LESSON 1: CONTRACT LAW OVERVIEW Flashcards
Do license holders have to use TREC’s contract forms? Does TREC discipline those who fail to use them?
Yes. License holders must use TREC-promulgated forms when applicable. Failure to do so can result in discipline. Exceptions are in Rule 537.11(a). License holders cannot alter forms except for factual details (Rule 537.11(c)).
What should a license holder do if no promulgated form exists?
Seek an attorney or draft an appropriate form.
Can real estate agents practice law?
No, unless they also hold a law license. Agents can explain forms but cannot give legal advice or opinions.
What legal restrictions are placed on license holders under TAC 537.11?
License holders cannot practice law, give legal advice, interpret contract legality, or discourage clients from hiring an attorney.
Who drafts and edits TREC contract forms?
The 13-member Broker-Lawyer Committee drafts and edits forms. TREC reviews and approves them.
Can real estate agents recommend an attorney to clients?
No, clients must choose and pay for their own attorney.
What is the TAR Legal Hotline?
A service for Texas REALTORS® to obtain legal information on real estate matters. License number verification is required.
What topics can be discussed with the TAR Legal Hotline?
Agency, brokerage, closings, license law, listings, regulations, titles, trust accounts.
Can agents share legal hotline information with clients?
No, doing so would be the indirect unauthorized practice of law.
What is a contract?
A legally binding agreement to do or not do something.
What are the five essential elements of a valid contract?
Competent parties, mutual agreement, lawful objective, consideration, and it must be in writing and signed.
What defines a competent party in a contract?
A party who is of legal age (18+ or emancipated) and not declared mentally incompetent by a judge.
What happens if a minor enters into a contract?
The contract is voidable and can be ratified or voided when the minor reaches the age of majority.
What is the difference between a void and a voidable contract?
A void contract has no legal effect and cannot be enforced. A voidable contract has all essential elements but can be rescinded by one party.
Can a mentally incompetent person enter into a contract?
No. Contracts involving individuals declared incompetent are void. A guardian or conservator must act on their behalf.
What is mutual agreement in a contract?
A contract must have an offer and acceptance with no fraud, misrepresentation, or duress.
What is the “mirror image rule” in contracts?
Acceptance must match the offer exactly. Any modification creates a counteroffer and rejects the original offer.
What does lawful objective mean in a contract?
The contract must comply with the law. Any contract involving illegal activity is void.
Can an illegal contract be enforced?
No. Courts will not enforce or award damages for illegal contracts.
What is “Consideration” in a contract?
Consideration is the exchange of something of value in return for the promise or service of the other party. It ensures a contract is legally binding.
What are the three essential elements for a contract to be enforceable?
Mutual assent (agreement to contract terms), a valid offer and acceptance, and consideration.
Why is consideration important in a contract?
Without consideration, a contract is not legally binding because both parties must suffer a detriment to gain a benefit.
What is an example of consideration?
If A promises B movie tickets in exchange for B mowing A’s lawn, the tickets and the mowing effort are both considerations.
What is the most common form of consideration in real estate contracts?
A promise for a promise (e.g., the buyer promises to pay, and the seller promises to transfer the deed). Money is also a common form of consideration.
Is earnest money considered consideration?
No, in real estate contracts, the promises exchanged (buyer paying and seller transferring the deed) serve as consideration.
What are trust funds in real estate?
Client’s money, earnest money, rent, unearned fees, security deposits, or any money held on behalf of another person.
Who can hold trust funds in Texas real estate transactions?
Brokers may hold earnest money in a trust account, but often transfer it to a title company. Salespersons must give trust money to their sponsoring broker.
What happens if a buyer backs out before depositing earnest money?
The Texas Real Estate Commission (TREC) does not decide who gets the earnest money. Legal disputes must be resolved through a private attorney.
What happens if a loan is denied and the seller won’t sign the earnest money release?
The title company cannot return the money without the seller’s release. TREC does not have jurisdiction, and legal counsel may be needed.
What happens if a broker won’t return earnest money after a deal falls through?
If a TREC-promulgated form was used, the broker requires both buyer and seller to agree on the distribution before disbursing the money.
When must an agent deposit earnest money?
By the close of business on the third working day after contract execution unless otherwise agreed in writing.
Can part of the earnest money be used to pay a commission if the contract falls through?
