Chapter 4 Flashcards
Contracts can be
Expressed or implied
An express contract is
written or stated. Examples: a written sales contract, a verbal lease agreement,
a written listing, a verbal buyer representation agreement.
An implied contract is
by actions or evidence. This agreement is neither written nor discussed. It is
simply performed. Examples: taking a taxi, ordering from a menu, filling your gas tank and paying
at the pump with a credit card.
Contracts can also be
unilateral or bilateral
A unilateral contract
binds only one party. An “If… then…” contract is unilateral.
An option is a unilateral contract.
An option contract is
the right to purchase property within a definite time period at a definite
price. There is no obligation to the purchaser to buy, but the seller is obligated to sell. Only one party
makes a promise - the seller. Only one party can be sued - the seller. The option fee goes directly to
the seller. To extend an option, the buyer would need to pay an added fee. When an option is exercised
the unilateral contract becomes bilateral.
A bilateral contract is
an exchange of promises, which binds both parties. A sales contract is a
bilateral contract. Both parties make promises and either or both can be sued
In real estate, the contract is a written promise to pay, by the buyer, and a written promise to deliver
a deed, by the seller. A properly prepared contract commits both parties to its terms. To be valid and
enforceable, the contract must have the following: (COLIC)
- Competent parties
- Offer and Acceptance
- Legal Purpose
- In writing
- Consideration
Competent Parties
Sane, sober, consenting adults
Offer and Acceptance without qualifications
mutual agreement, or mutual consent
Legal Purpose
also called legality of object
In writing
(statue of frauds)
Consideration
(Not earnest money) something of value (payment or a promise) in exchange form what is being offered
Without being in _____ the contract would be ____ but not _____
In writing
Valid
Not enforceable
Executed
The term executed, or the phrase fully executed is used when all
the terms and conditions of the contract have been met and carried out. It is considered
performed or discharged.
Executory contract
A contract that is signed, but not yet carried out
Valid contract
meets the requirements of a contract 1,2,3 and 5.
Void or invalid contract
has no binding effect on the parties who made it – for example
an agreement with someone who is documented as insane.
Voidable
in a voidable agreement one party has the right to withdraw
(a minor, someone who signed under duress, or under the influence of alcohol or drugs, an
injured party, etc.).
Unenforceable
is one that violates the Statute of Frauds
and will not be enforced by the courts – the verbal real estate agreement
Termination
contract may be terminated for any of
several reasons including bankruptcy or foreclosure, new laws making it illegal, or destruction
of the property. If one of the parties to a contract dies, the contract will be binding on
the heirs.
Rescission
If the parties to a contract agree to cancellation (mutual rescission), the contract is
terminated.
Breach of Contract
Default is non-performance of a duty under a contract. When one of the parties to the
contract is in default, the agreement has been breached.
Default
is non-performance of a duty under a contract
Liquidated
are money damages set out in the contract.
Punitive
Must be pursued in court. Punish the defaulting party
Compensatory Damages
Must be pursued in court. Are set to cover the actual injury or economic loss.
SELLER OPTIONS IF THE BUYER DEFAULTS:
• Accept damages negotiated in the contract - liquidated damages i.e. seller keeps the buyer’s
deposit
• Hold the other party to his duties through a suit for specific performance- ask the court
to force the buyer to buy the property
• Sue for money damages – money damages are both actual/compensatory and punitive
• Decide on mutual rescission – release the buyer
BUYER OPTIONS IF THE SELLER DEFAULTS:
• Decide on mutual rescission and recover the earnest money
• Hold the other party to his duties through a suit for specific performance - ask the court
to force the seller to sell the property
• Sue for money damages
Statute of Frauds
All contracts that relate to the transfer of any interest in real estate
must be in writing to be enforceable. A verbal agreement is voluntary and will not be
enforced by the courts. We always avoid verbal agreements in real estate. (In the case of two
agreements, one written and one verbal, the written agreement will always take precedence.)
A lease for one year or less is the exception to this law. It does not have to be in
writing to be enforceable.
