Real Estate Contracts - Section 3
Breach of Contract
Breach of contract occurs when a party fails to fulfill their part of the agreement.
Cancellation
Cancellation, like rescission, seeks to terminate an agreement or instrument. These remedies differ in that cancellation is used to void a particular document, or subsection of a contract, while rescission extinguishes the entire contract. Cancellation does not place the parties exactly in their former positions; it merely makes the instrument cancelled a non-issue from that point forward i.e., responsibilities of the parties are discharged as of the date of cancellation, but the parties are not required to "unwind" the contract as to any prior performance. In contrast, rescission extinguishes the contract and treats it as null and void from inception, and requires the restoration of consideration through restitution.
Changes
Changes are any new or altered items that were not in the original contract. If a change is desired or required, the parties must sign an amendment to the contract. In real estate transactions, this amendment will commonly take the form of an addendum to the purchase agreement.
Conditions - Acts or Events that Must Occur Before Performance is Due
Condition Precedent is a legal term that describes an act or event that must occur before performance under a contract is required. If the act or event does not occur, the performance is excused. Example: The sales agreement stipulates that the owner will make repairs to the roof prior to execution of the sale. If the owner does not make those repairs, the courts have held that the "condition precedent" has not been met, and therefore the owner is in breach and the buyer is not compelled to complete the purchase.
Consequential Damages
Consequential damages are indirect losses to the injured party. These damages are recoverable if the injured party can prove that the damages were foreseeable at the time the contract was made.
Consideration
Consideration is what one party to a contract offers to do if the other party performs the obligations of the contract. Generally, consideration is offered by one party in the form of money and by the other party in the form of an action. However, under the law, consideration can be almost anything. The actual performance of an act (a transfer of title to a property; a contractor building a house) A promise to perform or not perform some act ("I promise to pay you;" "I promise to mow your lawn") A promise not to build above a certain height in return for (money/property/property access) The terms of the offer determine what kind of consideration is needed to form a contract. In real estate transactions, the seller offers consideration in the form of the property being sold and the buyer offers consideration in the form of money or an exchange of property or other valuable consideration.
Legal Guidelines
Court decisions over the years have set several legal precedents with respect to contracts. These apply overall and in general and have the same force as statutory law. The following are the key guidelines which the Courts have established in ruling on contract disputes: -Written agreements take precedence over oral agreements -Later agreements supersede earlier agreements -Special clauses prevail over general clauses -Handwritten agreements override printed agreements -Specifications prevail over drawings -Words prevail over numbers; all dollar amounts in a contract should be written out -Ambiguous, misleading or confusing statements are always interpreted against the party preparing the contract.
Legal and Equitable Remedies
Courts have the power to grant two types of remedies: legal and equitable. Legal remedies for breach of contract include actions for damages, which is the remedy most often applied in contract disputes. This generally means a money award of some form. Equitable remedies include rescission and restitution, reformation, cancellation, "specific performance," and injunctions, and are only granted if there is no adequate legal remedy available.
Legal Remedies: Enforcement through Damages
Damages are a way to compensate the non-breaching party for economic losses arising from a breach of contract. Such losses can occur as a result of reliance on the contract, or because the non-breaching party's expectation of gain (usually called the "benefit of the bargain") has been lost. Alternatively, the seller may force the buyer to purchase the property. A lawsuit or other action (such as arbitration) seeking damages is the usual way to enforce a contract. Before a party has a right to seek enforcement of a contract, two things must occur: there must have been a breach of the contract by the other party and the party seeking enforcement must have suffered economic or other loss as a result of the breach. The usual remedy for breach of contract is monetary damages. Monetary damages awarded in a breach of contract action will be calculated to include: actual losses suffered by the non-breaching party and the benefits that would have been received from performance of the contract by the non-breaching party (called the "benefit of the bargain" by lawyers and judges). Damages for breach of contract are confined to those that are foreseeable or could reasonably have been contemplated as a result of the breach.
Damages
Damages are financial losses that occur when there is an injury to individuals or entities resulting from criminal or tortious conduct of another, such as breach of contract. Awarding monetary damages is the most common remedy that a court may provide when there has been a breach of contract.
Foreseeability
Damages will be limited to those damages that are suffered as a predictable result of the breach. Courts and attorneys refer to such predictable damages as being "foreseeable." Whether or not certain damages claimed are "foreseeable" is a factual determination made by the courts on a case-by-case basis.
Defenses to Claims of Breach of Contract
Defenses to breach of contract apply to situations where a breach of contract claim is alleged. The law recognizes a number of defenses that can protect a party from liability arising from a failure to fully perform or from incorrect performance. These defenses may lessen, or completely prevent, liability for payment of damages.
Estoppel
Estoppel is a legal prohibition which precludes a person from asserting or denying a fact generally based on that party having taken a legally opposed position to the fact or assertion in a previous action. (For example, a party that claimed they could not be at fault for something because they were not in that location at that time, cannot later make a legal claim asserting that they were, in fact, at that location at that time.)
