Chapter 18
Concepts and Issues in Real Estate Sales Contracts
INTRODUCTION
This chapter focuses on basic concepts, definitions, and issues that are important in
the real estate sales contract. The discussion is general in nature and not specifically
aimed at legal requirements in Georgia. The next chapter covers the important
Georgia requirements.
CLASSIFICATION OF REAL ESTATE SALES CONTRACTS
Real estate sales contracts, like all contracts, can be classified in various
ways. Contracts are either valid, voidable, or void. They are either enforceable or
unenforceable. They are either bilateral or unilateral. They are either express or
implied. They are either executory or executed. The legal characteristics of each
contract determine its classifications.
(a)
VALID, VOID, VOIDABLE, ENFORCEABLE AND UNENFORCEABLE
CONTRACTS - A valid contract fulfills all the legal requirements
imposed by the body of law known as contract law and is therefore
binding on all parties. For example, a valid contract must involve
lawful objects or actions. Therefore, the exchange of a house for
corporate bonds or stock is the basis for a valid contract. If the buyer
tenders forged bonds, the contract would be void because the passing
of forged bonds in not a lawful action.
A void contract is one that is lacking one or more of the legal
requirements for a binding agreement and is,therefore, binding on
neither party.
A voidable contract is an agreement that is binding on one party;
however, the other party has the right to rescind it and legally avoid
the contractual obligations. For example, parties to a contract must
know what they are doing at the time they reach agreement. If one
person can prove that he or she was intoxicated at the time and,
therefore, did not know what he or she was doing, that person may
set aside the contract. The contract is not “void” but is said to be
“voidable.”
An unenforceable contract may be a valid contract, but one that the
courts do not recognize and will not enforce. A real estate contract
must be in writing in order for the courts to enforce it. If two people
reach an agreement about the sale of a property that meets all the
legal requirements for a contract, but the agreement is not written,
the contract is valid, but the courts will not enforce the obligations of
either party under that contract because it is oral.
(b)
BILATERAL AND UNILATERAL CONTRACTS - A bilateral contract is an
agreement in which one person makes an offer of an action or a
promise to the other in exchange for an action or a promise. If the
second person accepts the offer, a bilateral contract exists. Each of
the two parties to the contract makes a promise or performs an act
and simultaneously receives a promise from the other party. The real
estate sales contract is a bilateral contract.
A unilateral contract contains a promise or offer by only one of the
parties to the contract. In other words, one person makes a promise
or extends an offer and the other person receives the benefit of the
promise or offer contingent upon the performance of some act. An
option agreement, in which the seller promises to sell at a certain price
during a specific period of time, should the buyer decide to buy, is a
unilateral contract.
(c)
EXPRESS AND IMPLIED CONTRACTS - An express contract can be oral
or written. The fundamental requirement is that the individuals
discuss and then agree to terms and conditions. A signed sales
contract is the best example of an express contract. It states all of the
items of agreement between the parties to the contract.
A contract can also result from inferences about facts and
circumstances. Such a contract is a contract "implied in facts." The
agreement between the parties forming the implied contract arises
from the intent of the individuals as shown by their conduct. For
example, a builder consistently allows the buyers of newly constructed
houses to move their belongings into their houses before closing. The
contract does not mention this practice and the builder never charges
rent. Now the builder will not allow the buyer of the next property to
move in before closing unless she pays rent. If the builder's previous
actions imply that the buyer has the right to free use of the house
before closing, the builder and buyer may have formed an implied
contract to that effect.
(d)
EXECUTORY AND EXECUTED CONTRACTS - An executory contract is a
contract signed by the two parties (the buyer and seller in a real
estate sales contract, or the landlord and tenant in a lease) who are in
the process of completing the promises made in the agreement
between them. In a sales contract, for example, the buyer applies for
a loan, and the seller maintains the property, orders a termite
inspection, and prepares to transfer ownership. An executory contract
exists between the date of the contract and the closing.
An executed contract represents a completed transaction. At the
closing, the buyer and the seller in a sales contract complete the terms
and conditions stated in the contract. The promises turn into actions.
Thus, at closing, a sales contract is transformed from an executory
contract to an executed contract.
(e)
THE REAL ESTATE SALES CONTRACT - The real estate sales contract is
a valid, express contract when the parties to the contract structure it
properly and legally and then sign it. In other words, it contains all of
the legally essential features of a valid contract. It is also a bilateral
contract, because two or more individuals have exchanged promises
after due deliberation and full agreement about the terms of the
sale. The evidence of the agreement is written into the contract.