Time is of the essence
A clause in a contract that allows each party to hold the other to
strict performance by the date specified is called time is of the essence. In a contract with
a time is of the essence clause, if one party cannot perform exactly on time, the contract
becomes voidable at the option of the other party. This clause is not a requirement of a valid
contract. It is a choice.
An offer
is a properly completed form with a price less than, equal to, or more than the seller’s asking
price and signed by the buyer. The purpose is to open negotiations between the buyer and the seller.
The offer may be called a purchase agreement.
An offer can be:
- An offer can be withdrawn at any time prior to acceptance.
- All offers must be presented to the intended party.
- An offer can be accepted, rejected, or countered.
Counteroffer
If a party
receiving an offer changes even one small item in the offer before signing. is actually a rejection of the offer, and the presentation of a new offer. The
purpose of a counteroffer is to continue negotiations and work towards agreement. A counteroffer
usually accepts some of the terms of the original offer and changes others. The offer becomes a contract
when it is accepted and acceptance is communicated
Earnest Money
is not necessary in a sales contract; it is not the consideration. The amount of earnest
money is determined by agreement of the parties. In the usual real estate sales contract the earnest
money will be the liquidated damages if the buyer defaults.
Equitable Title
is an interest created by a legal document, such as that
held by a buyer with a signed sales contract, who has not yet gone to closing. The buyer has an equitable
estate, or equitable title.
Contingency
A condition in a contract, which has not yet been met.
Common contingencies include
- Financing
- The sale of another property
- Inspection
Economic Life
is the period of profitable use during
which improvements contribute to value, or are being depreciated. When the improvements are fully
depreciated, that is the end of the economic life.
Installment Sale
is one where the sales price is paid in installments and at least one of the payments
is to be received after the close of the taxable year in which the sale occurs. Under certain
circumstances this can result in tax savings for the seller.
NOTE:
The license exam may refer to an installment sale as an “installment sales contract.” This is
an attempt to cause confusion with an installment contract. An installment sale is not the same as
an installment contract.
The Principal-Agent relationship is a
Fiduciary relationship. The relationship is based on trust
The
COMMON LAW OF AGENCY governs
the relationship between a broker and his principal.
The principle is often referred to as the
Client
As licensees in agency relationships, we must treat all parties with honesty and fairness, but we have
two levels of responsibility:
- Public Responsibility
- Fiduciary Responsibility
Public Resposibiliy
honesty, integrity, fairness, disclosure of material facts, and accounting of funds held. (These are your duties to customers or third parties in a transaction.) An
agent does not support or defend a customer’s interest.
Fiduciary Responsibilities
put the interests of your client first, give full disclosure to your
client (advice and opinions in addition to disclosing all pertinent facts - both material and
other,) be loyal to your principal, and be competent. (These are your duties to your client.)
An agent supports and defends his client’s interests.
In addition to a written agreement, agency can also be created
orally or by ratification
Ratification
occurs when a principal accepts actions that he did not authorize.
Listings and Buyer Representation Agreements are
employment contracts hiring a broker to represent
a seller or buyer, landlord or tenant. These agreements should be created in writing and
terminated in writing or by automatic termination on the agreed upon termination date.
There are three levels of agency:
- Universal agency
- General agency
- Special or Limited agency
Universal Agency
gives the agent the authority to represent his client in all matters, both
business and personal. It is the equivalent of having unlimited power of attorney and is very
rare in real estate.
Attourney-in-fact
A person with power of attorney
Genereal Agency
gives the agent the power to bind his principal in a particular trade or
business. Power to bind a principal is the power to sign a legally binding agreement in the
name of your principal. The general agent’s signature binds or commits the client to the
agreement. Limited Power of Attorney can be used to create general agency. (Owner -
Property Manager) (Broker - Sales agent)
Special or Limited Agency
gives the agent the power to perform only specific acts and no
others. This agent does NOT have the power to bind his client/principal. (Seller - Broker)
A written agreement is the preferred method of
Creating agency
A Buyer’s Representation Agreement
employs the broker to act as a fiduciary to the buyer.
