Real Estate Contracts Flashcards
Real estate contracts - time is of the essence
In general, courts presume that time is not of the essence in real estate contracts. Thus, the closing date stated in the contract is not absolutely binding in equity, and a party, even though late in tendering his own performance, can still enforce the contract if he tenders within a reasonable time (one or two months is usually considered reasonable). Time will be considered of the essence only if: (i) the contract so states, (ii) the circumstances indicate it was the parties’ intention, or (iii) one party gives the other notice that he desires to make time of the essence.
Doctrine of equitable conversion - property destroyed during contract period
The doctrine of equitable conversion holds that once an enforceable contract of sale is signed and each party is entitled to specific performance, the purchaser’s interest is real property, and the seller’s interest (the right to the proceeds) is personal property. Where property subject to a contract for sale is destroyed without the fault of either party before the date set for closing, the rule in the absence of a statute is that the risk of loss is on the buyer. Thus, the buyer must pay the contract price despite a loss, unless the contract provides otherwise.
Marketable title implied
Absent a provision to the contrary, a contract for the sale of land contains an implied promise by the seller that she will deliver to the buyer a marketable title at the time of closing. This promise imposes on the seller an obligation to deliver a title that is free from reasonable doubt, i.e., free from questions that might present an unreasonable risk of litigation. Title is marketable if a reasonably prudent buyer would accept it in the exercise of ordinary prudence. An inability to establish a record chain of title will generally tender the title unmarketable. If the seller is unable to acquire title before closing, so that title remains unmarketable, the buyer can rescind, sue for damages caused by breach, or obtain specific performance with an abatement of the purchase price. In a contract for the sale of real property, the seller of the land is entitled to use the proceeds of the sale to clear title if she can ensure that the purchaser will be protected.
Statute of Frauds
Under the Statute of Frauds, a land sale contract is unenforceable unless it is in writing and signed by the party to be charged. The Statute of Frauds requires the writing to contain all essential terms of the contract, which are: (i) a description of the property, (ii) identification of the parties to the contract, (iii) the price, and (iv) the signature of the party to be charged.
Buyer’s earnest money as liquidated damages in a real estate contract
When a sales contract provides that a seller may retain the buyer’s earnest money as liquidated damages, courts routinely uphold the seller’s retention of the money upon breach if the amount appears reasonable in light of the seller’s anticipated and actual damages. Many courts uphold retention of earnest money of up to 10% of the sale price without inquiry into its reasonableness.
Doctrine of equitable conversion - seller dies
The doctrine of equitable conversion holds that once an enforceable contract of sale is signed and each party is entitled to specific performance, the purchaser’s interest is real property, and the seller’s interest (the right to the proceeds) is personal property. If the seller dies, the takers of her real property must transfer title at closing, and the sale proceeds pass to the takers of her personal property.
Builder’s sale of residential building under construction/to be constructed - latent defect
At common law, contracts of sale and deeds of real property carry no implied warranties of quality or fitness for the purpose intended. The implied warranty of fitness or quality applied to contracts for a builder’s sale of any new residential building under construction or to be constructed. The warranty implied is that the new house is designed and constructed in a reasonably workmanlike manner and suitable for human habitation. A few courts have allowed a later owner of a house to recover from the original builder despite lack of privity. Public policy favors a buyer of new construction with no opportunity to inspect the premises.
Installment contracts and marketable title
Where an installment land contract is used, the seller’s obligation is tor furnish marketable title when delivery is to occur, e.g., when the buyer has made his final payment. Thus, a buyer cannot withhold payments or seek other remedies on grounds that the seller’s title is unmarketable prior to the date of promised delivery.
