Chapter 8: Deeds, Contracts, and Leases

Question 1

A deed is defined as

Answer 1

“A written, legal instrument that conveys an estate or interest in real property when it is executed and delivered.”

Question 2

The seller of a property is called the ____.

Answer 2

grantor

Question 3

The buyer is called the ____.

Answer 3

grantee

Question 4

For a deed to be legally valid:

Answer 4

• The deed must be in writing
• The grantor and grantee must be clearly identified
• The grantor must be legally capable (for example, not a minor or legally incapacitated)
• The property must be adequately described
• There must be a legally acceptable grantee clause
• There must be a consideration (amount)
• The deed must be signed by the grantor
• The deed must be delivered to the grantee

Question 5

Although a deed must be notarized by a notary public to be recorded, most states do not require a deed to be notarized to be “____.” However, to protect the interest of parties involved, it is always prudent to have a deed notarized so that it can be filed with the recorder of deeds in the county where the property is located

Answer 5

valid

Question 6

A grant deed is defined as:

Answer 6

“A deed containing, or having implied by law, some but not all of the usual covenants of title; esp., a deed in which the grantor warrants that he or she (1) has not previously conveyed the estate being granted, (2) has not encumbered the property except as noted in the deed, and (3) will convey to the grantee any title to the property acquired after the date of the deed.”

Question 7

When this type of deed is used, the grantor does not expressly warrant the title as being free and clear of all encumbrances and does not even warrant that he or she is the owner of the property.

Answer 7

Grant Deed

Question 8

A quitclaim deed is defined as

Answer 8

“A form of conveyance in which any interest the grantor possesses in the property described in the deed is conveyed to the grantee without warranty of title.”

Question 9

This is the weakest form of deed. It really says nothing other than: If I do own any interest in this property - it’s all yours!

It makes no claims or warrants to the quality of the title. It is used frequently in situations such as tax sales.

Answer 9

Quitclaim Deed

Question 10

A property is claimed by a county or town for non-payment of taxes. The municipality advertises and sells off the property for whatever it can get. They make no investigation of the title and make no guarantees. It is strictly caveat emptor (Latin for “buyer beware”)!

Answer 10

Quitclaim Deed

Question 11

A bargain and sale deed is defined as:

Answer 11

“A deed that conveys real estate from a seller to a buyer but does not guarantee clear title; used by court officials and fiduciaries to convey property they hold by force of law, but to which they do not hold title.”

Question 12

This is the next step up the ladder from a quitclaim deed. It does not guarantee that there is a clear title, but at least the seller (grantor) implies that they do hold title to the property.

Answer 12

Bargain and Sale Deed

An example of this might be a sheriff’s deed, which is given to the purchaser of a property at a court-ordered sale.

Most bargain and sale deeds do not have covenants or warranties; however in some states a seller is allowed to add covenants to this type of deed.

Question 13

A tax deed is defined as:

Answer 13

“A deed that conveys title to a property purchased at a tax sale; may or may not convey absolute title, free of all prior claims and liens, depending on state law.”

Question 14

A warranty deed is defined as

Answer 14

“A deed that conveys to the grantee title to the property free and clear of all encumbrances, except those specifically set forth in the document.”

Question 15

This is the best and most powerful type of deed.

Answer 15

Warranty Deed

Note: The grantor warrants or guarantees that the title being conveyed is free and clear of all encumbrances. If, at a later date, a cloud on the title appears or someone else makes a claim against the title, the grantor must make it right.

Question 16

A deed of trust, or trust deed, is defined as:

Answer 16

“A legal instrument similar to a mortgage document, except that three parties are involved in securing the debt: the borrower, a lender, and a trustee who holds property title when the deed of trust is executed and delivered. The trustee transfers title to the lender if the borrower defaults and to the borrower if the note is repaid. Also called a trust deed.”

Question 17

This is similar to a mortgage and is the method used in some states to encumber properties in lieu of recording a mortgage. Title is vested in a third party, the trustee, until the mortgage lien is satisfied.

Answer 17

Deed of Trust, Trust Deed.

Note: It is an alternative document that is a security instrument for a lender. In some states, lenders prefer deeds of trust because, in the event of mortgage default, the trustee is able to sell the property without going through a lengthy and expensive foreclosure process.

Question 18

A reconveyance is defined as

Answer 18

“Passing of title to real property back to the original owner; e.g., in a deed of trust arrangement, upon liquidation of the debt the property is reconveyed from a third-party trustee to the trustor (borrower).”

Question 19

If a deed of trust is recorded and then the loan is paid off, the ____ document passes title back to the borrower.

Answer 19

reconveyance

Question 20

This puts the world on notice that the property has transferred ownership.

