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Introduction.  The problem with dispute resolution is that the players need to know when to lay down their arms. This requires a review of priorities.  Wars are waged on the battlefield; they depend on a winning strategy. Peace moves in a different direction and requires far different skills. The goal is no longer victory but creating an off-ramp for the litigants to engage in discussions which should focus on peace in the future, not fault in the past. Pens have replaced pistols. With that in mind, here are some thoughts.

Settlement Prospects. First, don’t forget to look at the existing transactional documents; they may address how settlement is to proceed. For example, the OREF Sale Agreement not only encourages mediation, but it also levies a disincentive for the failure to attempt to do so. A party that refuses to first offer or agree to mediate before arbitration is underway cannot recover attorney fees should they prevail.

Mediation by a skilled lawyer-facilitator who is familiar with real estate and dispute resolution, can work wonders. The process should be at the top of every lawyer’s list – even if the disputants are out for blood. The reason is that the more time and money spent  rattling swords before mediation commences can make settlement  more difficult – the parties have now expended real dollars which will not likely be returned in settlement.

Performance vs. Damages. Since real estate is regarded as “unique” under the law, i.e., it is viewed as irreplaceable; damages may not suffice for a breach. Accordingly, the law may require performance under the contract rather than an award of damages.

A seller’s refusal to  convey may be compelled to do so under a decree of “specific performance.” This award may be coupled with damages for the buyer’s losses resulting from seller’s delayed closing. [Note, under the OREF Sale Agreement, the seller’s sole remedy against a buyer for nonperformance is limited to monetary damages.

 In other words, the seller does not have the ability to bring a specific performance claim to compel the buyer to buy. Why? The short answer – which I agree with – is that at least with residential property, specific performance against a buyer makes little practical sense. How do you “force” a buyer to fill out a loan application? How do you oversee the buyer’s information to make sure it accurately reflects their employment and credit history, their assets, etc.? Courts and arbitrators are not overseers of the buyer’s paperwork, making sure that it accurately and honestly sets forth current information. If the buyer doesn’t have the will or ability to purchase the property, the seller’s best remedy is a money judgment for their actual damages caused by the buyer’s refusal to timely close.

But before a buyer can compel specific performance, there are critical issues to consider. Can the seller convey unencumbered title? Does he/she have the legal right to do so? Are there any undisclosed liens on the property that will have to be paid before unencumbered title can be conveyed to the buyer? If so, the lienholder(s) must be named in any specific performance claim.  Second, are there any non-financial clouds on the title, such as easements or deed restrictions that would be unacceptable to the buyer?

These issues underscore the need for the buyer’s attorney to first obtain a “foreclosure report” from a title company before filing anything. It will identity of any persons or entities that have may have a claim to, or upon, the subject property. Naming these parties in the litigation or arbitration is essential. Why? Because a decree of specific performance against the seller, but not against the seller’s lienholder, is not a complete award. [Tip: The recorded lienholder named in the specific performance suit will still have priority . Thus, the money paid by the buyer in closing would first be applied to clearing title, before the seller gets the net sale proceeds.]  Similarly, if the case can be settled before filing a claim against the nonperforming seller, buyer’s counsel should still obtain a title report or other review of the public record, to make sure clear title can be conveyed.

Lastly, some real estate disputes may involve the immediate risk of damage to the property or its title. Say the seller is cutting timber on the land he or she already agreed to sell to the buyer. Going to court or filing for arbitration is not going to provide the buyer with an immediate remedy. This is what “provisional process” is for – it allows a party  to obtain an injunction restraining the owner from engaging in such conduct during the pendency of the dispute. [Note that Oregon law requires that a bond be obtained by the party seeking provisional relief, just in case the buyer is wrong.]

Filing A Lis Pendens. If a dispute affects title to the property, the OREF Sale Agreement allows the claimant to file a “lis pendens” on the public record against the seller’s property.  See, ORS 93.740. This has the effect of “clouding title” to the property by  informing all other potential buyers or lenders that there is a prior claim to the property ahead of them. In most cases, this recording will have the effect of preventing anyone else from purchasing the affected property or lending money against it. If a buyer or lender proceeds, notwithstanding the recorded lis pendens, their new interest will be subordinate to that of the party filing the lis pendens. This is the result of the concept of “constructive notice” which gives the world notice of a potentially superior claim that appears on the public record. See, ORS 93.642 et seq.

Statutes of Limitation. All legal claims are subject to various statutes of limitations – i.e., the time within which they may be enforced. Fraud and misrepresentation are 2 years; contracts on real property, 5 years; 6 years on most other contracts and property damage; 10 years for title claims, etc. The only way to stop or prevent the expiration of the applicable statute is by filing a lawsuit in court. The only exception is if there is a written contract providing otherwise. For example, dispute resolution under the OREF Sale Agreement requires mediation and arbitration. [Note; the Sale Agreement form published by the Oregon Realtor Association does not contain such a tolling agreement. This is a serious flaw in that form, in my opinion.  More about this in an upcoming post.]

Thus, parties that enter settlement negotiations of a real estate claim that has not yet been filed in court (or arbitration under the OREF Sale Agreement form), must be vigilant. Unless the adverse party agrees in advance to enter into a Tolling Agreement suspending the running of the applicable statute of limitations if settlement discussions continue past the applicable statute of limitations it could result in a loss of the claim. Accordingly, before discussing  settlement, it may be prudent to either get a Tolling Agreement from the other side, or file the claim in the applicable jurisdiction, abate or slow it down, during settlement discussions.

Party Dynamics; Needs & Knowledge. Mediation or other structured processes designed to result in settlement are set up so that the parties are in separate rooms – or via Zoom. The mediator is the only party that talks to both sides. In most cases, the parties never speak with each other.

Using good attorneys is essential. They will educate their clients on the process and provide the mediator with a summary of issues and the law. (See, Summary of mediation process here.) Note that some mediators will not  mediate a case if the parties are not legally represented. There is good reason for this since unrepresented parties often expect the mediator to educate them, which he/she cannot do. Mediators are neutrals; they cannot legally advise either side.

Sometimes one or both of the parties need information from the other side before making an informed settlement decision. For that reason, an exchange of pertinent documents (aka “discovery”) may be necessary before the case can be successfully settled. This exchange of information can be helpful for the mediator, as well. Most real estate disputes turn on a comparatively limited number of documents and facts. Forget the nuance, blame, or “gotcha” moments; save that for cross-examination at trial.

Bargaining Power. This is a function of time, money, and appetite. The likelihood of a successful settlement can be enhanced when both of the parties have substantially equal bargaining. But that is often not the case. One party may have reasons, disclosed or not, for wanting the matter resolved quickly. If the attorneys can do so, explaining the advantages of cost and time savings, it is encouraged. [Attorneys should not become emotionally invested in their clients’ cases – all decisions must be left to the parties; the attorneys should remain objective and realistic.]

Oftentimes, this is where a good mediator earns their fees. It is easier for the mediator than the attorney to bring the reality of the costs of litigation/arbitration home to a recalcitrant party. For example, it is not unusual for the mediator to ask the attorney, in front of his/her client, how much will the case cost if it cannot be settled? Since attorney fees are frequently a part of most written real estate agreements, the cost of losing in court or arbitration can double. This fact can have an effect of levelling the playing field and is often used by a skilled mediator to encourage settlement.

Experts.  Depending upon the nature of the case, sometimes experts may be useful, even during settlement. If justified by the cost-benefit, a good expert report can be useful during settlement discussions. That is not to say the report or even the name of the expert should be initially shared with the other side. But letting the mediator read it in advance may be helpful; the decision to share it with the other side can be decided later. It could prove to be the tipping point in settling the case.

The Settlement Agreement. Successful mediation means nothing without a solid settlement agreement backing it up. Drafting is critical. Even a simple case deserves a detailed agreement. There are several components:

  • A fair and accurate recital of the dispute that becomes a part of the terms of the settlement agreement;
  • The date, time, and place of payment; if performance is required, exactly when and how it will take place;
  • Mutual release terms must be full and complete (if that is the intent); everything should be released from the beginning of time to the present – including unknown claims;
  • Dispute resolution. Don’t forget to require mediation before arbitration or litigation if there is a dispute over the settlement terms. Consider including a cure provision so that if default occurs, that party is given notice and an opportunity to cure it.

 Conclusion.  If 12 -13 days of negotiations could result in the largely successful 1978 Camp David Accords between Egypt and Israel, discussion, mediation, and compromise should work almost anywhere. It certainly should be considered.

