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What is a Contract?

A Contract is a voluntary, legally enforceable promise between two competent parties to perform some legal act in exchange for consideration

 

Statute of Frauds

Everything in real estate has to be in writing, according to the Statute of Frauds 

 
 

Essential Elements of a Contract

Competent Parties

Mutual Assent (Meeting of the Minds)

Legal Purpose 

Consideration (something of value)

Competent Parties

Mutual Assent or Agreement

An essential element of a contract. 

Legal Purpose

An essential element of a valid contract. A contract for an illegal purpose is voi

Consideration

Anything of value that induces one to enter into a contract.

Factors affecting the enforceability of contracts 

 
 
 

Executory vs. Executed

  • A Purchase Agreement before it closes
  • A Lease Agreement
  • A closed transaction
 

Unilateral vs. Bilateral

  • An Option Contract
  • A Lease Option 
  • Exclusive Listing until there is an accepted offer
  • Open Listing

Sales contracts and listings are examples of bilateral contracts. 

  • Exclusive Right Listing
  • Purchase Agreement
 
 
 

Expressed vs. Implied

Expressed

“Said” or in writing.

Requirements for validity

An expressed contract requires that the elements are specifically stated, including offer, acceptance and consideration. Examples include the sale of real estate, employment contracts and even a contract to perform a service.

Fast food drive through

Pay before you eat

Pay then pump gas

Implied Agreement

Shown by actions 

If a customer enters a restaurant and orders food, for example, an implied contract is created. The restaurant owner is obligated to serve the food, and the customer is obligated to pay the prices listed on the menu for it. 

Fancy restaurant

Pay after you eat

Pump gas and then pay

 

Covenant

A binding agreement or promise 

Indemnify – Hold Harmless Clause

A provision in a contract that protects a party from damage or harm arising from the transaction.

 
 

Factors Affecting Enforceability

 
 

Void, voidable, unenforceable contracts

Valid Contract

A contract that is enforceable by all parties to the contract in a court of law. 

Unenforceable Contract

It looks valid but it can’t be done.. 

Voidable Contract

A flawed contract in which the innocent party has the power to either void or enforce, but that remains valid unless voided. Example: A minor (not legally competent) may enforce the contract even though the adult party cannot force the minor to perform. 

 

Void

Having no legal force or binding effect, not enforceable

Rights and obligations of parties to a contract

 

A contract with an unmarried minor is a Voidable Contract. At any time, the minor can change their mind. An adult cannot force a minor to complete a transaction. 

 

Impossibility of Peformance (Frustration)

 
 

Void or Voidable Contracts

 

Menace

The threat of duress is used to force a party to sign a contract. The injured party may void an agreement signed under duress or menace.

 

Duress

 

The contract may be voided even if both parties do not  sign. 

Undue Influence

Strong urging overwhelms a person, so they no longer act of their own accord. Contracts signed as a result of undue influence are voidable.

 

Misrepresentation

An untrue statement of material fact that induces a party to act. It may be intentional (fraud) or unintentional. A contract so signed is voidable by the injured party. 

 
 

Mistake (Negligent Misrepresentation)

An error of fact by both parties may cause a contract to be voidable. Example: A contract’s legal description depicts a different lot than the buyer was shown.

 

Fraud – VOID

Intentional deception or misrepresentation – a material misstatement of fact.

 
 
 

Executory and Executed Contracts 

Execute

To sign a document or to carry out a promised act or contract. 

 

Executed Contract

One that has been entirely performed. The closing executes the real estate purchase contract.

 

Executory Contract

One that has not yet been entirely performed. (Example: when you are “under contract,” you have an executory contract.) 

 

Contractual Intent

The inference that both parties are acting in good faith.

 
 
 

Breach of contract and remedies for breach

Breach of Contract

A violation or default of the terms and conditions stated in a contract.

 
 

Default

Breach or violation of an agreement.

 

Liquidated Damages

Those damages are specified by contract in advance (usually loss of earnest money) if the buyer defaults. If specified, liquidated damages are the seller’s only remedy against the buyer.

 

Actual Damages

Actual damages refer to the financial amount that is paid to a victim that suffered loss that can be calculated. Actual damages are often known as real damages or, legally, as compensatory damages. These are damages that arose from the neglect or mistake of another party.

 

Exemplary Damages

Damages above and beyond the actual cost of the loss, assessed to punish or set an example for others.

 
 
 
 

Termination, rescission, and cancellation of contracts

 
  • performance – all parties fulfilled
  • assignment and delegation – someone takes over for one party
  • death impossibility of performance – not legal
  • mutual agreement or Mutual Rescission – Agreement by both parties to abandon an executory contract.
  • novation – new contract replaces an old one
  • operation of law – some legal issue cancels the contract
  • partial performance – accept incomplete work as fulfillment
  • substantial performance – most of the work is done

The rescission of a contract is a return to the status quo.

If a buyer withdraws his offer before the seller accepts it, the buyer is entitled to his earnest money deposit.

 
 

Rescind

To take back or annul. Until an offer is accepted and becomes a contract, the offering party may rescind the offer without penalty.

 

Revocation

To recall or withdraw, such as withdrawal of an offer before acceptance by the offeree or offeror. 

 
 
 

Bilateral Contract

A promise for a promise, e.g., real estate purchase contracts. The buyer promises to buy; the seller promises to relinquish the title. 

Unilateral Contract

Only one person makes a promise.. 

In an option contract, the seller must sell, but the buyer is not forced into buying. It’s a unilateral contract. 

Option

unilateral contract in which the optionor (property owner) promises to sell if and when the optionee (prospective buyer) chooses to buy – at a price and before a date set in the option contract

 
 
 

Electronic signature and paperless transactions

As of 2000, the ESIGN Act became a federal law that legally recognizes electronic signatures. This has had a powerful influence on real estate transactions.

 
 

Fulfillment of the Contract

The contract will end when all conditions are satisfied.

 

Impossibility of Performance

A contract cannot be completed because it’s impossible.  Also called “frustration”.

When an investor wants to purchase a property to build a casino in a non-casino state, the contract will fail because of the Impossibility of Performance. When a person wants to buy an unlicensed whiskey store to run a whiskey store, the contract will fail for the Impossibility of Performance

State laws that regulate real estate securities are called blue-sky laws. 

 

Confession of Judgment Provision  📍NEW

A confession of judgment is a way to circumvent normal court proceedings and avoid a lengthy legal process to resolve a dispute. Signing such a confession of forfeits any of the rights the defendant has to dispute the claim in the future.

 

Courtesy of Jack

An offer an acceptance (an agreement) may also be referred to as each of the following EXCEPT:

a)meeting of the minds

b)rescission 📍 📍📍

c)mutual consent

d)mutual assent