Advanced Real Estate Transactions Moe Spring 2016
I. CONTRACTS FOR THE SALE OF LAND
Most real estate transfers are preceded by contracts of sale. Some period of time, typically thirty to ninety days, transpires between the contract's execution and the “closing” or transfer. Contracts of this type are often termed “earnest money contracts.”
A. THE STATUTE OF FRAUDS
1. REQUIREMENT OF WRITING
The Statute requires that the contract “or some memorandum or note thereof” be in writing. Some cases dispense with the requirement if the party resisting enforcement of the contract admits its existence.
2. MULTIPLE PIECES OF PAPER
The writing may be shown by more than one piece of paper, so long as all of the essential elements are present in the papers considered together.
3. CONSEQUENCES OF A LACK OF WRITING
If there is no sufficient writing, neither party can enforce the contract, either at law for damages or in equity for specific performance. However, the contract is not void (by the majority view) and it may be the basis for an action for rescission and restitution.
4. ELEMENTS WHICH THE WRITING MUST CONTAIN
In general, the following elements are necessary: (1) the names of the parties or some other identification of them; (2) an identification of the land; and (3) words indicating an intent to sell the land. The price need not be mentioned if the parties did not agree on one; the court will assume that a reasonable price was intended. Courts are divided as to whether detailed terms of any seller financing must be included in the writing. The date of closing need not be included even if the parties agreed to a date. If no date was agreed to, the court will assume that a reasonable time after the contract signing was intended.
5. THE SIGNATURE
Most American statutes require the writing to have been signed by “the party to be charged”—that is, the person who is resisting its enforcement in the lawsuit.
B. RESCISSION AND MODIFICATION
1. ORAL RESCISSION
The courts nearly always enforce oral rescissions, on the ground that the parties' action has not created (but rather, has eliminated) a contract for the sale of land, and hence, does not fall within the statute.
2. ORAL MODIFICATIONS
If a new contract, as orally modified, would fall within the Statute of Frauds, courts conclude that the new contract cannot be enforced.
3. ENFORCING ORAL MODIFICATIONS BY ESTOPPEL
If a party detrimentally relies upon an oral modification, the other party may be estopped from enforcing the original contract terms.
C. THE PART PERFORMANCE DOCTRINE
Part performance is a judicially‑created exception to the Statute of Frauds, and permits courts to enforce a contract in equity even though there is no sufficient writing to satisfy the Statute.
1. ACTS OF PART PERFORMANCE
Three types of acts (all by the purchaser) are generally recognized by the courts: (1) payment of all or a substantial part of the purchase price; (2) taking possession of the property; and (3) making substantial improvements on the land. Most courts require a combination of at least two of the acts listed above, and a few courts require all three. A number of recent cases have accepted acts of reliance on the contract other than these three.
2. RATIONALES FOR PART PERFORMANCE
a. The Evidentiary Rationale
Courts following this theory regard part performance as a substitute for the evidence which a writing would provide, and thus see the acts as justifying enforcement of the contract. Cases taking this approach usually say that the acts of part performance must be “unequivocally referable” to the contract—that is that they cannot be explained on any ground other than the existence of a contract.
b. Estoppel
Courts which use this approach to part performance focus on the unfairness to the party who claims that a contract exists but who cannot enforce it because of a lack of a writing.
c. Mixing the Two Theories
Some courts seem to invoke both an evidentiary and an estoppel theory of part performance, without clearly electing one approach or the other.
d. Which Party Can Use Part Performance
Courts using an evidentiary approach sometimes permit either party to use the purchaser's acts as evidence of the existence of a contract. Courts which follow the estoppel theory, on the other hand, generally hold that only a purchaser can use the purchaser's acts of part performance to overcome the lack of a writing.
e. Enforcement in Equity Only
The general rule is that the part performance doctrine is unavailable in an action at law.
