Chapter 8: Types of Contracts

did you know that some contracts don't have to be spelled out between the parties to be...
Click the card to flip 👆
1 / 170
Terms in this set (170)
For example, what type of contract exists when you order a meal at your favorite restaurant? "There's no contract," you may say. Actually, there is. Otherwise, "dine and dash" wouldn't be illegal. You didn't have to say to your server, "I'll pay you $12 if you bring me the garden salad." Your contractual obligation is understood, or implied.
valid contracta contract in which all the parties have met all the terms of the contractexecutory contracta contract in progress; one or more of the terms of contract remain undoneSales contracts are what?Express Bilateral Valid (in writing, for starters) Enforceable Executed or executoryYou order dinner at a fancy restaurant. Your bill is $500, and you are obligated to pay it.-impliedYou start a new job. You sign an employee agreement that spells out your salary and benefits package.-expressYou agree to buy a vacant property from a developer for $10,000.-bilateralYou promise to pay a $100 reward if someone returns your phone.unilateralYou own an "option to buy" on a property that says if you want to buy the place in two years for $20,000, you may.unilateralYou'll get a haircut that costs $50.--bilateralA contract that includes all necessary elements and is signed by all partiesvalidA contract that does not include all necessary elements-invalidA contract may be cancelled for one of a number of reasonsvoidableA written purchase agreement to buy a property, accepted in writing by the seller-enforceableAn oral agreement to purchase a property-unenforceableChet offers to buy Tina's property for $500,000. His written offer includes no earnest money. Tina accepts his offer.UnenforceableThe statute of frauds is commonly thought to convey that certain contracts must be in writing to be legal. The truth is somewhat different. The statute says that certain contracts must be in writing—and....contain specific elements—to be legally enforceable. Real estate contracts fall into this category.ex: of something not legally enforceableYou can legally convey your family estate to the newspaper delivery girl by simply stating, "Here, you take the place." If she then takes possession and no one raises a stink, this arrangement is perfectly legal. However, it's not legally enforceable. Anyone with a more valid claim to the estate could fight her claim, and would likely prevail. To protect her rights, your newspaper delivery girl would want to have a deed recorded in her name—a deed signed by you, the grantor of the property.according to the statute of frauds,Contracts conveying the ownership or interest in real property (and other specific contract types) must be written to be legally enforceablestatute of fraudsadapted from a 1677 English law for use as a defense in a breach of contract lawsuit. Each state has its own version of the statute of frauds, but, in general, the law prevents injury from fraudulent conduct in certain types of agreements, including property transfers.To meet the statute's requirements, the written agreement must:Identify the contracting parties. Clearly identify the subject matter of the contract. Present the essential terms and conditions of the contract.Other types of contracts that the statute of frauds requires to be in writing to be legally enforceable include:Marriage contracts (including prenuptial agreements) Contracts that, by their terms, can't be completed within one year (such as a lease of property that's for longer than one year) Contracts by the executor of a will to pay a debt of the estate from the executor's own funds Contracts for the sale of goods totaling $500 or more Contracts in which one party agrees to pay the debt of anotherThe word "parol" comes from the French term parole, meaning "word" or "formal promise." The parol evidence rule provides that in most cases,....a written agreement is the final and comprehensive expression of the parties' agreement, and generally prohibits the introduction of previous verbal or written statements that contradict, augment, or otherwise change the written contract's terms.The parol evidence rule provides that in most cases, a written agreement is the final and comprehensive expression of the parties' agreement, and generally prohibits the introduction of previous verbal or written statements that contradict, augment, or otherwise change the written contract's terms. However,in certain cases, oral evidence can be used to support or complete an otherwise incomplete or ambiguous contract.Remember that the statute of frauds resolves to ensure that no nonexistent agreement shall be enforced viaperjury or fraudRemember that the statute of frauds resolves to ensure that no nonexistent agreement shall be enforced via perjury or fraud. The parol evidence rule supports this byprohibiting parties from stating in court that the written contract they signed wasn't really what they intended.A real estate purchase agreement will be eitherexecutory or executed, depending on what stage of the process the transaction is in. When all terms of the contract have been met, the contract is executed. If any terms remain, the contract is executory.Keep in mind that an "executed" contract is also the term you'll hear when the parties have signed a contract. It's important to know the context to determine which form of an executed contract the speaker means.trueMark's broker asks if the buyer and seller have signed a contract. Mark replies that the contract has been ______.executedA transaction has closed, and the parties have met all contract terms.executedClosing is a week away, and the seller is nearly finished making agreed-upon repairs to the property.non-executedWhat is the statute of frauds?A law requiring contracts conveying ownership in real property to be in writing to be enforceable5 elements required for a valid contract:Legally competent parties Offer and acceptance