Kap Real Estate Chapter 9: Basic Contract Law

Question 1

1. What is a contract?

2. What conditions must a contract be formed under?

Answer 1

1. is a legally enforceable promise or set of promises between legally competent parties, supported by legal consideration, to do (or refrain from doing) a legal act that must be performed and for which the law provides a remedy if a breach of promise occurs.

2:

Voluntary—no one may be forced into a contract

An agreement or a promise—a contract is essentially a legally enforceable promise

Made by legally competent parties—the parties must be viewed by the law as capable of making a legally binding promise

Supported by legal consideration—a contract must be supported by some valuable thing that induces a party to enter into a contract and that must be legally sufficient to support a contract

About a legal act—no one may make an enforceable contract to do something illegal

Question 2

Express Contract

Answer 2

1. the parties state the terms and show their intentions in words to that effect. An express contract may be either oral or written.

The statute of frauds requires ALL CONTRACTS FOR THE TRANSFER OF AN INTEREST IN REAL ESTATE TO BE IN WRITING.

EX: Hugh approaches his neighbor, Bob, and says, “I will paint your house today for $500.” Bob replies, “If you paint my house today, I will pay you $500.” Hugh and Bob have entered into an express oral contract.

EX: Betty writes, signs, and delivers an offer, which Sam then signs. Betty and Sam have an express written contract as soon as Betty learns that Sam has signed Betty’s offer.

Question 3

Implied Contract

Answer 3

the agreement of the parties is demonstrated by their actions or conduct

EX: Ken goes into a restaurant and orders a meal. Ken has entered into an implied contract with the restaurant to pay for the meal, even though payment was not mentioned before the meal was ordered.

Question 4

Bilateral Contract

Answer 4

both parties promise to do or refrain from doing something; One promise is exchanged for another. (“I will do this, and you will do that.”). Most real estate-related contracts are bilateral in nature.

Question 5

Unilateral Contract

Answer 5

one party makes a promise to induce a second party to do something. The second party is not legally obligated to act; however, if the second party does comply, the first party is obligated to keep the promise. (“I will do this if you do that.”)

Example: a seller who agrees to give the buyer four months to decide whether to buy a property is giving the buyer an option, which is considered a unilateral contract.

Question 6

Executory Contract

Answer 6

-exists when something remains to be done by one or both parties.

EX: A sales contract, signed by all parties, pending closing, is an example of an executory contract.

Question 7

Executed Contract

Answer 7

executed contract is one in which all parties have fulfilled their promises and therefore, fully performed the contract

Ex: such as a sales contract that has closed.

(Do not be confused by the fact that the word execute is also used to refer to the signing of a contract.)

Question 8

Classification of Contracts

1) What are the 4 Classifications of contracts?
2) What are the legal effects of those contracts?

Answer 8

Valid

Void

Voidable

Unenforceable

2:

Valid - Binding and enforceable on both parties

(Ex: Agreement complies with essentials of a valid contract)

Void - No legal effect

(Ex: Contract for an illegal purpose)

Voidable - Valid but may be disaffirmed by one party (Ex: Contract with a minor)

Unenforceable - Valid between the parties, but neither party may force performance (Ex: Certain oral agreements)

Question 9

Valid Contract

Answer 9

complies with all the essential elements of a contract, and is binding and enforceable on both parties.

Question 10

Void Contract

Answer 10

is one that has no legal force or effect. It is unenforceable in a court of law because it does not meet the essential elements of a contract. However, a void contract may be fully executed unless one of the parties disaffirms it.

Question 11

What is a Voidable Contract?

What can contribute to a voidable contract?

Answer 11

1:
is one that seems, on the surface, to be valid but may be rescinded, or disaffirmed, by one of the parties, based on some legal principle.

2:

• drugged or intoxicated
• has the option to disaffirm the agreement does not do so within a prescribed period of time
• minor
• entered into with a person who is known to be mentally ill is usually voidable during the mental illness

Question 12

Unenforceable Contract

Answer 12

has all the elements of a valid contract; however, neither party can sue the other to force performance.

Unenforceable contracts are said to be valid as between the parties because once the agreement is fully executed and both parties are satisfied, neither has reason to initiate a lawsuit to force performance.

Example: an oral agreement for the sale of a parcel of real estate would be unenforceable, because the statute of frauds (discussed later) requires that real estate sales contracts be in writing to be enforceable

Question 13

What are the 4 Essential elements of a valid contract?