D. REMEDIES FOR BREACH OF A REAL ESTATE CONTRACT
1. DAMAGES
The general measure of “loss of bargain” damages is the difference between the contract price and the market value of the land on the date of the breach.
a. Events Occurring After the Breach
In general, changes in value of the real estate which occur after the date of breach are irrelevant.
b. Good Faith Failure of Title
About half of the American courts refuse to grant a purchaser loss‑of‑bargain damages if the seller's breach is a result of a title failure which was not a product of the seller's bad faith.
c. Special Damage Recovery
In addition to loss‑of‑bargain damages, a non‑breaching party may recover additional damages of several types if the necessary facts can be shown. These types include: (1) expenditures in reliance on the contract, such as title search and survey costs; (2) lost profits; and (3) increased interest expense. If the land is subject to a title defect or is smaller in area than represented, the purchaser may decide to proceed with the sale anyway, and may then claim damages to compensate for the discrepancy or shortage.
2. LIQUIDATED DAMAGES AND RETENTION OF DEPOSIT
In the great majority of land contracts, the purchaser makes an earnest money deposit of funds with the seller or seller's real estate broker.
a. Liquidated Damages or Forfeiture?
Courts usually purport to decide whether the retention of the deposit would be a valid liquidation of damages or an invalid penalty or forfeiture. The majority of cases focus on whether the earnest money amount constituted a reasonable estimate of the probable actual damages.
b. Preclusion of Other Remedies
Most cases hold that the presence of a liquidated damages clause bars recovery of actual damages. Such a clause normally will not bar specific performance unless the clause makes it very clear that retention of the deposit was regarded by the parties as the seller's only remedy.
c. Election of Remedies
Courts commonly require the seller to elect to retain or return the deposit within a short time after the breach has occurred: if the deposit is not returned, they may well conclude that the seller is barred from seeking other remedies.
3. SPECIFIC PERFORMANCE
Either the vendor or purchas
occur.
1. PRECEDENT AND CONCURRENT CONDITIONS
A condition precedent is one which must occur before a party has a duty of performance. A concurrent condition is one which is expected to occur simultaneously with the party's performance.
2. WAIVER OF CONDITIONS
If a condition is for the sole benefit of one party, that party may waive it and proceed to enforce the contract.
3. CONCURRENT CONDITIONS AND TENDER
The “closing” of the contract usually involves the delivery of a deed by the seller and the payment of the purchase money by the buyer. These performances are usually regarded as concurrent conditions, so that neither party is obligated to perform unless and until the other party has tendered his or her own performance.
4. CIRCUMSTANCES EXCUSING TENDER
Tender is unnecessary when: (a) the opposing party has clearly repudiated the contract; (b) other circumstances make it obvious that the opposing party is unwilling to perform; (c) the opposing party's evasive conduct has made a tender difficult or impossible; or (d) the opposing party's performance has become impossible.
G. QUALITY OF TITLE
Unless the parties agree to the contrary, the law will infer in every sales contract a covenant that the vendor's title is “marketable.”
1. MARKETABLE TITLE
A marketable title need not be a perfect title, but rather one that is free from all reasonable risks of attack.
2. TYPES OF TITLE DEFECTS
Almost any defect which may prevent the vendor from transferring a fee simple absolute title can impair marketability.
a. Flaws in the Chain of Ownership
A title may be unmarketable, for example, because some conveyance in the chain of title is forged, undelivered, obtained by fraud or duress, or executed by a minor.
b. Encumbrances
Encumbrances that may make title unmarketable include outstanding leases, restrictive covenants, mortgages, easements, party wall agreements, options, contracts of sale, and various types of liens.
c. Actions Depriving the Vendor of Title
A vendor may have lost his or her interest, for example, to an adverse possessor or to the government by eminent domain.
d. Other Matters Making Title Unmarketable
Other types of defects not usually thought to relate to title as such have nevertheless been treated by some courts as rendering title unmarketable. They include encroachments by improvements on the subject property on a neighboring parcel or vice versa, and existing violations of zoning ordinances.
3. TIMING OF MARKETABLE TITLE
The title need not be marketable until the date fixed for transfer of legal title. Some recent cases, however, have given the purchaser the right of rescission prior to closing if it appeared very unlikely that the vendor could cure the title defects.
