ch 6

Question 1

Contract

Answer 1

A contract, commonly abbreviated as K by people in the legal profession, is a legally binding agreement. To form a valid contract, certain basic elements must be present.
Per the statute of frauds, contracts for the purchase and sale of real property must be in writing in order to be valid (i.e., legally enforceable).

Question 2

Purchase and Sale Agreement

Answer 2

It is a type of contract
Seller – Buyer (Purchaser)
Contains the terms and conditions upon which the property will be transferred
Governs the rights and obligations between the parties
Covers the time the contract is signed through the closing date

Question 3

closing date

Answer 3

day on which the transfer of property actually occurs

Question 4

essential ingredients of contract

Answer 4

offer and acceptance; consideration; lawful purpose; legal capacity; legal authority

Question 5

offer and acceptance

Answer 5

Offer = a proposed contractual arrangement made by an “offeror,” to an “offeree,”
Acceptance = the point at which the offeree notifies the offeror that the offeree agrees to the terms and conditions of the proposed transaction.
Meeting of the minds/mutual assent = the terms of the offer and acceptance match

Question 6

Consideration

Answer 6

Each party must exchange something of value.

Examples = money, goods, services, and promises to do or to refrain from doing something

Question 7

Legal Capacity

Answer 7

Minors (voidable contracts)- Mentally incompetent persons (void

Question 8

Legal Authority

Answer 8

The four major areas in which the issue of legal authority may arise are discussed below.
Business entities
Executors of estates
Trustees
Powers of attorney

Question 9

Purchase and Sale agreements

Answer 9

In writing per the Statute of Frauds
Abbreviated in these slides as “PSA”
The blueprint for a real estate transaction
Does not actually transfer ownership of real property from the seller to the buyer

Question 10

Covenants

Answer 10

Legally binding promises.

- A failure to fulfill any covenants contained in a contract results in a party being in breach of contract.

Question 11

Contingencies

Answer 11

Conditions to a party’s obligation to complete the transaction. No breach for failure of contingency

Question 12

Provisions of a Typical Residential PSA

Answer 12

No set format for a PSA
Boilerplate provisions
Deal-specific provisions
Refer to sample PSA provided by instructor

Question 13

Common Components of a PSA

Answer 13

Name of Parties
Legal Description of Property
Purchase Price
Distribution of Closing Costs
Earnest Money
Seller Representations Regarding Property Condition
Seller Representations Regarding Title
Contingencies
Closing Date, Transfer of Property Possession, and Closing Attorney 
Prorations
Risk of Loss
Warranties Transfer
Survival
Notice Provision
Time is of the Essence
Successors and Assigns
Governing Law
Exhibits and Amendments 
Special Stipulations
Signature Blocks, Delivery and Acceptance
Defined Terms

Question 14

time is of the essence

Answer 14

means that all of the dates in a PSA are firm. If a time of the essence clause is not included, the dates in the PSA become approximate, rather than firm, leaving a court to determine what constitutes a reasonable amount of time for contractual performance beyond the dates set forth in the agreement

Question 15

Successors and assigns

Answer 15

A common PSA provision makes the contract binding on each party’s successors, heirs and permitted assigns. For example, if a party to a PSA dies, the contract will remain binding on that party’s estate

Question 16

Termination of Real Estate Contracts

Answer 16

mutual voluntary termination; impossibility of performance; material breech of contract; the closing

Question 17

material breech of contract

Answer 17

An action or inaction that constitutes substantial noncompliance with the terms of the contract.

Question 18

Closing

Answer 18

Any unfulfilled covenants that do not survive closing are no longer required to be fulfilled by the party who made the covenants

Question 19

Mutual Voluntary Termination

Answer 19

All parties to the contract may agree in writing to cancel, or terminate, the contract

Question 20

Impossibility of Performance

Answer 20

If an event such as a natural disaster occurs that is beyond the control of the parties, performance of the contract may be rendered impossible to perform

Question 21

Remedies for Breach of Contract

Answer 21

Duty of injured party to mitigate damages- May also seek reimbursement of attorney’s fees

Question 22

Breach of contract

Answer 22

Failure to uphold the covenants (promises) he has made in a contract

Question 23

Parol Evidence Rule

Answer 23

, the court treat the PSA as being a fully integrated contract, meaning that the court will not consider any evidence of verbal or prior agreements that constitute additional or contradictory terms of the PSA. The parol evidence rule is sometimes referred to as the “four corners” rule, because the court will not look beyond the four corners of a written contract in establishing the terms of the contract.

Question 24

Specific Performance

Answer 24

A court-ordered mandate that a party perform a specified act. Based on the premise that real property is unique and that money damages are not an adequate remedy.

Question 25

Money Damages

Answer 25

A/K/A compensatory damages
Theory is to place the injured party in the same monetary position he would have been in if the contract had been honored by the breaching party.
(1) the purchase price set forth in the PSA, and (2) the fair market value of the real property

Question 26

Example of Money Damages

Answer 26

Assume the purchase price of a piece of real property is $140,000 and its fair market value is $150,000.
May seller recover money damages if buyer defaults?
Answer: No, because the fair market value is higher than the purchase price.
May buyer recover money damages if seller defaults? Answer: Yes, because fair market value is higher than the purchase price. Buyer will have suffered monetary damages, in the amount of $10,000, as a result of the breach of contract by the seller

Question 27

Rescission and Restitution

Answer 27

Cancel the contract
Place the injured party in the same position he would have been in had the PSA never been signed.
Examples of expenses for which the non-breaching party would be reimbursed include the cost of hiring a lawyer, and obtaining a survey and home inspection, and fees paid for a title examination and any other pre-purchase expenses.

Question 28

Liquidated Damages

Answer 28

A pre-agreed upon sum of money
Parties try to estimate what actual damages would be in the event of default
Avoid too high a figure or it will be deemed an unenforceable penalty by the courts

Question 29

Option Contracts

Answer 29

A contract between a seller and an option holder
Option holder has the right, but not the obligation, to purchase a parcel of property at any time within a specified time period for an agreed-upon price.
In exchange for granting the option to the option holder, the seller will receive some form of consideration, usually a monetary payment.

Question 30

Lease-Purchase Agreements

Answer 30

Property owner agrees to lease real property to a tenant for a specified period of time at a specified lease rate.
The tenant agrees to purchase the property for a specified purchase price at the end of the term of the lease.
A portion of the tenant’s lease payments are typically credited toward the purchase of the property.

Question 31

Liquidated damages

Answer 31

Predetermined sum of money paid by breaching party in event of breach

Question 32

Recission

Answer 32

Injured party placed in position he would have been if PSA never signed

Question 33

Specific performance

Answer 33

Court mandates purchase and sale of property

Question 34

Money damages

Answer 34

Injured party in same monetary position as if PSA had been honored

Question 35

Defined terms

Answer 35

Terms used to describe terms I’m contract used throughout such as buyer, seller, property