What is the Offer to Purchase and Contract (Form 2-T)?
The Offer to Purchase and Contract (Form 2-T) is the document that is used in North Carolina to make an offer to buy property. When parties have reached an agreement and signed the Offer to Purchase and Contract , they have entered into a legally binding contract of sale and should rely on its terms in order to perform the contract. The Offer to Purchase and Contract must be in writing and signed by the parties. A valid written agreement may also be enforceable against a party that has signed an unsigned contract under the doctrine of ratification if the party has taken substantial performance under the contract. When the Offer to Purchase and Contract is fully signed and existing conditions satisfied per the terms of the contract, closing will follow.
Essential Elements of the Form 2-T
The offer to purchase and contract (form 2-T) is standard document used in the purchase and sale of real property in North Carolina. It is regularly used by real estate licensees to fulfill the terms of the purchase and sale agreement. Form 2-T contains several major components including: the buyer and seller, description of the real property, purchase price, deposit, financing, due diligence, closing and settlement costs, elements of exclusivity and special stipulations. Each of the aforementioned sections is discussed in turn below.
The buyer (or buyers) information is located in the upper left corner of the form and normally includes the buyer’s full name, mailing address, contact information, email address and social security number. Conversely, the seller (or sellers) information is located directly beneath the buyer(s) information and follows a similar format with the exception that the bottom section is composed of sellers’ names and their respective marital statuses. The first line of both the buyer(s) and seller(s) sections is an indication that the parties are either married or unmarried (i.e., the real property at issue is titled in a single name or jointly between husband and wife). It is important to note that if the property is owned by the husband and wife then both of those parties need to sign the contract even where the property is titled solely in one name. This is required in order for the property to be transferred free, clear and unencumbered to the buyer(s).
Located directly beneath the buyer(s) and seller(s) sections is a section of the form that describes the property being conveyed. This section is critical to the conveyance of the ownership interest in the property from the seller(s) to the buyer(s). If this section is not properly filled out, the seller(s) may not be able to effectively convey an interest in the property to the buyer(s). There are two possible ways to describe the property: (1) insert the county where the property is located along with an adequate description; or (2) insert the address of the property without submitting an adequate description. The latter is more common as the address of the property is often times easier to find for the buyer(s). Regardless of which method is employed, the section must be filled out properly for an enforceable sale to occur. A quote from an online article published on the legal website Justia.com explains why a proper description is so important and how the term "adequate" has been interpreted by courts:
"An adequate description is generally held to be that which will enable one acquainted with the premises, without a possibility of misconception, to locate them with reasonable certainty. Where property is described by street number alone, it will ordinarily be considered sufficient if the number is that of what is clearly the only house on the lot. The description is generally not inadequate simply because it can be improved upon in detail."
Some of the more basic terms that every contract should include are: amount of purchase price, the kind of financing the buyer (or borrowers) are using to purchase the property, how earnest money is being held and where it is to be deposited, cost of title insurance, choices of attorneys and the costs associated with closing and settlement, and whether or not the form includes any additional terms that have been agreed upon by the buyer(s) and seller(s).
As previously mentioned, it is normal for an offer to purchase and contract to be contingent on the buyer(s) being able to assess the "reasonableness" of the property within due diligence period. Under Article 2 of Chapter 93A ยง 93A-4.1 the definition of a due diligence period was amended to state: In real estate contracts, "due diligence period" means the period provided in a real estate contract during which the buyer has the right to terminate the contract for any reason or no reason. The due diligence period ends when any of the following occurs: (i) the buyer waives the buyer’s right to terminate the contract during the due diligence period. (ii) The buyer and seller execute an amendment to extend the due diligence period. (iii) The buyer terminates the contract in accordance with the contract terms, and properly notifies the seller of the termination in accordance with contract terms, if applicable. (iv) The contract is otherwise terminated in accordance with contract terms. (v) Closing occurs.
The due diligence period must be expressed in a definite time period such as a specific number of days or a specific date within which the inspection must be concluded. The purpose of the due diligence period is to allow the buyer(s) time to fully investigate the condition of the property to ensure that the buyer(s) are making the proper investment.
