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Real Estate - More Contracts

( Originally Published 1911 )



Financial statement. —A real estate contract is a commercial transaction, which resolves itself finally into the transfer of money against property. The most important thing in the bargain is the gross price at which the property is sold, so in the form of contract under consideration the first stipulation in the financial adjustment is a statement of the price, a blank being left for the amount. The payment of the gross price may be divided into four parts:

1. The earnest money paid on the execution of the contract.

2. The cash to be paid upon the delivery of the deed.

3. The amount of incumbrances subject to which the property is bought.

4. The amount of purchase money mortgage.

The first and second items are usually present in all contracts; the third and fourth or either of them may be present or not, according to the nature of the trans-action.

Earnest money.—The relation which the amount of earnest money bears to the entire consideration varies. Here again the bargain is looked at from different sides by buyer and seller. The buyer desires to risk as little money as possible before he gets his title because he wishes to have the use of his money pending the bargain, and he may not feel certain of the security which he is getting. In some jurisdictions it may not be certain that the purchaser has a lien on the property for the earnest money. For that reason a clause has been inserted in this form of contract specifically creating such a lien, so that, whether by operation of law or express stipulation, the purchaser looks to the property or such interest in the property as the seller has or can bind, as security for the money paid on contract. This is another reason why it is advisable to ascertain whether the seller appears to be the owner of the property.

The requirement of the seller is that the earnest money shall be sufficient to indemnify him for at least two things : one, the obligation for brokerage which he has incurred as soon as the bargain is agreed on ; and the other, the fact that from the time of the execution of the contract until the delivery of the deed, the property practically belongs to the purchaser. The seller has limited the amount which he can get for it and the chance of speculation for a larger price is not with him any longer, but with the purchaser. If the con-tract does not go through, he gets the property back with a blemish upon it by reason of the fact that for some cause or other it has been the subject of an unsuccessful bargain; and it is harder to sell property to which that has happened. The seller requires in addition assurance that the purchaser will have sufficient to lose when he has paid the earnest money to make him desire to get the property for the balance of the consideration which still remains to be paid.

Theoretically, the seller requires sufficient in the way of earnest money on the execution of the contract to leave the balance to be paid for the property an amount less than its true value, so that the purchaser will have the necessary incentive for taking the property; but it is not always possible for sellers to so arrange their contracts.

The amount of earnest money is seldom higher than 10 per cent of the purchase price and may be any sum less than that on which the parties can agree. It may be as little as a nominal sum. It may be that nothing is actually paid on signing the contract, but the seller is satisfied with the personal liability of an amply solvent purchaser.

The amount paid on the execution of the contract is generally paid by check. Delivery of actual money or certification of the check is not usually required, for if the check be not good, the contract could be set aside for failure of one of the considerations for entering into it; i. e., the payment down of earnest money.

Amount paid on delivery of the deed.—This amount may be the difference between the gross price and the earnest money, or it may be the difference between the gross price and the earnest money added to the third and fourth or the third or fourth division of the purchase price. The form of contract under consideration provides that the amount be paid in cash, which means if required, in legal tender money. It is customary and good business to accept a check certified by a solvent banking institution, but nothing less than a certified check is accepted on delivery of the deed, between persons unacquainted with one another. There are forms of contract in which it is stipulated that this amount shall be paid in cash or certified check. The seller who signs such a contract is ill advised, for a check certified by an unknown bank in a little country town would be a good tender under that contract. The contract should always call for cash on delivery of the deed; then a certified check may be accepted, but in such a case there is no obligation to deliver the deed until the actual money is paid.

Taking property subject to mortgage.—It is quite usual that property which is the subject of bargain and sale shall be encumbered by mortgage, and it is customary that property thus pledged be purchased subject to such mortgage. The difference between the amount for which the property has been mortgaged and its value is known as the equity, value of equity, or equity of redemption of the property. The mortgage or amount of mortgages is a part of the price.

