Real Estate Chapter Six

There can be four legal statuses of a contract:

1. Void 2. Voidable 3. Unenforceable 4. Valid

implied contract

An implied contract is established by the actions of the parties, without any oral or written agreement.

rejection

An offer also terminates due to rejection by the offeree. After rejecting the offer, the offeree cannot come back and create a contract.

Writing

For most contracts in real estate deals, there is a fifth element to create a valid contract. It must be in writing.

tender

Performing a contractual obligation

duress

Making a person enter into a contract against his will with use of physical power or threatening to use physical power.

Offer and Acceptance

Offer and acceptance is the second requirement for a valid contract. A contract can only be created when both parties give their mutual consent to its terms. A contract must be read and completely understood before it is signed. Once the contract is signed it is taken as consent granted. There has to be a sort of "meeting of the minds" for creating a valid contract. This is achieved through a process called offer and acceptance.

Unilateral contract

Only one party is obligated to fulfill a duty. An open listing agreement is an example of a unilateral contract because the seller promises a commission to the real estate broker for finding a buyer. The broker, however, has not promised to find a buyer, but if he does find a buyer, the seller is obligated to pay him the commission.

agreement between the parties

Parties to a contract may agree to discharge the contract in any of the following ways: 1. Rescission 2. Assignment 3. Cancellation 4. Novation

Doctrine of Laches

Similar to the concept of the statute of limitations. The court uses laches, an equitable principle, to prevent someone from asserting a claim after an unreasonable delay.

lapse of time

Some offers include a deadline for their acceptance after which the offer terminates automatically. If a time limit is not set for an offer, a reasonable time is allowed. If dispute between the parties develops over what amounts to a reasonable time, the court will decide what is reasonable.

anticipatory repudiation

Sometimes there is anticipatory repudiation by one of the parties. A positive statement by the defaulting party stating that he cannot or will not fulfill the terms of agreement is called an anticipatory repudiation. In this situation, there is no need to make a tender and a legal action can be undertaken right away.

cancellation

The parties agree to end the contract but previous acts performed under the contract cannot be undone. For example, if the payment of money was one of the contract terms and was paid before the cancellation, then it will not be returned.

party

The person participating in a contract is referred to as a party to the contract.

Legal relief for breach of contract

There are four legal reliefs for a breach of contract. They are: rescission compensatory damages liquidated damages specific performance

Novation

There are two types of novation. The first type is when a new party is substituted in an existing agreement. The first party is relieved of all liabilities attached with the contract. The second type of novation is when the parties substitute a new agreement in place of the original one, which discharges the old agreement. Unlike assignment, novation cannot be done without the consent of all the parties.

contents cannot be proven

This generally occurs with oral agreements. Although the law allows certain agreements to be oral, it is advised to always opt for a written agreement to avoid confusion and misunderstandings, and to be able to more easily prove the contract terms in court when required. Vaguely written contracts are said to be illusory and unenforceable, therefore, a written contract must be clearly worded regarding all its terms.

termination of an offer

This happens when the offeror has a change of mind and wants to terminate the offer or the offeree's circumstances have changed and he backs out. When the offer is terminated before being accepted, then no contract is formed.

executed contract

When a contract obligation is fully performed Executed and performed mean the same thing. The term executed is also used in another context in the real estate industry. Execution of a deed, a contract, a will, or any other legal document, simply means signing those documents as opposed to performing or fulfilling any terms it contains. In the above context, the parties who have executed

all contracts fall under a particular classification. These classifications are:

1. Executory and executed contracts. 2. Express and implied contracts 3. Bilateral and unilateral contracts.

What are the elements of a valid contract

1. Legal capacity to contract 2. Offer and acceptance 3. Lawful objective 4. Consideration 5. Writing

Some situations which can terminate an offer before being accepted are:

1. Revocation of an offer 2. Time lapse 3. Offeror's death or incompetence 4. Rejection 5. Counteroffer

The "writing" as required by the Statute of Frauds, could be in any form, such as a note, a memorandum, or a series of letters if:

