SHORT
INTRODUCTION TO CALIFORNIA REAL ESTATE PRINCIPLES,
© 1994 by Home Study, Inc. dba American Schools
Chapter IV: Contracts
Educational Objectives:
Learn about Essential Elements of a Contract, Statute of Frauds, Interpretation,
Performance and Discharge of
Contracts, Statute of Limitations, Real Estate Contracts, Listings
Defined, The Purchase Contract and Deposit Receipt,
Residential Purchase Agreement and Receipt for Deposit Reproduction: page1; page2; page3; page4; pag 5, R. E. TERMS
GLOSSARY, INDEX.
CONTRACT LAW OVERVIEW
The major purpose of contract law is to assure
that a contract is properly formed and is binding on and enforceable by the
parties. Contracts constitute "binding arrangements for the future,"
and may be either written or oral. The existence of a contract imposes
obligations on the parties, and as a result, creates certain rights and/or
limitations for those parties.
Real estate brokers and associates live and
operate in a world of contracts, an integral part of their normal course of
business. During the workday life of the licensee, contracts come early, often,
and with great rapidity in even a simple sale of real estate. First, of course,
is the listing agreement. When an offer is made, the intricacies of the
contract of sale must be dealt with. At the same time, various contracts with
abstracters, attorneys, consulting inspectors, and other support services enter
the picture. Finally, closing brings more contracts to consider.
Contract law is often complicated for even the
most competent specialist and situations arise where the legal aspects of a
contract are not clear. It is imperative that each element of every contract be
understood by all parties. If there is any question, the advice of an attorney
should be sought. Real estate licensees should never risk loss by giving legal
advice beyond their competence.
A contract may be defined as an agreement
between two or more competent persons, having for its purpose a legal objective
wherein the parties agree to act in a certain manner. A contract may also be
defined as a voluntary agreement supported by legal consideration between
legally competent parties to do or refrain from doing some legal act. In
essence, a contract is a set of promises that courts will enforce.
In real estate practice there are many different
types of contracts, each of which must meet certain minimum requirements for
enforcement. The most commonly encountered contracts used in professional real
estate brokerages are listing contracts and contracts for sale.
In the discussion and study of contract law,
reference is often made to different kinds of contracts and their various
characteristics. These classifications are not all inclusive nor all exclusive.
Any given contract may be classified in more than one category at the same time.
A formal contract depends upon a particular form
or mode of expression for its legal status based on statutory requirements.
With certain exceptions, such as contacts under seal, negotiable instruments,
and recognizance, formal contracts no longer are used.
An informal contact is one for which the law
does not require a particular set of formalities. Virtually all contracts used
in real estate transactions are considered informal or ordinary agreements
which may use any style of language as long as they meet the basic common law
requirements for a valid contract. Although they may in fact be very
complicated, real estate contracts are usually considered "simple"
contracts.
A unilateral contract is one in which only one
party makes a promise which may be accepted upon the act of another. It is
generally considered to be a promise in exchange for performance. A unilateral
contract is "one-sided" because only the offeror, who makes this
promise, will be legally bound.
In a bilateral contract, both parties make
promises. It is a two-sided agreement wherein each party is both a promisor and
a promisee and is under duty to render a performance
and enjoys the right to receive a performance. This is the more common type of
contract in real estate. A sales contract whereby the owner agrees to transfer
title in exchange for the buyer's agreement to pay cash is a clear example of a
bilateral contract, the exchange of a promise for a promise.
A contract which is in the process of being
carried out is an executory contract. When both parties have rendered their
promised performance, the contract may be considered fully executed
(performed). A contract may be wholly performed on one side, but unperformed on
the other, or unperformed on both sides in whole or in part (partially
executed). A real estate sales contract is executory until closed.
A contract for sale of real estate does not
transfer legal title, but while a real estate contract is executory, signed by
both parties, the purchaser has equitable title. If the seller refuses to sell,
the purchaser after tendering performance can sue for specific performance and
has the right to demand that legal title be transferred upon payment of the
full purchase price.
Contractual liability may be developed in several
different ways. Where language is used to indicate an agreement in words (as in
a written contract for sales of real estate) or where words are not used but
actions manifest an assent to contract, the contract is referred to as an
express contract.
Implied contracts are distinguishable from
express contracts only in that the offer and/or acceptance are found from
conduct rather than expressed words. The law will imply a contact where neither
words nor actions expresses an agreement but where a person accepts and retains
the beneficial results of another's services which were rendered at their own
request and which they had no reason to suppose were gratuitous. Implied
contacts for the sale of real estate cannot be enforced.
Legal effect of
contracts
The legal effect of express and implied
contracts is the same. The only difference is the manner in which assent is
manifested. Both are consensual in that there is a voluntary acceptance of
benefits by one or both parties resulting in the creation of a contractual
obligation. Real estate brokers are well advised, however, to assure that all
contracts are expressed in writing in order to ensure enforceability.
A valid contract contains all the essential
elements of a contract and is legally binding on all parties.
A void contract is one that has no legal effect.
It is no contract at all. It is actually inaccurate to call such an agreement a
contract since a contract by definition is a legally enforceable agreement. A
void contract usually comes about as a result of the absence of one or more
essential elements of a contract. A contract entered into to burn down a
building, for example, is a void contract as the objective is illegal.
A voidable contract is one that is valid and
enforceable on its face but may be properly rejected by one of the parties. The
aggrieved party, however, must take action to have the contact voided.
An unenforceable contract may satisfy all the
basic requirements for a valid contract, but cannot be enforced in the courts
because of some statutory requirement or some rule of law.
Some contracts are "implied in law,"
not to be confused with "implied contracts" discussed above. Quasi
contracts are non-consensual obligations imposed by law to prevent unjust
enrichment of one person at the expense of another. A quasi contract is not a
contract as such, as it is not based on expressed or implied promises.
FOR EXAMPLE: A
broker ordered ten lock boxes for securing homes listed for sale. The vendor,
through an honest mistake, shipped 100 units which the broker used. Although no
contract existed for the excess items, the broker would be expected to pay for
them if they are kept.
The law
reasonably protects against improper suits resulting from quasi contracts.
These may be applied in a wide variety of situations, but in general, the
following hold.
1.
The amount recovered must be the reasonable value of the goods or services
rendered.
2. An
opportunist or an intermeddler who tries to force benefits upon another cannot
recover.
3. The
provider of the benefits must have expected to be paid. It must not have been
intended to be gratuitous.
No
"one absolute correct form" is required for a valid contract. Any
form used, however, should specify all the terms and conditions of the
agreement between the parties and must be signed by those to be legally bound
by the document. Seven
essential elements are necessary in a real estate sales
contract, the absence of any one of which will make a contract void, voidable,
or unenforceable.
1. There must be an offer and an
acceptance.
2. There must be reality of consent.
3. There must be legal consideration.
4. The parties must have legal capacity
to contract.
5. The object of the contact must be
legal.
6. The document must be in writing.
7. The property must have a legal
description.
In examining an agreement to determine
whether or not a valid contract has in fact been created, contract attorneys
scrutinize each element. The failure of any one results in a decision of
"no contract."
In addition to the above, other
provisions are usually included in a contract. Among these are:
1. Date of the agreement.
2. Terms of payment.
3. Special agreements or contingencies
between the parties.
Offers
The first element of any contract is an
offer, that is, a promise by one party, the offeror, to act or perform in a
specified manner provided the other party acts or performs in a manner
requested. An offer confers upon the offeree a legal power to accept. Upon
acceptance, a contract is created.
The agreement process begins when the offeror
makes an offer to another, the offeree. The offer may be accepted as presented
or a counter proposal may be made. Often there is negotiating back and forth
over the terms of the proposed contract before a firm agreement is concluded,
particularly in the sale of real estate.
If
an offeree creates any variance from the terms proposed in the offer in
accepting it, the initial offer has been turned down and a counteroffer is
being made. With each subsequent counteroffer, the offeree switches legal position
to offeror while the offeror becomes the offeree. If a seller does not want to
risk the loss of a sale, acceptance of an offer to purchase must be unequivocal.
For an offer to be considered legally
sufficient it must meet three requirements:
1. The offer must be serious (bona fide).
2. It must be reasonably complete and
unambiguous.
3. It must be appropriately communicated
to the offeree.
The offeror must intend that an offer
become a contract. Acts, words, and behavior should lead a reasonable person
familiar with the business being transacted into believing that a bona fide
offer has been seriously and voluntarily proffered. Statements made in jest,
under great stress, or through bluffing, are not tenders of offers.
