Lesson 6: Contract Law Principles of California Real Estate.

Lesson 6: Lesson 6:

Contract LawContract Law

Principles of California Real Estate

Introduction

Contract: An agreement between two or more persons to do, or not do, certain things.

Introduction


Valid contract: A legally binding contract.

Introduction


Valid contract: A legally binding contract.Valid contract will be enforced by a

court if one party fails to comply with agreement.

Legal Classifications of Contracts

Contracts may be classified according to certain basic characteristics.

Legal Classifications of Contracts

Contracts may be classified according to certain basic characteristics.

Every contract is:express or impliedunilateral or bilateralexecutory or executed

Legal Classifications of Contracts Express vs. implied

Express contract: One that is put into words, oral or written.



Implied contract: One not expressed in words, but implied by the parties’ actions.



Implied contract: One not expressed in words, but implied by the parties’ actions.

Most contracts are express, not implied.

Legal Classifications of Contracts Unilateral vs. bilateral

Unilateral contract: Only one party promises to do something and is legally obligated to perform as promised.

Reward for Lost Dog!

I promise to pay$$- you promise nothing-



Bilateral contract: Both parties promise to do something and are legally obligated to perform as promised.



Bilateral contract: Both parties promise to do something and are legally obligated to perform as promised.

Most contracts are bilateral.

Legal Classifications of Contracts Executory vs. executed

Executory: Contract is in the process of being performed.

Listing for three months to sell property-

Up until sale of the property it is “in process”



Executed: Contract has been fully performed; both parties have fulfilled their promises.

The House sold, and you paid me the commission-



Executed: Contract has been fully performed; both parties have fulfilled their promises.

Note that “executed” may also refer to a contract that has been signed.

Contract Express or implied Unilateral or bilateral Executory or executed

Summary Legal Classifications of Contracts

Elements of a Valid Contract

A valid contract must have: Capacity Consideration lawful objective mutual consent

CCLM- say calm

Contract is not legally binding unless all parties have legal capacity to enter into it.

Elements of a Valid Contract Contractual capacity

Contract is not legally binding unless all parties have legal capacity to enter into it.

Two requirements for legal capacity:

(1) age

(2) mental competence

Elements of a Valid Contract Contractual capacity

In California, a person must be at least 18 to enter into a contract.18 is the age of majority.Someone under 18 is a minor.

Contractual Capacity Age of majority

In California, a person must be at least 18 to enter into a contract.18 is the age of majority.Someone under 18 is a minor.

Parent or legal guardian may enter into a binding contract on minor’s behalf.


Real estate contract in which one party is a minor is void.


Real estate contract in which one party is a minor is void.No legal effect. Neither party can enforce it

against the other.



against the other.

Other contracts (not related to real estate) signed by a minor are voidable by the minor.



against the other.

Other contracts (not related to real estate) signed by a minor are voidable by the minor.Other party can’t enforce contract.Minor can enforce contract through parent

or guardian if he or she wants to.


Exception: Emancipated minor may freely enter into any type of contract.


Exception: Emancipated minor may freely enter into any type of contract.

Minor may be emancipated by:marriagemilitary servicecourt order


Mentally competent: Of sound mind.

Contractual Capacity Mental competence

Mentally competent: Of sound mind.If one party has been declared mentally

incompetent, contract is void.Legal guardian can enter into contracts on

behalf of incompetent person.


Mentally competent: Of sound mind.If one party has been declared mentally

incompetent, contract is void.Legal guardian can enter into contracts on

behalf of incompetent person.

If someone enters into a contract while temporarily incompetent, contract may be voidable.


Capacity Age of majority Mental competence Guardian

Summary Contractual Capacity

Elements of a Valid Contract Consideration

Consideration: Each party to a contract must give the other something of value, which is called consideration.



Money, property, services, or a promise to provide something of value in the future.

Love and affection- gift to family member



Money, property, services, or a promise to provide something of value in the future.

