Real Estate CHP 8- Contracts

Terms II:

- "As is" - A legal term used to disclaim some implied warranties for an item being sold. Denotes that the seller is selling, and the buyer is buying a property in whatever condition it presently exists. - Assignment - The method or manner by which a right or contract is transferred from one person to another. - Caveat - A Latin term that means "let him beware." Caveats have many applications in law and finance, pertaining to all parties involved being aware of all of the facts of a transaction. Caveat is usually interpreted as a sort of warning or cautionary expression. - Caveat Emptor - Let the buyer beware. The buyer must examine the goods or property and buy at the buyer's own risk. - Consideration - Anything given to induce another to enter into a contract such as money or personal services. - Contingency - A provision in a contract that requires the occurrence of a specific event before the contract can be completed. - Counteroffer - A type of offer made in response to another offer, which was seen as unacceptable. A counteroffer revises the initial offer, making it more appealing for the person making the new offer. - Earnest Money Deposit - Down payment made by a purchaser of real estate as evidence of good faith. - Express Contract - A contract in which all elements of a contract are specifically stated (offer, acceptance, consideration), and the terms are stated, as compared to an "implied" contract in which the existence of the contract is assumed by the circumstances. - Implied Contract - A legal substitute for a contract. An implied contract is an agreement created by actions of the parties involved, but it is not written or spoken. This is a contract assumed to have been drawn. - Executed Contract - An agreement that has been fully performed. - Executory Contract - A contract which has not yet been fully performed (fully executed). - Forbearance - A special agreement between the lender and the borrower to delay a foreclosure. - Liquidated Damages - A provision in certain legal contracts that allows for the payment of a specified sum should one of the parties be in breach of contract. - Novation - The act of either: -1) replacing an obligation to perform with a new obligation; or -2) adding an obligation to perform; or -3) replacing a party to an agreement with a new party. - Offer and Acceptance - Elements required for the formation of a legally binding contract. The expression of an offer to contract on certain terms by one person (the "offeror") to another person (the "offeree"), and an indication by the offeree of its acceptance of those terms - Option - A right given for a consideration to purchase or lease a property upon specified terms within a specified time; if the right is not exercised the option holder is not subject to liability for damages; if exercised, the grantor of option must perform. - Power of Attorney - A written instrument duly signed and executed by a person which authorizes an agent to act on his/her behalf to the extent indicated in the instrument. - Reformation - A remedy whereby a court orders a change in a written document to reflect what it ought to have said in the first place. - Rescission - The right of an individual involved in a contract to return to a state identical to that before they entered into the agreement, due to courts not recognizing the contract as legally binding. In many cases, rescission may be an option if there is a material error in the contract, among other reasons. - Rider - Also known as an addendum, in general, is a writing annexed to an agreement. - Right of First Refusal - A contractual right that gives its holder the option to enter a business transaction with the owner of something, according to specified terms, before he owner is entitled to enter into the transaction with a third party. - Specific Performance - An order of a court which requires a party to perform a specific act, usually what is stated in a contract. - Statute of Frauds - State law which provides that certain contracts must be in writing in order to be enforceable at law. - Statute of Limitations - A statute barring all right of action after a certain period of time from the time when a cause of action first arises. - Uniform Commercial Code - A standard set of business laws that regulate financial contracts. The Uniform Commercial Code has been adopted by most states in the U.S. The code itself has nine separate articles. Each article deals with separate aspects of banking and loans. The UCC better enabled lenders to loan money secured by the borrower's personal property. - Void - To have no force or effect; that which is unenforceable. - Voidable - That which is capable of being adjudged void, but is not void unless action is taken to make it so. - Attorney Review Clause - A clause found in real estate contracts that may allow buyers to walk away from an agreed upon sale for any reason. - Down Payment - the portion of a home's purchase price that is paid in cash and is not part of the mortgage loan. This amount varies based on the loan type, but is determined by taking the difference of the sale price and the actual mortgage loan amount. Mortgage insurance is required when a down payment less than 20 percent is made. - Lawyer's Fund for Client Protection - Setup to protect consumers from dishonest attorneys. - Mortgage Contingency Clause - A clause in a contract that states a mortgage must be obtained in order for the contract to be binding.