Answer 20

Recordation

To be recorded in the public records, such as the office of a county clerk, recorder of deeds, or prothonotary, most states require an acknowledgement that the grantor’s signature on the deed is valid. This is usually accomplished by the signature and seal of a notary public or other designated official.

Question 21

What is a contract?

Answer 21

According to Nolo’s Legal Dictionary it is:

“A legally binding agreement between two or more persons that represents their promise to do or not to do a particular thing. In many jurisdictions statutes of frauds, or their equivalent, may render a real property contract voidable if it does not consist of a signed, written agreement.”

Duhaime’s Law Dictionary has a similar definition:

“An agreement between persons which obliges each party to do or not to do a certain thing.”

The Law.com law dictionary chimes in with this definition:

“an agreement with specific terms between two or more persons or entities in which there is a promise to do something.”

Question 22

Promise is further defined as:

Answer 22

“a firm agreement to perform an act, refrain from acting or make a payment or delivery.”

Question 23

contracts for goods worth in excess of $____ - these contracts need to be in writing in order to be enforceable.

Answer 23

$500

Question 24

The statute of limitations for suing for breach of an oral contract is ____ than for written contracts.

Answer 24

shorter

Question 25

The original articles of the Uniform Commercial Code have been adopted in every state except ____.

Answer 25

Louisiana

Question 26

Statute of Frauds:

Answer 26

The statute of frauds (SOF) is a legal concept that requires certain types of contracts to be executed in writing. The statute covers contracts for the sale of land, agreements involving goods worth over $500, and contracts lasting one year or more.

Every state has a statute of frauds that requires certain documents to be in writing. Generally, this includes real property titles and conveyances, leases for more than one year, wills, contracts not to be performed within one year from the making thereof, and contracts not to be performed within the lifetime of the promisor. The original statute was enacted in England in 1677 to prevent fraudulent land claims.

Question 27

Mutual Assent

Answer 27

Agreement by both parties to a contract. Mutual assent must be proven objectively, and is often established by showing an offer and acceptance (e.g., an offer to do X in exchange for Y, followed by an acceptance of that offer).

Question 28

Offer is defined as:

Answer 28

In the Restatement Second:

“A manifestation of willingness to enter into a bargain, which creates in the offeree the power of acceptance.”

The Law.com dictionary defines offer as:

“a specific proposal to enter into an agreement with another.”

Question 29

Offers remain open until they are:

Answer 29

• Accepted
• Rejected
• Retracted prior to acceptance
• Countered
• Expired by their own terms

Question 30

Acceptance is defined in the Restatement Second as:

Answer 30

“A manifestation of willingness to be bound by the terms of an offer made in a manner invited or required by the offer.”

All of the terms of the offer must be accepted without change or condition.

Acceptance may occur as an express act or an implied act.

Question 31

Express Contract:

Answer 31

In an express contract, the existence of the contract and its terms are stated in words or the writings of the parties. An express contract may be either oral or written.

Examples of express contracts include listing agreements, purchase offers, mortgages, leases, and installment contracts. Obviously, it is preferable to have them in writing, and most are.

Question 32

Implied Contract:

Answer 32

In an implied contract, the existence of the contract and its terms are inferred or implied from the conduct of the parties. The contract is created by the actions of the parties who perform the terms of the contract.

For example, if you sit down in a restaurant and order a meal, you imply a promise to pay for the food. The restaurant serves it to you on the basis of that promise.

The distinction between an express and implied contract is only in the manner in which agreement is shown. Both are based on the express or apparent intent of the parties.

Contracts may also be categorized as bilateral or unilateral.

Question 33

Bilateral Contract:

Answer 33

A bilateral contract is one in which both parties have made promises to each other. One promise is in exchange for another. A real estate sales contract is a bilateral agreement; Party A agrees to sell the property and Party B agrees to buy the property - under certain specified terms.

Question 34

Unilateral Contract:

Answer 34

A unilateral contract is one in which one party makes a promise in order to induce another party to do something. The second party is not legally compelled to comply. However, if the second party accepts and performs, then the first party must keep the promise.

A real estate option is a good example of a unilateral agreement. Party A agrees to sell his property to Party B for $200,000, anytime within the next six months. Party B is under no obligation to perform, that is, Party B can decide to exercise the option and buy the property or let the option expire without doing anything. If Party B decides to exercise the option, then Party A must sell.

The distinction is more of an academic one. Most commercial contracts of any substance are bilateral.

Question 35

Executed Contract:

Answer 35

An executed contract is one that has been fully performed. The promises have been fulfilled according to the terms of the contract, and there is nothing left to be done. An example would be a real offer to purchase after all contingencies have been met and the closing has occurred. File it away!

Question 36

Executory Contract:

Answer 36

An executory contract is one that is not been fully performed or completed. Something is still left to be done. A good example of this is a listing contract. A real estate agent tries to sell the property during the term of the contract. A mortgage would also be considered an executory contract until it is finally paid off or satisfied.