ESSENTIAL FEATURES OF A VALID AND ENFORCEABLE CONTRACT
A valid and enforceable real estate sales contract must have the following essential
legal features, each of which are described in more detail below:
(a)
agreement,
(b)
consideration,
(c)
competent parties,
(d)
reality of consent,
(e)
legality of purpose, and
(f)
necessity of writing.
AN AGREEMENT (OFFER AND ACCEPTANCE)
An agreement is the result of the negotiation of the terms and conditions of the
transaction. Two acts make up an agreement -- the offer and the acceptance. The
offer is the first step in the formation of a contract between two individuals. An offer
is a conditional promise made by one party (usually the potential buyer) to the other
party (usually the seller of the property). If the seller accepts the offer
unconditionally, an acceptance takes place. An acceptance is thus an indication of a
willingness to be bound by the terms of the offer. These two actions, the offer and
the acceptance, form the essential agreement for any valid contract.
(a)
THE OFFER - An offer must be (1) definite and certain, (2) complete,
(3) communicated to the offeree, and (4) intended to create a legal
obligation between the parties. To be definite and certain, the offer
must be clear and understandable to a reasonable person. The courts
require definiteness and certainty because the courts may have to
decide whether the parties to the contract complied with the specified
terms. If terms are vague, omitted, or impossible to measure, there is
no contract. The price, the condition of the property, and the time of
delivery are terms of a real estate sales contract that require proper
specification.
The offer must also be complete if the contract is to be enforceable in
a court of law. All the terms of agreement and thus the contract must
be negotiated and settled, and none of the terms can be left for future
negotiation and determination. The offer cannot contain a statement
that calls for future discussion of a term or condition of sale. A
statement such as "price to be negotiated at the time of exchange" is
not sufficient. The courts have ruled that they cannot complete an
unfinished contract; thus the incomplete contract would be
unenforceable, although it could still be valid.
The offeror (the buyer, for example) or his or her agent must
communicate and deliver the offer to the offeree (the seller in this
instance) in order for the contract to be effective. The offeror can
communicate the offer directly to the offeree or through an agent of
the offeree. An offer can be effective although a delay occurs in
reaching the offeree. A delay in the delivery of an offer might result
from the negligence of the offeror or from trouble with the means of
the offeror's communication. Therefore, in some instances the offeree
may be allowed a reasonable amount of time to respond even if the
effective time of the offer has expired. If the delay is apparent to the
offeree, however, he or she must communicate the acceptance of the
offer to the offeror within a reasonable time after the offer would
normally have been received.
The last characteristic of the offer, and of a contract, is the intention
by both the parties to create a legal obligation. The courts will not
hold a person legally responsible for a promise made in jest or anger,
if it should have been obvious to the offeree that the offer was not
serious.
(b)
THE ACCEPTANCE - The other half of the agreement is the
acceptance. An acceptance must be (1) made only by the person who
received the offer or his/her agent, (2) unconditional and identical to
the terms of the offer, and (3) communicated and delivered to the
offeror. First, for a contract to be valid, the person accepting the offer
must be the person who received the offer or an agent who has the
explicit authority to accept offers. If the seller has given the authority
to a lawyer, broker or other agent to accept an offer, the buyer can
deliver the offer to the seller's agent.
The acceptance also must occur without any conditions added to the
offer and without any provision deleted from the offer. In other
words, the offeree must either accept or reject the offer as-is without
changing the offer in any way. Any change in the terms required by
either party occurs through a process of negotiation. During the
negotiation process, the parties can make a series of offers and
counteroffers. For example, a prospective buyer makes an offer. If
the seller does not like all the terms, the seller can make a
counteroffer in which some of the original offer is unchanged and other
aspects undergo deletion, addition, or change. The buyer can accept,
reject, or amend the counteroffer. The offeree’s acceptance of the
counteroffer creates the contract. During negotiations, the buyer and
the seller change roles, with the seller becoming the offeror and the
buyer the offeree of the counteroffer, and vice versa, and so on, until
a contract is formed.
Finally, the party accepting the offer or counteroffer must
communicate and deliver the acceptance to the other party. As part of
the acceptance process, the party making the final offer may require
the acceptance to be delivered in a certain way. For example, the
buyer may stipulate that an acceptance will not be effective until he or
she actually receives the acceptance, or that the acceptance must be
given by a certain time. Custom and tradition also govern the receipt
of the acceptance. An accepted contract sent by mail generally takes
effect when properly posted, with the correct address and sufficient
postage.