Purchase money mortgage

- A purchase money mortgage is where the seller is actually giving you the loan. Along with the terms of the contract, you set out what the terms of the loans (from the seller) are going to be.

Sales contract cont'd

- Contingencies-a provision in a contract that requires that a certain act be done or a certain event occur before the contract becomes binding. i.e.buyer needs to get a specific loan, buyer has a right to an env report, or buyer needs to sell his home before buying another home. - Attorney review clause- Needed when the buyer and seller choose to have an attorney study the contract. The attorney must complete the contract review within the agreed-on time. The contract will be legally binding at the end of this period unless an attorney for the buyer or seller disapproves it. - Mortgage contingency clause- a provision that allows the buyer a certain period of time to obtain a commitment for financing at a specified interest rate for a certain amount of money. Usually lasts for 30-60 days, depending on the average time needed to obtain a loan commitment. This provides critical protection to the buyer. It allows the buyer to void the purchase contract without penalty in those cases in which the buyer is unable to obtain financing on the terms specified in the contract after making a reasonable or good-faith effort to do so within the time provided. Because this type of clause favors the buyer, some real estate agents suggest that the buyer obtain "prequalification" from a lender, which gives the seller a degree of confidence that the buyer will not use the clause to void the contract unless some extraordinary circumstance arises.

Broker's authority to prepare documents

- In NYC, the seller's attorney prepares sales contract. The Duncan and Hill decision recommended that NYS brokers and salespersons who prepare purchase and sales contracts protect themselves against charges of unauthorized practice of law by making the contracts subject to approval by attorneys for both the buyer and seller

Lease with the Option or the Right to Buy

- The option to buy typically stands for the time period of the lease itself. Does every month's rent that you paid cut down on the amount due on the purchase price? That is to be negotiated between the parties. After the lease is terminated the lessor (the tenant) no longer has the option to buy. A lease with the option to buy is negotiated by both parties. - Other contracts that would affect brokers are: - 'Listing agreements' - 'Sales contracts' - 'Leases' - 'Employment contracts' come into play between the broker relationships with their existing agency, if the broker is not operating independently.

How is the contract delivered?

- Typically the contract is delivered not by mail but by email

Option agreements

- a contract by which an optionor (owner) gives an optionee (prospective purchaser or lessee) the right to buy or lease the owner's property at a fixed price within a stated period of time. The optionee pays a fee (the agreed-on consideration) for this right and has no other obligation. The optionee is free to decide within the specified time to either buy or lease the property or allow the option to expire. The owner is bound to sell if requested; the optionee is not bound to buy. An option is often used by a tenant, who may then choose either to buy or to remain as a tenant.

IOLA accounts

- is a highly regulated account by the state and it's a non-interest bearing account and can put the deposits on behalf of the sellers into those accounts.

Unilateral contract

- is a one-sided agreement whereby one party makes a promise to be kept only if a second party does something. The second party is not legally obligated to act or perform; however, if the second party does comply, the first party must keep the promise. For ex: an Option is a real estate example of a unilateral contract. "I will sell you the property for $150,000 within two years if you wish." ("I will do this if you do that.") Only the owner is bound by an option; the other party is free either to buy or not to buy. Another ex: an open listing is another example of a unilateral contract. In this situation, the seller extends an offer of compensation to the broker procuring a sale on his or her property; however, the broker is under no obligation to deliver a sale or accept the terms of the listing.

Installment sales contract

- makes sense if a purchaser needs to delay (over a period of time) the amount of money that is required under the contract of sales. - Let's say it is a million dollar unit under an Installment Sales Contract, you would have 5 payments of $200,000 over a period of time. If they are on an accrue method of accounting or a cash method really depending on the date and the time that the payment is made. The seller is going to have a benefit.

