Florida Real Estate Principles, Practices & Law 44th Edition

Unit 11: Real Estate Contracts

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Contracts in General

• Defines the parties’ legal relationship and spells out each party’s rights and duties

• Voluntary agreement or promise between legally competent parties

• Underlying every contract is the promise

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Authority of Licensees to Prepare Contracts

• Real estate licensees may assist buyers and sellers with completion of four types of contracts as directed by the buyer or seller

– Listing agreement

– Buyer brokerage agreement

– Sale and purchase contract

– Option contract

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Essential Elements of a Contract

A valid contract complies with contract law and contains four essential elements1. Contractual capacity of the parties (competent parties)2. Offer and acceptance (mutual assent)

– “Meeting of the minds”– Offeror and offeree

3. Legal purpose (legality of object)4. Consideration (thing of value given in exchange for some

other value)– Valuable (measured in terms of money)– Good (cannot be measured in terms of money such as, love

and affection)

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Statute of Frauds

• Requires contracts conveying an interest in real property and contracts that are not performed within one year, must be in writing and signed to be enforceable– Purchase and sale contracts– Option contracts– Deeds and mortgage instruments– Lease agreements for a term longer than one year– Listing agreements for a term longer than one year– Buyer representation agreements for a term longer

than one year

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Statute of Limitations

• The time period, set by statute, during which the terms of a contract may be enforced

– Written contracts: 5 years

– Oral contracts (also called parol contracts): 4 years

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Elements of a Valid, Enforceable Real Estate Sale Contract (COLIC)

C Competent parties

O Offer and acceptance (meeting of minds)

L Legal purpose

I In writing and signed (Statute of Frauds)

C Consideration (valuable or good)

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Void, Voidable, and Unenforceable Contracts

• Void – Does not meet all the required elements of a valid

contract and, therefore, has no legal effect

• Voidable– Allows one of the parties to potentially disavow

contractual duties (contract with a minor)

• Unenforceable– A contract that will not be enforced in court (does

not comply with Statute of Frauds or exceeds time in Statute of Limitations)

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Contract Classifications

• Formal vs Informal– Formal

• Written (historically was under seal)

– Informal• Oral (parol contract)

• Bilateral vs Unilateral– Bilateral

• Obligates both parties to perform

– Unilateral• Obligates only one party

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Contract Classifications

• Express vs Implied – Express

• Agreement between the parties, terms have been declared orally or in writing

– Implied• Obligations and conditions not stated but may reasonably be

implied

• Executory vs Executed – Executory

• Agreement involving promises to be completed at a future date

– Executed• Parties have completed their obligations

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Contract Negotiation

• An offer shows intention to contract

• Parties to an offer

– Offeror makes the offer

– Offeree receives the offer

• Counteroffer

– Alters the terms of the original offer

– Nullifies the original offer and substitutes new offer

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Ways An Offer Is Terminated (WILD CARD)

W Withdrawal by offerorI InsanityL Lapse of timeD Death

C CounterofferA AcceptanceR RejectionD Destruction of the property

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Termination of Contracts

A contract is terminated when any of the following happens:

• Performance

• Mutual rescission (renunciation)

• Impossibility of performance

• Lapse of time

• Breach

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Remedies for Breach

Four legal remedies imposed by the courts for breach of a contract:1. Specific performance

– Court orders party who committed the breach to perform as stated in the contract

– Called Relief in equity sought by a buyer seeking the other party to do as promised

2. Liquidated damages– If buyer defaults, seller may retain deposits as

liquidated damages

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Remedies for Breach of Contract

3. Rescission

– Cancellation of contract

– Parties restored to original position

4. Compensatory damages

– Unliquidated damages

– Civil suit for money damages suffered because of breach

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Assignment and Novation

• Assignment occurs when one party transfers rights and duties to another person

– Assignor

– Assignee

• Novation occurs when a new party is substituted for one of the original parties

– Discharge the original party from the obligation

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Listing Contracts

• Agreement between owner and broker

• Listing contracts may be written, oral, or implied

– Listings for a term longer than one year must be in writing to be enforceable

– A sales associate’s authority is derived from their broker

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Written Listing Requirements

• Written listing contracts must include– Definite expiration date– Description of the property– Listing price and terms– Broker’s compensation (fee or commission)– Signature(s) of owner(s) of record

• Copy to seller within 24 hours• Automatic renewal clause prohibited

– $200 citation for including a self-renewal clause or failure to timely deliver a copy to the seller

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Types of Listings

• Open listing– One or more brokers– Commission to broker who sells the property – Usually a unilateral contract

• Exclusive-agency listing– One broker– Commission to listing broker if not sold directly by owner– Usually a bilateral contract

• Exclusive-right-of-sale listing– One broker – Commission to listing broker no matter who procures the buyer– Usually a bilateral contract

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Comparison of Listings

Type of Listing Agent Commission

Open One or more brokers Only to broker who sells property

Exclusive-agency One broker To listing broker if not sold by owner

Exclusive-right-of-sale One broker To listing broker no matter who sells

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Net Listing

• Commission is paid on a net basis

• An open, exclusive agency, or exclusive right of sale listing can be structured as a net listing

• Seller agrees to sell a property for a stated acceptable amount (seller’s net)

• Broker retains proceeds in excess of seller’s net

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Example of Net Listing

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Multiple Listing Service

• Cooperative service between brokers

• Listing information is entered into a clearinghouse for listings (with owner’s permission in the listing agreement)

– Listings are shared with other brokers

– If cooperating broker office produces the buyer, the cooperating office receives part of the commission

