RE Contract Laws Flashcards
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The TREC Fave Five
TREC is made up of five divisions:
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Education, Licensing, & Communication Enforcement Information Services Staff Services Administration
2
Q
Common Law:
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Law derived from past judicial decisions of courts
3
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Statutory Law:
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Law formally created by legislatures
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Annexation:
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Attaching (or affixing) personal property to real estate in a way that transforms the personal property into real property
5
Q
Adaptation:
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The use and modification of a particular item for a specific use in a property — specific use for a property could deem an item as real property
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Intention:
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The owner’s intent for an item — was it designed to be a part of the real property
7
Q
In Severalty:
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Describes undivided ownership of an estate, with an interest that is exclusive from other owners
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Testamentary Trust:
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A type of trust that is effective upon the death of the trustor
9
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Living Trust:
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Type of trust created during someone’s life to manage their assets in life and in death
10
Q
Sole Proprietorship: A
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business entity in which revenue, liability, and all responsibilities are owned by one person
11
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Partnerships:
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A business entity legally formed for two or more individuals to share profits
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Corporation:
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A company or group of people recognized as one entity under the law; owners purchase stocks in the corporation (shareholder) and the corporation is run by the board of directors (elected by the shareholders)
13
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S Corp:
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A corporation (that can only be formed with less than 100 shareholders) that is similarly taxed like a partnership to avoid double taxation
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General Partner:
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Person who takes the lead on day-to-day relationships and assumes full liability for the business
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Limited Partner:
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Person who is only liable for the amount they have invested into the business venture
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Joint Venture: A
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partnership formed by a group of investors for one venture — it dissolves after the venture is complete
17
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Promissory Estoppel: A
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legal doctrine that forces a party to keep a promise and prevents a party from backing out of an agreement
18
Q
Parol Evidence Rule:
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A common law rule that prevents a consumer from using things outside of the written contract to make a claim. Verbal promises not in the contract will not be upheld by the court.
19
Q
Statute of Limitations:
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Legal concept that establishes time limits from the date of event for bringing certain kinds of legal actions
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The Doctrine of Laches: A
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legal principle used to bar dated claims; used in conjunction with an unreasonable delay or negligence in asserting or defending one’s rights
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Allodial System:
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System of ownership in which land is owned completely, without an obligation of services or duties to another
22
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Ownership Interest:
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An undisputed right of an owner to their property
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Security Interest:
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The right of a lender to claim ownership of a property if a borrower defaults on payments
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Equitable Interest:
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A secondary and lesser interest in a property than the ownership interest with which it is associated.
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Public land-use controls:
Government-issued land-use controls such as zoning ordinances, subdivision regulations, and building codes
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Private land-use controls:
Land-use controls that are put into place by non-governmental entities, such as real estate developers
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Public ownership of land:
The role of government to own and maintain public land such as streets, highways, and parks
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Due process of law is a
constitutional guarantee which blocks the government from impacting its citizenry in an abusive manner.
