Contract Law

Question 1

What makes a contract binding? 5 items.

Answer 1

1. A voluntary offer and acceptance.
2. An agreement or promise
3. Legally competent parties.
4. A legal purpose.
5. Valuable compensation.

Question 2

A contract is Formed

Answer 2

When the buyer and seller have agreed upon all terms assuming all the parts of the contract are valid.

Question 3

Bilateral contract

Answer 3

Has at least 2 parties involved and each makes a promise to the other party.

Question 4

Unilateral contract

Answer 4

Has only one party involved and he or she makes a promise. In RE a seller promises a buyer an option to buy. But is under no obligation to purchase. If the buyer exercises right to buy, seller has to is obligated to sell the property.

Question 5

Status of contracts. 9 status designations.

Answer 5

1. Executory means not yet competed. Obligation still must be fulfilled.
2. Executed contract is complete. No more obligations are to be fulfilled.
3. Valid contract is all five elements of contract are in place.
4. Void contract is when at least one element is missing from the offer. The term is a misnomer due to the fact that with one missing element, the form was never really a contract. A void contract is unenforceable by either party.
5. Voidable contract is one which all elements are present and appear to be valid but upon further inspection one of the element is defective. Voidable contracts may be reaffirmed by the offending party prior to being cancelled or dismissed by the other party.
   For example, if an Oral contract to sell real estate is in place between two parties it might be valid but due to the statute of frauds requirement its rendered unenforceable in a court of law.

An unenforceable contract may still be valid if title transferred. There is no reason to initiate a lawsuit by either party.

Question 6

Common Types of contracts I real estate

Answer 6

1. Agency agreement. This is an express contract due to both parties understanding their rights and responsibilities. It is also written and valid under statute of frauds.
2. Buyer’s agreement

Both 1&2 are not real estate contracts but rather employment contracts and must still fulfill all requirements of a valid contract. Discusses commission and employment services etc.

3. Purchase agrement
   Contract between the buyer and seller for the sale of real property.

Question 7

Other Types of Contracts: Leases

Answer 7

Lease is a legal binding contract between two parties.
Leases are specific to:
Landlords, tenants, and property location and is highly customized therefore pre-printed forms are not conducive to this type of contract.

Question 8

Lease contract definitions:

Leasehold estate

Answer 8

Leasehold estate: is a lease contract for a limited or defined period of time.
Study note-L for limited

Leasehold state is a defined period of time during which the lessor transfers a portion of the rights to a lessee for the term of the lease. At the end of the designated time frame, the rights passed to the lessee return to the lessor. These rights are known as Revisionary rights or revisionary interests and are willable to the lessee’s heirs or successors.

Question 9

Lease contract definitions:

Freehold estate

Answer 9

Forever or indefinite lease period of time.

Study note-F for forever

Question 10

Lessor

Answer 10

The landlord. The person doing the leasing.

Question 11

Lessee

Answer 11

the person leasing or tenant

Question 12

Revisionary rights or revisionary interests

Answer 12

Leasehold state is a defined period of time during which the lessor transfers a portion of the rights to a lessee for the term of the lease. At the end of the designated time frame, the rights passed to the lessee return to the lessor. These rights are known as Revisionary rights or revisionary interests and are willable to the lessee’s heirs or successors.

Question 13

Estate for years (aka: Lease for term)

Answer 13

Most common leasehold estate.
Has defined begin and end date from days, weeks to months or years.
The lease may be terminated without cause prior to the defined expiration date by agreement of both parties.
IF the parties fail to agree on an early termination, the contractual lease is still in place. Unless themeless may be terminated with cause if declared by a court of law.

Question 14

Estate from period to period (aka Period Tenancy)

Answer 14

Can be created when a lessor and lessee enter into an agreement that does not specify an end date.
Has a defined period like a lease term from beginning to a defined end of period, however, the lease automatically renews for that same period of agreed time again and again virtually forever.

To terminate the lease, proper written notice must be given y either party at least one period prior to the proposed end date.

Question 15

Tenancy at Will (lease type)

Answer 15

Lease type that contains all the terms and conditions under which a landlord will rent a specific property for an Undetermined time, at a stated rent to a tenant.

This type of lease has no defined beginning nor ending dates and can be terminated be either the land lord or the tenant by written notice to the other or by death of either party. The length of notice may be governed by state law but maybe longer of the parties agree.

Tenancy at will also cam be legally created by the parties after the end of any lease which allows a tenant to remain.

Under this tenancy, a landlord can adjust the rent with no recourse by the tenant. Some states require proper notice to alter the rent even within a tenancy at will.

Question 16

Tenancy at Sufferance

Answer 16

When tenant wrongful holds over after the expiration of a lease with the landlord’s consent, typically where the tenant fils to surrender possession after the termination of the lease.

A tenancy at sufferance is the lowest estate in real estate and no notice of termination may be required fro the landlord to evict a tenant.

This type of tenancy is designed to protect the tenant from being classified as a trespasser and prevent his prevent his acquisition of title by adverse possession.

Question 17

Holdover Tenant

Answer 17

Created by Tenancy of Sufferance.
Is a tenant who once occupied a property legally under a lease but continues to occupy the premises without the landlord’s consent after the original lease expired.
Tenant is responsible for payment of the monthly rental at the existing rate and terms, which the landlord may accept without admitting the legality of the occupancy.

If holdover tenant does not leave after a written notice to quit, he is subject to a lawsuit for unlawful detainer.

Question 18

Financing Documents: 3 types

Answer 18

1. Options to purchase
2. Lease Options
3. Lease Purchase agreements

All are three variations of financing documents that can be used between a buyer and a seller.

