Washington Real Estate Fundamentals Lesson 6: Contract Law © 2011 Rockwell Publishing

Introduction Contract: Agreement between two or more competent persons to do, or not do, certain things in exchange for consideration. Valid contract: Agreement that meets minimum requirements so that it is legally binding. Will be enforced by a court if one party fails to fulfill terms of agreement. © 2011 Rockwell Publishing

Contract Classifications Contracts may be classified according to certain basic characteristics. Every contract is: express or implied unilateral or bilateral executory or executed © 2011 Rockwell Publishing

Contract Classifications Express vs. implied Express contract: Agreement that has been put into words, whether spoken or written. Implied contract: Created by actions of the parties, not by express agreement. Most contracts are express, not implied. © 2011 Rockwell Publishing

Contract Classifications Unilateral vs. bilateral Unilateral contract: Only one party promises to do something and is legally obligated to perform as promised. Bilateral contract: Both parties promise, both are legally obligated. Most contracts are bilateral. © 2011 Rockwell Publishing

Contract Classifications Executory vs. executed Executory: Contract is in the process of being performed. Executed: Contract has been fully performed; both parties have fulfilled their promises. Note: “executed” may also refer to a contract that has been signed, whether or not any performance has taken place. © 2011 Rockwell Publishing

Summary Contract Classifications Express or implied Unilateral or bilateral Executory or executed © 2011 Rockwell Publishing

Elements of a Valid Contract To be valid, a contract must have: parties with legal capacity mutual consent lawful objective consideration In addition, certain types of contracts must be in writing and signed. © 2011 Rockwell Publishing

Elements of a Valid Contract Contractual capacity Contract not legally binding unless all parties have legal capacity. Two requirements for legal capacity: age of majority mental competence © 2011 Rockwell Publishing

Contractual Capacity Age of majority In Washington, a person must be at least 18 to enter into a contract. Someone under 18 is a minor. Parent or legal guardian may enter into binding contract on minor’s behalf. © 2011 Rockwell Publishing

Contractual Capacity Age of majority Contract in which one party is a minor is voidable by the minor. Minor or guardian can choose whether to terminate or proceed with contract. Other party can’t enforce contract. © 2011 Rockwell Publishing

Contractual Capacity Mental competence Mentally competent: Of sound mind. If one party declared incompetent, contract void – no legal effect. Guardian can enter into contracts on behalf of incompetent person. Contract entered into while temporarily incompetent may be voidable. © 2011 Rockwell Publishing

Summary Contractual Capacity Age of majority Minor Mental competence Guardian © 2011 Rockwell Publishing

Elements of a Valid Contract Mutual consent Mutual consent: Contract legally binding only if both parties consent to its terms. A court presumes consent if someone signs a contract. Party who can’t read or doesn’t know language should ask someone she trusts to read or translate contract. © 2011 Rockwell Publishing

Mutual Consent Offer and acceptance Mutual consent arrived at through process of offer and acceptance: Offeror makes offer to offeree. If offeree accepts offer, contract formed. © 2011 Rockwell Publishing

Mutual Consent Offer Offer must: express intention to enter into contract be definite and certain If offer fails to specify all basic terms, it’s merely an offer to negotiate. © 2011 Rockwell Publishing

Offer Termination An offer may terminate due to: revocation by offeror lapse of time death or incompetency of the offeror rejection of the offer a counteroffer If offer terminates before acceptance, no contract formed. © 2011 Rockwell Publishing

Termination of an Offer Revocation Offeror can revoke offer any time before acceptance. Offeror must notify offeree of revocation before offeree accepts. © 2011 Rockwell Publishing

Termination of an Offer Lapse of time Offer with deadline for acceptance expires automatically when date or time arrives. Offer without deadline expires after reasonable amount of time. “Reasonable” depends on circumstances. Issue sometimes decided by court. © 2011 Rockwell Publishing