Question 37

Valid Contract:

Answer 37

A valid contract is one that is binding and enforceable on all parties. It contains all the valid elements of a contract and is still in force. That is akin to a real estate purchase transaction that has cleared all the contingencies but has not yet closed escrow.

Question 38

Void Contract:

Answer 38

A void contract is one that has no legal force or effect even though it contains the elements of a valid contract.

It could be “null and void” because it contains some illegal element that could not be enforced. For example, a contract could contain a clause that requires racial discrimination. Or, it could be for an illegal purpose such as to commit a crime or some act in violation of a legal use. Voiding a contract could also be the result of an act of God that is beyond the control of the parties; such as a fire or flood that destroys a property.

Question 39

Voidable Contract:

Answer 39

A voidable contract is one that results from the failure of the parties to meet some legal requirement.

For example, if a minor signs a contract to purchase real estate, it usually is voidable within a reasonable time after the minor reaches legal age. However, the parties are not required to void the contract. Most courts consider a voidable contract to become a valid contract if the eligible party does not act to disaffirm the agreement within a reasonable time.

Question 40

Unenforceable Contract:

Answer 40

An unenforceable contract is one that appears to be valid but would not be enforceable in court. For example, if one party tries to enforce an otherwise valid contract after the statute of limitations has expired, that contract would be unenforceable.

Other examples would be contracts that are vague and poorly worded, or verbal contracts in situations where written ones are required, as in real estate. However, even though they may not be enforceable in court, unenforceable contracts may still be considered valid if both parties still wish to complete performance.

Question 41

Elements of Contracts

Answer 41

There are five essential ingredients in a valid contract for the purchase of a real property interest that would be binding and enforceable on all parties:

• Competent parties
• Mutual agreement
• Consideration
• Lawful objective
• In writing and signed

Question 42

Competent Parties:

Answer 42

The Law.com law dictionary defines competent as

“in general, able to act in the circumstances, including the ability to perform a job or occupation, or to reason or make decisions.”

The ‘Lectric Law Dictionary defines competency as

“the mental ability to understand the general effect of a transaction or document.”

For a contract to be valid, the parties have to have the capacity to enter into a contract. Minors, for example, do not have the capacity to contract. The legal age, or age of majority, varies from state to state. Check your own state to determine the legal age.

The general rule is that the contract of a minor is voidable at the minor’s option. The minor can hold an adult to a contract, but the adult cannot legally hold the minor to a contract.

Another consideration is the mental capacity of the parties. Under the Restatement Second of the Uniform Commercial Code (UCC), a contract is voidable if a party “by reason of mental illness or defect is unable to act in a reasonable manner in relation to the transaction and the other party has reason to know of this condition.”

Question 43

Mutual Agreement:

Answer 43

For a contract to become binding, the parties must enter into it voluntarily and with a full understanding of the terms. There must be mutual assent and a “meeting of the minds.”

Lack of mutual agreement could be evidenced by such things as:

Fraud

• Misrepresentation
• Mutual mistake
• Undue influence
• Duress

Contracts signed by a party under undue influence or duress are voidable by that party -or a court. This might result if a party is elderly, sick, under great stress or under the influence of drugs or alcohol.

Duress was defined in U.S. v. Bethlehem Steel Corp., 315 U.S. 289 (1989) as:

“feebleness on one side, overpowering strength on the other.”

The Restatement Second of Contracts (UCC) discusses duress in these words: “If a party’s manifestation of assent is induced by an improper threat by the other party that leaves the victim no reasonable alternative, the contract is voidable by the victim.”

Question 44

Consideration

Answer 44

An agreement must be based on good and valuable consideration; something of value. This could be:

Money
Property
A promise of performance or a promise to pay
Forbearance: a promise to refrain from doing something

Question 45

Lawful Objective

Answer 45

The object to be achieved must be lawful and not against any public policy. Any contract to be used for an illegal purpose becomes void. An example would be a contract in restraint of trade.

Question 46

Parol Evidence Rule states:

Answer 46

that written contracts take precedence over oral agreements.

Question 47

The law.com Legal Dictionary defines the parol evidence rule this way:

Answer 47

“if there is evidence in writing (such as a signed contract) the terms of the contract cannot be altered by evidence of oral (parol) agreements purporting to change, explain or contradict the written document.”

Question 48

Discharge of Contracts

Contracts can be terminated or discharged by:

Answer 48

• Agreement of the parties
• Performance of the contract
• Impossibility of performance
• Operation of law

Question 49

Release is defined as:

Answer 49

“1) v. to give up a right as releasing one from his/her obligation to perform under a contract, or to relinquish a right to an interest in real property. 2) v. to give freedom, as letting out of prison. 3) n. the writing that grants a release.”

