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Learning Objectives
Upon completion of this course, participants will be able to:
Compare the differences between an oral and a written contract.
Explain which types of documents must be in writing according to the statute of
frauds.
Relate mutual assent to the consent of both parties to a contract being free and
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mutually communicated by each
other.
Break down the five key elements in creating a valid enforceable contract.
Summarize how a breach of contract may be remedied.
Outline the impact of interpretation of a contract on its validity
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Learning Objectives
Upon completion of this course, participants will be able to:
Identify the terms and conditions that must be contained in a contract as
well as the variations from state to state
Relate the legal implications of drawing up a contract
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Summarize provisions that may
be found in a real estate contract
Compile a list of the most commonly used addendum
Compare the different forms of notification
List the duties of a licensee
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Section 1
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Contract
As a real estate practitioner, getting contracts signed is one of the most important
things you do. You can spend all kinds of time, get along great with your clients, show
just the right property at the right time, but it doesn’t mean a thing until you get their
names on the dotted line. Even then, you had better make sure it is done in the right
way and is enforceable.
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Contract
So what exactly is a contract?
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Contract
According to Nolo’s Legal
Dictionary it is
“A legally binding
agreement involving two or
more people or businesses
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(called parties) that sets
forth what the parties will
or will not do.”
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Contract
According to Nolo’s Legal
Dictionary it is
Duhaime’s Law
Dictionary has a similar
definition:
“A legally binding
“An agreement between
agreement involving two or
persons which obliges
more people or businesses
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each party to do or not
(called parties) that sets
to do a certain thing.”
forth what the parties will
or will not do.”
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Contract
The Law.com Law dictionary
chimes in with this
definition:
“An agreement with specific
terms between two or more
persons or entities in which
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there is a promise to do
something.”
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Contract
One definition uses the
word “promise.” That
goes beyond just saying “I
promise!” In the Law.com
Dictionary, promise is
“An agreement with specific
further defined as “a firm
terms between two or more
agreement to perform an
persons or entities in which
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act, refrain from acting or
there is a promise to do
make a payment or
something.”
delivery.” As in a
promissory note, it is a
written promise to repay
something
The Law.com Law dictionary
chimes in with this
definition:
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Oral vs. Written
 Do you think a contract needs to be in writing? What about the good old
handshake? Miguel de Cervantes Saavedra (1547–1616) said, “An honest man’s
word is as good as his bond.” Well, that's all well and good, until the other person
decides to forget about the agreement.
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Oral vs. Written
 Do you think a contract needs to be in writing? What about the good old
handshake? Miguel de Cervantes Saavedra (1547–1616) said, “An honest man’s
word is as good as his bond.” Well, that's all well and good, until the other person
decides to forget about the agreement.
 There are some instances where an oral contract may be just as valid as a written
agreement, but they are few and far between. The main problem with oral
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contracts is proving their existence
and clarifying their terms. Samuel Goldwyn
(1882-1974) said, “a verbal contract isn't worth the paper it is written on.” We tend
to agree.
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Oral vs. Written
 Do you think a contract needs to be in writing? What about the good old
handshake? Miguel de Cervantes Saavedra (1547–1616) said, “An honest man’s
word is as good as his bond.” Well, that's all well and good, until the other person
decides to forget about the agreement.
 There are some instances where an oral contract may be just as valid as a written
agreement, but they are few and far between. The main problem with oral
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contracts is proving their existence
and clarifying their terms. Samuel Goldwyn
(1882-1974) said, “a verbal contract isn't worth the paper it is written on.” We tend
to agree.
 An oral contract is sometimes provable by action taken by one or both parties. If
you call an electrician to fix a short circuit and it is accomplished, you are obligated
to pay for the services even though you have not signed a written contract. Same
thing goes for ordering food or drinks at restaurants. By ordering food or drinks,
you are agreeing to pay for them.
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Oral vs. Written
 An oral contract works just fine as long as both parties agree. However, if a dispute
arises about the terms of payment, the quality of service or the timeline of the
service provided, the details of an oral contract are hard to prove.
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Oral vs. Written
 An oral contract works just fine as long as both parties agree. However, if a dispute
arises about the terms of payment, the quality of service or the timeline of the
service provided, the details of an oral contract are hard to prove.
 Another problem with oral contracts is that the statute of limitations for suing for
breach of an oral contract is shorter than for written contracts. For example, in
California it is two years for anwww.Mckissock.com
oral contract versus four years for a written contract.
In Connecticut it is three years versus six years, and Georgia has a big spread of
four years for oral contracts versus twenty years for written contracts.
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Oral vs. Written
 An oral contract works just fine as long as both parties agree. However, if a dispute
arises about the terms of payment, the quality of service or the timeline of the
service provided, the details of an oral contract are hard to prove.
 Another problem with oral contracts is that the statute of limitations for suing for
breach of an oral contract is shorter than for written contracts. For example, in
California it is two years for anwww.Mckissock.com
oral contract versus four years for a written contract.
In Connecticut it is three years versus six years, and Georgia has a big spread of
four years for oral contracts versus twenty years for written contracts.
 Most contracts that can be completed within one year can be written or oral. The
major exceptions are contracts involving the ownership of real estate and
commercial contracts for goods worth in excess of $500. These always need to be
in writing to be enforceable.
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Poll Question 1.
Law.com Law Dictionary defines a(n)
________ as an agreement with
specific terms between two or more
persons or entities, in which there is a
promise to do something.
A
Disclosure statement
B
Agreement
C
Contract
D
Deal
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Poll Question 1.
Law.com Law Dictionary defines a(n)
________ as an agreement with
specific terms between two or more
persons or entities, in which there is a
promise to do something.
A
Disclosure statement
B
Agreement
C
Contract
D
Deal
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Uniform Commercial Code
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Uniform Commercial Code
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Statute of Frauds
A “statute of frauds” requires that certain types of contracts be in writing and be
signed (acknowledged) by all of the parties that will be bound to the contract.
Contracts involving the sale or transfer of real property, in most states, fall under the
statute of frauds law, and therefore must be in writing. Contracts not in writing are
not enforceable.
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Statute of Frauds
Why This is Important for Real Estate Contracts?
 Historically, especially when a real estate transaction was conducted with a
handshake, the opportunities to commit acts of fraud were abundant.
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Statute of Frauds
Why This is Important for Real Estate Contracts?
 Historically, especially when a real estate transaction was conducted with a
handshake, the opportunities to commit acts of fraud were abundant.
 There are some basic reasons why all real estate contracts should fall under this
statute.
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Statute of Frauds
Why This is Important for Real Estate Contracts?
 Historically, especially when a real estate transaction was conducted with a
handshake, the opportunities to commit acts of fraud were abundant.
 There are some basic reasons why all real estate contracts should fall under this
statute.
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 The purchase or transfer of real property often involves many terms and conditions
as well as pricing. Because of this, the need to have these agreements in writing is
great.
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Statute of Frauds
Why This is Important for Real Estate Contracts?
 Historically, especially when a real estate transaction was conducted with a
handshake, the opportunities to commit acts of fraud were abundant.
 There are some basic reasons why all real estate contracts should fall under this
statute.
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 The purchase or transfer of real property often involves many terms and conditions
as well as pricing. Because of this, the need to have these agreements in writing is
great.
 There may be many contingencies in the contract which have deadlines for
completion. If these deadlines are not met, there can be serious consequences for
either party. Again, having these agreements in writing provides clarification for all
of the parties.
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Feedback Question 2.
According to the Uniform Commercial
Code, which of the following would
most likely NOT be considered
“goods”?
A
A tv valued at $300
B
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A refrigerator valued at $900
C
Unborn cattle
D
300 acres of growing corn
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Feedback Question 2.
According to the Uniform Commercial
Code, which of the following would
most likely NOT be considered
“goods”?
A
A tv valued at $300
B
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A refrigerator valued at $900
C
Unborn cattle
D
300 acres of growing corn
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Mutual Assent
We said a contract is an agreement. This should be a mutual assent to the same
terms. The consent of the parties to a contract should be free, mutual and
communicated by each to the other.
Usually this procedure of mutual assent is established by the process of offer and
acceptance.
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Mutual Assent
In the Restatement Second, offer is defined as “a manifestation of
willingness to enter into a bargain, which creates in the offeree the
power of acceptance.” The Law.com Dictionary defines offer as “a
specific proposal to enter into an agreement with another.”
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Offer
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Mutual Assent
In the Restatement Second, offer is defined as “a manifestation of
willingness to enter into a bargain, which creates in the offeree the
power of acceptance.” The Law.com Dictionary defines offer as “a
specific proposal to enter into an agreement with another.”
When you ask someone to do something, you are making an offer. The
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middle step is when
the other party accepts the deal. The final step is
performance; both sides have to live up to their side of the bargain.
Offer
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Mutual Assent
In the Restatement Second, offer is defined as “a manifestation of
willingness to enter into a bargain, which creates in the offeree the
power of acceptance.” The Law.com Dictionary defines offer as “a
specific proposal to enter into an agreement with another.”
When you ask someone to do something, you are making an offer. The
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middle step is when
the other party accepts the deal. The final step is
performance; both sides have to live up to their side of the bargain.
Offer
An offer may be revoked at any time prior to the communication of
acceptance of the offer. An offer may also be revoked by the maker of
the offer by giving notice of revocation to the person to whom the
offer was made. It could also be revoked by the lapse of time set forth
in the offer. Perhaps it is stipulated that the offer is only good for 48
hours.
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Mutual Assent
Offers remain open until they are:
 Accepted
 Rejected
 Retracted prior to acceptance
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 Expired by their own terms
Many times an offer is rejected, but a counter-offer is made by the
other party. This creates a new or modified set of terms that are given
in response to the original offer. Even a counter-offer can be
withdrawn prior to the acceptance by the other side.
Offer
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Mutual Assent
Acceptance is defined in the Restatement Second as
“a manifestation of willingness to be bound by the
terms of an offer made in a manner invited or
required by the offer.” All of the terms of the offer
must be accepted without change or condition.
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Acceptance
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Mutual Assent
Acceptance is defined in the Restatement Second as
“a manifestation of willingness to be bound by the
terms of an offer made in a manner invited or
required by the offer.” All of the terms of the offer
must be accepted without change or condition.
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Acceptance may occur as an express act or an implied
act. An express act is one in which the contract and its
terms are clear cut and stated in words or, more
often, in writing. An implied act is one in which the
existence of a contract and its terms are implied or
inferred based on the actions of a party.
Acceptance
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Feedback Question 3.
The consent of the parties to a
contract should be:
A
Free
B
Mutual
C
Communicated by each towww.Mckissock.com
the
other
D
All of the answers provided
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Feedback Question 3.