No, unless both parties agree in writing.
What is the Statute of Frauds in real estate?
It requires real estate contracts to be in writing and signed to be enforceable.
Why does the Statute of Frauds exist?
To prevent fraudulent conduct and ensure all parties clearly understand and have a record of their agreement.
What is the Parol Evidence Rule?
It prevents parties from altering a written contract by introducing prior or contemporaneous oral or written agreements not included in the contract.
When does the Parol Evidence Rule not apply?
In cases of clerical errors, fraud, duress, undue influence, or to show the existence of a separate agreement.
How can courts interpret contracts under the Parol Evidence Rule?
Courts may consider prior dealings, trade usage, and course of conduct to clarify or supplement a contract but not contradict it.
What is an integrated contract?
A contract that represents the final and complete agreement between the parties, making prior negotiations or side agreements unenforceable.
What were some traditional formalities in land transfers?
Land transfers involved elaborate ceremonies, such as placing clods of earth on an altar, processions around the property, or the grantor leaping over a hedge to renounce ownership.
What was the purpose of traditional land transfer ceremonies?
They served as clear, public demonstrations of ownership change, ensuring security of title and reducing disputes.
What modern requirement replaced traditional land transfer ceremonies?
The Statute of Frauds requires real estate transfers to be in writing and signed by the party to be bound.
How have courts interpreted the writing requirement in real estate transfers?
Courts have sometimes accepted informal writings like sketches on cocktail napkins or brown paper bags as valid.
What legislation facilitated electronic land transfers?
The Electronic Records in Global and National Commerce Act (E-sign Act) of 2000.
What is the key provision of the E-sign Act?
Contracts, signatures, or records cannot be denied validity solely because they are in electronic form.
What qualifies as a “transaction” under the E-sign Act?
Any action related to business, consumer, or commercial affairs, including the sale or lease of real property.
How does the E-sign Act define an electronic signature?
An electronic sound, symbol, or process attached to or logically associated with a contract and executed with intent to sign.
What are the five essential elements of a valid contract?
- Mutual Assent (100% agreement), 2. Legally Competent Parties (18, sane, and sober), 3. Consideration (exchange of value), 4. Lawful Objective (legal purpose), 5. Adherence to the Statute of Frauds (if required).
What are the four categories a contract can fall into?
- Valid, 2. Void, 3. Voidable, 4. Unenforceable
What makes a contract void?
A contract is void if it lacks essential legal elements or involves illegal acts, fraud, misrepresentation, duress, or undue influence.
What makes a contract unenforceable?
A contract becomes unenforceable if it is barred by the statute of limitations or the doctrine of laches.
What is the statute of limitations?
A law setting a maximum time period for filing legal claims. If the deadline passes, the claim is barred.
What is the doctrine of laches?
A legal principle that bars claims due to unreasonable delay in asserting rights, especially when the delay prejudices the opposing party.
What is the key difference between the statute of limitations and the doctrine of laches?
The statute of limitations is codified law with a set deadline, while laches is a common law doctrine applied at the judge’s discretion.
What makes a contract voidable?
A contract is voidable if one party can disaffirm it due to incompetence, duress, fraud, or misrepresentation.
What is an executory contract?
A contract where obligations are still being performed by one or more parties.
What is an example of an executory contract?
A real estate contract before closing, where the buyer is arranging financing and the seller is ordering a title policy.
When does an executory contract become executed?
When all contractual obligations are fulfilled by all parties, making it legally complete.
What is an example of an executed contract?
A real estate transaction where the title has been transferred, and the sales price has been paid.
What does the Texas Property Code consider as executory contracts?
Contracts that do not close for an extended period where the purchaser takes possession but does not receive legal title until later, including contracts for deed, land sales contracts, and lease-option contracts.
Since when does the Texas Property Code consider an option-to-buy with a residential lease an executory contract?
Since June 1, 2006.
Can TREC forms be used to create lease-purchase, lease-option contracts, or contracts for deed?
No, TREC and real estate trade associations in Texas do not provide standard forms for executory contracts.
What are the consequences of modifying TREC forms for executory contracts?
It is a violation of the license act and considered the unauthorized practice of law.
Why should buyers and sellers consult an attorney for executory contracts?
Executory contracts come with significant risks and legal requirements, and non-compliance can lead to penalties.