1. The subject matter of the contract is identified. 2. There is an indication of the agreement between the parties and its important terms. 3. It is signed by the binding party. A contract will not be enforceable if it falls under the Statute of Frauds and it is not written. Only in rare cases does the court enforce an unwritten agreement; therefore it is advisable to always put a contract in writing. In a dispute between a partly-handwritten and party an a partly-printed contract, generally the handwritten portion takes precedence. The intent of the handwritten portion is considered to be more reliable than the printed one. In certain types of contracts made in Spanish, Chinese, Korean, Tagalog, and Vietnamese between a business and a consumer, the consumer must receive a translated copy before signing the English version of the contract. This also applies to the financial institution that negotiates the loan application of a residential real property in one of the five languages listed above. In such a situation the borrower must be given a translated copy of the contract within three working days after the loan application.

breach of contract

A breach of contract occurs when one of the parties fails to perform some or all of the obligations of the contract without a reasonable legal excuse. The injured party is entitled to legal relief if the breach is a material breach.

acceptance

A contract is created only when the offeree has communicated acceptance to the offeror, as mentioned and within the time limit stated in the offer or before the offer is revoked. The acceptance of an offer must not be made under any threat, undue influence, fraud or duress. A contract is voidable if entered into under threat of harm to a person or a thing. Misrepresentation of a fact to someone who takes the misrepresentation as a truth in deciding to enter into a deal is called a fraud or fraudulent act.

express contract

A contract that has bee put into words in writing or orally. The parties to the contract have declared what they are willing to o and they have been told what is to be expected from the other party. Most contracts are expressed contracts.

contract voidable by other party

A contract voidable by one party is unenforceable by the other party. The party with the option of voiding the contract could instead choose to enforce the contract against the other party.

counteroffer

A counteroffer is created by making any change to the original offer. When some of the terms are unacceptable to the offeree, he can accept the offer after the required modifications in the original offer are made. When a counteroffer is made, the roles are reversed; the offeror becomes the offeree and he can either reject or or accept the revised offer. If a counteroffer is accepted, it creates a contract; if it is rejected, the party making the counteroffer cannot revert to the original offer and accept it. Issuing the counteroffer terminates the original offer.

statute of limitations expired

A law that sets a deadline for filing a lawsuit is called a Statute of Limitations. If the lawsuit is not filed by the injured party within the deadline set by the applicable statute, he loses his legal claim forever. This law's purpose is to prevent someone from suing another person after a long time has passed since a particular incidence, when memories may be vague and evidence missing. In California, the statue of limitations allows lawsuits concerning written contracts to be filed within four years after their breach, and the period for filing a lawsuit for oral contracts is two years after breach.

lawful objective

A lawful objective is the third requirement for a valid contract. A valid contract cannot be made for any unlawful activity, such as creating a contract to use real estate property for manufacturing illegal drugs. A contract is void if the objective is illegal. In a situation where the contrast has a legal, as well as illegal objective, then the contract will be valid only to carry out the legal objective.

material breach

A material breach is that unfulfilled obligation which is an important part of the contract.

contract

A promise made by one person to another to do something or refrain from doing something. Either the contract promise is made by only one of the parties or a separate promise is made by each of the parties. To be legally binding, a contract has to meet certain requirements. In a valid contract, it becomes the duty of each party to fulfill their specified contractual obligations. Whoever defaults (does not fulfill the promise made) in completing the contract terms is liable to the opposite party for breach of contract.

