It’s the Law: Backup contract is a weak position

Q: I found a condominium that I really liked, but it went under contract just before I made an offer. The owner and I agreed to enter a backup contract. Closing under the earlier contract has been extended three times. Can I force the owner to sell to me?

A: Sometimes a seller gets too much of a good thing. An owner cannot sell the same property twice, but can have more than one sale contract if one is primary and the other contingent on the primary contract terminating without transfer of title. In that case, the second contract is commonly referred to as a backup contract.

Terms of the backup contract are important. For the seller’s protection, the contract should clearly specify it is subject to termination of the earlier contract between the seller and a third party. For both parties protection, the backup contract should include description of how the seller will notify the buyer that the primary contract has terminated. Provisions in the contract under which the buyer has limited time to inspect, survey or obtain financing should run from date of notice from the seller that the backup contract has become primary and the buyer should not be obligated to conduct inspections or incur other expenses until the buyer knows he or she has a firm contract.

The buyer should also insist that the backup contract have a time limit for termination of the primary contract. If the buyer does not receive notice that the primary contract has terminated by a certain date, the buyer should have right to cancel the backup and obtain refund of the buyer’s deposit.

It is termination of the first contract that elevates the backup contract to first place. The seller is free to amend the original contract and extend the closing date, unless there is a provision in the backup contract prohibiting extensions or modifications.

In the recent case of Goldsmith versus Brockhouse, Goldsmith signed a backup contract with an owner. As time went on, the owner extended the closing date under the earlier contract and eventually closed on sale under the earlier contract. Goldsmith sued.

Goldsmith argued that because the preexisting contract had a clause making time of the essence, closing had to take place on the original scheduled closing date or that contract would be terminated. The court ruled that Goldsmith could not enforce the time of the essence provision because Goldsmith was not a beneficiary under the preexisting contract.

Goldsmith also argued that there was an implied covenant of good faith on part of the seller and first buyer prohibiting extensions or modifications. The court disagreed. The court explained that the seller and first buyer were free to amend their contract and to extend the closing date, as long as the backup contract did not have language limiting the seller’s rights in that regard.

The Goldsmith case emphasizes the importance of contract language and good legal advice in contract preparation. The wording of your contract will determine your rights and the obligations of your seller. I urge you to consult with an experienced attorney as soon as possible to review your contract and discuss your particular circumstances.

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William G. Morris is a lawyer with offices at 247 N. Collier Blvd., Marco Island. The column is not intended to be legal advice for specific circumstances. General questions can be sent by e-mail to wgmorrislaw@embarqmail.com or by fax to (239) 642-0722. Read other columns at http://www.wgmorris.com.

© 2008 marconews.com. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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