unit 9

bilateral contract

Contracts may also be classified as either bilateral or unilateral. In a bilateral contract, both parties promise to do or refrain from doing something; one promise is exchanged for another. ("I will do this, and you will do that.") A real estate sales contract is a bilateral contract because the seller promises to sell a parcel of real estate and deliver title to the property to the buyer, who promises to pay a certain sum of money for the property. Most real estate-related contracts are bilateral in nature.

reality of consent

Contracts signed by a person under duress or undue influence are voidable by that person or by a court. Extreme care should be taken when one or more of the parties to a contract are elderly, sick, in great distress, or under the influence of alcohol or drugs, both legal and illegal. To be valid, every contract must be signed as the free and voluntary act of each party. Misrepresentation, fraud, or mistake of fact could render a contract voidable by the injured party. In the absence of these factors, reality of consent has been reached.

In an executory purchase contract, the buyer's interest is described as A) equitable owner. B) free and clear title. C) naked legal title. D) legal title.

a

The electrical wiring in a house listed with a broker is defective. The broker is aware of this and intentionally deceives a potential buyer about it. The buyer purchases the home and later suffers a financial loss because of faulty wiring. This is an example of A) fraud. B) mistake of fact. C) mistake of law. D) novation.

a

A broker has found a buyer for a seller's home. The buyer has indicated in writing a willingness to buy the property for $1,000 less than the asking price and has deposited $5,000 in earnest money with the broker. The seller is out of town for the weekend, and the broker has been unable to inform the seller of the signed document. At this point, the buyer has signed A) a voidable contract. B) an offer. C) an executory agreement. D) an implied contract.

b

North Carolina Real Estate Commission Rule requires that brokers include all required data when completing preprinted contracts but prohibits the inclusion of brokerage compensation or a ____________ in a sales contract. A) document fee B) liability disclaimer C) expiration date D) sales agent name

b

Upon acceptance and communication of acceptance, the offer is now considered A) valid. B) a counteroffer. C) a contract. D) unilateral.

c

In the standard Offer to Purchase and Contract form jointly approved by the North Carolina Association of REALTORS® and the North Carolina Bar Association, all of the following provisions are found EXCEPT A) the requirement for the seller to convey title free and clear of all liens, except those listed in the contract. B) a description of the duties and obligations of the buyer and the seller. C) the "time is of the essence" clause for all dates in the contract including settlement. D) remedies for each party in case of breach.

c "Time is of the essence" is found in the NCCAR/NCBA Offer to Purchase and Contract, but not for all dates.

valid contract

complies with all the essential elements of a contract, which will be discussed later in this unit and is binding and enforceable on both parties.

A contract states that closing will take place on or before June 22 of this year and "time is of the essence." If the buyer cannot close until June 26, the buyer has breached the contract. the seller can potentially terminate the contract. A) II only B) I only C) Neither I nor II D) Both I and II

d

Alice is a minor who entered into a contract to sell Bob the house she had inherited. This contract is MOST likely A) voidable by Bob. B) valid. C) void. D) voidable by Alice.

d

Which of the following is NOT a bilateral contract? A) Residential lease for less than six months B) Exclusive agency listing agreement C) Purchase contract with contingencies D) Option to purchase agreement

d

Which of these statements is FALSE? A) Brokers are permitted to use preprinted forms printed from computers. B) Drafting a purchase agreement from scratch is considered a legal service. C) The North Carolina Real Estate Commission prohibits the inclusion of brokerage compensation or a liability disclaimer in a sales contract. D) A broker can obtain preprinted sales contract forms from the North Carolina Real Estate Commission.

d

void contract

is one that has no legal force or effect. It is unenforceable in a court of law because it does not meet the essential elements of a contract. However, a void contract may be fully executed unless one of the parties disaffirms it. EXAMPLE A seller enters into a purchase agreement with a buyer who has been adjudicated incompetent by a court. The contract is void because both parties must be competent to create a valid contract.

voidable contract

is one that seems, on the surface, to be valid but may be rescinded, or disaffirmed, by one of the parties, based on some legal principle. If someone makes a contract while drugged or intoxicated, the contract is voidable by that person. A voidable contract will be considered by the courts to be valid if the party who has the option to disaffirm the agreement does not do so within a prescribed period of time. A contract with a minor is voidable by the minor. A contract entered into with a person who is known to be mentally ill is usually voidable during the mental illness. On the other hand a contract entered into with a person who has been adjudicated (declared by a court) as incompetent is void.

