Section 3: Overview of Real Estate Contract Law in Texas
Which type of contract won't stand up in court?
Unenforceable
Which Contracts Must be in Writing?
-Contracts for the sale of goods totaling $500 or more -Contracts in which one party agrees to pay the debt of another individual -Marriage contracts -Leases for one year or more
Artist Lila Morgan signs an exclusive right-to-sell listing agreement with broker Megan Grant, paying the broker a commission when her house sells. Each party has specific obligations under the terms of their agreement. Which type of contract is this?
Bilateral
What is the statute of frauds?
A law that requires that certain types of contracts be in writing to prevent injury from fraudulent conduct
The seller and the buyer have agreed to make a change to the sales price of the Texas property. Which of the following will be used to indicate the change?
TREC Amendment form
Time is of the Essence
The parties will be held in strict compliance to any time frames specified in the contract.
What four things are required for a binding executory real estate contract to exist in the state of Texas?
-The owner of the property has accepted the offer in writing. -The offeror has been notified of the acceptance. -The offeror has made an offer in writing for the property. -The owner of the property has received the written offer.
TREC-Specific Requirements for Amendments and Addenda
-The proper way to make changes to an original contract in Texas is with the appropriate TREC-promulgated amendment form. -If an addendum is required and TREC provides a promulgated addendum form that addresses the situation, that form must be used. -An addendum must be signed by all parties to the transaction.
Which three documents constitute a contract between the buyer and the seller?
-The sales contract the parties have signed -Any associated addenda the parties have signed -Any associated amendments the parties have signed
Identifying Competent Parties in Texas
-Twenty-eight-year-old Craig is interested in purchasing a nice piece of property in a remote area of the state. He was recently treated for schizophrenia and released. -Margie, an 80-year-old woman who lives on her own, has been persuaded by her children to sell her house and move into a senior community. Margie has entered into a listing agreement with a local broker.
What is a competent party?
A party who has the capacity (legal and mental) to enter into a contract
What Does Reasonable Time Mean?
A time frame is left to the interpretation of the parties as to when all contractual obligations are to be met.
Voidable contract
Missing one or more essential elements
In a real estate transaction, which of the following is established when parties enter into an agreement voluntarily with full understanding of the contract terms?
Consent
TREC provides a promulgated amendment form that must be used for the following situations:
Changes to the sales price Additional repairs and treatments not covered in the original contract Changes to the closing date Settlement expenses Cost of lender-required repairs Cost of additional option fee Buyer wants to waive unrestricted right to terminate the contract Change to the date the buyer must give written notice to the seller that the buyer can't obtain buyer approval as specified in the Third Party Financing Addendum
Grayson Riker and Wyatt Kellen have met several times over coffee about two properties that Grayson owns, and that Wyatt is interested in. They enter into a contract that Grayson believes is for the first property and that Wyatt believes is for the second property. What is this an example of?
Mutual mistake
Facts about the 'In Writing' Rule
-An oral agreement of sale is unenforceable. -For a real estate contract to be enforceable in Texas, it must be in writing and signed by the parties to the contract.
Addendum
-An addition to an existing document -May be added without changing other terms already agreed to in the sales contract
Amendment
-A change to an existing document -When added, it changes the original terms of the sales contract
Valuable consideration
-Angus gave his mechanic a check for a custom-built motorcycle. -Quentin and his neighbor, Rowan, signed an agreement that Quentin would not mow his lawn before 10 a.m. and Rowan would not have parties in his backyard after 10 p.m. -Paola paid to have the option to terminate her contract with the seller in exchange for the seller's promise to let her out of the contract if she elected to do so by the option-to-terminate date.