What is a potential risk for buyers in a contract for deed?
The lender may foreclose on the property if the seller defaults, causing the buyer to lose their investment.
What is a bilateral contract?
A contract where both parties promise to do something for each other, obligating both to fulfill certain terms.
What is an example of a bilateral contract in real estate?
A real estate transaction where the buyer promises to pay and the seller promises to transfer the title.
What happens if one party in a bilateral contract does not fulfill their obligation?
The other party can seek legal recourse to enforce the contract.
What is a unilateral contract?
A contract in which only one party makes a promise, and the contract is fulfilled when the specified action is performed.
What is an example of a unilateral contract?
A broker offering a $1,000 bonus to any salesperson who brings in 10 listings, without obligating anyone to participate.
What is the Option to Terminate in the One to Four Family Residential Contract?
The seller allows the buyer to terminate within the agreed period, but the buyer is not obligated to do anything.
What happens if the buyer delivers the earnest money or option fee late?
The seller may terminate the contract or exercise other legal remedies.
What happens if no Option Fee is stated or paid on time?
The buyer does not have the unrestricted right to terminate the contract.
What does “Time is of the essence” mean in Paragraph 5 of the One to Four Family Residential Contract?
Strict compliance with deadlines is required for the contract to remain valid.
What does “time is of the essence” mean in a contract?
It means that performance within the specified time is necessary to require performance by the other party. Failure to act on time is a breach of contract.
Is time always of the essence in real estate contracts?
No, unless explicitly stated in the contract. Courts usually allow performance within a reasonable time if not specified.
What happens if a contract lacks a “reasonable time” clause?
It can be challenged in court, as reasonable time depends on the nature of the act and circumstances.
When time is of the essence, what happens if a deadline is missed?
Even a small delay, like five minutes past a deadline, can be considered a breach.
Should a licensee write “time is of the essence” in a contract?
No, clients should consult an attorney before including such language as it changes legal rights.
What are contingencies in a real estate contract?
Conditions that must be met for the contract to proceed to closing, often included in TREC addenda.
What is the purpose of the Third-Party Financing Addendum?
It provides a contingency for buyer and property financing approval. Time is of the essence for this provision.
What is the purpose of the Short Sale Addendum?
It makes the contract contingent upon the seller’s lender approving the short sale.
Must a buyer disclose if their purchase depends on selling another property?
Yes, this should be included in the contract using the Addendum for Sale of Other Property by Buyer.
What is an addendum in a contract?
A document added to the original contract to include additional terms or conditions.
What is the Parol Evidence Rule?
It states that only the written contract terms are considered in legal disputes, not verbal agreements.
What is the Four Corners Rule?
Courts interpret contracts based solely on their written content without external influences.
Where are addenda listed in the TREC contract?
In Paragraph 22 of the One to Four Family Residential Contract.
What is the difference between an addendum and an amendment?
An addendum is included at contract creation, while an amendment modifies an already signed contract.
Why is an amendment needed?
To change contract terms after signing, such as price, closing date, or repairs.
What is contract performance?
The fulfillment of contractual obligations by all parties within the agreed time frame.
What obligations do buyers and sellers have under a contract?
Buyers may need to provide credit documents, and sellers must furnish disclosures and title commitments.
What is earnest money?
A deposit demonstrating the buyer’s serious intent, delivered within 3 days of the contract’s effective date.
What is an option fee?
A fee paid by the buyer for the right to terminate the contract within a specified period.
What happens if earnest money or the option fee deadline falls on a weekend or holiday?
The deadline extends to the next business day.
What should buyers do during the termination period?
Get inspections, secure insurance, and apply for financing.
What is the title commitment requirement?
The seller must provide a title commitment and restrictive covenants within 20 days of contract receipt.
What is a General Warranty Deed?
A promise from the seller (grantor) to warrant and forever defend the property against any claims. The grantor also warrants that neither he nor his heirs have conveyed an interest in the property to anyone else and that the property is free from encumbrances.
What is a Special Warranty Deed?
A deed where the grantor warrants ownership and that no encumbrances were placed on the property during their ownership. Unlike a General Warranty Deed, the grantor does not promise to defend the property against claims prior to their ownership.
What is a Quitclaim Deed?
A deed where the grantor gives up any claim they may have in the property but makes no guarantee of ownership and no promise to defend the title.
