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Georgia Real Estate InfoBase Contents - Chapter 18

Chapter 18

Concepts and Issues in Real Estate Sales Contracts


INTRODUCTION

This chapter focuses on basic concepts, definitions, and issues that are important in the real estate sales contract.  The discussion is general in nature and not specifically aimed at legal requirements in Georgia.  The next chapter covers the important Georgia requirements.

CLASSIFICATION OF REAL ESTATE SALES CONTRACTS

Real estate sales contracts, like all contracts, can be classified in various ways.  Contracts are either valid, voidable, or void.  They are either enforceable or unenforceable. They are either bilateral or unilateral.  They are either express or implied.  They are either executory or executed.  The legal characteristics of each contract determine its classifications.

         

(a)     

VALID, VOID, VOIDABLE, ENFORCEABLE AND UNENFORCEABLE CONTRACTS - A valid contract fulfills all the legal requirements imposed by the body of law known as contract law and is therefore binding on all parties.  For example, a valid contract must involve lawful objects or actions.  Therefore, the exchange of a house for corporate bonds or stock is the basis for a valid contract.  If the buyer tenders forged bonds, the contract would be void because the passing of forged bonds in not a lawful action.

A void contract is one that is lacking one or more of the legal requirements for a binding agreement and is,therefore, binding on neither party. 

A voidable contract is an agreement that is binding on one party; however, the other party has the right to rescind it and legally avoid the contractual obligations.  For example, parties to a contract must know what they are doing at the time they reach agreement.  If one person can prove that he or she was intoxicated at the time and, therefore, did not know what he or she was doing, that person may set aside the contract.  The contract is not “void” but is said to be “voidable.”

An unenforceable contract may be a valid contract, but one that the courts do not recognize and will not enforce.  A real estate contract must be in writing in order for the courts to enforce it.  If two people reach an agreement about the sale of a property that meets all the legal requirements for a contract, but the agreement is not written, the contract is valid, but the courts will not enforce the obligations of either party under that contract because it is oral.

 

(b)

BILATERAL AND UNILATERAL CONTRACTS - A bilateral contract is an agreement in which one person makes an offer of an action or a promise to the other in exchange for an action or a promise.  If the second person accepts the offer, a bilateral contract exists.  Each of the two parties to the contract makes a promise or performs an act and simultaneously receives a promise from the other party.  The real estate sales contract is a bilateral contract.

A unilateral contract contains a promise or offer by only one of the parties to the contract.  In other words, one person makes a promise or extends an offer and the other person receives the benefit of the promise or offer contingent upon the performance of some act.  An option agreement, in which the seller promises to sell at a certain price during a specific period of time, should the buyer decide to buy, is a unilateral contract.

 

(c)

EXPRESS AND IMPLIED CONTRACTS - An express contract can be oral or written.  The fundamental requirement is that the individuals discuss and then agree to terms and conditions.  A signed sales contract is the best example of an express contract.  It states all of the items of agreement between the parties to the contract.

A contract can also result from inferences about facts and circumstances.  Such a contract is a contract "implied in facts."  The agreement between the parties forming the implied contract arises from the intent of the individuals as shown by their conduct.  For example, a builder consistently allows the buyers of newly constructed houses to move their belongings into their houses before closing.  The contract does not mention this practice and the builder never charges rent.  Now the builder will not allow the buyer of the next property to move in before closing unless she pays rent.  If the builder's previous actions imply that the buyer has the right to free use of the house before closing, the builder and buyer may have formed an implied contract to that effect. 

 

(d) 

EXECUTORY AND EXECUTED CONTRACTS - An executory contract is a contract signed by the two parties (the buyer and seller in a real estate sales contract, or the landlord and tenant in a lease) who are in the process of completing the promises made in the agreement between them.  In a sales contract, for example, the buyer applies for a loan, and the seller maintains the property, orders a termite inspection, and prepares to transfer ownership.  An executory contract exists between the date of the contract and the closing.

An executed contract represents a completed transaction.  At the closing, the buyer and the seller in a sales contract complete the terms and conditions stated in the contract.  The promises turn into actions. Thus, at closing, a sales contract is transformed from an executory contract to an executed contract.

 

(e)

THE REAL ESTATE SALES CONTRACT - The real estate sales contract is a valid, express contract when the parties to the contract structure it properly and legally and then sign it.  In other words, it contains all of the legally essential features of a valid contract.  It is also a bilateral contract, because two or more individuals have exchanged promises after due deliberation and full agreement about the terms of the sale.  The evidence of the agreement is written into the contract.