How Competency Affects Contract Validity
-If an individual who doesn't have legal capacity enters into a contract, that person can't be held liable for the terms of the contract, and the contract is void. -Minors don't have the contractual ability to enter into a valid real estate contract due to their age. This contract is voidable. However, a court of competent jurisdiction can emancipate the minor and declare that the minor is an adult with contractual 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 may not legally hold the minor to a contract. -An incompetent party doesn't have the legal capacity to appoint an attorney in fact. Consequently, if this situation were to occur, the contract would be void because of the incompetent party's lack of legal capacity. -An officer named in a corporate resolution signs a real estate contract for and on behalf of the corporation to sell corporate-owned property. As far as competent party requirements are concerned, this is a valid contract.
Performance Facts
-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.
Bilateral Real Estate Contracts
-Listing agreement (exclusive right to sell and exclusive agency) -Buyer representation -Purchase agreement -Lease agreement
Unilateral real estate contracts:
-Listing agreement (open listing) -Option to purchase -Option to terminate
Mutual agreement is based on complete, truthful, and accurate information. Mutual agreement is not present when which five of the following exist?
-Misrepresentation -Undue influence -Lack of contractual capacity -Fraud -Duress
Good consideration
-Nia gave her daughter a gift, with no expectation of receiving something in return
Consideration in a Real Estate Transaction
-The buyer offers to purchase the property for $250,000. -The seller's promise to sell the property to the buyer. -The buyer's promise to purchase the property. -The property itself
The appraisal on Jean's property came in at $22,000 less than the agreed-upon sales price, so the buyer, Thomas, wants to renegotiate the terms. If they can come up with a new price that is satisfactory to both parties, what will they use to document this?
Amendment
Jack and Al, who are neighbors, enter into an agreement not to permit their real estate agents to sell their homes to families of color. This agreement lacks ______, so it's void.
A lawful objective
When offer and acceptance has occurred, both parties enter into ______.
A mutual agreement
Alex's clients want to make a change to the original contract. Which of the following will Alex use to indicate the change?
An amendment form
Buyer Derek Shepherd and seller Mark Sloan enter into an agreement for Derek to purchase Mark's home. In their contract, the language says, "Derek Shepherd and/or assigns offers to purchase from Mark Sloan the property located at ..." Before closing, Derek substitutes his sister, Amelia, as the buyer. Unless the contract between Derek and Mark released Derek from his obligations, if Amelia fails to perform, Derek is obligated to do so. Is this an example of assignment or novation?
Assignment
Cindy enters into a contract to buy Jarod's home. She then transfers her right to purchase to her twin sister, Maud, for a small fee. But Maud neglects to fulfill the buyer's obligations under the contract, and Jarod is able to pursue Cindy, who's still liable. This is an example of ______.
Assignment
How would you explain novation to a client?
The rights and obligations of an original party to an existing contract are taken by another party, with the agreement of all parties to the contract.
In the eyes of the law, why do people under age 18 lack contractual ability?
Because they're minors
Banker Olivia Pope agrees to lease her four-bedroom, four-bath country home to author Fitz Peterson for $2,000 a month. Both parties have specific obligations under the terms of their written lease. Which type of contract is this?
Bilateral
Desmond has a signed listing agreement with his clients, the Harpers. In exchange for helping the Harpers list, market, and sell their home, the Harpers have agreed to pay Desmond a commission. What type of agreement do Desmond and the Harpers have?
Bilateral
Marco enters into a contract to acquire real property in return for some form of consideration. On the contract, he's regarded as the ______.
Buyer
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
Valid contract
Contains all essential elements
What does lawful objective mean?
Contracts must be written for a legal purpose.
Farm owner Ed agrees to sell his farm to his third-cousin-once-removed, Fred. Under the terms of the sale, Ed agrees to leave the farming machinery with the farm. The sale goes through, with Fred getting the title to the property and Ed getting the sale price, but when Fred heads to his new farm, he sees that Ed has removed all of the machinery. Which type of performance is this?
