Chapter 13
The Purchase Contract
Overview of Contracts
Offer
Additional Rules for Real
Estate Contracts
1. Statute of Frauds
2. Description of Property
No
Yes
Acceptance
No
No
Contract
Yes
Consideration
No
Yes
Undue
Influence
Defenses
Yes
Illegality?
Misrepresentation?
Fraud?
Duress?
Capacity
No
Writing Required?
Valid Contract
Mistake?
Void or
Voidable
Contract
Important clauses in real estate contracts
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Financing arrangements/contingencies
Apportionments
Risk of Loss
Closing date and escrow
Environmental contingency
Marketable title
Present Intent to Contract
Mary: “Ed, if you wanted to sell your
house, what would you ask for it?”
Ed: “I suppose $400,000 dollars would be
a fair price.”
Mary: “I’ll take it, if you will have the floors
refinished.”
Ed: “Sold.”
Consider 13.1, p. 318. An Offer?
I am very much interested in your lot, zoned C-2, which is located at the
south-eastern corner of Gilbert and Southern Roads. If the price is
$475,000 or less, I can pay cash. I will need it for construction by 6/1/13.
Present Intent to Contract
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Example - Do the parties have a contract?
January 4 Letter. I am interested in buying that lot you
showed me last Saturday. You talked about $40,000 as a
price. That sounds good to me. Let’s meet Wednesday at
Frisco Kid’s to iron out the details. Offer?
January 4 Reply (via fax). $40,000 is the price. Cash only.
I’ll see you Wednesday at 5:30. Acceptance? Offer?
Property Sold to Another. Before the meeting another buyer
paid $40,000 cash.
Lawsuit Over Who Bought Property.
End-of-Chapter Q: 6, p. 356
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Three writings
– Appointment of Agent. The appointment contained details on the sale,
including price, tax payments, commission and title.
– Downpayment Check. Signed by buyer “for down payment on Mattushek
land.”
– Agent Drafted Offer. “I hereby agree to buy the Mattushek place in
accordance with the terms in the agreement between [the appointment of
agent agreement referenced above].
Issue – Appointment writing only signed by one party, the seller, does that
matter?
Options – How Are They Different?
1. Paid-for offers
2. Consideration required
3. Irrevocable
Board of Control of Eastern Michigan
University v. Burgess (#X)
206 NW2d 256 (Mich 1973)
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Burgess signed a 60 day option to sell
his home to Eastern Michigan
University.
The document drafted by Burgess
stated receipt of “one and no/100 dollar
($1,00) and other valuable
consideration” $1 never paid.
Option with consideration must remain
open – otherwise it’s an offer that can be
revoked at any time.
Dispute as to whether offer revoked or
not. Seller said she called and revoked
the offer shortly after signing it, buyer
says she never revoked offer.
Consider 13.2 p. 321:
Does an options contract remain open
after revoked
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Option to Buy Farm
Negotiations to Buy/Sell Farm. A entered into negotiations with B to buy B’s
farm.
Option for 9 Months. B decided a selling price of $750,000 was fair and
agreed in exchange for $1,000 he would keep that price open for nine months.
Option Cancelled? After 6 months, A wrote B that A was no longer interested.
New Offer for $950,000. Within days B wrote A that a new buyer C was now
interested in the farm for $950,000. B told A that he would still sell to A if A
raised the price to $875,000 and closed within 10 days.
A Bought Farm for $875,000 Then Sued for $125,000. A bought the farm
and then sued to recover the difference in the purchase price from the options
price.
Trengen v. Mongeon (#6)
206 NW2d 284 (ND 1973)
Adequacy of Consideration
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Consideration – farm “sold” to son and daughter
in law for $38,400 plus $1,800 per year for the rest
of the seller’s lives.
Sister/Guardian Contested Sale.
Adequate Consideration?
Will Leaves Son Nothing.
Daughter/Guardian
of Mom and Dad –
Contests Contract
Dad and Mom
$38,400 plus
$1,800/year
Mom and Dad’s Farm
Son and Daughterin-Law
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Consider 13.3 p. 322
Adequate Consideration
Parol Evidence Rule
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Father to Son Option on Land.
Contract: “[i]n consideration for the mutual promises made in this agreement.”
Parol Evidence. Mutual promises included son’s agreement to stay in the area
– the other son had left the area.
Son Exercises Option/Other Son Sues. Not a valid offer/option because on
consideration.
Treatment of Unexpired Options
Rejected by Offeree
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Offer ends
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Offer ends if offeror refunds option payment
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Offer ends if offeror pro-rates and refunds portion of option according
to time used
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Offer ends if option agreement provides
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Offer continues until expiration of option period
Consider 13.4 p. 323:
Whether a ceiling fan results in a failed
contract
Original Hunter Ceiling Fan
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Sellers Did Not Want to Sell Ceiling Fan With House. They told the agent they
did not want to sell the original Hunter ceiling fan in the home and the agent told
them to take it down and replace it. The sellers agreed to do so the next Saturday.
