Unit 9 Flashcards
Distinguish among express and implied contracts; bilateral and unilateral contracts; executed and executory contracts; and valid, void, voidable, and unenforceable contracts.
- Express vs. Implied Contracts
Express Contract: Created through clear, direct terms, whether oral or written, where parties explicitly state the terms of the agreement. For example, a written lease agreement with specific terms is an express contract.
Implied Contract: Formed through actions, conduct, or circumstances rather than direct words. For instance, ordering food at a restaurant implies you’ll pay for it, creating an implied contract.
- Bilateral vs. Unilateral Contracts
Bilateral Contract: Involves mutual promises between two parties, where each side agrees to perform an action. Most real estate contracts are bilateral, as both buyer and seller agree to perform specific actions (e.g., selling and purchasing property).
Unilateral Contract: Involves a promise from one party in exchange for the performance of an action by the other. An example is a listing agreement offering commission if a broker finds a buyer. The contract is fulfilled only if the broker performs the action.
- Executed vs. Executory Contracts
Executed Contract: Fully completed and all terms have been fulfilled by both parties. A deed that has been signed and delivered is an executed contract.
Executory Contract: Partially or fully unperformed. One or both parties still have obligations to fulfill. A sales contract is executory until the buyer and seller meet all terms and close the deal.
- Valid, Void, Voidable, and Unenforceable Contracts
Valid Contract: Legally binding and enforceable because it meets all legal requirements, such as mutual consent, consideration, and lawful purpose.
Void Contract: Lacks one or more legal elements and has no legal effect; it cannot be enforced by either party. For example, a contract for an illegal purpose is void.
Voidable Contract: Valid initially but can be canceled by one or both parties due to specific reasons, such as misrepresentation or duress. A contract with a minor is often voidable.
Unenforceable Contract: Valid but cannot be enforced in court, often due to a procedural issue, like the Statute of Frauds requirement that real estate contracts be in writing. An oral agreement for property sale, for instance, is unenforceable in court.
Identify the requirements for a valid contract and the statute of limitations for contract enforcement.
Requirements for a Valid Contract
Mutual Consent (Offer and Acceptance): Both parties must agree to the terms of the contract. This involves a clear offer by one party and an acceptance by the other without changes or counteroffers.
Consideration: There must be something of value exchanged between the parties, such as money, services, or goods. In real estate, this typically means the buyer pays money in exchange for property.
Lawful Objective: The purpose of the contract must be legal. Contracts involving illegal activities are void and unenforceable.
Competent Parties: All parties entering into the contract must be legally capable, meaning they must be of legal age and of sound mind. Minors or those legally deemed incompetent cannot form binding contracts.
Writing and Signature (when required by law): Under the Statute of Frauds, certain contracts, including real estate transactions, must be in writing and signed to be enforceable.
Statute of Limitations for Contract Enforcement
The statute of limitations sets the maximum time period within which legal action must be initiated to enforce a contract. In Texas:
Oral Contracts: Typically, the statute of limitations is 4 years from the breach of contract.
Written Contracts: The statute of limitations is generally 4 years from the date of breach, though this can vary by jurisdiction.
If the statute of limitations expires, the contract becomes unenforceable, and parties lose the legal right to sue for breach of contract.
Explain how contracts may be discharged and the remedies available to a non-defaulting party.
Ways Contracts May Be Discharged
Performance: The contract is completed when all parties fulfill their obligations as specified. This is the most common way contracts are discharged.
Mutual Agreement: All parties agree to cancel or modify the contract. This can include substitution of a new contract, known as novation, where a new party or obligation replaces the original terms.
Operation of Law: Certain legal situations can discharge a contract, such as bankruptcy, a change in law making the contract illegal, or the statute of limitations expiring.
Impossibility of Performance: If unforeseen events make it impossible to perform the contract’s terms, such as destruction of the subject property, the contract may be discharged.
Breach of Contract: When one party fails to fulfill their contractual obligations, the other party may consider the contract discharged and pursue remedies.
Rescission: Rescission cancels the contract, returning both parties to their pre-contract positions, often used when misrepresentation or fraud has occurred.
Remedies for the Non-Defaulting Party
Specific Performance: A court may require the defaulting party to fulfill their contractual obligations, especially in real estate contracts where the property is unique. This remedy is commonly sought by buyers when sellers attempt to back out of a sale.
Monetary Damages: The non-defaulting party may seek compensation for financial losses resulting from the breach. These damages aim to make the injured party “whole” as if the contract had been performed.
Liquidated Damages: If the contract specifies a predetermined amount of damages in case of breach, the non-defaulting party may seek this amount. In real estate, this is often represented by the earnest money deposit forfeited by a defaulting buyer.
Rescission and Restitution: Rescission cancels the contract, and restitution returns any benefits exchanged, such as the return of a down payment to the buyer if a seller breaches.
Punitive Damages: Although rare in contract law, punitive damages may be awarded in cases of egregious wrongdoing or fraud, meant to punish the defaulting party beyond compensatory losses.
