Definition and Significance
A fully executed purchase agreement is a legally binding contract that serves as the framework for a real estate or business transaction. In the context of real estate, it is an agreement between a buyer and a seller, which may also involve other parties such as real estate agents and possible closing aides to sign. The four corners of this contract contain the material terms of the deal and requirements for each party to execute.
From a practical perspective, a fully executed purchase agreement is important because it defines the material terms of the deal and demonstrates that an agreement of the terms has been reached between the parties. For buyers and sellers, it is the first sign that a transaction is moving towards a successful closing. For performing obligations under the purchase agreement that may later arise , it is the only assurance to enforce a breach of the contract after closing occurs.
Although a purchase agreement forms the foundation for a successful closing, it does not end the need of a vital professional responsibility to ensure the agreed upon deal is successfully closed. Significant professional liability can result from failing to competently advise the parties of the risks associated with the transaction after the agreement is signed. Unless additional agreements and/or an extended period of time is identified within the purchase agreement for the completion of post-purchase agreement activities and milestones, the heavy majority of the professional liability and risk exposure arises when the purchase agreement is executed until the successful closing of the transaction.
Essential Components of a Fully Executed Purchase Agreement
A fully executed purchase agreement is a contract for the sale and purchase of real estate that is signed by both the buyer and the seller. It controls the contractual terms between the buyer and seller and serves to bind both parties to those terms.
Generally, any purchase agreement will include the following key elements: Any contract for sale of real estate should be in writing. A fully executed purchase contract makes it clear that there exists a written contract for sale. This is very important because the Statute of Frauds requires a contract for the sale of land to be in writing in order to comply with Florida law. If your purchase contract may last more than one year it will be void and unenforceable unless it is in writing.
Your purchase agreement will also describe the legal description of the property and may even be in the form of a metes and bounds description that would allow a surveyor to go out and locate the property based on this legal description. This is another way that the purchase contract will bind both you and the seller to the contract. The binding legal description makes it clear what property is being sold. The seller cannot later say they meant to sell some, but not all of the land.
Many purchase agreements also allow the buyer to conduct certain types of inspections of the property before closing so that the buyer can determine what work might be needed before closing. Depending on the type of work that the buyer may wish to conduct, they may be required to obtain permission from the seller. The purchase contract binding the parties to the agreed terms for the inspection period and requiring the buyer to get permission before conducting certain inspections helps to avoid any confusion after the contract is signed.
Execution Procedure for a Purchase Agreement
The process of executing a purchase agreement begins once the buyer and seller agree to the basic terms of the sale. This typically involves a negotiation phase where the buyer makes an offer to purchase the property, and the seller either accepts, rejects, or makes a counter-offer. On occasion an offer can be made contingent on a certain event, for example the buyer selling his or her current home. Once both parties reach an agreement on the essential price and terms of sale, it becomes what is commonly known as an "accepted offer." From there, a formal draft of a purchase agreement can be created and exchanged for review. After both the buyer and seller have the opportunity to review and make comments or request changes to the draft, the final purchase agreement is produced for signature.
While a buyer is not legally required to have an attorney present during the drafting or negotiation of a purchase agreement, it is highly recommended that all parties consult an attorney in order to best protect themselves from unwanted surprises or consequences down the line.
Implications for Legal
A fully executed purchase agreement legally binds both the seller and the buyer to each other and to the transaction. While a fully executed purchase agreement is a legally binding contract, it may prove necessary to engage in litigation to enforce its terms. In such cases, the party initiating the litigation must understand the potential legal issues that may arise from and be raised in the litigation. Such issues include:
The Legal Description Any deed pursuant to the purchase agreement must contain a legal description, not a mere reference to a previously recorded deed or plat. A legal description of the property is required because the property to be conveyed is considered immovable, real estate. The legal description must be so specific that two surveyors would come to the same opinion as to the location and extent of the property.
Performance of Conditions Precedent to Closing Performance of the conditions precedent to closing will depend not only on the actions of the parties but also on the occurrence of events, such as the obtaining of financing. If there is a disagreement as to whether all conditions to closing have been met, it may be necessary to have a deposit disbursed pending resolution of the issue. Reference to the rules of evidence with regard to the admissibility of parol testimony may become necessary to resolve a disagreement as to the intended meaning of provisions of the purchase agreement. The parties are not bound to interpret their agreement in a certain way by some other separate agreement.
Actions for Specific Performance A purchase agreement is one of the most common types of agreements in which a court may grant specific performance as an alternative or remedy to money damages. The parties must be legally bound to perform all of their obligations in terms of the purchase agreement. In the absence of a legal obligation between the parties, the remedy of specific performance cannot be granted.
Statute of Frauds The Statute of Frauds may bar any action to enforce an oral agreement that is not performed within one year, unless the parties both performed the agreement. While this does not apply to real estate purchase agreements which must be in writing, it is a consideration for any oral agreement in connection with real estate.
