Unit 8 Test Bank (Chapter 13)

Phase question is only one questionable

​Seller A has two counteroffers outstanding to Buyer B and Buyer C.  B and C both accept the counteroffers.

​A has a valid contract with both B and C.

• The seller in the example has formed two valid contracts and would have to convey the property to one buyer and pay damages for breach to the other buyer.

​Nondisclosure statutes govern which of the following topics?

​Structural defects - not me

Mrs. Clements gave the University of Iowa a written option on a piece of property she owned.  The University paid $300 to keep the option open from January 3, 1982 until April 3, 2010.  On February 15, 2010, Mrs. Clements notified the  University in writing that she was revoking her offer.  Mrs. Clements then sold the property to Douglas (a good faith purchaser who knew nothing about the option).

The University is entitled to damages

• An option contract is a separate contract from the underlying offer. It is a promise to keep an offer open for a specified period of time, and it is supported by its own consideration. In this case, the University of Iowa paid $300 to Mrs. Clements to keep the offer open for the property until April 3, 2010. This created a valid and enforceable option contract.

  • Mrs. Clements's attempt to revoke her offer on February 15, 2010, was ineffective because the option contract prevented her from doing so before the expiration date. By selling the property to Douglas, she breached the option contract. Therefore, the University is entitled to damages for the breach of contract.

On November 1, 2015, Sam made an offer to Bobby by mail for the sale of his mobile home lot at $14,000.  Sam’s offer included the following:  “Acceptance must be by Federal Express no later than 10:30 a.m. on November 5, 2015.”  Bobby accepted the offer by mail on November 4.  The acceptance arrived at 8 a.m. on November 5. Suppose that Bobby sent his acceptance via UPS overnight delivery on November 2 and the UPS package arrived at Sam’s home by 10:30 a.m. on November 3.

Sam and Bobby have a contract as of November 3 - not me 

Steve Thompson has made an offer to purchase a home on a short sale from First Third Bank for $120,000.  The bank has responded by e-mail indicating that it will consider the offer.  At the end of the e-mail is this language:

E-mails and the language in e-mails are not considered offers or acceptances for purposes of formation of a contract.  First Third Bank is not bound by any e-mail communications regarding the purchase or sale of property. All offers and acceptances must be handled through the bank’s sales office.

Later Steve e-mails the bank back and reiterates his offer.  A bank employees e-mails back, “We have your offer and are processing the paperwork now.  It is accepted.”  Which of the following is correct?

​Steve does not have a contract for the purchase of the home.

• The initial email from the bank explicitly states that "E-mails and the language in e-mails are not considered offers or acceptances for purposes of formation of a contract." It also states that "All offers and acceptances must be handled through the bank's sales office." Therefore, the subsequent email from the bank employee, despite saying "It is accepted," is not a valid acceptance of the offer and does not form a contract

​Misrepresentation can be based on a statement that is considered puffing.

True

• Misrepresentation can result from the sales-puffing techniques of brokers. The classic line given to induce buyers is, “If you are going to do anything, you had better do it quickly because I have another buyer on the line for this property.”

“I accept, but closing must be by December 31, 2020”, is not an acceptance.

True

• An acceptance of an offer must be a "mirror image" of the original offer, meaning it must agree to all the terms without any changes. When an offeree responds with new or different terms, such as adding the condition "closing must be by December 31, 2020," it is considered a counteroffer, not an acceptance. A counteroffer terminates the original offer and creates a new offer that the original offeror can then choose to accept or reject.

​"I might sell my house for $188,000" is not an offer.

True

• An offer, in the context of contract law, must be a clear, definite, and certain proposal to enter into a contract.

• statement indicates a lack of intent to be bound.

​Misrepresentation, to be grounds for rescission, must be shown to have been fraudulent.

False

• Misrepresentation can be innocent; that is, one party, through misinformation or lack of knowledge, provides the other party with inaccurate and misleading information.

• Misrepresentation can also be fraudulent, as when one party intentionally provides inaccurate information for purposes of inducing a sale.

• Misrepresentation can occur because of a party’s failure to disclose information that would have affected the purchasing decision.

• Rescission is generally appropriate in cases of fraud and misrepresentation

​A buyer's counteroffer is automatically rejected when the seller sells to someone else.

