General Knowledge of Contract Laws

liquidated damages clause

Many real estate contracts include a ____________ that limits buyer damages to a return of the earnest money if the seller breaches the contract.

Partial Performance

Partial performance is when one party meets some, but not all, of the terms of the contract. The innocent party may agree to accept partial performance, perhaps in return for some sort of compensation.

Amendment or an Addendum

When parties agree to other terms that are outside a main contract, these terms are included in an ___________ or an ____________. All these documents together form the complete agreement between the parties.

The Uniform Electronic Transactions Act (UETA)

is an attempt to bring some degree of standardization to state laws regarding use of electronic documents and signatures. It gives electronic signatures, records, and contracts the same legal weight as paper records with "wet" signatures (signed by hand in ink).

Consideration

is something of legal value offered by one party and accepted by another, e.g., the buyer's promise to pay the full purchase price, and the seller's promise to transfer marketable title through delivery of a deed.

Assignment

means to transfer contractual rights or duties to a new party. Some contracts have provisions either permitting or prohibiting assignment. Unless the contract specifically prohibits assignment, contracts are generally assignable. Unless the parties agree that the original buyer or tenant is to be released from contract obligations, the original party remains liable if the new party fails to meet the contract's obligations

Novation

occurs when one contract is substituted for another. The agreement may be between the same parties, or a new party may be substituted (this is novation of the parties). The intent between the parties is to discharge the old obligation, releasing the original party from those obligations.

Offer and Acceptance

occurs when the parties enter into an agreement voluntarily with full understanding of contract terms.

Time is of the essence

A contract phrase stating that "_____________", means that parties agree to strictly adhere to the deadlines listed in the contract. If specific deadlines aren't stated, performance must take place within a reasonable amount of time (often as determined by the courts).

When offer becomes binding (notification)

Acceptance occurs when all parties have signed a contract, while binding acceptance happens when the signed contract is delivered back to the offeror. Acceptance and binding acceptance must take place within the dates outlined in the contract. If dates aren't specified, then they must occur within a "reasonable time." Reasonable time can be interpreted differently by the courts, but the courts generally favor the buyers

Counter-offer cancels original offer

All offers and counter offers must be presented. If the counter offer is signed, it becomes a contract. Counter-offers kill the original offer and should only be used to counter unacceptable terms. Counter-offers are active until they are either accepted, rejected, or withdrawn. "Acceptance" of an offer, but with some changes to that offer, isn't actually acceptance at all. It's essentially a counter-offer. Finalize any counter-offer terms before responding to all of the other buyers/offers.

addendum

An _______________ is an addition to an existing document, such as an offer to purchase. It adds terms not addressed in the main body of the contract form.

unenforceable

If the contract has no legal force or effect

bilateral contract

In a ______________, both parties have obligations. Most real estate contracts are bilateral. For example, a purchase contract contains promises by both parties, so it's ______________

electronic documents and signatures

In many states,____________ and _____________ can be used only if the parties to the contract agree.

Mutual Agreement

Parties to the contract may terminate the contract through _____________. This is best accomplished through mutual written release

Damages

The innocent party can sue for _________. This is a means of seeking monetary compensation to make up for any harm caused.

unilateral rescission.

When a breach occurs, the innocent party may unilaterally terminate the contract.

release

When one party to a contract agrees in writing that the other party is no longer held to the provisions of the agreement, this is called a___________

Legally Competent Parties

are those who have the legal and mental capacity to enter into a contract. Contracts entered into with legally incompetent parties are voidable at the option of the incompetent party, but may be enforced against the competent party

executed contract

contract is one in which all parties to a contract have met all contract term. A contract for the sale of real estate is executed by the delivery and acceptance of the deed and the payment of the purchase price. (Note that you may also see the term "executed" used to refer a document that's been signed.)

voluntary

contract means the parties entered into the agreement voluntarily. Mistakes, misrepresentation, fraud, duress, or undue influence create a situation in which the consent is not real.

Contracts may be valid but unenforceable

example, a voidable contract is valid, but may not enforceable in a court of law.

oral contract

for the sale of real estate is unenforceable in court, even though it has the following requirements for a valid contract, which include: Offer and acceptance Consideration Legally competent parties Legal purpose Made voluntarily

Contract termination

generally means that one of the parties ends the contract before it's fully performed. The terminating party may owe duties or compensation to the other party.

Contract rescission (cancellation)

generally results from an operation of law, such as breach of contract, destruction of the object of the contract, etc. If the contract is rescinded, it is terminated, and the parties are legally returned to their position before there was a contract. For example, if one party breaches the agreement, the other may legally have the right to rescind the agreement.

