Section 12: Real Estate Contracts in Texas

When a breach occurs, the parties have several remedies available to them

-Accept partial performance -Rescind the contract unilaterally -Sue for damages (monetary damages) -Sue for specific performance -Accept liquidated damages -Mutually rescind the contract

Valuable consideration

-An exchange of money for a promise -An exchange of an item of value for money -An agreement between the parties to do or not do something

Sales contracts are

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

Invalid

A contract in which one or more of the essential elements is missing

Part of entering into a listing agreement is determining what type of agency relationship the seller wants to have with you. What are the three types of listing agreements?

-Open listing -Exclusive right to sell -Exclusive agency

Unilateral

A contract in which consideration (such as a promise) is only given by one party to the other

Good consideration

A gift

Express

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

Bilateral

A mutual contract that involves an exchange of promises or other consideration between 2 parties

Now let's take a closer look at each of the essential elements, beginning with legally competent parties. What is a legally competent party?

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

What does legal purpose mean?

Contracts must be written for a lawful objective.

What Does Assignment of Contract Mean?

To substitute a new party for one of the original parties stated in the contract -means to substitute a new party for one of the original parties stated in the contract. -most contracts are assignable. -In the event that the new party fails to live up to the obligations stated in the contract, the original party remains responsible to the terms of the agreement unless specifically stated otherwise in the contract. -When assigning a contract, the assignor should also check off any "contract is assignable" clause that is part of the purchase contract.

Legally Competent Parties

-If a party doesn't have legal capacity and enters into a contract anyway, the contract is voidable by the party lacking the capacity. -The minor who enters into a contract with an adult to purchase real estate may hold the adult to the contract, but the adult can't legally hold the minor to the contract.

Anna and Cindy, two friends, enter a contract to buy Jake's home. However, at the last minute, Cindy has a change of heart and wants out of the deal. Anna asks another friend, Sally, if she wants to take Cindy's place as co-buyer of Jake's home. Everyone agrees to the substitution of Sally for Cindy on the contract. This is an example of ______.

Novation

Novation of parties

Novation occurs when one party to an existing contract is substituted with a new party

What is the statute of limitations?

A law that states that, if legal remedy is sought against a person, the pursuer must bring a court action within a specified time period

Doris and Kathleen, who are neighbors, enter into an agreement to not permit their real estate agents to sell their homes to families with children. This agreement lacks ______, so it's void.

A lawful objective

Mary agreed to buy her mother's house when her mother moves to a senior living community. They sign a purchase agreement, but when Mary has to move because of work, she signs her rights in the contract over to her sister, Tina. Mary may still owe money if Tina can't come up with the agreed-upon funds. What's happening in this scenario?

Assignment

Which of the following scenarios is an example of novation?

Doug is buying Norm's farm, but has a serious accident and no longer wants to own a farm, so his daughter Linda decides to buy the property. Norm agrees to the substitution of Linda for Doug in the purchase contract, effectively creating a new contract.

Impossibility of performance

Due to circumstances out of their control, the parties cannot legally or practically do what they've agreed to do.

In which of the following types of contracts has one or more of the contract's terms yet to be completed?

Executory contract

What does "performance of a contract" mean?

Meet all of the terms of a contract. -One day, Herman Yolk and his wife, Imelda, bought a goose. The pair entered into a contract with the goose that stated that as long as the goose continued to lay golden eggs each day for a month, the couple would not have the goose for dinner. The goose laid a golden egg each day for one month, and the Yolks ordered takeout.

Tom Knicks, who was in the process of buying a home, died suddenly before he had a chance to close on the deal. Tom's heirs were required to meet the terms of the contract. This is an example of ______.

Operation of law

What does the parol evidence rule state?

In certain cases, oral evidence can be used to support or complete an otherwise incomplete or ambiguous contract.

In an addendum to the purchase and sale contract, the seller agrees to paint the house before conveying the house to the buyer. The weather changes, and the seller is unable to finish painting the house before closing. This is an example of _______.

Partial performance

What is the parol evidence rule?

It is a rule that states that in certain cases, oral evidence can be used to support or complete an otherwise incomplete or ambiguous contract.

Agnes Sherwood is tired of the bad attitudes and shoddy workmanship she's seeing these days. She contracted to have her gutters fixed and paid the gutter company good money, but she's still getting water in her basement from her gutters leaking. There's no way she's letting guys from that same company back onto her property to mess it up even more. She's taking this to court, by golly! What remedy is Agnes pursuing to address her breach of contract situation?

Sue for damages

Betty hired a contractor to replace her gutters. Within days, the gutters leaked and flooded her basement. She complained to the contractor, who replaced the gutters again. The next time it rained, the gutters leaked and flooded Betty's basement a second time. Frustrated, Betty decided to file a lawsuit against the contractor in an attempt to recover the money she lost. This is an example of ______.

