Chapter 7 - Contracts Flashcards
General Types of Contracts
A unilateral contract is a contract in which one party makes an express promise in exchange for the other party’s performance of an act. Thus, a unilateral contract is essentially a promise for an act.
For example, a broker employed under an open listing is not obligated to use due diligence in their efforts to locate a buyer. The broker only has a best-effort obligation since the broker does not accept the employment until they locate a buyer interested in the property. Thus, an open listing is legally classified as a unilateral contract, same is the case with an option contract.
A bilateral contract is a contract in which a promise by one party is given in exchange for a promise made by the other party. It is a promise given in exchange for a promise, both parties being required to perform.
For example, when representing a seller under a written exclusive listing, the broker and their licensees have entered into a bilateral employment agreement. Such an employment obligates the broker to exercise due diligence by way of a constant and continuing search to locate ready and willing buyers, while keeping the seller informed of their progress.
Valid, Void and Voidable Contracts
A valid contract is binding and enforceable against the parties. There are four essential elements of a valid contract
* CAPABALE PARTIES
* MUTUAL CONSENT
* LEGAL OBJECT/purpose of the contract and
* CONSIDERATION- money.
Need all four of these to be valid
CP-MC-LO-C
To be CAPABLE, the parties need to:
- be of sound mind
- possess their civil rights and
- be at least 18 years of age, or be an emancipated minor, military minor, or married minor.
MUTUAL CONSENT in real estate contracts is formed in 3 steps:
* the first party makes an OFFER to the second party, such as a buyer offering to purchase a seller’s property
* the second party ACCEPTS the offer without qualification and
* the second party MUST COMMUNICATE their acceptance to the first party,
Must have all this in order to open escrow.
However, if the original offer is accepted by the second party but on different terms, the second party’s response becomes a counter offer submitted from the second party to the first.
Both the form of consideration and the purpose of the contract are required to be lawful in order for the contract to be valid.
Further, under the state Statute of Frauds law, certain contracts need to be in writing and signed before they are legally enforceable, including:
- a contract with the intent to CONVEY, TRANSFER OR SELL REAL ESTATE
- a LISTING AGREEMENT employing a broker to sell a property, regardless of the length of the listing
- any contract that will be performed GREATER THAN A YEAR after it is entered into
- any LEASE EXCEEDING ONE YEAR and
- any agreement to REPAY THE DEBT OF ANOTHER.
Void and voidable are contract terms which are similar but are distinguishable by the date they affect the validity of a contract, and thus, the rights of those who relied on the contract.
Void contracts are unenforceable. It was never good to begin with.
Examples of VOID CONTRACTS include a:
- contract signed and delivered by a seller under the age of 18 ( here, the contract is void due to the legal incapacity)
- contract in which the consideration is illegal, such as a controlled substance.
A voidable contract, unlike a void contract, is a contract that is valid and enforceable after delivery until it is challenged due to a defect and a court order declares the contract to be invalid.
Examples of voidable contracts include a contract:
- obtained through false representations or
- obtained through undue influence or threat, stress, duress, like if the spouse threatens the life of other spouse.
Some performance contracts may be assigned, transferring the rights and duties held under a contract or agreement from one person to another. Similarly a Novation agreement substitutes a new contract into the place of an existing one.
Failure to perform under a contract is known as a breach.
Listing Agreements - Legal Aspects
Listing agreements
A listing agreement is a written Employment contract between a client and a licensed real estate broker. On entering into a listing agreement, the broker is retained and authorized to perform real estate-related services on behalf of the client in exchange for a fee.
The client retaining a broker May hold an ownership interest in real estate. Which the client seeks to sell, lease or encumber as collateral for trust deed financing.
The person employed by a client to provide Real Estate Services in expectation of compensation will always be a licensed real estate broker. Likewise, if a dispute arises with a client over the client’s failure to pay a fee, only the broker employed by a written listing agreement signed by the client May pursue collection.
A real estate licensee employed by the broker may have obtained the listing, but the licensee did so acting on behalf of the broker. The licensee has no independent right to enforce the listing agreement.
The relationship created between the client and the broker and properly documented by a written listing agreement has two distinct legal aspects:
- an employment relationship and
- an agency relationship.
