Section 10: Contracts and Michigan Contract Law Unit 6: Option Contracts and Terminating an Offer in Michigan

Addendum

An addition to an existing contract

Open listing agreement

A non-exclusive listing where the seller can have open listing agreements in place with multiple licensees, and only the licensee who procures the buyer earns the commission

Contracts and Contract Law in Michigan: Basic Types of Contracts

Express vs. implied Bilateral vs. unilateral Executed vs. executory Valid vs. invalid Enforceable vs. unenforceable Void vs. voidable

Contracts and Contract Law in Michigan: Statutes to Know

Statute of Fraud Statute of Limitations

What happens when a minor enters into a contract?

The minor can void it; the other party can't

What is "specific performance" of a contract?

The requirement to meet the terms of the contract exactly

Amendment

A change to an existing contract (it changes the original terms of the contract)

What does the statute of limitations provide?

A deadline for how long an aggrieved party to a contract may sue for damages

Voidable contract

One in which one party has the option to void the contract

Net listing

One in which the agent earns commission only if the property sells above a specified price

What is a contractual breach?

One party fails to meet the obligations of the contract

Option Contract Basics: What is a real estate licensee's role in an option contract?

While a knowledgeable real estate licensee may have some insight into the option contract process, this is really an area for a real estate attorney. Therefore, as a licensee, your best bet is to advise your client to seek the advice of a real estate attorney who understands the ins and outs of option contracts.

What are the essential elements of a valid contract?

Competent parties, mutual agreement, lawful objective, consent, and consideration. Contracts for the transfer of real property must be in writing and contain the signatures of the parties to be enforceable.

What is "performance" of a contract?

Completing the terms of the contract

Bilateral contract

One in which both parties have obligations

What is an exclusive right-to-sell listing agreement?

One in which the listing agent has earned their commission, regardless of who brings the buyer

Unilateral contract

One in which there is only one party making a promise (e.g., an offered reward to help find a lost pet)

What is "partial performance" of a contract?

One or both parties did not meet all terms of the contract (the other party can determine whether to accept partial performance or not)

Contracts and Contract Law in Michigan: Ways to Terminate an Offer

Acronym: Wild Card *Withdrawal *Insanity *Lapse of time *Death *Counter-offer *Acceptance *Rejection *Destruction of the property

Void contract

Not a contract because of lack of legality

Contracts and Contract Law in Michigan: Contracts Important to Real Estate

*Buyer representation agreements *Listing agreements *Sales contracts *Land contracts *Option contracts

Contracts and Contract Law in Michigan: Rules for Interpreting a Contract

*Executed contract trumps previous negotiations and stipulations (parol evidence rule) *Hand-written insertions trump typed insertions, which trump pre-printed text *Specific information trumps general *Numbers spelled out (one) trump numerals (1)

Contracts and Contract Law in Michigan: Ways to Discharge (End) a Contract

*Performance *Rescission *Release *Reformation *Assignment *Novation *Breach

Ways to Terminate an Offer

*WILDCARD* Withdrawal by offeror Insanity Lapse of time Death Counteroffer Acceptance Rejection Destruction of the property

Option

An offer to purchase a specific piece of real estate, but without the obligation to buy it. In an option contract, the potential buyer (optionee) is 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 gets to keep the option fee.

Option Contract Basics

An option contract, or option, is an offer to purchase a specific piece of real estate but without the obligation to buy it. An option contract gives the potential buyer, who is known as the optionee, the right to purchase the property of the seller, or optionor, at some time in the future. The option contract will spell out that time frame, which is usually from one to three years.

Lease with Option to Buy vs. Right of First Refusal

If it helps, remember that with an option, all the cards are in the option holder's hands: The option holder can decide when and whether to exercise the right to the property. It's more proactive. With a right of first refusal, the holder of the right waits until an event occurs (a third party makes an offer on the property) and then must decide whether to exercise the right, or let the property go. This is a more reactive position.

Option Contract Basics: What happens if the optionee decides to exercise the option?

If the optionee does exercise the option according to its terms and conditions, then a binding contract between the two parties is created. Once that happens, both parties are obligated to fulfill their contractual obligations: the seller sells, the buyer buys, and everyone lives happily ever after.

Option Contract Basics: What makes an option contract different from a regular sales contract?

In a "regular" sales contract, both the buyer and seller are bound to carry out their contractual obligations. In an option contract, only the optionor (seller) is bound by the option contract; therefore, it is a unilateral contract. While the option gives the optionee (buyer) the right to buy the subject property, it does not require the optionee to buy it. The optionee must pay an option fee (consideration) to the optionor, which can be for any amount that both parties agree to. If the optionee decides not to exercise the option to purchase the property, then the optionor gets to keep the option fee—and sell the property to someone else.

