Contracts

Question 1

Contract

Answer 1

an agreement between two or more parties who, in a “meeting of the minds,” have pledged to perform or refrain from performing some act.

Question 2

Valid Contract

Answer 2

A contract that is legally enforceable by virtue of meeting certain requirements of contract law. It is in writing is enforceable within a statutory time period. It is made orally is also generally enforceable within a statutory period, with the exceptions noted below.

Question 3

Legal Status of Contracts

Answer 3

• valid
• valid but unenforceable
• void
• voidable

Question 4

Valid but Unenforceable

Answer 4

State laws declare that some contracts are enforceable only if they are in writing. These laws apply in particular to the transfer of interests in real estate. Thus, while an oral contract may meet the tests for validity, if it falls under the laws requiring a written contract, the parties will not have legal recourse to enforce performance.

Question 5

Void

Answer 5

an agreement that does not meet the tests for validity, and therefore is no contract at all. If a contract is void, neither party can enforce it.

Question 6

Voidable

Answer 6

one which initially appears to be valid, but is subject to rescission by a party to the contract who is deemed to have acted under some kind of disability. Only the party who claims the disability may rescind the legal effect of the contract.

Question 7

Criteria for Contract Validity

Answer 7

• Competent Parties
• Voluntary Act of Good Faith
• Legal Purpose
• Mutual Consent
• Valuable Consideration

Question 8

Competent Parties

Answer 8

The parties to a contract must have the capacity to contract, and there must be at least two such parties. Capacity to contract is determined by three factors:
- legal age
- mental competency
- legitimate authority

Question 9

Valuable Consideration

Answer 9

A contract must contain a two-way exchange of valuable consideration as compensation for performance by the other party. The exchange of considerations must be two-way. The contract is not valid or enforceable if just one party provides consideration.

Question 10

Legal Purpose

Answer 10

The content, promise, or intent of a contract must be lawful. A contract that proposes an illegal act is void.

Question 11

Voluntary, good faith act

Answer 11

The parties must create the contract in good faith as a free and voluntary act. A contract is thus voidable if one party acted under duress, coercion, fraud, or misrepresentation.

Question 12

Validity of a Conveyance Contract

Answer 12

• be in writing
• contain a legal description of the property
• be signed by one or more of the parties

Question 13

Statute of Limitations

Answer 13

restricts the time period for which an injured party in a contract has the right to rescind or disaffirm the contract. A party to a voidable contract must act within the statutory period.

Question 14

Statute of Frauds

Answer 14

requires that certain contracts must be in writing to be enforceable. Real estate contracts that convey an interest in real property fall in this category, with the exception that a lease of one year’s duration or less may be oral. All other contracts to buy, sell, exchange, or lease interests in real property must be in writing to be enforceable. In addition, listing agreements in most states must be in writing.

Question 15

Electronic Contracting

Answer 15

through email and fax greatly facilitates the completion of transactions. Clients, lenders, title agents, inspectors, brokers, and other participants in a transaction can quickly share documentation and information. Electronic contracting is made possible by the Uniform Electronic Transactions Act (UETA) and the Electronic Signatures in Global and National Commerce Act (E-Sign), which are federal laws. UETA, which has been accepted in most states, provides that electronic records and signatures are legal and must be accepted. E-Sign makes contracts, records, and signatures legally enforceable, regardless of medium, even where UETA is not accepted.

Question 16

Offeror

Answer 16

proposes contract terms in an offer to the offeree

Question 17

Offer

Answer 17

expresses the offeror’s intention to enter into a contract with an offeree to perform the terms of the agreement in exchange for the offeree’s performance. In a real estate sale or lease contract, the offer must clearly contain all intended terms of the contract in writing and be communicated to the offeree.

Question 18

Acceptance

Answer 18

An offer gives the offeree the power of accepting. For an acceptance to be valid, the offeree must manifestly and unequivocally accept all terms of the offer without change, and so indicate by signing the offer, preferably with a date of signing. The acceptance must then be communicated to the offeror. If the communication of acceptance is by mail, the offer is considered to be communicated as soon as it is placed in the mail.

Question 19

Counteroffer

Answer 19

By changing any of the terms of an offer, the offeree creates a counteroffer, and the original offer is void. At this point, the offeree becomes the offeror, and the new offeree gains the right of acceptance. If accepted, the counteroffer becomes a valid contract provided all other requirements are met.

Question 20

Revocation of an Offer

Answer 20

An offer may be revoked, or withdrawn, at any time before the offeree has communicated acceptance. The revocation extinguishes the offer and the offeree’s right to accept it.

Question 21

Termination of an Offer

Answer 21

Any of the following actions or circumstances can terminate an offer:
- acceptance: the offeree accepts the offer, converting it to a contract
- rejection: the offeree rejects the offer
- revocation: the offeror withdraws the offer before acceptance
- lapse of time: the offer expires
- counteroffer: the offeree changes the offer
- death or insanity of either party

Question 22

Assignment of Contract

Answer 22

A real estate contract that is not a personal contract for services can be assigned to another party unless the terms of the agreement specifically prohibit assignment.

Listing agreements, for example, are not assignable, since they are personal service agreements between agent and principal. Sales contracts, however, are assignable, because they involve the purchase of real property rather than a personal service.

Question 23

Contract Preparation

Answer 23

In some states, brokers and agents may not draft contracts, but they may use standard promulgated forms and complete the blanks in the form.
As a rule, a broker or agent who completes real estate contracts is engaging in the unauthorized practice of law unless the broker is a party to the agreement, such as a in a listing agreement or sales contract. Brokers and agents may not complete leases, mortgages, contracts for deed, or promissory notes to which they are not a party.