No real estate dispute should go to arbitration or court until the settlement options are first vetted by the parties and their attorneys. Even if resolution appears unlikely, the opportunity should be seized. There is a time for everything. Ecclesiastes 3.1.∼Phil

 

Purple HouseA One-Party Listing Agreement obligates the seller to pay a broker’s commission only if he/she sells the home to a buyer who has been brought to him/her by that broker.  One-Party Listings are generally used in situations where a seller is attempting to sell their home without the assistance of a real estate broker. Such sellers are known in the industry by the acronym, “FSBO,” i.e. “For Sale By Owner.” Continue reading “Oregon Real Estate Commissions – One-Party Listings & Compensation Agreements”

[This article is one of a series of upcoming posts dealing with real estate disputes in Oregon, ranging from transactional matters to litigation matters. Enjoy!]

Introduction.  The term “Earnest Money Deposit” is familiar to most people – at least on the surface: It is the “deposit” that prospective buyers initially put down when offering to purchase a home.  Metaphorically, it shows their offer is made in “earnest.” But beyond the name, there are many tripwires that can arise, such as whether it will be refundable if buyer changes their mind? What if the seller wants an early release of the deposit before closing? What if seller changes their mind; can they return the deposit and end the transaction?

The Forms. In Oregon there are two standard form Sale Agreements: (a) The OREF form published by Oregon Real Estate Forms, LLC. It is the oldest form, dating back to the late 1990s; it laid the foundation for the current form today. It has been continuously updated to comply with changes in Oregon case law, statutes, and Realtor standards of practice. (b) The Oregon Realtors Association (“OR”) Sale Agreement form which came into existence circa 2021 and substantially followed the substance of the OREF form, although it is formatted differently. For purposes of this article, the following discussion will be based upon the OREF form, simply because I represented the company for 20+ years and am familiar with the genesis (i.e., rationale) of each provision.

The Basics. Functionally, an Earnest Money Deposit (hereinafter “Deposit”) normally accompanies the buyer’s written offer, the terms of which are set forth in the Sale Agreement. In Oregon, if one or more Realtors are involved on behalf of the parties, the terms of the Sale Agreement will likely be written up on the OREF form or the OR form.

Once the terms of the transaction are mutually agreed upon, the Sale Agreement is signed, Deposit paid, and escrow is opened at a local title insurance  or escrow company. Closing occurs after buyer’s purchase funds have been deposited, the loan has funded (unless it is a full cash offer and no lender is involved), title is marketable, escrow and title costs, prorates (e.g., for taxes, insurance, liens, and other expenses) have been paid, and the seller’s Deed has been signed and delivered for recording. The Deposit, which is technically a part of buyer’s downpayment, normally remains in escrow until closing, unless the parties agree that it will be disbursed earlier.

The main thing for all parties and their Realtors to remember is that escrow is a neutral depository; it cannot take any action without the joint written instructions of both seller and buyer; it will not act upon only one party’s instruction. Realtors are not parties to escrow and cannot give “instructions.” Once funds are deposited in escrow, their distribution thereafter must be jointly agreed upon by seller and buyer. This means that if there is a dispute over where the escrow funds are to go, it must be resolved either by joint agreement of the parties or pursuant to a court or arbitrator’s ruling. If no agreement can be reached, the title company has the option of tendering the disputed funds into court, filing a lawsuit against both seller and buyer,  and asking for judicial instructions for distribution of the funds. This legal process is called “interpleader” and the title/escrow company can recover attorney fees for their efforts. It is a process seller or buyer should avoid for obvious reasons – it means pride got in the way of prudence.

Liquidated Damages. This is a legal concept in which the parties agree, in advance of entering into a contract, that because of the difficulty in establishing damages for a breach, a fixed figure is pre-agreed upon, i.e., it is “liquidated.”  There is good reason for this; in real estate transactions, if the buyer fails or refuses to close, how will the seller “prove” they were damaged by the breach?  In most cases, seller’s damages from buyer’s failure to close are a result of the property being held off the market for an extended time. But in such cases, to be damaged the seller would have to point to other offers that were rejected. However, once an offer is accepted, it appears as “Pending” on the local MLS and prospective buyers shy away from them.  (There are other forms of damages such as “lost opportunity” or other events.)

But proving “what ifs” can be a formidable task. Ergo, the liquidiated damage clause is used to avoid these difficulties. It allows seller to avoid proving damages flowing from buyer’s breach. Caveat: Liquidated damage clauses are useful if properly used. But because the parties pre-agreed upon seller’s damages from buyer’s breach, they can become an unintended trap; if seller’s actual damages exceed the liquidated amount, seller is limited to the latter amount.

There are only two or three major Oregon cases on liquidated damages, and the law is fairly well settled. The basic elements of an enforceable liquidated damage clause will contain the following recitals (all of which are found in the OREF Sale Agreement form; the OR text appears to be shorter):

  • The parties expressly agree that seller’s economic and non-economic damages arising from buyer’s failure to close the transaction would be difficult or impossible to ascertain with any certainty;
  • The Deposit identified in the Sale Agreement is a fair, reasonable, and appropriate estimate of seller’s damages if the buyer defaults;
  • It represents a binding liquidated sum, not a penalty (i.e., it is intended to compensate seller, not punish buyer); and
  • The seller’s sole remedy against buyer for their breach of the Sale Agreement is limited to the Deposit. (Note that buyer’s remedy for seller’s refusal to close is not limited to recovering back the Deposit. See below.)

When Does The Deposit Becomes Nonrefundable?   This depends upon whether the Sale Agreement contains any buyer contingency clauses. Both the OREF and OR forms contain such clauses; they both allow buyer an agreed-upon period to exercise his/her due diligence (e.g., for title review, property inspection, sewer, septic, lead based paint inspections, financing/appraisal, etc.). If buyer gives seller timely written notice that one or more of the contingency provisions have failed, the Sale Agreement provides that the Deposit will be refunded. But if not timely given, they are deemed waived and the Deposit can become nonrefundable. This issue is where a good Realtor can come in handy. When the parties reach agreement, the Realtor can be asked to provide a written timeline of the important contingency commencement and expiration dates.

Early Buyer Defaults vs. Last Minute Defaults. It is one thing if a buyer’s breach occurs soon after the Sale Agreement is signed, e.g., their check or funding transfer fails to clear; buyer suddenly changes their mind; or events of illness, death, etc. In such cases, the seller could quickly declare a default, refund the Deposit, and put the property back on the market. But it is quite another thing if the buyer fails to show up for closing six weeks into the transaction. In the case of a late buyer default, the seller may be severely damaged for, say, moving out of the home, having stored furniture, or paid a nonrefundable Deposit on another home.

A belated buyer default could become a Doomsday Scenario in some cases.  Accordingly, in establishing the amount of the Deposit, seller should ask: “What is the worst thing that can happen?” “Can it occur here?” If so, the amount of the Deposit should be set at an amount to address it. Why? Because once the Deposit has been agreed upon, if it is insufficient to fully compensate seller for buyer’s belated default, it’s too late.

Who finally decides on the amount of the Deposit for the transaction? The answer is very fact-based. If buyer is ready, willing and able to close, seller needs to sell quickly (e.g. divorce or job transfer), and there are many available homes on the market, the buyer’s preference may carry the day. But in a tight market with limited homes for sale, the seller who can afford to wait for the best offer will likely determine the amount of the Deposit.

Tips, Traps and Take-Aways.  Below are a few – there are many more.

  • Sellers should be careful when agreeing upon the amount of the Deposit. If it is too small, say $1,000 – $2,000, it may be inadequate to fully compensate the seller; conversely, the smaller amount makes it easier for buyers to default and walk away from a comparatively small Deposit.
  • However, a Deposit that is unrealistically large could be deemed unenforceable as a penalty. What amount would constitute a “penalty”? It varies with the facts; if the property is highly prized and listed for $5,000,000, a $100,000 Deposit may not be out of the question. But if the property is selling for $350,000, a $100,000 Deposit would likely be deemed a penalty, and declared unenforceable.
  • Conversely, in bidding wars when several buyers are vying for a property, who gets to the front of the line may be determined, in part, by the size of the Deposit since it could serve as an inducement to accept an offer – especially if it is made nonrefundable. (A risky step for buyers, but not unheard of.)
  • When it comes to tailoring a provision for disposition of the Deposit, Realtors should avoid the temptation of writing an amendment to the pre-printed terms of the Sale Agreement; legal assistance may be appropriate. For example, to state that the Deposit will be “nonrefundable” is inadequate. If there is a dispute, the buyer will likely argue that it was too vague to be enforced.
  • Here is a caveat regarding non-refundability issues: The Sale Agreement already addresses the Deposit and contains other preprinted provisions in the Sale Agreement stating the conditions upon which the Deposit is refundable. They will likely be inconsistent with a hand-drafted nonrefunability addendum. Such inconsistencies should be addressed in advance.
  • Although the Sale Agreement contains a provision for buyers to pay an “Additional Deposit” later in the transaction, it is frequently overlooked. Yet this clause can be very useful for sellers where the closing date is extended or other seller concessions are granted. The longer a transaction remains open and the home is off the market, the greater the risk of unanticipated issues arising.

