Fact Pattern: Last week, we discussed who can sign a listing for a property owned by 2 people. This week, we move on to the sales contract. Let’s say you are the buyer’s agent for a new sales transaction. The owners of the property are John and Paul, who own the property together in their individual names.

Multiple Choice Question: Which one of the following statements is true for creating a valid sales contract? Pick the best answer:

A. It must be signed by both John and Paul as the “Sellers.”
B. It must be signed by either John or Paul as the “Seller.”
C. Who must sign as the “Seller” depends on whether John and Paul are married to each other.
D. It can be signed by Ringo as the “Seller.” 

Answer: The legal analysis for this situation is similar to last week’s legal analysis for taking a listing. Answer A is generally correct as a matter of our day-to-day practice, but not as a matter of law. If John and Paul own the property together, a buyer will generally want both of them to sign the sales contract upfront, so that both of them will be legally bound to the sales price and terms. Otherwise, if, for example, only John signs the sales contract, the contract may be valid as against John, but we may later discover that we are unable to close escrow, because Paul disapproves of the price or terms, or he just refuses to sell.

Answer B is wrong. The C.A.R. Residential Purchase Agreement (RPA) is an agreement to deliver marketable title to the buyer at close of escrow (see paragraph 13 of the RPA). The RPA is not a warranty that the seller has exclusive ownership and title at the time the seller enters into that contract.

If John signs the sales contract, but Paul does not, and Paul refuses to transfer title at close of escrow, John may be held in breach of the contract. The buyer can then pursue a legal claim against John to recover any monetary damages that the buyer suffered as a result of John’s breach. Buyers, however, generally do not want to do that, because their monetary damages are usually limited to their out-of-pocket costs, such as their inspection fee, appraisal fee, and other nominal expenses. Instead, buyers generally want to pursue a claim for specific performance, which is a court order requiring John to sell to the buyer as John promised. But in this particular situation, the buyer’s claim for specific performance against John will likely fail, because neither John nor the judge can force Paul to sell.

Answer C is wrong. A married person does not have the authority to obligate his or her spouse to perform on a contract (although a signing spouse may use community property assets to pay for any monetary liability that spouse incurs).

Answer D is the correct answer. Just like a buyer can elect to enter into a valid contract with John only (instead of both John and Paul), a buyer can also decide to enter into a contract with Ringo only (instead of both John and Paul). The reason that the sales contract with Ringo is valid, even though Ringo is not an owner, is, once again, because the RPA is merely an agreement to deliver marketable title at close of escrow. The RPA is not a warranty that the seller has exclusive ownership and title at the time the seller enters into that contract.

Entering into a contract with Ringo might make sense for a buyer in rare circumstances, e.g. Ringo is John’s and Paul’s business manager, attorney, or relative, with the unfettered ability to get John and Paul to transfer title at close of escrow. The typical buyer, however, would prefer that Ringo has a valid Power of Attorney to act on behalf of John and Paul.

-Thank You to Marilyn Simon (Pasadena Manager) for suggesting this week’s legal tip!

Copyright© 2021 Berkshire Hathaway HomeServices California Properties (BHHSCP). All rights reserved. Any unauthorized reproduction or use of this material is strictly prohibited. This information is believed to be accurate as of August 2, 2021. It is not intended as a substitute for legal advice in individual situations, and is not intended to nor does it create a standard of care for real estate professionals.