© 2010 Rockwell Publishing Lesson 6: Contract Law Principles of California Real Estate

© 2010 Rockwell Publishing Introduction Contract: An agreement between two or more competent persons to do, or not do, certain things in exchange for consideration.

© 2010 Rockwell Publishing Legal Classifications of Contracts Contracts may be classified according to certain basic characteristics. Every contract is: express or implied unilateral or bilateral executory or executed

© 2010 Rockwell Publishing Legal Classifications of Contracts Express vs. implied Express contract: One that has been put into words, oral or written. Implied contract: Created by the actions of the parties, not express agreement. Most contracts are express, not implied.

© 2010 Rockwell Publishing Legal Classifications of Contracts Unilateral vs. bilateral Unilateral contract: Only one party is legally obligated to perform as promised. Bilateral contract: Both parties promise to do something and are legally obligated to perform as promised. Most contracts are bilateral.

© 2010 Rockwell Publishing Legal Classifications of Contracts Executory vs. executed Executory: Contract has not yet been performed, or is in the process of being performed. Executed: Contract has been fully performed. Note that “executed” may also refer to a contract that has just been signed.

© 2010 Rockwell Publishing Contract Express or implied Unilateral or bilateral Executory or executed Summary Legal Classifications of Contracts

© 2010 Rockwell Publishing Elements of a Valid Contract A valid contract requires: parties with legal capacity mutual consent lawful objective consideration

© 2010 Rockwell Publishing Contract is not legally binding unless all parties have legal capacity to enter into it. Two requirements for legal capacity: age mental competence Elements of a Valid Contract Contractual capacity

© 2010 Rockwell Publishing Generally, person must be at least 18 (age of majority) to enter into contract. Someone under 18 is minor. Minors do not have capacity to appoint agent or enter into contract. Parent or legal guardian may enter into binding contract on minor’s behalf. Contractual Capacity Age

© 2010 Rockwell Publishing Void: Contract has no legal effect. Neither party can enforce it. Real estate contract in which one party is a minor is void. Other contracts (not related to real estate) signed by minor are voidable by minor. Other party can’t enforce contract. Minor can choose to enforce contract, through parent or guardian. Contractual Capacity Age

© 2010 Rockwell Publishing Exception: Emancipated minor may enter into any type of contract, including real estate. (Copies of emancipation documents should be part of closing.) Minor may be emancipated by: marriage (even if divorced) military service court order Contractual Capacity Age

© 2010 Rockwell Publishing Mentally competent: Of sound mind. If one party has been declared mentally incompetent, contract is void. Guardian can enter into contracts on behalf of incompetent person. If someone enters into contract while temporarily incompetent, contract may be voidable. Contractual Capacity Mental competence

© 2010 Rockwell Publishing Aliens may enter into contracts to transfer property, although they may be subject to certain reporting requirements. Incarcerated persons may also contract to buy or sell property, subject to public safety limitations. Contractual Capacity Aliens and convicts

© 2010 Rockwell Publishing Capacity Age of majority Mental competence Aliens and convicts Summary Contractual Capacity

© 2010 Rockwell Publishing Contract is legally binding only if both parties have consented to its terms. Once contract is signed, consent is presumed. No one should sign contract without understanding its contents. Elements of a Valid Contract Mutual consent

© 2010 Rockwell Publishing Mutual consent is sometimes called mutual assent, mutuality, or meeting of the minds. Mutual consent is achieved through offer and acceptance: Offeror makes offer to offeree. If offeree accepts offer, contract is formed. Mutual Consent Offer and acceptance

© 2010 Rockwell Publishing Offer terminates if before acceptance: offeror revokes offer too much time passes offeror dies or becomes incompetent offeree rejects offer offeree makes counteroffer If offer terminates before accepted, no contract formed. Offer and Acceptance Termination of offer

© 2010 Rockwell Publishing Offeror can revoke offer any time before acceptance. Offeror must notify offeree of revocation. Even if offer was supposed to remain open until particular date, offeror can revoke it before that date. Termination of Offer Revocation

© 2010 Rockwell Publishing Offer with deadline for acceptance expires automatically when that date or time arrives. Offer without deadline expires after reasonable amount of time. Termination of Offer Lapse of time

© 2010 Rockwell Publishing If offeror dies before offer is accepted, offer is terminated and no contract is formed. If a court determines offeror is mentally incompetent, offer is terminated. Termination of Offer Death or insanity

© 2010 Rockwell Publishing Rejection terminates offer. After rejecting offer, offeree can’t change mind and accept it. Contract formed only if offeror still wants to proceed. Termination of Offer Rejection by offeree

© 2010 Rockwell Publishing Counteroffer: When offeree agrees to some terms in original offer, but changes one or more terms. Although sometimes called qualified acceptance, counteroffer is rejection of original offer and tender of new offer. Roles of parties are reversed. Termination of Offer Counteroffer

© 2010 Rockwell Publishing Offer and Acceptance Communication of acceptance To create binding contract, offeree must communicate acceptance to offeror before offer terminates. Acceptance effective as soon as it is mailed, rather than when it is received.