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Actual Damages:
Monetary compensation given to an injured party for losses that were a result of the actions or omissions of another party
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Liquidated Damages:
Sum of money established by the contract as compensation in the event of default
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Exemplary Damages:
Fines used to punish the breaching party
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Gross Lease:
A lease in which the tenant will be responsible for the payment of a fixed monthly charge, while the landlord is responsible for paying all operating expenses
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Net Lease:
A lease in which the tenant pays a base rent rate plus all or part of the operating expenses
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Percentage Lease:
A commercial lease in which the tenant pays a base rent amount and a percentage of their business profits to the landlord
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Variable Lease:
A leasehold agreement in which the base rent changes
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Graduated Lease:
A variable lease agreement in which the amount of rent increases periodically at regular intervals
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Index Lease:
A variable lease agreement that also allows for a graduated increase of rent at periodic intervals
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Ground Lease:
A leasing of bare, undeveloped land
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Sale and Leaseback Agreement:
A way for landowners to free up capital while maintaining the same overhead expenses by selling their interest in a property and leasing it back at the same monthly rate
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Express Acceptance:
When the parties explicitly state that they agree to the terms of the offer
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Implied Acceptance:
When the parties bound by the contract act in a manner that just implies acceptance of the offer; unenforceable in Texas
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Conditional Acceptance:
Acceptance based upon a specific condition or event happening
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Novation:
The act of substituting one contract for another
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Title Contingency:
Allows the buyer to verify that a home's title is clear of any liens or other issues before completing the purchase of the home
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Financing Contingency:
Requires that the buyer get approved for a loan before being able to complete the purchase of a home
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Inspection Contingency:
Gives the buyer the right to get the home inspected and negotiate further if there are repair issues
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Sale of Other Property Contingency:
Makes the transaction contingent on the buyer selling their current property first
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Time is of the Essence:
A phrase used to communicate when a party to a contract must perform their contractual duties by a specific date and time in order to avoid a breach of contract
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Civil Rights Act of 1968:
Federal act prohibited discrimination concerning the sale, rental, and financing of housing based on race, religion, and national origin, a.k.a. the Fair Housing Act
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Housing for Older Persons Act:
Established that a planned living community could require a minimum age for new residents
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Dodd-Frank Wall Street Reform Act:
Created a new consumer watchdog to prevent mortgage companies and payday lenders from exploiting consumers
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Consumer Financial Protection Bureau (CFPB):
Independent agency created under the Dodd-Frank Wall Street Reform Act to supervise financial companies, banks, and credit unions as well as enforce federal consumer financial laws
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Collateral or equity “stripping”:
The practice of making loans that rely on the liquidation value of the borrower's home or other collateral rather than the borrower's ability to repay.
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Inadequate disclosure:
The practice of failing to fully disclose or explain the true costs and risks of loan transactions.
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Risky loan terms and structures:
The practice of making loans with terms or structures that make it more difficult or impossible for borrowers to reduce their indebtedness.
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Padding or packing:
The practice of charging customers unearned, concealed, or unwarranted fees.
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Flipping:
The practice of encouraging customers to frequently refinance mortgage loans solely for the purpose of earning loan-related fees.
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Single-premium credit insurance:
The requirement to obtain life, disability, or unemployment insurance for which the consumer does not receive a net tangible financial benefit.
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Negotiable Instrument:
A transferable, written promise by a party to pay a specific amount of money
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Non-Judicial Foreclosure:
A foreclosure that does not involve a suit or ruling of the court
— the two types are power-of-sale foreclosures and strict foreclosures
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Equitable Redemption:
Occurs before the foreclosure sale (auction) of the property and allows defaulting debtors to pay the defaulted portion of the debt and prevent foreclosure
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There are four main types of foreclosure. They are:
Judicial foreclosure
Non-judicial foreclosure
Auction
Deficiency judgments
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There are two types of non-judicial foreclosures:
Power-of-sale foreclosures
| Strict foreclosures
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Some deeds of trust and mortgage documents contain a power-of-sale clause, which allows the lender to
bypass the courts and take possession of and sell a collateral property when the borrower defaults on their loan.
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some states (including Texas) allow strict foreclosure, where the lender
gives notice of the default, and, if it is not paid in some specified time period, the lender may foreclose on the property, eliminating the borrower’s redemption rights (both equitable and statutory).
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Lenders sometimes seek a deficiency judgment against a defaulted borrower, guarantor on a loan, or endorsers if a foreclosure sale does not
generate enough money to pay off the loan and cover the costs of the foreclosure.
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Deficiency judgments require the defaulted borrower to
pay any remaining balance owed to the lender.
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When deficiency judgments are not allowed, the debt is called
non-recourse financing.
Borrowers who obtain non-recourse financing are not personally liable for the loan. In the event of default, the only way for lenders to collect the remaining balance of a loan is by foreclosure.
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There are two types of redemption:
Equitable redemption (before the auction)
Statutory redemption (after the auction)
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Texas allows equitable redemption, but does not allow
Statutory redemption
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The initial step in any short sale is a
purchase & sale (P&S) agreement between the buyer and seller.
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In a short sale, the lender would typically agree to absorb the loss incurred on the difference between
the sales price and the amount they are owed on their loan.