Consideration in typical real estate sale:seller’s promise to convey titlebuyer’s promise to pay agreed price

Elements of a Valid Contract Lawful objective

If one party agrees to commit an unlawful act, a court won’t enforce contract on behalf of either party. Rule applies to any contract involving a

violation of law or public policy.

Contract is legally binding only if both parties have consented to its terms.

Elements of a Valid Contract Mutual consent


Mutual consent arrived at through offer and acceptance:



Mutual consent arrived at through offer and acceptance: Offeror makes offer to offeree. If offeree accepts offer, contract is formed.


Offer must : express an intention to enter into a contract be definite and certain

Mutual Consent Offer and acceptance


To be “definite and certain,” offer must specifybasic contract terms.



To be “definite and certain,” offer must specifybasic contract terms. Vague offer is illusory. If accepted, contract is unenforceable.


Offer terminates if before acceptance:offeror revokes offertoo much time passesofferor dies or is declared insaneofferee rejects offerofferee makes counteroffer

Offer and Acceptance Termination of an offer

Offer terminates if before acceptance:offeror revokes offertoo much time passesofferor dies or is declared insaneofferee rejects offerofferee makes counteroffer

If offer terminates before it is accepted, no contract is formed.

Offer and Acceptance Termination of an offer

Offeror can revoke offer any time before acceptance. Offeror must notify offeree of revocation

before acceptance.

Termination of an Offer Revocation

Offeror can revoke offer any time before acceptance. Offeror must notify offeree of revocation

before acceptance.

Even if offer was supposed to remain open until a particular date, offeror can revoke it before that date arrives.

Termination of an Offer Revocation

Offer that states deadline for acceptance expires automatically when that date or time arrives.

Termination of an Offer Lapse of time


Offer without deadline expires after a reasonable amount of time has passed.



Offer without deadline expires after a reasonable amount of time has passed.“Reasonable” depends on

circumstances. Issue sometimes decided by court.


If offeror dies before offer is accepted, offer is terminated and no contract is formed.

Termination of an Offer Death or insanity

If offeror dies before offer is accepted, offer is terminated and no contract is formed.

If a court determines offeror is mentally incompetent, offer is terminated.

Termination of an Offer Death or insanity

Rejection terminates offer.After rejecting offer, offeree can’t simply

change mind and accept it.

Termination of an Offer Rejection by offeree

Rejection terminates offer.After rejecting offer, offeree can’t simply

change mind and accept it.Contract will be formed only if offeror still

wants to proceed.

Termination of an Offer Rejection by offeree

Counteroffer: When offeree agrees to some terms of original offer, but changes one or more other terms.

Termination of an Offer Counteroffer


Although sometimes called a qualified acceptance, a counteroffer has the legal effect of a rejection.



Although sometimes called a qualified acceptance, a counteroffer has the legal effect of a rejection.

Counteroffer terminates original offer and replaces it with new offer.


Offer and AcceptanceCommunication of acceptance

To create binding contract, offeree must communicate acceptance to offeror before offer terminates.



Offer may specify how acceptance must be communicated.



Offer may specify how acceptance must be communicated.

If no time or manner of acceptance is stated in offer, a reasonable time and manner is implied.

Negative Forces Affecting Consent

Acceptance must be freely given.


Acceptance must be freely given.

Contract voidable by victimized party if he or she can show consent resulted from:fraudundue influenceduress


Fraud Fraud: Misrepresenting a material fact to

someone who relies on the misinformation.



someone who relies on the misinformation.Material fact: Important information that

could affect offeree’s decision to enter into contract.



someone who relies on the misinformation.Material fact: Important information that

could affect offeree’s decision to enter into contract.

Fraud is either actual or constructive.


Fraud Actual fraud: Person making

misrepresentation knows or should know that it’s false.



misrepresentation knows or should know that it’s false.Intentional deceit.Statements made without knowing

whether they’re true.



misrepresentation knows or should know that it’s false.Intentional deceit.Statements made without knowing

whether they’re true.