Typically, offers must affirmatively be accepted by the offeree for a
contract to be formed. A person is not legally responsible to reply to
an offer made by another individual. In other words, lack of action or
silence is not an acceptance. Suppose an agreement in a contract
contains a statement made by the buyer to the effect that "the seller
accepts the offer if seller does not reply to the contrary." This
provision would not result in a contract because of the lack of action or
the silence of the seller (except in certain unusual situations not
necessary to this discussion).
(c)
TERMINATION OF THE OFFER - An offer stays in effect until one of the
following five events:
(1)
the seller rejects it,
(2)
the seller makes a counteroffer,
(3)
the buyer revokes the offer before the seller accepts it,
(4)
the time limit in the offer expires, or
(5)
unforeseen circumstances invalidate the offer.
The previous discussion dealt with the first and second events. In the
third event (revocation), the buyer can revoke the offer by contacting
the seller or the seller's agent and withdrawing the offer before its
acceptance. In the fourth event (expiration), the buyer can state a
definite period during which the offer remains open. He can say, "This
offer will be in effect until 6:00 p.m. on the 9th of March, 20XX". When
residential offers contain time limits, they are typically for two to five
days. Offers for commercial and multifamily residential properties
generally contain longer periods for the offer to be accepted. If the
time for the offer passes, the offer lapses or expires. If the offer does
not state a definite period, the offer stays in effect for a "reasonable
period." An explicit statement giving an expiration date for the offer
will avoid any need for such an interpretation.
In the fifth event, unforeseen circumstances can invalidate the
offer. The buyer might die while the offer is still in effect. If this
occurs before the acceptance, the offer terminates. If the buyer dies
after the acceptance by the seller, the contract can remain in effect if
a binding-upon-heirs clause exists in the contract. Destruction of the
property before the acceptance can also terminate the
offer. However, if destruction occurs after the acceptance, legal
problems can arise. See the discussion about "the risk of loss" clause
in the contract in a later chapter.
CONSIDERATION
Besides the agreement, a valid contract requires that each party to the contract give
something to the other. In an executory real estate sales contract, consideration is
the exchange of promises by the buyer and the seller (the buyer promises to pay a
sum of money in exchange for the seller’s promise to sell and deliver ownership of
the property at a certain price and under certain terms). This mutual exchange of
promises is valuable consideration. In an executory lease, the valuable consideration
is the tenant’s promise to pay rent in exchange for the use and possession of the
landlord’s property. In an executed sales contract, the valuable consideration is the
mutual exchange of funds and assets that occur at the closing, and in an executed
lease, the valuable consideration is the rent payments in exchange for receiving the
use and possession of the property. In most contracts, the items being exchanged
are approximately equivalent in value, but this is not a legal requirement.
COMPETENT PARTIES
The individuals who enter into a contract must have the legal capacity to make a
contract. People who do not have the legal capacity to contract are those people
who are under the legal age, insane, or mentally incapacitated by alcohol or drugs at
the time of forming the agreement.
Legal capacity may depend on the courts' interpretation of an individual's ability to
understand the nature of the transaction. In the law, a contract is not enforceable
against an individual who is not able to understand the agreement and the
consequences of the agreement. For example, the law assumes that minors do not
have business experience and, therefore, need protection against their own
immaturity and the possibility that older people may take advantage of them.
Because the parties to a contract must understand the nature of the transaction and
its consequences, a contract is not enforceable against individuals who were under
the influence of alcohol or drugs when they signed the contract. The law and the
courts assume such people to be incompetent. These individuals have a reasonable
time after they attain sobriety to reconsider. Finally, because of the need to
understand, contracts are not enforceable against people who are legally
incompetent due to advanced age, mental incapacity or medical condition.
REALITY OF CONSENT
For a contract to be valid, it must be free of mistakes, misrepresentations, fraud,
undue influence, and duress. The consent of each individual party to the contract
must be real and intentional. Without this consent, the contract is either void or
voidable depending upon the circumstances.