Sales contract

- sets forth all details of the agreement between a buyer and a seller for the purchase and sale of a parcel of real estate or shares of stock and a proprietary lease appurtenant there to and related to a cooperative unit. - Other names: offer to purchase, a contract of purchase and sale, an earnest money agreement, a binder and deposit receipt. RE brokers can fill in the blanks in simple transactions. -contract of sale is the most basic document in the sale of real estate because it sets out in detail the agreement between the buyer and the seller and establishes their legal rights and obligations. The contract, in effect, dictates the contents of the deed and is a blueprint for closing the sale.

Implied contracts

- the agreement of the parties is demonstrated by their acts and conduct. For ex: the patron who orders a meal in a restaurant has implied a promise to pay for the food. Similarly, the act of entering a metered taxi cab implies that the rider will pay the driver the amount indicated on the taxi's meter upon reaching his or her destination.

Binders

-A binder, or an offer to purchase is a preliminary agreement secured by the payment of cash money between a buyer and seller as an offer to purchase real estate. A binder secures the right to purchase real estate upon agreed terms for a limited period of time. The binder does not legally bound the buyer to absolutely purchase the property. If the buyer changes his mind or is unable to purchase, the money is forfeited unless the binder expressly provides that it is to be refunded. - Once a contract becomes executed, whatever is on these binders or other documents it is outside the 4 corners of the document and it is least likely to be considered. In fact most writers say that any prior documents that were signed or entered into they go away

Performance of Contract

-DATE: A contract may call for a specific time by which the agreed-on acts must be completely performed. Some contracts provide that "time is of the essence." This means the contract must be performed within the time limit specified. Any party who has not performed on time is deemed to have breached the contract. -When a contract does not specify a date for performance, the acts it requires should be performed within a reasonable time, depending on the situation. A real estate contract usually names a date and place for closing. If that date comes and goes without settlement, the contract is still valid, and either party has the right to a reasonable postponement. Either party may later make time of the essence; again, that action should be taken only with a lawyer's advice.

Terms:

-Express Contract - A contract in which all elements of a contract are specifically stated (offer, acceptance, consideration), and the terms are stated, as compared to an "implied" contract in which the existence of the contract is assumed by the circumstances. -Implied Contract - A legal substitute for a contract. An implied contract is an agreement created by actions of the parties involved, but it is not written or spoken. This is a contract assumed to have been drawn. -Executed Contract - An agreement that has been fully performed. -Executory Contract - A contract which has not yet been fully performed (fully executed).

Express contract

-In an express contract, the parties state the terms and show their intentions in words. It may be oral or written. For ex: a listing agreement is an express contract between seller and broker that names the broker as fiduciary representative (agent) of a seller. -the statute of frauds requires that any contract for the purchase and sale of a parcel of real property, in whole or in part, must always be in writing to be enforceable. As a result, the majority of real estate contracts fall into the category of express contracts.

cont'd

-In downstate NY, attorneys often prepare their own version of the contract; the listing agent will normally prepare a memorandum of sale or a deal sheet (which also contains names, addresses, & phone #s). This document will spell out the negotiated terms that have been agreed to by the respective parties to the transaction.

Sales contract

-Miscellaneous provisions- increasing awareness of consumers' rights has increased the number of disclosures that must be made to a buyer before that person is bound by a purchase contract. In NY, there are disclosure of agency relationships and disclosures relating to possible problems with lead paint, agricultural districts, and electric service. -When the purchaser wants to use a FHA/VA loan, a rider (attachment) usually comes w/ the contract & provides that the contract may be voided if the property is appraised by the lending institution for less than the sales price. FHA usually recommends a buyer get their own home inspector. The term caveat emptor means "let the buyer beware".