A Listing Agreement
employs the broker to act as a fiduciary to the seller.
A Management Agreement
employs the broker/property manager to act as a fiduciary to the
owner.
Buyer Representation Agreements and Listing Agreements create ____ ____ ____, but a Managment Agreement creates a _____ _____ _____
Special Agency Relationship
General Agency Relationship
Single Agency Broker
is one who does not act as a dual agent when one of the broker’s buyer clients
wants to purchase an in-house listing. Instead, the broker recommends that one of the parties (usually
the buyer) either find another broker or continue in the transaction unrepresented. Therefore,
single agency is the practice of representing either the buyer or the seller but never both in the same
transaction.
A transactional broker/facilitator
is a licensee who assists a buyer and seller in reaching an agreement
in a real estate transaction, but doesn’t have an agency relationship with either party. This agent
can also be called a transaction coordinator, a finder, or a middleman
A Dual agency broker
is practicing under the Common Law of Agency and agrees to represent
both parties with their written permission. A broker acting as a dual agent may appoint a designated
agent to represent the buyer and another designated agent to represent the seller.
In Texas, a broker who agrees to represent both parties in a single transaction must do so as an
Intermediary. The broker may appoint associates to work with the parties - one licensee to work with the
seller and one licensee to work with the buyer.
Dual Agency or Intermediary may only be permitted if
both the buyer and seller agree in writing.
Information about your role as an Intermediary or a dual agent should be given before a party reveals
any confidential information. A dual agent will have confidential information about both parties to
the transaction. He can never reveal any information to one party that might harm the interests of
the other party.
In an agency relationship, specific duties exist.
A principal’s duties to an agent are: (CRIP)
- Compensation
- Reimbursement
- Indemnification
- Performance
Compensation
pay the commission when earned
Reimbursement
repay approved expenses
Indemnification
defend the agent when the agent acts on the client’s instruction
Performance
comply with the written agreement
An agent’s duties to his principal are: (OLD CAR)
- Obedience
- Loyalty
- Disclosure
- Confidentiality
- Accounting
- Reasonable Care
Obedience
adhere to given instructions
Loyalty
place your client’s best interests first
Disclosure
reveal all known facts, give non-legal advice and opinions
Confidentiality
protect the private information of your client
Accounting
handle funds with care (This is the easiest duty of a dual agent. For all other
duties the buyer and seller can have opposing interests). A broker handling client funds must
never mix them with his/her own (commingling) or spend client or commingled funds
(conversion)
Reasonable Care
protect the property and legal interest of your client.
Negligence
Failure to use ordinary or reasonable care. Carelessness. Failure of and agent to carry out his prescribed duties.
Only a broker may earn a commission
and only a broker may sue to collect a commission. The
broker may sue a seller who has defaulted on a listing agreement, or a buyer who has defaulted on a
buyer’s representation agreement.
In order to maintain a claim for a commission, or be successful in a suit for a commission, the broker
must
be the procuring cause of the sale, or produce a purchaser who is ready, willing, and able to buy.
He must have a compensation/employment agreement in writing to enforce it. (A verbal agreement
makes you a volunteer - no commission is paid)
In Texas the broker must also be licensed by TREC, and have advised the purchaser in writing to
have the abstract examined by an attorney or to obtain title insurance.
Failure to provide this advice
precludes payment of any commission to the agent and can also cause suspension or revocation of a
license.
In addition to the broker’s commission established in the listing contract or management agreement,
buyer agency agreements can require a buyer to pay a broker.
Commission splitting arrangements for
cooperating brokers, flat fee for services agreements, reimbursements agreements, referral fees, and
finder’s fee agreements should all be in writing to avoid compensation disputes and lawsuits.
A broker may refuse to represent a prospect at will
long as he is not doing so for reasons prohibited
by the Fair Housing Acts.
Commissions are negotiable
therefore, different clients might pay different commissions. Once a
commission is negotiated, it belongs to the broker; therefore, the division of commissions is at the
discretion of that broker.
When an agent is also the seller or the buyer, this is called
agency coupled with an interest and this
dual role must always be disclosed