If a person were to buy a piece of property for $50,000, agreeing to pay $1,000 on signing the con-tract, $24,000 when the deed was delivered, $20,000 in a mortgage for that amount, and $5,000 in purchase money bond and mortgage, the first three divisions of the purchase price might be expressed in the contract as follows:

$1,000 on the signing of the contract, the receipt of which is hereby acknowledged;

$24,000 in cash on the delivery of the deed as hereinafter provided ;

$20,000 by taking the property subject to a mortgage for that amount, now a lien thereon.

From the seller's point of view this statement with regard to the mortgage would be satisfactory. He has the purchaser bound to accept the property subject to an existing mortgage; but the purchaser would require to know when the mortgage was due and what rate of interest he must pay for the use of the money. He ought to inquire to whom the mortgage was made or who holds it, because this will enable him to tell whether it is likely that payment will be required the moment the mortgage is due, or whether there is a probability that it will be extended. As a matter of law, if a mortgage be referred to in a contract as an existing mortgage, no matter how onerous the terms of that mortgage or how extraordinary, the purchaser who has signed the contract is held to have knowledge of those terms and will be bound to accept the title. For these reasons a complete clause for taking property subject to a mortgage should read: "By taking the premises subject to a mortgage for that amount, falling due (here insert due date of the mortgage), and bearing interest at the rate of - per cent per annum."

If there is a stipulation in the mortgage that it may be paid off before it is due, the purchaser should re-quire that the contract so stipulate. If he thinks $20,000 a small mortgage on a $50,000 piece of property, he should be careful to stipulate that he have the privilege of paying it off, or see that he buys the property subject to a mortgage which is due or will fall due within a short time.

In the case cited there is no liability on the part of the purchaser personally to pay the $20,000. There is nothing he risks beyond the loss of his equity. But it may be that the seller desires not only that the purchaser shall leave the property as security for the existing mortgage, but also, because he happens to be liable personally to pay the $20,000, he may desire that the purchaser shall also become liable, and that the seller shall step back into the position of surety for the amount, with the purchaser as first debtor. If the purchaser does thus assume a mortgage, he becomes liable not only to lose his equity in case the property is not sufficient to pay the mortgage debt, but also to pay any deficiency there may be between the amount realized on enforcing the mortgage and the amount of the mortgage debt. He becomes as liable as if he himself had borrowed the money and given his bond or note for it. In such a case the statement with relation to the mortgage would be expressed :

$20,000 by taking the premises subject to a mortgage for that amount, now a lien thereon, bearing interest at the rate of per annum and due ; payment of which the purchaser shall assume when the deed is delivered.

It may be that the purchaser voluntarily desires to be made personally liable for the payment of a small mortgage. There may be very little chance that there will be a deficiency between the amount that the property will realize and the mortgage debt ; and in some states there is an extraordinary form of taxation on personal property under which a man is able to set off his liabilities against his personal property. For these reasons buyers—especially rich buyers—when purchasing property subject to comparatively small mortgages frequently request that the transaction be shaped in such manner that the contract and deed shall contain an agreement by which the purchaser assumes the mortgage. The original obligor still remains liable for the bond as between himself and the lender. He can only be released from that liability in case there be some act or change in the terms entered into between the holder of the mortgage and some subsequent owner, for in-stance, if the lender extend the time of payment with a new owner.

Purchase money bond and mortgage.—In the bargain under consideration the purchaser requires credit for the balance of $5,000, and the amount is to be secured by a purchase money bond or notes and mortgage. The balance of the purchase money which re-mains unpaid upon the delivery of the deed, as between the parties remains a lien on the property, but it is necessary on the public records to warn anyone who deals with the purchaser that he has not paid for the property, so the seller exacts from the purchaser an agreement that he shall give a bond or notes for the payment of that balance, and shall secure the bond or notes by a purchase money mortgage to be given on the delivery of the deed.

