Introduction to the Contracts Course

(Video)
Hello and welcome to AYPO's Real Estate Education Series for real estate brokers in the state
of Oregon. I'm Sheri Wytcherley.

In this course we'll be discussing contracts.

The first class in this course will cover contracts and contract law in general.

From there, we'll look at specific real estate contracts.

We'll conclude this course with a discussion of special requirements of real estate contracts.

When you're ready, we'll begin with Contract Laws.

Introduction to Contract Law Basics

(Video)
In this class we'll be examining contracts and the basics of contract law.

We'll start with some general information about contract law.

Then we'll look at what is required for a contract to be valid.

After that, we'll discuss assignment and novation.

From there, we'll examine when a contract is considered performed or discharged.

Next, we'll take on breach of contract.

To finish, we'll explore contract clauses.

As a real estate agent you'll constantly deal with contracts. Before we talk about the specific
kinds of contracts that are used for real estate, you'll need to know the basics of contract law.
General Knowledge of Contract Law
A contract is a formal and legally enforceable agreement between two or more parties.

Basic Definitions in Contract Law

To understand the law of contracts, it is necessary to become familiar with some of the terms
that sound like "legal jargon," but which have special meanings in legal matters and by the
courts.

The following definitions are general summaries. More detailed definitions may be found at
http://dictionary.law.com/​. This is a free internet resource for legal information and assistance.
No endorsement of any products or material from this website is either made or implied.

Acceptance

Acceptance occurs when a party agrees to the exact terms of another party's offer. Offer and
acceptance are two basic elements in the formation of a contract.

Breach of Contract

Breach of contract occurs when a party fails to fulfill their part of the agreement.

Changes

Changes are any new or altered items that were not in the original contract.

If a change is desired or required, the parties must sign an amendment to the contract. In real
estate transactions, this amendment will commonly take the form of an addendum to the
purchase agreement.
Contract

A contract is a mutual agreement that requires an offer and acceptance, consideration, a legal
purpose, and parties with legal capacity.

Covenant

A covenant is a contract or part of a contract that is either expressly stated by the parties or
implied by law.

Damages

Damages are financial losses that occur when there is an injury to individuals or entities
resulting from criminal or tortious conduct of another, such as breach of contract. Awarding
monetary damages is the most common remedy that a court may provide when there has been
a breach of contract.

Earnest Money

In a real estate transaction, earnest money is money given by a prospective buyer to show
sincerity and to demonstrate their financial capability to raise the money called for in the
agreement and to serve as possible liquidated damages to the seller in the event the buyer
defaults on the agreement.

Estoppel

Estoppel is a legal prohibition which precludes a person from asserting or denying a fact
generally based on that party having taken a legally opposed position to the fact or assertion in
a previous action. (For example, a party that claimed they could not be at fault for something
because they were not in that location at that time, cannot later make a legal claim asserting
that they were, in fact, at that location at that time.)

Fraud

Fraud is an intentional misrepresentation, deceit, or concealment of a material fact known to a

party that they use with the intention of depriving a person of property or legal rights or
otherwise causing injury based on the injured party's reliance on the fraud.
Indemnify

To indemnify is to guarantee against any loss which another might suffer, and to compensate
for damage or loss sustained, expense incurred, etc.

Mitigation of Damages

A mitigation of damages is an action taken by a non-breaching party to lessen or reduce the

harm caused by a breach of contract.

Offer

An offer is the action that starts the process of forming a contract, e.g., I will give you $100,000
for your home.

Offeree

The offeree is the person or business entity receiving an offer. In real estate, terms the "offeree"
is commonly the "seller."

Offeror

The offeror is the person or business entity making an offer. In real estate terms, the "offeror" is
commonly the "buyer."

Performance

Performance is doing what is required of a party by a contract

Privity of Contract

Privity of contract is the direct relationship that exists between parties to a contract.

Remedies

Remedies are the lawful actions that are available through the courts to a party who has been
damaged by a breach of contract to enforce a right or recover damages.

Legal Guidelines
Court decisions over the years have set several legal precedents with respect to contracts.
These apply overall and in general and have the same force as statutory law. The following are
the key guidelines which the Courts have established in ruling on contract disputes:

● Written agreements take precedence over oral agreements

● Later agreements supersede earlier agreements
● Special clauses prevail over general clauses
● Handwritten agreements override printed agreements
● Specifications prevail over drawings
● Words prevail over numbers; all dollar amounts in a contract should be written out
● Ambiguous, misleading or confusing statements are always interpreted against the party
preparing the contract.

Types of Contracts: Oral and Written

Oral Contracts

Also referred to as "spoken" contracts, this contract category refers to contracts that are not in
writing. Unless prohibited by law, oral contracts are valid. However, even in those instances
where an oral contract is valid, enforcing the contract terms may be difficult or impossible.

Although not entirely accurate, it is always wise to remember the old cliché, "An oral contract is
only worth the paper it's printed on..."

Example:

● An owner and contractor enter into an oral contract to build a deck.

● After completion, the owner says the deck was to be 16 feet wide, the contractor says
the agreed width was 14 feet.
● The parties take their dispute to court, and each side testifies as to their understanding
on the deck width.
● The court hears testimony from both sides that directly contradict one another, and there
is no written contract which the court can use to settle the matter.
● Under these circumstances in this hypothetical, the court believes the owner is the more
truthful witness. Therefore, the contractor loses.
Where there is no written agreement to work with and both parties appear sincere in their
arguments, the courts tend to favor the party that appears to have been in the lesser bargaining
position, that is, most often, the consumer over the provider. ​This is a very general
observation. For any specific circumstances, consult an attorney!
Written Contracts

A written contract is a negotiated document, signed by and identifying all parties, explaining the
consideration given by each party, and stating the rights and duties of each party.

When the contract is put in writing, it describes the agreement of the parties, with terms and
conditions, and serves as proof of the parties' obligations.

Advantages of Written Contracts

There are many advantages to written contracts. Some of the most commonly recognized
advantages include:

● Written contracts provide a much higher level of certainty than oral contracts, so there is
less potential for disagreement regarding the rights and duties of the parties.
● By including a provision allowing for recovery of attorneys' fees, a written contract can
permit recovery of legal fees by the prevailing party in the event of a dispute.
● A written contract can precisely state warranty terms (rather than relying on implied
warranties).
● A written contract can provide for alternative dispute resolution (for example, mediation
or arbitration).
● Less ambiguity can lead to easier enforcement. Because of the certainty of terms, a
written contract is usually easier to enforce.

