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  • Can an offer be withdrawn after it’s made?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.