Suing for damages and breach of contract

What is the purpose of the listing agreement?

To identify the terms of the listing agent / seller agency relationship

Electronic records and electronic signatures in electronic transactions are legally enforceable as long as both parties to a transaction agree to conduct the transaction electronically.

True

Ken signed a contract to purchase Debra's condo. Ken signed the contract two weeks prior to turning 18, which is the age of majority in his state. Debra found out about his age prior to the closing but honored the contract, and they closed on the condo a month after Ken's birthday. What was the status of the contract when Ken and Debra entered into it?

Voidable

Sylvia, who's 15 years old, and her neighbor Marge, who's 24, agree that Sylvia will babysit Marge's toddler for the summer for $10 an hour. What type of contract is this?

Voidable

Regardless of the type of listing agreement, what two types of information are generally covered in a listing agreement?

-The responsibilities of the seller and the listing agent with regard to listing the property and entertaining offers -Terms under which the property will be listed and for how long

In a real estate transaction, which three of the following are examples of consideration?

-The seller's promise to sell the property to the buyer -The earnest money the buyer puts down -The property itself

Listing Agreement Termination

-The seller's property was completely destroyed when an F4 tornado tore through town. -The broker found a lovely couple with no financing contingency to buy his client's home. -The seller's broker was involved in a fatal car crash and died from his injuries. -Henry and his client, Hattie, entered into a three-month listing agreement. At the end of the three months with no buyer at the table, the two agreed to part ways.

To meet the statute's requirements, the written agreement must:

-Identify the contracting parties. -Clearly identify the subject matter of the contract. -Present the essential terms and conditions of the contract.

A buyer agency agreement can be terminated by:

-The buyer finding and purchasing a property (known as completion of the goal of the agreement) -Expiration of the term of the agreement -Mutual, written agreement to terminate the agreement -The death or incapacity of either party

Norman buys Connie's Texas home, and in the sales contract, he specifies that the outdoor grill must stay with the home. Connie ends up taking the grill when she moves out. If Norman wants to sue Connie for taking the grill, he must do so within ______.

4 years

What is the statute of limitations in Texas for a party to a contract to sue the other party for breach of contract?

4 years to sue for breach of contract

What is a buyer agency agreement?

A binding, written contract entered into by the potential buyer of a property and a broker

What is a listing agreement?

A binding, written contract entered into by the seller of a property and you, as the seller's listing agent (on behalf of your broker).

Impiled

A contract that is based on the actions or behaviors of the parties, not on words

Voidable

A contract that may be cancelled by 1 or more parties for 1 of several reasons -It may be missing an essential element and thus invalid; it may contain a mistake or a misrepresentation, or it may have been created or executed by a party under duress

Unenforceable

A contract that will not hold up in court

Enforceable

A contract that will stand up in court

Gloria Meeker can't believe it. She thought she had a buyer for her home, and at the last minute, the buyer bailed. At least Gloria can keep the earnest money. That's some consolation. What remedy is Gloria pursuing to address her breach of contract situation?

Accept liquidated damages

Nancy Owens finds herself in a breach of contract situation. Although the other party met some obligations, others weren't met. Nancy thinks it would cost more time and money to sue than it would to just accept the work that's been done and call it good. What remedy is Nancy going to pursue to address her breach of contract situation?

Accept partial performance

In which of the following scenarios is impossibility of contract performance occurring?

Due to circumstances beyond their control, the parties can't legally or practically do what they've agreed to do.

Which of these is an example of good consideration?

Gifting a house to a family member

To meet the requirements of the statute of frauds, an agreement must clearly identify the contract's subject matter, present the contract's essential terms and conditions, and ______ to be enforceable.

Identify the contracting parties

A valid contract must include which of the following elements?

Legally competent parties

A legally competent party means that an individual has the capacity, legally and ______, to enter into a contract.

Mentally

Homebuyers Edgar Whistlestop and his third wife, Florida, couldn't come to an agreement with the seller about non-safety-related items found during the home inspection that the Whistlestops wanted fixed, but that the seller wasn't willing to address. Having arrived at an impasse with neither party willing to negotiate, the parties agreed to cancel the contract. What remedy are the Whistlestops and the seller pursuing for their breach of contract situation?

Mutually rescind the contract

Sam entered into a contract to sell his home to Gina. After the inspection, Gina insisted that Sam replace the damaged roof. Sam refused, and the parties agreed to cancel the deal. This is an example of ______.

Mutually rescinding the contract

The process of substituting one party to an existing contract with a new party, releasing the original party from all contractual obligations and rights, is ____.

