Chapter 11

CONTRACTS IN GENERAL

A contract is a legally binding document in which two parties establish an agreement on the terms and conditions for the exchange of money and or goods. It may be oral or written.As long as both parties understand what they are offering and what they are getting, this is sufficient to establish a contract. Keep in mind that we are talking contract in general right now. Real estate contracts must be in writing to be enforceable. A real estate contract is a legally binding agreement in which the buyer and seller set the terms and conditions of the sale and purchase of real estate. Like all binding agreements, real estate contracts represent the promises that buyer and seller make to each other -- the buyer to pay a specified amount and the seller to transfer the title of the property.These promises are enforceable by law.

STATUTE OF LIMITATIONS

A contract is enforceable for a period of time defined in the statute of limitations.After that time, parties to a contract may not be sued for failure to perform. Statutes of limitations vary among states. In Florida, they are as follows: A. For a written contract, the party who defaults is liable for five years. B. For oral contracts, the party who defaults is liable for four years. C. For contracts that are partially in writing and partially oral, the written portion can be enforced for five years, while the oral portion can be enforced for four years.

Legality of Object

A contract is not enforceable if it contains provisions that are illegal (e.g., a provision to pay a commission to an unlicensed person). All of the terms and conditions of the contract must be legal.

VOID, VOIDABLE & UNENFORCEABLE CONTRACTS

A good contract in writing is enforceable. In other words, if one of the parties defaults, it can be brought to court. However, there are 3 conditions in which contracts are not enforceable: 1. A void contract lacks some or all of the conditions required to make it valid. It therefore has no legal standing and is not enforceable. 2. A voidable contract is one that can be voided by deliberate action by one of the parties. This means that one or more of the parties is not obligated to perform. For example, if a minor enters into a contract, he is legally entitled to void that contract as a minor. 3. An unenforceable contract cannot result in legal action or compulsion because it violates the requirements of the Statute of Frauds or because the statute of limitations has expired.

Contract Consideration

Consideration is anything of value that is exchanged in return for another thing of value (like a property, product, or service). It can be cash, diamonds, stocks, or even just a promise. Each party to a contract places some object of consideration in the agreement. The parties promise to do something, provide something, or refrain from doing something. The promises do not necessarily have to be equal. In the case of real estate transactions, the seller typically promises to convey title to a property and the buyer normally promises to pay a specified amount for it. There are 2 types of consideration: 1. Valuable consideration refers to the money to be paid or the equivalent value of something that can be measured in terms of money. 2. Good consideration refers to a thing of value that cannot be measured in terms of money, such as friendship, natural love, or family relationship. In Florida, both good and valuable consideration may support an enforceable contract as long as the consideration is commensurate with the scope of contract.

CONTRACTS PREPARATION

Contract preparation is an activity reserved for law practitioners. Real estate agents have extremely limited room for action on contracts. Because real estate licensees are not considered to be experts in the legal realm, they are prohibited from preparing deeds, mortgages, or promissory notes, or drawing up lease agreements. They are, however, permitted to fill in the blanks on lease contracts approved by the Florida Supreme Court for terms of up to one year. In general, Florida real estate practitioners use either an attorney written contract or the standard Florida Association of Realtors approved contract (the FAR/BAR contract). The Florida Association of Realtors (FAR) also makes available the Florida Supreme Court approved lease contract. The use of below-quality contracts may have disastrous consequences. If either buyer or seller defaults and the Broker or Sales Associate is using a below quality contract, the agent may be liable for professional malpractice, may also lose their commission. Contracts that licensees typically assist in drawing are: listing agreements, buyer broker agreements, sale and purchase contracts, and option contracts.

In Writing and Signed

Florida real estate contracts must be in writing to be enforceable. A written contract offers the opportunity to specify all the details that a buyer wants. Things like day of occupancy, inspection period, and financing clauses can be very efficiently summarized in a written contract. The contract must be signed by both parties. It is usually initialed on every page by both parties. To make sure that everyone reads the small print, it is good practice to have both parties initial those sections of the contract that may remain obscure otherwise. Although this is not a legal requirement, it prevents a buyer or a seller from claiming that he or she was not aware of specific elements of the contract.

Contractual Capacity of the Parties

For a contract to be enforceable, the parties must be competent. They must be of legal age and must not be mentally impaired. If a person is drunk or took drugs before signing a contract, it may be void if the person can prove he was impaired in court. Minors may enter into contracts, but are legally entitled to void the contract if they so choose.Adults contracting with minors must fulfill their obligations under the contract.

Earnest Money

In Florida, it is perfectly legal to present an offer without an initial deposit, but very few sellers will accept this kind of offer. The highest standard of enforceability is met by collecting earnest money or an initial deposit from the buyer, along with the offer. This is because the seller can be given the deposit as damages if an unmotivated buyer defaults. The initial deposit must be immediately deposited in an escrow account. It is legal for the buyer to use a postdated check as a deposit, as long as all parties are aware of and agree to its use.

Offer and Acceptance

In a contractual relationship, one party makes an offer and the other party accepts it. Florida courts have recently held that a contract must be signed to be enforced.The two parties must agree on all of the details involved in this offer and acceptance. In other words, they must agree on all the terms and conditions of the contract. The acceptance must mirror the conditions of the original offer to be considered an acceptance. If even minor changes are made to the original offer, then the offeree becomes the offeror, and it is up to the other party (now the offeree) to accept or refuse the counteroffer. Legally, the contract is considered to be formed at the moment that acceptance of the offer is communicated to the person making the offer.

REAL ESTATE CONTRACTS

Real estate brokers may assist buyers and sellers with the drawing up of 4 types of contracts: 1. Listing agreement: A broker's contract with a seller, it authorizes the broker to sell the property and collect a commission. 2. Buyer broker agreement: A contract with a buyer to represent his or her interests in the purchase of real property. 3. Sales and purchase contract: A contract between a buyer and seller specifying the terms and conditions of the transfer of real property. 4. Option contract: A contract to keep the offer to sell or lease real property open for a specified period of time. This contract obligates the seller (optionor) to sell, but does not obligate the buyer (optionee) to buy. An attorney's advice is recommended when drawing up an option contract.

STATUTE OF FRAUDS

The Statute of Frauds was enacted to protect the public from entering into fraudulent contracts in the sale and purchase of real estate. It states that for a contract to be enforceable in a court of law, it must either be in writing or witnessed. An oral contract is legal, but it is not enforceable unless there are at least two witnesses. Real estate contracts must be in writing and must be signed by both parties. There are 2 exceptions to this general rule: 1. If a buyer has paid part of the purchase price and taken possession of the property or made improvements to it as a result of an oral contract. 2. If both parties have fully performed their obligations as stated in the contract.

CONTRACT ESSENTIALS

There are 4 essential elements in a valid contract: 1. The parties are competent. 2. The contract is based on mutual agreement (offer and acceptance). 3. The purpose or object of the contract is legal. 4. The consideration for which the parties will perform is specified.

Equitable vs. Actual Title

When a buyer and seller enter into a purchase and sale contract, the buyer is said to have an equitable title in the real property. This is the legal recognition of the buyer's interest in the real property, despite the fact that the transaction has not been closed yet. For example, suppose that Jennifer enters into a purchase and sale contract with Kevin to sell him a piece of land, with the closing to be arranged in two weeks. If minerals are found in the land in the interim, they would belong to Kevin since he has an equitable title. An actual title is transferred by means of a deed. It conveys the full bundle of rights to the buyer when the deed is voluntarily delivered and voluntarily accepted at closing.