Oral vs. Written Contracts in Real Estate

Under the Statute of Frauds, all contracts for the sale of real property and for leases with
a duration of one year or longer MUST be in writing. Oral contracts for land will NOT be
recognized by the courts.
Both U.S. Federal law and Oregon state law require that all contracts for real estate be in writing
to be enforceable. Oral contracts are NOT allowed. In regard to Oregon law, this requirement is
found in section 41.580 of the Oregon Revised Statutes (the statute of frauds).

Electronic Signatures
Technology is rapidly changing the field of real estate.

A savvy broker understands the need to either adapt and incorporate technology into their
business or risk being left behind.

From marketing to closing, technology has changed the way real estate professionals conduct
nearly every aspect of their business. Yet, few of the technological advancements have done
more to relieve real estate professionals and their clients of irksome and tedious tasks than the
electronic signature.

Gone are the afternoons spent tracking down a client who missed one of the myriad signatures
needed as part of the transaction process. Now, a document can be sent to a client’s phone,
digitally signed, and sent back in a matter of moments.

So, how did it come to be that we can now electronically sign contracts with such legal weight?
Let’s take a look at some of the legislation that brought this about.

E-SIGN Act

There are several federal laws pertaining to electronic signatures, including the FDIC’s
Electronic Signatures in Global and National Commerce Act​ ​(E-SIGN Act)​, which is applicable to
any electronic agreements made after October 1, 2000.

Consumers may opt out of e-signatures if they wish, and may use paper if desired. Electronic
documents should be stored in a location and manner that allows them to be retrieved and
reproduced with reasonable ease.

Additionally, specific consumer disclosures must be made when using e-signatures:

Prior to obtaining their consent, financial institutions must provide the consumer, a clear
and conspicuous statement informing the consumer:
 ● of any right or option to have the record provided or made available on paper or
in a non electronic form, and the right to withdraw consent, including any
conditions, consequences, and fees in the event of such withdrawal;
● whether the consent applies only to the particular transaction that triggered the
disclosure or to identified categories of records that may be provided during the
course of the parties’ relationship;
● describing the procedures the consumer must use to withdraw consent and to
update information needed to contact the consumer electronically; and
● informing the consumer how the consumer may nonetheless request a paper
copy of a record and whether any fee will be charged for that copy.

The Act also specifies the provisions for retaining records:

Record Retention

The E-Sign Act requires a financial institution to maintain electronic records accurately
reflecting the information contained in applicable contracts, notices or disclosures and
that they remain accessible to all persons who are legally entitled to access for the
period required by law in a form that is capable of being accurately reproduced for later
reference.

Many electronic signature services, also provide long-term storage for transaction files. Thus, an
agent who uses an electronic signature service may have no more filing to do than simply to
mark the file as “Closed”.

Photo credit:​ F
​ lickr

There are many electronic signature services that can be used, in real estate and otherwise. If
you wish to choose a service to use electronic signatures, research your options thoroughly.
UETA

The​ ​Uniform Electronic Transmissions Act​, a precursor to ESIGN, is a model act introduced in
1999. It established the legal standing and binding nature of emails, electronic signatures, and
electronic records. The Act was developed in order to prepare the nation to handle electronic
communications by establishing rules and guidelines upon which states could model their
legislation.

UETA applies to transactions where the parties have consented to the use of electronic
documents. It is designed with the objective of ensuring that transactions conducted by these
means are enforceable to the same degree as transactions conducted by physical means and
manual signatures.

UETA was approved by a national committee and recommended for adoption by all states. As
of 2018, all but four states and territories have enacted its provisions.

The stated purpose of the UETA is to “remove barriers to electronic commerce by validating and
effectuating electronic records and signatures." Another way to put this is that the purpose of
this act is to ensure a record or signature will not be denied legal effect or enforceability
because it is electronic. This also means that a contract is enforceable even if it is in an
electronic form.

If a law requires that a contract have a signature to be enforceable, an electronic signature

satisfies this condition and makes the contract enforceable. The only exception to this is if a
party to the contract has opted-out under UETA.

The Uniform Electronic Transactions Act does not actually alter what elements make a valid
contract. Neither does UETA significantly change the elements that are required to make a
signature valid, other than the fact that a signature can be electronic.

Paperless Transactions
Two common ways in which all people communicate today, across the U.S, is via text and
email. That includes real estate agents and their clients. There’s a good reason for this - the
California Association of REALTORS​®​, CAR, found that 40% of today’s home buyers would
prefer their agent text them rather than call, and nearly half (46%) preferred to communicate
with their agent via email. Meanwhile through survey REALTORS​®​ have discovered that over
half of consumers found the house they like online. These two pieces of data point to a lot of
consumers desiring to work over the internet.

So if the bulk of communication happens via email or text, what does that look like for the
contracts in the transaction file?

First of all, licensees do need to save these communications as electronic records when
negotiating via email or text message. A brokerage’s written policy should have methods for
how to save these communications to ensure that they are not lost. Printed or not, these are not
contracts. And nothing in this, by the way, prevents a client and their broker from negotiating
provisions that are going to be in a contract, over electronic means. If a client has told you that
they prefer to communicate through text, it is no different than you calling them to discuss what
price they plan to offer for the house you showed them that morning.

Emails and text messages may be filed in paper form, or electronic form. For those who prefer
paper files, the text message or email may be printed and filed along with the other documents
of the transaction.

For those operating under a “paperless” system, the licensee can save or transfer every text
message or email to a database or cloud system which will store it safely.

Text messages may be saved electronically a number of different ways. We’ll just look at a few
here. To save messages from apple phones​ ​Macroplant​* offers a tutorial. To save messages for
android phones, try​ ​this method​*.

*It should be noted that we do not endorse the accuracy or security of these websites. If you
have problems then you should follow the policy set forth in your brokerage policy manual,
research methods for maintaining these types of records yourself, or contact an IT professional​.