Consent Legal purpose ConsiderationFor certain transactions, such as the sale of real property, the statute of frauds adds a sixth essential element to ensure the contract is enforceable:The agreement must be in writing, and it must contain the parties' signatures.So although state laws differ on many points, they agree oncontract lawA valid contract is one that isenforceable by lawA valid contract is one that is enforceable by law. Because the statute of frauds states that real property transfers of ownership must be in writing to be enforceable, one of the essential elements of a valid real estate contract is that it writingA legally competent party hasthe capacity (legal and mental) to enter into a contract.A legally competent party has the capacity (legal and mental) to enter into a contract. If the party does not have legal capacity and enters into a contract anyway,the contract is voidable (not automatically void) by the party lacking the capacity.In the case of a minor entering into a contract to purchase real estate, the minordoesn't have contractual ability due to his age. The minor may hold the adult to the contract, but the adult cannot legally hold the minor to a contract.Offer and AcceptanceThis is also called mutual agreement, or just acceptance. Offer and acceptance occurs only when there is a meeting of the minds, or when the parties are in complete agreement about the purpose and terms of the contract Most states require that the terms and conditions of the contract be in writing; the wording must express the agreed-upon terms and must be clearly understood by the parties.offeris a promise made by one party, requesting something in exchange for that promise. The party who makes it is the offeror.acceptanceis a promise to be bound by the exact terms made in the offer. The party who receives an offer is the offeree.The offeror can revoke the offerat any time before acceptance. An offer can also be terminated if the offeree doesn't accept within the time period stated in the offer.An offer to purchase and sell real estate can go back and forth between seller and buyer, with the parties trading positions of offeree and offeror with each counter-offer, until one of the parties accepts the offer exactly as the other party sent it. The offer is said to be a contract when the offeree accepts the exact terms of the offeror and notifies the offeror of that acceptance. This is called notice and deliveryNotice means that all parties are aware of the terms of the contract, and delivery simply means that both parties have copies of the signed contracts.Example of offer and acceptanceRob offered to purchase Laura's house, and Laura agreed to sell it. They were both fully aware of the terms, and although Laura initially countered the offer on price, they eventually reached agreement on all terms and signed a contract. However, if Rob had rejected Laura's counter-offer, there would've been no offer and acceptance, and therefore there would be no contract.ConsentThis is also called voluntary agreement. A contract must be entered into as a free and voluntary act, without undue influence or duress.Other circumstances that would deprive a party of the ability to consent to a contract includefraud, misrepresentation, and mutual mistake.Misrepresentationmay be unintentional, but fraud occurs when misrepresentation of a material fact is intentional. And mutual mistake occurs when both contract parties are mistaken about a material fact. This is why it's so important to document all of the terms and conditions as explicitly as possible when writing in the contract!Undue Influenceexists when an act of persuasion overcomes another individual's free will and judgment. This can include trickery and deception, and usually means that the person doing the influencing is in a position of trust and abuses that trust, such as a guardian and a ward, where the ward relies on, trusts, and obeys the guardian.Duressincludes the use or threat of force, such as blackmail or bodily harm. For example, a woman's ex-husband threatened to harm her if she didn't sell her house to him at a steep discount. If she signed the agreement under duress, there was no real offer and acceptance, and the ex-wife could revoke the contract.Example of consent not being demonstrated in a listing contract:In Gheeta's culture, wives are expected to respect and obey their husband's parents. Gheeta didn't want to sell the lakeside home that had been in her family for years, but her in-laws told her that she needed to sell it so that she could invest the money in her husband's business. Gheeta reluctantly entered into a listing contract to sell the home. This listing contract doesn't demonstrate consent or voluntary agreement.Legal PurposeAll contracts must be written for a legal purpose; that is, they must have a lawful objective. A contract for an illegal purpose is void.Example going against legal purposeSheena and her neighbor Rita signed an agreement to not sell their properties to minorities. This agreement would be unenforceable because it's discriminatory and violates fair housing laws. The contract is not for a lawful objective, so it's void.Consideration: For a contract to be legally binding, an offer and an acceptance must be supported by considerationwhich is defined as something of value offered by both parties.Consideration can include:Money (or promises of funds in the future) Property (real estate or other personal property) Labor, love, good wishes, or physical actions (non-monetary)Through this bargaining process, the parties agree (or promise) to fulfill a designated role, i.e., deliver goods in exchange for payment. Those actions that the individual parties have agreed uponconstitute the essence of consideration.Earnest money demonstrates the buyer's willingness to enter into a purchase agreement.Earnest money is not required to have a valid contract.The full consideration of a purchase agreement is thefull price for the home in exchange for the ownership title on the property.If a party doesn't have legal capacity and enters into a contract anyway, the contract is voidable by the party lacking the capacity.