Beware The Title

The real estate market is on drugs, and we all know it. We don’t even want to analyze it because we are afraid that whatever the magic is, it will disappear when we try to understand it.

One thing we do know, though, is that good times and bad make people do things they wouldn’t otherwise do. An example is the subject of this article.

A condominium reservation agreement is a document we all understand. It permits a developer to get the declaration together, calculate costs, and thereafter to present a contract to that buyer to close at a fixed price on a fixed date in the future. It permits a purchaser to review condominium documents and make an informed decision on whether or not to purchase before he irrevocably commits to buy. A condominium reservation agreement is authorized by the Bureau of Condominiums and must follow their form.

A condominium reservation agreement is a temporary reservation, which normally lasts only several weeks until condominium documents have been completed and approved. It is an aid to marketing and gets replaced by a firm contract for sale and purchase of a described unit, at an agreed price, with a set closing date in the future. Construction lenders, developers, and purchasers all rely on these documents, and all who play the game, in recent years, have been winners.

In this crazed market of ours, a new breed of reservation agreement, really a non-reservation agreement (I will call it here the “NRA” to borrow initials), is an agreement I have seen in two forms. The first form looks cosmetically exactly like a condominium reservation agreement and it is called, “reservation agreement.” Its content is not prescribed by any agency, and not even by good taste or fair play. The NRA establishes a price, a unit, and a future prospective date of purchase. It is different, though, because it gives the seller (sometimes also the buyer) the express right to cancel at any time, without penalty. By statute, an NRA cannot be used in a condominium context, but could be used in any other setting, such as for a townhouse or single-family dwelling.

Unless lenders or purchasers insist on a binding contract, an NRA may stay in place all the way through construction, to the time of closing. In the time between the date of signing an NRA and construction and delivery of the unit, recent history says the value of the unit can go up substantially. The buyer who waits out construction expecting to close on his NRA may be disappointed, because the seller could change the price, or not close. The realtor who lets his buyer sign such an agreement will have strong accusations made by his client that the client’s investment opportunity was lost unnecessarily.

To make matters more complicated, at law, a contract that binds only one party, binds no one. It is a void instrument. In a down market, the developer who used the NRA as a no-lose tool for waiting out the market, would find that his NRA will not force a buyer to the closing table. In a down market, the developer, and any construction lender who relied upon the NRA to establish a buy-sell relationship, would be disappointed, in my opinion. As a result, in a good market, the NRA tool leaves a buyer standing alone at the altar. In a bad market, the NRA leaves the developer and the construction lender with no buyer, and perhaps no market.

I said above that there are two variations of the NRA. One of them, again cosmetically, looks like a condominium reservation agreement, and it will be called “reservation agreement”. The other is called a “Contract to Buy”, and looks like a real contract. Again, it is not regulated or controlled, and again, it will establish a purchase price, a unit, and a closing date. However, the remedies section of the contract will state that if the seller breaches the contract, there is no remedy available for the buyer except to recover his earnest money deposit. In a good market, in which the buyer expects to purchase a unit worth more on closing date than his purchase price, taking back the EMD is no remedy at all. Again, the buyer is left at the altar, and again, the realtor or lawyer who let his buyer sign this agreement is left with an explanation to make. The law has a term for this contract which explains exactly what it is: an “illusory contract”. It walks and talks like a contract, but it is not.

One who starts a document in the community of commerce, intending it to deceive, will at best be known as unethical. At worst, these documents mislead and deceive, create false expectations, and may be the basis of claims for fraud.

Don’t assume the contents of a document because of its title. Not all “reservation agreements”, or even “contracts for sale”, are what they appear to be.

Start your new year by telling your closing agent how much you appreciate them. They spend their days making all of us look good.

Categories