Section 12 - Contracts and Tennessee Contract Law

What two meanings can an executed contract take on?

1. A contract signed by the parties, agreeing to all terms 2. A contract in which all terms have been fulfilled

What must be met in the written agreement to meet the statue of frauds requirements?

1. Identify the contracting parties 2. Cleary identify the subject matter of the contract 3. Present the essential terms and conditions of the contract

TAR Sales Contract (RF 401): Purchase and Sale

1. Identify the parties - your names go in as the undersigned buyers, and the sellers names are filled next 2. Legal description of the property, including the property's street address. 3. INCLUDED - Item A - list all broad categories, including anything permanently installed in the house itself. ITEM B - specific items we want to ensure stay with the house

5 Essential Elements to a valid Real Estate Contract (in addition to that fact the contract has to be in writing)

1. Legally Competent Parties 2. Offer and Acceptance 3. Consent 4. Legal Purpose 5. Consideration

4 Things To Remember when preparing the sales contract

1. Never form the agreement without first consulting with your clients about how the agreement should be made 2. Dont go beyond filling in the blanks 3. Never use non-standard language in the agreement or associated documents, such as addenda or amendments 4. Never give legal advice

TAR Sales Contract (RF 404): Purchase Price, Method of Payment and Closing Expenses

1. Purchase Price, Method of payment and closing expenses: 2. Item A identifies if the agreement is contingent upon the buyer obtaining financing and if so what type of loan 3. Item B - Financing Contingency Waived - For buyers paying all cash 3. Item C - Appraisal - agreement is contingent upon the appraised value of the property either equaling or exceeding the agreed-upon purchase price 4. Item D - Closing Expenses (D1 identifies the seller's portion) (D2 identifies the buyer's portion, such as transfer taxes, document preparation costs, lenders fees, etc.)

How many days after the binding agreement date does a buyer have to provide proof of available funds if the buyer has waived the financing contingency?

5

Statute of Frauds

Adapted in 1677 English law for use as a defense in a breach of contract lawsuit. In general - the law prevents injury from fraudulent conduct in certain types of agreements, including property transfers

Legally Competent Parties

Age of majority and mental Soundness

Contract

An agreement between competent legal parties to do or refrain from doing some legal act in exchange for consideration.

Express Contract

An express contract may be oral or written and clearly states the terms of the agreement between the parties

Implied Contract

An implied contract has not been expressly agreed upon, but relies on the actions of the party to determine the agreement (e.g. when ordering lunch at a diner, it is implied you will pay the bill)

What do valid contracts include?

An offer and acceptance, consent, consideration, legally competent parties and legal purpose

FIRPTA (Foreign Investment in Real Property Tax Act)

Applies to sellers from outside the US who are selling US residential real property

TAR Sales Contract: Buyers Due Diligence Section B - Insurability

B. explains that many different factors can affect the property's insurability and the insurance rate (flood and earthquake zoning, previous claims made on the property, etc.) buyers right and responsibility to determine insurance coverage and cost of insuring

Implied Contract

Based on the actions or behaviors of the parties, not on words.

What is the difference between bilateral and unilateral contracts?

Bilateral contracts, both parties have obligations Unilateral contract is one in which there is only ONE party making a promise. Example: $50 reward to help recover a lost cat

In a real estate transaction, what is established when the parties enter into an agreement voluntarily with a full understanding of the contract terms?

Consent

Why is a legal description recommended in a sales contract?

Leaves no doubt as to which property you're buying, and which property the seller is conveying. The legal description will be included on your deed.

If the buyer misses the deadline for delivering the earnest money check to the holder, how many days does the buyer have to provide the funds after receiving a late notice from the holder?

One

What is a legal competent party?

One who has the legal and mental capacity to enter into a contract

Which TAR form is the disclaimer notice that also must be kept on file?

RF 304

Which TAR form is the Purchase and Sale Agreement?

RF 401

Expenses Prorated

Real Estate Taxes, Rent, Assessments against the property, Association Dues and Maintenance fees

When are real estate purchase agreements executory?

Real estate purchase agreements are executory during the period when the parties are still negotiating their terms; they are VALID but not yet fully performed

Sellers closing costs include

Release of existing liens, preparation of the deed and sellers closing fee

It must be in writing

Required for contract validity only when the nature of the contract is real property

Offer and Acceptance

Requires mutual agreement of terms

Handling of earnest money/trust money

The holder deposits the earnest money into an escrow account as soon as the buyer provides the check. if the transaction goes to completion, the funds remain in the account until settlement, at which time the deposit amount is credited against the buyers closing costs. If the agreement is terminated prior to closing, the holder disburses the earnest money to whichever party is deemed to have the right to is, either by mutual agreement of the parties or via the terms set forth in the contract

Other names for a Sales Contract

The offer, Offer to purchase, Contract of purchase and sale, Purchase agreement

T/F: Tennessee has more than one contract form in use for real estate sales transactions

True

Within 14 days after the binding agreement date, the buyer must provide the seller with written proof that the buyer has available funds to close

True

You receive an offer in the mail that says you're eligible to win a cash prize if you place some stickers on a form and return it to the sender. What type of contract is this?

