Real Estate Contract Law - Chapters 1-6 Key Terms
Seven Essential Contract Principles (Real Estate Law)
Competent parties
For a contract to be valid, both parties must be competent: they must be of legal age, of sound mind, and alive at the time of acceptance.
Legal point: if a buyer makes an offer and dies before acceptance, the offer terminates.
Practical takeaway: a contract requires living, capable parties at the moment of acceptance.
Offer and acceptance (meeting of the minds)
Both parties must agree to the same terms.
The offer is first made by the buyer (the offeror); the seller is the offeree when the buyer presents the offer.
A listing contract between seller and broker is not an offer to the public; it states that if the broker finds a buyer ready, willing, and able, the broker earns a commission.
The buyer makes the first offer; the seller may accept, reject, or counteroffer.
Even a full-price, cash, no-contingency offer is not automatically accepted; the seller has the right to accept, reject, or counter because the seller received the first offer.
Example: List price 100{,}000; buyer offers 90{,}000. Buyer is the offeror; seller is the offeree.
Can an offer be withdrawn after it’s made? Yes, up until the time of acceptance.
Right after acceptance, there is no right of rescission for the buyer in many real estate contracts; the buyer is bound once acceptance is communicated.
A counteroffer is a rejection of the original offer and creates a brand-new offer from the seller back to the buyer; the original offer is voided.
Multiple offers
If multiple offers arrive, all offers must be presented to the seller together at the same time.
The seller can: accept one, reject all, or counteroffer one or more.
When counteroffering multiple offers, a seller usually counters one at a time (e.g., to offer #1; if fails, proceed to offer #2).
Even a very low offer (e.g., 10{,}000 plus animals or other terms) must be presented to the seller.
Equitable title and performance
If the parties agree on a price (e.g., 95{,}000), the buyer receives equitable title upon acceptance.
Equitable title gives the buyer the right to obtain the deed later and to sue for specific performance (court order to complete the sale).
Consideration
Consideration is something of value; typically money, but not necessarily earnest money.
A contract must have consideration to be enforceable; the promise to pay 90{,}000 is sufficient consideration.
Earnest money is not required for a contract to exist, but it strengthens the offer and can be used as liquidated damages if the buyer breaches.
Lawful object (lawful purpose)
Each contract must pursue a lawful objective.
Example of an unlawful purpose: hiring someone to build a meth lab.
Writtenness and signatures
A contract does not have to be in writing to exist, but it generally must be in writing to be enforceable in court.
Statute of Frauds: real estate sales contracts must be in writing to be enforceable.
Parol evidence rule: oral testimony cannot contradict or vary the written contract; the written agreement expresses the final intent.
All parties to the contract must sign the final agreement.
Description of the real estate
Must include a legal description of the land being conveyed and all pertinent appurtenances (structures, etc.).
Classification of contracts
Express vs. Implied
Express contracts: formed by explicit written or spoken terms (e.g., buyer-seller in a sales contract; broker-seller in a listing contract).
Implied contracts: created by actions and conduct; not explicitly stated (e.g., a broker’s suggestion that they’ll act as the buyer’s agent, which is not ideal and should be written).
Bilateral vs. Unilateral
Bilateral: two promises exchanged (both sides promise to do something) — e.g., typical buyer-seller transaction.
Unilateral: one promise in exchange for an action; acceptance occurs when the action is performed (e.g., an option contract).
Both types involve two parties, but the performance obligation differs.
Executory vs. Executed
Executory contract: promises are made but not yet completed (e.g., contract signed but not closed).
Executed contract: all promises completed (e.g., closing has occurred).
Time is of the essence
When included, terms must be completed in a timely manner (e.g., closing by a specific date; failing to do so could void the contract).
Legal effects of contracts
Valid and enforceable contract
Has all essential elements; in writing; enforceable in court.
Void contract
Has no legal effect; often due to lack of a competent party or illegality.
Voidable contract
Could be valid or voided by one party; depends on circumstances (e.g., minor, duress, misrepresentation).
Examples:
Minor signs a contract to buy real estate (voidable by the minor during minority).
A minor reached legal age; court may allow ratification or void the contract; reasonable time to decide after reaching adulthood.
Duress (extreme pressure) makes a contract voidable.
Misrepresentation (false material fact) makes a contract voidable (fraudulent misrepresentation is voidable).
Puffing (subjective opinions) is not misrepresentation and not a voidable contract.
Unenforceable contract
Enforceable rules exist, but the agreement cannot be enforced in court (commonly an oral agreement for real estate, which violates the Statute of Frauds).
