Chapter 11

Modern Real Estate Practice Twentieth Edition

Unit 11: Real Estate Contracts

LECTURE OUTLINE

I. Contract Law—a contract is a voluntary agreement or promise between legally

competent parties, supported by legal consideration, to perform (or refrain from

performing) some legal act

A. Express and implied contracts

1. Express contract—the parties state the terms and show their intentions in

words.

2. Implied contract—the agreement of the parties is demonstrated by their

acts and conduct.

3. Statute of frauds requires real estate contracts to be in writing.

B. Bilateral and unilateral contracts

1. In a bilateral contract, both parties promise to do something for the other;

a bilateral contract binds all parties and is enforceable against all parties.

2. In a unilateral contract, one party promises to do something to induce the

second party to do something; a unilateral contract is binding on and

enforceable against only one party.

C. Executed and executory contracts

1. Executed contract has been fully performed.

2. Executory contract requires some performance by one or more parties

before it is completed.

D. Creation of a valid contract (Figure 11.1)

1. Offer and acceptancemutual assent or meeting of the minds. Letter of

intent may be used to begin negotiating before an offer is made. Offer may

be terminated by the following:

a. Rejection, including a counteroffer

b. Failure to accept within prescribed time period

c. Revocation by the offeror before acceptance

2. Considerationsomething of legal value; that which is "good and

valuable" between the parties. Courts do not inquire into the adequacy of

consideration.

Modern Real Estate Practice Twentieth Edition

3. Consentparties must be able to make a prudent and knowledgeable

decision without undue influence. May be deprived by the following:

4. Legal purpose—purpose of agreement must not violate any law.

5. Legally competent parties—of legal age and sufficient mental capacity to

understand their actions

E. Validity of a contract

1. Validcomplies with the essentials of a valid contract; binding in a court

of law.

2. Voidhas no legal effect (never was a contract); lacks essential elements

of a valid contract.

3. Voidableappears valid but may be disaffirmed or voided by one party

based on some legal principle.

4. Unenforceableno party may sue for performance; type of contract being

used.

II. Discharge of Contracts—contract is discharged when terminated by complete

performance, a party’s breach or default, or other reason.

A. Performance of a contract

1. "Time is of the essence" means the contract must be performed within the

stipulated time.

2. If no time is stipulated, it should be performed within a reasonable time.

B. Assignmenttransfer of rights or duties under a contract; generally to a third

party (assignee)

C. Novationsubstitution of a new contract for an existing contract

D. Breach of contractviolation of any of the terms or conditions of a contract

without legal reason

1. If the seller defaults, the buyer may take one of the following actions:

a. Sue the seller for specific performance.

b. Sue the seller for damages.

2. If the buyer defaults, the seller may take one of the following actions:

a. Sue the buyer for the purchase price; this is the same as a suit for

specific performance.

Modern Real Estate Practice Twentieth Edition

d. Sue the buyer for damages—may be limited to the liquidated

damages stated in the agreement.

3. Statute of limitationsthe time limit in which to enforce rights; time

varies for different legal actions, rights not enforced within time period are

lost

E. Other reasons for termination--contracts may be discharged or terminated when

any of the following occur:

1. Partial performancewith written acceptance

2. Substantial performance may be sufficient to force payment with certain

adjustments

3. Impossibility of performancelegally impossible to perform the required

act

4. Mutual agreementby the parties to cancel the contract

5. Operation of lawsuch as the voiding of a contract by a minor, result of

fraud, improper alteration of the contract, or expiration of statute of

limitations

6. Rescission—one party may rescind the contract and return the parties to

their original positions; monies that have been exchanged must be returned

III. Contracts Used in the Real Estate Business—written agreements most commonly used by

real estate professionals are:

* Client representation agreements

* Real estate sales contracts

* Options

* Escrow agreements

* Property management agreements

* Leases

* Owner financing contracts (land contracts, contracts for deed)

A. Use of contract forms

1. Each state has different requirements.

2. A real estate licensee who is not a licensed attorney may not practice law;

i.e., draw up a contract.

3. Preprinted forms are commonly used.

4. In Practice: Students should become familiar with various types of

contracts used in the area; parties should have their attorneys review

contracts to ensure understanding

B. Sales contracts—may be called agreement of sale, offer to purchase, contract of

purchase and sale, purchase agreement, earnest money agreement, deposit receipt.