It is common in purchase and sale agreements for certain fees to be allocated to the buyer(s) as a cost of closing the transaction. This could be costs for examining the title, surveying the property or paying the real estate closing attorney. This section allows the buyer(s) and seller(s) to agree on who will be responsible for paying the closing costs and thus, may be subject to negotiation.
An exclusivity agreement is intended to provide the buyer(s) for a certain amount of time the exclusive right to purchase the property. Normally, this will either occur before the final agreement and thus eliminate the seller(s) ability to receive other offers within the exclusivity or it can occur before the signing of the offer to purchase and contract. This section also allows for the buyer(s) to pay a larger fee in order to secure exclusivity on the property.
Finally, the last section on the form discusses special stipulations that either party wishes to include within the form. This section is a catch-all that both parties utilize to include any details of the agreement that did not fall under the aforementioned categories.
Completing the Form 2-T
Completing the Offer to Purchase and Contract (Form 2-T)
Step 1: Seller’s Disclosure/Exemptions
While most forms that apply to real estate purchase and sale contracts in North Carolina require that Sellers disclose information about the property, the Offer to Purchase and Contract does not; instead, the Offer assumes that Seller is providing your Buyer with Sellers’ Residential Property and Owners Association Disclosure Statement. Unless otherwise indicated, all leases and a Seller’s disclosure pursuant to the Residential Disclosure Act must be attached to the Offer. The Exhibits section of the Offer to Purchase and Contract should contain listing information, a list of any inclusions or exclusions not otherwise disclosed on the form, the Seller’s disclosure, any other disclosers or exhibits, and the Seller’s Property Owner Association Disclosure, if applicable.
Step 2: The Parties and Property
One of the legal obligations of listing agents is to correctly identify the parties to the contract and the property that is being conveyed. As described above, the seller should attach all the required exhibits at the time the offer is made. Make sure to keep those exhibits consistent with any changes that might occur during negotiations.
If your buyer has an attorney, the attorney will provide instructions on how to advise your client as to the property description required. The MLS will no longer allow listing agents to use the MLS public records system to copy tax records and create a legal description from there. The best way to find a legal description is through a title search conducted by an attorney or by examining prior deeds to the property.
A title search will also reveal if there are any easements affecting the property. If there are, you should clearly state that they are part of the sale or not part of the sale in the legal description.
The MLS now requires us to provide the property identification number assigned by the county GIS department. If you attach the residential property and owners association disclosure statement to the offer to purchase and contract, it will appear on Exhibit A.
Step 3: Purchase Price
Typically, your offer price will be the number provided by your clients in the client consultation. The price the Seller is willing to accept may depend on the market in your area. You need to follow-up with your client before writing the offer to determine where that price point is. It will be important to do this in a market where multiple buyers are competing for the same property.
Step 4: Due Diligence
This section should be used for the due diligence process you’ve been taught about (or are currently being taught) in your class. Inspections, repairs, negotiations and travel all play a part.
Section A. Due Diligence Vendor List
If your buyer uses a home inspector, these inspectors will be bonded and insured and will include a due diligence vendor list. There are also some inspectors that operate outside the norm and unless your client has evidence of their qualifications, you need to advise them that if something goes wrong, they may not have any recourse available to them if there is something that needs repair that is caused as a result of the inspection. If your client’s inspections are included as permitted due diligence items and they are identified in the Exhibit section, then keep track of when and if they are completed. Typically the Exhibit will provide a list of the inspection the buyer wants to make during the due diligence period. How long that period lasts and when the buyer is entitled to sue over any failed conditions should also be spelled out.
Section B. Repairs
A separate exhibit should be attached that includes a list of repairs. Be prepared to address who will pay for the repairs, when they will be started, and if there are any limitations on the repairperson you are using. This is important for electrical and plumbing issues and issues arising from evidence of termites and other wood boring insects.
Section C. Permitted Due Diligence Items
You should not assume that the parties will be satisfied with your invoice. The buyer and the seller should be present. Be sure to explain to both parties that if they don’t agree to the repairs they risk having to pay someone else to have the repairs completed.
