CRE Principles: 6 Contract Law

Negative Forces Affecting Consent

Acceptance must be freely given. Contract voidable by victimized party if he can show consent resulted from: fraud undue influence duress

Remedies for Breach of Contract: Compensatory Damages

Amount of money court orders breaching party to pay other party, to compensate them for losses incurred as a result of breach. Most common remedy for breach of contract.

Contract

An agreement between two or more competent persons to do, or not do, certain things in exchange for consideration.

Statute of Frauds: Sufficient

Any form of writing will suffice, including notes, letters or memos, so long as they: identify contract subject matter and show agreement between parties, and are signed by party to be bound.

Remedies for Breach of Contract: Rescission

As explained earlier, _______ is termination of contract that returns parties to their original positions. ______ may be: by agreement between parties, or court-ordered remedy for breach of contract.

Executed

Contract has been fully performed. Note that "________" may also refer to a contract that has just been signed.

Elements of a Valid Contract: Contractual capacity

Contract is not legally binding unless all parties have legal capacity to enter into it. Two requirements for legal capacity: age mental competence

Remedies for Breach of Contract: Specific performance

Court orders breaching party to perform contract as agreed.

Contractual Capacity: Convicts

Incarcerated persons may also contract to buy or sell property, subject to public safety limitations.

Negative Forces Affecting Consent:Fraud: Concealing:

It isn't necessary to actually make misleading statements to commit fraud. Simply concealing material fact may be fraud.

Discharging a Contract: Full performance

Most contracts are discharged by full performance: each party performs as promised, and contractual relationship ends

Contractual Capacity: Mental competence

Of sound mind. If one party has been declared mentally incompetent, contract is void. Guardian can enter into contracts on behalf of incompetent person. If someone enters into contract while temporarily incompetent, contract may be voidable.

Termination of Offer: Lapse of time

Offer with deadline for acceptance expires automatically when that date or time arrives. Offer without deadline expires after reasonable amount of time.

Express contract

One that has been put into words, oral or written. Most contracts are _______, not implied.

Discharging a Contract: Assignment vs. novation

When contract is assigned, there is continuing liability for the assignor. With novation, there is no continuing liability for withdrawing party.

Termination of Offer: Counteroffer

When offeree agrees to some terms in original offer, but changes one or more terms. Although sometimes called qualified acceptance, counteroffer is rejection of original offer and tender of new offer. Roles of parties are reversed.

Discharging a Contract by:

full performance, or agreement between parties

Legal Status of Contracts: Four Terms:

void voidable unenforceable valid

Bilateral contract

Both parties promise to do something and are legally obligated to perform as promised. Most are this kind of contract.

Executory

Contract has not yet been performed, or is in the process of being performed.

Unilateral contract

Only one party is legally obligated to perform as promised.

Discharging a Contract: Agreement between parties

The parties to contract may also agree to discharge contract in following ways: rescission cancellation assignment novation

Remedies for Breach of Contract: Liquidated damages: In Real Estate Transactions:

buyer's good faith deposit often treated as liquidated damages for seller, if buyer breaches contract. (Note special CA rules regulating these deposits.)

A valid contract requires

parties with legal capacity mutual consent lawful objective consideration

Statute of Frauds: Noncompliance

A contract subject to statute of frauds is unenforceable if it isn't in writing and signed. However, oral real estate contract may still be enforced in unusual circumstances, such as when purchase price has been paid.

Statute of Frauds: Contracts must be in writing

California's statute of frauds applies to any contract: not performed within one year. for sale or exchange of real estate (purchase agreement). for lease of property, if term is greater than one year.

Negative Forces Affecting Consent: Duress

Compelling someone to do something against their will, using force, constraint, or threats.

Legal Status of Contracts: Voidable

Contract appears to be valid, but has some defect giving one or both parties power to withdraw. Examples: non-real estate contract entered into by minor (voidable by minor or guardian) contract entered into as result of fraud, undue influence, or duress

Contractual Capacity: Age: Void:

Contract has no legal effect. Neither party can enforce it. Real estate contract in which one party is a minor is void. Other contracts (not related to real estate) signed by minor are voidable by minor. Other party can't enforce contract. Minor can choose to enforce contract, through parent or guardian.

Elements of a Valid Contract: Mutual consent

Contract is legally binding only if both parties have consented to its terms. Once contract is signed, consent is presumed. No one should sign contract without understanding its contents.

Statute of Frauds: Hand written vs. printed

Contract may be printed, handwritten, or both. If conflict between printed and handwritten parts, handwritten part takes precedence. If party disputes whether contract was in writing, statute of frauds may not be used as defense.

Elements of a Valid Contract: Lawful objective

Contract's purpose (and consideration exchanged) must be lawful or contract is void.

Every contract is:

Contracts may be classified according to certain basic characteristics. express or implied unilateral or bilateral executory or executed

Implied contract

Created by the actions of the parties, not express agreement.

Contractual Capacity: Age: Exception:

Emancipated minor may enter into any type of contract, including real estate. (Copies of emancipation documents should be part of closing.) Minor may be emancipated by: marriage (even if divorced) military service court order

Discharging a Contract: Agreement between parties: Assignment: Permission:

Generally contract can be assigned without permission, unless: contract has clause forbidding assignment, or personal service contract (usually not assignable without permission). Example: listing agreement.

Contractual Capacity: Age

Generally, person must be at least 18 (age of majority) to enter into contract. Someone under 18 is minor. Minors do not have capacity to appoint agent or enter into contract. Parent or legal guardian may enter into binding contract on minor's behalf.