Why These Communications Matter

The real problem with negotiating via email, and especially text messages, is that the
communication is often relatively informal, and again, does not constitute a contract (although
this may be a developing area of case law). We are used to sending quick text messages to our
friends and family who understand our messages a certain way. When speaking with clients or
other licensees there is a risk of saying something that is taken the wrong way, or even worse,
sending a text message to the wrong party. This is a serious issue and should be given weighty
consideration. Licensees accidentally revealing a client’s confidential information might be at
stake - you cannot UNsend a ‘quick’ text or email and you cannot ask someone to UNsee a
client’s information. Once you send a message that you meant to send to the client, that says,
“Are you sure you’d take $10k less?” to the buyer’s broker, they know that information, no
matter if they delete it.

It is very important that you do whatever you can to avoid giving misrepresentations through
electronic communications. Because of the dangers, some companies will choose to even say
that communication should never be done via text message. However, this could result in
missing out on business with the 40% of consumers who prefer to work this way.

Keeping records of texts and emails will serve you well in the event that a dispute arises, or a
client or customer files suit against you, by providing proof of what was said.

So the use of texts and emails are up to the broker who creates the policy, but the broker does
not have the ability to say that text message will constitute contracts.

Text Messages as Binding Communications

MaxPixel

Although email has long been considered a legitimate method of official communication, it’s
important to understand how seriously the courts are taking text messages today.

Although the cases we’re going to look at did not occur in Oregon, it demonstrates the legal
interpretation of a judge regarding text messages. This is based, in part, on the UETA that both
Massachusetts and Oregon abide by, and it indicates the reasoning that judges may employ in
similar cases.
Case Study: St. John’s Holdings LLC v. Two Electronics, LLC

In the groundbreaking 2016 Massachusetts case of​ ​St. John’s Holdings LLC v. Two Electronics​,
Judge Foster decided that the text messages exchanged in the course of a real estate
transaction may constitute a binding contract to purchase and sell. This is true even in the
absence of a signed formal offer.

In this particular case, the real estate transaction in question was a commercial deal where both
parties were represented by agents. St. John’s Holdings LLC desired to purchase the property
owned by Two Electronics for use as a medical marijuana facility. The parties negotiated over
the terms of the transaction for a number of weeks, with letters of intent being exchanged as this
was done. The texts clearly indicate that both parties were agreeing to the deal, and,
importantly, the seller signed each text message with his name.

After exchanging these texts, emails, and letters, along with a deposit from the buyer, the seller
received another offer from a second buyer, and signed it prior to receiving the final Letter of
Intent. The seller argued that these communications did not form a binding agreement.

The judge disagreed, and even cited the Uniform Electronic Transmissions Act, along with
Massachusetts’ Statute of Frauds, in his reasoning that the communications did form a valid and
binding contract.

Case Study: William Donius v. John R. Milligan, Robert M. Gravis, and Richard
Holland

In​ ​this 2016 case​, also from Massachusetts, the judge ruled differently on the binding nature of
the electronic communication that occurred during the negotiations for a condominium unit.

The property in question was discussed between the agents of each party via text message.
During the course of these messages, the agents negotiated terms including a sales price and
closing date. During the course of these negotiations, the seller’s agent, Emily Flax, stated:

“The sellers accept the price. They are proposing a closing date of 6/24 in order
to have time to come and take their personal belongings. I can explain further
when we speak. Also want to make sure that the offer language about furnishings
agrees with new TRID regulations…”

The text continues to explain specific terms of the agreement that the sellers want. The buyer’s
agent followed up with an email containing a buyer-signed contract and deposit check image.
The sellers and agent did not sign or return the purchase agreement, and took an offer from
another buyer on the property.

In this case, the judge ruled that the text-message communications did not satisfy
Massachusetts’ Statute of Frauds. In the memorandum to the decisions, the judge writes:

“That the writing upon which the plaintiff relies is a series of text messages is not
the determinative factor. Text messages and emails can potentially satisfy the
Statute of Frauds, provided that they, like other writings, contain the essential
terms of the transaction and are signed by the parties to be bound or their
authorized agents. See St. John’s Holdings, LLC v Two Electronics, LLC…. the
text messages here are not signed by either the proposed buyer or seller, nor are
they signed by the agents. Further, for reasons stated below, there is no
showing, even as an allegation, that the seller’s agent, Flax, was authorized to
bind her principals to an agreement, and the substance of the text messages
relied on by the plaintiff demonstrate, at best, circumstances where the parties
have merely reached the stage of “imperfect negotiation” prior to formalizing a
contract, and have not yet reduced their agreement to terms.”

In other words, the fact that the negotiations were not, in any manner, “signed” by the
sellers, and that their agent did not have the authority to commit them to the contract, led
the judge to rule that the communications did not form a binding contract.

So, we can see that in these cases whether or not text communications are binding was
interpreted under the UETA, as well as under state statutes.

To protect themselves, agents should consider adding a disclaimer to their email to the
effect that nothing said via email constitutes a binding contract. Although text messages
are considerably briefer and do not lend themselves to such signatures, agents should
still consider including a note that the terms discussed are “subject to client approval”.

Requirements for Validity

To form a legally enforceable contract, the following basic elements are necessary:

● An offer
● An acceptance of the exact terms of the offer
● A valid (legal) purpose
 ● Consideration
● Parties with legal capacity

In addition to these elements, a contract's terms must be sufficiently clear and definite so that
the parties understand them at the time of entry into the contract. The more clear, precise, and
well defined the terms of the contract, the more likely it will be enforceable.

Note:​ Offer and acceptance are often listed as part of the same element making for only four
elements.

An Offer
The details of what is going to be performed as a result of this contract must be described,
including the manner in which it will be performed, the time frame, and the price. This means:
price, manner of payment (terms), time frames for specific deadlines to be met (such as earnest
money payment, due diligence), and escrow closing.

An offer is a promise made by one party to do, or not to do, a specific act or acts. A valid offer
requires a couple of elements: intent to contract and a definite statement of terms.

Intent

The parties must each intend to enter into a contract, and their spoken or written words must
communicate that intention.

Joking or offhand comments or discussion that may incidentally contain both an offer and
acceptance are not sufficient to form a contract.

The intent of the parties to be legally bound must be clear from both their words and conduct.

Definite Statement of Required Terms

The offer must clearly outline the terms of what is being offered, including any contingency
clauses or covenants that may apply and the respective obligations of the parties to the
contract.