-trueA minor who enters into a contract to purchase real estate has contractual abilitytrueA minor who enters into a contract with an adult to purchase real estate may hold the adult to the contract, but the adult can't legally hold the minor to the contract.-trueAn offer without acceptance is dead air. An acceptance without an offer is presumptuous, and no one can be held responsible for not meeting the terms of a non-existent offer.trueEver hear of breach of promise?That concept was the basis for a law that used to be on every state's books. The one doing the offering (proposing) could get in some serious legal trouble if the answer were affirmative and then the proposer reneged. Some states, such as Hawaii and South Carolina, still have a version of this on their books when the one doing the accepting suffers emotional distress from the breach. The offer alone isn't enough to get you into trouble; the acceptance alone isn't, either. But once offer and acceptance have both been made, a contractual agreement has been formed between the parties.Which two of these statements describe the essential element of offer and acceptance?Two parties enter into an agreement with a full understanding of contract terms. A real estate broker offers to represent a client in a sales transaction. They discuss the terms of the agreement, and the client accepts.What does legal purpose mean?Contracts must be written for a lawful objectiveA contract for an illegal purpose is ______.voidConsideration is an essential element in a contract. It showsintent and solidifies the understanding between the parties.What's consideration with regard to a contract?Something of value is given in exchange for something of valueIn a real estate transaction, which three of the following are examples of consideration?The seller's promise to sell the property to the buyer The seller's commitment to transfer the property to the new owner The property itselfThe sales contract (also known as purchase contract or purchase and sale agreement) may contain the main agreement between the parties, but it's usually not complete. When the parties agree to other terms that are outside of this document, these are attached to the sales contract and become part of the whole contract. So if someone were to ask you, "What's in the contract between the parties?" The answer would be:The sales contract, as signed by the parties Any associated amendments signed by the parties Any associated addenda signed by the partiesaddendumis a supplemental document that's attached to the original contract before contract acceptance. It explains or expands upon points in the contract and indicates additional requirements that aren't clear in the contract. An addendum is executed with and is considered part of the original contract once it's signed by the parties involved.Amendmentis a modification made later to the terms of an already-accepted contract. For example, if your buyers need to extend the closing date beyond the contracted date, this would require an amendment to the original terms. Once signed by the parties, an amendment becomes a part of the sales contract, and carries the same legal weight as if it had been there from the beginning.Common Sales Contract Addendainspection addendum and short saleinspection addendumis one of the most common addenda, and is often included with a standard sales contract. It outlines what, when, and how inspections will take place on the property being purchased if the buyer desires inspections. Addenda are only attached to the contract if the provisions within the contract don't meet the buyer's or seller's needs.short saleoccurs when a property is worth less than is owed. The short sale addendum specifies that the sale is contingent on the approval of the seller's lender, and identifies a deadline for lender approval of the buyer's offer.Common Sales Contract Amendmentsextension of the contract period or repairs or maintenance negotiationA common amendment to the sales contract is an extension of the contract period.This often happens if sellers need additional time to make required repairs, or it may be the result of buyer financing issues.Repairs or maintenance negotiatedbetween the buyer and seller during the contract period would be documented in an amendment to the initially accepted contract.A change to an existing document- Changes the original terms of the sales contract-amendmentAn addition to an existing document- May be added without changing the other terms already agreed to in the sales contract-addendumWhich two documents constitute a contract between the buyer and the seller?The agreement of sale, as signed by the parties Any associated addenda signed by the partiesThe E-Sign ActElectronic contracting is a quick, efficient, and cost-effective way for all parties involved in a real estate transaction (real estate agents, clients, lenders, title representatives, etc.) to communicate information and to share and acknowledge the receipt of documents. Not long ago, agents and their clients were concerned that by not having a paper copy of the transaction documents, the contract would not be legally enforceable. Those days are gone (or at least they should be), as evidenced by the Electronic Signatures in Global and National Commerce Act (E-Sign), which supports the use of electronic transactions and signatures, their legal effect, and their security. The E-Sign legislation became effective in October 2000 and makes electronically signed contracts and records valid and legally enforceable, whether they're formed on paper or using email. The act also put special protections in place for consumer transactions. These protections include, but are not limited to, obtaining the consumer's affirmative consent to the use of electronic records and the verification and acknowledgment of receipt of the electronic