It is necessary for the protection of the seller where a purchase money mortgage is given that the form of that mortgage be stipulated between the parties. He will require that a mortgage which is thus subordinate to another shall contain a clause which permits the holder of the subordinate mortgage to demand payment of his debt if default be made in any of the stipulations of the previous mortgage. On the other hand, the purchaser in contracting to give a purchase money mortgage upon terms which make it due after the time when the prior mortgage comes due, requires for his benefit that there be a stipulation in the purchase money mortgage that in case he pay off the first or prior mortgage that then the second subordinate mortgage shall still remain subject to a new first to be placed on the property—usually the stipulation being that it shall not exceed the existing mortgage. If the purchase money mortgage is to be paid off in installments, as frequently happens, the seller requires and is entitled to a stipulation that if any of the installments be not paid that then the whole amount shall be due and owing at the option of the holder of the mortgage. A clause relating to a purchase money mortgage of this sort may be expressed as follows:

$5,000 by the execution and delivery of the purchase money notes or bond of the purchaser, secured by purchase money mortgage on said premises for said sum, payable with interest at the rate of ... per annum, payable semi-annually. Said bond and mortgage to be in the form usually employed by (here insert some stipulation which will identify the form of mortgage to be used) and to contain a clause that if the first mortgage be discharged that this mortgage shall re-main subordinate to any new mortgage placed on said premises in place thereof.

There is some expense in connection with the giving of a purchase money mortgage and as already stated when speaking of loans, the borrower pays all expense of securing the loan. In such a transaction the purchaser must ask for credit, so it is stipulated that he pay the expense of drawing and recording the mortgage. The instrument is for the security of the seller so it is usually stipulated that the attorney for the seller shall draw the mortgage. Where there is a mortgage recording tax this is another expense in connection with the recording of a mortgage. Doubt has arisen as to whether the purchaser should pay this tax if there be no stipulation in the contract requiring him to do so. Therefore the seller who desires to protect himself properly requires three things in the contract : (1) That the mortgage and bond shall be drawn by his counsel. (2) That the buyer shall pay the cost of preparing and recording the mortgage. (3) That the buyer shall pay the mortgage tax, if any.

Delivery of deed.—It is necessary, by way of convenience, that a place be fixed for the delivery of the deed and the payment of the money. It may be at the office of either party or counsel for either party, at the office of a title insurance company, prospective lender or any place convenient. There is no custom with regard to it. For the same reason a day is fixed for the delivery and tender of money.

Apportionment of rent, interest, etc.—The next stipulation is that rents and interest on mortgages are to be apportioned. Rent is payable at stipulated times, and the delivery of the deed may not coincide with a rent day. Rents may have accrued from some prior date and be unpaid, or rent may have been paid in advance. The contract stipulates that these sums are to be apportioned, that is, justly divided between the par-ties. As a matter of law, in some states, rents are apportionable, but if there be no statute to that effect, it is not certain that rents will be apportioned, so it is appropriate to create this stipulation in the contract.

For the same reason the contract provides that interest on mortgages shall be apportioned. There is a blank in which it is often stipulated that insurance premiums shall be apportioned, and this is distinctly to the interest of the seller. If it be not so stipulated, the purchaser is not bound to take and pay for the unexpired balance of the fire insurance policies. He may leave them in the hands of the seller who will have to take the rebate at short rates instead of getting a fair apportionment for the unexpired term. In the interest of the seller this clause should read: "Rents, interest on mortgages and fire insurance premiums, if any, are to be apportioned."

Reading of water meter.—Wherever water is furnished by a municipality, the charge for the water is a public charge and may be a lien on the property. For that reason it is proper that when the title is delivered, it be free of lien of any water rate which has become due.

It is sometimes impossible to get a water meter reading when desired, so this form of contract provides that if there be a water meter on the property, the seller shall furnish a reading to a date not more than 30 days prior to the time set for closing, and that the parties shall adjust the unfixed meter charge for the intervening time upon the basis of such last reading.

