CHAPTER 11 SNAPSHOT REVIEW
Real Estate Contracts Snapshot Review
CONTRACT ESSENTIALS
Definition of a contract
●mutual promises based on “meeting of the minds” to do or refrain from doing something; potentially enforceable if created validly
Preparation of contracts
● only attorneys may legally prepare; real estate licensees may fill in standard forms for listing and buyer brokerage agreements, sale and option contracts
Legal status of contracts
●valid: meets criteria
●void: does not meet criteria
●voidable: invalid if disaffirmed
●valid yet unenforceable: certain oral contracts
Criteria for validity
●competent parties; mutual consent; valuable consideration; legal purpose; voluntary, good faith act
Validity of a conveyance contract
●must be in writing; contain a legal description; be signed by one or more parties
Enforcement limitations
●statute of frauds: must be written to be enforceable
●statute of limitations: must act within time frame
UETA & electroni contracting
●federal law: electronic records and signatures are legal and must be accepted; enforceable regardless of medium
CLASSIFICATIONS OF CONTRACTS
●oral or written; express or implied; unilateral or bilateral; executed or executory
CONTRACT CREATION
Offer and acceptance
●valid offer and valid acceptance creates contract
●offer becomes contract on communication of acceptance by offeree to offeror
Counteroffer
●any offer in response to an offer or any altered original offer; nullifies original offer
Revocation of an offer
●offeror may revoke offer prior to communication of acceptance by offeree
Termination of an offer
●acceptance; rejection; revocation; expiration; counteroffer; death or insanity
Assignment of a contract
●assignable unless expressly prohibited or a personal service
Contract preparation
●restricted unless licensed as attorney or a party to the contract
CONTRACT TERMINATION
Forms of contract termination
●performance; infeasibility; mutual agreement; cooling-period rescission; revocation; abandonment; lapse of time; invalidity of contract; breach of contract
Breach of contract
●default without cause
●legal remedies: rescission; forfeiture; suit for damages; specific performance
EMPLOYMENT AGREEMENTS
Foundations in agency law
●listing: broker’s enforceable contract of employment with client establishing special agency relationship to procure a customer
●parties: listing broker and client; broker’s subagents; customers and prospects
●fiduciary duties: loyalty; obedience; disclosure; care; diligence; accounting
●scope of authority: listings are special or limited agency, not general agency agreements; broker may not contract for client unless specifically authorized; clients liable only for broker’s acts within scope of authority
Types of Listing agreements
●owner listing: authorization to sell or lease;
●exclusive right-to-sell (or lease)— most prevalent; given to one broker; must usually be written; must expire; broker gets commission if property transfers during period
●exclusive agency— exclusive excepting owner; oral or written; must expire; broker gets commission unless owner sells
●buyer or tenant listing: authorization to represent buyer or tenant; open or exclusive listings with buyers or tenants to represent their interests compensation in form stipulated by agreement; may be paid by seller or landlord at closing; payable if buyer defaults; agent has fiduciary and disclosure duties
●open listing— non-exclusive; oral or written; no stated expiration; procuring cause gets commission; no commission if client procures customer
●net listing— all sale proceeds above a seller’s minimum price go to the broker; discouraged, if not illegal; legal in Florida
●transaction broker agreements— non-agency; no fiduciary duties; agent does not work in the interests of or for the benefit of either party
●multiple listing— placed in MLS; owners consent to rules and provisions of MLS
SALE CONTRACTS
Legal characteristics
●binding, bilateral contract for purchase and sale; enforceable; executory, or to be fulfilled; expires upon closing; must be in writing; contain valuable consideration; identify property; be signed by all; be a valid contract
Contract creation
●by unqualified acceptance of an offer; gives buyer equitable title, power to force specific performance
Earnest money escrow
●secures contract validity and buyer’s equitable interest; varies in amount; deposit controlled by disinterested party who must act according to escrow instructions
Contract contingencies
●conditions that must be met for the contract to be enforceable
Default
●buyer may sue for cancellation and damages or for specific performance; seller may claim deposit as liquidated damages, or may sue for cancellation, other damages, or for specific performance
Contract provisions
●parties, consideration, legal description, price and terms, loan approval, earnest money, escrow, closing and possession dates, conveyed interest, type of deed, title evidence, property condition warranty, closing costs, damage and destruction, default, broker’s representation, commission, seller’s representations
●inspections, owner’s association disclosure, survey, environmental hazards, compliance with laws, due-on-sale, seller financing disclosure, rental property tenant’s rights, FHA or VA financing condition, flood plain and flood insurance, condominium assessments, foreign seller withholding, tax-deferred exchange, merger of agreements, notices, time of the essence, fax transmission, survival, dispute resolution, addenda
Required disclosures
●Florida requires several disclosures – energy efficiency, known hazardous substances, transfer disclosure statement, flood insurance, inundation zones, high fire hazard zones, wildland fire areas, wildland fire, coastal property, HOA, condo and co-op, community development district, property tax, building code violation, Megan’s law, radon
FAR/BAR contract forms
●contract form licensed by FAR and Florida BAR
●contains standard provisions and allows non-standard provisions to be attached
Material defects
affecting residential
property value
●as of 1985, caveat emptor no longer used; sellers required to disclose all known defects whether or not observable
●Johnson vs. Davis: all known defects are to be disclosed, even those not readily observed; buyers need not prove fraud or negligence, only failure to disclose
●as-is provision: buyers purchase with no seller’s obligation to repair defects; sellers still required to disclose all known defects; buyers can cancel within 15-day inspection period
●licensee has duty to disclose all material facts; should advise seller of red flag issues detected; may include environmental concerns, property size and shape, neighborhood, construction quality, flooding, floorplan, adjacent property
OPTION CONTRACTS
Essential characteristics
●optionor gives option to optionee; unilateral contract: seller must perform; buyer need not; if option exercised, option becomes bilateral sale contract
Contract requirements
●must include: non-refundable consideration for the option right; price and terms of the sale; option period expiration date; legal description; must be in writing and meet contract validity requirements
Common provisions
●special provisions: how to exercise option; terms of option money forfeiture; how
option money will be applied to purchase price
Legal aspects
●creates equitable interest; is assignable; should be recorded
INSTALLMENT SALES CONTRACTS
●purchase price is paid over time in installments; seller retains title; buyer takes possession; at end of period, buyer pays balance of price, gets legal title
Interests and rights
●seller may encumber or assign interest; remains liable for underlying mortgage
●buyer may use, possess, profit; must make periodic payments, maintain the property, and purchase at end of term
Legal form
●specifies parties; property; consideration; terms; obligations; default; remedies; signatures; acknowledgement; payments; deadlines; permitted uses
Default and recourse
●if seller defaults, buyer may sue for cancellation and damages or specific performance; if buyer defaults, seller’s only remedy is foreclosure
Usage guidelines
●use attorney, standard forms, professional escrow and title services to minimize risk; record transaction