The consent of the parties to a
contract should be:
A
Free
B
Mutual
C
Communicated by each towww.Mckissock.com
the
other
D
All of the answers provided
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Quiz
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Types of Contracts
1
Express Contract
2
Implied Contract
3
Bilateral Contract
4
Unilateral Contract
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In an express contract, the existence of the
contract and its terms are stated in words or the
writings of the parties. An express contract may be
either oral or written. Examples of express
contracts include listing agreements, purchase
offers, mortgages, leases, and installment
contracts. Obviously, it is preferable to have them
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in writing, and most are.
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Types of Contracts
1
Express Contract
2
Implied Contract
3
Bilateral Contract
4
Unilateral Contract
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In an implied contract, the existence of the
contract and its terms are inferred or implied from
the conduct of the parties. The contract is created
by the actions of the parties who perform the
terms of the contract. If you sit down in a
restaurant and order a meal, you imply a promise
to pay for the food. The restaurant serves it to you
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on the basis of that promise.
The distinction between an express and implied
contract is only in the manner in which agreement
is shown. Both are based on the express or
apparent intent of the parties.
Contracts may also be categorized as bilateral or
unilateral.
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Types of Contracts
1
Express Contract
2
Implied Contract
3
Bilateral Contract
4
Unilateral Contract
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A bilateral contract is one in which both parties
have made promises to each other. One promise is
in exchange for another. A real estate sales
contract is a bilateral agreement; A agrees to sell
and B agrees to buy – under certain specified
terms.
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Types of Contracts
1
Express Contract
2
Implied Contract
3
Bilateral Contract
4
Unilateral Contract
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A unilateral contract is one in which one party
makes a promise in order to induce another party
to do something. The second party is not legally
compelled to comply. However, if the second party
accepts and performs, then the first party must
keep the promise. A real estate option is a good
example of a unilateral agreement. X agrees to sell
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his property to Z for $200,000, anytime within the
next 6 months. Z is under no obligation to
perform, but if he or she exercises the option, X
must then sell.
The distinction is more of an academic one. Most
commercial contracts of any substance are
bilateral.
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Poll Question 4.
A contract in which one party makes a
promise in order to induce another
party to do something is a __________
contract.
A
Bilateral
B
Unilateral
C
Executed
D
None of the answers provided
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Poll Question 4.
A contract in which one party makes a
promise in order to induce another
party to do something is a __________
contract.
A
Bilateral
B
Unilateral
C
Executed
D
None of the answers provided
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Types of Contracts
5
Executed Contract
6
Executory Contract
7
Valid Contract
8
Void Contract
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An executed contract is one that has been fully
performed. The promises have been fulfilled
according to the terms of the contract, and there is
nothing left to be done. An example would be a
real offer to purchase after all contingencies have
been met and the closing has occurred. File it
away!
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Types of Contracts
5
Executed Contract
6
Executory Contract
7
Valid Contract
8
Void Contract
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An executory contract is one that has not been
fully performed or completed; something is still
left to be done. A good example of this is a listing
contract. A real estate agent tries to sell the
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property during the term of the contract. A
mortgage would also be considered an executory
contract until it is finally paid off or satisfied.
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Types of Contracts
5
Executed Contract
6
Executory Contract
7
Valid Contract
8
Void Contract
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A valid contract is one that is binding and
enforceable on all parties. It contains all the valid
elements of a contract and is still in force. That is
akin to a real estate deal that has cleared all the
contingencies but has not closed yet.
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Types of Contracts
5
Executed Contract
6
Executory Contract
7
Valid Contract
8
Void Contract
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A void contract is one that has no legal force or
effect even though it contains the elements of a
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valid contract. It would be “null and void” because
it contains some illegal element that could not be
enforced. For example, it could contain a clause
that requires racial discrimination. Or, it could be
for an illegal purpose such as to commit a crime or
some act in violation of a legal use. It could also
stem from an act of God that is beyond the control
of the parties, such as a fire or flood that destroys
a property.
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Types of Contracts
9
10
A voidable contract is one that results from
the failure of the parties to meet some legal
Voidable Contract
requirement. For example, if a minor signs a
contract to purchase real estate, it usually is
voidable within a reasonable time after the
minor reaches legal age. However, the parties
Unenforceable Contract
are not required to void the contract. Most
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courts consider a voidable contract to become
a valid contract if the eligible party does not
act to disaffirm the agreement within a
reasonable time.
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Types of Contracts
9
10
An unenforceable contact is one that appears
to be valid but would not be enforceable in
Voidable Contract
court. For example, if one party tries to
enforce an otherwise valid contract after the
statute of limitations has expired, the contract
would be considered unenforceable. Other
Unenforceable Contract
examples would be contracts that are vague
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and poorly worded or verbal contracts where
written ones are required, as in real estate.
However, even though they may not be
enforceable in court, unenforceable contracts
may still be considered valid if both parties still
wish to complete performance.
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Feedback Question 5.
A contract that has been fully
performed is called a(n):
A
Unilateral Contract
B
Bilateral Contract
C
Executed Contract
D
Functional Contract
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Feedback Question 5.
A contract that has been fully
performed is called a(n):
A
Unilateral Contract
B
Bilateral Contract
C
Executed Contract
D
Functional Contract
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Assignment and Novation
Assignment - An assignment of a contract happens when the interests of the original
party (the assignor) are transferred to another party (the assignee). In general, an
assignment will generally be permitted unless there is an express prohibition against
assignment in the contract. The new party (the assignee) assumes primary
responsibility for the performance of the contract, and the original party (the assignor)
incurs secondary responsibility for the contract.
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Assignment and Novation
Novation – In the first instance, novation is the substitution of a new party into a
contract. The original party is relieved of any obligation for the contract. Novation can
also be the substitution of original contractual terms for new contractual terms if both
parties agree to the new terms.
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Section 2
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Elements of Contracts
Competent
Parties
The Law.com Law Dictionary defines competent as “in general, able to act in the
circumstances, including the ability to perform a job or occupation, or to reason or
make decisions.” The ‘Lectric Law Dictionary defines competency as “the mental
ability to understand the general effect of a transaction or document.”
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For a contract to be valid, the parties have to have the capacity to enter into a
contract. Minors, for example, do not have the capacity to contract. The legal age, or
age of majority, varies in different states. Check your own state to determine the legal
age.
The general rule is that the contract of a minor is voidable at the minor’s option. The
minor can hold an adult to a contract, but the adult cannot legally hold the minor to a
contract.
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Elements of Contracts
Mutual
Agreement
For a contract to become binding, the parties must enter into it voluntarily and with a
full understanding of the terms. There must be mutual assent and a “meeting of the
minds.”
Lack of mutual agreement could be evidenced by such things as:
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 Fraud
 Misrepresentation
 Mutual mistake
 Undue influence
 Duress
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Elements of Contracts
Consideration
An agreement must be based on good and valuable consideration; something of
value. This could be:




Money
Property
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A promise of performance; promise
to pay
Forbearance; promise to refrain from doing something
The Law.com Law Dictionary defines consideration this way “1) payment or money 2)
a vital element in the law of contracts, consideration is a benefit which must be
bargained for between the parties, and is the essential reason for a party entering
into a contract. Consideration must be of value (at least to the parties), and is
exchanged for the performance or promise of performance by the other party (such
performance itself is consideration). The Law.com Law Dictionary
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Elements of Contracts
Lawful
Objective
The object to be achieved must be lawful and not against any public policy.
Any contract to be used forwww.Mckissock.com
an illegal purpose becomes void. An example
would be a contract in restraint of trade.
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Elements of Contracts
In writing and
signed
Obviously, there is a potential for misunderstanding in oral contracts. All states have
adopted variations of the Statute of Frauds. Contracts for the sale of real estate and
for leases of more than one year need to be in writing to be enforceable.
The parol evidence rule states that
written contracts take precedence over oral
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agreements.
The Law.com Legal Dictionary defines the parol evidence rule this way: “if there is
evidence in writing (such as a signed contract) the terms of the contract cannot be
altered by evidence of oral (parol) agreements purporting to change, explain or
contradict the written document.”
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Feedback Question 6.
A competent party is one that:
A
Is age 16 or older
B
Is able to understand the terms
of the contract act in the
circumstances
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Has a witness present during
the signing
C
D
None of the answers shown
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Feedback Question 6.
A competent party is one that:
A
Is age 16 or older
B
Is able to understand the terms
of the contract act in the
circumstances
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Has a witness present during
the signing
C
D
None of the answers shown
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Discharge of Contracts
Contracts can be terminated or discharged by:
 Agreement of the parties
 Performance of the contract
Contract
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 Operation of law
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Discharge of Contracts
Agreement of the Parties
Contracts are created by the actions of parties and can be dissolved in like manner.
Generally, this is called a release of contract.
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Discharge of Contracts
Agreement of the Parties
Contracts are created by the actions of parties and can be dissolved in like manner.
Generally, this is called a release of contract.
Release is defined as:
 “v. to give up a right as releasing
one from his/her obligation to perform under a
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contract, or to relinquish a right to an interest in real property.
 v. to give freedom, as letting out of prison.
 n. the writing that grants a release.”
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Discharge of Contracts
Agreement of the Parties
Contracts are created by the actions of parties and can be dissolved in like manner.
Generally, this is called a release of contract.
Release is defined as:
 “v. to give up a right as releasing
one from his/her obligation to perform under a
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contract, or to relinquish a right to an interest in real property.
 v. to give freedom, as letting out of prison.
 n. the writing that grants a release.”
Another option is an assignment or novation of the contract. One party may wish to
withdraw without actually ending the agreement.
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Discharge of Contracts
Performance of Contract
The preferred and most common method of terminating contracts is full performance
of all the terms. The contract is then said to be executed.
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Discharge of Contracts
Performance of Contract
The preferred and most common method of terminating contracts is full performance
of all the terms. The contract is then said to be executed.
Execute is defined as:
 “v. to finish, complete or perform
as required, as in fulfilling one's obligations under
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a contract or a court order.
 To sign and otherwise complete a document, such as acknowledging the signature if
required to make the document valid.”
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Discharge of Contracts
Performance of Contract
The preferred and most common method of terminating contracts is full performance
of all the terms. The contract is then said to be executed.
Execute is defined as:
 “v. to finish, complete or perform
as required, as in fulfilling one's obligations under
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a contract or a court order.
 To sign and otherwise complete a document, such as acknowledging the signature if
required to make the document valid.”
A contract may call for a specific time by which agreements must be performed. There
may be a “time is of the essence” clause. A time is of the essence clause is defined as
“n. a phrase often used in contracts which in effect says: the specified time and dates
in this agreement are vital and thus mandatory, and ‘we mean it.’ Therefore any delayreasonable or not, slight or not-will be grounds for canceling the agreement.”
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Discharge of Contracts
Impossibility of Performance
Generally speaking, even if a party is unable to perform the obligations of a contract,
they are still liable. The only way to prevent this is to insert in the contract provisions
for relief in the event of impossibility.
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Discharge of Contracts
Impossibility of Performance
Generally speaking, even if a party is unable to perform the obligations of a contract,
they are still liable. The only way to prevent this is to insert in the contract provisions
for relief in the event of impossibility.
