Real Estate Principles and Practices Chapter 6 Contracts and Business Law © 2010 by South-Western, Cengage Learning

Key Terms Bilateral contract Consideration Contract Dual contract Duress Executed contract Executory contract Express contract Fraud Implied contract Latent defect Misrepresentation Novation Offer and acceptance Option Parole evidence rule Patent defect Specific performance

© 2010 by South-Western, Cengage Learning Key Terms Statute of frauds Undue influence Unenforceable contract Uniform Commercial Code Unilateral contract Valid contract Voidable contract Void contract

© 2010 by South-Western, Cengage Learning Definition and Types of Contracts Contract: Contract: voluntary agreement between two or more parties to perform or abstain from performing a legal act on which the parties reached a meeting of the minds

© 2010 by South-Western, Cengage Learning Definition and Types of Contracts Created by an act Ostensible contract Not enforceable May be written or oral All written contracts are express

© 2010 by South-Western, Cengage Learning Definition and Types of Contracts Promises by both parties Promise by one party

© 2010 by South-Western, Cengage Learning Definition and Types of Contracts Not completed Performance has been completed

© 2010 by South-Western, Cengage Learning Definition and Types of Contracts Two contracts for the same property with different terms Illegal

© 2010 by South-Western, Cengage Learning Elements of a Contract Offer and acceptance Meeting of the mindsConsideration Good or valuable Capacity of the parties Capable Legality of the object Legal purpose Written and signed contract By law

© 2010 by South-Western, Cengage Learning Elements of a Contract Agreed by mutual consent to terms Terms must be clearly defined

© 2010 by South-Western, Cengage Learning Elements of a Contract Mutual exchange of promises Earnest-money shows good faith Does not represent consideration Consideration in a real estate contract is something of value

© 2010 by South-Western, Cengage Learning Elements of a Contract Good or valuable Good consideration: an act given for consideration Valuable Money for property

© 2010 by South-Western, Cengage Learning Elements of a Contract Must be able to understand and carry out terms Legal age (18 – 21 years old) Minor may rescind the contract Other party is bound Until the age of majority and a reasonable time thereafter

© 2010 by South-Western, Cengage Learning Elements of a Contract Mentally incompetent person cannot enter into a contract Guardian or conservator Borderline incompetent Intoxicated or chemically dependent C ourt may annul within a reasonable time

© 2010 by South-Western, Cengage Learning Elements of a Contract Purpose must be lawful Court may intervene to avenge the injured party Rescind: Rescind: cancel

© 2010 by South-Western, Cengage Learning Elements of a Contract Statute of frauds: certain contract must be in writing to be enforceable Signed by parties against whom enforcement is sought Memorandum Lease of less than one year

© 2010 by South-Western, Cengage Learning Statute of Frauds All real estate transfers must be in writing and signed Avoid fraud To be enforceable Oral contract to buy or sell would not be upheld in court

© 2010 by South-Western, Cengage Learning Parole Evidence Rule Prior written or verbal evidence may not alter a written agreement An executed written document supersedes all prior negotiations and stipulations

© 2010 by South-Western, Cengage Learning Uniform Commercial Code Laws covering chattel sales Conditional sales contracts and chattel mortgages Stocks and commercial paper Sale of personal property Bill of sale Real estate when fixtures are involved

© 2010 by South-Western, Cengage Learning Uniform Commercial Code Chattel purchased and financed Financial statement is recorded If not paid – property can be repossessed Bulk transfers are regulated by UCC

© 2010 by South-Western, Cengage Learning Validity of Contracts All essential elements Enforceable in a court of law

© 2010 by South-Western, Cengage Learning Validity of Contracts No legal force Results when: Illegal purpose Operation of law prevents completion Act of nature prevents completion

© 2010 by South-Western, Cengage Learning Validity of Contracts One party may cancel Minor Party acted under duress or undue influence

© 2010 by South-Western, Cengage Learning Validity of Contracts Unenforceable Contract: Unenforceable Contract: Appears valid but cannot be enforced Misrepresentation: Misrepresentation: false statement not meant to deceive but has an effect on the finalization Courts rule against agents who knew or should have known Seller may be sued for withholding pertinent fact

© 2010 by South-Western, Cengage Learning Validity of Contracts Damaged party may rescind or collect damagesMistake One party changes their mind Bound by contract Mutual mistake May agree to rescind Fraud: Fraud: knowingly making a false statement regarding a material fact on which the other party relied and suffered damage

© 2010 by South-Western, Cengage Learning Validity of Contracts Duress: Duress: Coercion, threat, or force Voidable by party threatened Undue Influence: Undue Influence: unfair advantage preventing a party form using their own judgment Voidable by party coerced

© 2010 by South-Western, Cengage Learning Carrying Out Terms of a Contract When performance will transpire Purchase contract: Closing date Lease: length and termination No date: reasonable time Performance of a Contract

© 2010 by South-Western, Cengage Learning Carrying Out Terms of a Contract All contracts are assignable unless stated to the contrary Assignor: Assignor: holder of contract Assignee: Assignee: receiver of contract Rights, privileges, and obligations Assignment of a Contract Personal obligations may not be assigned without consent

© 2010 by South-Western, Cengage Learning Carrying Out Terms of a Contract Novation: Novation: substitution of a new contract for the existing one Assignment of a Contract

© 2010 by South-Western, Cengage Learning Carrying Out Terms of a Contract Discharge: terms fulfilled Complete performance failed: 1. Damage to the property 2. Death 3. Recession by mutual agreement 4. Partial performance Discharging of a Contract

© 2010 by South-Western, Cengage Learning Carrying Out Terms of a Contract Latent defect: Latent defect: hidden Patent defect: Patent defect: visible Buyer may rescind if seller does not disclose Latent and Hidden Defects

© 2010 by South-Western, Cengage Learning Option to Purchase Option: Option: contract granting the exclusive right to buy for a limited time Optionee: Optionee: prospective purchaser Optionor: Optionor: owner Option to Purchase

© 2010 by South-Western, Cengage Learning Option to Purchase Consideration is forfeited if optionee does purchase (carry out option) Ownership rights remain with the owner during option term Optionee may assign option Unilateral contract Option to Purchase

© 2010 by South-Western, Cengage Learning Option to Purchase Option contract vs. Contract to purchase 1. Option gives the right but not the obligation to buy 2. An accepted purchase contract is binding Option to Purchase

© 2010 by South-Western, Cengage Learning Commonly Used Contracts 1. Listing contract 2. Purchase agreement 3. Option contact 4. Lease 5. Property management contract 6. Mortgage 7. Deed of trust 8. Land contract

© 2010 by South-Western, Cengage Learning Commonly Used Contracts ContactBuyerOwner/SellerLender Third Party Tenant Purchase agreement granteegrantor land contract vendeeVendorowner optionoptioneeoptionor assignmentAssigneeassignor offer to purchase offerorofferee mortgageMortgagormortgagee deed of trust trustorbeneficiarytrustee leaselessorlessee