“Acceptance,” according to a well respected legal journal, is “a voluntary act of the offeree whereby he exercises the power conferred upon him by the offer and thereby creates a set of legal relationships called a contract.” In plain English, that means acceptance transforms an offer into a contract. Acceptance also terminates the offeror’s power to revoke the offer. Taken together, these two aspects of acceptance (cutting off revocation and creating a contract) make acceptance a matter of supreme importance.
The law favors the voluntary apportionment of economic interests. The law, therefore, strives to make certain that individuals cannot avoid voluntary contracts nor be forced into involuntary ones. Generally, contract rules, and those regarding acceptance are no exception, are designed to enforce individual intent. Did the offeror intend to create the power of acceptance? Did the offeree intend to accept it? These are the kinds of intent questions upon which contract formation often turns.
Intent is, of course, notoriously hard to prove. To compensate, the law of contracts adopts what is called the “objective theory of contracts.” Under the objective theory, it is not what a person actually intends that matters, it is what a reasonable person in the same circumstances would reasonably believe they intended that matters. Applied to acceptance, the objective theory says that if the offeree makes the promissory acceptance requested they will be held to their acceptance whether they intended to accept or not unless the offeror knows or should know they did not intend to accept.
The enforcement balance between being bound to voluntary contracts but not to involuntary ones underlies most of the rule of acceptance. For instance, if the offeror makes an offer to two people (e.g., husband and wife), only those two people can accept. Acceptance cannot be transferred, even if performance later can. One person cannot “accept” for another unless the person accepting has the express authority to bind that person to the kind of contract being offered and expressly accepts on that person’s behalf.
Offers to husbands and wives signed by only the husband or only the wife are not uncommon in real estate. Mostly, the lack of acceptance by one of two joint offerees doesn’t become an issue because the offeree who did not accept intends to and does perform the contract. When, however, the lack of acceptance by one of two or more joint offerees becomes an issue, you can have a real mess. Generally, when the husband and wife are buyers, the seller can enforce the contract against the signing spouse. Neither spouse however, will be able to enforce the contract against the seller unless the seller ignores the lack of acceptance by the joint offerees and goes forward with the contract.
When the husband and wife are the sellers, you have bigger issues because spouses often hold title as tenants by the entirety. A buyer who does not obtain the signatures of both husband and wife may be unable to enforce the contract against the non-signing spouse (unless the spouse who didn’t sign authorized the other spouse to sign for them or ratified the contract by his or her actions after formation). The buyer can, however, always sue the accepting spouse for breach of contract if they cannot deliver title as promised in the contract.
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Offers are a kind of promise or, if you like lawyer talk, a manifestation of willingness to enter into a bargain. The offer must be made in a way that would justify the other party believing that assent to the bargain is invited and will conclude the bargain. An offer, it is said, empowers the offeree to create a contract by acceptance. An unambiguous offer, therefore, commits the offeror to the bargain they propose subject only to the offeree’s acceptance.
There are, of course, a million ways to make ambiguous offers and, therefore, call into question contract formation. If a doctor says to a patient, “don’t worry, I can fix that,” can the patient sue the doctor for breach of contract if it turns out the doctor couldn’t fix it after all? The answer depends on not just the words used by the doctor, but the context in which they were used. Would the patient be justified in believing their assent to a bargain was invited and that their assent would conclude the bargain? In the context of an interaction between a doctor and a patient, few would believe a bargain was being proposed. If there was no offer, there was no contract and, therefore, no subsequent breach.
In real estate we rarely worry about manifesting willingness to enter into a bargain. That’s all handled by our forms. If you look again at the sale agreement or “earnest money” form you use, you will see express offer and acceptance language. The use of such forms removes doubt about whether an offer is being made. Unfortunately, the parties to a real estate transaction sometimes talk directly with each other and can sometimes make statements that could be taken as an offer.