An example of impossibility would
be if a law changed after the contract was arranged
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but before the full performance of the contract. Suppose a contract was signed to drain
lowland areas and since then it became declared as a protected wetland area. It would
now be an illegal act, and the contract would be void.
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Discharge of Contracts
Impossibility of Performance
Generally speaking, even if a party is unable to perform the obligations of a contract,
they are still liable. The only way to prevent this is to insert in the contract provisions
for relief in the event of impossibility.
An example of impossibility would
be if a law changed after the contract was arranged
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but before the full performance of the contract. Suppose a contract was signed to drain
lowland areas and since then it became declared as a protected wetland area. It would
now be an illegal act, and the contract would be void.
In contracts in which the performance depends on the continued existence of a given
person or thing, an implied condition is that the perishing of the person or thing shall
excuse performance. [Taylor v. Caldwell 122 Eng. Rep. 309 (1862).] Therefore, if a party
dies or a property is destroyed this could be considered impossibility to perform.
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Discharge of Contracts
Operation of Law
The application of law may change the rights and liabilities of the parties, without their
consent. Contracts can be terminated by operation of law under:
 Bankruptcy
 Statute of limitations
 Alteration of contract
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A filing of a petition for bankruptcy under federal law terminates any contracts in
existence as of that date.
If a party to a contract fails to bring action against a defaulting party within a specific
time frame under the Statute of Limitations, the right of remedy is lost. Check your
own particular state for the time periods under the Statute.
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Poll Question 7.
If a party to a contract is under the
influence of alcohol or drugs during
the signing of the agreement, a case
could be made to make the contract
voidable due to:
A
Undue influence or duress
B
Mutual mistake
C
Fraud
D
Misrepresentation
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Poll Question 7.
If a party to a contract is under the
influence of alcohol or drugs during
the signing of the agreement, a case
could be made to make the contract
voidable due to:
A
Undue influence or duress
B
Mutual mistake
C
Fraud
D
Misrepresentation
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Interpretation
Many occasions arise when there are different interpretations of terms in the contract.
Communication is a difficult skill, even in a one on one situation. One party says
something and the other party may hear, or choose to hear, something different.
Sometimes a meaning or spelling is misunderstood. At least in verbal communication
perhaps a meaning can be clarified through body language, or there is an opportunity
to question a meaning.
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Interpretation
Many occasions arise when there are different interpretations of terms in the contract.
Communication is a difficult skill, even in a one on one situation. One party says
something and the other party may hear, or choose to hear, something different.
Sometimes a meaning or spelling is misunderstood. At least in verbal communication
perhaps a meaning can be clarified through body language, or there is an opportunity
to question a meaning.
In written communication, the only
evidence is the written word. Certain words have
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different meanings to different people. Legal terms may be clear to lawyers and judges
but may lead to misunderstandings among lay people.
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Breach of Contract
Breach of contract is defined as “n. failing to perform any term of a contract, written
or oral, without a legitimate legal excuse. This may include not completing a job, not
paying in full or on time, failure to deliver all the goods, substituting inferior or
significantly different goods, not providing a bond when required, being late without
excuse, or any act which shows the party will not complete the work ("anticipatory
breach").
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Breach of contract is one of the most
common causes of law suits for damages
and/or court-ordered ‘specific performance’ of the contract.”
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Breach of Contract
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Remedies
Rescission
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Breach of Contract
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Remedies
Reformation
Rescission
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Breach of Contract
Injunction
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Remedies
Reformation
Rescission
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Breach of Contract
Specific
Performance
Injunction
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Remedies
Reformation
Rescission
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Feedback Question 8.
Rescission is defined as:
A
The cancellation of a contract
by a third party
B
The cancellation of a contract
due to a “time is of the
essence” clause
C
D
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The cancellation of a contract
by one of the parties
The cancellation of a contract
by mutual agreement of the
parties
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Feedback Question 8.
Rescission is defined as:
A
The cancellation of a contract
by a third party
B
The cancellation of a contract
due to a “time is of the
essence” clause
C
D
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The cancellation of a contract
by one of the parties
The cancellation of a contract
by mutual agreement of the
parties
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Breach of Contract
Compensatory
Damages
Specific
Performance
Injunction
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Remedies
Reformation
Rescission
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Breach of Contract
Compensatory
Damages
Consequential
Damages
Specific
Performance
Injunction
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Remedies
Reformation
Rescission
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Breach of Contract
Compensatory
Damages
Consequential
Damages
Specific
Performance
Injunction
Attorney Fees
and Costs
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Remedies
Reformation
Rescission
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Breach of Contract
Compensatory
Damages
Consequential
Damages
Specific
Performance
Injunction
Attorney Fees
and Costs
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Remedies
Liquidated
Damages
Reformation
Rescission
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Breach of Contract
Compensatory
Damages
Consequential
Damages
Specific
Performance
Injunction
Attorney Fees
and Costs
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Remedies
Liquidated
Damages
Reformation
Punitive
Damages
Rescission
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Feedback Question 9.
Reformation is defined as:
A
The correction or change of an
existing document by court
order upon petition by one of
the parties to the document
B
The development of a new
document by court order upon
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petition by one of the parties
to the document
C
The nullification of the existing
document by court order upon
petition by one of the parties
to the document
D
None of the answers provided
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Feedback Question 9.
Reformation is defined as:
A
The correction or change of an
existing document by court
order upon petition by one of
the parties to the document
B
The development of a new
document by court order upon
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petition by one of the parties
to the document
C
The nullification of the existing
document by court order upon
petition by one of the parties
to the document
D
None of the answers provided
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Real Estate Contract Breach
All of these remedies for breach of contract apply to any kind of contract. Let’s
investigate one more definition first.
Earnest money is defined in the Mirriam Webster Dictionary of Law as “something of
value given by a buyer to a seller to bind a bargain.”
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Real Estate Contract Breach
Now that we understand the terminology, let’s look at specific applications to real
estate contracts.
If a seller defaults, a buyer may
 Rescind the contract and recover the earnest money deposit
 File a suit calling for specific performance, to force the seller to sell the property; or
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 Sue the seller for compensatory
damages
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Real Estate Contract Breach
Now that we understand the terminology, let’s look at specific applications to real
estate contracts.
If a seller defaults, a buyer may
 Rescind the contract and recover the earnest money deposit
 File a suit calling for specific performance, to force the seller to sell the property; or
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 Sue the seller for compensatory
damages
If a buyer defaults, a seller may
 Declare the contract forfeited. The right to forfeit is usually provided in the terms of
the contract, and the seller generally is entitled to retain the earnest money and any
payments received from the buyer.
 Rescind the contract
 Sue for specific performance (this may require the seller to offer a valid deed to
show readiness to perform; or
 Sue for compensatory damage
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Importance of Communication with All Parties in a
Transaction
In a typical transaction, there may be many professionals involved. Let’s take a look at
some of the most common:
 Seller and his or her broker
 Buyer and his or her broker
 The closing company (escrow)www.Mckissock.com
 The lender
 The appraiser
 The title insurance company
 A structural or pest inspector
 The management company of a homeowners’ association
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Importance of Communication with All Parties in a
Transaction
 As a real estate professional, your role is to play “ring leader” to all of the
professionals involved and ensure that there is clear communication among all. This
communication may be in the form of phone calls, facsimiles, e-mails, mail, or in
person.
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1-800-328-2008
Importance of Communication with All Parties in a
Transaction
 As a real estate professional, your role is to play “ring leader” to all of the
professionals involved and ensure that there is clear communication among all. This
communication may be in the form of phone calls, facsimiles, e-mails, mail, or in
person.
 There are usually many terms www.Mckissock.com
and conditions in a contract, and many of them have
very specific timelines in which they must be accomplished. Because of the many
terms, events, and the number of professionals that are involved, clear
communication is essential.
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Importance of Communication with All Parties in a
Transaction
 As a real estate professional, your role is to play “ring leader” to all of the
professionals involved and ensure that there is clear communication among all. This
communication may be in the form of phone calls, facsimiles, e-mails, mail, or in
person.
 There are usually many terms www.Mckissock.com
and conditions in a contract, and many of them have
very specific timelines in which they must be accomplished. Because of the many
terms, events, and the number of professionals that are involved, clear
communication is essential.
 Very often, certain events must happen in a sequential manner, so that one event
must happen before another can take place. This is where communication is of key
importance. Oftentimes, a party must be notified that a prior event has taken place
so that they can then perform their role in the transaction.
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Importance of Communication with All Parties in a
Transaction
Let’s take a look at a few examples:
Example #1
The lender, Jane, feels that it is wise to hold off on ordering the appraisal until after the
buyer has performed a structural inspection and a pest inspection (even though there
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is a substantial lead time for ordering
the appraisal). Her reasoning is that, if the
property fails the structural inspection and the buyers choose not to purchase, they
will not have to pay for an appraisal. In this situation, it would be crucial for the buyer’s
broker to inform the lender, in a very timely manner, that the structural inspection was
completed, and there were no issues so that the lender could order an appraisal.
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Importance of Communication with All Parties in a
Transaction
Let’s take a look at a few examples:
Example #2
A wind storm causes a tree to fall on a property that is under contract and in escrow.
The tree causes major damage to the house, the detached garage, the roof, the fence,
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and the cement retaining wall. The
sellers are insured against the damage. The fallen
tree damage requires workmanship from the following persons: a carpenter, an
electrician, a drywall contractor, and a retaining wall specialist. Because of the
coordination with all of the different contractors, the process will take a lot of time and
closing of the transaction will be delayed. The sellers tell their broker about the
accident. Their broker, the listing broker, fails to inform the buyer’s broker of this
incident. In this circumstance, it was crucial for the listing broker to communicate the
status of the repairs with the buyer’s broker in a timely manner.
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Feedback Question 10.
If a seller breaches contract, then the
buyer can:
A
Sue the seller for
compensatory damages
B
Sue the seller for punitive
damages
C
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Declare the contract forfeited
D
None of the answers shown
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Feedback Question 10.
If a seller breaches contract, then the
buyer can:
A
Sue the seller for
compensatory damages
B
Sue the seller for punitive
damages
C
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Declare the contract forfeited
D
None of the answers shown
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“Common Pitfalls” That May be Encountered by
Licensees
Mistakes do happen. Let’s explore some of the more
common mistakes made by real estate licensees, and
then discuss resources that are available to help you
avoid these mistakes.
 Unfamiliarity with forms
 Not establishing a system
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 Handling of earnest money
 Paperwork or contracts which either are not filled out
correctly or cause a conflict within the contractual
agreement
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“Common Pitfalls” That May be Encountered by
Licensees
Unfamiliarity with Forms
Forms are one of the most important aspects of real
estate. These forms, when filled out and signed by both
the buyer(s) and seller(s), represent a legally binding
contract between the parties. The statute of frauds states
that all real estate contracts, in most
states, must be in
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writing. Should a dispute arise between the parties, a
court of law will place more weight on the written
contract than on parol (oral) evidence.
