RE CA CE Advanced - Contract - Law

Advanced Contract Law
California
Harlow T. Spaan, N. Jeffrey Sorg
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VERSION 2021-05-22
CONTENTS
Segment 1: Contract Law and the Formation of Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Creation of a Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1. Competent Parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2. Mutual Assent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
3. Consideration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
4. Legality of Purpose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
The Statute of Frauds - The Requirement That a Contract be in Writing . . . . . . . . . . . . . . . . . . . . . . 11
Adequate Description of the Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Contract Types . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Express and Implied Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Unilateral and Bilateral . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Executed and Executory Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Segment 2: Contract Performance, Interpretation, Assignment, and Delegation . . . . . . . . . 16
The Effects of Problems in the Formation of a Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Factors That May Make a Contract Voidable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Fraud in the Execution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Misrepresentation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Statements of Opinions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Concealment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Duress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Undue Influence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Mutual Mistake . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Interpretation of Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Assignment and Delegation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Rules of Assignment and Delegation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Assignment and The Statute of Frauds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Segment 3: Breach of Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Discharge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Assignment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Novation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Rescission . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Impossibility of Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Subsequent Illegality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Alteration of Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Bankruptcy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Laches . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Prevention of Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
I
Conditions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Breach of Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Breach of Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Total Breach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Partial Breach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Special Case of Untimeliness as Total Breach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Breach of Contract - Anticipatory Repudiation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Damages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Liquidated Damages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Attorney’s Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Rescission and Restitution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Reformation of Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Specific Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Punitive Damages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Foreclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Contract Liability vs. Tort Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Torts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Segment 4: Conditions and Contingencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Definitions of Condition and Contingency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
The Use of Conditions and Contingencies in the Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
The Legal Framework . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Definitions and the Ripening of a Condition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Silence on the Part of the Party Claiming the Benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
The Element of Time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Example of Time Expressly Stated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Example of When Time is NOT of the Essence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Satisfaction of the Party Claiming the Benefit of a Condition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Excuse of a Condition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
The Use of Contingencies in the Real Estate Sale Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Who Must Act? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
What is to be Done? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
When Must The Contingency be Satisfied? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
How is The Contingency to be Removed or Satisfied? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Using "Basic Drafting Questions" For The Drafting of Contingencies . . . . . . . . . . . . . . . . . . . . . . . 45
Standard Contingencies in the Printed Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
II
Segment 1: Contract Law and
the Formation of Contracts
Contract law is the collection of rules governing the formation, interpretation

and enforcement of promises. The collection of rules that make contract law
come from both common law and statutory law.
Contract law has its origins in English common law. Common law is the
part of English law derived from custom and judicial precedent rather than
statutes. The English colonists brought common law with them to the United
States. When the colonies adopted the US Constitution, each state was given
the power to develop its own laws. During this same era, commerce between
the states was limited and localized because of the lack of transportation
and communication, as well as inconsistent state laws. As the nation grew,
and transportation and communication between the states became efficient,
commerce between the states increased. Because each state had its laws gov-
erning the creation and interpretation of contracts, attorneys were necessarily
involved in contract preparation, interpretation, enforcement and jurisdiction.
In 1952, the American Bar Association created a uniform model for contract
law relating to commercial transactions between the states. This model, known as the Uniform Commercial
Code (UCC), has been adopted by all states. The UCC applies to real estate transactions, as far as it applies
to negotiable instruments, and to the sale of businesses.
Between 1923 and 1944, the American Law Institute worked on clarifying and simplifying the laws for
contracts, agency, conflict of laws, and other legal topics. Today, the basic principles of contract law that
apply to the practice of real estate are known as the Restatement of The Law of Contracts by the American
Law Institute.
In general, a contract is an agreement between competent legal parties to do or not do some legal
act in exchange for consideration. Once created, a contract establishes and defines the rights and
duties or responsibilities of the parties to the contract.
Segment 1: Contract Law and the Formation of Contracts
Creation of a Contract
For a contract to be valid, four elements must be present in the contract. These elements are:
1. Competent parties
2. Mutual Assent (also known as Offer and Acceptance)
3. Consideration
4. Legal (lawful) object or purpose
In most cases, a contract involving real property must also be in writing and include an adequate description
of the property involved.
1. Competent Parties
The first of the four required contract elements requires all parties to be legally competent. Some of the
issues involved in this element are age, felons, illiterate individuals, identifiable parties, mental capacity, and
legal authority.
Age of Contracting Party

In most states, a minor is an unmarried, unemancipated person under the age of 18. In response to emanci-
pated minors finding it difficult to obtain necessities to provide for themselves, laws exist that give emanci-
pated minors the ability to enter into binding contracts regarding these necessities.
An emancipated minor is one released from parental care and responsibility and made sui juris.
Sui Juris - having the capacity to manage one’s own affairs (West’s Encyclopedia of American
Law, edition 2. S.v. "sui juris" from https://legal-dictionary.thefreedictionary.com
/Sui+Juris )
Contracts entered into by minors are voidable by the minor, unless the contracts are entered into by an
emancipated minor for necessities such as a rental agreement for an apartment. Voidable means that a
minor can legally rescind a contract until a reasonable time has elapsed after reaching the age of majority.
The person contracting with a minor cannot void the contract, but the contract can be voided by the minor.
However, when a minor’s parent, legal guardian, or court appointed legal guardian enters into a contract for
the minor, then the minor cannot void (disaffirm) the contract.
When a minor enters into a contract and does not rescind it, the contract is valid and binding.
2 Creation of a Contract
Disaffirm - to revoke consent; repudiate; to refuse to support former acts or agreements. Disaffirm
is commonly applied in situations where an individual has made an agreement and opts to cancel
it, which he may do by right - such as a minor who disaffirms a contract. (West’s Encyclopedia of
American Law, edition 2. S.v. "disaffirm" from https://legal-dictionary.thefreedictionary
.com/disaffirm )
Felons
In most states, felons can grant powers of attorney, make wills, and enter into contracts to buy or sell real
and personal property. However, state laws can vary on specific issues, and courts may have imposed some
limitations on some individuals. If you are working with an individual who is a convicted felon, currently
serving a jail sentence, or is on probation, you will want to be sure to check state laws regarding limitations
imposed because of their status.
Illiterate Persons
Illiterate persons can enter into and be bound by written contracts. Usually the illiterate will bring another
person who will read the contract aloud, and then the illiterate person will sign the contract by making a
"mark" or "x" as their signature.
Illiterate - a term that is applied to one unacquainted with letters. (A Law Dictionary, Adapted to
the Constitution and Laws of the United States. By John Bouvier. S.v. "illiterate" from https:/
/legal-dictionary.thefreedictionary.com/illiterate )
Identifiable Parties
A party entering into a contract must be identifiable and exist at the time the notification of acceptance
of the contract occurs. The contract becomes void if a party dies or rescinds the offer before notification
of acceptance. If an offeree dies after the notification, in many instances, the contract remains enforceable
against their estate.
Mental Capacity
Mental capacity means the party has to understand the nature of the contractual agreement at the time
of entering into the contract. If a person is competent at the time of entering into a contract but is later
declared incompetent, then the contract remains valid and enforceable. If a person is mentally unfit at
the time the contract is entered into, including under the influence of drugs or alcohol, but has not been
determined to be unfit by a court before entering into the contract, the contract might be voidable. The law
is that a party is incompetent if they are either unaware that a contract was entered into or are unable to
clearly understand its terms and implications.
A contract is void when a party was declared legally incompetent before entering into the contract.
Creation of a Contract 3
Legal Authority
A person entering into a contract for another individual must have that individual’s legal authority to make
contracts on their behalf. For example,
• a court appointed guardian can legally act for a minor or a determined incompetent;
• a person holding a valid Special Power of Attorney or General Power of Attorney can enter into a contract
on behalf of the party granting it;
• a party who is an appointed personal representative of an estate, and authorized by the court to conduct
the affairs of the estate, can enter into contracts for a deceased person’s estate; and
• a person who is granted proper authority can enter into a contract for an organization.
2. Mutual Assent
Let’s take a look at the second of the four required contract elements, Mutual Assent. Mutual assent is also
known as a "meeting of the minds." A meeting of the minds is when one party makes an offer and another
party accepts that offer. The key to this contract element is that the contracting parties must agree to all
the terms and conditions and agree that they all have the same understanding and meaning. In a real estate
transaction, this mutual assent is acknowledged by the contracting seller’s and buyer’s signatures on the
offer.
Mutual Assent - agreement, arrangement, understanding. (Burton’s Legal Thesaurus, 4E. S.v.
"mutual assent" from https://legal-dictionary.thefreedictionary.com/mutual+assent )
The Offer
The offeror is the party making the offer. The offeree is the party who receives the offer. The offer is a
proposal showing the offeror’s specific willingness and promise to create a legal relationship once the offer
is accepted. The offer can be verbal or written. However, all real estate contracts must be in writing to be
valid and enforceable.
The offer must be concise enough to create a definite obligation and include all of the essential contract
elements. This means it has to be sufficiently complete, but not that every detail needs to be addressed at
the time the contract is entered into.
A specific offeree must be addressed by the offer, one who alone has the authority of acceptance. In other
words, the party to whom the offer is made must be the party who has the power to accept the offer.
The offeror must communicate the offer to the offeree. Communication can be either verbal or written.
Termination Before Acceptance

The offer is not binding until it is accepted. There are some ways to terminate an offer before it gets accepted
by the offeree. These methods of termination follow.
Revocation
The offeror can withdraw an offer any time before it is accepted by the offeree. The withdrawal of the offer
must be communicated to the offeree or the offeree’s agent before the offeree’s acceptance of the offer for
revocation to be effective. Notice given directly to the offeree is actual notice. Notice given to the offeree’s
agent is constructive notice. If the offeree accepts the offer after receipt of notice that the offer is withdrawn,
then the offeree’s acceptance becomes a counteroffer, which the offeror may either accept or reject.
Petra makes a written offer to purchase Brian’s house. Brian’s agent delivers the offer to Brian on
June 1st. Before Brian accepts the offer, Petra emails her agent and withdraws the offer. Petra’s
agent notifies Brian’s agent of this withdrawal at 10 AM on June 2nd. Brian accepted Petra’s of-
fer at 11 AM on the same day but before he received notification of the offer revocation from his
agent. Under this fact situation, the offer was successfully revoked because Petra’s agent delivered
the notice of revocation to Brian’s agent before Brian accepted the offer. Delivery to the agent is
delivery to the agent’s client. That is, the notification is effective on delivery to the agent of the
client - not to the actual client.
If an offeree is bound through the receipt of consideration to keep an offer open for a stated period, an option
contract is created. In this instance, the offer is not revocable until the stated period has expired.
Petra, the offeror, paid Brian, the offeree, $1,000 for the right to purchase Brian’s ranch for the
sum of $2,500,000 during the next 90 days. Because Petra paid for this right to purchase, Brian
cannot terminate the agreement. The contract Petra and Brian have entered into is an option con-
tract.
Lapse of Time
There are some ways the element of time can affect the status of an offer:
• The offer will remain open for the period stated.
"This offer shall remain open until 5:00 PM on Friday, June 26, 2020." This means that the offeree
has until that time to accept the offer. Nevertheless, the offeror can revoke the offer any time be-
fore acceptance by the offeree.
• If no time is stated in the offer, the offer will expire at the end of a reasonable time. "Reasonable" is
somewhat uncertain and would be a question of fact for a jury to decide.
Death of the Offeror or the Offeree

