CHAPTER 1 – CONTRACTS FOR THE SALE OF LAND
Part A. Real Estate Brokers
Open Listing Agreement
Property owner agrees to pay to the listing broker a commission if that broker effects the sale of the property, but retains the right to sell the property himself, as well as the right to procure the services of any other broker in the sale of the property.
Exclusive Agency Listing
This listing agreement is for a certain time and authorizes only one broker to sell the property, but permits the property owner to sell the property himself without incurring a commission.
Exclusive Right to Sell Listing – most popular
The sale of the property during the contract period, no matter by whom negotiated, obligates the property owner to pay a commission to the listing broker.
Traditional Full Service Broker
Market the home; Review contracts; Negotiate with potential home buyers and sellers; Locate properties for potential buyers; Arrange inspections; Provide potential buyers with information about the community; Apprise potential buyers about financing alternatives; Assist in the formation and negotiation of offers, counter offers, and acceptances; Assist with the closing of the transaction.
Fee for Service Broker
Brokers willing to sell a subset of real estate brokerage services.
Minimum Service Laws
Laws or regulations that dictate the services that a consumer must purchase when entering into a relationship with a real estate broker – whether the consumer wants to buy them or not.
Drake v. Hosley (1986)
Drake signed an exclusive listing agreement with Hosley, a broker to sell some land. The agreement provided for a 10% commission, if during the period of the listing agreement: (1) Hosley located a buyer “willing and able to purchase at the terms set by the seller,” or (2) the seller entered into a “binding sale” during the term set by the seller. Hosley found some buyers, and all the parties signed a purchase and sale agreement. However, Drake suddenly wished to have the sale close by April 11 (to satisfy a debt he owed his wife) and so Drake’s lawyer called Hosely and let him know. When the deal did not close on April 11, Hosley sold to another buyer on April 12 and refused to give Hosley his commission.
The court followed Ellsworth Dobbs, Inc. v. Johnson that a real estate broker does not normally earn a commission unless the contract of sale is performed. This is because it is understand that the commission normally comes from the sale proceeds. However, the Dobbs Court specifically held that rule applies only in the absence of a default by the seller.
Notes: Under the Dobbs rule the broker can revoke from a breaching seller, but there is no provision to recover from a breaching buyer, unless the condition is incorporated in the Contract of Sale.
“Broker is not normally the agent of the buyer”
Slover’s Holding: If a valid listing agreement exists between a seller of real estate and a real estate broker, the agent earns his commission if the seller accepts the purchaser’s offer, and the purchaser closes in accordance with the contract. If the seller breaches the agreement, the commission is earned by demonstrating that the buyer was, ready, willing, and able to close.
Conflicts of Interest – traditional rule – selling agent is a subagent of the seller. (a broker who contracts with a seller is the primary broker, and if another broker finds a buyer, then the two brokers split the commission 50-50. However, since the broker who found the buyer, has some fiduciary responsibility to both parties, it is a conflict of interest.
Unless agreed to by all parties after full disclosure, conflicts of interest by brokers can give rise to private liability, as well as public discipline by the state licensing body. The agent who causes loss to the principal by virtue of the conflict may loose the commission and be subject to a judgment for damages.
Under the Dobbs rule, if after signing a contract to purchase, the buyer backs out and no closing occurs, the seller will owe no commission. But shouldn’t the buyer’s broker now be able to recover its split of the commission from the buyer directly.
Duty to disclose material facts
A broker has a duty to disclose to a buyer material defects known to the broker but unknown to and unobservable by the buyer…even if the broker is the agent of the seller.
Easton v. Strassburger (1984) – California
The house for sale was damaged earlier by an earth slide, and the repair would have cost thousands. The agent did not disclose this fact to the buyer, but there was no direct evidence that the agent knew this.
The court held the agent liable for damages anyway, holding that the agent has a duty “to conduct a reasonably competent and diligent inspection of the residential property listed for sale and to disclose to prospective purchasers all facts materially affecting the value or desirability of the property that such an investigation would reveal.”
Note: A majority of states are unwilling to hold brokers liable when they were silent about defects of which they had no actual knowledge, but which could have been found by an inspection.
Silverman v. Pitterman (1991)
What must be disclosed? A married couple obtained a divorce. The house was ordered to be sold and proceeds split. The husband listed the house with a broker, who unknown to the wife, had a romantic relationship with the husband’s divorce lawyer. The wife found out and sued the broker, claiming a breach of fiduciary duty.