(a)
MISTAKES - Two types of mistake exist in the law. A mistake of
fact occurs when certain information or conditions in the contract are
not true: for example, when the identity of a party to the contract is
not correct, when the description or identity of the subject property is
not correct, or when the true nature of the agreement is not
correct. These mistakes generally do not void a contract but could
make it voidable. A mistake of law occurs when a person has full
knowledge of the facts but reaches a wrong conclusion about the legal
effect of those facts. This type of mistake is not a basis for voiding a
contract.
The important aspect of a mistake of fact relates to which party or
parties make the mistake. If both parties to the contract made a
mistake of fact, there has been a bilateral or mutual mistake, and
the contract is either voidable or void, depending on the
circumstances. If only one party to the contract made a mistake of
fact, there has been a unilateral mistake, and the courts do not
view the situation as grounds for automatically rescinding the
contract. The courts usually consider that unilateral mistakes result
from carelessness or lack of diligence of the mistaken party and
should not affect the rights of the other party. In other words, the
contract involving mistakes of fact is not automatically voidable but
the possibility exists.
(b)
MISREPRESENTATION OR FRAUD - A misrepresentation differs from a
mistake of fact, which is a misunderstanding or misconception that a
person has about a fact. By contrast, a misrepresentation is a failure
to disclose a material fact, or an incorrect or improper statement
about a material fact made by a party to the contract. A
misrepresentation makes a contract voidable by the party who suffers
a loss because of the misrepresentation. However, the contract is
voidable only if the misrepresentation refers to a material fact. In the
law, a material fact is information or evidence that a reasonable
person would consider important when deciding a course of action or
reaching a decision.
A contract is voidable if a misrepresentation of a material fact was
part of the basis for reaching the agreement. The misrepresentation
can be intentional or unintentional. If it is intentional, it is considered
fraud. If the misrepresentation is unintentional, it may be negligent
misrepresentation if the party knew or should have known the truth
about the material fact. In either case, the buyer has legal remedies,
and the victim of the misrepresentation or fraud may rescind the
contract because of the loss or may sue for dollar damages.
A buyer is seldom in a position to discover the seller's
misrepresentations until he or she takes possession of the
property. Some common grounds for misrepresentation in such cases
are the following:
(1)
the physical condition of the improvements;
(2)
the size, frequency, and sources of the income and the volume
of sales;
(3)
the operating expenses, especially maintenance and repairs,
and utility payments;
(4)
the location of the property's boundary lines;
(5)
the exact frontage of the property;
(6)
the age of the improvements on the property;
(7)
the soil's drainage capacity and characteristics; and
(8)
the existence of undisclosed encumbrances such as easements
and liens.
(c)
AVOIDING MISREPRESENTATION - Contract law imposes duties and
responsibilities on both parties who reach agreement in the sales
contract. These duties are sometimes referred to as the seller's
"duty to speak" and the buyer's "duty to seek."
(d)
THE SELLER'S DUTY TO SPEAK - Historically, the laws governing the
formation of contracts followed the concept of caveat emptor (let the
buyer beware). However, the law recognizes three situations in which
a seller has a duty to speak the truth. Failure to make true
statements about a material fact in these instances is
misrepresentation and, possibly, fraud.
First, in the fiduciary relationship between the seller of property and
his or her real estate broker, both parties have the duty to speak the
truth and to make a full disclosure of all the facts to each other.
Second, if one party to the contract knows an important material fact
not known by the other, the courts could rule that the contract is
voidable. This situation can arise in a real estate transaction if the
property being traded has a hidden defect. The defect might be a
physical defect in the improvement that is not visible upon inspection
of the property, or a title or other legal defect, such as a tax lien or
mechanic's lien against the property, or an unrecorded easement. In
these situations, the seller has a duty to inform the buyer of the
defect. If the seller fails to inform the buyer of a known but hidden
defect, the courts will probably view this action as fraud.
The third situation occurs when a person misstates or unintentionally
misrepresents an important material fact. Upon discovering this
misrepresentation, the person must correct the mistake immediately
or at the latest when negotiations resume. If the aggrieved party can
prove the person making the unintentional misrepresentation
subsequently learned of the error and did not correct it, the courts
may allow the aggrieved party to void the contract.
These three situations in which a person has a duty to speak have one
aspect in common -- one party has the wrong impression or wrong
information that certain things are true, whereas the other party is
aware that they are not true and also knows of the
misunderstanding. There is a legal responsibility to disclose the
truth. Most courts would hold that fraud exists if the lie
persists. The potential seller does not have to disclose all of the facts
about the property he or she is selling, only when he or she knows
the buyer is harboring a misunderstanding on some vital matter that
the duty to speak arises. The telling of "half-truths" is another
problem. Courts tend to view the revealing of only part of the truth
the same as telling a lie. If a seller states a fact that is true, the
seller must also state all of the other facts that either qualify or
modify the correct information. These half-truths can result in the
seller's liability to pay damage to the buyer.