The employment relationship established on entering into a listing agreement specifies the scope of activities the broker is to undertake in the employment and authorizes the broker to carry them out by contract.
On the other hand, the agency relationship is imposed on the broker by law as a rising out of the representation authorized by the employment. Agency carries with it the fiduciary duties of loyalty and full disclosure owed by the licensee to the client.
A variety of listing agreements exist, each employing and authorizing a broker to perform real estate related Services under different conditions. The variations usually relate to the:
- extent of the Broker’s representation
- type of services to be performed by the broker and
- events which trigger payment of a fee.
Most listing Agreements are for the sale or purchase of a single-family residence property intended to be occupied by the buyer. Others are for residential and Commercial income-producing properties, such as industrial, motel hotel, retail stores, office, Farm or unimproved properties.
Listing Agreements - Categories
Despite the application of various agreements to the type of property described in the listing, all listings fall into one of two general categories
- exclusive (an example of a bilateral contract) or
- open (an example of a unilateral contract).
Listing Agreements - Exclusive
Under an exclusive listing, a broker receives the sole right to represent
- an owner by marketing the listed property for sale or lease and locating a buyer or tenant
- a buyer or tenant by locating property or
- the borrower to obtain mortgage financing.
Two types of exclusive employment agreements for buying and selling real estate exist:
- an exclusive agency agreement for a seller or buyer and
- an exclusive right to sell or right to buy listing agreement.
Both types of exclusive listings establish the broker and their agents as the sole licensed real estate representatives of the client. However, they are distinguished by whether or not the broker has any right to a fee when the property is sold or located solely by the efforts of the client.
Under an EXCLUSIVE AGENCY agreement’s fee provision, the broker does not earn a fee when the client, acting independently of the clients broker and any other broker, accomplishes the objective of the employment, for example, selling the listed property or locating and buying the property sought.
Conversely, during the listing period, under an exclusive right to sell / buy agreement’s fee provision, the broker earns a fee no matter who produces the buyer or locates the property sought, be it the client, another broker or another representative of the client, or the client’s broker.
Similarly, an OPTION LISTING is a variation of the exclusive right to sell listing. It’s unique feature is the additional element of a grant to the broker of an option to buy the property at a predetermined price, if the property does not sell during the listing period.
Listing Agreements - Open
An OPEN LISTING, sometimes called a non-exclusive listing, does not Grant exclusive rights to the broker and their agents to be the sole representative of the cellar. Also, the client may enter into open listings with as many Brokers as they choose without becoming obligated to pay more than one fee. This is a no-obligation scenario.
A brokerage fee under an open listing to sell real estate is due to a broker ONLY IF the broker procures a ready willing and able buyer and presents the owner with a full price offer from the buyer to purchase the listed property.
The terms contained in the offer submitted by the broker will be substantially the same as the term sought by the owner under the listing to earn a fee whether or not the seller accepts it. If other terms are offered by a buyer and accepted by the owner, the broker will still earn their fee.
For a broker to be entitled to a fee under an open listing, the licensee needs to present the offer to the owner before the property is sold to some other buyer located by another broker or the owner. Also, the offer needs to be submitted before the listing expires or is revoked by withdrawal of the property from sale or buy the termination of the agency.
Further, a NET LISTING is used only with Sellers and can be structured as either an open or an exclusive type of listing. The net listing is distinguishable from all other listing arrangements due to the way compensation is calculated.
In a NET LISTING, the broker’s fee is not based on a percentage of the selling price. Instead, the seller’s net sales price, excluding brokerage fees and closing costs, the seller is to receive on closing is stated in the listing agreement. The broker’s fee equals whatever amount the buyer pays in excess of the sellers net figure and closing costs.
Buyer-Broker agreements
buyer broker agreement
An exclusive right to buy listing agreement is used by Brokers and their agents to prepare and submit to prospective buyers their offer to render services on their behalf as the buyers real estate agent. Under it, agents are employed to locate property sought by the buyer in exchange for the buyer’s assurance they will pay a fee to the agent when the buyer acquires the type of property they seek.
When entering into an exclusive right to buy agreement, the buyer’s broker and their agents agree to undertake the task to diligently locate, gather and disclose information and data for available properties on the buyers behalf.
