Chapter 6- Study Guide Fundamentals of Contract Law

1. Chapter 6
Contracts

2. Objectives
• After reading this chapter, you should be able
to
– Explain the requirements of a valid real estate
contract.
– Identify the remedies for default of a real estate
contract.
– Understand the role of a real estate agent in the
procurement of a real estate contract.

3. Objectives
• After reading this chapter, you should be able
to
– Distinguish the three types of real estate agency
listing agreements.
– Explain the federal tax consequences of a sale of
real property.

4. Requirements of a Valid Contract
• Contract
– Enforceable agreement between two or more
parties consisting of a promise or mutual promises
• For a valid real estate contract to exist, certain
legal requirements must be met
– If not met, contract is invalid
• Unenforceable

5. Requirements of a Valid Contract
• Legal requirements
– Legal capacity to contract
– Mutual agreement
– Consideration
– Lawful purpose
– Written agreement

6. Requirements of a Valid Contract
• Legal capacity to contract
– Parties entering into the contract are responsible
in such a way that the law will make them bound
by their promises
– Minors or infants
• Contract voidable
– Mental incompetents
• Contract void

7. Requirements of a Valid Contract
• Legal capacity to contract
– Corporations
• Individuals must sign on behalf of the corporation.
– Partnerships
• General partnership: unless expressly agreed to
otherwise, any general partner has the authority to
bind partnership.
• Limited partnerships: only general partner can bind
partnership.

8. Requirements of a Valid Contract
• Legal capacity to contract
– Limited liability companies
• Either manager or members can represent and sign
– Personal representatives
• Fiduciary to beneficiaries on behalf of the estate
– Cannot act in violation of will
– Limited power to buy and sell property
• Executor/executrix
• Administrator of intestate estate

9. Requirements of a Valid Contract
• Legal capacity to contract
– Trustees
• Similar to executors
• Fiduciary responsibility to the beneficiaries of the trust
– Agents
• Have the power and authority to act on behalf of the
principal
• Can appoint an agent as attorney-in-fact with power of
attorney (POA)
– If durable POA, cannot be revoked by incapacity

10. Requirements of a Valid Contract
• Mutual agreement
– “Meeting of the minds”
– Manifested by
• Offer
• Offeror (buyer)
• Offeree (seller)

11. Requirements of a Valid Contract
• Mutual agreement
– Offer does not result in contract until accepted by
offeree.
– If an acceptance does not contain the exact same
terms, it is considered a counteroffer.
• Must be approved by the other party

12. Requirements of a Valid Contract
• Consideration
– Money or something of value
• Lawful purpose

13. Requirements of a Valid Contract
• Written agreements
– Statute of frauds
• Contract to answer for debt of another
• Agreement made in consideration of marriage
• Agreement that cannot be performed in one year
• Contract for sale or transfer of land or any interest in
land
– Oral real estate contracts can be enforceable if
partial performance

14. Requirements of a Valid Contract
• Written agreements
– Written contract must contain
• Parties’ names
• Stated agreement to buy and sell
• Description of real property
• Purchase price
• Terms of payment

15. Requirements of a Valid Contract
• Written agreements
– Written contract must contain:
• Amount and disposition of earnest money
• Date of closing
• “Time is of the essence”
• Preclosing conditions
• Signatures

16. Remedies for Breach of
Real Estate Contract
• Remedies for injured party:
– Specific performance
– Money damages
– Rescission
– Liquidated damages

17. Remedies for Breach of
Real Estate Contract
• Specific performance
– Assumption that land is unique and no adequate
remedy exists at law
– Court orders both parties to perform on original
contract
– Limited to situations where contract for sale of
property is clear and free from fraud or mistake

18. Remedies for Breach of
Real Estate Contract
• Money damages
– Difference between contract price and fair market
value of real property at default
• Fair market value determined by expert witness

19. Remedies for Breach of
Real Estate Contract
• Rescission
– Equitable remedy that restores “status” of parties
prior to entering into a contract
– Contract terminated
– Innocent party reimbursed for any expenses
– Can be waived by conduct, words, or failure to
waive in a timely manner

20. Remedies for Breach of
Real Estate Contract
• Liquidated damages
– Reasonable, agreed-upon sum in contract in event
of breach
– Case
• Southeastern Land Fund, Inc. v. Real Estate World, Inc.
(Ga.1976)
– Was liquidated damages provision enforceable? Why or why
not?

21. Real Estate Broker
• Licensed by the state where property is
located
– Protects the public from unscrupulous practices
and establishes professional standards of conduct
• Earns commission on sale of property
• Agency relationship
– Between broker and client
– Based on fiduciary relationship of trust and
confidence

22. Real Estate Broker
• Agency relationship
– Duties of agent
• Follow instructions of the principal.
• Exercise reasonable care and skill in performance of
duties.
• Fully disclose all matters relating to the agency
relationship.
• Account for any money belonging to the principal that
comes into the agent’s possession.

23. Real Estate Broker
• Agency relationship
– Duties of principal
• Compensate agent.
• Reimburse agent for reasonable expenditures.
• Indemnify agent against any third party claims.
– Express versus implied authority
– Dual agent

24. Real Estate Broker
• Services provided
– Primary
• Find a buyer.
– Other
• Prep the property.
• Serve as an escrow agent.
• Prepare closing documents with the title company.

25. Listing Agreements
• Owners hire brokers to sell real property with
listing (agency) agreement.
• Three main types
– Open
– Exclusive
– Exclusive right to sell

26. Listing Agreements
• Open listing
– Owner hires agent.
– Owner reserves right to hire other agents and to
sell real property by own efforts.

27. Listing Agreements
• Exclusive listing
– Owner hires only one agent.
– Owner reserves right to sell real property by own
efforts.
• If owner’s efforts result in sale, no commission is
earned.

28. Listing Agreements
• Exclusive right-to-sell listing
– Owner hires only one agent.
– Regardless of owners efforts, agent will collect
commission on sale.
• Real estate brokers and the Internet

29. Taxation and the Sale of
Real Property
• Federal income tax
– Tax consequences of the sale of real property
depend in large part on use of the property.
• Home
• Commercial property

30. Taxation and the Sale of
Real Property
• Federal income tax
– Federal tax on the sale of a home
• Formula for computing taxable gain: selling price, less
selling expenses, less adjusted basis (price paid) of
home
• Amount left over is owner’s taxable gain
• If owner is in the home at least 2 of 5 years preceding
the date of sale, owner may exclude up to $250,000 of
gain or $500,000 if filing a joint return with a spouse.

31. Taxation and the Sale of
Real Property
• Federal income tax
– Federal tax on sale of commercial property
• Method of determining taxable gain is similar to that of
the sale of a home.
• Main difference is the requirement that an owner of
commercial property must deduct depreciation from
the basis in order to arrive at an adjusted basis of the
property.

32. Ethics: Commingling of
Client Funds
• Attorney who commingles client funds with
personal funds can face suspension or even
loss of license to practice law.
• Paralegal should never commingle funds
received by a client with own funds.
– Must account for all monies entrusted to
possession

33. Summary
• Real estate contracts require
– Legal capacity of all parties
– Offer and acceptance
– Consideration
– Lawful purpose
– Written terms

34. Summary
• Default
– Nondefaulting party (usually plaintiff) has
remedies
• Damages
• Liquidated damages
• Rescission
• Specific performance
• Recovery of expenses

35. Summary
• Real estate agents and brokers
– Become party to the contract
– May represent buyer or seller
• Or both, with consent
– Listing agreement may be exclusive or
nonexclusive