The offer will automatically terminate upon the death of either party whether or not the other know of the
death. If either dies before the communication of acceptance of the offer, then the contract is terminated. If
either party dies after communication of acceptance of the offer, the contract is usually valid and enforceable
against the deceased’s estate.
One possible result of the death of the offeror is that the estate would be required to pay the seller the
amount of the contract out of the estate proceeds. However, as a practical matter, the estate may not
be able to perform. Likewise, if the offeror’s personal income is required for qualifying for and obtaining
financing, then the estate will not be able to perform.
An offeree who dies after communicating acceptance of an offer is still obligated to perform the terms of the
contract obligates their estate to fulfill the contract.
Mental Incompetence
The offer will automatically terminate upon a declaration of mental incompetence of either the offeror or
offeree if this declaration occurs before the communication of the acceptance of the offer back to the offeror.
If the offeror is considered mentally incompetent after communication of the acceptance, a contract exists
and the guardian or representative of the offeror may be required to perform the contract.
Illegality of Subject Matter

The offer will automatically terminate if the subject matter of the offer becomes illegal before the offer is
accepted.
An offeror has agreed to pay XYZ Company for the installation of soft drink vending machines in
their high school. After reaching an agreement, a law is passed making vending machines in high
schools illegal. The passage of the law automatically terminates the offer to install the machines.
An offer for an illegal purpose is void.
Destruction of The Subject Matter

Destruction of the subject matter of the offer before acceptance terminates the offer. This is the case even if
the offeror is unaware of the destruction. Once an offer is accepted, a valid contract exists and the destruction
of the subject matter will not necessarily terminate the contract. The contract itself will dictate what will
happen if the property is destroyed after offer acceptance.
Rejection by Offeree
The offeree can terminate the offer by rejecting it in either of these two ways:
1. The offeree can reject the offer and communicate the rejection to the offeror. If the offer was in writing,
the rejection must be in writing.
2. The offeree can reject the offer by allowing the time deadline specified in the offer for acceptance to pass.
Sarah makes an offer to purchase Mariecella’s real property and leaves the offer open for accep-
tance until 5 PM on August 2nd. Mariecella regards Sarah’s offer as insulting and elects to allow
the time deadline to pass without a response.
Inquiries or negotiations that suggest different terms are not a rejection of the offer when made
during the period allowed for acceptance.
According to the real estate sale agreement, closing and possession are to be in three weeks. The
seller wants more time to move out but does not want to make a counteroffer that would reject the
original offer. Instead, the seller asks their real estate agent to ask the buyer if a 6-week possession
date would be acceptable. This verbal inquiry is not a counteroffer or rejection of the original of-
fer; rather it is intended to determine the buyer’s thinking and draw out information that might
help the seller better respond to the offer.
Counter Offer
A counteroffer is a rejection of the original offer to enter into a contract by changing an unsatisfactory offer
to one that is satisfactory. The original offeror may either accept or reject the counteroffer. If there is no
acceptance of the offer or counteroffer, then there is no mutual assent and no resulting contract.
In an offer to purchase Jeff’s real property, Catori specifies that the transaction will close in 60
days. Jeff is not happy with a 60-day closing and changes the time to close to 30 days. By chang-
ing the closing date, Jeff has rejected Catori’s offer and made a counteroffer; there is no contract
unless Catori accepts Jeff’s counteroffer.
An offer can be terminated in the following ways:
• Revocation
• Lapse of time
• Death of Offeror
• Insanity of Offeror
• Illegality of subject matter
• Destruction of subject matter
• Rejection
• Counteroffer
The Acceptance
Acceptance is an unqualified, definite, voluntary, and genuine assent of the offer given to the offeror or the
offeror’s agent in the manner invited or required by the offer. The acceptance must conform precisely and
not change any of the terms of the offer. If the offeree makes any changes to the original offer, the offeree
has rejected the offer and has made a counter offer.
Assent - agreement, as to a statement, proposal, etc. (Collins English Dictionary - Complete and
Unabridged. S.v. "assent" from https://www.thefreedictionary.com/assent )
The offeree must communicate offer acceptance back to the offeror. The method of communicating the
acceptance can be anything reasonable unless the offer or the law specifies otherwise.
In addition to written acceptance, offers that are for personal property can be accepted by action or
conduct. Any act or conduct that manifests to the offeror the offeree’s intention to accept is sufficient.
3. Consideration
The third contract element is consideration. In general, consideration is a legal concept that applies to the
law of contracts. Almost all contracts must be supported by consideration, or the contract is void.
In its most basic form, consideration is something of value provided by one party in exchange for something
of value from another party. Consideration can be a promise for a promise, a promise for an act, a promise
not to act, or even love and affection. In all cases, the parties have bargained at arm’s length with each
other, and both have given and received.
Example: John promises to give money to Pete for Pete’s car and Pete promises to give John his
car if John gives him money. This exchange is money for a car, or a promise for a promise. The
required element of consideration is present because each party to the contract is giving something
of value to the other. If John gave nothing of value to Pete, but Pete gave John the car, the ex-
change would be considered a gift, not a contract.
Example: John promises to pay Sam $4,000 after Sam landscapes John’s yard. This is an example
of a promise for an act. John is going to give Sam money after Sam acts.
Example: John tells Rick that he will give him $15,000 if Rick promises to take no further legal
action against John. This is an example of a promise in exchange for forbearance. John will pay
Rick if John promises not to do something.
There is no requirement that the consideration bargained for by the offeror and offeree have equal value.
However, where a significant disparity exists, the contract might be voidable.
Example: If John gives Pete $1,900 for a car with a book value of $2,500, the required contract
element of consideration would be present, even though the values are not equal. However, if John
gave Pete $1,000 for a $250,000 house, the transaction might be voidable and deemed a gift.
In all cases, consideration must be legally sufficient. Legally sufficient means that the consideration must be
either a legal detriment to the donor or a legal benefit to the recipient. A legal detriment is something a
party will do, but had no compulsion to do prior to the contract. A legal benefit is something to which the
recipient was not entitled to before the contract.
Consideration can be an obligation taken on or a benefit given. This means that the consideration does not
have to be tangible.
Example: Brian agrees to wash Jack’s car if Jack agrees to take care of Brian’s dog while Brian is
on vacation. In this case, nothing tangible is exchanged.
The element of consideration must be present in every contract. It can be an exchange of money, services,
negotiable instruments, personal property, the grant of rights, or forbearance to act.
In most real estate contracts, the consideration is a promise for a promise - the promise to pay the purchase
price in exchange for the deed, and the promise to transfer the deed in exchange for the purchase price.
Consideration is the mutual promise to buy and sell within the real estate sale agreement.
Example: Larry offers to purchase Jack’s house for $400,000. Jack agrees to sell his house to Larry
for $400,000. The mutual promises to buy and sell satisfy the required element of consideration.
An earnest money deposit is not consideration since its purpose is for liquidated damages payable
to the seller if the buyer defaults on the agreement.
Sometimes a promise is not supported by consideration, but the promise can nevertheless be enforced to
prevent an injustice. The legal theory used to obtain this result is known as promissory estoppel. This theory
prevents a party from denying that a promise is supported by consideration, even though no consideration
is given for a promise in cases where a promise should be enforced to prevent an injustice. In order for a
promissory estoppel to apply, four elements must be present: 1) there must be a promise by the promissor,
2) it must be calculated to induce reliance on the part of the promisee, 3) the promissee must have been
justified in actually relying on that promise, and 4) injury resulted.
Example: Jennifer lost her job and fell 4 months behind in her house payments. She called her
lender and reached an agreement to have 6 months to pay the past due payments. The lender
agreed not to commence a foreclosure action during that time, so long as the payments, plus past
due portions, were paid as per their new agreement. There was no consideration to support the
promise of the lender to extend the time to pay the past due amounts.
Three months after the bank agreed to extend the time to pay the past due amount, the lender
commenced a foreclosure action. Because each of the four required elements of promissory estop-
pel are present, the lender’s promise not to commence foreclosure action for six months is enforce-
able by Jennifer
4. Legality of Purpose
The fourth essential contract element is legality of purpose. Legality of purpose (also legal purpose) is the
contract element that requires the object of the contract to be legal. An agreement is legal and enforceable
only if it complies with the law and public policy. If entered into for an illegal purpose, a contract is not
legally binding. As a matter of public policy, contracts with an illegal purpose or that are against public
policy are void.
A contract is void if:
• It is created to pursue an illegal objective,
A contract to provide illegal drugs for money is unenforceable.
• It has some legal parts and some illegal parts, or
John will sell Mary his business for $250,000 in cash and $250,000 in cocaine.
• The purpose for which it was created was legal and then becomes illegal before the contract gets per-
formed.
John agrees to buy Mary’s video poker business, but before the contract gets performed the state
passes a law to make video poker illegal.
The Statute of Frauds - The Requirement That a

Contract be in Writing
The Statute of Frauds is a set of laws requiring, among other things, that
certain types of contracts be in writing. The statute originally came from
England and dates back to 1667. The basic concepts of this statute have
been adopted, in a more or less modified form, by nearly all of the states.
The chief characteristic of the statute is the provision that no suit or action
can be maintained on certain classes of contracts unless there is a written
evidence of the contract that is signed by the party to be charged. The
primary objective of the statute is to close the door on many court actions
that were believed to be based upon frauds perpetrated by perjuries when
no evidence of a contract existed.
California’s Statute of Frauds is found in California Civil Code Section

