Topic 11.8: Sales Contracts

Learning Objectives

After successfully completing this topic, you will be able to
• describe the characteristics of a contract,
• list the information to be included in a residential sales contract, and
• list at least four required property disclosures.

Overview of Contracts

A contract for sale and purchase is a written agreement between a seller (the vendor) and a buyer (the vendee). The seller promises to deliver a deed to the property, among other things, and the buyer promises to pay the purchase price. A contract for the sale of real estate must be written to be enforceable; letters and faxes can be part of a valid sales contract.

If the contract doesn’t state what type of deed the seller will deliver, the seller is required to provide a warranty deed.

A licensee must not record a sales contract without the owner’s approval, since it would affect the property’s title.

Earnest Money Deposits

An earnest money deposit is not the consideration for the contract; it is the buyer’s promise to pay the purchase price that is the consideration. The earnest money deposit, shows the seller that the buyer is serious and has put up a sufficient deposit to give the seller liquidated damages if the buyer defaults. A contract without an earnest money deposit is valid.

Equitable Title

Before the transaction has closed, the buyer has equitable title—the buyer will receive legal title to the property when all requirements of the contract are fulfilled.

Information to Include in Sales Contracts

• names of the parties,
• date, time and place of closing,
• purchase price,
• financing terms,
• quality of title to be conveyed,
• type of deed,
• items of personal property included in the sale,
• type of evidence of title to be provided,
• names of the seller and the buyer,
• legal description of the property,
• items to be prorated,
• which party pays specific expenses, and
• date of possession.

Spouse’s Signature

Sometimes one spouse in a marriage may own the house that is occupied by both husband and wife. Because of homestead rights, the sellers, both husband and wife, should sign the sales contract to make them both obligated to sign the deed at closing.

Power to Bind the Seller or the Buyer

A listing does not give the broker the right to sign a sales contract in the absence of the seller. The broker can do this only if the seller has signed a power of attorney for the broker.

Required Disclosures

A licensee must give the buyer the following disclosures

• radon gas,
• energy efficiency,
• lead-based paint,
• homeowner association,
• flood insurance,
• property tax, and
• building code violations.

This is a partial list of the required disclosures. There are more, depending on the type of property that is the subject of the contract.

Radon Gas Disclosure [Chapter 404.56(5), F.S.]

Licensees must give prospective buyers a radon gas disclosure stating what the gas is. Testing is not required. The law requires that the following wording be included in sales contracts:

“Radon is a naturally occurring radioactive gas that, when it has accumulated in a building in sufficient quantities, may present health risks to persons who are exposed to it over time. Levels of radon that exceed federal and state guidelines have been found in buildings in Florida. Additional information regarding radon and radon testing may be obtained from your county health department.” [Chapter 404.56(5), F.S.

Required radon gas disclosure

Energy Efficiency Disclosure [Chapter 553.996, F.S.]

The Florida Energy-Efficiency Rating Act requires that sellers or the broker who prepares a real estate contract for sale give an Energy Efficiency Brochure that includes

• notification that the buyer may order an energy-efficiency rating,
• creation of a uniform statewide rating system, and
• that the owner may qualify for an energy efficient mortgage.

It does not require that the seller conduct an energy-efficiency rating at his or her expense.

Lead-Based Paint Disclosure

The use of lead-based paint for residences, furniture, and toys has been banned since 1978. Sellers, landlords, or their brokers must disclose known information on lead-based paint and lead-based paint hazards before the sale or lease of most housing built before 1978. Sellers and landlords must
• Give an EPA-approved information pamphlet on identifying and controlling lead-based paint hazards (“protect your family from lead in your home”) pamphlet.
• Disclose any known information concerning lead-based paint or lead-based paint hazards. The seller or landlord must also disclose information such as the location of the lead-based paint and/or lead-based paint hazards, and the condition of the painted surfaces.
• Provide any records and reports on lead-based paint and/or lead-based paint hazards which are available to the seller or landlord (for multi-unit buildings, this requirement includes records and reports concerning common areas and other units, when such information was obtained as a result of a building-wide evaluation).
• Include an attachment to the contract or lease which includes a lead warning statement and confirms that the seller or landlord has complied with all notification requirements. this attachment is to be provided in the same language used in the rest of the contract. sellers or landlords, and agents, as well as homebuyers or tenants, must sign and date the attachment.
• Sellers must provide homebuyers a 10-day period to conduct a paint inspection or risk assessment for lead-based paint or lead-based paint hazards. parties may mutually agree, in writing, to lengthen or shorten the time period for inspection. homebuyers may waive this inspection opportunity.
• Provide a lead-based paint hazard disclosure form if the home was built before 1978. There is no requirement that a seller have the home inspected.