What are “Good Funds” in real estate transactions?
Acceptable funds include wire transfers, certified checks, cashier’s checks, and personal checks or money orders not exceeding $1,499.99.
What is a Breach of Contract?
A failure by one party to fulfill their contractual obligations, which can be categorized as material or immaterial.
What happens after a contract is breached?
The non-breaching party may seek enforcement of the contract, financial recovery, or alternative dispute resolution like mediation or arbitration. If unresolved, a lawsuit may be filed.
What are the types of damages for a breach of contract?
- Compensatory damages: Restore the non-breaching party to their original position. - Punitive damages: Punish wrongful acts (rare in business contracts). - Nominal damages: Token damages when no financial loss is proven. - Liquidated damages: Pre-agreed damages set in the contract.
What is Specific Performance?
A legal remedy where the court orders the breaching party to fulfill their contractual obligations, usually applied when the contract involves unique or rare subject matter.
What is the Assignment of Contract Rights?
The transfer of rights to receive benefits from a contract to another party, while obligations remain with the original party.
What is the difference between Assignment and Novation?
Assignment transfers rights but not obligations. Novation replaces the original party or contract with a new one, requiring consent from all parties.
What is Mortgage Assumption?
A third party takes over an existing mortgage, and the original borrower is released from liability if the lender approves the new borrower.
What are Assumable Mortgages?
FHA, VA, and USDA loans are assumable, but conventional loans are usually not.
Why would a buyer or seller consider Mortgage Assumption?
Buyers may secure a lower interest rate, while sellers may use it as an alternative if they struggle to find traditional buyers.
What is a Statute of Limitations?
A law that sets a time limit for filing lawsuits. If the deadline passes, the defendant can have the case dismissed.
How do Statutes of Limitations work in Texas?
The time limit may begin when the plaintiff knew or should have known of an injury. Some cases have maximum limits regardless of when the injury was discovered.
What is a Municipal Utility District (MUD)?
A political subdivision of Texas authorized by the TCEQ to provide water, sewage, drainage, and other services within its boundaries.
What does Notice Number 3 inform the seller?
It notifies the seller to obtain the statutory notice from the district office for the buyer to sign; failure to do so allows the buyer to terminate before closing.
How long do private transfer fees last?
They can last from 20 years to perpetuity but were banned in 2011 unless refiled within three years. HOA fees are not included in this ban.
What is the termination option in a real estate contract?
It allows the buyer to terminate the contract within a set period after paying the Option Fee. The Option Fee is non-refundable, but earnest money is refunded.
What happens if the Option Fee is not paid on time?
The buyer loses the unrestricted right to terminate the contract under the termination option.
When can a buyer terminate under the Third-Party Financing Addendum?
If financing is disapproved within the allowed time frame.
When should a buyer order a home inspection?
As soon as possible after signing the contract, ideally 3-4 days before the option period ends to allow negotiation time for repairs.
What happens after a home inspection?
The buyer may negotiate repairs; if no agreement is reached during the option period, the buyer can cancel. Any agreed repairs should be documented in an amendment.
When should an appraisal be ordered?
Right after the option period but no later than 10 days before closing. The lender should receive the report at least a week before closing.
When is a new survey required?
If there have been property modifications like adding a pool or fence. Otherwise, an existing survey may suffice with a notarized T-47 affidavit.
Who pays for the survey?
It depends on the contract agreement. A survey costs around $350 and should be ordered at least a week before closing.
When should the buyer obtain homeowner’s insurance?
A few weeks before closing to prevent delays, especially if the roof is uninsurable and needs replacement.
What is a home warranty, and who pays for it?
A policy covering repairs for major appliances and HVAC systems, usually for a year. The seller typically reimburses the buyer for the cost, up to the contract-specified amount.
When should a home warranty be selected?
At least 4 days before closing, preferably sooner.
What is the purpose of the final walk-through?
To ensure the property is in the agreed condition before closing. Any issues found are the buyer’s responsibility after closing.
What is the Settlement Statement (Closing Disclosure)?
A document provided by the title company at least 3 days before closing, detailing financial transactions. The buyer must review it and clarify any discrepancies.
How does the closing process work?
The buyer wires funds a day before closing, both parties sign documents at the title company, and the seller receives funds after the buyer’s loan is funded.