record. The use of electronic transmission and signatures with reThe use of electronic transmission and signatures with real estate contracts is supported by both federal and state lawtrueThe E-Sign Act requires the consumer's consent for electronic records and signatures to be used and considered valid.trueAlthough electronic contracting is supported by law, it's expensive and time-consuming, and should only be used on rare occasions.falseUse of Electronic Signatures in South CarolinaConducting real estate transactions electronically is becoming commonplace. Electronic processing of transactional paperwork is a quick and efficient way for real estate licensees, clients, lenders, and title representatives to communicate information and to acknowledge the receipt of documents. It also saves time and money. In the past, the legal force of electronic signatures was in question. Those days are gone (or at least they should be), due to federal and state laws that support the use of electronic transactions and signatures, and confirm their legal effect.Uniform Electronic Transactions Act, or UETA,was enacted to give electronic signatures, records, and contracts legal recognition equal to that of paper records and signatures. UETA was brought about by the efforts of the National Conference of Commissioners on Uniform State Laws (NCCUSL) to harmonize state laws regarding the validity of these records and to establish comprehensive rules regarding their use. In effect, as long as the party can prove that an electronic version of a record or signature was the act of the individual, it's just as binding as a physical paper version and may be used for record keeping or auditing purposes.Electronic Transaction ActSouth Carolina enacted its version of UETA in July of 2004 with the Uniform Electronic Transactions Act. Generally, the law states that electronic versions of real estate contracts and signatures meet the legal requirement for real estate contracts to be in writing, and that they're considered valid, provided the parties to the transaction have given consent to their use. The agreement of sale leverages this law by including the following statement in the signatures section of the contract: Return of this agreement, and any addenda and amendments, including return by electronic transmission, bearing the signatures of all parties, constitutes acceptance by the parties.South Carolina's Uniform Electronic Transactions Act exempts certain types of transactions, specifying that electronic signatures aren't legally valid for:Ordering prescription drugs Creating and executing wills, codicils, and testamentary trusts Cancelling or terminating utility services (e.g., water, heat, and power)South Carolina enacted its version of UETA in July of 2004trueSouth Carolina's Uniform Electronic Transactions Act requires consumer consent for electronic records and signatures to be used and considered valid.trueUnder South Carolina law, electronic transmission of addenda and amendments to the agreement of sale is not allowed.falseYour client, Tim, has owned his house for more than 30 years. He wants to sell it and buy a condo in Hawaii. Electronic signatures will be used throughout the sale to help expedite the process, while Tim's traveling back and forth. Tim knows this will make things easier, but he's used to having an original signed document, and is worried about conducting the sale of his home using electronic signatures. You should tell him:Federal and state law allow the use of electronic signatures. Provided we follow protocol, an electronic record can be retained as the original document.A contract is considered performed (fully executed) if all contracted terms have been completed. A breach of contract occurs if a party fails to meet the contractual obligations.Such a breach could potentially result in a termination of the contract entirely and could lead to a party seeking recourse.However, a contract that's not fully performed can still be valid if the other party is willing to waive the unmet terms. This is called partial performance. Here's an example:Let's say that Felix leases a home to Barbara for two years. Barbara pays her rent on time for 21 months and then becomes unable to pay due to an unfortunate automobile accident that left her unable to work. Instead of requiring Barbara to live up to the lease agreement terms, Felix agrees that Barbara's partial performance under the two-year lease is sufficient. The parties' obligations to one another are discharged.Remember that a discharge under partial performance requires that the parties agree;this agreement can be express (verbally or in writing) or implied through the parties' actions (though having it in writing is never a bad idea).Performance of a Contractmeans to meet all terms of the contract. It is possible to partially perform a contract. Partial performance occurs when a party does some, but not all, of what the party has agreed to do.example of performance of contractMillicent and her neighbor, Tommy, agree to swap houses. Because they both hate to move, they also agree to leave all of their furnishings behind but take their personal belongings. If they both do what they say, they've performed the contract. However, if Millicent swaps houses with Tommy but takes her dinette set with her, she has only partially performed on the contract between them. Tommy can sue Millicent or agree to take his dinette set with him, as well, or let Millicent have both, or any other terms the parties agree to. If Tommy wishes to make a real issue out of it, he could terminate the contract based on Millicent not performing.Part of performance is timeliness. Most real estate contracts contain the phrase "time is of the essence" to preventunnecessary delays to the process which may harm the parties. Time is of the essence means that the parties are agreeing to proceed in good faith and not unduly delay the process. When a contract indicates "time is of the essence," the standard of performing within "reasonable time" is replaced with performance within the time frame as addressed in the contract. Failure to perform within that time frame is a breach of the contract.When a specific date is not provided in the contract, performance must take place within a "reasonable time." Parties may interpret this time differently which can create issues and a possible lawsuit for breach of contract. In this case,a court may determine a "reasonable time" or they may consider the contract to be invalid because a specific time or date was not provided. It is good practice for contracts to include a clause similar to "Time is of the essence as to the closing date of September 30."example of reasonable timeAt age 65, Katie was purchasing her first home. The house she was buying was part of an estate, and the siblings who owned the house could not agree on anything. When Katie's agent sent paperwork to the sellers, they often didn't receive a response until well past the stated deadline. Because their continual delays cost Katie money (she kept having to extend the lease on her apartment, which had been increased due to her going month-to-month; she kept having to delay the movers, which resulted in additional charges, and she lost her rate lock with her lender due to closing being delayed, which resulted in an increased interest rate), Katie sued the sellers for breach of contract. They obviously did not meet their "time is of the essence" obligation.What does "performance of a contract" mean?Meet all the terms of the contractWhat does the phrase "time is of the essence" mean with regard to a real estate contract?The parties agree to proceed in good faith and not unduly delay the process.One day, Herman Yolk and his wife, Imelda, bought a goose. The pair entered into a contract with the goose that stated that as long as the goose continued to lay golden eggs each day for a month, the couple would not have the goose for dinner. The goose laid a golden egg each day for one month, and the Yolks ordered takeout.Performance of a contractSissy Redcap's litigious-happy grandmother coerced her into signing a contract that stated that Sissy would visit her grandmother every day and bring along a basket of goodies. In return, Sissy would receive a grandmotherly hug. After a week of visiting her grandmother, Sissy said, "The heck with this!" and played with her new friend, Winnifred Wolfe.Partial PerformanceJack Nimble and Jill Quick entered into an agreement to open a candlestick shop. True to her name, Jill completed everything she needed to do to meet her part of the contract well within the agreed upon time frame. Jack, on the other hand, didn't jump to it, and his failure to meet deadlines caused the two to lose the store.time is of the essencePerhaps you've heard the phrase "and/or assigns" and wondered what this meant. Often you'll see this in offers to purchase from investor clients, especially wholesalers who tie up a property and resell it for more than they agreed to pay, taking a small profit. An assignmentof a contract occurs when a new party is substituted for one of the original parties. Unless it's done with the permission of both parties and provisions are included to release the original party from liability, the original party remains responsible to the terms of the agreement if the new party fails to live up to those obligations. The request to assign a contract is most often done at the time the offer to purchase is made. Although contracts for the lease or sale of real estate are generally considered to be assignable without permission of the seller or lessor, assignments may not have any adverse effect on the other party to the contract. In fact, many sale and lease contracts have a clause prohibiting assignment without the agreement of the seller or lessor.The request to assign a contract is most often made prior to an offer being made to purchase the property.False (made when the offer happens)In the event that the new party fails to live up to the obligations stated in the contract, the original party remains responsible to the terms of the agreement unless specifically stated otherwise in the contract.-trueWhen assigning a contract, the assignor should also check off any "contract is assignable" clause that is part of the purchase contract.-trueLet's say that you represent a husband and wife who are buying a piece of farmland. The wife discovers she's allergic to hay and would prefer a penthouse view. The husband decides to stay in the city with his wife, but rather than terminate the contract with the seller, the husband asks his farm-loving cousin if he'd like to buy the property. The cousin agrees, and so does the seller. The cousin replaces the husband and wife on the existing purchase agreement. This new agreement is called anovation of partiesNovation of contract occurs whena new contract is created for the same purpose as a previous contract but with all previous contract edits and amendments incorporated.novationoccurs when one party to an existing contract is substituted with a new party (which may be referred to as novation of parties) or when a new contract is substituted for an old one between the same parties (aka novation of contract). With a novation, the new party takes over the rights and duties of the original party, and the original party is no longer obligated under the contract. All parties to the original contract must agree to the novation.example of novation of partiesFred's employer asked him to take the reins at their new facility, which meant he had to move to a different state. Fred arranged to purchase Bailey's home, and they signed a purchase contract. Then, two weeks later and before the sale closed, Fred was fired. Now Don would be moving to take over the new facility for Fred's former employer. Fred no longer wanted to buy Bailey's home, but luckily Don was willing to buy it instead. Fred and seller Bailey agreed to a novation of parties, and Don replaced Fred on the purchase contract. All of Fred's