REAL ESTATE LAW PRACTICAL. Daniel F. Hinkel. Sixth Edition. Australia Brazil Japan Korea Mexico Singapore Spain United Kingdom United States

Transcription

1 PRACTICAL REAL ESTATE LAW Sixth Edition Daniel F. Hinkel Australia Brazil Japan Korea Mexico Singapore Spain United Kingdom United States

2 Title: Practical Real Estate Law, Sixth Edition Author: Daniel F. Hinkel Vice President, Career and Professional Editorial: Dave Garza Director of Learning Solutions: Sandy Clark Senior Acquisitions Editor: Shelley Esposito Managing Editor: Larry Main Senior Product Manager: Melissa Riveglia Editorial Assistant: Danielle Klahr Vice President, Career and Professional Marketing: Jennifer Baker Marketing Director: Deborah Yarnell Marketing Manager: Erin Brennan Marketing Coordinator: Jonathan Sheehan Production Director: Wendy Troeger Production Manager: Mark Bernard Senior Content Project Manager: Betty Dickson Senior Art Director: Joy Kocsis Senior Technology Product Manager: Joe Pliss 2011, 2008, 2005, 2000, 1995, 1991 Delmar, Cengage Learning ALL RIGHTS RESERVED. No part of this work covered by the copyright herein may be reproduced, transmitted, stored, or used in any form or by any means graphic, electronic, or mechanical, including but not limited to photocopying, recording, scanning, digitizing, taping, Web distribution, information networks, or information storage and retrieval systems, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without the prior written permission of the publisher. For product information and technology assistance, contact us at Cengage Learning Customer & Sales Support, For permission to use material from this text or product, submit all requests online at Further permissions questions can be ed to Library of Congress Control Number: ISBN-13: ISBN-10: Delmar 5 Maxwell Drive Clifton Park, NY USA Cengage Learning is a leading provider of customized learning solutions with office locations around the globe, including Singapore, the United Kingdom, Australia, Mexico, Brazil, and Japan. Locate your local office at: international.cengage.com/region Cengage Learning products are represented in Canada by Nelson Education, Ltd. To learn more about Delmar, visit Purchase any of our products at your local college store or at our preferred online store NOTICE TO THE READER Publisher does not warrant or guarantee any of the products described herein or perform any independent analysis in connection with any of the product information contained herein. Publisher does not assume, and expressly disclaims, any obligation to obtain and include information other than that provided to it by the manufacturer. The reader is expressly warned to consider and adopt all safety precautions that might be indicated by the activities described herein and to avoid all potential hazards. By following the instructions contained herein, the reader willingly assumes all risks in connection with such instructions. The reader is notified that this text is an educational tool, not a practice book. Since the law is in constant change, no rule or statement of law in this book should be relied upon for any service to any client. The reader should always refer to standard legal sources for the current rule or law. If legal advice or other expert assistance is required, the services of the appropriate professional should be sought. The publisher makes no representations or warranties of any kind, including but not limited to, the warranties of fitness for particular purpose or merchantability, nor are any such representations implied with respect to the material set forth herein, and the publisher takes no responsibility with respect to such material. The publisher shall not be liable for any special, consequential, or exemplary damages resulting, in whole or part, from the readers use of, or reliance upon, this material. Printed in the United States of America

3 chapter 6 Contracts Objectives After reading this chapter, you should be able to: Explain the requirements of a valid real estate contract Identify the remedies for default of a real estate contract Understand the role of a real estate agent in the procurement of a real estate contract Distinguish the three types of real estate agency listing agreements Explain the federal tax consequences of a sale of real property Outline I. Requirements of a Valid Contract A. Legal Capacity to Contract 1. Minors or Infants 2. Mental Incompetents 3. Corporations 4. Partnerships 5. Limited Liability Companies 6. Personal Representatives 7. Trustees 8. Agents B. Mutual Agreement C. Consideration D. Lawful Purpose E. Written Agreements II. Remedies for Breach of a Real Estate Contract A. Specific Performance B. Money Damages C. Rescission D. Liquidated Damages Case: Southeastern Land Fund, Inc. v. Real Estate World, Inc. III. Real Estate Broker A. Agency Relationship B. Services Provided by a Real Estate Broker IV. Listing Agreements A. Open Listing B. Exclusive Listing C. Exclusive Right-to-Sell Listing D. Real Estate Brokers and the Internet V. Taxation and the Sale of Real Property A. Federal Income Tax B. Federal Income Tax on the Sale of a Home C. Federal Income Tax on the Sale of Commercial Property VI. Ethics: Commingling of Client Funds VII. Summary VIII. Web News IX. Key Terms X. Review Questions XI. Case Problems XII. Practical Assignments One of the main areas of a paralegal s involvement in real estate is assistance in representing a purchaser or seller in the sale and purchase of real property. When ownership to real property is acquired through purchase and sale, the transaction requires the negotiation and preparation of a contract before the actual transfer of ownership to the real property. The contract sets forth the terms for the purchase and sale. A paralegal who participates in a real estate contract transaction should be aware of the general legal rules governing the validity of a contract as well as the remedies available for an injured party in the event of a default under a contract. This chapter reviews the law regarding the validity of a real estate contract and the remedies for breach of a real estate contract. In addition, it briefly discusses the role of a real estate agent in procuring a real estate contract.

4 120 Practical Real Estate Law contract Agreement between two or more persons consisting of a promise or mutual promises that the law will enforce or the performance of which the law recognizes as a duty. REQUIREMENTS OF A VALID CONTRACT A contract is an agreement between two or more persons consisting of a promise or mutual promises that the law will enforce or the performance of which the law will in some way recognize as a duty. For a valid real estate contract to exist and the promises therein to be enforceable, a number of legal requirements exist. These requirements are (a) legal capacity of the parties, (b) mutual agreement, (c) consideration, (d) lawful purpose, and (e) written agreement. All the requirements must be present or the contract is invalid and the promises unenforceable. Legal Capacity to Contract The legal capacity means that the parties entering into the contract are responsible in such a way that the law will make them bound by their promises. In this section, we examine how this concept relates to minors or infants, mental incompetents, corporations, partnerships, limited liability companies, personal representatives, trustees, and agents. Minors or Infants The law protects a minor or infant from his or her contractual promises. A minor is deemed to be a person under a certain age (18 years in most states). A minor s contract is voidable at the election of the minor. The minor can void or fail to perform the contract if the minor so desires, but if the minor performs, the other party is bound. For example, an adult enters into a contract to purchase a car from a sixteen-year-old. If the sixteen-year-old decides not to sell the car, the adult has no legal recourse. On the other hand, if the adult decides not to buy the car, the sixteen-year-old can legally enforce the contract and require the adult to buy the car or pay damages. An exception to the voidability rule of contracts entered into by minors is a contract for necessities of the minor. A minor who is independent and living apart from his or her parents may be responsible for contracts entered into for necessities of life such as food, medical care, or even shelter. Generally, the purchase of real property is not considered as necessary, and most real estate contracts entered into by a minor are voidable at the election of the minor. Mental Incompetents Mental incompetents do not understand the essence of the contract. They are protected from their promises in most states. They do not understand that they own property, the value of the property, or the value of what the purchaser is offering. A mental incompetent may be a person who does not understand that by signing the contract, he or she is obligated to perform some task, such as sell or purchase property. The test for mental incompetence has a high standard. Mere lack of knowledge or failure to read a contract does not make a person a mental incompetent. Likewise, illiteracy is not mental incompetence. Persons adjudicated incompetent cannot enter into contracts after the adjudication, and any contracts entered into by them will be void. The adjudication of incompetency is a formal court proceeding, and a final adjudication will be part of the public court record. This adjudication, however, is generally not recorded in the real property records and therefore can only be determined by a search of the court records. A person who is, in fact, incompetent at the time of entering into a contract but has not been formally adjudicated incompetent has a defense to the contract. The contract will be void if the person can prove incompetency at the time of the contract s signature.

5 Contracts 121 Corporations A contract entered into by a corporation presents special legal capacity problems. A corporation is created by state statute and only has the power granted to it by state corporate law or its corporate charter. Most business corporations have the authority to buy and sell real property, and therefore, capacity is not a problem. Many nonprofit corporations, on the other hand, have limited powers. A nonprofit corporation s corporate charter should be examined to determine if the corporation has the legal authority to buy and sell real property. Even though the corporation probably has the authority to enter into a contract, human representatives of the corporation negotiate and sign the contract. Do these representatives truly represent the corporation, and do they have the authority to make the contract binding on the corporation? These questions of authority and capacity should be carefully examined by the paralegal. A corporate officer s authority is set forth in a resolution passed by the board of directors of the corporation. These board resolutions or corporate resolutions are obtained at the time the contract is signed. An example of a corporate resolution authorizing a contract and empowering representatives of the corporation to sign the contract is shown in Exhibit 6 1. Partnerships General partnerships and limited partnerships also create special authorization problems. A general partnership formed under the Uniform Partnership Act has the power to enter into contracts for the sale and purchase of real property. Unless the partnership agreement designates a managing partner, all partners must consent to any contracts entered into by the partnership. A review of the partnership agreement is necessary to determine what authority the partners have if less than all the partners are negotiating and signing the contract. Limited partnerships formed under the Uniform Limited Partnership Act authorize the general partners to act on behalf of the partnership and to buy and sell partnership real property. The consent or agreement of the limited partners is not required. The powers of the general partners, however, can be limited by the partnership agreement, and a review I, Ardene J. Thompson, the duly elected Assistant Secretary for First Arizona Savings, FSB (the Bank ) do hereby certify that all the Members of the Executive Committee of the Bank adopted the following action by written consent in lieu of a meeting, pursuant to Article IV, Section 6 of the Bylaws of the Bank, which resolution has not been amended or revoked as of the date hereof. BE IT RESOLVED, that the Executive Committee hereby approves the sale of that certain property known as Pace s Ferry Place, more particularly described in the attached Exhibit A (the Property ), to Village Properties, an Arizona general partnership, for the sum of $2,200, pursuant to the terms of the Purchase Agreement dated June 6, 20 ; and BE IT FURTHER RESOLVED, that James J. Connor, Administrative Vice President, or Ruth K. McGuire, Executive Vice President, are each hereby authorized to execute on behalf of the Bank any and all documents as may be necessary and proper to contract for and to close on the sale of the Property. IN WITNESS WHEREOF, I, Ardene J. Thompson, have duly set my hand and seal of the Bank. September 9, 20 Assistant Secretary [SEAL] Delmar/Cengage Learning EXHIBIT 6 1 Certification of Resolution

