1 / an introduction to the real estate businesswouldn’t have a voidable option. if the contract...

ABC Real Estate School 3st ed National Workbook August 2010 Page 277

Chapter 7 – Contracts

Learning Goals: • List and describe the d buyer

representation contrac• Name the ways a listi scuss each

situation. Describe how a competitive ma A) or appraisal can be used to help the seller set the listing price.

• List the types of information needed for a listing agreement. • Identify the major provisions of a typical exclusive listing agreement.

different types of listing agreements ants. ng agreement can be terminated and di

rket analysis (CM

Contracts A contract is an agreement between two parties to do or not to do certain things. It is a

promise or set of promises to perform or not to perform certain tasks. Most enforceable contracts can be oral or written, with the exception of contracts mentioned in the Statute of Frauds. This chapter will address contract law in general, not just contract law as it relates to real property.

Time is of the essence

When a contract states that time is of the essence, it means that the time and dates mentioned in contract are a critical element of the contract and should not be ignored by any of the party under any circumstances. The agreement is liable for cancellation if the contingencies60 (i.e. subject to financing, subject to appraisal, etc are not met in the time frame stated in the contract.

.)

60 Contingency is a condition for performance.

Statute of Frauds

The original statute that decl tracts for the sale of land, are unenforceable in a court of law if they aren’tcalled The Statute of Frauds and Perjuries; nicknamed the Statute of Frauds. This means that if challenged, a court would not be able to enforce this contract. If it isn’t challenged in a court of law, it would be a valid, binding contract. Over time this statute became reiterated in state

in order t be

to marry. Promises or commitments to loan money or to grant or extend credit in an original

principal amount of at least $100,000 made by a person engaged in the business of lending money or extending credit.

Every promise or commitment to pay a fee for obtaining a loan of money or an extension of credit for another person if the f

ared that certain contracts, including con in writing was a 1677 English statute

statutes, but is still often referred to as the Statute of Frauds.

In addition, this statute also includes the following to also be in writingvalid:

o

• Leases in excess of 1 year. Agreement that, by their terms, cannot be performed within 1 year from the date of

formation. Promises to answer for the debt or default of another. Promises made upon consideration of marriage, except mutual promises

ee is $1,000 or more.

Is the Contract Valid, Void or Voidable? A contract may be valid, void or voidable. A valid contract is legally enforceable. A void con . If a contract is voidable, the contract can be completed or rejected at the option of

tract is legally unenforceableone of the parties.

Valid A valid contract has all the necessary elements of a contract and is enforceable in a court of law. Contracts must meet certain criteria in order to be valid.

Someone must make an offer and someone must accept the offer. The person who makes fer is the offeror. The person who accepts the offer is the offeree. When they agree they the of

ABC Real Estate School 3st ed National Workbook August 2010 78

have an offer and acceptance, also known as (a.k.a.) an O and A, a.k.a. mutual assent, or a.k.a. a meeting of the minds. The contract m onsideration. The parties must consider it ust have some type of cvaluable. It doesn’t need to be cash. It is something that is bargained for and exchanged, something valuable enough to induce another part to complete the agreement. “In order to meet consideration's requirements, a contract must fulfill three elements. First, there must be a bargain regarding terms of an exchange. Second, there must be a mutual exchange. In other words, both parties must get something out of the contract. Third, the exchange must be something of value.”61 The final major element of a valid contract is legal ability. The parties must have legal ability and the act must be for a legal purpose that is possible to complete.

The parties must be of legal age to perform the contract. They must have enough mental capacity to comprehend the bargain. Both parties must be able to make a knowledgeable decision without duress (i.e. coerce by using force or intimidation to obtain compliance). The contract must be entered into voluntarily by both parties. Parties’ privy to the contract must not have committed any mistakes, fraud, misrepresentation, undue influence or duress.

The act or performance must also be a legal activity. A contract requiring the parties to perform illegal activities is not legally enforceable. And the purpose must be possible to complete. For example, a contract for a time-share cannot be completed if the time-share complex was never actually built or if a flood destroyed the unit before the contract was executed (i.e. fulfilled or fully performed).

Void A void contract doesn’t include all of the necessary elements to make it a valid contract.

Maybe the contracted for activity was not a legal activity: contract for the sale of illegal drugs, for example. Maybe property) nd the

it needed consideration (something of value in exchange for theotiated consideration. Maybe one of the parties had documentea re wasn’t neg d mental

problems and couldn’t legally enter into the contract. Maybe the property contracted for was destroyed by fire before conveyance. It has an obvious flaw and just doesn’t look valid. It is a void contract.

61 http://en.wikipedia.org/wiki/Consideration_under_American_law August 24, 2007.


Essential Elements of a Valid Contract I. Offer and acceptance (also known as…)

A. Offeror v. offeree B. meeting of the minds C. mutual assent D. offer and acceptance E. (O & A)

II. Consideration A. Parties must consider it valuable. B. acceptable types of legal consideration include:

1. A promise, or 2. A substantial sum of money.

III. Legal ability A. of legal age B. have enough mental capacity to understand activity

ly Possible A. must be for a legal activity B. must be possible to complete

1. property could not have been destroyed

C. each party must be able to make a knowledgeable decision D. contract must be entered into voluntarily E. if mistake, fraud, misrepresentation, undue influence, duress,

etc. took place the contract would become voidable at the option of the injured party

IV. Legal


Voidable

A contract can also be voidable. It looks valid. If both parties choose to affirm (continue with) the contract, it has all of the necessary elements to make it a valid contract. If one of the

ses to reject the contract, h . The most mmon reasons a person would be eligible to void a contract are:

m the activity, but the ions/consequences of performance of the contract. against by the other party.

tand the contract because of a documented

the contract didn’t understand the contract, and has the ability to iction. The mental problem didn’t t did not require a guardian to make

all activities.

he party to the contract was under s stepped in because it was a large

knew that the minor didn’t understand the ramifications of the

the e a pack of gum, a minor

expensive itemmeetin n

f real estate to have reached at least 18-years

age, 18 and 1 months of age? He/she may still ha ct.

