Real Estate Contracts
Types of Contract Terms
Contracts are made up of terms and conditions. Often, the words “terms and conditions” will appear at the top of the document, after which you will find multiple pages of legal language. In this discussion, we’re going to break down the most common legal terms, so that you can recognize what a particular section is trying to accomplish in your contract.*
So, here are the most common types of terms you will find in most contracts.
Definitions
In contracts, words matter and so do their definitions. Do not skip the definitions when reading your contracts. They exist for a reason, and may have important information that changes the nature of what you are agreeing to. Certain words, phrases, or terms may be specifically defined in the contract. The goal of these definitions is to ensure that all parties understand what the covenants, conditions, and warranties are saying. Any ambiguity in a contract can end up in court.
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Covenants
Covenants are promises. A covenant defines something that one party is going to do on behalf of another party, give to another party, or refrain from doing on behalf of another party. Covenants often use active words, particularly the words “will” or “shall.”
Unless the action a party is required to perform is a condition (see below), the action is a covenant. Here are a few examples of covenants:
- Party A shall sell a house on Lot 1 to Party B.
- Party A shall build a house on Lot 1.
- Party A shall deliver keys to the house to Party B.
- Party B shall pay Party A $200,000.
Because all of these are required actions a party must take under the contract, they would be considered covenants. When reading a real estate contract, it is important to look for and understand the terms where you, as either the buyer or seller, are required to act and where the other party is required to act.
Conditions
Conditions are terms which must occur in order for covenants to be enforceable. One way to think of conditions is the “if” in an “if, then” statement. If the condition is met, then the party must do an action. If the condition does not occur, however, the party has no responsibility to perform the action.
Conditions take a number of different forms. A condition may affect whether the whole contract moves forward. For example, “if Party A builds a house on Lot 1, then Party A will sell the house to Party B under the terms of this agreement.” In this case, the act of Party A building a house on Lot 1 is a condition to the contract. If Party A chooses to build an office building instead, then the condition is not satisfied and Party A is not required to sell the property to Party B.
A condition may be to a specific covenant. Here is an example:
- Party A shall build a house on Lot 1.
- Party A shall convey the house on Lot 1 to Party B.
- Party B shall pay $200,000 to Party A.
- If Party A fails to build the house by December first, Party A must pay a fee of $2000 for each additional month.
In this case, Party A is required to build and convey the house to Party B. Party B is required to buy the house. The condition in this case is to the specific covenant regarding how much Party B will pay for the house.
In both of these cases, the conditions have been written specifically in the contract. There can also be implied conditions. Implied conditions are ones in which in order to perform a covenant, something must happen. For example, one condition to being able to convey a specific title is to own that title. So one implied condition is that you do own or will own the title to the property you are conveying.
Conditions are not always something either party has control over. For example, one condition could be “if the temperature drops below 30 degrees, Party A will provide firewood to Party B.” In this case, Party A is not required to perform unless a condition outside the control of either party occurs.
Conditions are very important in real estate contracts, especially because many of them must be performed before closing. Knowing the conditions to closing is very important, and we go into the specifics here.
Warranties
A warranty is a promise or guarantee that something is true and reliable. When a party warrants something in a contract, they are promising that certain facts material to the contract are true and correct. If the fact warranted turns out not to be true, the warranting party will be in breach of the contract and will be liable to the other party for their damages caused by the breach.
An example of warranty could be: “Party A represents and warrants to Party B that the title being conveyed is clear of all defects, liens or encumbrances.” If Party B later discovers the title was not clear at the time of conveyance, Party A will have breached the warranty and Party B will be entitled to recover any damages caused by that breach from Party A..
Covenants and conditions both require a future action by or on behalf of the parties to a contract. Warranties do not involve future action. Instead, a contract warranty is a representation of past actions and/or the current condition or state of the item warranted.
For example: “Party A represents and warrants that it has done due diligence to uncover any existing liens on the property.” In this case, an action is involved, but that action has already occurred.
Warranties can be very important because the parties rely on warranties to set the stage for the deal. If a warranty turns out to be false, the ingredients necessary to make the deal work may not be in place.
Conclusion
Understanding these four pieces of a contract, how they are used, and what they mean will help you break down your real estate contract. To learn more, check out our article discussing specific terms that you will generally find in a real estate contract.
*The information provided in Blueprint Academy does not, and is not intended to, constitute legal advice. All content is for general informational purposes only and is not intended to provide a complete description of the subject matter. Specific processes will vary based on applicable law. The title and closing process will be handled by a third-party attorney to the extent required by law. Product offerings vary by jurisdiction and are not available or solicited in any state where we are not licensed.