NC Real Estate Unit 9 - Basic Contract Law

Mutual assent or deliberate agreement

An offer by one party is accepted by the other party.

Contract

legally enforceable promise or set of promises between legally competent parties, supported by legal consideration, to do (or refrain from doing) a legal act that must be performed and for which the law provides a remedy if a breach of promise occurs.

Unenforceable

Valid between the parties, but neither party may force performance -EX: Certain oral agreements

voidable

Valid but may be disaffirmed by one party -EX: Contract with a minor

Which of these statements is FALSE? A) Drafting a purchase agreement from scratch is considered a legal service. B) Brokers are permitted to use preprinted forms printed from computers. C) A broker can obtain preprinted sales contract forms from the North Carolina Real Estate Commission. D) The North Carolina Real Estate Commission prohibits the inclusion of brokerage compensation or a liability disclaimer in a sales contract.

C) A broker can obtain preprinted sales contract forms from the North Carolina Real Estate Commission.** **The North Carolina Real Estate Commission does not provide sales contract forms, nor does it create forms. Most brokers who are REALTORS® use the North Carolina Bar Association/North Carolina Association of REALTORS® standard forms.

A contract has been completed with all signatures provided. A buyer asks for a change to one piece of information in the contract and the seller verbally agrees. Who must sign off on this change? A) The seller B) The buyer C) Both parties who originally executed the contract D) The seller's real estate agent

C) Both parties who originally executed the contract

North Carolina Real Estate Commission Rule requires that brokers include all required data when completing preprinted contracts but prohibits the inclusion of brokerage compensation or a ____________ in a sales contract. A) document fee B) sales agent name C) liability disclaimer D) expiration date

C) liability disclaimer *A broker is permitted to fill in the blanks on certain approved preprinted documents (such as sales contracts and leases) when authorized to do so by other parties to the contract.

According to the statute of frauds, a contract for the sale of real estate, a long-term option, and a four-year commercial lease A) must be in writing to be legally binding. B) needs to be written and signed within appropriate time frames to be legal and enforceable. C) must be in writing to be enforceable. D) should be executed within a certain time or it will automatically expire.

C) must be in writing to be enforceable.

A buyer wishing to assign the standard Offer to Purchase and Contract (NCAR/NCBA) in North Carolina will be allowed to complete the assignment if the contract has A) been accepted and recorded. B) been properly notarized. C) no clause prohibiting assignment. D) been acknowledged and assigned within 72 hours of closing.

C) no clause prohibiting assignment. -Assignment refers to a transfer of rights or duties but not the liabilities under a contract to a third party. Rights in a contract may be assigned to a third party unless the agreement forbids such an assignment.

The legal remedy to enforce the terms of a contract is known as A) a lis pendens. B) an injunction. C) specific performance. D) a writ of attachment.

C) specific performance.

When the seller accepts any bid at any auction, no matter what type, the property is sold. In an absolute auction in North Carolina, no matter what the terms, the seller agrees to accept A) the wire transfer offer only. B) the cash offer only. C) the highest offer. D) the first offer.

C) the highest offer.

After the auctioneer accepts the offer, or bid, the buyer and the seller formalize their oral agreement with a written document to satisfy A) the attorney general. B) the real estate commissioner. C) the statute of frauds. D) the auction company.

C) the statute of frauds.

To assign a contract for the sale of real property is to A) record the contract with the appropriate register of deeds office. B) permit another broker to act as a subagent for the principal. C) transfer one's rights and responsibilities under the contract. D) require the seller and the buyer to record the contract.

C) transfer one's rights and responsibilities under the contract.

Brokers are permitted to draft contracts between buyers and sellers. True False

False -Brokers are permitted to fill in the blanks on certain approved preprinted documents, but they are not permitted to draft contracts. Drafting contracts is considered to be the practice of law.

A real estate contract with a minor is A) void. B) illegal. C) unilateral. D) voidable.

D) voidable.