False 

• When the seller sells to another person, that act doesn’t automatically terminate the counteroffer unless the buyer is notified of the sale. The key is communication — the buyer must know that the seller’s actions are inconsistent with the offer (like selling to someone else) for it to be considered rejected.

• Legally, a counteroffer remains open until it is:

  1. Revoked,

  2. Rejected,

  3. Expired, or

  4. Accepted by the other party.

Tom Clawson is buying a home from Deidre Davidson.  Tom asked for a termite report prior to closing on the house but after the contract had been signed by both Tom and Deidre.  Deidre contacted Ace Exterminators.  Ace’s representative found evidence of termite infestation and his report disclosed the infestation.  Deidre then called Bugs-R-Us and asked for another termite inspection.  Bugs-R-Us’s representative said there was not termite infestation and issued a clean report to Deidre, which Deidre then gave to Tom.  Shortly after moving in, Tom noticed some suspicious tracks along the frame of the garage.  Tom called the first name in the phone book, Ace Exterminators.  Ace’s representative arrived and said he did not need to do an inspection and furnished Tom with the report he had given to Deidre. Which of the following statements is correct?

Deidre has committed fraudulent misrepresentation.

• Fraudulent misrepresentation occurs when a party knowingly makes a false statement of a material fact with the intent to deceive another party, and the other party relies on that statement to their detriment.

ALSO

The termite report is a condition precedent to Tom and Deidre closing on the sale of the house.

• The question states that Tom asked for the termite report prior to closing on the house. This means that the report is a condition that must be met before the closing can happen. Therefore, it is a condition precedent. The other options are incorrect because the report is not a concurrent condition (since it must be completed before closing), it is not a violation of the Statute of Frauds (which applies to certain types of contracts being in writing), and while it may not be required in all states, in this scenario, it was specifically requested as a condition of the contract.

​The difference between a contract with earnest money and an option is:

​The option is not a contract for purchase and sale.

​Sally Ryan is purchasing a home from Reagan Davis.  Reagan’s partner died at this home while under hospice care.  The cause of death was AIDS-related complications.  Reagan did not disclose this information to Sally.  When Sally moves into the home the neighbors share with her the history of the home.  Which of the following is a correct statement?

​Reagan was not required to disclose the circumstances surrounding the death of her partner.

• In most jurisdictions, a seller is not required to disclose "non-material" facts about a property. These can include stigmatizing events like a death in the home, a murder, or a haunting. The cause of death of Reagan's partner is considered a non-material fact and therefore, Reagan was not legally obligated to disclose it to Sally.

Which of the following need not be disclosed by a seller?

That the seller will be paying an agent a commission

• A seller is generally required to disclose known material defects of a property to a buyer.

Which of the following will defeat marketable title?

Claim of reversionary interest of an heir

• A marketable title is a title to property that is free from any reasonable doubt as to its validity and is not subject to any claims or defects that would prevent a prudent buyer from accepting it.

• A claim of reversionary interest of an heir is a future interest in the property that could cause the title to revert to the heir. This type of claim creates a significant cloud on the title, making it unmarketable because it introduces a reasonable doubt about the seller's ability to convey a clear, fee simple title.

​A mail offer accepted by mail is effective when the acceptance is mailed.

True

• This rule in contract law states that an offer is considered accepted at the moment the acceptance is placed in the mail, not when it is received by the offeror.

​A seller who has two outstanding counteroffers risks multiple acceptances.

True

• The seller risks having both buyers accept their respective counteroffers, which would result in two valid contracts for the same item.

​An option requires a seller to hold an offer open for the stated period of time and is irrevocable.

True

​An option need not have consideration to be valid.

False

• In contract law, an option is a promise to keep an offer open for a specified period of time. For this promise to be legally binding and valid, it must be supported by consideration. Consideration is something of value exchanged between the parties, such as a payment of money, to make the promise enforceable. Without consideration, the promise is generally not enforceable and can be revoked by the offeror at any time.

  • usually money $$$

​“I am thinking of selling my house.  Are you interested?”, is not an offer.

True

​Which of the following would affect marketable title?

