Contract Law

Question 1

An owner of a parcel of vacant land and a prospective buyer enter into a written contract. For a nonrefundable fee, the owner agrees to keep the prospective buyer’s offer on a property open–for a mutually-acceptable period of time. If the prospective buyer decides to buy the vacant land, both parties have agreed to a purchase price. If the prospective buyer decides against purchasing the property, the owner will keep the nonrefundable fee received from the prospective buyer at the time the contract was signed. Which term most accurately describes the contractual agreement between these two parties?

Answer 1

Option Contract

• The agreement described in this fact pattern is an option: An option is a unilateral contract. An option is a contractual agreement between an owner (the “optionor”) and a prospective buyer (the “optionee”). The owner agrees not to sell the property to anyone else during the period of time specified in the option. This is a unilateral contract, meaning it is the exchange of a promise for performance. Here, the owner is promising not to sell the property to anyone else until the prospective buyer decides either to buy (i.e., perform) or not buy. Whatever the prospective buyer decides, the owner of the property will keep the nonrefundable option fee. During this option term, if the prospective buyer decides to exercise the option, the seller will sell the property to the prospective buyer at a price both parties have agreed to in the option agreement. Note: Prospective tenants could also enter into an option with owners regarding prospective leasehold property. If the prospective tenant decides not to exercise the option, the owner would keep the nonrefundable option fee.

Question 2

The law in all states provides that contracts for the sale of real estate or an interest in real estate are unenforceable unless they are in writing and signed by the parties. What law is this?

Answer 2

Statute of Frauds

• Contracts for the sale or purchase of real estate are unenforceable in a court of law unless they are in writing and signed by the parties to be charged. The purpose of the statute of frauds is to prevent fraud by a person seeking to enforce a contract that was never made. The statute was not designed to prevent oral contracts. One exception to this rule is oral leases for a period not exceeding one year. Such leases are enforceable if the intent of the parties can be established in court.