Discharge of contract

The cancellation or termination of a contract.

offeree

the party in receipt of the offer, usually the seller

Discharge of contract may be done in the following ways:

-Partial performance of the terms of the contract -Substantial performance -Impossibility of performance -Mutual agreement of the parties to cancel -Operation of law

A contract must be the following:

-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 some valuable thing that induces a party to enter into a contract and that must be legally sufficient to support a contract -About a legal act—no one may make an enforceable contract to do something illegal

While contracts are complicated, every valid contract has similar characteristics. A contract is what sort of agreement?

A contract is a voluntary agreement. No one may be forced into a contract.**

Smithson signed a purchase agreement to buy Cornell's home. Cornell then decided not to sell his home. Smithson sued him and ended up with the house. Which remedy did Smithson choose? A) Specific performance B) Unilateral rescission C) Damages D) Mutual agreement

A) Specific performance -An order of specific performance requires the defaulting party to perform as agreed in the contract.

A builder/seller advertising a selling bonus to any selling agent is an example of A) a unilateral contract. B) a bilateral contract. C) an open listing contract. D) a voidable contract.

A) a unilateral contract.** **In a unilateral contract, 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 obligated to keep the promise.

A void contract is one that is A) not legally enforceable. B) rescindable by agreement. C) voidable by only one of the parties. D) not in writing.

A) not legally enforceable.

Impossibility of performance.

An act required by the contract cannot be accomplished.

Operation of law

This is in terms of voiding of a contract by a minor, as a result of fraud or the expiration of the statute of limitations (discussed later in this unit), or as a result of the alteration of a contract without the written consent of all parties involved. Bankruptcy can also discharge a contractual obligation.

Partial performance of the terms of the contract

This is sometimes referred to as accord and satisfaction. When one party accepts something less than agreed on as complete performance, the contract is considered discharged.

Legality of object:

To be valid, a contract must not contemplate a purpose that is illegal or against public policy. If a contract calls for immoral performance, discrimination, or a criminal act to take place, the contract is void.

In a unilateral contract, one party promises to induce a second party do something. The second party is not legally obligated to act. True False

True

valid

Binding and enforceable on both parties -EX: Agreement complies with essentials of a valid contract

Consideration

Courts will not enforce gratuitous (free) promises. Consideration is something of legal value, bargained for and given in exchange for a promise or an act. -A binder or an earnest money deposit is merely an expression of good faith and is not required to create a valid contract.

A contract states that closing will take place on or before June 22 of this year and "time is of the essence." If the buyer cannot close until June 26, I. the buyer has breached the contract. II. the seller can potentially terminate the contract. A) II only B) I only C) Neither I nor II D) Both I and II

D) Both I and II

All of the following persons would have the potential of creating a voidable contract EXCEPT A) a seller that was taking strong pain medication after surgery. B) a buyer that will turn 18 after closing the transaction. C) a seller that drank a bottle of champagne prior to signing the contract. D) a buyer that does not read well.

D) a buyer that does not read well. -A voidable contract is one that seems, on the surface, to be valid but may be rescinded, or disaffirmed, by one of the parties, based on some legal principle. If someone makes a contract while drugged or intoxicated, the contract is voidable by that person.

In an auction without reserve, the seller agrees to accept the high bid, no matter what the terms of that bid are. In North Carolina, this is also called A) an auction of finality. B) a no fail auction. C) a drop dead auction. D) an absolute auction.

D) an absolute auction.

An executory contract exists when all of the parties have fulfilled their contractual obligations. True False

False -An executed contract exists when all of the parties have fully performed their contractual promises.

compensatory damages

money intended to restore a plaintiff to the position he was in before the injury -Thus, in many jurisdictions (but not North Carolina), the buyer can be sued for compensatory damages if the earnest money is not adequate to cover the seller's losses.

statute of frauds

requires that certain types of contracts be in writing to be enforceable in a court of law. -Most notably, all contracts for the transfer of an interest in real estate must be in writing, with the only exception being leases of three years or fewer from the time of their making.

executory contract

something remains to be done by one or both parties. -A sales contract, signed by all parties, pending closing, is an example of an executory contract.

