Key takeaways
- An executory contract in real estate is an agreement where both the buyer and seller have ongoing obligations that must be completed before the transfer of ownership.
- Executory contracts offer flexibility and protection, especially in scenarios like installment payments and anonymous purchases.
- By automating the creation of executory contracts with tools like Docupilot, businesses can streamline the process, ensuring accuracy, efficiency, and compliance.
According to a Thompson Reuters, respondents who use document automation for lease agreements (22%) report that they have time to Leverage workflows to develop new business models with clients and Win new clients with better business development.
If you've ever agreed with someone to take certain complementary actions over a period of time, then you've been involved in an executory contract, even if it wasn't formally defined as such.
The formal term executory contract is often used in legal contexts. However, it can also be called contract for deed, bond for deed, or agreement for sale depending on industry and jurisdiction.
In this article, we’ll be discussing the attributes and benefits of executory contracts particularly in real estate.
What is an Executory Contract?
An executory contract is a legal agreement in which the parties involved have ongoing duties to perform over a specific period of time.
Let's consider Alice and Bob enter into a contract where Alice agrees to sell Bob 100 widgets for $1,000, on two conditions:
- The widgets are delivered 30 days from today
- Bob pays $1000 30 days from today
The contract is executory because both parties have agreed to the terms, but neither has performed their obligations yet.
On the delivery date if Alice delivers 100 widgets to Bob, and Bob pays Alice $1,000, the contract is considered executed. If only one party fulfills their part, the contract is partially executed.
Examples of Executory Contracts
Here are some examples of executory contracts across different situations:
1. Employment contracts
In an employment contract, the employer is required to provide the employee with agreed-upon compensation, benefits, and a safe working environment.
In return, the employee must perform their job duties and adhere to company policies and standards. These mutually agreed-upon and continuous responsibilities make the employment contract executory.
2. Intellectual property licenses
In this form of executory contract, the licensor grants the licensee the right to use certain intellectual property, such as patents, trademarks, copyrights, or trade secrets. In return, the licensee pays one-time payments, ongoing royalties, or a combination of both.
The licensor is responsible for ensuring that the intellectual property remains valid and enforceable, by renewing registrations and defending against infringements.
On the other side, the licensee must comply with the terms of the license agreement, which often include conditions on how the intellectual property can be used, geographical limitations, and the duration of use.
3. Car leases
For car leases, the lessor (the entity leasing the car) provides the vehicle to the lessee for a specified duration, and in return, the lessee (the individual or business using the car) makes regular lease payments, typically on a monthly basis.
During the lease term, the lessor owns the vehicle and may also handle certain maintenance aspects or provide warranties. The lessee, meanwhile, must use the car in accordance with the lease agreement, which can include adhering to mileage limits, maintaining the vehicle, and obtaining necessary insurance.
4. Real estate leases
In this case, the landlord provides the tenant the right to occupy and use the property in exchange for regular rental payments. The landlord has several responsibilities throughout the lease term including:
- Performing necessary repairs in a timely manner.
- Conducting periodic inspections to ensure ongoing compliance with habitability standards
- Protecting the tenant’s right to enjoy the property without disturbance caused by the landlord or other tenants
- Addressing issues that arise, regardless of whether they are caused by the landlord or other factors
The tenant also has several obligations under the lease including:
- Timely payment of rent as specified in the lease agreement
- Keeping the property in good condition
- Complying with specific terms, such as restrictions on alterations and prohibited activities
Until the lease term ends and all rent payments are made, this contract remains executory. If either party fails to uphold their responsibilities, it can be termed contract breach, resulting in legal actions, penalties, or termination of the lease.
How is Executory Contract Different From Other Contracts
An executory contract primarily differs from other contracts due to the outstanding obligations for both parties. For example, in a real estate purchase agreement, the buyer has yet to pay the full price, and the seller has yet to transfer the deed.
This contrasts with executed contracts, where all parties have completed their duties, such as a cash sale where payment and delivery occur simultaneously.
Consequently, executory contracts demand careful negotiation and continuous monitoring to ensure compliance and mitigate risks.
What is an Executory Contract in Real Estate?
In a real estate executory contract, both the property seller and the buyer need to fulfill specific conditions before the final transfer of ownership can occur.
Attributes of executory contract in real estate
An executory contract in real estate is distinct from other types of real estate agreements in the following ways:
Deferred Title Transfer: Legal title to the property remains with the seller until all the buyer's contractual obligations are fulfilled, typically including full payment.
Equitable Ownership: Buyer usually receives equitable title, granting them an interest in the property and certain rights, such as possession and use, while the seller retains legal title.
Installment Payments: Purchase price is often paid in installments over time rather than a lump sum, similar to a financing arrangement.
Possession and Use: Buyer often gains immediate possession and the right to use the property, even though they do not yet have legal title.
Transfer of Deed: The buyer receives the deed only after they have completed all their obligations under the contract, including making all required payments.
Advantages of Real Estate Executory Contract
An Executory contract in real estate offers certain benefits to the seller and the buyer.
Benefits for sellers
Protection against default
If the buyer fails to meet their contractual obligations, the seller retains the right to reclaim the property.