Additional clauses or amendments to contracts are called riders or addenda. True False

t

The parol evidence rule dictates that no oral agreements that contradict the terms of a written agreement may be considered. True False

t

compensatory damages

the injured party may sue the breaching party for money damages or compensatory damages. Money damages are awarded to the injured party to compensate him or her for the breach of the contract, not to punish the party who breached the contract. The amount of the money damages should be only what is necessary to make the party whole—that is, put the party in the position he or she would have been in if the contract had been performed as agreed. Thus, in many jurisdictions (but not North Carolina), the buyer can be sued for compensatory damages if the earnest money is not adequate to cover the seller's losses.

executed contract

An executed contract is one in which all parties have fulfilled their promises and therefore, fully performed the contract, such as a sales contract that has closed. (Do not be confused by the fact that the word execute is also used to refer to the signing of a contract.)

executory contract

An executory contract exists when something remains to be done by one or both parties. A sales contract, signed by all parties, pending closing, is an example of an executory contract.

unenforceable contract

An unenforceable contract has all the elements of a valid contract; however, neither party can sue the other to force performance. Unenforceable contracts are said to be valid as between the parties because once the agreement is fully executed and both parties are satisfied, neither has reason to initiate a lawsuit to force performance. For example, an oral agreement for the sale of a parcel of real estate would be unenforceable, because the statute of frauds (discussed later) requires that real estate sales contracts be in writing to be enforceable. However, if both the seller and the buyer perform their obligations under the oral agreement, a valid transfer can occur, but if one of the parties refuses to perform, there is nothing the other party can do to compel performance.

assignment

Assignment refers to a transfer of rights or duties but not the liabilities under a contract to a third party. Rights in a contract may be assigned to a third party unless the agreement forbids such an assignment. Duties may also be assigned (delegated), but the original obligor remains secondarily liable for them (after the new obligor). The exception to this rule is a contract for personal services, which may not be assigned. Most contracts include a clause that either permits or forbids assignment. The NCBA/NCAR 2-T Offer to Purchase and Contract is not assignable without mutual written consent. An assignment does not terminate the contract or change the terms of the contract. EXAMPLE Joe signs a five-year lease on a store front. In two years, a rival decides to buy Joe's business. Joe accepts and turns over all of his inventory and the remaining period of his lease. Joe's landlord agrees to allow Joe to assign the lease obligations to the business' new owner. The new owner, the assignee, has primary responsibility, but Joe, the assignor, is also liable to meet all lease terms.

consequential damages

Award of special damages if the breaching party entered the contract with plans to breach; injured party may sue for lost profits.

breach of contract

A breach of contract is a violation, without legal excuse, of any of the terms or conditions of a contract, as when a seller breaches a sales contract by not delivering title to the buyer under the conditions stated in the agreement. The nondefaulting party has certain rights.

contract

A contract is a legally enforceable promise or set of promises between legally competent parties, supported by legal consideration, to do (or refrain from doing) a legal act that must be performed and for which the law provides a remedy if a breach of promise occurs. A contract must be the following: Voluntary—no one may be forced into a contract An agreement or a promise—a contract is essentially a legally enforceable promise Made by legally competent parties—the parties must be viewed by the law as capable of making a legally binding promise Supported by legal consideration—a contract must be supported by some valuable thing that induces a party to enter into a contract and that must be legally sufficient to support a contract About a legal act—no one may make an enforceable contract to do something illegal

Unilateral Contract

A contract that results when an offer can be accepted only by the offeree's performance. In a unilateral contract, one party makes a promise to induce a second party to do something. The second party is not legally obligated to act; however, if the second party does comply, the first party is obligated to keep the promise. ("I will do this if you do that.") For example, a seller who agrees to give the buyer four months to decide whether to buy a property is giving the buyer an option, which is considered a unilateral contract.

specific performance

A legal action to compel a party to carry out the terms of a contract. The injured party may file a court action, known as a suit for specific performance, to force the other party to perform the contract as agreed. Specific performance is ordered only when the subject matter of the contract is not readily available from another source and when each party has the ability to perform the contractual obligations. Because every parcel of real estate is considered unique, a suit for specific performance brought by the buyer against the seller under a purchase and sales contract may be successful if the buyer can demonstrate that the property is unique and/or rare. Sellers are seldom successful with this remedy against the buyer; acceptance of liquidated damages is a more likely remedy against a buyer that has breached.