The court held that the wife might recover both compensatory and punitive damages, and the broker might also be required to forfeit the commission.
Bazal v. Rhines (1999)
The broker knew of an existing restrictive covenant prohibiting keeping more than one dog in the subdivision, but failed to disclose that fact to the buyer, who the broker knew had four dogs.
Broker was held liable for damages when the sale fell through at the last minute because of the canine issue.
Lombardo v. Albu (2000)
The duty of disclosure can run in favor of the seller.
The buyer’s broker was held liable for failing to disclose to the seller adverse financial information about the buyer, actually known to the broker, that resulted in the buyer being unable to qualify for a mortgage and hence failing to close the transaction.
Friendship Manor v. Greiman(1990)**
Siegler, (Bee Tree), a conman, gave Greiman (attorney) a deed to property in Jackson as collateral for a loan. Greiman did not record. Subsequently Sigler executed a mortgage to Garden State. He then immediately transfer the property from Bee Tree to Mill Dam (this deed was recorded before the mortgage to Garden State Bank). The bank failed to protect itself by filing a notice of settlement pursuant to NJSA 46:16A-1. Garden State Bank not learning what Sigler did lent Sigler more money, accepting a second mortgage from Bee Tree. Greiman knew nothing about this. Sigler’s behavior made Greiman suspicious. Greiman learned of the deed from Bee Tree to Mill Dam, but did no further searching. He also learned that Sigler owned Mill Dam. He discovered the property was on a tax sale disclosure. Tried to redeem but couldn’t. At this point Greiman recorded his deed and instituted a suit for the right to redeem and the nullification of the Bee Tree/Mill Dam Deed. Greiman won and the judgment was recorded under Mill Dam as grantor and Greiman as Grantee (in the margin was a note that that made reference to the deed-book page on which the Bee Tree/Mill Dam deed was recorded. Without any other search of the record, Greiman contracted to sell property to Friendship manner. Friendship Manor’s search of the records found the mortgages and brought suit to compel Greiman to satisfy two mortgages which Greiman argues are void & unenforceable as to his chain of title because of their late recording.
Issue: Whether Greiman, when he recorded his deed from Sigler, had notice of the later executed but prior recorded mortgages from Bee Tree to the bank.
Rule: Constructive notice of an existing encumbrance – that is chargeable beyond actual knowledge and record notice – will also defeat a claimant’s right to rely on the protections otherwise afforded by the race notice statute. Constructive notice arises from the obligation of a claimant of a property interest to make reasonable and diligent inquiry as to existing claims or rights in and to real estate. The claimant will be charged with knowledge of whatever such an inquiry would uncover where facts are brought to his attention, sufficient to apprise him of the existence of an outstanding title or claim, or the surrounding circumstances are suspicious and the party purposefully or knowingly avoids further inquiry.
Analysis: Circumstances which placed upon Greiman the obligation to inquire as to Bee Tree’s recorded transactions after the date of the Mill Dam deed: (1) Greiman knew from the outset of his dealings with Sigler that Sigler was not an honorable man. (2) he obtained the Bee Tree deed not for value but for security of a small loan. (3) He chose not to record his deed for seven years. (4) Greiman replaced the Bee Tree’s corporate seals in the hands of Sigler, which contributed to the fraud. (5) Greiman was an experienced lawyer. (6) when he found the Mill Dam deed, executed and recorded on the same day, and learned that it was in effect a deed from Sigler to Sigler, he must have understood that Sigler rushed to create a new chain of title for some illicit purpose. All of these facts placed upon him the obligation to inquire from the record what Sigler’s purpose was. Greiman was required to satisfy the mortgages out of the plaintiff’s purchase price.
Slover’s Holding: A party who has reason to inquire about the bona fides of recorded instruments in the chain of title to a piece of property, will take his or her interest subject to the results of a reasonable inquiry, whether such inquiry was actually undertaken.
Part B. Statute of Frauds and Part Performance
Earnest Money Contract (short term, deposit receipt, binder, or marketing contract)
Sample on page 23
Permits the parties to prepare for the transfer of title by making the necessary arrangements (mortgage financing, inspections, title clearance, etc…). Usually provides for the closing – the delivery of the deed and the payment of the purchase price – within a short time after the contract signing.
Real Estate Installment Contract or contract for deed (Midwest)
Buyer goes into possession immediately, makes payment to the seller on a regular basis over a long time period and receives the deed when the last installment is paid. It is a mortgage substitute.