Remember, if your Buyer and Seller are both represented by attorneys or the offer has a provision stating that the seller will pay half of the closing costs, you need to have a settlement agency agreement between the parties and their attorneys.
Step 5: Time is of the Essence
Now it is up to you to work with both parties to meet all contractual deadlines.
Common Errors in the Form 2-T
When filling out an Offer to Purchase and Contract (Form 2-T), home buyers and sellers should be aware of a number of common mistakes that might lessen protections either way. One of the most pressing concerns right now is the seller’s failure to provide mandatory Lead Based Paint disclosures. This occurs primarily with post-1978 homes. Nevertheless, federal regulations require the seller to complete and provide these lead-based paint notifications for any home built prior to April 5, 1978.
Another issue seen by real estate professionals is the failure to use the appropriate Addenda provisions for the buyers and sellers. Form 2T allows buyers to select the "none" option, which removes many required addenda including the Conventional Financing Addendum and Common 12-T and Common 10-T. Selecting the "none" option or failing to use an addendum that references the Buyer Financing Contingency could allow the buyer to get out of the contract if the buyer can’t secure financing for the purchase. Another error occurs when the buyer’s agent attacks a seller who counters with an expiration date for the counter and/or offers to hold their acceptance open for a certain period. Doing so can significantly hinder the ability for a buyer to get a better deal on a home. A large number of contracts contain the section to lengthen the attorney review period when that does not apply.
One issue that is being seen more frequently is the failure of the buyer to initiate an option period. In addition, sellers looking to reject all prior offers are making mistakes by checking the "we do not want to consider any other offers" box and failing to initial the box on the Offer where that sentence begins.
The Role of Real Estate Agents and Lawyers
The Offer to Purchase and Contract (Form 2-T) is generally the most complicated of all of the forms that North Carolina real estate agents must fill out as part of their duties related to the listing, offer, negotiation, and sale of a home.
Form 2-T is introduced to homeowners and/or potential buyers after the Walsh and/or Zipper contract forms have been used to agree to the purchase price, closing date, and other basic terms of the transaction; but before the more complicated details of the sale are worked out, the "devil in the detail" that the attorneys begin to address in earnest. We find Form 2-T to be so complicated and important that we generally have our clients sign a separate engagement letter to confirm the specific services we’ll be providing to them and our fee arrangement. Disagreements frequently arise from the misunderstandings that occur concerning these details.
Even for transactions where both parties are represented by attorneys, the real estate agents continue to play an important role in preparing Form 2-T. Even where the Form 2-T is first used to memorialize the agreements reached between parties, and a separate "special purchase contract" (SPC) is drafted by the attorneys and signed following this process, Form 2-T continues to be the standard seller disclosure statement one of whose purposes is to protect sellers by authorizing the buyer to independently verify the condition of the property, disclosing many of the seller’s substantive obligations to the buyer, and authorizing the buyer to close early and without further obligating the seller if the buyer is ready, willing, and able to complete the transaction .
Other sections of the Form 2-T and the special stipulations section of the SPC allow the seller and buyer to agree on many other details concerning seller and buyer responsibilities. A substantial amount of time and energy are generally spent by the attorneys finalizing these details in the SPC. These details typically include the scope, quality, and timing of repairs, and the allocation of responsibility and costs for remediation of conditions discovered when the buyer is given access to the property to inspect.
All parties, including their attorneys, must become familiar with the Form 2-T and its many uses and provisions. In addition to the purposes described, it clarifies and confirms the seller’s obligations for clearing titles, obtaining approvals, including any that may be required by homeowner associations or others, and dealing with post-closing disputes. From our experience, the use of these forms will help avoid big problems later, while the commitment of all parties to understanding them provides a basis for cooperation and support even when things go wrong. Not only can it show you what steps your attorney and real estate professional take to protect your best interests, it also can reveal important details that you will want for yourself.
Legal Aspects of the Form 2-T
Form 2-T is a legally binding contract and both parties have substantial legal obligations under its terms. It is important to understand what is legally required after entering into a contract to purchase real property.