Changes in contracts (modifications and remedies)
Breach of contract
When one or both parties fail to perform as agreed.
Remedies for the buyer when the seller breaches
Specific performance: court order to compel completion (often the best remedy).
Rescission: return to the pre-contract status quo.
Sue for damages for breach of contract.
Remedies for the seller when the buyer breaches
Forfeiture (liquidated damages): keep earnest money if buyer backs out without good reason.
Specific performance: force completion.
Rescission: return to the status quo.
Sue for actual damages.
Mediation vs arbitration
Mediation: nonbinding; neutral mediator suggests resolutions; either party can still sue in court.
Arbitration: binding; decision of the arbitrator is final and enforceable.
Assignment vs novation
Assignment: transfer of rights to another party (may be allowed unless prohibited by contract).
Novation: a new contract replacing the old one (new party assumes the obligations; old contract is replaced).
Personal services contracts (e.g., listing agreements) are generally non-assignable because they are based on personal characteristics or relationships.
Addendum vs amendment
Addendum: addition to the contract; supplements terms without changing the original terms.
Amendment: changes to the terms of the contract; both parties must sign.
Option contracts vs right of first refusal
Option contract
A definite time period and a definite sale price are required for validity.
Unexercised option contracts are unilateral; exercised options become bilateral.
Parties: optionor (seller) and optionee (buyer).
Example: Seller offers an option to buy at 500{,}000 for 1 year; option money might be 50{,}000 paid by the optionee; if exercised, price may or may not apply the option money to the price.
The optionee does not obtain an ownership interest during the option period; merely the right to acquire an interest if the option is exercised.
The option can be assigned unless prohibited.
Right of first refusal (ROFR)
No definite price; a buyer has the right to match any offer if the property is offered for sale or lease.
The seller must offer to the ROFR holder first; if the ROFR holder matches the third-party offer, they may purchase; otherwise, the third party may purchase.
No definite price initially; the holder has priority but only if offered for sale.
Common thread: all contract laws still apply (consideration, competent parties, etc.).
Offer to purchase contracts (sales contracts)
Purpose
Used to transfer real estate from seller to buyer.
A contract does not terminate simply because one party dies before closing (in some cases).
Death scenarios
If the buyer dies in an all-cash deal before closing, the buyer’s heirs must honor the contract.
If the seller dies between contract and closing in an all-cash deal, the seller’s heirs must honor the contract.
If the buyer dies and the deal is financing contingent, the buyer may not be able to qualify for the loan, and the deal may fail.
Financing contingency (mortgage contingency)
Buyer must qualify for a loan to proceed; if not, earnest money may be returned.
Contingencies commonly included in sales contracts
Financing contingency (loan qualification).
Due diligence/inspection contingency (often called a due diligence clause in commercial contracts).
Earnest money
Also called good faith money; typically a few thousand dollars placed with an offer to purchase.
Not required for validity, but strengthens the offer.
Where does earnest money go? It is placed in an escrow or trust account until closing.
Escrow/trust accounts
Neutral accounts used to hold other people's money (earnest money, deposits).
Commingling (mixing escrow funds with broker’s personal or business funds) is illegal.
Conversion (using others’ money for own use) is illegal.
Escrow accounts can be interest-bearing if all parties agree on that arrangement.
Brokers may keep some of their own money in the escrow to cover service charges; in Kansas, the maximum amount allowed in such an arrangement is 100.
Miscellaneous terms
Escrow funds are held for the benefit of the transaction and to protect all parties.
Proper handling of escrow funds is essential to comply with fiduciary duties and state laws.
Quick recap of key numeric examples from the transcript
List price: 100{,}000
Buyer offer: 90{,}000
Counteroffer (seller): 95{,}000
Option money example: 50{,}000
Property value in an option example: 500{,}000
All-cash scenario with death implications: no loan contingency; death of party may trigger transfer to heirs depending on contract terms
Earnest money amount example: 2{,}000
Escrow cap in Kansas for the broker’s own use: 100
Notes on terminology used in practice:
Offeror: the party who makes the offer.
Offeree: the party who receives the offer.
Equitable title: the buyer’s right to obtain the deed at a later date and to seek specific performance.
Liquidated damages: pre-agreed damages, often via earnest money, for breach.
Puffing: subjective marketing statements not considered misrepresentation.
Parol evidence rule: governs whether oral statements can modify a written contract.
Time is of the essence: emphasizes timely performance within defined deadlines.
If you want, I can tailor these notes further to align with specific exam prompts or add practice questions and quick recall prompts.