A temporarily mentally incapacitated individual may also be able to void a contract. For example an individual suffering from documented Alzheimer’s decease would probably be able to convince a judge to void a contract that he entered into if he does not have full knowledge or memory of the event. A mentally ill person who had been adjudicated (labeled by a judge unfit to make their own decisions) is not able to sign a contract, so that contract is void.

parties chooco

is choice to reject it is legally enforceable

• One the parties is a minor, andof law allows for the minor to performinor didn’t understand the ramificat

• One of the parties was discriminated • One of the parties was not able to unders

mental disability.

Maybe a participant tovoid useit beca of a documented mental problem or age restrlegally prevent him or her from entering into all contracts. Ihis/her decisions for him. It was documented but assistance was not needed for

Maybe the age restriction wasn’t stated in state law. Table enter into the contract, but his/her parent18 and legally to

expenditure and the parentscontract.

If either the buyer or seller is a minor (under 18 years of age), the contract may be voidable, because the minor may argue that he/she did not fully understand his/her actions. If contract was a meeting-of-the-minds to acquire an inexpensive item likwouldn’t have a voidable option. If the contract was a meeting-of-the-minds to acquire an

, like a time-share, he/she may have a voidable option. If the contract was a g-of-the-minds to acquire a piece of real property, the contract may be void, rather tha

s require a buyer ovoidable, because most state lawof age.

What if the participant to the contract is of legalve a reasonable time after he turns 18 years old to void the contra


An individual who is drunk, or under the influence of drugs when he/she contracted, may also be able to argue for a voidable option. Again, it usually depends on the price of the item, and whether or not the ‘disease’ was documented and whether or not the individual was under the care of a physician. Under circumstances such as ay need to be able to make the decision to void the contract.

r

r committed a fraudulent act;

ree-, the contract will become voidable at the option of the buyer. If the

buyer is threatened or under duress s

contrac

these, a judge m

A contract may also be void due to the actions of the licensee. If the agent for a buyer oseller has misrepresented information (incorrect or misleading), changed information on the contract after it was signed, unintentionally lied, intentionally lied othe injured party (buyer or seller) can choose to void a contract. This is not automatic however. The injured party has a choice. The party can choose to continue with the contract, or choose to o he contract; if he/she can prove any of the misconducts in a court of law. v id t

If a buyer has been coerced into signing a contract with ‘undue influence’, (without fwill to make the decision)

(forced to perform an act against his or her will) the contract is voidable. And finally if there is a ‘mutual mistake’ (an example would be an incorrect addreson the sales contract), the contract will also become voidable.

A voidable contract is a valid contract which meets all of the legal elements. The t is voidable usually because of the actions or conditions of one of the parties. The party

has a choice to void the contract or continue on with, ratify, and complete the contract.

“What Exactly Is Mental Capacity? The law recognizes that adults, (people over age 18) have the right to manage their own affairs and condpeople below the age of adult

uct business, including the right to make health care decisions. Emancipated minors are hood (usually 18) who are also considered legally capable.

hoices presented, weighing up the information to determine what the decision will mean for them and then co

Capacity is the ability to make decisions for oneself. Capacity is when a person can go through the process of making their own decisions by understanding the information and c

mmunicating that decision. If a person is unable to follow this process and make his own decisions, that person is said to lack capacity.


A person may lack capacity due to a disability such as intellectual disability, dementia, brain injury or mental illness. A person may lack capacity temporarily. An example of this is during coma following an accident. The person may be able to make some decisions but not others.

Legal capacity and all the rights that go with it remain in effect until death, unless a court of law determines that a person can no lo

a

nger manage personal affairs in his own best interest and court intervention is necessary to protect the person..

ed

. People with ild de

People with dementia may require an evaluation of their level of cognition, memory, and judgme d

People are assumed to have capacity to make their own decisions unless it can be demonstratthat they lack capacity. Disability alone does not indicate a lack of capacity. A person with a disability may be able to make his or her own decisions without assistance.

A person in a coma cannot make any decisions, whereas a person with a severe language problem may be able to make decisions but may be unable to communicate themm mentia may think clearly enough to understand discussions.

Also, clinical incapacity is not necessarily permanent. People who are intoxicated, delirious, comatose, severely depressed, agitated, or otherwise impaired are likely to lack the capacity to make decisions but may later regain that capacity.

nt. Likewise, a clinical evaluation of the person's ability to conduct major legal anbusiness transactions may be needed before a lawyer or accountant can proceed with transactions.”62

Why might

ermanently) by a court of law a) contract is void

a person lack mental capacity?

A. minor isn’t old enough to fully comprehend all things B. individual isn’t physically capable of understanding the contract C. individual can’t understand the language D. individual is drunk E. individual isn’t sane

1. Temporary insane – not adjudicated by a court (Alzheimer’s) a) contract is voidable when sanity is regained

2. adjudicated insane (p

62 http://generalmedicine.suite101.com/article.cfm/capacity Aug 17, 2008 Asia Yousaf Accessed March 31, 2010.