Answer 13

Legally competent parties:

1. Of legal age and have sufficient mental capacity
2. Mutual assent or deliberate agreement:
3. An offer by one party is accepted by the other party
4. The terms of the agreement must be fairly definite and understood by both parties. Furthermore, the acceptance must be actually communicated to the offeror.

Legality of object:

-To be valid, a contract must not contemplate a purpose that is illegal or against public policy. If a contract calls for immoral performance, discrimination, or a criminal act to take place, the contract is void.

Consideration:

-Courts will not enforce gratuitous (free) promises

Consideration is something of legal value, bargained for and given in exchange for a promise or an act.

Any return promise to perform that has been bargained for and exchanged is legally sufficient to satisfy the consideration element

**the purchase price is the consideration in exchange for the transfer of the property in a real estate contract. A binder or an earnest money deposit is merely an expression of good faith and is not required to create a valid contract.

Question 14

What is a earnest money deposit?

Answer 14

-money pledged by a buyer to show good faith when making an offer to buy a home

Question 15

Reality of Consent

Answer 15

entered into freely based upon correct information about the matter to be valid; if duress, misrepresentation, or fraud was present when the agreement was made, there is no contract.

Question 16

Revocation of an offer

Answer 16

An offer may be revoked or withdrawn by the offeror at any time prior to acceptance if the revocation is communicated directly to the offeree by the offeror. It also can be revoked if the parties are notified through their agents.

Question 17

Counteroffer

Answer 17

The offeror is relieved of the original offer because the offeree has, in effect, rejected it by making changes. The offeror can accept the offeree’s counteroffer, reject it, or, if the offeror wishes, make another counteroffer.

Any change in the most recent offer results in another counteroffer, until one party agrees to the other party’s counteroffer and both parties sign the final contract.

Counteroffers may be made by pen and ink changes as long as each individual change within the offer is initialed and dated by all parties in addition to the signatures and dates necessary at the bottom of the contract. To avoid confusion and mistakes, signing a new NCBA/NCAR 2-T Offer to Purchase and Contract that incorporates all the changes is the preferred practice.

Question 18

statute of frauds

Answer 18

The North Carolina statute of frauds requires that to be enforceable in a court of law, conveyances of interests in real property—such as deeds, contracts for sale, mortgages, options, easements, and certain leases (those that are for longer than three years from their making)—must be in writing and signed by the party to be bound or by the party’s legally authorized agent.

Question 19

A listing agreement or a buyer representation agreement is an employment contract and is not covered by the North Carolina ____________; however, North Carolina Real Estate Commission rules require that agency agreements be in writing (Rule A.0104). The purpose of the North Carolina statute of frauds is to prevent fraudulent proof of an oral contract.

Answer 19

statute of fraud

Question 20

Parol Evidence Rule

Answer 20

is a rule of evidence that dictates that no oral agreements that contradict the terms of a written contract may be considered in a lawsuit based on the written agreement.

The written contract is assumed to be the complete manifestation of the agreement of the parties. The many exceptions to the rule include evidence that a contract was entered into illegally or evidence intended to clarify ambiguous contract terms. The party who drafted the ambiguous terms would most likely be ruled against in a court hearing.

Question 21

Performance of Contract

Answer 21

Many contracts call for a specific time at or by which the agreed-on acts must be completely performed. In addition, many contracts state that time is of the essence. This means that the contract must be performed within the time limit specified, and any party who has not performed on time is liable for breach of contract. If an offeror includes “time is of the essence” in the offer, the offeror can still revoke the offer at any time prior to acceptance.

When a date is noted in a contract but is not followed by the phrase, “time is of the essence,” the date is a general target date that all parties should attempt to meet. If the promised action is not completed by the target date, the contract is not automatically terminated or made voidable.

Question 22

Assignment and Novation

Answer 22

Assignment - refers to a transfer of rights or duties but not the liabilities under a contract to a third party

Rights in a contract may be assigned to a third party unless the agreement forbids such an assignment. Duties may also be assigned (delegated), but the original obligor remains secondarily liable for them. The exception to this rule is a contract for personal services, which may not be assigned. Most contracts include a clause that either permits or forbids assignment. NCBA/NCAR 2-T Offer to Purchase and Contract is not assignable without mutual written consent. An assignment does not terminate the contract or change the terms of the contract.

Novation
-Nova means new, and novation is the substitution of a new contract for an existing agreement with the intent of extinguishing the old contract. The new agreement may be between the same parties, or a new party may be substituted for either (novation of the parties).