Voidable Contracts
Even if a contract is made for a legal purpose, some contracts may be subject to being voided, that is, invalidated and declared unenforceable. A contract made with a person lacking legal capacity is "voidable" but may be accepted by the guardian of the party or ratified by the party once they are declared of legal capacity. Voidable contracts have the potential to be made valid once again, or terminated by the party with that prerogative. Void contracts are nullified and unenforceable. They cannot be resurrected except by a whole new agreement. Example: A contract made by a 17-year-old child will be subject to termination if it is not for a necessity of life such as food, clothing, shelter, or medical treatment, or it could be ratified by the boy at the age of 18.
Oral Contract Examples
Example: An owner and contractor enter into an oral contract to build a deck. After completion, the owner says the deck was to be 16 feet wide, the contractor says the agreed width was 14 feet. The parties take their dispute to court, and each side testifies as to their understanding on the deck width. The court hears testimony from both sides that directly contradict one another, and there is no written contract which the court can use to settle the matter. Under these circumstances in this hypothetical, the court believes the owner is the more truthful witness. Therefore, the contractor loses. Where there is no written agreement to work with and both parties appear sincere in their arguments, the courts tend to favor the party that appears to have been in the lesser bargaining position, that is, most often, the consumer over the provider. This is a very general observation. For any specific circumstances, consult an attorney!
Fraud
Fraud is an intentional misrepresentation, deceit, or concealment of a material fact known to a party that they use with the intention of depriving a person of property or legal rights or otherwise causing injury based on the injured party's reliance on the fraud.
Fraud
Fraud is deliberately giving false information, or deliberately withholding information known to be important. If a party enters into a contract as a result of fraud by the other party regarding a material matter, the contract may be void. However, it is a principle of the law that contracts should be maintained as valid, if at all possible. If the fraud is only with regard to an immaterial matter (refer to material vs. immaterial breaches above), a court might decide not to invalidate the entire contract. This defense is difficult to use, as it requires proof of the falsity of the information, as well as proof that the party making the false statement knew it was false and had the intent to deceive.
Fraud Damages
Generally: A person defrauded in the sale or exchange of real property is entitled to the difference between the actual value of that with which he or she parted, and the actual value of that which they received, together with any additional damage arising from the transaction. Additional damage may include an amount actually and reasonably expended in reliance on the fraud, and an amount that will actually compensate the defrauded party for loss and enjoyment of the property to the extent that the fraud caused that loss. Where the defrauded party has been induced by the fraud to sell or otherwise part with the property, that seller is entitled to recover an amount that will compensate him or her for profits or other gains that might reasonably have been earned by use of the property had the seller retained it. Similarly, where the defrauded party has been induced by reason of the fraud to purchase or otherwise acquire the property, that purchaser is entitled to an amount that will compensate him or her for any loss of profits or other gains that might have been earned from the use or sale of the property had it possessed the characteristics fraudulently attributed to it.
Electronic Signatures
Gone are the afternoons spent tracking down a client who missed one of the myriad signatures needed as part of the transaction process. Now, a document can be sent to a client's phone, digitally signed, and sent back in a matter of moments.
Impracticability/Impossibility
If performance is physically impossible because of circumstances beyond the control of the obligated party, then "impossibility or impracticability" becomes a defense against breach. Of course, a party must exercise all reasonable measures to attempt to complete performance, but if it is truly impossible, then the party is relieved of the duty.
Earnest Money
In a real estate transaction, earnest money is money given by a prospective buyer to show sincerity and to demonstrate their financial capability to raise the money called for in the agreement and to serve as possible liquidated damages to the seller in the event the buyer defaults on the agreement.
Duties of the Buyer, Seller, Additional Parties, and Their Agents
In performance of a real estate contract, all parties to the agreement are expected to follow through with the agreement as outlined. Who has the right to enforce performance of those duties will vary depending on the terms outlined in the sales agreement.
Text Messages as Binding Communications
In the groundbreaking 2016 Massachusetts case of St. John's Holdings LLC v. Two Electronics, Judge Foster decided that the text messages exchanged in the course of a real estate transaction may constitute a binding contract to purchase and sell. This is true even in the absence of a signed formal offer. In this particular case, the real estate transaction in question was a commercial deal where both parties were represented by agents. St. John's Holdings LLC desired to purchase the property owned by Two Electronics for use as a medical marijuana facility. The parties negotiated over the terms of the transaction for a number of weeks, with letters of intent being exchanged as this was done. The texts clearly indicate that both parties were agreeing to the deal, and, importantly, the seller signed each text message with his name. After exchanging these texts, emails, and letters, along with a deposit from the buyer, the seller received another offer from a second buyer, and signed it prior to receiving the final Letter of Intent. The seller argued that these communications did not form a binding agreement. The judge disagreed, and even cited the Uniform Electronic Transmissions Act, along with Massachusetts' Statute of Frauds, in his reasoning that the communications did form a valid and binding contract.
