(Lesson 2) Real Estate Contracts (Unit #11) Flashcards
Define contract law
A contract is a voluntary agreement or promise between legally competent parties, supported by legal consideration, to perform (or refrain from performing) some legal act.
a contract must:
- be voluntary- no one may be forced into a contract
- be an agreement or a promise- a contract is essentially a legally enforceable promise
- be made by legally competent parties- the parties must be viewed by the law as capable of making a legally binding promise
- be supported by legal consideration-a contract must be supported by something of value that induces a party to enter into the contract, and that something must be legally sufficient to support a contract
- have to do with a legal act- no one may legally contract to do something illegal
define express contract (aka express agreement)
exists when the parties state the terms and show their intentions in words.
an express contract may be oral or written
define statute of frauds
certain types of contracts (including those for the sale of real property) must be in writing to be enforceable in a court of law.
define implied contract:
the agreements of the parties is demonstrated by their acts and conducts
bilateral contract versus unilateral contract:
bilateral contract: both parties promise to do something; one promise is given in exchange for another
**in real estate a sales contract is bilateral because the seller promises to sell a parcel of land and give the title in exchange for a sum of money from the buyer
unilateral contract: one sided agreement.
**an option contract to retains one option to possibly make a purchase later is an example of a unilateral contract
executed vs executory contracts:
executed contract: is when all parties have done their responsibility in upholding the contract and performed their promises.
executory contract: exists when one or both parties still have an act to perform.
what are the essential elements of a valid contract?
a contract must meet certain requirements to be considered legally valid. these include:
- offer and acceptance (counteroffers are made until agreement or no agreement is made)
- consideration
- legally competent parties
- consent
- legal purpose
Dealing with multiple offers:
A licensee should converse with the buyer, or seller about the opportunity should multiple offers arise, and how they would want to handle the situation. Ultimately decisions about how multiple offers are negotiated, presented and accepted are up to the buyer/seller.. not the licensee.
define consideration as it relates to contracts for the buyer and seller
the contract must be based on consideration: something of a legal value offered by one party and accepted by another to perform some legal act in exchange.
*there must be a definite statement in the contract showing that something of value was given (promised) in exchange for the others parties promise
what is a legally competent party:
They must be able to understand the nature of their actions or consequences. They must be of legal age, in Illinois that contractual capacity is 18.
Define reality consent
under the doctrine of reality of consent, a contract must be voluntary and free of influence. A mistake, misrepresentation, fraud, deprives the party of reality of the contract. Thus, making the contract voidable by the injured party…. If the other party decides to sue for the breach of contract, the injured party could argue as defense that the contract lacked reality of consent.
define legal purpose in a contract
a contract must be of legal purpose. a contract for an illegal purpose or against public policies is not a valid contract.
Validity of contracts: can be described as valid, void, voidable, or unenforceable, depending on the circumstances.
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define a valid contract:
meets all the essential elements that make it legally sufficient in court of law
define a void contract:
has no legal means.. lacked one or more elements to make it a forceable contract. a void contract was never a legal contract.
define a voidable contract:
appears to be valid but may be revoked or disaffirmed by one or both parties based on some legal principle. if it is not disaffirmed a voidable contract may nevertheless end up being executed.
a contact entered under duress or intoxication, or as a result of fraud, mistake, or misrepresentation is always voidable
define an unenforceable contract:
may seem on the surface to be valid; however neither party can sue the other to force performance.
A contract may not be forceable if it is not in writing.
Performance of a contract:
Time is of essence: Means the contract must be perfumed within the time limit specified..
IF the contract does not state a certain time, then it must be done immediately or within a reasonable amount of time.
if the last day a deed or contract may be executed is on a holiday, or Sunday.. the deed may be executed on the next regular business day.
Define assignments:
assignments is a transfer of rights or duties under a contract. rights may be assigned to a third party (called the assignee) unless the contract forbids it.
example in practice: a elderly widower wants to move closer to his children.. his house has been on the market for some time. The widower is in the hospital at the time a buyer makes an offer to purchase, so he assigns his contract rights to his son. This allows the property to be sold in a real estate closing transaction without him being present or signing documents.
Define Novation
substation, for a new contracting over an existing one is called novation.
The new agreement may be amongst the same parties or a new party (this would be called novation of parties).
Define breach of contract
a breach of contract is a violation of any of the terms or conditions of a contract without legal excuse.
a contract may be terminated if it is breached by one of the parties.
Define specific performance:
if either the seller or buyer breaches the contract they may sue for specific performance unless the contract specifically states otherwise.
In a suit for specific performance, the buyer asks the court to force the seller to go through with the sale and convey the property as previously agreed.
Buyer remedies vs seller remedies
Buyer remedies: -suit for specific performance -suit for damages -rescind contract Seller remedies: -suit for specific performance -suit for damages -declare contract forfeited
Statue of limitations:
in Illinois, the statute of limitations for oral contracts is five years; it is 10 years for written contracts. Any rights not enforced within the applicable period are lost.
Other reasons for termination:
- Partial performance of the terms, along with a written acceptance by the other party.
