What is an addendum?
What is an addendum?
An addendum is a document that adds in information to a contract. You may sometimes hear people use the word amendment but in the context of real estate transactions, an addendum is a better word choice. The word amendment suggests that something is gone or changed. This is not correct . An addendum makes it really clear that something else has been added. An addendum to a real estate contract lays out additional terms that both the buyer and seller have agreed to be bound by in the process of their real estate transaction. An addendum can make changes to the price, responsibilities, deadlines, etc.
Top reasons to utilize addendums
There are many common scenarios where a buyer or seller may find themselves contemplating the need for an addendum in a real estate transaction:
- Purchasing a bank’s owned property. Most times banks have their own form addendums that will be used for any bank owned properties.
- Possible Date Changes. Either the financing deadline, inspection period deadline, closing date or all three may be affected by new information that was not known to the buyers or sellers at the time of signing the contract. If that is the case the parties will want to draft and sign a dated addendum.
- Buyer or Seller is requesting a credit or discount from the other party for repairs or costs.
- A buyer or seller wants to change the original terms of the contract that was signed by them for whatever reason.
- To clarify or correct something before submitting it to the other party.
- There has been an error made by the other title company or closing agent.
- A particular government agency with title over some of all of the property being purchased requires a specific language to be included in the contract.
Those are just a few examples as to why an addendum may be used within a real estate transaction.
Creating a real estate addendum
When drafting an addendum for a real estate transaction, it is important to clearly outline the intention of the changes, supplements or revisions being added into the contract. Parties to the addendum should adhere to the following steps to ensure that their revisions are legally binding.
Identify the parties involved in the original contract. If there are multiple parties to the contract, list each one. It is essential to identify whether these parties will be the same under the addendum. If any changes from the original contract to the addendum will involve reallocation of responsibilities or removal of one or more parties, be clear about this language in the addendum.
Identify the subject matter of the original contract, including the names of the specific parties involved, the "subject property" in question, purchase price and any essential dates that apply, such as effective date or closing date.
If the addendum includes the name of more than one specific party, it’s essential that each party understand what parts of the addendum apply to them. Make sure you are as clear as possible with your revisions to the contract, especially if one party will be held accountable to a provision or clause and another will not.
Include the original date of the contract, along with the date that the addendum itself was executed. If the intent of the addendum is to extend the contract, it should include the date by which the original contract would expire. It should also include whether the addendum is revoking or modifying any clauses in the original contract that could impact the other party’s ability to meet these deadlines.
An addendum to a real estate contract, like any legally binding business document, must be signed off by all parties that are impacted by its clauses. Once each party has signed, they have essentially entered into a new legally binding contract that must be fulfilled to the letter.
Legal ramifications of addendums
They will be binding and enforceable between the parties as long as they meet the same basic legal criteria required by any contract. They must be incorporated into the main contract, either by being attached to it or be included in a "merger" clause that states that any addendums supersede any prior agreement. If the addendum is not attached or referenced, if will be admissible as parol evidence that may be considered in the context of the overall intent of the contract, but generally, the contract will be construed according to its current terms.
If an addendum to a contract has been accepted by the seller of a property, it will often not be able to be cancelled and the original contract reverted back to unless there is language to that effect in the addendum, or if the addendum has been terminated in a manner as described above. Once an addendum has been signed, it can be a legally binding part of a contract , which makes it important that the person reviewing or signing off on the contract knows exactly what he or she is signing.
If there is an issue with an addendum, and you are asked to become involved, it is important to review what the intent of the contract and all addendums were. For example, if a closing date or contingent on sale is something that is questioned, it is important to look at the intent of the parties to see if the final agreement was to move up the date or not, and if so, when the date of closing was instead of simply proceeding as if it had not been modified.
Beware that one mistaken assumption about addendums is they are informal documents, and do not need the language that is usually required on a form contract. In actuality, addendums are legally binding contracts, and should have all the same components as the original contract. A well-written addendum with a clear explanation of any differences from the master contract is easier to deal with later if a problem arises.
Common pitfalls with addendums
Very few people enter into a real estate transaction with the intention of making a mistake. But errors tend to happen when everyone involved is operating on an emotional level. Anticipate problems that may arise from over- or under-wording addendums.
Problem:
Sometimes an addendum will say something like, "Unless otherwise agreed upon in writing, Buyer and Seller may both take possession of the Property on the close of escrow."
Solution:
That may be fine if the Buyer wants to make repairs to the property while they are still selling their own home. But be clear about whether either party being at the property is a good idea. In this example, it was only a condition for either party to be at the property, not whether one party should be there or not. If that was the case, it should state "Unless otherwise agreed upon in writing, Buyer shall be permitted to take possession on the close of escrow but Seller shall not be permitted unless written consent is given by Buyer."
Problem:
"Acceptable Home Warranty." Solution:
Oftentimes, an acceptable home warranty is already standard in the contract, so avoid redundancy. Furthermore, be specific about the home warranty company and which plan will be used. Calling out a company can make an expensive company cheaper in the long-run, and knowing the plans allows the parties to clearly identify what repairs the warranty covers.
Problem:
"Buyer acknowledges that they have been given all disclosures required to be delivered by the Seller." Solution:
Make sure that these disclosures are attached for all parties to sign, and submit them with the appropriate due diligence documents. Many times, home inspectors will point out damage after a close of escrow that will not be covered under seller disclosure forms. Home buyers should think about extending their home warranties to cover such repairs.
Problem:
"Seller shall provide smoke detectors in accordance with law." Solution:
The party responsible for providing smoke detectors should commit to a certain number of them and be specific about where they should be installed. For example, "Seller shall provide one smoke detector on each floor of Property in each sleeping room."
Case studies of effective addendum use
To illustrate the significance of addendums in real estate transactions, here are some real-life scenarios where addendums were effectively implemented to enhance the contract: A common area purchase addendum has been incorporated into all of the agreements for a shopping center. This agreement stipulates that the developers will pay the landlord an additional sum of money for a certain amount of time so that they can continue building and expanding the area. This agreement has enabled all parties to benefit – the landlord gets to sell more land to the developers and the developers get more land to build and expand their company. If additional tenants move in and there is an increase in foot traffic, this is a benefit for the landlord and the original tenants as well . The purchase agreement addendum reinforces and clarifies all of these points and adds more security to everyone involved in the deal. An existing hospital is adding a new nursing school to its campus, and the deal is drafted to reflect this. An addendum is attached to the main agreement which reflects the standard terms that the buyers and sellers agree to. An addendum will list all items that are included and excluded from the sale. This ensures that the buyer and seller are on the same page and agree on every detail. This addendum outlines every item, including the furniture, photocopiers and even the smoke alarms have been accounted for and excluded from the deal.