Understanding Purchase and Sale Agreements in Tennessee

What is a Purchase and Sale Agreement?

Purchase and Sale Agreement ("PSA") is a legally binding contract between a buyer and seller of real property. The purpose of the contract is to act as a record of the agreement between the parties, providing each with enforceable rights, and obligations, against one another. A typical Purchase and Sale Agreement contains basic identifying information about the property, such as its street address, parcel number, and/or legal description. It also includes the names of the buyer and seller, the purchase price, and the closing date. Other additional items may be included, such as earnest money deposit information, contingencies, inspections, and repairs to be made to the property by the seller prior to the closing on the transaction. In Tennessee , a Purchase and Sale Agreement is not required to be in writing. However, if a party wishes to seek the remedy of specific performance, the Purchase and Sale Agreement must be in writing. Specific performance is a court order compelling a party to perform their obligations under the terms of the contract. Specific performance actions are very expensive and usually unsuccessful. Generally, if either party has the ability to provide monetary compensation to satisfy a potential judgment against them, specific performance is not effective. For example, specific performance is usually not effective against an heir of an estate because that heir is usually not capable of simply paying the estate’s debts, litigation costs, and legal fees.

Critical Clauses of the Tennessee Agreements

As mentioned previously, the main goal of an agreement for the purchase and sale of real estate is to clearly spell out the rights and obligations of the buyer and seller. A Tennessee agreement will typically include five significant areas:
Parties to the agreement. The parties to the agreement should be clearly spelled out in order to establish who has the capacity to buy and sell the property.
Property description. The property in question should be identified with sufficient specificity to prevent any ambiguities about what is being purchased or sold. If applicable, condo declarations should be referenced as well.
Price and payment details. The agreement should address how the sales price is established and how it is to be paid. If there is an earnest money deposit required, the status of that deposit should be addressed.
Conditions for closing. An agreement between a buyer and a seller could be contingent on a variety of factors, such as the buyer obtaining financing or selling the buyer’s existing home. An agreement should clearly spell out conditions necessary to move forward with the closing.
Closing details. An agreement should discuss where closing will take place and when it will occur. Other closing details, such as whether the closing will be facilitated by a third party such as an escrow company, should also be included.

Legal Requirements Under Tennessee Law

It is important to understand the legal context in which a purchase and sale agreement exists. It is also important to be aware of state-specific clauses that must be incorporated.
Under Tennessee law, a purchase and sale agreement must contain some or all of the following to be legally enforceable:

(1) Disposition of Real Property: Agreements for the disposition of real property must be in writing to be specifically enforceable. This includes any agreement for the sale of land, which must be in writing and signed by the party to be charged.
(2) Disposition of Personal Property: An oral agreement for the disposition of personal property (not real property) can be specifically enforceable under the statute of frauds.
(3) Written Signature: In Tennessee, a signature is deemed "authentic," and presumptively valid, if it is the handwritten mark of the person who is deemed to have signed it. There is ample case law that addresses signature authentication, which must be proven by clear and convincing evidence. If a signature cannot be authenticated, the signature is presumed not to be authentic and is therefore commonly held invalid.
(4) Capacity to Enter into a Contract: To enter into a purchase and sale agreement in Tennessee, the contracting parties must have legal capacity to contract at the time of contract formation. One party must be able to form the requisite contract necessary to carry out the terms of the agreement, and the other must have legal capacity to consent to the contract. A minor lacks legal capacity to contract, thus his or her contracts are generally void or voidable at the option of the minor unless he or she is married or living separate and apart from his or her parents or guardians.

