For the uninitiated, talking through a real-estate deal can be a confusing experience. In fact, you may wonder if you even understood what was discussed. That’s because the world of real estate, like most fields, has its own language. Becoming literate in the lingo takes time and study. Fortunately, this article will give you a guided tour of 10 key agreements.
Most real-estate transactions involve three distinct stages. First, someone makes an offer. Second, the parties sign a contract governing what happens between the day the offer is accepted and the day the property formally changes hands. And, third, the parties sign a contract that transfers the property from the seller to the buyer.
The first agreement is an “offer.” This is when a person offers to buy or sell property to someone else. The offer should describe the property, the price, the down payment (also known as the deposit), how long the buyer has to buy the property, and a few other items. The other party then has four options: They can accept the offer, reject it, ignore it, or issue a counteroffer. The offer is usually the shortest and least formal of the real-estate contracts during a transaction.
If the parties agree, they will proceed to stage two: Executing an agreement governing what happens between signing the agreement and the transaction actually closing. This agreement has many names, depending on what kind of property interest is being sold.
Let’s discuss five versions. If the owner is selling fee simple title (which is the name for what most people think of as “owning” the property), the contract can be called a sales contract, a purchase contract, or a purchase and sale agreement. Each has the same meaning, but different lawyers will use different names based on personal preference. If, on the other hand, the seller is granting the buyer a new lease, then the contract will be called an agreement to enter lease. By contrast, if the seller owns a pre-existing lease, which they will transfer (i.e., assign) to the buyer, then the contract will normally be labeled an agreement to assign lease.
What should go into these agreements? Start with the buyer and seller’s names, include a description of the property, and mention the property’s condition. For instance, is it empty land or is there a house or apartment building located on it? If the land has a building, does the building have appliances, furniture, and so on? This type of stuff is usually called FF&E (short for “furniture, fixtures, and equipment”).
From there, state what the buyer will get (such as a 55-year lease) and what the seller will receive (typically money, either all at once or in several installments over a period of time).
Next, the contract should say when the property must be transferred (i.e., the closing date) and who will pay for any costs involved with closing. These costs typically include paying an escrow agent and recording the contract in the government’s official land records (known here as the Recorder’s Office).
Finally, the contract should address a variety of contingencies. For example, under what circumstances can a buyer walk away? In what situations can a seller stop the deal? And what happens if either party fails to live up to their end of the bargain (i.e., if someone “defaults”).
If all goes well, the transaction proceeds to the third and final stage: Transferring the property from the seller to the buyer (i.e., closing). As before, the name of the contract depends on the circumstances. For purposes of today’s article, we will stick to four kinds of transfer contracts—a deed, a lease, a lease assignment, and a sublease.
Let’s start with deeds. There are more than a dozen kinds of deeds. But we’ll concentrate on the basic idea: A deed transfers title to a property from the owner to another person. In the CNMI, only people of Northern Marianas descent can hold this level of ownership thanks to Article XII of the CNMI Constitution. Generally, deeds are short documents—a page or two.
More complicated is a lease, which is a contract that transfers property for a specific amount of time. In the CNMI, leases can last up to 55 years. Leases are more complex than deeds because the landlord and the tenant will have an ongoing relationship. Thus, there are many contingencies that a lease needs to address such as what happens if rent isn’t paid or the tenant wants to develop the property or the government takes the land through eminent domain.
Third is an assignment of lease. This type of contract transfers all of the tenant’s interest in a lease to a new tenant. These agreements focus on making sure that the original lease is still in effect and that the original tenant has not violated the lease.
Last is a sublease. This type of contract is similar to an assignment of lease. But whereas an assignment of lease transfers all of the original tenant’s rights and liabilities under the lease to the new tenant, a sublease is a partial transfer. So, for instance, if the original lease had 20 years left, but only transferred 10 to a new tenant, the contract would be a sublease.
Thus concludes our brief introduction to the wonderful world of real-estate contracts. If you’d like to know more or want to enter a real-estate transaction, consider speaking with a qualified professional.