​A joint tenancy issue when only one joint tenant is trying to sell the property

• A joint tenancy issue, where one joint tenant attempts to sell the property without the consent of the other joint tenants, would create a cloud on the title, making it unmarketable. This is because all joint tenants must agree to sell the property.

  • A lawsuit against the seller would not directly affect the title to the property unless the lawsuit is a lien on the property.

  • Visible easements and CC&Rs (Covenants, Conditions, and Restrictions) are typically disclosed and do not make a title unmarketable.

In June, 1988, John Simpson granted to his son, D. Bruce Simpson, the right to purchase various parcels of real property that were held initially by John’s revocable trust and later by his wife's (Mildred Simpson) revocable trust. The 1988 option agreement provided that Bruce could exercise the option at any time on or before 20 years from the date of the agreement and contained the following clause: “[i]n consideration for the mutual promises made in this agreement.”

 

When some of the properties were transferred to Mildred’s trust in 1993, Bruce executed a waiver of the option only to facilitate the transfer of the properties for estate planning purposes, and Mildred executed a written agreement ratifying and incorporating John’s 1988 option agreement. John died in 2002, and Mildred died in 2006. The properties were thereafter administered by John’s and Mildred’s trusts. In April 2008, Bruce exercised the option on several of the parcels. Bruce then died in March 2009. In April 2009, the personal representative of Bruce’s estate completed the purchase of the properties.

 

Chris, who is John’s other surviving son, filed a petition challenging the validity of the 1988 option agreement because of a lack of consideration with the vague clause. Family members testified that the mutual promises were related to John staying in the area, caring for his parents, and running the family fruit farm because Chris had left home and did not want to run the business.

​What language in options can make the consideration more clear?

​The consideration for the option:

John exercised the option:

​If there is a lack of consideration for the option:

​“For $1 and other good and valuable consideration”

• The phrase “in consideration for the mutual promises made in this agreement” (as in the case) can be seen as too vague, since it doesn’t specify what each party actually gave or promised.

• “For $1 and other good and valuable consideration”
  → This phrase explicitly states that something of value (even nominal) — like $1 — was actually exchanged.
  → It’s a common and legally recognized way to ensure the option is enforceable, even if the actual value is symbolic.

​Consisted of John’s promise to stay with his parents, run the farm, and care for them.

• Even though the option agreement said only “in consideration for the mutual promises made in this agreement,” testimony clarified what those promises were. The family’s understanding — that John (the father) gave the option to Bruce in exchange for Bruce’s promise to stay in the area, care for his parents, and operate the family fruit farm — established valid consideration.

Within the 20-year time period.

Chris and John would stand to inherit the property.

• If the option agreement lacks consideration, then it’s not legally enforceable — meaning Bruce never had a valid option to purchase the properties.

• Without a valid option, the properties would remain part of John and Mildred’s estates (or their trusts). After both parents died, the properties would pass according to their estate plans or intestate succession, which would include their heirs — Chris and John (the sons).

Smith and Jones entered into a contract in which Smith, as seller, promised to deliver the property to Jones "free from all violations of zoning ordinances."  To deliver marketable title, Smith:

Must clear all existing violations of zoning ordinances.

In new home sales:

There is an implied warranty of habitability.

• In most jurisdictions, a new home sale includes an implied warranty of habitability, which means the home is fit for human habitation and free from major structural defects. This warranty is typically provided by the builder or seller to the initial purchaser of the new home.

• Other Option: ILSFDA = Interstate Land Sales Full Disclosure Act (a federal law).

  • It requires developers selling 100+ lots across state lines to register with HUD and provide a property report to buyers.

  • This law applies to large subdivision or land sales, not typical new home sales by a builder or local seller.

To which type of sale does the ILSFDA not apply?

Sale of industrial lots in Buffalo

• The Interstate Land Sales Full Disclosure Act (ILSFDA) is designed to protect consumers in the sale or lease of residential lots (typically in subdivisions) sold across state lines.

• It does not apply to:

  • Commercial or industrial property sales (like industrial lots)

  • Certain large parcels (over 20 acres)

  • Certain exempt transactions (like those with completed homes or short-term obligations)

​The implied warranty of habitability has been extended to apply to buyers who purchase the home within the builder warranty period.