Acceptance or Rejection
When an offer is made and accepted on its exact terms, both the party making the offer and the
party accepting the offer have agreed to be bound by the stated terms, and a contract is formed.

Any "acceptance" that attempts to change or alter the terms of the original offer is not a true
acceptance and does not lead to the formation of a contract. Instead, it is a new offer, and a
contract can only be formed if the other party accepts the new offer on its exact terms.

Both parties to the contract must mutually agree to the obligations outlined in the terms of the
contract.

Acceptance of an offer occurs when a person to whom the offer has been directed makes an
appropriate statement of agreement with the terms of the offer.

Additionally, for an acceptance to be valid, it must be voluntary (not the result of threats or made
under duress) and the party accepting must have legal capacity to accept the definite and
explicit terms of the offer.

And the acceptance must be communicated to the offeror. If the offeror withdraws their offer
prior to being notified of the acceptance, no contract is formed.

An offer can be rejected in multiple ways.

● One party can indicate in writing that an offer is rejected.

● Since many offers have time limits, a party can reject an offer by allowing the time limit to
expire.
● A counteroffer is a rejection of the previous offer.
● The offeree may accept another offer instead, which is a rejection of all other offers
(although a back-up offer may be accepted concurrently. This will be discussed later.)

Any attempt to change the terms of the offer is legally a rejection of the offer. The changed
terms become a counteroffer which can then be accepted or rejected by the other party.

Valid Legal Purpose

A contract must have a legal purpose to be enforceable. The courts will not enforce a contract
that does not have a legal purpose. A legal purpose means:

● that the performance of the contract is not in and of itself unlawful and
● that performance of the contract will not result in a violation of law.
 Example 1: A seller cannot enforce a contract to extort money from a buyer, i.e., "Pay me
$1,000.00 extra for the property, or I'll break the windshields on your car."

Example 2: A buyer cannot force a seller to perform a contract that requires the seller to
commit fraud.

Example 3: An individual occupying a property owned by someone else cannot legally sell
that property to a third party.

Consideration
Consideration is what one party to a contract offers to do if the other party performs the
obligations of the contract. Generally, consideration is offered by one party in the form of money
and by the other party in the form of an action.

However, under the law, consideration can be almost anything.

● The actual performance of an act (a transfer of title to a property; a contractor building a

house)
● A promise to perform or not perform some act ("I promise to pay you;" "I promise to mow
your lawn")
● A promise not to build above a certain height in return for (money/property/property
access)

The terms of the offer determine what kind of consideration is needed to form a contract.

In real estate transactions, the seller offers consideration in the form of the property being sold
and the buyer offers consideration in the form of money or an exchange of property or other
valuable consideration.

Competent Parties with a Legal Capacity

One party must offer to enter into a legal agreement and another party must accept the terms of
the offer. To do so, both parties entering into the contract must have legal capacity.

Legal Capacity:

● Individuals must be 18 years of age or older.

 ● Individuals must not be operating under a determination of legal incompetence, such as
a court order depriving the individual of the ability to make contracts, and appointing a
legal representative to manage the party's financial affairs.
● Business entities (such as corporations, limited liability companies, and limited liability
partnerships) must be in compliance with state requirements by filing annual documents
and complying with assumed business name requirements.

Counteroffers

A counteroffer is a response to an initial contract offer which revises that offer with terms that
generally are more acceptable to the party making the counteroffer. As we have already noted,
a counteroffer is a rejection of the original offer.

There is technically no limit to the number of times a contract can be revised with counteroffers
in Oregon. The negotiation process of establishing a contract can involve a lengthy back and
forth process of counteroffers and counteroffers to counteroffers. Counteroffers are passed
between the negotiating parties until all the parties agree on the terms of the contract or the
negotiations are ended without the creation of any contract.

Priority of Multiple Counteroffers

When multiple parties are involved in the same contract negotiation, it is possible for multiple
offers, or multiple counteroffers, to be presented at the same time. All counteroffers have the
same priority. The party to which the counteroffers are being presented chooses which
counteroffers to accept, which to reject, and which to counteroffer.

Unenforceable Contracts
Oral or written contracts may be unenforceable because of a failure to comply with all the
elements of contract formation. Sometimes even a contract that is "validly formed" will be
unenforceable because of practical considerations (discussed below).

Types of Legally Unenforceable Contracts

Void Contracts

A void contract has no legal force or binding effect generally because the purpose of the
contract is illegal, against public policy, or lacks a critical element to forming a contract, such as
a clear purpose, or, in the event of a listing agreement, lacks the required expiration date..
 Example: A contract that requires performance of a crime.

Voidable Contracts

Even if a contract is made for a legal purpose, some contracts may be subject to being voided,
that is, invalidated and declared unenforceable. A contract made with a person lacking legal
capacity is "voidable" but may be accepted by the guardian of the party or ratified by the party
once they are declared of legal capacity.

Voidable contracts have the potential to be made valid once again, or terminated by the party
with that prerogative. Void contracts are nullified and unenforceable. They cannot be
resurrected except by a whole new agreement.

Example: A contract made by a 17-year-old child will be subject to termination if it is not for a
necessity of life such as food, clothing, shelter, or medical treatment, or it could be ratified by
the boy at the age of 18.

Contracts Unenforceable as a Practical Matter

Sometimes, contracts are unenforceable even if they appear to be legally valid. This can occur
when:

● contract terms are too vague and uncertain to interpret or

● the defaulting party is "judgment proof" (in other words, available assets are insufficient
to pay damages awarded in litigation).

Assignment and Novation

Assignment and novation are methods by which elements of a contract are altered.

Assignment
Assignment involves a transfer of rights or obligations established by a contract without
canceling or replacing the contract. Rights or obligations are moved from one of the original
parties to the contract to a third party.

For example, a company establishes a contract to clean an office building with the owners
of that building. The company has made a determination that they are dropping their
 cleaning services, so they contract with another party to take over their duties. The party
that the duties are assigned is substituted for the original party.

Note: If this action is not approved by the party receiving the services, they may take action
against the party with whom they originally contracted.

However, the language of the contract can have a significant effect on the scope and nature of
any assignments. This is why an assignment does not always relieve the assigning party of
liabilities.

Novation
Novation involves changing fundamental aspects of a contract in such a way that the contract is
replaced with a new version that reflects the changes. In other words, novation is the renewal or
replacement of a contract.