Case Study: William Donius v. John R. Milligan, Robert M. Gravis, and Richard Holland
In this 2016 case, also from Massachusetts, the judge ruled differently on the binding nature of the electronic communication that occurred during the negotiations for a condominium unit. The property in question was discussed between the agents of each party via text message. During the course of these messages, the agents negotiated terms including a sales price and closing date. During the course of these negotiations, the seller's agent, Emily Flax, stated: "The sellers accept the price. They are proposing a closing date of 6/24 in order to have time to come and take their personal belongings. I can explain further when we speak. Also want to make sure that the offer language about furnishings agrees with new TRID regulations..." The text continues to explain specific terms of the agreement that the sellers want. The buyer's agent followed up with an email containing a buyer-signed contract and deposit check image. The sellers and agent did not sign or return the purchase agreement, and took an offer from another buyer on the property. In this case, the judge ruled that the text-message communications did not satisfy Massachusetts' Statute of Frauds. In the memorandum to the decisions, the judge writes: "That the writing upon which the plaintiff relies is a series of text messages is not the determinative factor. Text messages and emails can potentially satisfy the Statute of Frauds, provided that they, like other writings, contain the essential terms of the transaction and are signed by the parties to be bound or their authorized agents. See St. John's Holdings, LLC v Two Electronics, LLC.... the text messages here are not signed by either the proposed buyer or seller, nor are they signed by the agents. Further, for reasons stated below, there is no showing, even as an allegation, that the seller's agent, Flax, was authorized to bind her principals to an agreement, and the substance of the text messages relied on by the plaintiff demonstrate, at best, circumstances where the parties have merely reached the stage of "imperfect negotiation" prior to formalizing a contract, and have not yet reduced their agreement to terms." In other words, the fact that the negotiations were not, in any manner, "signed" by the sellers, and that their agent did not have the authority to commit them to the contract, led the judge to rule that the communications did not form a binding contract. So, we can see that in these cases whether or not text communications are binding was interpreted under the UETA, as well as under state statutes. To protect themselves, agents should consider adding a disclaimer to their email to the effect that nothing said via email constitutes a binding contract. Although text messages are considerably briefer and do not lend themselves to such signatures, agents should still consider including a note that the terms discussed are "subject to client approval".
Interference With an Existing Contract
Intentional interference with contractual relations or tortious interference is a situation where a party knowingly causes damage to a contractual relationship that that party is not involved with. A party can be accused of interference for two primary reasons. The interfering party convinces another party to breach a contract. A furniture store has a contract that states the store will only sell armchairs made by a specific manufacturer. The store owner receives an offer from another furniture manufacturer to supply similar quality armchairs for less cost. A friend of the store owner, who knows about the store's exclusive contract, convinces the store owner to take the offer from the other manufacturer. This constitutes a breach of contract. In the resolution of the breach, the friend can also be held liable since the friend inspired the store owner to take the other offer knowing full well that that act would breach the terms of the existing contract. The interfering party prevents the performance of the contract in some way. Let's say that the friend of the store owner can't convince the store owner to take the offer from the other manufacturer. To ensure that the store owner takes the offer, the friend burns down the furniture factory of the manufacturer the store has the exclusive contract with. This act of arson constitutes tortious interference with the contract since it prevents the manufacturer from performing their end of the contract, namely providing armchairs. If a party involuntarily breaches a contract they are involved in, or performance of a contract is prevented by a non-human cause, then there is no intentional interference. A party has to know that there is a contractual relationship to interfere with and must be the cause of the contract breach or failure of performance for there to be grounds for consequence. Under Oregon law (ORS 696.301) a real estate licensee can have his or her license suspended or revoked if he or she intentionally interferes with an existing real estate contract. A real estate licensee who commits tortious interference can also be denied license renewal.
Liquidated Damages
Liquidated damages consist of an amount of money agreed upon by the parties as being fair compensation to the innocent party if a breach of contract occurs. The amount is included in a special provision of the contract that must be carefully worded to be enforceable by the courts. The amount of liquidated damages must reasonably estimate the actual damages that would be suffered in the event of a breach. If the amount stated in the contract is so large it is out of proportion to the harm that may be suffered, a court may refuse to award the amount stated in the contract. At a minimum, most real estate contracts contain standard clauses which specify the buyer's "earnest money" as liquidated damages payable to the seller if the buyer should choose not to complete the transaction.
Mistake
Mistake as to a material fact can be a defense to breach of contract claims, but a mistake made by only one party is not a defense. Only mistakes made by both parties as to the same material fact will serve as a defense.
...involves changing fundamental aspects of a contract in such a way that the contract is replaced with a new version that reflects the changes. Assignment... Abjurement... Novation... Reconfiguration...
Novation
Novation
Novation involves changing fundamental aspects of a contract in such a way that the contract is replaced with a new version that reflects the changes. In other words, novation is the renewal or replacement of a contract. There are a couple of things that can be altered through a novation. New debts or obligations can be established in the place of existing debts or obligations. A party to the contract can be exchanged for a new party. When a novation is carried out, the original contract and any obligations associated with it are cancelled. A new contract, which is nearly identical to the old contract (with the obvious exception of the changes instituted by the novation), is established in place of the old contract. For example, a seller establishes an exclusive listing agreement with a real estate agent. The real estate agent later realizes that she is overburdened and cannot effectively aid her customer. The real estate agent gets permission from her client to perform a novation of the listing agreement to another real estate agent she knows. The old listing agreement is cancelled and an identical listing agreement is set up with the other real estate agent.
When a Contract is Considered Performed or Discharged
Once the parties have reached mutually acceptable terms and entered into a contract, they are each bound to follow the terms of that agreement, specifically. This is known as "performance." Each party "performs" the obligations of the contract in the manner spelled out in the contract. In real estate terms, examples might be: a buyer transfers funds to the seller, or the seller transfers a title/deed to the buyer.