Disputes May Arise
It is no secret that the purchase dummy contract is a brief and simple contract. The brevity and simplicity come with benefits – but they also come with costs. The contract does not contain all of the potential amendments that may be necessary or desirable to a transaction. Whenever it is possible, the parties should consider preparing the offer to purchase on the Form 2-T with every conceivable amendment or provision that either party may desire.
Because the contract does not include all provisions that could arise during the entire process, it is possible that disputes will arise. The two parties may disagree about different aspects of the contract and the process to closing. These disputes could be related to earnest money, seller disclosures, the buyers’ due diligence, due diligence, damage to the property, repairs, special assessments, etc.
More than 100 years ago, North Carolina first adopted the Uniform Commercial Code (UCC), which addressed the legal obligations of buyers and sellers. Article 2 of the UCC relates directly to real estate and provides a lot of guidance throughout the purchase process for projects. Article 2 provides obligations both parties must meet, and provides remedies if the parties do not meet their obligations. The UCC has been amended over the years and even though it still provides remedies, a lot of these remedies have been taken out of the UCC into the common law: Case law. Therefore, if a dispute arises during the timeframe before closing, the parties could end up in a lawsuit arguing about these issues before a judge or jury. Because Form 2-T is most likely an enforceable contract, the judges and juries will likely have an obligation to enforce the purchase contract as originally contemplated.
Revisions and Developments of the Form 2-T
In November 2011, the North Carolina Real Estate Commission adopted several changes to various forms. One of the changes was the revision of Form 2-T – Offer to Purchase and Contract.
The Commission revised and clarified Form 2-T in light of rulings in several federal court decisions, including capital gains assessments in the Historic Board of Review, Inc. v. City of High Point decision and foreign tax withholdings in the United States v. Land bank Workaround, LLC decision. Of particular import for residential real estate transactions was the inclusion in the revised form 2-T of a new section of the contract. The section is titled Buyer’s Acknowledgment of Financing (Section 4(k)) and contains the following language: "Buyer acknowledges that this contract is contingent upon the ability of Buyer to consummate the loan referred to in Section 3(a) [the financing contingency] with the type of lender so indicated and under the rates and terms described in Section 2(a)&(b). If the lender so indicated is unable to close this loan to Buyer under the terms so referenced and if Buyer informs Seller of that fact by notice given not later than five (5) days prior to the scheduled Closing Date, the earnest money deposit shall be refunded to Buyer in full satisfaction of this contract and the parties hereto shall have no further obligations to one another hereunder."
As a buyer’s attorney, this section in 2-T is a key point that you should focus on when using this form in a transaction. Based on the wording of this section, if the buyer selects a lender who is unable to close the loan on the specified date, the buyer has no chance for an extension, even if that lender is the one specifically identified in the contract . If the financing contingency is later waived at or before closing, the buyer cannot later seek recovery of the earnest money deposit based on that waiver. From the perspective of an attorney who is involved in drafting or reviewing Form 2-T, this section required clarification because it may impose unrealistic demands on the buyer. This is particularly true if the buyer has a "of the essence" date for closing in the sale contract. In a case with a firm closure on the closing date, if the lender chosen by the buyer is unable to close on that date, the buyer could lose its earnest money deposit and lose out on the entire deal, even if the lender’s failure to close is completely outside of the buyer’s control. Furthermore, the buyer would have no right to negotiate for a possible extension of the contract deadline, even if the lender has provided evidence that closing will occur shortly after the original closing date. If the lender selected by the buyer cannot close the deal and the contract becomes null and void, the buyer is without options to recover the earnest money deposit until the buyer chooses or fails to complete a "1031 exchange" related to the sale of their original residence. (We mention this, too, because the new form clearly incorporates language concerning "1031 exchanges" among other areas of tax. If a buyer fails to complete such an exchange, then the buyer can recover the earnest money deposit, but only to the extent that filing a claim for the earnest money deposit is within the statute of limitation.) In the end, the practicality of the new section on Form 2-T is that the buyer’s choice of lender truly becomes an essential term of the contract. When you use Form 2-T, be sure to counsel your client on the potential issues that could arise from an inability of the selected lender to close the deal.