1624(a) (3) & (4) and also requires certain contracts to be in writing. "An
agreement authorizing or employing an agent, broker, or any other person
to purchase or sell real estate, or to lease real estate for a longer period
than one year, or to procure, introduce, or find a purchaser or seller of
real estate or a lessee or lessor of real estate where the lease is for a longer
period than one year, for compensation or a commission" is required by the statute to be in writing.
The statute also requires the following, "An agreement for the leasing for a longer period than one year, or
for the sale of real property, or of an interest therein; such an agreement, if made by an agent of the party
sought to be charged, is invalid, unless the authority of the agent is in writing, subscribed by the party
sought to be charged." These excerpts mean that contracts used in a real estate transaction are required to
be in writing. This written requirement does not have to be in any particular form or be contained in one
document.
Agreements subject to the statute of frauds are void unless there is a written agreement or memorandum
expressing the consideration and signed by the party to be charged. The actual written contract may be
informal as long as it adequately identifies the contracting parties, describes the property or subject matter
involved, discloses the terms and conditions of the agreement, expresses the consideration, and is signed by
the party to be charged.
Delivery of the writing may be required to form the contract, but it is not required to satisfy the
statute of frauds.
The general rule is that any contract subject to the statute of frauds that does not meet its written require-
ments is a nullity (does not exist) and cannot be enforced.
While the law requires a writing, it does not dictate the form of the agreement. A note or memorandum may
be sufficient for the agreement to be legally enforceable. A court would determine the element of sufficiency
on a case-by-case basis.
Almost all real estate contracts, including deeds, listing agreements, earnest money agreements,
lands sales contracts and others must be in writing. If they are not in writing, they will be
deemed void.
12 The Statute of Frauds - The Requirement That a Contract be in Writing

Adequate Description of the Property

An adequate description of the property is an essential element in the
transfer of real and personal property. With respect to real property, the
test is whether a disinterested party could properly identify the property
being conveyed with certainty. Transfers of real property have a legal
description that can be found on most important legal documents relating
to that property.
Use of a tax lot number as the description of the property is generally not
adequate since the county tax assessor can change it at any time. Tax lot
numbers give rise to confusion which can often result in litigation.
A property address by itself is usually not considered legally adequate to

describe real property. If circumstances force a licensee to use only an
address as the description for real property, then a more definitive legal
description provided by the title insurance company should be attached
to the agreement as an addendum as soon as it is available. For example,
"Before closing, a complete legal description of the property as denoted in the preliminary title report shall
become a part of this agreement."
In rental agreements, the street address is usually all that is necessary to describe the rental dwelling.
Contract Types
Contracts are classified as express or implied, unilateral or bilateral, or as executory or executed. These
different classifications refer to characteristics of the contract.
Express and Implied Contracts

Express contracts are those in either written or oral words using direct and appropriate language. The
meaning of the contract is easier to ascertain when it is in writing.
Oral or written contracts are known as express contracts because they are left to inference due to the
circumstances surrounding their creation.
Contracts that are created by implications are known as implied contracts. These types of contracts are
not created by oral or written agreement; rather they are deduced from the actions of the parties. Many
important contracts are created and performed this way every day.
Example: Steve wants to earn some money and asks John if he can mow his lawn. John agrees to
let Steve mow his lawn without specifying the amount he will pay. Because John allowed Steve to
mow his lawn after Steve had said he wanted to earn some money, an implied contract was created
to pay the reasonable value of the service performed by Steve.
Adequate Description of the Property 13

Implied contracts can give rise to uncertain terms because the parties are placed in a contractual
relationship without actual express consent to the contract. For this reason, implied contracts are
not the favored method of reaching an agreement.
The more important the contract, the more important it is that the contract is fully expressed and agreed to
orally or in writing. The law requires important contracts like those dealing with real estate to be in writing.
Unilateral and Bilateral

Contracts are also either unilateral (uni=one) or bilateral (bi=two), depending on who is making the
promises. Most contracts involve mutual promises where both parties agree to give or do something for
the other. These types of contracts are known as bilateral contracts. An important feature of a bilateral
contract is that each party can enforce the contract against the other.
Example: Brian promises to purchase Scott’s house for $500,000, and Brian promises to sell his
house to Scott for $500,000. Brian and Scott have made enforceable promises. If Brian fails to
purchase the house, Scott can attempt to enforce Brian’s promise. The reverse is also true.
In contrast to a bilateral contract, a unilateral contract is one in which only one party makes an express
promise to do or not to do something. The other party to the contract does not make any express promise
to do or not to do something.
Example: Joan wants to buy Marcy’s condominium. Marcy does not wish to sell her condominium
at this time but agrees to give Joan a right of first refusal to purchase it if she does decide to sell.
This means that if Marcy decides to sell, she must first offer it to Joan. The only promise given in
this example is by Marcy. Joan hasn’t made any promise to Marcy. Even when Marcy offers the
condominium to her, Joan is under no obligation to perform.
14 Contract Types
Executed and Executory Contracts

The terms executory and executed refer to the stage of the contract regarding performance. An executory
contract is one that has not been fully performed.
Example: Robert buys a house from Rebecca for $400,000 using seller financing payable over ten
years. Until the contract gets paid in full, it is said to be executory. An executed contract is one
that has been fully performed by both parties. In this example, when Robert has paid the con-
tract, and Rebecca has delivered the deed to Robert then the contract will be executed.
Contract Types 15
Segment 2: Contract
Performance, Interpretation,
Assignment, and Delegation
Even when all of the required contract formation elements of capacity,

mutual assent, consideration, and legal purpose are present, the contract
can be void or voidable because of problems during its formation. Most
problems that will occur during contract formation are from fraudulent,
deceitful, negligent, mistaken, or coercive conduct by a party to the con-
tract.
Contract terms or conditions might be vague, ambiguous, or indefinite.

When any of these conditions exist, there is no apparent mutual assent
(agreement). When there is no mutual assent, the parties may need to
file a suit for reformation. A suit for reformation is an asking of the
court to determine the meaning of the contract.
Void or voidable contracts and suit for reformation will be explored in

this course segment.
The Effects of Problems in the Formation of a Contract

The types of behavior or conduct previously outlined give the harmed party to the contract the ability to
make the entire contract void. Just because a contract is voidable does not necessarily mean that it is void.
If the parties do not want to void the contract, they can consider the contract acceptable and proceed with
its terms. The purpose of the law is to allow an injured party a way out of the contract. It does not reward
behavior on the part of those who intentionally take advantage of another party.
Contracts are either valid, void, or voidable:
• Valid Contract - A valid contract is one that is legally binding and legally enforceable. This type of
contract contains all of the necessary elements, is valid at formation, and remains so during its executory
period (the period in which the contract is to be executed). A contract is considered valid unless there
is some defect or circumstances which make it unenforceable.
• Void Contract - A void contract is a contract that never existed and had no legal validity. It is
considered a nullity. For example, a contract which does not contain all of the necessary elements (such
Segment 2: Contract Performance, Interpretation, Assignment, and Delegation
as a legal purpose) is void when it is formed. Contracts may also become void during the executory
period. For example, if a contract had a legal purpose at the time of its formation, and subsequently a
law is passed that making its subject illegal, the contract is void.
• Voidable Contract - A voidable contract is one that is clouded by a defect. The defect may be in
the formation of the contract itself or for some other reason. Voidable contracts have an imperfection
that, if one party desires, can make the contract rescindable. Rescindable means the contract can be
rescinded and thereby rendered void and unenforceable. Alternatively, the defect can be cured by a party
to the contract, thereby affirming or ratifying the contract. Ratification makes a voidable contract
fully enforceable. The legal effect of rescission is restitution. Restitution means to place the parties in
the contract into the same position they were before they entered into the contract, at least as far as is
practical.
Example: John is under contract to sell Robert a property that has no sewage disposal system.
John lied to Robert by telling him that he had a soil percolation test and that the property was
approved for a septic tank. During the inspection, Robert learns of John’s lies.
John committed a fraud that makes his contract with Robert voidable. Robert, however, does not
intend to build on the property for at least ten years and learns that a sewer service will be avail-
able before that time. Robert affirms or ratifies the contract by proceeding to closing, thereby cur-
ing the defect caused by John’s fraudulent misrepresentations.
If Robert elects to not proceed with the purchase, he has legal right to rescind the contract be-
cause of the defect caused by John’s fraudulent misrepresentations. Robert would have this right
even if the transaction closes escrow. A rescission after closing makes undoing a transaction more
complicated, but the court will do its best to put Robert back into the position he was in prior to
entering into the contract.
Factors That May Make a Contract Voidable

The following types of conduct can make an otherwise valid contract void or voidable:
Fraud in the Execution

Generally, fraud in the execution will occur when a party is induced by misrepresentations about
the contract’s essential terms, or by obtaining a signature on the contract that is materially
different from the contract that was originally represented. A defense to fraud in the execution is
very narrow. For example, a party cannot simply claim that they did not read the document to claim that
fraud in the execution occurred.
The only real defenses to fraud in the execution apply to situations where the complaining party is impaired
mentally, physically (such as blindness), is illiterate, or otherwise so impaired that the party is relying
completely on another person’s representations as to what is contained in the contract.
The Effects of Problems in the Formation of a Contract 17

Misrepresentation
Contracts entered into because the party relied on a misrepresentation are voidable at the option of the
party to whom the misrepresentation was made. The essential elements of misrepresentation that may allow
a party to void a contract are:
• A False Representation - Any representation made by one party that is true, but under the circum-
stances creates a false impression, is a false representation.
Example: A seller tells a buyer that the property is serviced by a domestic well, but does not men-
tion that the well goes dry for nine months of the year. While the seller made a true statement
regarding the well, the seller intentionally created a false impression.
A false representation may also be made when a party to the agreement claims no knowledge of a fact
when there is knowledge of that fact.
Example: A seller knows the gas converter on the furnace is cracked and releasing carbon monox-
ide into the home, but claims to the buyer that the furnace works and functions without any
known mechanical issues. In this case, the seller is knowingly making a false representation.
The actual misrepresentation must be of a nature that without it the contract would not have been
entered into. In other words, the misrepresentation cannot involve some minor issue in the contract;
rather it must be material to the formation of the contract. In the case of the example about the well,
the fact that it is dry most of the year is clearly material. Had the buyer known the truth about the well,
the contract would not have been entered into or it would have been entered into with different terms.
• The Speaker’s Knowledge of the Falsity or Ignorance of the Truth - A speaker who misleads
by intentionally misrepresenting a material fact or by acting in a reckless disregard of whether he is
misleading another satisfies this element. In addition, a party representing a material fact who does not
know the representation to be true, and who has no reasonable grounds to believe it to be true, has the
same effect as making a known false statement.
• Intent that the Statement is to be Acted Upon - The party making the false statement must
intend that the other party will act because of the statement.
• The Complaining Party Must Rely on the Truth of the Representation - The complaining party
must actually rely on the representation. However, gross negligence in relying on the misrepresentation
may be a defense to the misrepresentation. Evidence of the party’s efforts to investigate the purchase,
including the party’s experience and reliance on legal counsel and other experts, may be relevant in de-
termining whether the complaining party actually relied or could have relied upon the misrepresentation.
Whether a party to the contract relied on the misrepresentation is always a question of fact.
18 Factors That May Make a Contract Voidable