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The other type of pre-foreclosure sale is a
deed-in-lieu-of-foreclosure sale.
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Another way that liens can be categorized is by the way they are created. There are three ways:
Consensual liens
Statutory liens
Judgment liens
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For anyone interested in real estate finance, it is imperative to understand the economic indicators and market characteristics of the residential real estate market. Some such indicators include:
Supply and demand of housing
Mortgage rates
Other indicators influencing the market
The monetary system
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The exchange rate is the amount of
foreign currency that a dollar can buy.
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Phillips curve, which states that high unemployment is correlated with deflationary pressures, and low unemployment with
inflationary pressures.
The point along the curve at which there is no pressure for either inflation or deflation is known as the NAIRU or non-accelerating inflation rate of unemployment.
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NAIRU or
non-accelerating inflation rate of unemployment.
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Real estate is recognized by most investors as a good
hedge against inflation.
That is, real estate investments are less likely than many other investments to suffer the ills of rising inflation.
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Homestead exemption:
property that is occupied by its owner as a permanent residence is considered a homestead and eligible for tax exemption.
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Disability exemption: People with
disabilities may receive a property tax exemption in certain states.
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The Community Reinvestment Act (cont.)
The CRA requires that
each government-insured depository institution act in good faith to meet the credit needs of its entire community.
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In Texas, a handwritten will created solely by the maker (and not witnessed) is called a
Holographic Will
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Once a will is made, it can be changed. That process is
called codicil.
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Inverse Condemnation:
Occurs when the government has over-regulated a property so that it can’t be fairly used via restrictions, permitting, etc., that virtually eliminate any use of the property
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Reversion:
A future interest in land that is created when a grantor transfers a qualified interest to another party for a specific amount of time, under the condition that the interest will revert to the grantor when that period expires
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Accession:
Refers to the acquisition of new land or real property by artificial or natural means
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intestate succession means
that because there isn't a valid will, a probate court of the state will distribute any property to the decedent’s legal heirs by the statute of descent and distribution.
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General warranty deed is a deed that offers five basic warrants:
Covenant of Seisin: the seller warrants that they are the owner
Covenant Against Encumbrances: the property is free of any liens
Covenant of Quiet Enjoyment: the title is good against third parties who might bring suit
Covenant of Further Assurance: where the seller promises to make good any problems with title
Covenant of Warranty Forever: if title ever fails, seller will compensate buyer
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special warranty deed.
only provides one covenant instead of five. Its covenant is that there are no liens (encumbrances) against the property during the time the seller owned the property.
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Quitclaim deeds
carries no covenants, guarantees, or warranties for the grantee, it is used to correct title issues.
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What basic steps occur in the process of recording, and why should documents related to real estate transactions be publicly recorded?
The prospective buyer or titleholder must submit the document (deed or mortgage) to the appropriate county office, where it is reviewed to ensure that the document conforms to relevant state laws. After the document has been reviewed, the office will collect any necessary fees, complete the proper forms and then copy the document, and enter it into the public record. Titleholders and prospective buyers should record all property-related documents to give the public constructive notice of their interest in a property and any alterations that are made to its title.
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How does an individual have a document acknowledged, and why is acknowledgement necessary?
To have a document acknowledged, a titleholder or prospective buyer should take the document to a notary public or another public official who is authorized to notarize documents. The notary public will verify that the signature on the document belongs to the titleholder or prospective buyer, and will show this verification by marking the document with their seal. Acknowledgement is necessary because the acknowledgement process helps to ensure that the signature on the document is authentic and that anyone signing the document is doing so voluntarily.
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What is the connection between public records and a prospective buyer’s duty to follow the maxim “caveat emptor”?
The maxim “caveat emptor” means let the buyer beware. It is the buyer’s responsibility to seek out publicly-available information regarding any property in which they are interested. Therefore, the buyer needs to research the property actively. While a seller is legally required to make some disclosures regarding a property, they do not have to disclose information that has been entered into the public records regarding a property. Thus, it is the buyer’s duty to discover what information is actually contained in the public records.
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Why is title insurance generally thought to be necessary?
