Table of Contents
Addendums
"Addendum" has no special legal meaning. If you look the word up in a legal dictionary, it will say the same thing it does in a regular English dictionary. An addendum is "something added." That's it! An addendum is something added to something.
Because the word "addendum" has no special legal meaning, the legal effect of a document entitled "addendum" will depend on the context in which the document is used, not what it is called. This simple concept causes no end of trouble in real estate transactions. Addendums, and addendum forms, are used for all kinds of different purposes in real estate transactions. It is the confusion among those purposes that causes trouble.
Addendums are attached to offers and to counter offers as well as to contracts that have already been formed. Addendums are used to give notice, make disclosures, communicate waivers and even just to make a request of the other party. There are special purpose addendums like the lead-based paint addendum. Addendums are also used to create special contingencies for financing, title inspections and more.
Formation Addendums are used to add additional terms to an offer or counter offer. Addendums used to create special contingencies or otherwise modify the terms of existing agreements are Mutual Agreement Addendums. Agents will often use an addendum form to make disclosures, give notice or make waiver statements. Such Single Party Addendums can cause significant confusion if they are mistaken for formation or mutual agreement addendums. Finally, there has arisen in recent years broker-generated addendums, Disclosure Addendums or Do Nothing Addendums, that make various general disclosures about real estate without having anything to do with the transaction to which they are attached.
return to top Formation Addendums
If you look at a standard addendum form, you will usually see checkboxes across the top where the person using the form can indicate what the addendum is being added to. Typically, the checkbox choices are: real estate sale agreement; the seller's counter offer; and the buyer's counter offer. Whatever the exact choices, addendum forms always contain separate signature blocks for both buyer and seller.
In real estate, a "sale agreement" is just the buyer's offer until it is signed by the seller. The same goes for the seller's or buyer's counter offer: they are just offers until signed by the other party. An offer or counter offer becomes a contract upon acceptance. Acceptance and, therefore, formation of the contract happen when the offeree signs the offer and dispatches it to the offeror. Click HERE for a detailed discussion of acceptance. Adding addendums to offers, especially addendums with signature blocks of their own, can cause serious problems if not handled properly.
Formation addendums are really additional terms to an offer proposed by one party. Say, for instance, the buyer wants their offer to be contingent on a due diligence period during which they will perform certain inspections. The contingency they want is too complicated to be written into the "additional provisions" clause of their offer, so they attach an inspection addendum form to their offer. Now there are four signature blocks on the offer - two on the sale agreement form and two on the addendum.
Hopefully, the buyer signs both the sale agreement signature block and the addendum signature block when they use an addendum form to add terms to their offer. Hopefully, the same is true of the seller but the truth is, the seller has the opportunity to sign only the offer, only the addendum or, as they should, both. Human nature being what it is, each of the three options actually happen in real estate transactions.
Only when both parties sign both documents is there no problem. Any other variation will result in formation problems. If the buyer fails to sign the addendum, questions are raised about whether the addendum was a term of the offer. Clearly, if transmitted at the same time as the offer itself, it is intended as part of the offer. What then when the seller accepts the sale agreement form without signing the addendum? Is the result different if the seller signs only the addendum?
We know contract formation is about mutual assessment and mutual assessment is about intent. Click HERE for a detailed discussion of contract formation. We also know that writings and signatures are required by the Statute of Frauds, but that the Statute is asymmetrical, riddled with exceptions and has nothing to do with whether a contract exists or not. Click HERE for a detailed discussion of the Statute of Frauds. Thus, a contract formed with addendums that is not signed by all parties create complicated legal issues of intent and application of the Statute of Frauds.
So unpredictable are cases concerning intent to form a contract and the Statute of Frauds that about all that can be said is that real estate licensees must do everything they can to avoid such situations. If mistakes are made, do not be quick to believe they can be used to advantage to get out of a contract or avoid a term the other side believes has already been agreed to. Do not be quick to jump to the conclusion that you have an enforceable contract either. If the proper signature cannot be gained, it is time to advise your clients to seek the advice of a lawyer.
Formation addendum problems can arise at any stage of the contract formation process. A particularly common place for problems, however, is the buyer's counter to the seller's counter. It is tempting at this point for a seller who wants to make changes to the buyer's counter offer to "accept" the counter offer and attach to it an addendum with the desired changes. This manner of doing business creates real confusion because the seller intends another counter offer, but the paper work looks like acceptance coupled with a separate request for a mutual agreement addendum.
