REAL ESTATE CONTRACTS

WHAT IS A CONTRACT?

A contract is essentially an agreement based on a promise or set of promises which results in some legally enforceable obligations between two or more parties.

For a contract to be valid and enforceable, the following essential elements must be present:

 
  1. There must be an offer and an acceptance.
  2. There must be consideration.
  3. Contracting parties must have legal capacity.
  4. There must be reality of consent on the part of the contracting parties.
  5. The object or the subject matter of the contract must be legal .
  6. The agreement must be in proper legal from.

FORMATION OF CONTRACTS

To form a contract there must be and offer and an acceptance  supported by legally sufficient consideration. Together the offer and acceptance are referred to as mutual assent .

Offer- An offer is a promise conditioned upon some request or asked for act or promise. In order to be effective, an offer must contain three essential elements:

 
  1. An offer must be an expression of present contractual intent .
  2. An offer must be definite and certain  in terms.
  3. An offer must be communicated to the offeree .

Acceptance- An acceptance is a voluntary expression by the offeree to be bound by the exact terms of the offer in the manner requested or authorized by the offeror.

An acceptance must be unequivocal  and unconditional. Any qualified acceptance which adds new conditions is an implied rejection of the offer. This implied rejection, called a counteroffer , has the legal effect of reversing the position of the original parties.

Consideration - In order to have a valid informal contract, there must be legally sufficient consideration which was presently bargained for  by each promisor in exchange for his promise to the other. A legally sufficient consideration may consist of a promise, an act, or a forbearance to act. Legal consideration does not have to be money.

FACTORS AFFECTING VALIDITY OR ENFORCEABILITY

Capacity - Both parties to a contract must have legal capacity in order for the contract to be binding on both parties. Legal capacity is the recognition which the law gives that a person has the ability to incur legal liability or acquire legal rights. Some of the following classes of people are in some fashion protected or limited by law.

  • Infants (minors)
  • Insane persons
  • Intoxicated persons
  • Corporations

Reality of Consent- Contract law deals with the fulfillment of reasonable expectation of the contracting parties. A person who is forced or tricked into a contract cannot normally achieve reasonable expectations. The law will give relief to an innocent party in cases where fraud, misrepresentation, certain kinds of mistakes, duress, menace or undue influence caused one or more of the parties to a contract not to freely give consent.

Misrepresentation and Fraud- Is an innocent or negligent misstatement of a material fact detrimentally relied upon by the other party? If a person makes a misrepresentation and later learns of the mistake, a duty then arises to inform the person who is detrimentally relying on the misrepresentation. Failure to do so is fraud .

Ex: Don is planning to sell a house which has a flooded basement whenever it rains. He paints the basement in such a manner that all water marks are removed. Shirley inspects the house and makes no inquiry as to whether there is a leaky basement. She buys the house. One week after closing, the basement floods after a thunderstorm, and she wishes to rescind the contract.

Legality of Object- The law will not enforce a contract in which either the consideration or object is illegal or against public policy. If a contract contains independent components, some legal and some illegal, the law may enforce the legal components.

Ex: John, who is not a licensed broker, enters into a listing contract to find a buyer for Ann's house. For this service, John and Ann agree that John will earn 10% commission. John finds a buyer who purchases the house for $75,000. Ann refuses to pay a commission because John was not licensed. In a court case, John would lose because without a license the listing provision regarding his commission are void.

Legality of Form- Certain classes of contracts must be in writing and contain certain essential elements in order to be enforceable. This requirement is called the statute of frauds.

In order to satisfy the statute of frauds a writing or memorandum must contain the following essential elements:

  1. Identity of the contracting parties;
  2. Description of the subject matter;
  3. Terms and conditions of the contract;
  4. The consideration;

The signature of the party(s) to be charged or an authorized agent.