Chapter 13: Contracts

Legal Status of Contracts

Four ways a court may construe the validity, enforceability, and legal status of a contract: 1. Valid 2. Valid but unenforceable 3. Void 4. Voidable

Suit for Specific Performance

If the seller breaches a real estate sales contract, the buyer may sue, asking the court to force the seller to go through with the sale and convey the property as previously agreed.

Broker Clause

Names of the brokers involved in the sale and the commission for the listing broker and cooperating broker.

Oral Contracts

Occurs when the parties agree verbally without recording their agreement in a written document. - Are sometimes valid and enforceable; others are not enforceable, even if valid.

Earnest Money Deposit (EMD)

A deposit of funds to show good faith; money paid by a buyer when making an offer to demonstrate his willingness to fulfill the contract in earnest and good faith.

Counteroffer

An offeree's response to an offer in which the offeree rejects the original offer and at the same time makes a new offer.

Implied Contract

An unstated or unintentional agreement that may be considered to exist when the actions of any of the parties suggest the existence of an agreement. - COMMON EXAMPLE: agency agreement

Riders

Unrelated amendments added to a bill. ALSO CALLED: "addenda"

Requirements for a Valid Contract

- Competent parties - Mutual agreement - Lawful objective - Consideration - In writing (in most cases) Two Exceptions exist for the "in writing requirement": 1) A Listing Contract does not have to be in writing. We discuss that the listing contract is an Express Agency. It can be written or oral. 2) In NYC a lease under one year duration does not have to be in writing for both commercial and residential properties. It is good up to October 1 of each year.

Types of Contracts

- Oral or written - Express or implied - Unilateral or bilateral - Executed or executory

Uniform Commercial Code (UCC)

A body of laws/regulations that attempts to simplify and clarify laws that relate to commercial transactions, such as conditional sales contracts. Bank drafts, checks, promissory notes and certificates of deposit must follow these regulations.

Express Contract

A contract in which all the terms and covenants of the agreement have been clearly stated and agreed to by all parties, whether verbally or in writing.

Executed Contract

A contract that has been fully performed and fulfilled: neither party bears any further obligation. - EXAMPLE: A completed and expired lease contract. The landlord may re-possess the premises and the tenant has no further obligation to pay rent.

Voidable Contract

A contract that may be legally avoided (canceled, or annulled) at the option of one of the parties. - Can become valid if...the party who has reason to disaffirm the contract elects instead to perform it. - It initially appears to be valid but is subject to cancellation by a party to the contract who is believed to have acted under some kind of disability. - Only the party who claims the disability may cancel the legal effect of the contract. - For example, a party who was the victim of duress, coercion, or fraud in creation of a contract and can prove it may disaffirm the contract. However, the disaffirmation must occur within a legal time frame for the act of rescission to be valid. Similarly, if the party who has reason to disaffirm the contract elects instead to perform it, the contract is no longer voidable but valid. - A voidable contract differs from a void contract in that the void contract does not require an act of disaffirmation to make it unenforceable.

Valid Contract

A contract which can be legally enforced by the court. -

Suit for Damages

A damaged party may sue for money damages in civil court. The suit must be initiated within the time period allowed by the Statute of Limitations. - Liquidated Damages: When a contract states the total amount due to a damaged party in the event of a breach. - Compensatory Damages: When a contract does not specify the amount.

Breach of Contract

A failure to perform according to the terms of the agreement. ALSO CALLED: "default" and gives the damaged party the right to take legal action. The damaged party may elect the following legal remedies: - Rescission (a damaged party can rescind the contract) - Forfeiture (the breaching party gives something up) - Suit for Damages - Suit for Specific Performance

Statute of Limitations

A federal or state statute setting the maximum time period during which a certain action can be brought or certain rights enforced. In New York, the time limit for bringing a legal action involving a real estate contract is six years.

Time is of the Essence

A rule that is stated in most purchase and sale agreements and emphasizes the requirement that events related to the contract must be performed on time. Technically speaking, if a deadline for some performance is not met by the specified date, the party not meeting the deadline is in default. However, since in most cases both parties want the transaction to move forward, this problem can usually be solved by a written agreement to accept the late performance or to extend the deadline.

Right of First Refusal Clause

A statement in a lease or condominium articles of association that provides for a lessee or an association to have the first opportunity to purchase the property before it is offered to anyone else.

Bilateral Contract

A type of contract that arises when a promise is given in exchange for a return promise. - Example: An exclusive listing: The broker promises to exercise due diligence in the efforts to sell a property, and the seller promises to compensate the broker when and if the property sells.

Termination of a Contract

ALSO CALLED: "cancellation and discharge," and may occur for any of the following causes. - partial or insufficient performance - infeasibility (not possible to perform) - mutual agreement (parties agree to terminate) - operation of law - assignment of a contract

Installment Sales Contract

ALSO KNOWN AS: "contract of sale" or "land contract." This is the purchase of real estate wherein the purchase price is paid in installments over a long period of time, title is retained by seller, and upon default by buyer (vendee) the payments may be forfeited. - Considered a "bilateral agreement" between a seller (the vendor) and a buyer (the vendee). - The buyer receives an "equitable title."

