Contract Law - Part 3 - Chapters 44-47

Question 1

Determine when a breach of the terms and conditions of a purchase agreement entitles a buyer or seller to exercise their right to cancel

Answer 1

Cancellation of a real estate purchase agreement and escrow is due to either:

• a breach of the agreement by the other party
• the failure of an event to occur or a condition to be approved as called for in a contingency provision.

The cancellation of escrow only, does not cancel by reference the purchase agreement. Meaning escrow can be cancelled leaving the purchase agreement intact.

Question 2

Identify conduct which implies disapproval of a condition and is an exercise of the right to cancel

Answer 2

Non-performance is excused and the refusal to act is not a breach of the purchase agreement, if:

• a contingency provision exists authorizing the buyer or seller or the person benefiting from the contingency to terminate the purchase agreement on the failure of an event to occur or on disapproval of data, information, documents or reports
• the event fails to occur or the condition reviewed is disapproved and
• a person authorized or benefiting from the contingency provision acts to terminate the agreement by delivering a notice of cancellation prior to the expiration of their right to cancel.

Before an agreement is terminated by a buyer exercising a contingency provision, the buyers conduct needs to rise to the level of an unequivocal disapproval of the conditions presented by the data, information, documents and reports supplied by the seller.

Question 3

Distinguish a unilateral cancellation to terminate further performance under a purchase agreement from a bilateral rescission of a purchase contract which restores the buyer and seller to their pre-contract positions.

Answer 3

CANCELLATION IS A UNILATERAL ACT eliminating any further enforcement of the agreement from the moment of cancellation. However, the cancellation of a purchase agreement does not affect the legal consequences and liabilities for activities and events which preceded the cancellation.

Conversely, a RESCISSION of either an unexecuted purchase agreement (IE, escrow has not yet closed) or of a completed real estate transaction (IE escrow has closed) IS A BILATERAL AGREEMENT.

Under a rescission, both the buyer and seller, act in concert to retroactively annul the purchase agreement from the moment it was entered into. A rescission returns the buyer and seller to their respective positions they held prior to entering into the purchase agreement.

Question 4

bilateral rescission

Answer 4

A BILATERAL RESCISSION is an agreement by a buyer and seller mutually agreeing to terminate their purchase agreement. In contrast to a “cancellation” a RESCISSION returns the buyer and seller to their respective positions they held prior to entering into the purchase agreement. When a contract is rescinded, it is as though the parties had never agreed to the transaction. The retroactive return to their former, pre-contract positions is called restoration. RESCISSION LEADS TO RESTORATION.

Question 5

further-approval contingency provision

Answer 5

A FURTHER APPROVAL CONTINGENCY PROVISION is a provision in agreement calling for the further approval of an event or activity as a condition for further performance by the seller, buyer or third-party as a condition for further performance or the cancellation of the transaction by a person benefiting from the provision.

Question 6

restoration

Answer 6

RESTORATION is the return of funds and documents on a rescission of a purchase agreement sufficient to place the buyer and seller in the position they held before entering into the agreement. When both the buyer and seller enter into a rescission agreement, the restoration of the buyer and seller to their pre-contract positions eliminates all claims they may have had against each other for conduct which occurred after entering into the purchase agreement and prior to its rescission. A rescission is a voluntary activity by a mutual agreement to eliminate the purchase agreement, called a release and waiver agreement.

Question 7

unilateral cancellation

Answer 7

A UNILATERAL CANCELLATION is a situation under a purchase agreement when one party acting alone terminates the agreement, eliminating the requirement for the buyer and seller to perform on the terms stated.

Unilateral cancellation of a real estate purchase agreement and escrow is due to either:

• a breach of the agreement by the other party
• the failure of an event to occur or a condition to be approved as called for in a contingency provision.

Unilateral cancellation does away with whatever remains to be performed under the purchase agreement, called termination of the contract. Thus, a cancellation eliminates any future enforcement of the agreement from the moment of cancellation. However the cancellation for a purchase agreement does not affect the legal consequences and liabilities for activities and events which preceded the cancellation.

Here, the purchase agreement is cancelled by a unilateral act since the cancellation is undertaken by one person only.

