Chapter 8 - Real Estate Contracts

Question 1

Contract

Answer 1

An agreement/legally enforceable promise to do or not to do a certain thing.

Question 2

Bilateral Contract

Answer 2

A contract in which each party promises to do something–obligations are placed on both parties.
EX: real estate sales contracts, lease agreement, listing agreements

Question 3

Express Contract

Answer 3

A contract that has clearly been put into words, either spoken or written.

Question 4

Implied / Quasi Contract

Answer 4

An agreement that has not been put into words, but is implied by the actions of the parties (i.e., circumstances indicate the parties intended to create a contract). Implied contracts may be implied-in-fact (long-standing behavior) or implied-in-law (failing to find a contract would be contrary to law).

Question 5

Statute of Frauds

Answer 5

A state law, based on an old English statute…

• -requiring certain contracts to be in writing and signed before they will be enforceable at law (real property transactions & goods for $500 or more)
• -prescribing a period of limitations for the bringing of certain kinds of legal actions.
• -EX: contracts for the sale of real property or contracts that are not performed within one year
• -Forces the parties to think carefully about what they’re agreeing to
• -Produces a handy evidentiary record of the agreement (protects against memory loss and minimizes disagreement)

Question 6

What is the one exception to the Statute of Frauds?

Answer 6

an oral lease for less than a year is enforceable and does not need to be in writing

Question 7

Unilateral Contract

Answer 7

A contract in which one party promises to do something if the other party performs a certain act, but the other party does not promise to perform it; the contract is formed only if the other party does perform the requested act.
EX: open listing

Question 8

Sales Contract

Answer 8

agreement in which one person agrees to sell real property to another person, who, in turn, agrees to buy the property at a specified price before a specified date

Question 9

Lease Contract

Answer 9

contract that allows someone to possess and use real property for a specified time.

Question 10

Options Contract

Answer 10

contract that gives one party a right, but not an obligation, to purchase a property at a specified price during a specified time. During the options period, the seller cannot sell the property to anyone else. At the end of the options period, if the option holder has not exercised the option, then the seller is free to sell the property to someone else.

• -must be in writing, include consideration, and must be signed by all parties
• -allows the buyer to put an intended transaction on hold so that it can be completed on the buyer’s own schedule rather than on a timetable dictated by the seller
• -EX: rent to own agreement

Question 11

Right of First Refusal

Answer 11

Gives a person the chance to buy a property before anyone else

Question 12

Listing Agreement

Answer 12

an agency relationship between an agent and a seller which authorizes an agent to sell a property on the seller’s behalf. The listing agreement determines how and whether a real estate agent is paid.

Question 13

Exclusive Right to Sell Listing

Answer 13

gives an agent the exclusive right to sell a property on behalf of the seller for a fee. The seller is free to sell the property on their own, but the seller can’t ask another agent to sell the property; moreover, even if the seller sells her property herself, she will still be obligated to pay the agent the agreed fee.

Question 14

Exclusive Agency Listing

Answer 14

gives an agent the exclusive right to sell a property on behalf of the seller, but if the seller sells the property on his/her own, without help from the agent, then the agent is not entitled to a fee. The agent only receives a fee if the agent produces a sale.

Question 15

Open Listing

Answer 15

Allows the seller to make listing agreements with as many agents as she/he wishes and no agent has an exclusive right to sell the property on the seller’s behalf. If the seller sells the property without an agent’s help, then no agent receives a fee.

Question 16

Net Listing Agreement

Answer 16

agreement in which the seller specifies how much s/he wants to receive from the property, and the agent can keep any extra amounts earned from the sale. A net listing is ILLEGAL in many states because they tend to create a conflict of interest between the seller and agent; the seller may unknowingly underestimate the value of the property, resulting in an unfair windfall for the agent.

Question 17

Independent Contractor Agreements

Answer 17

If the person controls the manner, place, and time in which they perform their services, they are typically considered an independent contractor. Although a company may hire them to perform a particular task, the company generally does not tell them how, when, or where they should do the task. Companies are not required to withhold taxes from independent contractor payments, thus independent contractors are responsible for managing their tax responsibilities.

Question 18

When are real estate agents considered independent contractors?

Answer 18

1. If the agent is licensed
2. The agent’s fees are based on sales rather than hours worked
3. The agent works under written agreement that states the agent will not be treated as an employee for federal tax purposes

Question 19

Consideration

Answer 19

Anything given or promised by a party to induce another to enter into a contract, such as money, personal services, or a promise not to do something.

• -Has to be some new, bargained-for action
• -Past actions don’t count
• -Actions that would’ve been performed without the existence of the contract don’t count
• -Love & affection don’t count

Question 20

What are the essential elements of a valid contract?