Agents must be fully aware of what they are legally allowed to do and not do in preparing and interpreting contracts for clients. In addition to practicing law without a license, agents expose themselves to lawsuits from clients who relied on a contract as being legally acceptable.

Question 24

Oral vs. Written

Answer 24

A contract may be in writing or it may be an oral, or parol, contract. Certain oral contracts are valid and enforceable, others are not enforceable, even if valid. For example, most states require listing agreements, sales contracts, and leases exceeding one year to be in writing to be enforceable.

Question 25

Express Contract

Answer 25

A contract in which all the terms and covenants of the agreement have been manifestly stated and agreed to by all parties, whether verbally or in writing.

Question 26

Implied Contract

Answer 26

an unstated or unintentional agreement that may be deemed to exist when the actions of any of the parties suggest the existence of an agreement.

Question 27

Bilateral Contract

Answer 27

A contract in which both parties promise to perform their respective parts of an agreement in exchange for performance by the other party.

Question 28

Unilateral Contract

Answer 28

only one party promises to do something, provided the other party does something. The latter party is not obligated to perform any act, but the promising party must fulfill the promise if the other party chooses to perform.

Question 29

Executed Contract

Answer 29

A contract that has been fully performed and fulfilled: neither party bears any further obligation. A completed and expired lease contract is an example: the landlord may re-possess the premises and the tenant has no further obligation to pay rent.

Question 30

Executory Contract

Answer 30

A contract in which performance is yet to be completed. A sales contract prior to closing is an example: while the parties have agreed to buy and sell, the buyer has yet to pay the seller and the seller has yet to deed the property to the buyer.

Question 31

Forms of Contract Termination

Answer 31

• Performance
• Infeasibility
• Mutual Agreement
• Cooling-period rescission
• Revocation
• Abandonment
• Lapse of Time
• Invalidity of Contract

Question 32

Termination due to Performance

Answer 32

A contract terminates when fully performed by the parties. It may also terminate for:
- partial performance, if the parties agree
- sufficient performance, if a court determines a party has
sufficiently performed the contract, even though not to the full extent of every provision

Question 33

Termination due to Infeasibility

Answer 33

An otherwise valid contract can be canceled if it is not possible to perform. Certain personal services contracts, for example, depend on the unique capabilities of one person which cannot be substituted by someone else. If such a person dies or is sufficiently disabled, the contract is cancelable.

Question 34

Termination due to Mutual Agreement

Answer 34

Parties to a contract can agree to terminate, or renounce, the contract. If the parties wish to create a new contract to replace the cancelled contract, they must comply with the validity requirements for the new contract.

Question 35

Novation

Answer 35

A new contract that replaces a cancelled contract under a mutual agreement by both parties

Question 36

Termination due to Cooling-Period Rescission

Answer 36

Rescission is the act of nullifying a contract. In many states, parties to certain contracts are allowed a statutory amount of time after entering into a contract, or “cooling period”, to rescind the contract without cause. No reason need be stated for the cancellation, and the cancelling party incurs no liability for performance.

For example, consider the unsuspecting buyer of a lot in a new resort development. Such buyers are often the targets of hard-sell tactics which lead to a completed sales contract and a deposit. The statutory cooling period gives the buyer an opportunity to reconsider the investment in the absence of the persistent salesperson.

Question 37

Termination due to Revocation

Answer 37

cancellation of the contract by one party without the consent of the other. For example, a seller may revoke a listing to take the property off the market. While all parties have the power to revoke, they may not have a defensible right. In the absence of justifiable grounds, a revocation may not relieve the revoking party of contract obligations.

For example, a seller who revokes a listing without grounds may be required to pay a commission if the broker found a buyer, or reimburse the broker’s marketing expenses if no buyer was found.

Question 38

Termination due to Abandonment

Answer 38

occurs when parties fail to perform contract obligations. This situation may allow the parties to cancel the contract.

Question 39

Termination due to Lapse of Time

Answer 39

If a contract contains an expiration provision and date, the contract automatically expires on the deadline.

Question 40

Termination due to Invalidity of Contract

Answer 40

If a contract is void, it terminates without the need for disaffirmation. A voidable contract can be cancelled by operation of law or by rescission.

Question 41

Breach of Contract
Default

Answer 41

is a failure to perform according to the terms of the agreement. gives the damaged party the right to take legal action.

The damaged party may elect the following legal remedies:
- rescission
- forfeiture
- suit for damages
- suit for specific performance

Question 42

Rescission

Answer 42

A damaged party may rescind the contract. This cancels the contract and returns the parties to their pre-contract condition, including the refunding of any monies already transferred.

Question 43

Forfeiture

Answer 43

requires the breaching party to give up something, according to the terms of the contract. For example, a buyer who defaults on a sales contract may have to forfeit the earnest money deposit.

Question 44

Suit for Damages

Answer 44

A damaged party may sue for money damages in civil court. The suit must be initiated within the time period allowed by the statute of limitations.

Question 45

Liquidated Damages

Answer 45

When a contract states the total amount due to a damaged party in the event of a breach, the compensation

Question 46

Unliquidated Damages

Answer 46

If the contract does not specify the amount, the damaged party may sue in court for this

Question 47

Suit for Specific Performance

Answer 47

an attempt to force the defaulting party to comply with the terms of the contract. This suit occurs when it is difficult to identify damages because of the unique circumstances of the real property in question. The most common instance is a defaulted sale or lease contract where the buyer or seller wants the court to compel the defaulting party to go through with the transaction, even when the defaulter would prefer to pay a damage award.