Conclusion. Disputes over who keeps the Deposit can be a “zero-sum” proposition. That is, when a breach occurs, the Sale Agreement says the entire sum is either forfeited to seller as liquidated damages, or refunded to buyer. There is no middle ground; it is all or nothing. Unfortunately, some arbitrators may not heed that concept, and try to allocate a forfeited Deposit based upon “comparative fault” between the parties. This is an issue that seller’s attorneys may need to emphasize to the arbitrator. Conversely, buyer attorneys might argue that seller contributed to the events leading up to the default, and argue for an allocation of the Deposit, despite there being no language in the Sale Agreement addressing it.

Important Notes: (1) The Sale Agreement provides that if seller breaches and refuses to close, buyer may obtain a refund of the Deposit and seek damages including “specific performance” (i.e. requiring seller to sell per the Sale Agreement). This is because land is regarded as “unique” and recovery of money damages to the buyer are not the same as awarding him/her the property  – more about that in another article. (2) If there is a dispute only over disposition of the Deposit, i.e., it is agreed the sale transaction is over, seller can and should put the property back on the market. But before doing so, seller must first inquire whether the same title/escrow company can close another transaction while holding the disputed Deposit. If they say No, the subsequent sale should be opened at another escrow or title company.

Lastly, remember, the Sale Agreement contains a prevailing attorney fee provision. Thus, the smaller the Deposit the riskier it is to litigate/arbitrate, since the legal fees can exceed the amount  at issue.  Losing a $15,000 earnest money deposit dispute and paying $25,000+ in attorney fees to the other side (in addition to your own) can be a bitter pill. Both of the two statewide Sale Agreement forms provide that disputes over Deposits of $10,000 or less must be submitted to Small Claims Court, where attorneys are not permitted to represent the litigants. ~ Phil

Introduction. The term “Earnest Money Deposit” is familiar to most people – at least on the surface: It is the “deposit” that prospective buyers initially put down when offering to purchase a home.  But beyond that, there is much more, such as whether it will be refundable if buyer changes their mind? Does it stay refundable all the way to closing? What if seller changes their mind; can they just cancel the transaction, return the deposit, and resell the property for a higher price? These issues are a common source of conflict when the seller or buyer tries to withdraw from the transaction before closing.

Basics. In Oregon there are two standard form Sale Agreements: (a) The OREF form published by Oregon Real Estate Forms, LLC. It is the oldest form, dating back to the late 1990s. It is continuously updated to comply with changes in Oregon case law, statutes, and standards of practice. (b) The Oregon Realtors Association Sale Agreement form which came into existence circa 2021 and is substantially similar to the OREF form. For purposes of this article, the topics discussed below are not materially different between the two forms.

The Earnest Money Deposit (hereinafter “Deposit”) is a sum of money that normally accompanies the Sale Agreement offer. Once the terms of the transaction are mutually agreed upon, escrow is opened at a local title insurance company. Closing occurs after buyer’s funds have been deposited, the purchase money loan has funded (unless it is a cash offer), title is marketable, costs and prorates (e.g., for taxes, insurance, liens, and other expenses) have been paid, and the seller’s Deed has been signed and delivered for recording. The Deposit normally remains in escrow until closing; earlier disbursement to seller may only occur upon joint written instructions to escrow.

Liquidated Damages. There are only two or three major Oregon cases that are material to a discussion of liquidated damages. The law is fairly well settled. A well-drafted liquidated damages clause for Oregon Sale Agreements should contain the necessary recitals the law requires , such as the following elements:

  • The parties expressly agree seller’s economic and non-economic damages arising from buyer’s failure to close the transaction would be difficult or impossible to ascertain with any certainty;
  • The Deposit identified in the Sale Agreement is a fair, reasonable, and appropriate estimate of seller’s damages;
  • It represents a binding liquidated sum, not a penalty; and
  • The seller’s sole remedy against buyer for buyer’s failure to close the transaction is limited to the Deposit. (Note that buyer’s remedy for seller’s refusal to close is not limited to recovering back the Deposit. See below.)

Caveat: It is one thing if the buyer’s breach occurs soon after the Sale Agreement is signed, such as their check for the Deposit fails to clear; here the seller can quickly declare the default and put the property back on the market. But it is quite another thing if the buyer fails to show up for closing six weeks into the transaction. This is where a seller may be severely damaged for, say, moving out of the home, having stored furniture, possibly put nonrefundable money down on another home. Sellers should keep the Doomsday Scenario in mind when setting the amount of the Deposit: “What is the worst that can happen?”

Who finally decides on the amount of the Deposit for the transaction? The answer may be found in this cynical version of the Golden Rule: “He who has the gold makes the rules.” If seller needs to sell for economic reasons, the buyer’s offer will likely be at a lower price and with a smaller Deposit; if seller can afford to hold the property and wait for the highest and best offer, he/she will demand a larger Deposit.

Tips, Traps and Take-Aways.  Below are a few; there are many more.

  • Sellers should be careful when agreeing upon the amount of the Deposit. If it is too small, say $1,000 – $2,000, it may be inadequate. For example, if the buyer finds another more desirable home, he/she could refuse to perform under the Sale Agreement, readily forfeit the small Deposit and move on. Sellers should insist that the amount of the Deposit be of sufficient size to deal with the Doomsday Scenario and in an amount that the buyer will think twice about walking away. However, it cannot be unrealistically large – otherwise it could be deemed unenforceable as a penalty.
  • If seller wants the Deposit to be disbursed from escrow and become nonrefundable before closing, the arrangement must be carefully drafted. Realtors should avoid the temptation of writing their own special provisions into an Addendum that amend the pre-printed terms of the Sale Agreement; legal assistance may be appropriate. Saying nothing more than that the Deposit will be “disbursed and become nonrefundable” is inadequate. Here are a couple of reasons: (a) The clause should address what happens if seller causes the default; and (b) What about the other provisions in the Sale Agreement providing that the Deposit is refundable upon certain conditions? Otherwise, the Sale Agreement and Addendum are inconsistent. These issues should be addressed.
  • Although the Sale Agreement contains a provision for buyers to pay an “Additional Deposit” later in the transaction, it is frequently overlooked. Yet this clause can be very useful for sellers where the closing date is extended. The longer a transaction remains pending and the home is off the market, the greater the risk of unanticipated issues arising.
  • When does the earnest money deposit become nonrefundable? The basic rule is that the Deposit is refundable if buyer gives seller timely written notice that one or more of the Sale Agreement’s contingency provisions have failed (e.g., for title review, property, sewer, septic, lead based paint inspection, and financing/appraisal). These standard provisions all contain a limited period of time for buyer to exercise them. Otherwise, they are waived and the Deposit can become nonrefundable. This is where a good Realtor can come in handy. Ask him/her to provide a written timeline of these important events and dates. 

Conclusion. Disputes over who keeps the Deposit can be a “zero-sum” proposition. That is, when a breach occurs, the Sale Agreement says the entire sum is either forfeited to seller or refunded to buyer. There is no middle ground. (Important Note: The Sale Agreement provides that if seller breaches and refuses to close, buyer may obtain a refund of the Deposit and seek specific performance. This is because land is regarded as “unique” and recovery of money damages are not the same as awarding buyer the property.)

Lastly, remember, the Sale Agreement contains a prevailing attorney fee provision. Thus, the smaller the Deposit and the closer the case, the riskier it is to litigate/arbitrate, since legal fees can exceed the amount  at issue.  Losing a $15,000 earnest money deposit case and paying $25,000+ in attorney fees to the other side (in addition to your own) can be a bitter pill. For better or worse, the Sale Agreement provides that disputes over Deposits of $10,000 or less must be submitted to Small Claims Court, where attorneys are not permitted to represent the litigants. ~ Phil

©Copyright 2025 QUERIN LAW, LLC. Phillip C. Querin

Introduction. Most Oregon residential transactions are documented by one of two Sale Agreement forms, the OREF form, created circa 1997, or the Oregon Realtor (“OR”) form which was created circa 2020-23. Both forms are continuously updated. (Readers are encouraged to compare both forms before deciding which one to use. In either case, these documents are proprietary and should not be used in violation of their copyright.)1 

As explained below, the term “protocols” refers to the steps sellers and buyers follow throughout the transactional process. Over the past 25+ years, with the proliferation of state and federal real estate laws and regulations, most Oregon residential transactions have followed a “lock-step” approach, commencing with seller’s acceptance of buyer’s offer (or buyer’s acceptance of seller’s counteroffer) and ending with closing, when seller’s deed to buyer is recorded and possession changes hands.