When an offer is incomplete or vague and
the terms are unclear and uncertain, it cannot serve as the basis for a
contract. In law, the words did not rise to the status of an offer. The
requirements are not absolute certainty, however, but only a reasonable definiteness
and sometimes the terms are only implied. If the offer includes the usual
essential terms which are the names of the parties, the subject matter
involved, the price, and the time and place for performance, it will usually be
considered as having met the requirement. The requirement of definiteness
dictates the use of a legal description in a contract for sale of real estate.
An offer is not legally effective until
the party to whom it is directed has received it. If an offeree has no
knowledge of an offer, it has not been properly communicated and is therefore
not in effect. The requirement of communication of offers goes further in that
it must be communicated by the offeror personally or by an authorized agent. A
buyer who has learned that a property owner "will sell his house for
$75,000" cannot create a contract by saying to the owner, "I'll take
it."
A counteroffer is a response to an offer
which relates to the same subject matter as the original offer but differs from
it in one or more particulars. A counteroffer operates as a rejection of the
offer. In effect, it amounts to a conditional acceptance which the original
offeror, now the offeree, must agree to for a contract to be formed.
Any attempt on the part of an offeree to
change the terms proposed by the offeror creates a counteroffer. It has the
effect of a new offer, rejecting the original. The original offer cannot be
accepted thereafter by the offeree unless the offeror revives it by repeating
it.
Although there are exceptions, as a general
rule, offers may be withdrawn at any time and for any reason prior to
acceptance. This is so even if the offeror says the offer will be kept open for
a specified period of time. The power to accept continues until the offer is
terminated by some legally recognized method.
An offer may contain wording indicating
the time limit for remaining open. The offer is revoked if the offeree fails to
accept it within the prescribed time. In the absence of specifically stated
time, a reasonable period of time will be adjudged. After the time has expired,
any attempt on the part of the offeree to accept the offer simply constitutes a
new offer.
An offeror may withdraw a simple offer
for any reason (or without stating or having a reason) at any time prior to acceptance
by the offeree. Even if an offeror agrees to hold an offer open to acceptance
for a certain time, the offeror is generally not bound to do so.
If an offeree wants to be certain that an
offer will be held open for a certain period, the offeree must contract with
the offeror. In other words, the offeree must "buy" the time needed
by entering into an option contract.
Options are often simply part of another
agreement, such as options negotiated by lessees to buy leased premises. In
these cases, the options are part of the basic contract, and are supported by
the consideration of the basic contract. No additional or express consideration
is necessary for them to be binding.
The offer is terminated when the offeree
expressly states that the offer will not be accepted or if the offeree fails to
fulfill a condition prescribed by the offeror. Most frequently, however,
rejection comes in the form of a counteroffer which is a conditional acceptance
based on certain changes made in the terms. The original offer is rejected in
either case and is no longer operative. The original offer is dead and cannot
be accepted later unless revived by the offeror repeating it.
Although neither death nor insanity of
either party will terminate an executed contract, an offer will end upon the
occurrence of death or upon declaration of insanity of either party, regardless
of notice thereof.
Should the property subject to the offer
be destroyed or lost at no known fault of either party, the offer is terminated.
The offer is void if legislation is
enacted subsequent to the offer making it illegal. This is true even if the
offer has been accepted and a contract has come into effect. The executory
portion of such a contract cannot be enforced.
Acceptance
For a contract to be binding, it must
have a genuine acceptance as well as a bona fide offer. Acceptance of an offer
is essential to the creation of contact. The offeree must meet exactly all the
terms and conditions set forth by the offeror. No mutual consent is present if
negotiations are merely conditional.
When a valid offer has been properly
accepted, there is a "meeting of the minds." No contract exists
unless there is mutual consent or assent. Acceptance is both a matter of
intention and an overt act of manifestation. An acceptance must be both
positive and unequivocal. It may not change any of the terms of the offer, add
to, remove from, nor modify in any way the provisions of the offer.
In the case of a bilateral contact,
acceptance is some overt act by the offeree indicating an acceptance of the
terms of the offer, such as written or spoken words, or other action
communicated to the offeror.
Where an offer contemplates the formation
of a bilateral contact, the offeree must communicate an acceptance to the
offeror or at least place the acceptance in the ordinary channel of
communication in order to form a contract.
Where the offer consists of a promise in
exchange for an act, the formation and existence of the contract does not
depend upon notice being given to the offeror of the acceptance. Compliance by
performance of the requested act is sufficient. Performing the requested act
(or forbearance ) with the intention of accepting the offer is acceptance for a
unilateral contract.
Once an acceptance has been communicated,
the contract is completely formed and subsequent communications do not affect
it except for a mutual agreement to rescind or modify.
Reality of
consent
The consent of the parties to the
contract must be real before there is a contract. The terms of the contract
must reflect the true intention of the parties, i.e., what the parties have
reasonably indicated outwardly - not their secret intent. In order to be
recognized as a valid contract, the assent of the parties must be genuine and
free from mistake, misrepresentation, fraud, duress, menace or undue influence.
Depending upon the nature of a mistake,
the effect of a mistake on the validity of a contact varies. Innocent mistakes
serve to cancel agreements. Mistakes based on ignorance or poor judgment or the
fact that the contract had not been read before signing cannot be claimed as
material mistakes sufficient to terminate a contract. If a mistake is made in
the preparation of the offer, it is probably curable and will not affect the
contract. If the identity of one of the parties to the contract or the identity
of the subject matter is incorrect, the contract may not be void, but may be
voidable. A court may reform the contract. If, however, there is ambiguous
language which does not express the meaning or intentions of the parties, there
is no contract.
Should the contract be in violation of
law, it is void. However, if it is in the interpretation
of law and the contract is based on an erroneous conclusion, the contract
cannot be disavowed. It has been generally assumed that everyone knows the law
and failure to understand the legal consequence of signing a contract will not
bring relief. In more recent times, however, the presumption that everyone
knows the law is being given less weight.
When both parties contract in the belief
that certain conditions exist when in fact they do not, the contact is voidable.
An unknowing or innocent misstatement of
a material fact, without intention of deceit, can make a contract voidable at
the option of the party to whom the misrepresentation was made.
Any attempt to gain some unfair or
dishonest advantage over another will defeat the reality of consent and cause
the contract to be voidable, if not void. A defrauded party has the right to
collect damages or have the contract rescinded.
Contracts based on substantial
misrepresentation, the knowing and deliberate misrepresentation of material
facts, and done with the intent to deceive and possibly cause harm and injury,
are usually voidable at the option of the injured party. Failure to disclose
known defects ("remaining silent") can be considered fraud.
Misstatements based on opinion cannot be
construed as fraudulent acts. Exaggerated or superlative comments not made as
representations of fact, such as "this is a real good buy," are not
fraudulent. One test of "harmless trade puffery" is whether a
reasonable person would have relied on the statement,
Since the bargain theory of contracts is
fundamental to the free enterprise system, the law will not permit one party to
coerce another into an assent to an agreement. Duress is the use of force or
restraint to cause others to do something they would not do otherwise. Under
these conditions, there can be no genuine meeting of minds and such a contract
is not enforceable against the forced party.
Although menace is a mild form of duress,
and it is one of the bases for avoiding an agreement on grounds of defective
assent. Menace is compelling a person by wrongful threat of force to do or
agree to do an act. It includes the use of fear or threat of unlawful or
violent injury to any person, or threat of injury to the character of any such
person.
Overcoming freedom of will through unfair
persuasion is undue influence. It usually involves transactions resulting in
unnatural enrichment of someone because of their domination of another person.
Such unfair persuasion is usually an exploitation of such weakness as mental
infirmity, ignorance, lack of experience, old age, poor health, physical
handicap, emotional strain, or financial distress.
Undue influence most often results from a
relationship of trust and confidence between two persons wherein one is
justified in assuming that the other will be looking after the former's best
interest when the latter is actually violating the fiduciary relationship.
Legal
Consideration
A contract may meet all other
requirements to make it valid and yet fail because of lack of the technical
requirement of sufficient legal consideration. The concept of consideration is
not only difficult to define, it is also one of the most difficult concepts to
justify. Its roots go back to the beginning era of development of modern
contact law.
