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Unit 11: Key Points

These are the most important points for you to remember in this unit.

Contracts

  • A contract is an agreement between two or more parties to do, or to abstain from doing some legal act for an adequate compensation.
  • Contracts can be written or oral.
  • Brokers and sales associates can prepare
    • seller brokerage agreements (listings),
    • buyer-brokerage agreements,
    • sales contracts,
    • option contracts, and
    • leases, if filling in the blanks on a Florida Supreme Court-approved lease form.
  • Persons who are not attorneys may not prepare deeds, mortgages, promissory notes or any legal documents for other persons.
  • The unauthorized practice of law is a third-degree felony.
  • The Statute of Frauds requires that contracts pertaining to the transfer of real property must be written and signed to be enforceable unless a portion of the purchase price has been paid and
    • the buyer has moved in, or
    • the buyer has made improvements to the property.
  • The Statute of Limitations sets the maximum time to prosecute individuals for crimes or to enforce contracts.
  • Florida law provides that written contracts are enforceable for five years, and oral contracts for four years.

Valid, Void, Voidable, and Unenforceable Contracts

  • A valid contract is legally sufficient and has all the essential elements to create a contract.
  • A void contract has no legal effect . It may appear to be a contract, but cannot be enforced.
  • A voidable contract has all the requirements of a valid contract, but gives one or both parties the right to back out. A voidable contract is valid until one of the parties exercises the right to void the agreement.
  • An unenforceable contract is valid until a court is called upon to enforce it.

Essentials of a Contract

  • legally competent parties—the parties can’t be drunk or insane.
  • agreement—an agreement is a meeting of the minds. There must be an offer, an acceptance, and communication of the acceptance. 
  • legal purpose—the objective of the contract must not violate the law. 
  • consideration—a contract requires consideration to be enforceable.
  • Consideration is the promise to give up something of value when the agreement is closed.
  • A promise for a promise is sufficient consideration.
  • The two types of consideration are valuable consideration and good consideration.
    • Valuable consideration has monetary value, and is an essential for a contract.
    • Good consideration does not have monetary value. It is most often called love and affection.
    • Good consideration does not meet the standard for enforceability.
  • Real estate contracts must be in writing and signed.

Classification of Contracts

  • Bilateral or Unilateral Contracts
    • Bilateral contractsA bilateral contract requires both parties to perform.
    • Unilateral contracts—A unilateral contract requires only one of the parties to perform. An option contract is a unilateral contract.
  • Express or Implied Contracts
    • Express contracts—An expressedcontract has specific words of agreement.
    • Implied contractsImplied contracts are not specific because they arise by the acts of the parties. Implied contracts  often result in misunderstandings and lawsuits.
  • Executory or Executed Contracts
    • Executory contracts—executory contracts have not been performed because something remains to be done.
    • Executed contractsExecuted contracts have closed. Nothing else remains to be done.
  • Formal or Informal Contracts
    • Formal contractsFormal contracts are written and signed by the parties.
    • Informal, or parol contractsParol contracts are oral contracts. Oral contracts are enforceable for many purposes, but usually not for the transfer of real property.

Termination of Offers

  • Parties to an Offer
    • An offer is made by the offeror; it is received by the offeree.
    • The buyer may withdraw the offer at any time before the seller accepts it and communicates the acceptance to the buyer.
    • The buyer legally controls the deposit, and may request it back until the offer is accepted and communicated.
    • When the offer is accepted and becomes a contract, both the buyer and the seller control the deposit.
  • Termination of Offers–offer can be terminated by
    • acceptance,
    • rejection,
    • counteroffer,
    • withdrawal by offeror,
    • lapse of time,
    • insanity,
    • death, or
    • destruction of the property.

Termination of Contracts

  • Contracts can be terminated by
    • Performance—the most common way to terminate a contract is performance. Both parties fulfill their obligations and the transaction is completed to the satisfaction of all parties.
    • Impossibility of performance, for example the house burns down.
    • Mutual Rescission—sometimes the parties decide that it would be in their best interests to reverse the contract.
    • Operation of Law—a contract may be declared void by a court because of fraud or misrepresentation by one of the parties,
    • Illegal purpose, or
    • Bankruptcy either party. In the case of bankruptcy, a trustee will seize the real property for the benefit of the creditors and may void the contract.

Breach of Contract

  • When one of the parties to a contract fails to perform as promised, that party has breached the contract.
  • Remedies for breach–the party who did not breach the contract has four legal remedies:
    • rescind the contract—The innocent party may ask a court to cancel the contract, putting the parties back in their original positions, including a return of the deposit.
    • require specific performance—The innocent party may ask a court to require the other party to perform as promised.
    • sue for compensatory damages—The innocent party may ask a court to award compensatory damages in order to repay the losses suffered by the innocent party.
    • sue for liquidated damages—The innocent party asks the court to have the buyer forfeit the earnest money deposit. Liquidated damages are usually equal to the earnest money deposit.
  • Anticipatory breach—a definite statement that one of the parties will not perform on the required date (repudiation) is called an anticipatory breach.
  • The innocent party may treat the breach as immediate, terminate the contract, and sue for damages without waiting for the actual breach.
  • Assignment of contracts
    • A contract is usually assignable unless the terms or the law prohibits it.
    • The assignor has the legal rights and transfers them to an assignee.
    • A novation occurs when a contract is changed by agreement of all parties.
    • The assignee is substituted for another party, discharging the obligations of the assignor.

