REAL PROPERTY II – Durham
Contracts for the Sale of Land
I. Real Estate Brokers
i. There are 5 minimum requirements for buying and selling real estate:
1. The execution of a contract of sale;
2. Inspections of the property and examination of the seller’s title by the buyer;
3. The arranging of financing by the buyer;
4. The closing or “settlement;”
5. The recording of the deed and any mortgage or other security instrument which the buyer has executed.
ii. A large proportion of all real estate on the market (and especially residential) is “listed” with real estate brokers.
iii. The Broker’s Authority
1. The usual view is that the broker is only authorized to show, advertise, and market the property – the broker generally is not authorized to enter into an actual contract of sale.
a. Generally, the broker does not have the power of authority.
b. When the contract is silent or ambiguous, this is the assumption, but you may contract around it.
c. 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.
2. How long does the listing last?
a. Depends on the contract.
b. Residential – typically 90-120 days, but never fewer than 60 days.
c. Commercial – may last months or even years.
3. Professor Durham loves limiting the duration and the power of the broker.
iv. Types of Listings
1. Open Listing
a. 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 in the sale of the property.
b. The open listing is very pro-seller.
2. Exclusive Agency Listing
a. It is for a time certain and authorizes only one broker to sell the property but permits the property owner to sell the property himself without incurring a commission.
3. Exclusive Right to Sell Listing
a. The sale of the property during the contract period, no matter by whom negotiated, obliges the property owner to pay a commission to the listing broker.
b. The exclusive right to sell listing is very bro-broker.
v. The Relationship of Commissions to Selling Prices
1. Commissions, typically 1.5%, are the normal compensation for brokers.
2. The standard rationale for basing real estate commissions on selling prices is that, since higher prices will result in larger commissions, agents have an incentive to obtain the highest possible prices for their clients, the sellers.
3. However, because every additional dollar throws only a penny and a half into the pocket of the agent, the agent may push clients to accept lowball offers.
b. Brokerage Services
i. Most mainline real estate brokers require an exclusive right to sell listing.
ii. Some states require consumers to purchase brokerage services (minimum service laws).
iii. What services do traditional full-service brokers offer?
1. Marketing the home;
2. Reviewing contracts;
3. Negotiating with potential home buyers and sellers;
4. Locating potential properties for prospective buyers;
5. Arranging for prospective buyers to inspect properties;
6. Providing prospective buyers with pertinent information about a community such as relative property values, most recent selling prices, and property taxes;
7. Apprising potential buyers of financing alternatives;
8. Assisting in the formation and negotiation of offers, counter offers, and acceptances;
9. Assisting with the closing of the transaction.
iv. What is a fee-for-service broker?
1. These brokers “unbundle” the package of real estate services typically offered by traditional real estate brokers and charge a fixed or hourly fee for specific services.
2. These brokerage models enable consumers to save thousands of dollars by allowing them to purchase only those services they want.
v. How do minimum service laws work?
1. Minimum service provisions are laws that dictate the services that a consumer must purchase when entering into a relationship with a real estate broker.
2. They do this by requiring real estate brokers to provide a bundle of services whether the consumer wants to buy all of them or not.
3. Nine states require consumers to purchase more services than they want; eight states have minimum service requirements but allow consumers to waive those extra services, including Ohio.
c. When does the broker earn a commission?
i. The contract can stipulate how and what a broker will be paid.
ii. Two doctrines apply when the listing contract is silent or ambiguous:
1. Majority Rule – the common law rule
a. 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. (Drake v. Hosley)
b. Rationale – When a vendor enters a valid unconditional contract of sale with a purchaser procured by a broker, the purchaser’s acceptability is conclusively presumed because the vendor is estopped to deny the qualifications of a purchaser with whom he is willing to contract.
2. Growing Minority Rule – the Dobbs rule
a. In the absence of default by the seller, the broker’s right to commission comes into existence only when his buyer performs in accordance with the contract of sale.
b. A broker is still entitled to a commission if “improper or frustrating conduct” by the owner prevents title from passing.
c. Rationale – When an owner lists his property for sale with a broker, the owner usually expects that money for payment of a commission will come from the sale proceeds.
iii. If there are two brokers, who gets what of the commission will come down to local custom.