Review over Validity of Contracts Valid * it has all necessary elements * enforceable Void

* looks valid * a party to the contract didn’t understand the contract * chosen by the injured party * Minor * mentally incapacitated temporarily * couldn’t understand contract * drunk or o* if injured

* Duress * Unlawfu person is

fo* Mutual mi

* it does not have all necessary elements * doesn’t look valid Voidable

n drugs due to a salespersons:

* Misrepresentation * unintentional lying * Fraud * intentional lying

* Undue influence

l constraint or action exercised upon a person whereby the rced to perform an act against his or her will.

stake


Rules for Minors

I. creates a contract voidable at the option of the minor ith, or terminateII. minor has a choice to continue w the contract up to a

reasonable time after he/she becomes an adult the minor may be obligated if the contract is for a necessary item such

food, 2. clothing, 3. medical care,

sportation.

A.as: 1.

4. shelter, or 5. tran

Enforceable or unenforceable?

Unenforceable When is a contract unenforceable? If the contimpossible to perform, it is unenforceable.

ract is void it is unenforceable. If it is It may look like a valid contract, but it may be

laws have changed since the contract was formed. If the contract activity, it is void and unenforceable.

impossible to perform becauseis requiring a party to perform an illegal

Doctrine of Laches

Courts also may enforce a policy called the doctrine of laches. It is the legal principal stating that a right may be lost through undue delay or failure to assert it. It is an “unreasonabldelay in pursuing a right or claim in a way that prejudices th

e e party against whom relief is sought

n rights.”63 – also termed sleeping o

63Garner, Bryan A. (Ed.). (2004). Black’s Law Dictionary 8th ed. St. Paul: Thompson.


Example: Paul Giovanelli is trying to purchase a parcel of land. The offer written by his agent on

Monday the 12th stated that the offer was valid until Thursday at 5 pm. His agent delivered the offer to the listing agent (seller’s agent) who informed Mr. Giovanelli’s agent that the sellers were out of the country and it would probably be Monday the 19th before his would be able to present the offer to the sellers. It took 6 months for Mr. Giovanelli to find a parcel in the neighborhood that he was looking he would wait for a response. On Wednesday the 21st, there was stil d to make an offer on a different

to accept his offer and his

in, so he told his agent that l no answer and Paul decide

parcel of land. He figured that the seller had been given ample time offer was no longer enforceable, due to the doctrine of laches.

Parol Evidence Rule Another common-law principle that may affect a contract is the Parol Evidence Rule. This rule states that the final agreed upon contract terms are the terms found in the final written docum ents agreed to after, and any written or oral agreements agreed to before ot enforceable by a court of law. The final written agreement is the c

ent. Any verbal agreem the contract is signed, are nut-off point for contract terms.

In Summary, unenforceable… * looks like a valid contract

sible to perform because laws have changed since contract was formed

e

* Parol Evidence Rule: A rule of evidence providing that a written agreement is the final agreement of the parties, not to be varied or contradicted by prior or oral or written negotiations.

* may be impos* a law made it unenforceable such as: * Statute of Frauds: An oral contract real estate contract that was disputed could not b

enforced. * Laches: The legal principal that a right may be lost through undue delay or failure to

assert it

expression of thecontemporaneous


In Shor

t:

TYPES WHY? VOIDABLE MINOR, ALCOHOLIC, MENTALLY

DIMINSHED, CAN’T UNDERSTAND LANGUAGE, AGENT

MISREPRESENTED/COMMITTED FRAUAGENT CHANGED A SIGNED CONTRACT

D,

VOID MENTALLY CERTIFIED CLIENT, LACKS A TERM, ACT OF GOD (DESTROYED)

ILLEGAL CONTRACT UNENFORCEABLE STATUTE OF FRAUDS

PAROL EVIDENCE RULE LACHES

Additional Contract Terminology Executory v Executed

The same contract can be an executory contract and an executed contract, at different times, during its existence. An executory contract is a contract that is not fully performed. The agreement has not An executed contract, on the other hand, sential elements of a

were met, and it is no longer a contract to perform. It is an

letion Timing

been fulfilled and there is something left to complete. is a contract that is fully completed. It met all of the es

contract, the terms and conditions executed agreement. Type Comp

Executed done fully completed (closed/recorded) Executory undone not fully completed (in escrow)

Express v Implied A contract can be either expressed or implied. Both types can be verbally stated or in writing. Terms within a contract can also be expressly stated or only implied. In an express ontract, all parties understand the terms. The parties understand who the parties are to the

contract and comprehend everyone’s roles. It is expressly stated, and may be in writing or erbally made.

An implied contract is not expressly stated. At least one of the parties is mistaken and assumes something that may be untrue. Because of the conduct of one of the parties, the other party doesn’t have all of the facts. Terms are inferred because of the actions of one of the parties

the contract.

c

v

to


ExaCathy

mple Gunderson is viewing a single family home with her agent Jeff. Because

Cathy contacted Jeff by responding to an advertisement in the local phonebook, she assumes tha nsed to sell real estate. Jeff’s was licensed when he contracted with the local telephone book company to placeexpire three months ago. He never told Cathy licensed. She is assuming, because of his actions, tha It is implied.

Type Copy Intent

Express Words clearly

t Jeff is lice the advertisement, but let his license either way; that he is licensed or isn’t

t he is legally licensed.

ions Displayed Stated stated oral or written

Implied conduct or actions Displayed by the actions ofHow did it look

the parties. Conduct?

More Contract Law Terminology: Unilateral v Bilateral

A valid contract can be either unilateral or bilat These two typeseral. of contacts are distinguished by the number of parti illing p ‘uni’ is defined as one, and the word ‘bi’ is as two

es fulf romises at the same time. The word defined .