Competent Parties with a Legal Capacity
One party must offer to enter into a legal agreement and another party must accept the terms of the offer. To do so, both parties entering into the contract must have legal capacity. Legal Capacity: Individuals must be 18 years of age or older. Individuals must not be operating under a determination of legal incompetence, such as a court order depriving the individual of the ability to make contracts, and appointing a legal representative to manage the party's financial affairs. Business entities (such as corporations, limited liability companies, and limited liability partnerships) must be in compliance with state requirements by filing annual documents and complying with assumed business name requirements.
Unenforceable Contracts
Oral or written contracts may be unenforceable because of a failure to comply with all the elements of contract formation. Sometimes even a contract that is "validly formed" will be unenforceable because of practical considerations (discussed below).
Performance
Performance is doing what is required of a party by a contract.
Privity of Contract
Privity of Contract is a requirement (with some exceptions) for an individual to be able to bring suit against another for breach of contract. Explanation Privity of contract refers to the relationship between the parties to a contract. Only parties to a contract are in "privity" with one another, and only a party to the contract may bring suit in Court against another party to the contract for failure to "perform" the obligations of the contract. For example, a buyer/tenant of a property may not sue the former owner/seller of the property for failing to make repairs guaranteed by the land sales contract. Only the buyer and the seller are in "privity of contract" one with the other, so these are the only parties who have legal standing to file a lawsuit.
Privity of Contract
Privity of contract is the direct relationship that exists between parties to a contract.
Reformation
Reformation is an equitable remedy that can be used to correct a real estate purchase and sale agreement or other instrument, such as a deed, mortgage, or lease, in order to state the true agreement of the parties. The remedy presumes the existence and validity of the contract and serves as a vehicle to correct the terms to reflect the actual intent of the parties at the time the contract was made. This remedy does not affect anything that has already happened in the contract but is a "from here forward" alteration to the obligations. It does not seek to restore any party to their former position.
Remedies
Remedies are the lawful actions that are available through the courts to a party who has been damaged by a breach of contract to enforce a right or recover damages.
Remedies for Breach
Remedies are what the Courts provide in terms of compensation or as settlement of the dispute when a breach of contract occurs. A prime example is the buyer who makes an offer on a home, deposits "earnest money" with the offer, and then terminates the transaction later in the process after all contingencies are met. The remedy, in this case, is the buyer's earnest money, which is forfeited to the seller as compensation for the breach of contract. This particular example is greatly over-simplified and will be discussed in greater detail later in the module when we cover specific real estate contracts. The following discussion of "Remedies" is intended to be a general discussion of the topic only.
Covenants on Land
Restrictive covenants and easements on land are transferable from one party to a contract to another and they "run with," or remain with, the land. For example, an individual purchases a home in a subdivision which is governed by the covenants, conditions, and restrictions (CCRs) of a homeowners' association (HOA). This individual enters into a contract with the HOA to comply with and be bound by these covenants and restrictions. At a later date, the individual sells this home to a new buyer. The original promise to comply will likewise bind the new buyer and any future buyers of the property to comply with all CCRs. Even though the new buyer is not in "privity" of contract with the HOA, the HOA retains all rights to remedies as set forth in the original contract against the new owner and all future owners.
Contracts Unenforceable as a Practical Matter
Sometimes, contracts are unenforceable even if they appear to be legally valid. This can occur when: contract terms are too vague and uncertain to interpret or the defaulting party is "judgment proof" (in other words, available assets are insufficient to pay damages awarded in litigation).
Special Damages
Special Damages arise due to the special nature or circumstances of the non-breaching party or the project, and may be awarded by a court to cover losses not included in "benefit of the bargain" damages. Special damages are seldom awarded in real estate cases. Example: An owner dependent on a wheelchair is moving into a new home and hires a contractor to build ramps and other accessibility devices. The contractor fails to perform the work properly and the owner suffers additional injuries when a ramp collapses. Benefit of the bargain damages would compensate the owner for the extra cost of having the work done properly by another contractor. The court may also award special damages to cover the cost of the owner's physical injuries and loss of use of their new home.
Specific Performance
Specific performance occurs when one party has made a good faith effort to perform their obligations under a contract and the other party has NOT performed their obligations. Suit for specific performance is a request for the courts to compel the other party to do as the contract dictates.
Substantial Performance
Substantial performance occurs when a party has made a good faith effort to perform their obligations under a contract and has completely performed all essential obligations. A contract may be substantially performed even if minor, nonessential obligations have not been fully performed. Generally, this is not a principle which the courts would apply to Real Estate contracts. Because they deal with transfer of ownership, that transfer will either occur or not; there is seldom, if ever, a middle ground.
Record Retention
The E-Sign Act requires a financial institution to maintain electronic records accurately reflecting the information contained in applicable contracts, notices or disclosures and that they remain accessible to all persons who are legally entitled to access for the period required by law in a form that is capable of being accurately reproduced for later reference. Many electronic signature services, also provide long-term storage for transaction files. Thus, an agent who uses an electronic signature service may have no more filing to do than simply to mark the file as "Closed". There are many electronic signature services that can be used, in real estate and otherwise. If you wish to choose a service to use electronic signatures, research your options thoroughly.
