Real Property II Durham Fall 2014
Chapter 1. Contracts for the Sale of Lands
Section A. Real Estate Brokers
– The listing process involves the execution by the seller of a contract appointing the broker to be his or her agent in obtaining a buyer
– Broker’s Authority
o The usual view is that the broker has the authority to show, advertise, and market the property
o Thus, the broker cannot force the sale to place if the seller refuses to go forward
§ However, if the language of the listing agreement is specific enough, it may give the broker a “power of attorney” to enter into a contract and consummate sales … if a “power of attorney” to the broker is desired, it must be very clearly stated
– Types of Listings
o Statute of Frauds in nearly all states requires the listing agreement to be written
o Common types of listings:
§ “Open Listing” – the 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
§ “Exclusive Agency Listing” – for a time certain and authorizes only on broker to sell the property but permits the property owner to sell the property himself without incurring a commission
§ “Exclusive Right to Sell Listing” – 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
o Nearly all residential properties are listed on an “exclusive right to sell” form
– The Relationship of Commissions to Selling Prices
o The idea is that higher selling prices will result in larger commissions, and thus, agents have an incentive to obtain the highest possible prices for their clients (the sellers)
o Some economists argue that this rationale is flawed because some agents realize that they can make as much (if not more) by selling properties as quickly as possible (which givens them time to sell more properties) (essentially an “economies of scale” argument)
– Multiple Listing Services
o Agent will also list the property in an MLS Book
o There was an antitrust argument that the use of MLS Books was anti-competitive and thus violated the Sherman Act, however, this argument is moot at this point because MLS Books are published only now
– Discount Brokers
o Services that traditional Full-Service Brokers offer: (1) Marketing the home, (2) Reviewing contracts, (3) Negotiations, (4) Locating potential properties for buyers, (5) Arranging for potential buyers to inspect properties, (6) Providing pertinent information about a community, (7) Apprising financial alternatives, (8) Assisting in the formation and negotiation of offers, counter-offers, and acceptances, and (9) Assisting with the closing of the transactions.
o Fee-for-Service Brokers (discount brokers) are willing to sell a subset of these services and charge a fixed or hourly fee for specific services, and are provide considerable competition to Full-Service Brokers
o Obviously, a seller wants to make the most from selling the property, thus the appeal of fee-for-service brokers … However, many states have passed laws or regulations that dictate the services that a consumer must purchase when entering into a relationship with a real estate broker (“minimum service laws”)
§ 9 states require consumers to purchase more services than they may want, with no option to waive the extra services (AL, ID, IL, IN, IA, MO, TX, UT, and WA)
§ 8 states have minimum service requirements but allow consumers to waive those extra services (DE, FL, NV, NM, OH, PA, TN, WI)
o The problem with minimum service laws is that they do not ensure quality
– Drake v. Hosley
o The issue in the case was whether the broker (Hosley) was entitled to his commission after providing a ready, willing, and able buyer.
o Traditional Rule:
§ A broker is entitled to a commission when he produces a buyer ready, willing and able to purchase the property on the seller’s terms, even if the sale is not completed.
o Rule of Dobbs (minority rule, but adopted by the Alaska Supreme Court in this case):
§ A broker is not entitled to a commission until the contract of sale is performed
· However, a broker is still entitled to a commission if “improper or frustrating conduct” by the owner [seller] prevents title from passing
o Overall, the Court adopted the Dobbs rule, but held that the broker was entitled to his commission because it was the seller’s (Drake’s) conduct that prevented the sale from going through
– Notes after Drake v. Hosley:
o Courts are split on the question of whether contractual language to the effect of “commission shall be paid from the proceeds at closing” is sufficient to deny the broker commission if not closing ever occurs.
o If the purchase price is to be paid in installments, can the seller get out of paying part of the commission if the purchaser defaults in paying some installments? The general answer is that the full commission is payable, even in a jurisdiction that has adopted the Dobbs rule.
o 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 from state licensing body.
o In a large number of states, statutes or regulations now require real estate brokers to disclose in writing whether they represent the buyer or seller.
o Recently, there has been considerable growth in the use of “buyers’ brokers” in residential real estate … In most cases, listing brokers concede that it is appropriate to split their commission with selling brokers who represent buyers.
o A number of states allow dual agency by statute or regulation, but “dual agency” is risky because it requires identical loyalties to parties with different, often opposite, wishes and needs.
o A broker has a duty to disclose to a buyer material defects known to the broker but unknown to and unobservable by the buyer.
§ Easton Rule (California court): 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 affect the value or desirability of the property that such an investigation would reveal.”
· Courts outside of California have generally been unwilling to hold brokers liable when they were silent about defect of which they had no actual knowledge, but which could have been found by inspection.
– The duty to disclose is not necessarily limited to facts about the physical property itself.