“A bilateral contract is an agreement in which each of the parties to the contract makes a promise or promises to the other party. For example, in a contract for the sale of a home, the buyer promises to pay the seller the sales price in exchange for the seller's promise to deliver title to the property.

In a unilateral contract, only one party to the contract makes a promise. A typical example is the reward contract: A promise to pay a reward to B if B finds A's dog. B is not obliged to find A's dog, but A is obliged to pay the reward to B if B finds the dog. The consideration for the contract here is B's reliance on A's promise, or B giving up his legal right to do whatever he wanted at the time he was engaged in the finding of the dog.


In this example, the finding of the dog is a condition precedent to A's obligation to pay, although it is not a legal condition precedent, because technically no contract here has arisen until the dog is found (because B has not accepted A's offer until he finds the dog, and a contract requires offer, acceptance, and consideration), and the term "condition precedent" is used in contract law to designate a condition of a promise in a contract. For example, if B promised to find A's dog, and A promised to pay B when the dog was found, A's promise would have a condition attached to it, and offer and acceptance would already have occurred. This is a situation in which a condition precedent is attached to a bilateral contract.

Condition precedents can also be attached to unilateral contracts, however. This would require A to require a further condition to be met before he pays B for finding his dog. So, for example, A erson could say "If anyone finds my dog, and the sky falls down, I will give that p$10 0. In this situation, the dog is found by t be entitled to even if B, he would no the $100 untilthe s w y Aky falls do n. Therefore the sk falling down is a condition precedent to 's duty being actu n a fer aalized, eve though they are alre dy in a contract, since A has made an of nd B has accepted.

An offer of a unilateral contract may often be made to many people (or 'to the world') by means of an advertisement. In that situation, acceptance will only occur on satisfaction of the condition (such as the finding of the offeror's dog). If the condition is something that only one party can perform, both the offeror and offeree are protected – the offeror is protected because he will only ever be contractually obliged to one of the many offerees; and the offeree is protected, because if she does perform the condition, the offeror will be contractually obliged to pay her.

In unilateral contracts, the requirement that acceptance be communicated to the offeror is waived. The offeree accepts by performing the condition, and the offeree's performance is also treated as the price, or consideration, for the offeror's promise.

The offeror is master of the offer; it is he who decides whether the contract will be unilateral or bilateral. A bilateral contract is one in which there are duties on both sides, rights on both sides, and consideration on both sides. If an offeror makes an offer such as "If you promise to paint my house, I will give you $100," this is a bilateral contract once the offeree accepts. Each side has promised to do something, and each side will get something in return for what they have done.”64

Shortcut for figuring out Or vs. Ee: or = giver ee = taker

offeror (gave the offer) v offeree (accepted the offer) Works for everything except mortgages and trust deeds.

64 Accessed November 5, 2009. http://en.wikipedia.org/wiki/Contract#Bilateral_v._unilateral_contracts



Unilateral

e

A unilateral contract is a one-sided agreement in which one person makes a promise to perform if another person acts. It is a promise for an act. The 2nd party is not obligated to act, but if they do the first person needs to follow through with their promise. Only the maker of thpromise is obligated to perform.

Example:

eir m

Bally’s Time-share Resort has offered one free weekend stay at their resort inSouth Lake Tahoe to any couples between the ages of 36 and 48 that will attend thtime-share sales meeting on 4th of July weekend. Bally’s is obligated to perforonly if couples attend. If no one attends, Bally’s is not obligated to do anything. No couples are obligated to perform. This is an example of a unilateral contract.

Example: Owner Jesse has offered a lease option to his tenant. The renter ma

choose to purchase the home that he is renting y

under specific agreed-upon terms within a specific time-frame. If the tenant chooses to perform, he may purchase

thing.

the

is fully executed. Type Duties Timing Unilateral contingent

duties nly if, another chooses t (option)

the property. If the tenant chooses not to purchase the property, he does noThis is a unilateral contract. Jesse must honor the terms of the contract if his tenant chooses to purchase the property. Jesse does nothing if the tenant decidednot to purchase the property. If the tenant chooses to purchase the property,contract changes from a unilateral contract to a bilateral contract until the contract

a party is required to act, if and o

to perform – a promise for an acBilateral si e time – a multaneous both parties are required to act at the sam

duties promise for a promise (sales contract)

Bilateral A bilateral contract is a two-sided agreement in which both parties promise to fulfill promises or acts reciprocally.

Example: Mr. and Mrs. Ondler are purchasing a time-share from Bally’s. Th

promised to pay Bally’s for a time-share. Bally’s promised to provide the Ondlers with a time-share.

ey

It is a bilateral contract. Both parties are performing simultaneously.

Example: Owner Jesse has offered a lease option to his tenant. The renter has

chosen to exercise the option and purchase the home that he is renting under specific agreed-upon terms within a specific time-frame. This is a bilateral contract. Jesse must honor the terms of the contract because his tenant has chosen to exercise the option and purchase the property.

What is an option? ion is a unilateral contract that gives one party the right to purchase or lease stated price and terms within a specific period of time. If the optionee (receiver of ides to exercise his/her option, the optionor (giver of the option) cannot revoke the s beyond a ‘right of first refusal’, because the price, terms and time-frame has

An optproperty for a the option) decright. It extendbeen decided.

Example: nba th

se tt. ra Avenue in Las Vegas for 1 year. At the end of the year, Kathy will be able to purchase the rental fo ave agreed that she will use $1,000 of her security deposit towards the earnest money deposit. If the transaction doesn’t close by January 30, the option will expire.

