Contracts govern the real estate transaction.

Transcription

1 1 Contracts Wis. Stats. 240, , REEB Chapter Overview This chapter reviews the basic rules and concepts for contract construction, drafting, and interpretation. Contracts, including contracts for agency between brokers and their clients and contracts for property transfers between sellers and buyers or lessors and lessees, are the foundation of real estate practice. Important Terminology acceptance agreement binding acceptance capacity contract consideration contingency conveyance digital signature electronic signature enforceable homestead meeting of the minds rescission unenforceable valid void voidable Contracts govern the real estate transaction. Whether it is a contract between a broker and a client or a contract between a buyer and seller, without contracts, a real estate transaction could not occur. Parties rely on contracts to control their relationship. Contracts set the schedules for transactions and define parties rights and responsibilities throughout the process. THE LAW OF CONVEYANCE A conveyance is a written document evidencing a real estate transaction. The law of conveyance applies to leases greater than one year and transactions where an interest in land is created, alienated, mortgaged, or assigned. The law of conveyance does not apply to interests in land transferred by act or operation of law, by will, by non-probate transfer on death, or for leases of one year or less. Written documents that parties use in a real estate transaction must meet the requirements of Wisconsin s Law of Conveyances to be valid. If the transaction is subject to the law of conveyances, the conveyance must be in writing. The document may be a Wisconsin approved offer to purchase, a lease drafted by an attorney, or some other written document drafted by the parties. The conveyance must identify the parties to the transaction. In an offer to purchase, the parties are the buyer and the seller. In a lease, the parties are the rental property owner, who is the lessor, and the tenant, who is the lessee. The conveyance must identify the land. The law does not require that the conveyance contain a legal description but a legal description might be necessary if that is the only way to identify the property with certainty. For most residential transactions, identifying the property means including a street address but for new developments or undeveloped property, a legal description or tax identification number may be the only way to identify it. The conveyance must identify the interest in the land that one party is conveying to another. It must be signed by the parties and, if the conveyance is transferring an interest in a homestead, both spouses must sign it. A homestead is a married couple s dwelling and includes at least one-fourth of an acre of land surrounding the dwelling but not more than 40 acres. Lastly the conveyance must be delivered. 1

2 REAL ESTATE broker Wis. Stats Formal requisites. (1) Transactions under s (1) shall not be valid unless evidenced by a conveyance that satisfies all of the following: (a) Identifies the parties; and (b) Identifies the land; and (c) Identifies the interest conveyed, and any material term, condition, reservation, exception or contingency upon which the interest is to arise, continue or be extinguished, limited or encumbered; and (d) Is signed by or on behalf of each of the grantors; and (e) Is signed by or on behalf of all parties, if a lease or contract to convey; and (f) Is signed, or joined in by separate conveyance, by or on behalf of each spouse, if the conveyance alienates any interest of a married person in a homestead under s (7) except conveyances between spouses, but on a purchase money mortgage pledging that property as security only the purchaser need sign the mortgage; and (g) Is delivered. Except under s , a conveyance delivered upon a parol limitation or condition shall be subject thereto only if the issue arises in an action or proceeding commenced within 5 years following the date of such conditional delivery; however, when death or survival of a grantor is made such a limiting or conditioning circumstance, the conveyance shall be subject thereto only if the issue arises in an action or proceeding commenced within such 5-year period and commenced prior to such death. ELEMENTS OF A CONTRACT What is the difference between a contract and an agreement? Parties can have an agreement to act or perform according to an understanding between the parties but the agreement lacks some essential contractual element that would prevent a court from enforcing it against the parties so it is not considered legally binding. Parties can agree to duties and obligations and not have the agreement constitute an enforceable contract. A friend could agree to meet another friend for coffee. The parties have an agreement not a contract. If one of the friends decides not to meet the other, there is no legal method to force the other friend to attend the meeting. A contract is a legally binding agreement between parties that creates obligations that a court could enforce. It is more than just an agreement to behave in certain way. When an agreement contains all of the elements to a contract and a court could enforce it against the parties, it becomes a contract. One friend agrees to take a friend out for coffee once a week in exchange for weekly piano lessons. These friends now have a contract instead of just an agreement. If either party fails to perform as agreed to, the other friend could ask a court to enforce the contract. It does not matter, in this case, if the contract was oral or if they had an actual written contract, the exchange of promises created obligations on each party and one party cannot unilaterally decide not to follow through as agreed. 2