Form of deed.—The next clause in the contract relates to the form of deed to be delivered and the contract requires that, "The deed shall be in proper statutory short form for record." At one time deeds were very verbose and it got to be burdensome to read and record such long instruments, so in some states statutes have been enacted by which the covenants in a deed were reduced to a simple form of words; and that this simple form of words should be considered equivalent to the long covenants. The stipulation that the deed shall be in statutory short form is therefore appropriate, where such statutes exist.

The contract also provides that the deed shall contain the usual full covenants and warranty. Unless this stipulation were in the contract a seller could deliver any form of deed which was sufficient to convey the property, without assuming any further obligation with regard to it. The practice is that the purchaser exact five covenants from the seller, when the seller is an individual owning property in his own right:

1. A covenant against incumbrances,

2. A covenant of seizin—that the seller is the owner of the property and has a good right to convey it,

S. A covenant of quiet possession—that the purchaser shall obtain and quietly retain the possession of the property,

4. A covenant of further assurance—that the seller will at anytime in the future execute any other instruments which he can execute and which may be required to perfect the title,

5. A covenant of warranty—that the seller will forever warrant and defend the title.

If the seller be not contracting to sell in his own right, he will not obligate himself to make these covenants. A trustee selling property may obligate himself to give a covenant that he has not incumbered the property or done anything to defeat the title: beyond that no fiduciary or representative will go.

The stipulation further is that the deed shall be duly executed and acknowledged by the seller. It must be properly executed and acknowledged that it may be re-corded. It must be executed and acknowledged "by the seller," because very often purchasers will contract to buy property and take the covenant of a person whom they know to be solvent and amply able to respond to any liability to which he may be held by the operation of that covenant; but a purchaser might buy from a man who is known to be amply solvent and, if these words were not in the contract, the seller might convey to a dummy or intermediary without covenant and give the purchaser a full covenant and warranty deed of a person without responsibility. If the deed is not to contain full covenants or any covenant, it does not make any difference whose deed it is. The contract also stipulates that the deed shall be prepared and executed at the seller's expense. Another important stipulation is that the deed shall be such as to convey the premises in fee simple, free of all encumbrances except as stated in the contract.

Personal property included in the sale.-The next stipulation relates to personal property which may pass as appurtenant to the land. If a purchaser were buying an apartment house, he would want the lighting fixtures, janitor's tools, shades, gas stoves, etc. All those things which go with a piece of improved property as it stands as a going concern are commercially intended to be included in the bargain, but if the contract be one which relates purely and simply to real property the seller might hide behind the terms of the contract and refuse to deliver anything but the real property, so the stipulation is that, "All personal property appurtenant to or used in the operation of said premises is represented to be owned by the seller and is included in this sale."

Violations of law and municipal ordinances.—The next stipulation relates to an important subject—violations of law which do not amount to direct en-cumbrances upon the title. Attached to the provisions of building codes and other laws regulating use and construction are specific penalties. The provisions of these codes may be enforced by injunctions against the use of the property or by the exaction of penalties which become liens on the property; and to purchase property without making stipulation concerning this matter may subject a purchaser to unexpected burdens. Where such regulations exist it is proper for a purchaser to stipulate that the premises shall be delivered free of violations of law or municipal ordinances noted on the books up to the date of contract, unless he is consciously buying the property "as is"; the seller, however, will refuse to be liable for any such notices of violation issued after the date of the contract, for if he did not thus limit his obligation, there would be danger that unscrupulous purchasers might have inspections made and departmental requirements noted between the time of making contract and delivery of the deed,

Earnest money a lien.-For reasons already given a clause has been inserted in this form of contract specifically creating such a lien, so that, whether by operation of law or express stipulation, the purchaser looks to the property or such interest in the property as the seller has and can bind, to act as security for the money paid on contract.