Unilateral Contract A sweepstakes entry is a unilateral contract because only the sweepstakes admin. is obligated to perform any action; the recipient of the offer is not contractually bound to enter the contest

What is the difference between voidable contracts, void contract and invalid?

Voidable contracts are ones in which one party has the option to void the contract Void contract is not a contract because of lack of legality Invalid contract is one that is missing a legal element

When a contract VOID?

When a contract is written for an ILLEGAL purpose

When are contracts called executed?

When all parties have completed the terms of the contract

When does offer and acceptance occer?

When the parties enter into an agreement voluntarily with full understanding of the contract terms

What does the financing options in TAR sales contract indicate?

Whether the buyer has a financing contingency and if so what type of financing the buyer is securing

What does the appraisal contingency in the TAR sales and contract indicate?

Whether the buyers offer to purchase is based on the property appraising at or above the agree to purchase price

Does the buyer set the closing date?

Yes

Down payment

in contract to earnest money, must be paid as a condition established by the terms of the loan, to give the buyer some "skin" For an FHA loan for example, the min. down payment is 3.5%

Buyers Closing Cost INCLUDE

loan related fees, insurance fees, inspection fees, transfer tax, and buyers closing fee

Parol Evidence Rule

provides that in most cases, a written agreement is the final and comprehensive expression of the parties agreement, and generally prohibits the introduction of earlier verbal or written statements that contradict, augment or otherwise change the terms of the written contracts. The parol evidence rule supports this by prohibiting parties from stating in court that the written contract they signed wasn't really what they intended.

What is the purpose of the initial inspections?

to allow the buyer and seller the opportunity to negotiate the repair of issues uncovered by an inspection before the buyer makes the call to terminate the contract

Once the seller accepts the buyers offer and the contract is finalized, the buyer has a certain number of days to apply for financing

true

TAR Sales Contract (RF 401) Closings, Prorations, special assessments and warranties transfer

Item A - identifies closing date and time for purpose of agreement *sometimes possession date is different than closing date, fill out Occupancy Agreement. C- Special assessments, whether they will be paid by the sellers prior to closing or divvied up D - Warranties transfer - cover existing warranties such as pest control, maintenance contracts and items of that sort

TAR Sales Contract (RF 401) Title and Conveyance

Item A: states the title must be good and marketable. May be subject to commonly accepted easements, as well as zoning laws or other recorded docs. B- DEED - whose name will go on the deed

Executory Contract

A contract in process; one or more terms of the contract remain undone

What is the statute of frauds?

A law requiring contracts that convey ownership in real property must be in writing to be enforceable

Express Contract

A stated (written or oral) agreement between 2 parties to specific terms

TAR Sales Contract: Buyers Due Diligence Option A - Survey and flood certification

A. Survey and flood certification - the buyer may obtain a mortgage inspection, boundary line survey, or flood zone certification if you're worried about potential flooding

Buyer or seller pays this cost: Appraisal fees, credit reports, and final compliance inspection fees

Buyer

Buyer or seller pays this cost: Insurance Fees

Buyer

Buyer or seller pays this cost: Loan Related Fees

Buyer

Buyer or seller pays this cost: Transfer taxes and recording fees on deed of conveyance and deed of trust

Buyer

TAR Sales Contract (RF 401) Inspections

Buyers have the right to hired a licensed home inspector to inspect the home, at their own expense B - Initial Inspection - states when they can take place and specifies which items may be inspected, such as heating/cooling, plumbing, foundation and other exterior or interior components C- Termite inspection - D- buyers inspection and resolution

When is the BUYER required to deliver the purchase price payment to the seller?

Closing

Unilateral Contract

Contract in which consideration (such as a promise) is only given by one party to the other ONLY ONE PERSON HAS AN OBLIGATION

Invalid Contract

Contract in which one or more of the essential elements is missing

vaild contract

Contract that contains all the essential elements

Voidable contract

Contract that may be cancelled by one or more parties for one of several reasons. It may be missing an essential element and thus invalid; it may contain a mistake or misrepresentation, or it may have been created or executed by a party under duress. With voidable contracts, one person may be able to take advantage of the other. If a kid signs a lease for an apartment, it's voidable because she may not understand what the contract really means. A contract that can be cancelled for a # of reasons

Unenforceable Contract

Contract that will not hold up in court

Enforceable Contract

Contract that will stand up in court

Executed Contract

Contract which all the parties have met all terms of the contract

Void Contract

Contract with no legal force or effect To do something that is illegal or is a legal impossibility

Once received, where does the holder deposit the earnest money?