Partial performance
Seller Saul and buyer Becky sign a real estate contract in which Becky agrees to pay Saul $150,000 for his three-bedroom ranch. Becky applies for and receives an FHA loan for $120,000 and plans to pay the additional $30,000 in cash at closing. Saul agrees to have his fence, which has significant termite damage, repaired or replaced. He also agrees to remove the above-ground pool on the property and to remove the broken-down truck from the garage. He removes the pool but leaves the broken-down truck in the garage. He doesn't fix or replace the fence. What would be the reason for a discharge of contract?
Partial performance
Selma enters into a contract to buy Maura's home. The contract specifies that Maura must leave the refrigerator with the home and she must replace the stove before closing. After closing, Selma arrives at the home and sees the nice new stove, but Maura took the refrigerator with her. This is an example of ________ of the contract.
Partial performance
Small-town Texas mayor Mel "Shafty" McClain has agreed to sell a two-bedroom, two-bath home to former mayoral candidate "Emmy the Honest" Jenkins. In the sales contract, Emmy agreed to provide a $3,000 earnest money deposit with the signed contract and another $2,000 two weeks later. The day before closing, Emmy and Mel realize that Emmy didn't make the additional deposit. Since they're ready to close, Emmy and Mel agree to just move forward with the closing. Which type of performance is this?
Partial performance
Zenia Marx, up-and-coming film star, has agreed to sell to her ex-husband the beach property that has been in her family for years. Her ex-husband threatened to go public with her same-sex affairs if she didn't sell him the property. What is this an example of?
Duress
Alex, 67, is selling his two-story Dallas home to Shelly, 46, for $240,000. The written contract includes the property's legal description, and both parties sign the agreement.
Enforceable
Jackie, 25, agrees to sell Betty, 54, her one-bedroom, one-bath cottage for $100,000. Both parties are sane and sober, both agree to the terms of the written agreement, and both sign the agreement. Both parties carry out their terms as set forth in the contract, which includes a legal description of the property.
Enforceable
What type of contract do you have once the seller has accepted the buyer's offer in writing and the buyer has been notified of the acceptance?
Enforceable
Houston marketing director Sherman K "Shep" Watson, 53, had fallen into a sweet deal when he'd been transferred to the city from Podunkville, Missouri, seven months earlier. He'd signed a lease-option agreement with traveling salesman, Francis Keane, on Keane's three-bedroom, three-bathroom home on a one-acre ranch just outside the city limits. Shep and Francis negotiated and agreed on the contract, and when the seven-month lease portion of the agreement was up, the two finalized the purchase. The property title went to Shep, the purchase price went to Francis, and everyone lived happily ever after. Which type of contract is this?
Executed
Oscar Schiller and his second cousin, Kraig Kuller, signed a lease-purchase agreement on Schiller's Fort Worth home. At the end of the one-year lease term, Kraig decided to take the option to purchase the property. Once both of the men had fulfilled their obligations under the contract, Kraig received the title to the property, and Oscar received the funds from Kraig's lender. It was a done deal. Which type of contract is this?
Executed
Jerry and Lewis have entered into a sales contract. They're about three weeks into the transaction, with several terms of the agreement yet to be met. What type of contract do Jerry and Lewis have?
Executory
Property owner Easton West, 50, had offered his three-bedroom, three-bath home as a lease-option. Buyer Jim Jarmashian, 34, was sold on the idea, because he wouldn't be financially able to buy until the following March (10 months from the date they signed the lease-option agreement), when he turned 35, and the trust fund from his grandparents would be available to him. Easton and Jim have signed the written agreement—which was drawn up by a lawyer experienced in dealing with lease-options—and now it's a waiting game. Which type of contract is this?
Executory
School teacher Ramon Jaminez, 64, had looked forward to retirement—and never looking at another eye-rolling teenager for the rest of his life—from the time he'd started working as a high school chemistry teacher 40 years earlier. The year before, while vacationing on the Gulf Shores, he'd stumbled upon a sweet little fishing cottage that had his name all over it—and it was for sale! He knew it was meant to be his post-retirement home. The seller, 75-year-old Wayne Harris, had decided he was bored with the lazy life of a retiree, and he wanted to move to the Big Apple for a few years. The two signed a lease-purchase. Under the written contract, which was drawn up by an attorney who specialized in such deals, Ramon would lease the property until the following May (a mere eight months away), when he would purchase it. Both parties have signed the agreement. Which type of contract is this?