Statements of Opinions
Statements of opinion to the quality or value of a good investment are generally actionable when a fiduciary
relationship exists. The closer an expression of opinion moves toward an expression of fact, the more likely
the statement can be actionable. Real estate licensees are cautioned that since they are usually in a fiduciary
relationship with either the buyer or seller, statements of opinion should not be made lightly. The client has
the right to rely on the licensee’s expertise.
Statements such as, "In my opinion this house has the best view of Mt. Snowy in the entire city!" are consid-
ered puffing. Puffing is considered sales speak and is not designed to mislead or deceive. However, the
boundaries between puffing, statements of opinions, and misrepresentation are sometimes hard to determine.
Concealment
In general, concealment of a material fact is actionable fraud. In addition, nondisclosure of a material fact
can amount to actionable fraud when the party makes representations without full disclosure. Knowledge of
a material fact or latent defect affecting the property that can be observed by an ordinary examination must
be disclosed. Not to disclose constitutes a misrepresentation by omission, which is a form of concealment.
It should be noted that if either party to a real estate transaction suffers a loss because of a licensee’s
misrepresentation by either omission or commission, the licensee could lose his fee, and be held liable for
damages resulting from the relying party’s actions.
Example: Seller Rob listed his house. Buyer John makes an offer to purchase the house on a land
sale contract. The house sits back from the street approximately 30 feet. The driveway leading to
the garage appears to rest on solid ground. However, the garage floor actually rests on wood foun-
dation posts that have serious dry rot issues. The large crawlspace under the garage is accessible
from a door in the basement recreation room.
In order to conceal the damage to the garage, Rob places a large cabinet in front of the crawlspace
access door, thereby concealing access to the under-garage area. By placing the cabinet in front
of the door, the inspector, the buyer, and the real estate licensees all assume that the garage is
resting on solid ground.
After inspections, Buyer John closes the transaction. About a year after John takes possession
of the property, the garage floor begins to collapse. Due to the high cost of the repair and loss of
property value, John decided that he no longer wanted the property. John sues Rob to void the
contract because of Rob’s intentional concealment.
Factors That May Make a Contract Voidable 19

Duress
Duress is the threat of economic or physical harm leading another to enter into a contract that would not
otherwise have been entered into. The threat can be either to the contracting party or to a third party.
Because one of the required elements of a contract is that it must be entered into freely, duress can make
the contract voidable. If duress in the forming of the contract can be proven, the party who was coerced
into forming the contract is freed from their obligation under the contract as if the contract never existed.
Example: Terry has been trying to buy Bob’s commercial property to prevent future development
that will take away the scenic views from Terry’s unsold condominium project. Bob has refused to
sell to Terry. One night, Terry confronts Bob and tells him, "My brother is the head of the plan-
ning commission. If you don’t sell me that piece of land, I’ll make sure that you or anyone else you
decide to sell to will never be able to get approval for any development." Bob does not want to lose
his investment in the land and agrees to sell it to Terry by signing a real estate sale contract. Be-
cause Bob did not enter into the contract freely, it is voidable if Bob chooses to fight its validity
prior to closing.
Undue Influence
Undue influence is similar to duress. The difference between the two is a matter of degree. Duress relates
to coercion, while undue influence relates to persuasion. Undue influence usually arises when one
party to a contract has the ability to dominate the free will of the other. Factors to consider are the relative
health and ages of the parties, absence of third-party advice, and the circumstances of time and place relating
to the execution of the contract.
Example: Jeff takes care of his 94-year-old grandmother who is in failing health. Jeff does the gro-
cery shopping for her and controls most of her activities. Jeff convinces his grandmother to sell
him the family house at a price way below market value. Grandma or her heirs can later claim
that she sold to Jeff because of his undue influence over her, resulting in the sale being voided.
Mutual Mistake
A mistake of material fact by both parties is known as a mutual mistake. A mutual mistake of fact may
make a contract voidable. The mistake must relate to a fact, such as using an incorrect legal description in
a purchase agreement.
The mutual mistake cannot relate to a mistake of law. An example of a mistake of law would be a buyer
who desires to purchase a property to convert to a café, but the purchase agreement is not conditioned upon
proper zoning. After the offer is accepted and the buyer finds that local zoning will not allow the operation
of café on the property, the buyer would not have the right to make the contract voidable.
20 Factors That May Make a Contract Voidable

Example: John and Mary are purchasing one of two houses that sit next to each in the same sub-
division. They finally decide to make an offer for 2321 Maple Drive, which they are told is located
on Lot A. When they get to closing, they determine that 2321 Maple Drive is actually located on
Lot B. They and the builder both thought 2321 was located on Lot A. This mutual mistake of fact
would make the purchase agreement voidable. John and Mary cannot be forced to purchase the
house on Lot B.
Interpretation of Contracts
Contract language can be vague, ambiguous, or indefinite. The following are some common problems that
can lead to difficulty in interpreting the meaning of a contract:
• Indefinite - A contract that cannot be fully understood because of missing terms is defined as indefinite.
• Ambiguous - Contracts are ambiguous when the terms of the contract could have different meanings.
It is a question of law as to whether a specific contract provision is ambiguous. If the provision is ruled
ambiguous, the actual meaning will be a question of fact for the court to resolve.
• Vague - A contract is vague if it cannot be determined what is stated in the contract.
When the parties are unable to determine the meaning of a contract by

mutual agreement, they may want or need to have a court determine its
meaning by filing a suit for reformation.
A suit for reformation is the legal action that presents the contract
to a court of law. The court will look at the contract, apply rules for
interpretation of contracts, and then reform the contract to match its
interpretation. The following are some of these rules:
• Technical terms are given their technical meaning. Unless the context
of the contract clearly indicates a different meaning, technical terms
are given their normal technical meaning.
• If terms or provisions that should be in the contract are missing, then

the court will add them.
• When a pre-printed form is used, the typewritten material takes precedence over the pre-printed form,
and handwritten material takes precedence over both the pre-printed and typewritten.
• Where a public interest is affected, interpretation will favor the public interest.
• When there is an inconsistency between general provisions and specific provisions, the specific provisions
take precedence over the general.
• In interpreting the meaning of the contract, all circumstances surrounding it are taken into consideration.
• A contract or provision of a contract is interpreted against the party by whom it was drafted.
Factors That May Make a Contract Voidable 21

• If there is a set or series of contracts, the one later in time will govern.
It may be necessary for the court to receive oral testimony from the parties to the contract, or from third
parties when trying to determine intent. The oral testimony of this type is known as parol evidence. The
parol evidence rule states that oral (parol) testimony is not permitted to change the terms of a written
contract or to add to it. The reason for this rule is to preserve the sanctity of the written contract. As a
result, provisions left out of a written contract cannot be changed or added to a contract by oral testimony.
The written contract must stand on its own.
• Specific contract provisions control over general contract provisions.
• Handwritten provisions take precedence over typewritten provisions. Typewritten provisions take prece-
dence over pre-printed form provisions.
• When there is a conflict, addendum provisions take precedence over the main body contract provisions.
Assignment and Delegation

The law that deals with the transfer of rights and duties when one of the parties to a contract will either
assign their contract rights or delegate their contract duties to a third party is known as Assignment and
Delegation. Assignment deals with the transfer of rights. Delegation deals with the transfer of duties.
The parties to these transfers are:
• Assignor: The party who is assigning rights to another.
• Assignee: The party to whom the rights are assigned.
• Delegor: The party who is transferring duties to be performed to another.
• Delegee: The party to whom the duties to be performed are being transferred.
Rules of Assignment and Delegation

Unless expressly prohibited in a contract, the general rule is that contract rights and duties can be freely
assigned and delegated.
Example: A tenant and landlord enter into a rental agreement that does not expressly state there
cannot be an assignment by the tenant. If the tenant assigns their interest in the rental agreement
to another tenant, then the landlord has a new tenant.
When assignment occurs, the assignee is required to perform the obligations of the assignor. Failure to
perform constitutes a breach of the assignment agreement. In the event the assignee does not perform, the
assignor will be responsible.
22 Assignment and Delegation

Unless an assignment clause is present in the original agreement that permits the assignment and releases
the assignor from further obligation under the agreement, the assignment will not relieve the assignor of any
obligations under the agreement.
When assignments are of the types that are permitted, consent to the assignment cannot be unreasonably
withheld. Unreasonably withheld means that if the assignee is as qualified to perform as the assignor, then
the consent to the assignment cannot be withheld.
In most circumstances, even when there is consent to the assignment, the assignor is not released from the
contract. The assignor would remain secondarily liable in the event the assignee does not perform unless
there is a release of contract obligations for the assignor in the consent agreement. A release of contract
obligations for the assignor is called novation.
Novation is an agreement allowing an original contracting party to be released and another party
to be brought in as an obligant.
Example: Sarah bought a car using a bank loan. She eventually sold the car to Brian. As a part
of the agreement with Brian, Sarah assigned her interest in the car loan to Brian. The bank con-
sented to the assignment but did not release Sarah from any of the obligations of the loan. In this
situation, the bank will seek payment from Sarah if Brian defaults on the payments.
In many real estate contract assignments, the original obligor is not released. By not releasing the original
obligor, this gives the contract holder additional parties from which to seek a remedy in the event of default.
Assumptions of existing mortgages without novation are rare because of the Due on Sale Clause, although
some existing mortgages still allow qualifying assumptions that may or may not release the original borrower.
Novations usually occur in debtor/creditor contracts, such as mortgages, trust deeds, land sale contracts,
and leases. When a creditor agrees to accept a new borrower or lessee and relieve the original party from
the obligation, a new contract is formed with the assignee and the original contract is no longer enforceable
against the assignor.
Example: Phil entered into a one-year lease for an apartment owned by Mary. During the sixth
month of the lease, Phil moved out and Phil’s friend, Rob, agreed to move in and take over the
existing lease. Phil assigned his lease to Rob with Mary’s consent. In the assignment, Mary agreed
to release Phil from further obligation under the lease.
Contracts that are personal in nature, such as buyer agency contracts and listing agreements, are not
assignable. Contracts involving personal services are the main contracts that fall into this category.
Rules of Assignment and Delegation 23