Termination of an Offer Death or incompetency Offer terminated and no contract formed if: offeror dies before offer is accepted court declares offeror mentally incompetent © 2011 Rockwell Publishing

Termination of an Offer Rejection by offeree Rejection terminates offer. After rejecting offer, offeree can’t change mind and accept it. © 2011 Rockwell Publishing

Termination of an Offer Counteroffer Counteroffer: Offeree accepts some terms, but changes one or more other terms. Counteroffer terminates original offer and replaces it with new offer. Roles of offeror and offeree reversed. Sometimes called qualified acceptance, but has same legal effect as rejection. © 2011 Rockwell Publishing

Mutual Consent Acceptance To create contract, offeree must communicate acceptance to offeror before offer terminates. Offer may specify how acceptance must be communicated. If no time or manner of acceptance stated, reasonable time and manner implied. © 2011 Rockwell Publishing

Acceptance Negative influences Acceptance must be voluntary, free of negative influences. Contract voidable by victimized party if consent resulted from: fraud undue influence duress © 2011 Rockwell Publishing

Negative Influences Fraud Fraud: Misrepresenting a material fact to someone who relies on the misinformation. Material fact: Important information that may affect decision to enter into contract. Fraud may involve: misleading statements concealment of information © 2011 Rockwell Publishing

Fraud Actual vs. constructive fraud Actual fraud: Person making statement knows or should know that it’s false. Includes intentional deceit or concealment. Includes statements made without knowing whether they’re true or false. Constructive fraud: Person in position of trust or with superior knowledge unintentionally misleads another person. © 2011 Rockwell Publishing

Negative Influences Undue influence Undue influence: Persuading someone to sign contract by taking advantage of trust, weakness of mind, or distress. Persuasion strong enough to overpower will, so that consent isn’t truly voluntary. May involve abuse of special legal relationship based on trust: attorney-client, agent-principal, etc. © 2011 Rockwell Publishing

Negative Influences Duress Duress: Using force, constraint, or threats to compel someone to do something against his will. © 2011 Rockwell Publishing

Elements of a Valid Contract Lawful objective Both purpose of contract and consideration must be lawful. Can’t involve: violation of law violation of public policy Contract with unlawful objective is void. Court won’t enforce it for either party. © 2011 Rockwell Publishing

Elements of a Valid Contract Consideration Consideration: Something of value exchanged by contracting parties. Each must give the other something of value: money, property, services, or a promise to give something of value in the future In typical real estate sale: seller’s promise to convey title buyer’s promise to pay agreed price © 2011 Rockwell Publishing

Elements of a Valid Contract Statute of frauds Statute of frauds: State law that requires certain types of contracts to be in writing and signed. Contracts not covered by statute generally enforceable even though unwritten. © 2011 Rockwell Publishing

Statute of Frauds Which contracts must be in writing Washington’s statute of frauds applies to an agreement: to convey an interest in real property to assume the debts of another to employ an agent to sell, buy, lease, or exchange real property, if agent will be compensated that won’t be performed within one year © 2011 Rockwell Publishing

Statute of Frauds Adequate written contract To comply with statute of frauds, any “writing” is adequate as long as it: identifies contract subject matter indicates agreement between parties is signed by party to be bound May be printed, handwritten, or a combination. Handwritten part takes precedence if it conflicts with printed part. © 2011 Rockwell Publishing

Statute of Frauds Contracts that fail to comply Contract subject to statute of frauds unenforceable if not in writing and signed. But once contract fully performed, neither party can undo transaction based on statute of frauds. © 2011 Rockwell Publishing

Summary Consent and Other Requirements Mutual consent Offer and acceptance Counteroffer Fraud (actual or constructive) Undue influence Duress Lawful objective Consideration Statute of frauds © 2011 Rockwell Publishing

Legal Status of Contracts Four terms used to describe a contract’s legal status: void voidable unenforceable valid © 2011 Rockwell Publishing