ESSENTIAL FEATURES OF A VALID AND ENFORCEABLE CONTRACT

A valid and enforceable real estate sales contract must have the following essential legal features, each of which are described in more detail below:

         

(a)    

agreement,

 

(b) 

consideration,

 

(c) 

competent parties,

 

(d) 

reality of consent,

 

(e) 

legality of purpose, and

 

(f)  

necessity of writing.

AN AGREEMENT (OFFER AND ACCEPTANCE)

An agreement is the result of the negotiation of the terms and conditions of the transaction.  Two acts make up an agreement -- the offer and the acceptance.  The offer is the first step in the formation of a contract between two individuals.  An offer is a conditional promise made by one party (usually the potential buyer) to the other party (usually the seller of the property).  If the seller accepts the offer unconditionally, an acceptance takes place.  An acceptance is thus an indication of a willingness to be bound by the terms of the offer.  These two actions, the offer and the acceptance, form the essential agreement for any valid contract.

         

(a)     

THE OFFER - An offer must be (1) definite and certain, (2) complete, (3) communicated to the offeree, and (4) intended to create a legal obligation between the parties.  To be definite and certain, the offer must be clear and understandable to a reasonable person.  The courts require definiteness and certainty because the courts may have to decide whether the parties to the contract complied with the specified terms.  If terms are vague, omitted, or impossible to measure, there is no contract.  The price, the condition of the property, and the time of delivery are terms of a real estate sales contract that require proper specification.

The offer must also be complete if the contract is to be enforceable in a court of law.  All the terms of agreement and thus the contract must be negotiated and settled, and none of the terms can be left for future negotiation and determination.  The offer cannot contain a statement that calls for future discussion of a term or condition of sale.  A statement such as "price to be negotiated at the time of exchange" is not sufficient.  The courts have ruled that they cannot complete an unfinished contract; thus the incomplete contract would be unenforceable, although it could still be valid.

The offeror (the buyer, for example) or his or her agent must communicate and deliver the offer to the offeree (the seller in this instance) in order for the contract to be effective.  The offeror can communicate the offer directly to the offeree or through an agent of the offeree.  An offer can be effective although a delay occurs in reaching the offeree.  A delay in the delivery of an offer might result from the negligence of the offeror or from trouble with the means of the offeror's communication.  Therefore, in some instances the offeree may be allowed a reasonable amount of time to respond even if the effective time of the offer has expired.  If the delay is apparent to the offeree, however, he or she must communicate the acceptance of the offer to the offeror within a reasonable time after the offer would normally have been received.

The last characteristic of the offer, and of a contract, is the intention by both the parties to create a legal obligation.  The courts will not hold a person legally responsible for a promise made in jest or anger, if it should have been obvious to the offeree that the offer was not serious.

 

(b)

THE ACCEPTANCE - The other half of the agreement is the acceptance.  An acceptance must be (1) made only by the person who received the offer or his/her agent, (2) unconditional and identical to the terms of the offer, and (3) communicated and delivered to the offeror.  First, for a contract to be valid, the person accepting the offer must be the person who received the offer or an agent who has the explicit authority to accept offers.  If the seller has given the authority to a lawyer, broker or other agent to accept an offer, the buyer can deliver the offer to the seller's agent.
The acceptance also must occur without any conditions added to the offer and without any provision deleted from the offer.  In other words, the offeree must either accept or reject the offer as-is without changing the offer in any way.  Any change in the terms required by either party occurs through a process of negotiation.  During the negotiation process, the parties can make a series of offers and counteroffers.  For example, a prospective buyer makes an offer.  If the seller does not like all the terms, the seller can make a counteroffer in which some of the original offer is unchanged and other aspects undergo deletion, addition, or change.  The buyer can accept, reject, or amend the counteroffer.  The offeree’s acceptance of the counteroffer creates the contract.  During negotiations, the buyer and the seller change roles, with the seller becoming the offeror and the buyer the offeree of the counteroffer, and vice versa, and so on, until a contract is formed.

