BROKER RISK MANAGEMENT
WEEKLY PRACTICE TIP
Contracts – What is Necessary to be Valid?
There is often misunderstanding and, sometimes, misinformation as to when you have a valid, binding and enforceable agreement. By “enforceable,” attorneys mean, “can this agreement be enforced in a court of law?” Here are the basic elements necessary for a contract to be enforceable.
1. PARTIES: The names of the parties must be in the contract sufficient to determine who is making the agreement and who will be bound by those agreements.
For example, sometimes buyers do not want their names known. It is not sufficient to have an offer written omitting the buyer’s name – that contract would not be valid. If a buyer wishes to disguise their identity, they should discuss the matter with their attorney. For example, a trust could be created with the attorney as the trustee buying the property. Or, some other entity such as a corporation or LLC could be created for that purpose, with proper legal and tax advice, of course.
Oftentimes a party wishes to act through a Power of Attorney (“POA”). For real estate sales, all POA’s must be approved by the Title Company as being in recordable form. In many cases, the mental incapacity of a party will invalidate a POA. And, remember, no trustee, conservator or probate representative can delegate their powers to another by a POA.
See Weekly Practice Tips: “Power of Attorney” and “Termination of POA”
2. CAPACITY: The parties must have the legal capacity to enter into a contract. That is, they must be at least 18 years of age and of sound mind.
See Weekly Practice Tip: “Elder Abuse and Mental Capacity”
In addition, the parties must be free from fraud or duress in executing the contract. If a party signs a contract because of fraud, one remedy for that party is rescission of the contract. Alternatively, that party might be able to enforce the contract but sue for damages as a result of the fraud.
3. LEGAL PURPOSE: The contract must have a legal purpose. The courts will not enforce a contract that has an illegal purpose, such as to commit a crime, or which is against public policy.
4. OFFER AND ACCEPTANCE: There must be an OFFER and an ACCEPTANCE of that offer. According to the Statute of Frauds, real estate sales agreements must be in writing, and signed by the parties to the agreement. There must be a DELIVERY of the acceptance, defined as either the return delivery of the offer which has been signed by the seller, or the delivery of the last signed, unchanged counter-offer to the other party.
The contract (which consists of the offer and all addenda and counter-offers) must evidence that there was a MEETING OF THE MINDS on all of the important issues which are the subject of the contract.
See Weekly Practice Tips “Do We Have A Contract,” “What Constitutes ‘Delivery’ to
Create a Contract” and “Electronic Signatures on Contracts”
5. CONSIDERATION: By consideration, we mean that there has been a benefit conferred, or agreed to be conferred, upon the promisor by another person (which benefit the promisor is not otherwise entitled) as an inducement to the promisor to make the promise.
That legalese basically means in the typical real estate sale that there is a mutual exchange of promises, i.e. the seller is promising to sell the property to the buyer for a price and on specified terms; and the buyer promises, if all of the contingencies are met, to pay the agreed upon price for seller’s delivery of title to the buyer.
Thus, there is no requirement that there be an initial deposit; or any deposit at all for that matter. A real estate purchase agreement wherein no money is placed into escrow until just before close of escrow is a valid contract if all of the other requirements of a contract are present.
See Weekly Practice Tip: “No Deposit Does Not Invalidate a Contract”
6. CERTAINTY: The terms of the contract must be “certain” to the extent that a court can order a party to do the acts or promises in the contract (e.g., pay money or deliver title to a specific property). If any of the important terms of a contract are uncertain, it may render the whole contract invalid. For example, if a real estate Purchase Agreement did not have a definite closing date, a court may declare the whole contract invalid.
PRACTICE TIP:
If a seller or buyer is concerned whether there is a valid, binding contract, you should refer the client to a real estate attorney for advice.
DO NOT FORWARD TO CLIENTS. 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 2010 04/02/10
