Ch. 18 - Essential Characteristics of Contracts

Lawful Objectives

-Contracts are not valid that require performance that is unlawful (illegal). -if a contract is for legal purposes at the time it was executed, but becomes illegal prior to the performance of the contract, the contract becomes void. -Examples of unlawful terms: A residential lease cannot be in violation of Fair Housing Laws. For instance, a lease stating that children are not allowed violates the familial status portion of federal fair housing by discriminating against families with children

Examples of bilateral agreements:

-Independent contractor agreement--salesperson and sponsoring broker. -Listing agreement--requiring the broker to perform certain services and the seller to perform certain responsibilities. -Buyer representation agreement--defines the obligations and responsibilities of both parties. -Lease--tenant and the landlord agree to perform certain things. -Purchase agreement--always bilateral since they require both parties to perform.

Valid but Unenforceable

-State laws declare that some contracts are enforceable only if they are in writing. -apply to the transfer of interests in real estate and other real estate practices. -Therefore, while an oral contract may meet the tests for validity, if it falls under the laws requiring a written contract, the parties will not have legal recourse to enforce performance. -examples- oral long-term lease and an oral real estate sales contract

Legal Description

-The exact location and boundaries must be included in the sales contract. -A real estate contract that transfers property or any interest in property must include a legal description including leases, easements, right-of -ways, mortgages, time shares, and of course, sales.

Uniform Commercial Code, or UCC

-a uniform model for dealing with contracts and sales was needed. As a result, the American Bar Association created UCC

contract

-an agreement between two or more parties who, in a "meeting of the minds," have pledged to perform or refrain from performing some act. -A valid contract is one that is legally enforceable by virtue of meeting certain requirements of contract law.

Restatements for the Law of Contracts

-developed by the American Law Institute in 1944 -the foundation for the basic principles of contract law as it applies to real estate transactions.

mutual agreement

-full consent -When the parties mutually agree to voluntarily cancel a contract it is mutual rescission. -Mutual agreement means that the parties have entered into contract with full and truthful information and have done so voluntarily. This decision must be based on accurate information.

Competent Parties

-has the legal capacity to enter into a contract and may be held to the promises made in the agreement. -The legal definition of competent party addresses age, literacy, mental capacity, existence, and legal authority.

Unenforceable Contract

-is a contract which cannot be enforced in a court of law. -This could happen because the terms of the contract are ambiguous, if one party has a voidable contract, or if the Statute of Limitations has expired.

Duress.

-is a wrongful act or threat by one party that induces another party to perform some act, such as the signing of a contract, which he or she would not have done voluntarily. -As a result, there is no true meeting of minds of the parties and, therefore, there is no legally enforceable contract.

executory contract

-is one in which performance is yet to be completed. -A sales contract prior to closing is executory. While the parties have agreed to buy and sell, the buyer has yet to pay the seller and the seller has yet to deed the property to the buyer. -include any transaction that defers material action by either party that pertains to ownership or possession of real property into the future. -executory contract is the contract for deed

executed contract

-is one that has been fully performed and fulfilled: neither party bears any further obligation. A completed and expired lease contract is an executed contract. -A contract is said to have been executed when both parties have completed their obligations. In the case of a real estate contract, that milestone comes at closing

Valid

-is one which meets the legal requirements for validity. A valid contract that is in writing is enforceable within a statutory time period. -must employ six essential elements: competent parties, consideration, mutual agreement, lawful objective, must be in writing and signed by the parties, and contain a legal description.

Consideration

-is the exchange of promises offered by one party to another to do or not do something. -usually something of value being exchanged by one party to receive something of value from the other party. -can be the exchange of money, services, personal property, rights, or the requirement to refrain from doing something

Undue influence.

-is unlawful control exercised by one person over another in order to substitute the first person's will for that of the other.

In Writing and Signed by the Parties

-most states require certain contracts to be in writing and signed by all parties charged in the agreement in order to be enforceable in court. -This law goes back to the English law of 1677 known as the Statute for Prevention of Frauds and Perjuries. -There is one exception to the Statute of Frauds. Leases for one year or less may be oral and are enforceable.

Statute of Frauds

-protects consumers who enter into the types of contracts in which fraud is most likely to occur. -Real estate and other contracts that fall under the statute must be in writing and they must be signed to be enforceable.

What classic executory contract provides that the buyer gets title after making payments over a period of years? A purchase contract A real estate assignment Power of attorney A contract for deed

A contract for deed

What provides something to a party that he or she was not previously entitled to? An accommodation benefit. A yield A legal benefit

A legal benefit

The six elements required of a valid contract include:

Competent parties Consideration Mutual Agreement Lawful Objective In Writing and Signed by the Parties Legal Description

What are the two commonly used legal descriptions in a contract?

Metes and bounds Reference to a platted subdivision (lot, block, section, and subdivision name)

Real estate contracts aren't enforceable unless the parties have exchanged something of value, called: assiduity. consideration. cogitation. deliberation.

consideration.

Contract law

consists of both common law and statutory rules that govern the creation, interpretation, and enforcement of contracts.

A valid contract is one that is legally enforceable by virtue of meeting certain requirements of: finance law. contract law. civil law. executory law.

contract law.

When parties freely agree to the terms of the contract, exactly as the contract is written it is called: mutual assent. acknowledgement. accession. collaborative affirmation.

mutual assent.