Legal Status of Contracts Void Void: No contract; attempted agreement failed and can be disregarded. Neither party has to withdraw. Usually happens because essential element missing, such as: no consideration exchanged, or no consent (for instance, party mentally incompetent). © 2011 Rockwell Publishing

Legal Status of Contracts Voidable Voidable: One party can choose whether to withdraw or go through with the contract. Contract unenforceable by other party. Examples: contract entered into by minor (voidable by minor or guardian) contract entered into as a result of fraud, undue influence, or duress © 2011 Rockwell Publishing

Legal Status of Contracts Voidable Voidable contract is binding unless party asks court to rescind contract. Withdrawing party must take legal action within reasonable time. Otherwise, court may rule that contract has been ratified. © 2011 Rockwell Publishing

Legal Status of Contracts Unenforceable Unenforceable: Contract that can’t be enforced in court. Examples: terms can’t be proved voidable by other party statute of limitations expired © 2011 Rockwell Publishing

Unenforceable Contracts Terms can’t be proved Court can’t enforce contract if terms of agreement can’t be proved. Most often a problem with oral contracts. Parties probably agreed on all essential terms, but that can’t be proved now. © 2011 Rockwell Publishing

Unenforceable Contracts Voidable by other party If one party has a right to void a contract (for example, a minor), other party can’t enforce the agreement. © 2011 Rockwell Publishing

Unenforceable Contracts Statute of limitations expired Statute of limitations: Law that sets time limit for filing a lawsuit. Party who misses deadline loses right to sue. Contract unenforceable. Washington statute of limitations for contracts: breach of written contract: 6 years breach of oral contract: 3 years © 2011 Rockwell Publishing

Legal Status of Contracts Valid Valid contract: all essential elements terms can be proved in court not voidable (for example, no negative influences) statute of limitations hasn’t run out If one party fails to perform as promised, other can sue to have contract enforced. © 2011 Rockwell Publishing

Summary Legal Status of Contracts Void Voidable Unenforceable Valid Statute of limitations © 2011 Rockwell Publishing

Discharging a Contract Valid contract may be discharged by: full performance agreement between parties Most contracts are discharged by full performance. Each party performs as promised. Contractual relationship ends. © 2011 Rockwell Publishing

Discharging a Contract Agreement between parties Contract may be discharged without full performance, if parties agree to: rescission cancellation assignment novation © 2011 Rockwell Publishing

Discharging a Contract Rescission Rescission: Parties agree to terminate contract and undo steps already taken. Consideration is returned. Puts parties as nearly as possible back in positions they were in before contract. © 2011 Rockwell Publishing

Discharging a Contract Cancellation Cancellation: Parties agree to terminate contract without undoing steps already taken. Money paid prior to cancellation not returned. © 2011 Rockwell Publishing

Discharging a Contract Assignment Assignment: One party (assignor) withdraws from contract and assigns interest to new party (assignee). Contract not really discharged. If assignee defaults, other party can still sue assignor (secondary liability). © 2011 Rockwell Publishing

Discharging a Contract Assignment General rule: Contract can be assigned without other party’s consent, unless clause expressly forbids that. Exception: Personal services contract can’t be assigned without consent. © 2011 Rockwell Publishing

Discharging a Contract Novation Novation: Original party withdraws and is replaced by new party, and also is released from liability. No secondary liability (as in assignment). Always requires consent of other original party. Novation can also refer to substitution of new agreement for old one between same parties. © 2011 Rockwell Publishing

Summary Discharging a Contract Discharge Full performance Rescission Cancellation Assignment Secondary liability Novation © 2011 Rockwell Publishing

Remedies for Breach of Contract Breach of contract: When one party fails to fulfill a promise in the agreement, without legal excuse. If breach is material breach (important to contract), other party has right to sue. “Time is of the essence” clause makes failure to meet deadline material breach. © 2011 Rockwell Publishing

Remedies for Breach of Contract Four legal remedies for breach of contract: rescission compensatory damages liquidated damages specific performance © 2011 Rockwell Publishing