Example: Ed goes to his attorney, Victoria, for representation in a criminal matter. Ed selected
Victoria because of her high profile reputation as a first-rate criminal defense lawyer. Victoria can-
not assign Ed’s case to another attorney since Ed contracted for the personal services of Victoria.
Assignment and The Statute of Frauds

Generally, whenever real property is involved, the statute of frauds requires an assignment to be in writing.
A month-to-month rental agreement and a lease for less than one year are excluded from the statute of
frauds and do not have to be in writing.
General rule: If the agreement is in writing, then an assignment needs to be in writing. If the
agreement is not in writing, then an assignment does not need to be in writing.
24 Rules of Assignment and Delegation

Segment 3: Breach of Contract
In this course segment we discuss contract discharge, breach of con-

tract, and remedies for breach of contract.
When a contract is terminated, the contracting parties are discharged

or excused from further performance under the contract. There are a
number of situations that give rise to discharge.
The law pertaining to the breach of contracts relates to the conse-

quences of the non-performance or misperformance of a contractual
duty. If either party to a contract fails to perform, that party is in
default. Of particular importance are the concepts surrounding con-
ditions and contingencies. Once a condition has ripened and the duty
to perform becomes firm, then its non-performance is a breach of the
contract. However, not all breaches relate to conditions. In its most
basic form, breach of contract is simply a failure to perform
a duty required under the contract. The breach may be either total or partial, each with varying
consequences. When breach occurs, remedies are available to the non breaching party.
Discharge
Contracts can be terminated in a number of ways. The most desirable way to terminate a contract is when
all parties to the contract have fully performed it by carrying out all of the contract terms and provisions.
When a contract is terminated, the contracting parties are discharged from further performance under the
contract. The following are some of the reasons for contract termination and contract discharge:
Performance
Parties are discharged from further performance under a contract when they have completely performed all
of their obligations set forth in the contract.
Assignment
A transfer of a contract right or duty may relieve a party of the further obligation to perform. Contract
obligations may usually be assigned or delegated to another party, unless the contract specifically forbids
assignment. In most cases, the original obligor (contracting party) will remain primarily liable unless specif-
ically released. Similarly, unless the contract forbids it, contract rights may be assigned to a third party.
Example: Jack signed a lease agreement with Building Management. Two days later, Building
Management assigned its right to Jack’s rent to Acme Realty Holdings. Jack now has to pay rent
to Acme Realty Holdings.
Example: Jack entered into a lease with Building Management. There is no clause in the lease to
prevent Jack from assigning the lease. Six months after Jack entered into the lease, he assigned
it to Scott. Scott is now responsible for Jack’s obligations under the lease. Because there isn’t a
release from Building Management, Jack is obligated to pay the rent to Building Management if
Scott defaults.
Example: Jack entered into a lease agreement with Building Management. There is a clause in
the lease that allows Jack to assign his interest, subject to Building Management’s approval. Six
months after entering into the lease, Jack assigned his interest to Scott. Building Management ap-
proved of the assignment to Scott and gave Jack a release of liability. Scott has to perform Jack’s
obligations under the lease and pay the rent to Building Management. Because Building Manage-
ment gave Jack a release of liability, Jack is no longer obligated if Scott defaults.
Note that personal service contracts are not assignable. The reason for this is that the party
contracting for the personal services of an individual does so because they specifically want the personal
services of that individual
Example: Seller Drew desires to sell his luxury home over looking the Pacific Ocean. He contracts
with Josh, a million dollar producer, to list and sell his property. Drew specifically listed the prop-
erty with Josh and wants his personal services to market his property because of his reputation
and expertise. Josh cannot assign his listing contract to another listing agent, no matter how com-
petent that agent may be.
26 Discharge
Novation
Closely related to assignment is the concept of novation. Novation is the substitution of a new contract in
place of the original contract. This can occur when when a new party is substituted for any of the original
parties or when a new agreement is substituted for the original agreement between the original parties. Often
when an assignment occurs, the old contract will be terminated, the original obligor will be released from
further performance, and the assignee will become the obligor under a new agreement.
Example: Mark financed $400,000 of his $500,000 house purchase with Left Coast Bank using a
promissory note and mortgage. After two years, Mark has decided to sell his house to Rebecca
for $550,000. Rebecca agrees to cash out Mark’s $150,000 equity position, and wants to assume
Mark’s note and mortgage. Mark wants Left Coast Bank to release him from further liability if
they let Rebecca assume his obligation. Left Coast Bank agrees to a substitution of mortgagor
and releases Mark from further performance in exchange for Rebecca agreeing to pay a 1% as-
sumption fee. This substitution of mortgagor is known as novation.
Rescission
Contract rescission can occur in two ways:
1. A voidable contract can be rescinded by a party to the contract who has a unilateral right to rescind it
(such as in the case of duress). The voidable contract that is rescinded becomes void and unenforceable.
2. A contract can be rescinded by agreement between the parties to the contract. An agreement to rescind a
contract is a known as a rescission contract. A rescission contract must meet the same contract formalities
as all other types of contracts.
Impossibility of Performance
A contract is unenforceable when it becomes impossible to perform. Impossibility of performance excuses a
party to the contract, but only when the facts are such that no one else can perform.
Example: If the house being sold catches fire and burns to the ground, the buyer and seller will
both be discharged from further contract performance. Because there is no house to buy or sell, it
is impossible for either party perform the contract (to close the transaction).
Discharge 27
Subsequent Illegality
Just as a contract that is formed for an illegal purchase is void, so is one designed to perform a legal act that
subsequently becomes illegal. Subsequent illegality discharges the parties from future performance.
Example: The North Shore School District entered into a contract with a local soft drink distrib-
utor to allow their soft drink products to be sold from vending machines in every school through-
out their district. The distributor, in order to place the machines in school, is required to pay the
school district an annual fee of $17,000 per school in exchange for the contract. Four years later,
the state legislature passed a law that prohibiting the placement of soft drink vending machines
in schools. As a result of the new law, the distributor refuses to pay the school district the annual
$17,000 fee per school commencing on the date the law becomes effective. Because of the subse-
quent illegality of vending machines in schools, the distributor can void its contract with North
Shore School District without penalty.
Alteration of Contract
If a party to a contract materially alters the contract to his benefit, the obligation of the other party is
discharged form future performance.
Bankruptcy
Bankruptcy discharges most debt and other contractual obligations. Some examples of debts that are not
discharged are child support, those arising out of fraud or misrepresentation, as well as certain taxes. In
addition, contracts such as listing agreements and other agency contracts are discharged once one party,
either the principal or agent, files a bankruptcy action.
Laches
The Doctrine of Laches is based on the maxim that equity aids the vigilant and not those who procrastinate
regarding their rights. Laches is the claim that the adverse party was negligent by waiting too
long to assert its rights or claim, and that because of the delay, that party is no longer entitled
to act. Put another way, a party to the contract may be barred from asserting any rights under the contract
if too much time passes.
This delay has the effect of discharging the non delaying party from future contract performance. Because
the length of delay in performance or assertion of rights is subjective, in order for the Doctrine of Laches
to apply, statutes have been enacted to define the length of time that a party has before it must assert its
rights under a contract. Laches is similar to a statute of limitation.
28 Discharge
Prevention of Performance
Prevention of performance is when one party to the contract interferes to prevent another from performing,
or delays performance of the party so the time fixed in the contract for the performance runs out. When
this happens, the non interfering party can be discharged from the contract.
Conditions
A condition is any event, the happening or non-happening of which limits, modifies, or terminates a con-
tractual obligation. In many instances, if a condition does not occur, further performance of a party to the
contract may be excused.
Conditions, also known as contingencies, play a major role in most real estate transactions. Because of their
importance and significance to the practice of real estate, Segment 4 of this course is devoted to a detailed
discussion of conditions and contingencies.
Breach of Contract
A material breach by one party to a bilateral contract may discharge the other party’s obligation to further
perform.
Breach of Contract
A material breach of contract by one party can discharge the other party’s further performance of the contract.
There are many forms and degrees of contract breach, not all of which will excuse further performance of
the contract.
Most contracts are carried out according to their terms. However, contracts are also broken or breached
because of a failure to perform a contractual provision. The following are the ways breach of contract occurs,
along with resulting consequences:
Total Breach
The difference between a total breach and a partial breach of contract is based on the extent or severity of
the breach. The more material the breach, the more likely it will be considered a total breach. If the breach
is total, a contract can be terminated, and damages may result.
Discharge 29
Partial Breach
If a breach is partial, then the remaining contract duties are generally not discharged, and the parties must
continue with their performance of the contract. Damages may be an issue for the breached portion of the
contract.
Special Case of Untimeliness as Total Breach

Generally, untimeliness in performance does not result in a total breach of contract. Sometimes the impor-
tance of timeliness is implied or a time is of the essence provision is present in the contract. If there is no
time is of the essence provision, untimeliness is generally considered to be a partial breach and further per-
formance probably will be required. Not meeting performance dates when a time is of the essence provision
exists can result in total breach and termination of the contract. Most preprinted real estate sale agreements
include this provision.
Time is of the essence is a contract provision that means all of the specified dates and times
in the contract are mandatory and any delay in meeting these dates and times will be grounds for
canceling the contract: Time is of the essence to this agreement.
Breach of Contract - Anticipatory Repudiation