To execute a document means: sign it. to release it. to enforce it. to adhere to obligations of the contract.

sign it.

mutual mistake vs unilateral mistake vs mistake of law

--Mutual mistake- is a mutual mistake of fact with respect to the subject of the contract, a court will evaluate the individual intention of the parties to determine whether there had been, in fact, a meeting of the minds. --Unilateral mistake- an error made by one party - gives no basis for avoiding a contract, but a contract that contains a typographical error may be corrected. --Mistake of law- a party who has full knowledge of the facts reaches an invalid conclusion as to their legal effect, such a mistake of law will not invalidate a contract or affect its enforceability.

Bilateral and Unilateral Contracts

-A bilateral contract is one in which both parties promise to perform their respective parts of an agreement in exchange for performance by the other party. -An unilateral contract, only one party promises to do something, provided the other party does something. The latter party is not obligated to perform any act, but the promising party must fulfill the promise if the other party chooses to perform. -both types of contracts can be breached. -difference- In unilateral contracts, the one offering the deal promises to pay when a certain act or task is complete, but bilateral contracts allow for an upfront exchange.

legal benefit vs legal detriment.

-A legal benefit provides something to a party that he or she was not previously entitled to -A legal detriment is something a party will do that he or she was not previously obligated to do.

Absence of Mutual Assent

-A meeting of the minds, or mutual assent, means parties freely agree to the terms of the contract, exactly as the contract is written.

Void vs. Voidable

-A void contract is an agreement that does not meet the tests for validity, and therefore is no contract at all. If a contract is void, neither party can enforce it. -For example, a contract that does not include consideration is void -A voidable contract is one which initially appears to be valid but is subject to cancellation by a party to the contract who is believed to have acted under some kind of disability. Only the party who claims the disability may cancel the legal effect of the contract. -For example, a party who was the victim of duress, undue influence, fraud, misrepresentation, our mutual mistake in creation of a contract and can prove it may disaffirm the contract. -A voidable contract differs from a void contract in that the void contract does not require an act of disaffirmation to make it unenforceable.

Express vs. Implied

-An express contract is one in which all the terms and covenants of the agreement have been clearly stated and agreed to by all parties, whether verbally or in writing. -An implied contract is an unstated or unintentional agreement that may be considered to exist when the actions of any of the parties suggest the existence of an agreement. -To establish the existence of an implied contract, it is necessary to show an unambiguous offer, unambiguous acceptance, mutual intent to be bound, and consideration. -exceeds $500.00 must be written to be legally enforceable

Contingencies

-Contingencies are essentially conditions that must be met in order for the contract to be enforceable. -Common contingencies in a real estate purchase agreement involve financing, inspections and disclosures, and seller providing marketable title.

Examples of unilateral agreements;

-reward contract -insurance contract. -Listing agreement--an open listing, where a seller agrees to pay one or more brokers depending on who brings a buyer, is unilateral. "IF you bring a ready, willing and able buyer, I will pay you a fee." -Option to purchase-- binds the seller and prevents the seller from selling to another party, but it does not bind the prospective buyer to make the purchase. -Option to terminate--binds the seller and prevents the seller from selling to another party, but the buyer is not bound to purchase the property during the term of the option. -Note--Options are always unilateral.

Earnest Money

-shows the serious intent of the buyer and may serve as liquidated damages in the event of breach of contract. -Liquidated damages are funds paid by the defaulting party to the non-defaulting party according to the terms of the contract.

Originals and Modifications

-the buyer's agent must maintain the original signed contract on file for at least 5 years. -In real estate transactions, the easiest and best way to make changes to the contract is by attaching an amendment or an addenda that is signed by all the parties. The signed amendment or addenda then becomes part of the original contract.

Real estate contracts

-the legal agreements that underlie the transfer and financing of real estate, as well as the real estate brokerage business. -Listing and representation agreements and real estate purchase agreements are the most commonly used real estate contracts.

A party must have reached the age of majority to enter into a valid contract. In Oklahoma, the majority age is: 17 18 19 21

18

Doctrine of Laches

This principle states that a court has determined a contract is unenforceable due to needless delay or neglect in filing a claim even though the Statute of Limitations may not have expired.

A valid real estate contract must employ six essential elements: competent parties, consideration, mutual agreement, lawful objective, must be in writing and signed by the parties, and contain: an acceleration clause. an appraisal. an examination of title. a legal description.

a legal description.

Contracts between two people or between a person and a business usually start with: an arrangement. a settlement. an agreement. a commitment.

an agreement.

An unstated or unintentional agreement that may be considered to exist when the actions of any of the parties suggest the existence of an agreement is called: an implied contract. an executory contract. an express contract. a voidable contract.

an implied contract.

A bilateral agreement that is between a salesperson and sponsoring broker is called: an authorization. an independent contractor agreement. a representation agreement. a listing agreement.

an independent contractor agreement.

A contract is said to have been executed when both parties have completed their obligations. In the case of a real estate contract, that milestone comes: at the listing. at the inspection. at closing. at appraisal.

at closing.

In real estate transactions, the easiest and best way to make changes to the contract is by: getting broker authorization. attaching an amendment. making a new contract. initialing the changes.

attaching an amendment.

A contract that is formed illegally is: void. adequate. implied. express.

void.