3 Contracts - 1 REEB Agreements to be in writing. A licensee shall put in writing all listing contracts, guaranteed sales agreements, buyer agency agreements, offers to purchase, property management agreements, option contracts, financial obligations and any other commitments regarding transactions, expressing the exact agreement of the parties unless the writing is completed by the parties or their attorneys or the writing is outside the scope of the licensee s authority under ch. REEB 16. Courts can enforce both written and oral contracts. The law of conveyances requires real estate contracts be in writing. A seller could hire a listing broker with a verbal agreement to pay the listing broker a commission when the house sells. If the seller did not pay, the listing broker would have no legal remedy. A court would not enforce an oral listing contract and the listing broker is violating administrative code provisions and ethical obligations that require real estate contracts to be in writing. Wis. Stats Real estate agency contracts. (1) Every contract to pay a commission to a real estate agent or broker or to any other person for selling or buying real estate shall be void unless such contract or note or memorandum thereof describes that real estate; expresses the price for which the same may be sold or purchased, the commission to be paid and the period during which the agent or broker shall procure a buyer or seller; is in writing; and is subscribed by the person agreeing to pay such commission, except that a contract to pay a commission to a person for locating a type of property need not describe the property. A contract between parties begins with an offer from one party and acceptance by the other party. The contract could be an offer to purchase, a listing contract, or an offer to lease a property. A contract must have other elements for it to bind the parties to behave according to the terms of the contract. The parties must have the capacity to contract. Capacity refers to a party s legal competence to enter into the contractual relationship. A party is legally competent and, therefore has the capacity to contract, if the party is of legal age to contract, which is 18 years or older and is of sound mind, which means having the ability to understand the consequence of the contractual relationship. Parties to a contract must have a meeting of the minds, which means agreement on the terms, conditions, and subject matter of the contract. Parties may begin the contractual process with a meeting of the minds as may be the case with a listing contract. The seller wants to list the house, is prepared to pay a commission when it sells, and wants the broker to use the broker s standard marketing process. The listing broker is willing to list the house in exchange for the commission and will use the broker s standard marketing process. In the case of an offer to purchase, a meeting of the minds may only occur after negotiation. To goal of negotiation is to arrive at a meeting of the minds. A contract must have consideration, which is something of value that a party gives in exchange for a promise. A contract may involve good consideration or valuable consideration or both. Valuable consideration is a thing of monetary value given in exchange under a contract. Good consideration is a thing of value that does not have a measurable monetary value such as a promise. Finally, a contract must be for a legal purpose. 3

4 REAL ESTATE broker PARTIES TO A CONTRACT A contract can only bind the parties to the contract, which means that only the parties who made the contract can be forced to perform according to its terms and that parties to a contract cannot use it to bind third parties to the contractual relationship or obligations. Parties to Real Estate Contracts Listing contract: Listing broker and the seller. Buyer agency agreement: Buyer s broker and the buyer. Offer to purchase: Buyer and the seller. Lease: Property owner and tenant. Option to purchase: Optionor and optionee. The optionor is the person granting the option and agreeing to sell according the option terms and the optionee is the person purchasing the option and the right to purchase the property for the set period of time. Property management: Property owner and the property manager. Authority to Sign Contracts Brokers may have transactions where the actual parties to a contract are unavailable or unable to sign the contract. Much in the same way a seller or a buyer, as a principal, hires a broker to be an agent in the real estate transaction, a party can give another person the authority to execute contracts, including real estate contracts on that party s behalf. A person acting on behalf of party in a real estate transaction must have the authority to do so. The authority can be voluntarily granted as in the case where a person designates another as the person s agent using a power of attorney document or a trustee is acting on behalf of a trust. A court can grant a person authority to act on behalf of another as in a guardianship or a personal representative of an estate. A couple needs to sell their home because the wife is going to be a visiting professor at a Swedish university. Before they can sell the home, the wife must go to Sweden to begin her preparation for the term. With current technology, the couple could solve the problem of her absence by using electronic documents, but they may find a buyer who does not want to use of electronic documents. To permit her husband to sign any real estate documents on her behalf, the wife could grant her husband a limited power of attorney to sign transaction documents for her. If they find a buyer, the husband signs his own name to the offer and then signs his name again noting that he is signing as an agent for his wife. He does not sign her name. An older man is experiencing declining cognitive ability and can no longer live at home. He does not have a power of attorney appointing anyone to manage his affairs so when it becomes necessary to sell the man s home, his son must go to court and ask the court to appoint a guardian for his father. The court appoints the son as guardian for his father. The son now has the authority to list the father s house for sale and sign any documents related to the transaction. The son signs his own name, not his father s name. Brokers are not responsible for determining the validity of a party s grant of authority or the extent of the authority but brokers should instruct parties to provide a copy of the document that permits the party to sign on behalf of another. Real estate contracts can involve multiple parties such as when listing a house for a married couple, negotiating an offer for a vacation property owned by four siblings, or locating retail spaces for a company owned by three, equal partners. Parties may also be entities such as corporations, nonprofits, or limited liability partnerships. When working with multiple parties, brokers need to figure out whether one person has signing authority for the multiple parties, whether all parties must sign a document, or who has the authority to sign for a corporation or partnership. 4