Amendment

is a change to an existing contract between parties. It changes one or more of the original contract terms. For example, if the closing date must be changed, or the buyer decides she wants the curtains to remain and the seller agrees (after the original contract noted the seller was taking them), the parties can execute an amendment outlining the additional agreement between them.

contract clause

is a section or provision within a contract that addresses a specific point of law or aspect of the agreement.

Void Contract

isn't a contract at all because it lacks one or more of the requirements for a valid contract.

Oral Contracts

may be valid but unenforceable or difficult to enforce

Legal Purpose

means that the contract results in a legal outcome.

Contract discharge (aka performance, execution)

means that the parties have met all contract terms and are discharged from their contractual obligations.

Breach of contract

occurs when one party fails to meet contract obligations. The innocent party may take any one of several actions as a remedy to the breached contract.

Severability

refers to the concept that if a court deems a term in the contract to be unenforceable, the remainder of the contract remains enforceable

statute of frauds

requires that certain types of contracts, such as for a property ownership transfer, be in writing to be legally enforceable and to prevent injury from fraudulent conduct.

Addendum and amendment forms

should be recommended and/or approved by the broker.

specific performance

specific performance suit seeks to force a party to make good on the promises made in some way

Common contract clauses include:

"Time is of the essence" means that both parties faithfully agree to perform responsibilities within the time limits of the contract. Choice of law specifies that any dispute arising under the contract shall be determined in accordance with the law in a particular jurisdiction. Indemnification means one or both parties commit to compensate the other for any harm, liability, or loss arising out of the contract. Contingency clauses define a condition or action that a party must meet in order to not be in breach of contract. An arbitration clause requires the parties to resolve or attempt to resolve their disputes through an arbitration process. A mediation clause requires the parties to attempt mediation prior to engaging in arbitration or a legal action. A statute of limitations clause in the contract states the time frame in which a party can file a lawsuit relative to the contract.

Contract clauses, including amendments and addenda

A contract clause is a section or provision within a contract that addresses a specific point of law or aspect of the agreement. Common contract clauses include: "Time is of the essence" means that both parties faithfully agree to perform responsibilities within the time limits of the contract. Choice of law specifies that any dispute arising under the contract shall be determined in accordance with the law in a particular jurisdiction. Indemnification means one or both parties commit to compensate the other for any harm, liability, or loss arising out of the contract. Contingency clauses define a condition or action that a party must meet in order to not be in breach of contract. An arbitration clause requires the parties to resolve or attempt to resolve their disputes through an arbitration process. A mediation clause requires the parties to attempt mediation prior to engaging in arbitration or a legal action. A statute of limitations clause in the contract states the time frame in which a party can file a lawsuit relative to the contract.

Void, voidable, and unenforceable contracts

A voidable contract is one that appears valid, but one or both parties have a legal right to disaffirm it. This could be because one of the parties lacks legal competence, or because there was a mistake or misrepresentation, causing a failure of reality in consent. The contract is voidable by the incompetent or misled party but enforceable against the other party. A void contract isn't a contract at all because it lacks one or more of the requirements for a valid contract. It has no legal force or effect; it's unenforceable. Oral contracts may be valid but unenforceable or difficult to enforce

Termination, rescission, and cancellation of contracts

Contract discharge (aka performance, execution) means that the parties have met all contract terms and are discharged from their contractual obligations. Contract termination generally means that one of the parties ends the contract before it's fully performed. The terminating party may owe duties or compensation to the other party. When one party to a contract agrees in writing that the other party is no longer held to the provisions of the agreement, this is called release. Contract rescission (cancellation) generally results from an operation of law, such as breach of contract, destruction of the object of the contract, etc. If the contract is rescinded, it is terminated, and the parties are legally returned to their position before there was a contract. For example, if one party breaches the agreement, the other may legally have the right to rescind the agreement. Parties to the contract may terminate the contract through mutual agreement. This is best accomplished through mutual written release. Assignment means to transfer contractual rights or duties to a new party. Some contracts have provisions either permitting or prohibiting assignment. Unless the contract specifically prohibits assignment, contracts are generally assignable. Unless the parties agree that the original buyer or tenant is to be released from contract obligations, the original party remains liable if the new party fails to meet the contract's obligations. Novation occurs when one contract is substituted for another. The agreement may be between the same parties, or a new party may be substituted (this is novation of the parties). The intent between the parties is to discharge the old obligation, releasing the original party from those obligations.

Contracts signed under the following circumstances are unenforceable:

Contract is for an illegal purpose One or more of the contract parties was under duress or undue influence One or more of the contract parties committed misrepresentation Contract terms are patently unfair or violate public policy Contract contains errors

executory Contract

Contracts are ______________ until all of the promises in the contract have been completed. A contract for the sale of real estate is executory until the deed is delivered and accepted.