Consequential damages

special damages that might be obtained if the damages upon breach were reasonably foreseeable to the breaching party at the time of making the contract. It also allows the injured party to sue for lost profits.

implied contract

the agreement of the parties is demonstrated by their actions or conduct. -In a seller-agency relationship, a listing agreement is a written, express contract between the seller and the broker/firm, naming the broker/firm as the fiduciary representative of the seller. -EX: Ken goes into a restaurant and orders a meal. Ken has entered into an implied contract with the restaurant to pay for the meal, even though payment was not mentioned before the meal was ordered.

Liquidated damages

the amount of money that will compensate the injured party for breach, which the parties agree to at the time they enter into the contract. -For example, in NC, the earnest money deposit is considered liquidated damages in the event the buyer breaches the contract. The seller is entitled to keep the amount of the deposit as compensation for any injuries caused by the buyer's breach of contract.

Rescission

the contract is declared invalid and both parties return to the position they were in before they entered into the contract. -may be appropriate when facts were misrepresented or one party entered the contract under duress. -A right of rescission may be written into the contract or may be stipulated by law, such as the five-day right of rescission for a time-share purchase or the seven-day right of rescission for a new condominium purchase.

time is of the essence

the contract must be performed within the time limit specified, and any party who has not performed on time is liable for breach of contract. -If an offeror includes "time is of the essence" in the offer, the offeror can still revoke the offer at any time prior to acceptance.

express contract

the parties state the terms and show their intentions in words to that effect. An express contract may be either oral or written. -The statute of frauds (discussed later) requires all contracts for the transfer of an interest in real estate to be in writing. Therefore, all real estate contracts should be expressed written contracts. -EX: Hugh approaches his neighbor, Bob, and says, "I will paint your house today for $500." Bob replies, "If you paint my house today, I will pay you $500." Hugh and Bob have entered into an express oral contract. -EX: Betty writes, signs, and delivers an offer, which Sam then signs. Betty and Sam have an express written contract as soon as Betty learns that Sam has signed Betty's offer.

The parol evidence rule dictates that no oral agreements that contradict the terms of a written agreement may be considered. True False

true -The parol evidence rule states that the written contract is assumed to be the complete understanding of the parties.

offeror

the party making the offer, usually the buyer

In general, the four essentials of a valid contract are as follows:

1. Legally competent parties 2. Mutual assent or deliberate agreement 3. Legality of object 4. Consideration

parol evidence rule

a rule of evidence that dictates that no oral agreements that contradict the terms of a written contract may be considered in a lawsuit based on the written agreement. -The many exceptions to the rule include evidence that a contract was entered into illegally or evidence intended to clarify ambiguous contract terms.

breach of contract

a violation, without legal excuse, of any of the terms or conditions of a contract, as when a seller breaches a sales contract by not delivering title to the buyer under the conditions stated in the agreement. -you are not an attorney, get one involved if buyer doesnt show up to closing

addendum

additional clause added to agreement -All changes and additions should be dated and must be initialed in the margin or on the rider by both parties when the contract is executed.

Legally competent parties:

age (18 in NC) and sufficient mental capacity -A party who understands the nature and effect of the contract has sufficient mental capacity. Mental capacity is not the same as medical sanity. Similarly, an illiterate person (one who cannot read and/or write) has mental capacity and can still be a party to a contract.

executed contract

is one in which all parties have fulfilled their promises and therefore, fully performed the contract, such as a sales contract that has closed. -(Do not be confused by the fact that the word execute is also used to refer to the signing of a contract.)

unilateral contract

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 obligated to keep the promise. ("I will do this if you do that.") -For example, a seller who agrees to give the buyer four months to decide whether to buy a property is giving the buyer an option, which is considered a unilateral contract.

voidable contract

one that seems, on the surface, to be valid but may be rescinded, or disaffirmed, by one of the parties, based on some legal principle. -If someone makes a contract while drugged or intoxicated, the contract is voidable by that person. A voidable contract will be considered by the courts to be valid if the party who has the option to disaffirm the agreement does not do so within a prescribed period of time. -A contract with a minor is voidable by the minor. A contract entered into with a person who is known to be mentally ill is usually voidable during the mental illness. On the other hand a contract entered into with a person who has been adjudicated (declared by a court) as incompetent is void.