Remedies for Breach of Contract Rescission As explained earlier, rescission is termination of contract that returns parties to original (pre-contract) positions. May occur by: agreement of parties court order © 2011 Rockwell Publishing

Remedies for Breach of Contract Compensatory damages Compensatory damages: Money that court orders breaching party to pay other party, to compensate for losses resulting from breach. Most common remedy for breach of contract. Intended to put nonbreaching party in position she would have been in if contract performed. © 2011 Rockwell Publishing

Remedies for Breach of Contract Liquidated damages Liquidated damages: Parties agree in advance to amount that will serve as compensation in event of breach. Nonbreaching party can’t sue for more. Helps parties avoid costly litigation. In residential purchase agreement, earnest money usually treated as liquidated damages if buyer defaults. © 2011 Rockwell Publishing

Remedies for Breach of Contract Specific performance Specific performance: Court orders breaching party to perform contract as agreed. Generally ordered only if money damages would be inadequate remedy. Subject of contract is unique, so damages would not make it possible to purchase substitute. Court may be willing to grant specific performance to real estate buyer. © 2011 Rockwell Publishing

Breach of Contract Tender Tender: Unconditional offer by one party to perform his part of the agreement. Usually made when it appears other party is going to default. To be entitled to sue for breach, nonbreaching party must show he was ready to fulfill contract. © 2011 Rockwell Publishing

Breach of Contract Anticipatory repudiation Anticipatory repudiation: Express statement by breaching party indicating that she is not going to perform as agreed. If anticipatory repudiation occurs, other party can sue for breach of contract without making a tender. © 2011 Rockwell Publishing

Types of Real Estate Contracts Listing agreement Buyer representation agreement Purchase and sale agreement Land contract Lease Escrow instructions Option agreement © 2011 Rockwell Publishing

Types of Real Estate Contracts Listing agreement Contract between real estate seller and brokerage firm. In Washington, firm can’t sue for commission without written agreement. What firm must do to earn commission depends on type of listing. © 2011 Rockwell Publishing

Types of Real Estate Contracts Buyer representation agreement Contract between real estate buyer and brokerage firm. Buyer hires firm to help find suitable property and/or negotiate purchase. Again, firm can’t sue for compensation without written agreement. © 2011 Rockwell Publishing

Types of Real Estate Contracts Purchase and sale agreement Contract between real estate seller and buyer. States all terms of sale, such as: price closing date contingencies Form first serves as buyer’s offer, becomes binding contract if accepted by seller. © 2011 Rockwell Publishing

Types of Real Estate Contracts Land contract Contract used when buyer purchases seller’s property on installment basis. Vendor (seller) retains legal title until full purchase price is paid. Vendee (buyer) has equitable title and possession of property while paying off price. © 2011 Rockwell Publishing

Types of Real Estate Contracts Lease Contract transferring right of possession and use from landlord (owner) to tenant. Sets terms of occupancy, such as: rent responsibilities of each party duration of tenancy © 2011 Rockwell Publishing

Types of Real Estate Contracts Escrow instructions Contract authorizing escrow agent to close a transaction. States obligations and conditions that must be fulfilled for sale to close. Buyer and seller generally sign joint instructions. Separate instructions used in some commercial transactions. © 2011 Rockwell Publishing

Types of Real Estate Contracts Option agreement Contract creating right to buy, sell, or lease property for certain price within a certain period of time. Must be in writing and supported by consideration. In option to purchase: optionor is seller optionee is buyer © 2011 Rockwell Publishing

Types of Real Estate Contracts Option agreement Gives optionee a contract right, but not a property interest. May be assigned unless otherwise agreed. May be recorded. Different from right of first refusal. © 2011 Rockwell Publishing

Summary Remedies and Types of Contracts Rescission Compensatory damages Liquidated damages Specific performance Tender Anticipatory repudiation Option agreement © 2011 Rockwell Publishing