5 Contracts - 1 Wis. Stats Agents, officers and guardians. (1m) A conveyance signed by one purporting to act as agent for another shall be ineffective as against the purported principal unless such agent was expressly authorized, and unless the authorizing principal is identified as such in the conveyance or in the form of signature or acknowledgment. The burden of proving the authority of any such agent shall be upon the person asserting the same. (2) Unless a different authorization is recorded under sub. (3) or is contained in the corporation s articles of incorporation, any one officer of a private corporation is authorized to sign conveyances in the corporate name. The absence of a corporate seal shall not invalidate any corporate conveyance. Public corporations shall authorize and execute conveyances as provided by law. (3m) A nonprofit association, as defined in s (2), may authorize a person to execute conveyances of estates or interests in real property by executing and filing a statement of authority under s CREATING BINDING CONTRACTS To create a contract that is enforceable, parties must complete steps to bind other parties to the contract. For example, a buyer drafts an offer and delivers it to a seller. The seller needs to accept the contract and deliver it back to the buyer before the offer turns into an enforceable contract. The contract must be properly signed by the parties and delivered according to the terms of the offer. Parties must complete events by the deadlines provided in the offer or they will not bind the other party to a contract. If a seller signs and delivers an offer to purchase back to a buyer but fails to do so by the deadline for binding acceptance in the offer, then the parties do not have a contract for sale. Signing the Contract The parties to a contract must sign it for the contract to have any effect. Without signatures, no party is bound by the terms or entitled to the rights under the contract. A signature is a person s name or mark made by the person or at the direction of that person. Signing a contract is evidence of intent to agree to its terms. A digital signature is a unique, digital code that attaches to an electronically sent message or document that identifies the sender of the document. For example, when a department store sends an advertisement to a customer by , that advertisement has a digital signature identifying the sender. A digital signature is usually an encrypted code that contains information identifying the sender. An electronic signature is a symbol, sound, or process that a person attaches to a document with the intent that it serve as the person s signature. An electronic signature can be the person s typed name, a scanned image of a handwritten signature, a personal identification number used to transmit documents, or clicking an acceptance button on a particular website. An electronic signature is not encrypted and might not identify the true sender of a document. Acceptance and Binding Acceptance Acceptance and binding acceptance are events that change the status of a contract and the parties rights and obligations under the contract. The Wisconsin offers to purchase define acceptance as when all Buyers and Sellers have signed one copy of the Offer, or separate but identical copies of the Offer. Binding acceptance is when a copy of the accepted Offer is delivered to the Buyer on or before the buyer s deadline for binding acceptance. Even after the seller accepts an offer, it is still not a binding contract on either party until it is delivered back to the buyer according to the terms of the offer. The reason that achieving binding acceptance is important is because a party can withdraw an offer at any time prior to binding acceptance. Once parties have binding acceptance, the offer 5

6 REAL ESTATE broker to purchase becomes a contract for sale. It changes from being a suggestion of terms by which the buyer might acquire the seller s property to a binding contract under which both parties have rights and obligations that a court can enforce. A buyer writes an offer on a property, signs it, and delivers it to the listing broker. The listing broker takes it to the seller, who signs it, and makes it an accepted offer. The listing broker takes the accepted offer and drives back to the office where the broker intends to fax it to the buyer according to the buyer s delivery terms. Before the broker gets back to the office, the buyer calls and withdraws. The parties do not have a contract and the seller cannot do anything to force the buyer to purchase the property. A buyer writes an offer on a property, signs its, and delivers it to the listing broker. The listing broker takes it to the seller, who signs it, and makes it an accepted offer. The listing broker takes the accepted offer, drives back to the office, and faxes it to the buyer according to the buyer s delivery terms. The offer to purchase is now a binding contract for sale and both the seller and the buyer have rights and obligations that a court could enforce. Time is of the Essence and Deadlines If a contract provision is of the essence, it means that it is of such importance that if the responsible party does not meet it, the party will be in breach. The Wisconsin offers to purchase allow buyers and sellers to negotiate whether time is of the essence as to dates and deadlines. This means that a party can choose the dates and deadlines that are of such importance that if the responsible party does not meet it, the party is in breach of the offer to purchase. The default is that time is of the essence to all dates and deadlines unless the parties choose otherwise. A party can make time of the essence applicable to some, none, or all of the dates and deadlines in a contract. If time is not of the essence, then performance must within a reasonable time. Reasonable time is not defined and in the event of a dispute, it would be up to a court to decide whether a party performed within a reasonable time. A buyer writes an offer that includes time is of the essence to all dates and deadlines except delivery of earnest money. The buyer s offer states that the buyer will deliver earnest money within 7 days of acceptance. The buyer hopes to be able to deliver earnest money within 7 days of acceptance but if a check the buyer is expecting is late, the buyer will not be able to deliver it by the deadline. A seller accepts the buyer s offer on July 1, which means that the buyer s deadline for delivering the earnest money is July 8. July 8 is a Friday and the buyer does not deliver the earnest money. The seller decides to wait until Monday, July 11 before contacting the buyer about the missed deadline. The seller contacts the buyer on Monday, July 11 and the buyer tells the seller that the buyer will not have the earnest money until Friday, July 15. The seller thinks this unreasonable, that the buyer breached the contract, and delivers a notice to the buyer that the seller is voiding the contract because the buyer is in breach. The buyer ignores the seller s notice and delivers the money to the listing broker on July 15. If the seller accepts the earnest money at this time, the contract is probably still valid. If the seller rejects the money and the buyer files a lawsuit to enforce the contract, would a court think that the buyer performed within a reasonable period of time according to the terms of the contract when time is not of the essence as to dates and deadlines? 6

