Texas Law of Contacts Ch 3

In writing and signed by the parties

The statute of frauds requires that, to be enforceable, an agreement affecting title to or interest in real estate in Texas must be in writing and signed by the parties. An oral agreement for the sale of real estate is generally void and therefore unenforceable except in very narrow circumstances. offers and counteroffers should always be in writing

Fraud

intentional misrepresentation of an important fact related to the contract. the misrepresentation often relates to a material defect of the property voidable by the party upon whom the fraud was perpetrated.

Unilateral Contract

is a one-sided agreement. One party makes a promise to entice 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. only one party promises to do something

Apparent authority,

principal's actions lead third parties reasonably to assume that the agent has authority

Duress

use of force or coercion by one party to induce the other party to enter into a contract. The coercion may be physical or mental, but it must deprive the other party of free will. The use of duress makes the contract voidable

Attorney-in-fact

Any person who meets the competent party test may, through a duly executed specific power of attorney, name and appoint another to act as an attorney-in-fact. The attorney-in-fact serves in a fiduciary capacity to the person who makes the appointment. The signature of the attorney-in-fact binds a party just as effectively as the party's own signature. A power of attorney granting authority to transfer title to real property must recite the legal description of the subject of the authority.

Bilateral Contract

"both parties promise to do something; one promise is given in exchange for another." A real estate sales contract is a bilateral contract because the seller promises to sell a parcel of real estate and transfer title to the property to the buyer, who promises to pay a certain sum of money for the property. An exclusive-right-to-sell listing contract is a bilateral contract. A bilateral contract binds both parties to fulfill their promises once both parties have signed the contract

Executory contract

"exists when one (or both) party still has an act to perform" A sales contract is an executory contract from the time it is signed until closing; ownership has not yet changed hands, and the seller has not received the sales price. *closing and delivery of a deed will occur more than 180 days after the execution (signing by both parties) of the contract to give more protection to purchasers. include contracts for deed, lease-purchase, or lease-option transactions. TREC does not promulgate contract forms

Executed Contract

"is one in which all parties have fulfilled their promises; the contract has been performed." At closing, the sales contract is executed

Legally competent parties

"meaning they must be of legal age and have enough mental capacity to understand the nature or consequences of their actions in the contract." A party who does not have legal capacity (incompetent party) may not be held to the terms of an agreement. An 18 year old has the legal capacity to enter into contracts in Texas. Under the Texas Family Code, a minor between the ages of 16 and 18 may file a petition with a court to request emancipation. An emancipated minor has the capacity of an adult, including the capacity to contract. A contract signed by a non-emancipated minor (younger than 18) is classified as voidable; it can be terminated at the sole option of the minor party. If the minor chooses to uphold and fulfill the terms of the agreement, the contract is binding **Individuals are considered sane or mentally competent until declared otherwise by a court. The parties must also be sober and demonstrate contractual intent. Elderly with history of dementia or irrational behavior that may complicate matters and make a contract entered into with such person voidable elderly person may have delegated someone such as another family member to act on that person's behalf under a power of attorney.

Mutual agreement (mutual assent)

"meeting of the minds"; that is, there must be complete agreement between the parties about the purpose and essential terms of the contract" Courts look to the "objective intent of the parties" to determine whether they intended to enter into a binding agreement. The wording of the contract must express all the agreed terms and must be clearly understood by the parties. Mutual agreement also means that the parties must enter the contract freely and voluntarily. Their decisions must be based on truthful, accurate information. **Misrepresentation or fraud precludes an enforceable agreement.

Consideration

"something of legal value offered by one party and accepted by another as an inducement to perform or to refrain from performing some act. " There must be a definite statement of consideration in a contract to show that something of value was given in exchange for the promise. Consideration is some interest or benefit accruing to one party, or some loss or responsibility by the other party. Consideration must be "good and valuable between the parties." The courts do not inquire into the adequacy of consideration. Adequate consideration ranges from as little as a promise of "love and affection" to a substantial sum of money. Anything that has been bargained for and exchanged is legally sufficient to satisfy the requirement for consideration. The only requirements are that the parties agree and that no undue influence or fraud has occurred. Texas courts have ruled that a promise given in exchange for a promise is adequate consideration to bind a purchase agreement. The promise to sell and the promise to purchase, in paragraph 1 of the TREC-promulgated residential contract forms, serve as adequate consideration to bind the contract. ** earnest money doesn't have to be tendered to create a valid real estate contract.

Express Contract

"the parties state the terms and show their intentions in words, either oral or written." Most real estate contracts are express contracts; they have been committed to writing.

There in no binding executory contract until

(1) a written offer has been made; (2) there is a written acceptance by the offeree; and (3) the offeree has notified the offeror of the acceptance. ***A lease for one year or less does not need to be in writing to be enforceable. All other real estate agreements must be in writing to be enforceable.