The statute of frauds requires that the contract or some memorandum or note thereof be in writing. Any writing that meets the necessary elements will do, whether it was intended to memorialize the contract or not. If there is no sufficient writing, neither party can enforce the contract.
Requirements: (a) The names of the parties; (b) An identification of the land; (c) Words indicating an intent to sell; (d) Price; (e) Cases are divided as to whether the financing terms should be included; (f) Date of closing. If the date is not in the Contract, the court will assume a reasonable time is allowed; and (g) Contract must be signed.
Part performance doctrine – a judicially created exception to the statute of frauds, which permits the courts to enforce a contract in equity even though there is no sufficient writing. Part performance is merely a substitute for a writing. It is still necessary to prove offer, acceptance, consideration etc…Examples of part performance: (1) Payment of part of the purchase price; (2) taking possession of the property; and (3) making improvements on the land that increases the value. At least two are required, some states require all three.
Theories of Part Performance
Reliance: Restatement, Second, Contracts § 129 – K may be enforced even if there is a failure to comply with the statute of frauds, if it is established that the party seeking enforcement, in reasonable reliance on the K and the continuing assent of the party against whom enforcement is sought, has changed his position that injustice can be avoided only by specific enforcement (note that the restatement is not limited to the “big 3” acts, payment possession, and improvements). When the acts of reliance are not the “big 3” the courts follow the broader view of the Restatement sometimes called the doctrine of promissory estoppel.
Evidentiary: This theory grows out of the idea that the Statute of Frauds has mainly an evidentiary role; we demand a writing because it otherwise too easy for one of the parties to invent a contract where none existed. Alternative types of evidence, such as the purchaser’s acts of part performance, ought to be equally satisfactory proof of the contracts existence if they are strong and unequivocally enough.
Johnston v. Curtis (2000)
Johnstons sign a contract to buy a house from the Curtis’ for $114k.. Johnston’s obligation was subject to “buyer’s ability to obtain a loan secured by the property in an amount no less than $102,600. The term of years and the interest rate were not stated in the K. The house appraised for only $110K and the bank denied the loan. After the initial K fell through, the parties orally agreed to reduce the price to $110K. Before the closing the Johnstons moved into the house and paid the Curtis’ $500.00. Johnstons were approved for a loan, but with an interest rate of 10.75 which they said was too high and refused to close.
Is the Contract enforceable? When the loan fell through and prior to the oral modification, the Johnstons were relieved of their obligation to perform. Generally, an oral modification must be in writing. But the part performance (possession by the Johnstons and the $500 payment) had taken the Contract out of the statute of frauds. The Court held that the K was not subject to a condition precedent that the Johnstons qualify for financing acceptable to them. Original K contained a blank space where the limitation on the interest rate could have been inserted but was left blank. The original K did not limit the closing costs.
Slover’s Holding: The requirement that a contract for the purchase and sale of real estate be in writing will not be enforced if there is clear & convincing evidence of: (a) an oral agreement containing all material terms; and (b) part performance by the party seeking to enforce the oral agreement.
Rosenfield v. Zerneck (2004)
Buyers made an all cash offer to purchase the Seller’s house. Seller responded in an email, in which he accepted the buyer’s offer, set a date by which the sale must close, and stated that the offer was not subject to any financing contingencies. At the foot of the email, the seller typed his name. When the partied failed to close the transaction, the buyers brought suit for specific performance.
The Court held that the Seller’s act of typing his name at the bottom of the email manifested his intention to authenticate the transmission for the Statute of Frauds purposes and the copy of the email in question submitted as evidence constitutes a sufficient demonstration of same. However, the court held that the seller’s email failed to contain several essential terms, including the amount of the down payment, and treatment of a commercial lease encumbering the property.
The Court distinguished this from Parma Title v. Estate of Short, which held that the automatic printing, by a fax machine, of the senders name at the top of each page transmitted, did not constitute a signing authenticating
e contract or by other language which indicates that the time of performance is important to them. In the absence of such language, the courts will assume that time is not of the essence unless there are other circumstances, such as a rapidly fluctuating market or specific plans of one party which depend on the time of performance and which are known to the other party, which indicate that the time of performance is of great significance.
Notice making time of the essence – Even if time was not originally made essential in the contract, either party can make it such by a notice to the other within a reasonable time prior to the agreed closing date. However, if the notice is given an unreasonably short time prior to the date of performance, it will be ineffective and time will not be considered essential.
Duties and remedies if time is of the essence – If the contract or the surrounding circumstances make time of the essence, a late tender of performance by one party fully excuses the other from performing. Thus, the one who is late has no right to enforce the contract. The lateness of the tender is a total breach, and also gives rise to liability for loss-of bargain details.