Finally, the party accepting the offer or counteroffer must communicate and deliver the acceptance to the other party.  As part of the acceptance process, the party making the final offer may require the acceptance to be delivered in a certain way.  For example, the buyer may stipulate that an acceptance will not be effective until he or she actually receives the acceptance, or that the acceptance must be given by a certain time.  Custom and tradition also govern the receipt of the acceptance.  An accepted contract sent by mail generally takes effect when properly posted, with the correct address and sufficient postage.

Typically, offers must affirmatively be accepted by the offeree for a contract to be formed.  A person is not legally responsible to reply to an offer made by another individual.  In other words, lack of action or silence is not an acceptance.  Suppose an agreement in a contract contains a statement made by the buyer to the effect that "the seller accepts the offer if seller does not reply to the contrary."  This provision would not result in a contract because of the lack of action or the silence of the seller (except in certain unusual situations not necessary to this discussion).

 

(c) 

TERMINATION OF THE OFFER -  An offer stays in effect until one of the following five events:

 

 

(1)

the seller rejects it,

 

 

(2)

the seller makes a counteroffer,

 

 

(3)

the buyer revokes the offer before the seller accepts it,

 

 

(4)

the time limit in the offer expires, or

 

 

(5)

unforeseen circumstances invalidate the offer.

 

 

The previous discussion dealt with the first and second events.  In the third event (revocation), the buyer can revoke the offer by contacting the seller or the seller's agent and withdrawing the offer before its acceptance.  In the fourth event (expiration), the buyer can state a definite period during which the offer remains open.  He can say, "This offer will be in effect until 6:00 p.m. on the 9th of March, 20XX". When residential offers contain time limits, they are typically for two to five days.  Offers for commercial and multifamily residential properties generally contain longer periods for the offer to be accepted.  If the time for the offer passes, the offer lapses or expires.  If the offer does not state a definite period, the offer stays in effect for a "reasonable period."  An explicit statement giving an expiration date for the offer will avoid any need for such an interpretation.

In the fifth event, unforeseen circumstances can invalidate the offer.  The buyer might die while the offer is still in effect.   If this occurs before the acceptance, the offer terminates.  If the buyer dies after the acceptance by the seller, the contract can remain in effect if a binding-upon-heirs clause exists in the contract.  Destruction of the property before the acceptance can also terminate the offer.   However, if destruction occurs after the acceptance, legal problems can arise.  See the discussion about "the risk of loss" clause in the contract in a later chapter.

CONSIDERATION

Besides the agreement, a valid contract requires that each party to the contract give something to the other.  In an executory real estate sales contract, consideration is the exchange of promises by the buyer and the seller (the buyer promises to pay a sum of money in exchange for the seller’s promise to sell and deliver ownership of the property at a certain price and under certain terms). This mutual exchange of promises is valuable consideration.  In an executory lease, the valuable consideration is the tenant’s promise to pay rent in exchange for the use and possession of the landlord’s property. In an executed sales contract, the valuable consideration is the mutual exchange of funds and assets that occur at the closing, and in an executed lease, the valuable consideration is the rent payments in exchange for receiving the use and possession of the property. In most contracts, the items being exchanged are approximately equivalent in value, but this is not a legal requirement.

COMPETENT PARTIES

The individuals who enter into a contract must have the legal capacity to make a contract.   People who do not have the legal capacity to contract are those people who are under the legal age, insane, or mentally incapacitated by alcohol or drugs at the time of forming the agreement.

Legal capacity may depend on the courts' interpretation of an individual's ability to understand the nature of the transaction.  In the law, a contract is not enforceable against an individual who is not able to understand the agreement and the consequences of the agreement.  For example, the law assumes that minors do not have business experience and, therefore, need protection against their own immaturity and the possibility that older people may take advantage of them.

Because the parties to a contract must understand the nature of the transaction and its consequences, a contract is not enforceable against individuals who were under the influence of alcohol or drugs when they signed the contract.   The law and the courts assume such people to be incompetent.  These individuals have a reasonable time after they attain sobriety to reconsider.  Finally, because of the need to understand, contracts are not enforceable against people who are legally incompetent due to advanced age, mental incapacity or medical condition.

REALITY OF CONSENT

For a contract to be valid, it must be free of mistakes, misrepresentations, fraud, undue influence, and duress.  The consent of each individual party to the contract must be real and intentional.  Without this consent, the contract is either void or voidable depending upon the circumstances.