Novation

When can specific performance be enforced under a sales contract?

One party didn't meet the terms of the contract in the specified time frame, and is now being required to do exactly what was agreed to in the contract.

Which of these constitutes a breach of contract?

One party fails to meet the obligations of the contract.

Substantial performace

One party has met most—but not all—of the terms specified in the contract, and may be required to pay damages for the terms not met.

Jayne was tired of waiting for her subcontractor to get his part of the deal done. The agreed-upon deadlines came and went, and Jayne lost money waiting for the subcontractor to come through. She decided that if the subcontractor wasn't going to honor his commitments, neither was she, so Jayne consulted with her attorney and then terminated the contract. This is an example of ______.

Rescinding the contract unilaterally

In a contract, consideration is the giving of ______.

Something of value in exchange for something of value

What's consideration with regard to a contract?

Something of value is given in exchange for something of value.

Mark Strong thought he had bought and closed on a nice bit of property, but the seller has refused to deliver the title to him. Mark met his obligations per his written contract with the seller, and the seller met all but one—handing over the title. Mark isn't going to let the seller get away with this. He's going to get his title, even if it means going to court. What remedy is Mark pursuing to address his breach of contract situation?

Sue for specific performance

Both parties have to sign the agreement to demonstrate _____.

That they understand the terms

What does the phrase, "time is of the essence," mean with regard to a real estate contract?

The parties agree to proceed in good faith and not unduly delay the process. -Jack Nimble and Jill Quick entered into an agreement to open a candlestick shop. True to her name, Jill completed everything she needed to do to meet her part of the contract in record time. Jack, on the other hand, didn't jump to it, and his delays caused the two to lose the store.

Which of these choices describes novation?

The rights and obligations of an original party to an existing contract are taken by another party, creating a new contract.

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

Rick Tynes is tired of waiting for his subcontractor to get his part of the deal done. The agreed-upon deadlines have come and gone, and Rick is losing money waiting for the subcontractor to come through. If the subcontractor isn't going to honor his commitments, neither is Rick. There's no point in throwing good money after bad by suing the subcontractor. He's just going to consult with his attorney and then terminate this contract and be finished with the whole ordeal. What remedy is Rick pursuing to address his breach of contract situation?

Unilaterally rescind the contract

A contract for an illegal purpose is ______.

Void

Rescission

When both parties agree to cancel a contract

Breach of contract

When one party cancels against the wishes of the other party -can also occur when an obligation of the contract isn't met—for instance, a buyer fails to deposit earnest money by the deadline the parties agreed to.

What's the Statute of Frauds?

says that certain contracts must be in writing—and contain specific elements—to be legally enforceable. -A law requiring contracts conveying ownership in real property to be in writing to be enforceable

Novation of contract

when a new contract is substituted for an old one between the same parties

Which type of contract is the opposite of an express contract?

Impiled

Consent doesn't exist, then, in the following situations:

-There is a mistake -Misrepresentation -Fraud -Undue influence

Partial performance

One or both parties have completed only a portion of the terms agreed to in the contract.

When does partial performance of a contract occur?

One or both parties have completed only a portion of the terms agreed to in the contract.

Specific performance

One party did not meet the terms of the contract in the specified time frame, and must now do exactly what was agreed to in the contract.

Zack enters into a contract to buy Olivia's home. Per the terms of the contract, Zack must put down a $10,000 earnest money deposit and have the property inspected within five days. In reality, he puts down a $12,000 deposit and has the property inspected within two days. This is an example of ______.

Performance of the contract

Valid

A contract that contains all the essential elements

Void

A contract with no legal force or effect

When a breach of contract occurs, the aggrieved party can remedy the situation in four of these ways. What options does the wronged party have?

-Accept partial performance -Sue for specific performance -Sue for damages -Mutually rescind the contract

Which three of the following statements indicate who has the right to terminate a breached contract?

-Both parties can agree to terminate the contract. -The innocent party can terminate the contract. -The guilty party can terminate the contract with aggrieved party's permission.

Performance Fact

-Impossibility of performance occurs when the property is destroyed, or is made the subject of eminent domain. -. No other property or monetary damages equal specific performance—only meeting the terms of the original contract will qualify. -In impossibility of performance situations, the parties are released from their contractual obligations. -In substantial performance situations, the offending party may be required to compensate the other party for damages, resulting from incomplete performance of the contract terms.

