CHAPTER 12: CONTRACT LAW

A contract

A contract is a voluntary agreement or promise between legally competent parties, supported by legal consideration, to perform (or refrain from performing) some legal act. That definition may be easier to understand if its various parts are examined separately. A contract must be voluntary - no one may be forced into a contract, an agreement or a promise - a contract is essentially a legally enforceable promise; made by legally competent parties - the parties must be viewed by the law as capable of making a legally binding promise, supported by legal consideration - a contract must be supported by something of value that induces a party to enter into the contract, and that something must be legally sufficient to support a contract, and having to do with a legal act - no one may legally contract to do something illegal. Licensees use many types of contracts and agreements to carry out their responsibilities to sellers, buyers, and the general public. The general body of law that governs such agreements is known as contract law.

A contract can be described as valid, void, voidable, or unenforceable, depending on the circumstances.

A contract is valid when it meets all the essential elements that make it legally sufficient or enforceable. A contract is void when it has no legal force or effect because it lacks some or all of the essential elements of a contract. A contract that is voidable appears on the surface to be valid but may be rescinded or disaffirmed by one or both parties based on some legal principle. If it is not disaffirmed, a voidable contract may nevertheless end up 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 prescribed by state law. Several situations may result in a contract that is voidable. A contract entered into under duress A contract entered into while intoxicated As a result of fraud, mistake, or misrepresentation, it is always voidable by the compelled or defrauded party. A contract with a minor is also voidable; minors are permitted to disaffirm real estate contracts at any time while underage and for a certain period of time after reaching majority age. Finally, a contract entered into by a mentally ill person usually is voidable during the mental illness and for a reasonable period after recovery. On the other hand, a contract made by a person who has been adjudicated insane (that is, found to be insane by a court) is void at the outset based on insanity judgments being a matter of public record.

Many sales contracts provide for the following:

Any personal property to be left with the premises for the purchaser (such as major appliances or lawn and garden equipment) Any real property to be removed by the seller before the closing (such as a storage shed) The transfer of any applicable warranties on items such as heating and cooling systems or built-in appliances The identification of any leased equipment that must be transferred to the purchaser or returned to the lessor (such as security systems, cable television boxes, and water softeners) The appointment of a closing or settlement agent Closing or settlement instructions The transfer of any impound or escrow account funds The transfer or payment of any outstanding special assessments The purchaser's right to inspect the property shortly before the closing or settlement (often called the walk-through) The agreement as to what documents will be provided by each party and when and where they will be delivered

Destruction of the premises

Illinois has adopted the Uniform Vendor and Purchaser Risk Act, which specifically states that the seller bears any loss that occurs before the title passes or the buyer takes possession. If the entire premises or a material part of it is destroyed, the seller cannot enforce the contract against the buyer. Any earnest money must be returned. On the other hand, if title or possession has been transferred to the buyer, he must pay the full contract price, even in the event of partially or totally destroyed premises (e.g., the house burns while both parties are at the closing).

Bilateral and Unilateral Contracts

In a 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 convey property title to the buyer, who in turn promises to pay a certain sum of money for the property. A unilateral contract, on the other hand, is a one-sided agreement. One party makes a promise to induce a second party to do something. The second party is not legally obligated to act. However, if the second party does comply, the first party is then obligated to keep the promise. An option contract to retain one's option to possibly make a purchase later is an example of a unilateral contract.