True

• Courts in many states have extended the implied warranty of habitability to protect subsequent buyers — not just the first purchaser — if the sale occurs within the builder’s warranty period (or a reasonable time after completion).

  The reasoning is that the defects relate to the builder’s workmanship or materials, and the warranty period shows the builder still has responsibility for the home’s condition.

  So even if the original buyer resells during that period, the new buyer can often still benefit from the implied warranty of habitability.

​Misrepresentation requires proof of intent.

False

• Misrepresentation does not always require proof of intent. There are different types of misrepresentation, including innocent misrepresentation, negligent misrepresentation, and fraudulent misrepresentation. While fraudulent misrepresentation requires proof of intent to deceive, innocent and negligent misrepresentation do not.

A stipulated means acceptance sent by a different means is effective when it is sent.

False

• When an offeror stipulates a specific means of acceptance, the offeree must use that exact method for the acceptance to be effective upon dispatch. If the offeree uses a different means of acceptance, the acceptance is not effective until it is received by the offeror.

​An option has the same rights and legal effect as earnest money.

False

• An option and earnest money have different legal effects. Earnest money is a deposit made to a seller that shows the buyer's good faith in a transaction. It is typically refundable under certain conditions. An option, on the other hand, is a contract that gives a buyer the exclusive right to purchase a property within a specific timeframe, and the money paid for the option is typically non-refundable.

​Some states do not require affirmative disclosure of the presence of AIDS‑positive dwellers in a listed property.

True 

• Some states do not require the affirmative disclosure of the presence of AIDS-positive dwellers in a listed property. This is due to laws that protect individuals with certain medical conditions, such as AIDS, from discrimination in housing. These laws are often based on the Fair Housing Act and similar state-level regulations.

Earnest money:

Is the deposit on a land purchase.

• Earnest money is a deposit made to a seller that shows the buyer's good faith in a transaction. In real estate, this deposit is typically a percentage of the purchase price and is held in an escrow account.

​A offers to B to sell him a parcel of land for $5,000, stating that the offer will remain open for thirty days. B replies, “I will pay $4,800 for the parcel,” and on A's declining that, B writes, within the thirty day period, “I accept your offer to sell for $5,000.”

“I accept your offer to sell for $5,000,” is:

A new offer 

• A's initial offer was for $5,000. B's reply of "$4,800" is a counteroffer, which effectively rejects the original offer and creates a new one. When A declines the counteroffer, the original offer is not revived.

Joan offered to buy John’s house for $250,000.  John responded, “I accept, for $250,000 and you pay all closing costs.”

Joan and John do not have a contract

• In contract law, an offer must be accepted without any changes to its terms. This is known as the "mirror image rule." When John responded to Joan's offer by adding the condition that she must pay all closing costs, he did not accept her original offer. Instead, he made a counteroffer.

​Liquidated damages in real estate purchase contracts:

Generally consist of the earnest money

• In a real estate purchase contract, liquidated damages are a pre-determined amount of money that a buyer agrees to pay the seller if the buyer breaches the contract. This amount is typically the earnest money deposit that the buyer has already provided. This provision is intended to compensate the seller for their time and effort in taking the property off the market and is an alternative to the seller having to sue for actual damages.

​Psychological disclosure statutes cover issues such as AIDS and murder on the property.

True

• Psychological disclosure statutes (also called stigmatized property laws) deal with non-physical issues that might affect a property’s value or desirability — such as if a murder, suicide, or disease (like AIDS) occurred there.

• These laws vary by state, but the statement is true in general.

​“I accept provided that the premises will be vacated prior to March 1, 2015”, is a valid acceptance if communicated to the offeror properly.

False

• For an acceptance to be valid in contract law, it must be an unqualified and absolute agreement to the terms of the offer. This is known as the "mirror image rule."

​A recipient of a counteroffer must accept the counteroffer upon receipt if they made the original offer.

False

• A counteroffer is a rejection of the original offer and a new offer in its place. The original offeror (now the recipient of the counteroffer) is not obligated to accept the new offer, just as they were not obligated to accept the original offer. They have the right to accept, reject, or make another counteroffer.