There are five additional essential elements to a valid real estate contract. These are:

-Legally competent parties -Offer and acceptance -Consent -Legal purpose -Consideration

Rhoda has power of attorney for her father, Winston, who is 85 and has a heart condition. Over the years, she's made recommendations to him about which properties he should buy and sell. She asks her father to please invest in her new restaurant, but Winston declines. He thinks it's too risky. Rhoda is furious and tells him that she will no longer take care of his financial matters. So Winston, with nowhere else to turn, gives her $20,000 as a loan, and he signs a contract under those terms. Later, Rhoda's restaurant fails. Winston goes to court to get his money back, but Rhoda produces a contract that says that the money was an investment, not a loan. Winston said that he thought he signed a contract that made the money a loan. Which of the following statements about this situation are true? Select all that apply.

-Rhoda had undue influence over her father, so Winston's consent was invalidated. -Rhoda's actions have given Winston the power to void the contract.

Partial performance

-Sissy Redcap's litigious-happy grandmother coerced her into signing a contract that stated that Sissy would visit her grandmother every day and bring along a basket of goodies. In return, Sissy would receive a grandmotherly hug. After a week of visiting her grandmother, Sissy said, "The heck with this!" and played with her new friend, Winnifred Wolfe.

The written buyer agency agreement should include the following types of information:

-The names and contact information for both your broker and the buyer -The type of property being sought (residential, approximate size, etc.) -The type, amount, and other terms of compensation. Some agents charge a flat fee, while others request a percentage of the purchase price (or a share of the listing agent's commission). At times, buyer's agents will require that a retainer be paid, and that amount will be a credit to the broker's fee once a property is found and closing occurs. Compensation information must include the conditions under which compensation is considered "earned and payable." -The beginning and ending dates of the agreement -The obligations of each party -Intermediary status options -Addenda and special provisions

Your listing agreement must include the following information:

-The property's list price -Firm dates for the listing agreement's beginning and ending -The broker's specific compensation (including the terms for earning that compensation, and the amount— usually expressed as a percentage of commission or flat fee—that must be paid) -Terms for payment of cooperating agent's commission -Owners' names/addresses -Property's legal description (from the deed) -Property's zoning classification and lot size -The seller's permission for the broker to post the listing on the MLS, install a keybox, and display the property on the Internet

The statute of frauds has established a number of signature requirements to prevent fraudulent proof of a fake oral contract.

-The spouse must sign any time there is a release of marital property rights -The party to be charged must sign.

Legally, duress can mean any of the following:

-Threats to physically harm someone, their family, or their property -Threats of legal action, such as a lawsuit or criminal prosecution -Threats of severe economic damage

When Does Offer and Acceptance Occur?

-Two parties enter into an agreement with full understanding of contract terms. -A real estate broker offers to represent a client in a sales transaction. They discuss the terms of the agreement and the client accepts.

Executory

A contract in progress; 1 or more terms of the contract remain undone

Executed

A contract in which all the parties have met all terms of the contract

Kenneth entered into a contract to sell his home to Valerie, who put down a $5,000 earnest money deposit. At the last minute, Valerie backed out of the deal and Kenneth kept the earnest deposit. This is an example of ______.

Accepting liquidated damages

Grace found herself in a breach of contract situation where other party met some of the terms but not others. Grace thought it would cost a lot of time and money to sue, so she decided to accept the work that had been done and call it good. This is an example of ______.

Accepting partial performance

Martha made an offer to buy Drake's home, and he accepted it. Under the terms of the agreement, Martha was supposed to make an earnest money deposit of $10,000, but she only put down $5,000. Drake accepted the lesser deposit, and the sale was ultimately finalized. This is an example of ______.

Accepting partial performance

Bill and Mindy, who are neighbors, get into a disagreement about late-night noise. The two come to an agreement: Bill promises to stop having loud parties and Mindy promises to keep her dogs inside after 10 p.m. Their promises represent the ______ in their agreement.

Consideration

Carl and Sadie, who are neighbors, got into a disagreement about early-morning noise on the weekends. The two came to an agreement: Carl promised to not mow the lawn before 10 a.m., and Sadie promised to put bark collars on her dogs in the early morning hours. Their promises represent the ______ in their agreement.

Consideration

Your neighbor hires a middle school student to mow his lawn every two weeks. He draws up a written contract in which he clearly outlines the student's mowing responsibilities and the payment the student will receive in return. Which of the following is true in this situation?

If the neighbor and the student are content to uphold their agreement, the fact that it's not legally binding doesn't matter.

Your seller client signed a contract with a buyer, but the buyer now wishes to back out of the contract and has offered to have a friend take his place as buyer through the process of novation. Your seller client is agreeable. Since everyone agrees, is it okay for you to cross out the original buyer's name on the contract and substitute the new buyer's name?

No -In such a situation, you must advise your client to consult with a qualified attorney. Novation may introduce complexities that the parties (and their respective licensees) haven't thought of.