Seller Property Disclosure Form. The genesis of this form goes back to 1993, in which the Oregon Legislature gave residential sellers a choice of offering buyers a “Disclosure” form or a “Disclaimer” form.  The Disclosure form required sellers to answer a series of questions about the property, and the Disclaimer form “disclaimed” all representations about the property. The immediate result was that most attorneys advised their seller-clients to disclaim everything, rather than disclose anything. This approach did nothing to enhance transparency, so the disclaimer alternative was abandoned. In Oregon we’ve used the Disclosure form ever since. Buyers had (and still have) an absolute 5-business day right of revocation following delivery of that form.

Generally, the 1993 Disclosure form has remained substantially the same over the years, only with slightly improved text and a few new questions for sellers to answer. It is still not a model of draftsmanship (which is what occurs when representatives from the various stakeholders – e.g., title companies, consumer groups, Realtor groups, lenders, insurers, contractors, etc. – must all agree on the final product. (For an abbreviated article explaining “group think,” see “Abilene Paradox” story.)

Nevertheless, the Disclosure form is an important first step in giving buyers a starting point for conducting their due diligence. However, sellers’ representations in the form are not warranties; they are based only upon the seller’s “actual knowledge” i.e., what he or she believes at the time of completing the form, without necessarily having performed any investigation in advance.  The form warns that sellers’ representations are not intended for buyers to rely upon in lieu of conducting their own inspections and other due diligence. At best, the Disclosure form is a starting point for buyers. If negative information is revealed by the seller, e.g., prior flooding in the crawl space, it is required to be explained in an accompanying addendum, and the responsibility then shifts to the buyer to further investigate and evaluate the issue.

Real Estate Sale Agreement. Normally the buyer and/or their Realtor complete the Sale Agreement form for submission to the seller. Before acceptance, usually the only substantive information a prospective buyer has about the property consists of  data obtained from available public records, e.g., property taxes, and the multiple listing service (“MLS”) information where the seller’s broker has listed the property.

  • Buyer Due Diligence. Once the offer is accepted, the Sale Agreement permits buyer to complete their due diligence by the exercise of several inspection contingencies including, among other things,  the status of title and the physical condition of the property and its operating systems, e.g, sewer/septic, water, cooling, heating, plumbing, electrical, etc. Another major buyer contingency makes the transaction subject to a satisfactory appraisal and financing. If the buyer is dissatisfied (in his/her sole discretion) with any one of these contingencies, he/she (or their broker) may give timely written notice to the seller (or their broker) to terminate the transaction and obtain a full refund of the earnest money deposit.
  • Buyer Warnings. In addition to making the offer contingent upon buyer’s satisfaction with all of their contingencies, the Sale Agreement carries with it several warnings to buyers:
    • Section 10 (Property Inspections) advises buyers to have a complete inspection of the Property by qualified licensed professionals (e.g.,  for structural condition, soil condition/compaction/stability, survey, etc.). It also provides that if the buyer proceeds to close the transaction, he/she waives all contingencies and accepts the condition of the Property.
      • Note, the inspection contingency expires at an identified time, and unless buyer gives timely written notice of termination, he/she will be deemed to have accepted the condition of the property. In other words, “silence is consent.”
    • Section 14 (Seller Representations) of the Sale Agreement warns that the seller representations are not warranties regarding the condition of the Property and are not a substitute for buyer’s responsibility to conduct their own independent investigation, including the use of professionals, where appropriate.
    • As if these warnings were not enough, the Sale Agreement contains at Section 16 an As-Is provision: “Except for Seller’s express written agreements and written representations contained herein, and Seller’s Property Disclosure, if any, Buyer is purchasing the Property “AS-IS,” in its present condition and with all defects apparent or not apparent.”
    • Section 41 (Offer to Purchase) acknowledges that Buyer has fully read and understands the terms of the Sale Agreement and “has not relied on any oral or written statement made by Seller, Seller’s Agent, or Buyer’s Agent that is not expressly contained in this Agreement.”
      • This warning is important because the listing agreement and broker’s promotional literature may contain descriptions amenities that do not become a part of the Sale Agreement unless expressly incorporated into it.
      • Accordingly, the safest practice for buyers and their brokers is to specifically include in the offer any important representations or promises about the property that are not already found in the Sale Agreement. In short, unless expressly included, ancillary promotional information (e.g., “property abuts Green Space that cannot be developed”) does not become a part of the Sale Agreement.

Conclusion. In summary, residential real estate transactions in Oregon divide buyer and seller responsibilities as follows:

  • Sellers’ duties are to complete the Property Disclosure form and Sale Agreement upon their “actual knowledge.”  The Sale Agreement provides the representations are made to the “best of Seller’s knowledge.”  Sellers should carefully review these representations before signing the Sale Agreement. Query: Is this it, or does seller have any further duties of disclosure beyond these two forms? The answer is Yes. Oregon’s common law, i.e., the law developed in written opinions from the appellate courts over the years, still applies. This will be covered in a subsequent post.
  • Upon mutual execution  of the Sale Agreement, the buyer’s duty is to exercise their due diligence responsibilities during the prescribed contingency periods. During this time they must review and evaluate all important information, such as the preliminary title report, professional inspections, sewer/septic reports, and all other agreed-upon inspections or tests. If financing is a contingency, it makes the sale subject to the buyer obtaining purchase money financing (unless it is a cash offer) and an appraisal that is not less than the agreed-upon purchase price of the home. As noted above, although buyers have a right to rely upon seller’s representations, those statements are not warranties or guaranties; they should not be relied upon to the exclusion of their own due diligence. If a buyer learns of a discrepancy between the seller’s written disclosures and their own due diligence, buyer should immediately stop and clarify the reason for the discrepancy. Closing without doing so can arguably result in a waiver by buyer. (Note: The preceding assumes there is no  fraud or concealment by seller.)

If these protocols are followed, buyers will be able to make an informed decision whether to: (a)  Allow their contingencies to lapse and close the transaction or (b) Timely withdraw from the transaction and obtain a return of the earnest money deposit. ~ Phil

©Copyright 2025 QUERIN LAW, LLC. Phillip C. Querin

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  1. In the interest of full disclosure, as legal counsel for OREF during its first approximately 20 years I was very involved in the development of the OREF Sale Agreement and all of its other real estate forms.

Introduction. Regardless of how active (or inactive) the market is, sellers’ brokers should always be on the lookout for “red flags.” These are the often harmless-looking provisions that, if ignored, can later come back and bite sellers. Here are a few. Note that this article refers to the 2022 OREF Sale Agreement, so section and line numbers may be different today):

The “Or Assigns” Provision. First, be aware that deep in the 2022 OREF Residential Sale Agreement (Sec.37(6)) is a single sentence that many Realtors® may be unfamiliar with. It states:

“…Buyer’s rights under this Agreement, or in the Property, are not assignable without the prior written consent of Seller.” (Emphasis added.)

Where does this issue come up? When the Sale Agreement offer includes the words “or assigns” after buyer(s) names in Section 1. There is a reasonable chance when requested by buyer, his/her broker dutifully does so without inquiring about the intent or purpose of the provision. There is also a reasonable chance the buyer’s broker may not be aware of Section 37(6) saying that seller’s consent is required.

May Seller Impose Conditions on the Assignment? So, if the offer is accepted with the “or assigns” language inserted, does the seller have any say in whether they will give or withhold consent? Clearly yes – assuming they are aware that Section 37(6) gives them that right.  It is my opinion that accepting an offer on the OREF Sale Agreement with the words “or assigns” inserted after the name of the buyer does not mean the buyer is free to assign the Sale Agreement without seller’s consent.

Below is a short summary of the variety of issues that arise from these two seemingly innocuous words unless fully vetted by sellers before accepting the offer. The main issue is whether seller can condition their consent upon other factors, such as:

  • Requiring that the assignee have the same or better financial credentials as the buyer-assignor?
  • Requiring that the buyer-assignor remain as a guarantor of the assignee’s performance?

There are at least two very different reasons for a buyer’s use of the “or assigns” language:

  • Buyer is merely acting as a middleman,[1] often with the idea of tying up the property and then “flipping” it, to use the vernacular sense. This business model is invariably coupled with the idea that the buyer intends to improve the property, either cosmetically or more substantively, and make a profit upon resale. While there should be no particular concern to the seller in this transaction (assuming the buyer is properly vetted), there should be – in my opinion – a heightened due diligence concern to third-party buyers who acquire such property. But that is the subject of another post.
  • As is seen in more commercial ventures, the buyer is using the “or assigns” language to acquire a property and then create a holding entity, such as an LLC, to go into title. The only issue of significance here is for sellers to make sure that the original buyer (who has presumably already been vetted for their financial bona fides) does not create the holding company that is controlled by a new member with whom seller is unacquainted. This condition can and should be included in any consent to the assignment.

