A void contract is one that is lacking one or more of the legal requirements for a binding agreement and is,therefore, binding on neither party.

A voidable contract is an agreement that is binding on one party; however, the other party has the right to rescind it and legally avoid the contractual obligations.  For example, parties to a contract must know what they are doing at the time they reach agreement.  If one person can prove that he or she was intoxicated at the time and, therefore, did not know what he or she was doing, that person may set aside the contract.  The contract is not “void” but is said to be “voidable.”

An unenforceable contract may be a valid contract, but one that the courts do not recognize and will not enforce.  A real estate contract must be in writing in order for the courts to enforce it.  If two people reach an agreement about the sale of a property that meets all the legal requirements for a contract, but the agreement is not written, the contract is valid, but the courts will not enforce the obligations of either party under that contract because it is oral.

A unilateral contract contains a promise or offer by only one of the parties to the contract.  In other words, one person makes a promise or extends an offer and the other person receives the benefit of the promise or offer contingent upon the performance of some act.  An option agreement, in which the seller promises to sell at a certain price during a specific period of time, should the buyer decide to buy, is a unilateral contract.

A contract can also result from inferences about facts and circumstances.  Such a contract is a contract “implied in facts.”  The agreement between the parties forming the implied contract arises from the intent of the individuals as shown by their conduct.  For example, a builder consistently allows the buyers of newly constructed houses to move their belongings into their houses before closing.  The contract does not mention this practice and the builder never charges rent.  Now the builder will not allow the buyer of the next property to move in before closing unless she pays rent.  If the builder’s previous actions imply that the buyer has the right to free use of the house before closing, the builder and buyer may have formed an implied contract to that effect.

An executed contract represents a completed transaction.  At the closing, the buyer and the seller in a sales contract complete the terms and conditions stated in the contract.  The promises turn into actions. Thus, at closing, a sales contract is transformed from an executory contract to an executed contract.

The offer must also be complete if the contract is to be enforceable in a court of law.  All the terms of agreement and thus the contract must be negotiated and settled, and none of the terms can be left for future negotiation and determination.  The offer cannot contain a statement that calls for future discussion of a term or condition of sale.  A statement such as “price to be negotiated at the time of exchange” is not sufficient.  The courts have ruled that they cannot complete an unfinished contract; thus the incomplete contract would be unenforceable, although it could still be valid.

The offeror (the buyer, for example) or his or her agent must communicate and deliver the offer to the offeree (the seller in this instance) in order for the contract to be effective.  The offeror can communicate the offer directly to the offeree or through an agent of the offeree.  An offer can be effective although a delay occurs in reaching the offeree.  A delay in the delivery of an offer might result from the negligence of the offeror or from trouble with the means of the offeror’s communication.  Therefore, in some instances the offeree may be allowed a reasonable amount of time to respond even if the effective time of the offer has expired.  If the delay is apparent to the offeree, however, he or she must communicate the acceptance of the offer to the offeror within a reasonable time after the offer would normally have been received.

The last characteristic of the offer, and of a contract, is the intention by both the parties to create a legal obligation.  The courts will not hold a person legally responsible for a promise made in jest or anger, if it should have been obvious to the offeree that the offer was not serious.

Typically, offers must affirmatively be accepted by the offeree for a contract to be formed.  A person is not legally responsible to reply to an offer made by another individual.  In other words, lack of action or silence is not an acceptance.  Suppose an agreement in a contract contains a statement made by the buyer to the effect that “the seller accepts the offer if seller does not reply to the contrary.”  This provision would not result in a contract because of the lack of action or the silence of the seller (except in certain unusual situations not necessary to this discussion).

In the fifth event, unforeseen circumstances can invalidate the offer.  The buyer might die while the offer is still in effect.   If this occurs before the acceptance, the offer terminates.  If the buyer dies after the acceptance by the seller, the contract can remain in effect if a binding-upon-heirs clause exists in the contract.  Destruction of the property before the acceptance can also terminate the offer.   However, if destruction occurs after the acceptance, legal problems can arise.  See the discussion about “the risk of loss” clause in the contract in a later chapter.

The important aspect of a mistake of fact relates to which party or parties make the mistake.  If both parties to the contract made a mistake of fact, there has been a bilateral or mutual mistake, and the contract is either voidable or void, depending on the circumstances.  If only one party to the contract made a mistake of fact, there has been a unilateral mistake, and the courts do not view the situation as grounds for automatically rescinding the contract.  The courts usually consider that unilateral mistakes result from carelessness or lack of diligence of the mistaken party and should not affect the rights of the other party.  In other words, the contract involving mistakes of fact is not automatically voidable but the possibility exists.

A contract is voidable if a misrepresentation of a material fact was part of the basis for reaching the agreement.  The misrepresentation can be intentional or unintentional.  If it is intentional, it is considered fraud.  If the misrepresentation is unintentional, it may be negligent misrepresentation if the party knew or should have known the truth about the material fact.  In either case, the buyer has legal remedies, and the victim of the misrepresentation or fraud may rescind the contract because of the loss or may sue for dollar damages.

