Understanding the Contract of Sale

QUESTION: We have just picked out the house which we would like to purchase. In order to make an offer, the agent has advised us that we must sign a contract. There are many provisions which I do not understand, and I am concerned that we may leave something out. Are there any guidelines which we should consider before signing a contract?

ANSWER: The most important principle which you must keep in mind when purchasing real estate is that in order to be binding, all terms of the contract must be in writing. You must be certain to include provisions in the contract which properly reflect the understandings of all parties. For example, you may believe that you are going to receive the washer and dryer when you purchase the house. However, it may be the seller’s intention to remove the washer and dryer. Therefore, in order to eliminate any problems regarding this issue, a provision should be inserted in the contract which states whether the washer and dryer will convey with the property.

The Maryland Association of Realtors has created a contract form which can be utilized throughout the State. There are a number of provisions which should be included in your contract, the majority of which will appear in the contract forms. Summarized below is a checklist of items which should appear in your contract. For reference purposes, a copy of the Maryland Residential Contract of Sale is included on pages 10-19 of our free information booklet Ask the Lawyer. Reference is made, where applicable, to the specific paragraph provision. Your contract should include, at a minimum, the following:

Time is of the Essence— Time is “of the essence” in this Contract. The performance of every contractual obligation within the time frame designated in the contract is essential to avoid a breach or default of the contract.

Paragraph 1. Date of Offer — This is the date when the offer is written. When the Seller accepts the offer, then the parties will have a ratified contract.

Paragraphs 2. and 3. Seller and Buyer — Identifies the Seller and Buyer. All parties should legibly fill in their full name.

Paragraph 4. Property Description — This provision requires only the street address. If available, the legal description (Lot, Block, Subdivision) should be included. This helps to avoid confusion regarding the precise location of the property to be transferred.

Paragraph 5. Estate — Most properties in Maryland are sold “in fee simple.” This means that you will own the house and the land. If ground rent applies, it means you are only leasing the land.

Paragraph 6. Purchase Price — Total price to be paid for the land and/or house.

Paragraph 7. Payment Terms — This provision describes the amount of money initially paid by the Buyer to secure its performance under the contract. This is commonly known as the “deposit.”

Paragraph 8. Settlement — This is the exact date for settlement, or sooner if agreed to by the parties.

Paragraph 9. Financing — The various types of available financing are described. An addendum is required for the particular type of financing to be used.

Paragraph 10. Financing Application and Commitment — This paragraph requires the Buyer to make application for financing within a certain number of days and makes the contract contingent on the Buyer obtaining the described financing within a specific time frame. If a loan commitment is not issued in the required time, the contract may become null and void, and the Buyer may be entitled to a refund of the deposit previously paid, provided that the Buyer diligently pursued financing.

Paragraph 11. Alternate Financing — The Buyer may obtain financing which differs from that specified in Paragraph 9. Even so, the Buyer is not relieved of Buyer’s obligation to pursue the financing specified in Paragraph 9. If the Buyer accepts alternate financing from that specified in Paragraph 9, then this change must not increase the Seller’s settlement costs.

Paragraph 12. Home and/or Environmental Inspection — The Buyer is advised of its right to request a home inspection. An addendum to the contract is necessary if the Buyer desires to have the purchase contingent upon a property inspection.

Paragraph 13. Inclusions/Exclusions — This section describes the appliances, fixtures and equipment that convey or do not convey with the sale. It is important to carefully inspect the property and identify any items that will be removed from the property by the Seller, or any items that the Buyer believes will be conveyed.

Paragraph 14. Agriculturally Assessed Property — If the property is assessed agricultural, this provision states whether the Buyer or Seller will pay the additional Agricultural Transfer Tax.

Paragraph 15. Forest Conservation and Management Program — This paragraph discloses whether there are additional forest conservation taxes assessed as a result of the transfer.

Paragraph 16. Lead Based Paint Hazards — Federal law requires the disclosure of general information on Lead Paint. Also, the Seller must disclose any information they have regarding lead based paint in the property. The Buyer has the right to make the contract contingent upon a lead paint inspection.