Question 8

Identify conduct which places a buyer or seller in a real estate transaction in default on a material condition premitting the other person to terminate the purchase agreement

Answer 8

For the buyer or seller to place the other in default, three transactional facts need to exist:

• a date crucial to the continuation of the transaction needs to have passed
• the condition called for in the purchase agreement did not occur by the scheduled date and
• the person cancelling is required to have fully performed all activities required in order for the other person to perform by the scheduled date, called conditions precedent, and have performed or be ready, willing and able to perform at the time of cancellation, all activities they were obligated to perform in order to close escrow, called conditions concurrent.

A Time Essence provision gives notice to the buyer and seller that their compliance by a set time for an event to occur or a condition to be met is essential to the continuation of the transaction. For a vast majority of agents who work diligently to clear conditions and close a transaction, the Time Essence clause places a risk of cancellation on a transaction. However, foreseeable delays and closing the transaction exist in all real estate sales.

An effective Notice of Cancellation interferes with the completion of a transaction as initially envisioned by the buyer and seller at the time they entered into the purchase agreement and escrow instructions. On a proper cancellation, the person terminating the purchase agreement does not need to further perform any act called for, including the close of escrow. Further, the transaction has been terminated and the obligations of both the buyer and the seller to further perform no longer exist.

Question 9

Establish when a buyer or seller may exercise their right to cancel and terminate a purchase agreement

Answer 9

To establish the right to cancel when time is not stated or established in the purchase agreement or escrow instructions as crucial, the party in default needs to be given notice that the date set has the new deadline will be strictly enforced and adhered to. Further, the person in default needs to be given a realistic period of time after being given a notice to perform before any cancellation is considered effective.

Before either a buyer or seller may effectively cancel a transaction, they are required to place the other person in default and cannot also be in default themselves on the date scheduled for the other person’s performance or the event to occur.

Question 10

Allow for extensions of time to perform to avoid premature termination of a purchase agreement

Answer 10

When logically possible, courts ignore boilerplate Time Essence clauses and enforce the original bargain, if no financial harm results from the delay.

All in all the seller or buyer has to give the buyer or seller a reasonable amount of time to close escrow, for example the additional days needed to record the buyers loan before the buyer’s failure to perform justifies exercising any cancellation rights. Agents can also include in purchase agreements an authorization to extend performance clause that allows them to extend performance dates within a reasonable amount of time for either the buyer or seller to perform before a cancellation can take place.

Question 11

Recognize conduct which constitutes a persons waiver of their right to cancel due to a time-essence provision

Answer 11

Even when the date scheduled for a buyer or seller to perform is established as crucial, INCONSISTENT CONDUCT by the person entitled to cancel constitutes a waiver of their right to cancel. Once the right to immediately cancel has been waived, the person who failed to perform by the agreed deadline is no longer in default. Until the person who failed to perform is placed in default again, the right to cancel cannot be exercised.

A waiver by inaction does not occur simply because a person’s right to cancel the transaction is not immediately exercised on the failure of the other person to perform or an event to occur. Affirmative conduct needs to occur by the person entitled to cancel, not just mere inaction, before the right to cancel under a Time Essence situation is Waived.

After a waiver of a date scheduled for approval of a condition or occurrence of an event, time needs to be reinstated as crucial to the continuance of the transaction, or a reasonable, additional period of time must have passed after waiver of the right to cancel, before the transaction can be cancelled.

Time is best reinstated as essential to the continuation of the transaction by notifying the person who needs to perform they are required to perform by the end of an additional period of time, set with sufficient duration as needed to provide them with a realistic opportunity to perform. If performance is not forthcoming during the additional period of time, the transaction may be promptly cancelled since strict compliance with the extension is now enforceable.

Question 12

authorization-to-extend provision

Answer 12

The AUTHORIZATION-TO-EXTEND PROVISION is a purchase agreement provision granting authority to extend performance dates before the transaction may be canceled. This provision grants the agents power to extend performance dates up to 30 days (or other wording indicating an accommodation for delays), whether or not a Time Essence clause or a Seller May Cancel clause exists.

Question 13

condition concurrent

Answer 13

CONDITION CONCURRENT is a purchase agreement provision requiring performance of an activity by a buyer or seller without concern for the performance of any other party.

Question 14

condition precedent

Answer 14

CONDITION PRECEDENT is a purchase agreement provision requiring the occurrence of an event or performance of an act by the other party before the buyer or seller is required to perform.

Question 15

Notice of Cancellation

Answer 15

A NOTICE OF CANCELLATION is a notice from either the buyer or seller given to the other party canceling the transaction. On a proper cancellation for cause, the person terminating the purchase agreement transaction does not need to further perform any act called for, including the close of escrow. Further, the transaction has been terminated and the obligations of both the buyer and seller to further perform no longer exist.