Constructive fraud: Person in a position of trust or with superior knowledge unintentionally misleads other person.


Fraud It isn’t necessary to actually make misleading

statements to commit fraud.


Fraud It isn’t necessary to actually make misleading

statements to commit fraud. Simply concealing a material fact may

be fraud. Concealment of a material fact is

sometimes called negative fraud.

Negative Forces Affecting Consent Undue influence

Undue influence: Persuading someone to sign contract by taking advantage of trust, weakness of mind, or distress.



Persuasion strong enough to overpower will, so that consent isn’t truly voluntary.



Persuasion strong enough to overpower will, so that consent isn’t truly voluntary.

May involve abuse of special legal relationship based on trust: broker-seller, attorney-client, etc.

Negative Forces Affecting Consent Duress

Duress: One party uses physical confinement, violence, or threat of confinement or violence to force other party to sign.

Negative Forces Affecting ConsentLaw presumes consent

Other party can enforce contract unless it can be proved in court that fraud, undue influence, or duress was involved.


Someone who signs contract without reading it is not excused from performance.Party who can’t read should always ask

someone he trusts to read it for him.


Someone who signs contract without reading it is not excused from performance.Party who can’t read should always ask

someone he trusts to read it for him.Party who doesn’t know language

should always ask someone she trusts to translate.

Elements of a Valid Contract Statute of frauds

The statute of frauds is a state law that requires some types of contracts to be: in writing, and signed.

Statute of Frauds Which contracts must be in writing

California’s statute of frauds applies to any agreement:

1. that is not to be performed within one year




2. for sale or exchange of real estate (e.g., purchase and sale agreement)




2. for sale or exchange of real estate (e.g., purchase and sale agreement)

3. For leasing real estate, if it will expire more than one year after it is entered into(e.g., 13-month lease)


4. authorizing agent to purchase or sell real estate (power of attorney)



5. authorizing agent to find buyer or seller for real estate, if agent will receive compensation (listing agreement)



5. authorizing agent to find buyer or seller for real estate, if agent will receive compensation (listing agreement)

6. for assumption of a mortgage or deed of trust

All other contracts are not covered by statute of frauds and need not be in writing.


All other contracts are not covered by statute of frauds and need not be in writing.Examples:

lease expiring in less than one yearcontract for the sale of personal property


A contract subject to the statute of frauds is unenforceable if it:isn’t in writing, orisn’t signed by the party to be bound

(the one who’s being sued).

Statute of Frauds Status of contract that doesn’t comply

A contract subject to the statute of frauds is unenforceable if it:isn’t in writing, orisn’t signed by the party to be bound

(the one who’s being sued).

But once the contract has been fully performed, neither party can undo the transaction based on the statute of frauds.

Statute of Frauds Status of contract that doesn’t comply

To fulfill statute of frauds, any “writing” is adequate if:it identifies contract subject matter,indicates agreement between parties, andis signed by the party to be bound.

Statute of Frauds Adequate written contract

To fulfill statute of frauds, any “writing” is adequate if:it identifies contract subject matter,indicates agreement between parties, andis signed by the party to be bound.

May be printed, handwritten, or a combination. If conflict between printed and handwritten

parts, handwritten part takes precedence.

Statute of Frauds Adequate written contract

Mutual consent Termination of offer Counteroffer Fraud, undue influence, duress Lawful objective Consideration Statute of frauds

Summary Mutual Consent and

Other Required Elements

Legal Status of Contracts

Terms indicating to what extent a contract is legally binding:voidvoidableunenforceablevalid

Legal Status of Contracts Void

Void contract: no legal effect whatsoever.



Parties are in same position they’d be in if they had not attempted to make a contract.



Parties are in same position they’d be in if they had not attempted to make a contract. Contract can be disregarded.Neither party needs to withdraw,

because there’s nothing to withdraw from.