The form of contract under consideration goes further than the law and says that the reasonable expense of examination of title shall also be a lien on the property but, for the protection of the seller, it is stipulated that the lien shall not continue after the purchaser has made default under the contract.

Damage by fire.—The next clause which appears in the form of contract under consideration relates to the visible condition of the property. When a purchaser buys *a piece of improved property, he buys with reference to the state of facts which is apparent with regard to its physical condition ; and is entitled to have it delivered to him in practically the same condition as when the contract was made. If there be any appreciable change between the time of making the con-tract and the delivery of title which is not the result of ordinary wear and tear, overwhelming physical calamity, or destruction by the elements, it would seem clear that the seller is not delivering that which was the real subject of the bargain, to wit, the property in the physical condition it was in when the bargain was concluded. It is held by some, however, that the doctrine that in equity the property belongs to the purchaser after the making of the contract, has such influence upon the rights of the parties that the purchaser would be bound to take the property even though there were injury by fire, because from that time he had an interest in the property which he might have covered by fire insurance. That there may be no misunderstanding between the parties, it is advisable, if the risk or damage by fire until the delivery of the deed is to be assumed by the seller, that the contract so stipulate.

It may be that the transaction is of such nature that the purchaser ought to take the property whether or not there be destruction by fire or other calamity between the time of closing the contract and the delivery of the deed. Such cases are found where valuable property is sold, when almost the entire value lies in the land, and little or no value is placed upon the structures. It is then customary to provide expressly that the purchaser shall take the property notwithstanding there be loss by reason of fire damage; and in such case it is usual to state that the purchaser shall receive from the seller whatever may be collected on the policy if there should be a loss in the meantime.

Sometimes the transaction is of such importance to the parties that it is stipulated that it shall go through no matter what kind of damage there may be to the building in the interim. When the land value rises so high that the structures are incapable of earning interest upon it, then the structures disappear from the valuation; and in such cases it is appropriate to stipulate that no matter what change there may be in the physical condition of the property between the time of making the contract and the delivery of the deed, that the purchaser shall take the property and pay the stipulated price.

Contract binding on heirs, executors, etc.—"The stipulations aforesaid are to apply to and bind the heirs, executors, administrators, successors and assigns of the respective parties." If a seller should die before title passes and the property go to his heirs, they must carry out the contract; if the title should fall to his executors, they ought to be called upon to perform the contract. The seller having made his agreement and being thus bound, the purchaser should also provide in case he die pending the contract that his executors or administrators shall pay the purchase money. If the seller should sell his property pending the contract to one who knows of it, his assignee—the person who buys—is bound. If a purchaser should sell his contract to an assignee another principle comes in, i. e., a person can sell his assets, but not his obligations. If a purchaser sell his contract to a person whose obligation is worth having and desires to be relieved of the burden of performance of the contract, he should get from the man on whom he relies to take the property an agreement that he will perform the contract in the stead of the assignor.

Agreement as to commission.—The next stipulation in the form of contract under consideration is one which is really not part of the contract at all but merely a stipulation between the seller and broker who has brought about the sale and is inserted entirely for the benefit of the broker. The parties formally ratify the meeting of the minds which the broker has brought about, stating that the seller agrees that the person who has acted as broker brought about the sale, and agrees to pay his commission. That clause was first inserted in contracts at the time when the act of the State of New York as to written authority was still in force, and a broker having brought the transaction between the parties to a successful conclusion and not having written authority might have failed in an action for commission.

The seal.—The contract then calls to witness the fact that the signatures and seals of the parties arc attached. It is subscribed in order that it may be en-forceable. It must be subscribed by the person to be charged, i. e., both parties need not sign each contract; each of them must sign one counterpart. The con-tract is also sealed. A seal originally was some sort of impression attached to a writing to witness its formal execution : men stamped their sign or their family arms to witness instruments, because they could not write. The seal has remained formal testimony to the execution of documents from that time until the present.