Factors affecting enforceability of contracts

Contracts may be valid but unenforceable. For example, a voidable contract is valid, but may not enforceable in a court of law. Contracts signed under the following circumstances are unenforceable: Contract is for an illegal purpose One or more of the contract parties was under duress or undue influence One or more of the contract parties committed misrepresentation Contract terms are patently unfair or violate public policy Contract contains errors Severability refers to the concept that if a court deems a term in the contract to be unenforceable, the remainder of the contract remains enforceable.

Offers/Purchase Agreements

General requirements Once signed, the sales contract is a binding, written agreement between the buyer and the seller. Other names forms (drafted by a licensed attorney) used to write a sales contract are: Offer to purchase Sales agreement Contract of purchase and sale Purchase agreement Earnest money agreement Agreement of sale The process of the buyer and the seller entering into a contract of sale typically begins when a potential buyer makes a written offer to a seller. Although the form used to make the offer may be titled sales contract, it is not a contract but an offer that isn't a contract until the parties come to acceptance. The party extending the offer is an offeror. The party receiving the offer is an offeree. In the event the seller accepts the buyer's offer, there is a contract. In the event the seller does not accept the buyer's offer, typically the seller will extend a counter-offer to the buyer. When this happens, the seller becomes the offeror, and the buyer is the offeree. The sales contract identifies the parties and establishes the transaction's terms and conditions. The sales contract documents the earnest money amount, which the buyer and seller negotiate. Licensees may fill in the blanks on a sales contract form. Information often included in a sales contract include the earnest money deposit amount, specific closing instructions, closing agent selection, deed type to be presented by the seller, the proration method for rent, taxes, and other closing costs, buyer possession timeline, home warranty transfer, if available, and seller warranty specifics, if offered. Licensees should be careful to use only approved forms for additional terms. Drafting contract language may be considered practicing law without a license.

Notice, delivery, and acceptance of contracts

How and when parties to a contract send notice regarding contract terms is critical for avoiding breach of contract situations. Most contracts include a notices clause that describes how contract-related notice may be made and when notice is considered to have been received. For example, a purchase or listing contract may permit contract parties to select whether notices may be delivered electronically. Notice from one party to the other may become necessary during contract negotiation or with a breach of contract and termination situation. Delivery and acceptance most often comes into play after a buyer makes an offer and while the contract is still being negotiated. An offer isn't a contract until it's signed (accepted by) the seller and delivered (physically or electronically) to the buyer or the buyer's agent. If a seller counter-offers a buyer's offer, the original offer is no longer in effect; the counter-offer becomes a contract if it's signed by the buyer and accepted by the seller. Delivery and acceptance relies heavily on the "time is of the essence" concept. For example, if a buyer submits an offer with an acceptance deadline and the seller fails to respond by that deadline, the offer is technically void; if a seller presents a counter-offer with an acceptance deadline and the buyer fails to respond by that deadline, the counter-offer is technically void.

unilateral contract

In a _____________, only one party makes a promise. An option contract is one example of a unilateral real estate contract. An option contract, or option, is an offer to purchase a specific piece of real estate without the obligation to buy it. In an option contract the potential buyer (optionee) is usually required to pay an option fee to the seller (optionor). If the optionee decides not to exercise the option and purchase the property, the optionor typically retains the option fee. If the optionee decides to exercise the option, the optionor is required to perform the contract terms, and the contract then becomes a bilateral contract. Some option agreements are a lease with the option to buy. The lessees have an option to purchase the leased property should they choose to exercise the option. If they violate any of the lease terms while the option is active, they lessor may terminate the option contract.

Bilateral vs. unilateral contracts (option agreement)

In a bilateral contract, both parties have obligations. Most real estate contracts are bilateral. For example, a purchase contract contains promises by both parties, so it's bilateral. In a unilateral contract, only one party makes a promise. An option contract is one example of a unilateral real estate contract. An option contract, or option, is an offer to purchase a specific piece of real estate without the obligation to buy it. In an option contract the potential buyer (optionee) is usually required to pay an option fee to the seller (optionor). If the optionee decides not to exercise the option and purchase the property, the optionor typically retains the option fee. If the optionee decides to exercise the option, the optionor is required to perform the contract terms, and the contract then becomes a bilateral contract. Some option agreements are a lease with the option to buy. The lessees have an option to purchase the leased property should they choose to exercise the option. If they violate any of the lease terms while the option is active, they lessor may terminate the option contract.