Consideration is something of value which
is committed by each of the parties to an agreement and without which the
parties cannot be held to their promise. Unless a bargain is reached in
exchanging something for something, a contract cannot be legally enforced. For
a contract to be formed, something must be given in an exchange. Our legal
system will not enforce a contact based on purely gratuitous promises.
Valuable consideration may be a mutual
exchange of promises by which the parties obligate themselves to do something
they were not legally required to do before. Consideration must have value.
There must be a reciprocal relationship between the offeror's promise and the
offeree's performance or return promise. Valuable consideration may be
property, time, service, the payment of money, other things of value measurable
in dollars, or simply a legal right.
Consideration may also be defined as a
legal detriment to the promisee bargained for by the promisor. Legal detriment
means that the promisee gives up or promises to give up a legal right, or
assumes or promises or assume a legal burden. In the normal course of business,
both parties suffer legal detriments and both enjoy legal benefits from
entering into a contract. In bilateral contracts, both parties incur legal
detriment.
The general trend in contract law is to
place more emphasis on the intent of the parties. Intent will determine whether
a detriment or benefit has resulted from the bargain, and whether consideration
is created, binding the parties to keep their promises. The determination of intent
is through the same objective standard applied to making and accepting an offer.
Most contracts are supported by valuable
consideration, distinguishing them from gifts. Good consideration (love and
affection, with no pecuniary measure of value) is sufficient to support a gift
deed, but is insufficient for most other contacts.
Love and affection may be compelling
motives for making a promise, but they are not words of bargaining. Because
such a contract is not supported by present consideration, courts may not
specifically enforce such a promise should the grantor have a change of mind
before performing. A completed gift is irrevocable while a gratuitous promise
is generally unenforceable. The grantee cannot enforce any covenants supported
only by good consideration against the grantor.
If the transfer was done to avoid
creditors, a contract supported only by good consideration can be set aside
because no money actually changed hands.
Nominal consideration is consideration in
name only, bearing no relation to market value. It may be used to disguise the
true value of the exchange, or may be as stated. A recital of obvious nominal
consideration would be: "$10.00 and other valuable consideration."
The law does not require adequacy of
consideration to find a contract enforceable. The value given to constitute
legally adequate consideration has no relationship to actual value. Once
consideration is found in a contract, courts seldom will inquire into its
adequacy or sufficiency. The law usually is not concerned whether the value of
one of the promises is equal in value to the other.
As a general rule, the recital of a
promise for a promise is sufficient consideration to create a binding mutual
obligation. Because the value of the exchange is involved, the fact that some
duty was exchanged for a relatively small amount or that one party got the
better of a bargain does not usually concern the courts. As long as the parties
to the contract appear to have equal bargaining capabilities, the value of
mutual consideration is not important. The law requires only that consideration
exchanged meet the definition.
A written
agreement that states consideration has been given is not conclusive proof that
consideration has been bargained and paid. Consideration must have some value
and must actually be given. Earnest money deposits are not intended to make a
purchase contract binding; they serve only as a source of payment for damages
in the event the prospective purchasers do not keep their promises and breach
the contract.
A nominal sum written into a contract
will not always suffice as legal consideration. The amount is not the issue but
whether or not actual consideration was given. In some states, "One dollar
in hand paid in consideration of X's promise to..." will not make the
promise enforceable. The recital of any payment may be interpreted as a promise
to pay and a binding contract is thereby created. Proof of legal consideration
in addition to that recited, such as forbearance of a right to bring a
justifiable law suit, would be sufficient. The burden of proof of lack of
consideration is placed on the party seeking to invalidate or avoid the
contract (instrument.)
Because consideration is something given in
exchange for a promise and to induce it, there must be present consideration to
support a contract. Past consideration is an attempt to support present
promises with a previously conferred benefit. A past event given as
consideration makes a contract unenforceable because the object of the contract
was not something bargained for. Anything that has occurred prior to the
promise cannot be consideration.
The content of the promise may determine
whether a bargained for promise constitutes adequate consideration. A promise
may be so worded that it is left up to the promisor to decide whether or not to
perform. It may be worded so that the promisor has an unrestricted right to
cancel the contract. Because such words in the promise do not obligate the
promisor, it is an illusory promise. There being no legal detriment to the
promisee, such consideration is legally insufficient. For example: "I will
sell you a corner lot when I plat my next subdivision" is, without more,
an illusory promise.
A promise which requires the commission
of a crime or which violates basic public policy is obviously illegal and will
void a contract. It is not always clear what does or does not violate statutes
designed to protect the public health and morals. A court decision may be necessary
to determine whether consideration given is legal.
An option must be supported by
consideration and, to be enforceable, must have all the elements of a contract.
A promise to pay a mere recital of
consideration alone is not sufficient consideration to exercise an option. An
exception is a lease-option in which the provisions of the lease are themselves
sufficient consideration to support the option.
All persons are presumed to have the
legal capacity to enter into contracts. Some, however, do not have the full
understanding of their rights nor the capacity to understand the nature,
purpose, and effect of a contract. These are considered in law not to have full
contractual capacity and are afforded some degree of special protection under
the law. Among them are minors, mental defectives and intoxicated persons.
The courts recognize that persons of
immature years lack capacity to compete on an equal basis with other persons,
so they have given minors the right to protect themselves against their own
lack of experience, judgment and ability. Although some minors have the
intelligence to comprehend the most complex of transactions, they need to be
protected from their immaturity, inexperience and tendency to buy impulsively.
Legality
The general rule of law is that any time
prior to attaining the age of majority and within a reasonable period
thereafter, nearly all contracts entered into by the minor may be avoided with
no liability. After reaching legal age, minors may ratify or approve their
previous contracts and will then be bound by them. A "reasonable
time" for affirming or disavowing a contract depends on conditions
surrounding the situation.
Adults are in the perilous legal position
of being liable for contracts which can be disaffirmed or canceled by a party
who is a minor. Since a contract with a minor binds both the minor and the
adult unless the minor elects to disaffirm it, a contract with a minor is not
void on its face, but is voidable. The burden is upon adults to ascertain that
the persons with whom they deal are of legal age.
Ratification is a manifestation of an
intention to be bound by a contract entered into during the period of minority.
Minors cannot ratify a real estate contract until they come of age, at which
time there are several ways to manifest ratification.
If the minor does nothing to disaffirm
the contract within a reasonable period of time after attaining majority, the
contract will be considered affirmed. Reasonableness of time will depend on the
situation. If the contract is executory, more time may be allowed than if the
contract is completed.
Upon reaching the age of majority,
persons may expressly declare their intention in words to be bound by a
contract entered into as a minor. The means of expression is not important. It
can be written or it may be made orally and no particular form of expression is
required. It must be more than a mere acknowledgment of the existence of the
agreement. It must be an indication of an intent to be bound by the contract.
The conduct of a person may imply an
intention to continue the responsibility attendant to the contract. For
example, if a minor purchases a home three months before reaching majority and
continues to meet monthly payments and reside therein after reaching majority,
the action would constitute ratification.
The major objective of the law in giving
a minor the right to avoid contracts was to protect the minor's estate from
dissipation during minority and did not include the requirement that the minor
return to the adult the consideration received. In more recent times, the
tendency of courts has been to have the minor place the adult in status quo,
that is, restored to the legal position prior to the contract. Upon rescission
of a voidable contract, the parties must return any consideration that was
exchanged. The minor owes the duty to return to the other party of the contract
any payment received and which he still has at the time of disaffirmance. The
minor is also entitled to recover all the payments made as well as the return
of any property still in the possession of the other contracting party.
There are several exceptions to the
general rule that minors may avoid their contracts. One is that contracts made
by minors to obtain necessaries are not voidable by minors and will be enforced
against them. Necessaries are those things personal to the minor, such as food,
clothing, shelter, medical care, elemental education, training for a trade, and
the tools of a trade, suitable for the minor's station in life.
In matters related to housing, minors who
are married have rights different from those of unmarried minors. Anyone who is
legally married and otherwise qualified may dispose of and make contracts
relating to real estate, regardless of age.
A minor cannot be held liable for damages
for loss of rent caused by the breach of a lease, but can be held liable for
the reasonable rental value of the premises during the time occupied, provided
it would be classed as a necessary and suitable to the minor's station in life.
Majority begins on a person's eighteenth birthday.
Legal procedures have been established to
provide "judicial emancipation" of minors. Upon petition by or on
behalf of a minor and a court hearing, a judge may find that removal of the disabilities
of minority is in the best interest of the minor and may declare the minor
capable of tending to affairs of business and competent to enter into contracts.