Suppose a man says to his neighbor, “I’d sell my house if I thought I could get $300,000,” and the neighbor says, “Ok, I’ll have the $300,000 in the morning, you’ve got a deal.” Does the man have to sell his house to his neighbor? What if the owner received a letter from the neighbor saying, “Will you sell me your house for $250,000?” The owner writes back saying, “I wouldn’t even consider selling my house for less than $300,000” and the neighbor writes back: “I accept?” Can the neighbor now force the sale?
In these kinds of cases, courts usually find no offer was made because these are statements of future intentions, hopes or estimates, not promises. But, when parties start communicating, especially in writing, about what price or what terms might be acceptable, watch out. What a court might later make of these communications is not always predictable. Click here for a copy of an Oregon Supreme Court case discussing the legal requirements for an offer to purchase or sell real property.
Because of the unintended offer potential, any written communication discussing the terms or conditions of a sale, that is not intended as an offer, should say right in the document that it is not an offer. The same applies to verbal discussions of price and terms but in a verbal exchange there is the added protection of the Statute of Frauds. It is, however, very unwise to rely solely on the Statute of Frauds. Click here for a detailed discussion of the Oregon Statute of Frauds.
One place where being clear about what is and isn’t an offer can be critical is in multiple offer situations. A seller with multiple offers to consider may want to make counter offers to more than one buyer. Because a true counter offer, like any unambiguous offer, will create the power of acceptance in the offeree, extreme care must be used to avoid creating more than one contract. Various strategies and forms have been developed to deal with multiple offers. Be certain you understand these strategies and forms before countering more than one buyer. Click here a detailed discussion of multiple offers, including sample language.
Another place where clarity is required in offers is where preliminary negotiations are followed by the execution of a separate formal document of agreement. The preliminary negotiation problem plagued real estate for years after the invention of the fax machine. In the early days of fax transactions, there was concern that copies of offers faxed back and forth might not be formal enough to indicate the parties’ intent to enter into a contract because no single written memorial of the agreement existed. To compensate for this concern, brokers for years sent around the “original” offer to get “original” signatures after everyone had agreed to the deal by fax.
This manner of doing business created uncertainty in the formation of real estate contracts because either party could argue that no contract was intended until the “original” was signed. Otherwise, what purpose was served by sending around the original?
To solve the problem, a “multiple counterparts” clause was added to real estate contracts saying the documents could be signed in multiple counter parts with the same effects as signing one document. Such clauses are now obsolete because of state and federal electronic transaction legislation but you will still see them in real estate contracts today.
An offer, however signed, can offer a unilateral contract or a bilateral contract. Both types are used in the practice of real estate. The cooperation agreement between brokers formed through a multiple listing service is formed on the basis of a unilateral offer of compensation. The listing broker promises to pay a coop commission to any broker who procures a buyer for the broker’s listing. The offer is unilateral because only the listing broker makes a promise.
A cooperating broker cannot accept the unilateral offer by promising to procure a buyer, they must actually procure one. Unilateral offers are accepted by performance, not promise. That means the cooperating brokers are under no obligation to procure a buyer and the listing broker, though bound by their promise, can withdraw their offer at any time prior to the other broker’s actual performance. Click here for a detailed discussion of offers of compensation. This manner of contracting is very different from the way buyers and seller deal with each other.
Bilateral contracts, like a sale agreement between a buyer and a seller, involve the exchange of promises. An exchange of promises is sufficient consideration for a bilateral contract and no other consideration in the form of money or property is necessary. Click here for a detailed discussion of the role of earnest money in real estate contracts. Because bilateral contracts are binding without additional consideration, an offer of a bilateral contract creates in the offeree the power to bind the offeror by giving nothing more than a promise. This places special emphasis on the acceptance, revocation and performance of bilateral contracts. Acceptance is the next subject in this topic.
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Contract Formation is the most important step in a real estate transaction. Notwithstanding its importance, or maybe because of it, the formation of real estate contracts is fraught with uncertainty, myth and superstition. Some of that uncertainty, myth and superstition is the result of the legal complexities of contract law. More, however, is the result of human nature.