7 Contracts - 1 Delivery As real estate licensees know, delivery in terms of a real estate transaction means something more than just delivering an item or a document to a person. Much like acceptance and binding acceptance, delivery is something that a party to a contract achieves by performing actions dictated by the contract. Achieving delivery correctly is important because it triggers additional rights and obligations under the contract such as starting deadlines or preventing a party from withdrawing. When a party drafts a contract, the party chooses the form or forms of delivery the party wants to use to communicate and send documents related to the transaction. Most of the Wisconsin offers permit a buyer to choose from personal, fax, commercial delivery, U.S. Mail, or delivery. A buyer can choose one or more forms of delivery by which a buyer is willing to receive documents and notices related to the contract. Broker Practice Tip Broker employers should have agents print out fax confirmations and save receipts for both U.S. Mail and commercial deliveries showing when they send documents. Keep them with the client file in case there is ever a dispute about when the party achieved delivery for dates and deadlines. Fax all the pages of a document and when a document is two-sided, remember to fax both sides. When does delivery occur? Unlike with fax, personal, and mail delivery, deciding when something is delivered by is more of an open question. Generally, people agree that when the leaves the server, delivery occurs but this could be a matter of dispute between parties. Delivery delivery is the newest form of delivery for buyers and sellers to choose when conducting a real estate transaction. Parties can use to deliver documents related to the transaction. Depending on the nature of the transaction, a party may have to do more than just checking the optional provision box in front of the delivery option for delivery to be effective. Consumers need to comply with two sources of law: 1. E-Sign, which is the federal law addressing electronic commerce and requiring consumer electronic consent; and 2. E-Commerce, which is the Wisconsin law addressing electronic commerce. Parties need to comply with both laws in consumer transactions where the property or sale proceeds will be used for personal, family, or household purposes. The laws permit parties to use electronic versions of paperwork but only if consumers meet the legal requirements for electronic notices and disclosures. The purpose of the laws is to protect consumers in residential transactions. To comply with the laws, a consumer must be able to receive electronic consent that includes federally mandated language advising of the consumer s right to choose to receive electronic versions of documents that are otherwise required to be in writing. Consumers should be able to receive s, open attachments, receive required federal disclosures, agree to and confirm system requirements, provide addresses, and return consent to electronic documents electronically. 7