UETA
The Uniform Electronic Transmissions Act, a precursor to ESIGN, is a model act introduced in 1999. It established the legal standing and binding nature of emails, electronic signatures, and electronic records. The Act was developed in order to prepare the nation to handle electronic communications by establishing rules and guidelines upon which states could model their legislation. UETA applies to transactions where the parties have consented to the use of electronic documents. It is designed with the objective of ensuring that transactions conducted by these means are enforceable to the same degree as transactions conducted by physical means and manual signatures. UETA was approved by a national committee and recommended for adoption by all states. As of 2018, all but four states and territories have enacted its provisions. The stated purpose of the UETA is to "remove barriers to electronic commerce by validating and effectuating electronic records and signatures." Another way to put this is that the purpose of this act is to ensure a record or signature will not be denied legal effect or enforceability because it is electronic. This also means that a contract is enforceable even if it is in an electronic form. If a law requires that a contract have a signature to be enforceable, an electronic signature satisfies this condition and makes the contract enforceable. The only exception to this is if a party to the contract has opted-out under UETA. The Uniform Electronic Transactions Act does not actually alter what elements make a valid contract. Neither does UETA significantly change the elements that are required to make a signature valid, other than the fact that a signature can be electronic.
An Offer
The details of what is going to be performed as a result of this contract must be described, including the manner in which it will be performed, the time frame, and the price. This means: price, manner of payment (terms), time frames for specific deadlines to be met (such as earnest money payment, due diligence), and escrow closing. An offer is a promise made by one party to do, or not to do, a specific act or acts. A valid offer requires a couple of elements: intent to contract and a definite statement of terms.
Mitigation
The non-breaching party has a duty to minimize the damage it suffers as a result of the breach. Both expectation and reliance damages will be reduced by the amount that could have been avoided if the non-breaching party had taken reasonable measures to reduce the harm.
Definite Statement of Required Terms
The offer must clearly outline the terms of what is being offered, including any contingency clauses or covenants that may apply and the respective obligations of the parties to the contract.
Offeree
The offeree is the person or business entity receiving an offer. In real estate, terms the "offeree" is commonly the "seller."
Offeror
The offeror is the person or business entity making an offer. In real estate terms, the "offeror" is commonly the "buyer."
Intent
The parties must each intend to enter into a contract, and their spoken or written words must communicate that intention. Joking or offhand comments or discussion that may incidentally contain both an offer and acceptance are not sufficient to form a contract. The intent of the parties to be legally bound must be clear from both their words and conduct.
Legal Remedies: Enforcement through Damages - Expectation (Benefit of the Bargain) Damages
The purpose of awarding expectation damages to the non-breaching party is to provide the benefits that would have been received if the contract were fully performed by both sides (the benefit of the bargain). Damages should put the plaintiff in as good a position as if the defendant had fully performed as required by the contract, or at least back into the position that they would have been had the contract never been formed.
Reliance Damages
The purpose of reliance damages is to return the non-breaching party to the position that they would have been in if the contract had not been made. Reliance damages are usually an alternative to expectation damages. They are used when it is not possible to show --with any reasonable certainty-- the amount of the expected damages, and in cases where a breach occurs very early in the course of a contract. Reliance damages will ordinarily be measured by the costs expended by the non-breaching party in performing (or getting ready to perform) the contract up to the breach date.
Why These Communications Matter
The real problem with negotiating via email, and especially text messages, is that the communication is often relatively informal, and again, does not constitute a contract (although this may be a developing area of case law). We are used to sending quick text messages to our friends and family who understand our messages a certain way. When speaking with clients or other licensees there is a risk of saying something that is taken the wrong way, or even worse, sending a text message to the wrong party. This is a serious issue and should be given weighty consideration. Licensees accidentally revealing a client's confidential information might be at stake - you cannot UNsend a 'quick' text or email and you cannot ask someone to UNsee a client's information. Once you send a message that you meant to send to the client, that says, "Are you sure you'd take $10k less?" to the buyer's broker, they know that information, no matter if they delete it. It is very important that you do whatever you can to avoid giving misrepresentations through electronic communications. Because of the dangers, some companies will choose to even say that communication should never be done via text message. However, this could result in missing out on business with the 40% of consumers who prefer to work this way. Keeping records of texts and emails will serve you well in the event that a dispute arises, or a client or customer files suit against you, by providing proof of what was said. So the use of texts and emails are up to the broker who creates the policy, but the broker does not have the ability to say that text message will constitute contracts.
Determining Whether a Breach is Material or Immaterial
The relative importance of the obligation that is not performed will determine whether a breach is material or immaterial (in other words, the seriousness of a breach). Example: Failure of the seller in our previous example to repair the roof would be a material breach. Failure of the seller to adequately clean out a storage shed prior to transfer of the property likely would be an immaterial breach. Courts will take the following factors into consideration when determining whether a breach is material or immaterial: Whether the breach was caused as a result of negligence, or if the breaching party acted deliberately with knowledge that harm to the other would occur The amount of harm suffered by the non-breaching party What is required to cure the harm suffered by the other party Whether or not the non-breaching party could lessen the harm suffered and what it would take to do so. Such measures that could be taken by the non-breaching party to lessen harm are called "mitigation of damages."