Kathy Roseller/lessor Garre

um has negotiated a lease with an option to purchase wiKathy will be leasing Garrett’s 3-bedroom house on Saha

r $240,000. They h



What are Options? I. the optionee can decide whether or not to exercise the option II. the optionor can’t revoke III. example: a lessee has an option to purchase within a specific period of time for specific

.

t of First Refusal does not have decided terms) VII. deposit is non-refundable VIII. If the b

A. callIX. if th

A. What are Offers?

terms IV example: a lessee has an option to release the commercial unit without renegotiating V. unilateral contract VI. terms are decided (Righ

uyer buys ed exercising the option

e buyer does not buy the option expires

offeror made an offer to offeree

Seller Buyer ree (taker of the offer) Offeror (g Offe iver of the offer)

They change position if the offer is countered.

Seller Buyer Offeror (giver of the offer) Offeree (taker of the offer)

ptions for offeree: Reject it (Nevada requires it in writing)

II. Accept it A. binds parties

III. Counter it A. rej

IV. Do nA. B.

Options

Revoke or withdraw before the acceptance is communicated to the offeror or their agent

OI.

ects the initial offer othing (Nevada requires it in writing.)

after a reasonable period of time it is rejected the offer will expire

for offeror: I.

What is a ‘Right of first refusal’? r the option

action with the owner of something within a specified terms; before the owner is entitled to enter

hird party. nes wants to purchase property from Seller Garcia,

but he hasn’t sold his home ye loose the property, but he also does not want to ha his home doesn’t sell soon? If Seller Garcia finds another buyer willing to contract, Buyer Jones will purchase the house, own both homes, and take a chance that he will sell his present home. If Seller Garcia does not find another interested party, it will give Jones

ed by Seller Garcia. Jones requested the ‘rig of first refusal’ in writing. Garcia will continue to mar ready, Garcia will give Jones 3-days to start escrow or caobligation. The terms have been agreed upon, $250,000, closing in 30 days, closing costs split 50%/50% with an earnest money deposit of $15,000. Assuming Garcia has been presented with another offer and Jones does not act within the 3-day

, Garcia m

Right of first refusal is a contractual right that gives its holdeto enter into a business transperiod of time, according to specifiedinto that transaction with a t

For example: Buyer Jot. Jones doesn’t want to

ve to pay for both homes, and what is

time to sell his present home first. Buyer Jones has already signed an offer that was presented and accept

ht ket his home, and if he finds a buyer before Jones is

ncel his offer. It is an option, not an

period, Garcia is free to accept the new offer. First ust give Jones the option to act.


Assignment and Novation

Assignment: A contract may also be able to be assigned. When a person or company assigns a contract, he/she transfers the property, duties or rights agreed to in a contract, to another party. The assignment usually does not legally release torigina

he assignor from their duties agreed to in the l bilateral contract.

Example: U.S. Bank may assign loans made by them to another lender to free up funds. In this case, U.S. Bank’s original loan documents would state that it is able to assign the loans, and the borrower will stay obligated to the agreed upon terms regardless of which financial institution owns the loan.

Example: ABC Realty leases office space that is larger than its current needs. It would like

to lease half of the unit to a Title Company. ABC Realty is deciding between subleasing the unit and assigning its rights to the Title Company.

If the Title Company subleases the property, the Title Company will make the payments directly to ABC Realty. ABC Realty will still be liable for the full terms of the lease to the property management firm. If the Title Company doesn’t cut a check on time, ABC Realty will still need to make the full payment. ABC Realty also needs to verify the terms of their current lease to find out if the sublease is allowed under the terms of the lease.

If a sublease isn’t allowed under its lease, it will assign the rights to the Title Company. ABC Realty will still be liable for the whole lease, and the Title Company will probably send its payments directly to the property management firm, but ABC Realty will still be secondarily liable if the Title Company fails to make its payments.

Short: n assignment is a:

• Transfer of rights or duties under a contract. • The original party remains primarily liable unless specifically released. • It is a substitution of parties. • An assignment may be used to for:

o A landlord in a lease assigning the lease to new landlord/owner of property, or o A lender selling a loan to another lender.

InA


Changing a C Since pre-printed contract form in real estate transactions, sometimes

eed to change, omit and add items on the contracts. Other times conditions o be

r than creating individual unique contracts for each client, and/or re-negotiating the original contract when a change needs to be made; agents use addendums and amendments.

ontract s are usually used

buyers and sellers nand other terms don’t happen as anticipated and agreed upon, requiring contract changes tmade. In addition, inspections may produce surprises and appraisals may not generate the anticipated value, requiring re-negotiations.

Contract terms may not be changed without the expressed (written) knowledge and consent of all parties. Rathe

All contract changes must be initialed or signed by all parties (completely executed)!!!!!

Amendment Amendterms, tspace t the originatransac

ment means to change. Anytime a contract is changed to clarify, add or omit he contract has been amended. If a contract doesn’t afford the parties enough white o clarify, add or omit terms; amendments are made by adding additional documents tol contract. These changes or amendments are signed or initialed by all parties to the tion.

Addendum eans to add. An addendum is a rider, a separate document, which is made ntract by referencing the original document. It is initialed or signed by all

that needs to be fixed before closing. be lowered.

the initial contract is agreed upon. It enables the parties to pletely re-negotiating a new contract. All of the

origin t ne he initials of all parties in order to be part of the transaction.