A contract that doesn’t fulfill one of the basic requirements may be void.


A contract that doesn’t fulfill one of the basic requirements may be void.

Examples:no consideration exchangedparty is mentally incompetentminor is party to real estate contractobjective is unlawfulparty’s signature is forged


Legal Status of Contracts Voidable

If contract is voidable:One party can choose whether to

withdraw or go through with the contract.Contract unenforceable by other party.


If contract is voidable:One party can choose whether to withdraw

or go through with the contract.Contract unenforceable by other party.

Examples:non-real estate contract entered into by a

minor (voidable by minor or guardian)contract entered into as a result of fraud,

undue influence, or duress

Voidable contract is binding unless party asks court to rescind contract.


Voidable contract is binding unless party asks court to rescind contract. Withdrawing party must take legal action

within reasonable time.Otherwise, court may rule that contract

has been ratified.


Legal Status of Contracts Unenforceable

Contract is classified as unenforceable if its contents can’t be proved in court.


Contract is classified as unenforceable if its contents can’t be proved in court.Often a problem with unwritten contracts.Or if written contract is too vaguely

worded and parties can’t prove what they intended, court will refuse to enforce it.

Contract also unenforceable if statute of limitations missed.


Contract also unenforceable if statute of limitations missed.Statute of limitations sets time limit for

filing a lawsuit.Party who misses applicable deadline

loses right to sue.


Contract also unenforceable if statute of limitations missed.Statute of limitations sets time limit for

filing a lawsuit.Party who misses applicable deadline

loses right to sue.

California statute of limitations for contracts: Breach of written contract: 4 years Breach of oral contract: 2 years


Court may also bar legal claim under doctrine of laches.Legal principle that allows court to

decide there’s been an undue delay in asserting the claim.


Court may also bar legal claim under doctrine of laches.Legal principle that allows court to

decide there’s been an undue delay in asserting the claim.

Different from statute of limitations, which sets specific deadline for filing claim.


Legal Status of Contracts Valid

Contract is valid if:it meets all requirements for forming a

contract,its contents can be proved in court, andstatute of limitations hasn’t run out.

Legal Status of Contracts Valid

Contract is valid if:it meets all requirements for forming a

contract,its contents can be proved in court, andstatute of limitations hasn’t run out.

If one party fails to perform as promised, other can sue to have contract enforced.

Summary Legal Status of Contracts

Void Voidable Unenforceable Valid

Discharging a Contract

Most contracts are discharged by full performance:Each party performs as promised.Contractual relationship ends.

Discharging a Contract Most contracts are discharged by

full performance:Each party performs as promised.Contractual relationship ends.

May be discharged without full performance, if parties agree to: rescissioncancellationassignmentnovation

Discharging a Contract Rescission

Rescission: Parties agree to terminate contract and undo any steps already taken to perform.


Rescission: Parties agree to terminate contract and undo any steps already taken to perform.If either party has paid the party other

money or given any property, it’s returned.


Rescission: Parties agree to terminate contract and undo any steps already taken to perform.If either party has paid the party other

money or given any property, it’s returned.Parties put themselves back in positions

they were in before contract was formed, as if contract never happened.

Discharging a Contract Cancellation

Cancellation: Parties agree to terminate contract without undoing whatever steps they’ve already taken.

Discharging a Contract Cancellation

Cancellation: Parties agree to terminate contract without undoing whatever steps they’ve already taken. If money has changed hands, party

who received it is allowed to keep it.

Discharging a Contract Assignment

Assignment: One party withdraws and has someone else take his place.Original party (assignor) assigns his

interest in contract to new party (assignee).


Assignment: One party withdraws and has someone else take his place.Original party (assignor) assigns his

interest in contract to new party (assignee).

Assignor remains secondarily liable.Contract not really discharged.If assignee defaults, other party can still

sue assignor.

