REAL ESTATE CONTRACTS

REAL ESTATE CONTRACTS

Real estate contracts include the following: (l) contracts for the sale of real property or of an interest therein; (2)
agreements for leasing of realty for a longer period than one year; and (3) agreements authorizing or employing
an agent or broker to buy or sell real estate for compensation or a commission.

These contracts are essentially like any other contract except that they must be in writing and signed by the
party to be charged to make them valid under the Statute of Frauds. Thus, as we have seen in the discussion on
contracts in general, there are four requirements: (l) parties capable of contracting; (2) their consent (i.e.,
genuine offer and acceptance); (3) a lawful object; and (4) sufficient consideration.

In the usual real estate sales transaction, the prospective buyer states the terms and conditions under which the
buyer is willing to purchase the property. These terms and conditions constitute the offer. If the owner of the
property agrees to all of the terms and conditions of the offer, it is an acceptance which results in the creation of
a contract. It does not make a difference whether the offer comes from the seller or the buyer. If the negotiation
ultimately leads to a definite offer on the one side and unconditional acceptance on the other side, a contract has
been created. To complete the contract for the sale of real property, the parties must reduce the terms and
conditions to writing and sign the contract.

Provisions in Contracts

Forms such as listing agreements (authorization to sell), deposit receipts, exchange agreements, and other real
estate contracts for the sale or exchange of real estate should contain the following provisions:

1. The date of the agreement;

2. The names and addresses of the parties to the contract;

3. A description of the property;

4. The consideration;

5. Reference to creation of new mortgages (or trust deeds) and the terms thereof; the terms and conditions of
existing mortgages, if any;

6. Any other provisions which may be required or requested by either of the parties;

7. The date and place of closing the contract.

A contract of sale normally calls for the preparation of a deed to convey the property. It is executory because
when the deed is properly signed and delivered to the purchaser the contract is executed.

Handling deposit on property in a sale. An earnest money deposit by a prospective purchaser of real property
is trust funds. The broker must handle the deposit as prescribed by the Real Estate Law and The Regulations.

Section 10145 of the Real Estate Law provides that the broker who receives trust funds must place the funds
into a trust fund account in a bank or other recognized depository, if the broker does not place the funds into a
neutral escrow or into the hands of the broker’s principal.

The regulations of the Commissioner dictate the procedures to be followed by a broker who elects to hold the
funds uncashed or places the earnest money deposit into the broker’s trust fund account until acceptance. The
contract usually provides that, upon acceptance, the deposit will be immediately placed into an independent
escrow or title company.

The provision of law that sanctions the handing over of all varieties of trust funds to a principal by the broker
poses some dilemmas for brokers when the trust funds, which are toward the purchase, are in the form of
deposits. The particularly troublesome predicaments brokers may face are the transactions in which the buyer
has allegedly breached a binding contract to purchase the real property. The law permits a broker to hand over
an earnest money deposit to the seller as soon as there has been an acceptance of the offer to purchase, unless
the terms of the contract provide otherwise. The question then becomes whether the broker, who has the money
in his or her trust fund account, can refuse to turn it over to the seller upon demand when the seller concludes
that the buyer has breached the contract?

There is no legal authority that provides a clear-cut answer to this question. Those knowledgeable in the Real
Estate Law in California contend the broker holds the earnest money deposit after an apparent acceptance of the
contract as an escrow holder rather than as an agent of the seller. The Department does not accept this
proposition. However, it does understand the broker is in a very difficult position when a transaction falls apart
and either or both parties demand the earnest money. To avoid the decision as to who is entitled to an earnest
money deposit and the later possibility of being held liable or subject to disciplinary action for making the
wrong decision, the broker is well advised to file an interpleader action and deposit the funds in the court where
the action is to be brought. If, as noted above, the trust funds have already been placed into an independent
escrow upon acceptance, the funds may be held there pending resolution of the dispute.

Forfeitures. Contracts for the sale of real property frequently include a provision that states if a prospective
buyer breaches the contract through no fault of the seller or broker, the deposit made by the buyer toward the
purchase shall be divided between the seller and the broker. Such provisions of cases of breaches by the buyer
by the forfeiture of the deposit come within the definition of liquidated damages clauses.

If the contract is for the purchase and sale of residential real property, defined as a dwelling of not more than
four residential units, and the buyer intends to occupy the dwelling or one of the units as a residence, the
following rules apply:

1. These special rules apply only to amounts actually prepaid, in the form of deposit, downpayment, or
otherwise.

2. If the amount paid pursuant to the liquidated damages clause does not exceed 3% of the purchase price, the
clause is valid unless the buyer proves that the amount paid is unreasonable.

3. If the amount actually paid pursuant to the liquidated damages clause exceeds 3% of the purchase price, the
clause is invalid unless the party seeking to enforce it proves that the amount paid is reasonable.

4. The provision must be separately signed or initialed by each party to the contract, and if it is a printed
contract, the provision must be set off in ten point bold type or contrasting red print in eight point type.

These rules do not apply to real property sales contracts, as defined in Civil Code Section 2985.