Question 16

seller-may-cancel provision

Answer 16

The SELLER-MAY-CANCEL PROVISION is a purchase agreement provision authorizing the seller to cancel if the specified condition or event does not occur, whether or not the agreement contains a Time Essence provision.

Before escrow will call for closing funds, the seller needs to have fully performed.

Question 17

time-essence provision

Answer 17

The TIME ESSENCE PROVISION is a purchase agreement provision establishing that dates or performance of any occurrence of an event are to be strictly enforced as essential to the continuation of the transaction. By it’s plain words, the time Essence provision give notice to the buyer and seller that their compliance by the date set in other Provisions in the purchase agreement with call for an event to occur or an activity to be performed is essential to the continuation of the transaction.

Thus, the apparent bargain built into the purchase agreement by the presence of a time essence provision gives the buyer or seller the right to immediately cancel the transaction on:

• the failure of an event to occur or
• the failure of the other party to act, usually by approval, by the appointed date.

Question 18

Identify the types of disputes that may arise at various stages of a real estate transaction

Answer 18

Disputes with a client or person occasionally arise in real estate transactions. Agency disputes may arise during the marketing period, escrow period and post-closing period.

Question 19

Judiciously handle disputes arising between agents, buyers and sellers

Answer 19

These disputes might become significant enough that agents best option is to terminate the agency relationship. To do this, a release and waiver needs to be entered into by all persons concerned as part of the cancellation agreement.

Question 20

Provide for an properly document the cancellation of employment and purchase agreements, and the release and waiver of liabilities

Answer 20

A mutual cancellation agreement terminates any further activity under the existing agreement or agency relationship. A release agreement, signed by all persons to a transaction as part of a cancellation agreement, retroactively extinguishes all known claims and ends all possible liabilities in disputes between those subject to the agreement.

Question 21

agency dispute

Answer 21

AGENCY DISPUTES are disputes between an agent and their client which arise during the marketing period, in escrow or after closing.

Question 22

principal disputes

Answer 22

PRINCIPAL DISPUTES are disputes between a buyer and seller.

Question 23

unknown and unsuspected claims

Answer 23

UNKNOWN AND UNSUSPECTED CLAIMS are claims unknown to the parties which are later established and pursued after entering into a general release. To eliminate these unknown claims, a waiver of the right to later pursue these claims needs to be included with a general release and made part of the mutual cancellation agreement. A written, signed release agreement does not require any new consideration to be paid for the cancellation, release and waiver to be enforceable as a bar to further claims.

NOTE - When a sales transaction is rescinded, unknown and unsuspected claims may NOT be waived just using a general release agreement, but rather a ‘Waiver of the Right to Later Pursue these Claims” needs to be included WITH a General release and made part of the mutual cancellation agreement.

Question 24

Identify a seller’s interference with the closing of a real estate sales transaction and what may motivate them to avoid closing

Answer 24

A seller occasionally interferes with the close of escrow and completion of a purchase by refusing to deliver closing documents, return escrow instructions, eliminate defects as agreed or fulfill their obligations. The sellers refusal or failure to timely act under the purchase agreement and close escrow arises during dramatic increases in the value of the type of property they have just agreed to sell to the buyer. As a result, “seller remorse” sets in, manifested by the seller’s efforts to trigger a default by the buyer which justifies the sellers termination of the purchase agreement.

Question 25

Discuss the remedies a buyer has on a seller’s breach or cancellation of a purchased agreemetn

Answer 25

Remedies available to the buyer in these circumstances include:

• abandoning the transaction by entering into a mutual cancellation of the purchase agreement and escrow instructions
• acquiring the property by pursuing specific performance of the purchase agreement
• pursuing the recovery of money, whether or not the buyer still wishes to acquire the property.

Misrepresentation of a property’s value by a prospective buyer and their agent does not, by itself, justify an owners cancellation of the purchase agreement. Estimates of value made by prospective buyers and their agents to sellers are usually mere expressions of their opinion of value, not facts a seller may rely on. The buyer and the buyer’s agents are known adversaries of any seller who owe no specific fiduciary duties to the seller.

If the seller sells the property to another buyer after acceptance of a purchase agreement offer from the original buyer, the seller may be found liable to the original buyer for the difference in price.

