Commercial real estate deals usually involve several agreements among lessees and lessors, from lease agreements to unilateral contracts. What is a unilateral contract?
It is a real estate contract where one party promises to act in exchange for the other party’s compliance.
For instance, a unilateral contract might be applicable where an offeree only agrees to purchase an investment property if the offeror agrees to make certain repairs.
The critical element of this contract is that only one party is legally bound to perform, and the other party has the option of whether or not to go through with the deal. This is in contrast to a bilateral contract, which is a two-sided agreement where both parties have a legal obligation to fulfill the terms of the contract.
What Is a Unilateral Contract?
Often executed in real estate transactions, a unilateral agreement is based on the condition that the first party will do a specified act only if the second party does another specified action. To create a unilateral contract, all parties must agree to perform something specific before the contract exists.
In general, the contract involves one party (i.e., the offeror, promisor, or seller) who makes an offer, such as selling a property at a specific amount, and the other party (i.e., the offeree, promisee, or buyer) is free to accept or decline the offer. If the buyer decides to go ahead with the deal, they have a contractual obligation to pay the price they agreed on.
A typical example of a unilateral contract is an insurance contract, where the insurer agrees to pay for damages or losses specified in the insurance policy in exchange for a premium paid by the insured. The insurance company is not obligated to provide coverage if the insured does not reimburse the premium.
An everyday-life example of a unilateral contract may involve a reward contract, such as when someone offers a reward for returning a lost pet. The person offering the reward makes a unilateral offer: If someone finds and returns the lost dog, they receive it.
Keep in mind the finder of the pet is under no legal obligation to accept the offer, but if they do choose to return the lost dog, they are fulfilling the terms of the contract and will receive the stated reward. If the contract were a bilateral agreement, it would bind both parties.
What Are the Different Types of Unilateral Contracts?
Regarding commercial real estate, the three most widely used unilateral contracts are right of first refusal (ROFR), option, and exclusive agency.
Right of First Refusal
This gives the holder the right to be the first party offered the opportunity to purchase a property if it is put up for sale. In addition, the holder of the ROFR is allowed to match any third-party offer.
For example, if a tenant has a ROFR clause in their lease, they will have the first opportunity to buy the property if the landlord decides to sell. ROFR can be essential in protecting investments or ensuring the desired property is not sold to another party.
An option contract allows the holder to purchase a property at a set price point within a certain period. Investors may use options to control properties they want to buy in the future.
Take a real estate developer who may agree to give an investor the option to purchase a parcel of land for $100,000 within the following year.
If the investment value of the land increases during that year, the investor can exercise their option and buy the land for $100,000. On the other hand, if they choose not to exercise their option, they can walk away from the deal, owing nothing.
The designated agent from this type of agreement benefits from having the sole right to sell a property during the business contract period. An exclusive agency is standard when a seller wants to ensure a professional and experienced agent markets their property.
What to Do If There Is a Breach of Contract?
A breach of contract can lead to significant legal repercussions. Seek legal advice from a real estate attorney familiar with contract law if you believe there has been a breach of contract. In addition, determine whether or not the contract can be salvaged.
If both parties are willing to work together, it may be possible to repair the relationship and move forward. However, if one party is unwilling to work toward a resolution, it may be best to terminate the contract.
Provide written notice to the breaching party if you decide on contractual revocation. This notice should outline the specific ways the contract has been breached. Give the party a reasonable period to remedy the issue.
Consider pursuing legal action if the party remains inactive. Gather all relevant evidence and documentation relating to the breach of contracts, such as correspondence between yourself and the other party, copies of the original contract, and any witnesses who can attest to the breach. Then file a lawsuit against the breaching party.
What Are the Upsides & Limitations of Unilateral Agreements?
Unilateral contracts in real estate deals carry both advantages and disadvantages. On the plus side, these agreements offer a degree of flexibility to buyers and sellers.
For instance, a buyer could negotiate a lower purchase price if they are willing to waive certain contingencies, such as the loan contingency.
Additionally, unilateral contracts help establish custom terms that fit the needs of both parties involved in the transaction. This can be particularly beneficial when trying to negotiate a problematic sale.
On the downside, unilateral contracts can be risky. Because these contracts are subject to different rules and regulations than traditional real estate sales, there is more room for error.
If a buyer waives their mortgage contingency, for example, they could lose their deposit if they fail to secure financing for the property.
Similarly, sellers could find themselves in a less-than-ideal situation if they agree to terms that violate state or local laws. It’s always recommended to consult with an experienced real estate agent, law firm, or attorney before entering into a unilateral contract.
How To Create a Unilateral Contract
A unilateral contract is formed when one party extends an offer to another to create a legally binding agreement. The other party accepts the offer by taking the specified actions. The party extending the offer is considered the offeror, while the party accepting the offer is known as the offeree.
To create a unilateral contract, the offeror must make an unambiguous offer and define the terms of the agreement. The offeree can then accept the offer by performing the required actions. Here are additional tips for drafting a unilateral agreement:
- The offer must be explicitly clear. The agreement should spell out precisely what the offer entails and what the other party will receive in return, such as a specific amount of money.
- The contract should be in writing. This helps to avoid any misunderstandings or disputes down the line.
- Both parties must sign the contract. A signature keeps both parties on the same page and potentially offers legal protection.
- Include an expiration date on the offer. The end date prevents one party from holding the other to the contract indefinitely.
When Should You Use a Unilateral Contract?
It makes sense to employ a unilateral contract for particular real estate transactions. If you’re selling a property “as is” without warranties or guarantees, it’s common to use a unilateral agreement. This protects the seller from liability if the buyer discovers issues with the property after closing.
Another relevant scenario is when you’re selling a property that requires significant repairs. In this case, the buyer would be aware of the needed repairs upfront and assume all responsibility for making those repairs before or after closing, per the contractual terms.
Selling a fix-and-flip property or short sale could also warrant a unilateral contract.
For this deal, the contract may state that the seller will not be responsible for making any repairs or paying any outstanding debts associated with the property since the responsibility usually falls on the buyer.