Escrow account

Sales contracts are (EBVEE)___________________________

Express Bilateral Valid (in writing for starters) Enforceable Executed or executory

True/False: In Tennessee, only one contract form is used for real estate sales transactions

FALSE - The sales contract will differ based on the type of transaction.

Prorations

Fair share of expenses apportioned among the parties. Example: property taxes, if the seller prepaid the property taxes, the buyer would be responsible for the taxes due during their time of ownership. Calculated as of the closing date. Real estate taxes, homeowners association fees, and the like for previous year will be paid by the seller

When is the seller required to present that lead paint disclosure to the buyer?

For any residential property built before 1978

In Tennessee, interest in real is transferred using what deed?

General Warranty Deed

In tennessee property is conveyed with what type of deed

General Warranty Deed

Items that are permanently attached to a property, such as the house and garage, and included in the sale price of the property are referred to as what?

Improvements

Consent

Must be entered voluntarily, without duress or undue influence

Legal Purpose

Must be for a lawful reason

Bilateral Contract

Mutual contract that involves an exchange of promises or other consideration between two parties

Is earnest money required to have a binding sales contract?

No, Earnest money isn't required to have a binding sales contract (although its usually required by the seller). If no earnest money is provided, the prospective buyers only consideration is the promise to pay the purchase price.

TAR Sales Contract: Buyers Due Diligence Section C - Water Supply

Section C- Water Supply buyers responsibility to determine if the water supply complies with state and local requirements

TAR Sales Contract: Buyers Due Diligence Section D - Waste Disposal

Section D - Waste Disposal regarding waste disposal systems - its up to the buyer to determine if its up to par

TAR Sales Contract: Buyers Due Diligence Section E - Title exceptions

Section E - Title exceptions Gives the buyers notice that the general warranty deed may be subject to declarations, restrictions and easements that could impose obligations on the buyer and may limit the buyers use of the property

Buyer or seller pays this cost: Accrued or outstanding association dues or fees

Seller

Buyer or seller pays this cost: Deed preparation and notary fees

Seller

Buyer or seller pays this cost: Releases of existing liens

Seller

Consideration

Something of value offered by both parties, may include Money (or promises of funds in the future) Property (Real estate or other personal property) Labor, or love or good wishes or physical actions (non-monetary)

Consideration

Something of value, even a promise to do or not do something

T/F A minor who enters into a contract with an adult to transfer ownership of real property may hold the adult to the contract, but the adult may not legally hold the minor to the contract

TRUE

True/False: Its fine for licensees to add addenda to a contract if the contract doesnt cover the terms needed by the parties; however, licensees should use standard addenda and standard language

TRUE

What does legal purpose mean?

That contracts are valid only when their consummation would result in legal outcome

Per the TAR purchase and Sale Agreement, who in a sales transaction may be subject to tax withholding per the Foreign Investment in Real Property Tax Act (FIRPTA)?

The Seller

What happens if the seller is unable to remedy the defects by either the closing date or the agreed-upon extension date?

The agreement is terminated and the buyer is entitled to a refund of the earnest money/trust money

What is the sales contract?

The buyer documented offer to the seller to purchase the home

What is the sales contract?

The buyers documented offer to the seller to purchase the property identified in the agreement

What happens if a party does not have legal capacity and enters into a contract anyway?

The contract is voidable by the party lacking the capacity

Binding Agreement Date

The day that the party who made the last offer or counter-offer receives notice that the final offer has been accepted. Most timelines in the agreement are driven by this date

What does the The Tennessee Real Estate Broke License Act of 1973 require licensees to disclose?

The duties they owe to clients and all other parties to the transaction prior to entering into a transaction

TAR Sales Contract (RF 401): Earnest Money/ Trust Money

The first party identifies when youll pay the earnest/trust money, the name of the holder, and the amount 2.

What happens to the sales contract once signed by all parties?

The sales contract is a legally binding document

Title and Conveyance Paragraph

The seller is required to convey the property to the buyer at closing using a general warranty deed. This type of deed provides the most protection to the grantee by guaranteeing that the title is good and marketable

The statue of frauds requires what?

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

Earnest Money (trust money)

a down payment on the down payment. whatever is written becomes part of the terms being considered in the offer/acceptance period. Shows good faith in completing the transaction and is a consideration because it means that the buyers are putting that money at risk if you should default on the contract money must be real and available immediately