6 122 Practical Real Estate Law agent A person who has the power and authority to act on behalf of another person. An authorized agent s actions will bind the person on whose behalf the agent is acting. principal A person who appoints an agent to act on his or her behalf. of the agreement is necessary to determine what authority the general partners have to sign contracts binding on the limited partnership. In addition, general partners do not have the authority, without limited partners consent, to sell all the assets of the limited partnership. A real property limited partnership may have only one asset, such as an apartment project or a shopping center. A careful examination of the affairs of the limited partnership as well as the agreement is necessary in these situations. Limited Liability Companies A limited liability company consists of members of the company who either collectively act on behalf of the company or appoint managers or managing members to act on behalf of the company. Generally, any contract entered into by a limited liability company will need the consent or agreement of all members, evidenced either by their signatures on the contract or by giving authority to a manager or group of members to sign the contract. A careful examination of the limited liability company articles of organization and operating agreement is necessary to determine which members have authority to sign contracts on behalf of the company. Personal Representatives An executor or executrix of an estate has limited power to enter into contracts to buy and sell real property on behalf of the estate. An executor or executrix only has the power given by state law and under the will. An executor or executrix cannot act in violation of the will without a court order. Therefore, when reviewing contracts entered into with estates of deceased people, it is necessary to review not only state law regarding the executor s or executrix s powers, but also the actual will that appoints the executor or executrix. An administrator of an intestate estate (one in which the deceased died without a will) has limited power to buy and sell property. In many states, an administrator cannot enter into a contract to sell estate property without a court order or without consent from all the heirs who would be entitled to inherit the property. Trustees Trustees of a trust have problems similar to those of executors or executrixes and administrators. A trustee only has the authority given by state law and by the actual trust instrument. A contract entered into with a trust requires that the trust document be carefully reviewed to see if the trustee has the authority to bind the trust to the contract. Trustees also have a fiduciary responsibility to the beneficiaries of the trust. This means that the trustee cannot deal with trust property in such a way as to be detrimental to the beneficiaries. For example, a trustee could not enter into a contract to sell trust property to herself, her relatives, or any other entity in which the trustee has a financial interest. This would be self-dealing and a breach of fiduciary duty. In addition, a trustee cannot enter into a contract to sell trust property if the trustee intends to use the proceeds for purposes other than to benefit the beneficiaries. In any situation where a trustee would potentially be breaching his or her fiduciary duty, the trustee does not have the authority to act unless all the beneficiaries consent to the action. Beneficiaries who are under legal age cannot give their consent without the appointment of a guardian. Agents An agent is a person who has the power and authority to act on behalf of another person. A person who appoints an agent to act on his or her behalf is known as a principal. An authorized agent s actions will bind the principal. For example, if an agent is authorized to sign a contract, then it will be the principal, not the agent, who is responsible for the performance of the contract.

7 Contracts 123 A person occasionally appoints an agent or an attorney-in-fact to sign real estate contracts on his or her behalf. This is done by the use of a written agency agreement known as a power of attorney. A person who appoints an agent is the principal under the power of attorney, and the agent is known as an attorney-in-fact. Although the agent is known as an attorney-in-fact, the agent need not be a licensed lawyer. Any person competent to enter into a binding contract can be an attorney-in-fact under a power of attorney. An attorneyin-fact only has the power granted to it by the express written agency appointment. A power of attorney is generally prepared in recordable form and is recorded along with any deed or other recorded document signed by the attorney-in-fact. An example of a broad general power of attorney is set out in Exhibit 6 2. In reviewing contracts signed by an attorney-in-fact, it is necessary to review the power of attorney carefully to make sure the attorney-in-fact is acting within the scope of authority. Powers of attorney cannot be expanded on, nor can any powers be implied. The language must be carefully drawn to provide the attorney with the power to act. For example, a power of attorney that gives the attorney the authority to sell property does not give the attorney the authority to purchase property. When dealing with real property contracts, it is necessary that the agency appointment or power of attorney be written and have the same formality as the contract. For example, if the contract is under seal (usually designated by the word seal at the end of the signature lines), the power of attorney must likewise have the same formality and be under seal. A power of attorney can be revoked at any time by the person appointing the agent. In addition, powers of attorney are automatically revoked by the death of the principal or by the appointment of a new agent for the same purpose. Generally, a power of attorney, unless it is a so-called durable power of attorney, is also revoked by the insanity or incompetence of the principal. Durable powers of attorney have been created to provide that the appointment of the agent will continue despite the later incompetence or insanity of the principal. It is essential to establish, as best one can, that the power of attorney has not been revoked at the time the agent signs the contract. Due to the uncertainties involved when a contract or other legal document is signed by a power of attorney, many institutions and other parties are reluctant to enter into agreements with a party using a power of attorney. power of attorney Written document authorizing another person to act as one s agent. Mutual Agreement A valid contract requires that an agreement and bargain be struck between the parties to the contract. The parties must agree on the same thing, on the same terms, and at the same time. This situation is referred to as meeting of the minds. This mutual consent may be manifested by an offer on the part of one party and an acceptance of the offer on the part of the other party. An offer is a promise to do something. A person who makes an offer is often called an offeror, and a person to whom an offer has been made is often called an offeree. In the case of a real estate contract, an offer can be an offer to purchase made by a buyer or an offer to sell made by a seller. An offer generally must be sufficiently clear to determine what is being offered and must be communicated to the other party. An offer does not result in a contract until the offer has been accepted by the person to whom the offer has been made. The acceptance of the offer must be in response to the offer and, in the case of a real estate contract, must be an acceptance of the exact same terms as the offer. The acceptance must also be communicated by the offeree to the offeror. Generally, an offer can be withdrawn by the offeror at any time prior to receipt of a notice of an acceptance of the offer from the offeree. In addition, an acceptance made by an offeree of the offer that is on different terms is a counteroffer, which has the effect of terminating or rescinding the original offer and offer A contractual promise to do something. offeror A person who makes an offer to contract. offeree A person to whom an offer to contract has been made. counteroffer A response to an offer by the offeree stating terms of acceptance different from the offer. Counteroffer terminates the original offer and becomes an offer of its own to be accepted or rejected.

8 124 Practical Real Estate Law EXHIBIT 6 2 Power of Attorney KNOW ALL MEN BY THESE PRESENTS: That I, ANDREW J. NELSON, resident of Clay County, Illinois, being desirous of arranging for the transaction of my business through an attorney-in-fact, have appointed, named and constituted, and by these presents do name, constitute and appoint SUSAN T. BRAXTON, a resident of Clay County, Illinois, as my true and lawful attorney-in-fact, and do authorize said attorneyin-fact, for me in my name, place and stead: to execute, and deliver, any and all sale documentation necessary in order to close a sale of my property known as the Clay County Office Park and being more particularly described on Exhibit A attached hereto and made a part hereof to BURTON INVESTMENTS COMPANY, INC. pursuant to a real estate contract by and between Andrew J. Nelson and Burton Investments Company, Inc. dated December 6, 20, said sale documents to include but not be limited to, affidavits, general warranty deeds, assignment of warranties, assignment of leases and rents, and general warranty bill of sale. I hereby further give and grant unto my said attorney-in-fact full power and authority to execute and deliver any and all other instruments and documents and to do and perform any and all other acts necessary and proper to be done in the exercise of any of the foregoing powers as largely, fully, and amply as I might or could do if I were personally present, with full power of substitution and revocation, and I hereby ratify and confirm all that my said attorney-in-fact shall lawfully do or cause to be done by virtue hereof. It is my intent, and it is expressly understood, that the powers herein granted to my said attorney-in-fact shall not be terminated in the event that I become physically or mentally incompetent to manage my affairs. Said attorney-in-fact shall be authorized to exercise all powers herein granted notwithstanding said incompetency. Said attorney-in-fact shall not be required to seek the appointment of a guardian of my person or property, but may instead exercise all of the powers herein granted. And I hereby declare that any act or thing lawfully done hereunder by my said attorney-infact shall be binding on myself, and my heirs, legal and personal representatives, and assigns, whether the same shall have been done before or after my death or other revocation of this instrument, unless and until notice thereof shall have been received by my said attorney-infact. Unless any person has notice of the revocation of this power of attorney, any person relying on these presents shall presume that such power continues to be in full force and effect. Any banks, bankers, trust companies, savings and loan associations, fiduciaries, depositories, or other institutions, persons, firms, or corporations may act in reliance hereon and shall be fully protected. My attorney-in-fact herein named shall not be liable for any loss resulting from any action taken by said attorney-in-fact if done in good faith and in the absence of fraud. Notwithstanding anything contained herein to the contrary, this power may be revoked, and notice of such revocation shall be deemed received by all the world, by written instrument recorded in the Office of the Clerk of the Superior Court of Clay County, Illinois. IN WITNESS WHEREOF the undersigned hereunto set his hand and seal, this day of,. Signed, sealed and delivered in the presence of: Witness Notary Public My Commission Expires: [NOTARY SEAL] (SEAL) ANDREW J. NELSON Delmar/Cengage Learning

