© 2011 rockwell publishing washington real estate fundamentals lesson 6: contract law
TRANSCRIPT
© 2011 Rockwell Publishing
Washington Real Estate Fundamentals
Lesson 6:
Contract Law
© 2011 Rockwell Publishing
Introduction
Contract: Agreement between two or more competent persons to do, or not do, certain things in exchange for consideration.
Valid contract: Agreement that meets minimum requirements so that it is legally binding.
Will be enforced by a court if one party fails to fulfill terms of agreement.
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Contract Classifications
Contracts may be classified according to certain basic characteristics.
Every contract is:express or impliedunilateral or bilateralexecutory or executed
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Contract ClassificationsExpress vs. implied
Express contract: Agreement that has been put into words, whether spoken or written.
Implied contract: Created by actions of the parties, not by express agreement.
Most contracts are express, not implied.
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Contract ClassificationsUnilateral vs. bilateral
Unilateral contract: Only one party promises to do something and is legally obligated to perform as promised.
Bilateral contract: Both parties promise, both are legally obligated.
Most contracts are bilateral.
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Contract ClassificationsExecutory vs. executed
Executory: Contract is in the process of being performed.
Executed: Contract has been fully performed; both parties have fulfilled their promises.
Note: “executed” may also refer to a contract that has been signed, whether or not any performance has taken place.
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• Contract• Express or implied• Unilateral or bilateral• Executory or executed
SummaryContract Classifications
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Elements of a Valid Contract
To be valid, a contract must have:parties with legal capacitymutual consent lawful objectiveconsideration
In addition, certain types of contracts must be in writing and signed.
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Elements of a Valid Contract Contractual capacity
Contract not legally binding unless all parties have legal capacity.
Two requirements for legal capacity: age of majoritymental competence
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In Washington, a person must be at least 18 to enter into a contract.
Someone under 18 is a minor.
Parent or legal guardian may enter into binding contract on minor’s behalf.
Contractual CapacityAge of majority
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Contractual CapacityAge of majority
Contract in which one party is a minor is voidable by the minor.
Minor or guardian can choose whether to terminate or proceed with contract.
Other party can’t enforce contract.
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Contractual Capacity Mental competence
Mentally competent: Of sound mind.
If one party declared incompetent, contract void – no legal effect.
Guardian can enter into contracts on behalf of incompetent person.
Contract entered into while temporarily incompetent may be voidable.
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• Capacity• Age of majority• Minor• Mental competence • Guardian
SummaryContractual Capacity
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Elements of a Valid ContractMutual consent
Mutual consent: Contract legally binding only if both parties consent to its terms.
A court presumes consent if someone signs a contract.
Party who can’t read or doesn’t know language should ask someone she trusts to read or translate contract.
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Mutual ConsentOffer and acceptance
Mutual consent arrived at through process of offer and acceptance:
Offeror makes offer to offeree.If offeree accepts offer, contract formed.
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Mutual ConsentOffer
Offer must:express intention to enter into contractbe definite and certain
If offer fails to specify all basic terms, it’s merely an offer to negotiate.
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OfferTermination
An offer may terminate due to:revocation by offerorlapse of timedeath or incompetency of the offerorrejection of the offera counteroffer
If offer terminates before acceptance, no contract formed.
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Termination of an OfferRevocation
Offeror can revoke offer any time before acceptance.
Offeror must notify offeree of revocation before offeree accepts.
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Termination of an OfferLapse of time
Offer with deadline for acceptance expires automatically when date or time arrives.
Offer without deadline expires after reasonable amount of time.
“Reasonable” depends on circumstances. Issue sometimes decided by court.
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Termination of an OfferDeath or incompetency
Offer terminated and no contract formed if:offeror dies before offer is acceptedcourt declares offeror mentally
incompetent
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Termination of an OfferRejection by offeree
Rejection terminates offer.After rejecting offer, offeree can’t change
mind and accept it.
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Termination of an OfferCounteroffer
Counteroffer: Offeree accepts some terms, but changes one or more other terms.
Counteroffer terminates original offer and replaces it with new offer.Roles of offeror and offeree reversed.
Sometimes called qualified acceptance, but has same legal effect as rejection.
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Mutual ConsentAcceptance
To create contract, offeree must communicate acceptance to offeror before offer terminates.
Offer may specify how acceptance must be communicated.
If no time or manner of acceptance stated, reasonable time and manner implied.
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AcceptanceNegative influences
Acceptance must be voluntary, free of negative influences.
Contract voidable by victimized party if consent resulted from:
fraudundue influenceduress
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Negative InfluencesFraud
Fraud: Misrepresenting a material fact to someone who relies on the misinformation.
Material fact: Important information that may affect decision to enter into contract.