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“Common Pitfalls” That May be Encountered by
Licensees
Unfamiliarity with Forms
Forms are one of the most important aspects of real
estate. These forms, when filled out and signed by both
the buyer(s) and seller(s), represent a legally binding
contract between the parties. The statute of frauds states
that all real estate contracts, in most
states, must be in
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writing. Should a dispute arise between the parties, a
court of law will place more weight on the written
contract than on parol (oral) evidence.
Use only standard forms in the exercise of your duties.
Such forms must be reviewed and approved by real
estate attorneys. Use extreme caution in adding anything
to these standard forms.
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“Common Pitfalls” That May be Encountered by
Licensees
Resources that are Available if You are Unfamiliar with the Forms:
 Your broker or manager can be an important resource for assistance with filling out
forms. Some brokerages offer in-house training for their licensees.
www.Mckissock.com
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“Common Pitfalls” That May be Encountered by
Licensees
Resources that are Available if You are Unfamiliar with the Forms:
 Your broker or manager can be an important resource for assistance with filling out
forms. Some brokerages offer in-house training for their licensees.
 Also, some multiple listing associations offer courses for filling out forms, for
changes to existing forms, andwww.Mckissock.com
for new forms.
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“Common Pitfalls” That May be Encountered by
Licensees
Resources that are Available if You are Unfamiliar with the Forms:
 Your broker or manager can be an important resource for assistance with filling out
forms. Some brokerages offer in-house training for their licensees.
 Also, some multiple listing associations offer courses for filling out forms, for
changes to existing forms, andwww.Mckissock.com
for new forms.
 Some real estate schools also offer courses, both on-line and live lecture, on filling
out forms.
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“Common Pitfalls” That May be Encountered by
Licensees
Resources that are Available if You are Unfamiliar with the Forms:
 Your broker or manager can be an important resource for assistance with filling out
forms. Some brokerages offer in-house training for their licensees.
 Also, some multiple listing associations offer courses for filling out forms, for
changes to existing forms, andwww.Mckissock.com
for new forms.
 Some real estate schools also offer courses, both on-line and live lecture, on filling
out forms.
 One of the best ways to familiarize yourself with forms is to simply practice filling
out the common real estate forms before you have a real buyer or seller. Your
clients will depend on you, as their real estate professional, to not only fill out the
forms correctly but have the ability to explain all clauses in these forms should they
have questions before signing.
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Poll Question 11.
In a real estate transaction, if the
buyer defaults, the seller may do
which of the following:
A
Recover the earnest money
deposit
B
Declare the contract forfeited
C
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Sue for punitive damages
D
All of the answers shown
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Poll Question 11.
In a real estate transaction, if the
buyer defaults, the seller may do
which of the following:
A
Recover the earnest money
deposit
B
Declare the contract forfeited
C
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Sue for punitive damages
D
All of the answers shown
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Section 3
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Contract Terminology
Life would be so easy if there was a standard form for a real estate sales contract. We
don’t even have a common name or terminology. In various parts of the country they
are called:
 Purchase agreement
 Sales agreement
 Offer to purchase
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 Contract of purchase and sale
 Purchase and sale contract
 Binder
 Earnest money agreement
 Memorandum of sale
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Contract Terminology
The real estate sales contract is a bilateral express contract for the purchase of
specifically identified real property rights. The transaction is presumed to be “arms
length” where the parties are presumed to have equal bargaining power, equal
knowledge of the facts, and neither party has taken undue advantage of the other.
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Contract Terminology
The real estate sales contract is a bilateral express contract for the purchase of
specifically identified real property rights. The transaction is presumed to be “arms
length” where the parties are presumed to have equal bargaining power, equal
knowledge of the facts, and neither party has taken undue advantage of the other.
The typical agreement starts with an offer to purchase a property at a specific price
and terms. If a real estate agent is involved in the transaction, the offer is submitted
through them to the seller. Remember,
the offer may be withdrawn at any time prior to
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the seller’s acceptance and notification of the acceptance reaches the one who made
the offer. If all terms are accepted, the agreement becomes binding to all parties.
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Contract Terminology
If the accepted offer varies in any degree from
the original offer, it is not an acceptance but a
counteroffer. If the seller makes a counteroffer,
then the original contract is terminated, as if it
were a rejection of the initial offer. The buyer
and the seller have now changed roles, and the
seller is offering a deal to the buyer.
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Contract Terminology
If the accepted offer varies in any degree from
the original offer, it is not an acceptance but a
counteroffer. If the seller makes a counteroffer,
then the original contract is terminated, as if it
were a rejection of the initial offer. The buyer
and the seller have now changed roles, and the
seller is offering a deal to the buyer.
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This can be played back and forth many times
with counteroffer after counteroffer. If they
never reach an agreement, there is no contract
and no liability on either party. If there is
ultimately an agreement to ALL terms then the
contract springs to life and becomes an
enforceable instrument.
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Contract Terminology
All terms and conditions of the sale of the property need to be contained in the
contract. These would include, but are not limited to:













Sales price
Type of financing, if any
Method of payment
Required inspections
Personal property included inwww.Mckissock.com
the sale
Proration of taxes and insurance
Risk of loss from fire, flood, etc. prior to closing
Time of possession
Time of closing
Type of deed
Type of title acceptable to buyer
Any contingencies
Time period for acceptance or rejection
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Feedback Question 12.
Which of these terms and conditions
of the sale of property must be in the
contract?
A
Sales price
B
Any contingencies
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C
Type of deed
D
All of the answers shown
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Feedback Question 12.
Which of these terms and conditions
of the sale of property must be in the
contract?
A
Sales price
B
Any contingencies
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C
Type of deed
D
All of the answers shown
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Format
 As we said earlier, there is no standard format for a real estate sales contract. It may
vary from state to state, depending on the requirements of that state. Even within
states, there are likely to be regional variations dependent on state regulations,
relationships with local Bar Associations, etc.
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Format
 As we said earlier, there is no standard format for a real estate sales contract. It may
vary from state to state, depending on the requirements of that state. Even within
states, there are likely to be regional variations dependent on state regulations,
relationships with local Bar Associations, etc.
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 There are many generic contract
forms available in bookstores, stationery stores,
business supply stores, or through the internet. You can go to Staples, Office Depot,
or Office Max and pick up pads of these forms.
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Format
 As we said earlier, there is no standard format for a real estate sales contract. It may
vary from state to state, depending on the requirements of that state. Even within
states, there are likely to be regional variations dependent on state regulations,
relationships with local Bar Associations, etc.
www.Mckissock.com
 There are many generic contract
forms available in bookstores, stationery stores,
business supply stores, or through the internet. You can go to Staples, Office Depot,
or Office Max and pick up pads of these forms.
 Homeowners may buy kits with do it yourself materials to sell your own house and
draw up your own contract, along with draw your own will, declare bankruptcy or
get a divorce
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Format
Besides the complexities of contract law, there are local, state and federal regulations that
may have oversight. Real estate contracts may have to reflect the current policies of these
regulatory agencies.
Federal laws that may apply include:
 Lead-based paint disclosure, if properties were built prior to 1978
 FHA/VA financing requiring certain
contract language
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 The Civil Rights Act of 1964 prohibiting discrimination, and the 1988 Fair Housing
Amendments Act outlining procedures and penalties for enforcement
 Environmental hazards addressed under the EPA and CERCLA legislation
 Federal laws controlling wetlands, wildlife and endangered species
 RESPA requiring closing statements be done on the HUD-1 form
 Federal tax laws controlling aspects of depreciation, tax-free exchanges, capitol gains
treatment, once in a lifetime relief for the sale of a residence and passive income losses.
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Format
State laws may require:
 Certain forms to be used
 Certain language or clauses to be used in contracts
 Disclosure of environmental hazards
 Property condition disclosure www.Mckissock.com
forms
 Testing for hazards such as underground storage tanks or radon
 Consumer protection booklets
 Disclosure of agency relationships
 Lead paint disclosure forms or booklets
 Warranties in new construction
 Disclosure of stigmatized properties
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Feedback Question 13.
To attain contract status, the process
of __________ and _________ must
have occurred:
A
Offer and Acceptance
B
Application and Acceptance
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C
Offer and Application
D
Application and Agreement
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Feedback Question 13.
To attain contract status, the process
of __________ and _________ must
have occurred:
A
Offer and Acceptance
B
Application and Acceptance
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C
Offer and Application
D
Application and Agreement
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The Usual Suspects
There are numerous forms used throughout the country in real estate transactions,
but the reason for each is, for the most part, the same. Let's spend some time looking
at the most common forms used in real estate transactions.
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The Usual Suspects
Purchase and Sale Agreement (PSA)
A Purchase and Sale Agreement is used when a buyer (the offeror) intends to make an
offer to the seller (the offeree). Since the Statute of Frauds requires all real estate
offers to be in writing, in most states, the PSA is used for this purpose. Included in the
PSA are all of the terms and conditions of the purchase and the timeframes in which
certain actions must be performed.
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The Usual Suspects
The PSA will typically specify some of the following:
 Purchase price
 Closing date
 Included items, such as appliances,
wood stoves, security systems
 Earnest money and default
 Date of the contract




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 Information about disclosures
The multiple listing number, if it has one
 Contingencies
The full names of all the purchasers
 Information about the title company
The common address and county where
 Information about the closing or
the property is located
escrow agent
A legal description
 Closing date and date of possession
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The Usual Suspects
The PSA will typically specify some of the following:
 Offer expiration date
 Service of closing agent for payment of utilities
 Charges and assessments due after closing
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 Agency disclosure
 Addenda attached to the contract
 Buyer’s address, phone, fax, e-mail address and signature
 Seller’s address, phone, fax, e-mail address and signature
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The Usual Suspects
The type of Purchase and Sale Agreement (PSA) that will be used will depend on the
property. The various types most commonly used by residential agents are:
 PSA for Single-Family Homes
 PSA for Multi-Family Homes
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 PSA for Vacant Land (Unimproved Property)
 PSA for Condominiums
The PSA is usually completed by the broker working with the buyers, then signed by
the buyers, and presented to the sellers.
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Feedback Question 14.
If the accepted offer varies from the
original offer, it is known as a:
A
Reformation
B
Counteroffer
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C
Earnest money deposit
D
Rescission
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Feedback Question 14.
If the accepted offer varies from the
original offer, it is known as a:
A
Reformation
B
Counteroffer
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C
Earnest money deposit
D
Rescission
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The Usual Suspects
Listing Agreements
When a licensee lists a property for sale, a listing agreement acts as a contract
between the seller and the licensee (in actuality, between the seller and the
brokerage). It is like an employment contract in some ways, but it is between a seller
and an independent contractor (the licensee).
