When It Comes To An Agreement Of Sale, Make Sure To Account For Contingencies, Deadlines

Written by: Alan Nochumson

An agreement of sale for real estate typically involves more than how much the property is being transferred for and when the closing will take place. Instead, there are many contingencies and deadlines set forth in such an agreement of sale which affects the rights and obligations of the parties.

In an unpublished opinion issued by the Superior Court of Pennsylvania in Firely v. Warner, 2017 Pa. Super. Unpub. LEXIS 3986 (Oct. 26, 2017), prospective real estate buyers were able to keep the significant deposit they paid on account of the agreement of sale they entered into with their sellers when they terminated the agreement of sale based upon an inspection contingency clause contained within the agreement of sale.

In late 2008, John and Holly Firely offered to purchase a property from Ralph B. Warner, Daniel Glennon and Robert Seville, trustees for Adam Warner, for the purchase price of $700,000, the opinion said.

After many changes to the agreement of sale by the parties, the sellers initialed the last changes to it and forwarded same to the listing agent on Dece. 13, 2008, the opinion said.

The Firelys agreed to place $70,000 in escrow as a deposit under the finalized agreement of sale, the opinion said.

The finalized agreement of sale also included an inspection contingency clause, the opinion said.

According to the agreement of sale, the inspection contingency period lasted 15 days, with the commencement date of the contingency period one day after the agreement of sale was fully executed by the parties, and, within the 15-day contingency period, the Firelys could accept the information in the inspections and proceed with the property acquisition, terminate the agreement of sale and recoup their deposit of $70,000, or enter into an addendum to the agreement of sale under mutually agreeable terms and conditions for the sellers to provide for any necessary repairs or credits at settlement, the opinion said.

Under the agreement of sale, if the Firelys did not exercise their right of terminate the agreement of sale within the 15-day inspection contingency period, they accepted the property and could not recoup their deposit under the inspection contingency clause, the opinion said.

On Dec. 13, 2008, the listing agent sent an email to the real estate agent representing the Firelys “stating ‘the finalized contract was received by e-mail” that very day by the sellers and that “the start date for all buyer property inspection is Dec. 14, 2008,” the opinion said.

As such, the 15-day inspection contingency period should have expired on Dec. 28, 2008 under the terms and conditions of the agreement of sale.

Regardless, when the real estate agent representing the Firelys received this email, she indicated that she believed that the Firelys “had from the day after the 14, Dec. 15, 2008, through Dec. 29, 2008, to provide notice on the inspections.”

The contractor who inspected the well and septic systems for the Firelys opined “that the septic system was unsatisfactory, and that the well water did not meet established portability standards,” the opinion said.

On Dec. 29, 2008, the real estate agent representing the Firelys advised the listing agent that, given the condition of the well and septic systems, the Firelys were not willing to go forward with the purchase unless the sellers were willing to negotiate a mutually acceptable downward adjustment of the purchase price, the opinion said.

On Jan. 2, 2008, one of the trustees for the seller advised the listing agent via email that the sellers would not be willing to remediate the septic system issue or any other issues with the property and for the listing agent to notify the Firelys accordingly, the opinion said.

In that email, that trustee wrote that the Firelys “should not be able to terminate the agreement of sale at the time based upon the inspections since the deadline for termination based on inspections (Dec. 29) had passed.”

Several days later, the listing agent stated to the Firelys’ real estate agent that the sellers were not willing to repair the well and septic systems, the opinion said.

In response, later that day, the Firelys then signed a notice of termination of agreement of sale and agreement of sale release and distribution of the deposit money, the opinion said.

At that point, the sellers did not sign the release, but instead the real estate agents representing the parties continued to negotiate in an attempt to complete the real estate transaction, the opinion said.

Ultimately, the parties failed to come to an agreement on the well and septic systems, and the sellers refused to return the deposit monies of $70,000 to the Firelys, the opinion said.

The Firelys then filed a lawsuit against the sellers seeking the return of the $70,000 being held in escrow on account of the agreement of sale, the opinion said.

In response, the sellers filed a counterclaim against the Firelys, seeking a declaratory judgment that the Firelys breached the agreement of sale and were in default, specific performance to retain the deposit monies under the agreement of sale, mitigated damages on the sale to the third party, and incidental and consequential damages caused by the property being vacant when the deal terminated, the opinion said.