Damages Recoverable by a Seller
The seller's remedy on a buyer's failure to tender the purchase price under a sale agreement is the excess, if any, of the contract price over the property's value at the time of the breach, together with consequential damages according to proof and interest. The earnest would be forfeit first as liquidated damages, but well may be short of actual damage caused. If the contract price is less than the fair market value plus any consequential damages, the seller has no damages and may not recover from the defaulting buyer, regardless of the willfulness of the breach. Consequential damages are any additional expenses that naturally flow from the breach and are necessary to assure the seller the benefit of their bargain. For example, the seller may recover expenses incurred in remarketing the property to be sold, including a broker's commission.
Exceptions to the Doctrine of Privity of Contract
There are several exceptions to the doctrine of privity of contract, two of which apply to real estate contracts: Agency & ....?
E-SIGN Act
There are several federal laws pertaining to electronic signatures, including the FDIC's Electronic Signatures in Global and National Commerce Act (E-SIGN Act), which is applicable to any electronic agreements made after October 1, 2000. Consumers may opt out of e-signatures if they wish, and may use paper if desired. Electronic documents should be stored in a location and manner that allows them to be retrieved and reproduced with reasonable ease. Additionally, specific consumer disclosures must be made when using e-signatures: Prior to obtaining their consent, financial institutions must provide the consumer, a clear and conspicuous statement informing the consumer: of any right or option to have the record provided or made available on paper or in a non electronic form, and the right to withdraw consent, including any conditions, consequences, and fees in the event of such withdrawal; whether the consent applies only to the particular transaction that triggered the disclosure or to identified categories of records that may be provided during the course of the parties' relationship; describing the procedures the consumer must use to withdraw consent and to update information needed to contact the consumer electronically; and informing the consumer how the consumer may nonetheless request a paper copy of a record and whether any fee will be charged for that copy. The Act also specifies the provisions for retaining records:
Requirements for Validity
To form a legally enforceable contract, the following basic elements are necessary: An offer An acceptance of the exact terms of the offer A valid (legal) purpose Consideration Parties with legal capacity In addition to these elements, a contract's terms must be sufficiently clear and definite so that the parties understand them at the time of entry into the contract. The more clear, precise, and well defined the terms of the contract, the more likely it will be enforceable. Note: Offer and acceptance are often listed as part of the same element making for only four elements.
Indemnify
To indemnify is to guarantee against any loss which another might suffer, and to compensate for damage or loss sustained, expense incurred, etc.
Paperless Transactions
Two common ways in which all people communicate today, across the U.S, is via text and email. That includes real estate agents and their clients. There's a good reason for this - the California Association of REALTORS®, CAR, found that 40% of today's home buyers would prefer their agent text them rather than call, and nearly half (46%) preferred to communicate with their agent via email. Meanwhile through survey REALTORS® have discovered that over half of consumers found the house they like online. These two pieces of data point to a lot of consumers desiring to work over the internet. So if the bulk of communication happens via email or text, what does that look like for the contracts in the transaction file? First of all, licensees do need to save these communications as electronic records when negotiating via email or text message. A brokerage's written policy should have methods for how to save these communications to ensure that they are not lost. Printed or not, these are not contracts. And nothing in this, by the way, prevents a client and their broker from negotiating provisions that are going to be in a contract, over electronic means. If a client has told you that they prefer to communicate through text, it is no different than you calling them to discuss what price they plan to offer for the house you showed them that morning. Emails and text messages may be filed in paper form, or electronic form. For those who prefer paper files, the text message or email may be printed and filed along with the other documents of the transaction. For those operating under a "paperless" system, the licensee can save or transfer every text message or email to a database or cloud system which will store it safely. Text messages may be saved electronically a number of different ways. We'll just look at a few here. To save messages from apple phones Macroplant* offers a tutorial. To save messages for android phones, try this method*. *It should be noted that we do not endorse the accuracy or security of these websites. If you have problems then you should follow the policy set forth in your brokerage policy manual, research methods for maintaining these types of records yourself, or contact an IT professional.
Oral vs. Written Contracts in Real Estate
Under the Statute of Frauds, all contracts for the sale of real property and for leases with a duration of one year or longer MUST be in writing. Oral contracts for land will NOT be recognized by the courts. Both U.S. Federal law and Oregon state law require that all contracts for real estate be in writing to be enforceable. Oral contracts are NOT allowed. In regard to Oregon law, this requirement is found in section 41.580 of the Oregon Revised Statutes (the statute of frauds).
Material or Immaterial Breach
When a material breach occurs, it creates a right in the other party to enforce contract remedies. An immaterial breach may not create enforcement remedies.
Exceptions to the Doctrine of Privity of Contract - Agency
When an individual acting as an agent on behalf of another (e.g. a seller) enters into a contract on that individual's behalf with a third party (e.g. a buyer), the individual (in this case the seller) retains all rights to enforce the contract against the third party, and, vice versa, the third party retains rights to enforce the contract against the individual.
