Unit 11: Principles of Real Estate Contracts

Question 1

Contract

Answer 1

A voluntary, legally enforceable promise between two competent parties to perform (or not perform) some legal act in exchange for consideration.

Question 2

Elements of a Contract

Answer 2

A contract must be:

• Voluntary
• An Agreement or Promise
• made by Legally Competent Parties
• Supported by Legal Consideration
• for a Legal Act

Question 3

Express Contract

Answer 3

An oral or written contract in which the parties state the contract’s terms and express their intentions in words

Question 4

Implied Contract

Answer 4

A contract under which the agreement of the parties is demonstrated by their acts and conduct

Question 5

Bilateral Contract

Answer 5

A contract in which both parties promise to do something; one promise is given in exchange for another.

All parties to the instrument are legally bound to act as prescribed.

(e.g. a real estate contract - seller promises to sell a parcel of real estate and deliver title to the buyer, who promises to pay a certain sum of money for the property)

Question 6

Unilateral Contract

Answer 6

A one-sided contract wherein one party makes a promise to induce a second party to do something

The Second Party is not legally bound to perform; however, if the Seconde Party does comply, the first party is obligated to keep the promise.

(e.g. an option to purchase real estate)

Question 7

Executed Contract

Answer 7

A contract in which all parties have fulfilled their promises and thus performed the contract.

Question 8

Executory Contract

Answer 8

A contract under which something remains to be done by one or more of the parties.

(e.g. an Agreement of Sale is an executory contract from the time it is signed until closing: as ownership has not yet changed hands, and the seller has not received the full sales price. At closing, these obligations are satisfired and the contract is fully executed.)

Question 9

Valid Contract

Answer 9

A contract that meets all the essential requirements of a contract that make it legally sufficient, enforceable, and binding in a court of law.

Question 10

Void Contract

Answer 10

A “contract” that has no legal force or effect because it lacks some or all of the essential elements of a contract.

A contract that is void was never a legal contract.

(e.g. the use of a forged name in a listing contract would make the contract void)

Question 11

Voidable Contract

Answer 11

A contract that appears on the surface to be valid but may be rescinded or disaffirmed by one or both parties based on some legal principle.

A Voidable Contract is considered valid by the courts if the party who has the option to disaffirm the agreement does not do so within a time prescribed by law.

Examples of Voidable Contracts include:

• Minors (under 18)
• Mentally Ill Person
• A contract made under duress, w/ misrepresentation, undue influence, or intent to defraud.

Question 12

Unenforceable Contract

Answer 12

A contact that has all the elements of a valid contract, yet neither party can sue the other to force performance of it.

e.g. an unsigned contract is generally unenforceable

Question 13

Offer

Answer 13

A promise made by one party requesting something in exchange for that promise with the intention that the offeror will be bound to the terms if the offer is accepted

Question 14

Acceptance

Answer 14

A promise by the offeree to be bound by the exact terms proposed by the offeror.

Question 15

Counteroffer

Answer 15

A new offer made as a reply to an offer received. It has the effect of rejecting the original offer, which cannot be accepted thereafter unless revived by the offeror.

Question 16

Consideration

Answer 16

Something of legal value offered by one party and accepted by another as an inducement to act or refrain from some act.

That received by grantors in exchange for their deed. Something of value that induces a person to enter into a contract.

Question 17

Statute of Frauds

Answer 17

That part of a state law that requires certain instruments, such as deeds, real estate sales contracts, and certain leases to be in writing and signed by the seller to be legally enforceable.

Question 18

“Time is of the Essence”

Answer 18

A phrase in a contract that requires the performance of a certain act within a stated period.

Question 19

Assignment

Answer 19

Assignment refers to a transfer of rights or duties under a contract.

Generally, rights and obligations may be assigned to a third party (called the assignee) unless the contract forbids it.

Obligations may be delegated, but the original party remains primarily liable unless specifically released. Most contracts have a clause to either permit or forbid assignment.

Question 20

Novation

Answer 20

Novation is the substitution of a new contract in place of the original one. The new agreement may be between the same parties, or a new party may be substituted for either (this is novation of the parties). The parties’ intent must be to discharge the old obligation. For instance, when a real estate purchaser assumes the seller’s existing mortgage loan, the lender may choose to release the seller and substitute the buyer as the party primarily liable for the mortgage debt.

Question 21

Breach of Contract

Answer 21

A violation of the any of the terms or conditions without legal excuse

e.g. failure to make a payment when it is due.

Question 22

Suit for Specific Performance

Answer 22

A cour suit initiated by a buyer when the seller breaches a real estate sales contract, asking the court to force the seller to go through with the sale and convey the property as previously agreed

Question 23

Liquidated Damages

Answer 23

An amount predetermined by the parties to a contract as the total compensation to an injured party should the other party breach the contract

A **Liquidated Damages **Clause permits the seller to keep the earnest money deposit and any other payments received from the buyer as the seller’s sole remedy.

The clause may limit the buyer’s remedy to a return of earnest money and other payments should the seller default.

Question 24

Statute of Limitations

Answer 24

State law limits the time within which parties to a contract may bring legal suit to enforce their rights.

In Pennsylvania, the statute of limitations is four years from the date the contract is breached.

Any rights that are not enforced within the applicable time are lost.

Question 25

Recission

Answer 25

The practice of one party canceling or terminating a contract, which has the effect of returning the parties to their original positions before the contract was made.

Question 26

Statute of Frauds

Answer 26

That part of a state law that requires certain instruments, such as deeds, real estate sales contracts, and certain leases to be in writing to be legally enforceable.

Question 27

Assignment

Answer 27

The transfer in writing of interest in a bond, mortgage, lease, or other instrument.

Question 28

Novation

Answer 28

Substituting a new obligation for an old one or substituting new parties to an existing obligation.

The new agreement may be between the same parties, or a new party may be subsitituted for either.

The parties’ intent must be to discharge the old obligation

(e.g. when a real estate purchaser assumes the seller’s existing mortgage loan, the lender may choose to release the seller and substitute the buyer as the party primarily liable for the mortgage debt.)

Question 29

Breach of Contract

Answer 29

Violation of any terms or conditions in a contract without legal excuse; for example, failure to make a payment when it is due.

Question 30

Essentials of a VALID CONTRACT are:

Answer 30

1. Offer and Acceptance
2. Consideration
3. Legally Competent Parties
4. Legality of Object
5. Reality of Consent