Question 19

Options to purchase

Answer 19

Gives the buyer the right to purchase the property from a seller at a later date. Only Unilateral contract.

The buyer and seller may agree to a purchase price now or the buyer may agree to the market value at the time the option is exercised; it’s negotiable.

Terms are negotiable but length is from 1 to 3 years.

The buyer places a deposit with the seller some form of option consideration or a nominal amount paid now to acquire the option. The option considerations is rarely refundable if the buyer fails to exercise the option but is usually but need not be, applied to the overall sales price when the buyer exercises his option.

This period time of option agreed upon, no one else can buy the property.

*Buyer is not obligated to buy the property but merely has the option to buy it.

If the buyer does not purchase the property at or before the end of the option period, the option expires and the sell is free to sell to another buyer.

This option agreement is the only Unilateral contract used in RE. Buyer not obligated to buy; Seller obligated to sell.

Question 20

Lease Option

Answer 20

IS two separate documents-a LEASE combined with an OPTION.
Can be use when a buyer want to buy the property but may not be financially able to get a loan at the moment.

The buyer and and seller could enter a lease with an option to buy at a future date.
Buyer becomes a tenant for a specific period of time and pays monthly lease payments.
At the end of the lease or anytime during, the tenant has the OPTION to buy the property at the predetermined price establish by both parties.
However, the purchase price per both party agreement will be determined by market value at the time the option is exercised. *the fact that the price is not determined PRIOR to the exercise date does not invalidate the option.

Seller may require a deposit for the lease portion and a separate option consideration for the purchase portion of the deal. Typically the security deposit is applied to the purchase price or refunded to the tenant if purchase not exercised.

During the lease portion, the tenant may or may not be responsible for the maintenance , insurance and taxes on the property.

Question 21

Lease PURCHASE

Answer 21

Very similar to Lease Option. However, at the time the lease ends, the tenant/buyer is CONTRACTUALLY responsible to BUY the property.

Failure to purchase could be subject to liability to the seller for damages under the specific performance clause.
This is a stronger purchase agreement vs lease option.

Question 22

Specific Performance

Answer 22

Where one party or the other fails to complete a contract without cause. The harmed party may seek specific performance from the other party to compensate that harm typically in the form of money.

Question 23

LAND CONTRACTS

Answer 23

Another contract used to finance real estate.
AKA: Contract for Deed or Installment Sale

Vendee can enter into an agreement with the vendor to buy a piece of property in regularly scheduled payments, typically monthly.
At signing, vendee get “equitable title” and possession of the property.
At signing, vendor keeps Legal title interest in the property.
After the vendee makes all monthly payments per contract, the legal title transfers and the vendor must deliver good legal title of the property to the vendee by way of a deed.

Vendee takes responsibilities for maintenance, property insurance and real estate taxes. In most states, they are also allowed to file for the homestead exemption to help defer some of the real estate taxes.

Question 24

Difference between a lease option and land contract

Answer 24

In a lease if the tenant defaults, he may be subject to a small claims case called an actual eviction.

If a vendee defaults on a land contract where equitable title was give, the Vendor has to file a Foreclosure lawsuit to regain the title passed to the vendee. The lawsuit can cost more money than evicting a tenant.

Question 25

Real Estate Risk Management

Answer 25

Four ways to handle it:

1. Avoid it
2. Control it
3. Retain it
4. Transfer it

Question 26

Insurance Companies

Answer 26

Are companies that will accept the transfer of a risk from you for a cost, called a premium.
The more you transfer, the higher the premium , the less risk you retain.
The less risk you transfer, the more you retain, the lower the premium.

Question 27

Insurance Premium

Answer 27

The monthly cost a client pays to an insurance company to accept the risk a given outcome for a given activity.

Question 28

Types of Insurance

Answer 28

1. Hazard Insurance
2. Contents and Personal Property Insurance
3. Consequential Loss
4. Liability Insurance
5. Flood insurance (not covered in homeowner’s insurance)
6. Multi-peril insurance (flood and fire protection; therefore is is an insurance policy that has 2 or more coverage)

Homeowners insurance: Collectively includes Hazard and Liability

Question 29

Hazard Insurance

Answer 29

Protects a homeowner against the costs of damage from fire, smoke, vandalism, and more.
When you take out a mortgage, th leader requires you take out a hazard insurance to protect their investment. Many lenders incorporate the insurance payment into your monthly mortgage payment.
It can protect only against specifically named damages.

Question 30

Homeowners Insurance

Answer 30

Homeowners insurance is not synonymous with Hazard insurance.
Hazard only covers physical damage.
Homeowners insurance typically includes liability protection and hazard insurance.

Question 31

Liability Insurance

Answer 31

Offers Financial protection for you and your family.
Personal liability coverage within your Homeowner’s Policy provides coverage for bodily injury and property damage sustained by others for which you or your family members are legally responsible. For example if someone falls down your stairs, or your child accidentally throws ball an breaks neighbor’s window, you may be held responsible for the damages.

Question 32

Insurance Reimbursement

Answer 32

Amount reimbursed calculated several ways.
1. Replacement: Payment is based on the replacement cost of damaged or stolen property. It compensates you for actual cost of replacing property.

2. Actual cash value: this is the standard method. This is equal the replacement cost minus depreciation of the item over time.

PREMIUMS for these policies cost more for the Replacement than actual cash value

Question 33

Errors and Omissions Insurance (E&O)

Answer 33

Type of professional liability insurance that protect companies and their workers or individuals agains claims made by clients for inadequate work or negligent actions.

E&O often covers both court costs and any settlements up to the amount specified by the insurance contract. E&O insurance is based on the financial exposure of the company and the activities it undertakes.