An option:

Must be supported by consideration to be valid 

• An option contract is a contract to keep an offer open for a specified period of time. For this contract to be valid, it must be supported by consideration. Consideration is something of value exchanged between the parties, which can be money, a promise, or an act. Without consideration, the offeror is not legally bound to keep the offer open and can revoke it at any time.

​In which Phase of a property condition report are soil tests conducted for determining possible environmental issues?

Soil tests are not part of a property condition report - not me

Phase I - not me 

1st Phase II - not me 

2nd Phase II - I guess me 

CHECK THIS ONE IN BOOK AND EMAIL PROFESSOR

• standard Property Condition Reports (PCRs) do not typically include soil tests.

• A PCR is a physical assessment of a property's visible and readily accessible systems and components, like the roof, HVAC, and structure.

• Soil testing is a separate, specialized service conducted by geotechnical or environmental engineers

​“I accept your offer, but I must have you cover closing costs,”  is an example of a counteroffer.

True

​An option can be revoked any time prior to acceptance.

False

Electronic (fax) forms of contracts are valid.

True

• as long as they meet the legal requirements for a valid contract, such as mutual assent, offer, acceptance, and consideration

​Conditions precedent may serve to excuse the buyer's or seller's performance under the purchase contract.

True

• A condition precedent is an event that must occur before performance under a contract is due. If the condition is not met, the party whose performance is conditioned on the event is excused from performing.

• For example, a purchase contract for a house might be conditioned on the buyer obtaining a mortgage. If the buyer is unable to secure a mortgage, the condition precedent is not met, and the buyer is excused from completing the purchase. 

On November 1, 2015, Sam made an offer to Bobby by mail for the sale of his mobile home lot at $14,000.  Sam’s offer included the following:  “Acceptance must be by Federal Express no later than 10:30 a.m. on November 5, 2015.”  Bobby accepted the offer by mail on November 4.  The acceptance arrived at 8 a.m. on November 5. Suppose that Bobby sent his acceptance via UPS overnight delivery on November 2 and the UPS package arrived at Sam’s home by 10:30 a.m. on November 3.

Sam and Bobby do not have a contract

• The offer made by Sam specified that acceptance must be by Federal Express.

Under the ILSFDA, pending litigation involving developers is revealed: 

In the statement of record.

​A buyer accepts when he changes only immaterial terms.

False

• When a buyer changes any term of an offer, whether material or immaterial, it constitutes a counteroffer, not an acceptance. An acceptance must be an unconditional agreement to the terms of the original offer.

​“I accept your offer.  Please include the floating dock on the lake near the cabin,” is an acceptance.

False

An option that ends on December 31, 2020 cannot be accepted on January 1, 2021.

True

​Part performance is an exception to the statute of frauds requirements for land sales contracts to be in writing.

True 

• The doctrine of part performance is an exception to the Statute of Frauds. The Statute of Frauds requires that certain contracts, including those for the sale of land, must be in writing to be enforceable. However, if a party has partially performed their obligations under an oral contract for the sale of land, a court may enforce the contract even without a written agreement to prevent an unjust result.

​A seller can revoke an option at any time so long as there is proper notification.

False

The following exchanges occurred in a series of faxes:

​

Day 1 – “I would be interested in purchasing your citrus grove in Mesa, AZ.” /s/ John Duggan

Day 2 – “I might consider selling my citrus grove if the price is right.” /s/ Maurice Germaine

Day 3 –  “I could offer $3.2 million.” /s/ John

Day 4 – “I’ll sell.” /s/ Maurice

The fact that these communications were faxes is irrelevant.

​A contract for the sale of real estate need not be in writing.

False

• In the United States, the Statute of Frauds requires that contracts for the sale of real estate must be in writing to be enforceable. This law is in place to prevent fraudulent claims and to ensure that there is clear evidence of the agreement.

The following exchanges occurred via fax:

​

Buyer 1, Day 1 – “I offer to buy (legal description of property) for $350,000.”

Seller, Day 2 – “I will sell (legal description of property) for $375,000.”

Buyer 2, Day 3 – “I will buy (legal description of property) for $380,000.”

Seller, Day 3 (later) – “I accept your offer of $380,000.”                  

Buyer 1, Day 3 (even later) – “I accept your counter offer of $375,000.”