© 2010 Rockwell Publishing Negative Forces Affecting Consent Acceptance must be freely given. Contract voidable by victimized party if he can show consent resulted from: fraud undue influence duress

© 2010 Rockwell Publishing Negative Forces Affecting Consent Fraud Fraud: Misrepresenting material fact to someone who relies on misinformation. Material fact: Information that is likely to affect a decision. Fraud is either actual or constructive.

© 2010 Rockwell Publishing Negative Forces Affecting Consent Fraud Actual fraud: Person making misrepresentation knows or should know that it’s false: intentional deceit, or statements made without knowing whether they’re true. Constructive fraud: Person in position of trust or with superior knowledge unintentionally misleads someone.

© 2010 Rockwell Publishing Negative Forces Affecting Consent Fraud It isn’t necessary to actually make misleading statements to commit fraud. Simply concealing material fact may be fraud.

© 2010 Rockwell Publishing Negative Forces Affecting Consent Undue influence Undue influence: Taking advantage of one’s influence over another, or their weakness of mind or distress, to pressure them into contract. Persuasion strong enough to overpower will, so consent isn’t truly voluntary. May involve abuse of special relationship based on trust: broker-seller, attorney- client

© 2010 Rockwell Publishing Negative Forces Affecting Consent Duress Duress: Compelling someone to do something against their will, using force, constraint, or threats.

© 2010 Rockwell Publishing Elements of a Valid Contract Lawful objective Contract’s purpose (and consideration exchanged) must be lawful or contract is void.

© 2010 Rockwell Publishing Elements of a Valid Contract Consideration Consideration: Something of value exchanged by contracting parties. Money, property, services, or promise to do something (or not do it). In typical real estate sale: seller’s promise to convey title buyer’s promise to pay agreed price

© 2010 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.

© 2010 Rockwell Publishing Statute of Frauds Contracts must be in writing California’s statute of frauds applies to any contract: not performed within one year for sale or exchange of real estate (purchase agreement) for lease of property, if term is greater than one year

© 2010 Rockwell Publishing Statute of Frauds Contracts must be in writing Statute of Frauds (cont’d): authorizing agent to buy or sell real estate (power of attorney) authorizing agent to find buyer or seller for real estate (listing agreement, buyer representation agreement) assumption of mortgage or deed of trust

© 2010 Rockwell Publishing A contract subject to statute of frauds is unenforceable if it isn’t in writing and signed. However, oral real estate contract may still be enforced in unusual circumstances, such as when purchase price has been paid. Statute of Frauds Noncompliance

© 2010 Rockwell Publishing Any form of writing will suffice, including notes, letters or memos, so long as they: identify contract subject matter and show agreement between parties, and are signed by party to be bound. Statute of Frauds

© 2010 Rockwell Publishing Contract may be printed, handwritten, or both. If conflict between printed and handwritten parts, handwritten part takes precedence. If party disputes whether contract was in writing, statute of frauds may not be used as defense. Statute of Frauds

© 2010 Rockwell Publishing Mutual consent Termination of offer Counteroffer Fraud, undue influence, duress Lawful objective Consideration Statute of frauds Summary Mutual Consent/Other Contract Elements

© 2010 Rockwell Publishing Legal Status of Contracts Four terms are used to describe legal status of a contract: void voidable unenforceable valid

© 2010 Rockwell Publishing Legal Status of Contracts Void Void contract: No legal effect whatsoever. Parties are in same position they’d be in if they had not attempted to contract. Contract can be disregarded. Occurs most often when one of the essential contract elements is lacking.

© 2010 Rockwell Publishing Legal Status of Contracts Voidable Voidable contract: Contract appears to be valid, but has some defect giving one or both parties power to withdraw. Examples: non-real estate contract entered into by minor (voidable by minor or guardian) contract entered into as result of fraud, undue influence, or duress

© 2010 Rockwell Publishing 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. Legal Status of Contracts Voidable

© 2010 Rockwell Publishing Legal Status of Contracts Unenforceable Unenforceable contract: One that can’t be enforced in court because: its contents can’t be proved (oral contract or written contract that is vaguely worded) other party has voidable contract statute of limitations has expired

© 2010 Rockwell Publishing Statute of limitations: Sets time limit for filing a lawsuit; party who misses deadline loses right to sue. California statute of limitations: breach of written contract: 4 years breach of oral contract: 2 years Legal Status of Contracts Unenforceable

© 2010 Rockwell Publishing Court may also bar claim under doctrine of laches. Legal principle that allows court to decide unreasonable delay in asserting claim prevents legal action. Different from statute of limitations, which sets specific deadline for filing claim. Legal Status of Contracts Unenforceable

© 2010 Rockwell Publishing Legal Status of Contracts Valid Valid contract: has all essential elements is free from negative influences contents can be proved in court statute of limitations hasn’t expired If one party fails to perform as promised, other can sue to have contract enforced.