SUMMARY

A contract is a voluntary, legally enforceable promise or set of promises between two competent parties to perform (or not perform) some legal act in exchange for consideration. A contract may be express or implied by conduct of parties, required to be in writing to be enforceable in a court of law, bilateral (having obligations on both sides) or unilateral (a promise by one side that can be accepted or rejected by the other side), executed (all parties have fulfilled their promises) or executory (one or both parties still have an act to perform), void if one of the essential elements is missing, or voidable if it may be rescinded or disaffirmed by one or both parties. The essential elements of a valid contract are as follows: Agreement or promise based on an offer by one party (offeror) that is accepted by the other (offeree) Mutual assent or meeting of the minds Counteroffer that terminates the original offer and initiates a new offer Legally competent parties of legal age who are able to understand the nature or consequences of their actions Supported by legal consideration, - something of legal value, which could be love and affection, - free of undue influence or fraud, and - need not be earnest money; exchange of promises is sufficient. Concerned with a legal act Can be valid, void, or voidable, depending on circumstances - Valid—contains all legal elements - Void—not legal force or effect - Voidable—may be rescinded by either party

List of some of the contingencies TREC- promulgated residential contract forms and addenda

Addendum for Back-up Contract, TREC No. 11-7—This addendum is used when a Back-Up Contract is executed on a property where there is an existing contract. The Back Up Contract is binding on the parties and is conditioned on the first contract terminating by a certain date. If the first contract does not terminate by that date, the Back-Up Contract terminates (is voided) and the earnest money is refunded to the buyer. Addendum for Sale of Other Property by Buyer, TREC No. 10-6—This addendum is used when the buyer needs to sell an existing home. The addendum creates a contingency that lets the buyer terminate or waive the contingency if the buyer's property is not sold by a date certain. In this case the contract is voidable as the buyer can choose to waive the contingency. Third-Party Financing Addendum, TREC No. 40-7—This addendum makes the contract contingent on the buyer getting buyer approval (assets, income, credit history) for financing within a certain date. Similarly, the contract is contingent on property approval (property has satisfied lender's underwriting requirements for the loan). In both cases, the buyer may choose to terminate the contract and receive the earnest money therefore making the contract voidable. Seller Financing Addendum, TREC No. 26-7—If the seller has agreed to seller financing, this addendum makes the contract contingent on buyer timely providing financial information to seller and seller approving buyer for financing. If buyer fails to timely provide the information to seller, seller may terminate and the earnest money will be paid to seller. If buyer timely provides the information and seller determines that buyer's credit is unacceptable, seller may terminate the contract within seven days and buyer will be refunded the earnest money. In either case, seller may choose to terminate, therefore making the contract voidable. Short Sale Addendum, TREC No. 45-1—This addendum makes the contract contingent on the seller getting approval from the lender to sell the property and accept seller's net proceeds in full satisfaction of seller's liability under the mortgage loan. If the seller does not provide the buyer with notice of the lender's approval by a date certain or the lender gives timely approval and later withdraws it prior to closing and funding, the contract terminates and the earnest money is refunded to the buyer. Under this contingency, the contract terminates (is void) if the contingencies are not met. One to Four Residential Contract, TREC No. 20-14, paragraph 6.B. Commitment—If, due to factors beyond sellers control, the title commitment and exception documents are not timely provided to buyer, the buyer may terminate the contract and receive the earnest money making the contract voidable. One to Four Residential Contract, TREC No. 20-14, paragraph 6.D. Exceptions—If buyer objects to defects disclosed in the survey or title commitment and seller fails to timely cure the objections, buyer may terminate and receive the earnest money therefore making the contract voidable. One to Four Residential Contract, TREC No. 20-14, paragraph 7.E, Lender Required Repairs—If lender required repairs and treatments are more than 5% of the purchase price, buyer may terminate and receive the earnest money therefore making the contract voidable.

required disclosures associated with the TREC - promulgated forms and Texas and federal law:

Federal law requires sellers to provide a lead-based paint disclosure to buyers if the home was built prior to 1978. The TREC Addendum for Seller's Disclosure of Lead-Based Paint, TREC No. OP-L provides the required disclosure and gives the buyer an option to terminate within 10 days after an inspection reveals the presence of lead-based paint. This addendum makes the contract voidable by the buyer if lead-based paint is found. As earlier described in Unit 1, when the seller fails to provide and the buyer of a previously occupied single-family residence fails to receive the written seller's disclosure of property condition as required by Section 5.008 of the Texas Property Code (and addressed in TREC Form OP-H, Seller's Disclosure of Property Condition), the contract may be terminated at the sole option of the buyer and is therefore voidable by the buyer. If the information is presented after the agreement is signed, the buyer may terminate the contract within seven days after receipt of the disclosure. Paragraph 7.B of the TREC One to Four Residential (Resale) Contract, TREC No. 20-14 addresses this disclosure. When homeowners' association information has not been provided to the buyer prior to creating an executory contract to purchase, the buyer has the unrestricted right to terminate the agreement pursuant to Section 5.012 of the Texas Property Code. If the information is presented after the agreement is signed, the buyer may terminate the contract within seven days after receipt of the disclosure. When the property is situated in a utility district or other statutorily created district providing water, sewer, drainage, or flood control, chapter 49 of the Texas Water Code establishes the contract voidable by the buyer if the seller has not forwarded the appropriate notice prior to creating an executory contract to purchase. Failure to provide the notice to the buyer gives the buyer the option to terminate the contract making the contract voidable. Paragraph 6.E.3 of the TREC One to Four Residential (Resale) Contract, TREC No. 20-14 addresses this disclosure. Residential Condominium Contract, TREC No 30-13, paragraph 2.C.(2)—if the buyer does not receive the resale certificate before signing the contract, the buyer may terminate the contract and receive the earnest money within six days of seller providing Condominium Resale Certificate or if the seller fails to timely provide it. This provision makes the contract voidable.

Examples of bilateral and unilateral contracts

Independent contractor agreement—a bilateral agreement that clarifies the relationship between a sales agent and a sponsoring broker; the parties exchange promises regarding their respective duties and obligations. Residential lease—a bilateral agreement between a landlord and tenant that specifies what each party promises to do or refrain from doing during the term of the lease. (see Appendix 3) Option to purchase—a unilateral agreement that binds the property owner and prevents the owner from selling the property to another party, but does not bind the prospective buyer to buy; the owner promises to give the option holder, often times a tenant, the first chance to buy the property at some time in the future. While a license holder may encounter this type of agreement, she should never create one using the TREC promulgated residential contract forms and addenda for use in a transaction where the license holder represents one (or both as intermediary) of the parties because doing so may be considered the unauthorized practice of law. Exclusive right to sell agency listing agreement—a bilateral agreement that involves an exchange of promises and obligations between the listing broker and the Seller. (see Appendix 4) Open listing agreement—a unilateral agreement where the seller promises to pay any real estate agent that produces a buyer; the agent makes no promises. Buyer representation agreement—a bilateral agreement that defines the working relationship between a buyer and the buyer's agent, and creates an exclusive agency relationship. (see Appendix 5) One to Four Residential Contract (Resale)—a bilateral agreement between buyer and seller that exchanges promises between the parties. (see Appendix 1) Property Management Agreement—a bilateral agreement between a property owner and an agent where the parties exchange promises regarding their respective duties and obligations including the owner's duty to pay the agent for managing the property and the agent's promise to perform as described in the agreement. (see Appendix 6)

Essential Elements of Contract

Offer and acceptance, consideration, legal purpose, mutual agreement, legal capacity

Discharge of Contract

Performance, breach, remedies (damages, specific performance

Contain a legal description

Texas Supreme Court has ruled that a real estate contract must itself contain a property description or reference another existing document that describes or identifies the land with reasonable certainty. **A street address is not typically an adequate description of the property for contract purposes. The commonly used legal description in Texas is reference to a recorded plat (lot, block, section number, subdivision name). **series of documents, such as an exchange of emails, may be considered a contract as long as the normal contractual elements are present. That is, the property is identified properly, there is mutual agreement on the essential terms, and there is consideration, competent parties, and a legal purpose.

Implied Contract

agreement of the parties is demonstrated by their acts and conduct.

Disclosures

The failure of the seller to timely provide the notice gives the buyer the option to terminate the contract and receive the earnest money making the contract voidable.

Offer and acceptance

There must be an offer made by one party that is accepted by the other. The person who makes the offer is the offeror. The person to whom an offer is made is the offeree. An offer is a promise made by one party, requesting something in exchange for that promise. The offer is made with the intention that the offeror will be bound to the terms if the offer is accepted. The terms of the offer must be definite and specific and must be communicated to the offeree. An acceptance is a promise by the offeree to be bound by the exact terms proposed by the offeror. The acceptance must be communicated to the offeror or to that person's agent. Proposing any deviation from the terms of the offer is considered a rejection of the original offer. This is called a counteroffer. The counteroffer must be accepted by both parties for a contract to exist. offer may be terminated by the offeree's outright rejection of it offeree may fail to accept the offer before it expires. The offeror may revoke the offer at any time before acceptance. This revocation must be communicated to the offeree by the offeror, either directly or through the parties' agents. The offer is revoked if the offeree learns of the revocation and observes the offeror acting in a manner that indicates that the offer no longer exists.

