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.
Quasi contracts are obligations created by law (in the absence of any agreement between the parties) as a method of giving a remedy in the nature of contract relief. A quasi contract might be imposed in a circumstance in which one has received and retains money or goods which in fairness and justice belongs to another. They are used to fill the void where no consensual contract liability exists.
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.
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.
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.
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.
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 primary purpose of the Statute of Frauds is to require reliable evidence that an alleged contract was indeed entered into. A principle it serves is to minimize the possibility of a court being tricked into improperly ruling on matters involving real estate and certain other special situations. To accomplish this purpose, the statute requires that an agreement covered by the statute, or some note or memorandum thereof, must be in writing and signed by the party against whom enforcement is sought. Otherwise, the agreement is not enforceable in court.
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
The courts in general look solely to the writing in determining the contents of a contract. Since all preliminary negotiations are merged with a final unambiguous contract, the last writing best expresses the intent of the parties. Oral evidence is not admissible to add to, alter, vary, or contradict the terms of a written contract. However, when one of the parties contends that part of the writing has been omitted or that part of the agreement has been stated incorrectly, the court will look to the principle of law known as the 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.
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.
Both parties may agree to cancel the contract. The agreement of rescission is in effect a new contract with both parties agreeing to surrender the rights which were established by the old contract. The consideration for the new contract is the surrendering the rights of the old one.
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.
An alternative to mutual rescission is novation. This is the substitution of a new contract for an existing one. A novation is the substitution of a new party who assumes the responsibilities of the old party releasing the other from the obligation.
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.
The time limit for bringing suit for breach of contract may expire under the statute of limitations, barring the right of action to enforce contractual obligations due to unreasonable delay in seeking action.
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.
Net Listing. In a net listing the compensation is not definitely determined, but a clause in the contract usually permits the agent to retain as compensation all the money received in excess of the selling price set by the seller. Under the Real Estate Law failure of an agent to disclose the amount of agent's compensation in connection with a net listing is cause for revocation or suspension of license. This must be done prior to or at the time the principal binds himself or herself to the transaction. The agent is also required by the Real Estate Law to reveal to both buyer and seller, in writing within one month of the closing of the transaction, the selling price involved.
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.
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.
This space covers the items of personal property included in the purchase price. If the listing is residential income property, the inserted clause could read: "The purchase price shall include all personal property and fixtures listed in the inventory attached hereto."
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."
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.
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.
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)