C1 S10: Unit 3: Performance and Discharge of Contracts in Texas

Martha made an offer to buy Drake's home, and he accepted it. Under the terms of the agreement, Martha was supposed to make an earnest money deposit of $10,000, but she only put down $5,000. Drake accepted the lesser deposit, and the sale was ultimately finalized. This is an example of .... A. Accepting partial performance B. Rescinding the contract unilaterally C. Suing for damages D. Suing for specific performance

A. Accepting partial performance

What is it called when one party to a contract transfers the contractual rights and obligations to another but remains liable for the contract terms? A. Assignment B. Execution C. Novation D. Termination

A. Assignment Parties to a contract can assign their rights and obligations under the contract to a new party. This technique is most often used by wholesalers, and is generally allowable only if specifically agreed to in the contract.

Andy breached his contract with Claire. But, what exactly can Claire do about it? As it turns out, she can do plenty. Types of Contract Breach: Rescind the contract unilaterally

Claire has the option to rescind; Andy does not.

Explain novation

Novation occurs when one party to an existing contract is substituted with a new party (which may be referred to as novation of parties) or when a new contract is substituted for an old one between the same parties (aka novation of contract). With a novation, the new party takes over the rights and duties of the original party, and the original party is no longer obligated under the contract. All parties to the original contract must agree to the novation. Novation can have complicated legal consequences, so it should never be attempted without the participation of an attorney.

Discharge of contract: Impossibility of performance

Occurs when the property is destroyed or made the subject of eminent domain. The parties cannot legally or practically do what they've agreed to do, so they are released from their obligations under the contract.

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. True or false

True

Specific performance requirements can be satisfied through property or monetary damages. True or false

False No other property or monetary damages equal specific performance—only meeting the terms of the original contract will qualify.

The request to assign a contract is most often made prior to an offer being made to purchase the property. True or false

False The request to assign a contract is most often made at the time the offer to purchase is made.

Which of these constitutes a breach of contract? A. One party fails to meet the obligations of the contract. B. One party threatens to terminate the contract. C. Something surfaces with the contract, causing both parties to question the contract's validity. D. Both parties fail to meet contract obligations.

A. One party fails to meet the obligations of the contract

Anna and Cindy entered a contract to buy Jake's home. However, at the last minute, Cindy had a change of heart and wanted out of the deal. Anna asked another friend, Sally, if she wanted to take Cindy's place as a co-buyer of Jake's home. Everyone agreed to the substitution of Sally for Cindy on the contract. Of what is this an example? A. Assignment B. Fraud C. Mutual mistake D. Novation

D. Novation Novation involves substitution of one of the original parties (in this case, Cindy) with a new party (Sally). All original parties to the contract must agree, and Cindy is released from all liability.

When does substantial performance of a contract occur? A. Both parties fully meet the contract's terms. B. One or both parties have completed only a portion of the terms agreed to in the contract. C. One party did not meet the terms of the contract in the specified timeframe and is being required to do exactly what was agreed to in the contract. D. One party has met most but not all of the terms specified in the contract, and may be required to pay damages for the terms not met.

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

Andy breached his contract with Claire. But, what exactly can Claire do about it? As it turns out, she can do plenty. Types of Contract Breach: Accept partial performance

If Andy deposits the earnest money check on day seven, perhaps Claire will be satisfied and go through with the contract.

Discharge of contract: Specific performance

Is a lawsuit to force the other party to perform under the contract terms (no monies, just actions). It means that a party must do exactly what they agreed to do. So if a seller agreed to sell a property and then later reneged, the buyer can sue for specific performance, meaning the seller must sell the property as agreed. No other property or monetary damages equal specific performance—only meeting the terms of the original contract qualifies.

How and When Novation Can Occur Miguel and Tina have a signed contract for Tina to buy Miguel's house. The original contract form is a mess. Tina spilled coffee on it, obliterating some of the text. Tina and Miguel have crossed out and initialed several changes. They decide to write a new contract that cleans up the coffee spill and incorporates all their changes.

Novation

How and When Novation Can Occur Two couples, Jill and John and Josie and Jack, decide to enter into a timeshare agreement. When Josie gets cold feet about it, Jack ditches her and instead becomes a couple with Lourdes. Everyone agrees that Lourdes can replace Josie in the timeshare agreement, and Josie no longer will have any liability.