Termination of Offer: Death or insanity

If offeror dies before offer is accepted, offer is terminated and no contract is formed. If a court determines offeror is mentally incompetent, offer is terminated.

Legal Status of Contracts: Unenforceable contract: Doctrine of Laches:

Legal principle that allows court to decide unreasonable delay in asserting claim prevents legal action. Different from statute of limitations, which sets specific deadline for filing claim.

Negative Forces Affecting Consent: Fraud

Misrepresenting material fact to someone who relies on misinformation. Material fact: Information that is likely to affect a decision. Fraud is either actual or constructive.

Mutual Consent: Offer and acceptance

Mutual consent is sometimes called mutual assent, mutuality, or meeting of the minds. Mutual consent is achieved through offer and acceptance: Offeror makes offer to offeree. If offeree accepts offer, contract is formed.

Legal Status of Contracts: Void

No legal effect whatsoever. Parties are in same position they'd be in if they had not attempted to contract. Contract can be disregarded. Occurs most often when one of the essential contract elements is lacking.

Offer and Acceptance: Termination of offer

Offer terminates if before acceptance: offeror revokes offer too much time passes offeror dies or becomes incompetent offeree rejects offer offeree makes counteroffer If offer terminates before accepted, no contract formed.

Termination of Offer: Revocation

Offeror can revoke offer any time before acceptance. Offeror must notify offeree of revocation. Even if offer was supposed to remain open until particular date, offeror can revoke it before that date.

Discharging a Contract: Agreement between parties: Assignment

One party (assignor) withdraws and assigns his interest to new party (assignee). Original contract not really discharged. Assignee has primary liability, but assignor has secondary liability. If assignee defaults, other party can still sue assignor.

Legal Status of Contracts: Unenforceable contract

One that can't be enforced in court because: its contents can't be proved (oral contract or written contract that is vaguely worded) other party has voidable contract statute of limitations has expired

Discharging a Contract: Agreement between parties: Cancellation

Parties agree to terminate contract without undoing steps taken. Money paid before cancellation is not returned (mainly, good faith deposit).

Discharging a Contract: Agreement between parties: Rescission

Parties sign written agreement to end contract and undo steps already taken. If either party paid money or gave property, it's returned. Parties return themselves to positions they were in before contract was formed.

Negative Forces Affecting Consent: Fraud: Constructive fraud:

Person in position of trust or with superior knowledge unintentionally misleads someone.

Negative Forces Affecting Consent: Fraud: Actual fraud:

Person making misrepresentation knows or should know that it's false: intentional deceit, or statements made without knowing whether they're true.

Termination of Offer: Rejection by offeree

Rejection terminates offer. After rejecting offer, offeree can't change mind and accept it. Contract formed only if offeror still wants to proceed.

Remedies for Breach of Contract: Liquidated damages

Remedy parties agree to in advance, with provision in contract. If one party breaches, other party is entitled to agreed sum of money (_____). _____ are only remedy; can't sue for more.

Legal Status of Contracts: Unenforceable contract: Statute of Limitations

Sets time limit for filing a lawsuit; party who misses deadline loses right to sue. California statute of limitations: breach of written contract: 4 years breach of oral contract: 2 years

Elements of a Valid Contract: Consideration

Something of value exchanged by contracting parties. Money, property, services, or promise to do something (or not do it). In typical real estate sale: seller's promise to convey title buyer's promise to pay agreed price

Remedies for Breach of Contract: Specific performance: Exceptions:

Specific performance not always granted. Court may decide damages are adequate compensation. Generally, specific performance awarded only if subject of contract is unique. Court may be willing to grant specific performance to real estate buyer.

Elements of a Valid Contract: Statute of frauds

State law that requires certain types of contracts to be in writing, and signed.

Discharging a Contract: Agreement between parties: Novation

Substitution of new party or new obligation between same parties. Always requires consent of other (original) party.

Negative Forces Affecting Consent: Undue influence

Taking advantage of one's influence over another, or their weakness of mind or distress, to pressure them into contract. Persuasion strong enough to overpower will, so consent isn't truly voluntary. May involve abuse of special relationship based on trust: broker-seller, attorney-client

Offer and Acceptance: Communication of acceptance

To create binding contract, offeree must communicate acceptance to offeror before offer terminates. Acceptance effective as soon as it is mailed, rather than when it is received.

Breach of Contract: Tender

Unconditional offer by one of the parties to perform as agreed. Before party can sue for breach of contract, non-breaching party must show he is ready to carry out his side of bargain (deliver deed or fund purchase).

Legal Status of Contracts: Voidable: Binding?

Voidable contract is binding unless party asks court to rescind contract. Withdrawing party must take legal action within reasonable time. Otherwise, court may rule that contract has been ratified.

Breach of contract:

When one party fails, without legal excuse, to perform any of the promises contained in agreement. If one party breaches contract, other party may have right to sue. A breach may be material or minor.

Statute of Frauds: Contracts must be in writing cont.

authorizing agent to buy or sell real estate (power of attorney) authorizing agent to find buyer or seller for real estate (listing agreement, buyer representation agreement) assumption of mortgage or deed of trust

Legal Status of Contracts: Valid contract:

has all essential elements. is free from negative influences. contents can be proved in court. statute of limitations hasn't expired. If one party fails to perform as promised, other can sue to have contract enforced.

Contractual Capacity: Aliens

may enter into contracts to transfer property, although they may be subject to certain reporting requirements.

Four legal remedies for breach of contract

rescission compensatory damages liquidated damages specific performance