On Friday the “for sale” sign went up and a different agent showed some buyers
the home and they bought it.
Seller Signed Contingent on Fan. The sellers accepted all terms but put above
their signature: “Ceiling fan in family room is not included.”
What happens?
Termination of Offer
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Rejection*
Counteroffer* - Common law - mirror image rule
Revocation*
Death of offeror
Bankruptcy
Illegality
End-of-Chapter Q2, p. 354 Inspection Reveals Defects
• *Effective
Contractupon
Signed
with Handwritten Addendum.
receipt
“Closing is subject to buyer’s inspection of property by him and his
designated specialist and complete satisfaction of specialist with
property condition.”
• Inspection Reveals Problems. The roof would need to be replaced in a few
years. Some wood needed to be replaced. The buyer demanded that these
items be fixed. The seller said the clause allows the buyer out of the contract –
not the right to have the problems fixed.
Acceptance - Common Law
1. Must be absolute, unconditional and unequivocal for common
law
2. Mirror image rule is a zero tolerance rule
3. Must be by the party with the power of acceptance
4. Must be communicated to the offeror
Acceptance - Conditional
Misnomer: This is not acceptance
“I accept provided that…”
“I accept on the condition that…”
“I accept if…”
“I accept if and only if…”
“I accept but I must…”
Counteroffer and rejection
Case Discussion
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Consider 13.5, p. 324: How to accept contracts – fax?
Oil and Gas Application. Gilmore filed an oil and gas application.
His application was accepted and he received a letter stating:
All Copies of the lease form must be properly executed and filed in this office
within thirty (30) days from your receipt of this decision, which constitutes a
compliance period. Failure to do so will result in the rejection of your offer without
further notice. The Bureau of Land Management said it had to be a holographic
copy.
Sent Executed Copies Via Certified Mail. Gilmore sent signed copies via certified
mail. However, the mail did not arrive in time. The mail arrived after 8 days – one
day late.
Sent Fax Copy that Arrived in Time. He then tried to get a flight and could not.
He offered to send a fax and they said no. He sent a fax to an attorney who hand
delivered the forms in time.
Anzalaco v. Graber
Inspection Clause/Secondary Offer
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Seller (Graber) to sell home to buyer (Lee).
Subject to Inspection
– (a) remove inspection contingency
– (b) Accept subject to seller agreeing to have defects…fixed…must agree
within three days of seller’s receipt of buyer’s request or contract is null
and void
– (c) terminate the agreement
Buyer choice B, but seller refused to fixed anything.
Buyer then changed to choice A (within timeframe for having the inspection
completed).
Seller found new buyer and entered into secondary offer.
New buyer sued for specific performance
Issues: Can a buyer switch choices from having defects fixed to removing the
contingency? Is the new buyer entitled to specific performance even though
seller could not deliver good title because Lee refused to sign a release from
Lee’s offer.
Case Discussion
Consider 13.6, p. 328: Timing of acceptances.
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Cynthia has listed her home. She gets two offers: (1) for
$283,000 and (2) for $284,000. She responds to both she will sell
for $285,000 – “This is good until March 4, 2010, 6 PM”
Buyer A Accepts. Suppose Buyer A accepts on March 3, 2010
and communicates the offer at 7 pm. Cynthia then contacts Buyer
B and says I revoke my offer.
Buyer A Accepts and So Does Buyer B. Suppose that before
Cynthia contacts B, B contact Cynthia and accepts at 2:15 pm
(written form signed).
Buyer B Paid for Option. Suppose that B paid Cynthia $500 to
hold the offer open until March 4, 2010 at 6 pm?
Dhillon v Zions First National Bank
Statute of Frauds
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Negotiation Agreement. In the agreement the parties agreed that email
communications count as oral and not written communication.
Parties Strike a Deal on Email.
Bank Sends Agreement – Not Signed. Buyer paid a $75,000 deposit per
email instructions.
Buyer Signs. Bank refuses. Do they have a deal?
S Development v. Pima Capital Partners (#X)
31 P3d 123 (AZ App 2002), p. 343
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AS IS. Two apartment
buildings sold “as is.” Buyer
had an inspector inspect the
buildings but did not find
anything.
Patent/Latent Defect. The
water pipes used were made
from poly-butylene which
would leak under normal
pressure with warm water.
Seller Refused Inspection
To Damage Buildings. The
water pipe was buried 6
inches into the walls. All the
water pipe that was visible
was copper.
poly-butylene water pipe
ARC Constr. v. Zelenak
Implied Warranty of Habitability
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New Home Purchase. Zelenaks purchased a new home from ARC.
Defects. Windows and doors were not installed correctly causing leaking. The
leaking caused mold and medical problems for the Zelenaks’ 8 year old
asthmatic son.