Modern Real Estate Practice Twentieth Edition

1. The sales contract is the most important document in a sales transaction

because it establishes the legal rights and obligations of the buyer and

seller; it dictates the contents of a deed.

a. Offer

b. Counteroffer

(1) Original offer ceases to exist.

(2) Buyer may accept or reject counteroffer.

(3) Counteroffer may be withdrawn at any time before it has

been accepted.

c. Acceptancerequired to create a contract.

(1) If accepted as written, the contract is created and a signed

copy must be given to all parties.

(2) Notification of acceptance must be given to the party who

made the offer before the contract is considered created.

d. Binderused in some areas as a "short form" sales contract

e. Earnest money depositsevidence of the buyer's intention to carry

out the terms of the contract

(1) Should be held by the broker, escrow agent, or attorney in a

trust or escrow account

(2) Amount to be agreed upon by buyer and seller

(3) Should show how interest earned (if any) will be

distributed

(4) Should be of a sufficient amount to discourage the buyer

from defaulting and compensate the seller for taking the

property off the market

f. Equitable title—after the contract is created but before the deed is

delivered, the buyer may have an insurable interest in the property

being purchased

g. Destruction of premises—depending on the jurisdiction, either the

seller or the buyer can be responsible for the property after the

contract is created but before the deed is delivered

h. Liquidated damages—commonly, the contract specifies that the

earnest money will be used as liquidated damages to compensate

the seller if the buyer breaches the contract

C. Provisions of a sales contract

1. Identification of the buyer and statement of the buyer's obligation to

purchase

Modern Real Estate Practice Twentieth Edition

2. An adequate description of the property, such as street address

3. Identification of the seller and the statement of the type of deed the seller

will give, including any covenants, conditions, and restrictions

4. Purchase price and financial arrangements for its payment, including

amount and form of down payment or earnest money

5. Identification of closing or settlement agent and closing or settlement

instructions

6. Date for closing and transfer of possession to the buyer

7. Title evidence that will be satisfactory to the buyer

8. Provisions for prorations

9. Outcome of the contract should the property be damaged or destroyed

between time of signing and closing date

10. Remedies in the event of a breach of the contract

11. Contingencies or conditions of the sale

12. Personal property to be included in the sale

13. Fixtures or other real estate items that are not included in the sale

14. Transfer of any applicable warranties on equipment or appliances

15. Identification of any leased equipment to be transferred to buyer or

returned to lessor

16. Transfer or payment of any outstanding special assessments

17. Buyer’s right to inspect the property shortly before closing

18. Documents to be provided by each party and place/time for delivery

19. Dated signatures of all parties

D. Contingenciesadditional conditions that must be satisfied before a sales

contract is fully enforceable (include examples of those commonly used in your

area)

1. Elements include;

a. Action necessary to satisfy

b. Time frame within which to perform

c. Any cost involve and party responsible for payment

2. Most common contingencies are

a. Mortgage

b. Inspections

c. Property sale

d. Lienholder approval, if purchase will be a short sale

e. Escape clause that permits seller to continue to market the property

until all of buyer’s contingencies have been satisfied or removed

E. Amendments and addendums

1. An amendment is a change to existing content of a contract.

Modern Real Estate Practice Twentieth Edition

2. An addendum is an additional, new provision to a contract.

3.Disclosures of property conditions, either by custom or as required by state law

F. Options

1. An option grants the right to buy or lease property at a fixed price within a

stated period of time

2. Residential lease option may provide for a portion of the lease payent to

be applied to the purchase price if option is exercised.

3. Option on commercial property may depend on a condition being fulfilled,

such as obtaining a zoning change or building permit.

G. Owner financing contracts: Land contracts(contract for deed, bond for title,

installment contract, land sales contract, articles of agreement for warranty deed)

1. Seller/vendor retains legal title to the property.

2. Buyer/vendee receives possession and equitable title; becomes responsible

for paying principal, interest, real estate taxes, hazard insurance premiums,

and maintenance and repairs on the property, depending on terms of the

contract.

3. Seller delivers the deed when the terms of the contract have been met,

usually full payment of the contract amount.