Answer 20

1. Legal Capacity - all parties must have the legal capacity to enter into the contract
2. Offer & Acceptance - the parties must have a meeting of the minds
3. Consideration - anything given or promised by a party to induce another to enter into a contract
4. Mutual Agreement
5. Legal Purpose - the contract must have a lawful objective - contracts that do not have a legal purpose are considered void

Question 21

Offer

Answer 21

The essential terms of the offer must be clear enough for the other party to say “Yes”; the offer must be sincere and intentional. An offer made in jest cannot create a contract.

Question 22

Counteroffer

Answer 22

Rejection of the original offer and proposal of a new offer OR improper acceptance (i.e., accepting a delivered offer at 1pm even though the deal was “send your acceptance in writing by 12pm”; negotiation & bargaining of the contract. Uncertainty during the bargaining process can kill a contract at closing (make sure it’s clear & explicit)

Question 23

Acceptance

Answer 23

mirroring of the offer - saying yes to the exact proposed offer. Must be clear and affirmative.

Question 24

Legal Detriment Test

Answer 24

consideration exists if a party agrees to do something they are not legally obligated to do or agrees not to do something they have a legal right to do. By making the agreement, the party limits their legal rights in some way. If you agree to do something the law already requires, then consideration can’t exist.
EX: contract between uncle and nephew for 15 year old to not smoke until he’s 18. Because law already required Brian to refrain from smoking as a minor, his admirable restraint could not be consideration for the contract

Question 25

Legal Competence

Answer 25

1. Of age (18 & older)
2. Understandability - immaturity, inexperience, mental illness, or intoxication can limit a person’s judgment that can be taken advantage of
   - -in place to make sure that parties accept their obligations of the contract freely and willfully.

Question 26

Voidable Contract

Answer 26

contract becoming unenforceable if a party lacks legal capacity due to minority, mental illness, or intoxication. The party lacking legal capacity gets to choose whether or not to go ahead with the contract or void it.

Question 27

Voided Contract

Answer 27

Unenforceable contract - neither party will have to perform the obligations under the original contract

Question 28

Legal Purpose of the Contract

Answer 28

There must be a meeting of the minds, not created by mistake, fraud (deceit), duress, or undue influence

• -courts will not enforce a contract that aims to accomplish something illegal or against public policy
• -contracts are usually not voidable due to a unilateral mistake; mutual mistakes (both parties) make contracts voidable

Question 29

Duress

Answer 29

Someone forcing you into a transaction against your will or in a blackmail type situation
–these contracts are never valid

Question 30

Undue Influence

Answer 30

third party attempting to influence another person’s decision-making in a negative way (typically happens to people who have mental handicaps or who are elderly)

Question 31

Executed Contract

Answer 31

A contract in which both parties have completely performed their contractual obligations.

Question 32

Executory Contract

Answer 32

A contract in which one or both parties have not yet completed performance of their obligations.

Question 33

Valid (Contract)

Answer 33

Having force, or binding force; legally sufficient and authorized by law.

Question 34

Void (Contract)

Answer 34

To have no force or effect; that which is unenforceable due to lacking an essential element of a contract.

Question 35

Voidable (Contract)

Answer 35

That which is capable of being adjudged void, but is not void unless action is taken to make it so / valid contracts that can be avoided, usually by the choice of one of the parties, lacking legal capacity (minor, mentally ill, or intoxicated person)

Question 36

Expectation / Compensatory Damages

Answer 36

money award that puts the non-breaching party in the same financial position she would have been in if her expectations had been met, that is, if the breaching party had performed as promised.

Question 37

Unconscionable Contract

Answer 37

contract that no reasonable person would agree to and no honest person would expect to make. EX: Van Gogh painting sold by unaware seller for 50 cents.

Question 38

Enforceable Contract

Answer 38

contract in which the parties may be legally required to perform

Question 39

Unenforeable Contract

Answer 39

contract that appears to meet the requirements for validity but would not be enforceable in court., EX: oral contract used to purchase property

Question 40

Time is of the Essence

Answer 40

A condition of a contract expressing the essential nature of performance of the contract by a party in a specified period of time. If the parties haven’t performed by the date set in the clause, they are in breach of contract.

Question 41

Reasonable Time

Answer 41

If a contract does not specify a fixed time for performance, courts usually say the parties have to perform within a “reasonable time.” This rule is a natural offshoot of the duty to perform in good faith.
–Depends on the nature of the contract and the circumstances of the specific case

Question 42

Assignment

Answer 42

A transfer by a person (assignor) of that person’s rights under a contract to another person (assignee).