The use of a seal in modern times is two fold: First, and most important, a seal imports consideration. It raises the presumption that the person who has affixed his seal to an instrument has received consideration. The second use of the seal is in relation to attempts to charge an undisclosed principal. In dealing with a dummy, if the instrument be unsealed, a person may go behind the instrument and charge the principal or any one else who is responsible for the transaction, but upon a sealed instrument, as matter of law, only the person who has executed it can be charged. When men are dealing with or through dummies, if they fear they will have to charge some one else under the instrument or desire that they shall be protected against being charged under the instrument, they should always be careful, under professional advice, to deter-mine whether or not the instrument should be sealed. However, real estate transactions usually are founded upon the property under consideration and it is appropriate to look only to the property and to the signers of the instrument, and not through the instrument and behind the instrument to others; so that it is usual that contracts for the sale of real property shall be sealed.

Another influence that a seal has upon instruments is in connection with the statute of limitations, which provides that within a certain time a debt is outlawed by limitation. In all states there is a difference in the time of limitation between a sealed and an unsealed instrument, a sealed instrument having a greater length of life than an unsealed. In the State of New York upon a sealed instrument the time of limitation is twenty years; if the instrument be unsealed the time is six years.

Witness and acknowledgment—When a contract has been subscribed by the parties it is complete, and for purposes of enforcement need not have any other formality: it need not be witnessed or acknowledged. If it be witnessed it is merely as a convenient memorandum of the fact that the person witnessing it was present and saw the parties sign the instrument.

Contracts are not usually recorded upon the public records unless default is feared. For that reason they are very often not acknowledged or the signature proved. Acknowledgment of an instrument is had if the person signing the instrument appear before a public officer authorized by law to receive acknowledgments, and ac-knowledge to him that he executed the instrument. The person must be known to the officer and known to him to be the one who executed the instrument and the officer must sign a certificate to that effect. If an instrument have such a certificate of acknowledgment, it may be put on the public records. If the instrument be witnessed and if parties have not acknowledged it, the subscribing witness may go before a public officer and swear to the fact that he was present and saw the parties execute the instrument, that he knew them, and knew them to be the persons described in the instrument and saw them execute it. Thereupon the public officer will indorse a certificate to that effect upon the instrument, which is equivalent to a direct acknowledgment, and then the instrument may be put upon the public records.

Non-performance of contracts.—The failure to perform a contract may be by either party. The seller may not perform for one of two reasons, because he will not, or because he cannot. If he is able to perform and will not, the purchaser has three remedies : First, he may disaffirm the transaction, ask to have his money back and his expenses. If he gets what he asks for, that ends it; and whether voluntarily or as a result of a suit at law the contract has been disaffirmed and the parties are back where they were before. Second, the purchaser may want the property. Real property has inherent qualities. A man may have bought a specific piece of property for specific purposes and he is entitled to have that piece of property. He may bring what is technically known as an action for specific performance, the result of which is—if the purchaser be successful—that a decree is made that the seller shall specifically perform by conveying to the purchaser the property in the manner in which it was contracted to be conveyed. That decree is enforceable, if not complied with, by punishment for contempt of court, not by the sale of the property or execution by the sheriff. The purchaser has a third remedy. If the seller can sell and will not, a purchaser may sue for damage. His damages are usually limited to the amount of earnest money and interest and the reasonable expense of examining the title, unless special damage can be shown; and then it is usually limited to the difference between the actual market value of the property and the sales price. If a purchaser buy for $7,000 and can show the court that the property is fairly worth $10,000, he has lost a profit of $3,000 and his damage may be estimated at $3,000, earnest money and interest, and expenses for examination of title.