Anticipatory repudiation, also called anticipatory breach, is when a promising party, before perfor-
mance is due, declares an intention not to perform the contract, thereby alerting the other party to the
contract to anticipate the breach. When an anticipatory breach occurs, the performing party does not have
to wait for the breach to occur before being excused from the contract and may be able to sue for total
breach or seek some other remedy against the nonperforming party.
Because the consequences differ between total or partial breach, the risks of determining the type
of contract breach must be left to an attorney.
30 Breach of Contract
Remedies
Once a contract is breached, there are remedies available to the injured
party. These remedies are:
• Those consistent with an affirmed contract, such as damages for breach

or tort damages for deceit.
• Those based on the theory that the transaction is disaffirmed and to

be voided with rescission and restitution being imposed.
Logically, a party cannot affirm and disaffirm the contract at the same
time. A remedy based on an affirmation of the contract is inconsistent with a remedy based on disaffirmation.
It would seem that the election of one remedy necessarily excludes the other. However, in California, a
plaintiff can plead inconsistent remedies in the original complaint. The election as to remedies is then made
on the merits of the case at the time it goes to judgment. This is referred to as pleading in the alternative.
Pleading in the alternative is the process that allows the plaintiff to submit to the various court-proposed
remedies, even though those alternative remedies would appear to be inconsistent.
Numerous remedies are available when a contract is breached. Contracts typically stipulate which remedies
either party may seek in the event of a breach, but not all remedies are always available in all contracts.
Available remedies may also be determined by statute or case law. The following is a brief discussion of the
typical available remedies in a real estate transaction:
Damages
If a contract has been entered into, and either a total or a partial breach has occurred, damages may be
sought by the injured party. The following general principles apply to the law of damages:
1. Damages for a breach must be proved with reasonable certainty. Damages cannot be recovered
if they are too speculative or the loss sustained cannot be proved with reasonable certainty. In general,
the measure of damages is to place the injured party, as far as monetary compensation is possible, in the
same position as if the contract had been fully performed. These damages are often referred to as actual
damages. Sometimes, the court will find that the defendant breached the contract, but that the plaintiff
cannot demonstrate any actual damages. In this instance, the court may award a small sum referred as
nominal damages.
2. Damages are usually measured at the occurrence of the breach. Furthermore, the amount of
recoverable damages allowed an injured party is for the actual loss caused by the breach. For example,
if a tenant with a one-year lease moves out six months early and the landlord re-rents the apartment
within two weeks at the same monthly rent, the landlord’s actual loss is two weeks of rent. The landlord
cannot collect rent for the six months remaining under the original lease term.
3. Damages must also be foreseeable. A simple statement of this rule is that the injured party may
not recover damages for a loss, unless the breaching party had a reason to foresee that the loss was a
probable result of the breach when the contract was made. Whether a loss is foreseeable is a question of
fact for each case. Usually, the defendant’s actions cause a series of events that cause further harm to the
plaintiff. The damages awarded to the plaintiff under these circumstances are referred to as consequential
damages or special damages.
Remedies 31
For example, the defendant sells the plaintiff a warehouse, but doesn’t tell the plaintiff that the
roof leaks. The defendant also knows that the plaintiff is purchasing the warehouse to store art-
work. After the plaintiff closes the sale and moves his artwork into the building, a heavy rain-
storm occurs, the roof leaks and damages the artwork. The buyer sues the seller asking for sums
to repair the roof and to replace the damaged artwork. The court would award the plaintiff actual
damages for the costs of the roof repair and consequential damages for the loss of the artwork.
An injured party also has a duty to mitigate, reduce or lessen the damages. For example, if the tenant
in the above example moved out six months early, the landlord has a duty to mitigate by attempting to
re-rent the unit as soon as possible. The landlord cannot remain idle and then claim six months of rent
as damages.
Liquidated Damages
Liquidated damages are often set forth within a contract. Liquidated damages specify in advance the amount
of damages for a breach of contract. Liquidated damages clauses are usually enforced by the courts, so long
as the amount specified is reasonable and does not go beyond just compensation to an amount that would
be considered unreasonable. Liquidated damages in a real estate transaction is the earnest money offered by
the buyer and agreed to by the seller.
Attorney’s Fees
Attorney’s fees are not recoverable unless authorized by the contract or statute. The contract should state
that attorney’s fees would be due to the prevailing party for any action brought in a trial court or any appeal
therefrom. Without an attorney’s fees clause, many times the plaintiff would not be able to afford to bring
the action to recover damages because the cost might be more than the recoverable damages. It should be
noted that the standard California purchase and sale agreement contains specific language with respect to
this issue.
Rescission and Restitution

Rescission and restitution is an alternative approach. Rescission means cancellation, destruction, or un-
making of the contract. Restitution means restoring the parties to their relative positions before entering
into the contract. This usually means each party returns to the other that which was received under the
contract.
An example of rescission and restitution would be a land purchaser returning possession and title
to the land in exchange for the seller returning the purchase price paid, minus reasonable rent for
the period in possession of the property.
32 Remedies
Reformation of Contract
Reformation of contract is a remedy provided by courts of equity. This remedy has specific application to
situations where an agreement incorrectly expresses the true agreement the parties intended to enter into.
The court, in essence, rewrites the agreement to express the actual and intended agreement of the parties.
Specific Performance
Specific performance is a remedy granted by the court when obtaining a suitable substitute for the promised
performance through damages would be difficult or impossible to determine. Specific performance is granted
the court through ordering the breaching party to perform their contract duties. The court could also order
an injunction. An injunction is an order by the court to the breaching party to refrain from doing a specific
act. An injunction is the opposite of specific performance.
Example: The Smiths enter into a real estate sale agreement to purchase a property with a unique
view of the city. All contract conditions have been met by both parties, but the seller refuses to
close. Since the nature of the property is unique, and since monetary damages would not ade-
quately compensate the purchaser, the court would require the seller to perform by completing
the sale of the property.
Personal service contracts cannot be enforced by specific performance. Personal service contracts include
listing agreements, property management agreements, and other broker employment agreements such as
buyer’s broker service contracts. In other words, if a seller wants to cancel a listing contract, the listing
broker cannot sue for specific performance. However, the broker might be able to recover any loss due to the
wrongful cancellation by suing for actual damages.
Punitive Damages
In addition to actual damages arising out of breach of contract, a claim for punitive damages may also be
brought. Punitive damages are usually based upon a tort. A tort is a civil wrong that one party inflicts
upon another. Punitive damages usually come about when the conduct of a party is so bad, egregious or
unconscionable that the court finds it is desirable to craft a remedy designed to punish. These damages are
awarded in addition to those awarded to compensate for actual loss. In real estate related contracts, punitive
awards arise out of tort actions, such as fraud, negligent misrepresentation, intentional misrepresentation, or
interference with economic relationships.
Remedies 33
Foreclosure
Foreclosure is a specific remedy available to a lender that has a security interest in real property securing the
amount of a mortgage loan. In the event of borrower default, the lender may look to its security interest to
satisfy the loan. Foreclosure is the legal process by which the lender (i.e., the lien holder) obtains the right
to sell the property to satisfy the amount of the defaulted debt. The result of foreclosure is the extinguishing
of the borrower’s interest in the property and the lender obtaining the right to sell the property.
Contract Liability vs. Tort Liability

The contract creates the obligations and duties a licensee assumes as a result of a listing agreement or buyer
broker agreement. A licensee has certain attendant obligations that attach to the contractual relationship but
are not part of the contract itself. Attendant obligations and duties are such things as fiduciary obligations
as well as other duties and obligations found in the law, not necessarily in the contract.
The contract remedies discussed earlier were based on a breach of contract. However, many relationships
in a typical real estate transaction are not contractual. For example, there is no contractual relationship
between the listing broker and the buyer. As a result, there is no contractual basis to require the listing
broker to disclose a material fact to the buyer, but many jurisdictions have passed legislation requiring this
disclosure.
Torts are wrongful conduct by one person that causes injury to another.
Torts
Tort is a French word meaning wrong. Tort duties are legal liabilities
independent of contract liability. They apply to the involuntary assump-
tion of liability and risk. For these injuries, tort law attempts to right
the wrong by awarding monetary damages to the wronged party. Even in
situations where there is a contractual relationship between a licensee and
a party to the transaction, tort law and remedies provide an additional
option for a wronged party may proceed against the licensee.
Torts are intentional or non-intentional. Intentional torts are actions
intended to harm. In the area of real estate practice, these torts usu-
ally relate to fraud. Torts based on negligence are unintentional torts.
Negligence involves activities that might cause harm but that are not nec-
essarily intended to cause harm.
Because tort claims usually carry higher damage awards than claims based
on breach of contract, lawyers sometimes attempt to convert contract claims into tort claims even though
courts are usually reluctant to allow breach of contract claims to be turned into tort claims.
A tort is a civil action. However, there is an interrelationship between torts and crimes. Most crimes involve
torts, but not all torts are crimes. Conduct that is held to be a civil tort in the area of real estate brokerage
will most likely be subject to disciplinary action by the state real estate authority.
34 Remedies
Segment 4: Conditions and Contingencies
In the typical real estate transaction, at least one or more conditions or contingencies must be met in order
for the contract to become binding.
Because many contract provisions do not become affirmative duties to perform ("ripen") until the happening
of an event, it is important for the real estate licensee to have a basic understanding of law relating to condi-
tions and contingencies. Unless the specified conditions have occurred, there may be no duty for one of the
parties to the contract to continue with the transaction. Understanding the many issues surrounding condi-
tions can assist the real estate licensee in eliminating problems that arise from poorly drafted contingencies
or from not following the steps necessary for their proper removal.
Definitions of Condition and Contingency

• Condition - an event, not certain to occur, unless its non-occurrence is excused before performance
under a contract becomes due. (Restatement of Contracts Section 224 [1981])
• Contingency - an event that may occur, a possibility. (Blacks Law Dictionary, Fourth Revised Edition)
In this course, the terms condition and contingency will be used interchangeably. Technically, how-
ever, "contingency" relates more to an event, while "condition" relates more to the existence of an
obligation that ripens due to the happening of an event.
Real estate licensees tend to use the word condition as a synonym for a contract term or a contract provision.
The use of "condition" to mean a contract term or a contract provision is incorrect and imprecise. Term and
provision mean those rights and duties that describe the real estate sale agreement (the contract) itself. A
condition is a contractual element that qualifies a contract term or provision.
The Use of Conditions and Contingencies in the

Agreement
A contingency is a powerful tool in a real estate transaction. A contingency is for use by the party for whose
benefit it is inserted into the agreement. When used correctly, a contingency completely relieves a party
of the obligation to perform the contract without putting the party in breach of the contract. Usually a
contingency is inserted into a contract because the information relating to the contingency is not readily
available, or because a crucial event needs to occur before a party is willing to proceed. When this is the
case, a contingency allows the benefited party the necessary time to obtain the needed information or for
the event to occur prior to becoming obligated to perform the balance of the contract.
As a general rule of contract interpretation, unless otherwise stated in
the contract, either party, the buyer or seller, can claim benefit for a
contingency, regardless of who drafted it and made it part of the con-
tract. Unless specified in the agreement, one party cannot unilaterally
waive the contingency. When drafting a condition or contingency, a
real estate licensee should include who (the buyer, the seller, or both
the buyer and seller) has the right to waive, satisfy, or remove the
contingency.
Because the buyer usually requires information regarding the condition

of the property being purchased, along with time to qualify for financ-
ing, most contingencies are drafted and inserted into the contract for
the buyer’s benefit. A contingency of this nature allows the buyer or
a third party, such as a lender, time to investigate matters of concern. When the financing contingency
is properly written, if the lender’s investigation of the buyer is not satisfactory, the buyer can cancel the
contract without being in breach.
Few sale agreements have contingencies inserted into them for the benefit of the seller. One example of a
contract benefiting a seller is the sale of the property being contingent upon the seller finding a suitable
replacement property.
Ideally, sellers prefer offers without any contingencies for the benefit of a buyer. However, as is prudent
and common practice, most sale agreements contain a number of contingencies inserted specifically for the
benefit of the buyer. To make sure the buyer is committed to performance of the entire contract, a seller
who accepts an offer with contingencies should help the buyer waive or remove them as soon as possible and
the seller should give minimal time for the buyer to remove or waive contingencies.
36 The Use of Conditions and Contingencies in the Agreement