Risk Management Tip. There are some individuals who believe they can, without a real estate license, purchase real property using this “or assigns” verbiage, and flip the property to a third-party, taking profit from the difference between the purchase and re-selling price. I do not recommend this business model, since (a) the Oregon Real Estate Agency (at least in the past) has taken the position that this practice violates the licensing law, and can require the flipper to “disgorge” their “illegal commission” because it was obtained without an Oregon license[2]; (b) the flip requires the assignee, often a consumer, to understand and appreciate what is occurring, since by the time of the assignment, all of the standard buyer due diligence contingencies could have expired; and (c) it will raise the ire of every broker in the neighborhood, and thus result in a stream of complaints to the Agency.

Conclusion. So, the take-away here is that when buyers add the “or assigns” text to their offers, seller and listing agent antennae should go up. While there may be perfectly legitimate reasons for this approach, it bears serious vetting by sellers before accepting the offer. Waiting until after acceptance could be too late.  ~ Phil 

©Copyright 2022 QUERIN LAW, LLC. Phillip C. Querin

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[1] To the woke crowd, forgive me for the use of this allegedly misogynistic term. But according to Online Etymology Dictionary, here, the word “middleman” means, “…in the trading sense, ‘contractor, negotiator, broker,’ especially one who buys merchandise in bulk and sells it in smaller quantities to retailers or other traders,” 1795, from middle (adj.) + man (n.).” Accordingly, I have deferred to 200+ years of linguistic consensus saying it’s OK for me to use this word in mixed company. Whew!

[2] If you doubt the Agency’s authority to do this, take a close look at the list of activities for which Oregon requires a real estate license before earning a commission (ORS 696.010 (17), then consider ORS 696.040, which provides that “(o)ne act or transaction of professional real estate activity is sufficient to constitute engaging in professional real estate activity, within the meaning of this chapter.”

Introduction. This is a continuation of Part One, which addressed the printed contingencies found in the 2022 OREF Residential Real Estate Sale Agreement. (References to section and line numbers may be different today.)

Part One already covered:

  • Sections 5.1 (Financing Contingencies) and 5.2 (Failure of Financing Contingencies);
  • Section 6. (Seller-Carried Financing); and
  • Section 9 (Title Insurance).

As a reminder, a contingency is an event that must occur (or not occur)[1] for the transaction to become binding. All printed contingencies in the Sale Agreement are for the buyer’s benefit. There may be other contingencies in the transaction, such as the seller finding a replacement home, but they would be added by Addendum.[2]

Section 11.1 (Private Wells). This section asks: “Does the Property include a well that supplies or is intended to supply domestic water for household use? [  ] Yes [  ]No. If yes, Buyer has attached OREF 082 Private Well Addendum to this Agreement.”

For buyers who have never owned a property serviced by a well, this contingency demands caution. Contact the Water Resources Department for information: https://www.oregon.gov/owrd/pages/index.aspx.

Even for experienced buyers, caution must be exercised. The seller’s knowledge and opinions are important, but expert verification is critical. The Addendum asks about well logs, well reports, and other information. If available, an expert should carefully review them. If there are no such logs or reports, ask why.

Buyers should familiarize themselves with the experiences of nearby neighbors who are also on wells. Are there any known problems? How much does it cost to drill a new well in the area? Are there any geologic issues that are problematic? What about water purity and flow? Has the seller complained about any well issues in the past?

Well testing is critical. The Well Addendum provides that Seller, at Seller’s expense, is to have the well tested for arsenic, nitrates and total coliform bacteria and to submit the results to the Oregon Health Authority and buyer. However, unless there is a transfer of title, well testing is not required.

Areas impacted by recent wildfires could contain arsenic, nitrate, bacteria, lead, and, possibly benzene, toluene, ethylbenzene, and xylenes (BTEX). However, these are “extra” tests and at buyer’s cost.

Well flow testing is at buyer’s expense. It should never be waived.

Buyer’s right to terminate in the Well Addendum is slightly different from the professional inspection provision in the Sale Agreement, discussed above. In the latter, there is an immediate right to “unconditionally disapprove” of the home inspector’s report. But in the Well Addendum, after release of the test results, there is a “negotiation period” for the parties to attempt to reach agreement on the nature, cost and financial responsibility for remedying any “substantial deficiencies” in the system. However, in the end, buyer is not obligated to reach agreement on a solution and may terminate the transaction and obtain a refund of their earnest money deposit.

Risk Management Tip. Well water problems discovered after closing can be costly to buyers – and their real estate agents who may be brought into the dispute. For brokers who are new to the business or unfamiliar with well water issues, it is critical to partner with another broker with this expertise. And regardless, the buyer should always secure an experienced professional to evaluate the system. Brokers should resist the temptation to offer their opinions about a well, the system, or quality and flow of drinking water – regardless of their familiarity with the seller, well water in general, or their experience. The minute an opinion is expressed, it makes you an expert. The Sale Agreement goes to great lengths in saying Realtors® are not experts –  allow that disclaimer to protect you!

Section 11.2 (Septic/Onsite Sewage System). This too is an important contingency for buyers unfamiliar with these systems. If the system is shared, buyer should have an expert review the terms of the sharing agreement. They can vary in terms and clarity. Buyers should find out if there have been any problems in cost sharing. The Oregon DEQ regulates residential septic systems. See link here.

The protocols in the Septic Addendum are similar to those for well water. But interestingly, contrary to the Well Addendum, there is no “negotiation period” after the test results are shared. The “unconditional termination” provision of the Septic Addendum is similar to the one found in the professional inspection section of the Sale Agreement.

Risk Management Tip. Brokers should always remember that when dealing with septic systems, there are two issues: (a) the tank; and, (b) the drain field. In some cases, the tank could be perfectly fine, but the drain field shot – or vice versa.

And as with the Well Water Addendum, brokers with limited familiarity with these systems should partner with a more experienced person. And as with well water problems discovered after closing, the cost to remedy a failing tank or drain field can be significant. As the dollars increase, buyers are more inclined to look around for someone – such as a real estate agent with E&O insurance – to share the cost. Let the expert do the talking and stay in the background when dealing with well water and septic systems.

Section 12. (Lead Based Paint Contingency Period). As most Realtors® know, if a residential property is being sold that was constructed before 1978, then on, or promptly after, the Effective Date of the Sale Agreement, the seller is required to deliver to buyer OREF 021 Lead-Based Paint Disclosure Addendum together with the EPA Pamphlet entitled “Protect Your Family From Lead in Your Home.”

Unless waived by Buyer in the Disclosure Addendum, buyer has ten (10) calendar days (or another mutually agreed on period) to (a) conduct a lead-based paint assessment or inspection and (b) unconditionally cancel the transaction by written notice to the seller at any time before midnight on the last day of the 10-day period. If timely made, the transaction is then terminated, and buyer has the right to recover their earnest money deposit.

Seems pretty straightforward, right? Simple enough, yes? This is what the 2022 Sale Agreement says today. This is not what it used to say for several years prior to 2022. The problem today is this: Under the terms of the 2022 Sale Agreement, buyer’s right of cancellation is unlimited, so long as it is timely made – it no longer requires any inspection or evaluation.

For example, say the buyers found a beautiful old pre-1978 home in a beautiful old neighborhood. They loved the home but had not made up their minds whether they could afford the repairs and upkeep. But it was sure to go quickly – there were already multiple offers. Rather than getting repair bids and putting a sharp pencil to the numbers, they immediately made an all-cash offer, paid $100,000 earnest money deposit, and waived their property inspection contingency. The good news for the buyers was that their offer was accepted. The bad news for the sellers is that they accepted the offer without requiring their buyers to waive the LBP Contingency. So now, buyers have tied up the property for a “free peek” and have time to decide whether to remain in the transaction with little or no risk. They may cancel the transaction within the 10-calendar day period for no reason, without inspecting or evaluating the property for LBP, and obtain a full refund of their $100,000 deposit!

Why? Because the LBP Contingency no longer provides that buyer’s right of cancellation may occur only if a certified LBP inspector identifies the existence of LBP or LBP Hazards in the property.

Risk Management Tip. First, consider the rationale for buyers having LBP inspections. If the home is pre-1978 the chance of it containing LBP somewhere is pretty high since lead was found in all paint back then. The question today isn’t really if there is LBP, but whether it has been “incapsulated” – i.e., painted over with more recent non-LBP in the years since 1978 i.e., during the last 44 years.