Condo sales

-The buyer of a condominium receives fee simple title to his or her unit "from the plaster in" and also a percentage of ownership of the common elements. Special contracts are used for condominium sales.

cont'd

-There's no standard form for sales contracts, a licensee can never prepare a sales contracts, and sales contracts always should state that seller should consult an attorney before signing. Even though there's no standard form, often times the Blumberg forms are used.

cont'd

-a broker may use a contract form that has been approved by a recognized bar association in conjunction with a recognized REALTORS® assn, provided that: 1.) the form requires only that the broker fill in nonlegal provisions, like names, date and location of the closing, property descr, and sales price; and 2.) the document clearly and prominently indicates on its face that it is a legally binding document and recommends that the parties seek advice from their attorneys before signing.

Unenforceable contract

-also seems on the surface to be valid; however, neither party can successfully sue the other to force performance. For example, if one party tries to enforce an otherwise valid contract after the statute of limitations has expired, the contract is unenforceable. Unenforceable contracts are said to be "valid as between the parties" because if both desire to go through with it, they can do so.

Listing agreements

-are contracts that establish the rights of the broker as agent and of the buyer/seller as principal. They are considered the employment contract between the principal and the agent in a real estate transaction.

Valid contract

-complies with all the essential elements required for a contract to be binding and enforceable on both parties i.e. signature, competent parties. Refer to table on Validity of Contracts

Executory contracts

-exists when something remains to be done. A real estate sales contract is executory before final settlement; after the closing it is executed. A mortgage would be another example of an executory contract. Although the mortgage is signed by the borrower, it remains executory until such time as all payments have been made by the borrower to the lender.

Contract procedures

-if all goes well in the transaction, the contract will be signed, usually the buyer is the first one to sign. The contract signing normally includes the tendering of an earnest money deposit by the buyer. This is so that: -the earnest money deposit acts as a good-faith gesture of the willingness of the buyer to conclude the transaction, and -it also acts as a means for liquidating potential damages in the event of the buyer's default. -After careful review by the sellers' attorney, the seller signs.

Invalid contract

-invalid contract would be a unilateral contract that would be entirely inappropriate. -Let's say it's a sublet situation and an invalid contract situation would be where the original tenant did not get the consent of the landlord, sublet the unit, sublet the condo they vacated and someone else is living there. They are in an agreement for the terms of the rent with that new party but it is not a valid contract because the landlord did not have anything to do with it and the landlord's consent is required.

Executed contracts

-one in which both parties have fulfilled their promises and performed the contract. Once one or both parties sign on the dotted line, it becomes an executed contract and the sale closes. If there's no signature, it's an executory contract

Void contract

-one that has no legal effect because it does not meet the essential elements of a contract. A contract to commit a crime, or to pay interest higher than allowed by usury law, would be void. A contract has to be for a legal purpose.

Voidable contract

-one that seems on the surface to be valid but may be voided, or disaffirmed, by one of the parties. For example, a contract entered into with a minor usually is voidable; a minor generally is permitted to disaffirm a real estate contract within a reasonable time after reaching legal age. -A voidable contract is considered by the courts to be valid if the party that could disaffirm the agreement does not do so within a reasonable period of time.

NYS Lawyer's Fund for Client Protection

-the protection of legal consumers from the dishonest conduct in the practice of law, the preservation of the integrity of the bar, the safeguarding of the good name of lawyers for their honesty in handling of client money, and the promotion of the general public's confidence in the administering of the justice system in the state of New York.

5 Elements Essential to a Valid Contract

1.) Competent parties- To enter into a binding contract in NY, a person must be at least 18 years old and of sound mind. A married person younger than 18 is considered an adult for the purposes of buying a principal residence. In New York, the consent of a parent or guardian is required for a minor to get married. 2.) Offer & acceptance- This requirement, also called mutual assent, means there must be a clear meeting of the minds. The contract must express all the agreed-on terms and must be clearly understood by the parties. 3.) Consideration- The agreement must be based on good and valuable consideration. Consideration is what the parties promise in the agreement to give to or receive from each other. Consideration may consist of money, exchange of value, or mutual promises. The promises might consist of a pledge to perform some act or of forbearance, a promise to refrain from doing something. The price or amount must be stated definitely and payable in exchange for the deed or right received. 4.) Legality of object- To be valid and enforceable, a contract must not involve a purpose that is illegal or against public policy. 5.) NY's statute of frauds requires that certain types of contracts be in writing. These include contracts for the sale of real estate and for leasing real property for more than one year.