         

(a)      

MISTAKES - Two types of mistake exist in the law.  A mistake of fact occurs when certain information or conditions in the contract are not true: for example, when the identity of a party to the contract is not correct, when the description or identity of the subject property is not correct, or when the true nature of the agreement is not correct.  These mistakes generally do not void a contract but could make it voidable.  A mistake of law occurs when a person has full knowledge of the facts but reaches a wrong conclusion about the legal effect of those facts.  This type of mistake is not a basis for voiding a contract.

The important aspect of a mistake of fact relates to which party or parties make the mistake.  If both parties to the contract made a mistake of fact, there has been a bilateral or mutual mistake, and the contract is either voidable or void, depending on the circumstances.  If only one party to the contract made a mistake of fact, there has been a unilateral mistake, and the courts do not view the situation as grounds for automatically rescinding the contract.  The courts usually consider that unilateral mistakes result from carelessness or lack of diligence of the mistaken party and should not affect the rights of the other party.  In other words, the contract involving mistakes of fact is not automatically voidable but the possibility exists. 

 

(b) 

MISREPRESENTATION OR FRAUD - A misrepresentation differs from a mistake of fact, which is a misunderstanding or misconception that a person has about a fact.  By contrast, a misrepresentation is a failure to disclose a material fact, or an incorrect or improper statement about a material fact made by a party to the contract.  A misrepresentation makes a contract voidable by the party who suffers a loss because of the misrepresentation.  However, the contract is voidable only if the misrepresentation refers to a material fact.  In the law, a material fact is information or evidence that a reasonable person would consider important when deciding a course of action or reaching a decision.

A contract is voidable if a misrepresentation of a material fact was part of the basis for reaching the agreement.  The misrepresentation can be intentional or unintentional.  If it is intentional, it is considered fraud.  If the misrepresentation is unintentional, it may be negligent misrepresentation if the party knew or should have known the truth about the material fact.  In either case, the buyer has legal remedies, and the victim of the misrepresentation or fraud may rescind the contract because of the loss or may sue for dollar damages.

A buyer is seldom in a position to discover the seller's misrepresentations until he or she takes possession of the property.  Some common grounds for misrepresentation in such cases are the following:

 

 

 (1)

the physical condition of the improvements; 

 

 

 (2)

the size, frequency, and sources of the income and the volume of sales;

 

 

 (3)

the operating expenses, especially maintenance and repairs, and utility payments;

 

 

 (4)

the location of the property's boundary lines;

 

 

 (5)

the exact frontage of the property;

 

 

 (6)

the age of the improvements on the property;

 

 

 (7)

the soil's drainage capacity and characteristics; and

 

 

 (8)

the existence of undisclosed encumbrances such as easements and liens.

 

(c)

AVOIDING MISREPRESENTATION - Contract law imposes duties and responsibilities on both parties who reach agreement in the sales contract.   These duties are sometimes referred to as the seller's "duty to speak" and the buyer's "duty to seek."

 

(d) 

THE SELLER'S DUTY TO SPEAK - Historically, the laws governing the formation of contracts followed the concept of caveat emptor (let the buyer beware).  However, the law recognizes three situations in which a seller has a duty to speak the truth.  Failure to make true statements about a material fact in these instances is misrepresentation and, possibly, fraud.

First, in the fiduciary relationship between the seller of property and his or her real estate broker, both parties have the duty to speak the truth and to make a full disclosure of all the facts to each other.
Second, if one party to the contract knows an important material fact not known by the other, the courts could rule that the contract is voidable.  This situation can arise in a real estate transaction if the property being traded has a hidden defect.  The defect might be a physical defect in the improvement that is not visible upon inspection of the property, or a title or other legal defect, such as a tax lien or mechanic's lien against the property, or an unrecorded easement.  In these situations, the seller has a duty to inform the buyer of the defect.  If the seller fails to inform the buyer of a known but hidden defect, the courts will probably view this action as fraud.

The third situation occurs when a person misstates or unintentionally misrepresents an important material fact.  Upon discovering this misrepresentation, the person must correct the mistake immediately or at the latest when negotiations resume.  If the aggrieved party can prove the person making the unintentional misrepresentation subsequently learned of the error and did not correct it, the courts may allow the aggrieved party to void the contract.