“Lead based paint hazards” are those you can see, include peeling, chipping, chalking, cracking, damaged, or damp LBP. Certainly, these conditions bear evaluation, especially if the buyers have small children. But most buyers, assuming they are familiar with LBP risks to their kids, would likely recognize during one or more walk-throughs whether those conditions existed, and would hire remediation experts immediately after closing and before taking possession.

The Take-Away. Listing agents should view with caution buyers’ use of the LBP Contingency as it currently reads. It can – and has – been used as a ruse to tie up a property with very little risk of losing the earnest money deposit.  Is it a ruse, or is it based on a legitimate good faith concern? I submit that if its use arises from a legitimate good faith concern, then listing agents suggest their seller require that the LBP Contingency include an inspection and report by a professional.  But if there is a suspicion the purchasers are merely using the LBP Contingency to buy time, suggest the seller require that the purchasers waive it.

One last comment. The reason the Seller Property Disclosure Section 13 of the Sale Agreement is not discussed as a “contingency” in these two articles is because it was not created by OREF, but by Oregon statute. It really is not a “contingency” since it does not depend on any third-party events, such as unsatisfactory inspections, LBP, title defect, or sewer and well water reports.

All rights and duties relating to the Seller Property Disclosure Statement are found at ORS 105.464 et seq. It was well-intended legislation that serves as a cautionary tale about how things can go awry when forms drafting is relegated to disparate legislative committees and interest groups with differing agendas, skills, and attention spans. ~Phil

 ©Copyright 2022 QUERIN LAW, LLC. Phillip C. Querin

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[1] I say “not occur” because the professional inspection contingency is tied to buyer not rejecting the report. Same for the title contingency. Silence is consent.

2 Note to sellers: This contingency can be risky if not carefully drafted to assure that the contingent event is not satisfied or waived too early. Merely “entering into an agreement to purchase a replacement home” can be premature. The inspection should be completed, and financing pre-approval obtained – at minimum.

Introduction. Disputes involving earnest money deposits are a “zero sum game.” There is one winner and one loser; no in-between. Arbitrators do not – or certainly should not – split the deposit in a misguided effort to equitably allocate the funds. (Note: This analysis refers to the OREF Sale Agreement form, so references to section and line numbers may be different from those today.)

Equity is not the issue; both parties have already stipulated in the Sale Agreement’s liquidated damages clause that if there is a breach, the non-breaching party keeps the deposit. (A liquidated damage clause is one in which the contracting parties agree, in advance, that should there be a breach, the damages will be the sum of X dollars. If properly drafted, the clause prevents both sides from later arguing that the actual damages resulting from the breach are either higher or lower than the pre-agreed “liquidated” amount.  In the case of the buyer’s breach of the OREF Sale Agreement, the parties agree that seller’s remedy for the buyer’s breach will be to retain the deposit – i.e., it is the liquidated sum the parties have pre-agreed upon.  Thus, if the seller breaches the Sale Agreement, the buyer recovers back the deposit (but retains the right to also seek specific performance of the contract). If the buyer breachs the Sale Agreement, the seller retains the deposit as liquidated damages.  There is no provision in the Sale Agreement allowing the arbitrator or court to “apportion” liquidated damages.

Critical to understanding liquidated damage clauses is recognizing the difficulty in quantifying a seller’s damages when their buyer breaches the Sale Agreement. The clause relieves the seller of the difficulty in “proving” the value of the lost opportunity to sell the property to a person who never made an offer.

This is where the liquidate damages clause proves its worth. Otherwise, how is the seller to prove that but for the buyer’s offer, a better offer would have been made? Once a transaction appears as “pending” in the MLS, most prospective buyers move on – at least assuming other inventory is available. Without a liquidated damage clause it is almost impossible for sellers to prove they were damaged by “losing” an offer they never received.

Earnest Money Dispute Scenarios – Seller Keeps the Deposit

Section 28.3 of the Sale Agreement lays out three scenarios which can result in the buyer forfeiting their deposit. If seller signs and accepts the Sale Agreement, title is marketable, and seller did not breach, he or she may terminate the transaction and keep the deposit if:

  1. Buyer misrepresented their financial status. Section 4 of the 2022 OREF Sale Agreement provides at lines 55-58:

Buyer represents that Buyer has liquid and available funds for the Deposit and down payment, and if an all-cash transaction, the full Purchase Price, sufficient to Close this transaction and is not relying on any contingent source of funds (for example, from loans, gifts, sale or closing of other property, 401(k) disbursements, etc.), except as follows (describe):                                                                          _________________________

What this means is that buyers signing an offer of purchase actually have the money. Buyer agents should vet this issue with their clients; the failure to do so is a disservice to the seller and listing agent. And if sellers doubt their buyer’s financial bona fides they should counter the offer with a demand that the buyer provide proof of collected funds capable of being used to fund the deposit and down payment.

Practice Tip: Sellers and their brokers should be careful about inadvertently waiving this provision. Once a seller and/or their broker acquire knowledge that the buyer has misrepresented their financial status, seller must decide whether to terminate, or continue moving forward with the buyer. In the latter scenario, seller should call out the non-performance and give the buyer a choice to either forfeit the deposit or agree to some other solution satisfactory to seller in a written Addendum. Doing nothing and moving forward can result in a waiver of this provision.

Earnest money deposit is not timely paid. If the buyer’s bank (a) does not pay, when presented, a check given as earnest money, or (b) buyer fails to timely make a wire transfer for the deposit, it entitles the seller to claim a breach of contract and retain the deposit. But again, sellers cannot ignore the breach and only later claim it as a basis for retaining the deposit. Unfortunately, buyers’ late payments are frequently overlooked, and the parties continue to move forward, trying to keep the transaction together while the buyer struggles to find the necessary funds.

Practice Tip: Section 37.1 of the 2022 OREF Sale Agreement (Miscellaneous) provides at Line 414: “Time is of the essence of this Agreement.” Upon the failure of the deposit to be timely made, sellers and/or their brokers should immediately address it in an Addendum, reciting the default and obligating the buyer to another performance date for the deposit. Waiting after two or three failures makes it difficult for the seller to later claim that time is still “of the essence.” [Note: the 2025 form may vary slightly.]

  1. Buyer’s fails to complete the transaction in accordance with the material terms of the Sale Agreement. This provision is a catch-all, and the most significant for sellers. However, the buyer’s failure must be “material,” i.e., a provision or condition that is essential to completion of the transaction. Technical defaults or failures quickly remedied are not always “material.”

Earnest Money Dispute Scenarios – Deposit Returned to Buyer

Refund to Buyer. The OREF Sale Agreement identifies three scenarios that will result in the buyer recovering back the deposit. However, a refund of the deposit is not the buyer’s only remedy should the seller default; buyer may also bring a claim for specific performance and/or damages.

  1. The parties are under contract, but the seller cannot deliver “marketable title.” Marketable title is title that is free of all objectionable liens and encumbrances. For example, title to property is frequently encumbered by recorded utility easements. While they show up on the preliminary title report, and technically “encumber” or “burden” the property – they are normally not a problem. Utility easements for the installation and maintenance of powerlines, gas lines, water, etc., do not negatively affect the quality of title but, rather, enhance its developability.

When title is “unmarketable” it is encumbered by some recorded instrument, e.g., a judgment lien, a mortgage, or a tax lien, that could result in the owner having to pay money to release the lien. Similarly, certain recorded easements could negatively affect a property making it unmarketable – e.g., an unlimited public right of access over the property to the beach.

Who determines whether title is unmarketable such that the buyer can cancel the transaction and obtain a refund of their earnest money deposit? If the parties cannot agree, the judge or arbitrator will decide whether the lien or encumbrance on title is sufficiently significant as to make it unmarketable.[1]

  1. Seller fails to complete the transaction in accordance with the material terms of the Sale Agreement. For example, seller refuses to permit access to buyer’s inspector or appraiser. In such a case, a buyer could terminate the transaction and demand a full refund of the deposit. But remember, as noted above, even if the buyer recovers back his or her deposit, they may also bring a claim against the seller for “specific performance.”

Conversely, unless the Sale Agreement provides otherwise, a seller’s sole remedy on account of their buyer’s breach is to retain the deposit as “liquidated damages.” The OREF Sale Agreement, as most residential sale agreements, limits the seller’s damages to the amount of the deposit. In other words, the seller cannot pursue a defaulting buyer for “specific performance” or additional damages.[2]

  1. If a buyer-contingency fails through no fault of the buyer. For example, if the professional inspection contingency fails, buyer is entitled to a refund of the deposit. In addition to ones inserted in the offer (e.g., sale of buyer’s residence), there are several pre-printed buyer contingencies in the Sale Agreement. Realtors® should become familiar with all of them.