Novation

Performance of a Contract, Partial Performance, or Time Is of the Essence? Jack Nimble and Jill Quick entered into an agreement to open a candlestick shop. True to her name, Jill completed everything she needed to do to meet her part of the contract in record time. Jack, on the other hand, didn't jump to it, and his delays caused the two to lose the store.

Time is of the essence

Assignment of Contract

Transfer of all rights under a contract to a third party. Assignor remains secondarily liability.

In the event that the new party fails to live up to the obligations stated in the contract, the original party remains responsible to the terms of the agreement unless specifically stated otherwise in the contract. True or false

True

The assignment method is often used with bank-owned properties and short sales. True or false

False

A contract that includes an "and/or assigns" clause is required to contain provisions to release the original party from their obligations and delegate them to the new party. True or false

False There's no requirement for this type of provision with the "and/or assigns" clause.

Discharge of contract: Substantial performance

(of ample or considerable amount) Occurs when one party has met most but not all of the terms specified in the contract and may be required to pay damages for the terms not met. For example, a painter is paid to paint a 200-foot fence and only completes 190 feet. This can also refer to sellers who do not fully complete agreed-upon repairs, but the buyer will still accept the property and fulfill to transaction.

List the different categories of damages

1. Punitive: Money charged as punishment for the infraction committed 2. Liquidated: Money agreed to be paid in a contract 3. Compensatory: Money awarded resulting from damages, loss or injury due to negligence of the guilty party

Andy breached his contract with Claire. But, what exactly can Claire do about it? As it turns out, she can do plenty. Types of Contract Breach: Sue Andy for specific performance

A suit for specific performance requires the parties to make good on the promises they made. It's too late for Andy to meet the two-day deadline, but Claire could still sue him to deposit the check. Chances are she wouldn't do this because by the time the suit was filed, he could have deposited the check.

When does an assignment occur?

An assignment of a contract occurs when a new party is substituted for one of the original parties. Unless it's done with the permission of both parties, and provisions are included to release the original party from liability, the original party remains responsible to the terms of the agreement if the new party fails to live up to those obligations. The request to assign a contract is most often done at the time the offer to purchase is made.

Tom Knicks, who was in the process of buying a home, died suddenly before he had a chance to close on the deal. Tom's heirs were required to meet the terms of the contract. This is an example of.... A. Specific performance B. Substantial performance C. Operation of law D. Partial performance

C. Operation of law The buyer is not allowed to assign the contract to another person; however, the courts have decided that in the event of the buyer's death, the buyer's heirs automatically assume obligation for meeting the terms of the agreement

Discharge of contract: Operation of law

Is the manner in which an individual acquires rights or liabilities automatically due to law, and not through an agreement or act of their own. It exists because the courts have determined, through prior cases, what the parties intend. For example, homestead rights are automatic, because the law says they exist. There is no need for an individual to file documents to obtain homestead rights. Another example of operation of law is if a person dies intestate (without a will), that person's heirs will inherit their property due to the law of descent and distribution. This type of right exists through the operation of law, because even without a will, the law says the deceased person's heirs inherit that person's property. Similarly, if an individual dies while in the process of completing a real estate sales transaction, the individual's heirs are required by law to meet the terms of the contract.

Your seller client signed a contract with a buyer, but the buyer now wishes to back out of the contract and has offered to have a friend take his place as buyer through the process of novation. Your seller client is agreeable. Since everyone agrees, is it okay for you to cross out the original buyer's name on the contract and substitute the new buyer's name? Yes or no

No It's not a good idea to take such an action, even if everyone's agreeable. Real estate licensees aren't attorneys, and novation may introduce contract issues. Encourage your clients to seek an attorney's advice. In such a situation, you must advise your client to consult with a qualified attorney. Novation may introduce complexities that the parties (and their respective licensees) haven't thought of.

Breach of Contract Remedies

1. Terminate - Unilateral rescission: Fine, if the other party is not going to meet his obligations, I'm going to terminate. - Mutual rescission: Okay, this contract isn't working out for either of us. Let's put it in writing that we've agreed to call it quits. 2. Accept - Accept partial performance: Although you haven't met all of your obligations, I'm willing to move forward with the contract anyway. - Liquidated damages: Things just aren't working out, so I'm going to cut my losses and accept liquidated damages per our agreement because you didn't hold up your end of the deal. 3. Sue - Sue for monetary damages: All right, then. If you don't want to fulfill your obligations through actions, with the court's help, I'll take out what you owe me in cash and call it even. - Sue for specific performance: Hold on just a minute! You're not getting off that easy. With the help of the courts, I'm going to make sure you fulfill the terms of our contract.