(e)
THE BUYER'S DUTY TO SEEK INFORMATION - Both parties to the
contract, including the buyer, have a duty to make use of all readily
available public information and take every opportunity to inspect the
property. Misrepresentations can occur and pass unnoticed even if
the material facts are readily and equally available to both parties to a
contract. In these situations, misrepresentation of a material fact by
the seller may not always allow the buyer to cancel the contract.
One example of this is a zoning ordinance. The seller could knowingly
or unknowingly misrepresent the nature of a land-use restriction that
affects the property. In this situation, a misrepresentation of existing
state or local law does not provide the basis for rescission of the
contract because the law and land use regulations in the zoning
ordinance are a matter of public knowledge, open and available to
buyer.
Another common situation involves the physical inspection of the
property and its neighborhood. Misrepresentations may relate to
matters that the buyer's inspection of the property can reveal. The
buyer may not be entitled to rely on the seller's statements about the
condition of the building or the nature of the neighborhood when the
buyer has the opportunity to make a careful inspection.
(f)
DURESS AND UNDUE INFLUENCE - Undue influence is the unfair
advantage that one person has over another because of a relationship
between the parties. If undue influence exists, the contract is
voidable by the individual who is unfairly or unduly influenced. For
example, if an employer extracts a contract from an employee by
relating it to continued employment, undue influence exists.
Duress is the use of force or the threat of personal injury to make a
contract against the free will of the other party. Contracts entered
under duress are voidable by the party forced into the
agreement. Duress occurs if a neighbor obtains a contract to buy an
adjacent property by telling the owner that he will beat up the owner
if he does not agree to sell. So-called “economic duress,” where one
party takes advantage of the other party’s financial situation (such as
when a seller is about to lose his or her property to foreclosure)
normally will not make a contract voidable by the distressed party.
LEGALITY OF PURPOSE
Contracts must involve legal promises, actions, and objects. If illegal acts or objects
form the basis of a contract, the law considers the contract to be illegal and void,
and consequently unenforceable in courts of law. Unlawful or illegal activities or
objects are those specifically prohibited by law, those contrary to the rules
established under common law, or those contrary to stated public policy. Any
contract that violates a statute or an ordinance is illegal and consequently is a void
agreement. Forged currency and/or financial instruments such as stocks and bonds
offered as consideration in a contract make the contract void. Similarly, a contract
to convert a single family house on residentially zoned land into a retail store would
be void.
NECESSITY OF WRITING
Contracts can be oral or written. Oral agreements, however, are subject to failure of
memory, misinterpretation, misrepresentation, and possibly even fraud. To
overcome these problems, the English Parliament passed the first version of the
Statute of Frauds in 1677. Every state, including Georgia, has its own Statute of
Frauds requiring certain contractual agreements to be in written form. Georgia’s
Statute of Frauds governs contracts to buy, sell or lease real property, or any partial
interest in real property; consequently, these contracts must be in writing.
The Statute of Frauds does not require all terms of the contract to be in writing,
provided there must be some signed, written piece of evidence to give the court a
reason to believe that an agreement exists. The written evidence can be the
contract itself or a memorandum, a written document that outlines the nature of the
agreement and gives a judge reason to believe the two parties wanted to enter into
a legally binding contract. To satisfy the Statute of Frauds, the memorandum of the
contract must contain at least the following pieces of information:
(a)
the names of seller and buyer;
(b)
a sufficient description of the land;
(c)
the contract price;
(d)
the terms of sale, if other than cash; and
(e)
the signatures of the parties to the contract.
Contracts that do not comply with the necessity of writing are not necessarily illegal
or fraudulent or invalid. The necessity-of-writing provision attempts to prevent
misrepresentation or fraud that can easily arise when contracts are oral. Oral
contracts are sufficient if there is no need to go to court to settle some difference
between the buyer and seller. However, for real estate contracts and other contracts
governed by the Statute of Frauds, failure to satisfy the writing requirement means
that the contract is not enforceable in a court of law.