Under
the Emancipation of Minors Act emancipated minors are persons under 18 years of
age who have either entered a valid marriage or are on active duty in the US
armed forces and received a declaration of emancipation from a superior court
of the county of residence.
Mentally incapacitated persons are given
the same protection as that given to minors. Many incompetent persons have
never been adjudged as such and continue to function in business, freely
entering into contracts. Contracts of incompetents are voidable, not void.
Should the person be determined to have been incompetent at the time the
contract was entered into, affirmative action on the part of the incompetent
will be necessary to set it aside later. Since it is difficult to recognize the
affliction of incompetence, there is no effective way to avoid the problem
except through the exercise of good judgment.
Because the law cannot separate people
with unjust intent from those of good intentions, insane persons can avoid
contractual obligations. The contracts of persons judicially declared insane
are void and can never have any effect. Because the proceedings by which
guardians and conservators are appointed are a matter of public record, all
those dealing with an insane person or an adjudged incompetent are presumed to
know of that person's inability to enter into contracts.
The rules regarding the contracts of
persons under the influence of alcohol or other drugs are similar to those of
other persons lacking the capacity to understand the nature of a transaction.
The contract of an intoxicated person is usually binding, except where that
person is so intoxicated as to be incapable of understanding the consequences
of the transaction. In that case, the intoxicated person, upon regaining
sobriety, may ratify the contract or may disaffirm the contract and recover the
consideration given. In the case of disaffirmance, the other party must also be
returned to the same legal position as before the contract.
Legal counsel should always be sought
when entering into contracts involving any type of organization.
The contractual ability of a corporation
is usually determined by its charter and by-laws. Its capacity to contract may
be related only to specific matters or it may be related to broad areas of
business transactions. It is usually necessary to obtain copies of minutes of
corporate meetings showing that the transaction is authorized and indicating
who is empowered to sign for matters involving real property on behalf of the
corporate contractor.
A partnership cannot contract except
through a general partner. Each general partner has the authority to bind the
firm. Third parties dealing with a partner are entitled to rely on the
partner's representations of having authority even when a partner is exceeding
authority.
Unincorporated associations cannot
contract in the name of the association as they do not have a clearly
recognized legal status. They must be treated as a group of individuals with
each member of the association (or syndicate, or other designation) having the
legal capacity to contract. A contract entered into in the name of an
unincorporated association will bind the members who authorized the contract or
ratified it after it was negotiated.
Governmental units have no capacity to
conduct business of any kind unless they are specifically authorized by statute
to do so. They are strictly controlled by statutes and ordinances, so it is
important in dealing with any governmental unit to verify its authority to
contract.
Illiterate persons are considered
competent to contract. A contract signed by an illiterate is presumed valid
unless fraud or undue influence can be proved.
Legal rights of persons convicted of
felonies are suspended upon a sentence of imprisonment in a state penitentiary
for any term less than life. If sentenced to life imprisonment or death, rights
are completely taken away and they cannot enter into valid contracts, except
for the sale of their interest in real property. Parole restores a limited
series of civil rights, including the right to contract. All rights may be
regained when a full pardon is granted.
The objective of a contract refers to the
action the contract requires the parties to take or not to take. Legality of
objective implies that a contract must contemplate a legitimate purpose and
must not be contrary to law. Since all contracts must have a legal purpose, any
contract formed to accomplish an illegal end was never a contract and is void
from its inception.
The general rule is that a contract must
be legal in its formation and operation. Any contract requiring the violation
of a statute, the commission of a crime, or which is contrary to accepted
standards of morality, is illegal and void. There are, however, exceptions to
the rules and each case must be decided according to the facts. What in fact
constitutes illegality does not lend itself to a neat statement of legal
principles and may or may not be illegal depending on the circumstances.
Another general rule is that if part of a
contract is illegal, the illegal part taints the whole agreement and causes it
to be void. However, depending upon the seriousness of the illegality, the
courts may not require dismissal, especially if it causes severe penalty to an
innocent party. If an agreement is "divisible," the legal part can be
enforced concurrently with the voidance of the illegal part.
An infinite variety of situations give
rise to illegal objectives. In general, a contract will be illegal if
prohibited by statute, is in violation of the common law, or is contrary to
public policy. By necessity, these are addressed here in general classifications,
are not inclusive of all, and represent only a few of the possibilities within
categories.
Agreements
Illegal by Statute
An agreement is illegal if it comes
within a class of agreements made illegal by statutory law. Some statutes
expressly state that certain types of agreements are "illegal,"
"unlawful," or "void." This clearly indicates the intention
of the legislative body to make such agreements illegal. However, where the
intention is not expressed, it is not always clear whether the agreement should
be held legal or not.
Statutes in all states regulate or
prohibit wagering. A contract to lease a building for an illegal gambling
casino would not be enforceable. To create speculative risks where no risk
previously existed (wagering) is usually prohibited by statute, whereas a good
faith transaction of the commodity market is legal.
Regulatory agencies are established in
all states to protect the public and to require licenses for the practice of
professions. Any contract in which a person bargains to perform services
requiring a license or engages in a regulated business without first having
obtained a license for that purpose is illegal.
Anti-trust
laws are designed to maintain and preserve business competition. The Sherman
Anti-Trust Act specifically provides that "every contract...or conspiracy
in restraint of trade...is declared illegal.- Price fixing occurs when parties
conspire to set prices for rentals rather than let those prices be established
though competition on the open market. If a group of real estate brokers
creates a "fee schedule" of commission rates to which all must
adhere, there is a violation of the anti-trust laws. Agreements to allocate the
sales market and/or set commission rates are direct illegal restraints of trade.
Other types of trade restraint are not
covered by anti-trust legislation. A reasonable amount of restraint of trade is
acceptable under common law.
It is not unusual for a seller of a
business to enter into a contract agreeing not to compete with the buyer for a
given period of time.
Partnerships are sometimes dissolved
under the condition that the withdrawing partner is not allowed to start a
business in competition within a given time or distance from the established
business.
Employees are often required, as a
condition of employment, to enter into an agreement with the employer that upon
termination the employee will not compete by setting up a similar business or
go to work for a competitor.
Employees may agree not to reveal trade
secrets after leaving the company.
These provisions are valid provided they
are reasonable. As long as the public is not deprived of a benefit which could
result from the competition, the courts will usually enforce such restriction.
Although there is no rigid definition of
unconscionability, it is a legal doctrine whereby a court will refuse to
enforce a contract that is grossly unfair or unscrupulous at the time it was
made. Even though an unconscionable agreement does not constitute fraud or some
other traditional variety of illegal conduct, if it is offensive to the public
conscience, it may be held illegal.
Courts may refuse to enforce a contract
when there is evidence of undue influence exerted upon the principal or the
beneficiary on the part of the agent. When the personal interests of the agent
are enhanced in the transaction, it is considered immoral or unethical and
against public policy. In general, such agreements involving conflict of
interest are illegal unless there is full disclosure and the other parties
effectively consent.
An agreement to commit a crime or tort is
obviously illegal. A crime is a wrong to the public whereas a tort is a wrong
or injury to an individual or individuals. A contract to induce someone to
commit a criminal or tortious act is illegal and unenforceable. But a contract
which may indirectly aid or contribute to an illegal activity is not
automatically rendered illegal.
Provisions of a lease exonerating a
landlord from liability for injuries caused to the tenant by the landlord's own
negligence are known as exculpatory clauses and are contrary to public policy.
It is illegal to have two contracts
between the buyer and the seller for the same property with each contract
containing a different price, with the intention of submitting a fraudulent
contract to a lending institution to induce a larger loan. Such dual contracts
make the agent participant a party to fraudulent collusion and subject to
license suspension or revocation as well as to civil damages.
An agent cannot declare to the lender
that the earnest deposit was greater than it truly was, or delay in depositing
the earnest payment so that the assets of the purchaser will be inflated. A
broker cannot be a party to naming a false consideration by accepting an earnest
deposit in the form of a check while agreeing not to deposit it in an attempt
to mislead the mortgage company as to the financial resources of the buyer.
Good business practice calls for all
important and complicated business transactions to be reduced to writing. An
oral contract is as enforceable as a written one, except for those classes of
contracts thought to affect such vital interests that a writing should be
required as evidence of contractual intent.