- Substantial performance: in which one party has substantially performed on the contract but does not complete all the details exactly as the contract requires..(with certain adjustments of compensation made for damages suffered by the other party)
- impossibility of performance, in which an act required by the contract cannot be legally accomplished
- mutual agreement of the parties to cancel
- operation of law: such as voiding of a contract as a result of fraud, due to expiration of the statute of limitations, or because a contract was altered without the written consent of all parties involved.
- rescission: in which one party may cancel or terminate the contract as though it had never been made. cancellation terminates a contract without a return to the original position. rescission, however, returns the parties to their original positions before the contract, so any monies that have been exchanged must be returned. Rescission is normally a contractual remedy for a breach, but a contract may also be rescinded by the mutual agreement of the parties.
Contracts used in the real estate business:
The written agreements most commonly used by brokers and managing brokers are:
- listing agreements and buyer agency agreements
- real estate sales contracts
- options agreements
- escrow agreements
- leases, and
- land contracts or contracts for deed.
Contract forms in real estate
Because many real estate transactions are similar in nature, there are pre printed documents.. the licensee should know what to fill in the blanks and what to cross out that doesn’t apply. as well as writing additional clauses and agreements.
Listing and buyer agency agreements
listing and buyer agency agreements are employment contracts.
A listing agreement: establishes the rights and obligations of the sponsoring broker as agent and the seller as principal.
A buyer agency agreement: establishes the relationship between a buyer as principal and sponsoring broker as agent.
Listing agreement: working for the seller
Buyer agency agreement: working for the buyer
Customary terms of real estate sales contracts
A real estate sales contract contains all the agreements between the buyer of a parcel of real estate and the seller.
**Illinois law indicates that sales contracts must indicated “real estate sales contract” at the top and in bold.
The contract of sale is the most important document in the sale of real estate. It establishes the legal rights and obligations of the buyer and the seller.
Home vs. construction warranties and their benefits
it is not unusual for a seller to purchase a transferable home warranty in anticipation of selling becomes it makes the real estate more attractive.
A home warranty covers the cost to fix or replace an item in the home, Air conditioning, kitchen appliances etc. usually used to cover big ticker items from $300-$600.
The warranty lasts for a year and can be renewed.
construction warranties refer to warranties for construction that are supplied buy the seller.. generally construction warranties last from six months to two years. the items covered in the warranty will vary builder to builder..
define earnest money deposits
it is customary for a buyer/purchaser to provide a deposit with making an offer to purchase real estate. This deposit, usually in the form of a check is called earnest money. The earnest money is evidence of the buyers intention to carry out with the contract in good faith. The check should not be delivered until after there is a sales contract.
Define commingling with escrow and conversion
escrow accounts are used for earnest money deposits. sponsoring brokers are strictly prohibited for commingling, that is mixing their own funds with funds in special escrow accounts. Sponsoring brokers may never use escrow funds for personal use; this illegal act is Calle conversion.
define equitable title
when the sales contract has been executed but the deed of payments have not been made the buyer does not have rights to the legal title. But does have interest in the land therefore this interest is called equitable title. equitable title may give the buyer an insurable interest in the property.
Define destruction of the premises
states that the seller bears any los that occurs before the title passes or the buyer takes possession. If the entire premises or a material part of the property is destroyed the seller cannot enforce the contract upon the buyer and must return all earnest money.
If the buyer does have the title or possession of the property and destruction happens the buyer must pay the full contract price.
define liquidated damages
to avoid lawsuit if one party breaches the contract, the parties may agree on a certain amount of money that will compensate the non breaching party. usually earnest money will serve as the remedy / liquidated damages if the buyer refuses to perform without good reason.
define contingency relating to sales contract
additional conditions that must me satisfied before a sales contract is fully enforceable are called contingencies. a contingency includes the following 3 elements.
- the specific actions necessary to satisfy the contingency
- the time frame within which the actions must occur
- who is responsible for paying any costs involved
most common contingencies
- mortgage contingency: should the buyer be unable to secure financing
- inspection contingency: to inspect the property
- attorney contingency: both parties have the option of having the contract reviewed by their attorney
- property sale contingency: buyers may make the sales contract contingent on the sale of their current home by a certain date.
- escape clause: a seller may insist on an escape clause, which permits the seller to continue to market the property until all the buyers contingencies have been satisfied or removed.
**contingencies create a voidable contract
Amendments and Addendums
An amendment is a change to an existing contract. anytime words or provisions have been added or deleted from the body of contract is noted as amended. This may include personal property items or closing date. Amendments must be signed or initialed by all parties.
on the other hand an addendum is any provision added to an existing contract without altering the content of the original.
define options:
an option is a contract provided by the optionor (the owner) to the optionee (the buyer or lessee) the right to buy the property or lease the owners property at a fixed rate. The optionee pays a fee for this option right. The optionee has no other obligation but to either decide to take the option or let the option expire.
Define land contracts:
a real estate sale can be made by a land contract. under a typical land contract the seller retains the legal title. The buyer takes possession and gets equitable title and pays the seller over months installments of principal and interest usually over a number of years.
Letters of Intent
due to the complex nature of commercial real estate transactions, many contracts start off as an exchange of LOI. letters of intent. Typically, LOIs are not meant to be binding and usually state this swell. To best communicate and make sure letters are not misconstrued it is best to indicate that that these are negotiations and not binding unless a formal contract is executed.