THE END RESULT OF THE CONTRACT -- DISCHARGE, NONPERFORMANCE, OR
BREACH OF CONTRACT
After the buyer and seller negotiate and sign the real estate contract, the rights and
duties created by the contract remain in force until one of three things occurs:
(a)
discharge or performance of the rights and duties created by the
contract;
(b)
one or both parties to the contract are legally excused from
performance of their contractual duties; or
(c)
one party to the contract fails to perform according to the terms and
provisions established in the contract.
DISCHARGE OR PERFORMANCE OF THE CONTRACT
The usual method of discharge for a contract is the complete performance by both
parties of the obligations that each incurred under the contractual agreement. Each
party to the contract must perform the actions or fulfill the promises they made, and
each party expects the other to do the same. In the real estate sales contract, the
buyer promises to pay for the parcel of real property. Two questions related to
payment are "What is payment?" and "What is good evidence that payment has been
made and that the obligation has been discharged?"
(a)
FORM OF PAYMENT - The transfer of money that is legal tender
(currency) is payment. A certified check is as acceptable as cash
because the seller knows the funds are in the bank. However,
payment by means of a personal check is less clear. Here, absolute
discharge of the obligation to make payment in the contract may not
occur until the check clears the bank.
If "seller financing" in the form of a purchase money loan is part of
the financial agreement, the parties must agree that execution of the
purchase-money note and security deed discharges the
contract. Failure to state this agreement could make performance of
the contract a function of when the buyer pays off the loan received
under the purchase-money mortgage.
(b)
NOVATION - Novation involves substitution either of a new party for
one of the original parties to the contract, or of a new obligation for
one of those specified in the agreement between the original
parties. In other words, a party to the contract may find another
person who is willing to assume the duties and obligations of the
contract. This new party must agree to assume all of the
responsibilities and duties of the original party who is seeking to be
freed from the obligations of the contract. In a real estate sales
contract, this person is typically the buyer. Both parties to the
original contract must agree to the substitution.
Another type of novation is the mutually agreeable substitution of a
different obligation for one of the original obligations specified in the
contract. For example, the real estate contract signed by both the
buyer and seller states that the kitchen appliances remain with the
property. The seller now realizes that the appliances match the
decor of his or her new house and seeks the buyer's approval to
substitute $700 for the appliances. If the buyer agrees, the new
obligation of the seller to pay $700 (or reduce the sales price by
$700) supersedes the original obligation to leave the appliances.
(c)
ACCORD & SATISFACTION - The process of accord and satisfaction
also discharges obligations incurred in the contract. An accord is a
major change, not a substitution, in the agreement made between
the two parties to the contract. For example, a buyer promised to get
a new loan for 80% of the sales price and to give 20% in earnest
money and cash at closing. Now the buyer says that the new loan
must be a 90% loan or the seller needs to accept a 10% purchase
money note. The proposed arrangement is different from the one
specified in the contract. The buyer and seller disagree but work to
resolve the situation. They agree to an 85% new loan and a 5%
purchase money mortgage. The term satisfaction denotes that the
new arrangement is acceptable to the buyer and the seller.
The legal doctrine of accord and satisfaction requires that there be a
dispute or uncertainty about the consideration specified in the
contract. The buyer and seller negotiate a compromise agreement to
the contract. Their differences disappear (the accord), and the
mutual obligations are satisfactory (the satisfaction). The two parties
enter into a new contract; and in so doing, they surrender the legal
right to take the dispute or the settlement agreement into court.
The difference between novation and accord and satisfaction is that a
novation involves a substitution within the original contract, whereas
accord and satisfaction results in the formation of a new contract to
replace the original agreement.
LEGAL EXCUSES FOR NONPERFORMANCE
Although the contract binds two individuals to a certain agreement, one of them may
have a legal excuse not to perform the terms of the contract. For example, a valid
contract requires competent parties. A legal incompetent, such as a minor, may
have a legal excuse not to perform. If reality of consent is lacking, the party who did
not give his or her true consent can receive a legal excuse from the contract. Other
legal excuses for nonperformance include the following:
(a)
CONDITION PRECEDENT - Many contracts contain statements that one
of the parties must perform an act or fulfill a promise before the other
party needs to act or fulfill a promise. In other words, performance by
one of the parties depends on a prior action by the other party to the
contract. This is known as a condition precedent. Failure by one
party to perform a condition precedent is a legal excuse for the other
party to be relieved from his or her contractual obligations.