Statute of Frauds

A state law in California that requires certain types of contracts to be written and signed. 1. An agreement which will not be completed within one year. 2. An agreement for the sale of real estate or an interest in real estate or a lease of real estate for more than one year. 3. An agreement authorizing an agent to sell or purchase real estate or lease it for one year or more. 4. An agency agreement authorizing an agent to find a purchaser or seller of real estate, or a lessee or lessor of real estate where the lease period is more than one year. 5. An agreement by a purchaser of real estate to pay a debt which is secured by a mortgage or deed of trust on the purchased property or if the purchaser is to assume the debt.

discharging a contract

A valid and enforceable contract may be discharged by: 1. Full Performance 2. Agreement between the parties.

valid

A valid contract is one including all the required elements, which are free of negative influences and can be proved in court.

void

A void contract has no legal effect and it is not considered to be a contract. This generally happens due to the complete lack of an important element of a contract, like a mutual consent or a lawful object. A void contract may be ignored and neither party has to take any legal action to disclaim the agreement.

voidable

Although a voidable contract seems to be valid, it has some fault which gives either one of the parties the power to withdraw from the agreement. For example, a contract entered by a temporarily incompetent person may be voidable by that person after regaining his mental competency. A voidable contract cannot be disregarded. If legal action to withdraw from the contract is not taken within a stipulated time, the court may declare the contract is ratified. In cases where the injured party desires to continue with the contract, he may ratify it.

offer

An offer exists only when an offeror, the person making the offer has communicated its term to the offeree, the person receiving the offer. It should be clear that an offer is being made. Since there is a standard, detailed form which is used in almost all real estate dealings, knowing the intentions of the offeror is relatively easy.

offeror's death or incompetence

An offer is terminated if the offeror dies or if he is declared incompetent.

tender

An unconditional offer by one of the parties to a contract to fulfill his part of the agreement. it is also sometimes referred to as "an offer to make an offer good" Generally made when it seems that the other party might default, the tender is necessary before any legal action can be taken to remedy the breach of contract.

unenforceable

An unenforceable contract cannot be enforced in court for one of the following reasons. 1. Its contents cannot be proven. 2. It is voidable by the other party. 3. The statute of limitations has expired.

constructive fraud

Any misrepresentation made without an intention to deceive is constructive fraud.

Assignment

At times one of the parties to a contract assigns is interest in the contract to another person by withdrawal. Unless the terms of a contract prohibit assignment, a contract may be assigned to another person; the assignee is the new party who takes over the responsibilities of the assignor, the one who makes the assignment. However, the assignor remains secondarily liable. A personal service contract cannot be assigned without the consent of the other party.

Bilateral contract

Both parties promise to fulfill a duty which they both are obligated to perform. A typical real estate purchase is an example of a bilateral contract where the seller promises to transfer the right of ownership and the buyer promises to pay the agreed price to the seller.

consideration

Consideration is the fourth requirement for a valid contract. Consideration is an obligation or a payment which each party must abide by to enforce the contract. It may be in the form of money, a service, or a promise to do something, or not to do something in the future. For example, in a normal real estate purchase agreement, the buyer promises to pay a certain amount of money to the seller (at a predetermined time) and the seller, on his part, promises to convey title to the buyer after obtaining his money. In this scenario, both parties have given and received consideration.

compensatory damages

Financial losses that a party suffers because of a breach of contract are called damages. Compensatory damages are the most common remedy for a breach of contract. The court orders the breaching party to pay a sum of money to the injured party for the losses incurred due to the breach of contract.

actual fraud

It happens when the person knowingly makes a false statement with an intention to deceive or does not know whether or not the statement is true but makes it anyway.

fraud or fraudulent act

Misrepresentation of a fact to someone who takes the misrepresentation as a truth in deciding to enter into a deal

Good Faith Deposit

Money given by the buyer to the seller when entering into a purchase agreement. It implies the buyer's intent of fulfilling the terms of the contract. The seller can keep the Good Faith Deposit if the buyer defaults on the contract. When that happens, the contract is cancelled.

Revocation of an offer

The offeror can revoke the offer before it is accepted by communicating the decision of revocation directly to the offeree or through a reliable source (like the real estate agent).