Parts of a sales contract

6 essential parts of a valid sales contract: 1.) Contract in writing 2.) Competent parties 3.) Agreement to buy and sell 4.) Adequate description of the property 5.) Consideration (price and terms of payment) 6.) Signatures of the parties (The signature of a witness is not essential for a valid contract.) -Provisions in sales contract should cover: the grantor's agreement to convey (should specify type of deed) and the place and time of closing.

Lead based paint hazard disclosure

A buyer who purchases almost any residential property built before 1978 must be furnished with a booklet discussing lead-based paint hazards and disclosing any the seller is aware of. A purchase contract for a pre-1978 residential building must allow the buyer 10 days to have the place checked for lead hazards before the contract is binding.

equitable title

A buyer who signs a contract to purchase real estate does not receive title to the land; only delivery of a deed can actually convey title. However, after the contract is signed, the buyer has a contract right known as equitable title (right to obtain absolute ownership to property when legal title is held in another's name).

Co-op apt contracts

A co-op is owned by a corporation, the buyer of a co-op apartment does not receive a deed to real estate. Instead, he or she buys shares in the corporation and receives a proprietary lease to a unit in the building. These shares are personal property rather than real property. They can usually be financed, but through a loan under the Uniform Commercial Code (UCC) rather than a mortgage. -In a transaction involving the sale of real property, a mortgage is the financing type used. -In a transaction involving the sale of personal property, a UCC financing type is utilized. -The co-op board of directors have to right to refuse or approve of potential owners. -The board may charge the seller a flip tax at the time of sale. A flip tax is the percentage amount paid by the selling shareholder to the cooperative at close of title. Flip taxes are income-generating mechanisms for the cooperative.

Contract

A contract is a voluntary agreement between legally competent parties to perform or refrain from performing some legal act, supported by legal consideration. They can be: -express or implied; -unilateral or bilateral; -executory or executed; and -valid, void, voidable, or unenforceable.

Assumed mortgage

An assumed mortgage takes place if I inherit a piece of property that has a mortgage, then I assume that mortgage as well. All the obligations and debts that belonged to the estate will now belong to me.

counteroffer

Any attempt by the seller to change the terms proposed by the buyer ("Okay, except that . . .") is a counteroffer. Any counteroffer essentially cancels the original offer. The buyer is no longer bound by the original offer because the seller has, in effect, rejected it. The buyer may accept the seller's counteroffer or reject it or, make another counteroffer. Any change in the last offer made results in a counteroffer until one party finally agrees with the other party's last offer and both parties sign the final contract. -A contract is not considered valid until the person making the offer has been notified of the other party's acceptance. Any offer can be rescinded prior to acceptance/communication of acceptance by the other party.

Undue influence and duress

Contracts signed by a person under duress or undue influence are voidable (may be canceled) by such person or by a court. Extreme care should be taken when one or more of the parties to a contract is elderly, sick, in great distress, or under the influence of drugs or alcohol. To be valid, every contract must be signed as the free and voluntary act of each party.

conversion

Earnest money must be held by a broker or lawyer in a special trust, or escrow, bank account. This money may not be commingled, or mixed, with a broker's personal funds. A broker may not use such funds for his or her personal use (called a conversion- legal term for stealing)