 The seller has a contract with both Buyer 1 and Buyer 2

​Liquidated damage clauses:

Are enforceable is resonable.

• Liquidated damages are a contract provision that specifies a predetermined amount of money that must be paid as damages for a breach of contract. For a liquidated damages clause to be enforceable, the amount must be a reasonable estimate of the actual damages that would be incurred if the contract were breached. If the amount is considered a penalty rather than a reasonable estimate of damages, a court will likely find the clause unenforceable.

​To deliver marketable title, the seller must deliver property to the buyer that is free from mortgages and other liens.

True

• A marketable title is a title to property that is free from any reasonable doubt as to its validity. This means the property is free of undisclosed encumbrances, such as mortgages, liens, or other claims that could potentially affect the buyer's ownership. The seller is obligated to deliver a marketable title to the buyer at closing unless the contract specifies otherwise.

​The previous presence of meth labs on a property is now a required disclosure in many states.

True

• In many states, laws require sellers to disclose if a property was previously used as a methamphetamine lab. This is because the chemicals used in meth production can contaminate the property, posing health risks to future occupants. The disclosure allows potential buyers to be aware of the issue and take necessary precautions, such as professional cleaning or remediation.

“This offer to remain open until July 7, 2021” in a written offer with no consideration must remain open until July 7, 2021.

False

• An offer without consideration is a gratuitous promise and can be revoked by the offeror at any time, even if they stated that it would remain open for a certain period. For an offer to be irrevocable for a specific period, it must be supported by consideration (an option contract) or fall under a specific legal rule like the "firm offer" rule under the Uniform Commercial Code (UCC) for merchants.

In June, 1988, John Simpson granted to his son, D. Bruce Simpson, the right to purchase various parcels of real property that were held initially by John’s revocable trust and later by his wife's (Mildred Simpson) revocable trust. The 1988 option agreement provided that Bruce could exercise the option at any time on or before 20 years from the date of the agreement and contained the following clause: “[i]n consideration for the mutual promises made in this agreement.”

 

When some of the properties were transferred to Mildred’s trust in 1993, Bruce executed a waiver of the option only to facilitate the transfer of the properties for estate planning purposes, and Mildred executed a written agreement ratifying and incorporating John’s 1988 option agreement. John died in 2002, and Mildred died in 2006. The properties were thereafter administered by John’s and Mildred’s trusts. In April 2008, Bruce exercised the option on several of the parcels. Bruce then died in March 2009. In April 2009, the personal representative of Bruce’s estate completed the purchase of the properties.

 

Chris, who is John’s other surviving son, filed a petition challenging the validity of the 1988 option agreement because of a lack of consideration with the vague clause. Family members testified that the mutual promises were related to John staying in the area, caring for his parents, and running the family fruit farm because Chris had left home and did not want to run the business.

​Highlands Plaza, Inc., entered into an agreement to purchase property from Viking Investment Corporation. The purchase was conditioned upon Highlands obtaining a $725,000 mortgage on the property. Highlands was able to obtain the $725,000 only through a first and second mortgage with different institutions, but still sought to go through with the sale. Viking refused on the grounds that the financing condition was not met. Highlands has brought suit for specific performance. What is the result?

The contract condition has been satisfied and Viking must perform

• The financing contingency required Highlands Plaza to obtain a $725,000 mortgage — it did not specify that the loan must come from one mortgage or one lender.

  • Highlands did obtain the total $725,000 in financing — just through two loans (a first and second mortgage).

  • Because the total financing amount required by the contract was met, the condition precedent (obtaining the mortgage) has been satisfied.

  Therefore:

  • Viking cannot refuse to sell based on how Highlands structured its financing.

  • Highlands has fulfilled the condition, so Viking must perform (i.e., go through with the sale).

​The ability of the buyer to obtain financing is generally an implied condition precedent to performance under the purchase contract.

False

• Obtaining financing is usually not an implied condition precedent.

• Unless the contract explicitly includes a financing contingency, the buyer is generally obligated to perform even if they cannot get a loan.

• In other words, the default rule is that the buyer assumes the risk of financing unless the contract specifically makes it a condition.

Multiple offers carry no dangers for the seller.​

False