Parts of a sales contract

The purchaser's name and a statement of the purchaser's obligation to purchase the property, including how the purchaser intends to take title An adequate description of the property, such as the street address The seller's name and a statement of the type of deed a seller agrees to give, including any covenants, conditions, and restrictions that apply to the deed The purchase price and how the purchaser intends to pay for the property, including earnest money deposits, additional cash from the purchaser, and the conditions of any mortgage financing the purchaser intends to obtain or assume The amount and form of the down payment or earnest money deposit and whether it will be in the form of a check or promissory note A provision for the closing of the transaction and the transfer of possession of the property to the purchaser by a specific date A provision for title evidence (abstract and legal opinion, certificate of title, or title insurance policy) The method by which real estate taxes, rents, fuel costs, and other expenses are to be prorated A provision for the completion of the contract should the property be damaged or destroyed between the time of signing and the closing date A liquidated damages clause, a right-to-sue provision, or another statement of remedies available in the event of default Contingency clauses (such as the buyer's obtaining financing or selling a currently owned property or the seller's acquisition of another desired property or clearing of the title; attorney approval and home inspection are other commonly included contingencies) The dated signatures of all parties (the signature of a witness is not essential to a valid contract)—In some states, the seller's non-owning spouse may be required to release potential marital or homestead rights. An agent may sign for a principal if the agent has been expressly authorized to do so. When sellers are co-owners, all must sign if the entire ownership is being transferred. In Illinois, commission is now paid as follows: "The real estate brokers named in this Contract shall be compensated in accordance with their agreements with their clients and/or any offer of compensation made by the listing broker in a multiple listing service in which the listing and cooperating broker participate."

Amendments and addendums

amendment is a change to an existing contract Any time words or provisions are added to or deleted from the body of the contract, the contract has been amended. Amendments must be signed or initialed by all parties. addendum is any provision added to an existing contract without altering the content of the original. An addendum is essentially a new contract between the parties that includes the original contract's provisions "by reference"; that is, the addendum mentions the original contract. An addendum must be signed by both parties. Amendment = Change Addendum = Addition

Liquidated damages

compensation amount agreement if contract is breached If a sales contract specifies that the earnest money deposit is to serve as liquidated damages in case the buyer defaults, the seller will be entitled to keep the deposit if the buyer refuses to perform without good reason. The seller who keeps the deposit as liquidated damages may not sue for any further damages if the contract provides that the deposit is the seller's sole remedy.

Enforceable between the parties

contract cant be enforceable if it was oral only written contracts can be enforceable in court, with very few exceptions. In Illinois, most of our real estate contracts/agreements have to be in writing.

Legal purpose

A contract must be for a legal purpose that is, even with all the other elements (consent, competent parties, consideration, and offer and acceptance). A contract for an illegal purpose or an act against public policies is not a valid contract.

Land Contracts — Installment Contract (Seller Financing)

A real estate sale can be made by a land contract, also called a contract for deed, an installment contract, or articles of agreement for warranty deed. Under a typical land contract, the seller (also known as the vendor) retains legal title. The buyer (called the vendee) takes possession and gets equitable title to the property. The buyer agrees to give the seller a down payment and pay regular monthly installments of principal and interest over a number of years. The buyer also agrees to pay real estate taxes, insurance premiums, repairs, and upkeep on the property. Any provision in an installment contract or land contract is void if the document: forbids the contract buyer to record the contract, provides that recording shall not constitute notice, or provides any penalty for recording.

liquidated damages

An amount predetermined by the parties to a contract as the total compensation the aggrieved party will receive should the other party breach the contract.

Executed and Executory Contracts

An executed contract: all parties have fulfilled their promises. An executory contract exists when one or both parties still have 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. At closing, the sales contract is executed.)

DIFFERENCE BETWEEN E-SIGNATURES (ELECTRONIC SIGNATURES) AND DIGITAL SIGNATURES

E-SIG INTENT DIGITAL SIG MORE ENCRYPTED e-signature is the legally binding record and the digital signature is the underlying technology that helps verify the authenticity of the transaction.

TYPES OF CONTRACTS

Express and Implied Contracts Depending on how a contract is created, it is either express or implied. An express contract exists when the parties state the terms and show their intentions in words. An express contract may be oral or written. In an implied contract, the agreement of the parties is demonstrated by their acts and conduct.

NOTE

Illinois case law supports the proposition that exclusive brokerage contracts are unilateral, not bilateral, contracts. If exclusive brokerage contracts were bilateral contracts, then the listing broker would be in breach of contract if he failed to produce a buyer.

NOTE

Illinois law provides that all persons come of "legal age" on their 18th birthday. Contracts entered into by a minor in Illinois are voidable until the minor reaches majority and for a reasonable time afterward. There is no statutory period within which a person may void a contract after reaching majority in Illinois. What is considered "reasonable" depends on the circumstances of each case, although the courts tend to allow a maximum of six months.