Question 26

Advise on the monetary losses a buyer can recover upon the seller’s breach of a purchase agreement

Answer 26

A buyer who seeks to recover money from a breaching seller, in lieu of ownership of the property, does so based on monetary claims within three categories of money losses.

The buyers monetary claims can be:

• GENERAL DAMAGES, being money directly expended in the transaction or the monetary value lost in the transaction
• SPECIAL DAMAGES, post breach, also called consequential damages, being money collaterally lost due to the sellers breach and
• PRE-JUDGEMENT INTEREST on all monies recovered.

When a buyer is entitled to the price to Value difference on a sale of a property from a breaching seller, the value of the property is assessed at the date of the breach even if this occurs several years after the original purchase agreement is entered into, such as in a breach of a right of first refusal provision with no set expiration.

Special damages are recoverable only if they had been known by the seller to likely be incurred by the buyer in the event the seller breaches the purchase agreement, like a IRC 1031 transaction. Losses and expenses too remote and speculative to be foreseen by the seller when agreeing to sell on the terms stated in the purchase agreement as seller obligations if they breach are not recoverable from the seller, such as profits from an anticipated use or income from Rent.

A buyer who recovers money losses is also entitled to recover interest at the (legal) rate of 10%, commencing on the date of the sellers breach on the amount recovered.

In all real estate agreements and Implied Covenant of Good Faith and Fair Dealing exists. The Covenant imposes a duty on the seller to timely perform by taking action to avoid frustrating the buyers right to receive the benefits of the agreement.

Question 27

bona fide purchaser (BFP)

Answer 27

A BONA FIDE PURCHASER (BFP) is a buyer who acquires ownership of real estate without actual knowledge or record a notice (constructive knowledge) of a pre-existing enforceable purchase agreement held by another buyer regarding the same property. As a bona fide purchaser the buyer pays consideration to acquire and take title to the property while having no knowledge of a claim to the property held by the other buyer.

Question 28

general damages

Answer 28

GENERAL DAMAGES are money losses by a buyer or seller due to their expenditures and loss of value directly related to a failed property sales transaction.

These are losses DIRECTLY RELATED to their acquisition of the property which they are no longer going to acquire including:

• MONEY ADVANCED by the buyer towards the price of the property such as deposits held by the agent or escrow or previously released to the seller
• EXPENSES INCURRED examining title conditions, inspecting the property, verifying operating income and expenses, and obtaining financing, Escrow Services, engineering and Improvement plans Etc all called transactional expenses
• MOVE-IN EXPENSES incurred preparing the property to take possession
• THE PRICE TO VALUE DIFFERENCE between the price agreed to in the breached purchase agreement and the value of the property on the date of the sellers breach.

Question 29

implied covenant of good faith and fair dealing

Answer 29

IMPLIED COVENANT OF GOOD FAITH AND FAIR DEALING is a legal presumption that parties to an agreement will deal equitably with one another by abiding by the terms of the agreement and timely performing their obligations. This Covenant imposes a duty on the seller to timely perform by taking action to avoid frustrating the buyers right to receive the benefits of the agreement – for example by allowing time for the buyer and their lender to fund escrow.

Question 30

price to value difference

Answer 30

PRICE TO VALUE DIFFERENCE is the difference between the price agreed to in a purchase agreement and the value of the property on the date the agreement is breached.

Question 31

right of first refusal

Answer 31

FIRST RIGHT OF REFUSAL is a pre-emptive right held by a person other than the owner to buy a property if the owner decides to sell.

Question 32

special damages

Answer 32

SPECIAL DAMAGES also known as CONSEQUENTIAL DAMAGES are money losses not incurred directly from another’s breach of the real estate agreement, but which are naturally incurred as a result of the breach. A buyer whose seller has breached their purchase agreement is also entitled to recover related expenses incurred by the buyer AFTER THE BREACH. These post breach expenditures only qualify for Recovery if they are the NATURAL RESULT of the sellers breach, called special damages.

For the buyer to recover POST BREACH expenditures, the seller on entry into the agreement needs to know or be on notice the expenses will likely be incurred by the buyer as a natural and unavoidable result of the sellers breach of the purchase agreement.

EXAMPLE - builder doesn’t finish a build in enough time for the buyer to qualify for his IRC 1031 transaction, therefore, the special damages recoverable by the buyer in the form of a money award include:

• the full amount of the profit tax the buyer paid
• the rent paid for the temporary facilities until the build was completed (plus the cost of additional moving expenses) and
• interest at 10% from the date the amount of rent and profit tax were paid by the buyer.