Acceptance or Rejection
When an offer is made and accepted on its exact terms, both the party making the offer and the party accepting the offer have agreed to be bound by the stated terms, and a contract is formed. Any "acceptance" that attempts to change or alter the terms of the original offer is not a true acceptance and does not lead to the formation of a contract. Instead, it is a new offer, and a contract can only be formed if the other party accepts the new offer on its exact terms. Both parties to the contract must mutually agree to the obligations outlined in the terms of the contract. Acceptance of an offer occurs when a person to whom the offer has been directed makes an appropriate statement of agreement with the terms of the offer. Additionally, for an acceptance to be valid, it must be voluntary (not the result of threats or made under duress) and the party accepting must have legal capacity to accept the definite and explicit terms of the offer. And the acceptance must be communicated to the offeror. If the offeror withdraws their offer prior to being notified of the acceptance, no contract is formed. An offer can be rejected in multiple ways. One party can indicate in writing that an offer is rejected. Since many offers have time limits, a party can reject an offer by allowing the time limit to expire. A counteroffer is a rejection of the previous offer. The offeree may accept another offer instead, which is a rejection of all other offers (although a back-up offer may be accepted concurrently. This will be discussed later.) Any attempt to change the terms of the offer is legally a rejection of the offer. The changed terms become a counteroffer which can then be accepted or rejected by the other party.
Priority of Multiple Counteroffers
When multiple parties are involved in the same contract negotiation, it is possible for multiple offers, or multiple counteroffers, to be presented at the same time. All counteroffers have the same priority. The party to which the counteroffers are being presented chooses which counteroffers to accept, which to reject, and which to counteroffer.
Repudiation of the Contract by the Other Party
When one party to a contract lets the other party to the contract know, by word or action, that they no longer intend to be bound by the contract, this is called "repudiation." When the second party receives notice of this intent, that second party's duty of performance is terminated. If the party who repudiated the contract later sues for breach, the other party can use the repudiation as a defense. Use of this defense is always tricky, and the party relying on the defense must present evidence that will convince the court that repudiation occurred.
Executed and Executory Contracts
When talking about performance, we need to talk about a distinction between contracts. A contract can be defined as executed or executory. An executed contract is one where performance is immediate and complete, such as in a simple contract to exchange money for merchandise. The acts are immediately completed and the contract is fulfilled. An executory has a longer term effect in which there is an agreement now for actions to be completed in the future, such as a real estate contract where there are contingencies to be met. A sale of land for cash that happens on the spot would be executed. One where financing must be obtained, inspections performed, and other contingencies would be executory A contract for buying a car is normally an executed contract. Once the buyer and the car dealer have signed the contract, the buyer hands over the required money and ownership is handed over to the buyer. All the requirements of the contract are met immediately after the contract is signed. However, if there is financing where the lender holds the title and the buyer makes regular payments, the contract would be executory.
Counteroffers
-Priority of Multiple Counteroffers -Unenforceable Contracts
Types of Legally Unenforceable Contracts
-Void Contracts -Voidable Contracts -Contracts Unenforceable as a Practical Matter
Breach of Contract
A breach is an unexcused failure by a party to a contract to do what the contract requires. A party is in breach of a contract when, without a legally sufficient excuse, there is a failure to fully and properly perform a duty.
Damages Recoverable by a Buyer
A buyer's right to recover damages against a seller for breach of a purchase and sale agreement is usually limited by restrictions in State Codes. Where the breach arises from a covenant or warranty in the sale agreement, the general contract measure of damages applies and the buyer is entitled to the amount that will compensate them for all detriment proximately caused by the breach or likely to result from it. This might include inspection fees, appraisal or repair costs, or any other costs which the potential buyer incurred while believing the sale would proceed forward. Where the seller fails to perform altogether by refusing to convey title, damages may include: the price paid; the expenses incurred in investigating title and preparing the necessary papers; the difference between the agreed purchase price and the market value of the property at the time of breach; the expenses incurred in preparing to enter on the land; consequential damages according to proof; and interest.
Contract
A contract is a formal and legally enforceable agreement between two or more parties.
Contract
A contract is a mutual agreement that requires an offer and acceptance, consideration, a legal purpose, and parties with legal capacity.
Coercion or Duress
A contract is not enforceable when an individual is threatened or forced to agree or perform against their free will.
Valid Legal Purpose
A contract must have a legal purpose to be enforceable. The courts will not enforce a contract that does not have a legal purpose. A legal purpose means: that the performance of the contract is not in and of itself unlawful and that performance of the contract will not result in a violation of law. Example 1: A seller cannot enforce a contract to extort money from a buyer, i.e., "Pay me $1,000.00 extra for the property, or I'll break the windshields on your car." Example 2: A buyer cannot force a seller to perform a contract that requires the seller to commit fraud. Example 3: An individual occupying a property owned by someone else cannot legally sell that property to a third party.
Counteroffers
A counteroffer is a response to an initial contract offer which revises that offer with terms that generally are more acceptable to the party making the counteroffer. As we have already noted, a counteroffer is a rejection of the original offer. There is technically no limit to the number of times a contract can be revised with counteroffers in Oregon. The negotiation process of establishing a contract can involve a lengthy back and forth process of counteroffers and counteroffers to counteroffers. Counteroffers are passed between the negotiating parties until all the parties agree on the terms of the contract or the negotiations are ended without the creation of any contract.
Covenant
A covenant is a contract or part of a contract that is either expressly stated by the parties or implied by law.
Material Breach
A material breach is one that will cause great harm or substantially lessens the value of the contract for the non-breaching party. A material breach can have several consequences, among them: canceling the non-breaching party's duty to perform contract obligations, and giving the non-breaching party an immediate right to pursue enforcement remedies.