Listing Contracts

  • A listing contract is an agreement between a broker and a property owner or a buyer.
  • When the contract is between a broker and a buyer, the agreement is called a buyer brokerage agreement.
  • Conditions Created by Listing Agreements—a listing agreement between a broker and a seller requires the broker to either find a purchaser or effect a sale.
    • Find a purchaser requires the broker to bring a buyer who offers the price and terms specified by the seller. If the seller signs a contract, regardless of the price, the  seller owes a commission to the broker.
    • Effect a sale means that the broker must not only find a ready, willing, and able buyer, but the sale must close.
  • Legal requirements of listings
    • Listings may be written or oral.
    • Listings are not covered under that statute of frauds unless the agreement is for more than one year.
    • If the listing is in writing,  the broker must give the seller a copy within 24 hours after the seller signs it.
    • A listing may not have an automatic renewal feature, or the listing is void. The seller must sign each renewal.
  • A listing does not give the broker the right to sign a sales contract in the absence of the seller. The broker can do this only if the seller has signed a power of attorney for the broker.
  • Types of listings—the three principal types of listings are exclusive right of sale, exclusive agency, or open.
    • An exclusive right-of-sale listing is the most desirable from the broker’s standpoint. The broker is entitled to a commission whether sold by him, the owner, or another brokerage firm.
    • An exclusive agency listing is very similar to the exclusive right of sale listing except that the seller can sell the property himself without paying the broker a commission.
    • An open listing describes an arrangement where a seller attempts to sell his own property, but promises a broker to pay a commission if the broker brings a buyer. The seller may give an open listing to many brokers, and only the broker who sells the property is paid.
  • A net listing is created when a seller specifies an acceptable net amount of money from the sale after paying the commission.
  • Brokers who take a net listing are in danger of getting much less than their customary commission because of the requirement to present all offers.
  • The Multiple Listing Service allows brokers to share information about their listings and gives an offer of compensation to the selling broker.

Sales contracts

  • A contract for sale and purchase is a written agreement between a seller (the vendor) and a buyer (the vendee).
  • The seller promises to deliver a deed to the property, among other things, and the buyer promises to pay the purchase price.
  • A contract for the sale of real estate must be written to be enforceable. Letters and faxes can be part of a valid sales contract.
  • If the contract doesn’t state what type of deed the seller will deliver, the seller is required to provide a warranty deed.
  • An earnest money deposit is not the consideration for the contract; it is the buyer’s promise to pay the purchase price that is the consideration. A contract without an earnest money deposit is valid.

Earnest Money Deposits

  • Radon Gas Disclosure—licensees must give prospective buyers a radon gas disclosure stating what the gas is. Testing is not required.
  • Energy Efficiency Disclosure—requires that sellers or the broker who prepares a real estate contract for sale give an Energy Efficiency disclosure. It does not require that the seller conduct an energy-efficiency rating at his or her expense.
    • Lead-based Paint Disclosure–for the sale or lease of most housing built before 1978.
    • Sellers and landlords must give an EPA-approved information pamphlet, disclose any known information concerning lead-based paint or lead-based paint hazards.
    • Sellers must provide homebuyers a 10-day period to conduct a paint inspection or risk assessment.
  • Homeowner’s Association Disclosure—the seller must give the buyer a homeowner’s association disclosure if the home is in a neighborhood where an association is allowed to place a lien on properties for non-payment of dues, or if there are restrictive covenants restricting the use and occupancy of the property.
    • If the seller does not give the disclosure before the buyer signs the contract, the contract is voidable by the buyer at any time before closing. The buyer’s right to void the contract cannot be waivedin the contract.
  • Property Tax Disclosure—warns the buyer not to rely on the current year’s taxes as an indication of what the taxes will be in the first year of their ownership.
    • A change of ownership may trigger reassessments resulting in higher property taxes because of the artificial caps on the property from the Save Our Homes Amendment.
  • Defects that materially affect the value of residential property.
  • Any encumbrances that will remain on the property after the closing.

Options and Procuring Cause

  • Option contracts are unilateral contracts, since only one party, the owner (optionor), is required to perform.
    • The optionee is not obligated to perform.
    • If the optionee does not purchase the property, the consideration paid for the option belongs to the optionor.
    • An option contract must be written and signed by the parties to be enforceable.
    • An option contract is not valid unless substantial valuable consideration has been paid.
    • Real estate licensees who wish to obtain an option contract should give the seller a no brokerage relationship notice and provide substantial valuable consideration for the contract.
  • Procuring cause–when a broker’s efforts have resulted in a sale, the broker is the procuring cause of the sale.
    • A broker who has an exclusive right of sale contract is automatically the procuring cause of the sale. A broker must show that a series of continuing actions during a period led directly to the sale.
    • The Florida Real Estate Commission will not settle broker disputes.

Misrepresentation and Fraud

  • Licensees may not advertise property or services that is fraudulent, false, deceptive, or misleading.
  • Brokers can be disciplined for failing to direct, control, or manage a broker associate or sales associate employed by the broker.