Brokers and salespersons use many types of contracts and agreements in the course of their business. There are agency contracts within these documents as well as sales contracts, option agreements, installment contracts, leases, and escrow agreements. State laws require these type of agreements be in writing. Before studying the specifics of each individual type of agreement, you first must understand the basic principles of contract law, the general body of law that governs the operation of these type of agreements.
We will break these further down, but first let’s briefly explain the broker’s authority to prepare the documents.
Broker’s Authority to Prepare Documents
As a rule, real estate brokers don’t have the authority to practice law. That means to prepare legal documents like deeds and mortgages or even give legal advice. Most states have specific guidelines developed by agreement between broker and lawyer associations. This is by court decision, or by statute regarding the authority of real estate licensees to prepare documents for their clients and customers.
In general, real estate licensees can fill in the blanks of preprinted documents approved by the state bar association, local real estate association, or the real estate regulators. Make sure you ask state officials or your local real estate association to determine the current authority of real estate licensees to prepare documents.
Contract Law
A contract is a voluntary agreement between legally competent parties to perform some legal act supported by legal consideration. Or to refrain from performing one. In essence, two parties exchange promises.
Depending on the situation and the nature or language of the agreement, a contract can be (1) expressed or implied; (2) bilateral or unilateral; (3) executory or executed; and (4) valid, void, voidable, or unenforceable. These terms describe the type, status, and legal effect of a contract.
Expressed and Implied Contracts
A contract is expressed or implied. It just depends on how it was created. In an expressed contract, the parties state the terms and show their intentions in words, either orally or in writing. In an implied contract, the parties demonstrate the agreement by their conduct.
For the most part, the majority of real estate contracts have to be in writing. So, they’re usually expressed.
Bilateral and Unilateral Contracts
Contracts are either classified as bilateral or unilateral. A bilateral contract, means both parties promise to do something. One promise is given in exchange for another. A real estate contract is a bilateral contract. One party promises to give a parcel of real estate and deliver the title to the property to the purchaser. The purchaser promises to pay a certain sum of money for the property.
In a one-sided, or unilateral contract, one party makes a promise in order to induce a second party to perform. The second party is not legally obligated to act. However, if the second party does comply, the first part has to keep the promise.
Executory and Executed Contracts
A contract is classified either executory or executed. That’s depending on whether the agreement is completely performed. An executory contract, exists when something remains to be done by one or both parties. When both parties fully perform their promises and their contract, it’s a fully executed contract.
Validity of Contracts
Depending on the circumstances, a contract is valid, void, voidable, or unenforceable. A valid contract complies with all essentials of a contract and binds both parties. A void contract is not legally enforceable. It doesn’t meet the essentials of a contract. Any one of the parties can reject or dis-affirm a voidable contract. Here’s an example, a a contract entered with a minor is voidable. Another one is a contract create with someone under duress is voidable.
Even a purchase agreement subject to financing is also a voidable contract. Why?!.. Well.. They buyer’s ability to buy the house or any piece of real estate lies withing their ability to get financing. So if they can’t, then they’ll back out of a contract.
If a contract is unenforceable, it just means that it seems valid on the surface, but neither party can sue the other to force performance. Here’s an example. In many states, a listing or sales agreement is invalid, or unenforceable, unless it is in writng and signed by the parties.
Alright, let’s break down the essential elements of a valid contract.
Essential Elements of a Valid Contract
The essentials of a valid real estate contract vary somewhat from state to state. Those elements uniformly required are (1) competent parties, (2) mutual assent, (3) consideration, (4) legality of object, and (5) legal form.
Competent Parties
All parties entering into a real estate contract or any contract has to have legal capacity. The buyer and seller have to be of legal age and not suffering from a mental disability that makes them incompetent. So in most states, 18 is the legal age to enter into binding contracts.
If someone enters into a contract with someone who’s under the influence of alcohol or drugs, then it could be voidable. Even if someone who the court judge is incompetent will nullify the contract.
Keep that in mind.. .
Attorneys-In-Fact
So, you can technically get an attorney to act for you. It’s called a power of attorney. Anyone acting under the dictates of a properly executed power of attorney acquires the capacity to contract for another person. Obviously, it just needs to comply with state law. So this person would sign on behalf of another person as an attorney-in-fact. Most states require that the power of attorney be in writing though. Signed and acknowledged by the principal, and recorded, if the act that will be performed is the conveyance of titles to real property. Remember, that a power of attorney ceases to exist after the creator dies.
Now if you have a corporation, its still legally capable of contracting. The only thing is, the individual signing on behalf of the corporation has to have the authority from the board of directors. There are state law requirements that differ, so make sure you follow them!
Partnerships
In a general partnership, each general partner usually has the power to enter into agreements on behalf of the entire partnership. With a limited partnership, only the general partners may contract on behalf of the partnership because limited partners may have only a financial interest in the venture.
Mutual Assent
Mutual assent (also called mutual consent or a mutual agreement) requires that all parties must be mutually willing to enter into the contract and that the contract be signed as the free and voluntary act of each party. There has to be a meeting of the minds between the two parties. The contract wording has to express all of the agreed-upon terms and be clearly understood by the parties. But in order to arrive at a mutual assent, an offer and acceptance of that specific offer must be completed where a counteroffer can also be presented.
Misrepresentation, Fraud, and Mistakes
To achieve mutual assent, both parties have to agree to terms without any misrepresentation, fraud, and mistakes. Misrepresentation is literally an innocent misstatement of a material fact that someone relies on and causes the person to suffer damage. Fraud is the deliberate misstatement of a material fact with intent to deceive on something that a person relies on, and causes them to suffer damage. Fraud results from failure to disclose vital information like latent defects. A mistake is not poor judgement, or even ignorance. It generally involves a mutual misunderstanding in negotiations between the parties or is a mistake of fact. Like if a party is confused as to which property is under consideration.
Let’s check out what consideration is now..
Consideration
For a contract to be valid, it has to show consideration. In a few states, a seal is sufficient. The consideration given is either good or valuable consideration. So, good consideration is generally recognized only in transactions with loved ones. It has to be established that a relationship of love and affection exists. Valuable consideration is anything that is express-able in terms of monetary value, like money, notes, promises, labor, service, real property, or personal property.
Earnest Money
Don’t confuse consideration with earnest money. Even though consideration is an important part of a contract, earnest money shows sincerity and that you intend to complete the contract if the seller accepts the offer. You’ll give this with the offer to purchase. Earnest money is usually in cash, but in today’s world you can find others ways to do it.
Seal
When you seal a contract, it requires placing the word seal or the letters “L.S.”. That’s Latin for locus sigilli, meaning place of the seal.
In Closing..
It’s important to understand what are the components of a real estate contract. Speak to an attorney while conducting real estate transactions.
