Legal Hotline

Some of the most commonly asked questions we receive surround the Sale of Buyer’s Property Contingency. The MN Realtors® Purchase Agreement includes three potential options related to whether the buyer has a property to sell and also the Addendum to Purchase Agreement: Sale of Buyer’s Property Contingency. We frequently get questions on the mechanics of how to remove the Contingency, what constitutes a valid purchase agreement, and what type of negotiations parties might face related to the Contingency.

Example: If the Addendum to Purchase Agreement: Sale of Buyer’s Property Contingency wasn’t used, but the second sale of buyer’s property contingency option was selected in the Purchase Agreement, you do not need to provide a copy of the buyer’s purchase agreement to the seller. The Purchase Agreement is contingent upon the successful closing of the buyer’s property. This option is utilized when your buyer already entered into a purchase agreement for the sale of their property prior to entering into a Purchase Agreement with the seller. Checking the second option creates a contingency for the successful closing of buyer’s property. If buyer’s property does not close by the closing date specified in your Purchase Agreement, then the buyer is excused from performance and the Purchase Agreement is canceled.

TIP: Sellers should understand that if they accept a purchase agreement contingency upon the closing of the buyer’s property, the purchase agreement for the buyer’s property may have numerous contingencies other than financing (i.e. inspection contingency, contingency for the sale of the buyer’s property, etc.), and therefore, the buyer may be excused from performance of your Purchase Agreement if the purchase agreement for the buyer’s property does not timely close.)

Listing agents often would like to know whether they must disclose the contents of an inspection report they were given by a buyer canceling based on an inspection contingency. If the items in the report are material facts (not opinions) and will affect the buyer’s use or enjoyment of the property, then those facts must be disclosed. If they are not factual or substantial enough to affect the use or enjoyment of the property by a prospective buyer, then they do not need to be disclosed. Ultimately, as with any material fact matter, whether to disclose is going to be a risk assessment decision for the seller and the listing agent to make, as each has disclosure burdens. Put yourself in the shoes of the buyer; if you were the buyer and would want to know the fact, then you likely should be disclosing it to other prospective buyers.

The analysis to determine the answer depends heavily on whether the information obtained is a material fact (see The Legal Companion: Disclosure). Determination of whether something is both material and a fact can be a tricky analysis and a risk assessment for both licensees and their clients. The individual who performs an inspection of the property does not need to be a professional inspector. The inspection contingency option in the MNR’s Purchase Agreement states that the “inspection(s) or test(s) shall be done by an inspector(s) or tester(s) of the Buyer’s choice. Buyer shall satisfy Buyer as to the qualifications of the inspector(s) or tester(s).” In Minnesota, there is no government-issued inspector’s license. Thus, if an inspector is reasonably qualified by the buyer’s standards, then the buyer may use that person.

• If the property is or was the site of a suicide, accidental death, natural death, or perceived paranormal activity.

If this exception applies, the analysis is much simpler.  Those types of deaths do not need to be disclosed.  (See The Legal Companion: Disclosure)

Compensation is a common issue raised by many Realtors®. The right to compensation is determined based on many factors, including complying with statutory requirements, what type of agency (or non-agency) relationship exists, what contracts are in place to provide for such compensation, and whether a Realtor® working with a buyer might have been the procuring cause of the sale in which cooperating compensation was offered.

In Minnesota, you must have a written agreement to bring a civil action for payment of compensation. You must also have disclosed the licensee’s agency relationship to the parties to the transaction as required by Minnesota Statutes Chapter 82. However, there is no requirement to be a seller’s broker or buyer’s broker to receive compensation under a written agreement. Minnesota Realtors® has a series of Facilitator Services Agreements that entitle Realtors® to compensation without being a seller’s broker or a buyer’s broker. The other consideration for compensation issues is whether cooperating compensation has been offered to a buyer’s agent or facilitator from a listing agent on the MLS or otherwise. If cooperating compensation is offered to a buyer’s agent only, the broker (or salesperson) working with the buyer must have a signed agreement for representation (even if no compensation is promised from the buyer). If cooperating compensation is offered to facilitators as well, it’s possible to be paid without a written agreement or any other contract from the buyer, assuming the broker (or salesperson) is the procuring cause.

(See The Legal Companion: Code of Ethics and Standards of Practice of the National Association of Realtors® )

“Coming Soon” advertisements are another hot topic in the market. There are many considerations involved in the property utilization of such advertisements.

Check with your MLS regarding their use of coming soon as a status, as the prescribed time limit may vary among MLS systems.

It’s also important to be sure you’re being truthful and honest in your advertising. Using coming soon with the intention of never allowing access to the general public could be a violation of Article 12 of the Code of Ethics, as well as state licensing laws. Additionally, there is the potential of violation of the federal Fair Housing Act.