If the seller cannot perform—if, for instance, it is found that his title is defective, that persons whom he does not control have interests in the property which prevent him from conveying, then it would be futile to sue for specific performance. In such a case the purchaser's remedy, if the seller has acted in good faith, is limited merely to the recovery of his earnest money with interest, and the reasonable expense of examining the title. If he can show that the seller acted in bad faith, that knowing he could not perform the contract, he led the purchaser to make the bargain to his detriment, the purchaser may obtain such secondary damage as he can show, but he will not get speculative damage. He must show by expert testimony the value of the property and the value of the bargain of which he has been deprived.

Seller's remedies.—A seller may not know the infirmities of his title. He may not have had it examined; things entirely beyond his control may have happened or things of which he knew nothing; but a man ought not to contract to buy a piece of property without knowing whether or not he can pay for. it. When a purchaser fails to perform, a seller has three remedies : First, he may retain the earnest money and go no further; second, he may begin an action for specific performance, which must be founded upon an allegation that the purchaser can perform but will not.

If the seller succeed in such an action, it can be enforced by punishment for contempt of court. Third, the seller may sue the purchaser for damage; and here again the measure of damage will be the difference between the contract price and the value of the property. If a man contract to buy a piece of property for $10,000 because he wants it very much, and when the time for closing title comes the market has changed, or the property is only worth $7,000 in the open market, the difference between the sales price and the contract price—$3,000—is the measure of the seller's damage. But at all times the purchaser having failed to perform his contract, no matter what remedy is resorted to, or if the seller resort to no remedy, he is entitled to retain the earnest money. Very often sellers are satisfied with this, especially as the feeling is that purchasers who default in their contracts are usually of small personal responsibility outside of the money which they have paid on contract, so that it is seldom worth while to pursue them further. A purchaser who has defaulted in his contract naturally could take no advantage of the contract which he had broken; therefore could not sue to recover the money which he had paid down.

Exchange contracts.—Sometimes the contract is not one by which property is sold for money, but partakes rather of the nature of a barter or exchange. A man who owns a piece of property of a certain value and desires to buy a piece of much greater value may not be prepared to pay the necessary money. A small piece and some money will buy the larger piece. That larger piece and some money will buy a still larger piece, until finally the man finds himself with a very large real estate investment. Or the process may be reversed, and a man who has a very large investment, or a builder who has constructed an expensive improvement, desiring to work out of it and finding customers who have some real estate investments and some money, will make a trade. He will take some money and a smaller investment and thus gradually work out of the large investment down to a cash basis.

There are men who give most of their time as brokers or operators to the exchange of real property. Sometimes they work it as people trade on the stock ex-change, to keep things moving, but oftener it is in the course of the accumulation from small properties up to larger ones, or in working from large properties down to a cash basis. The contract which is brought about when exchanges have been agreed on is of the same nature as a contract in a cash sale. A standard form of such a contract is given below.

AGREEMENT, made and dated between hereinafter described as party of the first part, and hereinafter described as party of the second part, for the exchange of real property.

WITNESSETH, as follows:

The party of the first part, in consideration of one dollar, the receipt of which is hereby acknowledged, and of the conveyance by the party of the second part hereinafter agreed to be made, hereby agrees to sell, grant and convey to the party of the second part, at a valuation, for the purpose of this contract, of ...... Dollars, ALL that land with the buildings and improvements thereon, in the

The party of the second part, in consideration of one dollar, the receipt of which is hereby acknowledged, and of the conveyance by the party of the first part herein before agreed to be made, hereby agrees to sell, grant and convey to the party of the first part, at a valuation for the purpose of this contract, of ........ Dollars. ALL that land with the buildings and improvements thereon in the

The premises which are to be conveyed by the party of the first part shall be conveyed subject to the following encumbrances:

The premises which are to be conveyed by the party of the second part shall be conveyed subject to the following encumbrances:

The difference between the values of the respective premises, over and above encumbrances, for the purpose of this contract, shall be deemed to be ...... Dollars, and that sum shall be due and payable as follows, by the party of the The deeds shall be delivered and exchanged at the office of at o'clock on 19.. It is agreed by the respective parties hereto that brought about this exchange and that the brokerage shall be paid as follows:

Rents and interest on mortgages, if any, are to be apportioned, and the risk of loss or damage to said premises by fire, until the delivery of said deeds, is to be borne by the respective sellers.