An example of a condition precedent in a real estate sales contract is a
requirement that the seller do some repair and maintenance work
before the closing. Assume that the ceilings in the living and dining
rooms are warped and discolored because of leaks in the roof. The
buyer may require that before closing the seller patch the roof to stop
the leaks and paint both the living and dining rooms. If the seller
having agreed to make the repairs (a condition precedent) fails to do
so, the buyer may have a legal excuse for nonperformance of his or
her obligation in the contract. However, if the condition precedent is
insignificant, its performance may not be required to make the
contract legally binding. In such cases, the party who expected the
condition precedent to be performed may be limited to deducting the
financial damages caused by the other person's nonperformance from
the sales price. In this situation, the buyer would reduce the cash
payment to the seller by the expenses incurred to patch the roof and
repaint the living and dining rooms. If stopping the leaks required
putting a new roof on the building, however, and if the buyer and
seller fully understood a new roof was part of the contract, the seller's
failure to perform the condition precedent could be a legal excuse for
the buyer to escape the contractual obligations.
(b)
WAIVER - Another legal excuse for nonperformance is waiver. A
waiver is an action or statement by one party to the contract that
shows an intention not to enforce the provisions of the contract that
the other party agreed to perform. The person granting the waiver
therefore gives up the opportunity to enforce a legal right and thereby
loses that right. A waiver of one person's right to force the other
person's performance of the contract provides a legal excuse for
nonperformance by the other person.
(c)
PREVENTION, FRUSTRATION AND IMPOSSIBILITY - Contract law
provides other legal excuses for nonperformance of a contract. These
excuses, including such things as prevention, frustration, and
impossibility, are beyond the scope of this text. If these situations
arise, contact an attorney.
BREACH OF CONTRACT
A breach of contract is the failure to perform the acts or promises made in the
contract. Breach of contract is nonperformance of a contract without a legally
acceptable excuse. If one party to the contract does not perform according to the
terms of the contract, the other party may suffer a financial loss. The injured party
has one or more forms of legal recourse in this event. The courts may require that
the contract be fulfilled, or they may provide that the injured party receive
compensation for the injury or damages due to the breach of contract.
The legal actions or remedies that the injured party can undertake are rescission or
cancellation, a lawsuit to obtain financial compensation for the damages suffered,
and a lawsuit to obtain specific performance of the contract.
(a)
RESCISSION - When one party to the contract fails to perform
according to the agreement, the other party has the right to return to
the same legal and financial position he or she held prior to the
formation of the contract. In other words, the non-breaching party will
be placed in the same financial position he or she was in before signing
the contract. This remedy is rescission. In this situation, both parties
return any consideration they received. A rescission may be voluntary,
by agreement between the parties, or else the injured party may
request a court order.
Imagine that after signing a real estate sales contract, the buyer and
seller have a change of heart. Neither party wants to honor the
contract. This situation is a voluntary rescission between the buyer and
the seller. The seller compensates the broker, who returns the earnest
money to the buyer, who accepts it and goes about the task of finding
another house. Cancellation is the same as rescission with the
exception that the injured party retains the right to sue for damages.
(b)
DAMAGES - A second remedy available to the injured party in a breach
of contract is a lawsuit to recover a financial loss caused by the breach
of contract. The court tries to place the injured party in approximately
the same financial position he or she was in under the terms of the
contract. The money awarded to the injured party is compensatory
damages with the amount of the award determined by the extent of
the financial injury.
In certain situations, the parties to the contract may foresee the
possibility that a breach of contract may occur. Consequently, they
may agree on an amount of money to be paid to the injured party in
case the default does take place. In this situation, the predetermined
sum of money is liquidated damages. The earnest money deposit
frequently is treated as liquidated damages in case of a breach of the
sales contract by the buyer, even though the seller may also retain the
right to sue for additional damages.
(c)
SPECIFIC PERFORMANCE - Another remedy for breach of contract is
specific performance. In a sales contract, the courts may grant the
injured party (typically the buyer) a court order requiring that the
defaulting party (typically the seller) sell the property according to the
specific terms included in the agreement. This remedy usually involves
properties that are unique such as works of art and real estate. If the
judge requires evidence of the property's uniqueness, certain attributes
or characteristics of the property, or the relationship between the
owner and the use of the property, can be used to show it is unique. If
the buyer, as the injured party, can show that the property is unique,
he or she can request specific performance of the contract instead of
money damages. If the judge rules in favor of the buyer, the seller
must complete the transaction negotiated in the contract.