Bilateral contract

In a bilateral contract both parties promise to perform under and as required by the contract; one promise is given in exchange for another. For ex: a real estate sales contract is a bilateral contract. The seller promises to sell a parcel of real estate to the buyer, who promises to buy via a payment of a certain sum of money. "I will do this, and you will do that." "OK." -express contracts are bilateral contracts

cont'd

In other areas of the state, the broker prepares a precontract agreement, aka a binder, which may or may not be legally enforceable but usually contains many of the essential terms used later in a contract. It also may acknowledge receipt of an earnest money deposit. Purchase offers often are handled by attorneys. Below 5 steps involved in preparing a fully executed, binding purchase and sales contract: 1.) The attorneys prepare and negotiate the contract of sale. 2.) The seller's attorney sends the buyer's attorney a draft contract, which the buyer can agree to or modify by suggesting acceptable changes through the buyer's attorney. 3.) After negotiation, the buyer's attorney sends the contract negotiated by the buyer with the down payment (considered an offer at this point) to the seller through the seller's attorney for acceptance. 4.) The offer is considered accepted when and after it is signed by the seller and delivered to the office of the buyer's attorney. 5.) At this point, it is binding on both parties.

memorandum of sale

In some areas, brokers prepare a non-binding memorandum of sale/data sheet/ terms sheet which states the essential terms of the agreement. The parties agree to have a formal and complete contract of sale drawn up by an attorney.

release

In the case of a land contract, the buyer should record the land contract. This protects the buyer against the subject property being pledged in the future as collateral to another lender by the seller. If the parties decide not to go through with the purchase and sale, they usually enter into a written release, freeing each other from any obligation under the contract.

cont'd

Most sales contracts also include: -Encumbrances to which the deed will be made subject -Earnest money deposit -Mortgage financing the buyer plans to obtain and other contingencies -Possession by the buyer -Title evidence -Prorations and adjustments -Destruction of the premises before closing -Default by either party -Prior deed -Prior title insurance policy -Survey -Certificate of Occupancy -Personal Data (names, addresses, telephone numbers, marital status, Social Security numbers, etc.) -Tax bills -Miscellaneous provisions

destruction of premises

NYS has adopted the Uniform Vendor and Purchaser Risk Act, which provides that the seller (vendor) bears any loss, most commonly from a fire, that occurs before the title passes or the buyer (vendee) takes possession.

Statue of limitations

New York allows a specific time limit of six years during which parties to a contract may bring legal suit to enforce their rights. Any party who does not take steps to enforce his or her rights within this statute of limitations may lose those rights. The six-year period applies to contracts, foreclosures, mortgages, and cases of fraud. Lawsuits to recover real property have a ten-year statute of limitations in New York. The principle or doctrine of laches bears similarity to that of the statute of limitations. Laches is an undue delay or failure to assert a claim or right that can result in the loss of that claim or right. A colloquial way of describing them would be, "Use them or lose them."

Assignment & Novation

Often after a contract has been signed, one party wants to withdraw without actually ending the agreement. This may be accomplished through either assignment or novation. It should be noted that standard residential contracts of sale do not have an assignment clause. Also, when the contract is silent on the subject of assignment, it is not allowed. In either case, assignment can occur with the consent of the seller.

Offer & acceptance

One of the essential elements of a valid contract of sale is a meeting of the minds, where the buyer and seller agree on the terms of the sale. Usually accomplished through the process of offer and acceptance. In Upstate, an offer to purchase is drawn up, signed by the prospective buyer, and presented by the broker to the seller. This is an offer. If the seller agrees to the offer exactly as it was made and signs the contract, the offer has been accepted, and the contract is valid. Then the contract gets approved by an attorney if needed and a copy is given to each party.