These three situations in which a person has a duty to speak have one aspect in common -- one party has the wrong impression or wrong information that certain things are true, whereas the other party is aware that they are not true and also knows of the misunderstanding.  There is a legal responsibility to disclose the truth.   Most courts would hold that fraud exists if the lie persists.  The potential seller does not have to disclose all of the facts about the property he or she is selling, only when he or she knows the buyer is harboring a misunderstanding on some vital matter that the duty to speak arises. The telling of "half-truths" is another problem.  Courts tend to view the revealing of only part of the truth the same as telling a lie.  If a seller states a fact that is true, the seller must also state all of the other facts that either qualify or modify the correct information.  These half-truths can result in the seller's liability to pay damage to the buyer.

 

(e)  

THE BUYER'S DUTY TO SEEK INFORMATION - Both parties to the contract, including the buyer, have a duty to make use of all readily available public information and take every opportunity to inspect the property.  Misrepresentations can occur and pass unnoticed even if the material facts are readily and equally available to both parties to a contract.  In these situations, misrepresentation of a material fact by the seller may not always allow the buyer to cancel the contract.

One example of this is a zoning ordinance.  The seller could knowingly or unknowingly misrepresent the nature of a land-use restriction that affects the property.  In this situation, a misrepresentation of existing state or local law does not provide the basis for rescission of the contract because the law and land use regulations in the zoning ordinance are a matter of public knowledge, open and available to buyer.

Another common situation involves the physical inspection of the property and its neighborhood.  Misrepresentations may relate to matters that the buyer's inspection of the property can reveal.  The buyer may not be entitled to rely on the seller's statements about the condition of the building or the nature of the neighborhood when the buyer has the opportunity to make a careful inspection.

 

(f)  

DURESS AND UNDUE INFLUENCE - Undue influence is the unfair advantage that one person has over another because of a relationship between the parties.  If undue influence exists, the contract is voidable by the individual who is unfairly or unduly influenced.   For example, if an employer extracts a contract from an employee by relating it to continued employment, undue influence exists.

Duress is the use of force or the threat of personal injury to make a contract against the free will of the other party.  Contracts entered under duress are voidable by the party forced into the agreement.   Duress occurs if a neighbor obtains a contract to buy an adjacent property by telling the owner that he will beat up the owner if he does not agree to sell.  So-called “economic duress,” where one party takes advantage of the other party’s financial situation (such as when a seller is about to lose his or her property to foreclosure) normally will not make a contract voidable by the distressed party.


LEGALITY OF PURPOSE

Contracts must involve legal promises, actions, and objects.   If illegal acts or objects form the basis of a contract, the law considers the contract to be illegal and void, and consequently unenforceable in courts of law.  Unlawful or illegal activities or objects are those specifically prohibited by law, those contrary to the rules established under common law, or those contrary to stated public policy.  Any contract that violates a statute or an ordinance is illegal and consequently is a void agreement.  Forged currency and/or financial instruments such as stocks and bonds offered as consideration in a contract make the contract void.  Similarly, a contract to convert a single family house on residentially zoned land into a retail store would be void.

NECESSITY OF WRITING

Contracts can be oral or written.  Oral agreements, however, are subject to failure of memory, misinterpretation, misrepresentation, and possibly even fraud.  To overcome these problems, the English Parliament passed the first version of the Statute of Frauds in 1677.   Every state, including Georgia, has its own Statute of Frauds requiring certain contractual agreements to be in written form.  Georgia’s Statute of Frauds governs contracts to buy, sell or lease real property, or any partial interest in real property; consequently, these contracts must be in writing.

The Statute of Frauds does not require all terms of the contract to be in writing, provided there must be some signed, written piece of evidence to give the court a reason to believe that an agreement exists.  The written evidence can be the contract itself or a memorandum, a written document that outlines the nature of the agreement and gives a judge reason to believe the two parties wanted to enter into a legally binding contract.   To satisfy the Statute of Frauds, the memorandum of the contract must contain at least the following pieces of information:

         

(a)    

the names of seller and buyer;

 

(b)

a sufficient description of the land; 

 

(c) 

the contract price;

 

(d)

the terms of sale, if other than cash; and

 

(e) 

the signatures of the parties to the contract.

Contracts that do not comply with the necessity of writing are not necessarily illegal or fraudulent or invalid. The necessity-of-writing provision attempts to prevent misrepresentation or fraud that can easily arise when contracts are oral.  Oral contracts are sufficient if there is no need to go to court to settle some difference between the buyer and seller.  However, for real estate contracts and other contracts governed by the Statute of Frauds, failure to satisfy the writing requirement means that the contract is not enforceable in a court of law.