Question 50

Assignment is defined as:

Answer 50

“n. the act of transferring an interest in property or some right (such as contract benefits) to another. It is used commonly by lawyers, accountants, business people, title companies and others dealing with property.”

Question 51

Novation is defined as:

Answer 51

“n. agreement of parties to a contract to substitute a new contract for the old one. It extinguishes (cancels) the old agreement. A novation is often used when the parties find that payments or performance cannot be made under the terms of the original agreement, or the debtor will be forced to default or go into bankruptcy unless the debt is restructured. While voluntary, a novation is often the only way any funds can be paid.”

With novation, a new contract is created which terminates the original agreement and absolves the original party from liability.

Question 52

Performance of Contract

Answer 52

The preferred and most common method of terminating contracts is full performance of all the terms. The contract is then said to be executed.

Question 53

Execute is defined as:

Answer 53

“v. 1) to finish, complete or perform as required, as in fulfilling one’s obligations under a contract or a court order. 2) to sign and otherwise complete a document, such as acknowledging the signature if required to make the document valid.”

Question 54

A time is of the essence clause is defined as:

Answer 54

“n. a phrase often used in contracts which in effect says: the specified time and dates in this agreement are vital and thus mandatory, and ‘we mean it.’ Therefore any delay - reasonable or not, slight or not - will be grounds for canceling the agreement.”

Question 55

Impossibility of Performance

Answer 55

Generally speaking, even if a party is unable to perform the obligations of a contract, they are still liable. The only way to prevent this is to insert in the contract provisions for relief in the event of impossibility.

An example of impossibility would be if a law changed after the contract was arranged but before the full performance of the contract. Suppose a contract was signed to drain lowland areas and since then it became declared as a protected wetland area. It would now be an illegal act, and the contract would be void.

In contracts in which the performance depends on the continued existence of a given person or thing, an implied condition is that the perishing of the person or thing shall excuse performance. [Taylor v. Caldwell 122 Eng. Rep. 309 (1862).] Therefore, if a party dies or a property is destroyed, this could be considered impossibility to perform.

Question 56

The application of law may change the rights and liabilities of the parties, without their consent. Contracts can be terminated by operation of law under:

Answer 56

• Bankruptcy
• Statute of limitations
• Alteration of contract

A filing of a petition for bankruptcy under federal law terminates any contracts in existence as of that date.

If a party to a contract fails to bring action against a defaulting party within a specific time frame under the Statute of Limitations, the right of remedy is lost. Check your own particular state for the time periods under the Statute.

The intentional alteration of a contract without written consent of all parties effectively terminates the agreement. Of course, this may lead to liability.

Question 57

Default – Breach Of Contract

Answer 57

“n. failing to perform any term of a contract, written or oral, without a legitimate legal excuse. This may include not completing a job, not paying in full or on time, failure to deliver all the goods, substituting inferior or significantly different goods, not providing a bond when required, being late without excuse, or any act which shows the party will not complete the work (“anticipatory breach”). Breach of contract is one of the most common causes of law suits for damages and/or court-ordered “specific performance” of the contract.”

Question 58

Remedies - Breach Of Contract

Answer 58

A breach of contract does not relieve the obligations of the breaching party. The non-defaulting party has legal recourses which may be obtained by filing suit in a court of law. These remedies would include:

Rescission
Reformation
Injunction
Specific performance
Compensatory damages
Consequential damages
Attorney fees and costs
Liquidated damages
Punitive damages

Question 59

Rescission

Answer 59

“n. the cancellation of a contract by mutual agreement of the parties.”

Rescission may be applied when the contract has not been performed and there is a breach by one party. After a suit, a court may order the parties placed back in their original position; as if the contract had never existed. Basically, the contract is canceled and both sides are excused from any further performance. Any deposit money is returned.

Question 60

Reformation is defined as

Answer 60

“n. the correction or change of an existing document by court order upon petition of one of the parties to the document. Reformation will be ordered if there is proof that the parties did not intend the language as written or there was an omission due to mistake or misunderstanding. Quite often a party petitions for reformation when one or both parties realize the effect of the document as written is different from what was expected but it has already been recorded or filed with a governmental agency.”

This may have even occurred from a clerical error.

Question 61

Injunction is defined simply as:

Answer 61

A court order requiring a person to do or cease doing a specific action.

Question 62

Specific performance is defined as:

Answer 62

‘n. the right of a party to a contract to demand that the defendant (the party who it is claimed breached the contract) be ordered in the judgment to perform the contract. Specific performance may be ordered instead of (or in addition to) a judgment for money if the contract can still be performed and money cannot sufficiently reward the plaintiff.”

An example could be when a defendant was to sell a property and did not, a judge may order the defendant to actually complete the sale.

Specific performance is the opposite of rescission.