Note that the “no fault of the buyer” clause does not mean the buyer cannot exercise their right of termination by disapproval of a sewer, septic, inspection report, or well water report – this is their right.

However, if a buyer sabotaged their financial statement so as to be rejected for financing, that would prevent them from obtaining a refund of the deposit. The law implies an obligation on parties under contract to exercise them in good faith; the failure to do so is a breach of that implied obligation and a breach of the contract.[3]

Liquidated Damages. There are only two or three major Oregon cases that are material to a discussion of liquidated damages. The law is fairly well settled. A well-drafted liquidated damages clause should contain the necessary recitals the law looks to in upholding them. For example, in the 2022 OREF Sale Agreement, it Section 28.3 provided:

The parties expressly agree Seller’s economic and non-economic damages arising from buyer’s failure to close this transaction in accordance with the terms of this Agreement would be difficult or impossible to ascertain with any certainty, that the Deposits identified in this Agreement are a fair, reasonable, and appropriate estimate of those damages, and represent a binding liquidated sum, not a penalty. [Note: The 2025 form may vary slightly.]

The Seller’s sole remedy against Buyer for Buyer’s failure to close this transaction in accordance with the material terms of this Agreement is limited to the amount of earnest money paid or agreed to be paid in this Agreement. Seller’s right to recover from Buyer any unpaid earnest money agreed to be paid in this Agreement will be resolved as described in the Dispute Resolution Sections below.

What has not been addressed above – but should not be ignored in any discussion of earnest money deposits, is that under the OREF Sale Agreement, and similar forms in Oregon, retention of the earnest money deposit is the seller’s sole remedy in the event of a buyer’s breach. That is why the amount of the deposit is so important.

It is one thing if the breach occurs soon after the Sale Agreement is signed, such as the buyer’s check for the deposit fails to clear – the seller can quickly declare the default and put the property back on the market. But it is quite another thing if the buyer fails to show up for closing six weeks into the transaction.

The take-away for listing agents is that they should discuss with their sellers in advance, what damage might occur if the buyer defaulted late in the transaction. The raison d’être for the deposit is to make a seller think twice about defaulting. In other words, walking away from the transaction must “hurt” financially. This is not to say it should be designed to “penalize” buyers for defaulting, but it should be a sufficient amount to keep them  incentivized to remain in the transaction.[4] A deposit the buyer can walk away from without concern is not a real deposit.

 Conclusion. As noted at the beginning, earnest money disputes are a “zero-sum” proposition, since a forfeiture or refund depends upon who committed the breach. Once determined, the prevailing party gets the deposit.[5]

But an equally important issue is whether both parties are prepared to roll the dice, knowing that the prevailing party is entitled to recover their attorney fees from the losing side. Thus, the loser loses big; this directs the focus on the size of the gamble. A large deposit, say $75,000 or $100,000+ might incentivize one side or the other to pursue the funds; but lesser amounts require more evaluation, especially when the amount of the deposit could be exceeded by the attorney fees expended in the battle – in other words, a Pyrrhic Victory.

©Copyright 2025 QUERIN LAW, LLC. Phillip C. Querin

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[1] Note: Title being “unmarketable” is different from saying the property cannot be sold or that it has no value. “Unmarketability” is sufficient if it reduces the property’s value such that it no longer is worth what a ready, willing and able buyer would pay for its intended purpose. For example, if the property is zoned residential, but because of recorded easements or other limitations on use, it cannot be sold as a residential lot, it is unmarketable for its highest and best use.

[2] I am speaking of customary practice in Oregon, not elsewhere.

[3] Note that all inspection reports can be rejected by buyers without having to give a reason. In other words, they can reject the “report” not some particular item in that report. If the latter standard were the rule, sellers would be forever arguing that the item buyer rejected, e.g., the furnace was fully functional, and not a good faith basis to terminate  the transaction.

[4] For example, a deposit of $50,000 – $75,000, if duly considered by the seller in advance (assuming the sale price was significant), e.g., $1,000,000 would likely withstand scrutiny. $500,000 likely would not. Beware: Brokers should avoid applying a simple 10% or 20% multiplier since that is not “a fair, reasonable, and appropriate estimate” of damages – it is just a formula pulled out of the air.

[5] Lest the reader ask, rhetorically, “what happens if both seller and buyer are in default?” the answer is the latest default is the only one that counts. For example, if the buyer failed to timely make the deposit, but eventually did so – and it was accepted – that “default” has been waived by the seller. If the next default occurs, say by the seller in failing to close on time, buyer can terminate and get their deposit back. But note that the Sale Agreement expressly provides that a refund of the buyer’s deposit does not mean the seller is off the hook. The reason is because even if the deposit is returned to the buyer, he or she still has a right to seek specific performance. Otherwise, a seller could avoid having to sell to a buyer by simply creating their own default and refunding the deposit.

Introduction. As most Oregon Realtors® know, the OREF Sale Agreement provides that, subject to certain exclusions, all disputes that cannot be otherwise amicably resolved must be first mediated. If that isn’t successful, recourse is through mandatory arbitration. The filing of legal actions in court is not permitted except in cases seeking “provisional process” e.g., for injunctions, restraining orders, and similar matters requesting immediate and extraordinary relief.

The OREF Sale Agreement form has a mandatory mediation process  through Arbitration Service of Portland, Inc (“ASP”). ASP also administers the mandatory arbitraton of disputes under the Sale Agreement.

In some of these seller-buyer disputes, one or both Realtors® may be named because a claimant feels their broker, or the other broker, or both brokers, engaged or participated in activity that caused them damage.

The Sale Agreement’s mediation/arbitration dispute resolution process involving Realtors® is not available to resolve claims for violation of the NAR Code of Ethics. Those are handled at the local Realtor® association level. Similarly, claims against brokers for violation of Oregon’s licensing laws and rules (ORS Chapter 696 and OAR 863) must be filed through the Oregon Real Estate Agency

Seller Misrepresentation Claims. Caveat: This discussion relates only to the topics, not the outcomes. Having several of these claims end up in arbitration does not mean they all resulted in awards for the buyer against the seller.

Unquestionably, over the years, this has been the largest source of claims ending up in arbitration. Moreover, they often include the seller’s broker. This joinder of parties, i.e., naming the seller and their listing agent as co-respondents, should not be a surprise. Oftentimes, it is the listing agent to whom the seller confides, and (unfortunately) the listing agent wittingly or unwittingly, acquires information that provides the basis for a buyer’s claim against that broker.

For example, in completing the Sellers Property Disclosure Statement (“Disclosure Form” or “Form”), sellers turn to their agent to better understand how to answer particular questions: Below are some examples of Disclosure Form questions[1] – coupled with a typical inquiry the seller might have of their broker before finalizing the Form:

  •  Are there problems with settling, soil, standing water or drainage on the property or in the immediate area? “I had some problems last year, but they all got resolved. Do I need to answer “Yes”?
  • Are there any pending or proposed special assessments? “There have been some recent owner complaints to the HOA about ceiling leaks in their units – but not mine. Contractors are looking at things right now. So far, there have been no assessments proposed, nor assessments made. How should I answer?”
  • Are there any encroachments, boundary agreements, boundary disputes, or boundary changes? “My neighbor told me he thought my fence was on his land, but he never asked me to move it. We have no dispute. Do I need to answer ‘Yes’”?
  • Are there any moisture problems, areas of water penetration, mildew or moisture conditions (especially in the basement)? “There are some leaks in the basement during the winter months, but they all go away when the rains stop. Do I have to answer “Yes” even though they are not really a ‘problem’ and are just temporary?”

The “Situational Ethics” Problem. Each of the above property disclosure questions might be answered differently if asked of a seller versus asking the prospective buyer. The seller who does not disclose (or “under-discloses”) may believe they are answering appropriately by strictly interpreting the scope of the question subjectively. E.g., “Yes there was a problem, but it was repaired”; “No, there is no ‘dispute’“; “No, it has not been a problem.”

But how would the seller respond to the following: “If you were a buyer wouldn’t you want to know these things – i.e., letting the buyer decide whether the issue is important in their purchasing decision?”

The minute the listing agent becomes involved in salving the seller’s conscious for not disclosing an issue because the framing of the question didn’t strictly require it, the agent has, figuratively speaking, left their “fingerprints” on the Disclosure Form, which provides a basis for including them in the claim.

The Take-Away. Buyer claims of nondisclosure against sellers and their brokers are primarily – but not exclusively – the result of information the seller could have disclosed but elected not to.