There are a couple of things that can be altered through a novation.

● New debts or obligations can be established in the place of existing debts or obligations.
● A party to the contract can be exchanged for a new party.

When a novation is carried out, the original contract and any obligations associated with it are
cancelled. A new contract, which is nearly identical to the old contract (with the obvious
exception of the changes instituted by the novation), is established in place of the old contract.

For example, a seller establishes an exclusive listing agreement with a real estate agent.
The real estate agent later realizes that she is overburdened and cannot effectively aid her
customer. The real estate agent gets permission from her client to perform a novation of
the listing agreement to another real estate agent she knows. The old listing agreement is
cancelled and an identical listing agreement is set up with the other real estate agent.

When a Contract is Considered

Performed or Discharged
Once the parties have reached mutually acceptable terms and entered into a contract, they are
each bound to follow the terms of that agreement, specifically. This is known as "performance."
Each party "performs" the obligations of the contract in the manner spelled out in the contract. In
real estate terms, examples might be:

● a buyer transfers funds to the seller, or

● the seller transfers a title/deed to the buyer.

Duties of the Buyer, Seller, Additional Parties, and

Their Agents
In performance of a real estate contract, all parties to the agreement are expected to follow
through with the agreement as outlined. Who has the right to enforce performance of those
duties will vary depending on the terms outlined in the sales agreement.

Conditions - Acts or Events that Must Occur Before

Performance is Due
Condition Precedent is a legal term that describes an act or event that must occur before
performance under a contract is required. If the act or event does not occur, the performance is
excused.

Example: The sales agreement stipulates that the owner will make repairs to the roof prior
to execution of the sale. If the owner does not make those repairs, the courts have held
that the "condition precedent" has not been met, and therefore the owner is in breach and
the buyer is not compelled to complete the purchase.

Substantial Performance
Substantial performance occurs when a party has made a good faith effort to perform their
obligations under a contract and has completely performed all essential obligations.

A contract may be substantially performed even if minor, nonessential obligations have not been
fully performed.

Generally, this is not a principle which the courts would apply to Real Estate contracts. Because
they deal with transfer of ownership, that transfer will either occur or not; there is seldom, if ever,
a middle ground.
Specific Performance
Specific performance occurs when one party has made a good faith effort to perform their
obligations under a contract and the other party has NOT performed their obligations.

Suit for specific performance is a request for the courts to compel the other party to do as the
contract dictates.

Executed and Executory Contracts

When talking about performance, we need to talk about a distinction between contracts.

A contract can be defined as executed or executory. An executed contract is one where

performance is immediate and complete, such as in a simple contract to exchange money for
merchandise. The acts are immediately completed and the contract is fulfilled.

An executory has a longer term effect in which there is an agreement now for actions to be
completed in the future, such as a real estate contract where there are contingencies to be met.
A sale of land for cash that happens on the spot would be executed. One where financing must
be obtained, inspections performed, and other contingencies would be executory

A contract for buying a car is normally an executed contract. Once the buyer and the car dealer
have signed the contract, the buyer hands over the required money and ownership is handed
over to the buyer. All the requirements of the contract are met immediately after the contract is
signed. However, if there is financing where the lender holds the title and the buyer makes
regular payments, the contract would be executory.

Interference With an Existing Contract

Intentional interference with contractual relations or tortious interference is a situation where a
party knowingly causes damage to a contractual relationship that that party is not involved with.

A party can be accused of interference for two primary reasons.

● The interfering party convinces another party to breach a contract.

A furniture store has a contract that states the store will only sell armchairs made by a
specific manufacturer. The store owner receives an offer from another furniture
manufacturer to supply similar quality armchairs for less cost. A friend of the store
 owner, who knows about the store's exclusive contract, convinces the store owner to
take the offer from the other manufacturer. This constitutes a breach of contract. In the
resolution of the breach, the friend can also be held liable since the friend inspired the
store owner to take the other offer knowing full well that that act would breach the
terms of the existing contract.

● The interfering party prevents the performance of the contract in some way.

Let's say that the friend of the store owner can't convince the store owner to take the
offer from the other manufacturer. To ensure that the store owner takes the offer, the
friend burns down the furniture factory of the manufacturer the store has the exclusive
contract with. This act of arson constitutes tortious interference with the contract since
it prevents the manufacturer from performing their end of the contract, namely
providing armchairs.

If a party involuntarily breaches a contract they are involved in, or performance of a contract is
prevented by a non-human cause, then there is no intentional interference. A party has to know
that there is a contractual relationship to interfere with and must be the cause of the contract
breach or failure of performance for there to be grounds for consequence.

Under Oregon law (ORS 696.301) a real estate licensee can have his or her license suspended
or revoked if he or she intentionally interferes with an existing real estate contract. A real estate
licensee who commits tortious interference can also be denied license renewal.

Breach of Contract
A breach is an unexcused failure by a party to a contract to do what the contract requires. A
party is in breach of a contract when, without a legally sufficient excuse, there is a failure to fully
and properly perform a duty.
Material or Immaterial Breach
When a material breach occurs, it creates a right in the other party to enforce contract remedies.
An immaterial breach may not create enforcement remedies.

Determining Whether a Breach is Material or Immaterial

The relative importance of the obligation that is not performed will determine whether a breach
is material or immaterial (in other words, the seriousness of a breach).

Example:

Failure of the seller in our previous example to repair the roof would be a material breach.

Failure of the seller to adequately clean out a storage shed prior to transfer of the property
likely would be an immaterial breach.

Courts will take the following factors into consideration when determining whether a breach is
material or immaterial:

● Whether the breach was caused as a result of negligence, or if the breaching party acted
deliberately with knowledge that harm to the other would occur
● The amount of harm suffered by the non-breaching party
● What is required to cure the harm suffered by the other party
● Whether or not the non-breaching party could lessen the harm suffered and what it
would take to do so. Such measures that could be taken by the non-breaching party to
lessen harm are called "mitigation of damages."

Consequences of a Breach
Material Breach

A material breach is one that will cause great harm or substantially lessens the value of the
contract for the non-breaching party.

A material breach can have several consequences, among them:

● canceling the non-breaching party's duty to perform contract obligations, and

● giving the non-breaching party an immediate right to pursue enforcement remedies.
Immaterial Breach

An immaterial breach is one that does not significantly lessen the value of the contract for the
other party or does not result in significant harm to that party.

