REAL ESTATE TRANSACTIONS
SPRING 2006
Professor Circo
CONTRACTS FOR THE SALE OF LAND
I. Brokers
A. Purpose of a Listing Agreement
i. Is the contract which gives the broker the authority to bind the seller.
ii. Drafted to protect the broker’s interest and to specify under what circumstances the broker will receive payment.
B. 3 Types of Listing Agreements – THIS WILL BE ON THE TEST
i. Open Listing
1. Owner will pay the broker, if the broker finds a buyer.
2. The owner is free to use other brokers to find a willing buyer w/o the original broker earning a commission.
ii. Exclusive Agency Listing
1. Seller agrees not to hire another broker, but the Seller retains the authority to find his own buyer w/o owing a commission.
iii. Exclusive Right to Sell
1. The broker earns a commission if the property is sold during the contractual period, even if the broker did not assist in finding the buyer.
2. Seller’s argument against this type of listing agreement
a. Broker not motivated to sell b/c he is not facing any competition
3. Broker’s argument for this type of listing agreement
a. Broker selected by good reputation and reputation will encourage him to work.
b. His type will ensure that I will be paid for advertising that I do on your behalf.
C. When has a broker earned a commission?
i. First you need to classify the type of listing agreement, then apply one of the rules below.
ii. Traditional Rule
1. A broker who produces a ready, willing, and able buyer has earned a commission regardless of whether the sale is not completed.
iii. Minority Approach
1. A broker does not earn his commission unless the sale is completed.
a. However, if seller’s improper or frustrating conduct is the reason the sale isn’t completed, the broker will be granted his commission.
iv. Both rules can be contracted around.
1. It is probably best to explain in the contract when the broker has earned his commission
D. Drafting Issues
i. Be careful about inconsistencies in your drafting.
ii. If you are representing the seller, make sure your client knows the ramifications of the type of listing agreement he chooses.
iii. Assume that if you don’t understand a provision that others will not understand it either.
E. Who does the broker represent?
i. The broker can represent the seller, buyer, or both.
ii. Depending on the relationship the broker has to the parties, the broker may have to make certain disclosures.
iii. There is a huge potential for a conflict of interest, if the broker represents both buyer and seller.
II. Statute of Frauds
A. A contract for the sale of an interest in real estate must be in writing and signed by the party to be charged or it is unenforceable.
i. Statute of Frauds does not require a formal writing. Courts will accept some memorandum that includes the essential terms of the contract.
ii. Essential terms
1. Names of parties
2. identification of the land
3. the intent to sale
B. Getting around the Statute of Frauds
i. Part Performance
ii. Promissory Estoppel
III. Conditions
A. Conditions
i. Condition precedent: trigger event that will cause a party’s obligation to arise.
1. Its important to cover risks with conditions.
ii. If there is a promise, the party’s obligation arises whether the event occurs or not.
B. Drafting Lesson
i. Be very clear whether you are intending a condition or promise.
IV. Remedies for Breach of Land Contract
A. Buyer’s Remedy if Seller has defective title
i. English Rule: limits the buyer to restitution when the seller’s title is defective except where the seller has willfully refused to convey or is guilty of fraud or deceit.
1. equates to a return of deposit w/ interest and return of expenses.
2. Rationale: Developed at a time when searching title was a difficult and uncertain process.
3. This is the majority approach (only slightly so).
ii. American Rule
1. Buyer can obtain the benefit of the bargain damages regardless of the nature of the reason for the seller’s default
B. Compensatory Damages
i. There are a lot of different way to compute compensatory damages
1. Difference in FMV and K price.
a. FMV could be measured at the time of breach
b. The re-sale price might be relevant
ii. Buyer’s potential consequential damages
1. cost of title examination, survey, attorneys fees
2. loss of favorable financing
iii. Ark. Code Ann. § 16-22-308 gives a trial court discretion to award attorneys fees to a prevailing party in a contract action even if this such a provision is not included in the contract.
C. Specific Performance
i. Generally an appropriate remedy for seller’s breach.
1. Buyer’s argument for SP – damages are inadequate b/c of the uniqueness of real estate.
ii. Seller may want SP for buyer’s breach
1. Seller’s argument: property is hard to re-sale.
iii. Traditionally, specific performance was available to both buyers and sellers for breach of the contract.
1. Rationale
a. Mutuality of remedy: specific performance should be available to seller if it is available for buyer.
i. If you don’t follow mutuality principle, you must ask—is the seller’s remedy at law (damages) sufficient
b. The illiquidity of real est
i. Encumbrances: The mere existence of a lien makes title unmarketable, but the mere existence of an ordinance does not make title unmarketable.
1. A violation of an ordinance does make title unmarketable.
2. Many courts hold that an easement does not make title unmarketable if it is obviously visible and is beneficial to the land.
a. Example – power line easements.
ii. Access: A complete lack of access to a public road probably renders title unmarketable.
iii. Encroachments: onto the land being sold render title unmarketable.
1. also, if the seller has created a structure that encroaches onto neighboring land, the title is unmarketable.
iv. Adverse Possession: If vendor’s claim to title is based on adverse possession, title may be unmarketable.
v. Hazardous Waste
1. General Rule: physical conditions have no title implications.
2. However, if there is a statute that provides for the imposition of a lien to reimburse gov’t for cost of clean-up, there might be reason to be concerned.
a. If the lien is imposed, title is unmarketable.
b. If the lien is merely a possibility at the time of the sale, title will probably be considered marketable.
vi. Title of Record
1. Generally, the documents that comprise the links in the chain need to be of record unless the contract provides otherwise.
vii. Catch-all: If there is a general risk of litigation that a reasonable buyer would find unacceptable, the title is unmarketable.
viii. Modifying the definition of marketability
1. The parties can define marketable in their contract.
C. Curing Title Defects
i. If the buyer finds a basis for objection to the quality of title, the buyer must notify the seller and give a fair opportunity for the defect to be cured.
1. This opportunity does not have to be given if the defect is not curable.
ii. Generally, the title does not have to be marketable until closing.
1. “At the time the vendor signs the contract for sale he need have no title at all, so long as it appears possible for him to obtain it by the closing date.”
a. This rule might cause problems in long term, installment land contracts b/c the vendor has until the payment of the last installment to procure title.
Some cases give the vendee a right to rescind the contract if the vendor is unable to provide reasonable assurances that