This can be particularly advantageous in cases of buyer bankruptcy or inability to secure financing, as it provides a clear path for the seller to regain property without lengthy foreclosure processes.
Avoiding the “No Sale Clause”
Some financing programs or down payment assistance programs include "no sale clauses" that restrict the immediate resale of a property for profit for a certain period (known as flipping).
With an executory contract, the seller may sell the property and only pass the title when the restriction period expires.
Preventing “Due on Sale Clause”
Traditional mortgages have "due on sale" clauses, which require the borrower (seller) to fully repay the loan if the property is sold to a new owner (buyer).
Executory contracts allow the seller to transfer property rights without triggering this clause, thus avoiding the immediate need to pay off existing loans. This can be particularly beneficial if the seller wants to use the capital to service other obligations rather than foreclosing the loan.
Benefits for buyers
Retain property under bankruptc
According to Section 365 of the US Bankruptcy Code, a debtor in bankruptcy can assume or reject an executory contract. By assuming the contract, the debtor may retain the property even if they declare bankruptcy.
However, in the bankruptcy case of The Weinstein Company, the Third Circuit clarified that when a debtor assumes a contract, they must provide assurance of their ability to fulfill the contractual obligations, including making the necessary payments. This ensures that the debtor can maintain expected performance despite their bankruptcy status.
Own property anonymously
Given that the title remains with the seller until the final payment is completed, the buyer's identity may not be disclosed in public records until ownership is fully transferred.
For instance, Mike enters into an installment land contract with Julie to buy her property. The property title remains with Julie until Mike completes his payment, so Mike's identity remains private, until ownership is fully transferred.
This anonymity can be advantageous for asset protection, or strategic real estate acquisitions.
Installment Property Payment
An executory contract allows buyers to make installment payments directly to the seller, who retains the deed until full payment. This arrangement offers reassurance to the seller and expands homeownership opportunities to those who may not qualify for traditional financing, with options for negotiating lower down payments and more flexible payment plans.
How to Create a Real Estate Executory Contract
Identify the Parties: Clearly identify the buyer(s) and seller(s) parties involved in the real estate transaction.
Describe the Property: Provide a detailed description of the property including the address, and parcel number.
State the Purchase Price: Clearly indicate the agreed-upon purchase price for the property including terms regarding payment, such as the amount of the deposit, financing arrangements, and the total amount to be paid.
Define the Closing Date: Specify the date on which the property transfer will be completed and ownership will officially change hands.
Detail the Obligations of Each Party: Clearly outline the obligations of both the buyer and the seller. For the buyer, this may include securing financing and providing earnest money. For the seller, this may include making certain repairs or providing clear title to the property.
Include Default Terms: Specify what will happen if either party defaults on their obligations such as forfeiture of deposits or the right to pursue legal remedies.
Signatures and Dates: Ensure that the contract is signed and dated by all parties involved including any agents or representatives who have the authority to act on behalf of the buyer or seller.
Legal Review: It’s advisable to have the contract reviewed by a real estate attorney to ensure that it complies with local laws and protects the interests of both parties.
How Docupilot Simplifies Executory Contracts Creation
- Template-Based Creation: Docupilot allows businesses to create templates that can include placeholders for dynamic content that automatically populate based on the specific details of each deal, such as parties' names, terms, payment schedules, and other relevant details.
- Data Integration: By integrating with databases or CRM systems, Docupilot can pull in required data automatically minimizing errors and ensuring accuracy.
- Conditional Logic: Executory contracts often contain clauses that are triggered under specific conditions. Docupilot supports conditional logic in document creation, allowing for the automatic inclusion or alteration of text based on predefined rules. This is particularly useful for contracts that have variable terms based on the context of the deal.
- Bulk Generation and Sending: For companies that need to execute similar contracts frequently or in large numbers—like real estate firms or subscription-based services—Docupilot can generate and send out multiple contracts at once, saving time and ensuring uniformity across all documents.
- E-Signature Integration: Docupilot integrates with e-signature solutions like DocuSign or Adobe Sign, facilitating the seamless execution of contracts.
Conclusion: Automate Your Real Estate Executory Contract
An executory contract is ideal for property transactions involving long-term commitments like real estate leases.
If you are interested in automating the creation of an executory contract use Docupilot’s document generation platform.
This affordable contract automation tool helps you generate contracts in bulk using templates, autofills dynamic details, and allows automated contract signing and storage. Sign up now for a 30-day free trial.
Executory Contract in Real Estate FAQs
What does executory contract mean in real estate?
An executory contract in real estate is an agreement where pending obligations by the property seller and buyer must be fulfilled before the transaction is completed at closing.
What does executed mean in real estate?
In real estate, "executed" means that all terms of the contract have been fulfilled and the transaction is completed.
What is an example of an executory contract?
An example of an executory contract is a lease agreement where the tenant continually pays rent and the landlord continually provides the premises.
What is the executory period in real estate?
In real estate, the executory period is the time between the signing of a purchase agreement and the closing of the sale, during which both parties fulfill their obligations.
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