The solution to formation problems stemming from the use of standard addendum forms is diligence. Be aware of the use intended when using addendum forms and make sure that use is clearly communicated to the other party. Make certain the needed signatures are obtained on both sides. Do not be quick to declare terms included or contracts "dead." If a disagreement over the meaning of addendums used during the formation of a contract cannot be resolved by the parties, it is time to advise legal consultation.
return to top Mutual Agreement Addendums
Mutual agreement addendums are used to modify existing agreements. Unfortunately, the same form with the same three checkboxes is used as is used to make an addendum to an offer or counter offer. The potential confusion is exacerbated by the practice of using the name "sale agreement" for both the buyer's offer and the resulting contract once there is acceptance. Basically, rather than agreements to modify and additional terms forms, one "addendum" form is used for both uses.
Because the use is not clear from the content of the form, only the context in which the form is used tells you what it is. When used to make modifications to an existing contract, mutual agreement addendums do not normally affect the formation, validity or enforceability of the underlying contract. Typically, mutual agreement addendums propose a modification that may be accepted or rejected by the other party without calling into question the existing agreement between the parties.
Like everything else in law, there are exceptions to the general rule that requests for modification of an existing contract has no affect on the contract itself. When it comes to modifications of existing contracts, the exception that is implicated is created by the doctrine of repudiation. Repudiation is a positive statement refusing to perform an otherwise binding agreement. Repudiation raises the issues of anticipatory breach of contract. Click HERE for a detailed discussion of anticipatory breach issues.
Under the doctrine of anticipatory breach, a positive statement of intent not to perform a contract can sometimes be considered a material breach excusing the other party's duty to perform the contract. This arcane legal doctrine is probably at the bottom of one of the most ill-founded and long-running real estate myths ever to appear. That myth is that a request for repairs made through a mutual agreement addendum is somehow a "counter offer" which, if the seller "rejects," ends the transaction.
An addendum to an already formed contract, requesting repairs or anything else, is not going to affect the underlying contract except under the most unusual of circumstances. Instead, a mutual agreement addendum is simply a request to modify the terms of the contract. The other party to such a request is, of course, free to reject the request. They can counter with different or additional terms; all without having any affect upon the existing agreement. In that sense, but only in that sense, it is like offer and acceptance. What you are looking for is a meeting of the minds - not on the contract - but on the modification itself.
Because proposing changes to an existing contract is like offer and acceptance, all the problems associated with offer and acceptance apply. Click HERE for a detailed explanation of contract formation. So, for instance, if the buyer sends the seller an addendum proposing new terms and the seller accepts the addendum by signing it, but also crosses out one of the terms, you have acceptance varying the terms of an offer or a counter offer. Single signature problems, grumbling assent and all the rest of the problems that can arise in offer and acceptance can arise in mutual agreement addendums.
The key, as with formation addendums, is to always understand the context in which an addendum form is being used. Here, that context is a request for modification. Don't think generically: "addendum." Think contextually: additional terms to offer or modification request. In that way, many of the problems associated with the use of generic "addendum" forms can be avoided.
return to top Single Party Addendums
Single party addendums are statements, disclosures, waivers, notices and the like that are associated with a real estate deal. Strictly speaking, sure things are not "added" to an offer or a contract or anything else. They are stand alone additional documents exchanged between the parties during a transaction.
Take a document used to give notice for instance. "Notice" is simply a statement informing someone of a fact. Notice does not require agreement of any kind. Notice is given because one party has a right to some information and the other the duty to communicate it. A document used to give notice is, for that reason, an example of a single party document.
Using standard addendum forms to communicate single party statements, disclosures, waivers, or notices can cause confusion. Because addendum forms are intended to add terms to offers or modify existing contracts, they contain agreement language and signature blocks for both parties. It is, therefore, not uncommon to see one party try to "reject" the other party's notice or disclosure or for agents to run around after the deal has closed trying to get additional signatures on documents that require only one signature.
Using mutual agreement forms in single party situations is common when deals go bad. For instance, a buyer or seller who wants to terminate a transaction because a contingency has failed or the other party has not performed will often use a mutual agreement addendum in the form of a termination agreement to accomplish their end. When the other side rejects the addendum, the whole deal goes into limbo casting doubt on the disbursement of the earnest money and the marketability of the property. Click HERE for a detailed discussion of contract termination issues.