Executory
Montgomery Simms, the owner of a piece of prime property near the heart of downtown Austin, enters into an agreement with Dan and Marge Harper from out of state. The transaction is made completely online and the Harpers are very surprised to discover that they're now the proud owners of a vacant lot on the outskirts of town. What is this an example of?
Fraud
Void Contract
Has no legal force or effect
In addition to using an amendment form to note and date each change to the original contract, what else should an agent do?
Have all parties sign the amendment.
Sisters Chandra and Yvonne have found the perfect little town in which to open their new clothing boutique, an adorable three-bedroom home only five minutes away. These buyers and the seller, Lyle, signed a real estate contract, and each performed their duties accordingly. One week before closing, a tornado flattens most of their town, including the perfect house they'd planned to purchase. What's the reason for discharge of contract?
Impossibility of performance
Megan, a seller, tells the party buying her home that the property will soon be part of the public water system. She makes this claim based on erroneous information supplied to her by the city. The buyer relies upon this information and moves forward with the purchase of the home. This is an example of ______.
Innocent misrepresentation
Tim Mix, a rodeo fanatic, was pumped to buy property next to the old fairgrounds that the media and Tim's real estate broker said would be selected to host an annual rodeo event for the next 10 years. The organizers of the rodeo event changed their minds and decided to hold the event in the next town over.
Innocent misrepresentation
What purpose does a legal description serve in a real estate contract?
It helps to correctly and accurately identify the property being transferred.
If you had to explain "assignment of contract" to a client, what would you say?
It occurs when one of the original parties transfers his or her rights under the contract to a new party.
Earnest, a well-known writer who is renowned for his constant drinking, enters into an agreement, while drunk, to sell a stranger his house for $10 if the stranger agrees to take his wife and dog in the bargain. What is this an example of?
Lack of contractual capacity
Buyer Anderson Simpson and his cousin, Jethro Smithers, sign a contract to purchase a three-acre farm—complete with a four-bedroom house—from farmer Oleson McDonald. Jethro loses all of his savings during a bad weekend in Vegas, so he can't afford his part of the purchase. Instead, Anderson and Farmer McDonald allow another cousin, Jeraldine, to take Jethro's place in the contract, and Jethro is no longer liable. Is this an example of assignment or novation?
Novation
Buyer Ellen Portis and her girlfriend, Carmen DiMorales, enter into a contract with seller Pepper White to purchase his three-bedroom ranch. Ellen and Carmen part ways, due to Ellen's involvement with her new girlfriend, Jeanette Winters, and Carmen leaves the country. Before she does so, she, Ellen, Pepper, and Jeanette agree to allow Jeanette to replace her in the purchase contract for Pepper's house. Carmen departs with no further obligations under the contract. Is this an example of assignment or novation?
Novation
First, what constitutes a breach of contract?
One party fails to meet the obligations of the contract.
Buyer Shane McKay signed a buyer representation agreement with broker Callie to help him locate a three-bedroom condo to purchase. He agreed to pay Callie a set commission if the listing broker declined to share commission with her. Callie found Shane a perfect condo with all of the bells and whistles—including literal bells and whistles (don't ask)—and Callie was paid the agreed-upon commission. Which type of performance is this?
Performance
Property owner Polly and buyer Betty reached an agreement for Betty to purchase Polly's home for $309,500. Both Polly and Betty performed their obligations, as stated in the contract, and the sale closed on the agreed-upon date. Polly received the $309,500 sales price, and Betty received the title to the house. Which type of performance is this?
Performance
Emit enters into a contract to buy Oliver's home. Per the terms of the contract, Emit must put down a $5,000 security deposit and have the property inspected within five days. In reality, he puts down an $8,000 deposit and has the property inspected within three days. This is an example of ________.