Addendum mpart of the original coparties. Maybe an inspection uncovered a leaky pipeMaybe the appraisal came in lower than anticipated and the sales price needs to Usually addendums are created after change terms of the transaction without com

al terms still stand, except for the new terms agreed upon in the addendum. Any term thaeds to be clarified or fixed requires an addendum and t



Novation: A novation is the act of replacing parties or terms in a contract with new parties or terms in a new contract. Unlike an assignment, where the original party remains liable and only one party makes a change, in a novation, the parties’ intent is to discharge the old contract obligatioA new contract is substituted for the old contract, and the old contract is released. An examof a novation would be a mortgage loan refina

n. ple

nce. The original mortgage is replaced by the new, refinanced mortgage.

Example: ABC Realty leases office space that is larger than its current needs. If the

property management firm agrees, and the Title Company signs a new lease with the property management firm for the unit; ABC Realty will no longer be liable for the remainder of the lease term for that unit. If all the parties agree, and a new lease for the remainder of the term is created, the original contract will have been performed by novation.

Typical Types of Real Estate Contracts Real Estate contracts come in all different sizes and shapes. Real Estate Licensees use contracts for listing agreement, purchase agreement, counteroffers, agency disclosures, options, right of first refusal contracts, financing contracts and escrow agreement contracts, to name of

w. The important consistency is that since licensees are not licensed attorneys, they are not feallowed to practice law.

In Short: A few types of real estate contracts:

* Listing agreement. * Purchase Agreement. * Counter Offers. * Agency Disclosures.

* Options. * Right of First Refusal Contracts. * Financing Contracts. * Escrow Agreements.

Listing agreement

A listing agreement is an employment agreement between a licensee and a seller or sellers of real property to give the licensee the right to offer the property for sale.

Most listing agreements contain:

1. A start date and an end date. 2. The list price at which the property will be offered for sale. 3. The names and signatures (with dates signed) of all parties to the contract. 4. A description of the property. 5. Description of items included and/or excluded from the sale. 6. ee The amount of compensation offered to the broker, whether it is in the form of a flat f

or percentage of the sales price. 7. The terms and conditions under which the brokerage fee shall be paid and by who. 8. The licensee’s responsibilities. 9. Stated consequences for default of contract.

Payment of a commission to a real estate broker is usually subject to a successful negotiation between a ready, willing and able buyer and a seller and usually the subsequent closing/recording/settlement of the transaction.

Nevada Law with regards to Exclusive Listings

Listing Contracts • employment contract

• establishes the rights and obligations of between agent and principal • Nevada required all exclusive listing and buyer agency contracts to be in writing

uyers & Sellers Exclusive Right to Sell and Exclusive Agency)

st be in writing 2) must have a term

3) cannot be autom must be signed b

(Includes B

1) muination date

atically renewing 4) y both seller and agent


Types of Listing Contracts/Agreements

There are 4 major types of listing contracts also called listing agreements:

1) Exclusive right to sell: An exclusive agency agreement may be used with either a buyer or a seller. The most common type of residential listing agreement used with a seller, is an exclusive right to sell agreement. When the licensee and seller agree to and use an exclusive right to sell agreement, the seller must pay the brokerage a commission if, by the expiration date in the listing contract, the property is sold; regardless of whether the buyer is obtained through the licensee’s efforts or not. Even if the seller finds the buyer himself, a commission is still owed to the brokerage. If the seller lists the property with any other brokerage before the expiration of the existing listing, and the property sells; the seller could be obligated to pay multiple commissions.

Example: Seller Jackson lists his house with Licensee Alan under a 1-year exclusive right to sell listing agreement. Six months later, Jackson isn’t happy with Licensee Alan and Licensee Antebellum said that she has a buyer, but she won’t show the property unless Jackson signs an exclusive right to sell listing agreement with her. Jackson signed the new agreement. Jackson finds the buyer himself. Does he owe either licensee a commission?

Yes, he owes both licensees a commission. This commission will be paid to the licensee’s broker’s and the broker w eed upon amount. It doesn’t ill disperse the contract-agrmatter who finds the buyer. Wh a tract is in force, the seller must en n exclusive right to sell conpay a commission to the license ble’ buyer is found. e if a ‘ready, willing, and a

2) Exclusive Agency:

An exclusive agency agreement may also be used with either a buyer or a seller. It is also commonly nt the used with commercial property. The employment agreement used to represeseller in the sale of the property is called an exclusive agency listing agreement. The employm ncy ent agreement used to represent a buyer is called an exclusive agency buyer ageagreement.

Regardless of the part only if the sale is created do y, the clie onnt must pay the broker a commissito the efforts of the through that brokerage, licensee. edIf the property is sold to a buyer obtainthe client owes the e buyer by himself, the listing brokerage a commission. If the seller finds thseller does not have to pay a commission to the listing brokerage. This works the same way with a contract between a buyer and a broker. If the buyer finds his own property, the buyer does not have to pay a commission to the listing brokerage.



Example: Seller Jackson lists his house with Licensee Alan under a 1-year exclusive agency listing agreement. Six months later, Jackson finds the buyer himself. Does he owe Alan a commission?

No. Jackson can sell the property himself, without liability of a commission to Alan.

Why would a buyer pay a licensee to represent him?

Example: Buyer Carrie is looking to purchase a small casino. Licensee Underwood required Carrie to sign an agency agreement because he wants to make sure he gets paid

3) Open Agency: A seller is entering into an agreement to sell his/her property with more than one br er okerage. The seller must pay a commission only to the brokerage which brings the buyfor the real estate. Typically, if the seller finds the buyer him/herself, the seller does not have to pay a commission. An open listing is most commonly used when listing commercial property.

Example: Frieda wants to sell her restaurant in a busy location in downtown Reno. She has contracted with several business brokers under an open agency agreement. Frieda found the buyer herself. Does she owe any licensees a commission?