Time is of the essence

A phrase in a contract that requires the performance of a certain act within a stated period of time. Under any contract, each party has certain rights and duties to fulfill. The question of when a contract duty must be performed is an important factor. Many contracts call for a specific time at or by which the agreed-on acts must be completely performed. In addition, many contracts state that time is of the essence. This means that the contract must be performed within the time limit specified, and any party who has not performed on time is liable for breach of contract. If an offeror includes "time is of the essence" in the offer, the offeror can still revoke the offer at any time prior to acceptance. When a date is noted in a contract but is not followed by the phrase, "time is of the essence," the date is a general target date that all parties should attempt to meet. If the promised action is not completed by the target date, the contract is not automatically terminated or made voidable. As long as the action is completed within a reasonable time, the contract will probably still be binding on all parties. The definition of a reasonable time would necessitate a court ruling. When a contract does not specify a date for performance, the acts it requires should be performed within a reasonable time (as determined by the court, if a conflict arises). The interpretation of what constitutes a reasonable time will depend on the situation. Generally, if the act can be done immediately—such as a payment of money—it should be performed immediately unless the

four essentials of a valid contract

Legally competent parties: Both parties to the contract must be of legal age and have sufficient mental capacity. In North Carolina, 18 is the age of contractual capacity. Persons younger than 18 years of age are deemed infants or minors. Generally, minors' contracts are voidable by the minor or may be canceled before or within a reasonable time after the minor reaches age 18. (In other words, an adult cannot hold a minor to a contract, but a minor can hold an adult to a contract.) A broker should inquire carefully into the ages of both the purchaser and the seller of real estate. Advanced age, in contrast, may be an indication of a person's incapacity to contract as a result of senility. In questions of legal competency, it may be desirable to consult with the client's lawyer. A party who understands the nature and effect of the contract has sufficient mental capacity. Mental capacity is not the same as medical sanity. Similarly, an illiterate person (one who cannot read and/or write) has mental capacity and can still be a party to a contract. Mutual assent or deliberate agreement: An offer by one party is accepted by the other party. Offer and acceptance means that there must be a "meeting of the minds". Courts look to the objective intent of the parties to determine whether they intended to enter into a binding agreement. The terms of the agreement must be fairly definite and understood by both parties. Furthermore, the acceptance must be actually communicated to the offeror. (The methods of making and receiving offers, the counteroffer, the acceptance, and communication will be discussed in detail in Unit 10.) Legality of object: To be valid, a contract must not contemplate a purpose that is illegal or against public policy. If a contract calls for immoral performance, discrimination, or a criminal act to take place, the contract is void. Consideration: Courts will not enforce gratuitous (free) promises. Consideration is something of legal value, bargained for and given in exchange for a promise or an act. Any return promise to perform that has been bargained for and exchanged is legally sufficient to satisfy the consideration element; for example, the purchase price is the consideration in exchange for the transfer of the property in a real estate contract. In addition to money, other valuables such as antiques, jewelry, and stock could be used as consideration, though they would be highly unusual in a real estate contract. A binder or an earnest money deposit is merely an expression of good faith and is not required to create a valid contract.

statute of frauds

Not all contracts must be in writing to be enforceable; however, every state has adopted the common-law doctrine known as the statute of frauds, which requires that certain types of contracts be in writing to be enforceable in a court of law. Most notably, all contracts for the transfer of an interest in real estate must be in writing, with the only exception being leases of three years or fewer from the time of their making. The North Carolina statute of frauds requires that to be enforceable in a court of law, conveyances of interests in real property—such as deeds, contracts for sale, mortgages, options, easements, and certain leases (those that are for longer than three years from their making)—must be in writing and signed by the party to be bound or by the party's legally authorized agent. A listing agreement or a buyer representation agreement is an employment contract and is not covered by the North Carolina statute of frauds; however, North Carolina Real Estate Commission rules require that agency agreements be in writing (Rule A.0104). The purpose of the North Carolina statute of frauds is to prevent fraudulent proof of an oral contract.