Fraud may involve:misleading statementsconcealment of information
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FraudActual vs. constructive fraud
Actual fraud: Person making statement knows or should know that it’s false.
Includes intentional deceit or concealment.Includes statements made without
knowing whether they’re true or false.
Constructive fraud: Person in position of trust or with superior knowledge unintentionally misleads another person.
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Negative InfluencesUndue influence
Undue influence: Persuading someone to sign contract by taking advantage of trust, weakness of mind, or distress.
Persuasion strong enough to overpower will, so that consent isn’t truly voluntary.
May involve abuse of special legal relationship based on trust: attorney-client, agent-principal, etc.
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Negative InfluencesDuress
Duress: Using force, constraint, or threats to compel someone to do something against his will.
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Elements of a Valid ContractLawful objective
Both purpose of contract and consideration must be lawful.
Can’t involve:violation of lawviolation of public policy
Contract with unlawful objective is void. Court won’t enforce it for either party.
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Elements of a Valid ContractConsideration
Consideration: Something of value exchanged by contracting parties.
Each must give the other something of value:money, property, services, or a promise
to give something of value in the future
In typical real estate sale:seller’s promise to convey titlebuyer’s promise to pay agreed price
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Elements of a Valid ContractStatute of frauds
Statute of frauds: State law that requires certain types of contracts to be in writing and signed.
Contracts not covered by statute generally enforceable even though unwritten.
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Statute of FraudsWhich contracts must be in writing
Washington’s statute of frauds applies to an agreement:
to convey an interest in real propertyto assume the debts of anotherto employ an agent to sell, buy, lease, or
exchange real property, if agent will be compensated
that won’t be performed within one year
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Statute of FraudsAdequate written contract
To comply with statute of frauds, any “writing” is adequate as long as it:
identifies contract subject matterindicates agreement between partiesis signed by party to be bound
May be printed, handwritten, or a combination. Handwritten part takes precedence if it
conflicts with printed part.
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Statute of FraudsContracts that fail to comply
Contract subject to statute of frauds unenforceable if not in writing and signed.
But once contract fully performed, neither party can undo transaction based on statute of frauds.
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• Mutual consent• Offer and acceptance• Counteroffer• Fraud (actual or constructive)• Undue influence• Duress• Lawful objective• Consideration• Statute of frauds
SummaryConsent and Other Requirements
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Legal Status of Contracts
Four terms used to describe a contract’s legal status:
voidvoidableunenforceablevalid
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Legal Status of ContractsVoid
Void: No contract; attempted agreement failed and can be disregarded.
Neither party has to withdraw.Usually happens because essential
element missing, such as: no consideration exchanged, or no consent (for instance, party mentally
incompetent).
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Legal Status of ContractsVoidable
Voidable: One party can choose whether to withdraw or go through with the contract.
Contract unenforceable by other party.Examples:
contract entered into by minor (voidable by minor or guardian)
contract entered into as a result of fraud, undue influence, or duress
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Voidable contract is binding unless party asks court to rescind contract.
Withdrawing party must take legal action within reasonable time.
Otherwise, court may rule that contract has been ratified.
Legal Status of ContractsVoidable
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Legal Status of ContractsUnenforceable
Unenforceable: Contract that can’t be enforced in court.
Examples: terms can’t be provedvoidable by other partystatute of limitations expired
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Unenforceable ContractsTerms can’t be proved
Court can’t enforce contract if terms of agreement can’t be proved.
Most often a problem with oral contracts.Parties probably agreed on all essential
terms, but that can’t be proved now.
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Unenforceable ContractsVoidable by other party
If one party has a right to void a contract (for example, a minor), other party can’t enforce the agreement.
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Unenforceable ContractsStatute of limitations expired
Statute of limitations: Law that sets time limit for filing a lawsuit.Party who misses deadline loses right to sue.Contract unenforceable.
Washington statute of limitations for contracts:breach of written contract: 6 yearsbreach of oral contract: 3 years
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Legal Status of ContractsValid
Valid contract:all essential elementsterms can be proved in courtnot voidable (for example, no negative
influences)statute of limitations hasn’t run out
If one party fails to perform as promised, other can sue to have contract enforced.
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• Void• Voidable • Unenforceable• Valid• Statute of limitations
SummaryLegal Status of Contracts
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Discharging a Contract
Valid contract may be discharged by:full performanceagreement between parties
Most contracts are discharged by full performance.
Each party performs as promised.Contractual relationship ends.
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Discharging a ContractAgreement between parties
Contract may be discharged without full performance, if parties agree to:
rescissioncancellationassignmentnovation
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Discharging a ContractRescission
Rescission: Parties agree to terminate contract and undo steps already taken.
Consideration is returned.Puts parties as nearly as possible back in
positions they were in before contract.
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Discharging a ContractCancellation
Cancellation: Parties agree to terminate contract without undoing steps already taken.