Sued for Implied Warranty of Habitability
– Applies to First Owner.
– Subsequent Owners Only for Latent Defects.
Home Foreclosed – Zelenaks Lost Home.
Standing Issue: Can Zelenaks sue when no longer own the home?
Liquidated Damages
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Consider 13.13, p. 351: liquidated damages.
Liquidated Damages Law.
• Reasonable estimate of actual damages
• Actual damages hard to estimate
Agreement to Purchase Land. Agreement to buy 18 lots over 12 months.
Liquidated Damages Clause. “If the buyer shall fail to fulfill the buyer’s
agreements herein, all deposits made hereunder by the buyer shall be retained by
the seller as liquidated damages and this shall be the seller’s sole remedy at law
and equity.”
Buyer Failed to Buy Remaining Properties. Seller kept $50,000 down payment
as liquidated damages.
Seller Sold Lots for More. Is it a penalty because seller was ultimately able to sell
the lots for more?
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Consider 13.14, p. 351: Square Footage As Material
Contract Provided: “…ANY REFERENCE TO THE SQUARE FOOTAGE OF THE
PREMISES …IS APPROXIMATE..IF MATERIAL TO THE BUYER, IT MUST BE
VERIFIED DURING THE INSPECTION PERIOD.”
Sold as 3,792 – Actual 3,605.
Issue: Contract Breach?
Statute of Frauds
Land
Options
Contracts
Leases
Mortgages
Exception: partial performance,
possession, and/or improvements
and payment
Partial Performance Exception
to Statute of Frauds
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That valuable improvements have been
made to the property; or
That there has been full or partial payment
of the purchase price and that the party
who has paid money has possession of the
property.
Statue of Frauds/Part Performance
Statute of Frauds question.
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Oral Contract. Hancock Construction claimed it had an oral
contract to purchase property.
Reliance. Hancock had engineering studies done based on
the oral contract and arranged to obtain a loan.
Seller Refused to Sell
Action for Specific Performance.
Financing Contingencies
Condition Precedent
Consider 13.8, p. 336: Financing Contingency
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Highlands Agrees to Buy Land Subject to Financing of
$750,000.
Highlands Secures Financing With Second Mortgage.
Highland could not get a bank to finance the full $750,000 but
was able to get two banks to do so with a first and second
mortgage.
Seller Refused Sale Stating Financing Contingency Not
Met.
Why Is Financing Clause In Agreement? Protect buyer or
seller?
Other common condition
precedents?
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Environmental assessments
More?
Perroncello v. Donahue (#X)
859 NE2d 827 (Mass 2007), p. 344
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Contract to Purchase Property. Signed a contract to purchase a property for
$2,250,000.
Liquidated Damages Clause. “If the buyer shall fail to fulfill the buyer’s
agreements herein, all deposits made hereunder by the buyer shall be retained
by the seller and shall be seller’s sole remedy at law or equity.”
$150,000 Deposit. The buyer paid a $150,000 deposit.
Buyer Missed Closing Date for Lack of Financing. The buyer missed the
date for the expiration of the contract but was able to closed three weeks later.
Seller Tried to Sell Property To Another. Seller put a new “for sale” sign on
the property and kept the $150,000
Buyer Lawsuit. Buyer sued for the $150,000 and specific performance.
Seller Response. Also sought specific performance but still wanted to keep
the $150,000.
Court Held: Can either keep the $150,000 or seek specific performance – not
both.
Consider 13.15, Haunted house
Consider 13.11 p. 344: Problem with Golf balls hitting
roof. Required to disclose?
Reed v. King (#X)
193 Cal Rptr 130 (1983), p. 353
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Multiple murders committed at house – must that
be disclosed?
Answer depends on whether “material” and
whether material depends on whether it materially
impacts the value of the house.
Noisy neighbors – cause house to shake.
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Innocent Misrepresentation
Basis of the
bargain
Fact or
promise
Rescission is the
only available
remedy
Proof Requirements for
Misrepresentation
1.
A statement of material fact
has been made or omitted
The type of information
involved would affect the
buying decision.
2.
There is reliance on the
statement of fact
The buyer uses the fact in
making the decision of
whether to buy (see earlier
discussion under “AS IS”
clauses for disclosures
about patent and latent
defects).
3.
There is detriment
The buyer suffers through
loss of property value or
cost of repair.
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Consider 13.12, p. 348: Fraud
hypotheticals.
The test scores for this area’s public
schools are the highest in the state.
This roof has a 30-year warranty.
This well could never run dry.
That easement is not recorded, but
it’s valid.
This property was certified in 2006 as
termite free.
The crime rate is very low here.
The city has no plans for a stadium
next to this house.
The value on this house just keeps
going up.
Basements in this area don’t leak.
Home Warranties
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Implied Warranty of
Habitability (statute based)
Purchased Home Warranty
Disclaim Implied Warranty?