Errors to Avoid
The common mistakes we see in our practice as real estate attorneys, in reverse order from least mistakes to worst mistakes:
- Failure to obtain a signature from all parties on the Purchase Agreement. While this may seem obvious, we see this time and again. You need to obtain signatures from both parties to the transaction, plus any authorized agents. If one party fails to sign the Purchase Agreement and an issue arises, that party can deny it ever made the deal and you are now at square one. It is not enough to just get their initials.
- Failure to sign an addendum to the Purchase Agreement if there is any change to the original Purchase Agreement. A purchase agreement is a contract. If you are purchasing a home and any change is made to it, such as the address or the closing date, you must do an addendum to the Purchase Agreement . You cannot simply hand write it in and initial it or strike it through. All parties must initial the changes. If there is no addendum, it is as if there was never a change. The original terms will be in effect until someone has a signed addendum.
- Not have it read by an attorney. There is no substitute for having a licensed attorney review your Purchase Agreement prior to signing. We cannot stress this enough. A great benefit of hiring an attorney to represent you in your real estate transaction is that a real estate attorney will know what to look for in a Purchase Agreement to ensure it is in compliance with the local real estate laws. An experienced attorney will know the entire process for a real estate transaction and can guide you through each part of it.
Identifying When an Agreement is Fully Executed
When a purchase agreement is considered "fully executed" will depend on the contract language. We are often asked if a fax of the purchase or lease agreement with an original signature is sufficient. Often, the answer is "no". Most purchase agreements and leases will require that an original signature is necessary (except electronic signatures).
So while it might be acceptable to fax the document to the other party, you should not consider the deal "done" unless the fully executed document is actually delivered. As a matter of practicality, if you have an e-mailed or faxed signature from the other party, I recommend that you get an acknowledgement by the other party before delivery of the document that they consider the document "the deal". Otherwise, it may be necessary to then fax by facsimile or email the executed document to the other party. Keys and possession of the property also typically go hand in hand with the delivery of the fully executed contract.
There are two common ways that contracts become "effective". One is the date on the contract itself is considered the effective date (after all parties have signed). The other is the date of delivery of the contract to the other party. These two dates could be the same, but not necessarily. So for example, if the seller signs the contract on January 1 and returns to the purchaser, the seller’s acceptance date is January 1. If the purchaser does not actually get the contract until January 5 (because of a fax or by hard copy) that is the effective date for purposes of determining the ‘time of the essence’ clause in a purchase agreement.
Buyer beware, the obligation of earnest money and other deposits could be created up on the closing of the contract, so be sure you know if any obligation exists.
Influence of a Fully Executed Agreement on Financing
A fully executed purchase agreement is also valuable when financing the purchase of the business. Since the business almost always becomes collateral for business loans, financing is an important part of the process. Almost every lender will want a copy of the executed purchase agreement to attach to the loan file, even if some lenders say they do not. The document shows the lender what the buyer is acquiring and what property the lender will have as a claim against the business. The purchase agreement provides important information regarding the business and its assets.
In the case of mortgage financing for commercial real estate, a fully executed purchase agreement is critical because it provides enough information for the lender to prepare a Title Insurance Commitment, which is necessary for the mortgage closing. This title insurance is required by lenders for the protection of their security interest in the collateral. The Title Insurance Commitment relies on the information set forth in the purchase agreement. A lender will not close a mortgage without a Title Insurance Commitment or other similar title opinion.
Dispute Resolution in Executed Agreements
Mediation and arbitration are two methods of dispute resolution that can be particularly useful when dealing with issues arising from a fully executed purchase agreement. Both processes are generally conducted before litigation, although the parties may still choose to file a lawsuit if the dispute remains unresolved.
Mediation – In most cases, mediator fees are split between the parties. The mediator will usually receive the facts of the case from both sides in advance and use these facts to propose a fair resolution of the case. During the mediation, the mediator will attempt to get both sides to agree on a settlement. The details of the settlement are then put into an agreement which is signed by the parties and their lawyers.
The benefit of mediation is that it is confidential and the mediator will not provide any information to the courts or juries regarding statements made during mediation unless there is a threat of bodily injury or harm. Additionally, mediation is usually less expensive than taking the case to court. Although the courts do not mandate mediation , any person considering litigation for a purchase agreement dispute should consider attempting mediation as a way to reach a resolution without having to take the case to court.
Arbitration – Similar to litigation, arbitration is a formal process whereby the parties present their case to a third party arbitrator. The arbitrator will then decide who is in the right and who is in the wrong, and will make a decision on how to resolve the dispute. Arbitration is binding and therefore, unlike mediation, will impact the outcome of a case. The arbitrator’s decision must be accepted and any further attempts to resolve the issue through the courts will be denied. However, the courts may review the arbitration award to assess whether it was fair, but will usually uphold the arbitration award.
Arbitration may be required by certain contracts, such as a fully executed purchase agreement. Depending on the situation, an arbitration clause may have been included within the agreement, outlining how the dispute will be resolved. Any persons who are unsure whether they are obligated to arbitrate their case should consult an attorney to discuss the situation. Individuals who are required to attend arbitration should seek legal representation to assist in making their case.