9 Contracts 125 becoming an offer on its own, which then must be accepted or rejected. For example, Aaron offers to sell a house to Bill for $200,000. Bill responds with an offer to buy the house for $185,000. At this stage of negotiations, Aaron has offered to sell for $200,000, and Bill has offered to buy for $185,000. Bill s offer to buy for $185,000 is a counteroffer to Aaron s offer to sell for $200,000. Bill s counteroffer revokes Aaron s original offer. The only offer that now can be accepted or rejected is Bill s offer to buy for $185,000. Until such time as Aaron and Bill agree on the same price, there is no mutual agreement and no contract. Consideration A contract must state the consideration flowing from one party to the other or from each to both. Consideration may be money, something of value, or, in many states, just a recital of the agreement of the parties to buy and sell. Lawful Purpose A contract must be for a lawful purpose to be enforceable. Generally, all real estate contracts are for a lawful purpose and thus satisfy this test. Contracts to commit crimes or that are against public policy are unenforceable. For example, assume that the owner of a home believes that she would be able to get a better price for the home if she raffled it off in a lottery. The owner sells tickets or chances to win the home, hoping to sell enough tickets to recover more than the sale price for the home. If this type of lottery takes place in a state that makes gambling or lotteries either a crime or against public policy, the agreement would be unenforceable. The winner of the lottery, even though having paid money for the winning ticket, would be unable to require the owner of the home to transfer the home to him or her for the price of the lottery ticket. consideration Something of value given to make the promises in a contract enforceable. Written Agreements Not every contract must be in writing to be enforceable; however, early in the development of contract law, it was observed that oral agreements were subject to much abuse. Consequently, in 1677, the statute of frauds was enacted in England. Its purpose was to prevent any fraudulent practices as were commonly upheld by perjury in the law courts. The statute of frauds, which has been adopted in almost every state, basically provides that certain contracts are not enforceable unless there exists some written memorandum or agreement that is signed by the party to be charged with the obligation. The statute of frauds requires various categories of contracts to be in writing. These categories are (a) a contract to answer for the debt of another person (guaranty or surety contract); (b) an agreement made on consideration of marriage; (c) any agreement that is not to be performed within one year from the date thereof; and (d) any contract for the sale or transfer of land or any interest in land. Unless a state s statute of frauds requires a contract to be in writing to be enforceable, an oral contract will be enforceable. Therefore, any contract not listed within a state s statute of frauds as requiring a writing will be enforceable without a writing. The main problem with an oral contract is the ability to prove what the terms of the contract were. Therefore, even in areas where a written contract is not required to be enforceable, people are well advised to reduce the contract to writing so that later if there is a dispute, the terms of the contract can be proven. Although real estate contracts are generally required to be in writing, there is an exception to this rule. This exception is known as the doctrine of part performance. Most states will provide that an oral contract to buy or sell property is enforceable if one of the parties to the contract has partially performed in reliance upon the contract. For example, there is an oral contract between a seller and purchaser to sell a home for $200,000. The purchaser, in reliance upon the contract, tenders payment to the seller of the $200,000. Under these

10 126 Practical Real Estate Law circumstances, the purchaser could require the seller to sell the home for $200,000. One problem with the doctrine of part performance is the ability to prove the performance was made in relation to an oral contract. The purchaser in this example would have to prove by some means that he or she had a contract with the seller to purchase the home in question for $200,000. If the seller denies that such a contract existed, the purchaser will have a difficult burden of proof in establishing its oral contract for the sale of the property and the application of the doctrine of part performance to make such oral contract enforceable. The issue would probably be determined by a jury and would depend on the credibility of the seller s and purchaser s testimony in regard to the alleged contract. A written real estate contract should contain at least the following essential details: (a) names of the parties (seller and buyer); (b) stated agreement to buy and sell; (c) description of the real property to be bought and sold; (d) purchase price; (e) terms of payment; (f) amount and disposition of the earnest money paid by the purchaser; (g) date of closing (when the transfer of ownership is to take place); (h) statement that time is of the essence ; (i) if the parties so desire, a list of conditions before the sale; and (j) signature of the parties. Chapter 7 contains a thorough discussion of contract provisions and sample forms of contracts. REMEDIES FOR BREACH OF A REAL ESTATE CONTRACT In the event one of the parties to a contract for the purchase and sale of real estate breaches the contract and fails to perform the obligations under the contract, the injured party is entitled to one of the following remedies: (a) specific performance, (b) money damages, (c) rescission, or (d) liquidated damages. specific performance Remedy for breach of real estate contract that requires a defaulting party to perform the promises made in the contract. Specific Performance The remedy of specific performance follows a theory that real property is unique; therefore, when a party defaults under a contract, that party should be required to perform the obligations under the contract. Under the remedy of specific performance, the party in default is ordered by the court to perform. For example, if a seller defaults on a contract, the court orders the seller to sell the real property to the purchaser pursuant to the terms of the contract. This is an ideal remedy for the purchaser because he or she receives what was originally bargained for the real property at the agreed-to purchase price. Specific performance also can be awarded to a seller against a defaulting purchaser. In this case, the court orders the purchaser to pay the contract price to the seller and receive title to the real property. One limitation on the use of specific performance is the ability of the defaulting party to perform. For example, a person who does not own a parcel of real property contracts to sell the real property to a purchaser. The seller, then, because of lack of title, fails to perform. The court cannot order specific performance because performance is impossible; therefore, the injured party is left with money damages or rescission. Specific performance is limited to situations where the contract for the sale of the property is clear and definite as to its terms and is free from fraud or mistake. Specific performance has been denied where the property description in the contract was so vague and uncertain that it would be difficult to tell what property was intended to be bought or sold. Specific performance has been denied where there is a question of fairness in the adequacy of consideration and the enforcement of the contract would not be equitable. For example, if a purchaser and seller entered into a contract whereby property worth $1,000,000 was to be sold, through some mistake of the seller s, for a value of $100,000, the inadequacy of the price may justify a court s decision to deny specific performance.

11 Contracts 127 Money Damages The theory for money damages is that the injured party is to be placed in the same situation he or she would be in if the contract had been performed, insofar as money can do it. The amount of money damage is the difference between the contract price and the market value of the real property at the time and place of default. For example, a seller can only recover damages for the purchaser s default if the fair market value of the real property is less than the contract price at the time of default. It is only in this circumstance that the seller has lost money as a result of the sale not closing. On the other hand, a purchaser can only recover from a seller for money damages if the fair market value of the real property is more than the purchase price at the time of the default. It is only under this circumstance that the purchaser has lost money as a result of the sale not going through. The determination of fair market value usually is done by expert witnesses such as appraisers. Assume, for example, that a parcel of property has a fair market value of $200,000. A contract is entered into between a seller and purchaser to sell the property for $180,000. The seller refuses to sell the property to the purchaser and breaches the contract. The purchaser can therefore recover the difference between the fair market value of the property and the purchase price of the property from the seller. This difference would be $200,000 fair market value less $180,000 purchase price, or $20,000 that could be recovered. The seller, under the same set of factual circumstances, could not recover from the purchaser if the purchaser defaulted on the contract. The reason for this is that the purchaser has a contract to buy the property for less than its fair market value. A default by the purchaser under the rule of damages has not damaged the seller. In fact, the seller has received a benefit by the purchaser not buying the property at a price which is $20,000 less than its fair market value. In this situation, the seller would not be able to recover any damages from the purchaser. If the purchaser had agreed to pay $220,000 for the home and then defaulted, then the seller would have suffered damage. The damage would be the difference between fair market value of $200,000 and the purchase price of $220,000. The seller would be entitled to receive $20,000 from the defaulting purchaser. Rescission Rescission operates under a different theory than money damages or specific performance. Here, instead of trying to put the injured party in the position he or she would have been in had the contract been performed, the law attempts to place the injured party in the position he or she would have been in had the contract not been entered into. That is, restore the status to the time before entering into the contract. The remedy of rescission provides that the contract is to be terminated and the injured party reimbursed for expenses incurred in preparation for the performance of the contract. For example, the seller breaches the obligation to sell property to a purchaser. The purchaser, in preparation of performance of the contract, has hired an attorney to do a title examination and prepare the contract and a surveyor to survey the property. The purchaser has bills totaling $2,000. If the purchaser is awarded rescission, the contract is terminated, and the seller is ordered to pay the purchaser $2,000 as reimbursement for expenses. The remedy of rescission is also used when a seller or purchaser has committed fraud in connection with a real estate sale. For example, a seller of a home represented verbally to the purchasers that the basement did not leak. Following the purchase of the home, the purchasers found that there were severe flooding problems in the basement. The purchasers may sue the seller for damages caused by the flooding, or decide they do not want the home and sue to rescind the contract. If the rescission is successful, the purchasers would return the home to the seller and would receive from the seller the purchase price paid for the home. rescission Remedy for default of a real estate contract wherein the contract is terminated and the defaulting party must reimburse the injured party for expenses incurred in connection with the contract.

12 128 Practical Real Estate Law Rescission can be waived. Rescission may be waived when the purchaser s conduct amounts to a recognition of the transaction or the purchaser acts in a manner inconsistent with a repudiation of a contract. Once rescission is waived, it cannot be revived. Improvements made to the property by a purchaser may constitute a waiver of the right of rescission. Failure to timely rescind can also result in a waiver of the right of rescission. A purchaser generally must rescind the contract in a timely fashion as soon as the facts supporting the rescission are discovered. It is easy to see why money damages, specific performance, and rescission are inconsistent remedies. It is impossible to require a party to perform and collect money damages at the same time. A party cannot rescind or terminate the contract and also have the court order the performance under the contract. Because these remedies are inconsistent, the injured party is entitled to only one of the remedies. However, at the time of suit, to enforce the contract, the party need not elect a certain remedy but instead may ask the court to award in the alternative all three forms of relief. The courts then will decide, after all the evidence is presented, which remedy will be awarded. For example, if the seller does not own the real property or the real property has serious title defects that cannot be corrected, then performance is not granted. Instead, the purchaser is left with the remedy of either money damages or rescission. In the same example, if it turns out that the fair market value of the real property and the contract price are the same, then the purchaser cannot recover money damages but is left with rescission as the only remedy. liquidated damages Amount of money agreed on by the parties to a contract to be the damages in the event of a default of the contract. Liquidated Damages Sometimes the parties do not want to rely on money damages, specific performance, or rescission as a remedy for breach of contract and instead agree within the contract that a certain sum of money is to be paid in the event of default. This agreed-upon sum, called liquidated damages, is enforceable, provided it does not result in a penalty. The amount agreed on must be reasonable close to what actual money damages would be in the event of default. When liquidated damages are included within a contract, they typically are the exclusive remedy. The parties can only collect liquidated damages, unless for some reason the provision is not enforceable. It is not unusual for contracts to provide that the purchaser will forfeit earnest money as liquidated damages in the event of the purchaser s default. A sample contract liquidated damages provision is shown in Example 6 1. Example 6 1 In the event the transaction contemplated hereby is not closed because of Purchaser s default, the Earnest Money Deposit shall be paid to Seller as full liquidated damages for such failure to close, the parties acknowledging the difficulty of ascertaining Seller s damages in such circumstances, whereupon neither party hereto shall have any further rights, claims, or liabilities under this Agreement except for the provisions that are made to survive the termination or cancellation of this Agreement. Said liquidated damages shall be Seller s sole and exclusive remedy, and Seller shall expressly not have the right to seek specific performance. These contract provisions must be drafted carefully or the forfeiture may result in an unenforceable liquidated damage provision. This problem is illustrated in the case Southeastern Land Fund, Inc. v. Real Estate World, Inc., 227 S.E.2d 340.