Contract formation requires “mutual assent” – a deceptively simple legal concept that means a mutual manifestation of assent to the same terms. Mutual assent is usually established by offer and acceptance. One party proposes the terms of an agreement (the offer) and the other party assents to those terms (the acceptance). Real estate transactions almost always start with the buyer making a written offer to the seller.
Offers tend not to cause many legal problems. That is not the case with acceptance. There are often misunderstandings over communicating acceptance. A recurring problem in real estate is acceptance varying from the offer. This happens when little changes are made to an offer by interlineations prior to “acceptance.” All these issues are covered in this topic.
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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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Consideration is one of those wonderful legal concepts that everyone has heard of but few understand. Consideration is not a physical thing like money. It’s not a metaphysical thing like “love and affection.” Strictly speaking, it’s not even a separate “necessary” element of a contract. Consideration is an abstraction developed by courts as a means of determining what kinds of promises the law will enforce.
Consideration is really just a way to demand social utility by limiting the judicial enforcement of promises to those that involve an exchange for value. An exchange for value is another way of saying a real bargain. Asking whether there is consideration for a contract is the same as asking whether there was an actual bargain in which each party promised to give up or receive something of value to them. The legal definition of consideration is, of course, a lot denser.
Courts often claim consideration has multiple (usually three) elements. Accordingly, a promise is said to be “supported by consideration” if: 1) The promisee suffers legal detriment; 2) the detriment induces the promise; and 3) the promise induces the detriment. Just think bargain. My promise to sell you my house (parting with my house is a “legal detriment”) induces you to promise to give me money (parting with money is a “legal detriment”) and that is what induced me to sell you the house. It is simple, really: something for something.
Consideration is so simple a concept that it almost never has anything to do with modern real estate practices. Unfortunately, that hasn’t prevented the development of real estate myths about consideration. The most virulent of these myths is the one that real estate contracts are void unless earnest money is in hand at the time of offer because without earnest money there is no consideration.
Though often repeated, and even taught in some real estate classes, it just isn’t true that you need earnest money to have an enforceable contract for the sale of real property. My promise to sell my house induces your promise to give me money which induces me to sell you my house. The consideration is the promises themselves. Earnest money has nothing to do with consideration, though it is, of course, still a very good idea. Click here for a detailed discussion of earnest money.
One place consideration does sometimes play a role in real estate is in settlements or contract modifications. For instance, parties will often use termination agreements when deals fail. Often, these agreements contain promises not to sue. Often these promises are extended to the agents, not just the parties to the termination agreement.
Courts have ruled that such promises are not enforceable because they are not backed by consideration. They are not backed by consideration, courts reason, because the agents gain benefit without legal detriment. That is the case because the agents have nothing to bargain with for the parties agreeing not to sue them. It would be different if the agents were parties to the termination agreement and, for instance, gave up claim to a commission or right to sue the principals for damages.
Another place you sometimes see lack of consideration play a role in real estate is in contract modifications. If a party, who is already bound to perform under a contract, extracts a modification of some kind from the other party by threatening not to perform, the modification may be found unenforceable for want of consideration. That is the case because the party seeking the modification suffers no legal detriment by performing the contract because they were already legally obligated to do so. Anytime you see a one-sided exchange, think about consideration. Other than that, it is rarely an issue in real estate.
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You will likely work your whole real estate career and never have any cause to consider the Lawful Object of a contract. The common example of a contract with an illegal object is a contract to have someone murdered. Such contracts are void. Needless to say, this is not a big issue in real estate.
Lawful Object is rarely used as a defense to a real estate contract. Take, for instance, the contract to sell an illegally subdivided lot. It is not illegal to buy or sell an illegally created lot. An attempt to sell a piece of a farm zoned EFU results in a tenancy in common, not an illegal contract. Where the buyer does not know of the illegality, the issue will be mistake or misrepresentation rather than illegality.