Performance of the contract
Recorded plat
Provides lot, block, section number, and subdivision name
Metes and bounds
Provides the direction and distance of a line forming the boundaries of the property and the physical features that define the boundaries
Buyer Kristy is purchasing a three-bedroom house on a half-acre lot from seller Simon. She plans to finance the purchase with an FHA loan, but she applies for it only two weeks before the scheduled closing, and the funding decision has not yet been made at by the closing. Simon sues her, but the court determines that the contract was invalid, because a specific date or time for her to apply for the loan was not provided. Is this an example of time is of the essence or reasonable time?
Reasonable Time
Shada is purchasing a two-bedroom cabin from Jerome. She agrees to apply for a conventional loan, although the sales contract doesn't specify the date by which she must do that. She doesn't apply for the loan until the week before closing, and because of this, she doesn't have the funds to purchase Jerome's cabin on the date of closing. Jerome plans to sue her for breach of contract. Is this an example of "time is of the essence" or "reasonable time"?
Reasonable Time
Buyers Emily and Jordan Smith find the home of their dreams: a three-acre ranch-style home that includes a walk-out basement, which is perfect for Jordan's aging mother, who's coming to live with them. They're devastated when seller Lenny decides he wants out of the contract, and they sue him to force him to sell them the home anyway. What's the claim?
Specific performance
Amy and Aaron Eckers love the split-entry home they've found and are excited for their sons to enroll in the top-rated high school. The property owner, Kyle, accepts their offer of $235,000 and agrees to replace the air-conditioning, which is old and inefficient, and to paint the house tan, rather than the glaring orange he preferred. The Eckers receive funding for the sale, and Kyle replaces the A/C and paints all but the back side of the house the neutral tan the Eckers requested. The back of the house, which isn't visible from the road, remains orange, because Kyle ran out of time to finish the paint job. What type of performance is this?
Substantial performance
Buyer Mary and property owner Jack sign a contract on Jack's two-story house in Plano. Mary agrees to apply for her FHA loan within seven business days, but doesn't end up doing it until day 15. Because of this, the closing will have to be delayed, and Jack, who'd planned on moving out of town the day after closing, will now have to fly back into town to finalize the closing paperwork. Is this an example of "time is of the essence" or "reasonable time"?
Time is of the Essence
Buyer Roberto is purchasing a four-bedroom bungalow near the beach from seller Sam. Their closing date is set for April 18, and their contract says that "Time is of the essence as to the closing date of April 18." Sam agrees to have a termite inspection done, and he schedules it for April 16. When the inspection reveals termite damage, Sam agrees to pay for the repairs, but they can't be completed for another 10 days, which will put them eight days past the scheduled closing date. Is this an example of time is of the essence or reasonable time?
Time is of the Essence
What Does Performance of a Contract Mean?
To meet all of the terms of a contract
What Does Partial Performance of a Contract Mean?
To meet at least some of the terms of a contract
Camilla is her father's legal guardian because he suffers from a mental illness. Her father would like to buy a luxury condo, but Camilla tells him he can only afford a modest condo. In reality, Camilla's father can easily afford a luxury condo, but she hopes to transfer his extra money into her personal accounts. Her father trusts Camilla, and he enters into a contract to buy a modest and inexpensive condo. This is an example of ______.
Undue influence
Noah Holmes, a real estate investor, talked one of his elderly neighbors, Mrs. Amelia Pines, into selling him her home for much less than it was worth. He planned to use the home as rental property. What is this an example of?
Undue influence
Property owner, Jeff, 35, has received a written offer from buyer Kyle, 66, and has given his verbal acceptance. Kyle has signed the agreement. However, before Jeff had a chance to sign the contract, he was in a car accident, and is now in a coma.