obligations and rights become Don's, and Fred was no longer obligated under the contract. The contract was the same, but one party had been replaced by a new personexample of novation of contractKatarina and Marcus made several changes to the contract between them, initialing each change. In addition, there had been several contract amendments. It was getting confusing! Katarina and Marcus agreed to write a new contract that incorporated all the changes and amendments. This contract novation would release Katarina and Marcus from the terms of the previous contract and its amendments and bind them to the new contract that included the terms they both desire.Novation****Novation can have complicated legal consequences, so it should never be attempted without an attorney's participation.Two couples, Jill and John and Josie and Jack, decide to enter into a timeshare agreement. When Josie gets cold feet about it, Jack ditches her and instead becomes a couple with Lourdes. Everyone agrees that Lourdes can replace Josie in the timeshare agreement, and Josie no longer will have any liabilitynovationNora and her husband, Tom, have made a back-up offer on the home of their dreams, which is accepted. A week later, they're told that the first offer is going to closing. Nora and Tom make an offer on another homenot novationMyra and Michelle have decided to buy a townhome and have entered into a contract with Hugh Dent, the seller. After reviewing her finances, Michelle gets cold feet, leaves Myra a note, and leaves town. Myra can't afford the place on her own and has to terminate the contract.not novationMiguel and Tina have a signed contract for Tina to buy Miguel's house. The original contract form is a mess. Tina spilled coffee on it, obliterating some of the text. Tina and Miguel have crossed out and initialed several changes. They decide to write a new contract that cleans up the coffee spill and incorporates all their changesnovationYour seller client signed a contract with a buyer, but the buyer now wishes to back out of the contract and has offered to have a friend take his place as buyer through the process of novation. Your seller client is agreeable. Since everyone agrees, is it okay for you to cross out the original buyer's name on the contract and substitute the new buyer's name?No. Please seek attorney advice before doing this.The best way for a contract to be discharged (aka terminated) is when it's been completely performed: all terms are fulfilled. However, contracts can and do terminate for other reasons, such asnovation, partial performance, breach of contract, etc. Agreement and operation of law, in the form of release and rescission, are two other actions.Quick note of distinction:termination is ending a contractual relationship during the term of the contract. This is akin to a married couple getting a divorce. Rescission, on the other hand, is ending a contractual relationship in a way that restores the parties to their original positions before the contract was created. This is more like an annulment, than a divorce.contract releasethe parties agree to terminate before the contract is fully executed, whether a listing contract or a sales contractContracts can be released in the following ways:Conditional, in which some obligation must be met for the release to be accomplished Unconditional, in which no obligation needs be met; it's a done deal With consideration, which requires compensation of some kindLet's say you have a listing agreement with Bob, a seller. Bob decides to take his property off the market before the listing period has expired. With a conditional release,Bob agrees that if he sells the property, or if another licensee sells the property within a timeframe that you and Bob have agreed upon (for instance, if the house sells within 60 days of the release date to a person who was shown the house during the original listing period), the terms of your agreement still apply. Bob would owe a commission according to the terms of your original agreement.But what if both you and Bob want out. Maybe you and he are rabid fans of two opposing and mortal enemy baseball teams and can't see eye to eye on anything. Anunconditional release might be in order, in which you as an agent of your broker and Bob release one another from the original terms of the listing contract.Consider this third scenario: Bob wants to take his house off the market, but he knows you've spent considerable time and expense marketing the property. He agrees to compensate you for those activities and in return, you release him from the contractThat's a release with consideration.Example of lease with considerationBette and Doug have a contract on their home, but the buyer, Grady, has had a change of heart and asks to be released from the contract. It's a hot seller's market, so Bette and Doug agree, but they still retain a portion of Grady's earnest money as a condition for granting the release. Two days later, they sign a contract with a new buyer.Rescission, which is technically a legal action, is another kettle of fish entirely. A rescissionis a definitive end of the parties' commitments under an agreement usually due to a breach of contract—one in which the parties are returned to their pre-contract status, which in legal (and Latin) terms is called status quo ante. That's a critical difference between rescission and release. With rescission, each party gives back anything they received under the contract, in order to restore everyone (including the involved licensees) to their pre-contract position. So this is not a true termination of the contract.Think of rescission as an annulment:The parties return to their starting point just as if the contract never happened. The contract is rewound, undone, abracadabra. It never existed. Because rescission releases the former parties to the contract from any liabilities and restores their pre-contract positions, it also generally involves a waiver of all further claims of breach of contract.Many sales