NOTE

Illinois requires several mandatory disclosures by sellers and licensees acting as their agents, such as disclosure of property conditions and agency relationships. These disclosures are included in the sales contract by physical attachment or by reference.

NOTE

In Illinois, a licensee should not use any form titled "Offer to Purchase" if the form is intended to become a binding real estate contract. Illinois law requires that sales contracts indicate at the top "Real Estate Sales Contract" in bold type.

The most common contingencies include:

Mortgage contingency- The buyer's earnest money is protected until a lender commits the mortgage loan funds. (This is sometimes called a financing contingency.) Inspection contingency - A sales contract may be contingent on the buyer obtaining certain inspections of the property within a set time frame. Inspections may include a basic home inspection or special inspections for radon, wood-boring insects, lead-based paint, structural and mechanical systems, sewage facilities, or various toxic materials. Property sale contingency - Buyers may make the sales contract contingent on the sale of their current home by a certain date. This protects the buyer from owning two homes at the same time and also helps ensure the availability of cash for the purchase.

NOVATION

Substituting a new contract for an old one and the release of liability.

NOTE

The Illinois State law, The Uniform Electronic Transaction Act (UTEA), passed in 1999 also recognizes electronic signatures as legally binding - i.e. handwritten and electronic signatures (e-signatures) are equally legal forms of signatures. Additionally the legality of the electronic form of real estate contracts (e-real estate contracts) was also confirmed. . A Federal law covering this subject was also passed in 2000, the Electronic Signatures in Global and National Commerce Act (ESIGN) recognizes electronic signatures as legally binding in business transactions.

OPTIONS NOTE

The option agreement is a unilateral contract .(ONE SIDED) If the option is not exercised within the time specified in the contract, both the optionor's obligation and the optionee's right expire.

Parole evidence rule

The written contract is assumed to be the complete agreement of the parties.

PROBLEMS WTH E-SIGNATURES (ELECTRONIC SIGNATURES) AND REAL ESTATE CONTRACTS

Where there is NOT good will between the parties, either currently or some time in the future (buyer's remorse, seller's remorse, landlord remorse, tenant remorse) or other problems, and the electronic content of the document is challenged or the electronic signature is challenged, there could be a serious problem. For instance, one of the parties could claim that the e-real estate contract has been modified since their e-signature was attached to the document.

Options

a contract by which an optionor (generally an owner) gives an optionee (a prospective purchaser or lessee) the right to buy or lease the owner's property at a fixed price within a certain period of time. An option contract is not a sales contract. At the time the option is signed by the parties, the owner does not sell and the optionee does not buy. The parties merely agree that the optionee has the right to buy and the owner is obligated to sell if the optionee decides to exercise his right of option.

Conversion

involves the use of the escrow funds to pay for personal or business expenses. This is also a violation of Real Estate Licensing Law.

The contract must be based on consideration.

is something of legal value offered by one party and accepted by another as an inducement to perform or to refrain from performing some act Good Consideration — Love and affection Valuable Consideration— Money, things of tangible value (gold, pearls, diamonds)

Equitable title

legal tittle to property not valid until purchaser has recieved and accepted the deed on the day of closing after both buyer and seller have executed a sales contract, the buyer acquires an interest in the land. until the deed has been received

Offer and acceptance (mutual assent)

means that there must be a meeting of the minds, or complete agreement about the purpose and terms of the contract. In Illinois, the offer and acceptance must be in writing.

Each sponsoring broker who utilizes an escrow account to hold Earnest Money Deposits:

must maintain a complete journal and ledger of all earnest money transactions and a Log of all escrow accounts notify the IDFPR of the name of the federally insured institution where the money is deposited. All funds must be deposited in escrow accounts no later than the end of the next business day following the acceptance of the real estate contract or lease agreement. Both the account itself and sponsoring broker records are subject to inspection at any time. Sponsoring broker records need to be produced within 24 hours upon official request Escrow reconciliations must be completed within ten days after receipt of the monthly bank statement Escrow Account documents must be kept for a minimum of five years. Only the sponsoring broker or an authorized agent may withdraw funds from the account. Fees and/or commissions earned by the sponsoring broker that are to be paid from the funds in this account are to be disbursed by the sponsoring broker from the account no earlier than the day the transaction is consummated or terminated and no later than the next business day after consummation or termination of the transaction.