Paragraph 17. Addenda — This section itemizes a number of possible contingencies or disclosures that the Buyer or Seller might request to be incorporated into the contract. A separate addendum must be incorporated to spell out the terms of any special requests. Also, if the Buyer has any special contingencies which the Buyer needs assistance in drafting, any attorney with Village Settlements, Inc., can assist the Buyer.

Paragraph 18. Wood Destroying Insect Inspection — This section provides for an inspection of the house, garage (or within 3 feet of the house or garage), outbuildings located within 3 feet of the residence or garage, and a portion of any fence located within 3 feet of the residence or garage for wood destroying insects. The Seller is required to have any infestation treated and any damages repaired. If the repairs are extremely expensive, the contract provides that the Buyer or Seller may have the right to limit their expenditures or cancel the contract.

Paragraph 19. Deposit — This paragraph provides for the placement of the deposit in escrow. The deposit may be placed in an interest-bearing account.

Paragraph 20. Deed and Title — The Seller must deliver clear title to the property, subject to the normal recorded easements, covenants and any other matters of record.

Paragraph 21. Condition of Property and Possession — The property condition paragraph states that the property shall be vacant at settlement and clear of trash and debris. The property should be delivered in substantially the same condition as existed on the day the Contract was accepted. Unless otherwise specified, the property is sold “as is.”

Paragraph 22. Adjustments — This paragraph requires the Buyer and Seller to prorate and adjust to the date of settlement the various charges such as taxes and homeowner’s association fees. Any heating oil remaining in the tank will become the property of the Buyer without reimbursement to the Seller.

Paragraph 23. Settlement Costs — The Buyer is responsible for paying all settlement costs, charges, and lender’s fees, unless the parties negotiate otherwise. The Seller will pay for clearing existing loans.

Paragraph 24. Transfer Charges — Unless otherwise agreed, all transfer and recordation taxes are shared equally between the Buyer and Seller. If the Buyer is a First-Time Maryland Homebuyer, then it is presumed, unless otherwise negotiated, that all transfer and recordation taxes will be paid by the Seller. Also, for a first-time Buyer, the Buyer is exempt from paying the State transfer tax, and the Seller must pay a ¼% State transfer tax.

Paragraph 25. Broker Liability — The parties acknowledge that the agents cannot be responsible for the condition of the property.

Paragraph 26. Broker’s Fee — The settlement attorney is directed to disburse the real estate commission in accordance with the listing agreement.

Paragraph 27. Seller Responsibility — Seller agrees to keep existing loans from falling into default, and to correct any notices of violations from governmental agencies regarding the property.

Paragraph 28. Buyer Responsibility — The Buyer is obligated to diligently pursue the financing described in the contract. If the Buyer misrepresents its financial status, then the Seller may treat this as a breach of contract, and the Buyer could lose its deposit.

Paragraph 29. Homeowner’s Association — This paragraph states the need for a contract addendum if the property is within a mandatory homeowner’s association.

Paragraph 31. Sale/Settlement or Lease of Other Real Estate — This provision expressly states that the contract is not contingent on the sale or rental of other real estate unless an addendum to the contract sets forth such a condition.

Paragraph 32. Leases — The Seller agrees not to renew any leases beyond settlement.

Paragraph 33. Default — This section provides remedies for either party in the event of a default by the other party. If the Buyer fails to settle, the Seller may elect to retain the deposit, or sue the Buyer for additional monetary damages. If the Seller fails to settle, the Buyer can sue to force the Seller to perform its contractual obligations, and/or for monetary damages.

Paragraph 34. Mediation of Disputes — This provision provides for mandatory mediation in the event that a dispute arises between any parties to the contract.

Paragraph 35. Attorney’s Fees — In the event of a lawsuit relating to the contract, the losing party can be required to pay the attorney’s fees of the winning party.