contracts include a right of rescission provision that specify a certain period of time during which the buyer may rescind the contract, such as three days after receiving the seller's disclosures. Other rescissions are based onspecific contingencies in the contract, such as the inspection or financing contingencies.Rescission may occur for several other reasons, including:Mutual mistake: The parties did not understand the terms in a contract or have different understandings about them. Wait! We didn't mean THAT house! Unilateral mistake: One of the parties misunderstood the contract terms or circumstances. I just learned the property was built on a landfill! Fraud: When one party lies or deceives the other to get them to agree to the contract, the party who was misled has a right to rescind. You mean the seller doesn't actually own the Brooklyn Bridge? Lack of capacity to contract: One or both of the parties don't have the legal capacity to contract, such as not being of age or being mentally incapacitated. What do you mean, you're only 16? Duress: One party uses threats, violence, or other action on someone to enter into a contract. The party under duress has a right to rescind. Okay, so I DID hold your cat hostage. Undue influence: When one party coerces another into signing a contract. Here, Mom, let me move your oxygen tank so you can sign this ...A rescission must be demanded as soon asthe facts that support the claim to rescind come to light.It's important to note that, legally, rescission may beunilateral or bilateral (mutual). For instance, when a buyer fails to obtain financing by the financing contingency date set in the contract, the seller may opt to rescind the contract and return the buyer's earnest money.But what if the buyer defaults on the contract much later in the transaction process and wants to rescind the contract?In that case, the seller can choose from among a few options: release the buyer and then attempt to retain the earnest money (which could be small comfort), sue for damages, sue for specific performance, or agree with the defaulting buyer to cancel the contract via mutual rescission.Why would a seller opt for mutual rescission?Other legal remedies involve time and expense, and the outcome isn't guaranteed. And of course, the specific terms of the contract may complicate matters. Mutual rescission may be the best option.Further, rescission is trickier than release, and that's because states often have their own laws and legal precedents regarding conditions when rescission is permitted and when it's not. For example,many states do not allow a rescission once the transaction has closed, but other states do, depending on the circumstances, such as claims of misrepresentation.There's one more issue we haven't discussed, and that's what happens when a contract cannot be performed because of the destruction of premisesWhen the property is destroyed by natural or unintentional causes, the parties cannot legally or practically do what they've agreed to do, so they're released from their obligations under the contract. Impossibility of performance means it is impossible to complete the transaction.Here's a crucial bit for you: When you're working with clients who're considering either a release or rescission, make certain youadvise them to seek legal advice to help them select the best course of action for their particular situation. Don't cross the line into unauthorized practice of law, even when you have years of real estate experience and feel qualified to do so in these circumstances. Stay firmly within the scope of your expertise.Abbie learns the seller has no legal right to sell the house she's buying because his aunt actually owns it. Abbie cancels the contract.recission (major breach of contract)Buyer Trina is unexpectedly transferred overseas, so she has to cancel her contract to Lori's house. Lori agrees.-releaseRemember, rescission is like an annulment: The parties return to their starting point just as if the contract never happened.That's a critical difference between rescission and release. Rescission releases the former parties to the contract from any liabilities (unlike a release, which sometimes involves some liability) and restores their pre-contract positions.Also, rescission can be murkier than release because rescission is an operation of law. States have their own laws and legal precedents regarding conditions when rescission is permitted and when it's not. For example,many states don't allow a rescission once the transaction has closed, but other states do, depending on the circumstances, such as claims of misrepresentation or fraud.When both parties agree to cancel a contract, it's a rescission. When one party cancels against the wishes of the other party, it's abreach of contract. A breach can also occur when an obligation of the contract isn't met—for instance, a buyer fails to deposit earnest money by the deadline the parties agreed to.A contract is a legal agreement. The parties to a contract indicate that they agree to all terms by signing it. A breach of contract occurs whenone party fails to meet the contractual obligations. When a breach occurs, the innocent party can terminate the contract; the party who is guilty of the breach cannot terminate without permission from the aggrieved party.example of breach of contractAndy and Claire agreed that Andy will purchase Claire's condo for $235,000. Andy agreed to give Claire a promissory note for $5,000 with the promise to convert the note to a check with escrow within two business days. Five business days pass, and Andy still had not deposited his earnest money check.When a breach occurs, the parties have several remedies available to them. Using this example, Claire may:Accept partial performance. If Andy deposits the earnest money check on day seven, perhaps Claire will be satisfied and go through with the contract and will accept partial performance. Rescind the contract unilaterally. Claire has the option to rescind; Andy does