Notices Clause

Most contracts include a ___________ that describes how contract-related notice may be made and when notice is considered to have been received. For example, a purchase or listing contract may permit contract parties to select whether notices may be delivered electronically.

Rights and obligations of parties to a contract

Most contracts include many pages of information about the terms and conditions that contracting parties must meet. Contract law also includes some implied rights and obligations of parties to a contract. These rights and obligations are not necessarily specified within the contract. A contract is a legally binding agreement. All parties to a contract must perform the contract terms or be considered in breach of contract. The parties have a right to form and execute the contract free from undue influence (taking advantage of someone based on a relationship) or duress (wrongful pressure, coercion, or force involving a threat). The parties should operate in good faith to execute the contract with no deceptive practices. All parties must comply with contract terms in a timely manner (time is of the essence). All parties have the right to a transaction that's free from fraud or misrepresentation.

Electronic signature and paperless transactions

State laws govern the use of electronic documents and signatures. The Uniform Electronic Transactions Act (UETA) is an attempt to bring some degree of standardization to state laws regarding use of electronic documents and signatures. It gives electronic signatures, records, and contracts the same legal weight as paper records with "wet" signatures (signed by hand in ink). The UETA defines an electronic signature as "an electronic sound, symbol, or process attached to or logically associated with a record and executed or adopted by a person with the intent to sign." In many states, electronic documents and signatures can be used only if the parties to the contract agree.

Requirements for Validity

The statute of frauds requires that certain types of contracts, such as for a property ownership transfer, be in writing to be legally enforceable and to prevent injury from fraudulent conduct. An oral contract for the sale of real estate is unenforceable in court, even though it has the following requirements for a valid contract, which include: Offer and acceptance Consideration Legally competent parties Legal purpose Made voluntarily Offer and acceptance occurs when the parties enter into an agreement voluntarily with full understanding of contract terms. Consideration is something of legal value offered by one party and accepted by another, e.g., the buyer's promise to pay the full purchase price, and the seller's promise to transfer marketable title through delivery of a deed. Legally competent parties are those who have the legal and mental capacity to enter into a contract. Contracts entered into with legally incompetent parties are voidable at the option of the incompetent party, but may be enforced against the competent party Legal purpose means that the contract results in a legal outcome. A voluntary contract means the parties entered into the agreement voluntarily. Mistakes, misrepresentation, fraud, duress, or undue influence create a situation in which the consent is not real.

Multiple offers

There are several strategies for responding to ___________. Countering more than one offer at the same time puts the seller at risk of having agreed to sell one property to two different buyers, which is illegal. A back up contract is one that has been accepted contingent on the disposition of the primary contract. Licensees should recommend that clients get legal advice before entering into a back-up contract. An escalator offer is one where the buyer offers to top any existing offer by a certain amount, up to a specified cap. A licensee should encourage seller clients to counter-offer an escalator offer with one at the buyer's maximum price (which you can tell because of the cap). Again, licenses must present all offers, even if there are multiple for the same property, and even after an offer has been accepted.

Voidable Contract

This type of contract is one that appears valid, but one or both parties have a legal right to disaffirm it. This could be because one of the parties lacks legal competence, or because there was a mistake or misrepresentation, causing a failure of reality in consent. The contract is voidable by the incompetent or misled party but enforceable against the other party.

Contingencies

______________ are conditions that must be met before the agreement of sale is complete and enforceable. For example, a purchase may be contingent for a number of days upon the buyer receiving a loan commitment. Contingencies usually include the actions necessary to remove the condition, a deadline for its removal, and the party responsible for taking the actions to remove the condition. All ______________ to the contract must be satisfied at the specific times and dates called for in the agreement. Failure to do so is a breach of the agreement. The original offer is no longer legally binding. A home sale contingency makes the sale contingent on the buyer selling an existing home or property. A home inspection contingency makes the sale contingent upon a satisfactory home inspection. A financing or mortgage contingency makes the sale contingent on the buyer obtaining financing, and an appraisal contingency makes it contingent on the property appraising at or above the sales price. The greater the number of contingencies on an offer, the less attractive it is to the seller. If a buyer misses a contingency deadline, they may lose their earnest money. If the seller misses a contingency deadline, the buyer may have the right to terminate the contract. Contract termination based on the inability to meet a contingency or on the other party's failure to meet a deadline typically requires written notice to the other party. A buyer's agent should caution buyers to use contingencies to protect themselves, but not kill the deal with too many contingencies.

Uniform Electronic Transactions Act (UETA)

defines an electronic signature as "an electronic sound, symbol, or process attached to or logically associated with a record and executed or adopted by a person with the intent to sign."