Georgia Real Estate - Section 11 Unit 3
What is the name of the process of substituting one party to an existing contract with a new party, releasing the original party from all contractual obligations and rights?
Novation
When is a contract still valid after a party to a contract dies?
Only when the deceased party's contract responsibilities can be carried out by someone else
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.
Substantial performance
The person who holds the title to the property is the person who assumes the risk.
True
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.
What is the deciding factor when determining whether the buyer or the seller takes the loss on a property that is taken by eminent domain?
Whether or not title and possession have transferred
Due to circumstances out of their control, the parties cannot legally or practically do what they've agreed to do.
Impossibility of performance
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?
No
Mary agreed to buy her mother's house when her mother planned to move to a senior living community. They signed a purchase agreement, but when Mary had to move because of work, she signed her rights in the contract over to her sister, Tina. Mary may still owe money if Tina can't come up with the agreed-upon funds. What's happening in this scenario?
Assignment
Two buyers entered into a contract to buy an income property, but prior to the sale, one of the parties was replaced by a third party. The original buyer will be held responsible if the new party fails to live up to his obligations. What is this an example of?
Assignment
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?
Assignment
Sally the Seller and Bobby the Buyer are about to sign the closing documents when a fire truck rushes by. The house is burning down! The documents are not signed. Which of these outcomes adheres to the rights provided by the Uniform Vendor and Purchaser Risk Act?
Bobby does not have to pay the closing costs and will get his earnest money back
When does performance of a contract occur?
Both parties have fully met the terms of the contract.
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
Nora and her husband, Tom, have made a back-up offer on the home of their dreams, which is accepted. A week later, they're told that the first offer is going to closing. Nora and Tom make an offer on another home.
Not novation
A buyer and seller entered into a contract, but prior to closing, the buyer changed his mind. With the seller's approval, a third party took the buyer's place as the buyer in the purchase contract. What is this an example of?
Novation
Mary contracted to buy her mother's house when her mother moves to a senior living community, but now Mary has to move because of work and no longer wants to buy the house. With their mother's agreement, Mary's sister, Tina, steps in, releasing Mary from her obligation. They write up a new contract, with the only change being that Tina is now the party to the contract rather than Mary. What's happened here?
Novation
Miguel and Tina have a signed contract for Tina to buy Miguel's house. The original contract is a mess. Tina spilled coffee on it, obliterating some of the text. Additionally, 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
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
Which of the following statements best describes what this phrase means?
To meet all of the terms of a contract
Which of the following statements best describes the meaning of this phrase?
To meet at least some of the terms of a contract
Which of these is the best meaning for "assignment of contract"?
To substitute a new party for one of the original parties stated in the contract
Jane Hathaway has hired Monty the landscape architect to spiff up the grounds on her new property. However, Monty gets bitten by a rattlesnake at work one day and sadly passes away. Unfortunately, Monty's only employee, Charlie, isn't licensed to perform the work. What are Jane's options?
Too bad! The contract is automatically discharged
Impossibility of performance occurs when the property is destroyed, or is made the subject of eminent domain.
True
In impossibility of performance situations, the parties are released from their contractual obligations.
True
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
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
When assigning a contract, the assignor should also check off any "contract is assignable" clause that is part of the purchase contract.
True
Two buyers entered into a contract to purchase a home. One of the buyers pulled out of the deal, and a substitute buyer took the original buyer's place in the contract. All of the parties agreed to the substitution. What is this an example of?
novation
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.
Partial performance always results in termination of the contract.
False
Property that is taken by eminent domain is exempt from this act.
False
Specific performance requirements can be satisfied through property or monetary damages.
False
The request to assign a contract is most often made prior to an offer being made to purchase the property.
False
If a buyer or seller passes away, the contract _____ as long as the deceased's estate can take over the responsibilities of the contract. If the deceased person is the only person who can carry out the terms of the contract, the contract _____.
Can still stand Is void
Sally the seller and Bobby the buyer have just closed on the sales transaction, and Bobby is out the door with his new house keys when he sees a fire truck headed straight for his new house.
Buyer
The Uniform Vendor and Purchaser Risk Act clarifies the rights granted to whom?
The buyer and the seller
What language may be included in a contract after the assignor's name to make it clear that the contract is assignable?
"And/or assigns"
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 therefore 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 the transaction.
Good ol' Granny Daisy passes away before the home she's selling closes escrow. However, buyer Jane Hathaway says it's her dream home and still wants to buy it. Likewise, as executors of Daisy's estate, Daisy's son and daughter are eager to get their share of Daisy's fortune and want to close on the house, too. What are their options?
Continue with the current contract because it's still valid
Which of the following scenarios is an example of novation?
Doug is buying Norm's farm, but has a serious accident and no longer wants to own a farm, so his daughter Linda decides to buy the property. Norm agrees to the substitution of Linda for Doug in the purchase contract, effectively creating a new contract.
In which of the following scenarios is impossibility of contract performance occurring?
Due to circumstances beyond their control, the parties can't legally or practically do what they've agreed to do.