Although prospective buyers and titleholders may take many precautions to ensure that a title has no defects or encumbrances, even the most careful research cannot ensure that a title is absolutely without defects or encumbrances. Title insurance protects the titleholder from any undiscovered problems with the title that occurred before they took possession of the title. The title insurance company offers compensation for any damages that the titleholder suffers as a result of these defects. We should note that the title insurance company assumes the right of subrogation and can sue the party responsible for the claim against the title.
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If their buying agent did their job, the buyer understood the need to negotiate sufficient option time to complete the following steps:
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Property inspection
Repair negotiation (if indicated by inspection)
Loan approval
Homeowner’s policy purchase
Appraisal and survey
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Title work is the umbrella term that
comprises all work a title company will do between the time a preliminary title report is done and the final step of issuing a title commitment.
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Good funds:
Funds a buyer is expected to bring to or have available for closing in a format acceptable to the title company
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The Loan Estimate Form is a three-page form given to
the buyer when applying for a mortgage loan.
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Effective Date:
The date the contract becomes binding between the parties
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Option Period:
The window of time during which a buyer can opt out of a contract without penalty; a right that is purchased by the buyer
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Legal Description:
Describes the property in such a precise and distinct manner as to unmistakably identify it from all surrounding properties
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What is the purpose of the statute of frauds?
The statute of frauds requires that specific contracts be in writing.
*It stipulates that all contracts that involve the sale or transfer of real estate, debts, specific obligations and the sale of goods (exceeding $500) be in writing. Contracts that cannot be completed within one year must also adhere to the statute of frauds.
The PURPOSE behind these stipulations is to ensure that fraudulent conduct does not occur and to prevent attempts to enforce invalid contracts.
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Why is it important to adhere to the statute of frauds and get all contracts in writing?
This prevents any future misunderstandings and clearly indicates to each party their role in the contract. If the parties have a detailed contract, they will not need to go to court to settle any disputes because they know that the terms of their contract will be upheld in a court of law. Parties cannot dispute a contract that defines its terms clearly. It is also easier and more convenient to have a written contract so that neither party can change the terms of the agreement without the other’s consent or back out of the agreement.
105
If an individual wishes to lease a property for a fixed amount of time but does not want to constantly have to renew the lease, what type of estate do they want?
A periodic estate allows the tenant to have a fixed lease period; however, at the end of that lease period, the lease automatically renews unless the landlord or tenant terminates it. Therefore, a tenant who wishes automatic renewal of their lease without notice should want a periodic estate.
106
What is the difference between an express contract and an implied contract?
An express contract is an agreement in which the terms are clearly stated (expressed). The parties who have entered an express contract understand the terms and obligations of the agreement. An implied contract, on the other hand, is an agreement in which the terms are not stated but are implied. In these scenarios, the actions of the parties create the contract.
107
What is the difference between a void contract and a voidable contract?
A void contract implies that a legal contract never existed.
A voidable contract, on the other hand, contains the essential components of an enforceable contract; however, one party may be bound to the terms of the contract, whereas the other may not. Often, in a voidable contract, one of the parties involved is either a minor or has been deemed mentally incompetent by a court. When this occurs, the minor or mentally incompetent person can withdraw from the contract at any time. The other party, on the other hand, may still be bound by the terms of the contract.
108
Why might a principal grant another party the power of attorney?
an individual (principal) will feel that they do not have the mental or physical capability to complete a specific transaction or make decisions.
There are three types of power of attorney: nondurable power of attorney, durable power of attorney, and springing power of attorney.
109
What are the differences between a leasehold estate and a freehold estate?
In a freehold estate, the property owner has actual possession and ownership of the property. They can occupy and own the property for an unspecified period of time.
In a leasehold estate, the tenant has actual possession of the property for a specified period of time, but they do not own the property.
110
Promissory estoppel is a
legal doctrine that forces a party to keep a promise and prevents them from backing out of an agreement.
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Endorsements:
Amendments to the standard coverage in the title policy
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Restrictive Covenant:
A type of encumbrance that restricts how a buyer could use the property they are buying