• -Both original parties in the contract typically must agree to an assignment clause.
• -Typically not permitted for personal services (unique)
• -Assignor may still be held liable for assignee’s failure to perform

Question 43

Novation

Answer 43

The substitution or exchange of a new obligation or contract for an old one by the mutual agreement of the parties.
–Usually results in a completely new contract, under the same terms, but with different parties
–Releases one of the original parties from their obligations
EX: assumption of an existing mortgage by a new buyer

Question 44

Liquidated Damages

Answer 44

A sum agreed upon by the parties to be full damages if a certain event occurs (i.e., breach or unforeseen event) to compensate non-breaching parties for contract losses.

Question 45

Rescission

Answer 45

(a court order for) the cancellation of a contract and restoration of the parties to the same position they held before the contract was entered into.

Question 46

Specific Performance

Answer 46

(A court ordered) action to compel performance of an agreement to remedy a contract, e.g., sale of land as an alternative to damages or rescission.

Question 47

How can a contract be discharged/end?

Answer 47

1. Mutual agreement to terminate the contract
2. Full Performance by both parties
3. Impossibility of Performance that neither party plays a part in creating (i.e., tornado destroys property that was to be sold)
4. Operation of Law - legally unenforceable
5. Breach of Contract

Question 48

(Temporary / Permanent) Injunction

Answer 48

an order directing a party to do something or not do something

Question 49

Reformation

Answer 49

court remedy that clarifies the parties’ contract to align with their original intent when they’ve done a poor job of writing down what the contract actually requires. Then they’ll have an enforceable contract that reflects those clarified obligations.

Question 50

Restitution

Answer 50

after a contract is rescinded, either party must return anything of value they received during the contract performance. This prevents a party from being unjustly enriched when a contract is rescinded.

Question 51

Parol Evidence Rule

Answer 51

establishes specific guidelines as to whether someone can introduce extrinsic evidence of the circumstances surrounding the creation, implementation, or enforcement of a contract that is outside of the “four corners” of the contract document. This promotes the idea that everything the parties want to be in the contract should be written.

• -written contracts trump any preexisting oral contract
• -make sure to include any non-dictionary definitions in the contract

Question 52

Boilerplate

Answer 52

terms that typically do not change from contract to contract. When tailor-made and boilerplate terms conflict, the unique terms always trump the boilerplate language.

Question 53

Letter of Intent

Answer 53

non-binding agreement between the buyer and seller documenting their intention to enter into a sales agreement in the future.

• -NOT the sales agreement itself
• -not legally enforceable
• -Attorneys can draft these

Question 54

Collateral Contract

Answer 54

written agreements to enter into a contract, but money is exchanged for the right to enter into the contract.

Question 55

Earnest Money

Answer 55

cash held by a third party to guaranty that the buyer completes the transaction

• -Purpose: to make sure the buyer completes the transaction and does not back out for good cause
• -The amount of earnest money should be proportional to the risk the seller takes when the real estate is taken off the market
• -negotiable
• -sacrosanct - held in escrow for the benefit of 3rd parties

Question 56

Commingling

Answer 56

The illegal mixing of personal funds with money held in trust on behalf of a client.

Question 57

Conversion

Answer 57

The unlawful appropriation of another’s property, as in the conversion of trust funds. The funds held in escrow do not belong to the 3rd party.

Question 58

Interpleader

Answer 58

lawsuit filed in the county court that the escrow agent files when there’s a dispute between the buyer and the seller as to who should get the earnest money back

Question 59

Addendum

Answer 59

Additional related pages of material, prepared by an attorney, that are added to and become part of a contract and do not require signature of the parties. The addendum(s) must be referenced in the form itself

Question 60

Amendment

Answer 60

Changes the terms of the real estate contract - must be signed by both parties

Question 61

Can real estate agents charge clients for completing approved, pre-printed real estate contracts/forms?

Answer 61

NO, according to REEB 16.05

Question 62

Pre-approved Forms

Answer 62

The REEB (Real Estate Examination Board) prohibits real estate licensees from creating their own forms or modifying pre-approved forms (must be used “as is”)

• -These pre-approved forms are available on the DSPS
• -If creating your own version, layout and content must be identical to the original (even formatting like bolding, capitalization, punctuation, etc.); provisions must be included; firm’s name/address/phone number may be included in an appropriate place on the form; no additional text may be added

Question 63

Arbitration

Answer 63

an alternative dispute resolution in a dispute btwn a buyer and seller or btwn a party and licensee or brokerage firm, which is heard outside of court. A neutral 3rd party holds a hearing to obtain the facts and circumstances of the dispute. After both sides have had an opportunity to present their cases, the arbitrator issues a ruling that’s binding on both parties.

Question 64

What if someone is unhappy with an arbitrator’s decision?

Answer 64

WI statue 788.015 recognizes arbitration agreements in real estate disputes as not only valid and enforceable, but irrevocable. Wisconsin courts will generally enforce arbitration provisions of contracts.