1. However, the buyer’s agent is typically paid by the seller.
iv. Installment Contracts
1. If the purchase price is to be paid in installments, the commission is owed once the sale is closed, even if the buyer cannot keep up with the payments.
2. This general rule is true even in a jurisdiction that has adopted the Dobbs rule.
3. However, it’s quite possible for the brokerage agreement to provide that the broker will be paid only if and as the installments are paid.
d. Conflicts of Interest
i. Agency Disclosure Requirements
1. In a large number of states, statutes now require brokers to disclose in writing whether they represent the buyer or seller.
ii. Dual Agency
1. It is theoretically possible for a broker to represent both buyer and seller quite explicitly; every state allows dual agency and a number of states now expressly allow it by statute.
2. However, a dual agent must disclose the existence of the dual agency to both principals.
e. Duty to Disclose Material Facts
i. It has long been widely recognized that a broker has a duty to disclose to a buyer material defects known to the broker but unknown to and unobservable by the buyer.
1. This is true even if the broker is the agent of the seller.
ii. In Easton v. Strassburger, the court held the agent liable for damages for not disclosing something even the agent did not know about.
1. The agent had 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.
2. However, Easton is an extreme holding and typically only applies in California.
II. The Statute of Frauds and Part Performance
a. Executory Period
i. Considerable time – typically 30-90 days or more – commonly bases between the contract’s execution and its performance at the “closing,” at which time the vendor gets his money and the purchaser gets legal title by a deed to her.
ii. There are two main
stances, the greater likelihood there was a meeting of the minds.
iv. Title Approval
1. The contract will stipulate how much time the seller has to obtain a title report, how much time the buyer has to make objections, and how much time the seller then has to terminate the contract or cure the title matters.
a. If someone lets the days slide, they’re waived it!
b. If someone is giving more time, get it in writing!
d. Material Modifications
i. A material modification of a contract comes within the Statute of Frauds and must be in writing in order to be valid and binding.
ii. Part Performance Exception
1. In order to remove an oral agreement from the Statute of Frauds, it is necessary to prove, by clear and convincing evidence:
a. The making of the oral agreement and
b. Its part performance.
2. Partial performance of a contract by payment of part of the purchase price and placing a buyer in possession of land pursuant to an agreement of sale and purchase is sufficient to take the contract out of the Statute of Frauds. (Johnston v. Curtis)
iii. Three Types of Part Performance
1. Improvements that increase the value of the property;
2. Payment of part or all of the purchase price;
3. Taking possession of the property.
*Usually you must have at least two of these, and it’s almost always possessionand one of the other two.
e. Condition Precedents
i. Whether a provision of a contract amounts to a condition precedent is generally dependent on what the parties intended, as adduced from the contract itself.
ii. When the terms of a written contract are ambiguous and susceptible to more than one interpretation, extrinsic evidence is permitted to establish the intent of the parties.
iii. If condition precedents are not met, a party’s failure to perform may be excused.
III. Remedies and Real Estate Contracts
a. Two Most Widely Employed Remedies
i. An award of damages usually contemplates that the vendor will keep the property, or will sell it to someone else.
ii. An order of specific performance is predicated on the vendor conveying it to the contract purchaser, who will pay the agreed full price.
1. In general, either buyer or seller may seek either remedy if the other party breaches.
i. Loss of Bargain Damages – Compensatory Damages
1. Compensatory damages are designed to put the injured party in as a good a position as he would have had if performance had been rendered as promised.
2. Traditionally measured as the difference between the contract price and the fair market value of the land on the date of breach.
a. The vendor can obtain nothing if the property’s value is higher than the contract price.
b. The purchaser can recover nothing if the property is worth less than the contract amount.
3. Lost Profits
a. The difference between market and contract price may not be suitable in all situations.
b. Thus where a buyer had in turn contracted to sell the realty, it is reasonable to measure his damages in terms of the actual lost profit.
What the proper elements of damage are depend upon the