When a purchaser makes an offer to purchase residential property in California, he or she generally uses a standard pre-printed form to do so. In reviewing that offer document, the seller needs not only to make sure he or she is comfortable with the economic terms of the deal, but also some key legal elements. In our opinion, it is especially important for the seller to focus on the issues discussed below in order to minimize the likelihood and cost of potential disputes with the buyer:
MEDIATION
While each circumstance needs to be analyzed separately, we generally recommend against sellers pre-electing to submit any potential disputes to mediation. We do so because:
ARBITRATION
We generally recommend electing arbitration with JAMS (a private dispute resolution service) and utilizing its streamlined arbitration rules for three reasons:
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Although not as expensive as litigation, JAMS arbitration can be expensive — up to $10,000 per day — which reflects the experience of their arbitrators, but this cost also discourages trivial claims by a buyer.
ATTORNEYS' FEES
Again, while each situation needs to be analyzed separately, we generally recommend that sellers don't use an attorneys' fees clause that provides that the prevailing party will be paid its reasonable attorneys' fees and costs by the unsuccessful party. While an attorneys' fees clause can cut both ways, on balance we believe that the absence of an attorneys' fees clause will make a buyer think twice before pursuing a less than ironclad claim. It also eliminates the risk that an attorneys' fees award can outweigh the value of a claim by the buyer.
DISCLOSURE
In our experience, the failure to disclose material adverse conditions about a property is the single biggest reason for post-sale disputes between a buyer and seller of residential property. A seller generally is required to disclose known material facts and defects affecting the property, including known insurance claims within the past five years. Under California law, a seller generally must provide a Real Estate Transfer Disclosure Statement to a buyer. California law also mandates other disclosures. Furthermore, brokerage companies often encourage sellers to provide extensive supplementary disclosures. A seller should take great care in completing such forms. If a seller is uncertain about any particular question in a disclosure form, the seller should choose the "unknown" option, if available.
BUYER INSPECTION
Sellers should provide the buyer the right to retain experienced professionals to inspect the property and issue a comprehensive report. That way it will be clear the buyer had the opportunity to discover any issues with the property. Standard form purchase agreements typically provide buyer the right to cancel the contract if the seller will not remedy defects disclosed by the inspection, if demand is made within a set time period. Sellers should make this time period short, e.g., five days after the inspection.
BUYER INSURANCE
Sellers should consider requiring the buyer to be responsible for all claims to the extent covered by buyer's liability or casualty insurance.
CONCLUSION
A "form" real estate contract should be carefully reviewed and considered to minimize expensive future entanglements and liabilities.
If you have questions about any of the issues raised in this article, contact Thomas A. Larsen (415.399.3026 or tlarsen@howardrice.com) or your usual Howard Rice attorney.
To comply with IRS rules, we hereby inform you that any Federal tax advice contained herein is not written or intended to be used, and the recipient and any subsequent reader cannot use or refer to such advice, either (i) for the purpose of avoiding any penalties asserted under the Internal Revenue Code, or (ii) in any marketing or promotional materials.