Waiver of timely performance – Even if time is of the essence, courts often find waivers of strict performance from oral or written statements from the parties’ actions. The statute of frauds does not bar oral waivers. If one party accepts the other’s late performance without objection, or orally states that it will be acceptable, a waiver will often be found.
When tender is excused – Ordinarily the obligation for the seller to tender a deed and the buyer to tender the purchase price are concurrent conditions. Neither party can regard the other as in breach without first tendering his or her own performance. Tender by a party may be excused when (1) the other party has anticipatorily repudiated the contract; (2) even without repudiation, it is apparent that the other party will not perform, or is obstructing the attempted tender; (3) the other party’s performance has become impossible (seller sold property to third party).
Mutual failure to tender – if time is not of the essence and neither party tenders on the agreed date, neither is in breach; the closing is automatically extended until one sets a date and notifies the other. But what if time is of the essence and neither party show up to the closing. Some courts hold that both parties are discharged on the ground that substantial performance after that date has passed.
If time has not been made “of the essence”:
(1) the party who is late, but tenders her own performance within a reasonable time after the agreed closing date, may nevertheless (a) enforce the contract by specific performance; or (b) rescind the contract and recover her earnest money if the other party refuses to perform (Miller); but….
(2) The party who is late in tendering performance is liable for “interim” damages caused by the delay; and
(3) The party who is late is barred from recovery of damages against the other party if the latter repudiates the contract (the late party’s tender of performance on time being a condition to the other party’s duty to perform at law.
If time is made “of the essence”:
(1) One who is late cannot enforce the contract in equity or at law; the delay is treated as a material breach, and the innocent party’s duty of performance is discharged.
(2) The innocent party is entitled to rescission, damages, or (if that party is seller) retention of the buyer’s earnest money if the usual tests are met. Even a very slight delay is sufficient to discharge the innocent party.
GR: If time is not of the essence, a late (but reasonably late) tender of performance is a breach of contract, but it is not a material breach. One who commits an immaterial breach must pay the damages caused by the breach, but continues to have the power to enforce the contract. On the other hand, if time is not of the essence and a party tenders performance that is unreasonably late, or if time is of the essence and a party is late at all [even 30 minutes], the breach is material and the other party’s duty of performance is discharged.
How much delay is unreasonable? – One case found a 10 year delay reasonable. However, as a rule of thumb, courts routinely find 30 to 90 days reasonable.
Analysis: Did the original contract make time of the essences; If it did not, has one of the parties properly made time of the essence; how far beyond the agreed closing date is the party late.
Miller v. Almquist (1998)
Almquists contract to buy apt. 4T from the Millers for $545K (10% deposit).
– closing to be April 1, but delayed due to problems getting the loan approval
– Almquists ask to move closing to April 16; Millers agree, but insist time is of the essence.
Further delays prevented Almquists from closing until April 23
– Millers refused to close, saying Almquists’ tender was untimely, kept $54k deposit
When a contract for the sale of property does not specify that time is of the essence, either party is entitled to a reasonable adjournment of the closing date. In granting the adjournment, the other party may unilaterally impose a condition that time is of the essence as to the rescheduled date. The effectiveness of this condition is contingent on the specificity of the notice and on the reasonableness of the time period. A reasonable time period depends on the facts & circumstances of each case; (1) nature and object of the contract; (2) previous conduct of the parties; (3) presence or absence of good faith; (4) experience of the parties; (5) possibility of hard ship or prejudice to either one, as well as the specific number of days to close. This case turns on whether the post notice time period in which to close especially when the time of the essence provision was unilaterally made by the sellers after the buyers had selected a very short adjourned closing date.
The buyers were not experienced in the real estate field, they suffered a hardship in their inability to close (needed the adjacent apartment to make room for their family & wife’s mentally retarded sister; they lost their deposit). Conversely the sellers failed to show how they would be prejudiced by the short delay. They were to receive an all cash deal plus expenses for the delay in closing. Court held that an extension of less than 15 days was not a reasonable time, so the April 23 tender by Almquist was tender. The court directed the that the Almquists get their deposit back.
Slover’s Holding: Every contract contains an implied obligation by each party to deal fairly with the other and to eschew [avoid] actions which would deprive the other party of the fruits of the agreement. (“if the seller extended the usual courtesies under the circumstances…the buyers…would have presented a check for the entire purchase price.”)