cont'd

Other pertinent info when preparing contract: -Date. -Reflect the date of contract preparation. -Identification of the parties. Names the interested parties to the transaction (i.e., the buyer and the seller). -Legal description. Provides a legal description of the property (the section, lot and block number -Personal property provision. Addresses any personal property to be transferred or not transferred with the real property. -Consideration. One of the required essential elements for a contract to be valid and enforceable. The exchange of value is stated within this section of the contract; it will normally state the purchase price. -Terms of payment. Addresses the manner by which payment is to be made and will also include any earnest money deposit due at contract signing. -"Subject to" provision. Will spell out any contingencies requisite for the transaction to proceed (i.e., lender financing). -Type of deed. Sets forth the type of deed to be conveyed by the seller to the buyer. -Closing time and place. Will provide the date and time that the closing is expected to take place. The words "on or about" or "time is of the essence" distinguish the expected date, time of closing, and responsibility of the parties to close. -Broker clause. Lists the names of any brokers involved in the transaction and a statement as to the party responsible for remuneration of fees (normally paid by the seller). -Apportionments. Covers the responsibilities of the parties for any charges or income due either party on the day of closing. These items are always set forth within the closing statement. The closing statement is normally prepared (prior to the closing) by the closing/escrow agent. -Lien law. States that NY lien law establishes that, where particular funds are to be received by owners, contractors, and subcontractors in connection with any improvements of real property, those individuals or entities become statutory trustees to the holding of statutory trust assets. -Condition of property. Covers the basis for condition of the property to be delivered to the buyer at closing/transfer of title (i.e., property to be delivered in "as is condition"). Things should be working in the unit or property. -Merger clause. Covers the avoidance of any precontract discussions and negotiations from surviving the written contract and agreement. In order to be effective, it also stipulates that any amendment, waiver, or change to the agreement must be in writing and executed by the interested parties to the contract. -Loan contingency clause. Outlines the buyer's prerequisite requirement to obtain financing as paramount to the completion and closing of the transaction. In the event financing cannot be legitimately accomplished, the buyer would be entitled to void the contract and receive back his or her earnest money deposit. -Possession. Addresses the point at which the buyer will receive physical possession of the purchased property (i.e., on the day of closing, at some determinable date after the date of closing, or that the buyer receives earlier possession prior to the closing). -Down payment. Addresses the buyer's initial investment/monetary responsibility under the contract. -No survival. Applies to events following the execution/closing of the contract. Where no survival of terms is applicable, the contract and responsibilities of the parties cease at execution/closing and transfer of title.

Rescission

Seen w/ contracts for the purchase of some types of personal property, the buyer has 3 days in which to reconsider and rescind (cancel) the contract. No such right of rescission applies to contracts for the purchase of real estate (with certain exceptions, for example, when lead-based paint laws apply). Another form and example of rescission exists when borrowers change their minds about a mortgage loan. In this case, a borrower has three days in which to cancel the transaction if the mortgage was for the refinancing of presently owned and owner-occupied property. No right of rescission, however, applies to mortgage loans used for the purchase of real estate.

When seller defaults or breaches contract:

The buyer has a combination of three alternatives: -The buyer may rescind, or cancel, the contract and recover the earnest money deposit. -The buyer may file a court suit, known as an action for specific performance, to force the seller to perform the contract (that is, sell the property). -The buyer may sue the seller for compensatory damages.

ernest money deposits

When a buyer provides a down payment, initial equity, or contract deposit, it gives evidence of the buyer's intention to carry out the terms of the contract. Often held by the party holding the escrow involved in the sale (upstate) or the seller's attorney (New York City area). The state requires that each sales contract name and identify the party holding the deposit and the bank where it is to be held. If the offer is not accepted, the earnest money deposit is returned immediately to the would-be buyer. -The deposit generally should be enough to discourage the buyer from defaulting, compensate the seller for taking the property off the market, and cover any expenses the seller might incur if the buyer defaults. However, a purchase offer with no earnest money is valid. -If a contracted sale fails to close, the RE broker who is holding a deposit in escrow should not turn over the money to either party without written agreement or release from both buyer and seller or their attorneys. In the event of a prolonged disagreement, the money can be placed in the custody of a court pending final settlement.

cont'd

When prepared, the sales contract will provide for the agreed-on amount of earnest money deposit to be made by the buyer. -the buyer normally is required to deposit 10% of the purchase price to whichever party is acting as the escrow/closing agent to the transaction (seller's attorney/listing agent).