8 REAL ESTATE broker Broker Practice Tip Two steps for every contract: A party must consent to use , must provide consent electronically, and the party must include as form of delivery in the contract. A consumer must provide electronic consent electronically. A scanned or faxed hardcopy of a consumer s signature is not electronic consent. The consent must make the entire trip, from agent, to consumer, and back again electronically. If a consumer cannot provide electronic consent, the consumer cannot use as a form of delivery. The law is to protect consumers. Broker-to-broker electronic consent is not necessary. A consumer must provide electronic consent regardless of the address used in the delivery section of the document. Lines of the WB-11 state that [E]ach consumer providing an address below has first consented electronically to the use of electronic documents, delivery and electronic signatures in the transaction, as required by federal law. The WRA s Addendum D incorporates electronic delivery into a contract that does not already provide it. It is not electronic consent. A broker does not need to use Addendum D if the document already contains as an optional form of delivery. A broker needs to use Addendum D if a consumer wants to include delivery in a listing contract, a buyer agency agreement, or an offer that does not provide for delivery. A consumer must provide electronic consent before a broker checks the delivery box and includes an address. By checking the box and providing an address, the party is affirmatively asserting that the party has already provided proper electronic consent. It is incompetent practice to affirm receipt of electronic consent if a party has not provided it. A listing broker does not have to ask for proof of electronic consent from a cooperating broker. If a cooperating broker submits an offer that includes as a form of delivery, the broker can ask for proof of electronic consent, and might be wise to do so if the broker has any reason to doubt that the buyer provided it, but the broker does not have to request proof. For more resources on delivery, go to Fax When a party consents to fax as a form of delivery, the party needs to include a fax number in the contract, whether that is an agency agreement, an offer, or some other document. As with the other forms of delivery, to choose fax as a form of delivery, a party marks the optional provisions box by that choice. Fax delivery occurs when a party sends the document, not when the other party receives it. Personal Personal delivery is the default method of delivery in the Wisconsin offers to purchase. A party does not have to choose anything to make it a part of the document. If a party does not want personal delivery to be an option, the party strikes it from the contract. Personal delivery occurs when the recipient has the document in hand. Commercial Delivery or U.S. Mail Like with fax delivery, when a party chooses delivery by commercial delivery or U.S. Mail, delivery occurs when the document is sent as long as the sender pre-pays the fees or charges them to an account. A party chooses commercial delivery or U.S. Mail by checking the optional provision box in front of the choice. 8

9 Contracts - 1 VALIDITY AND STATUS OF CONTRACTS Brokers must make sure they and their agents draft valid contracts. A court cannot enforce contract that is not valid. Valid real estate contracts contain all the essential elements and are in writing. The status of contracts refers to whether a contract is enforceable, unenforceable, void, or voidable. An enforceable contract is one that a party could take to a court and the court could craft a remedy that would force the parties to perform according to the terms of the contract. An unenforceable contract is one that if brought before a court, the court could not craft a remedy to force the parties to perform according to the terms of the contract. Poor or ambiguous drafting can render a contract unenforceable. If a party takes a contract to court but it is drafted in such way that the court could not determine one or both of the parties intentions, the court will not be able to create a remedy to enforce the terms of the contract. An example of this could be a poorly drafted contingency that required a seller to repair something but did not include any standards or deadlines for the repairs. Drafting mistakes can also lead to an unenforceable contract. Reviewing contracts for proper drafting is an important role for all brokers and brokers working with newly licensed agents will want to pay extra attention because newly licensed agents will lack the experience to see when their drafting is vague or ambiguous. A buyer drafts an offer to purchase for a seller s property but uses an incorrect street address that identifies the house next door. The seller accepts the offer and the parties are just waiting to close. The seller decides not to sell. A buyer could not ask a court to enforce the buyer s offer. A court may be able to come up with a remedy for the parties other than enforcing the contact. The mistake with the address rendered it unenforceable. A contract can also be void or voidable. A void contract no legal effect. A contract may be void because it is technically defective, illegal, or against public policy. An example of a void contract is one without a party s signature. The defect of the missing signature prevents a contract from existing. A tenant and a rental property owner agree to an unusual, verbal lease agreement where the tenant pays the $600 monthly rent with an amount of marijuana equal $600.* Because the lease is less than one year, it does not have to in writing to comply with the law of conveyances. If the tenant is unable to pay rent for a particular month, the property owner cannot go to court to try to enforce the terms of the contract because the contract terms are illegal. The tenant cannot go to court to enforce the agreement if, for example, the property owner raised the rent. *This lease agreement is based on an actual tenant/ property owner lease agreement. Law enforcement caught up with the tenant before either party had an opportunity to attempt to enforce the lease. A voidable contract is valid and enforceable but one of the parties can void it. If one party breaches a contract, the non-breaching party can often choose to void the contract by rescinding it. Rescission is the legal remedy of unmaking a contract and restoring the parties to their original positions before contracting with one another. Parties may have to return payments, documents, and property already exchanged according to contract terms. Only the non-breaching party can rescind a voidable contract. If the non-breaching party chooses to ignore the breach, the party who is in breach does not have a right to void the contract. A buyer s financing contingency included a deadline for providing a pre-qualification letter to the seller. The buyer did not provide the letter by the deadline. The buyer is in breach, making the contract voidable by the seller. The seller can choose to continue with the contract. If the seller continues to act as if the contract is still valid and enforceable, the seller can lose the right to nullify the contract. 9