THE END RESULT OF THE CONTRACT -- DISCHARGE, NONPERFORMANCE, OR BREACH OF CONTRACT

After the buyer and seller negotiate and sign the real estate contract, the rights and duties created by the contract remain in force until one of three things occurs:

         

(a)     

discharge or performance of the rights and duties created by the contract;

 

(b)

one or both parties to the contract are legally excused from performance of their contractual duties; or

 

(c) 

one party to the contract fails to perform according to the terms and provisions established in the contract.

 
 DISCHARGE OR PERFORMANCE OF THE CONTRACT

The usual method of discharge for a contract is the complete performance by both parties of the obligations that each incurred under the contractual agreement.  Each party to the contract must perform the actions or fulfill the promises they made, and each party expects the other to do the same.  In the real estate sales contract, the buyer promises to pay for the parcel of real property.  Two questions related to payment are "What is payment?" and "What is good evidence that payment has been made and that the obligation has been discharged?"

         

(a)       

FORM OF PAYMENT - The transfer of money that is legal tender (currency) is payment.  A certified check is as acceptable as cash because the seller knows the funds are in the bank.  However, payment by means of a personal check is less clear.  Here, absolute discharge of the obligation to make payment in the contract may not occur until the check clears the bank.

If "seller financing" in the form of a purchase money loan is part of the financial agreement, the parties must agree that execution of the purchase-money note and security deed discharges the contract.  Failure to state this agreement could make performance of the contract a function of when the buyer pays off the loan received under the purchase-money mortgage.

 

(b) 

NOVATION - Novation involves substitution either of a new party for one of the original parties to the contract, or of a new obligation for one of those specified in the agreement between the original parties.  In other words, a party to the contract may find another person who is willing to assume the duties and obligations of the contract.  This new party must agree to assume all of the responsibilities and duties of the original party who is seeking to be freed from the obligations of the contract.  In a real estate sales contract, this person is typically the buyer. Both parties to the original contract must agree to the substitution.

Another type of novation is the mutually agreeable substitution of a different obligation for one of the original obligations specified in the contract.  For example, the real estate contract signed by both the buyer and seller states that the kitchen appliances remain with the property.  The seller now realizes that the appliances match the decor of his or her new house and seeks the buyer's approval to substitute $700 for the appliances.  If the buyer agrees, the new obligation of the seller to pay $700 (or reduce the sales price by $700) supersedes the original obligation to leave the appliances.

 

(c) 

ACCORD & SATISFACTION - The process of accord and satisfaction also discharges obligations incurred in the contract. An accord is a major change, not a substitution, in the agreement made between the two parties to the contract. For example, a buyer promised to get a new loan for 80% of the sales price and to give 20% in earnest money and cash at closing. Now the buyer says that the new loan must be a 90% loan or the seller needs to accept a 10% purchase money note. The proposed arrangement is different from the one specified in the contract. The buyer and seller disagree but work to resolve the situation. They agree to an 85% new loan and a 5% purchase money mortgage. The term satisfaction denotes that the new arrangement is acceptable to the buyer and the seller.
The legal doctrine of accord and satisfaction requires that there be a dispute or uncertainty about the consideration specified in the contract.  The buyer and seller negotiate a compromise agreement to the contract.  Their differences disappear (the accord), and the mutual obligations are satisfactory (the satisfaction).  The two parties enter into a new contract; and in so doing, they surrender the legal right to take the dispute or the settlement agreement into court.

The difference between novation and accord and satisfaction is that a novation involves a substitution within the original contract, whereas accord and satisfaction results in the formation of a new contract to replace the original agreement.

LEGAL EXCUSES FOR NONPERFORMANCE

Although the contract binds two individuals to a certain agreement, one of them may have a legal excuse not to perform the terms of the contract.  For example, a valid contract requires competent parties.  A legal incompetent, such as a minor, may have a legal excuse not to perform.  If reality of consent is lacking, the party who did not give his or her true consent can receive a legal excuse from the contract.  Other legal excuses for nonperformance include the following:

         

(a)     

CONDITION PRECEDENT - Many contracts contain statements that one of the parties must perform an act or fulfill a promise before the other party needs to act or fulfill a promise.  In other words, performance by one of the parties depends on a prior action by the other party to the contract.  This is known as a condition precedent.  Failure by one party to perform a condition precedent is a legal excuse for the other party to be relieved from his or her contractual obligations.