The buyer, who has until now been treated as a customer, now becomes a client. As a client, the buyer authorizes the agent to act on their behalf to locate and look into properties known to be on the market but unlisted or listed with other brokers.
Offers/Purchase Contracts/Agreements
Offers - purchase contracts - agreements.
For real estate sales to convey ownership of a property, the primary document used to negotiate the transaction between a buyer and seller is the PURCHASE AGREEMENT (PA), aka a DEPOSIT RECEIPT. Numerous California Publishers produce purchase agreement forms, all of which are legal for use in California.
A purchase agreement may be TERMINATED under the following situations:
- REJECTION OR COUNTER OFFER by the party who received the offer, which terminates the original offer
- NATURAL EXPIRATION, which occurs when a time limit is given and passed for the formal acceptance or rejection of an offer.
- REVOCATION of the offer by the submitting party prior to the communication of its rejection or acceptance by the party who received the offer or
- the DEATH OF A BUYER prior to the communication of the rejection or acceptance of the offer.
Two basic categories of purchase agreements exist for the documentation of real estate sales. The categories are influenced primarily by legislation and Court decisions addressing the handling of the disclosures and due diligence investigations in the marketing of properties.
The TWO CATEGORIES OF PURCHASE AGREEMENTS are for:
- 124 unit residential property sales transactions, which are protected, targeted transactions imposing a greater degree of disclosure on the parties and
- other than 124 unit residential property sales transactions, such as for residential and Commercial income-producing properties and owner-occupied business / farming properties.
Escrow instructions provided yet another variation on the purchase agreement. For example, a buyer and seller having orally agreed on the terms of a sale, with or without the assistance of a agent, contact an escrow company to handle their transaction. Escrow instructions are prepared and signed, without first entering into a real estate purchase agreement. Here, the escrow instructions bind the buyer and seller as though they had entered into a purchase agreement.
A letter of intent is a non-binding proposal signed and submitted to a property owner to begin negotiations. For example a note on a cocktail napkin is okay!
An addendum, and add to, is an attachment to a contract or agreement used to incorporate an additional provision agreed to but not included in the boilerplate provisions of the agreement. Similarly, an existing contract may be amended with the mutual consent of both parties.
Promissory Notes and Securities
Promissory notes and securities
The promise to pay the debt is set out in a written contract called a promissory note. A promissory note, also referred to as a note, is a document given as evidence of a debt owed by one person ( the borrower/debtor/payor) to another ( the lender/ carry-back seller/ payee).
A note documents the terms for repayment of a debt, including:
- the amount of the principal to be paid
- the interest rate charged on remaining principal
- the periodic payment schedule and
- any due date.
A mortgage-backed bonds (MBB) is an asset-backed security representing a claim on the cash flows from payments received on a mortgage. Mortgage-backed bonds are sold on the secondary mortgage Market.
A Real Estate Investment Trust (REIT) is a corporate security traded on the stock market as a conduit for making investments in income-producing real estate, trust deeds and government securities. REITs are the point at which the stock market and the real estate market Collide, and are one way for individuals to invest in income property, without purchasing and operating the property themselves.
Purchase/lease options
Purchase / lease options.
An OPTION TO PURCHASE a property from a seller imposes no obligation on the buyer to open escrow and purchase the property. Conversely, the option contains the seller’s irrevocable offer that OBLIGATES THE SELLER TO SELL THE PROPERTY on the terms stated in the option agreement if the buyer decides to buy the property within a set period of time, called the option period.
Thus, the option agreement allows the buyer to control the property without committing themselves to purchase it unless they exercise the option, if ever.
When the buyer exercises the option, a bilateral sales contract is automatically formed, no differently than they had accepted an offer from the seller to sell the property under a purchase agreement containing nearly identical terms. Thus, on exercise, both parties become obligated to perform as agreed and must proceed with closing the sale since no contingencies exist.
In an option agreement, the owner/seller is referred to as the OPTIONOR and the potential buyer is referred to as the OPTIONEE.
The other significant use of an option to buy relates to residential and Commercial leasing Arrangements. A purchase option may be structured as a standalone contract or incorporated into a lease. In this context, a purchase option offers a prospective tenant the ability to later acquire ownership of the property they will be occupying.