What elements are required in a valid option contract?

It must be in writing and signed by the optionor and state the amount of consideration, the length of the option period, and the sales price of the property

Statute of Frauds

Legal requirement that certain contracts, including the sale of real property, be in writing to be enforceable

Contracts and Contract Law in Michigan: Essential Elements of a Valid Contract

Legally competent parties Legal purpose Offer and acceptance consideration

Express contract

May be oral or written and clearly states the terms of the agreement between the parties

What is "substantial performance" of a contract?

Most, but not all, of the terms specified in the contract have been met, and the party not meeting the remaining terms may be required to pay damages for the terms not met

Lease With Option To Buy

One possible option for purchasers who may not be able to get traditional financing, but who want to own a home is a lease with an option to buy. An option is an offer. When the buyer exercises the option, the buyer is accepting the offer Although the buyer pays the seller for the right to invoke the option, the buyer may not ever invoke it, in which case the fee is forfeited to the seller. If the optionee doesn't exercise the option before the expiration date, the owner is free to sell. Sometimes a portion of the lease payments will apply toward the property's purchase price; other times, all rental income is just that—rental income. A breach of the lease terms may negate the option, and the prospective purchaser could even lose any portion of lease payments that were intended to go toward the purchase price.

Exclusive agency listing agreement

One that pays commission to the listing agent only when a real estate professional procures the buyer (if the seller does, no listing commission is owed)

Invalid contract

One that's missing a legal element

Implied contract

One that's not been expressly agreed upon, but relies on the actions of the parties to determine the agreement (e.g., when ordering lunch at a diner, it is implied that you will pay the bill)

Option Contract Basics: Who uses an option contract, and when do they use it?

Option contracts are used in a variety of situations. Commonly, an option can be attached to a lease. It allows the lessee (renter) the option to purchase the property at the end of the lease term or within the timeframe noted in the option contract. This is usually known as a lease option, or a lease with an option to buy. This is often used to give the lessee time to come up with the money to purchase the property. In general, option contracts are entered into to allow the optionee the time to raise money to purchase a property. Sometimes a real estate investor chooses to make the relatively low-risk investment in an option on an undeveloped piece of land—especially if the property is in a prime location—and then take the option period to find investors and developers. The original investor (optionee) charges these investors and developers a higher price than the option amount, and after exercising the option contract, flips the property for a nice profit.

Right of First Refusal

Similar to, but different from, a lease option is a right of first refusal. With a right of first refusal, the holder may purchase the property if the seller decides to sell to anyone. The order of events is this: *The prospective purchaser asks for (and often pays a fee for) a right of first refusal. *At some point, the owner may put the property up for sale or lease. *Another party makes an offer to the owner. *The holder of the right of first refusal now has to "put up or shut up"—either match the new party's offer, or allow the property to be sold or leased to the third party.

What's an assignment of a contract?

Someone substitutes for one of the original parties to the contract (which requires the consent of the parties and the original party may still remain responsible for the terms in the event of a default of the substitute)

What is "impossibility of performance" as it relates to a contract?

The parties cannot legally or practically do what they've agreed to do (in such cases, they are released from their contractual obligations to one another)

What's a novation of a contract?

The substitution of one party for another in an agreement; the original party is released from all obligations

Option Contract Required Elements

While an option contract is a unilateral contract (in which one party is contractually obligated to keep the duties outlined in the contract), it is still a contract. As such, it must contain all the terms and provisions required by law for a valid contract. *consideration: To be enforceable, there must be consideration (something of value—generally, money) given in exchange for the promises made in the contract. In this case, the optionee (buyer) must pay the consideration (option fee), usually money, to the optionor (seller). The amount of consideration must be stated in the contract. The contractual "promises" are that the optionor will not sell the property to anyone else, and the optionor will sell it to the optionee, if the optionee so chooses, under the terms and conditions of the option contract. *option period: It must state how long the option period is; if not, a court will require the optionor to make the option period for a "reasonable time." (The typical option period is often six months. Option periods cannot be "forever," or even be extended indefinitely.) *It must clearly state the sales price of the property, or the way in which the price will be determined, if the optionee chooses to purchase the land during the option period. *statute of frauds: which means it must be: -Written -Signed by the optionor In addition to these elements, an option contract must clearly state any other terms or conditions that apply to the optionee's exercise of the option to purchase the property.