CA Principles 06_Presentation.ppt

Principles of California Real Estate Lesson 6: Contract Law © 2021 Rockwell Publishing Introduction Contract: An agreement between two or more competent persons to do, or not do, certain things in exchange for consideration. © 2021 Rockwell Publishing Legal Classifications of Contracts Contracts may...

Principles of California Real Estate Lesson 6: Contract Law © 2021 Rockwell Publishing Introduction Contract: An agreement between two or more competent persons to do, or not do, certain things in exchange for consideration. © 2021 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 © 2021 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. © 2021 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. © 2021 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. © 2021 Rockwell Publishing Summary Legal Classifications of Contracts Contract Express or implied Unilateral or bilateral Executory or executed © 2021 Rockwell Publishing Elements of a Valid Contract A valid contract requires:  parties with legal capacity  mutual consent  lawful objective  consideration © 2021 Rockwell Publishing Elements of a Valid Contract Contractual capacity Contract is not legally binding unless all parties have legal capacity to enter into it. Two requirements for legal capacity:  age  mental competence © 2021 Rockwell Publishing Contractual Capacity Age 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. © 2021 Rockwell Publishing Contractual Capacity Age 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. © 2021 Rockwell Publishing Contractual Capacity Age 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 © 2021 Rockwell Publishing Contractual Capacity Mental competence 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. © 2021 Rockwell Publishing Contractual Capacity Aliens and convicts Aliens may enter into contracts to transfer property, although they may be subject to withholding requirements. Incarcerated persons may also contract to buy or sell property, subject to public safety limitations. © 2021 Rockwell Publishing Summary Contractual Capacity Capacity Age of majority Mental competence Aliens and convicts © 2021 Rockwell Publishing Elements of a Valid Contract Mutual consent 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. © 2021 Rockwell Publishing Mutual Consent Offer and acceptance 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. © 2021 Rockwell Publishing Offer and Acceptance Termination of offer 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. © 2021 Rockwell Publishing Termination of Offer Revocation 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. © 2021 Rockwell Publishing Termination of Offer Lapse of time Offer with deadline for acceptance expires automatically when that date or time arrives.  Offer without deadline expires after reasonable amount of time. © 2021 Rockwell Publishing Termination of Offer Death or insanity 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. © 2021 Rockwell Publishing Termination of Offer Rejection by offeree Rejection terminates offer.  After rejecting offer, offeree can’t change mind and accept it.  Contract formed only if offeror still wants to proceed. © 2021 Rockwell Publishing Termination of Offer Counteroffer 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. © 2021 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 (“mailbox rule”).  Purchase agreement language often overrides mailbox rule. © 2021 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 © 2021 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. © 2021 Rockwell Publishing Negative Forces Affecting Consent Fraud Actual fraud: Person making misrepresentation either:  knew statement was false, or  made statement without knowing whether it was true. Constructive fraud: Person in position of trust or with superior knowledge unintentionally misleads someone. © 2021 Rockwell Publishing Negative Forces Affecting Consent Fraud It isn’t necessary to actually make a statement to commit fraud.  Concealing a material fact is also fraud, if the omission ends up harming a party. © 2021 Rockwell Publishing Negative Forces Affecting Consent Undue influence Undue influence: When someone uses position of trust or authority to pressure victim 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, attorneyclient © 2021 Rockwell Publishing Negative Forces Affecting Consent Duress Duress: Compelling someone to do something against their will, using force, constraint, or threats. © 2021 Rockwell Publishing Elements of a Valid Contract Lawful objective Contract’s purpose (and consideration exchanged) must be lawful or contract is void. © 2021 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 © 2021 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. © 2021 Rockwell Publishing Statute of Frauds Contracts must be in writing California’s statute of frauds applies to any contract:  not performed within one year (or during lifetime of promisor)  for sale or exchange of real estate (purchase agreement)  for lease of property, if term is greater than one year © 2021 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 © 2021 Rockwell Publishing Statute of Frauds Writing requirement 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. © 2021 Rockwell Publishing Statute of Frauds Noncompliance 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. © 2021 Rockwell Publishing Statute of Frauds Contract may be printed, handwritten, or both.  If conflict between printed and handwritten parts, handwritten part takes precedence. © 2021 Rockwell Publishing Summary Mutual Consent/Other Contract Elements Mutual consent Termination of offer Counteroffer Fraud, undue influence, duress Lawful objective Consideration Statute of frauds © 2021 Rockwell Publishing Legal Status of Contracts Four terms are used to describe legal status of a contract:  void  voidable  unenforceable  valid © 2021 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 basic contract requirements is lacking. © 2021 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 © 2021 Rockwell Publishing Legal Status of Contracts Voidable Voidable contract is binding unless party asks court to rescind contract.  Withdrawing party must take legal action to rescind within reasonable time.  Otherwise, court may rule that contract has been ratified. © 2021 Rockwell Publishing Legal Status of Contracts Unenforceable Unenforceable contract: One that can’t be enforced in court because:  it violates statute of frauds  its contents can’t be proved (some oral contracts or written contract that is vaguely worded)  other party has voidable contract  statute of limitations has expired © 2021 Rockwell Publishing Legal Status of Contracts Unenforceable 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 © 2021 Rockwell Publishing Legal Status of Contracts Unenforceable 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. © 2021 Rockwell Publishing Legal Status of Contracts Valid Valid contract:  meets all requirements for contract formation  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. © 2021 Rockwell Publishing Summary Legal Status of Contracts Void Voidable Unenforceable Valid © 2021 Rockwell Publishing Discharging a Contract Once there is a valid, enforceable contract it may be discharged by:  full performance, or  agreement between parties. © 2021 Rockwell Publishing Discharging a Contract Full performance Most contracts are discharged by full performance:  each party performs as promised, and  contractual relationship ends. © 2021 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 © 2021 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. © 2021 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). © 2021 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. © 2021 Rockwell Publishing Discharging a Contract Assignment Generally contract can be assigned without permission, unless:  contract has clause requiring consent to assignment, or  personal service contract (usually not assignable without permission). Example: listing agreement. © 2021 Rockwell Publishing Discharging a Contract Novation Novation: Substitution of new party or new obligation between same parties.  Always requires consent of other (original) party. © 2021 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. © 2021 Rockwell Publishing Summary Discharging a Contract Discharge Full performance Rescission Cancellation Assignment Novation © 2021 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. © 2021 Rockwell Publishing Remedies for Breach of Contract Four legal remedies for breach of contract:  rescission  compensatory damages  liquidated damages  specific performance © 2021 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. © 2021 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; usually can’t sue for more. © 2021 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 CA rules regulating enforceability of liquidated damages provisions. © 2021 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. © 2021 Rockwell Publishing Remedies for Breach of Contract Specific performance Specific performance: Court orders breaching party to perform contract as agreed. © 2021 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. © 2021 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). © 2021 Rockwell Publishing Summary Remedies for Breach of Contract Rescission Compensatory damages Liquidated damages Specific performance Tender © 2021 Rockwell Publishing