There are two types of auctions:

1. Auctions with reserve 2. Auctions without reserve

A seller is under contract to convey ownership of a property to a buyer. The seller changes his mind, and the buyer sues for specific performance. What is the buyer seeking in the lawsuit? A) Conveyance of the property B) Money damages C) Deficiency judgment D) New contract

A) Conveyance of the property -An injured party may file a court action, known as a suit for specific performance, to force the other party to perform the contract as agreed. Because every parcel of real estate is considered unique, a suit for specific performance brought by the buyer against the seller under a purchase and sales contract may be successful if the buyer can demonstrate that the property is unique and/or rare.

The buyer has requested that an item of personal property be included in the sale, and the seller orally agreed to include it. The buyer agent forgets to add the item to the offer and does not review the offer with the buyer. The omission is not discovered until closing, and the seller refuses to leave it. In this instance, which is FALSE? A) The item must be left with the property because personal property conveys unless excluded. B) The buyer's agent may have to buy the item and could be disciplined for lack of competency. C) The broker should have included the personal property in the offer. D) The seller is not bound by the oral agreement to include the object because it was not included in the written contract.

A) The item must be left with the property because personal property conveys unless excluded

A real estate auctioneer requires two licenses to auction real estate. One is a real estate license and the other is A) an auctioneer's license. B) an arbiter's license. C) a negotiator's license. D) a special agent license.

A) an auctioneer's license.** **If an auctioneer sells everything except real estate, the auctioneer does not need the real estate license.

All of the following are essential to the validity of a purchase contract EXCEPT A) earnest money in good funds. B) communication of acceptance to the offeror. C) lawful objective. D) consideration in money, promises, or something of value.

A) earnest money in good funds. -A binder or an earnest money de¬posit is merely an expression of good faith and is not required to create a valid contract.

In a standard sales contract, several words were crossed out or inserted by the parties. To eliminate future controversy as to whether the changes were made before or after the contract was signed, the usual procedure is to A) have both parties initial or sign and date in the margin near each change. B) redraw the entire contract. C) have each party write a letter to the other approving the changes. D) write a letter to each party listing the changes.

A) have both parties initial or sign and date in the margin near each change.

All of the following are essential elements of a contract EXCEPT A) rescission. B) mutual agreement. C) a lawful objective. D) consideration.

A) rescission. -Rescission is a remedy for breach. The injured party may rescind the contract, which means the contract is declared invalid and both parties return to the position they were in before they entered into the contract. Rescission may be appropriate when facts were misrepresented or one party entered the contract under duress.

In an auction, when the seller accepts any bid at any auction, no matter what type, the property is A) sold. B) foreclosed. C) in transition. D) pending.

A) sold.** **Both seller and buyer should fully understand that once the auctioneer declares a bid accepted, the property is sold on those terms because the auctioneer can bind the seller.

A written real estate contract is presumed to be the complete agreement of the parties to a contract because of A) the parol evidence rule. B) the statute of limitations. C) the doctrine of caveat emptor. D) the statute of frauds.

A) the parol evidence rule. -The parol evidence rule prohibits any terms of a prior oral agreement from being part of a written real estate contract unless those terms are written into the contract itself. The rule prevents fraudulent oral terms from being considered part of a real estate contract.

A contract between two parties that legally binds one party to perform but allows the other party to disaffirm the contract is A) voidable. B) executed. C) bilateral. D) void.

A) voidable. -In most voidable contracts, one party but not the other is legally bound to perform.

counteroffer

Any attempt by the offeree to change any of the terms proposed by the offeror -Counteroffers may be made by pen and ink changes as long as each individual change within the offer is initialed and dated by all parties in addition to the signatures and dates necessary at the bottom of the contract. -To avoid confusion and mistakes, signing a new NCBA/NCAR 2-T Offer to Purchase and Contract that incorporates all the changes is the preferred practice.

A minor inherited a large old mansion from his uncle. A cousin offered to purchase the house, and the minor agreed and sold the house. In this situation, was a valid contract formed? A) No, the minor may not enter into a contract but may legally convey title and sign the deed. B) No, the contract to sell was voidable by the minor, who can rescind the sale. C) Yes, the contract was voidable by the cousin who did not rescind, so the sale became legal when the deed was passed. D) Yes, the minor is allowed to sell property to relatives but cannot purchase property until reaching legal age.

