Beware of the Pitfalls When Using Boilerplate Real Estate Contracts

In the complex realm of residential and commercial real estate transactions, the importance of a well-crafted customized contract cannot be overstated. However, the convenience and seemingly time-saving allure of boilerplate real estate contracts have led many real estate agents and buyers and sellers to neglect the inherent pitfalls associated with their use. While these template contracts may offer a quick solution, their one-size-fits-all nature often fails to address the unique nuances of individual transactions, potentially exposing parties to unforeseen legal and financial complications. Given the complexity of the transaction, it can be wise to consult an attorney to prepare specific terms not contemplated by a boilerplate contract. I have encountered dozens of transactions where an issue presented itself, and the contract was either vague or silent on how the parties should proceed. This blog seeks to highlight specific areas of concern with these off-the-shelf contracts and how to deal with possible confusion.

Areas of Concern

1. Lack of Specificity

The first major area of concern deals with a lack of specificity. Boilerplate real estate contracts are designed to cater to a wide range of scenarios. However, each transaction is unique, and it is difficult for a form document to cover each scenario in any given transaction. Deals can vary significantly in terms of property type, financing, and contingencies, making it crucial to tailor the contract to the circumstances at hand. As an example, several developers and investors acquire unentitled or “raw” land and seek to have it entitled for a specific use. This requires a detailed contract enumerating several specific contingencies that are required to be satisfied prior to closing. A boilerplate contract does not provide for any such entitlement or permit contingencies, and it also does not provide much room to draft these contingencies within the document itself. Using such a contract in this scenario would be doing a disservice to the contract buyer.

2. Inadequate Risk Allocation

One of a lawyer’s primary concerns when drafting a contract is to effectively manage the risk for their client, whether representing a buyer or a seller. A properly drafted contract should adequately spread the risk among the parties, while not overburdening one of the parties with an undue share of the potential liability in the contract. A common scenario that I see in my practice are buyers that do not want to see their deposits become nonrefundable until all contract contingencies have been satisfied. This requires specific language that simply does not exist within the standard form contracts used by many in the industry. Another common provision within boilerplate contracts is for both parties to bear their own attorneys’ fees in a contract dispute regardless of which party prevails in court. This term can act to the disadvantage of a party when the other side materially breaches the contract, either intentionally or unintentionally, and the nonbreaching party is forced to sue to enforce the terms of the contract. It unfairly costs the nonbreaching party legal fees when they’ve done nothing wrong. Legal fees in a contract dispute can be cost-prohibitive in many situations, leaving the nonbreaching party with little to no recourse.

3. Unintended Ambiguities

Boilerplate contracts often contain standardized language that may be subject to multiple interpretations. Ambiguous terms related to financing, property conditions, or timelines may lead to confusion and possible disagreements between the parties. Specificity is key in these situations. A primary example in residential deals concerns negotiating repairs on the resale of a property. The language prepared and negotiated must be specific not only with which party is responsible for the specific repair acts, but also what is the expected result after the repair. It is surprising how often buyers and sellers have different expectations on how repairs should be completed. These concerns need to be completely discussed between the parties and addressed within the terms of the contract.

4. Ignoring Evolving Market Trends

Real estate markets are dynamic, and they evolve over time in response to economic, social, and environmental factors. Boilerplate contracts, while typically updated on a semiregular basis by the local realtor’s trade association, are static by nature. They may not account for emerging trends or changes in market conditions. One such emerging trend deals with the allocation of commissions. A 2023 federal jury decision in the Middle District of Missouri has caused disruption in the standard practice of sellers paying the commissions of both brokers involved in a transaction. If sellers are no longer obligated to pay these commissions in the future, a boilerplate contract will have to be reviewed and analyzed to see whether it has evolved with the market trend. If not, the seller could literally pay the price.

Conclusion

While the use of boilerplate real estate contracts may offer a quick and seemingly convenient solution, the pitfalls associated with their generic nature can have far-reaching consequences. From a lack of specificity to inadequate risk allocation, unintended ambiguities, and the ignorance of evolving market trends, the risks are manifold. Customization is key in the realm of real estate transactions, where each deal is unique and demands a tailored approach to mitigate risks, protect interests, and ensure a smooth and successful transaction. As the saying goes, the devil is in the details, and when it comes to real estate contracts, attention to those details is paramount. An experienced real estate attorney familiar with contract drafting should be consulted prior to signing any deal.