13 Contracts 129 CASE Southeastern Land Fund, Inc. v. Real Estate World, Inc. 237 Ga. 227, 227 S.E.2d 340 (Ga. 1976) INGRAM, Justice. Certiorari was granted in this case 1 for this court to consider whether a provision in a real estate sales contract, providing for the payment of earnest money, should be considered as a provision for liquidated damages. The Court of Appeals concluded this provision was a penalty and could not be enforced. The litigation began when the seller filed suit against the buyer who defaulted under the contract. The buyer had paid $5,000 in cash as earnest money when the contract was signed. Thereafter, a promissory note for $45,000, representing additional earnest money, was executed and delivered by the buyer to the seller pursuant to the contract. The buyer defaulted at closing and the seller sued the buyer to collect the $45,000 note. The seller obtained a summary judgment in the trial court and the buyer s motion for summary judgment and counterclaim for return of the $5,000 earnest money were denied. On appeal to the Court of Appeals, that court reversed in a 6 3 decision and held the earnest money provision of the contract amounted to a penalty. The Court of Appeals also ruled that the buyer s motion for summary judgment should have been granted by the trial court. The contract provides: In the event purchaser defaults hereunder after having paid the additional earnest money [$45,000]... seller shall be entitled to retain all original earnest money [$5,000] paid hereunder as partial liquidated damages occasioned by such default, to collect the proceeds of the indebtedness owed by purchaser as additional earnest money as further partial liquidated damages occasioned by such default, and to pursue any and all remedies available to him at law or equity including, but not limited to, an action for specific performance of this contract. [1, 2] If, as the Court of Appeals found, this provision in the contract was a penalty, or is unenforceable as a liquidated damages provision, then the buyer can prevail in asserting a defense to the enforcement of the $45,000 note. If, on the other hand, this is a proper provision for liquidated damages, then the seller can prevail in enforcing the note. Of course, whether a provision represents liquidated damages or a penalty does not depend upon the label the parties place on the payment but rather depends on the effect it was intended to have and whether it was reasonable. See Lytle v. Scottish American Mortgage Co., 122 Ga. 458, 50 S.E. 402 (1905). Where the parties do not undertake to estimate damages in advance of the breach and instead provide for both a forfeiture [penalty] plus actual damages, the amount, even though called 1 The decision of the Court of Appeals is reported in 137 Ga. App. 771, 224 S.E.2d 747 (1976). liquidated damages, is instead an unenforceable penalty. See Foote & Davis Co. v. Malony, 115 Ga. 985, 42 S.E. 413 (1902). [3] The seller argues that a seller who is not in default may always retain the earnest money paid by the buyer and sue for actual damages above the amount of earnest money received under the contract. We do not agree with this argument and the seller cites no authority that support it. While it is true that the earnest money feature of a real estate contract distinguishes it to some extent from a wholly executory contract, the same basic contract rules are used to determine available remedies for the breach of a real estate sales contract as for the breach of other contracts. This general contract law of remedies for a breach, as well as the intent of the parties in providing specific remedies in the contract, must be used in analyzing and deciding each particular case. [4] Depending on the language used in the contract and the discernible intent of the parties, the existence of an earnest money provision in a real estate sales contract can have one of three effects in the case of a breach by the buyer. First, the money could be considered as partial payment of any actual damages which can be proven as the result of the buyer s breach. 2 Second, the money could be applied as part payment of the purchase price in the enforcement of the contract in a suit for specific performance by the seller. Third, the money could be liquidated damages for breach of the contract by the buyer. A provision for earnest money cannot, however, under Georgia law, be used for all three results as we shall see. [5 7] Of course, if the real estate sales contract is silent on the remedy to be provided, the non breaching seller is entitled to his proven actual damages. The ordinary measure of damages is the difference between the contract price and the market value of the property at the time of the buyer s breach. Shives v. Young, 81 Ga. App. 30, 57 S.E.2d 874 (1950). If the nonbreaching seller sues for actual damages, the earnest money then becomes a fund out of which those damages are partially paid if the proven damages exceed the amount of the earnest money. 3 [8] Even if the real estate contract is silent as to the remedy of specific performance, it is still available as a remedy unless it is specifically excluded as a remedy. In the cases in 2 We do not decide in this case whether a breaching buyer may sue in the first instance for recovery of earnest money if the seller suffers no actual damages. 3 Apparently, in many instances where real estate sales contracts provide that earnest money will be retained by the seller to be applied toward the seller s damages, as a result of the buyer s default, no suit is brought by the seller to prove his actual damages and likewise the buyer does not contest whether the seller has actually suffered damages or the extent of them. In these circumstances, the earnest money is really treated by the parties as liquidated damages, after a breach by the buyer, even though the parties did not agree to liquidate the damages in their contract. (continued)

14 130 Practical Real Estate Law which rescission has been used as a remedy the parties are put as nearly as is possible back to the status quo ante. See Lightfoot v. Brower, 133 Ga. 766, 66 S.E (1909); Walter Tally, Inc. v. Council, 109 Ga.App.100, 135 S.E.2d 515 (1964); Woodruff v. Camp, 101 Ga. App. 124, 112 S.E. 2d 831 (1960). Cf. Higgins v. Kenney, 159 Ga. 736 S.E. 827 (1924). [9] Of course, Georgia law also recognizes that the parties may agree in their contract to a sum to liquidate their damages. Code Ann provides: Damages are given as compensation for the injury sustained. If the parties agree in their contract what the damages for a breach shall be, they are said to be liquidated, and unless the agreement violates some principle of law, the parties are bound thereby. (Emphasis supplied.) See also Code Ann [10] In deciding whether a contract provision is enforceable as liquidated damages, the court makes a tripartite inquiry to determine if the following factors are present: First, the injury caused by the breach must be difficult or impossible of accurate estimation; second, the parties must intend to provide for damages rather than for a penalty; and third, the sum stipulated must be reasonable pre-estimate of the probable loss. Calamari & Perillo, The Law of Contracts, 367 (1970). See Tuten v. Morgan, 160 Ga. 90, 92, 127 S.E. 143 (1924), and Bernhardt v. Federal Terra Cotta Co., 24 Ga. App. 635, 101 S.E. 588 (1919). See also Martin v. Lott, 144 Ga. 660, 87 S.E. 902 (1915). [11] Another feature implicit in the concept of liquidated damages in addition to the above actors is that both parties are bound by their agreement. See Code Ann See e.g., Jarro Building Industries Corp. v. Schwartz, 54 Misc. 2d 13, 281 N.Y.S.2d 420 (1967). A nonbreaching party who has agreed to accept liquidated damages cannot elect after a breach to take actual damages should they prove greater than the sum specified. The breaching party cannot complain that the actual damages are less than those specified as liquidated damages. The liquidated damages become the maximum as well as the minimum sum that can be collected. Mayor etc. of Brunswick v. Aetna Indemnity Co., 4 Ga. App. 722, 727,62 S.E. 475, 477 (1908). The problem that this particular contract provision raises is whether the seller has tried to retain a right to elect to sue for actual damages rather than liquidated damages and in so doing has rendered the purported liquidated damages provision unenforceable. This particular paragraph in the contract provides for partial liquidated damages. This can be read that the parties intended for the two partial liquidated damages provisions to comprise the whole. However, it is also susceptible to the construction that these two partial liquidated damages were not intended to be the sole damages remedy for this particular breach of contract. [12] The contract provision that included the retention of the right to elect specific performance as an alternative remedy to damages poses no problem in our analysis as it does not render a valid liquidated damages provision unenforceable. See, e.g., Wells v. First National Exhibitor s Circuit, Inc., 149 Ga. 200, 99 S.E. 615 (1919). The law is now well settled that a liquidated damages provision will not in and of itself be construed as barring the remedy of specific performance. Rubenstein v. Rubenstein, 23 N.Y.2d 293, 296, N.Y.S.2d 354, 244 N.E.2d 49 (1968). To bar specific performance there should be explicit language in the liquidated damages provision that it is to be the sole remedy. See also Restatement, Contracts 378. Thus the retention of the right to elect specific performance in this contract does not render the purported liquidated damages provision invalid. The answer must be found elsewhere in the construction of these contract provisions. [13, 14] We think a correct resolution of this issue must be found in the doctrine that in cases of doubt the courts favor the construction which holds the stipulated sum to be a penalty, and limits the recovery to the amount of damages actually shown, rather than a liquidation of the damages. Mayor & Council of Brunswick v. Aetna Indemnity Co., supra, 4 Ga. App. p. 728, 62 S.E. p If the parties intended for the $5,000 and the $45,000 to represent the maximum as well as the minimum sum that can be collected, from the buyer s breach, the contract should have made it clear that this was the effect intended by these provisions. It is the lingering ambiguity inherent in these provisions of the contract that persuades us to affirm the result reached by the Court of Appeals in construing the contract. In summary, we hold that these contract provisions are not enforceable under Georgia law as proper liquidated damages provisions in this real estate sales contract. It follows that the trial court erred in granting summary judgment in favor of the seller and we affirm the Court of Appeals reversal of that portion of the trial court s order. However, the existence of the actual damages, if any, to be proven by the nonbreaching seller precludes the grant of the buyer s motion for summary judgment. Therefore, that portion of the Court of Appeals opinion directing the grant of the buyer s motion for summary judgment must be reversed. JUDGMENT AFFIRMED IN PART; REVERSED IN PART. REAL ESTATE BROKER Although real estate may be sold without the services of a real estate broker, many sale transactions are arranged by a real estate broker, who earns a commission in matching a buyer and seller. A real estate broker is subject to license by various state agencies. The aims of licensing are to protect the public from unscrupulous practices and to establish professional standards

