Closely related to the concept of necessary elements is the idea of “material terms.” Material terms of a contract are often called “essential terms.” They are terms that go to the essence of the bargain. Without them, a court cannot enforce the bargain because it cannot be certain what the bargain actually is.
Because the material terms of a bargain are considered essential, they are often thought of as required. You will hear people say that a contract for the sale of real property MUST have this particular term or that particular term or it is “illegal” or “void” or some other unfortunate-sounding term. The truth, of course, is more complicated.
Courts distinguish between the material and subordinate terms of a contract. According to Oregon courts, “[a] term is ‘material’ to an enforceable agreement when it goes to the substance of the contract and, if breached, defeats the object of the parties in entering into the agreement.” All the other terms of a contract are considered “subordinate” and, therefore, not essential to the enforcement of the contract. Such terms are often called “subordinate details of performance.”
Oregon courts have identified six material or essential terms when it comes to the sale or purchase of real property. The terms are: 1) designation of the parties; 2) identification of the property; 3) the promise to sell and buy; 4) the purchase price; 5) how the purchase price will be paid; and 6) a fixed time and place for the delivery of the deed or closing. Courts are quick to point out, however, that depending on the circumstances there may be more material terms. Ultimately, what is or isn’t material to a particular contract depends on the parties’ intent as found in their agreement.
The idea of material or essential terms is relevant only in a dispute about enforcement of a contract. When it comes to real estate, such disputes usually involve specific performance of a promise to sell. Sellers sometimes defend against specific performance by claiming that one or more of the material terms were omitted or insufficient. They almost never win such arguments but real estate agents should know enough about material terms to avoid creating the potential for such arguments.
Although each of the six material terms cited by Oregon courts has been the basis of a defense against specific performance at one time or another, by far the most popular is identification of the property. This is the case because standard real estate forms make it hard (not impossible) to miss the other material terms. Identification of the property, even though still the most common “material term” defect, is not the problem it once was.
Identification of the property was once a bigger problem because of the use of tax lot numbers and street addresses to describe property. Lawyers trying to defeat specific performance claims would use the lack of legal description to argue the identification of the property was too indefinite to support specific performance. Mostly, they lost but lawyers still started including legal descriptions in sale contracts. From there, it was a short step to the real estate myth that a contract was somehow “void” if it didn’t contain the legal description of the property.
Modern real estate forms avoid the whole legal description issue by using lot numbers and addresses but also adding a line that says the parties agree to provide the legal description for the purpose of title and identification. That simple agreement defeats any claim of faulty identity. Agents should be aware, however, that not all forms contain such “saving” provisions to handle identification of the property.
In addition to identification issues, you will sometimes see lack of promise to buy or sell arguments. Such arguments result when real estate transactions are proposed by letter or other non-standard writing. That makes the problem easy to control for real estate licensees who use standard forms. Party identification, purchase price and means of payment are similarly easy to control by using standard real estate forms. That leaves only the time and place of closing to cause trouble.
Real estate deals, especially those involving real estate licensees, close in escrow. That makes the “place” of closing pretty simple. Time, you would think, would be similarly simple but is not. You sometimes hear, for instance, that a contract must have a specific closing date to be valid. Like most easily stated rules, this one is inaccurate. It is a huge leap from requiring a time and place of closing to demanding a specific date.
The time of closing can be implied from the other terms of a contract. It can be stated by reference to performance of another term in the contract. What courts mean when they say the time and place of closing is material is that they have to be able to figure out when performance was due. A date certain helps but that doesn’t mean a contract without one is automatically void. Click here for a recent Oregon Court of Appeals decision discussing the closing date issue.
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