BROKER RISK MANAGEMENT
WEEKLY PRACTICE TIP
Contract Basics
1. What are the essential elements for a binding contract?
A: The following are all required in order for there to be a binding contract:
(1) The parties are capable of contracting and consenting to the agreement. This means that the parties must be:
A. 18 years of age or older (unless the individual is an emancipated minor who is either married or on active military duty), and
B. Of sound mind. This means that they are not mentally incapacitated, under duress, intoxicated or drugged.
(2) The offer contains all of the material terms which, in a real estate sale contract, includes the names of the parties, identity of the property, the price and terms of the purchase, a specific closing date, etc. In a listing agreement, this means that there must be a clearly identifiable property, a list price and a beginning and ending of the listing period.
(3) Acceptance of the offer as made. Any variation from the original offer constitutes a counter-offer that must be accepted without change, or be yet another counter-offer.
(4) Communication of acceptance to the party making the offer. The purchase agreements require delivery “and personal receipt” by the other party or their designated agent.
(5) Mutuality of consent. This means that there must be a “meeting of the minds” on all of the material terms of the contract. Consent can be defeated if there was duress, undue influence, fraud, or a mistake.
(6) Good and valuable consideration. This means that the promises or obligations are not gratuitous. Consideration can mean money or it can mean a promise to do something.
2. Do we need an initial good-faith deposit in order to have consideration and a binding contract?
A: No. It is the mutual promises of the parties that constitute the consideration for the contract. (I promise to give you $1,000,000. You promise to give me a deed.). So, a contract without an initial deposit is still valid. However, it is still a good idea to have an initial deposit.
3. Can I start sentences in offers and counter-offers with, “Buyer to. . . ” or “Seller to. . .”
do something?
A. Not a good idea. Avoid starting addendum and counter-offer sentences with the words, “Seller to. . . ” or “Buyer to. . . “ as it is often difficult to determine if such a sentence is a contingency (for which a party can cancel without penalty) or an obligation (for which a party will be in default if they don’t do it). If it is to be a contingency, start the sentence with: “This contract is contingent upon…” or “Subject to….” . If it is to be a promise or obligation, start the sentence with: “Seller will…” or “Buyer shall…”
4. Can I cancel an outstanding offer or counter-offer, and if so how?
A: Yes, an outstanding and unexpired offer or counter-offer can be cancelled at any time prior to the delivery and receipt of that signed document from the other party. Offers and counter-offers can be cancelled in writing or verbally. However, there is a risk with issuing a verbal cancellation in proving that it was, in fact, cancelled. Writing is always best. However, if circumstances dictate a verbal cancellation (emergency situations only — no time to obtain a written cancellation), be sure to have witnesses to the cancellation.
5. Can a seller accept an expired offer?
A: No. Once an offer has expired, it cannot be accepted by the receiving party. This is true for counter-offers as well. But, there is a way for the parties to deal with expired offers to create a binding contract. See Weekly Practice Tip entitled: “Expired Offers.”
6. If my buyers counter seller’s Counter-Offer No. 1 with Counter-Offer No. 2, which is delivered to the listing agent, and then change their minds, can buyers rescind their Counter Offer No. 2 and accept seller’s Counter-Offer No. 1?
A: No. A counter-offer kills all prior offers and counter-offers. So, once an offer or counter-offer has been countered, the countering party cannot then just go back and sign the original offer or counter-offer to them.
7. Can a deposit be “non-refundable?”
A: Not in a residential purchase agreement. There is a court case in California which states that in a residential sale, if there is an attempt to create a non-refundable deposit, the court will treat the deposit as liquidated damages.
See Weekly Practice Tip entitled: “Non-Refundable Deposits”
Even in non-residential sales, it is suspect whether a deposit can be truly non-refundable, because a court may view the amount of the deposit to be a penalty or “forfeiture” to the extent is bears no relationship to actual damages.
8. Can a purchase agreement be assigned by a buyer to another without obtaining seller’s approval?
A: Depending on the form of purchase agreement used, generally the answer is yes. All contracts in California are assignable unless specifically not assignable. A limitation on this would be if the seller is looking to the “bona fides” of the buyer for performance (e.g., seller carrying a note based on buyer’s good credit).
FORMS: The CAR and SFAR purchase agreements have no limitation on assignments. The PRDS purchase agreement does limit assignments.
See Weekly Practice Tip entitled: “Assignment of Contracts”
9. Does a buyer have an automatic 3-Day right to rescind the contact?
A: No. This is a misconception that many agents have. There is no automatic right for a party to cancel a purchase agreement for real property. For some PERSONAL property contracts, there is a statutory 3-day “cooling off” period – but this does NOT apply to real property sales. Perhaps this idea comes from the automatic 3-Day right to cancel pursuant to the TDS statute.
See Weekly Practice Tip entitled: “Transfer Disclosure Statement – The Right Way”
But, that TDS right to cancel is apart from the contract and only exists if a TDS was required on that transaction and was delivered to buyer after the offer was written.
10. Where can I get more information?
A. CAR has an excellent memo entitled “Contract Law and Real Estate Transactions” at:
http://www.car.org/legal/contract-forms-folder/contract-law-re-transactions/
DO NOT FORWARD TO CLIENTS OR THIRD PARTIES. This Weekly Practice Tip is for the exclusive use of clients of Broker Risk Management and their agents. It may not be reproduced or distributed without the express written consent of Broker Risk Management. The advice and recommendations contained herein are not necessarily indicative of standards of care in the industry, but rather are intended to suggest good risk management practices.
© Copyright Broker Risk Management 2013 08/30/13