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The Usual Suspects
The listing agreement will normally specify the following items:
 The common address for the property
 The legal description
 Seller’s warranties and representations
in regard to the right to sell and
encroachments
 The length of time of the listing
 Seller’s indemnification to hold agent
harmless if his or her representations
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 The licensee and the brokerage company
are incorrect
 The rate of commission
 Brief information on closing costs
 What will happen in the event the seller
sells the property
 Permission from the seller to be listed in
MLS and that his or her agent may
cooperate with other members of the
MLS
 Disclaimer on Distressed Homes
 Authorization to install a key box
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The Usual Suspects
The listing agreement will normally specify the following items:
 Disclaimer regarding insurance
 Broker’s right to market the property
 Brief information on the seller’s
disclosure statement
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 Consequences and damages in the event of a buyer’s breach
 Attorney’s fees
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The Usual Suspects
There are two types of listing agreements, depending on the state that you are in:
Exclusive Agency Sale and Listing Agreement
The broker does not earn the listing portion of the commission if the seller
produces a sale.
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Exclusive Sale and Listing Agreement
Allows the broker to earn the listing portion of the commission, no matter who
sells the property.
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The Usual Suspects
Conditional Release of Listing
The Conditional Release of Listing is another common contract that residential brokers
use. In essence, it rescinds the listing agreement with the condition that the seller will
still pay the broker a commission if a future buyer purchases the property, having
identified the property through the means of the broker’s advertising or showing
within six months.
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The Usual Suspects
Buyer’s Agreement
Commonly used by residential brokers in most states is the Buyer’s Agreement. There
are two types: Buyer’s Agency Agreement and Buyer’s Agreement No Agency.
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The Usual Suspects
Buyer’s Agreement
Commonly used by residential brokers in most states is the Buyer’s Agreement. There
are two types: Buyer’s Agency Agreement and Buyer’s Agreement No Agency.
Buyer’s Agency Agreement
States that the licensee represents
the buyer and that the buyer has an obligation to
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that licensee for commission during the term of the agreement. This agreement is
unilaterally cancellable by either party and must be done in writing. If two brokers are
ever in a dispute over commission, a buyer agency agreement can be the proof that a
particular licensee would be entitled to earn a commission.
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The Usual Suspects
Buyer’s Agreement
Commonly used by residential brokers in most states is the Buyer’s Agreement. There
are two types: Buyer’s Agency Agreement and Buyer’s Agreement No Agency.
Buyer’s Agency Agreement
States that the licensee represents
the buyer and that the buyer has an obligation to
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that licensee for commission during the term of the agreement. This agreement is
unilaterally cancellable by either party and must be done in writing. If two brokers are
ever in a dispute over commission, a buyer agency agreement can be the proof that a
particular licensee would be entitled to earn a commission.
Buyer’s Agreement No Agency
This contract states that the licensee does not represent the buyer, even though he or
she may be performing brokerage services for the buyer.
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The Usual Suspects
Legal Descriptions
When taking a listing, it is of extreme importance to obtain a full legal description
from the last deed and have it initialed by the seller(s). A street or common address is
not sufficient, and the listing agreement could be voidable.
For a Purchase and Sale Agreement, the same holds true, and the full legal description
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must be initialed by both the buyer
and the seller.
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The Usual Suspects
Here’s an example of a correct full legal description:
Exhibit “A” Legal Description
The Grantor Paul S. Post and Mary B. Post, husband and wife
For and in consideration of TEN DOLLARS AND OTHER GOOD AND VALUABLE
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CONSIDERATION in hand paid, conveys,
and warrants to Peter D. Sanders and Kim H.
Sanders
The following described real estate situated in the county of SNOHOMISH, State of
Washington
LOT 14, HAYWOOD HILLS, ACCORDING TO THE PLAT THEREOF RECORDED ON VOLUME
32 OF PLATS, PAGES(S) 121-123, INCLUSIVE RECORDS OF SNOHOMISH COUNTY,
WASHINGTON. SITUATED IN THE COUNTY OF SNOHOMISH, STATE OF WASHINGTON.
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Miscellaneous Provisions
FHA
Miscellaneous
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Provisions
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FHA/VA requires a rider that
the contract may be voided if
the property is appraised for
less than the selling price. FHA
also requires that before
signing an agreement, the
buyer acknowledge receiving
a notice entitled “For your
Protection, Get a Home
Inspection.”
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Miscellaneous Provisions
FHA
Final Walk
Through
Miscellaneous
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Provisions
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Sometimes the purchasers
request an opportunity to do
a final inspection of the
property just prior to the
closing.
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Miscellaneous Provisions
FHA
Final Walk
Through
Miscellaneous
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Provisions
Certificate of
Occupancy
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In some locations, a
Certificate of Occupancy must
be obtained prior to passing
of title. It needs to be
established as to which party
is responsible.
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Miscellaneous Provisions
FHA
Final Walk
Through
Miscellaneous
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Provisions
Certificate of
Occupancy
Cooperative
Apartments
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Purchase of a cooperative
apartment is different from
other real estate transactions.
Ownership of a cooperative
entails ownership of shares of
stock in the corporation that
owns the whole building. A
cooperative is classified as
personal property, not real
property. Ownership of the
stock does not constitute a
fee simple interest.
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Miscellaneous Provisions
Condominiums
FHA
Final Walk
Through
Miscellaneous
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Provisions
Certificate of
Occupancy
Cooperative
Apartments
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Ownership of a condominium
includes fee simple title to
some described three
dimensional space plus rights
to common areas jointly
owned by other owners in the
project. However, they may
require special contract
provisions.
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Miscellaneous Provisions
FHA
Condominiums
Final Walk
Through
Option
Agreements
Miscellaneous
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Provisions
Certificate of
Occupancy
Cooperative
Apartments
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Option is defined as “n. a right
to purchase property or
require another to perform
upon agreed-upon terms. An
option is paid for as part of a
contract, but must be
‘exercised’ in order for the
property to be purchased or
the performance of the other
party to be required.
‘Exercise’ of an option
normally requires notice and
payment of the contract price.
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Miscellaneous Provisions
FHA
Condominiums
Final Walk
Through
Option
Agreements
Miscellaneous
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Provisions
Certificate of
Occupancy
Right of
First Refusal
A right of first refusal means
that a party has the right to
purchase or lease a property if
another purchaser comes
along. They have a chance to
“match the offer.” If they fail
to match another legitimate
offer, the claim is forfeited.
Cooperative
Apartments
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Miscellaneous Provisions
Condominiums
FHA
Option
Agreements
Final Walk
Through
Miscellaneous
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Provisions
Certificate of
Occupancy
Right of
First Refusal
Cooperative
Apartments
Installment
Sales Contract
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This is sometimes called
Installment Sale or Land
Contract. It is defined as “n.
an agreement in which
payments of money, delivery
of goods or performance of
services are to be made in a
series of payments, deliveries
or performances, usually on
specific dates or upon certain
happenings.
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Poll Question 15.
If the buyer makes an offer, he may
withdraw the offer at any time before:
A
Notification of the seller's
acceptance reaches him
B
Completion of the
sale/contract
C
The day of closing
D
The buyer may withdraw the
offer at any time
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Poll Question 15.
If the buyer makes an offer, he may
withdraw the offer at any time before:
A
Notification of the seller's
acceptance reaches him
B
Completion of the
sale/contract
C
The day of closing
D
The buyer may withdraw the
offer at any time
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When to Ask for Help
You should seek the advice or assistance of your broker any time you feel that you or
the brokerage may be at risk. If you are at risk, then most likely your brokerage will be
at risk as well. Designated brokers and managing brokers are responsible for the
supervision and actions of their licensees. The term is referred to as vicarious liability
which means that a party (the brokerage) is responsible for the actions of another
party (the licensee).
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P
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When to Ask for Help
While this list is certainly not exhaustive, the following are some key circumstances
when you should consider seeking assistance:
 Unfamiliarity with a specific form
 Not knowing which form to use in which circumstance
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 Unfamiliarity with new or existing
real estate laws or legislation
 Problems revolving around communications with the purchaser
 If you are a new licensee
 If the purchaser is requesting contingencies which are unique or ambiguous
 If there is not a preprinted form available to cover a particular circumstance (we will
be covering this in greater detail later in this chapter)
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When to Ask for Help
While this list is certainly not exhaustive, the following are some key circumstances
when you should consider seeking assistance:
 If there is confusion with agency and who you should represent
 Unique circumstances and unique properties
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 Not knowing which addenda should
be used in conjunction with a particular offer
and particular circumstances
 If you have questions about the handling of the earnest money
 If you are unsure about the computation of time as it relates to the contingencies in
the contract
 If the potential purchasers have questions about the Purchase and Sale Agreement
(PSA) that you cannot answer
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Feedback Question 16.
Which of the following must be
included in a real estate contract for
sale of property?
A
Type of deed
B
C
Type of title acceptable to the
buyer
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Date of closing
D
All of the answers provided
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Feedback Question 16.
Which of the following must be
included in a real estate contract for
sale of property?
A
Type of deed
B
C
Type of title acceptable to the
buyer
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Date of closing
D
All of the answers provided
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Unauthorized Practice of Law
 A broker should avoid drafting contracts, contract provisions, or legal documents
that could be construed as the product of an unlicensed practice of law.
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Unauthorized Practice of Law
 A broker should avoid drafting contracts, contract provisions, or legal documents
that could be construed as the product of an unlicensed practice of law.
 Your job is to assist your clients in completing the standard contract forms.
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Unauthorized Practice of Law
 A broker should avoid drafting contracts, contract provisions, or legal documents
that could be construed as the product of an unlicensed practice of law.
 Your job is to assist your clients in completing the standard contract forms.
 Guide your clients by educating them on each of the clauses in the contract and
how they might best draft thewww.Mckissock.com
agreements.
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1-800-328-2008
Unauthorized Practice of Law
 A broker should avoid drafting contracts, contract provisions, or legal documents
that could be construed as the product of an unlicensed practice of law.
 Your job is to assist your clients in completing the standard contract forms.
 Guide your clients by educating them on each of the clauses in the contract and
how they might best draft thewww.Mckissock.com
agreements.
 Advise your clients to seek proper legal counsel if the contract should extend
beyond the standard form or should your client wish to have a custom agreement
drafted.
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Unauthorized Practice of Law
 A broker should avoid drafting contracts, contract provisions, or legal documents
that could be construed as the product of an unlicensed practice of law.
 Your job is to assist your clients in completing the standard contract forms.
 Guide your clients by educating them on each of the clauses in the contract and
how they might best draft thewww.Mckissock.com
agreements.
 Advise your clients to seek proper legal counsel if the contract should extend
beyond the standard form or should your client wish to have a custom agreement
drafted.
 Use only standard forms in the exercise of your duties. Such forms must be
reviewed and approved by real estate attorneys. Use extreme caution in adding
anything to these standard forms.