Unenforceable
Property owner, Stephanie, 75, signs a contract with buyer Lula, 67. The written contract includes the legal description of the property and the terms and conditions of the sale; both parties sign it. Two days before closing, a tornado races through town and flattens the property.
Unenforceable
Property owner Judy offers to pay a 4% commission to any licensee who brings her a buyer for her two-bedroom, one-bathroom house. Stan, a licensee, can bring her a buyer to earn the commission, but he's under no obligation to do so.
Unilateral
Property owner Romi, 45, signs a six-month option agreement on her ranch with cowboy Tex, 55. Under the terms of an option agreement, Romi agrees to not sell her property to any other sellers for six months. Tex has no obligation to purchase Romi's property from her. Which type of contract is this?
Unilateral
Sylvan, the seller, and Eric, the buyer, have signed an option agreement, which is an offer to purchase a specific piece of real estate without the obligation to buy it. Until Eric exercises his option to buy, only Sylvan is bound by the option agreement; he may not sell the property to anyone else during the option period. What type of contract is this?
Unilateral
Melinda, an attorney for the seller, was extremely satisfied with the purchase offer her client signed. The sales contract contained all of the essential elements. What type of contract is this?
Valid
Property owner Marcus, who is 41, agrees to sell his Victorian-style house to 50-year-old buyer Janiece Fraulein. In return, Janiece agrees to pay him $249,000. The written real estate contract includes the legal description of the house and the signatures of both parties to the agreement. What type of contract is this?
Valid
Property owner Skylar, who is 25, agrees to sell her one-room cabin to her older cousin, Frank, for $90,000. Their written contract provides the street address, as well as a legal description of the property, and includes the property's furnishings, which consist of one lumpy sofa and one equally lumpy bed. Frank wishes he could have gotten the cabin for less, but his cousin had always been bullheaded. Both parties sign the contract. What type of contract is this?
Valid
Gangster Mal Mapone needs to dispose of a particularly gabby former business associate, Benny the Bird. He agrees to sign over the title to an old property he owns to Johnny in exchange for Johnny's promise to make Benny disappear. What type of contract is this?
Void
Hadley signed a contract agreeing that she would be a drug mule in exchange for a large amount of cash, paid in installments over a period of three months. Because this contract is for an illegal purpose, it's __________.
Void
Two drunk people, Earl and Merle, agree to swap houses—Earl's nice house on the Gulf for Merle's run-down shack in the middle of nowhere—if the Cowboys win their next three games. They write up the contract on a piece of paper and each sign it, with the bartender as their witness. They all drink to football, and within two hours, Earl and Merle are dragged off by the cops for being "drunk and disorderly." What type of contract is this?
Void
Property owner Jacob Sladder, 32, signs a contract with 17-year-old Alfred Woodard in which Jacob agrees to sell his two-bedroom, one-bath home to Alfred for $110,000. Both parties sign the written contract, which Jacob's attorney had drawn up. The contract includes a legal property description, but not the street address. What type of contract is this?
Voidable
Property owner Mike Mapousch, 31, and buyer, Kimberly Oh, sign a written real estate contract for Kimberly to purchase Mike's house for $250,000. The contract contains both the legal description of the property and its street address. They both agree on the price and terms of the contract and sign it. Mike doesn't provide Kimberly with the seller's disclosure of property condition, as required by the Texas Property Code, before the closing. What type of contract is this?
Voidable
In general terms, when does mutual agreement occur?
When parties enter into an agreement voluntarily with full understanding of the contract terms
What is consideration?
When something of value is given in exchange for something of value
An enforceable contract is one that ______.
Will stand up in court
An unenforceable contract is one that ______.
Won't stand up in court
Which of the following actions is a violation of TREC rules regarding addenda?
Writing something in the Special Provisions of a TREC contract if there is a TREC addendum form that can be used
Is the following a violation of TREC Rules? Instead of using the TREC Addendum for Sale of Other Property by Buyer, Cameron, an agent for the buyer, noted the contingency in the Special Provisions section of the TREC sales contract.
Yes