10 REAL ESTATE broker COURTS AND CONTRACT LAW Brokers needs to be aware that there is almost no black-and-white contract law and that the way a court will interpret a contract or decide a case involving a contract will depend entirely on the circumstances of that case. Two sellers could sue two different buyers for breaching an offer to purchase by failing to provide earnest money by the deadline in the contract. A court may rule for the buyer in one case and the seller in the other case even though the underlying breach giving rise to the dispute was identical. Additionally, contract law is always changing so a court may interpret a provision one way this year but another way next year. It all depends on the case that is before the court. Brokers must be careful not to give legal advice because of the uncertainty of how a court will interpret a contract. It can be tempting to tell a seller that the seller can keep a buyer s earnest money if a buyer breaches a contract provision but if a buyer objects to the broker disbursing earnest money to the seller and the parties end up in court, a court may find that the buyer only breached because of the seller s actions and that seller must return the buyer s earnest money. At which point, the seller is going to be unhappy with the broker over the lack of the promised earnest money. There are some general rules that courts follow when interpreting contracts. When a dispute arises, courts try to determine the intent of the parties and craft a remedy that will achieve the parties intents. Courts also give greater weight to a party s specific terms than pre-printed provisions. That is because a party s specifically included terms are better evidence of the party s intent than the pre-printed terms that were already a part of the contract when the party began the transaction. The drafter of a contract must be clear when drafting terms because courts construe ambiguous terms against the drafter. That means that if a broker is writing an offer for a buyer and includes a contingency, for example, that has an ambiguous performance standard and the buyer and the seller have a dispute about whether or not the contingency has been satisfied, the court is going to give greater weight to the seller s interpretation. This is because the buyer, as the drafter, knew what the contingency was supposed to mean but the seller had to rely on the way it was drafted to determine what the buyer s intention was and if the seller performed differently than the buyer expected, then the seller should not be faulted for relying on the contingency as written. DRAFTING CONTRACTS AND CONTINGENCIES Drafting contracts and contingencies may be one of the most important functions a broker or a salesperson does for a client or a customer. To properly draft a contract, a broker must use the correct form, complete it thoroughly and unambiguously, and in a manner that expresses the intent of the parties. Clients and customers lack the experience that a broker brings to the transaction. A broker s experience and real estate knowledge is vital to helping consumers express their intentions when drafting contracts and contingencies. A broker knows that days is not the same as business days when deciding what deadlines to include in an offer and that delivery occurs at different times depending on the method for delivery a consumer wants to use to communicate with another party. The average consumer in a real estate transaction will not have the experience to know these key points and needs to rely on the broker s expertise when drafting contract and contingency terms. A contingency is an event that may or may not occur. Buyers make offers contingent on some other event occurring. In essence, when a buyer s offer includes contingencies, the buyer is communicating to the seller, I will buy your property as long as certain events occur. Contingencies are how buyers and sellers craft the details of their transaction. Making offers contingent on events, tests, or being able to secure the funds necessary for the transaction are how buyers attempt to acquire a property and protect the buyer s interests. Sellers can also use contingencies when making counter-offers and the contingencies that a buyer includes in an offer will influence whether a seller will accept a particular offer. 10

11 Contracts - 1 A Simple Radon Contingency Consider a buyer who wants to make an offer contingent on radon testing. A buyer writing an offer without the assistance of a broker might include a provision that says this offer is contingent on a radon test. It is the broker s experience that will educate a buyer that making an offer contingent on radon testing is not sufficient. The buyer s contingency must also include many more details than just a radon test. Who is to do the radon testing? Who will pay for it? By when must the testing be completed? What levels are unacceptable to the buyer? What is the effect on the offer if the levels are over the buyer s limit? Will the buyer give the seller a right to mitigate? If so, who will pay for the mitigation? Will the buyer or the seller get to choose the contractor who does the work? Will the buyer get to test again after mitigation is complete? Poorly drafted contingences can cause a transaction to fail, lead to disappointed parties, result in a lawsuit between a buyer and a seller, or even worse, a lawsuit involving the broker. Poorly drafted contingencies that do not provide a measurable performance standard may prevent a court from enforcing the contract. Additionally, poor drafting can lead to consumer complaints against the broker and potential discipline from the Department of Safety and Professional Services (DSPS). There are the standard contingencies in the residential offers to purchase such as the financing, home inspection, or closing of a buyer s property contingencies. Other offers like the vacant land and the commercial offer have additional contingencies like proposed use, map, environmental evaluation, and document review. Brokers may also use additional contingencies with offers for items like well testing, septic system evaluation, or radon testing. For more common contingencies such as well testing, brokers may have a pre-printed document that they use as an addendum to the offer and other situations may call for a broker to draft a custom contingency to address the unique characteristics of the transaction. Broker Practice Tip Supervising brokers must review contracts for broker-employees and salespeople. When reviewing contracts a broker should consider: Does the contract achieve the intent of the parties? Is it on the correct form and filled in completely? Are the contingencies complete and unambiguous? Are important terms defined? Are addenda incorporated properly? Are the dates and deadlines clear and logical? Are inapplicable provisions struck? 11