Homeowner’s Association Disclosure

The seller must give the buyer a homeowner’s association disclosure if the home is in a neighborhood where an association is allowed to place a lien on properties for non-payment of dues, or if there are restrictive covenants restricting the use and occupancy of the property. If the seller does not give the disclosure before the buyer signs the contract, the contract is voidable by the buyer at any time before closing. The buyer’s right to void the contract cannot be waived in the contract. [Chapter 720, F.S.]

Homeowner’s Association Disclosure Language

Property Tax Disclosure

A seller or the seller’s agent must give the buyer a property tax disclosure warning the buyer not to rely on the current year’s taxes as an indication of what the taxes will be in the first year of their ownership. A change of ownership may trigger reassessments resulting in higher property taxes because of the artificial caps on the property from the Save Our Homes Amendment. [Chapter 689.261, F.S.]

Defects That Materially Affect the Value of Residential Property

Johnson vs. Davis is part of Florida’s case law that requires sellers of residential property to disclose to the buyer any material defects in a property that are not readily visible. Another case that is related is Raynor v. Wise Realty that an “as is” contract provision does not relieve the seller of the obligation to disclose material defects.

The seller must disclose any encumbrances that will remain on the property after the closing. If no encumbrances are listed in the contract, the seller will be required to deed the property free and clear of all encumbrances.

Duty for Licensees to Disclose

While Johnson v. Davis requires the sellers to make defect disclosures it did not speak to the duties of real estate licensees. The legislature corrected that oversight, so now Florida licensees have the duty under the law to disclose all “known facts that materially affect the value of residential real property and are not readily observable.” If a licensee fails to make the disclosure, the licensee is subject to disciplinary action.

A licensee who has knowledge of defects should disclose to a buyer the presence of sinkholes, boundary disputes with neighbors, pending claims against the property, environmental hazards, roof, plumbing, or electrical problems. Licensees who fail to disclose problems with the property title, if known, may be guilty of fraud.

If an issue is important enough to disclose, it is important enough to document that disclosure. Licensees should always make written disclosure. The best practice is “when in doubt, disclose.”

Community Development District Disclosure [Chapter 190, F.S.]

A Community Development District (CDD) is an independent, local, special purpose entity that builds and maintains amenities in a new community. The CDD is a legal entity with the power and right to enter contracts; to own both real and personal property; adopt bylaws, rules and regulations, and orders; to obtain funds by borrowing; to issue bonds; to impose assessments and levy taxes on property within the District. 

Board of Supervisors

The landowners of the District elect the Board of Supervisors.  The Board of Supervisors must comply with the regulations and procedures of local governments, including State ethics and financial disclosure laws.  Taxes and assessments are set annually by the Board of Supervisors and are itemized on the property tax statement, in addition to County and other local government taxes and assessments as provided for by law.

CDD Concept

The theory behind CDDs holds that services and public facilities used by residents and landowners will be available early in the development process, and are controlled by those who use them, and are paid for by self-imposed assessments and fees. Because the CDD is controlled by the landowners/residents, the decision of what services are offered and which facilities are constructed is up to the landowners/residents, not the developer.

CDD Costs

The cost to operate a CDD is paid by property owners. The CDD levies a non-ad valorem assessment (meaning it’s a fixed fee, not based on the value of the property), which appears on their annual property tax bill from the county tax collector. The fee may consist of two parts—an annual assessment for operations and maintenance, which can fluctuate up and down from year to year based on the budget adopted for that fiscal year—and an annual capital assessment to repay bonds sold by the CDD to finance community infrastructure and facilities, which annual assessments are generally fixed for the term of the bonds.

Required Disclosure

Every contract for the initial sale of a parcel of real property and each contract for the initial sale of a residential unit within the district shall include, immediately above the purchaser’s signature the following disclosure statement in boldfaced and conspicuous type which is larger than the type in the remaining text of the contract:

“THE   (Name of District)   COMMUNITY DEVELOPMENT DISTRICT MAY IMPOSE AND LEVY TAXES OR ASSESSMENTS, OR BOTH TAXES AND ASSESSMENTS, ON THIS PROPERTY. THESE TAXES AND ASSESSMENTS PAY THE CONSTRUCTION, OPERATION, AND MAINTENANCE COSTS OF CERTAIN PUBLIC FACILITIES AND SERVICES OF THE DISTRICT AND ARE SET ANNUALLY BY THE GOVERNING BOARD OF THE DISTRICT. THESE TAXES AND ASSESSMENTS ARE IN ADDITION TO COUNTY AND OTHER LOCAL GOVERNMENTAL TAXES AND ASSESSMENTS AND ALL OTHER TAXES AND ASSESSMENTS PROVIDED FOR BY LAW.”