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“Consent” as a necessary element is, in some ways, the same as having the “mutual assent” necessary to form a contract. Consent means to agree willingly. There is a free-will component to consent. Consent to a contract must be free of force, intimidation or trick. Old melodramas where sweet Nell is tricked or forced by the evil villain into signing the deed to the ranch miss the issue of consent. Contracts induced by force, intimidation or trickery are not enforceable, or if you like, they are void.
Another component of consent often overlooked is the idea of mistake. A mistake as to what is being purchased can destroy consent. If I consent to A, but unbeknownst to either party what is really offered is B, can I be said to have consented to B? This issue of mistake is a powerful one and is discussed in detail in the section on Contract Formation.
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State law protects “minors” (unmarried persons under the age of eighteen) and “incompetents” (those declared by a court to be incapable of handling their own affairs) because they do not have the “capacity” to enter into contracts. Contracts with minors are said to be “voidable” by the minor at any time prior to reaching majority or within a reasonable time thereafter unless the contract is for a “necessity.” No Oregon court has ever ruled on whether real estate is a “necessity” for a minor. Much would depend on the circumstances of the purchase and the nature of the property (e.g., an emancipated minor renting an apartment near the college where they are enrolled).
Contracts with persons already declared incompetent are said to be “void.” Void is just another way of saying courts will not enforce contracts made by incompetents. Where a person is declared incompetent after formation of a contract, the contract, like that with a minor, is said to be voidable. Avoiding a contract altogether on capacity grounds requires proof of incompetence at the time of contract. Incompetence at the time of contract can be seen as another way to attack consent – and that’s where capacity can get messy.
Other than in cases dealing with minors or declared incompetents, capacity is about the ability to understand the nature and consequences of one’s actions. Take, for instance, a person who is falling down drunk or over medicated or suffering memory problems or delirious or just having trouble distinguishing reality. In any of these cases, capacity may become an issue because doubt is cast on the person’s ability to understand what they are doing. Without that understanding, it is hard to say there was “mutual assent” sufficient to form a contract.
Other than in the case of minors or incompetents, capacity is more a formation problem rather than some kind of required element. Thinking of capacity in this way will help you avoid problems. If anything (age, speech, mannerisms, memory, etc.) makes you question a party’s mental capacity, think about whether the contract could later be challenged. If there is doubt, it is time to seek help. At a minimum, close questioning of the person’s understanding of the nature and consequences of what they are doing is in order as is careful documentation of your discussion.
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Contracts are about promises. In fact, one legal definition of a contract is: “a promise or set of promises for breach of which the law gives remedy.” A more abstract definition is that a contract is simply an “enforceable agreement.” Whatever the definition used, when people talk about the necessary or required “elements” of a contract, what they are really talking about is what it takes to make a promise or agreement “valid” so that it can be enforced in a court of law.
Actually, it is misleading in some ways to talk about the elements of a “valid” contract because that suggests some specific magical terms are needed to form a contract. That is not true. Instead, there are certain things courts routinely look for before they will enforce a contract. These things, elements if you will, are “necessary” in the sense that doubt about them creates doubt about the enforceability of the contract. Whether there is a contract in the first place is a matter of contract formation, whether what was formed is valid or enforceable or not. Click here for a discussion of contract formation.
It is often said that every contract must have: 1) capacity; 2) consent; 3) a lawful object and 4) consideration. That is true, as far as it goes, but what is being tested is the social utility of a particular agreement. Capacity, consent and the rest are just things one would expect to find in a bargain that benefits society by helping individuals order their economic life. When one or more are missing, society may decline to enforce the exchange.
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Understanding Contracts means knowing something about how courts handle contract disputes. It is contractual disputes which have caused the courts to define the Necessary Elements and Material Terms of contracts. Many contract disputes involve Contract Formation. That means understanding Offer, Acceptance and the misunderstood subject of Acknowledgement. Contract formation also involves Termination of Offers. All these issues are covered in this subject
A big part of any contract for the sale of real property is the earnest money pledged by the buyer. Understanding and handling earnest money is covered in the Earnest Money section. Also covered is the complex and, at times, confusing subject of dealing with Multiple Offers.
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