Paragraph 36. Settlement Attorney — The buyer is advised that they have the right to select the settlement attorney, such as Village Settlements, Inc.

Paragraph 37. Owners Title Insurance — The buyer has the right to obtain an owners title insurance policy. The lender is instructed to quote the premium for an “enhanced” policy.

Paragraph 38. Limited Warranty — The buyer is advised that any home warranty plan provided by the seller may be a limited warranty.

Paragraph 41. Guaranty Fund — The Buyer is notified of the protection afforded by the Real Estate Guaranty Fund.

Paragraph 42. Disclosure Notice — The Buyer is advised of its right to receive a property condition disclosure or disclaimer statement from the Seller.

Paragraph 43. Maryland Non-Resident Seller — If the property is not the Seller’s principal residence and the Seller is a non-Maryland resident, money may be held back at settlement for capital gains taxes. Non-Resident Sellers should contact Village Settlements well in advance of settlement for additional instructions.

Paragraph 44. Internal Revenue Service Filing — The parties agree to cooperate with the settlement attorney in completing the required IRS 1099 report.

Paragraph 46. Wetlands Notice — “Wetlands” are described and Buyers are given information on how to obtain further information regarding wetlands.

Paragraph 47. Forest Conservation Act Notice — The Seller represents that the property is not subject to a forest conservation plan. If the owner of the property is subject to obligations under a forest conservation plan, this must be disclosed in a separate addendum.

Paragraph 48. Notice Concerning Conservation Easements — The buyer must be advised of certain conservation easements.

Paragraph 49. Foreign Investment Taxes (FIRPTA) — Under Federal Law, a non-resident alien of the U.S. may be required to escrow money to pay capital gains taxes.

Paragraph 50. Criminal Activity and Sexual Offenders — The Buyer is advised of its right to review the public information regarding any criminal activity near the property.

Paragraph 52. Notice to the Parties — This paragraph explains to all parties that the agents and brokers cannot make representations as to a number of factors regarding the property such as water quality, availability of utilities, septic systems, lot size or zoning.

Paragraph 53. Property Tax Notice — This paragraph advises the Buyer that they have the right to appeal the tax assessment during certain time periods.

Paragraph 54. Non-Assignability — The contract cannot be assigned to a different Buyer without the Seller’s consent.

Paragraph 55. Paragraph Headings — Paragraph headings are for reference only, and are not part of the contract.

Paragraph 56. Computation of Days — This provision explains how “days” are calculated in the contract.

Paragraph 57. Entire Agreement — The written contract contains the complete agreement of the parties. Only written modifications or amendments to the contract will be valid. The parties should not rely on oral promises or representations.

Paragraph 58. Electronic Delivery — In addition to signing the original document, the contract can be ratified by facsimile or telecopier.

Broker Information — This provision identifies who the real estate agents are and discloses their status representing either the Seller, the Buyer, or both. This section is not sufficient, however, to satisfy the disclosure requirements of the Maryland Agency Disclosure Law.

There are other provisions which the Buyer may wish to have included in the contract. For example, the Montgomery County Jurisdictional Addendum is essential for any transaction in Montgomery County, Maryland. This addendum is discussed in detail on pages 20-23 of our free book Ask the Lawyer. Also, the purchaser may want the entire contract to be contingent upon an inspection of the property to determine whether any defects exist in the structure or in windows, doors, or other similar items. The Seller may want the contract to be contingent upon the purchaser providing proof that the purchaser will preliminarily qualify for financing. As mentioned above, any items which are to convey (such as the washer and dryer) or to be removed (such as a family heirloom chandelier) should be specifically noted in the contract, either in Paragraph 13 or on a separate addendum.

The transaction may also be contingent upon the purchaser selling her existing home. This contingency should be specifically delineated in the contract.

There may be a number of other contingencies or provisions which the purchaser or seller may want to include in the contract. As long as the subject matter is legal, it is perfectly permissible to include those items in the contract. The purchaser and seller are advised to work with real estate agents and/or attorneys in order to properly draft the contract provisions.