A lease with an option to purchase is distinguished from the purchase rights held by a tenant under a RIGHT OF FIRST REFUSAL AGREEMENT.
Unless the seller is given something in exchange for the right, the option fails for lack of CONSIDERATION. Judy use the example of $10,000 put down as option money.
While consideration is needed to create an option agreement which is binding on the seller or landlord, the amount of the consideration paid for an option may be a minimal amount. Further, while CONSIDERATION IS NECESSARY FOR A PURCHASE OPTION TO BE ENFORCABLE, a method for payment of the purchase price or a closing date are not.
Thus, the option, like all contracts, needs to have the four Essential Elements to be enforceable.
Unless a particular manner for exercising the option is specified in the option agreement, any communication from a buyer to a seller of their intention to exercise the option is sufficient.
Advanced fee
Advance fee.
Broker fees deposited with the broker before they are earned are called advance fees. Advance fees will be deposited in the Broker’s trust account. The funds belong to the client of the broker, not the broker, and may not be withdrawn by the broker before they are earned and a statement is sent to the client. people don’t do this very often.
In addition to trust fund accounting requirements, a broker needs to send the client a verified accounting for the advance fees:
- no later than the end of each calendar quarter and
- at the time the contract between the broker and client is fully performed.
Before a broker May solicit, advertise for and agree to receive an advanced fee, the advance fee agreement and materials are to be submitted to the commissioner of the Department of Real Estate for approval at least 10 calendar days prior to use.
If the commissioner, within 10 calendar days of receipt, determines the material might mislead clients, the commissioner May order the broker to refrain from using the material.
To be approved by the commissioner, the advance fee agreement and any materials to be used with the agreement will:
- contain the total amount of the advance fee and the event triggering the fee or the date the fees will become due and payable
- list a specific and complete description of the services to be rendered to earn the advance fee
- give a definite date for full performance of the services described in the advance fee agreement and
- contain no false, misleading or deceptive representations.
acknowledgment
Acknowledgement - a formal declaration made before an authorized person, for example, a notary public, by a person who has signed an instrument stating that the signature was their free act. In this state and acknowledgement is the statement by an officer such as a notary that the signatory to the instrument is the person represented to be.
bi-lateral contract
Bilateral contract - a promise for a promise, such as a purchase agreement or a listing agreement.
unilateral contrack
Unilateral contract - A unilateral contract is a one-sided agreement-that is, only one party makes a promise to perform. A lease option is a unilateral contract until the option is exercised. Another example of a unilateral contract is a lost dog sign-if you find the dog, you get paid, but you are not promising to go and look for the dog.
In a unilateral contract, one party must perform (and not just promise to perform) for the contract to be binding. For example, in an option, the optionor (seller) promises to keep a specific offer to sell open for a specific time in exchange for the performance of an act by the optionee (buyer); that is, the actual payment (not just the promise to pay) of the option money. When the option is exercised, a bilateral contract to buy and sell is created according to the terms outlined in the option.
breach
Breach - the failure to perform when required on an agreement, or failure of a Duty owed another, either by Omission or an act.
business opportunity listing
Business opportunity listing - the assets for a business Enterprise including its Goodwill. The term includes the sale or lease of the business and Goodwill of an existing business Enterprise or opportunity.
capable parties
Capable parties - parties who can be held responsible for the performance of their obligations under a contract. One of the Essential Elements needed to form a contract.
coercion
Coercion - the act of persuading someone to do something against their will by use of force or threat.
consideration
Consideration - anything given or promised by a party to induce another to enter into a contract. It may be a benefit conferred upon one party or a detriment suffered by the other.
counteroffer
Counter offer - an alternative response to an offer received consisting of terms different from those of the offer rejected.
duress
Duress - an unlawful constraint imposed by one person on an individual which forces the individual to act against their will.
enforceable contract
Enforceable contract - an agreement which meets minimum elements needed to be enforceable in court.
essential elements of a contract
Essential elements of a contract - four conditions required to form a legal contract: * capable parties, * mutual consent acceptance * legal object, and * consideration. CP-MC-LOC CAPABLE PARTIES MUTUAL CONSENT LEGAL OBJECT CONSIDERATION THESE ARE THE FOUR ESSENTIAL ELEMENTS OF A CONTRACT