B) No, the contract to sell was voidable by the minor, who can rescind the sale

In which of the following situations has reality of consent been reached? A) Buyer's spouse threatened divorce if buyer did not buy property. B) Seller lied about her motivation for selling. C) Listing agent lied about completion dates of recreational amenities. D) Seller signed sales contract at gunpoint.

B) Seller lied about her motivation for selling.** **Contracts signed by a person under duress or undue influence are voidable by that person or by a court. Extreme care should be taken when one or more of the parties to a contract are elderly, sick, in great distress, or under the influence of alcohol or drugs, both legal and illegal.

Which of the following BEST describes a contract that is voidable? A) The contract that is oral B) The contract that may be valid C) The contract with no legal effect D) The contract that has not been signed

B) The contract that may be valid -A voidable contract is one that seems, on the surface, to be valid but may be rescinded, or disaffirmed, by one of the parties, based on some legal principle (i.e., a contract made while drugged or intoxicated or a contract with a minor).

When preparing documents for a sales transaction, if there are no available standard or preprinted forms drafted by a North Carolina attorney, then the broker should refer the parties to A) another broker. B) an attorney. C) an office supply store. D) the Real Estate Commission.

B) an attorney.

A buyer is under contract but would rather let her friend buy it. Unless the contract prohibits it, the friend can take over the buyer's obligation by the process known as A) subordination. B) assignment. C) substantial performance. D) mutual consent.

B) assignment.

A real estate license gives the broker the right to A) act as a principal to the contract. B) fill in the blanks on pre-printed standard forms. C) draft offers to purchase for a client. D) perform as a notary public.

B) fill in the blanks on pre-printed standard forms.

If a real estate client directs a broker to draft contract language, the broker A) is empowered to draft documents. B) is prohibited from doing so. C) requests his licensed assistant to do this. D) is able to have the client sign a waiver so the broker may do this.

B) is prohibited from doing so.

All of the following would make a real estate contract voidable EXCEPT A) a minor has signed the document. B) it is not in writing. C) the broker misrepresented the property. D) the buyer is under duress.

B) it is not in writing.

If text in a preprinted contract is not applicable to the transaction the broker is performing, the broker should A) find a contract that doesn't have those words. B) rule out the unwanted words with a line through them. C) draft a contract without the words. D) inform the client they may not proceed with the transaction.

B) rule out the unwanted words with a line through them.** **Another option would be to add an addendum discounting the words that are not applicable.

A purchase agreement would likely be voidable under all of the following circumstances EXCEPT A) the seller made a material misrepresentation to the buyer. B) the buyer didn't read or understand the contract. C) the purchaser is a minor. D) the seller signed under duress.

B) the buyer didn't read or understand the contract.

There are two types of real estate auctions. In one, the seller has the right to stop the bidding if it becomes apparent that the high bid will be unacceptable, or too low, to the seller. This is A) an auction bait and switch. B) an auction in abstention. C) an auction with safe stop. D) an auction with reserve.

D) an auction with reserve.

A broker is permitted to fill in the blanks on certain approved preprinted documents (such as sales contracts and leases) when authorized to do so by the parties, provided the broker A) has a lawyer present at the time B) has the client fill in the blanks at the brokers' direction. C) charges a fee for filling out forms. D) does not charge a separate fee for completing the forms.

D) does not charge a separate fee for completing the forms.

To be enforceable, contracts for the purchase and sale of real estate would need all of the following EXCEPT A) mentally capable parties that understand the terms of the contract. B) to be in writing and signed by all parties to be charged. C) mutually acceptable terms of the agreement. D) earnest money deposit that accompanies the contract.

D) earnest money deposit that accompanies the contract.

A licensed real estate broker is NOT authorized to A) provide lines for clients to initial in margins of documents. B) fill in blanks on addenda. C) write appropriate language on preprinted forms. D) practice law.

D) practice law.

Brokers are permitted to use electronic, computer, or word-processing equipment to store preprinted approved forms. Stored forms may not be altered in any way before the form is presented to A) the printer queue. B) the closer. C) the appraiser. D) the parties to the contract.