© 2010 Rockwell Publishing Summary Legal Status of Contracts Void Voidable Unenforceable Valid

© 2010 Rockwell Publishing Discharging a Contract Once there is a valid, enforceable contract it may be discharged by: full performance, or agreement between parties

© 2010 Rockwell Publishing Discharging a Contract Full performance Most contracts are discharged by full performance: each party performs as promised, and contractual relationship ends

© 2010 Rockwell Publishing Discharging a Contract Agreement between parties The parties to contract may also agree to discharge contract in following ways: rescission cancellation assignment novation

© 2010 Rockwell Publishing Discharging a Contract Rescission Rescission: Parties sign written agreement to end contract and undo steps already taken. If either party paid money or gave property, it’s returned. Parties return themselves to positions they were in before contract was formed.

© 2010 Rockwell Publishing Discharging a Contract Cancellation Cancellation: Parties agree to terminate contract without undoing steps taken. Money paid before cancellation is not returned (mainly, good faith deposit).

© 2010 Rockwell Publishing Discharging a Contract Assignment Assignment: One party (assignor) withdraws and assigns his interest to new party (assignee). Original contract not really discharged. Assignee has primary liability, but assignor has secondary liability. If assignee defaults, other party can still sue assignor.

© 2010 Rockwell Publishing Generally contract can be assigned without permission, unless: contract has clause forbidding assignment, or personal service contract (usually not assignable without permission). Example: listing agreement. Discharging a Contract Assignment

© 2010 Rockwell Publishing Discharging a Contract Novation Novation: Substitution of new party or new obligation between same parties. Always requires consent of other (original) party.

© 2010 Rockwell Publishing Discharging a Contract Assignment vs. novation When contract is assigned, there is continuing liability for the assignor. With novation, there is no continuing liability for withdrawing party.

© 2010 Rockwell Publishing Summary Discharging a Contract Discharge Full performance Rescission Cancellation Assignment Novation

© 2010 Rockwell Publishing Breach of Contract Breach of contract: When one party fails, without legal excuse, to perform any of the promises contained in agreement. If one party breaches contract, other party may have right to sue. A breach may be material or minor.

© 2010 Rockwell Publishing Four legal remedies for breach of contract: rescission compensatory damages liquidated damages specific performance Remedies for Breach of Contract

© 2010 Rockwell Publishing Remedies for Breach of Contract Rescission As explained earlier, rescission is termination of contract that returns parties to their original positions. Rescission may be: by agreement between parties, or court-ordered remedy for breach of contract.

© 2010 Rockwell Publishing Remedies for Breach of Contract Liquidated damages Liquidated damages: Remedy parties agree to in advance, with provision in contract. If one party breaches, other party is entitled to agreed sum of money (liquidated damages). Liquidated damages are only remedy; can’t sue for more.

© 2010 Rockwell Publishing Remedies for Breach of Contract Liquidated damages In real estate transactions, buyer’s good faith deposit often treated as liquidated damages for seller, if buyer breaches contract. (Note special CA rules regulating these deposits.)

© 2010 Rockwell Publishing Remedies for Breach of Contract Compensatory Damages Compensatory damages: Amount of money court orders breaching party to pay other party, to compensate them for losses incurred as a result of breach. Most common remedy for breach of contract.

© 2010 Rockwell Publishing Remedies for Breach of Contract Specific performance Specific performance: Court orders breaching party to perform contract as agreed.

© 2010 Rockwell Publishing Remedies for Breach of Contract Specific performance Specific performance not always granted. Court may decide damages are adequate compensation. Generally, specific performance awarded only if subject of contract is unique. Court may be willing to grant specific performance to real estate buyer.

© 2010 Rockwell Publishing Breach of Contract Tender Tender: Unconditional offer by one of the parties to perform as agreed. Before party can sue for breach of contract, non-breaching party must show he is ready to carry out his side of bargain (deliver deed or fund purchase).

© 2010 Rockwell Publishing Summary Remedies for Breach of Contract Rescission Compensatory Damages Liquidated damages Specific performance Tender