15 Contracts 131 of conduct. Most licensing criteria require that the real estate broker demonstrate a certain degree of competence in the area of real property law and maintain continuing education credits. Generally, a real estate license authority may deny a license to a person applying to be a broker if the person does not have a good reputation for honesty, trustworthiness, and integrity; has been convicted of certain enumerated crimes; or has been sanctioned by any regulatory agency for violating a law regulating the sale of real estate. A broker who does not have a license or whose license has been suspended is not entitled to receive a real estate commission. The National Association of Realtors is a trade association for real estate agents. Interesting information can be found on its Web page, including a code of ethics, membership information, and current events of interest to real estate agents and brokers. The Web page can be visited at Agency Relationship The relationship between a real estate broker and his or her client is known as an agency relationship. An agency relationship is one based on trust and confidence of the parties and is a fiduciary relationship. The client who can either be a seller or buyer of real property is known as the principal in the relationship, and the real estate broker is the agent. The broker is also a fiduciary. A fiduciary is a person who holds a special relationship of confidence and trust to a principal and owes to the principal a duty to exercise all of the affairs of the principal in good faith and with loyalty. An agent or fiduciary also has the obligation to do what is best for the principal and not to self-deal or seek any benefit from a transaction that would be a detriment to the principal. For example, an agent who is hired by a principal to seek out and identify commercial properties that the principal would be interested in buying cannot, while in the employment of the principal, find such commercial property and then, as an agent, invest in such properties on his or her own behalf. This type of selfdealing would be a breach of the fiduciary obligation that the agent owes to the principal. Generally, an agent owes certain other duties or responsibilities to a principal. In several states these duties comprise (1) a duty to follow the instructions of the principal, (2) a duty to exercise reasonable care and skill and performance of the agent s duties, (3) a duty to fully disclose all matters the agent becomes aware of relating to the agency relationship, and (4) a duty to account for any money belonging to the principal that comes into the agent s possession. An agency relationship is a bilateral relationship, and a principal owes certain duties and obligations to the agent. Generally, these duties are (1) a duty to compensate the agent for his or her work, (2) a duty to reimburse the agent for any expenditures the agent has reasonably incurred in connection with the performance of the agency, and (3) a duty to indemnify the agent against any third-party claims that may be made against the agent due to his or her performance under the agency agreement. An agent may also have the power and authority to bind the principal to agreements entered into or actions taken by the agent on behalf of a principal. The authority of an agent to bind a principal may be divided into both express authority and implied authority. Express authority is authority that has been clearly given by the principal to the agent. This authority generally is given in written form, such as a listing agreement or property management agreement. For example, it is not unusual for owners of apartments to hire a property manager to manage the leasing and maintenance of the apartment units. Generally, the owner will enter into a property management agreement with the agent outlining the terms under which the agent may lease apartments to prospective tenants. The actual leasing and in many cases the execution of the leases will be done by fiduciary Person who holds a special relationship of confidence and trust to a principal and owes to the principal a duty to exercise all of the affairs of the principal in good faith and with loyalty. express authority Authority that has been clearly given by the principal to the agent.

16 132 Practical Real Estate Law implied authority Implied authority is implied by law to be those things necessary and proper for the agent to carry out the duties of the agency. the agent. Although the agent signs the leases, the principal is responsible to the tenant for the lease terms. Implied authority, on the other hand, is not authority expressly given to an agent by the principal. Instead, implied authority is implied by law to be those things necessary and proper for the agent to carry out the duties of the agency. For example, an agent or property manager hired by a property owner to lease apartments may also have the implied authority to advertise the rental of such apartments in newspapers and to contract for office supplies and other materials necessary to enable them to lease the apartments. The principal as the party responsible for all acts of the agent, including acts done by implied authority, would be responsible to pay the cost of the advertising as well as honor the contract for the office supplies and other materials. Traditionally, real estate brokers represented owners of properties who were interested in selling their property. These brokers would find a purchaser to buy the property and would collect a commission from the seller. The broker, although he or she spent most of his or her time with prospective purchasers of the property, was really an agent for the seller, and it was the seller to whom the agent had a fiduciary obligation. Recently, there has been a growth of real estate brokers who specialize in representing purchasers. These brokers will work with persons who are interested in purchasing property. Their services may involve identifying potential of properties to purchase as well as negotiating the terms of the purchase. A purchaser s agent may be paid a commission from the owner of the property once the sale is completed or may receive a commission from the purchaser. Many states also recognize dual agents. A dual agent is a broker who simultaneously has a client relationship with both the seller and purchaser in the same real estate transaction. Although a dual agency may be legal, it is easy to see how it is difficult for a dual agent to perform fiduciary obligations to two principals who do not have a mutual interest in the transaction. A dual agent trying to get the best price for a property on behalf of the seller and, at the same time, get a fair price for the purchaser may find his or her duties of loyalty and good faith strained. Generally, a broker may only act as a dual agent after a full disclosure of the relationship and with the written consent of both buyer and seller. Services Provided by a Real Estate Broker A real estate broker can provide a number of useful services that can assist an owner in the sale of real property. A broker may specialize in a special type of property such as high priced homes or commercial shopping centers or property located in certain geographic areas of the community. This specialization enables a broker to assist an owner in determining a correct price for the property, as well as to identify potential purchasers who might be interested in the property. Pricing property for sale is a very important aspect of the transaction and one where a broker can provide a valuable service. Ideally, the owner wants the best price that he or she can receive from the sale of the property; however, one must be realistic concerning this price. Property which is placed on the market at too high a price may not sell for a long period of time or until the price is reduced. Both a delay in sale and a reduction in price are unpleasant for the owner. On the other hand, if a property is priced too low, even though a sale might quickly take place, the owner may likewise be unhappy because of money that was lost in pricing the property. A real estate broker generally has access to figures concerning what similar properties have sold for in the community. Using a database that shows comparison pricing, as well as both new listings and sales, enables a broker to provide an owner with pricing information to accomplish the owner s objectives of both a quick sale and a fair price.

17 Contracts 133 A real estate broker can also help an owner prepare a property for sale. A homeowner who has lived in a home for several years cannot see it with the same eyes as a harried house-hunter. A skilled real estate broker can quickly take in the scene and suggest ways to improve the property s appearance for sale. For example, new paint will brighten up the house or walls and make it more attractive. Removing clutter from the home will make it appear more spacious. A broker can also compile a sale booklet for prospective purchasers containing information about taxes, utility rates, nearby schools, parks, and available transportation. A broker can assist an owner in advertising a property for sale and hold open house tours of the property. Generally, during these open house tours, the owner of the home is not present. A broker will generally prefer to work without the owner so that the broker can present the home for sale in an objective and professional manner. A real estate broker s main service to an owner is to find a purchaser. A good broker who is constantly working with a group of potential purchasers will become familiar with their needs or wants with respect to property. For example, a residential broker may work with a young couple who is looking for their first home. The broker may have shown the couple a number of houses that did not meet their tastes, requirements, or budget. Over a period of time spent with the couple, the broker will learn what types of properties they are interested in, what they do not like, and what they can afford. Once a property comes on the market that seems to satisfy all of the couple s requirements, the broker can quickly identify the property and hopefully assist in the consummation of the sale. Although real estate brokers are not attorneys, they do many things that resemble the practice of law. It is not unusual for many states to permit real estate brokers to prepare contracts for the sale of real property. A broker may also act as an escrow agent for the purpose of holding earnest money deposits or other payments in connection with the contract. Real estate brokers are experienced in closing sales for real estate and often assist both sellers and purchasers in preparing for the closing. It is not unusual for a real estate broker to arrange for the preparation of title examinations, surveys, insurance, inspection reports, and other matters that must be attended to in order for the sale to take place. LISTING AGREEMENTS Owners hire brokers to sell real property with a listing (agency) agreement. A form of listing agreement is shown as Exhibit 6 3. The main types of listing agreements are open, exclusive, and exclusive right to sell. Brokers listing agreements usually provide that the real property is to be sold during a period of time (a listing period). These agreements also state that if the real property is introduced to a number of people during the listing period and sold to one of the people after the listing period, the agent is entitled to a commission. A seller should require that the agent submit to the seller a list of people to whom the real property has been shown before the expiration of the listing agreement. The agent also should agree that if the real property is sold to one of these people within some reasonable period of time (e.g., six months) after the listing expiration, a commission will be due and payable. listing agreement Agreement entered into between an owner and a real estate broker retaining the real estate broker to assist the owner in selling real property. Open Listing Under an open listing, an owner of property hires an agent or a broker to sell the real property, but the owner still reserves the right to hire other agents or brokers and to sell the real property on his or her own efforts. The first agent or broker to bring a purchaser who is

