This article was written by Christopher J. Charles, Esq. and Eric L. Walberg, Esq.
With interest rates hovering at historic lows and prices generally stable, many experts agree that now is still a good time to purchase real estate in Arizona. Everyone appreciates a good deal. But some buyers approach that goal with the wrong strategy. For example, some buyers aim to keep “one foot in and foot out” in case a better deal comes along prior to close of escrow. We refer to this as “buyer’s leverage.” Arizona is not unique in experiencing this phenomenon. But two of Arizona’s key contract interpretation rules could result in unintended consequences for the unwary buyer.
The first of these two unique rules is that the court cannot rewrite contract terms. On the other hand, the second rule allows the court to consider oral or other extraneous evidence outside the “four corners of the contract” in interpreting an agreement (i.e., a broad interpretation of the “parole evidence rule”). This article explores these Arizona-unique contract interpretation rules and their relationship to each other in the context of real estate agreements.
The ready, willing, and able buyer cannot maximize his leverage without an appreciation and impact of these two Arizona-unique rules on the following “boiler plate” contract provisions:
This agreement constitutes the entire agreement of both parties, and all previous communication between both parties whether written or oral with the reference to the subject matter of this agreement is canceled and superseded.
In the event that any provision of this agreement is deemed vague or unenforceable, the parties agree that the [judge/arbitrator] shall rewrite the provision to be enforceable and/or to reflect the intent of the parties.
Including the latter contract provision in an effort to insert “flexibility” and maximize “buyer’s leverage” could have the unintended consequence of bogging the buyer down in litigation, thanks to the above contract interpretation rules.
For example, a common issue addressed in real estate contracts is the financing contingency. The ready, willing and able buyer might wish to keep its “options open” by requiring that the financing contingency language be drafted in such a manner that he can “escape” the deal if another more advantageous deal comes along. The buyer can demand and may receive a rather vague financial contingency provision that on its face places little or no parameters on the source or terms of financing it might be required to pursue, believing that negotiating such vague terms might prevent the buyer providing more information about its efforts than it might want to divulge to the seller. By insisting on this “flexibility,” however, the buyer may unwittingly open itself up to litigation in Arizona because the seller is able to press the buyer to provide more detail about its efforts to secure financing than the buyer is accustomed to providing in other states. lf the buyer balks at providing this information, the unique contract interpretation rules in Arizona can provide the leverage to the seller against the buyer by asserting that either the brokers or parties involved in the negotiation of the agreement envisioned that the buyer would pursue a certain type of financing. In the end, the seller can claim that although the explicit terms of the agreement do not set forth what efforts the buyer must undertake or agree to, the parties cannot release the buyer from its contractual obligations by claiming a failure to obtain acceptable financing for the purchase of the real estate.
In the example above, the next move by the buyer might be to point out to the seller that the financing contingency language in the contract is so broad that the buyer need only claim the inability to obtain “acceptable” financing, and the contract is terminated. The problem with this approach is that it opens the door to the second Arizona-unique rule of contract interpretation: that court cannot rewrite the contract, notwithstanding inclusion of a contract provision expressly providing to the contrary. The seller will counter that the buyer is simply trying to insert certainty into a contract that did not contain certainty, something an Arizona arbitrator or judge cannot do. This would require the court to delve deeper into the “real intentions” of the parties, and to look to oral or other evidence outside the “four corners” of the contract. Ultimately, this results in a potentially vicious cycle of investigation into the contract that the buyer may never have envisioned at signing. Because the Arizona court cannot re-write the contract, there is no clear end game for either side.
The buyer’s leverage is a function of how many deals it can be involved with at any one time, and how motivated the seller is to close the deal to possibly become the ready, willing and able buyer himself. The dynamics of the real estate deal are rarely known by the parties and can change quickly. But often the parties (including brokers) fool themselves by believing they understand these dynamics. For example, the respective brokers or other agents (including legal counsel) can be fully informed of the motivations of both parties in entering the deal. But in the course of due diligence, the seller or buyer might be introduced to a totally unrelated alternative deal that they simply cannot pass up, making the closing (or failure to close) so important that they are willing to risk the relationship by killing (or forcing) the deal.
The moral to this story? Draft clear and complete contracts (including well-drafted amendments or addenda) to maximize the chance of smooth transactions and to reduce the risk of disputes or litigation.
If you or someone you know has questions regarding real estate contracts, please call today to speak with Mr. Charles.