Monthly Archives: October 2015

The most important clause in a real estate contract.

October 15, 2015

The typical real estate contract has tens, sometimes dozens, of clauses. Each is important, but there is one clause that is generally considered the most important clause in a real estate contract, and in all contracts for that matter.
If you had to guess, which of the following would you say is the most important clause in a real estate contract:

a. the price to be paid
b. the amount of earnest money
c. the legal description of the property
d. the remedies for breach of the contract

The most correct answer is “d,” the clause that provides the remedies for breach of the contract. Simply put, the remedies for breach clause is the one that states what happens if one of the parties defaults on the contract. Although it is true that if there were no description of the property or the price to be paid there would not even be a contract because there would not be a meeting of the minds, and therefore no contract. However, the question as stated assumes that there is already a contract.

For example, most residential real estate contracts have a clause stating that the buyer has deposited a sum of money known as earnest money with the real estate broker. Earnest money is often called “good faith” money because it shows that the buyer is serious about going through with the transaction and that he or she has something to lose if they back out of the contract. Because most residential real estate purchases are financed there is usually a contingency clause that states that if the buyer is not able to obtain financing at a certain rate by a certain date then the contract is void and the earnest money will be refunded. But what if the buyer simply backs out of the transaction and states, “I’m not going through with this deal?” That’s when the remedies for breach kick in. The clause may state that the party can go to court and sue for damages, pay a certain amount for damages, etc.

Let us move to other types of contracts. One of the more common remedies for breach clauses in business contracts nowadays states that in the event of a dispute the parties will arbitrate the matter instead of going to court. For example, a certain telecommunications company has this clause in its contract with users, “You agree that, by entering into this Agreement, you and (the company) are each waiving the right to a trial by jury or to participate in a class action.” This type clause is getting a lot of attention these days because some consumer advocacy organizations are challenging arbitration clauses.
Many Democrats in Congress are urging the federal agency that regulates consumer finance to ban mandatory arbitration clauses altogether. The Dodd-Frank Wall Street Reform and Consumer Protection Act required that the Consumer Financial Protection Bureau (CFPB) study arbitration agreements and provide a report to Congress of its findings. The report was submitted to Congress in March 2015. It is 728 pages in length, and can be found on the CFPB website. It mostly applies to banks, credit card companies and other types of lenders.

In today’s Internet and digital world there is a form of contract known as an End User License Agreement (EULA). These are those agreements that users of computer programs, applications and various software pop up before downloading. Most users probably never take the time to read what they are agreeing to. I suspect that it is because the agreements tend to be lengthy and that the user believes the benefits outweigh the risk of such agreements. Also, many of these agreements contain a clause such as:
“(The provider) reserves the right to update and change, from time to time, this Software License and all documents incorporated by reference. (The provider) … may change this Software License by posting a new version without notice to you. Use of the … Software after such change constitutes acceptance of such changes.”

Is there really a contract if one of the parties agrees that the other party can change the agreement without notice?

Finally, full disclosure. This columnist is not an attorney, and this information should not be considered legal advice. The intent to show the importance and use of contracts in daily life. And even though it is not practical to call an attorney every time a person or business enters into a contract, it is important to know that for certain contracts an attorney should always be contacted. Common sense is a good guide.