Effect of seller’s death on real estate contract. A real problem may ensue if a contract is entered into for the
sale or purchase of real estate and the seller dies before the time of taking title. A properly drawn real estate

contract contains a provision stating that all the terms of the contract are binding upon the heirs, executors,
administrators, and the assigns of the respective parties.

With this provision, the buyer’s rights are the same against the heirs, executors, administrators, or assigns of the
seller as the buyer had against the seller. Under these circumstances, the buyer may compel specific
performance of the contract by the seller’s heirs, administrators, executors, or assigns.

Uniform Vendor and Purchaser Risk Act (Civil Code Section 1662). In some circumstances, after a contract
is made for the purchase and sale of real property, a fire or other disaster destroys or seriously damages the
property. The question becomes who shall take the loss? Under California’s Uniform Vendor and Purchaser
Risk Act, any contract made in this state for the purchase and sale of real property shall be interpreted as
including an agreement that the parties shall have the following rights and duties unless the contract expressly
provides otherwise:

1. If, when neither the legal title nor the possession of the subject matter of the contract has been transferred,
and all or a material part thereof is destroyed without fault of the purchaser or is taken by eminent domain,
the seller cannot enforce the contract, and the purchaser is entitled to recover any portion of the price paid;

2. If, either the legal title or the possession of the subject matter of the contract has been transferred, and all or
any part thereof is destroyed without fault of the seller or is taken by eminent domain, the purchaser is not
relieved from a duty to pay the price, nor entitled to recover any portion thereof that has been paid.

Options

Since an option is a form of contract, the requirements for the enforceability of real estate contracts apply to
options. Some consideration, even though it might be only 25¢ on a $100,000 parcel of real estate, must in fact
pass from optionee to optionor. A mere recital of consideration alone is insufficient. Provisions of a lease,
however, constitute sufficient consideration to support an option contained in the lease. Option contracts
typically run from seller to buyer. That is, in exchange for consideration paid by the buyer, the seller is deprived
of the right and power to revoke the basic offer to sell. The buyer, in effect, purchases an agreed amount of time
in which to accept or reject the seller’s underlying offer concerning the property. Thus, the underlying offer is
rendered irrevocable for the period specified in the collateral option contract.

Although option rights are usually assignable unless there is a restriction to the contrary, they do not give the
optionee any interest in the land. For this reason, the optionee cannot mortgage his or her rights. However, the
holder of an unexercised option does, however, have an interest for which the holder may be entitled to
compensation upon condemnation of the land.

The option may be given either alone or in connection with the lease of the property. It may be in either the
customary form of an exclusive right to purchase or lease, or in the form of a privilege of first right of refusal to
purchase or lease. The option will terminate automatically upon expiration of the time specified without
exercise by the optionee. Additionally, the termination of a lease containing an option also usually terminates
the option. A renewal of the lease may, however, renew the option. The specific lease situation must sometimes
be carefully examined, since the option provisions and the lease provisions may be divisible.

An option to purchase real property is a written agreement whereby the owner of real property agrees with the
prospective buyer, that such buyer shall have the right to purchase the property from the owner at a fixed price
within a certain time. Terms of financing, payments, etc., should be set forth in such agreement. The
prospective buyer at buyer’s option may comply with all the terms of the agreement or be relieved from its
terms. The owner would not have recourse to any legal procedures for damages or specific performance. The
option does not bind the optionee to any performance. It merely gives the optionee a right to demand
performance. Time is of the essence in an option and is usually strictly construed. If no time is specified, a
reasonable time period is implied.

If an option is recorded by the optionee, but is not exercised before or on the date of the expiration of the option,
the optionee should remove the effect of the option from the records by recording a quitclaim deed.

The broker usually does not earn a commission for having secured a client who takes an option, as the broker’s
right of commission does not arise unless the option is exercised.

Listing Defined

A listing is a written contract by which a principal employs an agent to do certain duties (e.g., sell real property)
for the principal. Therefore, an agent holding a listing is always bound by the law of agency and has certain
fiduciary obligations to the principal that do not exist between two principals.

Net listing. In a net listing the compensation is not definitely determined, but a clause in the contract usually
permits the agent to retain as compensation all the money received in excess of the selling price that is accepted
by the seller. Under the Real Estate Law, failure of an agent to disclose the amount of an agent’s compensation
in connection with a net listing is cause for revocation or suspension of license. The disclosure must be done
prior to or at the time the principal binds himself or herself to the transaction. The agent is also required by the
Real Estate Law, in writing within one month of the transactions’ closing, to reveal to both buyer and seller the
selling price involved. The law, which is the usual practice, permits this information to be disclosed by the
closing statement of the escrow holder.

A net listing is perfectly legitimate, but it may give rise to a charge of fraud, misrepresentation and other abuses.
Accordingly, if a net listing is used, the commission arrangement should be thoroughly explained to the
principal.

Open listing. An open listing is a written memorandum signed by the party to be charged (usually the seller of
the property) which authorizes the broker to act as agent for the sale of certain described property. Usually, no
time limit is specified for the employment, although open listings can provide for a definite term. The property
is identified by a suitable description, and generally the terms and conditions of sale are set forth in the open
listing.