When parties to an oral contract are in
full agreement on all terms, the contract is binding and enforceable in the
courts. Oral contracts, however, are subject to misunderstanding of the rights
and obligations of the parties and may be difficult to prove in a court
proceeding should a dispute arise. The terms are more easily forgotten than the
terms of a written contract, and are thereby more susceptible to the
perpetration of fraud by one seeking enforcement of a contract or terms that
never in fact existed. This was recognized centuries ago in English Law and has
evolved into "statutes of frauds" being adopted with minor variations
in all states. These laws are based on the general pattern of the 1677 English
statute called the "Statute for the Prevention of Frauds and Perjuries."
Certain contracts must be in writing to
be enforceable:
The following contracts are invalid,
unless the same, or some note or memorandum thereof, be in writing and
subscribed by the party to be charged, or by his agent:
An agreement for the leasing for a longer
period than one (1) year, or for the sale of real property, or of an interest
therein; and such agreement, if made by an agent of the party sought to be
charged, is invalid, unless the authority of the agent be in writing,
subscribed by the party sought to be charged.
The
Statute of Frauds can itself be used as an instrument of fraud for oppression
against persons ignorant of the writing requirement or lacking in bargaining
power to complete a writing. To prevent injustice which can arise from the
misuse of the writing requirement and to avoid unjust enrichment in statute of
frauds cases, an executed (performed) contract cannot be re-opened because it
failed to comply with all provisions of the statute. If an oral contract is
fully executed, both parties having completed their required performances, the
contract may not be set aside. It is a closed deal.
So
far as real estate licensees are concerned, the two main classes of contracts
covered by the statute are contracts for the sale of an interest in land and
leases not performable within a year.
Under
statutes of frauds, an oral contract for sale of real estate falling within the
scope of its provisions is unenforceable, not void or voidable. A contract for
the sale of real property, or which will affect any ownership rights or
interest therein, must be evidenced by a writing to be enforceable. Such
contracts provide evidence of an intention to enter a contract but are not the
instruments which actually convey title. Examples of instruments conveying an
"interest in land" are mortgages, easements, contacts to purchase or
to sell, contracts for the exchange of real estate, contracts for deed,
options, and leases (unless the lease is within a statutory exception for
short-term leases).
A
deed transferring title from a grantor to a specified grantee must be in
writing, not as a requirement of the statute of frauds, but for another reason.
A deed, although a contract, is not making a promise. It actually transfers the
interest and, when recorded in the public land records, gives constructive
notice of ownership.
The
dividing line between long-term and short-term contracts is one year. Except
for contracts for the transfer of interest in real estate, executory bilateral
contracts which can be performed within one year are excluded from the Statute
of Frauds. If the performance of the contract cannot conceivably occur within
one year, the contract is long-term, covered by the statute, and needs to be
evidenced by a writing to be enforceable.
Contracts
for the lease of real estate for periods of more than one year fall within the
Statute of Frauds. If a tenant has signed a lease, and has been accepted by the
landlord, the landlord may enforce the document even though the landlord may
not have actually signed the lease. The tenant in this case is the party the
landlord is "charging with performance."
The
one-year period begins with the time the contract is made, not the time it
becomes effective. A lease entered into on July 1 for one year, beginning July
3, is a long-term contract as it cannot be performed within a year of its
making. Since the law does not usually count fractions of days, a one-year
lease entered into on January 1 would begin on January 2 and run through
January 1 of the following year is still a short-term contract.
Where
there was an intention to reduce a contract to writing, the written contract
will supersede all prior negotiations and conversations relative to the
agreement. Words hand written on a printed form will prevail over
contradictions in the printed matter.
Any
modifications of contracts falling under the provisions of the Statute of
Frauds must meet the requirement of the statute to be enforceable. If the
parties mutually wish to cancel an enforceable contact in whole or in part,
however, an oral agreement can rescind any written contract.
Parol Evidence Rule
Parol
evidence, or oral evidence, applies only to writings. There can be no
application of the parol evidence rule unless there is a written contract in
which the parties intended to integrate all the terms of their agreement. The
purpose of parol evidence is to assure the certainty and security of
transactions by giving binding effect to a final expression of an agreement. It
is used to determine whether the writing was the complete and intended
statement of the contract.
It
is determined by a judge after oral testimony whether the contract properly
reflects the agreement or should be added to or modified per the intentions of
the parties.
Contract Performance
Performance
of contracts means that the parties have carried out the obligations imposed
upon them.
In
general, an executed contract is valid and binding upon the parties, their
heirs and assigns. Those entering into contract usually expect to render a
performance as agreed. In fact, the whole system of the business world depends
upon contracting parties abiding by the contacts they make.
The
most common means of termination of contracts is complete and literal
performance of the contractual duty in full. However, circumstance may vary
from that originally contemplated. Performance as first agreed may have to be
superseded by a subsequent agreement or an alternation in the initial contract.
Even
if the contract is not fulfilled in every particular, the full or literal
performance of all conditions may not be required. If the portion unfulfilled
was a promised performance, there can be damages for its partial breach.
Justice does not demand complete, literal fulfillment of all conditions, only
substantial fulfillment.
If
the contract is required to be completed "to the satisfaction" of the
other party and the "satisfaction" can be measured objectively, a
contract may be considered performed when performance meets the objective
standard.
Most
contracts will specify a time for completion of their terms. Many contract
forms will include the words "time is of essence" which means legally
that strict adherence to the time provision of the contract can be, but not
necessarily will be, enforced.
Unless
otherwise provided in a real estate contract, all of the contract terms are
merged into and superseded by the deed. In effect, a contract merges into the
deed and ceases to exist. If the seller wants any of the terms of the contract
to continue and survive the deed, a special survival clause must be inserted in
the deed. If the sales contract, however, calls for something to be done after
the closing, such as roof repair, the requirement would usually survive the
deed and be enforceable.
As
applied to contracts, discharge
means the termination of a contractual obligation prior to completion of
performance according to its terms. When the parties to a contract wish to put
an end to the contract without performing it, or with a view to performance in
a different manner, they may alter the performance obligations in some way.
If one party voluntarily relinquishes a
right under contract to require complete performance, strict performance has
been waived, relieving the obligor of the waived obligation.
When
both parties desire to alter or amend the original contract rather, than put an
end to it, they may resort to an "accord and satisfaction" which is
similar to creating a substitute contract. If the new agreement is reached
after the original contract has matured or after breach of the original
contract, the new agreement is called an accord. The acceptance by both parties
of a new contract in place of the old is called a satisfaction.
A
breaching party may be willing to complete the contract if more favorable terms
can be negotiated. If the other party will agree to voluntarily make certain
changes in the contract, a substitute contract will replace the old one. The
contract should be re-drafted and signed by the parties involved.
FOR
EXAMPLE: A signs a 5-year lease to pay $900 per month for an office. Three
years later he finds another location and wants to move. In the meantime, rents
for similar offices in the building decline to $600 per month. In order to keep
A, the landlord may be willing to reduce the rent to a price more in line with
the market value, on the condition A sign a new year lease.
Or
perhaps the rent for comparable office space has increased to $1,000 per month.
The landlord may be happy to cancel A's lease in favor of one to B for current
market value.
When
a tenant has an unexplained absence from a leased space for a reasonable period
of time after default in the payment of rent, the lease may be presumed
abandoned and the terms of the contract breached. The leasehold contract has
been terminated. In some jurisdictions, in the case of residential space,
statutes prescribe a specific time period. Whether or not there has been an
abandonment is a question of fact determined by the circumstances in each case.
A contract originally
contemplated cannot be performed when the promised performance is literally no
longer possible. Should the contractor delivering personal services die or have
an incapacitating illness before the performance was due or completed, the
contract could be discharged on the grounds of impossibility. Other
circumstances relating to this category would be destruction of the property or
the source of supply essential to the performance, or changes in the law
(intervening illegality) declaring the performance illegal.
In the absence of an agreement otherwise, the
risk of loss does not pass from the seller to the buyer until either legal
title or possession has passed to the buyer. Once title or possession has
passed, the buyer is responsible for subsequent losses. The act covers
situations in which all or a material part of the property is destroyed.
When one of the parties encounters exceptional
circumstances considered substantial, unforeseen and unforeseeable, the
contract cannot be enforced. If the problem could have been anticipated, the
obligation is legally enforceable. For instance, bad weather, excavation
problems, and rising prices can be expected, while an unprecedented flood or a
terrorist's bombing cannot be foreseen.