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When Your Client Should Seek Legal Advice
The following is a list, not exhaustive, of some circumstances when you may suggest
that your client seek legal advice:
 When your managing broker or designated broker suggests that it is necessary
 When there are serious misunderstandings or issues between buyer and seller
 When any party to the transaction
is threatening a lawsuit
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 When the issue involves serious legal ramifications
 When either party breaches the contract
 If fraud, negligence, misrepresentation, or concealment is involved
 When any serious complications arise which are beyond your scope of knowledge
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When Your Client Should Seek Legal Advice
The following is a list, not exhaustive, of some circumstances when you may suggest
that your client seek legal advice:
 Unusual circumstance where a buyer may want to include certain verbiage in a
contract
 When your client is at serious legal risk
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 When you and your brokerage are legally at risk
 When an important major mistake has been made and needs to be rectified
 When a client breaches a contract
 When major complications arise from the title of a property
 When the offer requires additional written language which is beyond the
framework of the preprinted forms
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Contingency and "Subject To" Clauses
In some states, the terms “contingent” and “subject to” are often used
interchangeably in a Purchase and Sale Agreement. The more precise definitions are
explained below:
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Contingency and "Subject To" Clauses
In some states, the terms “contingent” and “subject to” are often used
interchangeably in a Purchase and Sale Agreement. The more precise definitions are
explained below:
Definition of “Subject To”:
“Subject to” can refer to something that goes along with or “runs with” a property
when it is purchased. Examples of this would be the purchase of a property subject to
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an existing easement or subject to an encroachment. It usually refers to a pre-existing
condition.
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1-800-328-2008
Contingency and "Subject To" Clauses
In some states, the terms “contingent” and “subject to” are often used
interchangeably in a Purchase and Sale Agreement. The more precise definitions are
explained below:
Definition of “Subject To”:
“Subject to” can refer to something that goes along with or “runs with” a property
when it is purchased. Examples of this would be the purchase of a property subject to
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an existing easement or subject to an encroachment. It usually refers to a pre-existing
condition.
Example of a written clause using “Subject To”:
“Buyer agrees to purchase this property subject to the existing easement in favor of
the property to the north.”
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Contingency and "Subject To" Clauses
In some states, the terms “contingent” and “subject to” are often used
interchangeably in a Purchase and Sale Agreement. The more precise definitions are
explained below:
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1-800-328-2008
Contingency and "Subject To" Clauses
In some states, the terms “contingent” and “subject to” are often used
interchangeably in a Purchase and Sale Agreement. The more precise definitions are
explained below:
Definition of Contingency
A contingency or “subject to” clause in a contract states that an event must occur for
the contract to continue. If the event does not happen, the contract is not continued,
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and the buyer’s earnest money is usually refunded.
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1-800-328-2008
Contingency and "Subject To" Clauses
In some states, the terms “contingent” and “subject to” are often used
interchangeably in a Purchase and Sale Agreement. The more precise definitions are
explained below:
Definition of Contingency
A contingency or “subject to” clause in a contract states that an event must occur for
the contract to continue. If the event does not happen, the contract is not continued,
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and the buyer’s earnest money is usually refunded.
Example of a written clause with a contingency:
“This offer is contingent upon Aunt Sue’s approval of this contract, within three
business days after mutual acceptance of this offer. If purchaser does not give notice
to the seller or the seller’s agent of approval within three business days after mutual
acceptance, then this offer shall become void.” It must be in writing.
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Feedback Question 17.
Which of the following is true of
earnest money deposits?
A
They show sincerity of the
buyer
B
They demonstrate financial
ability
C
D
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They can serve as liquidated
damages to the seller if there is
a breach of contract
All of the answers shown
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Feedback Question 17.
Which of the following is true of
earnest money deposits?
A
They show sincerity of the
buyer
B
They demonstrate financial
ability
C
D
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They can serve as liquidated
damages to the seller if there is
a breach of contract
All of the answers shown
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Practice of Law
Real estate agents should be wary about the unauthorized practice of law. In New
York State, for example, the Department of State has long considered the unlawful
practice of law by a real estate broker or salesperson as grounds for disciplinary
action. Its interpretation of what constitutes unlawful practice has been guided by
relevant provisions of the Judiciary Law and by the seminal case of Duncan & Hill
Realty, Inc. v. Department of State.
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Practice of Law
Judiciary Law §478 prohibits the practice of law by non-attorneys, the purpose of
which is to protect the public from the dangers of legal representation and advice
given by persons not trained, examined, and licensed for such work.
In Duncan & Hill, the court upheld the Department of State's determination that a real
estate broker who was not a licensed attorney demonstrated untrustworthiness and
incompetence in violation of Real Property Law §441-c; finding that, when he
prepared documents that included
detailed mortgage terms he had devised, he
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engaged in the unauthorized practice of law.
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Practice of Law
Here are some warnings to the public from the American Bar Association.
Q. When should I see an attorney about buying or selling a home?
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Practice of Law
Here are some warnings to the public from the American Bar Association.
Q. When should I see an attorney about buying or selling a home?
A. It probably isn't necessary to consult a lawyer when you begin your search for a
home. If you are a buyer, you probably will want your attorney to enter the process
when you are ready to make an www.Mckissock.com
offer and, certainly, before you sign an offer to
purchase. If you are a seller, you probably will want to consult an attorney early in the
process and before signing a listing agreement with a real estate agent. Buying and
selling real estate almost always entails a contract. So, keep in mind that a typed or
handwritten "letter or agreement" or "letter of understanding" signed by the parties
will be binding if it meets the legal requirements of a contract. Don't sign something
assuming it's not a contract and, therefore, not important. If something goes wrong,
you don't want to discover too late that you've signed away important rights, failed to
include important protections, or failed to receive what you expected. Legal advice
will be much more helpful and less expensive before rather than after signing a
purchase contract.
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Practice of Law
Here are some warnings to the public from the American Bar Association.
Q. What is the purchase contract?
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Practice of Law
Here are some warnings to the public from the American Bar Association.
Q. What is the purchase contract?
A. The purchase contract may be called a sales contract, real estate contract, purchase
agreement, sales agreement, or purchase and sale agreement. Whatever it is called, it
is a legal document that, when signed
by both parties, is a legal contract that will
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govern the entire transaction. Before signing such a contract, you will want to review it
carefully and have your attorney review it. Remember, once signed, you are obligated
to fulfill your part of the contract.
So find out what your local practitioners are doing. Check with the local REALTOR
organization and/or Multiple Listing Service. Check with the local and state Bar
Association. Know your state license law thoroughly so that you are performing in the
correct manner.
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Poll Question 18.
A _______________ means that a
party has the right to purchase or
lease a property if another purchaser
comes along.
A
Certificate of Occupancy
B
Right of First Refusal
C
Installment Sale
D
Final Walkthrough
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1-800-328-2008
Poll Question 18.
A _______________ means that a
party has the right to purchase or
lease a property if another purchaser
comes along.
A
Certificate of Occupancy
B
Right of First Refusal
C
Installment Sale
D
Final Walkthrough
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1-800-328-2008
Section 4
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Amendments and Modifications
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Amendments and Modifications
Inspection Addendum
An inspection addendum usually covers an inspection of the property and
deals with structural issues,www.Mckissock.com
some pest infestations, underground
residential heating oil tanks, and on-site sewage disposal systems.
As a result of this inspection, the buyer can approve of the inspection,
terminate the transaction, request additional inspections, or ask the seller
to perform repairs or modifications. The seller may agree to perform the
requested repairs/modifications or refuse. The buyer retains the right to
proceed or terminate the contract.
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Amendments and Modifications
Financing Addendum
When an offer is contingent upon the buyer obtaining financing, certain
items may be specified, such
as:
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






Type of loan that the buyer will acquire
Percentage of down payment
Timeframe to make application if he or she has not already done so
Timeframe for a loan commitment
Consequence of an appraisal being less than the sale price
Closing costs that the seller will pay for the buyer
Homeowner insurance contingency
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Amendments and Modifications
Optional Clauses Addendum
An optional clause addendum addresses such items as:









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Square footage, lot size, and encroachments
Title insurance
Grounds maintenance
Item left by the seller
Utilities
Insulation for new construction
Leased property
Homeowner’s association review board
Other
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Feedback Question 19.
Amendments are additions to the
main Purchase and Sale Agreement
(PSA) which cover specific or unique
circumstances. They are commonly
referred to as ________.
A
Side agreements
B
Recognition agreements
C
Addenda
D
Highest and best use
agreements
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1-800-328-2008
Feedback Question 19.
Amendments are additions to the
main Purchase and Sale Agreement
(PSA) which cover specific or unique
circumstances. They are commonly
referred to as ________.
A
Side agreements
B
Recognition agreements
C
Addenda
D
Highest and best use
agreements
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Amendments and Modifications
Feasibility Contingency Addendum
A feasibility addendum will often accompany an offer to purchase vacant
land or commercial property. The buyer will be given a certain number of
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days to perform an independent study of the property which might
include:




Building or development moratoria
Flood zones
Wetlands and shore lands
Roads
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




Water
Sewer
Other utilities
Capacity Charges
Assessments
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Amendments and Modifications
Homeowner (Hazard) Insurance Addendum
Homeowner’s (hazard) insurance is important for almost all residential
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properties. Not only is it good
risk management for the homeowner, but
most lenders require it as a means of reducing their own risk.
There can be times when a buyer may be refused insurance on a particular
property. This may be due to an unsatisfactory CLUE report. CLUE is an
acronym for Comprehensive Loss Underwriting Exchange. It is a
compilation of all insurance claims. The CLUE may be a report on a
particular person or on a property.
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Amendments and Modifications
An Addendum Which Would Address What Personal
Property or Fixtures Were Included in the Sale
All personal property and trade fixtures which are included in the sale
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should be clearly specified in
the purchase and sale agreement. There are a
number of ways to do this.
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Feedback Question 20.
A financing addendum and a structural
inspection addendum are common
addenda to a
______________________.
A
Seller’s property disclosure
statement
B
Lease agreement
C
Purchase and sale agreement
(PSA)
D
Promissory note
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1-800-328-2008
Feedback Question 20.
A financing addendum and a structural
inspection addendum are common
addenda to a
______________________.
A
Seller’s property disclosure
statement
B
Lease agreement
C
Purchase and sale agreement
(PSA)
D
Promissory note
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Amendments and Modifications
Possession Addendum
(if possession is not at the time of closing)
In many circumstances, the date of possession is not the closing date.
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Usually this is because the seller
will need to close his or her current home
and receive the net proceeds from that home before he or she can
purchase his or her next home. Even in an ideal situation where both
homes close concurrently, the homeowner will need time to move to the
next home.
There are also circumstances where the seller will need extra time to move
for various other reasons.
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Amendments and Modifications
Possession Addendum
(if possession is not at the time of closing)
An addendum should be drawn up and attached to the Purchase and Sale
Agreement which addresses www.Mckissock.com
all of the following:
 Length of the possession period by the seller
 Which party will insure the home during the “possession” period (this is
usually the buyer through his or her homeowner’s insurance)
 What charge, if any, will be paid by the seller for this “possession” period
TIP: Insurance liability is important. All parties should make sure that the
property is insured during this time.