Open listings are the simplest form of written authorization to sell. They may be given concurrently to more
than one agent. Usually, the seller is not required to notify the other agents in case of a sale by one of them in
order to prevent liability of paying more than one commission. Where several open listings are given, the
commission is considered to be earned by the broker who first finds a buyer who meets the terms of the listing,
or whose offer is accepted by the seller. If the owner personally sells the property, the owner is not obligated to
pay a commission to any of the brokers holding open listings. The sale of the property under such an agreement
cancels all outstanding open listings.

Exclusive agency listing. An exclusive agency listing is a contract containing the words “exclusive agency.”
The commission is payable to the broker named in the contract, and if the broker or any other broker finds the
buyer and effects the sale, the broker holding the exclusive listing is entitled to a commission.

If a broker other than the broker holding the exclusive agency listing is the procuring cause of the sale, and the
procuring broker has some types of written agreement with the seller, the owner may be liable for the payment
of two full commissions. Because the listing refers to an agency and the owner is not an agent, the owner may
personally effect the sale without incurring liability for commission to the broker holding the exclusive agency
listing.

Exclusive right to sell listing. Another form of listing is the exclusive right to sell. Under such listing, a
commission is due to the broker named in the contract if the property is sold within the time limit by the said
broker, by any other broker, or by the owner. Frequently, this listing also provides that the owner will be liable
for a commission if a sale is made, within a specified time after the listing expires, to a buyer introduced to the
owner by the listing broker during the term of the listing. The real estate broker is usually obligated under the
terms of the listing contract to furnish a list of the names of persons with whom the broker has negotiated during
the listing period, within a specified number of days after the expiration of the listing.

The exclusive right and the exclusive agency type of listing must be for a definite term, with a specified time of
termination. If a broker does not provide for this, the broker’s license is subject to disciplinary action under the
Real Estate Law.

Multiple listing service. A multiple listing service is a cooperative listing service conducted by a group of
brokers, usually members of a real estate board. The group provides a standard multiple listing form which is
used by the members. It is usually an Exclusive Authorization Right to Sell listing form and provides, among
other things, that the member of the group who takes the particular listing is to turn it in to a central bureau.

From there, it, is distributed to all participants in the service and all have the right to work on it. Commissions
earned on such listings are shared between the cooperating brokers, with the listing broker providing for the
division of commission in each listing sent to other participants.

When broker is entitled to commission. Ordinarily the broker is entitled to a commission when the broker
produces a buyer who is ready, willing, and able to purchase the property for the price and on the terms
specified by the principal, regardless of whether the sale is ever consummated. Contracts may expressly provide
that no commission is payable except on a completed sale or on an installment of the purchase price when paid
by the buyer. Such provision controls in the absence of fraud or prevention of performance by the principal. The
broker must be the procuring cause of the sale. It is not sufficient that the broker merely introduces the seller
and buyer, if they are unable to agree on the terms of the sale within the time period of the agency.

The broker may, however, have a cause of action for the payment of commission if, within a specified time after
expiration of the listing, the property is sold to a buyer introduced by the broker during the term of the listing
contract.

Deposit Receipt

California brokers use a deposit receipt when accepting earnest money with an offer to purchase real property.
This is a receipt for the money deposited and, more importantly, the basic contract for the transaction. It should
set forth all the basic factors which are included in a contract of sale, including arrangements for financing. It
should contain a complete understanding among the buyer, seller, and broker as to the return of the deposit in
the event the offer is not accepted, and provisions for disposition of deposit money should the buyer fail to
complete the purchase.

Some of these provisions are incorporated by standard clauses in the deposit receipt forms. The terms and
conditions written into the offer must be done with extreme care by the broker or salesperson.

Agent must give copies of contracts. The real estate license law provides that brokers and salespersons must
give copies of documents and agreements to the persons signing them at the time the signature is obtained. The
law not only applies to copies of listing contracts and deposit receipts, but to any document pertaining to any of
the acts for which one is required to hold a real estate license.

Tender Defined

A tender in a real estate transaction is an offer by one of the parties to the contract to carry out that party’s part
of the contract. A tender is usually made at the time of closing of escrow (i.e., concluding the transaction). If
one of the parties defaults or is unable to carry out his or her contractual obligation, the other party makes the
tender. (If the seller, an offer of the deed and a demand for payment of the balance of the purchase price. If the
purchaser is ready, an offer of the money required and demand for the deed.) If litigation arisis out of some
dispute between the buyer and the seller, the party who made the tender can rightfully claim that he or she was
ready, willing and able to go through with the deal, and that the other party defaulted. If both parties were in
default, neither may recover any damages from the other. Whether the parties made a tender is a question of fact
that must be established by competent evidence.

The person must specify any objections at the time the tender is made or the objections are waived. The tender
of performance, when properly made, has the effect of placing the other party in default if the other party
refuses to accept it, and the party making the tender may rescind or sue for breach of contract or specific
performance.