Buyer

Also referred to as the "vendee."

Seller

Also referred to as the "vendor."

Listing Contract

An agreement between an owner of real estate and a real estate broker that obligates the broker to attempt to sell the property under specified conditions and terms. It obligates the property owner to pay a commission to the broker if the broker is successful in obtaining a ready, willing, and able buyer for the property on terms specified or on terms acceptable to the seller.

Contract

An agreement between two or more parties who, in a "meeting of the minds," have pledged to perform or refrain from performing some act. - A valid contract is one that is legally enforceable by virtue of meeting certain requirements of contract law. - If a contract does not meet the requirements, it is not valid and the parties to it cannot resort to a court of law to enforce its provisions. - A contract is not a legal form or a prescribed set of words in a document, but rather the intangible agreement that was made in "the meeting of the minds" of the parties to the contract.

Void Contract

An agreement that does not meet the tests for validity and therefore is no contract at all. If a contract is void, neither party can enforce it. - For example, a contract that does not include consideration is void. Likewise, a contract to extort money from a business is void. - Void contracts and instruments are also described as "null and void." - A contract agreement to sell alcohol to minor would be an example of this type of contract.

Written Contract

Contract with terms in writing. - Most states require listing agreements, sales contracts, and leases exceeding one year to be in writing to be enforceable.

Apportionments

Division of expenses between buyers and sellers.

Purchase Offers

In a typical real estate transaction, the buyers start the process by making an offer using a purchase and sales contract form. The buyers can withdraw this offer any time before it is accepted by the sellers. - Mutual consent needed for a contract to be valid is reached through the process of offer and acceptance.

Binders

In some parts of New York, this is a term that is used INSTEAD OF the "purchase and sale agreement."

Personal Property Provision

List of the items that are included or excluded from the sale.

Forbearance

Means refraining from taking legal action when a payment of a promissory note in a mortgage is in arrears. ALSO KNOWN AS: "debt relief" and is usually granted only after the borrower has made arrangements to pay the arrears at some future date.

Caveat

Means warning and is often used as a short form of the phrase caveat emptor, a Latin phrase meaning "Let the buyer beware."

Lease

Must be in writing unless the term is for one year or less. In which case, they do not have to be in writing to be enforceable.

Written Contracts (Real Estate)

Must: - Contain a legal description of the property. - Be signed by one or more of the parties. ** A 6-month lease does not need to be in writing to be enforceable.

Unilateral Contract

One party promises to do something in exchange for an action from another party. - "Option to Buy" is an example of this type of contract. The party offering the option to buy promises to sell a property if the optionee decides to exercise the option. While the potential buyer does not have to buy, the owner must sell if the option is exercised.

Mutual Agreement

Requires that a contract involve a clear and definite offer and an intentional, unqualified acceptance of the offer. - In effect, the parties must agree to the terms without equivocation. A court may nullify a contract where the acceptance of terms by either party was partial, accidental, or vague. - ALSO KNOWN AS: "offer and acceptance" and "meeting of the minds,"

Statute of Frauds

Requires that certain contracts must be in writing to be enforceable. - Real estate contracts that transfer an interest in real property fall in this category, with the exception of a lease with a term of one year. - All other contracts to buy, sell, exchange, or lease interests in real property must be in writing to be enforceable.

Consideration

Something of value exchanged for something else of value. A contract must contain a two-way exchange of valuable consideration as compensation for performance by the other party. The exchange of considerations must be two-way. The contract is not valid or enforceable if just one party provides consideration.

Valid But Unenforceable Contract

State laws declare that some contracts are enforceable only if they are in writing. These laws apply in particular to the transfer of interests in real estate. Therefore, while an oral contract may meet the tests for validity, if it falls under the laws requiring a written contract, the parties will not have legal recourse to enforce performance. - An oral long-term lease and an oral real estate sales contract are examples of contracts that may be valid but not enforceable. - Note that such contracts, if valid, remain so even though not enforceable. This means that if the parties fully execute and perform the contract, the outcome may not be changed.

Valuable Consideration

Tangible Value: Such as money or something a party promises to do or not do. For example, a home builder may promise to build a house for a party as consideration for receiving money from the home buyer. Or a landowner may agree not to sell a property as consideration for a developer's option money. Intangible Value: Something that a party must give up, such as a homeowner's occupancy of the house in exchange for rent. In effect, consideration is the price one party must pay to obtain performance from the other party.

Loan Contingency Clause

Terms of the new mortgage.

Agency Agreement

The agreement between principal and agent whereby the agent undertakes to act on behalf of the principal. - In NY, must be in writing.

Lawful Objective

The content, promise, or intent of a contract must be lawful. A contract that proposes an illegal act is void.

Competent Parties

The parties to a contract must have the capacity to contract, and there must be at least two such parties. Capacity to contract is determined by three factors: - Legal age - Mental competency - Legitimate authority In New York, a person must be at least 18 years old to enter into a binding contract. If a person under 18 is legally married, he or she is considered an adult for the purposes of purchasing a residence.

Option Agreement

This type of contract would be used to transfer real estate interests from one party to another.