18 134 Practical Real Estate Law EXHIBIT 6 3 Exclusive Seller Listing Agreement Reprinted with permission of Georgia Association of Realtors, Inc. EXCLUSIVE SELLER LISTING AGREEMENT (ALSO REFERRED TO AS EXCLUSIVE SELLER BROKERAGE AGREEMENT) State law prohibits Broker from representing Seller as a client without first entering into a written agreement with Seller under O.C.G.A. 10-6A-1 et. seq. For and in consideration of the mutual promises contained herein and other good and valuable consideration, as seller (hereinafter referred to as Seller ), and as broker and its affiliated licensees (hereinafter collectively referred to as Broker ) do hereby enter into this Agreement, this day of, Exclusive Listing Agreement. Seller hereby grants to Broker the exclusive right and privilege as the agent of the Seller to show and offer for sale the following described property as the real estate broker for Seller: All that tract of land lying and being in Land Lot of the District, Section of County, Georgia, and being known as Address, City, Georgia Zip Code, according to the present system of numbering in and around this area, being more particularly described as Lot, Block, Unit, Phase/Section of Subdivision, as recorded in Plat Book, Page, County, Georgia records together with all fixtures, landscaping, improvements, and appurtenances, all being hereinafter collectively referred to as the Property. The full legal description of the Property is the same as is recorded with the Clerk of the Superior Court of the county in which the Property is located and is made a part of this Agreement by reference. The term of this Agreement shall begin on the day of, 20 and shall continue through the day of, 20 (hereinafter referred to as Listing Period ). 2. Independent Contractor Relationship. This Agreement shall create an independent contractor relationship between Broker and Seller. Broker shall at no time be considered an employee of Seller. Seller acknowledges that the real estate licensees affiliated with Broker are independent contractors of Broker, and are not Broker s employees. 3. Broker s Duties to Seller. Broker s sole duties to Seller shall be to: A. Use Broker s best efforts to procure a buyer ready, willing, and able to purchase Property at a sales price of at least $ (which amount includes the commission) or any other price acceptable to Seller; B. Assist to the extent requested by Seller, in negotiating the terms of and filling out a pre-printed real estate purchase and sale agreement; and C. Comply with all applicable laws in performing its duties hereunder including the Brokerage Relationships in Real Estate Transaction Act, O.C.G.A. 10-6A-1 et. seq. 4. Seller s Duties. Seller represents that Seller: A. presently has title to Property or has full authority to enter into this Agreement; B. will cooperate with Broker to sell Property to prospective buyers and will refer all inquiries concerning the sale of Property to the Broker during the terms of this agreement; C. will make Property available for showing at reasonable times as requested by Broker; and D. will provide Broker with accurate information regarding Property (including information concerning all adverse material facts pertaining to the physical condition of Property); and E. must fully comply with all state and federal laws. 5. Marketing. A. Advertisements: Broker may advertise Property for sale in all media and may photograph and/or videotape and use the photographs and/ or videotapes in connection with Broker s marketing efforts. Seller agrees not to place any advertisements on the property or to advertise the property for sale in any media except with the prior written consent of Broker. Broker is also hereby authorized to place Broker s For Sale sign on Property. Broker is authorized to procure buyers to purchase Property in cooperation with other real estate brokers and their affiliated licensees. Broker may distribute listing and sales information (including the sales price) to them and other members of the multiple listing service(s), and said cooperating brokers and their licensees may with permission of Broker (which permission may be granted or denied in the sole discretion of Broker) republish such information on their Internet web sites. Broker and other real estate brokers and their affiliated licensees may show Property without first notifying Seller. (continued)

19 Contracts 135 EXHIBIT 6 3 Exclusive Seller Listing Agreement (continued) B. Lockboxes: A lockbox may be used in connection with the marketing of Property. There have been isolated instances of reported burglaries of homes on which lockboxes have been placed and for which the lockbox has been alleged to have been used to access the home. In order to minimize the risk of misuse of the lockbox, Broker recommends against the use of lockboxes on door handles that can be unscrewed from the outside or on other parts of the home from which the lockbox can be easily removed. Since others will have access to Property, Seller agrees to either remove all valuables or put them in a secure place. C. Multiple Listing Service(s): Seller acknowledges that Broker is a member of the following multiple listing service(s): ( Service(s) ). Broker agrees to file this listing with said Service(s) within forty-eight hours after Seller signs the same (excepting weekends, federal holidays and postal holidays). Seller acknowledges that the Service(s) is/are not a party to this Agreement and is/are not responsible for errors or omissions on the part of Seller or Broker. Seller agrees to indemnify Service(s) from and against any and all claims, liabilities, damages or losses arising out of or related to the listing and sale of Property. 6. Commission. A. Seller agrees to pay Broker at closing a commission (hereinafter Commission ) of percent (%) of the sales price of Property or $ in the event that during the term of this Agreement: 1. Broker procures a buyer ready, willing, and able to purchase Property at the price described above; or 2. Seller enters into a contract for the sale or exchange of Property with any buyer, whether through the efforts of Broker or any other person, including Seller. B. Broker shall share this Commission with a cooperating broker, if any, who procures the buyer of Property by paying such cooperating broker percent (%) of the sales price of Property OR $. Cooperating brokers are expressly intended to be thirdparty beneficiaries under this Agreement. C. In the event that Seller sells or contracts to sell Property to any buyer introduced to Property by Broker within days after the expiration of the Listing Period, then SelIer shall pay the commission referenced above to Broker at the closing of the sale or exchange of Property. Notwithstanding the above, in the event that Property is sold to the prospective buyer by or through another licensed broker with whom Seller has signed an exclusive right to sell listing agreement, then no commission shall be owed to Broker by virtue of this Agreement. The commission obligations set forth herein shall survive the termination of this Agreement. 7. Limits on Broker s Authority and Responsibility. Seller acknowledges and agrees that Broker: A. may show other properties to prospective buyers who are interested in Property; B. shall not be responsible to advise Seller on any matter including but not limited to the following: any matter which could have been revealed through a survey, title search or inspection of Property; the condition of Property, any portion thereof, or any item therein; building products and construction techniques; the necessity or cost of any repairs to Property; mold; hazardous or toxic materials or substances; termites and other wood destroying organisms; the tax or legal consequences of this transaction; the availability and cost of utilities or community amenities; the appraised or future value of Property; any condition(s) existing off Property which may affect Property; the terms, conditions and availability of financing; and the uses and zoning of Property whether permitted or proposed. Seller acknowledges that Brokers are not experts with respect to the above matters and that, if any of these matters or any other matters are of concern to them, they should seek independent expert advice relative thereto. Seller acknowledges that Broker shall not be responsible to monitor or supervise any portion of any construction or repairs to Property and that such tasks clearly fall outside the scope of real estate brokerage services; C. shall owe no duties to Seller nor have any authority to act on behalf of Seller other than what is set forth in this Agreement; D. may make all disclosures required by law; E. may disclose all information about Property to others; and F. shall, under no circumstances, have any liability greater than the amount of the real estate commission paid hereunder to Broker (excluding any commission amount paid to a cooperating real estate broker, if any). G. shall be held harmless from any and all claims, causes of action, or damages arising out of or relating to: 1. inaccurate and/or incomplete information provided by Broker to a prospective buyer; 2. earnest money handled by anyone other than Broker; or 3. any injury to persons on Property and/or loss of or damage to Property or anything contained therein. 8. Extension. If during the term of this Agreement, Seller and a prospective buyer enter into a real estate sales contract which is not consummated for any reason whatsoever, then the original expiration date of this Agreement shall be extended for the number of days that the Property was under contract. 9. Seller s Property Disclosure Statement and Official Georgia Wood Infestation Report. Within days of the date of this Agreement, Seller agrees to provide Broker with a current, fully executed Seller s Property Disclosure Statement. Additionally, within days of the date of this Agreement, Seller agrees to provide Broker with an Official Georgia Wood Infestation Report dated not more than 180 days prior to the date of this Agreement. Broker is hereby authorized to distribute the same to prospective buyers interested in Property. (continued)

20 136 Practical Real Estate Law EXHIBIT 6 3 Exclusive Seller Listing Agreement (continued) 10. Required State Law Disclosures. A. Broker agrees to keep confidential all information that Seller asks to be kept confidential by express request or instruction unless the Seller permits such disclosure by subsequent word or conduct or such disclosure is required by law. B. Broker may not knowingly give customers false information. C. In the event of a conflict between Broker s duty not to give customers false information and the duty to keep the confidences of Seller, the duty not to give customers false information shall prevail. D. Unless specified below, Broker has no other known agency relationships with other parties which would conflict with any interests of Seller (except that Broker may represent other buyers, sellers, landlords, and tenants in buying, selling or leasing property). 11. Disclosure of Potentially Fraudulent Activities. A. To help prevent fraud in real estate transactions, Seller does hereby give Broker permission to report any suspicious, unusual and/or potentially illegal or fraudulent activity (including but not limited to mortgage fraud) to: 1. Governmental officials, agencies and/or authorities and/or 2. Any mortgage lender, mortgage insurer, mortgage investor and/or title insurance company which could potentially be harmed if the activity was in fact fraudulent or illegal. B. Seller acknowledges that Broker does not have special expertise with respect to detecting fraud in real estate transactions. Therefore, Seller acknowledges that: 1. Activities which are fraudulent or illegal may be undetected by Broker and 2. Activities which are lawful and/or routine may be reported by Broker as being suspicious, unusual or potentially illegal or fraudulent. 12. Broker s Policy on Agency. Unless Broker indicates below that Broker is not offering a specific agency relationship, the types of agency relationships offered by Broker are: seller agency, buyer agency, designated agency, dual agency, landlord agency, and tenant agency. The agency relationship(s), if any, NOT offered by Broker is/are the following:. 13. Dual Agency Disclosure. [Applicable only if Broker s agency policy is to practice dual agency] If Seller and a prospective buyer are both being represented by the same Broker, Seller is aware that Broker is acting as a dual agent in this transaction and consents to the same. Seller has been advised that: A. In serving as a dual agent, Broker is representing two clients whose interests are or at times could be different or even adverse; B. Broker will disclose all adverse, material facts relevant to the transaction and actually known to the dual agent to all parties in the transaction except for information made confidential by request or instructions from either client which is not otherwise required to be disclosed by law; C. Seller does not have to consent to dual agency and, the consent of the Seller to dual agency has been given voluntarily and the Seller has read and understands the brokerage engagement agreement. D. Notwithstanding any provision to the contrary contained herein, Seller hereby directs Broker, while acting as a dual agent, to keep confidential and not reveal to the other party any information which could materially and adversely affect their negotiating position. E. Broker or Broker s affiliated licensees will timely disclose to each client the nature of any material relationship with other clients other than that incidental to the transaction. A material relationship shall mean any actually known personal, familiar, or business relationship between Broker and a client which would impair the ability of Broker to exercise fair and independent judgment relative to another client. The other party whom Broker may represent in the event of dual agency may or may not be identified at the time Seller enters into this Agreement. If any party is identified after the Agreement and has a material relationship with Broker, then Broker shall timely provide to Seller a disclosure of the nature of such relationship. 14. Designated Agency Disclosure. [Applicable only if Broker s agency policy is to practice designated agency] Seller does hereby consent to Broker acting in a designated agency capacity in transactions in which Broker is representing Seller and a prospective buyer. With designated agency, the Broker assigns one or more of its affiliated licensees exclusively to represent the Seller and one or more of its other affiliated licensees exclusively to represent the prospective buyer. 15. Notices. Except as otherwise provided herein, all notices required or permitted hereunder shall be in writing, signed by the party giving the notice and delivered either: A. in person; B. by an overnight delivery service, prepaid; C. by facsimile transmission (FAX) to Broker and Seller at their respective FAX telephone numbers, if any, identified on the signature page of this Agreement (provided that an original of the notice shall be promptly sent thereafter if so requested by the party receiving the same); or D. by the United States Postal Service, postage prepaid, registered or certified return receipt requested. The parties agree that a faxed signature of a party constitutes an original signature binding upon that party. Notices shall be deemed to be given as of the date and time they are actually received, except for Fax notices which shall be deemed to have been given and received as of the date and time they are transmitted provided that the sending FAX produces a written confirmation showing the correct date and time of (continued)