Depending on the type of breach and the amount of harm suffered by the non-breaching party,
damages may be awarded, but an immaterial breach will not allow the non-breaching party to
terminate the contract.

Privity of Contract
Privity of Contract is a requirement (with some exceptions) for an individual to be able to bring
suit against another for breach of contract.

Explanation

Privity of contract refers to the relationship between the parties to a contract. Only parties to a
contract are in "privity" with one another, and only a party to the contract may bring suit in Court
against another party to the contract for failure to "perform" the obligations of the contract.

For example, a buyer/tenant of a property may not sue the former owner/seller of the property
for failing to make repairs guaranteed by the land sales contract. Only the buyer and the seller
are in "privity of contract" one with the other, so these are the only parties who have legal
standing to file a lawsuit.

Exceptions to the Doctrine of Privity of Contract

There are several exceptions to the doctrine of privity of contract, two of which apply to real
estate contracts.

Agency

When an individual acting as an ​agent​ on behalf of another (e.g. a seller) enters into a contract
on that individual's behalf with a third party (e.g. a buyer), the individual (in this case the seller)
retains all rights to enforce the contract against the third party, and, vice versa, the third party
retains rights to enforce the contract against the individual.

Covenants on Land
Restrictive covenants and easements on land are transferable from one party to a contract to
another and they "run with," or remain with, the land.

For example, an individual purchases a home in a subdivision which is governed by the

covenants, conditions, and restrictions (CCRs) of a homeowners' association (HOA). This
individual enters into a contract with the HOA to comply with and be bound by these covenants
and restrictions. At a later date, the individual sells this home to a new buyer. The original
promise to comply will likewise bind the new buyer and any future buyers of the property to
comply with all CCRs.

Even though the new buyer is not in "privity" of contract with the HOA, the HOA retains all rights
to remedies as set forth in the original contract against the new owner and all future owners.

Defenses to Claims of Breach of Contract

Defenses to breach of contract apply to situations where a breach of contract claim is alleged.
The law recognizes a number of defenses that can protect a party from liability arising from a
failure to fully perform or from incorrect performance.

These defenses may lessen, or completely prevent, liability for payment of damages.

Impracticability/Impossibility

If performance is physically impossible because of circumstances beyond the control of the

obligated party, then "impossibility or impracticability" becomes a defense against breach.

Of course, a party must exercise all reasonable measures to attempt to complete performance,
but if it is truly impossible, then the party is relieved of the duty.

Illegality

An act or obligation that is illegal and contrary to legal principles may not be the subject of a
contract. A contract is not enforceable when it is formed around an illegal purpose, such as
performance that is criminal or against public policy.
Coercion or Duress

A contract is not enforceable when an individual is threatened or forced to agree or perform

against their free will.

Mistake

Mistake as to a material fact can be a defense to breach of contract claims, but a mistake made
by only one party is not a defense. Only mistakes made by both parties as to the same material
fact will serve as a defense.

Unilateral Mistake

A unilateral mistake is defined as a mistake or misunderstanding as to the terms or effect of a

contract by one of the parties but not by the other.

A unilateral mistake is usually not a defense to breach of contract claims.

Mutual Mistake

A mutual mistake of a material fact is a defense to an alleged breach of contract.

If it can be established that both parties were in error regarding a major fact leading to the
contract formation, the contract may be determined to be null and void, or the contract may be
reformed (this means that the court rewrites the contract to agree with the actual intent of the
parties at the time of formation).

Use of this defense is extremely limited, and a mistake by one party will not usually void the
contract unless the other party knew or should have known about the mistake and tried to take
advantage of the situation.

Fraud
Fraud is deliberately giving false information, or deliberately withholding information known to be
important. If a party enters into a contract as a result of fraud by the other party regarding a
material matter, the contract may be void.

However, it is a principle of the law that contracts should be maintained as valid, if at all
possible. If the fraud is only with regard to an immaterial matter (refer to material vs. immaterial
breaches above), a court might decide not to invalidate the entire contract.

This defense is difficult to use, as it requires proof of the falsity of the information, as well as
proof that the party making the false statement knew it was false and had the intent to deceive.

Repudiation of the Contract by the Other Party

When one party to a contract lets the other party to the contract know, by word or action, that
they no longer intend to be bound by the contract, this is called "repudiation."

When the second party receives notice of this intent, that second party's duty of performance is
terminated. If the party who repudiated the contract later sues for breach, the other party can
use the repudiation as a defense.

Use of this defense is always tricky, and the party relying on the defense must present evidence
that will convince the court that repudiation occurred.

Performance Excused - Failure of Condition Precedent

A party can defend against a breach of contract claim by showing that a condition precedent did
not occur.

Remedies for Breach

Remedies are what the Courts provide in terms of compensation or as settlement of the dispute
when a breach of contract occurs.

A prime example is the buyer who makes an offer on a home, deposits "earnest money" with the
offer, and then terminates the transaction later in the process after all contingencies are met.

The remedy, in this case, is the buyer's earnest money, which is forfeited to the seller as
compensation for the breach of contract. This particular example is greatly over-simplified and
will be discussed in greater detail later in the module when we cover specific real estate
contracts.

The following discussion of "Remedies" is intended to be a general discussion of the topic only.

Legal and Equitable Remedies

Courts have the power to grant two types of remedies: legal and equitable.

Legal remedies for breach of contract include actions for damages, which is the remedy most
often applied in contract disputes. This generally means a money award of some form.

Equitable remedies include rescission and restitution, reformation, cancellation, "specific

performance," and injunctions, and are only granted if there is no adequate legal remedy
available.

Legal Remedies: Enforcement through Damages

Damages are a way to compensate the non-breaching party for economic losses arising from a
breach of contract.

Such losses can occur as a result of reliance on the contract, or because the non-breaching
party's expectation of gain (usually called the "benefit of the bargain") has been lost.

Alternatively, the seller may force the buyer to purchase the property.

A lawsuit or other action (such as arbitration) seeking damages is the usual way to enforce a
contract.

Before a party has a right to seek enforcement of a contract, two things must occur:
 ● there must have been a breach of the contract by the other party and
● the party seeking enforcement must have suffered economic or other loss as a result of
the breach.