When performance once sought by an
obligee is no longer of value to the obligee, cancellation of the contract may
be sought. Even though the performance is possible and legal, changed
circumstances no longer provide the purpose intended causing frustration of
purpose.
FOR EXAMPLE: A party rents an apartment
along Park Avenue because it provides an excellent view of a ticker tape parade
for the returning football team victorious in a bowl game. The apartment had
been advertised and offered for one day for that purpose by the apartment
owner. However, a blizzard of unusual proportions strikes the state and the
parade is cancelled. The purpose in contracting for the use of the apartment is
frustrated and the contract may be terminated.
Performance may also be excused where the
fulfillment of the contract has become impractical. Unforeseen developments,
such as great expense, injury or loss for the promisor can lead to
cancellation, as well as when the benefits of the promisee have little or no
further value.
Sometimes contracts are discharged by law
without regard to the will of the parties. Due process is always provided, but
circumstances surrounding the contract may result in its cancellation by
operation of law. Such discharges include, but are not limited to, the
following examples:
Contracts merged or fused into subsequent
agreements are discharged by superseding contracts.
Unknown
and unauthorized alterations made in a written, signed contract can result in
its termination.
A
discharge of responsibility may result from bankruptcy when the court releases
the debtor from contractual obligations.
The statute of limitations provides that,
after a statutory number of years, a definite cutoff point is reached in
bringing certain legal actions. The law is intended to aid the vigilant. In
theory, if the true owners of property are not interested in protecting their
property, neither are the courts. In these times of rapid transportation and
instant communication, property owners do not need an extended period of time
to know what is happening to their property in order to take legal action to
protect their rights.
The doctrine of laches does not provide a
statutory period of time but recognizes an unreasonable delay in bringing
action. It will not permit the enforcement of certain legal rights beyond a
time determined to be reasonable by reasonable persons in the business. A common
sense way to express it is, "You cannot sit (or sleep) on your rights."
Remedies for
breach
Both the promisor and the promisee have a
number of remedies in the event of an unexcused failure of the other party to
perform a required contractual obligation. The most commonly sought remedies in
lawsuits for breach of contract are legal remedies (damages) and equitable
remedies (specific performance and rescission). The circumstances and law of
each transaction determine the best legal action.
The law requires the court to examine
four areas before a plaintiff may successfully collect for a breach of
contract. The first test is cause; the damage must be caused by the breach. The
second is that the amount of damages must be reasonably ascertainable. Thirdly,
the damages must have been reasonably foreseeable when the contract was
performed. Finally, the injured party must mitigate the damages to reduce loss.
The requirement of mitigation, for example, requires a landlord to make a
reasonable good faith effort to lease space when a tenant has moved out in
violation of a lease.
The rationale for contract damage awards
is that parties are entitled to damages for their loss of expectancies. An
injured party is entitled to be placed, as nearly as practicable, in the
position which would have been achieved if the contract had been performed as
agreed.
The broad classes of damages awarded by
courts as remedies for breach of contact injuries are compensatory,
consequential (or special), liquidated, punitive, and nominal.
Plaintiffs usually seek money to
compensate for harm sustained as a result of a breach of contract. Where the
payment of money is an adequate substitute for the performance promised by a
breaching party, a judgment for damages is the sole remedy. The amount of
damages sustained from a breach of contract must be proven within a reasonable
degree of certainty, as noted above.
Consequential or special damages are
damages which a plaintiff seeks in order to recover loss indirectly caused by
the breach of contract.
Most real estate sales contracts include
a liquidated damages clause which allows the contracting parties to receive a
stipulated amount to be paid as the sole remedy in case of breach by the other.
If the sum agreed upon (usually the amount of the earnest deposit) was
reasonably proportionate to the probable damages which would result from the
anticipated breach, such a clause is valid and enforceable by the injured party.
It is difficult and impractical to
accurately predetermine liquidated damages. If the damages agreed to in the
contract are excessive, the liquidated damages clause is unenforceable.
Where extreme circumstances justify
penalizing the defendant, courts sometimes award damages to an injured person
which are vindictive and exemplary. The award is not intended to repay the
injured party for actual losses suffered but is designed to punish the
perpetrator. Punitive damages may be statutory in nature. For example, treble
damages are authorized by federal law in restraint of trade cases.
When a court or jury finds that there was
technically a breach of contact in which no significant pecuniary loss was
sustained, damages may be awarded in a token amount, such as one dollar.
In some situations, courts will conclude
that money is insufficient to make all parties "whole" again. Typical
equitable remedies include specific performance and rescission of agreements.
As land is a unique item, when parties
bargain for a specific piece of property, they are not required to substitute
another. Based on the premise that no two pieces of real estate are exactly
alike, the doctrine of specific performance requires performance in strict
accordance with the terms of the contract. Money is not an adequate substitute
for land as money cannot replace a piece of land identical to the parcel under
contract. As damages cannot therefore be established in terms of mere money,
the promised act must be completed as promised and the contract specifically
performed. To use specific performance as a remedy, the plaintiff must show
that the contract as to the defendant is just and reasonable.
Innocent parties are allowed to withdraw
from contracts if induced to enter into a contract by fraud or
misrepresentation. By rescinding such contracts, parties may legally withhold
the performance of an obligation. Those legally incompetent to contract may
rescind their agreements.
(The following is reprinted by permission
from the CalBRE Reference Book, p.147-148, 621-647)
A listing is a contract by which a
principal employs an agent to do certain things for the principal. Therefore an
agent holding a listing is always bound by the law of agency and has certain
obligations to the principal that do not exist between two principals. The most
common forms of listing agreements are described in the following paragraphs.
Open
Listing.
An open listing is a written memorandum signed by the party to be charged
(usually the seller of the property) which authorizes the broker to act as
agent for the sale of certain described property. Usually no time limit is specified
for the employment.(Although open listings can provide for a definite term. )
The property is identified by a suitable description, and generally the terms
and conditions of sale are set forth.
Exclusive Agency Listing. An exclusive
agency listing is a contract containing the words "exclusive agency."
The commission is payable to the broker named in the contract and if the broker
or any other broker finds the buyer and effects the sale , the broker holding
the exclusive listing is entitled to a commission.
Note: If a broker other than the broker
holding the exclusive agency listing is the procuring cause of the sale, the
owner may be liable for the payment of two full commissions provided the
procuring broker has some type of written agreement with the seller. It is to
be noted that the listing refers to an agency and as the owner is not an agent,
the owner may personally effect the sale without incurring liability for
commission to the broker holding the exclusive agency listing.
Exclusive Right to Sell
Listing. Another form of listing is the "exclusive right to sell. "
Under such listing, a commission is due the broker named in the contract if the
property is sold within the time limit by the said broker, by any other broker,
or by the owner. Frequently such contracts also provide that the owner shall be
liable to pay a commission, if a sale is made within a specified time after the
listing expires, to a buyer introduced to the owner by the listing broker
during the term of the listing. The real estate broker is usually obligated
under the terms of the listing contract to furnish a list of the names of
persons with whom the broker has negotiated during the listing period within a
specified number of days after the expiration of the listing.
The "exclusive right" and the
"exclusive agency" type of listing must be for a definite term, with
a specified time of termination. If a licensed broker does not provide for
this, the broker is subject to disciplinary action against broker's license, under
the California Real Estate Law.
Multiple Listing Service. A multiple
listing service is a cooperative listing service conducted by a group of
brokers, usually members of a real estate board. The group provides a standard
"multiple listing" form which is used by the members. It is usually
an "Exclusive Authorization Right to Sell" listing form, and
provides, among other things, that the member of the group who takes the
particular listing is to turn it in to a central bureau. From there it is
distributed to all participants in the service and all have the right to work
on it. Commissions earned on such listings are shared between the cooperating
brokers, with the listing broker providing for the division of commission in
each listing sent to other participants.
When Broker is Entitled to Commission.
Ordinarily the broker is entitled to a commission when the broker produces a
buyer, ready, willing and able to purchase the property for the price and on
the terms specified by the principal, regardless of whether the sale is ever consummated.
Contracts may expressly provide that no commissions are payable except upon a
completed sale or on an installment of the purchase price when paid by the
buyer, and such a provision controls in the absence of fraud or prevention of
performance by the principal. The broker must be the procuring cause of the
sale; it is not sufficient that the broker merely introduces the seller and
buyer, if they are unable to agree upon the terms of the sale within the time
period of the agency.
The broker may, however, have a cause of
action for the payment of commission under the listing contract if the property
is sold to the buyer introduced by the broker after the listing has expired.
