© 2011 Rockwell Publishing Washington Real Estate Fundamentals Lesson 6: Contract Law.

© 2011 Rockwell Publishing

Washington Real Estate Fundamentals

Lesson 6:

Contract Law


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.


Contract Classifications

Contracts may be classified according to certain basic characteristics.

Every contract is:express or impliedunilateral or bilateralexecutory or executed


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.


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.


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.


• Contract• Express or implied• Unilateral or bilateral• Executory or executed

SummaryContract Classifications


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.


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


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


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.


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.


• Capacity• Age of majority• Minor• Mental competence • Guardian

SummaryContractual Capacity


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.


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.


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.


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.


Termination of an OfferRevocation

Offeror can revoke offer any time before acceptance.

Offeror must notify offeree of revocation before offeree accepts.


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.


Termination of an OfferDeath or incompetency

Offer terminated and no contract formed if:offeror dies before offer is acceptedcourt declares offeror mentally

incompetent


Termination of an OfferRejection by offeree

Rejection terminates offer.After rejecting offer, offeree can’t change

mind and accept it.


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.


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.


AcceptanceNegative influences

Acceptance must be voluntary, free of negative influences.

Contract voidable by victimized party if consent resulted from:

fraudundue influenceduress


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


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.


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.


Negative InfluencesDuress

Duress: Using force, constraint, or threats to compel someone to do something against his will.


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.


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


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.


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


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.


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.


• Mutual consent• Offer and acceptance• Counteroffer• Fraud (actual or constructive)• Undue influence• Duress• Lawful objective• Consideration• Statute of frauds

SummaryConsent and Other Requirements


Legal Status of Contracts

Four terms used to describe a contract’s legal status:

voidvoidableunenforceablevalid


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).


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


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


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


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.


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.


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


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.


• Void• Voidable • Unenforceable• Valid• Statute of limitations

SummaryLegal Status of Contracts


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.


Discharging a ContractAgreement between parties

Contract may be discharged without full performance, if parties agree to:

rescissioncancellationassignmentnovation


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.


Discharging a ContractCancellation

Cancellation: Parties agree to terminate contract without undoing steps already taken.

Money paid prior to cancellation not returned.


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).


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


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.


• Discharge• Full performance• Rescission• Cancellation• Assignment• Secondary liability• Novation

SummaryDischarging a Contract


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.


Remedies for Breach of Contract

Four legal remedies for breach of contract:rescissioncompensatory damages liquidated damagesspecific performance


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


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.


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.


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.


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.


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.


Types of Real Estate Contracts

Listing agreementBuyer representation agreementPurchase and sale agreementLand contractLeaseEscrow instructionsOption agreement


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.


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.


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.


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.


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


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.


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


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.


• Rescission• Compensatory damages• Liquidated damages• Specific performance• Tender• Anticipatory repudiation• Option agreement

SummaryRemedies and Types of Contracts

© 2011 Rockwell Publishing Washington Real Estate Fundamentals Lesson 6: Contract Law.

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Transcript of © 2011 Rockwell Publishing Washington Real Estate Fundamentals Lesson 6: Contract Law.