The usual remedy for breach of contract is monetary damages.

Monetary damages awarded in a breach of contract action will be calculated to include:

● actual losses suffered by the non-breaching party and

● the benefits that would have been received from performance of the contract by the
non-breaching party (called the "benefit of the bargain" by lawyers and judges).

Damages for breach of contract are confined to those that are foreseeable or could reasonably
have been contemplated as a result of the breach.

Expectation (Benefit of the Bargain) Damages

The purpose of awarding expectation damages to the non-breaching party is to provide the
benefits that would have been received if the contract were fully performed by both sides (the
benefit of the bargain). Damages should put the plaintiff in as good a position as if the defendant
had fully performed as required by the contract, or at least back into the position that they would
have been had the contract never been formed.

Damages Recoverable by a Buyer

A buyer's right to recover damages against a seller for breach of a purchase and sale
agreement is usually limited by restrictions in State Codes.

Where the breach arises from a covenant or warranty in the sale agreement, the general
contract measure of damages applies and the buyer is entitled to the amount that will
compensate them for all detriment proximately caused by the breach or likely to result from it.
This might include inspection fees, appraisal or repair costs, or any other costs which the
potential buyer incurred while believing the sale would proceed forward.

Where the seller fails to perform altogether by refusing to convey title, damages may include:

● the price paid;

● the expenses incurred in investigating title and preparing the necessary papers;
● the difference between the agreed purchase price and the market value of the property
at the time of breach;
● the expenses incurred in preparing to enter on the land;
● consequential damages according to proof; and
 ● interest.

Damages Recoverable by a Seller

The seller's remedy on a buyer's failure to tender the purchase price under a sale agreement is
the excess, if any, of the contract price over the property's value at the time of the breach,
together with consequential damages according to proof and interest. The earnest would be
forfeit first as liquidated damages, but well may be short of actual damage caused.

If the contract price is less than the fair market value plus any consequential damages, the
seller has no damages and may not recover from the defaulting buyer, regardless of the
willfulness of the breach.

Consequential damages are any additional expenses that naturally flow from the breach and are
necessary to assure the seller the benefit of their bargain. For example, the seller may recover
expenses incurred in remarketing the property to be sold, including a broker's commission.

Reliance Damages

The purpose of reliance damages is to return the non-breaching party to the position that they
would have been in if the contract had not been made.

Reliance damages are usually an alternative to expectation damages. They are used when it is
not possible to show --with any reasonable certainty-- the amount of the expected damages,
and in cases where a breach occurs very early in the course of a contract.

Reliance damages will ordinarily be measured by the costs expended by the non-breaching
party in performing (or getting ready to perform) the contract up to the breach date.

Liquidated Damages

Liquidated damages consist of an amount of money agreed upon by the parties as being fair
compensation to the innocent party if a breach of contract occurs.

The amount is included in a special provision of the contract that must be carefully worded to be
enforceable by the courts. The amount of liquidated damages must reasonably estimate the
actual damages that would be suffered in the event of a breach.

If the amount stated in the contract is so large it is out of proportion to the harm that may be
suffered, a court may refuse to award the amount stated in the contract.
At a minimum, most real estate contracts contain standard clauses which specify the buyer's
"earnest money" as liquidated damages payable to the seller if the buyer should choose not to
complete the transaction.

Fraud Damages

Generally:

A person defrauded in the sale or exchange of real property is entitled to the difference
between the actual value of that with which he or she parted, and the actual value of that
which they received, together with any additional damage arising from the transaction.

Additional damage may include an amount actually and reasonably expended in reliance
on the fraud, and an amount that will actually compensate the defrauded party for loss and
enjoyment of the property to the extent that the fraud caused that loss.

Where the defrauded party has been induced by the fraud to sell or otherwise part with the
property, that seller is entitled to recover an amount that will compensate him or her for
profits or other gains that might reasonably have been earned by use of the property had
the seller retained it.

Similarly, where the defrauded party has been induced by reason of the fraud to purchase
or otherwise acquire the property, that purchaser is entitled to an amount that will
compensate him or her for any loss of profits or other gains that might have been earned
from the use or sale of the property had it possessed the characteristics fraudulently
attributed to it.

Special Damages

Special Damages arise due to the special nature or circumstances of the non-breaching party or
the project, and may be awarded by a court to cover losses not included in "benefit of the
bargain" damages.

Special damages are seldom awarded in real estate cases.

Example:

An owner dependent on a wheelchair is moving into a new home and hires a contractor to
build ramps and other accessibility devices. The contractor fails to perform the work
properly and the owner suffers additional injuries when a ramp collapses.
 Benefit of the bargain damages would compensate the owner for the extra cost of having
the work done properly by another contractor. The court may also award special damages
to cover the cost of the owner's physical injuries and loss of use of their new home.

Consequential Damages

Consequential damages are indirect losses to the injured party. These damages are
recoverable if the injured party can prove that the damages were foreseeable at the time the
contract was made.

Legal Remedies: Measurement of Damages

Certainty

All damages, whatever their nature, must be proved with reasonable certainty to be recoverable.
A claim for damages based on speculation or guesswork is not sufficient.

Generally, there must be clear and objective evidence of the amount of damages actually
sustained to allow recovery.

Mitigation

The non-breaching party has a duty to minimize the damage it suffers as a result of the breach.

Both expectation and reliance damages will be reduced by the amount that could have been
avoided if the non-breaching party had taken reasonable measures to reduce the harm.

Foreseeability

Damages will be limited to those damages that are suffered as a predictable result of the
breach. Courts and attorneys refer to such predictable damages as being "foreseeable."

Whether or not certain damages claimed are "foreseeable" is a factual determination made by
the courts on a case-by-case basis.

Equitable Remedies

Rescission and Restitution

A real property contract, like other types of contracts, may be rescinded under specific
circumstances. Rescission ends the contract, terminates further liability on the agreement, and
restores the parties to their former positions.

This generally requires each party to return any consideration received prior to the rescission.

Reformation

Reformation is an equitable remedy that can be used to correct a real estate purchase and sale
agreement or other instrument, such as a deed, mortgage, or lease, in order to state the true
agreement of the parties.

The remedy presumes the existence and validity of the contract and serves as a vehicle to
correct the terms to reflect the actual intent of the parties at the time the contract was made.

