§22.4 - Contract Terminology

• Jurisdiction: Washington

§22.4 CONTRACT TERMINOLOGY

Forms are merely checklists for careful drafting. The fact that a contract form or contract clause is printed in a form book or manual should not create any presumption of unrebuttable sanctity. Real estate contracts create unique drafting considerations with respect to the conveyance of real property. Many of the same issues occur with each transaction, while other issues require special drafting. The following sections of this chapter contain suggested terminology for basic drafting of real estate contracts.

(1) Use of real estate contract forms

No standard form real estate contract presently exists for the state of Washington. Attorneys, real estate brokers, and title insurance companies in many counties have attempted to standardize a real estate contract form for use in a particular area. Exercise caution in the use of any form and remember to adapt the form to the specific transaction. For example, if the seller wishes to prevent immediate logging of timber followed by a quick default, a contract provision must be inserted to prohibit buyers in possession from logging timber at all or until a portion of the purchase price has been paid.

Practice Tip: Two forms of real estate contract have been approved for use by limited practice officers in Washington, i.e., by persons authorized under APR 12 of the Admission to Practice Rules issued by the Washington Supreme Court to perform as closing officers in real estate and personal property transactions. They are commonly identified as forms LPB 45 and LPB 44 and may be accessed at the Washington State Bar Association's website at http://www.wsba.org/info.

(2) Prior encumbrances

The existence of a prior encumbrance (mortgage, deed of trust, or real estate contract) requires special drafting considerations. In effect, the purchase price partially comprises the principal amounts due under the prior encumbrance. The buyer's counsel should review the terms of any prior encumbrance and determine that the execution of the real estate contract will not cause a default or acceleration of the prior encumbrance. The seller's counsel may need to determine that the execution of the real estate contract will not cause the interest rate of the prior encumbrance to be adjusted beyond the interest rate stated in the real estate contract. The contract should require the buyer to comply with the terms, covenants, and conditions of the prior encumbrance, even if such obligations are in addition to those contained in the real estate contract. Both parties should be required to transmit to the other party copies of any written notice from the holder of a prior encumbrance. The following clauses address the issue of who is obligated to pay the prior encumbrance:

With respect to the mortgage (or deed of trust) dated ________________ recorded ________ under _______________ County Auditor's File No. ____________________________, executed by _______________________ as mortgagor in favor of __________________________ as mortgagee (or by __________________________ as grantor in favor of ________________ as trustee and ________________ as beneficiary), _____________________ shall timely pay and perform all obligations in connection with said mortgage (deed of trust) and the debt secured thereby and shall defend, indemnify, and hold __________ harmless with respect to any obligation or claim arising therefrom during the term of this contract. [Add the following sentence if the seller is to make the payments.] In the event that seller fails to make any such payment when due, then buyer may make payments and receive a credit for the amount thereof against payments next falling due under this contract.

This language is appropriate if a prior encumbrance is a real estate contract, rather than a mortgage or deed of trust:

With respect to the real estate contract dated _________________________ recorded _______________ ________________, under ___________________ County Auditor's File No. ______________________________, executed by _______________________________________ as seller and ______________________________________ herein as buyer, seller herein shall timely pay and perform all obligations in connection with said real estate contract and the debt evidenced thereby, and shall defend, indemnify, and hold harmless buyer with respect to any obligation or claim arising therefrom during the term of this contract. In the event that seller fails to make such payment when due, then buyer herein may make payment and receive a credit for the amount thereof against payments next falling due under this contract.

Buyer shall pay in full this real estate contract on or before _______________________ by (a) paying to seller cash in an amount equal to those items set forth below in (i), (ii), and (iii) and (b) assuming and agreeing to pay, in a Purchaser's Assignment of Real Estate Contract and agreed to be executed by seller herein the real estate contract described above. On the date of such assumption buyer herein shall (i) pay to seller herein an amount equal to the difference between the principal balance of this real estate contract and the principal balance of the real estate contract described above; (ii) pay to seller herein accrued interest on this real estate contract; (iii) pay any transfer fee required to make such assumption; and (iv) reimburse seller herein for seller's reserve account, if any. Interest on said real estate contract to be assumed by buyer herein shall be prorated between seller herein and buyer herein as of the date of assumption.

Practice Tip: When the contract is subject to a prior encumbrance, the amounts due under which are to be included in the buyer's payment, the buyer may wish to make those payments into a collection or escrow account with a third party under instructions to disburse them to the seller and the lienholder in the appropriate sums. The identification of that agent and the terms of the instructions should be included in the contract.

The following language protects the buyer against default or acceleration of the prior encumbrance:

Seller represents and warrants to buyer that the execution, delivery, and recordation of this contract will not cause the above-described mortgage (deed of trust or real estate contract) to become in default or accelerated. Buyer agrees to comply with each and every term, covenant, and condition of the above-described mortgage (deed of trust or real estate contract), including such obligations as may be in addition to those contained in this contract. Buyer shall defend, indemnify, and hold harmless seller from and against all losses, claims, demands, and allegations arising as a result of buyer's failure to comply with the terms, covenants, and conditions of the above-described mortgage (deed of trust or real estate contract). In the event either of the parties hereto gives or receives a written notice to or from the holder of the mortgage (deed of trust or real estate contract), either party agrees to promptly transmit a copy of such notice to the other party.

Lenders on prior mortgages, deeds of trust, and real estate contracts typically require a reserve account for the payment of real estate taxes, assessments, and insurance premiums. The parties should consider contract payment terms with respect to the reserve account. If the buyer is to pay these amounts as part of the monthly payment, the following language is suggested:

In addition to the payments on principal and interest, buyer shall pay a sum equal to one-twelfth (1/12) of the annual taxes, assessments, and insurance premiums as estimated by seller. Said payments shall be due at the same time as the contract payments herein.

If the buyer is to reimburse the seller other than as part of the monthly payment, the following language is suggested:

During the term of the real estate contract, seller's reserve account in connection with the mortgage (deed of trust) described above automatically pays annual real estate taxes, assessments, and annual hazard insurance premiums. Commencing ________________ and each _____________________ thereafter during the term of this contract, buyer shall reimburse seller for real estate taxes paid by seller's reserve account upon written notification by seller to buyer of the amount of taxes paid by the reserve account. Buyer likewise shall reimburse seller for the cost of the annual hazard insurance premiums paid by seller's reserve account upon written notification by seller to buyer of the amount paid by the reserve account.

The buyer also must verify from the holder of the prior encumbrance that the seller has timely paid and performed all payments and obligations in connection with the prior encumbrance and that the indebtedness secured by the prior encumbrance is being amortized in a manner consistent with the payment of the unpaid purchase price obligation pursuant to the contract.

With respect to the [include specific details of prior encumbrance] seller shall (a) timely pay and perform all payments and obligations in connection with the prior encumbrance and the indebtedness secured thereby; (b) defend, indemnify, and hold buyer harmless from and against any claim or liability arising therefrom, including buyer's attorney fees in defense of any claim or liability; and (c) in the event seller fails to make any such payment when due, then buyer may make payment and receive a credit for the amount thereof against payments next falling due under this contract. Seller further covenants that (i) seller shall obtain the written statement of [holder of prior encumbrance] that seller has timely paid and performed all payments and obligations in connection with the above-described prior encumbrance and the indebtedness secured thereby, that the prior encumbrance is current in all material respects, and that seller is in...