Mitigation of Damages
A mitigation of damages is an action taken by a non-breaching party to lessen or reduce the harm caused by a breach of contract.
Mutual Mistake
A mutual mistake of a material fact is a defense to an alleged breach of contract. If it can be established that both parties were in error regarding a major fact leading to the contract formation, the contract may be determined to be null and void, or the contract may be reformed (this means that the court rewrites the contract to agree with the actual intent of the parties at the time of formation). Use of this defense is extremely limited, and a mistake by one party will not usually void the contract unless the other party knew or should have known about the mistake and tried to take advantage of the situation.
Performance Excused - Failure of Condition Precedent
A party can defend against a breach of contract claim by showing that a condition precedent did not occur.
What is a substantial performance? A party has failed to complete all the obligations of a contract A party has performed all the obligations in the contract in the exact manner outlined in the contract A party has completed the obligations of another contract that were substantially similar to contract in question A party has made a good faith effort to perform his or her obligations under a contract and has completely performed all essential obligations
A party has made a good faith effort to perform his or her obligations under a contract and has completely performed all essential obligations
Rescission and Restitution
A real property contract, like other types of contracts, may be rescinded under specific circumstances. Rescission ends the contract, terminates further liability on the agreement, and restores the parties to their former positions. This generally requires each party to return any consideration received prior to the rescission.
Unilateral Mistake
A unilateral mistake is defined as a mistake or misunderstanding as to the terms or effect of a contract by one of the parties but not by the other. A unilateral mistake is usually not a defense to breach of contract claims.
Void Contracts
A void contract has no legal force or binding effect generally because the purpose of the contract is illegal, against public policy, or lacks a critical element to forming a contract, such as a clear purpose, or, in the event of a listing agreement, lacks the required expiration date.. Example: A contract that requires performance of a crime.
Which has superior legal capacity: a written or a verbal contract? The legal capacity depends on when the contract was established A verbal contract A written contract Written and verbal contracts are equal in legal capacity
A written contract
Written Contracts
A written contract is a negotiated document, signed by and identifying all parties, explaining the consideration given by each party, and stating the rights and duties of each party. When the contract is put in writing, it describes the agreement of the parties, with terms and conditions, and serves as proof of the parties' obligations.
Acceptance
Acceptance occurs when a party agrees to the exact terms of another party's offer. Offer and acceptance are two basic elements in the formation of a contract.
Written Contracts
Advantages of Written Contracts There are many advantages to written contracts. Some of the most commonly recognized advantages include: Written contracts provide a much higher level of certainty than oral contracts, so there is less potential for disagreement regarding the rights and duties of the parties. By including a provision allowing for recovery of attorneys' fees, a written contract can permit recovery of legal fees by the prevailing party in the event of a dispute. A written contract can precisely state warranty terms (rather than relying on implied warranties). A written contract can provide for alternative dispute resolution (for example, mediation or arbitration). Less ambiguity can lead to easier enforcement. Because of the certainty of terms, a written contract is usually easier to enforce.
Certainty
All damages, whatever their nature, must be proved with reasonable certainty to be recoverable. A claim for damages based on speculation or guesswork is not sufficient. Generally, there must be clear and objective evidence of the amount of damages actually sustained to allow recovery.
To form a legally enforceable contract, which of the following basic elements are necessary? Parties with legal capacity All of these are correct An offer Consideration
All of these are correct
Oral Contracts
Also referred to as "spoken" contracts, this contract category refers to contracts that are not in writing. Unless prohibited by law, oral contracts are valid. However, even in those instances where an oral contract is valid, enforcing the contract terms may be difficult or impossible. Although not entirely accurate, it is always wise to remember the old cliché, "An oral contract is only worth the paper it's printed on..."
Text Messages as Binding Communications
Although email has long been considered a legitimate method of official communication, it's important to understand how seriously the courts are taking text messages today. Although the cases we're going to look at did not occur in Oregon, it demonstrates the legal interpretation of a judge regarding text messages. This is based, in part, on the UETA that both Massachusetts and Oregon abide by, and it indicates the reasoning that judges may employ in similar cases.
Illegality
An act or obligation that is illegal and contrary to legal principles may not be the subject of a contract. A contract is not enforceable when it is formed around an illegal purpose, such as performance that is criminal or against public policy.
Immaterial Breach
An immaterial breach is one that does not significantly lessen the value of the contract for the other party or does not result in significant harm to that party. Depending on the type of breach and the amount of harm suffered by the non-breaching party, damages may be awarded, but an immaterial breach will not allow the non-breaching party to terminate the contract.
Offer
An offer is the action that starts the process of forming a contract, e.g., I will give you $100,000 for your home.
Assignment and Novation
Assignment and novation are methods by which elements of a contract are altered.
Assignment
Assignment involves a transfer of rights or obligations established by a contract without canceling or replacing the contract. Rights or obligations are moved from one of the original parties to the contract to a third party. For example, a company establishes a contract to clean an office building with the owners of that building. The company has made a determination that they are dropping their cleaning services, so they contract with another party to take over their duties. The party that the duties are assigned is substituted for the original party. Note: If this action is not approved by the party receiving the services, they may take action against the party with whom they originally contracted. However, the language of the contract can have a significant effect on the scope and nature of any assignments. This is why an assignment does not always relieve the assigning party of liabilities.