This remedy does not affect anything that has already happened in the contract but is a "from
here forward" alteration to the obligations. It does not seek to restore any party to their former
position.

Cancellation

Cancellation, like rescission, seeks to terminate an agreement or instrument.

These remedies differ in that cancellation is used to void a particular document, or subsection of
a contract, while rescission extinguishes the entire contract.

Cancellation does not place the parties exactly in their former positions; it merely makes the
instrument cancelled a non-issue from that point forward

i.e., responsibilities of the parties are discharged as of the date of cancellation, but the
parties are not required to "unwind" the contract as to any prior performance.

In contrast, rescission extinguishes the contract and treats it as null and void from inception, and
requires the restoration of consideration through restitution.

Specific Performance

"Specific performance" relief is given by compelling a party to do that which ought to be done.
In the case of a real property transaction, the buyer may file an action for specific performance
to compel a seller to convey the real property which is the subject of the transaction or the seller
may file an action to require the buyer to purchase the property.

Contract Clauses
The following are standard contract clauses that appear in nearly every type of contract.

Attorney's Fees
An attorney's fees clause is a provision in a contract. This clause states that, in the event of a
contract related lawsuit, the losing party will reimburse the party that won the lawsuit for
attorney's fees. Depending on the contract, this kind of clause may also require the losing party
to provide reimbursement for other court costs and fees.

Arbitration
An arbitration clause states that any disputes related to the contract must be resolved through
arbitration rather than through a lawsuit.

Choice of Law and Jurisdiction

A choice of law clause and a jurisdiction clause address similar concerns.

A choice of law clause establishes which state's laws and rules will be utilized in the event that
there is a lawsuit related to the contract.
A jurisdiction or forum clause identifies the state and county where any contract-related lawsuit
will take place.

Contract Price and Payment Schedule

A written contract will state the contract price and may indicate a payment schedule. These are
standard elements in a buy and sell agreement in real estate.

Escape
An escape clause sets down conditions under which a party can back out of a contract without
breaching the contract.

A 72-hour clause is a particular kind of escape clause that is common to real estate sale
contracts.

This clause allows the seller of a property to accept a conditional offer from the buyer
associated with the contract while also keeping the property on the market. If the seller receives
a competing offer from another buyer, they can invoke the 72-hour clause. The clause requires
the buyer associated with the real estate contract to purchase the property within a specified
amount of time (not necessarily 72 hours). If the initial buyer does not complete the purchase in
the specified time limit, the offer is rejected and the competing offer becomes the only offer.

The 72-hour clause allows the seller to back out of the contract with the initial buyer, if the initial
buyer fails to complete the purchase.

Exculpatory Clause
An exculpatory clause is a provision in a contract under which either of two things is stipulated:

(1) one party is relieved of any blame or liability arising from the other party's wrongdoing, or

(2) one party (usually the one that drafted the agreement) is freed of all liability arising out of
performance, or failure to perform, that contract.

Indemnity
An indemnification clause states that a party, or parties, associated with a contract will cover
certain losses or expenses incurred by another party under the contract.

Indemnity clauses are often designed to protect parties under contract from liability and losses
owed to third parties.

Liquidated Damages
Liquidated damages provisions set a dollar amount that will be forfeited, or paid, if a certain type
of breach of contract occurs.

Each state has very specific guidelines on the language that must be used for liquidated
damages clauses to be considered valid, and a contracts lawyer should be consulted before
including such a clause.

Standard real estate forms usually will contain the appropriate wording for the state in which you
are operating.

Merger and Integration

A merger and integration clause states that the written form of the contract is the final version of
the contract, which overrides any previous agreements or negotiations.

The point of the clause is to prevent parties under the contract from claiming the contract is not
valid because it does not conform to earlier versions or agreements.

Non-Waiver
A non-waiver clause states that a party under a contract does not lose the right to enforce
contractual obligations even if that party forgives another party's non-compliance with the
contract.

For example, a contract between a landlord and a tenant states that the tenant owes
$1,100 in rent each month. At some point, the tenant misses a payment. The landlord gives
the tenant the benefit of the doubt and forgives the missed payment. A non-waiver clause
allows the landlord to do this and still be able to enforce the contract if the tenant misses a
payment in the future. Without this clause, the landlord would lose the right to enforcement
since the forgiveness could be legally interpreted as a change in the contract.
Severability
A severability clause states that a contract is still valid even if one of the provisions of the
contract is rendered invalid.

The intention of a severability clause is to protect the integrity of the whole contract. A contract
with a severability clause can still be legally valid even if one of its component parts is not.

"Time is of the Essence"

Real Estate contracts frequently contain conditions relating to time, in particular, specific dates
by which specific tasks (such as an inspection, repairs, etc.) be completed.

If a contract is silent on the time for performance of work, the courts will infer a reasonable time
for performance.

When the contract states that "time is of the essence," the completion date or time is critical and
time itself has a high value. When a contract provides that "time is of the essence," failure to
meet a performance deadline can be a breach of contract.

In addition to being grounds for a breach of contract, "time is of the essence" provisions can
affect payments under a contract.

Contracts may stipulate rewards for early closing or impose penalties for delays. When "time is
of the essence," the dates for performance, bonuses, and penalties are strictly enforced.

Conclusion to Contracts Basics (Video)

Contracts are legally enforceable agreements between two or more parties.
At their most basic, contracts come in two forms: written and oral. Written contracts are superior
to oral contracts, mainly because written contracts have a greater degree of certainty and less
ambiguity than oral contracts.

To be valid and enforceable a contract must have parties with legal capacity, an offer, legal
purpose, an exchange of consideration, and terms that are accepted by all parties.

Assignment is a process through which rights or obligations of a contract can be shifted to a

third party without cancelling the contract. Novation is a process through which fundamental
aspects of a contract are altered, namely the obligations or the parties connected to the
contract. With novation, the contract is replaced with a new contract that reflects the changes.

A breach of contract is a situation where one party has failed to complete his, her, or its
obligations as specified by the contract. A breach of contract is commonly dealt with by a lawsuit
where the party that committed the breach is sued by the other parties under the contract.

There are several standard contract clauses which are found in most contracts. Escape clauses,
arbitration clauses, and merger and integration clauses are all examples of common contract
clauses.

This concludes our discussion of basic contract law and contracts.