Real Estate Contracts
A contract is a legally enforceable agreement between competent parties who agree to perform, or refrain from performing, certain acts. A contract represents the “meeting of the minds”, the agreement, between parties. It’s important to note that the term “contract” does not actually refer to a written agreement. Remember, the parties only need to achieve a “meeting of the minds” to create a contract. However, in order for that “contract” to be enforceable in Virginia, it must be in writing, signed by all parties.
What good is a contact if it’s not enforceable? Not very good at all. This is a very important factor to take into consideration when advising your clients and negotiating offers. It’s common practice for most Licensees to negotiate the terms of the contract verbally or via email. Despite the fact that these efforts do indeed create a contract, it must be in writing and signed by all parties in order to be enforced.
The following six essential contract elements must exist in order to create a legally binding and enforceable real estate contract:
1. The Contract: Meeting of the minds
- A term used to define mutual agreement, whereas parties to said agreement have clarified their intentions and understanding of the terms and wish to form a contract. There must be a valid offer made and an unqualified acceptance of that offer communicated before “meeting of the minds”, or mutual agreement of the parties, exists. With a clear understanding regarding the terms, and agreement by all parties, there is no contract.
2. Competency: Lack of Defenses
- A contract defense is a material defect in the “meeting of the minds”. Such a defect could prevent the contract from forming (void) or possibly render what would otherwise be a valid contract unenforceable (voidable). A few examples are listed below:
- Promissory Estoppel
3. The What: Clearly identified property description
- Real estate contract must include a legal property description. If the property is not clearly identifiable than the parties would not have a mutual understanding or meeting of the minds. It’s important to remember that a property address is not considered a legal property description. Therefore it is highly recommended that all real estate contracts include both the property address and more importantly, the legal property description, which can be found in the tax records, Deed and/or mortgage documents.
4. Exchange For: Consideration
- Consideration is a legal term with a long history of interpretation. In Virginia the term is most often referred to as Valuable Consideration. Locating the root definition and clarity as it pertains to real estate within Virginia Code can provide hours of entertainment. However, I find the following explanation to be the least confusing: During the contract negotiation process parties’ bargain with one another to exchange promises. Typically to receive some right or benefit from the real estate transaction. For example deliver title in exchange for payment. The resulting end benefit of the bargaining, whatever the parties agreed to do or not to do, is “valuable consideration”. Therefore, in order for Contracts to be legally enforceable the agreement must be supported by some type of valuable consideration.
5. Legal Purpose
- Contract must be formed with legal purpose and have legality of object. The Courts cannot enforce a contract that requires a party to perform an illegal act. For example, a person might enter into a contract for murder and while the contract itself is valid, the Courts could not enforce any breach that existed. Any contract to do an illegal act is unenforceable and void, even if the consideration has been paid. It is also a contract defense.
6. Get it in writing
- The most recent addition, get it in writing. While a contract can be created simply by the parties having a “meeting of the minds”, it is not enforceable and now as we implement changes from HB 1907, some real estate contracts, for example Agency, must be defined and consented to in writing.
Understanding Unilateral vs. Bilateral
We’ve established that In order for a contract to exist a “meeting of the minds” must have occurred. However, there are some instances in real estate where only one party promises to act or refrain from acting (perform), and this would be considered a Unilateral agreement. In these instances, while one party may be obligated, a contract is not formally created until both parties agree to act or refrain from acting as defined within the agreement. Only then would a Unilateral agreement become Bilateral.
Quick memory reference:
- Unilateral = You, one party.
- One party promises
- Request or Offer is made
- Examples of a Unilateral Contracts which could become Bilateral Contracts under certain provisions:
- Offer to Purchase
- Open Listing agreement
- Option Contracts
- Bilateral = Two, both parties.
- Both parties promise
- Request or Offer is Accepted/Performed
- Examples of when a Unilateral Contracts becomes a Bilateral Contract:
- Acceptance of Offer to Purchase
- Performance of Open Listing agreement by a Licensee
- Option Contracts when the Tenant elects to move forward in the Purchase
Executory vs. Executed
Legal verbiage can be confusing, especially when the same word can mean different things depending on the context in which it is used. For example, the term “Principle” is interchangeably used within our industry and can refer to a Principle Broker, the Principle to a transaction who has conferred authority, which could be either the Broker or Client, or the Principle as it refers to a mortgage balance. Adding to terminology confusion is when real estate professionals use terms incorrectly, and that happens most frequently with the word “Executed”.
So let’s take a minute to refresh our knowledge regarding the difference between Executory and Executed. A contract is “Executory” when one or both parties have agreed to the contract terms, but have not yet performed. For example, a seller has promised to sell, and a buyer promised to buy, both agreeing to certain contract contingencies and have signed, but parties have not yet fully performed as required to proceed to close. Whereas, a contract is “executed” when both have fully performed as agreed and there is nothing left to do by either party. Therefore, merely having a signed contract by both parties does not constitute an Executed contract.
Quick memory reference:
|Prisoner waiting on death row
||Prison execution completed.
Author: Lee Gosselin, Associate Broker & Owner