Protect Yourself From Standard Real Estate & Architect Agreements

If “standard” agreements included terms that met the reasonable expectations of both parties, there would be little reason for lawyers to review the average contract for real estate, architecture and numerous other forms. However, too often, a “standard” agreement is not fair to both parties and omits reasonable obligations for both parties. Contracts which limit the liability of a party may be quite fair to one of the parties; but, if the potential damages resulting from a breach or negligence exceed the limits of liability, the contract which initially seemed fair, might, in fact, only be fair to one party. Following are some examples of why standard contract may not be fair to both parties.

Real estate purchase sale contracts are assumed to give a buyer an inspection period during which they can reject the property for any reason. However, most real estate sales agreements are prepared by a realtor using the “standard” form. If the contract states that the buyer must have a “reasonable objection” to terminate the contract, the cancellation of the contract would now be subject to a judge’s or arbitrator’s interpretation of the buyer’s “reasonable objection.” The contract should provide that the buyer can cancel for any reason, not just a “reasonable objection.”

Real estate contracts typically require the parties to waive all claims against the realtor and escrow agency. However, if the realtor or the escrow agent are negligent in their performance of work, why should there be a waiver prior to performance? While the clause may be unenforceable, professionals should be held to the community standard of care and not require a waiver before they have performed any services.

Architect agreements that shorten statutes of limitations so that by the time a problem arises it is too late to sue, are among the objectionable “standard” forms of contract. Many architect and construction contracts use the forms prepared by the American Institute of Architects (“AIA”). These forms cover many important issues, but the architect contract form unreasonably reduces the time within which a claim for negligence or breach of contract can be made. This may result in the owner learning about a design problem and being barred from filing suit or arbitration because the time to file a claim has passed. In Arizona, the time to file a claim for negligence is two years after learning of the problem. Arizona law, by a Statute of Repose, allows suit to be brought in connection with a construction project within eight or nine years from completion. Clarify the limitation with your architect and attorney.

The AIA form for construction projects general conditions has no provision to award the prevailing party attorney’s fees, whether by litigation or arbitration. In Arizona, if there is no written clause providing the award of attorney’s fees, an arbitrator is not authorized to award attorney’s fees. This clause should be included.

Many contracts limit the amount of damages recoverable to the total payment made in the purchase of the service or product. As an example, you purchased a piece of equipment for $20,000 or paid $20,000 for engineering fees; the contract contains a clause that limits all damages to $20,000. Unfortunately, the damages that may flow from faulty equipment or negligent services may be many times the $20,000 paid. Limiting potential damages is an excellent method to control one party’s liability; but, for the party damaged by faulty equipment or negligent services, the limitation of liability is not fair.

Contracts should include all the important terms which you have negotiated. The contract should state in simple English when and what is required of all the parties. Once a dispute occurs, contracts should have a clause requiring mediation. Mediation is a non-binding process which effectively resolves many disputes with less cost and aggravation than litigation or arbitration.

Due to the complexity of the legal system, construction contracts should require that you, as the owner, be a third-party beneficiary of contracts with consultants and subcontractors. As you have not entered a contract with those third parties, you need to examine the contract between your party and the subconsultants or subcontractors. Those third parties should have the same proof of insurance that you have required and specifically provide that you are a third-party beneficiary of the services that they have provided. This will give you a direct right of action should they be negligent in their work.

Be sure when you enter into a contract that your best interests are protected. A man’s home might be his castle, but a good contract will ensure that his castle won’t become his dungeon.