If there be water meters on the premises, the respective sellers shall furnish readings to dates not more than thirty days prior to the time herein set for closing title and the unfixed meter charges for the intervening time shall be apportioned on the basis of such last readings.

All personal property appurtenant to or used in the operation of said premises is represented to be owned by the respective sellers and is included in this exchange.

All notes or notices of violation of law or municipal ordinances, orders or requirements noted in or issued by the Tenement House or Building Departments, against or affecting the premises at the date hereof, shall be complied with by the respective sellers and the premises shall be conveyed free of the same. The respective sellers shall furnish the respective purchasers with authorizations to make the necessary searches therefor.

Each of the parties agrees to convey the property herein before described as sold by such party respectively, free from all encumbrances, except as above specified, and to execute, acknowledge and deliver to the other party, or to the assigns of the other party, a deed in proper statutory short form for record containing the usual full covenants and warranty, so as to convey to the grantee the fee simple of said premises free from all encumbrances except as herein stated. The deed, in each case, shall be drawn at the cost of the party of the first part thereto.

The stipulations aforesaid are to apply to and bind the heirs, executors, administrators, successors and assigns of the respective parties:

WITNESS, the signatures and seals of the above parties.

IN PRESENCE OF

[L. S.]

[L. S.]

[L. S.]

[L. S.]

Parties and consideration.—In exchanges of real property there are really two sellers and two buyers. The contract is really two contracts to sell. The agreement is between the party of the first part and the party of the second part. The consideration in this contract is the mutual agreement by each party to sell his own property and to accept the property of the other party.

Description.—The description should be written with the same care as in a contract of sale and the limitations on ownership with regard to each parcel as carefully set out.

Financial statement.—In place of the absolute price the properties are said to be at a "valuation for the purpose of this contract." These valuations need not be actual: they may be nominal. Each property may be put in at one dollar, or any reference to the valuation may be struck out, but it is usual to fix arbitrary values. Sometimes they are inflated, and if both sides of the contract are inflated equally, this is legitimate. Brokers do not get commission, however, on inflated values, but only upon actual values. Those actual values are the subject of negotiation between the parties and the broker before the contract is executed, and necessarily ought to be agreed to so as to avoid confusion or dispute afterwards.

The contract then provides that the premises shall be conveyed subject to stated encumbrances. Appropriately the next step is to balance the figures—the difference between the values of the respective properties over and above encumbrances—and the next clause states that this difference "shall be deemed to be." '

The entire contract is subjective. The valuations are fixed arbitrarily, and the difference is fixed as something that is "deemed." The contract provides as to the manner in which the difference between the values shall be paid.

The remaining steps of the contract are practically the same as in a contract of sale, but it is bilateral, not unilateral. Each of the parties obligates himself to do the same things with respect to the property which he is selling or buying, as these things may be appropriate.

Rents and interest are to be apportioned, water meters read on both properties. The personal property appurtenant to the premises is included in the sale. Notices of violations are to be taken care of by the seller in each instance. Each party agrees to convey his property free from encumbrance except as specified, and the stipulation binds both parties.

Remedies for failure to perform the contract in ex-changes are similar to the remedies for failure to perform a contract of sale. They may be by action for damage, specific performance or forfeiture of the earnest money, if the party paying the difference has put up part of it as earnest money. The property which is to be exchanged stands pledged for the performance of the contract. If one party sues the other for breach of contract, each may have incurred brokerage. The person who is trying to enforce the contract may have incurred and paid brokerage, but it is not a part of the damage which can be claimed from the defaulter. Brokerage is not an element of damage for breach of contract, but payment for bringing about a contract.



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