The Legal Framework

Contract provisions do not ripen into affirmative duties until the happening of some contingency or event.
In this section, we will discuss some issues and concepts relating to conditions. These issues are
• definition of condition;
• the ripening of a condition into an affirmative duty;
• the silence of the party who claims a benefit;
• the element of time;
• satisfaction of the party claiming the benefit; and
• the concepts of occurrence or nonoccurrence, waiver and excuse of a contract condition.
Whether a condition has been satisfied and ripened into an affirmative contract duty is crucial to know. If
it does ripen, non-performance of the contract will constitute a total or partial breach. If it does not ripen,
the contract can be canceled without further performance.
Definitions and the Ripening of a Condition

A contract condition is often referred to as a condition precedent. A condition precedent is a condition that
must occur before further contract duties will ripen. In other words, meeting the condition must occur before
there is a further obligation to perform the balance of the contract. Contract conditions are specific contract
elements that are created by contract provisions. Contract provisions modify contract duties.
Example: "This Agreement is contingent upon the buyer and the property qualifying for and ob-
taining a loan of $250,000."
Before the buyer and the property qualify for the loan, there is no affirmative duty for the buyer to perform
the balance of the contract. There are two events that must occur before the buyer becomes affirmatively
obligated: (1) the buyer must qualify for the loan and (2) the property must qualify for the loan. Once those
two events occur, the buyer’s obligation to perform ripens into an affirmative contract duty.
Example: "Buyer shall cause a professional oil tank inspection to occur. This offer will be subject
to the buyer being satisfied with the results thereof."
Before the oil tank inspection, there is no affirmative duty for the part of the buyer to perform. There are
two events that must occur before the buyer becomes affirmatively obligated: (1) an oil tank inspection, and
(2) the buyer must be satisfied with the results of the inspection. Once those two events have occurred, the
buyer’s obligation to perform ripens into an affirmative contract duty.
The Legal Framework 37

The effect of the occurrence of a condition is to ripen the qualified duty. In the above examples, the duty
- to close the transaction - is qualified by the events that are to occur. Once those events occur, the duty
of the buyer will become an affirmative duty, thereby requiring further contract performance. If the buyer
does not perform, there is a breach of contract.
If the condition fails to occur or to be met, no ripening of the qualified duty will occur and further contract
performance is not required; there is no breach of contract.
Silence on the Part of the Party Claiming the Benefit

The issue of silence by the party claiming the benefit of the condition
is one of whether silence is treated as approval or disapproval of the
condition. For example:
• "If the buyer does not issue written disapproval of the property
inspection report within seven business days, the buyer shall be
deemed to have accepted the condition of the property."
• "If the buyer does not give written approval of the property
inspection report within seven business days, this transaction shall
become void without further action by either party hereto."
In both of these examples, assume the buyer does nothing and the seven business days pass. In the first
example, the buyer, in being silent, is deemed to have approved the inspection report. As a result, the duty
to perform has ripened into an affirmative obligation. In the second example, the buyer, in being silent, is
deemed to have not approved the inspection report. As a result, the buyer is discharged from any further
obligations under the contract. Clearly, based upon the drafting of the condition, the impact of silence will
have two very different results.
Licensees should pay attention to how silence by the party who is claiming the benefit of a con-
dition will influence the ripening of the affirmative duty to perform or the discharge from any
further performance. In many cases, silence has inadvertently led a buyer or a seller (and their
agents) into a result that was neither desired nor intended.
38 Definitions and the Ripening of a Condition

The Element of Time

The element of time is often stated as a limiting factor to a condition. This means that the occurrence or
non-occurrence of an event is to happen by a certain date or within a certain period. Generally, time is a
material element of a condition and the occurrence or non-occurrence of the event within the specified time
limit will have an impact on the ripening of the underlying duty to perform.
Usually, time is viewed as a material element in the following situations:
• When the parties have expressly stated that time is a material element by the inclusion of "time is of the
essence" in the contract
• When the nature of the agreement itself would indicate that time is a material factor where performance
must occur on or before the stated date
• When the delaying party has been given a reasonable notice and the opportunity to meet the specified
condition
Example of Time Expressly Stated
Example: "Buyer may have the property inspected by professionals of Buyer’s choice. If the in-
spection reports show material defective conditions in or on the property, Buyer may terminate
the transaction by delivering written disapproval of the inspection reports to Seller within seven
business days from mutual acceptance hereof. If buyer does not disapprove of the inspection re-
port in writing within the seven business days, Buyer shall be deemed to have accepted the condi-
tion of the property."
In this example, the limiting factor for the buyer’s inspection contingency is that of time and the buyer must
disapprove the inspection report within seven-business days. If the buyer does not disapprove the report
within seven-business days, the buyer is deemed to have accepted the condition of the property, and the
duty to perform automatically ripens. Time, in this case, is expressly stated as a material element of the
condition.
The Element of Time 39

Example of When Time is NOT of the Essence
Example: "This sale is subject to Buyer obtaining gifted funds in an amount necessary to close
this transaction by December 12." The closing date stated in the sale agreement is December 12
and there is no "time is of the essence" clause in the agreement. The buyer misses the closing date
because the gifted funds are not available on December 12. The seller enters into a different sale
agreement with a different buyer on December 23, and then the original buyer obtains the gifted
funds to close on December 24.
First, we must determine if the contingency of receiving the gifted funds by the specified date of December
12 is material to the contract. Because there isn’t a "time is of the essence" clause in the contract, the
result will most likely be that the first buyer would have a reasonable time to obtain the gifted funds. The
occurrence of the condition twelve days after the specified date could very well be considered as reasonable.
In this case, the seller sold the property twice and faces a double jeopardy situation.
The element of time is material to the condition that it attaches to. The occurrence or non-occurrence of an
event by the specified date or period relating to a specific condition is important. If a party to an agreement
is attempting to terminate or enforce the agreement against the other party, an attorney would first look to
the dates relating to the contingencies that would provide for the ripening of the underlying condition into
a contractual duty.
"Time is of the essence" means that failure to act within the time provided constitutes a breach of contract.
The general rule in real estate is that time is NOT of the essence to the contract unless the parties specifically
include a "time is of the essence" clause into the contract.
Satisfaction of the Party Claiming the Benefit of a

Condition
A contractual condition is often based on the satisfaction of the party for whose benefit it was written into
the contract. Courts have categorized satisfaction in these two ways:
1. Satisfaction based on the "taste, personal fancy, or personal judgment of a party to the contract."
2. Satisfaction based on an objective "reasonable person" standard.
The two standards can lead to different results.
Example: The sale agreement says that the buyer’s offer is contingent upon an inspection of the
property satisfactory to the buyer. The buyer orders and completes an inspection, but the re-
port indicates the size of the air conditioner is just a 2.5-ton unit. Although more than adequate
to cool the house, the buyer wanted a minimum 4-ton unit. As a result, the buyer does not issue
waiver of the inspection contingency.
40 The Element of Time

Under the first standard, the personal fancy or personal judgment of the buyer, the decision relating to
satisfaction is absolute, as long as the decision is made in good faith. Generally, this standard is only applied
in situations where the condition is purely personal in nature. Because the air conditioner size probably
wouldn’t be considered purely personal, the reasonable person standard should be applied. The personal
fancy (or personal judgment) standard is applied only in limited situations when the nature of the condition
is clarified as purely personal. An example might be conditioning an offer upon verification that the windows
in the property are of a size that would allow the purchaser to install the purchaser’s antique stained glass
windows.
In most cases, the nature of the condition is that the satisfaction of the party claiming the benefit of the
condition is based upon a reasonable person standard, unless stated otherwise by using a personal fancy
clause. The personal standard category of satisfaction is reviewable by a court as a question of fact. In other
words, if the buyer refuses to remove the inspection contingency because of the size of the air conditioning
unit, the question the court would ask and answer is, "Would a reasonable person reject an otherwise
satisfactory inspection report solely on the size of an air conditioner?" The court would probably say that
the objection is not reasonable and order the contingency removed. The result of this type of order by the
court would be that the buyer’s duty to close the transaction will ripen into an affirmative duty.
To clarify intent and avoid confusion, personal fancy contingencies should be specifically drafted
into the contract condition.
Excuse of a Condition
The law relating to the excuse of a condition deals with whether the condition must occur to require a party
to carry out the rest of the contract. A contract duty that is subject to a condition could ripen into an
affirmative duty to perform the contract even though the condition does not happen.
If a specific condition inserted by a party does not occur, the party may still agree to perform the rest of the
contract. This is known as the right to waive. This right does not have to be specifically granted in the
contract; it is usually an inherent right of the contract. The party who has the right to waive a condition is
the party for whose benefit the condition is inserted into the contract. This means that if a contingency is
inserted for the benefit of the buyer, only the buyer can waive it.
The waiver must be in writing because real estate is subject to the Statute of Frauds. In the event of
litigation, a written document provides definitive proof of waiver.
Example: The buyer includes in the purchase agreement, "This transaction is subject to the buyer
financing the purchase price." The buyer later decides to pay all cash and gives written waiver of
the financing condition. Once the waiver is given, the duty to perform the balance of the agree-
ment (to close the transaction) ripens into an affirmative duty. In other words, the buyer has ex-
cused their condition by giving a waiver.
Satisfaction of the Party Claiming the Benefit of a Condition 41

In some situations where a condition exists, the courts will ripen the contract duty even though the required
condition did not occur. This result is reached in cases where the court implies that the party benefiting
from the condition had a duty to use reasonable due diligence to make sure the condition was satisfied.
Example: The buyer includes in the purchase agreement, "This transaction is subject to the buyer
financing the purchase price." The buyer changes their mind about the purchase and refuses to
submit the necessary information for loan qualification. Because the buyer did not use reasonable
due diligence to carry out the condition as agreed, the condition is excused and the duty to per-
form the balance of the contract (to close the transaction) ripens into an affirmative duty. Because
the buyer cannot perform without financing, and because the financing condition is excused and
no longer protecting the buyer, the buyer is forced to default (forfeit their earnest money deposit).
The Use of Contingencies in the Real Estate Sale

Agreement
Contingencies and conditions can have a powerful impact on the closing of a transaction. Contract conditions
qualify the affirmative duty to proceed with a transaction until such condition has occurred or been excused.
The better-drafted contingencies are those that are specific. To ensure proper contingency drafting, the
following questions should be asked:
• Who must act?
• What is to be done?
• When must the contingency be satisfied?
• How is the contingency to be removed or satisfied?
• What happens if a contingency is not satisfied?
Let’s take a look at each of these.
Who Must Act?

