Best of the Hotline: Beware installment sales contracts

Facts: Our caller, a listing agent, was having trouble finding a qualified buyer for her client’s property. Shortly before the listing expired, a buyer offered to purchase the property on an installment sales contract and agreed to pay $2,000 down and $500 a month beginning with the first of the following month. Buyer and seller decided they would wait until the expiration of the broker’s listing so they would not have to pay a commission and the listing salesperson was in accord! In fact, not only did the listing salesperson agree for herself and her broker not to take a commission, she also offered to prepare the installment sales contract for free.

The installment sales agreement was signed and the $2,000 paid. The buyer delayed in moving into the property and failed to pay the first month’s installment. With the aid of the listing salesperson, buyer and seller orally agreed that seller would waive the first installment and the buyer could move into the property in advance of the first day of the second month.

The details are insignificant and to make a long story short, the buyer never took possession and refused to pay any of the installments. In fact, she demanded her initial deposit of $2,000 back and agreed that upon receipt of the money she would release her interest in the property so that the seller could list and sell it. As the seller contemplated buyer’s position, the listing salesperson encouraged her to accept it. In fact, the listing salesperson offered to pay the $2,000 for the seller who would, over a period of a few months, reimburse her. Seller agreed, but after the listing salesperson told the buyer that she’d be repaid her $2,000 deposit, seller renounced her prior promise to pay.

Q:  With the seller refusing to abide by the oral agreement to reimburse the buyer’s $2,000 and with the listing agent having extended the promise of reimbursement to buyer, what responsibility does the listing agent now bear? 

A: What a mess!  Was the listing agent’s promise to buyer clearly contingent on seller’s entry into the agreement to reimburse the $2,000 or was the agent’s offer independent? It really doesn’t matter because the listing agent is so inextricably involved in this transaction that there is no simple out.

First, the agent had no right to waive her broker’s commission. Clearly the agreement to sell on an installment basis was reached during the listing period regardless of the date it was signed and broker should have had the opportunity to determine whether she would waive her commission.

Second, no salesperson or broker should ever draft an installment sales contract. Assuring that both parties are secured in the transaction is a difficult balancing act and requires precise draftsmanship and review of the risks with the parties. Each should have independent counsel. Drafting an installment sales contract constitutes the unauthorized practice of law given the lack of a standard contract and the relative inability of standardizing such a transaction.

Third, while the agent’s liability to pay $2,000 to the buyer is less than certain, it makes sense that the agent make payment. It could be argued that the agent will receive no consideration for the payment and therefore her offer was gratuitous and not enforceable. All it takes, however, is for the buyer to complain to the Real Estate Commission and this agent is going to have more than $2,000 worth of defense fees, fines and possible lost income due to suspension.

Need I go on? Apparently, yes. This is not the first time I have written on the subject of licensees drafting installment sales contracts. The consequences can be disastrous, both for the parties and the licensees. Yet we continue to receive calls on the Hotline where licensees are allowing the unusual transaction to proceed without legal intervention. Installment sales agreements and other non-standard agreements should not be drafted by licensees. You can earn your full commission without taking on the added liability of drafting agreements and counseling clients in unusual agreements.