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Amendments and Modifications
Modifications
A contract is said to be fully acknowledged once it has been signed by both
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parties (the purchaser and the
seller). This constitutes a legally binding
contract and is also known as mutual acceptance. Changes to the contract
after mutual acceptance can only be made if both the buyer and the seller
agree to the changes. Both parties must either sign or initial and date the
changes.
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Amendments and Modifications
Modifications
When changes are made, it is important to notify and re-copy those parties who
may already have a copy of the
contract. These parties may include:
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 The buyer
 The seller
 The listing broker’s transaction file and his or her brokerage’s transaction file
 The buyer’s broker’s transaction file and his or her brokerage’s transaction file
 The closing agent (escrow)
 The lender
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Amendments and Modifications
Attaching Additional Pages and
Addenda to the Contract
There are circumstances that arise where something changes during a
transaction. The need for additional
paperwork may be desired. Again, it must
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be remembered that any additions to the contract after mutual acceptance can
only be made if both parties agree. If changes, additions, or deletions are made,
both parties must initial or sign and date the item or clause that has been
changed, added, or deleted. It is illegal to make any change to a contract without
the agreement and initials of both parties.
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Feeback Question 21.
A ___________is a provision in a real
estate contract that specifies the
contract would cease to exist upon the
occurrence or non-occurrence of a
certain event.
A
Contingency
B
Cease and desist order www.Mckissock.com
C
Vesting agreement
D
Disclosure agreement
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Feeback Question 21.
A ___________is a provision in a real
estate contract that specifies the
contract would cease to exist upon the
occurrence or non-occurrence of a
certain event.
A
Contingency
B
Cease and desist order www.Mckissock.com
C
Vesting agreement
D
Disclosure agreement
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Importance of Notifications
A notification may be sent in order to make someone aware of any of the following:











An offer
A counter-offer
A rejection of an offer
An acceptance of an offer
A removal of a contingency in the contract
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Addenda to the contract
Resale or public offering statements
Homeowners’ association documents
Disclosures
Title reports
Forms which were agreed to be supplied by the buyer, seller, or
third parties
 Etc.
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Importance of Notifications
 All notices must be in writing. At least one of the buyers must sign a notice given to
a seller. At least one seller must sign a notice given to the buyer. Exceptions to this
may be certain notices obtained through third parties and original offers.
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Importance of Notifications
 All notices must be in writing. At least one of the buyers must sign a notice given to
a seller. At least one seller must sign a notice given to the buyer. Exceptions to this
may be certain notices obtained through third parties and original offers.
 Notices delivered to the broker of either party are deemed notices accepted by his
or her client.
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1-800-328-2008
Importance of Notifications
 All notices must be in writing. At least one of the buyers must sign a notice given to
a seller. At least one seller must sign a notice given to the buyer. Exceptions to this
may be certain notices obtained through third parties and original offers.
 Notices delivered to the broker of either party are deemed notices accepted by his
or her client.
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 Notices are important because throughout the statewide form for the Purchase and
Sale Agreement, many time limits are specified for when notices must be delivered.
“Time is of the Essence.”
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Importance of Notifications
 All notices must be in writing. At least one of the buyers must sign a notice given to
a seller. At least one seller must sign a notice given to the buyer. Exceptions to this
may be certain notices obtained through third parties and original offers.
 Notices delivered to the broker of either party are deemed notices accepted by his
or her client.
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 Notices are important because throughout the statewide form for the Purchase and
Sale Agreement, many time limits are specified for when notices must be delivered.
“Time is of the Essence.”
 You, as the real estate professional, are responsible for making sure that these time
deadlines are met by both of the parties to the transaction and also that of third
party providers.
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Original Copies and Facsimiles
Presenting Offers and Counteroffers - There are three basic methods by which offers
and counteroffers are presented:
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in person
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Original Copies and Facsimiles
Presenting Offers and Counteroffers - There are three basic methods by which offers
and counteroffers are presented:
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in person
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by fax
1-800-328-2008
Original Copies and Facsimiles
Presenting Offers and Counteroffers - There are three basic methods by which offers
and counteroffers are presented:
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in person
www.McKissock.com
by fax
by e-mail
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Original Copies and Facsimiles
Presenting Offers and Counteroffers - There are three basic methods by which offers
and counteroffers are presented:
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in person
by fax
by e-mail
It is important to note that permission to fax or e-mail must
be stated in the contract and agreed to by all of the parties.
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Original Copies and Facsimiles
by fax
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by e-mail
Here is an example of verbiage in a Purchase and Sale Agreement contract excluding email transmission:
“Facsimile and E-mail Transmission: Facsimile transmission of any signed document, and
re-transmission of signed facsimile transmission, shall be the same as delivery of an
original. At the request of either party, the parties will confirm facsimile transmitted
signatures by signing an original document. E-mail transmission of any document or
notice shall not be effective unless the parties to this Agreement otherwise agreed to
that in writing.”
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Feedback Question 22.
All notices must:
A
Be verbal or in writing
B
Be in writing
C
Neither verbally nor in writing
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D
Be published in the local
newspaper
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Feedback Question 22.
All notices must:
A
Be verbal or in writing
B
Be in writing
C
Neither verbally nor in writing
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D
Be published in the local
newspaper
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Original Copies and Facsimiles
Presenting Offers and Counteroffers in Person with Original Copies
Presenting offers in person has some major advantages. First, a broker can get a feel
for the reaction of the other party, to whom he or she is presenting, through the
observation of body language. Secondly, a broker will also have the opportunity to
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provide clarifications or answer any
questions that the other party may have.
Thirdly, a broker will have the opportunity to show his or her enthusiasm and
sincerity and communicate the strengths of his or her clients. Fourthly, a broker will
have the advantage of working with clean original documents.
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1-800-328-2008
Original Copies and Facsimiles
Presenting Offers and Counteroffers in Person with Original Copies
Presenting offers in person has some major advantages. First, a broker can get a feel
for the reaction of the other party, to whom he or she is presenting, through the
observation of body language. Secondly, a broker will also have the opportunity to
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provide clarifications or answer any
questions that the other party may have.
Thirdly, a broker will have the opportunity to show his or her enthusiasm and
sincerity and communicate the strengths of his or her clients. Fourthly, a broker will
have the advantage of working with clean original documents.
The disadvantage is that all parties (buyer’s broker, listing broker, and sellers) will
have to schedule a common time to meet. With busy schedules, out-of-town sellers,
or sellers who travel for business, this can be quite challenging. Also, the cost of fuel
can be a disadvantage for a meeting, especially if any of the brokers or the sellers
must travel a long distance to meet.
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Original Copies and Facsimiles
Presenting Offers and Counteroffers via Facsimile (fax)
Presenting offers via fax has some advantages since fax machines are in almost
every office and in most homes. Transmission is fast and an offer can be received by
the listing broker within minutes.
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1-800-328-2008
Original Copies and Facsimiles
Presenting Offers and Counteroffers via Facsimile (fax)
Presenting offers via fax has some advantages since fax machines are in almost
every office and in most homes. Transmission is fast and an offer can be received by
the listing broker within minutes.
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The disadvantage of fax transmittal is that after a few generations of faxing, the
document can be of very poor quality and difficult to read.
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1-800-328-2008
Original Copies and Facsimiles
Presenting Offers and Counteroffers via Facsimile (fax)
Presenting offers via fax has some advantages since fax machines are in almost
every office and in most homes. Transmission is fast and an offer can be received by
the listing broker within minutes.
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The disadvantage of fax transmittal is that after a few generations of faxing, the
document can be of very poor quality and difficult to read.
Most fax machines can be programmed so that a fax journal is produced after each
transmittal. This journal will show the time, the number of pages that have been
successfully transmitted, and the receiving fax number. It will not serve as proof as
to the contents of the transmittal. If your fax machine is not set up for individual
journals after each transmittal, look into the possibility of programming it to do so.
This journal should be kept with each transmittal in the real estate transaction file.
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1-800-328-2008
Original Copies and Facsimiles
Presenting Offers and Counteroffers via E-mail
Presenting offers via e-mail has a major advantage. Each e-mail shows the date and
contents of the entire transmittal. It does not show, however, if the e-mail was
received.
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1-800-328-2008
Original Copies and Facsimiles
Presenting Offers and Counteroffers via E-mail
Presenting offers via e-mail has a major advantage. Each e-mail shows the date and
contents of the entire transmittal. It does not show, however, if the e-mail was
received.
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Disadvantages of e-mail transmission involve signatures. Until electronic signatures
are more commonly used, a contract that has been e-mailed must first be printed
out, then signed, and then scanned to allow for the re-transmittal. As with faxes,
multiple generations of this type of transmittal may lessen the quality of the
document and cause it to be illegible. As discussed earlier, e-mails do not show
proof of receipt.
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Poll Question 23.
A disadvantage of fax transmittal is
that:
A
Multiple generations of faxing
can cause the document to be
illegible
B
It is more time-consuming than
delivery of the original
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C
It is more expensive than
delivery of the original
D
The escrow company will not
accept fax copies
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Poll Question 23.
A disadvantage of fax transmittal is
that:
A
Multiple generations of faxing
can cause the document to be
illegible
B
It is more time-consuming than
delivery of the original
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C
It is more expensive than
delivery of the original
D
The escrow company will not
accept fax copies
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Completion, Rescission, Termination & Discharge
How a Contract Can Be Discharged or Terminated?
Agreement between the Parties – In this situation, both parties may agree to
discharge the contract because of:
 Cancellation - When both parties to the contract decide to terminate the
agreement.
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Completion, Rescission, Termination & Discharge
How a Contract Can Be Discharged or Terminated?
Agreement between the Parties – In this situation, both parties may agree to
discharge the contract because of:
 Cancellation - When both parties to the contract decide to terminate the
agreement.
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 Rescission - When a contract is cancelled and both parties are returned to their
original positions.
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Completion, Rescission, Termination & Discharge
How a Contract Can Be Discharged or Terminated?
Agreement between the Parties – In this situation, both parties may agree to
discharge the contract because of:
 Cancellation - When both parties to the contract decide to terminate the
agreement.
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 Rescission - When a contract is cancelled and both parties are returned to their
original positions.
 Novation - When the contract has been substituted for a new contract.
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Completion, Rescission, Termination & Discharge
How a Contract Can Be Discharged or Terminated?
Agreement between the Parties – In this situation, both parties may agree to
discharge the contract because of:
 Cancellation - When both parties to the contract decide to terminate the
agreement.
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 Rescission - When a contract is cancelled and both parties are returned to their
original positions.
 Novation - When the contract has been substituted for a new contract.
 Full Performance - When all of the parties have performed their obligations under
a contract, then a contract is discharged. This is known as full performance or
completion.