General rule:one party can assign her interest

without other party’s permission,unless contract has clause expressly

forbidding assignment.


General rule:one party can assign her interest

without other party’s permission,unless contract has clause expressly

forbidding assignment.

Exception: Contract specific to one person, such as hazard insurance policy, typically can’t be assigned.


Discharging a Contract Novation

Novation: Original party withdraws and is replaced by new party, and also is released from further liability.


Novation: Original party withdraws and is replaced by new party, and also is released from further liability.Always requires consent of the other

original party.


Novation: Original party withdraws and is replaced by new party, and also is released from further liability.Always requires consent of the other

original party.

Novation can also refer to substitution of new agreement for old agreement, between same parties.

Summary Discharging a Contract

Discharge Full performance Rescission Cancellation Assignment Novation

Remedies for Breach of Contract

Breach of contract: When one party doesn’t perform as agreed, without discharging contract and without legal excuse.


Breach of contract: When one party doesn’t perform as agreed, without discharging contract and without legal excuse.If one party breaches contract, other

party has the right to sue.

Four legal remedies for breach of contract: rescission damages liquidated damages specific performance


Remedies for Breach of Contract Rescission

As explained earlier, in rescission the contract ends and any steps taken to carry it out are undone.


As explained earlier, in rescission the contract ends and any steps taken to carry it out are undone.Parties are put back in their pre-contract

positions.


As explained earlier, in rescission the contract ends and any steps taken to carry it out are undone.Parties are put back in their pre-contract

positions.

Rescission may be:result of agreement between parties, orcourt-ordered remedy for breach of contract.

Remedies for Breach of ContractDamages

Damages: An amount of money a court orders breaching party to pay other party.

Remedies for Breach of ContractDamages

Damages: An amount of money a court orders breaching party to pay other party.Compensates non-breaching party for

losses resulting from breach.Most common remedy for breach of

contract.

Remedies for Breach of Contract Liquidated damages

Liquidated damages: Remedy that parties may agree to in advance, by including provision in contract.



If one party breaches, other party is entitled to specified sum of money (the liquidated damages).



If one party breaches, other party is entitled to specified sum of money (the liquidated damages).

The liquidated damages are the other party’s only remedy; can’t sue for more.


In residential deposit receipt, parties usually agree to treat good faith deposit as liquidated damages if buyer defaults.


In residential deposit receipt, parties usually agree to treat good faith deposit as liquidated damages if buyer defaults.

California has special rules that apply in this context, which are explained in next lesson.

Remedies for Breach of Contract Specific performance

Specific performance: Court orders breaching party to carry out contract.


Specific performance: Court orders breaching party to carry out contract. Sometimes damages aren’t enough to

compensate for breach of contract.Non-breaching party wants to make

other party fulfill promise.


Specific performance not always granted.Court may decide damages award is

adequate compensation.




General rule: Specific performance only awarded if subject of contract is unique.




General rule: Specific performance only awarded if subject of contract is unique.

Damages award won’t enable buyer to obtain replacement if none exists.

Court may be willing to grant specific performance to real estate buyer.

Breach of Contract Tender offer

To be entitled to sue for breach of contract, non-breaching party must be ready to carry out his side of the bargain.

Breach of Contract Tender offer

To be entitled to sue for breach of contract, non-breaching party must be ready to carry out his side of the bargain.

Before filing lawsuit, non-breaching party is usually required to make a tender: unconditional offer to perform as agreed.

Tender Offer Anticipatory repudiation

Anticipatory repudiation: One party repudiates contract by making definite statement that she is not going to perform as agreed.

Tender Offer Anticipatory repudiation

Anticipatory repudiation: One party repudiates contract by making definite statement that she is not going to perform as agreed.If anticipatory repudiation occurs, other

party can sue without making a tender.

Summary Remedies for Breach of Contract

Rescission Damages Liquidated damages Specific performance Tender offer

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Lesson 6: Contract Law Principles of California Real Estate.

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