(See Coming Soon Listings)

There are many ways for listing brokers and their clients to handle multiple offer situations. Sometimes, it’s a chance for a listing broker to get creative with his or her negotiation skills. There are, however, a few rules that must always be followed according to Minnesota law and the Code of Ethics.

Example 1: I submitted an offer on a property that received multiple offers. I never got anything back from the seller. How can I verify that my offer was actually submitted? You really cannot verify in some cases. The Code of Ethics, Article 1, Standard of Practice 1-7 states that if you make a written request for an affirmation from the listing agent that the offer was presented, the listing agent must answer whether the offer was presented in writing or face a potential violation of the Code.  If you have proof of  failure to present an offer, such an act would also be a violation of Minn. Stat. § 82.71 (and Code of Ethics, Article 1). It would be an interference with an exclusive contract to contact the seller directly to ask. (See Minn. Stat. § 82.81, subd. 9, and Code of Ethics, Article 16). Additionally, as a Realtor®, you have a duty under Article 3 of the Code of Ethics to cooperate with other licensees, but if the seller instructed the listing agent not to respond, then the listing agent would be exempt from that requirement.

Example 2: I’m the listing agent for a hot property with five offers. The seller wants to counter the two top offers and see what happens. Can we do that? This would not be wise. While it’s possible to withdraw the other counteroffer before acceptance if one counteroffer is accepted, there is a risk that both counteroffers could be submitted before one of them could be withdrawn. If both counteroffers are accepted, then the seller would have promised to sell the house to two buyers (which is clearly not possible). If your client wants to do this, please refer them to legal counsel to help them weigh their legal exposure.

(See Multiple Offers, Strategies for Handling Multiple Offers, Multiple Offers and Disclosures)

A much contended post-purchase agreement issue is often what personal property was supposed to be included. Issues include whether an item is a fixture, appurtenance or improvement to the property, whether it was specifically included in the purchase agreement, and whether it was advertised on the MLS or discussed in the seller’s disclosure. Ultimately, another issue to consider when formulating agreements related to personal property is whether the structure of the agreement might constitute lender fraud.

Minnesota Realtors® does not have a separate personal property transfer agreement form. Instead, the Purchase Agreement addresses fixtures and personal property that will be transferred as part of the purchase on page 1. All improvements, fixtures, and appurtenances, including but not limited to those listed in that paragraph, are considered part of the real property and transfer with it automatically. This would include built-in appliances that are so much a part of the real property that removing them would not be feasible without damaging the property. However, not all appliances are built-ins — the average refrigerator or washer and dryer set would not be considered built-ins. Additionally, parties might want to transfer larger personal property items that would not be considered permanently affixed to or part of the real property, such as boat docks, televisions, and the like. Thus, Minnesota Realtors® provides lines on page 1 in the Purchase Agreement to write in additional items that the parties intend to be transferred with the property at closing. Minnesota Realtors® encourages parties to use the Purchase Agreement, rather than a separate agreement, to transfer additional personal property. Lenders need to be aware that such personal property is included in the transfer as part of the purchase price when determining the loan-to-value ratio of the property and whether a loan should be made. If a lender requests that the personal property transfer be removed from the Purchase Agreement, then salespersons should consult with their broker or legal counsel for advice on how to assist their clients in transferring the personal property through a separate Bill of Sale with appropriate consideration. Keep in mind that the amount paid for the personal property needs to reflect its market value.

(See The Legal Companion: Personal Property Transfers in Real Property Transactions and Guide to Personal Property Transfers)

Many property managers struggle with landlords who have “no pet” policies or limitations on pets that may end up wrongfully excluding prospective tenants with disabilities because those persons require an animal for assistance related to their disabilities. However, many property managers also struggle with the emerging issue of animal certifications and doctor’s notes that can be purchased from the Internet with claims that the animals are needed to support persons with disabilities. The actions taken by property managers and landlords should be carefully analyzed in terms of potential risk of liability and the penalties for violating the Fair Housing Act. (See The Legal Companion: Leasing and Property Management and Legal Hotline Q & A: Assistance Animals) 

There are many contingencies, disputes and other situations that result in the cancellation of a purchase agreement or desire to cancel including:

• refusals to cancel and next steps for the parties;
• disputes over the earnest money;
• timing of release of the earnest money by brokers; and
• whether a purchase agreement is “expired.”

There are often issues surrounding the buyer’s financing that come up between the purchase agreement and closing that may cause delays or other disputes.