No. Frieda can sell the property herself, without liability of a commission to anyone.

entitled to any amount exceeding the seller’s stated net sales price. The seller sets the ‘net’ proceeds that he wants to receive.4) Net Listing: The broker is

Example: Seller Raul listed his house with Licensee Rick with a net listing. Raul wants to net $240,000. The property sold for $265,000. Does he owe Rick a commission?

Yes. Raul owes Rick the difference, or $25,000.

Title: Legal v Equitable:

Equitable Title: The interest held by someone who has agreed to purchase but has not yet closed the transaction.

Legal Title: The interest held by someone after the transaction is closed and recorded. Legal title is c l property. lear and enforceable title that represents legal ownership of rea

4 Types of Listing Agreements A. Exclusive Right to Sell

4. even if the seller finds a buyer without the salesperson’s assistance, the seller ission

ing B. Exclusive Agency

1. salesperson is appointed as sellers sole agent - best type of listing agreement for agent 2. salesperson is given the exclusive right to market sellers’ property 3. while in effect, seller must pay salespersons commission regardless of who sells the property

must pay a comm5. seller usually obtains an agent that is more willing to spend time and money marketing the property 6. Nevada requires this contract to be in writ

1. seller retains the right to sell the property without paying the salesperson a commission

salesperson has been the procuring cause of the sale 2. seller is obligated to pay a commission to the salesperson only if the

3. Nevada requires this contract to be in writing C. Open Listing

1. seller retains the right to employ any number of agents 2. seller is obligated to pay a commission only to the brokerage that produced a ready, willing, and able buyer 3. seller can sell it himself without being liable for a commission

D. Net Listing 1. specifies that the seller will earn a certain amount of money from any sale with the excess going to the agent 2. the agent is free to offer the property for sale at any price over the net amount

4. LEGAL in Nevada, but could cause agency problems (disclosures recommended.)

3. creates a conflict of interest


Agency Relationship Disclosures To provide an explanation of agency relationships and duties, the law requires that a real

estate broker d ies which arise from certain agency relationships. agent of the seller, agent of the buyer, or agent of both the

lationship(s) disclosed.

isclose in writing the general dutAdditionally, the broker’s status asseller and buyer (dual agent) is to be disclosed to the principals of the transaction who must consent to the agency re Buyer Agency Agreements A buyer agency agreement is the contract that establishes and defines a relationship between a buyer and buyer’s agent. Typically, the purpose of the contract is to identify any commission due the agent, and the criteria for establishing commission earned. There are three major types of buyer agency agreem ency agreement, (2) exclusive a y agreement. This

ween the buyer and the

Differences: they fi r the opopen awant ttransac

ents including: (1) exclusive buyer aggency buyer agency agreement, and (3) open buyer agenc

the working relationship betagreement pre-sets the ground rules forbuyer’s agent. uIf sed, it is presented and signed by the buyer before any work commences.

An exclusive buyer agency agreement obligates a buyer to compensate an agent even if nd the buyer themselves. An exclusive agency buyer agency agreement affords the buye

portunity to find their own property without obligation of compensation to the agent. An gency buyer agency agreement is the type of agreement that a buyer enters into if they o contract with multiple agents. Only the agent that is the procuring cause of the tion to entitled to compensation.

In Summary, Buyer Agency Types: * exclusive buyer agency agreement

* buyer is obligated to compensate agent if he/she purchases the described type of property

* buyer is required to pay even if agent was not procuring cause65 of sale * exclusive agency buyer agency agreement

* buyer can find own property without obligation of commission buyer agency agreement* open

* The buyer is obligated to compensate only the salesperson that was the procuring le.

cause of the sa* The buyer can enter into similar agreements with multiple agents.

65 Garne th

r, Bryan A. (Ed.). (2004). Black’s Law Dictionary 8 ed. St. Paul: Thompson.



Sales Contract

eneral RequirementsG

A sales contract is a binding contract between a buyer and a seller. It is binding upon their heirs and does not terminate automatically upon the death of either party. Most sales contracts contain:

1. The purchase price including payment and closing cost details (financing, cash, etc.). 2. Description of the property involved. 3. Description of items included and/or excluded from the sale. 4. A statement that ‘time is of the essence’. 5. The names and signatures (with dates signed) of all parties to the contract. 6. Dates important to conditions that must be met. 7. Description of items (usually personal property) included and/or excluded from the sale. 8. Earnest money receipt. 9. Line for seller’s signature to accept or reject the offer. 10. Stated consequences for default of contract.

Unlike a listing contract, an accepted sales contract (also called a purchase agreement) is

nding on the heirs and estates of the buyer and the seller. Upon the seller’s acceptance of the offer to purchase, the buyer has equitable title in the real estate. Upon closing, legal title.

tracts

bi

Sales Con • agreement between buyer and seller • also called an:

• offer to purchase • a contract of purchase and sale • purchase agreement • earnest money agreement • deposit receipt • O & A

Real Estate Sales Contracts (not employment contracts like listing contracts)

Must be in writing (because of the Statute of Frauds) Contingencies: • at must be satisfied before a sales contract is full enforceable

elements:

esponsible for paying any costs involved • 3 most common

additional conditions th• includes the following 3

• actions necessary to satisfy the contingency • time frame within the actions must be performed • who is r

• mortgage contingency • protects the buyers earnest money until the lender commits the mortgage loan

funds • inspection contingency

• contingent on inspections such as insects, lead-based paint, structural and

encymechanical systems, sewage facilities, radon and other toxic materials

• property sale conting e to be sold before purchasing

have been satisfied or removed. • permits se

• contingency requiring the buyers present homnew home

• protects the buyer from owning 2 homes at the same time • Escape clause

• permits seller to market the property until all of buyers contingencies

ller to accept a better offer

What is a counterofferEJECTIO

? N of the original offer and the creation of a

not be reincarnated. It is terminated by the

by the prospective buyer (offeror). The seller(offeree) he offer. The buyer(offeree) rejects the

counteroffer, and creates a counteroffer. The offeree and offeror positions change, reflecting the party that is creating the offer or counteroffer (offeror) and the party that is receiving the offer or counteroffer (offeree).

