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Contract Issues


Question 1: I am the listing broker. The offer from the buyer, counter from the seller, and acceptance of the counter from the buyer was all done by fax. I received a faxed copy of the earnest money check from the buyer with the initial offer. The buyer accepted and signed the counterproposal five days ago, but we still haven’t received the earnest money from the buyer. Is the contract void?

Response 1: The Real Estate Commission approved contract does not address the date by which the earnest money must be tendered if the earnest money is to be tendered after the contract is formed. The Real Estate Commission approved contract assumes that the earnest money will be delivered with the buyer’s offer.

The contract is not void. A void contract is one which was essentially never formed. The mutual exchange of the buyer’s promise to buy, in exchange for the seller’s promise to sell, is sufficient consideration from the buyer to support the formation of the contract.

If the seller wishes to terminate the contract at this point, the seller has a strong argument that buyer has breached the contract. Custom and practice in the industry require prompt delivery of the earnest money in these situations and conventional wisdom suggests that a five day delay is an untimely tender.

However, reasonable people can disagree about these things. Failing to identifying a specific date by which the earnest money must be tendered creates uncertainty which in turn could cause mischief for the seller, the buyer, or both of them. What if the delay is three days? What if two of those three days are a weekend? What if the delay is two days and, in the mean time, the seller receives a higher offer from a competing buyer?

If the earnest money funds aren’t tendered with the initial offer, it is important for the brokers to identify the date by which the earnest money must be tendered.

Question 2: I am trying to put together a deal where the buyer and seller have verbally agreed upon price, financing terms, closing date and all other major points. However, there is an unresolved question about whether the neighbor’s garage encroaches upon the subject property. How can I keep the momentum of this deal moving forward, but still give the parties an opportunity to address these issues after the property goes under contract?

Response 2: It is not unusual for a buyer and seller to desire to form a contract even though there is some significant unresolved issue at the time the contract is formed. For example, the parties may know that the neighbor’s garage encroaches onto the subject property. The buyer and seller wish to form a contract and figure out how to deal with the garage encroachment as the contract proceeds.

The brokers can put an “unresolved contingency clause” in the contract which allows the parties to identify some unresolved issue to be addressed later. If the unresolved issue is not addressed later, the contract dies. Using this clause has the disadvantage of creating an out for either the seller, the buyer, or both of them. But section 10 of the Colorado Real Estate Commission approved contract already provides a significant “out” clause for a buyer. If the contingency addressing the unresolved issue requires resolution, or not, by the same date as the Resolution Deadline, the unresolved contingency clause does not extend the uncertainty for the seller.

Any such contingency should identify the unresolved issue, which side (the buyer or the seller) will propose a solution, by when the solution is to be proposed, and the deadline by which the solution must be agreed to in order for the contract to continue. If the unresolved issue is not resolved by the deadline, then the contract should terminate.


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