Example: My client is the purchaser in a purchase agreement containing a financing contingency. The price in the purchase agreement is $300,000, but the property only appraised for $297,000. Now what? This situation depends on which financing contingency is used. If the Minnesota Realtors® Purchase Agreement is used and the Conventional or Privately Insured Conventional box is checked in the MORTGAGE FINANCING section, there is no contingency for the property appraising at or greater than the purchase price. Thus, even if the property appraises lower, the purchaser is still required to purchase the property (and is not entitled to a price reduction or cancellation) unless his or her financing is actually denied.  This means that the purchaser is required to pay the down payment agreed upon on page 1 of the Purchase Agreement; however, the purchaser is not required to pay additional down payment to qualify, so if the financing can be approved without additional payment, then the purchaser must proceed.  (Note:  The terms or ratio of the loan may not be as favorable as intended by the original down payment; however, that if financing is not denied, the purchaser cannot cancel on that basis.)  If the Minnesota Realtors® Purchase Agreement is used and the Department of Veterans' Affairs ("DVA") Guaranteed or Federal Housing Administration ("FHA") Insured boxes are checked in the MORTGAGE FINANCING section, the answer may be different. These options each include escape clauses that state that if the purchase price is higher than the value of the property, then the purchaser will not be required to purchase the property or forfeit earnest money. The FHA Escape Clause specifically mentions that the appraised value determines the value of the property, while the DVA Escape Clause states that the DVA itself determines the value. Thus, if FHA or DVA financing is involved, it’s likely that the purchaser will be able to cancel the transaction and receive his or her earnest money back. Additionally, parties could write their own additional contingency that the property must appraise in order for the purchaser to be bound by the purchase agreement.

Buyers may struggle with providing a written statement to the seller, or the seller may struggle with whether the written statement satisfies the MN Realtors® Financing Contingency in the Purchase Agreement.

Example: My client is the seller in a purchase agreement with the Conventional or Privately Insured Conventional Mortgage Financing option selected. The parties selected the option that requires the purchaser to provide a Written Statement to the seller before a certain date. The purchaser provided a Written Statement containing all of the required information before the date specified. However, the purchaser’s financing was ultimately denied. Does my seller have to give back the earnest money? Usually, no; the Mortgage Financing section of the MNR Purchase Agreement provides that the contingency will be removed if the purchaser provides the Written Statement, as defined therein, by the date specified. Once the purchaser has provided the Written Statement, the purchaser takes on the risk of having financing denied and losing his or her earnest money if the purchase does not close, unless the issue is caused by the seller’s failure to complete work orders.

Sometimes, buyers want or need to change the terms of their financing after the final acceptance of the purchase agreement to proceed with the sale.

Example 1: What are the seller’s rights when a buyer wants to change the type of financing used in the purchase after the purchase agreement is executed? The buyer has contractually agreed to apply for a particular type of financing in the Purchase Agreement (Conventional, DVA, FHA) and is bound by those terms, unless the seller agrees otherwise in writing through an Amendment to the Purchase Agreement. Listing brokers should advise their sellers that changes in financing, depending on how late in the transaction they come up, could cause significant delays in close, as the buyer has to go through the underwriting process again, most likely. On the other hand, the buyer might have found out he doesn’t qualify for the financing he initially wrote into the Purchase Agreement, and the deal may not be able to close without the seller’s allowance of the change.

Example 2: What are the details a Realtor® should know when utilizing the MN Realtors® forms specific to the financing contingency’s written statement? On the financing contingency, there are generally two options for the parties to choose: 1) the buyer has until closing to satisfy the contingency, and the earnest money can be directed to the buyer or seller (at the parties’ election) at closing if the buyer fails to secure financing; or 2) the buyer has until a certain agreed upon date to provide a written statement to the seller indicating that the loan is approved (and whether that is subject to any conditions) and that going forward, the buyer is willing to risk her earnest money. By providing the written statement, the buyer is stating she will lose her earnest money if the closing does not occur; however, the buyer will still be excused from performance (actually purchasing the property) if she is unable to finalize her financing — the contingency does not go away entirely. If the buyer fails to provide the written statement by the deadline, the seller has the right to cancel at any time after that. If no written statement is provided and the closing date comes, then the Purchase Agreement is automatically canceled.

With a low supply and high demand for real property to purchase in Minnesota and elsewhere, escalation clauses have become all the rage. But, there are certain measures that should be taken by both listing and buyer’s agents to protect their clients from unintended consequences.

Some issues to consider for buyers’ representatives:

1. The highest price doesn’t always win.
2. Surprise purchase price.
3. Winning the bidding war doesn’t always mean winning the house.
4. Due diligence is necessary to protect the buyer’s interest.
5. There may be more than one offer with an escalation clause.

Some issues to consider for sellers’ representatives:

1. An appraisal contingency could ruin the deal.
2. Even if there is no appraisal contingency, a financing contingency may lead to the same result.

(See The Basics of Escalation Clauses.)