A counteroffer is a Rnew offer. The original offer cancounteroffer.

offer is madeAnrejects the offer by countering t


When does the offer become binding?

e ALL offers and counteroffaccept

rs may be revoked at any time before ance, regardless of the stated end date of the contract. An offer or

e that the person making the eptance.

counteroffer is not considered accepted until the timeror) has been notified of the offeree’s accoffer (off

Typical Parts of Rme is of the

eal Estate Contracts Ti d time a ny

Contingencycontract is binding. The contract is ‘subject to’ completion of these activities before the stated deadlin Earnest Moevidence of a states that the m eited if the purchaser fails to carry out the term ertain amount of earnest money be included with the offer (stated in the MLS database listing), but ultimately the amount is the decision of the offeror. It is necessary for the licensee to verify the existence of the funds, if a receipt is provided to the prospective buyer. It may or may not be re-fundable to the buyer.

essence n. “a phrase often used in contracts, which, in effect says: the specifiend dates in this agreement are vital and thus, mandatory, and "we mean it." Therefore, a

r not, slight or not, will be grounds for cancelling the agreement”. 66 delay, reasonable o

: A contingency is the dependence on a stated event which must occur before a

e.

ney Receipt: Good faith sum of money given to bind a contract. It gives the best buyer’s intention to carry out the terms of the offer. Often a real estate contract

pplied to the purchase price and is foney is a orfs of the agreement. The seller may request a c

Commission Earned v Commission Received

♦ Commission is earned when the work for which the sales agent or licensee was hired has

been accomplished. It may or may not be received if something happens to the deal and the agent does not sue for the commission.

♦ Commission is paid after the deed is recorded.

66 Accessed Nov 2009. http://legal-dictionary.thefreedictionary.com/Time+is+of+the+Essence


Default or Breach of Cos or conditions of a contract

ntract: (i.e. violating any term without a legal excuse)

re of the stated medies.

Specific performance is the more common remedy. Have the parties continue with, and complete the contract as agreed.

If that is not possible, a monitory damage may become more appropriate. Often times that puts th their mind, often the contract states that r their ‘lost time’.

er) on a ocument that states the solution found in the contract. If that solution is not satisfactory to one

as y

y the title/escrow company.

What happens if the buyer changes his mind?

If either of the parties changes his/her mind and wants to cancel the transaction, the contract will be the first place to search for solutions. What are the consequences that the parties agreed to in the contract? Often times, the contract will mention one or more

e earnest money deposit in play. If the buyer’s changethe earnest money deposit will be given to the sellers fo

Regardless of the solution, someone other than the licensee will decide the applicable damages. Usually the escrow/title company will be a first responder in attempting to find an agreement by requesting the signatures of both licensees and both parties (buyer and selldor more of the parties, a court of law will probably be needed to give the title/escrow directionto the solution. If that also does not end satisfactory, state law may need to decide the fate of anfunds held b Solutions: I. Specific performance:

A. Specific performance is issued by a court when a contract is breached67, requiring a party to continue to perform a specific act, usually what is stated in the contract. It is usually used to complete a previously established transaction, thus being the most effective remedy in protecting the expectation interest of the innocent party to a contract. It is the opposite of an injunction, preventing the party from continuing with the transaction.

B. The buyer asks the court to force the seller to go through with the sale and convey the property as previously agreed.

II. Suit for damages A. Compensa

1. actual dam

tory damages ages are for actual harm

2. used for agency violationsB. Liquidated damages

1. previously agreed damages 2. seller may get earnest

money deposit if buyer defaults

67 ct is a legal concep ore of the parties to

contractBreach of contra t in which a binding agreement or bargained-for exchange is not honored by one or m

the contract by non-performance or interference with the other party's performance. http://en.wikipedia.org/wiki/Breach_of_


http://legal-dictionary.thefreedictionary.com/Time+is+of+the+Essence

ABC Real Estate School 3st ed National Workbook August 2010 6

What Terminates a Contract?:

executed II.

re as follows:

C. Government is taking property in a condemnation suit (The legal seizure of property by a government authority for public use, through the powers of eminent

nd

I. Performance A. individuals have finished terms and conditions B. The contract is not possible to complete A. possible examples a

1. house burned down 2. laws were changed since contract was formed

III. All parties agreed to terminate the contract A. Broker may sue for commission

IV. Contract was assigned to someone else A. novation - original signer is no longer liable B. no novation - original signer is still secondarily liable

V. The law prevented the contract from continuing because of: A. Illegal contract B. Voidable contract

domain). D. Statute of Frauds required the contract to be in writing in order to be enforceable E. Statute of Limitations (exceeded the maximum possible legal time frame to

complete the contract). F. writ of attachment (the asset is ‘frozen’ during a pending lawsuit or ceased by a

judge) was in place G. parties to the contract changed the contract without all parties knowledge a

approval H. change of ownership

1 / an introduction to the real estate businesswouldn’t have a voidable option. if the contract...

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