Discharge of a Contract in the Case of a Deceased Party
It's never a good day when someone passes away (unless that someone is Lord Voldemort). Unfortunately, you may come across this situation during a real estate transaction. Here's what can potentially happen if a party to a contract dies. Usually, if either the seller or buyer passes away, the contract can still stand, because the deceased's estate can take over responsibility for carrying out the deceased's affairs (including the sale of the home). The same goes for mortgage payments—if Aunt Petunia dies, her estate still needs to make her loan payments, or the home may be foreclosed on. If, on the other hand, the party is the only person capable of performing his or her part of the contract, the contract may be discharged. An example would be an independent mason who was contracted to build a chimney and fireplace. If he were to pass away, that contract could be discharged. If, however, he worked as an employee of a masonry company, it could be assumed that another employee could perform the work and the contract could be carried out.
After living out her golden years in her dream home, Jane Hathaway dies peacefully in her sleep of natural causes. Unfortunately for her son, Jethro, her mortgage isn't paid off and her addiction to online shopping left him in a heap of debt. He's financially unable to continue with the mortgage payments. What are Jethro's options?
Jethro must continue with the current contract because it is still valid
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. Example Fred's employer asked him to take the reins at their new facility, which meant he had to move to a different state. Fred arranged to purchase Bailey's home, and they signed a purchase contract. Then, two weeks later and before the sale closed, Fred was fired. Now Don would be moving to take over the new facility for Fred's former employer. Fred no longer wanted to buy Bailey's home, but luckily Don was willing to buy it instead. Fred and seller Bailey agreed to a novation of parties, and Don replaced Fred on the purchase contract. All of Fred's obligations and rights become Don's, and Fred was no longer obligated under the contract. The contract was the same, but one party had been replaced by a new person. Example Katarina and Marcus made several changes to the contract between them, initialing each change. In addition, there had been several contract amendments. It was getting confusing! Katarina and Marcus agreed to write a new contract that incorporated all the changes and amendments. This contract novation would release Katarina and Marcus from the terms of the previous contract and its amendments and bind them to the new contract that included the terms they both desire. Novation can have complicated legal consequences, so it should never be attempted without an attorney's participation.
What's the key difference between assignment and novation of a contract?
Novation releases the original party from all obligations, while assignment does not.
When does partial performance of a contract occur?
One or both parties have completed only a portion of the terms agreed to in the contract.
When can specific performance be enforced under a sales contract?
One party didn't meet the terms of the contract in the specified timeframe, and is now being required to do exactly what was agreed to in the contract.
When does substantial performance of a contract occur?
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.
When is a contract discharged after a party to a contract dies?
Only when there is no one capable of performing the deceased party's responsibilities to the contract
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 ______.
Operation of law
One or both parties have completed only a portion of the terms agreed to in the contract.
Partial performance
Discharge of Contrast
Partial performance Specific performance Substantial performance Impossibility of performance Operation of law
Performance and Partial Performance of a Contract
Performance of a contract means to meet all terms of the contract. It is possible to partially perform a contract. Partial performance occurs when a party does some, but not all, of what the party has agreed to do. Example Millicent and her neighbor, Tommy, agree to swap houses. Because they both hate to move, they also agree to leave all of their furnishings behind but take their personal belongings. If they both do what they say, they've performed the contract. However, if Millicent swaps houses with Tommy but takes her dinette set with her, she has only partially performed on the contract between them. Tommy has several options. He can sue Millicent, he can agree to take his dinette set with him, he can let Millicent have both sets, or both parties can agree to any other terms. If Tommy wanted to make a real issue out of it, he could terminate the contract based on Millicent not performing.
Assignment of a Contract
Perhaps you've heard the phrase "and/or assigns" and wondered what this meant. Often you'll see this in offers to purchase from investor clients, especially wholesalers who tie up a property and resell it for more than they agreed to pay, taking a small profit. 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. Although contracts for the lease or sale of real estate are generally considered to be assignable without permission of the seller or lessor, assignments may not have any adverse effect on the other party to the contract. In fact, many sale and lease contracts have a clause prohibiting assignment without the agreement of the seller or lessor. Example Beauford Gillette's offer to purchase Simon Randall's home included the following language, "Beauford Gillette and or assigns offers to purchase from Simon Randall the property located at ..." Before the transaction closed, Beauford substituted his cousin, Sylvester Morton, as the buyer. Unless the contract between Beauford and Simon released Beauford from his obligations, if Sylvester fails to perform, Beauford is obligated to do so.
Bobby the buyer has paid a handsome earnest money deposit on Sally the seller's house, and the house has passed the contingency period with flying colors. On the night before date of closing, a wildfire gets close enough to Sally's house to damage the siding.
Seller
One party did not meet the terms of the contract in the specified timeframe, and must now do exactly what was agreed to in the contract.
Specific performance
Property Damage
The Uniform Vendor and Purchaser Risk Act protects buyers when the property they're in the process of purchasing is damaged. Depending on the severity of the damage, they may be entitled to back out of the contract and get any money paid returned to them. As the title holder, the property owner assumes any risk to the property prior to closing, unless the buyer takes possession before closing occurs. The act applies to property that is destroyed, damaged, or taken by eminent domain. In order to receive their money back and void the contract, the damage must occur before the buyer has taken possession or title has passed. Plus, the damage must be severe; the buyer can't get out of a contract in this manner just because of a leaky faucet. In that case, the seller could have the leak repaired quickly and still enforce the contract.
Which of these choices describes novation?
The rights and obligations of an original party to an existing contract are taken by another party, creating a new contract.
Specific performance
is a lawsuit to force the other party to perform under the contract terms (no moneys, 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.
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.