novation

Novation is another way to avoid the terms of an existing contract without breaching that contract. Nova means new, and novation is the substitution of a new contract for an existing agreement with the intent of extinguishing the old contract. The new agreement may be between the same parties, or a new party may be substituted for either (novation of the parties). The parties' intent must be to discharge (cancel) the old obligation; therefore, it does terminate the original contract. The new agreement must be supported by consideration and must conform to all the essential elements of a valid contract. In the previous example, if Joe's landlord agreed to rescind Joe's lease and sign a new lease with Ben, this would be a novation. Joe would have no further liability for the lease.

a contract may also be discharged by

Partial performance of the terms of the contract. This is sometimes referred to as accord and satisfaction. When one party accepts something less than agreed on as complete performance, the contract is considered discharged. Substantial performance. One party has substantially performed the contract but does not complete all the details exactly as the contract requires. Such performance—for example, under construction contracts—may be sufficient to force payment, with certain adjustments for any damages suffered by the other party. Impossibility of performance. An act required by the contract cannot be accomplished. Mutual agreement of the parties to cancel. Operation of law. This is in terms of voiding of a contract by a minor, as a result of fraud or the expiration of the statute of limitations (discussed later in this unit), or as a result of the alteration of a contract without the written consent of all parties involved. Bankruptcy can also discharge a contractual obligation.

general rules for interpretation of contracts

Preliminary negotiations inconsistent with the terms of a final written contract are not admissible as evidence to alter a contract's terms. A contract is interpreted as a whole, and all writings forming a part of the same transaction are interpreted together. If possible, a contract will be construed as to render it reasonable rather than unreasonable. Ordinary words will be interpreted in their popular sense unless circumstances indicate that the parties intended to use them in a special sense. Where there is a conflict between preprinted versus written provisions of a contract, the preferred interpretation favors written provision over preprinted language. Ambiguities in a contract typically will be construed against the party who prepared the provision or who chose the words that create doubt.

auctioneer

The familiar procedure of a buyer making an offer to purchase, which the real estate agent then presents to the seller for acceptance or rejection, is avoided with an auction. Instead of merely presenting the offer to the seller, an auctioneer actually accepts the offer on behalf of the seller. (The typical real estate agent virtually never has the authority to accept an offer on behalf of the seller.) After the auctioneer accepts the offer, or bid, the buyer and seller formalize their oral agreement with a written document (to satisfy the statute of frauds) [see Rule A.0104(h)]. A real estate auctioneer must have two licenses: (1) a real estate license and (2) an auctioneer's license. The mere crier of sales is exempt from real estate licensure [see G.S. 93A-2(a)].

liquidated damages

The injured party may be entitled to collect liquidated damages. Liquidated damages are defined as the amount of money that will compensate the injured party for breach, which the parties agree to at the time they enter into the contract. For example, in North Carolina, the earnest money deposit is considered liquidated damages in the event the buyer breaches the contract. The seller is entitled to keep the amount of the deposit as compensation for any injuries caused by the buyer's breach of contract.

rescission

The injured party may rescind the contract, which means the contract is declared invalid and both parties return to the position they were in before they entered into the contract. Rescission may be appropriate when facts were misrepresented or one party entered the contract under duress. A right of rescission may be written into the contract or may be stipulated by law, such as the five-day right of rescission for a time-share purchase or the seven-day right of rescission for a new condominium purchase.

parol evidence rule

The parol evidence rule, another heritage of the common law, is a rule of evidence that dictates that no oral agreements that contradict the terms of a written contract may be considered in a lawsuit based on the written agreement. The written contract is assumed to be the complete manifestation of the agreement of the parties. The many exceptions to the rule include evidence that a contract was entered into illegally or evidence intended to clarify ambiguous contract terms. The party who drafted the ambiguous terms would most likely be ruled against in a court hearing.

two types of auctions

There are two types of auctions: Auctions with reserve: The seller reserves the right to stop the bidding if it becomes apparent that the high bid will be unacceptable (i.e., too low) to the seller. The seller must reject all bids before the auction is concluded and the auctioneer accepts a bid. Auctions without reserve: The seller agrees to accept the high bid, no matter what the terms of that bid. This is also called an absolute auction in North Carolina.