The key to avoiding confusion in the use of single party addendums is to always ask whether what is being communicated requires the other party's agreement. A disclosure, for instance, is just a form of notice. It, therefore, does not require agreement signature blocks. That is not to say that it might not be a good idea to have a way for the other side to acknowledge receipt, just that there is no need for agreement to disclosures. This problem is discussed more fully in the next section of this subject when dealing with Disclosure Addendums or Do Nothing Addendums.
return to top Disclosure Addendums or Do Nothing Addendums
Disclosure addendums are a relatively recent development in the real estate industry. For years, real estate agents have used their client's contract as a risk management vehicle for themselves. For instance, most real estate sale forms contain clauses in which the parties waive reliance on the statements of the agents. Sales forms often contain warnings of legal consequences - for instance: "Buyer's election to waive the right of inspection is solely the Buyer's decision and at the Buyer's own risk." Acknowledgement of legal rights, like the seller's obligation to make a property disclosure and the buyer's right to revoke their offer under state property disclosure statutes, are common as well.
Such warnings, waivers, disclosures and statements of consequences are thought to protect the agents from both misrepresentation and lack of diligence claims by buyers and sellers. For example, requiring the parties to acknowledge their rights and obligations under the state property disclosure laws is thought to protect agents who fail to explain these rights and obligations to their clients. Statements of consequences, on the other hand, are thought to undermine the client's reliance on the diligence of their agent. Waivers are similarly aimed at the reasonableness of the client's reliance on the statements, or lack of statements, by the agent. Such form contract tactics are common in sales industries where the transaction is conducted on forms provided by the salesperson.
Disclosure addendums are a natural extension of the use of the client's contract for the agent's risk management. As the number of potential problems in real estate sales has increased to include everything from the type of siding to the type of smoke alarms, brokers have responded with their own homemade addendums chock full of warnings, disclosures, consequence statements, waivers and the like. Some of these addendums run to several pages. It is not uncommon today to see competing multi-page addendums from both brokers appended to deals and signed by all parties.
Disclosure addendums, because they are attached to all transactions, have no real bearing on the specific transaction to which they are attached. Although universally presented as mutual agreement addendums, they are in fact single party addendums. That is the case because they do not propose additional substantive terms or seek to modify the parties' agreement. Disclosure addendums, because they contain only general statements applicable to all property, rather than statements specific to the property actually purchased, have no real affect on agent liability.
Agent liability in a real estate transaction flows either from misrepresenting the property or failing to protect the client's interests. A general statement, for instance, that houses can sometimes contain mold that may be harmful to humans, says nothing about the condition of any specific property. An agent who misses telltale signs of mold while showing a house, or fails to disclose that the seller had mold cleaned and painted over, will not be helped by a general warning to buyers about mold contained in a Disclosure Addendum. Their liability, with or without the addendum, will be based on what they knew or should have known about this particular piece of property.
The effect (actually lack of effect) of Disclosure Addendums on professional malpractice claims is even worse. Diligence is about using training and knowledge to protect and advance the client's interest. An addendum warning generally about mold and siding and smoke alarms and asbestos and radon and oil tanks and wells and insulation and so on serves to warn the agents as much as it serves to warn the buyer or seller. If the buyer should be unfortunate enough to purchase a home infested with mold or having "illegal alarms" or defective siding, or asbestos or any thing warned of in the Disclosure Addendum, the agents will have to explain what steps they took, given the potential risk cited in the addendum (e.g., suggested inspections, reported of similar incidents in the area, were diligent in listing the property, called the buyer's attention to "red flags" during showing, etc.).
As if the effectiveness, or lack thereof, and even the danger to agents created by Disclosure Addendums were not enough, they also can create problems in formation of the contract. Buyers are often, as they should be, reluctant to sign Disclosure Addendums. Deals may then flounder, not on terms of the transaction proposed for the benefit of the buyer or seller, but on those proposed for the benefit of the agents.
There is little the individual agent can do about Disclosure Addendums. The practice is well established and brokers are often willing to forgo transactions if a buyer is unwilling to sign the company's addendum. Although Disclosure Addendums are usually legally ineffective, a real estate licensee cannot offer an opinion on their legal effectiveness without risking the unlicensed practice of law. For that reason, most agents just present the things with a vague explanation that the other company "requires" the addendum.
Hopefully, Disclosure Addendums will become a thing of the past as the industry matures into a professional services industry and leaves its "sales" origin behind. In a professional services industry, client risk management is done between the professional and their client in private and is never made part of the client's business with third- parties. Providing general information and even warnings to one's own client in private is common in the provision of professional services.
Eventually, buyer and seller advisories, client information letters, engagement letters, diligence checklists and the like will be developed to manage client risk. Disclosure will then return to being deal specific. In the meantime, about all an agent can do is be aware that Disclosure Addendums are not good risk management tools because they are ineffective, have the potential to increase agent risk, and may interfere with bringing the parties together.
return to top