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Issues with Cancelling a Contract
 As stated earlier, a contract is legally binding. If the buyer or the seller chooses to
cancel a contract, he or she could be found guilty of a breach of contract which is
also known as a default.
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Issues with Cancelling a Contract
 As stated earlier, a contract is legally binding. If the buyer or the seller chooses to
cancel a contract, he or she could be found guilty of a breach of contract which is
also known as a default.
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 If a buyer defaults, he or she could lose his or her earnest money or be sued by the
seller for non-performance or damages.
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Issues with Cancelling a Contract
 As stated earlier, a contract is legally binding. If the buyer or the seller chooses to
cancel a contract, he or she could be found guilty of a breach of contract which is
also known as a default.
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 If a buyer defaults, he or she could lose his or her earnest money or be sued by the
seller for non-performance or damages.
 The remedy that is available is usually defined in the Purchase and Sale Agreement.
If the seller defaults, there is a possibility that the buyer could sue for damages.
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Feedback Question 24.
When considering the strength of an
offer, one should consider:
A
The buyer’s purchasing power
B
The price offered
C
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The terms of the contract
D
All of the above
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Feedback Question 24.
When considering the strength of an
offer, one should consider:
A
The buyer’s purchasing power
B
The price offered
C
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The terms of the contract
D
All of the above
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Default (Breach) and the Rights of Both Parties
A breach of contract is when one or both of the parties fail to perform according to
the terms and conditions of the contract. If there has been a material breach
(meaning that the breach was important to one of the parties), then the other party
may be able to take court action.
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Default (Breach) and the Rights of Both Parties
There are four legal remedies for a breach of contract which include:
Specific Performance
A legal action where the court orders the
Liqudated Damages
party who breached the contract to
perform according to the contract. In the
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circumstance of a Purchase and Sale
Compensatory Damages
Agreement, the seller would be
obligated to sell the property as
promised and deliver the deed to the
Rescission
buyer, and the buyer would be obligated
to purchase the property as promised.
Specific performance, as a remedy, may
not always be possible.
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Contract
There are four legal remedies for a breach of contract which include:
Specific Performance
When both parties to a contract agree in
advance to a dollar amount that will
Liqudated Damages
compensate the other party in the event
of a breach, this is considered liquidated
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damages. This amount must be set forth
Compensatory Damages
in writing. There are two important
points to remember about liquidated
damages; first, it limits the amount that
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the non-breaching party can recover.
Secondly, it makes it easier for the nonbreaching party to recover these
damages since they were agreed to in
writing in advance.
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Contract
There are four legal remedies for a breach of contract which include:
Specific Performance
The most common remedy for a breach
of contract, given that there was not a
liquidated damages clause, is
Liqudated Damages
compensatory damages. This
compensates the other party for the
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Compensatory Damages
financial loss that he or she incurred
because of the breach of contract. The
amount awarded is usually intended to
Rescission
place the non-breaching party in the
same financial position that he or she
would have been placed if the breaching
party had performed as per the terms of
the contract.
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Contract
There are four legal remedies for a breach of contract which include:
Specific Performance
Liqudated Damages
A rescission takes place when a contract
has been cancelled and each party is
returned to his or her original position.
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Compensatory Damages
If a Purchase and Sale Agreement were
to be rescinded, then the buyer would
forfeit the right to purchase the property
Rescission
and the seller would refund the earnest
money to the buyer. A rescission could
result from the agreement of the parties
or by court order.
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Feedback Question 25.
The most common remedy for a
breach of contract, given that there
was not a liquidated damages clause,
is __________________.
A
Compensatory damages
B
Specific performance
C
Special assessments
D
Residual damages
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Feedback Question 25.
The most common remedy for a
breach of contract, given that there
was not a liquidated damages clause,
is __________________.
A
Compensatory damages
B
Specific performance
C
Special assessments
D
Residual damages
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Earnest Money and Proper Handling
When a buyer extends an offer to purchase property, the buyer will make a good faith
deposit, called an earnest money deposit. This demonstrates that he or she is serious
about the purchase of the home and his or her offer is bona fide. Also, some buyers
will make larger earnest money deposits in order to make their offer more attractive
and desirable to the seller.
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Earnest Money and Proper Handling
After the offer is accepted, the earnest money deposit becomes part of the contract
and is deposited into an escrow account at the selling licensee’s brokerage or into a
trust account held by the closing agent (escrow). If the buyer defaults on any portion
of the Purchase and Sale Agreement, the buyer may have to forfeit the deposit to pay
for damages incurred by the seller (such as having the property off the market and the
fact that the seller may have had other potential buyers who are no longer interested).
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Earnest Money and Proper Handling
Duties of Licensee
 To exercise reasonable skill and care
 To deal honestly and in good faith
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Feedback Question 26.
When a buyer extends an offer to
purchase property, the buyer will
make a good faith deposit. This is
known as a(n):
A
Contract to Purchase
B
Fully acknowledged contract
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C
Counter-offer
D
Earnest Money
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Feedback Question 26.
When a buyer extends an offer to
purchase property, the buyer will
make a good faith deposit. This is
known as a(n):
A
Contract to Purchase
B
Fully acknowledged contract
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C
Counter-offer
D
Earnest Money
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Earnest Money and Proper Handling
Earnest money may be in many different forms, but let’s take a look at three which
are acceptable:
Personal Checks - This is usually the most common form of earnest money deposit
since most people carry checkbooks with them, and there is no need to make a visit
to a financial institution to obtain a money order or cashier’s check.
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Earnest Money and Proper Handling
Earnest money may be in many different forms, but let’s take a look at three which
are acceptable:
Personal Checks - This is usually the most common form of earnest money deposit
since most people carry checkbooks with them, and there is no need to make a visit
to a financial institution to obtain a money order or cashier’s check.
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Cashier’s Check or Money Order – Again, the disadvantage is that a financial
institution must be open when the earnest money is being remitted. Most financial
institutions have limits on the amount allowed for money orders.
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1-800-328-2008
Earnest Money and Proper Handling
Earnest money may be in many different forms, but let’s take a look at three which
are acceptable:
Personal Checks - This is usually the most common form of earnest money deposit
since most people carry checkbooks with them, and there is no need to make a visit
to a financial institution to obtain a money order or cashier’s check.
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Cashier’s Check or Money Order – Again, the disadvantage is that a financial
institution must be open when the earnest money is being remitted. Most financial
institutions have limits on the amount allowed for money orders.
Promissory Note - This is a note signed by the buyer guaranteeing that he or she will
deposit the earnest money at some specified future date. This form of earnest
money might be used when a buyer expects to receive some net proceeds from the
sale of a property soon, but does not have the cash on hand at the moment.
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Proper Handling of Earnest Money
 Both the listing broker and the selling broker are required to adhere to strict
policies and procedures surrounding the handling of funds held for others.
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Proper Handling of Earnest Money
 Both the listing broker and the selling broker are required to adhere to strict
policies and procedures surrounding the handling of funds held for others.
 Violations and mishandling of these funds may result in civil suits, criminal
proceedings, and disciplinary action by the State.
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1-800-328-2008
Proper Handling of Earnest Money
 Both the listing broker and the selling broker are required to adhere to strict
policies and procedures surrounding the handling of funds held for others.
 Violations and mishandling of these funds may result in civil suits, criminal
proceedings, and disciplinary action by the State.
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 The result could be a monetary fine and/or suspension or revocation of the
brokerage or broker’s real estate license.
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1-800-328-2008
Proper Handling of Earnest Money
 Both the listing broker and the selling broker are required to adhere to strict
policies and procedures surrounding the handling of funds held for others.
 Violations and mishandling of these funds may result in civil suits, criminal
proceedings, and disciplinary action by the State.
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 The result could be a monetary fine and/or suspension or revocation of the
brokerage or broker’s real estate license.
 Usually, the selling broker representing the buyer will be responsible for collecting
the earnest money. This is not set in stone though. In some states it is acceptable,
with the use of a clause in the purchase agreement, for the buyer and seller to
decide who holds the deposit.
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Feedback Question 27.
Which of the following is an
acceptable form of Earnest Money?
A
Personal Check
B
Cashier’s Check
C
Promissory Note
D
All of the above
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Feedback Question 27.
Which of the following is an
acceptable form of Earnest Money?
A
Personal Check
B
Cashier’s Check
C
Promissory Note
D
All of the above
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Proper Handling of Earnest Money
 This deposit must be collected and deposited according to the terms of the
Purchase and Sale Agreement.
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Proper Handling of Earnest Money
 This deposit must be collected and deposited according to the terms of the
Purchase and Sale Agreement.
 The funds must be deposited in the broker’s trust account or in a trust account held
by the closing agent (escrow).
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Proper Handling of Earnest Money
 This deposit must be collected and deposited according to the terms of the
Purchase and Sale Agreement.
 The funds must be deposited in the broker’s trust account or in a trust account held
by the closing agent (escrow).
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 A receipt for the deposit is usually required by state law and should be placed in
the transaction folder.
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Proper Handling of Earnest Money
 This deposit must be collected and deposited according to the terms of the
Purchase and Sale Agreement.
 The funds must be deposited in the broker’s trust account or in a trust account held
by the closing agent (escrow).
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 A receipt for the deposit is usually required by state law and should be placed in
the transaction folder.
 These deposits must be kept in a separate trust account and are not allowed to be
commingled with any other funds.
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Proper Handling of Earnest Money
Let’s look at some examples of earnest money being handled improperly, and the
adverse or detrimental impact that it could have on a buyer or a seller in a real
estate transaction.
The buyer’s broker does not collect the earnest money or does not collect the full
amount -- In this scenario, the seller may not have all or any compensation, should the
buyer default. And the buyer may
be in default if the Purchase and Sale Agreement
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contract stated that a specified amount was to be deposited to a trust account on a
certain date.
Buyer’s broker collected the funds but did not deposit them -- The same holds true as
in the above scenario. In addition, when a broker “holds” earnest money, the chances
of the check becoming lost or stolen increase exponentially.
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Poll Question 28.
Who normally holds the earnest
money during a transaction?
A
The seller
B
The buyer
C
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A trust account of the selling
broker, closing agent
D
The seller’s broker
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Poll Question 28.
Who normally holds the earnest
money during a transaction?
A
The seller
B
The buyer
C
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A trust account of the selling
broker, closing agent
D
The seller’s broker
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Communicating the Status of Earnest Money
 As we stated earlier, a licensee has the duty to properly handle all earnest monies.
 Many sellers might assume that the earnest money has been collected and
deposited as specified in the contract.
 Care should be taken by the buyer’s broker to collect and deposit the monies as
agreed upon.
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 Proper documentation to prove that the funds have been handled properly is
essential.
 Communicating the status of funds to the seller’s broker is a sound practice. The
 seller’s broker should also require documentation as to the status of these funds.
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We hope you enjoyed the course, and if you have any
questions, please don’t hesitate to call us at
1-800-328-2008.
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