TERMS THAT SHOULD BE INCLUDED IN A REAL ESTATE CONTRACT

1. Buyer may terminate the contract for any reason or no reason, in Buyer’s sole discretion, whether questionably reasonable or not.
2. Upon termination all earnest money shall be released to Buyer immediately.
3. If there is evidence of termites, Buyer may terminate this agreement and earnest money will be released to Buyer immediately.
4. If the premises are not in substantially the same condition as of the date the Buyer signs the contract, Buyer will have the right to terminate the agreement and all earnest money will be released immediately to Buyer.
5. If the Seller breaches the agreement, Buyer has a right to specific performance.
6. Seller should deliver to Buyer copies of all documents and information Seller has in its possession including, but not limited to, surveys, building plans, building permits, contracts for the construction and operation of the premises, notices from governments or insurance companies of bills or summary reports reflecting utility bills, pest control and extermination services, inspection reports, and copies of any litigation involving the premises.
7. Buyer’s time for review of the title commitment should begin seven (7) days after Buyer’s receipt of all recorded documents and an ALTA (American Land Title Association) survey.
8. There will be an MAI (Member Appraisal Institute) appraisal of the premises and if that appraisal is in an amount less than the purchase price, the Buyer will have the right to terminate the agreement and all earnest money will be released immediately to Buyer.
9. Seller warranties that:
   1. There are no claims, actions, suits, or other proceedings (including condemnation) pending or threatened that may detrimentally affect Buyer’s right, title, or interest in the Premises or the value of the Premises or Seller’s ability to perform Seller’s obligations under this Agreement.
   2. Seller has complete title to the Premises subject only to the matters reflected in the preliminary title report.
   3. No work has been performed or materials furnished which might give rise to mechanic’s liens.
   4. Seller is not prohibited from consummating the transactions.
   5. There are no parties in adverse possession; there are no parties in possession except Seller and no party has been granted any license, lease, or other right.
   6. There are no attachments, executions, assignments for the benefit of creditors, receiverships, conservatorship, or voluntary or involuntary proceedings in bankruptcy.
   7. There is no default, nor has any event occurred which would constitute a default in any contract, mortgage, deed of trust, lease, or other instrument.
   8. There are no contracts or other obligations for the sale, exchange, or transfer of the property.
   9. Seller has no knowledge of any violations of law, rules, regulations, ordinances, codes, covenants, conditions, restrictions, or agreements. Seller has not received notice of a violation from any insurance company or governmental agency. If any notices of violations are received prior to Close of Escrow, Buyer may terminate agreement.
   10. Seller is not aware of any radon gas contamination.
   11. Seller has no knowledge of any sites of historical or archaeological importance.
   12. Seller will not at any time prior to or after Close of Escrow grant to any person an interest in the premises.
   13. The property has the appropriate zoning designation, and Seller will not join in, consent to, request, or apply for any change unless Buyer approves.
   14. Seller expressly warrants that the property has access to and from a public street.
10. Neither Seller nor any other person, to the best of Seller’s knowledge, has ever caused or permitted any Hazardous Material to be placed, held, located, or disposed of on, under, or at the Premises or any part thereof, nor has any part of the premises ever been used as a treatment, storage, or disposal site for any Hazardous Material.
11. Seller indemnifies Buyer and agrees to pay, defend, and hold Buyer harmless from all losses, liabilities, incurred with respect to the presence of any Hazardous Material.
12. Seller warranties and representations shall survive Close of Escrow.
13. Seller does indemnify and hold Buyer harmless from any liability, arising from any act or omission of Seller pertaining in any manner to the premises for the period of time prior to Close of Escrow.

TERMS THAT SHOULD BE INCLUDED IN ARCHITECTURE CONTRACTS

1. Owner will have the right to join architect and general contractor in single mediation and arbitration.
2. Architect will provide a time schedule for producing documents.
3. Architect is to advise Owner in writing when it is aware of any conflicts, errors, omissions in the Construction Documents or defects in construction of the project.
4. If the cost of the project as bid or negotiated exceeds the Owner’s budget by X percent (e.g., between 15-20%) Architect will revise the Construction Documents at no additional cost.
5. Owner will be advised of all consultants and third parties hired by Architect in connection with the preparation of the Construction Documents, Owner will have a reasonable right of approval, and Owner will be a third-party beneficiary of such contracts. Third party contracts will contain a provision making a third-party beneficiary and will require the same professional error and omissions insurance and commercial general insurance required of Architect.
6. Architect will be liable to Owner for additional costs incurred by Owner due to conflicts, errors or omissions in the Construction Documents.
7. All documents, plans, sketches, models, etc., prepared by the Architect, including the schematic designs, the Design Development and the Construction Bid Documents are to be used solely for this Project. The Architect:
   1. shall be deemed the author for copyright of the documents
   2. shall not use these documents for any other project
   3. shall be responsible for accuracy and adequacy of the plans.

   The Owner:

   1. shall have ownership of all documents
   2. will be provided copies requested
   3. agrees that these documents shall not be used for any other project without approval and compensation to Architect.
   4. shall have an irrevocable license to use, reproduce or make derivative works from these documents for any renovations, maintenance or remodeling of the Project
   5. shall have an irrevocable license to use the image of the Project and to reproduce documents and data obtained within the documents
   6. shall have an irrevocable license to use and reproduce the image of the Project designed by the Architect.
8. Architect will review as-builts prepared by contractor for accuracy.
9. Architect’s services for construction administration include one (1) year warranty inspection.
10. The construction documents will require contractor to prepare photos and daily logs during the progress of the project. Architect, Engineer, Contractor and all subcontractors which prepare records of the project (daily logs, field reports, job meeting minutes, etc.) and will exchange copies weekly.
11. If Architect is retained for construction administration, Architect will review lien waivers of contractor, subcontractors and suppliers with each pay application.
12. Architect’s contract is entered into based upon a standard of mutual trust, good faith and fair dealing. Architect’s services will meet the “highest” standards of the community in preparation of the Construction Documents.
13. Owner has the right to terminate the project at any time for convenience of Owner and Owner will pay for all work performed to date as well as any additional costs for obligations which cannot be terminated.
14. Architect is to cooperate with Owner’s General Contractor in value engineering changes to the project.
15. In designing Construction Documents, Architect will identify resulting effects of costs savings (e.g., if the Owner expects a quiet environment and the HVAC system is on a roof that is too light, vibration noise will be reflected in the building; or, if lightweight concrete is used for a floor decking, the stability of the floor may be affected if other design changes are not examined).
16. In the event of any arbitration or litigation, the prevailing party will be paid reasonable attorney’s fees, costs of expert witnesses and costs of the arbitration or litigation. (In Arizona, if arbitration does not contain an attorney’s fees provision, the Arbitrator cannot award fees to the prevailing party.)