Section B. The Statute of Frauds and Part Performance
– 2 types of real estate sales contracts:
o “Short-term,” “Earnest-money,” “Deposit receipt,” “Binder,” or “Marketing” contracts – function is simply to permit the parties to prepare for the transfer of title … Usually provides for the closing (delivery of deed and payment of purchase price) within a short time after contract’s signing … Buyer usually takes possession at closing
o “Real estate installment contract,” or “Contract for deed” – contemplates that buyer will go into possession immediately, make payments to the seller on a regular basis (say, monthly) over a long time period (say, 10 to 25 years), and finally receive a deed when the last installment is paid [essentially a “mortgage substitute”] – The great majority of real estate sales contracts are in writing for two reasons: (1) broker wants the deal to go through and the contract provides pressure on the parties to go through with the deal, and (2) the broker wants to be paid, and the contract usually provides an obligation to pay the broker’s commission
– Johnston v. Curtis
o RULE: a contract for the sale of land comes within the statute of frauds and must be in writing to be enforceable … a material modification of a contract comes within the statute of frauds and must be in writing in order to be valid and binding … in order to remove an oral agreement form the statute of frauds, it is necessary to prove both the making of the oral agreement and its part performance by clear and convincing evidence
o “The Johnstons’ acts of taking possession of the property and paying a portion of the purchase price are sufficient to take the oral modification to the contract out of the statute of frauds.”
– Rosenfeld v. Zerneck
o It is unclear why this case was not resolved relying on “E-sign,” which was enacted in 1994 and preempts state law (including the statute of frauds)
o Issue in this case is (1) whether a signature on an email is sufficient to satisfy the statute of frauds, and (2) whether the email was sufficient to create a binding contract.
o Court held (1) “the sender’s act of typing his name at the bottom of the e-mail manifested his intention to authenticate this transmission for Statute of Frauds purposes” and (2) “the parties did not have a meeting of the minds as to the terms of the sale of this premises”
§ Court focuses on the fact that the email did not discuss a deposit or the effect of the sale on the preexisting lease … but if the contract does not mention a deposit, then there is not deposit required
ior contract, the court will not force the innocent purchaser to give up the land in order to give the original buyer specific performance (unless purchaser has notice of the prior contract, then specific performance forces purchaser to give land to original purchaser)
§ if the purchaser was buying the land for the purpose of immediate resale at a profit, its supposed uniqueness is of no real consequence to her, and damages is sometimes considered an adequate remedy
§ both specific performance and other remedies may be denied if there are precedent or concurrent conditions which have not been fulfilled or if the plaintiff is in substantial breach
§ if the contract gives the vendor the right to forfeit the purchaser’s earnest money as liquidated damages, the clause may be treated as the vendor’s sole remedy, barring him from specific performance (most courts allow the vendor to elect between the two unless the clause is, by its own terms, the sole remedy
– Mahoney v. Tingley (enforceability of earnest money agreements/liquidated damages clauses)
o A penalty exists where there is an attempt to enforce an obligation to pay a sum fixed by agreement of the parties as a punishment for the failure to fulfill some primary contractual obligation
§ “Amounts up to ten percent of the purchase price are nearly always acceptable to the courts.”
§ The reasonableness of the amount of liquidated damages should be judged as of the time the contract is entered into, not necessarily at the date of breach
o Three elements that must be met in order to validate such a clause:
1. the parties intended to agree in advance to the settlement of damages that might arise from the breach;
2. the amount of liquidated damages was reasonable at the time of contracting, bearing some relation to the damages which might be sustained; and
3. actual damages would be uncertain in amount and difficult to prove (assumed to be inherently true in real estate sale contracts).
o Does the presence of the liquidate damages clause bar other remedies?
§ If the clause doesn’t address the issue, the usual rule is that the vendor may not seek actual damages (since that would be having one’s cake and eating it too), but may seek specific performance (since a limitation on damages does not imply a limitation on non-damage remedies like specific performance)
Section D. Time of Performance and Tender
– Miller v. Almquist (time is of the essence – Time of Performance)
o Two general rules:
§ If time is not of the essence, a late (but reasonably late – usually 30 to 90 days) 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] § If time if not of the essence and a party tender performance that is unreasonably later, or if time is of the essence and a party is late at all, the breach is material and the other party’s duty of performance is discharged
o The contract must state “Time is of the essence of this contract”
o Even if time was not originally of the essence, either party can unilaterally make it so by giving the other notice to that effect and fixing a date for performance which is a reasonable time beyond the date of the notice. Once such notice is given, it binds both parties.
§ Even if time is of the essence, either party can waive the other’s duty to perform strictly on time … or a waiver may also be inferred from the circumstances, without a formal statement.
§ After giving a waiver, a party may reinstate “time of the essence” but must given a reasonable time for the other party to prepare to close