Contract
"Contract" - a written agreement that binds both buyer and seller
together. Contracts can be long, complex documents or short statements of
not more than a few sentences. But regardless of length, all contracts
have certain elements that are either written into an agreement or
assumed.
In its most basic form, a contract can be seen as a voluntary
arrangement between at least two parties who consent to a set of clearly
understood terms and conditions-either set out in writing or assumed
because of the parties' actions-to achieve a specific purpose and a
mutual benefit.
We use contracts every day. Buying a hammer from a hardware store is an
example of a basic contract. There is an offer ("Hammers for sale") and an
acceptance ("Hey, I'll take one"). Buyer and seller act voluntarily for a mutual
benefit-the seller receives money and the buyer acquires a hammer.
But contracts and the contracting process can get far more complex,
particularly when dealing with commercial transactions such as the purchase and
sale of real property. Even though real estate agreements can be complex, buyers and
sellers should still have an idea of how the contracting process works.
Here are the major elements that can be
found in every real estate agreement.
- Offer and Acceptance: An essential part of every contract is an
"offer" made by one person and an "acceptance" made by another. The
offer must be in terms that both buyer and seller understand, and any
acceptance must be equally understandable.
To create a contract, there must be both "offer" and "acceptance."
In most real estate transactions it is the seller who sets the negotiating
process in motion by making an offer, and the buyer who responds with an
acceptance or a counteroffer. In response to the buyer, a seller can agree
to the buyer's proposal, reject it, or suggest a counteroffer. A counteroffer, in turn, automatically replaces the original offer.
- Price or Other Duty: The formation of a contract is complete
when one party understands the other's offer and accepts it. When
both parties perform their obligations under the contract it's fulfilled.
In terms of real estate, the general obligation of the buyer is to pay for
the property, while the seller must deliver a deed.
- Modification: Once made, contract terms may be modified but
only with the agreement of both buyer and seller.
- Competency of Parties: In order for a contract to be valid, both
buyer and seller must be legally and mentally competent. "Legally
competent" means being of legal age, 18 or older in most jurisdictions.
"Mentally competent" means being able to make a reasonable decision
unclouded by mental illness, drug dependency, or similar afflictions.
- Mutual Benefit: A contract must create a mutual benefit between
the parties. In a real estate sale, the seller gets the money and the
buyer gets the property.
- Bargaining Position: Both buyer and seller must be able to
negotiate as equals to have a valid contract. In situations where one party
feels compelled to act because he believes he has no choice, or he does
not have a valid opportunity to understand the agreement, or he finds
the complex and technical language used in the contract is over his
head, then such contracts may, in certain instances, be declared invalid
by the courts because these deals lack a true "bargaining over terms."
A contract in which the language cannot be understood equally by
both parties is a so-called "contract of adhesion."
- Voluntary Action: A contract will not be enforceable if it was signed
under pressure or duress.
- Reciprocal Benefit or "Consideration": A contract must require
that each party does something for the other. Doing something to fulfill a
contract is called "consideration." "Consideration" can be the payment of money,
an exchange of goods and services, or even an exchange of a promise for a
promise.
- Quality of Goods/Acceptability of Subject Matter: A reasonable expectation in every contract is
that the goods (or "subject matter") being purchased are not defective. Selling a house that does not
have an occupancy permit, for example, would mean that the property
could not be used as a home, and so the seller's "goods" (the house)
would not be acceptable, the contract would have failed, and the purchaser would have cause to seek damages.
There are limitations, though, on both "use" and "damages." The
limitation of "use" is that the purchaser must employ the product for
its generally intended purpose. A home seller has no obligation to
assure that his property can be used as a distillery, nuclear dump, or
for any purpose other than as a residence. Damages, in turn, are
limited to necessary repairs or reasonable compensation.
- Discovering a Defect: Problems also arise as to who should be
"on notice" concerning defects and who is responsible for their repair.
In connection with real estate contracts, "defects" could involve both
title problems as well as the physical condition of the property.
Generally, it is up to the seller to be sure that no title defects exist.
Thus, if there are any problems preventing the buyer from obtaining
complete and clear title, the seller is obligated to resolve them. Defects
in title can include liens, unreleased judgments, or questionable prior
deeds. A major exception here concerns sales that involve so-called
"quitclaim" deeds-deeds where the seller makes no warranties
whatsoever and may not even own the property.
At times, it is not the title but the condition of the property that is an
issue. If a defect is so plain as to be obvious by visual inspection or
other reasonable examination, then the purchaser might well be "on
notice." Being on notice, in turn, means the buyer cannot later claim
that he was unaware of the defect. However, if a defect is known to the
seller and cannot be seen by the purchaser, then the seller generally
must inform the purchaser of the problem.
- Language for Breach: Just as contracts are made every day, so
are they broken every day. Difficulties may arise when one side does
not "perform," some event takes place that makes performing
impossible, or the buyer and seller disagree about the exact meaning of a
clause or/phrase.
Sometimes the failure to perform is serious. When this happens, the
contract is said to have been "broken," and a "breach of contract" has
taken place. Generally, real estate contracts have provisions that define
breaches and provide remedies if one party or the other fails to perform.
- Signatures: All signers must have the capacity and authority to sign
and their signatures must be valid.
"Capacity" refers to the requirement that all signers must be of
legal age and of sound mind. The "authority" of the parties refers to
the requirement that someone signing a contract must have the right
to bind himself or others he may represent. This can be a tricky issue
in the case of corporations (does the corporation have the right to
purchase or sell real estate?), partnerships (what is the authority of
the signing partner or partners?), and multiple owners (whose
signature is required on a contract and whose signature, if anyone's, can
be left off?).
Signatures, to be valid, must correctly state the name of the person
who is contracting and match the name that is typed or written into the
body of the contract and represent the free and informed choice of
each signer.
- Damages: Once a contract is broken, the matter of "damages"
must be considered. Rather than leave the matter to endless debate,
many real estate contracts establish how breaches and damages are to
be handled in case of a problem.
Damages can range from symbolic sums to huge monetary
awards. In assessing breaches and damages, courts will take into
account such matters as the language in the contract, the conduct of
the parties, and whether all the elements for a valid contractual
agreement were present in the first place.
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