12 REAL ESTATE broker Broker Practice Tip Pre-printed Contingency Documents The WRA offers many pre-printed contingencies that brokers can use for their transactions. The WRA s pre-printed contingencies are available in zipform. Providing broker-employees and salespeople with tried and trusted pre-printed contingencies to use in transactions can help avoid drafting errors of the inexperienced real estate practitioner. The Wisconsin Clause Manual In conjunction with the University of Wisconsin Law School, the WRA produces The Wisconsin Clause Manual that contains attorney-drafted clauses that brokers can use to create customized contingencies to fit the transaction when a pre-printed document will not suit the needs of the parties. Brokers may also draft their own manuals of pre-printed contingencies and clauses for their broker employees or salespeople to use when drafting contracts. Call an Attorney If these drafting tools do not provide the necessary language that a broker needs to include in a contract to suit the needs of the parties, a broker can always consult an attorney to draft any additional contingencies that a party needs to include as part of an offer. ENDING THE CONTRACTUAL RELATIONSHIP Completion of the Contract The best way for a contractual relationship to end is completion of the contract. A buyer and a seller close a transaction, they have completed their contract, and their contractual relationship concludes. A listing broker procures a buyer for the seller, the parties close, the seller pays the broker s hard-earned commission, and their contractual relationship concludes. A buyer s broker successfully finds the buyer s dream home, the buyer pays the broker s success fee, and their contractual relationship concludes. All parties walk away having satisfied their various contractual obligations and the contractual relationship is over. Not all transactions work out so successfully. Brokers need to know the other ways in which contractual relationships terminate. Not all terminations are painful ends to the relationship but some have potentially serious consequences that brokers must consider before, during, and after entering into contractual relationships with buyers and sellers or other brokers. Rescission Rescission simply means undoing the contract to the effect that the parties are restored to the position before they executed the contract. It is like going back in time and pretending that the contract never existed. For parties to successfully rescind a contract, both parties must agree to this action. Neither party has any rights or obligations resulting from the contract and there is no relationship between the parties. For example, a broker signs a listing contract with a seller who needs to sell a property because of a new job opportunity. The broker and the seller execute the listing contract and the next day, the seller calls the broker to say that the seller will not be taking the new position and does not want to sell the property anymore. At this point, the broker has not done any marketing and has not incurred any expense other than the broker s time in meeting with the seller. The broker agrees to rescind the contract and the broker and the seller both go forward as if the listing contract never existed. To achieve this, a broker and a seller can execute a cancellation agreement and mutual release to cancel the listing and release each other from any rights or obligations arising from the listing contract. 12

13 Contracts - 1 Termination Termination of a contract does not require the consent of both parties. Either party can unilaterally terminate a contract by giving notice to the other party and delivering it according to the terms of the contract. Termination can occur with contracts between brokers and clients and between buyers and sellers. Between buyers and sellers, termination may be the result of a buyer delivering a notice of defects to a seller where the buyer did not give the seller a right to cure. A buyer delivers notice to the seller and their contractual relationship terminates. Between brokers and clients, termination might be the result of one party being unsatisfied with the other party s performance under a contract or it could just be that one party can no longer fulfill the terms of the contract. With terminating contracts, brokers must make sure that broker-employees and salespeople understand that they do not have the authority to terminate contracts without the supervising broker s permission. Making this clear will help protect a supervising broker from wrongful contract terminations by broker-employees and salespeople. A listing broker executes a listing contract with a seller. The listing broker markets the property according to the terms of the contract and presents several attractive offers to the seller, all of which the seller rejects. When speaking with the seller, the listing broker asks why the seller is rejecting the seemingly attractive offers and what terms the seller is looking for in an offer. The seller reveals that, based on the names of the buyers that submitted offers, the seller did not think any of the buyers were Americans as defined by the seller. The broker tries to educate the seller about fair housing laws and that the seller s actions constitute prohibited discrimination under the fair housing laws and that the broker cannot participate in these actions. The seller makes it clear to the listing broker that the seller will not accept any offer unless the buyer is sufficiently American by the seller s standards. The listing broker decides to terminate the relationship with the seller. The broker has a few options for ending the relationship such as using a cancellation agreement and mutual release or changing the expiration date of the contract but the seller will not agree to these and insists the listing broker continue marketing the property and look for an American buyer. The listing broker decides to deliver a notice to the seller terminating the listing even though doing so puts the listing broker in breach of contract. The listing broker feels confident that a court would not entertain a suit from the seller against the broker for breach of contract once the broker explained why the broker had to terminate the contract. Modification A broker can terminate a contractual relationship by modifying a contract. As with rescission, modification requires the consent of both parties. When modifying a contract to terminate the contractual relationship, the modification is to the expiration date. A broker may do this with a seller who listed a property for several months with a broker but did not receive any reasonable offers. The seller decides to take the property off the market for the winter and re-list it in the spring. The broker agrees to this and the seller and the broker sign an amendment that changes the expiration date of the listing contract to the date they sign the amendment. The contractual relationship is over and, unless the parties stated otherwise in the amendment, the listing broker retains rights to protected buyers. Death of a Party In the unfortunate situation that a seller of a listed property dies, the contractual relationship between the seller and the broker terminates. The seller s estate does not have to fulfill the terms of the contract though often times the estate will then list the property with the listing broker but this a new contractual relationship, not a continuation of the contract with the original seller. A buyer agency agreement also terminates at the death of the buyer or the broker. The untimely death of a broker-employee or salesperson does not terminate an agency contract because the contract is between the client and the employing broker. 13