Legal capacity to contract

The primary requirement of a valid contract is having legal capacity to enter into a contract. A person has to be competent and at least 18 years old to enter into a valid contract. In California, anyone younger than 18 is a minor and cannot make a contract concerning real estate. Such a contract will be void if a minor signs a contract, that contrast is voidable by the minor (it cannot be enforced against him) This clause prevents people who are too young to understand the consequences of entering into a legally bonding contract 1. A legally emancipated minor may enter into any type of contract. A minor can be emancipated by marrying, joining the military services, or by petition to a court of law. A married minor may enter into a real estate contract to buy property. When making a real estate transaction, a minor emancipated by a court order must provide copies of the emancipation document to the real estate agency for it to know that the minor has the capacity to make the transaction. Only a mentally competent person can enter into a contract. If the court has declared a person to be mentally incompetent, any contract signed by him becomes void. Even without a judicial order, an incompetent person, so proved by evidence, may be unable to form a contract. Anyone who makes a contract while under the influence of drugs or alcohol may later (within a stipulated time period) disaffirm the contract. It is noteworthy that a person receiving psychiatric treatment may not necessarily be incompetent. An exception to the capacity rules is that, if the minor or incompetent person contracts to buy necesseities like food or medicine, such a contract cannot be voided. Whenever a minor receives a property as a gift or inheritance, a guardian must be appointed for him. A guardian takes the responsibility to handle the property conveyance, lease, encumbrance, and other transactions on behalf of the unemancipated minor. The property of a deceased person is either handled by an executor named in his will or by an administrator appointed by the court (if no executor was named in the will of the deceased). The actions of the representatives are subject to approval from the probate court. An alien who is not a citizen of the U.S. has similar property rights as a citizen. He may purchase or sell property freely, although there are some property-transfer reporting requirements to be fulfilled. Convicts and those serving a prison sentence do have a right to transfer or obtain real property. Their property is not forfeited, either.

contractual obligation

The promise made by each party is that party's contractual obligation.

Full performance

This implies that the parties fulfilled all of the obligations and thus the contract is executed. For instance, when the deed to property is delivered to the buyer and the seller receives the agreed upon purchase price, their purchase agreement has been discharged by full performance.

Specific performance

This is the legal action through which the breaching party is forced to fulfill the terms of the contract. This action is normally taken as a remedy only if monetary damages would not suffice.

time is of the essence

Time is of the essence is mentioned in may standard contracts, which indicates that performing the obligations on time is important and not meeting the deadline will be considered a breach of contract. If a party fails to meet the deadline, the other party decides whether to continue with the contract or to discharge it using the "time is of the essence" clause.

Rescission

To repeat, rescission takes both parties back to their position before contracting. The rescission can either be by agreement or by the court's intervention when one of the parties has breached the contract.

undue influence

Using one's influence to threaten or pressure a person into making a contract or taking advantage of someone's weakness of mind to cause him to enter into a contract.

Executory contract

When a contract obligation is yet to be performed or is in the process of being performed

Rescission

When both parties agree to take back (rescind) the contract, they do it through a process called rescission. A rescission is sometimes referred to as "a contract to destroy a contract" To rescind a purchase contract the buyer and the seller signs an agreement to terminate the original agreement. If there was money or other consideration involved, it is returned. In some cases, rescission is carried out by court orders instead of agreement between the parties.

liquidated damages

When the parties to a contract agree in advance to an amount that will serve as full compensation if ever one of the parties breaches the contract, that amount becomes the liquidated damages of the injured party. The provision of the liquidated damages clause is beneficial to both parties. They can settle their disputes without approaching the judiciary. However, the liquidated damages provision limits the amount of compensation the injured party would receive. In a real estate transaction, if there is a breach of contract by the buyer, the seller is entitled to keep the Good Faith Deposit as liquidated damages. Generally the seller cannot sue the buyer for any further compensation There is no liquidated damages clause in a typical real estate agreement if the seller breaches the contract instead of the buyer. In this case, the buyer can sue the seller for compensatory damages.