Describe the differences between promulgated and approved forms and the requirements for their use.
In real estate transactions, understanding the difference between promulgated and approved forms is crucial for ensuring compliance with state laws and regulations. Here’s an overview of each and the requirements for their use:
Promulgated Forms
Definition: Promulgated forms are standardized forms that are required to be used by licensed real estate agents in certain transactions. These forms are created and officially approved by the Texas Real Estate Commission (TREC).
Purpose: Promulgated forms ensure consistency, fairness, and transparency in real estate transactions. They help protect both the buyer and the seller by standardizing the terms and conditions of common real estate agreements.
Examples:
One to Four Family Residential Contract (Resale)
Unimproved Property Contract
New Home Contract (Incomplete Construction)
Requirements for Use:
Real estate agents must use promulgated forms in the appropriate situations unless an exception applies, such as:
A lawyer drafts a contract for the transaction.
The form pertains to a transaction type where TREC hasn’t provided a promulgated form (e.g., commercial transactions).
The principal party requires their own form to be used.
Agents are prohibited from modifying the substantive elements of a promulgated form (though they may fill in blanks or attach addenda as needed).
Approved Forms
Definition: Approved forms are forms that are authorized for use but are not mandated by TREC. These forms may be developed by other organizations (e.g., Texas Association of Realtors, TAR) or law firms and have been approved for use in specific transactions.
Purpose: Approved forms are used when no promulgated form exists for the particular transaction, or when a client insists on using a specific form drafted by their attorney. They provide flexibility in real estate transactions that don’t fit the standardized promulgated forms.
Examples:
Forms created by the Texas Association of Realtors (TAR) for specific uses, like commercial real estate or property management, where TREC does not issue promulgated forms.
Requirements for Use:
Real estate agents are allowed to use approved forms when no TREC-promulgated form applies to the specific transaction type.
Agents cannot draft their own contracts or alter significant legal terms in approved forms unless they are also licensed attorneys.
Discuss the provisions of the Texas-promulgated contract, a broker’s avoiding the unauthorized practice of law, and the computation of time.
- Provisions of the Texas-Promulgated Contract
Texas Real Estate Commission (TREC) promulgates standard contract forms to simplify real estate transactions and ensure fairness between buyers and sellers. These forms include specific provisions that address critical aspects of real estate contracts.
Some key provisions found in Texas-promulgated contracts include:
Property Description: Clearly identifies the property being sold, typically by legal description.
Sales Price: Includes the total sales price, with details on the down payment, financing, and any balance due at closing.
Financing Contingency: Allows the buyer to make the purchase contingent upon securing financing under specified terms. If the buyer fails to secure financing, the contract can be terminated.
Earnest Money: Specifies the amount of earnest money the buyer deposits to demonstrate their serious intent to buy the property. It also details what happens to the earnest money if the contract is terminated.
Title Policy and Survey: Details who will pay for the title insurance policy and survey of the property, and outlines deadlines for delivery of the title commitment.
Property Condition: Includes any property disclosures, inspections, and repairs that need to be addressed before closing.
Closing Date: Specifies the date the transaction will close, along with conditions for extending the closing date if needed.
Special Provisions: Allows for any additional terms that are specific to the agreement but must not create new legal obligations. Real estate agents are limited in what they can include here to avoid practicing law.
Default and Remedies: Specifies what happens if either the buyer or seller defaults on the agreement, including potential remedies such as earnest money forfeiture or specific performance.
- Avoiding Unauthorized Practice of Law by Brokers
In Texas, real estate agents and brokers are not licensed to practice law, and they must avoid creating or altering legal documents in ways that could constitute unauthorized practice of law. TREC provides promulgated contract forms to ensure that brokers and agents can assist clients without stepping into the role of a legal advisor. Here’s how brokers can avoid unauthorized practice of law:
Use Promulgated Forms: Brokers must use TREC-promulgated forms in applicable real estate transactions. These forms have been carefully drafted to include all necessary legal terms and protections without requiring agents to modify or create their own legal terms.
Fill in the Blanks: Brokers are allowed to fill in the blanks on promulgated forms with information such as the buyer’s and seller’s names, the legal description of the property, the sales price, and deadlines. They cannot, however, alter the legal substance of the form or add complex legal language.
Use Special Provisions Carefully: The “Special Provisions” section in TREC contracts allows brokers to write in factual statements or business details that are not already covered by the form. However, brokers are prohibited from drafting legal language or changing the legal rights and obligations of the parties.
Refer Clients to Attorneys: If a client requires legal advice or if there are complex legal issues involved in the transaction, brokers should refer their clients to a licensed attorney. This includes situations where custom contracts are required or when legal interpretation of the contract is needed.
- Computation of Time in Texas Contracts
The computation of time provision in Texas real estate contracts ensures that deadlines are clearly defined and understood by both parties. Here’s how time is computed:
Counting Calendar Days: Texas contracts typically use calendar days (not business days) for all time periods unless otherwise specified. This means that weekends and holidays are counted as part of the time period.