14 REAL ESTATE broker Not all contractual relationships terminate with the death of a party. For example, when a seller and a buyer have a contractual relationship, the death of either party does not terminate the offer and the estate of the deceased party steps in to take the place of the deceased. Leases also do not terminate at the death of a party. Operation of Law Operation of law can also terminate a contractual relationship. For example, if a city or county used the power of eminent domain to condemn a seller s property, the listing agreement terminates and the seller and the listing broker no longer have a contractual relationship. Default and Breach When a party to a contract does not perform according to the terms of the contract, the party defaults on the terms and is in breach of contract. This can terminate the contractual relationship but brokers need to be careful when a party appears to be in breach because a court might find otherwise if the dispute resulted in a lawsuit. Deciding when a party is in breach of contract and has defaulted on the terms is often a matter for a court to decide so employing brokers should educate broker-employees and salespeople not to make the decision as to whether a party is in breach. This caution is true for both agency agreements with the broker and with offers to purchase between buyers and sellers. A salesperson executes a listing contract with a seller on behalf of the employing broker. The seller wants the marketing to include several open houses. When the salesperson goes to conduct the open house, the seller is having a party because the Packers made it into the playoffs and the game is on. When the seller scheduled the open house, a playoff run did not look promising for America s favorite team so the seller felt confident scheduling the open house for that particular Sunday. The seller tells the salesperson to conduct the open house but not to show the den where the seller is hosting the party. The den is one of the best features of the house. The salesperson is annoyed with the seller and decides to cancel the open house and go watch the game. The salesperson informs the seller that the contractual relationship is terminated because the seller breached the terms of the listing where the seller agreed to cooperate with marketing efforts. The broker agrees that the seller is in default, has breached the listing agreement and that the breach has terminated the contractual relationship. The broker stops marketing the property and removes the broker s yard sign on the following Monday. If the seller decided to sue the broker for terminating the contract, a court might have a different opinion as to the effects on the contract due to the seller s behavior. The seller arguably breached the terms of the contract by not cooperating with marketing efforts but whether that automatically terminated the contractual relationship as the broker determined, might be a matter for a court to decide. The caution here for brokers is that default on contract terms and a party s breach of the contract can terminate a contractual relationship but that should never be the assumed result. This caution may be even more important in terms of how brokers and salespeople educate buyers and sellers in the case where one party defaults on the terms of an offer to purchase. Brokers and salespeople should never conclusively tell buyers and sellers that the other party is in default on the terms of a contract but if a buyer or seller thinks the other party is breaching the contract, the broker or salesperson can direct the party to the section in the offer that addresses default and recommend that the party seek legal counsel for a review of the party s options. When dealing with the breach of a buyer or a seller, the offers to purchase include standard remedies for default for a buyer or a seller to consider but the parties are not limited to those remedies. If another remedy is available, a buyer or a seller can pursue that instead of one of the pre-printed default remedies presented in the offer. 14

15 Contracts - 1 The Wisconsin Offers to Purchase provide the following remedies in the case of default: If Buyer defaults, Seller may: (1) sue for specific performance and request the earnest money as partial payment of the purchase price; or (2) terminate the Offer and have the option to: (a) request the earnest money as liquidated damages; or (b) sue for actual damages. If Seller defaults, Buyer may; (1) sue for specific performance; or (2) terminate the Offer and request the return of earnest money, sue for actual damages, or both. In addition, the Parties may seek any other remedies available in law or equity. 15