Deposit Receipt
Generally California brokers use a
deposit receipt when accepting "earnest money" to bind an offer for
property by a prospective buyer. This is a very important instrument in the
typical real estate transaction. It is a receipt for the money deposited, but
more importantly it is customarily the basic contract for the purchase and sale
of the real property involved.
Agent Must Give Copies of Contracts. The
real estate license law provides that brokers and salespersons must give copies
of documents and agreements to the persons signing them at the time the
signature is obtained. The law not only applies to copies of listing contracts
and deposit receipts, but to any document pertaining to any of the acts for
which one is required to hold a real estate license.
A
tender in a real estate transaction is an offer by one of the parties to the
contract to carry out that party's part of the contract. A tender is usually
made at the time of the closing of title (i. e. , concluding the
transaction).If, at closing of title, one of the parties defaults or is unable
to carry out his or her contractual obligation, and the other party is ready to
close, the latter makes the tender. If the latter is the seller, then the
seller offers the deed to the purchaser , and demands the payment of the
balance of the purchase price.
If
the latter is the purchaser, the purchaser offers the amount of money required
in accordance with the provisions of the contract, and demands the deed from
the seller.
The listing Agreement
The
Exclusive Authorization and Right to Sell form is a listing for sale of one or
more specifically described parcels of real property. For all forms turn to
Appendix Beach clause of the listing form deserves careful consideration by the
owner and the licensee who are prospective parties to the contract.
1.
Right to Sell. The correct name of the agent's firm should be inserted. If
agent is operating under a fictitious name, this should be used. A listing must
have a definite term. Writing out or abbreviating the names of the months is
preferable to using numerals. The term of the listing ends at midnight on a
specified day of a month.
2. Terms
of Sale. Insert the agreed-upon listing price. The minimum requirement for
setting forth the terms of a sale, where cash is acceptable to the owner, is to
express the price in cash.
If
the sale may be financed by a VA or FHA loan, details of the owner's conditions
with respect to the payment of points should be spelled out.
Where
a first loan can be assumed or legally "taken subject to," with the
owner willing to carry secondary financing, the specific terms of the proposed
secondary financing should be set forth.
Personal
Property
3. Multiple
Listing Service (MLS): This paragraph provides that the listing will be
submitted to the multiple listing service where information about the property
will be disseminated to authorized members, who as sub-agents of the Broker
also elicit the interest of potential buyers for the property.
4. Evidence of
Title. This paragraph designates the person who under local practice normally
pays the title insurance fee.
5. Compensation.
The statutory language in 10-point bold type regarding the negotiability of
real estate commissions is also contained in this section of the form.
6.
Deposit. Authorizes the agent to accept and hold a deposit.
7. Home
Protection Plan. Informs seller of the availability of coverage, although not
required by law.
8. Keybox.
Authorizes the agent to place a key repository on the listed property.
9.
Sign. Authorizes the placement of a sign on the property.
10. Pest Control Provides
that the seller will or will not provide a report.
11. Disclosure. This clause
acts as a reminder of the statutory duty of certain owners to provide buyers
with the Real Estate Transfer Disclosure Statement. The provision also contains
a hold harmless protection clause in the event of seller's failure to make full
disclosure.
12. Tax Withholding. See
discussion of the Purchase Contract under Item 14 below.
13. "Civil
Rights" Clause. This is the "civil rights" clause of the
agreement, in compliance with federal and state laws. The clause is prima facie
evidence of nondiscriminatory intent.
14 Arbitration. This
provision if initialed by the broker individually, or by the broker's
authorized associate licensee and all sellers constitutes an agreement to refer
all disputes or claims "in law or equity" arising out of the listing
or any resulting transaction to binding arbitration. The Notice and waiver
wording is required by statute.
15. Attorney's Fees. Calls
for reasonable attorney's fees to prevailing party.
16. Additional Terms.
Provisions not covered earlier could include date for possession,
"rent" for property when possession is delivered on a date other than
closing day, repairs to be made by owner, termite work, and so on.
A
change of price or terms of the listing should never be made on the face of the
original contract, but on a price change or extension of listing form.
17. Entire Agreement.
Guards against verbal agreements. Owner Signatures. Date the agreement and have
all owners sign the listing. If the property is owned by a partnership or a
corporation, the proper officials should sign. Be sure to give the owner a copy
of the agreement.
Agent
Signature. When the listing is signed by an authorized licensee member of the
broker's staff or by the broker himself, it becomes a bilateral contract, i.e.,
a promise for a promise. The broker's obligation under the agreement is to be
"diligent in endeavoring to obtain a purchaser."
The Purchase
Contract and Deposit Receipt
That part of the Real Estate Purchase
Contract and Receipt for Deposit above the word "ACCEPTANCE"
constitutes only the buyer's offer and a receipt for buyer's deposit. With the
seller's acceptance and communication thereof to the buyer it becomes a
purchase contract on the terms and conditions of the total agreement. If
properly completed, the acceptance clause also becomes a final employment
contract between the seller and the broker, fixing the exact amount of
compensation due the broker upon the occurrence of certain events.
The Purchase Contract and Receipt for
Deposit point for point discussion:
Line 1. Insert the name of the city where
the buyer actually signs the offer to purchase. In inserting the date, do not
abbreviate.
Line 2. The full name(s) of the person(s)
to whom the receipt for deposit is given should be stated here. Designations like
"husband and wife," "unmarried woman," etc. may be valuable
for identification.
Line 3. The amount of the deposit should
be written in both letters and figures in the appropriate space. If the listing
agreement prescribes a minimum acceptable deposit, the broker should, of
course, have obtained that amount.
The broker must also achieve a meeting of
the minds of the principals on the amount of liquidated damages, if any, in
event of the buyer's breach of contract by appropriate initialing when required
in paragraph 16. The amount of the deposit assumes added significance in
contract forms which include the liquidated damages clause.
Page 1 of 4, Lines 7 and 8. The property
should be described with sufficient detail as to be readily identifiable. For urban
property a street address may be adequate. Other parcels may either be
identified by a metes and bounds description or by block and lot number.
In newer tracts, the description commonly
is given by reference to an officially recorded map. Reference to a preliminary
title report is also acceptable, as follows: "Land and improvements
commonly known as Street, more particularly described in the attached
preliminary title report No. issued by Title Company. Said
property consisting of a 12-unit apartment house."
Country property is often sold as
containing "140 acres more or less." Such a sale is "in
gross" and not "by the acre." An unreasonable difference in
actual acreage is material, and goes to the essence of the contract. Reference
to a current survey is a preferred method of describing the property.
1. Financing-Terms of Sale
The following checklist indicates the
elements of a clear and concise "terms of payment" clause:
The amount of increased deposit, if any.
The amount of total cash down payment.
When down payment shall be paid.
The amount of loan or loans expressed in
dollars or in percentage of price.
The length of the loan or loans (unless
this can be determined from the amortization rate set out in the contract).
The rate of interest on each loan and
whether it is variable or renegotiable or fixed.
The amount of periodic payment and its
mode of payment (monthly, quarterly, semi-annually, or annually).
Whether the periodic payment includes
principal, interest, taxes, and insurance.
Prepayment charges, if any.
Loan charges, if any, setup charges,
assumption fees, and points.
Specific clauses used in FHA loans or VA
loans.
Whether or not sale is conditioned upon
buyer's ability to obtain a specified loan within a period of time.
Whether an existing loan is to be
formally assumed (and at what interest rate) or "taken subject to."
Whether seller is to take back a mortgage
loan and any specific provisions concerning such "purchase money"
mortgage.
Where the broker acts as an
"arranger of credit" in a sale of residential property containing no
more than four units and "arranges" for the seller to carry back
financing, both buyer and seller must be provided with a Seller Financing Statement
containing the information required by Civil Code Sections 2956? 2967.A
Mortgage Loan Disclosure Statement must be delivered to the borrower (buyer)
where a broker for compensation negotiates or arranges for a loan to be secured
by a lien on a residential property containing four units or less.
Additionally, any compensation paid a broker from a lender must be disclosed to
both buyer and seller pursuant to Commissioner's Regulation 2904.
Seller
agrees that prior to date set for closing seller will at seller's own cost and
expense repair and properly fix the following:(itemize)
Item
1. Notice that obtaining the stated financing is a condition of the contract.
Item
1.F. Seller assisted financing calls for exact terms. In addition to the
preprinted terms, seller financing may include: "balloon payment",
paydowns on principal at certain intervals, one time transfers, discount for
prepayment, right to move loan to other security etc..
