Flashcards in Chapter 11: Real Estate Contracts Deck (119)
Real Estate Contracts
Real estate licensees must understand the essential elements of a valid contract. A real estate transaction depends on a clear and concise agreement between the parties to the contract. The two most commonly used contracts in real estate brokerage are the listing contract, and the purchase and sale contract.
is an employment contract for professional services negotiated between a member of the public and a real estate broker.
Purchase and Sale Contract
is negotiated between an owner of property and a potential buyer, which specifies the terms and conditions for the transfer of ownership.
What is a contract?
By definition, a contract is an agreement between two or more competent parties that creates an obligation to do or not to do a particular thing.
A contract is not required to be in a certain format, to be on a single piece of paper, or to even be in written form. The agreement can be either written or oral.
What is an assignment?
The sale, transfer, or subrogation of rights in a contract. An assignment is a contract between the assignor and the assignee. Most contracts are assignable unless prohibited in the agreement.
The assignor of a contract is not relieved of performance as a result of assignment. If the assignee fails to perform, the assignor is responsible for performance of the contract as originally agreed.
What is an assignor?
The party who grants the rights.
What is an assignee?
the party who receives the rights.
What are the 4 essential elements necessary to create a valid contract?
1. Lawful Subject
2. Offer and Acceptance
4. Competent Parties
a contract must be for a lawful (legal) purpose and not contrary to public welfare. For example, an agreement between two parties to rob a bank would not be a valid contract since the subject of the agreement is unlawful.
Offer and Acceptance
there must be an offer and acceptance, agreement, or meeting of the minds. A mutual understanding of the terms of the contract is reached when an offer made by one party is accepted by another party, and communicated to all parties.
a contract must specify a sufficient consideration. Either valuable or good consideration may be sufficient. Valuable consideration is money or anything of value that can be converted to money. This includes cash, personal property, real property, or enforceable promises. Love and affection, which are incapable of being expressed in terms of money, are called good consideration. An executor contract must be accompanied by a sufficient consideration. However, once a contract is executed, the sufficiency of the consideration will not come into question.
a valid contract is an agreement between two or more competent parties. Minors, persons who are declared as incompetent by the courts, and persons known to be mentally incompetent do not have the capacity to contract. The law affords special protection to individuals who lack the capacity to contract. A contract made with an incompetent party is voidable. The incompetent party may void the contract and cannot be held accountable for performance. Conversely, an incompetent party can enforce a contract that cannot be enforced against them.
Creation of a Contract
A contract is created when the offer of one party is accepted, and acceptance of the offer is communicated to the person who made the offer.
Communication of acceptance indicates that a complete meeting of the minds exists. A contract does not exist until communication has taken place.
Delivery of a contract to all parties is proof that communication has taken place.
Acknowledgement by the Parties
Frequently, contracts have an acknowledgement by the parties as to the voluntary nature of the transaction. The acknowledgment is accomplished when the parties appear before an officer of the court such as a notary public or judge. Proof of identity is required and signature of the parties is made in the presence of the public official. Acknowledgment is necessary if a document is to be recorded in the public records.
A notary public applies a stamp or impresses a seal to the document to attest to the authenticity of the signatures of the parties. The seal of a notary public, called an acknowledgement, should not be confused with the word “seal” as used in connection with contract law. In contract law, the word “seal” does not refer to the acknowledgement. The seal is the placement of the word “seal” or the letters “L.S.,” locus sigilli, following the signatures of the parties.
The Statute of Frauds
The original Statute of Frauds was enacted in England in 1677 to provide protection against fraud in the sale of real property.
In Writing to be Enforceable
The Statute of Frauds requires a contract for the transfer of a right or interest in land to be in writing in order to be enforceable.
Real estate sales contracts, leases for more than one year, deeds, mortgages, and option contracts are conveyed by the Stature of Frauds. Any document that purports to convey a right or interest in land must be in writing to be enforceable.
The Statute of Frauds does not make an oral real estate sales contract illegal or invalid. An executed oral real estate sales agreement that reaches a successful conclusion is perfectly legal. The courts will not overturn an executed oral real estate sales contract.
An exception to the Statute of Frauds exists when a buyer makes a partial payment and either takes possession of, or makes improvements to the property.
Memory Device: “COLIC” competent parties, offer and acceptance, lawful subject, in writing, consideration.
The Statute of Limitations
The Statute of Limitations provides time limits in which parties are allowed to bring legal action to enforce their rights under a contract.
The periods allowed for various types of contracts are?
if a contract is entirely oral, action must be brought within four years.
a contract wholly in writing may be enforced if action is brought within five years.
Partially Oral and Partially Written
A contract, which is partially oral and partially written, can be enforced based on whether the portion in dispute is oral or written and in accordance with the time limits indicated above.
all the terms and conditions are specified and agreed to by the parties. In this case, a complete understanding exists. An express contract can be either oral or written.
exists when some or all of the terms and conditions can be assumed by the nature of the agreement or the words and actions of the parties. An implied contract can be either oral or written, or could be an implied provision of another contract.
both of the parties to the contract mutually agree to be bound to performance of the terms and conditions specified. One party exchanges a promise to perform an act based on a promise of the other party. A promise is given in exchange for a promise.
only one party expressly agrees to perform an act. Only the one who agrees to perform the act is bound by the terms of the contract. One party gives a promise of performance based on performance by the other party. A promise is given in exchange for an act.
any term or condition remains to be performed.
when all parties have fully performed.
is written, contains all the elements of a valid contract, and may be recorded in the public record. A formal contract is enforceable under the Statute of Frauds. One definition of a formal contract is “a contract that is wholly written and under seal.” In past years, the existence of a seal was a significant matter, but today a seal is a formality that does not affect the validity or enforceability of the contract.
Informal (Parol) Contract
is an oral agreement (made solely by word of mouth), or partially written contract between the parties that may or may not contain all the elements of a valid contract and is not recorded in the public record. An informal contract can be a valid, legal contract, but is not enforceable under the Statute of Frauds. Oral contracts are often referred to as parol contracts.