate firm, Buyer and Seller acknowledge that said principal broker shall become the disclosed limited agent for both Buyer and Seller as more fully explained in the disclosed Limited Agency Agreements that have been reviewed and signed by Buyer, Seller and Licensee(s).

Buyer shall sign this acknowledgment at the time of signing this Agreement before submission to Seller. Seller shall sign this acknowledgment at the time this Agreement is first submitted to Seller, even if this Agreement will be rejected or a counter offer will be made. Sellers signature to this Final Agency Acknowledgment shall not constitute acceptance of the Agreement or any terms therein.

ACKNOWLEDGED

Buyer: ________ Print _________________Dated: ________

Buyer: ________ Print _________________Dated: ________

Seller: ________ Print _________________Dated: ________

Seller: ________ Print _________________Dated: ________

 

The statute requires the buyer to acknowledge the existing relationships when signing their offer. The seller must sign the acknowledgement when they accept or reject the offer. The first question, of course, is does the buyer acknowledge the seller’s agent or just their own? How about the seller? Is the seller acknowledging their relationship with the listing agent or that and the buyer’s relationship with the selling agent? Does it matter?

It is unlikely the Legislature actually intended the final agency acknowledgement form to have anything to do with the creation or termination of agency relationships. At the time the law was enacted (1993), a big issue in the industry was buyers assuming the agent they were working with represented them when, in fact, the agent represented the seller as a subagent of the listing agent. This sub-agency relationship applied even when the agent did not work for the listing firm. The final agency disclosure was intended to inform the buyer of the true status of the agent assisting them in writing the offer. It was little more than an after thought that the seller should acknowledge the same thing.

Today’s complicated agency relationships make the agency acknowledgment all but a relic of the past. In most transactions, the buyer has their own agent and the seller their own. Increasingly, both these agency relationships are already acknowledged in formal documents like listings or buyer service agreements. When dual agency is involved, the parties will have already signed disclosed limited agency agreement that spell, out in complete details, the relationships involved. The final agency acknowledgment assumes relationships that are not based on explicit consent. Such relationships are rare in real estate today, calling into question the continued utility of the acknowledgement requirement.

Notwithstanding the questionable utility of a final agency acknowledgement, it will likely be around for many years to come. Careful explanation of actual agency relationships at the time they are formed will continue to make dealing with final acknowledgment a simple mechanical filling in of the blanks. Although in most situations filling in the blanks themselves present few problems, there is some confusion around unrepresented parties and the difference between disclosed limited agency and designated agency.

The final agency acknowledgment form drafted by the Real Estate Agency assumes the buyer and seller are each represented. When one or the other is unrepresented, the blanks in the form are simply inapplicable. For that reason, the best approach is marking each blank “NA” or “NONE” when dealing with an unrepresented party. That way, no blanks are left to create confusion or room from subsequent inappropriate entries. Filling in the final agency acknowledgement properly is, however, not enough when dealing with an unrepresented party. Additional special procedures should always be used when dealing with unrepresented parties. Click here for a detailed discussion of those procedures.

The final agency acknowledgment requirement predates the development of disclosed limited agency and designated agency. Click here for an explanation of disclosed limited and designated agency. The advent of disclosed limited and designated agency was handled by adding to section (3) to the acknowledgment form. The agency relationships to be selected by the buyer and seller did not, however, change. The choices of agency relationship remained: buyer exclusively, seller exclusively and both buyer and seller on the selling side and seller exclusively and both buyer and seller remained the choices on the listing side. This has lead to some confusion about how to fill out the acknowledgment in designated agency situations.

As explained in Working With Clients, designated agency is a special statutory form of dual agency. By statute, however, only the principal broker becomes a disclosed limited agent. The listing and selling agents represent only the party with whom they already have an agency relationship. ORS 696.815(4). Under the statute, the brokers acting as designated agents “continue to represent only the party with whom the broker has an agency relationship unless all parties agree otherwise in writing.” Because the designated agents continue to represent only the principal they already have, their representation is “exclusive” for purposes of filling out the final agency acknowledgment.
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What is this topic about?

Writing the deal means using standard forms. Chief among these forms is the Residential Real Estate Sale Agreement form. There are separate sale forms for farms and ranches, commercial real estate and new construction. No attempt is made here to explain particular forms or their use. Such form specific information is available from form publishers. Click here to view an explanation of clauses found in the commonly used Oregon Real Estate Forms, LLC residential sale agreement form.

Rather than a “how to” explanation for particular forms, this subject contains an overview of common clauses found in such forms and the issues and problems surrounding the subject matter of such clauses. These subjects include:Final Agency Acknowledgment, continuing through Financing, Title, Inspections, Dispute Resolution and Closing.
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