During litigation, the property sold for $425,000 to a third party, the opinion said.

In the interim, the sellers had negotiated with several other potential buyers, and had entered into several agreements of sale, which never came to fruition. they also leased the property for a portion of time prior to sale, the opinion said.

After a bench trial occurred, the trial court found in favor of the Firelys and against the sellers and awarded the Firelys their $70,000 deposit back.

The sellers then appealed the trial court’s ruling to the Superior Court.

On appeal, the sellers argued that the Firelys failed to timely exercise their right to terminate the agreement of sale within the allotted inspection contingency period and, therefore, were required to purchase the property from the sellers under the terms and conditions of the agreement of sale.

The sellers, in the alternative, argued that, even if the Firelys’ alleged notice of intent to terminate the agreement of sale was deemed timely, the notice was not in the proper format.

The Superior Court examined the relevant portions of the agreement of sale entered into by the parties.

In doing so, the Superior Court confirmed that the agreement of sale expressly provided for a 15-day inspection contingency period to allow for inspections of the property to occur, that all time periods under the agreement of sale would be counted from the date of execution (excluding the day the agreement of sale was executed by the parties and including the last day of the time period), and that “the performance of any of the obligations of the agreement [of sale] are of the essence and are binding”.

Furthermore, according to the Superior Court, under the agreement of sale, all deposit monies paid by the Firelys pursuant to the agreement of sale were to be returned to them in the event they properly terminated the agreement of sale.

On the other hand, as indicated by the Superior Court, the sellers had the right to keep the $70,000 being held in escrow in the event that the Firelys breached any terms or conditions of the agreement of sale.

After reviewing the evidence produced at trial, the Superior Court concluded that there was sufficient evidence in the record to support the trial court’s finding that the Firelys were entitled to the return of their $70,000 deposit.

The trial court emphasized that, given the parties’ lack of timeliness in their dealings with each other, it was “unwilling to impose a hyper-technical interpretation on the parties’ agreement of sale, after the fact, where the parties themselves failed to strictly abide by the contract terms during the process.”

The Superior Court cited legal precedent where appellate courts in Pennsylvania “have held that even where an agreement of sale makes time of the essence, this provision may be waived by conduct of the parties.”

In other words, even though the inspection contingency period technically expired on Dec. 28, 2008, the Superior Court overlooked the fact that the Firelys did not state their intention to terminate the agreement of sale based upon the inspection contingency clause via email through their real estate agent to the listing agent until Dec. 29, 2008, one day after the inspection contingency period elapsed.

The Superior Court pointed out, among other things, that one of the trustees of the sellers even erroneously admitted to the listing agent in an email on Jan. 2, 2009, that he believed that the inspection contingency period elapsed on Dec. 29, 2008 and that the listing agent did not respond to the aforementioned Dec. 29, 2008, email from the Firelys’ real estate agent until well over a week later on Jan. 6, 2009.

The Superior Court also rejected the sellers’ contention that the “Dec. 29, 2008 email, stating that the Firelys no longer wished to proceed with the sale unless the sellers were willing to negotiate on the septic system issue, was invalid due to improper format.”

Citing to the trial court’s ruling, the Superior Court pointed out that the trial “court was not directed to any language in the agreement of sale indicating that a buyer must terminate with a specific form” and the sellers did not establish “that notice of termination had to be in a specific format.”

Rather, the Superior Court surprisingly allowed the agreement of sale to be terminated by way of conditional language, as the email only stated that the Firelys were unwilling to proceed forward with the real estate transaction unless the purchase price was negotiated downward by mutual agreement of the parties.

Lessons Learned

The Superior Court’s ruling in Firely is a situation where an appellate court may have saved prospective buyers from losing a significant deposit made under a written agreement of sale.

With that being said, most times, representing sellers and buyers in real estate transactions includes many contingencies and deadlines along the way until closing occurs.

It is, thus, ever so important to make sure that these contingencies and deadlines are properly accounted for and met or the party you are representing may face dire consequences.

Reprinted with permission from the December 8, 2017 edition of The Legal Intelligencer © 2017 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited. For information, contact 877-257-3382, reprints@alm.com or visit www.almreprints.com.

Alan Nochumson