21 Contracts 137 EXHIBIT 6 3 Exclusive Seller Listing Agreement (continued) the transmission and the telephone number referenced herein to which the notice should have been sent. All notice requirements referenced herein shall be strictly construed. Any notice sent by FAX shall be sent to such other FAX number as the receiving party may from time to time specify by notice to the party sending the FAX. 16. Early Termination. Broker or Seller shall have the right to terminate this Agreement at any time by giving the other party written notice; however, such a termination shall not limit Broker s right to collect any commission earned or owing as of the date of termination or to which Broker is entitled to collect herein after the termination of this Agreement. It being expressly agreed that such rights shall survive the termination of this Agreement. 17. Governing Law. This Agreement may be signed in multiple counterparts and shall be governed by and interpreted pursuant to the laws of the State of Georgia. 18. Entire Agreement. This Agreement constitutes the sole and entire agreement between the parties. No representation, promise or inducement not included in this Agreement shall be binding upon any party hereto. This Agreement and the terms and conditions herein may not be amended, modified or waived except by the written agreement of Seller. The failure of the parties to adhere strictly to the terms and conditions of this Agreement shall not constitute a waiver of the right of the parties later to insist on such strict adherence. SPECIAL STIPULATIONS: The following Special Stipulations, if conflicting with any exhibit, addendum, or preceding paragraph, shall control: BY SIGNING THIS AGREEMENT, SELLER ACKNOWLEDGES THAT: (1) SELLER HAS READ ALL PROVISIONS AND DISCLOSURES MADE HEREIN; (2) SELLER UNDERSTANDS ALL SUCH PROVISIONS AND DISCLOSURES AND HAS ENTERED INTO THIS AGREEMENT VOLUNTARILY; AND (3) SELLER IS NOT SUBJECT TO A CURRENT LISTING AGREEMENT WITH ANY OTHER BROKER. RECEIPT OF A COPY OF THIS AGREEMENT IS HEREBY ACKNOWLEDGED BY SELLER. The above Agreement is hereby accepted, o clock.m., on the day of, 20. Broker MLS Office Code Brokerage Firm License Number Broker s Phone# & FAX# By: Broker or Broker s Affiliated Licensee Print or Type Name Agent s Georgia Real Estate License Number Seller s Signature Print or Type Name Seller s Signature Print or Type Name Phone# FAX# Address:

22 138 Practical Real Estate Law ready, willing, and able to purchase the real property at the price demanded by the seller earns the commission. Because open listings can result in a free-for-all, with a number of brokers and agents competing for the commission, most brokers or agents shy away from open listings. They would prefer to use energy and time on listings that increase their chances for a commission. Exclusive Listing Under an exclusive listing, an owner hires only one broker or agent to assist in the sale of the real property. The owner still reserves the right to sell the real property, and if the owner s efforts result in a sale, no commission is earned. Exclusive Right-to-Sell Listing Under an exclusive right-to-sell listing, an owner hires only one broker or agent to assist in selling the real property, and the owner agrees that if the real property is sold, even through the owner s efforts, a commission is earned. Brokers and agents prefer this type of listing, which assures a commission if the real property is sold during the listing period. Many brokers and agents participate in a multiple-listing service. A multiple-listing service is a cooperative of brokers who pool all their listings and make them available to all members of the service. By doing this, a seller s real property is made available to all brokers in the community, and the chances for a quick sale are greatly enhanced. A broker or an agent earns a real estate commission if the broker or agent produces a person who is ready, willing, and able to purchase the real property at the price and on the terms required by the seller in the listing agreement. The broker or agent must be the procuring cause of the sale. This means that the broker or agent must find a purchaser within the time agreed in the listing, and the purchaser s offer must meet the terms of the listing unless modifications are agreed to by the real property owner. The term able to buy means that the purchaser has the financial ability as well as the legal and mental capacity to enter into an enforceable contract to purchase the real property. The broker or agent earns the commission once a purchaser who meets the terms of the seller s offer to sell the property is presented to the seller. The commission is earned even if the seller refuses the purchaser s offer, or if the seller and purchaser go to contract but the contract does not close. Although the commission is earned at the time the purchaser and seller contract, it typically is not paid until the contract closes and the purchase money is received by the seller. The real estate commission typically is a percentage of the sales price and is paid by the seller. The real estate contract usually outlines the commission rights of a broker or agent, and the broker or agent is made a party to the contract for the purpose of enforcing the commission rights. Some states provide for a broker to have a lien on the property being sold in the event the broker s commission is not paid. Generally, real estate broker lien laws apply only to the sale of commercial property and not to the sale of condominiums and homes. Usually a broker, in order to perfect a lien for a commission, must file a written notice of lien upon the property providing information concerning the amount of the unpaid commission and other factual information regarding the claim of lien. Once the lien is recorded, it becomes a monetary charge against the property and cannot be removed until either payment of the commission or a settlement with the broker. The broker has the right to require the liened property to be sold to pay the commission.

23 Contracts 139 Real Estate Brokers and the Internet Real estate brokers have embraced the Internet for purposes of advertising properties for sale. Using digital photography, a broker is able to provide to a prospective purchaser with a virtual tour of any home listed with the broker for sale. A prospective purchaser, using the Internet, can review both the exterior and the interior of a number of homes in a very short period of time. Homes that appear attractive on the Internet can then be viewed in person at a later time. Recently there has been a growth of low-cost Internet realtors who operate entire brokerage companies on the Internet. These Internet brokers may acquire listings for placement on the Internet or may contract with other, more traditional brokers for listings with an agreement that, if the home sells through the Internet broker, the traditional broker will receive a share of the commission. While most buyers use online listings essentially for background information, using the Internet to facilitate the sale of a property is a growth industry, and as both buyers and sellers become more familiar with its use, it may become a major method of selling real property. TAXATION AND THE SALE OF REAL PROPERTY Federal Income Tax The sale of real property may result in the owner having a gain for purposes of taxation and owing an income tax to both the federal and state governments based upon the proceeds received from the sale. Although real estate paralegals are generally not involved in calculating an owner s taxable gain on the sale of the property or in preparing the owner s tax return, knowledge regarding the tax consequences of a sale is important. Generally, the tax consequences of the sale of real property depend to a large part on the use of the property, whether it was used as a home for the owner or as commercial income-producing property. Federal Income Tax on the Sale of a Home The sale of a home can create federal and state income tax consequences. The Internal Revenue Code generally defines a home as a house, houseboat, mobile home, cooperative apartment, or condominium. It is necessary for the owner to have resided in the home at the time of the sale for at least two of the past five years prior to the date of the sale. If an owner has more than one home, such as a vacation home, the owner can only treat one home under the home sale taxation rules. Generally, it would be the home where the owner lives most of the time. The formula for computing a taxable gain on the sale of a home is the selling price, less selling expenses, less adjusted basis of the home. The amount left over would be the owner s taxable gain. The selling price is defined as the total amount the owner receives from the sale of the home. It includes all money, notes, mortgages, and other debts assumed by the buyer as part of the sale. To arrive at the amount that would be a taxable gain from the sale of a home, an owner may subtract selling expenses from the selling price. The selling expenses would include commissions for real estate brokers, any advertising fees, legal fees, and loan charges paid by the owner, such as loan placement fees or points. In addition to subtracting selling expenses from the selling price, the owner may also subtract the adjusted basis of the home from the selling price.

24 140 Practical Real Estate Law An owner s basis for a home is his or her purchase price for the home. The purchase price includes not only the actual contract price paid for the home, but also any settlement fees or closing costs. For example, if the purchaser had to pay an attorney, surveyor, and title insurance company in order to buy the home, the cost of all of those items could be added to the purchase price to determine the basis for the property. This basis may also be adjusted by other factors. For example, the basis may be increased by the cost of any additions or improvements made to the home that have a useful life of more than one year. In addition, any amounts net of insurance proceeds an owner may have spent after a casualty to restore damaged property may be added to the basis. The amount left over after subtracting selling expenses and adjusted basis from the selling price is the owner s taxable gain from the sale. If the amount left over is a loss, the loss may not be deducted on an owner s income tax return for the sale of a home. If the amount is a gain, the amount may be taxed at capital gain rates. Under current tax laws, a property owner may exclude up to $250,000 of gain from the sale of a home, or $500,000 if the owner files a joint return with his or her spouse. Exhibit 6 4 shows how gain would be computed on the sale of a home. Federal Income Tax on the Sale of Commercial Property The sale of commercial property also has income tax consequences. The method of arriving at the taxable gain is similar to that of the sale of a home. That is, it is selling price, less selling expenses, less adjusted basis. The amount left over, if a positive amount, is a taxable gain. Unlike the sale of a home, an owner of commercial property may subtract from his or her income any losses received from the sale of a commercial property. The main difference between the taxable consequences from the sale of a home and that of commercial property is the requirement that an owner of commercial property deduct depreciation from the basis in order to arrive at an adjusted basis of the property. Depreciation is a tax method that permits a property owner to recover the cost of incomeproducing property through yearly deductions. By depreciating property, the property owner may deduct some of his or her costs from the acquisition of the property on the tax return for each year of ownership. Depreciation is only permitted on property that is used for rental or income-producing purposes. Only the value of improvements can EXHIBIT 6 4 Example: Computation of Taxable Gain for Sale of a Home Example: Computation of Taxable Gain for the Sale of a Home Contract Sales Price $200, Less Brokerage Commission (6%) $ 12, Less Closing Costs Attributed to Seller $ 2, Net Selling Price $186, Less Owner s Adjusted Basis $135, (calculated below) Taxable Gain $ 51, Calculation of Owner s Basis: Owner s Purchase Price $125, Plus Legal Fees, Title Insurance, and Survey Costs in Connection with the Purchase $ 5, Plus Capital Improvements: New Roof with a Life of 10 years $ 5, Adjusted Basis $135, Delmar/Cengage Learning