Usually, the party who must act will be the party benefiting from the condition. In drafting the contingency,
licensees should always state who must act to satisfy it.
• INCORRECT DRAFTING:"A property inspection shall be performed on the property, and all ele-
ments and systems thereof shall be inspected by a professional inspector." The condition does not state
who is responsible for causing the inspection to occur. Is it the buyer, the seller, the lender? No clear
conclusion can be reached from the condition as written.
• CORRECT DRAFTING:"At buyer’s expense, the buyer shall have the property and all elements and
systems thereof inspected by one or more professionals of buyer’s choice." The condition clearly states
that the buyer is responsible for causing the inspection to occur.
42 Excuse of a Condition
What is to be Done?
To avoid disputes and define the scope of the condition, a licensee should specify what must be done to
satisfy the contingency.
• INCORRECT DRAFTING:"This transaction is subject to buyer’s attorney’s approval." This example

is improperly drafted because we do not know what is subject to the approval of the buyer’s attorney. Is
it the transaction, the real estate sale agreement itself, the land sale contract? Because of not knowing,
there is no basis to determine what will satisfy the contingency.
• CORRECT DRAFTING:"Subject to the buyer’s attorney’s approval of the Land Sale Contract. The
Land Sale Contract is to be prepared by the seller’s attorney, with one-half the cost reimbursed by the
buyer." In this example, we learn who is to prepare the land sale contract and that it is subject to the
approval of the buyer’s attorney.
When Must The Contingency be Satisfied?

If no specific time is stated for the satisfaction or waiver of a contingency,
a reasonable time for the nature of the contingency can be determined
by a court. To avoid this situation, every contingency should have
a deadline. The buyer usually wants as long of a contingency period as
possible while the seller usually wants as short of a contingency period
as possible. The contingency deadline should be reasonable, taking into
consideration the nature of the contingency.
For example, a contingency relating to a home inspection requires a rather

short period such as five to seven business days. A contingency relating
to obtaining a property zone change requires a long period such as nine
months to one year.
A contingency is defective if it does not provide a deadline for satisfaction or waiver.
How is The Contingency to be Removed or Satisfied?

How the contingency is removed or satisfied is important. The method may impose a burden on the party
for whose benefit the contingency was written. Many buyers have had a contingency satisfied because they
or their agent did not pay attention to the manner by which a contingency was to be satisfied.
The Use of Contingencies in the Real Estate Sale Agreement 43

Party must act to remove contingency
Example: "At Buyer’s expense, Buyer may have the property and all elements and systems thereof
inspected by one or more professionals of Buyer’s choice. Buyer shall have seven business days to
conduct said inspection and to review and approve the inspection report."
In this example, the buyer must have the property inspected and approve the report within the seven business
day time frame. If the buyer does not approve the report, the contingency is not removed and the transaction
will be void.
Party may be silent to remove contingency
Example: "At Buyer’s expense, Buyer may have the property and all elements and systems thereof
inspected by one or more professionals of Buyer’s choice. If Buyer does not disapprove the inspec-
tion report in writing within seven business days, Buyer will be deemed to accept the condition of
the property."
In this example, if the buyer does nothing, then the condition is removed. "Doing nothing" is an example of
passive removal. Passive removal of a contingency means the contingency will be automatically removed
unless the party for whose benefit it is written does something to remove it (performs an affirmative act).
Licensees who do not pay attention to time deadlines may inadvertently cause their client to satisfy a
contingency by silence, when the client’s intention was not to satisfy the contingency.
What Happens if a Condition is Not Satisfied?

One of three things should happen if a condition is not satisfied. They are:
1. The transaction will become void: In this case, if the condition in question was not met by a certain
date, the transaction is canceled. In order to keep the transaction valid, the remaining two alternatives
to cancellation are preferred.
2. The contingency should disappear, just as if it were satisfied:
Example: "If the buyer does not cancel, in writing, and within the specified period, the contin-
gency is automatically removed." The result is that the condition is satisfied and the buyer’s duty
to perform ripens into an affirmative obligation to close the transaction.
3. The agreement should be re-defined: If a contingency is not removed, a mechanism should be in

place to resolve the problem raised by its non-removal.
44 The Use of Contingencies in the Real Estate Sale Agreement

Example: "At Buyer’s expense, buyer may have the property and all elements and systems thereof
inspected by one or more professionals of buyer’s choice. Buyer shall have seven business days to
conduct said inspection and to review and approve the inspection report. Should the report reveal
adverse conditions, and at Buyer’s sole option, Buyer may proceed with the transaction if Seller
agrees to credit Buyer for up to $_________ at closing as a result of the repairs." Such a pre-
determined method to resolve the condition will help to prevent automatic termination of the con-
tract.
Using "Basic Drafting Questions" For The Drafting of

Contingencies
A carefully drafted contingency is important to the successful transaction closing. It provides a blueprint
for how the contingency is to be handled and what will happen if it is not satisfied. Using the drafting
questions, let’s create a contingency for the benefit of a buyer asking for a property inspection.
• The basic contingency:
"This sale is subject to a professional inspection of the property."
• Who must act:
"This sale is subject to the buyer’s approval of a professional inspection of the property."
• Become more specific about what is to be done:
"This sale is subject to the buyer’s approval of a professional inspection of the property, and all elements
and systems thereof and the grounds, at Buyer’s sole expense."
• When must the contingency be satisfied:
"This sale is subject to the buyer’s approval of a professional inspection of the property, and all elements
and systems thereof and the grounds, at Buyer’s sole expense, on or before seven business days from
mutual acceptance of this Agreement."
• How is the contingency to be removed, waived or satisfied:
"This sale is subject to the buyer’s written approval of a professional inspection of the property, and all
elements and systems thereof and the grounds, at Buyer’s sole expense, on or before seven business days
from mutual acceptance of this Agreement."
• What is to happen if the contingency is not satisfied:
"This sale is subject to the buyer’s written approval of a professional inspection of the property, and
all elements and systems thereof and the grounds, at Buyer’s sole expense, on or before seven business
days from mutual acceptance of this Agreement (the "contingency period"). If Buyer fails to give written
approval before the end of the contingency period, this transaction shall become void, and the earnest
money deposited in this transaction shall be immediately returned to the buyer."
The Use of Contingencies in the Real Estate Sale Agreement 45

Standard Contingencies in the Printed Agreement

Standard pre-printed forms contain a number of contingencies. Some of these contingencies are:
• Buyer and property qualifying for financing
• Seller providing marketable title
• Professional inspection
• Lead-based paint disclosure and inspection
• Oil tank inspection contingency
• Review and approval of CC&Rs (Conditions, Covenants, and Restrictions of a Homeowner’s Association)
Some additional contingencies or conditions that arise in a common real estate transaction are as follows:
• Sale and the closing of a buyer’s property
• Environmental hazard inspection contingency
• Inspection of books and records
• Review of leases/rental agreements
• Review of rent rolls
• Review of property service contracts
• Review of prior building permits affecting property
• Review of past uses of property
• Site studies
• Zone of use changes
• Approval of site and building plans
• Topographical surveys
• Soils testing
46 Standard Contingencies in the Printed Agreement

Summary
Conditions and contingencies play a major role in most real estate contracts. Licensees should understand
their importance and significance, and remain mindful that conditions and contingencies are a very powerful
tool that can be used by either party to the transaction in order to limit, modify or terminate contractual
obligations.

RE CA CE Advanced - Contract - Law

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Advanced Contract Law

Harlow T. Spaan, N. Jeffrey Sorg

Segment 1: Contract Law and the Formation of Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Contract law is the collection of rules governing the formation, interpretation

2. Mutual Assent (also known as Offer and Acceptance)

4. Legal (lawful) object or purpose

Age of Contracting Party

Termination Before Acceptance

• The offer will remain open for the period stated.

Death of the Offeror or the Offeree

Illegality of Subject Matter

Destruction of The Subject Matter

An offer can be terminated in the following ways:

• Illegality of subject matter

• Destruction of subject matter

A contract is void if:

• It is created to pursue an illegal objective,

A contract to provide illegal drugs for money is unenforceable.

• It has some legal parts and some illegal parts, or

The Statute of Frauds - The Requirement That a

California’s Statute of Frauds is found in California Civil Code Section

12 The Statute of Frauds - The Requirement That a Contract be in Writing

Adequate Description of the Property

A property address by itself is usually not considered legally adequate to

Express and Implied Contracts

Adequate Description of the Property 13

Unilateral and Bilateral

Executed and Executory Contracts

Even when all of the required contract formation elements of capacity,

Contract terms or conditions might be vague, ambiguous, or indefinite.

Void or voidable contracts and suit for reformation will be explored in

The Effects of Problems in the Formation of a Contract

Contracts are either valid, void, or voidable:

Factors That May Make a Contract Voidable

Fraud in the Execution

The Effects of Problems in the Formation of a Contract 17

18 Factors That May Make a Contract Voidable

Factors That May Make a Contract Voidable 19

20 Factors That May Make a Contract Voidable

• Vague - A contract is vague if it cannot be determined what is stated in the contract.

When the parties are unable to determine the meaning of a contract by

• If terms or provisions that should be in the contract are missing, then

Factors That May Make a Contract Voidable 21

• Specific contract provisions control over general contract provisions.

Assignment and Delegation

• Assignor: The party who is assigning rights to another.

• Assignee: The party to whom the rights are assigned.

• Delegor: The party who is transferring duties to be performed to another.

Rules of Assignment and Delegation

22 Assignment and Delegation

Rules of Assignment and Delegation 23

Assignment and The Statute of Frauds

24 Rules of Assignment and Delegation

In this course segment we discuss contract discharge, breach of con-

When a contract is terminated, the contracting parties are discharged

The law pertaining to the breach of contracts relates to the conse-

Special Case of Untimeliness as Total Breach

Breach of Contract - Anticipatory Repudiation

• Those consistent with an affirmed contract, such as damages for breach

• Those based on the theory that the transaction is disaffirmed and to

Rescission and Restitution

Contract Liability vs. Tort Liability

Definitions of Condition and Contingency