NOTE

offer is a promise made by one party, requesting something in exchange for that promise. Proposing any deviation from the terms of the offer constitutes a rejection of the original offer and creates a new offer. The original offer ceases to exist Any offer or counteroffer may be withdrawn at any time before it has been accepted, even if the person making the offer or counteroffer agreed to keep the offer open for a set period. Acceptance If the seller: agrees to the original offer or a later counteroffer exactly as it is made signs the document, the offer has been accepted and a contract is formed. licensee must advise the buyer of the seller's acceptance An offer is not considered accepted until the person making the offer has been notified of the other party's acceptance.

commingling

ponsoring brokers are strictly prohibited from commingling, that is, depositing earnest money in their personal or corporate operating account. The very act of depositing earnest money in these accounts constituters a violation of Real Estate Licensing Law

The Illinois Statute of Frauds

requires that any contracts for the sale of land, or for leases that for more than one year from the date they are entered into, must be in writing to be enforceable in court. The Illinois Real Estate License Act of 2000 also indicates that certain other contracts must be in writing, such as employment agreements between sponsoring brokers and their sponsored licensees.

Performance of a Contract

contract must be performed within the time limit specified. In Illinois, a deed or contract executed on a Sunday or legal holiday is valid and enforceable. However, when the last day on which a deed or contract must be executed is a holiday or a Sunday, the deed or contract may be executed on the next regular business day.

breach of contract

The failurclause permits the seller to keep the earnest money deposit and any other payments received from the buyer as the seller's sole remedy. Statute of limitations In Illinois, the statute of limitations for oral contracts is five years; for written contracts, ten years. Any rights not enforced within the applicable time period are lost.e, without legal excuse, of one of the parties to a contract to perform according to the contract.

Continue to Market a Signed Contract with Contingencies

A seller may insist on an escape clause, which permits the seller to continue to market the property until all the buyer's contingencies have been satisfied or removed. The buyer may retain the right to eliminate the contingencies if the seller receives a more favorable offer.

Reality of consent

free and voluntary act of each party misrepresentation, fraud, undue influence, or duress deprives a person of that ability.

Contingencies

Additional conditions that must be satisfied before a sales contract is fully enforceable includes the following three elements: The specific actions necessary to satisfy the contingency The time frame within which the actions must occur Who is responsible for paying any costs involved

Legally competent parties

All parties to the contract must have legal capacity. That is, they must be of legal age and have enough mental capacity to understand the nature or consequences of their actions in the contract. In most states, 18 is the age of contractual capacity.

NOTE

Any installment contract for the sale of a dwelling that consists of 12 or fewer units is voidable at the option of the buyer unless either a certificate of compliance or an express warranty that no notice of a building code violation has been received within the past ten years is attached to or incorporated into the contract. If notice has been received within the past ten years and not complied with, each notice must be listed with a detailed explanation. Neither buyer nor seller may waive this requirement. A buyer who, under an installment contract, purchases residential property containing six or fewer units (which includes one unit in which the purchaser will reside) from a land trust must be told the names of all beneficiaries of the trust at the time the contract is executed. The buyer has the option to void the contract if the names are not revealed.

Quinlan & Tyson Decision

The 1966 Illinois Supreme Court decision in the case of Chicago Bar Association, et al. v. Quinlan and Tyson, Inc., placed certain limitations on real estate licensees in drafting a contract of sale. The court ruled that : Licensees can only use standard (pre-printed or digital) form contracts that are customarily used in the real estate community Licensees are authorized only to fill in blanks on pre-printed or digital form contracts. Where no information is required for a blank space, the Licensee should insert NA or a line through the unused blank. It is a violation of Licensing Law to leave blank spaces in a signed contract (either pre-printed or digital). Licensees are authorized only to line out wording which is not applicable to the pre-printed or digital contract, such as alternative financing arrangements. If changes are made by the agreement of all the principals, the buyers and sellers must initial any changes they agree to add. All licensees can give each person signing or initialing the contract an original "true copy" (signed hard copy) or forward a copy of the electronically edited, initialed and signed electronic version of the contract to the buyer and seller, within 24 hours of the time of signing.