25 Contracts 141 be depreciated, not the land itself. There are a number of depreciation systems available to a property owner. Depreciation is generally permitted over a period of time, such as 20 years. For example, an owner of an apartment project is depreciating the property over a period of 20 years with a straight-line depreciation method. The owner would be permitted to depreciate 5 percent of the cost of the improvements for each year of ownership. If the improvements were purchased for $1,000,000, the apartment owner could subtract 5 percent (1/20th) of the cost of these improvements, or $50,000, from the owner s income on his or her income tax return each year. The depreciation deduction of $50,000, however, does reduce the owner s basis in the property by $50,000. For example, if the apartment owner has owned the apartments for five years, the adjusted basis of the property would be $1,000,000 less $250,000 accrued depreciation, or $750,000. It would be this adjusted basis that would be subtracted from a selling price for the apartments in order to arrive at a taxable gain. It is easy to see that in many cases, although the property owner is getting a tax deduction for each year of ownership, a portion of these taxes are recaptured at the time of sale through an increase in the taxable gain due to the adjustment in basis by the accrued depreciation. ETHICS: Commingling of Client Funds A paralegal is employed by a law firm. One of the firm s clients is purchasing a home. The attorney, with the paralegal s help, has been requested to prepare the contract. The contract requires a down payment of $5,000 to be made at the time the contract is signed. The client signs the contract and gives to the paralegal a check with the paralegal shown as the payee for the down payment. The intent is that the check would be endorsed by the paralegal into the firm s escrow account and that a check would be issued to the seller as an earnest money down payment. The paralegal receives the check on Friday, noticing that it is made out to him. The paralegal endorses the check and places it into his personal checking account, fully intending on Monday to write a check from the account to the firm s escrow account. Are the acceptance of the check made out to the paralegal as payee and the depositing of the check into his personal account breaches of ethics? One of the main ethical requirements for the practice of law is to separate client funds from personal funds. An attorney who commingles client funds with personal funds can face suspension or even loss of license to practice law. A paralegal, likewise, should never, under any circumstances, commingle funds received by a client with his or her own funds. A paralegal must always account for all monies or properties entrusted into his or her possession, and such money or property should be kept separate and apart from his or her own personal account. Acceptance of a check made payable to the paralegal in this case is a breach of ethics. In addition, the deposit of the check into the paralegal s own personal account, even though it may have been an innocent mistake on the paralegal s part, is also a breach of ethics. SUMMARY A contract is an important legal document in the transfer of ownership to real property. It is the legal glue that binds seller and purchaser together. Real estate contracts, in order to be enforceable, require that both the buyer and seller have legal capacity to contract, that there are both an offer and a mutual acceptance of that offer for the purchase and sale of the property, that consideration is given, that the contract is for a lawful purpose, and that the terms of the contract are written. All these requirements are necessary for the contract to be enforceable by either seller or purchaser. If any one of the elements is missing, the contract will be unenforceable. If either a purchaser or seller defaults on the obligations under a contract, then the injured party may recover certain relief from the defaulting party. This relief may be in the form of specific performance that requires the defaulting party to perform the contract as agreed to, or it may be in the form of

26 142 Practical Real Estate Law money damages or recovery of expenses. In addition, many real estate contracts contain liquidated damage provisions that specify that a certain sum of money will be paid in the event either the seller or the buyer defaults. Although all real estate contracts have buyers and sellers as parties, many are often procured by real estate agents or brokers, and these brokers become a party to the contract. Real estate brokers may represent both purchasers and sellers in connection with a contract and generally perform services pursuant to a listing or agency agreement. These agreements may be either exclusive or nonexclusive. Although most real estate contracts contain basic information regarding the purchase price, the description of the real property, and the date for the transfer of title, they also address numerous other issues of importance to the purchaser and seller. A full discussion of real estate contracts, including sample contract clauses and complete sample contracts, follows in Chapter 7. HELPFUL WEBSITES The National Association of Realtors Web sites contain interesting information for the prospective homebuyer or seller. The sites contain information about the value of real estate brokers and how to work with a broker to buy or sell a home. The sites also contain some excellent calculators on such topics as home affordability, rent versus buy, how much mortgage a person can afford, and home value projections. See and agent consideration contract counteroffer express authority fiduciary KEY TERMS implied authority liquidated damages listing agreement offer offeree offeror power of attorney principal rescission specific performance REVIEW QUESTIONS 1. What are the requirements of a valid real estate contract? 2. What is the statute of frauds, and what effect does it have on the validity of contracts? 3. Explain the difference between an exclusive listing and an exclusive right-to-sell listing. 4. Explain the three remedies available for the breach of a real estate contract. 5. Under what circumstances would a liquidated damage provision be unenforceable? 6. Why must contracts entered into with partnerships, executors, and trustees be carefully examined? 7. When is a real estate broker entitled to a commission? 8. Under what circumstances can a power of attorney be revoked? 9. Why is the contract of a mental incompetent unenforceable? 10. If a seller defaults on a contract, what is the most desirable remedy for the purchaser? CASE PROBLEMS 1. Seller and purchaser enter into a contract for the sale and purchase of real property for a price of $175,000. The property has a value of $190,000. The purchaser fails to perform. What is the amount of money damages to be awarded to the seller? What is the amount of money damages owed to the purchaser if the seller fails to perform? 2. Susan Seller has contracted to sell her home to Bob Buyer. The sale is for $150,000 cash with no conditions except that title be marketable and the sale must close on July 20 at Susan s attorney s office. On July 18, Bob calls Susan and informs her that he had planned to buy the property by a loan assumption (i.e., he had assumed that his rich uncle would lend him the money). The rich uncle, however, has refused, and Bob does not have the cash to go ahead with the deal. Bob further mentions that he owns some other real estate worth about $500,000 and perhaps he could sell or get a loan against this real estate and have enough cash to go ahead

27 Contracts 143 with the deal sometime in the future. Bob asks Susan if she will extend the closing for a month, until August 20. Susan says no and further informs Bob that she is ready, willing, and able to perform on July 20. On July 20, no closing takes place. On July 21, Susan sues Bob for breach of contract. Please answer the following questions with full discussion: (a) Has Bob breached the contract? (b) Does Susan have the right to sue Bob on July 21? (c) If Susan can sue Bob on July 21, what remedies are available to Susan for Bob s breach of contract? 3. You are a paralegal with a law firm. One of the firm s clients, a corporation, has entered into a contract to purchase property from Dwight Sneed. The client, after entering into the contract, has discovered that Dwight Sneed is 16 years old. The client is worried that Dwight Sneed s promises under the contract are unenforceable, and to avoid problems, the client wants to get out of the contract. Is the contract enforceable by Dwight Sneed against the corporate client? 4. You are assisting in the negotiation and preparation of a contract for the purchase and sale of real property. The seller of the property is a partnership composed of two partners. The partners are XYZ Realty Company, also a Texas corporation, and ABC Realty Company, also a Texas corporation. You have been asked to obtain proper documentation to demonstrate that the seller has the authority to enter into the contract and will be bound by the terms of the contract. What documentation will you need? 5. Alice Skinflint has retained Honest Broker to assist her in selling her vacation home. Skinflint and Broker enter into a listing agreement wherein the property is to be offered for sale for $300,000 cash. The listing is to expire on May 1. On April 25, Honest Broker receives an offer to purchase Skinflint s vacation home from I. M. Rich. The offer is for $300,000 cash, and Mr. Rich is a multimillionaire. Honest Broker calls Alice Skinflint and tells her that he has a purchaser for her vacation home and that he would like to meet with her before May 1 to have a contract signed. Alice Skinflint informs Honest Broker that she is going out of town for a vacation and will not be back until May 5 and that she cannot enter into a contract before the expiration of the listing on May 1. Alice Skinflint returns from her vacation on May 6, calls I. M. Rich, and signs a contract with I. M. Rich to sell the vacation home for $300,000. Honest Broker requests that Skinflint pay him a 6 percent commission on the sale. Skinflint refuses, saying that the property had not been sold before the expiration of the listing on May 1. What are the chances of Honest Broker recovering the commission from Skinflint? 6. Sam Seller offers to sell his home to Pat Purchaser for the sum of $160,000. Pat Purchaser responds that she will only purchase the home for $150,000. Sam Seller rejects Pat Purchaser s offer to purchase for $150,000. Pat Purchaser then offers $160,000 for Sam Seller s home. Is there a contract between Sam Seller and Pat Purchaser for the sale and purchase of the home at $160,000? PRACTICAL ASSIGNMENTS 1. Research your state s statute of frauds law and prepare a brief memorandum summarizing what contracts are required to be in writing in your state. 2. Research your state s law concerning liquidated damages. What is required in your state for a liquidated damage provision in a real estate contract to be enforceable? Prepare a short memorandum regarding the conclusions of your research. 3. Research your state s law regarding powers of attorney and their use in the transfer of ownership to real property. Prepare a brief memorandum outlining the requirements for a power of attorney authorizing a person to sign a deed and discuss whether your state law requires Student StudyWare CD-ROM Interactive Student CD in the book includes additional quizzing, case studies, and key terms flashcards. the power of attorney to be recorded with the deed. Obtain from your instructor or an attorney a power of attorney form used in your state and compare it to the one shown as Exhibit 6 2. How is it similar, and how is it different? 4. Can a real estate broker act as a dual agent in your state? Please research the law carefully and prepare a short memorandum outlining what is required, in the form of disclosure or otherwise, for a real estate broker to represent both the seller and purchaser. This information is probably codified as part of the real estate brokerage statutes. Make a copy of the appropriate statute and add it as an appendix to your memorandum. Online Companion For additional resources, please go to