Item
1.J. Here the buyer agrees to diligently and in good faith obtain applicable
financing.
Item
3. This section serves to incorporate any supplements and addendums into the
purchase contract.
Item
4. This section names the escrow holder, provides for the number of days to
close the escrow, and specifies how the escrow fees will be paid.
Item
5. At the time of drawing up the offer, brokers sometimes do not have
sufficient information about the status of the title to the property. This is
something that should have been learned at the time the listing was taken. The
use of a form under which a buyer is to take title "subject to easements,
restrictions, covenants, and conditions of record" should be avoided.
Item
6. The vesting of title clause has the caveat: "The manner of taking title
may have significant legal and tax consequences. Therefore, give this matter
serious consideration."
Item
7. This is the proration clause. For income property where other expenses of
the property are often prorated, it should continue with "and other expenses
of the property." Where security deposits exist, it is better to insert in
paragraph 1. a sentence such as: "Security deposits shall be credited to
buyer." The proration cut-off date should be inserted by using one of the
two given alternatives, either the day of recordation or another specific date.
Item
8. If the seller is to remain in possession after closing, care should be taken
to use an "occupancy agreement after sale" that does not make the
seller a tenant.
Item
9. This clause obligates the seller to deliver all keys, garage openers and
means to operate alarms to the buyer.
Item
10. If only a few items of personal property are included in the sales price,
these should be enumerated in this paragraph. A separate personal property
addendum should be prepared and incorporated into the sales agreement if the
list of personal property is extensive.
Item
11. The list of fixtures in this paragraph covers most fixtures common to
residential property.
Item
12. Smoke Detectors. Licensees should be familiar with local ordinances
regarding smoke detectors.
Item
13. A transferee (Buyer) of residential real property improved with one to four
units is entitled to receive from the seller a statutory Real Estate Transfer
Disclosure Statement.
Item 14. Tax
Withholding. To force foreign investors in U.S. real property to pay taxes on
disposition of that property as U.S. investors, in 1980 Congress passed the
Foreign Investment in Real Property Tax Act (FIRPTA). A transferee of a U.S.
real property interest must assume that the transferor is foreign, until it is
established that the transferor is a U.S. person (IRC 1445 (f) (3) ).
A buyer acts at his peril if he simply
assumes that the transferor is a U.S. person and therefore fails to obtain an
appropriate certificate. Legal advice should be sought if there is the
slightest doubt regarding the status of the seller? transferor's status.
Item 15. This clause provides
authorization for disclosure to members of a multiple listing or sales service
of the sale, price, terms and financing of the property.
Item 16. This provision contains eleven
optional clauses. Only those which both the buyer and seller agree to include
by initialing individually are incorporated into the agreement.
16(A). Physical and Geological
Inspections. Gives the buyer the right to have appropriate experts inspect the
building.
16(B). Condition of Property. This clause
obligate the seller to maintain the property in the same condition as when the
contract was signed. This warranty continues until physical possession is made
available to the buyer. Seller also warrants that the roof is free of all known
leaks and that the various utility systems and built-in appliances are
operative.
16(C). Seller Representation. The seller
should be carefully interviewed at the time of the listing with regard to any
official notices received from any government agency regarding the legality of
the property.
16(D). Pest Control. Effective July 1,
1988 Structural Pest Control Companies must upon request divide their reports
into two divisions: Section 1.Infestation or infection which is evident, and
Section 2. conditions that are present which are deemed likely to lead to
infestation or infection. The clause conforms to these divisions and gives the
parties an election as to which party shall be responsible for any recommended
repairs.
16(E). Flood Hazard Zone Disclosures. If
the property is located in a "Flood Zone", the parties are informed
of the requirement for flood insurance.
16(F). Special Studies Zone. This
paragraph should be initialed whenever a property is located in a zone where
construction or development of any structure for human occupancy is subject to
a geological report.
16(G). Energy Conservation Retrofit. This
paragraph refers to any local ordinances which demand compliance with minimum
energy conservation.
16(H). Home Protection Plan. Such plans
are popular in many areas. This clause provides space for insertion of the
designated party to pay for the plan. If the parties do not want to buy such
plan, the waiver should be filled out and initialed.
16(I). Condominium/P.U.D. In this
paragraph the seller's duty to deliver certain information and documents in the
sale of condominiums and planned unit developments are set forth.
16(J). This paragraph contains the
liquidated damages clause.
If the parties leave the blanks in this
clause open it signifies that they in fact chose to abolish any thought of
liquidating damages. Should the Buyer default, the Seller has the option to sue
for specific performance or to prove actual damages. If the parties chose to
initial the boxes, the provision purports to entitle the Seller to retain a
deposit of up to 3% of the purchase price as liquidated damages if the Buyer
defaults.
16(K). Arbitration. The arbitration
clause affects the remedy the parties to the transaction will have if the
contract fails. In approving the arbitration clause, the parties agree in
advance to give up their right to a court or jury trial and their right to
appeal any decision that might be rendered by the arbitrator(s).
Item 17. Other terms and conditions. Use
this space for provisions of the contract not found in the printed text. If
insufficient space insert: "See addendum ( # ) incorporated herein by
reference".
Item 18. Attorney's fees. The prevailing
party whether in a court action or arbitration is entitled to reasonable
attorney's fees and cost as determined by the court or arbitrator.
Item 19. Entire Contract. This clause is
designed to exclude introduction of evidence of any oral agreement which would
vary the term of the contract. It does not preclude the introduction of
evidence regarding fraud or misrepresentation. The clause also includes a
"time is of the essence clause" to indicate the performance of any act
under the agreement shall take place on the date indicated.
Item 20. The captions in the form are not
intended as part of the agreement, but for identification purposes only.
Item 21. Agency Relationship
Confirmation. At the time of the buyer's offer confirm the appropriate agency
relationship. The name of the "agent" to be inserted here is not the
name of the associate licensee, but the name of the employing broker.
Item 22. The caveat that amendments,
modification and alterations must be made in writing executed by the buyer and
seller is included in the contract form to guard against verbal agreements. The
licensee should always get the parties' written consent to extension of time or
other modifications. It avoids annoying misunderstandings.
Item 23. The last clause in the offer
part of the contract, establishes that the instrument is the buyer's offer to
purchase the described property. The balance of this clause sets forth the mode
of acceptance.
Insert broker's name and the
salesperson's signature, the office address, and telephone number. It may be
desirable to include a residence telephone number.
Obtain the buyer's signature. Get both
the buyer's home and business addresses and telephone numbers to make it easier
to deliver the accepted copy of the deposit receipt. Watch for authority to
sign by partnerships and corporations. Buyer must receive a copy when the offer
is signed.
Seller's
Acceptance
The balance of the contract contains the
acceptance provisions. The seller agrees to the confirmation of the agency
relationship as set forth in Item 21.Space is provided to make the acceptance
of the offer subject to a counter-offer. The contract provides for attorney's
fees and costs to the prevailing party in disputes between seller and broker.
Business and Professions Code Section
10147.5 requires in the sale of one-to-four residential units, including a
mobilehome, that "any printed or form agreement which . . . initially
establishes, or is intended to establish . . . a right to compensation to be
paid to a real estate licensee . . .shall contain" what is often referred
to as a "commission negotiability statement."
Where no prior listing agreement exists
covering a sale of one-to-four residential units including a mobilehome, the
REAL ESTATE PURCHASE CONTRACT AND RECEIPT FOR DEPOSIT becomes the printed form
which initially fixes the compensation. Differently worded purchase contracts
covering the various individual types of real property are available.
Don't forget to fill in the space
indicating the total number of pages in the contract and to have all the
elective clauses in Item 16 initialed by the seller, (as well as the buyer) if
they are to be included in the agreement.
Counteroffers
The Real Estate Purchase Contract and
Receipt for Deposit is designed specifically for the straightforward
transaction. The buyer makes an offer and the seller accepts it. If the seller
chooses not to accept the offer, the seller may wish to keep negotiations open
by submitting a counteroffer, setting the scene for the employment of a
counteroffer technique by the broker.
If the counteroffer includes a price
change, it is most practical not to insert the commission amount in terms of
dollars, but rather as " percent of selling price." Remember to have
the seller initial this change on the face of the contract and sign both the
acceptance clause and the actual counteroffer.
(End of the CalBRE Reference Book excerpt)
