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The Facts About Purchase and Sale Agreements: An Interview with Howard Kohn of Kohn Law, P.L.L.C.

By Howard Kohn

Tell us a little bit about your company and the services you offer.

While my firm name changed to Kohn Law, P.L.L.C., several years ago, my law practice was formed in early 1994, and I have been practicing in Raleigh since 1981. My practice areas include residential (both single-family and multi-family) and commercial real estate, planned communities and affordable housing. Services offered include real estate and loan closings, drafting organizational documents, declarations, easements, maintenance agreements and amendments for planned community and condominium developments, and covenant interpretation.

Is there something that most people don't know about purchase and sale agreements that they should know?

Several years ago, the Joint Forms Committee, which is a committee comprised of real estate lawyers as well as Realtors, and upon which I have served for many years, shifted to a "due diligence" approach with regard to Form 2-T, which is the standard Offer to Purchase and Contract used in the vast majority of existing home sales. This approach allows the buyer to terminate the contract for any reason or no reason at all during the examination period, in exchange for payment of a due diligence fee, in addition to the earnest money deposit. Some members of the committee, myself included, did not feel that it was necessary for the buyer to have to pay this additional fee, but it was included to make sure that the contract would not be unenforceable on the theory that no additional monetary consideration was paid by the buyer for the termination right. In practice, Realtors for buyers tend to recommend nominal due diligence fees, since the buyer loses the due diligence fee if the buyer terminates. To the contrary, the committee came to see the due diligence fee as a means of allowing the seller to be compensated for its damages in having the house off the market until the due diligence period expires, which normally would include one or two mortgage payments. It is obvious that the respective interests of the buyer and seller are at odds in this negotiation.

Can you briefly explain the main reasons why it's important to have a lawyer prepare and/or review a residential purchase and sale agreement?

While it has been the objective of the Joint Forms Committee to provide certainty of outcome and a less subjective Form 2-T, there are many possible problem scenarios that the contract still does not address clearly. I can say without much doubt that while the Realtors on the Joint Forms Committee were very much in favor of the due diligence concept, they want a form that Realtors can fill out and don't want to have to wait for the buyer's lawyer to review a contract before it gets signed. And it can be argued that unilateral termination rights given to the buyer under current Form 2-T make it less important to seek the approval of a lawyer before signing, especially where the due diligence fee is nominal.

What is the state law regarding working with an attorney at this stage?

I am not aware of any such law and can say that I have rarely reviewed contracts before they are signed during my 33 years of practice. That is not to say I don't offer to do that, free of charge, if a buyer wants me to. But the problem is that unless I am asked specific questions about a clause in the contract, it is practically impossible to provide a meaningful review of the contract as a whole, and most buyers lack the understanding to question specific clauses.

How reliable is it when a standard "fill in the blank" type of form is used for the agreement?

For the most part, Form 2-T works well, in my opinion, and the members of the committee are always tweaking it to address different problem areas that arise.

What are some of the most common unfavorable variations/items you've found in purchase and sale agreements?

Since I believe that the Form 2-T is buyer-seller neutral, or at least is intended to be, the most unfavorable terms are seen in contracts from other jurisdictions, forms obtained on-line, or forms created by builders, which are almost always slanted heavily in favor of the builder and may result in disastrous consequences for the buyer. Realtors using Form 2-T are well-trained to avoid drafting any clauses and to refer any special terms to lawyers to draft, but occasionally we see clauses drafted by Realtors or the parties themselves, which are almost always ineffective.

Do you have any advice for potential home buyers or sellers before they sign the agreement?

Read it and all of the other documents that the agreement suggests that the buyer read, most importantly the restrictive covenants for the property.

What's the best way for people to contact you and your company?

Clients and prospective clients are encouraged to call or email me or my legal assistant, Michelle Haskett. I am always available to them on my direct line, cell phone and office email address, all of which appear on my emails. I am copied automatically on emails sent to our main email address.

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