To be fair, however, some fault can be placed on the spectacularly poor and inconsistent drafting of the Disclosure Form – keeping in mind that the text is a product of legislative drafting, not OREF drafting. Time does not permit examples, but there are many.[2]

Also, sometimes seller nondisclosure claims can be traced back to other, less culpable, factors: E.g., (a) Information that was beyond the scope of the Form’s questions; (b) The seller made a good faith error;[3] (c) The buyer already knew or should have known of the defective condition; or (d) Any number of other reasons unrelated to an effort to intentionally conceal information from the buyer.

For listing agents and their sellers, there is One Rule: “If in doubt, disclose.” There is no such thing as saying too much. Or to put a finer point on it, sellers should make the same level of disclosure in answering the form as they would want if they were buyers reading the form. This approach is also known as The Golden Rule. “Disclose, Disclose, Disclose.” Let the buyer decide what is important to them.

Specific Performance Claims. The second largest category in ASP claims relate to buyers asking the arbitrator to require the seller to complete the transaction. This is called “specific performance” which is really the name of the remedy sought for the seller’s breach of contract in refusing to close the transaction.

Since money damages are not really sufficient to fully compensate a prospective buyer, specific performance is the preferred remedy – especially in times of limited inventory when a suitable replacement property is not available. These claims do not normally include the listing broker.

In many specific performance cases, though not all, the reason a seller declines to close the transaction is because they believe they underpriced the property, and/or have a back-up buyer for a better price. Occasionally, sellers decline to sell because they cannot find a replacement home and refuse to close under the misguided belief they can unwind their first transaction.[4]

If the Sale Agreement is clear on its face, the buyer has complied with its terms, and is ready, willing and able to perform, there is a potential claim for specific performance against the seller.

Earnest Money Disputes. The third largest area of contested cases involve earnest money disputes. These situations arise because either the seller or buyer believe the other side breached the pre-closing terms of the Sale Agreement. Examples include the failure to timely deposit (or provide proof of ) funds; the failure to timely secure financing; and untimely rejection of the property inspection report. There are many others.

Although these claims do not normally include a party’s broker, there are things agents can do to reduce such disputes: (a) Know all deadlines; (b) Discuss them with the buyer and seller; and (c) Make sure both agents agree on the same deadline dates.

Why Are There No Seller vs. Buyer Damage Claims In Arbitration? The answer is found in the OREF Sale Agreement – and almost all other contracts for the sale of real property. The earnest money deposited by buyer into escrow is expressly intended to serve as the seller’s agreed-upon “damages” in the event buyer fails to perform. This pre-agreed sum is known as “liquidated damages” i.e., it is stipulated to be the amount the parties have agreed upon in advance, as representing seller’s damages caused by buyer’s default.

This can be a two-edged sword. If the buyer breaches early in the transaction, the earnest money deposit may far exceed seller’s actual damages (assuming seller can quickly resell the property); but if the buyer breaches late in the transaction and the seller had moved out of the property and relocated elsewhere, their actual damages may far exceed the stipulated damages represented by the deposit. In either case, since the sum has been agreed to in advance, with the proper recitals in the Sale Agreement it is the maximum amount seller may recover for buyer’s nonperformance – nothing more.

Conclusion. Are the number of disputes that end up in mediation and arbitration going up, down, or staying the same? That question cannot be answered as it is framed. The reason is that, there should be an inverse relationship between the numbers in mediation and arbitration. That is, the more mediations there are, the fewer arbitrations there should be. To put it another way, mediations, if properly conducted, should have a prophylactic or lessening effect on the number of arbitrations. That has been the case ever since the mandatory mediation clause was instituted in the OREF Sale Agreement circa 1997.[5]

~ Phil

©Copyright 2022 QUERIN LAW, LLC. Phillip C. Querin

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[1] There are too many to list here. The failure to include them is not to minimize their importance.

[2] Drafting of legislation is often the product of committees composed of stakeholders. How many iterations the final product went through  – how many drafters reviewed each one – or how many last-minute changes were made with little or no oversight, is unknown. Clearly, the Disclosure Form contains inconsistent and conflated language. [See discussion at: https://q-law.com/oregon-sellers-property-disclosure-conundrum/]

[3] To be clear, the statute, ORS 105.464, provides that the seller’s answers are based upon their “actual knowledge of the property at the time of disclosure.” Technically, if that knowledge is the result of a good faith error, it cannot (or should not) form the basis of a claim against seller. The representations in the Form are not warranties.

[4] In these situations, sellers should include a well-drafted contingency making the sale transaction subject to the purchase and closing of the replacement property. However, this requires careful drafting; some buyers may not want to wait for the seller’s purchase to close before allowing the contingency to expire. Sellers should be encouraged to consult with qualified legal counsel before entertaining offers.

[5] The reason is because for over 25 years, the mediation clause in the OREF Sale Agreement has contained a provision that if a party failed or refused to mediate first, they could not recover attorney fees later in arbitration, even if they prevailed. This became a significant incentive for recalcitrant parties to first try to settle their disputes in mediation. It worked.

Discussion. The short answer is “Yes.” But the longer answer requires more explanation. First, a caveat:  By “review” I do not mean by the listing agent for the purpose of substantively changing a seller’s answers. Rather, by “review” I mean “review for completeness.” Oregon’s property disclosure statute, ORS 105.464, instructs sellers to:

“Please complete the following form. Do not leave any spaces blank.” (Emphasis added.)

Accordingly, it is my belief that brokers for both sellers and buyers should routinely review disclosure forms to confirm they are complete in two respects:

  • To make sure there are no unanswered questions. The choices are “Yes,” “No,” “Unknown,” or “Not Applicable;” and
  • To make sure that if an asterisk (*) appears next to a question, the requisite written explanation is attached.

The disclosure statutes provide that buyers have five business days[1] after their seller’s delivery of the form to “revoke” (i.e., withdraw) their offer, based upon a “disapproval” of the seller’s information provided in the form. The buyer’s notice of revocation must be written and delivered, but there is no required wording. “I disapprove” will suffice, if timely made.

Questions:

  • What if one or more questions are left unanswered or the required explanation is not attached?
  • Has the form been “completed”?
  • And if not completed, does the buyer’s five-business day period for revocation still commence on delivery?
  • If the revocation period does not commence, does that mean buyer’s to withdraw from the transaction runs all the way to closing?[2] See, ORS 105.475(3).

The statutes are silent on these questions.

This discussion is more than hypothetical. I have seen critical questions left unanswered and unexplained; sometimes unintentionally, and other times, likely on purpose. (I will defer for another day the discussion on whether fraud by omission, e.g., silence, is any less venal than fraud by an outright misrepresentation.)

Review By Listing Agents. Most sellers and listing agents would agree that expiration of the buyer’s right of revocation is an important event. Why? Because revocation requires no explanation; it is easy – like buyer’s remorse. Secondly, only after the revocation period expires can the parties get down to the serious business of focusing on due diligence issues.

Accordingly, anything that can prolong the five-business day period, such as delivery of an incomplete disclosure form that gets returned, is a disservice to the seller. For this reason, listing agents should review their client’s disclosure form for completeness before delivery to the buyer or buyer’s agent. The failure to catch an incomplete form before delivery can result in unnecessary delay.

Review By Buyer Agents. Conversely, buyer agents should review the disclosure form for completeness immediately upon receipt. If there are critical questions left blank, or written explanations that have not been attached, the disclosure form should be promptly returned. If that occurs, it should be made clear to the listing agent that the five-business day right of revocation will not commence until the “completed” form is delivered.

However, for buyer agents another critical function exists. In some cases, a seller may answer a question in the affirmative, e.g., that the roof has leaked, or there was water in the basement, but the buyer fails to follow up. Equally problematic is when a seller responds “Unknown” to questions that demand further inquiry. In both instances, buyer agents should encourage their clients to alert the inspector to these issues. This is another reason for review – to be a second set of eyes for the buyer; it is useful for developing a due diligence checklist. If necessary, the seller should be contacted for more details.

The Take-Away. Accordingly, both agents should, at the earliest possible time, review the seller property disclosure form for completeness. Not doing so creates a risk of unnecessarily prolonging the revocation period. Again, this is not to say listing agents should become involved in answering the questions, checking boxes, or authoring explanations. Those responsibilities belong exclusively to the seller. ~ Phil 

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[1] The statutory form found at ORS 105.464 is wrong. It should say “five business days.” The original legislation at Section 1, Chapter 547 of the 1993 Oregon Session Laws provided “five business days.”  Why this error has remained ignored and uncorrected for nearly 20 years is a mystery. We changed the OREF Disclosure form years ago to be consistent with ORS 105.475(1).

[2] This is not to suggest that a buyer could accept a disclosure form, realize it was incomplete, say nothing and retain the right to revoke all the way to closing. A buyer’s failure to act promptly under those circumstances would likely operate as a waiver or estoppel against them.