Classification of Contract

Valid, void, voidable, enforceable, unenforceable, express, implied, unilateral, bilateral, executory, executed

voidable contract

appears on the surface to be valid but may be set aside if one or more of the contracting parties choose to do so based on some legal principle. A voidable contract is considered by the courts to be valid if the party who has the option to disaffirm the agreement does not do so within a period of time. A contract with a minor, for example, is voidable. A contract entered into by a mentally ill person is usually voidable during the mental illness and for a reasonable period after the person has recovered.

Actual authority

authority that the principal has expressly or impliedly given to an agent who has accepted it Ex. when a party hires a real estate agent to negotiate the sale or purchase of real estate

Statute of Frauds

certain types of contracts must be in writing to be enforceable in a court of law.

Contingencies

conditions which if not met, give the buyer (and sometimes the seller) the option to take some other action, such as extend the contract closing date, extend the time to complete the act, waive the contingency, or to terminate the contract and be paid the earnest money. Such contingencies make the contract voidable at the option of the party if the contingency is not met.

Paragraph 15 of the TREC contract

contain many terms and conditions that obligate both the buyer and seller. If one party fails to comply with the terms of the contract, the party is in breach of the contract. Under paragraph 15, the non-defaulting party, either seller or buyer has a variety of remedies, including terminating (voiding) the contract and receiving the earnest money.

Legally competent parties ( general agent)

empowered to represent the principal in a broad range of matters and may bind the principal to any contracts within the scope of the agent's authority. The real estate broker (or sales agent) typically does not have this scope of authority as an agent in a real estate transaction the relationship between a broker (as a principal) and the broker's sales agent (as an agent) is usually a general agency relationship. The independent contractor agreement between the broker and sales agent typically authorizes the sales agent to enter into listing agreements on behalf of the broker. The relationship of a property manager to a property owner is also an example of general agency as the property management agreement will typically give the property manager the authority to enter into leases on behalf of the owner

Legal purpose

even with all the other elements (mutual agreement, competent parties, consideration, and offer and acceptance) present. A contract for an illegal purpose or an act against public policies is not a valid contract. EX. Contracts for the sale or purchase of illegal drugs; contracts to engage in gambling in a state where gambling is against the law; contracts of employment with underage individuals; a lease to use a property specifically to make illegal drugs, such as meth; a lease to use a property as a brothel in a state other than Nevada.

void contract

has no legal force or effect because it lacks some or all the essential elements of a contract. A contract that is void was never a legal contract. For example, the use of a forged name in a listing contract would make the contract void.

Legally competent parties ( special agent)

is authorized to represent the principal in one special act or business transaction, under detailed instructions. A real estate broker is usually a special agent. If hired by a seller, the broker is limited to finding a "ready, willing, and able" buyer for the property. A special agent for a buyer has the limited responsibility of finding a property that meets the buyer's criteria. As a special agent, the broker may not bind or obligate the principal (client).

Power of Attorney (POA)

legal document in which one person appoints another person to act as an agent on his or her behalf Real estate agents often work with individuals acting under a power of attorney, as a trustee, or on behalf of a business entity to buy and sell real property for a principal Agent should obtain a copy of the authorizing documents for the agent's transaction file should any doubt be cast on whether a non-owning agent is authorized to bind a principal to a contract relevant when dealing with other real estate agents working on behalf of a party as if they had authority to bind the party and who may in fact only be special agents under a listing or buyer representation agreement. The validity of a real estate contract may be challenged by a party attempting to void the contract by alleging that a person who signed the contract was not authorized to bind the party to the terms of the contract. license holders must understand the law of agency as it relates to contracts entered into by such agents

Unenforceable contract

may also appear on the surface to be valid; however, neither party can sue the other to force performance Ex. an oral agreement for the sale of a parcel of real estate would be unenforceable. Because the statute of frauds requires that real estate sales contracts be in writing, the defaulting party could not be taken to court and forced to perform. An unenforceable contract is said to be "valid as between the parties." **This means that once the agreement is fully executed and both parties are satisfied, neither has reason to initiate a lawsuit to force performance.

valid contract

meets all the essential elements that make it legally sufficient, or enforceable, and is binding in a court of law.

Texas real estate contracts

must be in writing and be signed by the parties to be charged with the promises. In addition, a real estate contract in Texas must contain a legal description.

Contract contingencies and voidability

occurs if one of the parties breaches a term of the contract, fails to meet a contingency in the contract, or the seller fails to timely provide a disclosure required by law.

Undue influence

occurs when one party takes advantage of another person using a position of power, trust or a confidential relationship to enter into a contract Ex. attorney or doctor unduly influencing a client, or an adult child unduly influencing an elderly parent. If undue influence is present, a contract may be voidable.

Mutual mistake

occurs when the parties to a contract are both mistaken about the same material fact within their contract the contract is voidable. **unilateral mistake by only one party does not necessarily make the contract void or voidable.