Common Contingencies and Provisions

It is important understand the common contingencies and clauses in Tennessee purchase and sale agreements. This information will flow into the section of the article that describes the most common reasons that contracts fall through.
Inspection Periods
An inspection period is a specified time frame within which a buyer must hire accredited professionals to inspect the property. They will conduct a thorough analysis for defects in all major systems and components (i.e., roofs, plumbing, electrical systems, appliances, heating and air systems, etc.). If they identify a defect, they will categorize it as minor, material, or major. A minor defect is one that is often difficult for the average buyer to identify without technical expertise. A major defect is a material defect that poses a substantial risk to health and safety (such as a structural problem). A material defect is one that would negatively impact the fair market value of the property. The buyer will then use this information to determine whether or not it should proceed with the transaction .
Financing Conditions
A financing condition is a requirement that the buyer must demonstrate their ability to secure financing for the price of the home. This clause is generally triggered if the buyer has approached financing as a contingency. To comply with this clause, the buyer must be able to acquire a mortgage loan with specific terms. This is usually a fixed rate and a specific interest rate.
HUD Conditions
You will also see conditions to satisfy the U.S. Department of Housing and Urban Development (HUD). Unless the seller is HUD itself, this clause will almost always be satisfied. Therefore, you should not consider it to be a true contingency. It simply states the buyer’s obligation to satisfy their duties under the National Housing Act and the HUD regulations.
Seller Disclosures
A seller disclosure is a disclosure that the seller of the home is required to provide to the buyer. The seller must disclose the condition of the home upon the buyer’s request. This clause obligates the buyer to obtain and review the disclosures. It will also obligate the buyer to let their attorney review the disclosures. This clause helps to protect the buyer’s interests.

Role of Real Estate Agents and Attorneys

When it comes to finalizing the purchase of a home, if you’re buying or selling real property in Tennessee, you will be represented by both a Real Estate Agent and an Attorney. You may choose the attorney. If you do not, the closing agent may refer you to one. It is important to note that in Tennessee, a real estate agent may represent either side of a real estate transaction. When a real estate agent represents a buyer in a real estate transaction, the agent’s role includes locating a property to purchase. The agent will then make an offer on behalf of the buyer, will negotiate the terms of the deal, and once the contract is signed, will arrange for inspections, appraisals, financing, and other details necessary to render the transaction successful including coordination with the attorney who will represent the buyer. When a real estate agent represents a seller in a real estate transaction, the agent’s role includes selling the property, preparing advertisements and marketing it, and setting up showings and open houses. The real estate agent is responsible for communicating offers and counteroffers between the parties, all of which the attorney must review and approve. Real estate agents can draft contracts, but in Tennessee, real estate attorneys must draft, review, and execute the final purchase and sale agreement to the extent it covers any of the legal aspects of the transaction.

How an Agreement is Finalized

Once you have entered into an accepted offer, the seller will prepare a purchase and sale agreement and forward it to your real estate agent (selling agent). If you purchased a home represented by a real estate agent it is the seller’s agent’s responsibility to prepare these documents. You should carefully read all sections of this document. Items such as financing contingencies, repairs, inspection items, closing time frames and earnest money must be clearly detailed in the agreement. A Tennessee purchase and sale agreement (or "PSA") forms our firm’s initial retainer agreement that authorizes the firm to represent you in the transaction. Carefully review the retainer agreement as well, as it will differ somewhat from what the terms are in the PSA.
The PSA will reference a settlement statement based on the first mortgage holder’s good faith estimate of the estimated expenses. This form will generally include the cost of the title insurance premium, excise tax, deed recording fees, attorney fees, preparation cost and other closing costs. Be sure to ask your lender for the cost of title insurance so that you will know the exact amount before you get to closing . This will help you to know what other fees you will be expected to pay.
The next step in finalizing the agreement is for closing to be held. Closing generally occurs within 30-45 days of the acceptance of the offer. The actual amount of time depends upon the seller’s lender being prepared and ready to close on the set date. Prior to closing, a clear title must be established. A title search will be ordered by the buyer’s attorney to ensure that the buyer receives a clear title.
Closing is a formal meeting with the buyer, seller, buyers closing attorney, sellers closing attorney and/or title company closing the transaction. It is usually held at the closing attorney’s office or a title insurance agency and lasts between one and two hours. At the meeting the following documents will be reviewed by all parties: The check for the down payment is given to the closing agent and is deposited in an escrow account until after the closing. If for some reason the closing does not occur within the set time period the closing agent is required by law to send the funds back to the buyer. After closing the funds will be dispersed.