D) the parties to the contract.

The typical real estate agent or broker rarely has the ability to accept an offer in place of A) the brokerage. B) the bank. C) the title company D) the seller.

D) the seller.

Linda and John are attending an auction to purchase 35 acres of farmland. They were the high bidders, even though their bid was very low. The type of auction Linda and John attended was an auction A) run by an online auction service. B) without a licensed listing broker in attendance. C) without a licensed auctioneer. D) without reserve.

D) without reserve.

reality of consent

If misrepresentation, fraud, mistake of fact, undue influence or duress are absent in contract formation, good contract is formed.

void

No legal effect -It is unenforceable in a court of law because it does not meet the essential elements of a contract. However, a void contract may be fully executed unless one of the parties disaffirms it. -EX: Contract for an illegal purpose -EX: A seller enters into a purchase agreement with a buyer who has been adjudicated incompetent by a court. The contract is void because both parties must be competent to create a valid contract.

Substantial performance

One party has substantially performed the contract but does not complete all the details exactly as the contract requires. -Such performance—for example, under construction contracts—may be sufficient to force payment, with certain adjustments for any damages suffered by the other party.

Novation

Substituting a new contract for an old one -another way to avoid the terms of an existing contract without breaching that contract. -Nova means new, and novation is the substitution of a new contract for an existing agreement with the intent of extinguishing the old contract. -The new agreement may be between the same parties, or a new party may be substituted for either (novation of the parties). The parties' intent must be to discharge (cancel) the old obligation; therefore, it does terminate the original contract. The new agreement must be supported by consideration and must conform to all the essential elements of a valid contract..

auction

The familiar procedure of a buyer making an offer to purchase, which the real estate agent then presents to the seller for acceptance or rejection, is avoided with an auction. Instead of merely presenting the offer to the seller, an auctioneer actually accepts the offer on behalf of the seller.

specific performance

The injured party may file a court action, known as a suit for specific performance, to force the other party to perform the contract as agreed. Specific performance is ordered only when the subject matter of the contract is not readily available from another source and when each party has the ability to perform the contractual obligations.

Auctions without reserve

The seller agrees to accept the high bid, no matter what the terms of that bid. This is also called an absolute auction in North Carolina.

Auctions with reserve

The seller reserves the right to stop the bidding if it becomes apparent that the high bid will be unacceptable (i.e., too low) to the seller. The seller must reject all bids before the auction is concluded and the auctioneer accepts a bid.

In an auction with reserve, the seller reserves the right to stop the bidding if it is apparent that the high bid will be too low to the seller. True False

True

Misrepresentation or fraud could render a contract voidable by the injured party. True False

True -Misrepresentation or fraud could create a voidable contract. To be valid, every contract must be signed as the free and voluntary act of each party.

Additional clauses or amendments to contracts are called riders or addenda. True False

True -Riders or addenda are additional passages or amendment to contracts.

An absolute auction is one where the seller agrees to accept the high bid, no matter what the terms of the bid. True False

True** **An absolute auction, also known as an auction without reserve, is one where the seller agrees to accept the highest bid, no matter what its terms are.

Assignment

a transfer of rights or duties but not the liabilities under a contract to a third party

bilateral contract

both parties promise to do or refrain from doing something; one promise is exchanged for another. ("I will do this, and you will do that.") -A real estate sales contract is a bilateral contract because the seller promises to sell a parcel of real estate and deliver title to the property to the buyer, who promises to pay a certain sum of money for the property. Most real estate-related contracts are bilateral in nature.

unenforceable contract

has all the elements of a valid contract; however, neither party can sue the other to force performance. -Unenforceable contracts are said to be valid as between the parties because once the agreement is fully executed and both parties are satisfied, neither has reason to initiate a lawsuit to force performance. -For example, an oral agreement for the sale of a parcel of real estate would be unenforceable, because the statute of frauds (discussed later) requires that real estate sales contracts be in writing to be enforceable. However, if both the seller and the buyer perform their obligations under the oral agreement, a valid transfer can occur, but if one of the parties refuses to perform, there is nothing the other party can do to compel performance.