Starting Date: When computing time, the day of the event (such as the execution of the contract) is generally not counted. The next calendar day is considered Day 1. For example, if a contract is signed on March 1st, then March 2nd is Day 1 of the time period.
Deadlines that Fall on Weekends or Holidays: If a deadline falls on a weekend or a legal holiday, the deadline is automatically extended to the next business day. This prevents issues when important actions like closing or delivering documents need to happen on non-business days.
Time is of the Essence: While not always explicitly stated in all Texas contracts, the “time is of the essence” clause can be added to ensure that strict adherence to deadlines is required. If included, any failure to meet deadlines can result in a breach of contract.
Identify the purpose and procedures for a buyer’s getting a property condition inspection.
A property condition inspection helps buyers evaluate the physical condition of a property and identify any defects or safety issues. Its primary purposes are to uncover hidden problems, negotiate repairs or price adjustments, ensure safety, and assist in decision-making. Many lenders also require an inspection to meet mortgage standards.
The procedure involves hiring a licensed inspector, scheduling the inspection, and receiving a detailed report on the property’s systems and structure. Based on the findings, buyers can negotiate repairs, request price reductions, or terminate the contract. If repairs are made, a re-inspection may be conducted to ensure completion. The inspection contingency period gives buyers time to make informed decisions.
Distinguish between the option contract and a contract for deed, including the characteristics of each.
- Option Contract
Definition: An option contract is an agreement where the seller grants the buyer (optionee) the exclusive right, but not the obligation, to purchase a property at a specified price within a set time period.
Characteristics:
Non-obligatory for the Buyer: The buyer has the right, but not the obligation, to purchase the property.
Option Fee: The buyer typically pays an option fee for this right, which may or may not be applied to the purchase price if they proceed with the sale.
Time-Limited: The buyer must decide whether to exercise the option within a defined time period, after which the option expires.
No Transfer of Ownership Until Exercised: Ownership does not transfer unless the buyer exercises the option and a purchase contract is executed.
Use: Often used when a buyer is uncertain about purchasing a property or needs time to secure financing but wants to lock in a price.
- Contract for Deed (Land Contract)
Definition: A contract for deed is an agreement where the buyer agrees to pay the seller in installments over time. The buyer occupies and controls the property, but the seller retains legal title until the final payment is made.
Characteristics:
Seller-Financed: The seller finances the purchase by allowing the buyer to make installment payments over an agreed period, similar to a mortgage.
Buyer Occupies the Property: The buyer takes possession and uses the property but does not receive legal title until all payments are made.
No Immediate Transfer of Legal Title: The seller holds legal title during the contract term, and the buyer holds equitable title, gaining full ownership only after fulfilling all payment obligations.
Forfeiture Risk: If the buyer defaults on payments, the seller may terminate the contract, and the buyer could lose all prior payments and rights to the property.
Use: Commonly used when buyers cannot obtain traditional financing, allowing them to gradually pay for the property while living in it.
Agreement in writing and signed
This refers to the legal requirement that contracts for real estate transactions must be in writing and signed by the parties to be enforceable under the statute of frauds.
Bilateral contract
A contract in which both parties make promises to each other. For example, a real estate sales contract is a bilateral agreement, as both the buyer and the seller have obligations to perform.
Assignment
The transfer of rights or interests in a contract from one party to another. The original party typically remains secondarily liable unless released.
Breach
The failure to perform a contract according to its terms. A breach may lead to legal action by the non-defaulting party.
Consideration
Something of value exchanged between parties to a contract, such as money, a promise, or an action. Without consideration, a contract is not legally binding.
Competent parties
This term refers to the requirement that parties entering into a contract must have the legal capacity to do so, which typically means they are of legal age and mentally sound.
Contract
A legally binding agreement between two or more parties to perform or refrain from performing certain actions. Contracts can be express or implied, bilateral or unilateral, and can have various legal statuses, such as executed or executory.
Contract for deed
Also known as an installment contract, this is a type of agreement in which the buyer pays the seller in installments, and the seller retains title until the buyer fulfills the terms of the contract.
Counteroffer
An offer made in response to an earlier offer, effectively rejecting the original offer. The counteroffer must be accepted by the other party to create a binding contract.
Earnest money deposit
A deposit made by the buyer to show good faith when entering into a real estate contract. It is held in escrow and typically applied toward the purchase price at closing.
Equitable title
A buyer’s right to gain full ownership of a property once the terms of the contract have been fulfilled. Equitable title provides an insurable interest in the property.
Escrow agreement
A legal arrangement in which a third party holds money or property in trust until certain conditions are met, typically used in real estate transactions to ensure that all terms of the agreement are satisfied before closing.
Executed contract
A contract in which all parties have fulfilled their obligations. It can also refer to the signing of a contract.
Express contract
A contract in which the terms are explicitly stated, either orally or in writing.
Executory contract
A contract in which some obligations remain to be performed by one or both parties.
Implied contract
A contract created by the actions of the parties, even though the terms are not explicitly stated.