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Buyer Brokerage Agreements

An employment contract with the buyer that includes

• Parties and term of agreement

• Characteristics of property desired

• Broker’s obligations

• Buyer’s obligations

• Retainer and compensation

• Protection period

• Early termination and dispute resolution

• Authorized brokerage relationship

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Broker’s Compensation

• Specified in the listing or the buyer brokerage agreement

• Find a Purchaser– Broker must produce a buyer who is ready, willing,

and able to purchase at the terms of the listing contract or at other terms the seller accepts

• Effect a Sale– Broker must produce a buyer who is ready, willing,

and able to purchase at the terms specified or accepted by the seller and must ensure the transaction closes

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Broker’s Compensation

• Broker earns the commission and then splits the commission with a cooperating broker (if sold by another broker)

– Employing broker splits commission with associate involved in the transaction

– Cooperating broker splits commission with sales associate involved in the transaction

– Sales associates receive compensation from employing broker

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Commission Checks

• Closing agent can legally prepare a check payable to the associate for the associate’s share of the commission

– Broker must give the closing agent written authorization and instructions regarding the amount of commission the associate is to be paid (blanket authorization prohibited)

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Commission Checks, continued

• To be paid, the broker must

– Hold a current, active license at the time the listing or buyer agreement is entered into and real estate services are conducted

– Be employed through a listing or buyer broker agreement

– Be the procuring cause (started chain of events that resulted in the sale)

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Option Contracts

• Agreement to keep open for a specified period of time an offer to sell or lease real property– Property owner (optionor) grants buyer (optionee) the exclusive

right to buy the property for a specified price and terms within a certain period of time

• Unilateral contract– Optionor is bound to perform under the terms of the option– Optionee is under no obligation to buy the property

• Consideration for right to purchase under terms of option• Terms and provisions required of a valid contract• Options assignable unless prohibited in the terms of agreement• Licensee requirements

– Substantial valuable consideration

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Sale and Purchase Contracts

• Parties are the vendor (seller) and vendee(buyer)

• Bilateral contract because it contains promises to perform by both parties

• In writing and signed

– (Statute of Frauds)

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Information in Sale and Purchase Contracts

• Names of vendor and vendee• Legal description• Consideration• Purchase price• Financing or cash terms• Type of deed the seller will deliver• Title evidence to be provided• Expenses and prorations to be paid• Personal property included• Date, time, and place of closing• When possession of property will occur

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Spouse’s Signature

• If property is owned by married couple (tenancy by the entireties), or

• If property is a homestead and ownership is in only one spouse’s name (in severalty), then

– Both spouses must sign the real estate contract

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Power to Bind the Seller or the Buyer

• Broker does not have the authority to sign a contract for the buyer or the seller or to bind the buyer or the seller to a contract unless power to do so is granted

• Power of attorney

– Written legal document designating another person as attorney-in-fact

– Special power of attorney limits attorney-in-fact to one special act

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Material Defects Disclosure

• Sellers of residential property must disclose material defects

• Johnson v. Davis

– Florida Supreme Court decision

• “As is” provision does not circumvent duty to disclose

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Information That Is Not a Material Fact

• Material defects concern the property and NOT its occupants

• Fair housing law and Florida statutes state that occupant’s information is NOT a material fact to be disclosed

– HIV or AIDS

– Site of a homicide, suicide, or death

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Radon Gas Disclosure

• Required radon disclosure statement on sale and lease contracts

– Information regarding radon gas

– Does not require testing for sale or lease

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Lead-Based Paint

• Residential Lead-based Paint Hazard Reduction Act (federal law)

• Applies to housing built prior to 1978

• Disclosure either as a separate document, or the disclosure may be incorporated into the sale contract or lease agreement

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Lead-Based Paint

• Homes built prior to 1978– Sellers/landlords must disclose presence of any

known lead-based paint– Buyers and renters must be given an EPA booklet – Sellers must allow buyers to conduct an inspection

within 10 days (inspection is not required and seller is not required to pay for inspection)

– If seller or landlord does not comply, a buyer or tenant who is harmed by the presence of lead-based paint may sue the seller or landlord

– Contractor requirements

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Energy Efficiency Disclosure

• Florida Building Energy-Efficiency Rating Act

– Buyers, at time of or prior to signing sale contract, receive an information brochure stating purchaser may get an energy-efficiency rating

– Created uniform, statewide energy efficiency rating system of new and existing buildings

– Rating system applies to public, commercial and residential structures

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Homeowners Association Disclosure

• Property subject to mandatory homeowner’s association

• Provide buyers with a disclosure regarding the association, fees, restrictive covenants, and assessments

• 3-day right of rescission (if not received before signing sale contract)– Cannot be waived

– Ends at closing

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© Kaplan, Inc.

Property Tax Disclosure

• Disclosure summary concerning ad valorem taxes before or at the time of execution of a contract for sale

• Buyers should not rely on the amount of the seller’s property taxes as an indication of the taxes purchasers will be required to pay in the year following purchase of the property

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Building Code Violation Disclosure

• Seller must disclose

– The existence and nature of the violation

– Copy of the pleadings, notice, etc.

– Buyer will be responsible for compliance with code

• Seller must forward name and address of new owner to code enforcement agency within 5 days

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Community Development District (CDD)

• Independent special district

– Services the long-term needs of its community

– Constructs, operates, and maintains infrastructure and services

– Developer finances construction of infrastructure by issuing bonds

– Homeowners repay the bonds through tax assessments

– Written disclosure in initial contracts for sale

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Misrepresentation and Fraud

• Misrepresentation

– Misstatement, omission, or concealment of factual matter

• Fraud

– Licensee made misstatement

– Licensee knew statement was not accurate

– Party relied on the misstatement

– Party was damaged as a result