Explain partial performance

A contract that's not fully performed can still be valid if the other party is willing to waive the unmet terms Example: Let's say that Felix leases a home to Barbara for two years. Barbara pays her rent on time for 21 months and then becomes unable to pay due to an unfortunate automobile accident that left her unable to work. Instead of requiring Barbara to live up to the lease agreement terms, Felix agrees that Barbara's partial performance under the two-year lease is sufficient. The parties' obligations to one another are discharged.

When does breach happen?

A breach of contract occurs when one party fails to meet the obligations of the contract. When a breach occurs, the innocent party can terminate the contract; the party who is guilty of the breach can't—at least not without permission from the aggrieved party.

Performance of a contract

A contract is considered performed (fully executed) if all contracted terms have been completed. A breach of contract occurs if a party fails to meet the contractual obligations. Such a breach could potentially result in a termination of the contract entirely and could lead to a party seeking recourse.

Andy breached his contract with Claire. But, what exactly can Claire do about it? As it turns out, she can do plenty. Types of Contract Breach: Sue Andy for damage

Claire could take Andy to court claiming breach of contract if they are unable to work out another solution. Claire could claim that by having her property off the market for six days, she suffered a monetary loss and could seek monetary damages.

Statute of Limitations in Texas

If legal remedy is sought against a person, the pursuer must bring a court action within a specified period of time. The statute of limitations even applies, in some instances, to the state itself. In Texas, a party to a contract has four years from the date of a contract breach to sue the other party.

Andy breached his contract with Claire. But, what exactly can Claire do about it? As it turns out, she can do plenty. Types of Contract Breach: Accept liquidated damages

In this case, Claire has no liquidated damages. Generally, the earnest money deposit serves as the seller's liquidated damages, and Andy hasn't deposited it yet. But this is an option for sellers when a buyer breaches the contract later in the game. In fact, the primary purpose of the earnest money deposit is to get some of the buyer's skin in the game and provide protection (legal remedy) for the seller.

Andy breached his contract with Claire. But, what exactly can Claire do about it? As it turns out, she can do plenty. Types of Contract Breach: Mutually rescind the contract

Let's say that Andy has changed his mind about buying Claire's property, and Claire has another buyer in the wings who is willing to pay even more. In this case, the parties would likely agree to mutual rescission of the contract.

Discharge of Contract: Partial performance

Means that only a portion of what a party has agreed to has been completed. Sometimes, partial performance is enough for the other party; sometimes, it results in a termination.

How and When Novation Can Occur Myra and Michelle have decided to buy a townhome and have entered into a contract with Hugh Dent, the seller. After reviewing her finances, Michelle gets cold feet, leaves Myra a note, and leaves town. Myra can't afford the place on her own and has to terminate the contract.

Not novation

Performance of a Contract, Partial Performance, or Time Is of the Essence? Sissy Redcap's grandmother coerced her into signing a contract that stated that Sissy would visit her grandmother every day and bring along a basket of goodies. In return, Sissy would receive a grandmotherly hug. After a week of visiting her grandmother, Sissy said, "The heck with this!" and played with her new friend, Winnifred Wolfe.

Partial performance

Performance of a Contract, Partial Performance, or Time Is of the Essence? One day, Herman and his wife, Imelda, bought a goose. The pair entered into a contract with the goose that stated that as long as the goose continued to lay golden eggs each day for a month, the couple would not have the goose for dinner. The goose laid a golden egg each day for one month, and the couple ordered takeout.

Performance of a contract

Explain Timeliness

When a specific date is not provided in the contract, performance must take place within a "reasonable time." Parties may interpret this time differently which can create issues and a possible lawsuit for breach of contract. In this case, a court may determine a "reasonable time" or they may consider the contract to be invalid because a specific time or date was not provided. It is good practice for contracts to include a clause

Explain damages

When an individual has been found guilty of a breach of contract, the damages are not limited to recouping costs from expenses paid.

Breach of Contract

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