Money paid prior to cancellation not returned.
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Discharging a ContractAssignment
Assignment: One party (assignor) withdraws from contract and assigns interest to new party (assignee).
Contract not really discharged.If assignee defaults, other party can still
sue assignor (secondary liability).
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General rule:Contract can be assigned without other
party’s consent, unless clause expressly forbids that.
Exception:Personal services contract can’t be
assigned without consent.
Discharging a ContractAssignment
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Discharging a ContractNovation
Novation: Original party withdraws and is replaced by new party, and also is released from liability.
No secondary liability (as in assignment).Always requires consent of other original
party.
Novation can also refer to substitution of new agreement for old one between same parties.
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• Discharge• Full performance• Rescission• Cancellation• Assignment• Secondary liability• Novation
SummaryDischarging a Contract
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Remedies for Breach of Contract
Breach of contract: When one party fails to fulfill a promise in the agreement, without legal excuse.
If breach is material breach (important to contract), other party has right to sue.
“Time is of the essence” clause makes failure to meet deadline material breach.
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Remedies for Breach of Contract
Four legal remedies for breach of contract:rescissioncompensatory damages liquidated damagesspecific performance
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Remedies for Breach of ContractRescission
As explained earlier, rescission is termination of contract that returns parties to original (pre-contract) positions.
May occur by:agreement of partiescourt order
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Remedies for Breach of ContractCompensatory damages
Compensatory damages: Money that court orders breaching party to pay other party, to compensate for losses resulting from breach.
Most common remedy for breach of contract.
Intended to put nonbreaching party in position she would have been in if contract performed.
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Remedies for Breach of ContractLiquidated damages
Liquidated damages: Parties agree in advance to amount that will serve as compensation in event of breach.
Nonbreaching party can’t sue for more.Helps parties avoid costly litigation.
In residential purchase agreement, earnest money usually treated as liquidated damages if buyer defaults.
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Remedies for Breach of ContractSpecific performance
Specific performance: Court orders breaching party to perform contract as agreed.
Generally ordered only if money damages would be inadequate remedy.Subject of contract is unique, so
damages would not make it possible to purchase substitute.
Court may be willing to grant specific performance to real estate buyer.
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Breach of ContractTender
Tender: Unconditional offer by one party to perform his part of the agreement.
Usually made when it appears other party is going to default.
To be entitled to sue for breach, nonbreaching party must show he was ready to fulfill contract.
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Breach of ContractAnticipatory repudiation
Anticipatory repudiation: Express statement by breaching party indicating that she is not going to perform as agreed.
If anticipatory repudiation occurs, other party can sue for breach of contract without making a tender.
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Types of Real Estate Contracts
Listing agreementBuyer representation agreementPurchase and sale agreementLand contractLeaseEscrow instructionsOption agreement
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Types of Real Estate Contracts Listing agreement
Contract between real estate seller and brokerage firm.
In Washington, firm can’t sue for commission without written agreement.
What firm must do to earn commission depends on type of listing.
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Types of Real Estate Contracts Buyer representation agreement
Contract between real estate buyer and brokerage firm.
Buyer hires firm to help find suitable property and/or negotiate purchase.
Again, firm can’t sue for compensation without written agreement.
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Types of Real Estate Contracts Purchase and sale agreement
Contract between real estate seller and buyer.
States all terms of sale, such as:priceclosing datecontingencies
Form first serves as buyer’s offer, becomes binding contract if accepted by seller.
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Types of Real Estate ContractsLand contract
Contract used when buyer purchases seller’s property on installment basis.
Vendor (seller) retains legal title until full purchase price is paid.
Vendee (buyer) has equitable title and possession of property while paying off price.
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Types of Real Estate Contracts Lease
Contract transferring right of possession and use from landlord (owner) to tenant.
Sets terms of occupancy, such as:rentresponsibilities of each partyduration of tenancy
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Types of Real Estate Contracts Escrow instructions
Contract authorizing escrow agent to close a transaction.
States obligations and conditions that must be fulfilled for sale to close.
Buyer and seller generally sign joint instructions.Separate instructions used in some
commercial transactions.
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Types of Real Estate Contracts Option agreement
Contract creating right to buy, sell, or lease property for certain price within a certain period of time.
Must be in writing and supported by consideration.
In option to purchase:optionor is selleroptionee is buyer
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Types of Real Estate Contracts Option agreement
Gives optionee a contract right, but not a property interest.
May be assigned unless otherwise agreed.
May be recorded.
Different from right of first refusal.
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• Rescission• Compensatory damages• Liquidated damages• Specific performance• Tender• Anticipatory repudiation• Option agreement
SummaryRemedies and Types of Contracts
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© 2011 Rockwell Publishing Washington Real Estate Fundamentals Lesson 5: Public Restrictions on Land