Land contract aka installment sales contract

aka contract for deed or an installment contract. Under a typical land contract, the seller, (or vendor), retains ownership, while the buyer, (or vendee), moves in and has an equitable interest in the property. In a common form, the buyer agrees to give the seller a down payment and pay regular installments of principal and interest over a number of years. Land contracts are used as financing instruments since, by receiving installments over a prescribed period of time, the seller acts as the lender. Land contracts or installment sales contracts bear resemblance to a "layaway plan" in a retail store: In a layaway plan, the seller of the item retains ownership of the item until all installments under the layaway plan have been paid. In a land contract or installment sales contract, although the buyer receives possession of the property as well as equitable title, the seller holds the deed until all installments have been paid.

Sales contract cont'd

escape clause- or kickout. Such a provision allows the seller to look for another offer, with the original purchaser retaining the right, if challenged, either to firm up the first sales contract (dropping the contingency) or to void the contract. If the first buyer chose to drop out, the seller would then be free to accept the other offer. Liquidated damages- an amount of money, agreed to in advance by buyer & seller, that will serve as total compensation if one party does not live up to the contract. If a sales contract specifies that the earnest money deposit will serve as liquidated damages, the seller will be entitled to only the deposit if the buyer refuses to perform for no good reason. The seller who does agree to accept the deposit as liquidated damages may not sue later for any further damages.

Sullivan Law

is a requirement for plain language that is clear and coherent in certain written agreements for the sale or lease of residential property. This doesn't apply to agreements for amounts greater than $50,000.

Breach of contract

is a violation of any of the terms or conditions of a contract without legal excuse. A default can be defined as the failure to perform on the terms of the contract by either party to that contract. For example, a seller enters into a contract with a buyer for the purchase and sale of a home and later refuses to sell.

cont'd

printed forms can b used for contracts but 3 problems can happen: 1.) what info goes in fill in the blanks, 2.) what printed matter is N/A to a particular sale and can be ruled out by drawing lines through the unwanted words; and (3) what clauses or agreements (called riders) are to be added.

Assignment

refers to a transfer of all of one's rights and/or duties under a contract. Generally, rights may be assigned to a third party unless the agreement forbids such an assignment. Most contracts include a clause that either permits or forbids assignment.

Parole evidence rule

states that the written contract takes precedence over oral agreements or promises. A promise that is not in the written contract may not be legally binding.

American Bar Association

the national representative of the legal profession. Its purpose is for serving the general public as well as the legal profession through the promotion of justice, professionalism, and, most of all, respect for the law. The ABA provides: accreditation for law schools, continuing legal education (CLE), information about the law, programs that assist lawyers and judges in their work, and a variety of initiatives intended to improve the legal system for the general public.

When the buyer defaults or breaches contract:

the seller may pursue one of the following four courses of action: -The seller may declare the contract forfeited. The right to forfeit usually is provided in the terms of the contract, and the seller usually is entitled to retain the earnest money and all payments received from the buyer. -The seller may rescind the contract; that is, he or she may cancel, or terminate, the contract as if it had never been made. -The seller may sue for specific performance. This may require that the seller offer a valid deed to the buyer to show that the seller is ready to meet the contract terms. -The seller may sue for compensatory damages.

Novation

the substitution of a new contract for an existing agreement. It may also involve the substitution of a new party for an old party. The new agreement may retain the same parties or substitute a new party for either (novation of the parties). A real estate ex. might be the assumption of a present mortgage by the new owner of a property, with the lender releasing the original borrower and substituting the new one.

Discharge of contract

to end a contract either by completing the performance or it being breached; Other methods: 1.) Partial performance of the terms along with a written acceptance by the person for whom acts have not been done or to whom money has not been paid 2.) Substantial performance, in which one party has performed most of the contract but does not complete all details exactly as the contract requires, which may be sufficient to force payment with certain adjustments for any damages suffered by the other party 3.) Impossibility of performance, in which an act required by the contract cannot be legally accomplished 4.) Mutual agreement of the parties to cancel 5.) Operation of law, as in the voiding of a contract by a minor, as a result of fraud, owing to the expiration of the statute of limitations, or because of alteration of a contract without written consent of all parties involved