not. Sue Andy for damages. Claire could take Andy to court claiming breach of contract if they are unable to work out another solution. Claire could claim that by having her property off the market for six days, she suffered a monetary loss and could seek monetary damages in the form of punitive or compensatory damages. Compensatory damages compensate a party for actual loss based on the contract's value. Punitive damages provide payment in excess of any compensatory damages but are rarely awarded in breach-of-contract lawsuits. Sue Andy for specific performance. A suit for specific performance requires the parties to make good on the promises they made. It's too late for Andy to meet the two-day deadline, but Claire could still sue him to deposit the check. Chances are she wouldn't do this because by the time the suit was filed, he could deposit the check. Accept liquidated damages. In this case, Claire has no liquidated damages. Generally, the term liquidated damages refers to an agreement by the buyer to pay the seller a specified amount of damages if the buyer breaches the contract. Usually, that is the earnest money deposit, but in this case, Andy hasn't deposited it yet. In fact, the primary purpose of the earnest money deposit is to get some of the buyer's skin in the game and provide protection (legal remedy) for the seller. Mutually rescind the contract. Let's say that Andy has changed his mind about buying Claire's property, and Claire has another buyer in the wings who is willing to pay. In this case, the parties would likely agree to mutual rescission of the contract.Which of these constitutes a breach of contract?One party fails to meet the obligations of the contract.Which three of the following statements indicate who has the right to terminate a breached contract?Both parties can agree to terminate the contract. The innocent party can terminate the contract. The guilty party can terminate the contract with aggrieved party's permission. Correct! When a breach occurs, the innocent party can terminate the contract, the guilty party can terminate the contract with permission from the aggrieved party, or they can mutually agree to rescind the contract.Nancy Owens finds herself in a breach of contract situation. Although the other party met some obligations, others weren't met. Nancy thinks it would cost more time and money to sue than it would to just accept the work that's been done and call it good. What remedy is Nancy going to pursue to address her breach of contract situation?accept partial performanceRick Tynes is tired of waiting for his subcontractor to get his part of the deal done. The agreed-upon deadlines have come and gone, and Rick is losing money waiting for the subcontractor to come through. If the subcontractor isn't going to honor his commitments, neither is Rick. There's no point in throwing good money after bad by suing the subcontractor. He's just going to consult with his attorney and then terminate this contract and be finished with the whole ordeal. What remedy is Rick pursuing to address his breach of contract situation?Unilaterally rescind the contractAgnes Sherwood is tired of the bad attitudes and shoddy workmanship she's seeing these days. She contracted to have her gutters fixed and paid the gutter company good money, but she's still getting water in her basement from her gutters leaking. There's no way she's letting guys from that same company back onto her property to mess it up even more. She's taking this to court, by golly! What remedy is Agnes pursuing to address her breach of contract situation?Sue for damagesMark Strong thought he had bought and closed on a nice bit of property, but the seller has refused to deliver the title to him. Mark met his obligations per his written contract with the seller, and the seller met all but one—handing over the title. Mark isn't going to let the seller get away with this. He's going to get his title, even if it means going to court. What remedy is Mark pursuing to address his breach of contract situation?Sue for specific performanceGloria Meeker can't believe it. She thought she had a buyer for her home, and at the last minute, the buyer bailed. At least Gloria can keep the earnest money. That's some consolation. What remedy is Gloria pursuing to address her breach of contract situation?Accept liquidated damagesThe buyers couldn't come to an agreement with the seller about non-safety-related items found during the home inspection that the buyers wanted to be fixed, but that the seller wasn't willing to address. Having arrived at an impasse with neither party willing to negotiate, the parties agreed to cancel the contract. What remedy are the buyers and the seller pursuing for their breach of contract situation?Mutually rescind the contractThe statute of limitations is a law that states that if legal remedy is sought against a person, the pursuer mustbring a court action within a specified period of time. The statute of limitations even applies, in some instances, to the state itself.The deadlines for legal remedy vary by state and by the type of claim. In South Carolina, the statute of limitations is 20 years for a contract breach if the breach is related to a contract for property secured by a mortgage. The limit is three years for breaches of other contracts (such as a lease).trueexample of statute of limitationsBarry purchased and moved into Stella's house on July 1, 2015. Their contract was signed on May 15, 2015. On his move-in date, Barry discovered that Stella had removed an antique canoe she'd promised to leave with the house. Barry, an antique watercraft buff, was steamed. If he wants to sue Stella, he has until June 30, 2035. If he drifted to sleep for 20 years and then decided to sue, the statute of limitations would apply, and he'd be up a creek without a canoe.What's the definition of statute of limitations?A law stating that if legal remedy is sought against a party the pursuer must bring court action within a specific period of time