An example of a condition precedent in a real estate sales contract is a requirement that the seller do some repair and maintenance work before the closing.  Assume that the ceilings in the living and dining rooms are warped and discolored because of leaks in the roof. The buyer may require that before closing the seller patch the roof to stop the leaks and paint both the living and dining rooms. If the seller having agreed to make the repairs (a condition precedent) fails to do so, the buyer may have a legal excuse for nonperformance of his or her obligation in the contract.  However, if the condition precedent is insignificant, its performance may not be required to make the contract legally binding.  In such cases, the party who expected the condition precedent to be performed may be limited to deducting the financial damages caused by the other person's nonperformance from the sales price. In this situation, the buyer would reduce the cash payment to the seller by the expenses incurred to patch the roof and repaint the living and dining rooms.  If stopping the leaks required putting a new roof on the building, however, and if the buyer and seller fully understood a new roof was part of the contract, the seller's failure to perform the condition precedent could be a legal excuse for the buyer to escape the contractual obligations.

 

(b) 

WAIVER - Another legal excuse for nonperformance is waiver.  A waiver is an action or statement by one party to the contract that shows an intention not to enforce the provisions of the contract that the other party agreed to perform.  The person granting the waiver therefore gives up the opportunity to enforce a legal right and thereby loses that right.  A waiver of one person's right to force the other person's performance of the contract provides a legal excuse for nonperformance by the other person.  

 

(c)  

PREVENTION, FRUSTRATION AND IMPOSSIBILITY - Contract law provides other legal excuses for nonperformance of a contract.  These excuses, including such things as prevention, frustration, and impossibility, are beyond the scope of this text.   If these situations arise, contact an attorney.

BREACH OF CONTRACT

A breach of contract is the failure to perform the acts or promises made in the contract.   Breach of contract is nonperformance of a contract without a legally acceptable excuse.   If one party to the contract does not perform according to the terms of the contract, the other party may suffer a financial loss.  The injured party has one or more forms of legal recourse in this event.  The courts may require that the contract be fulfilled, or they may provide that the injured party receive compensation for the injury or damages due to the breach of contract.

The legal actions or remedies that the injured party can undertake are rescission or cancellation, a lawsuit to obtain financial compensation for the damages suffered, and a lawsuit to obtain specific performance of the contract.

         

(a)    

RESCISSION - When one party to the contract fails to perform according to the agreement, the other party has the right to return to the same legal and financial position he or she held prior to the formation of the contract.  In other words, the non-breaching party will be placed in the same financial position he or she was in before signing the contract.  This remedy is rescission. In this situation, both parties return any consideration they received.  A rescission may be voluntary, by agreement between the parties, or else the injured party may request a court order.
Imagine that after signing a real estate sales contract, the buyer and seller have a change of heart.  Neither party wants to honor the contract. This situation is a voluntary rescission between the buyer and the seller.  The seller compensates the broker, who returns the earnest money to the buyer, who accepts it and goes about the task of finding another house. Cancellation is the same as rescission with the exception that the injured party retains the right to sue for damages.

 

(b) 

DAMAGES - A second remedy available to the injured party in a breach of contract is a lawsuit to recover a financial loss caused by the breach of contract.   The court tries to place the injured party in approximately the same financial position he or she was in under the terms of the contract.   The money awarded to the injured party is compensatory damages with the amount of the award determined by the extent of the financial injury.

In certain situations, the parties to the contract may foresee the possibility that a breach of contract may occur.  Consequently, they may agree on an amount of money to be paid to the injured party in case the default does take place.  In this situation, the predetermined sum of money is liquidated damages.  The earnest money deposit frequently is treated as liquidated damages in case of a breach of the sales contract by the buyer, even though the seller may also retain the right to sue for additional damages.

 

(c)  

SPECIFIC PERFORMANCE - Another remedy for breach of contract is specific performance.  In a sales contract, the courts may grant the injured party (typically the buyer) a court order requiring that the defaulting party (typically the seller) sell the property according to the specific terms included in the agreement.  This remedy usually involves properties that are unique such as works of art and real estate.  If the judge requires evidence of the property's uniqueness, certain attributes or characteristics of the property, or the relationship between the owner and the use of the property, can be used to show it is unique.  If the buyer, as the injured party, can show that the property is unique, he or she can request specific performance of the contract instead of money damages.  If the judge rules in favor of the buyer, the seller must complete the transaction negotiated in the contract.