Question 23

Discharge of Contract

1) What is it?
2) Ways it can be breached or broken

Answer 23

1) is a breached or broken contract
2) -Partial performance of the terms of the contract. This is sometimes referred to as accord and satisfaction. When one party accepts something less than agreed on as complete performance, the contract is considered discharged.
- Substantial performance. One party has substantially performed the contract but does not complete all the details exactly as the contract requires. Such performance—for example, under construction contracts—may be sufficient to force payment, with certain adjustments for any damages suffered by the other party.
- Impossibility of performance. An act required by the contract cannot be accomplished.
- Mutual agreement of the parties to cancel.
- Operation of law. This is in terms of voiding of a contract by a minor, as a result of fraud or the expiration of the statute of limitations (discussed later in this unit), or as a result of the alteration of a contract without the written consent of all parties involved. Bankruptcy can also discharge a contractual obligation.

Question 24

General Rules for Interpretation of Contracts

Answer 24

• Preliminary negotiations inconsistent with the terms of a final written contract are not admissible as evidence to alter a contract’s terms.
• A contract is interpreted as a whole, and all writings forming a part of the same transaction are interpreted together.
• If possible, a contract will be construed as to render it reasonable rather than unreasonable.
• Ordinary words will be interpreted in their popular sense unless circumstances indicate that the parties intended to use them in a special sense.
• Where there is a conflict between preprinted versus written provisions of a contract, the preferred interpretation favors written provision over preprinted language.
• Ambiguities in a contract typically will be construed against the party who prepared the provision or who chose the words that create doubt.

Question 25

Breach of Contract

Answer 25

-is a violation, without legal excuse, of any of the terms or conditions of a contract, as when a seller breaches a sales contract by not delivering title to the buyer under the conditions stated in the agreement. The nondefaulting party has certain rights

Question 26

What can happen to the breaching party in a Breach of Contract?

contract defaults, the nondefaulting party has the following alternatives:

Answer 26

• sue the breaching party for money damages or compensatory damages
• entitled to collect liquidated damages. Liquidated damages are defined as the amount of money that will compensate the injured party for breach, which the parties agree to at the time they enter into the contract. For example, in North Carolina, the earnest money deposit is considered liquidated damages in the event the buyer breaches the contract. The seller is entitled to keep the amount of the deposit as compensation for any injuries caused by the buyer’s breach of contract.
• Consequential damages are special damages that might be obtained if the damages upon breach were reasonably foreseeable to the breaching party at the time of making the contract. It also allows the injured party to sue for lost profits.
• specific performance, to force the other party to perform the contract as agreed. Specific performance is ordered only when the subject matter of the contract is not readily available from another source and when each party has the ability to perform the contractual obligations. Long shot but possible is property is unique or rare
• Rescission: The injured party may rescind the contract, which means the contract is declared invalid and both parties return to the position they were in before they entered into the contract.

Question 27

Broker’s Authority to Prepare Documents

1. What contracts can brokers draft up?
2. What happens if there is no available standard or reprinted form drafted by a NC attorney?
3. What 3 issues might arise with preprinted forms?

Answer 27

1. None, we are not authorized to practice law…drafting is prohibited but may fill in blanks on preprinted forms. All changes and additions should be dated and must be initialed in the margin or on the rider by both parties when the contract is executed.
2. If there is no available standard or preprinted form drafted by a

North Carolina attorney for a certain type of transaction or condition, then the broker should refer the parties to their attorneys to draft appropriate language and/or documents.

3. The use of preprinted forms raises three issues: (1) how to fill in the blanks, (2) which text is not applicable to a particular sale and is to be ruled out by drawing a line through the unwanted words or by adding an amendment, and (3) what additional clauses or agreements (called riders or addenda, or in the singular, addendum) are to be included

Question 28

What happens in Auction Sales?

Answer 28

-an auctioneer actually accepts the offer on behalf of the seller

Question 29

Auctions with reserve

Answer 29

The seller reserves the right to stop the bidding if it becomes apparent that the high bid will be unacceptable (i.e., too low) to the seller. The seller must reject all bids before the auction is concluded and the auctioneer accepts a bid.

Question 30

Auctions without reserve (AKA Absolute auction):

Answer 30

Auctions without reserve (AKA Absolute auction): The seller agrees to accept the high bid, no matter what the terms of that bid. This is also called an absolute auction in North Carolina.

Question 31

A real estate auctioneer requires two licenses to auction real estate, what are the two licenses?

Answer 31

Real Estate License and a auctioneers license