A buyer is seldom in a position to discover the seller’s misrepresentations until he or she takes possession of the property.  Some common grounds for misrepresentation in such cases are the following:

First, in the fiduciary relationship between the seller of property and his or her real estate broker, both parties have the duty to speak the truth and to make a full disclosure of all the facts to each other.
Second, if one party to the contract knows an important material fact not known by the other, the courts could rule that the contract is voidable.  This situation can arise in a real estate transaction if the property being traded has a hidden defect.  The defect might be a physical defect in the improvement that is not visible upon inspection of the property, or a title or other legal defect, such as a tax lien or mechanic’s lien against the property, or an unrecorded easement.  In these situations, the seller has a duty to inform the buyer of the defect.  If the seller fails to inform the buyer of a known but hidden defect, the courts will probably view this action as fraud.

The third situation occurs when a person misstates or unintentionally misrepresents an important material fact.  Upon discovering this misrepresentation, the person must correct the mistake immediately or at the latest when negotiations resume.  If the aggrieved party can prove the person making the unintentional misrepresentation subsequently learned of the error and did not correct it, the courts may allow the aggrieved party to void the contract.

These three situations in which a person has a duty to speak have one aspect in common — one party has the wrong impression or wrong information that certain things are true, whereas the other party is aware that they are not true and also knows of the misunderstanding.  There is a legal responsibility to disclose the truth.   Most courts would hold that fraud exists if the lie persists.  The potential seller does not have to disclose all of the facts about the property he or she is selling, only when he or she knows the buyer is harboring a misunderstanding on some vital matter that the duty to speak arises. The telling of “half-truths” is another problem.  Courts tend to view the revealing of only part of the truth the same as telling a lie.  If a seller states a fact that is true, the seller must also state all of the other facts that either qualify or modify the correct information.  These half-truths can result in the seller’s liability to pay damage to the buyer.

One example of this is a zoning ordinance.  The seller could knowingly or unknowingly misrepresent the nature of a land-use restriction that affects the property.  In this situation, a misrepresentation of existing state or local law does not provide the basis for rescission of the contract because the law and land use regulations in the zoning ordinance are a matter of public knowledge, open and available to buyer.

Another common situation involves the physical inspection of the property and its neighborhood.  Misrepresentations may relate to matters that the buyer’s inspection of the property can reveal.  The buyer may not be entitled to rely on the seller’s statements about the condition of the building or the nature of the neighborhood when the buyer has the opportunity to make a careful inspection.

Duress is the use of force or the threat of personal injury to make a contract against the free will of the other party.  Contracts entered under duress are voidable by the party forced into the agreement.   Duress occurs if a neighbor obtains a contract to buy an adjacent property by telling the owner that he will beat up the owner if he does not agree to sell.  So-called “economic duress,” where one party takes advantage of the other party’s financial situation (such as when a seller is about to lose his or her property to foreclosure) normally will not make a contract voidable by the distressed party.

If “seller financing” in the form of a purchase money loan is part of the financial agreement, the parties must agree that execution of the purchase-money note and security deed discharges the contract.  Failure to state this agreement could make performance of the contract a function of when the buyer pays off the loan received under the purchase-money mortgage.

Another type of novation is the mutually agreeable substitution of a different obligation for one of the original obligations specified in the contract.  For example, the real estate contract signed by both the buyer and seller states that the kitchen appliances remain with the property.  The seller now realizes that the appliances match the decor of his or her new house and seeks the buyer’s approval to substitute $700 for the appliances.  If the buyer agrees, the new obligation of the seller to pay $700 (or reduce the sales price by $700) supersedes the original obligation to leave the appliances.

An example of a condition precedent in a real estate sales contract is a requirement that the seller do some repair and maintenance work before the closing.  Assume that the ceilings in the living and dining rooms are warped and discolored because of leaks in the roof. The buyer may require that before closing the seller patch the roof to stop the leaks and paint both the living and dining rooms. If the seller having agreed to make the repairs (a condition precedent) fails to do so, the buyer may have a legal excuse for nonperformance of his or her obligation in the contract.  However, if the condition precedent is insignificant, its performance may not be required to make the contract legally binding.  In such cases, the party who expected the condition precedent to be performed may be limited to deducting the financial damages caused by the other person’s nonperformance from the sales price. In this situation, the buyer would reduce the cash payment to the seller by the expenses incurred to patch the roof and repaint the living and dining rooms.  If stopping the leaks required putting a new roof on the building, however, and if the buyer and seller fully understood a new roof was part of the contract, the seller’s failure to perform the condition precedent could be a legal excuse for the buyer to escape the contractual obligations.

In certain situations, the parties to the contract may foresee the possibility that a breach of contract may occur.  Consequently, they may agree on an amount of money to be paid to the injured party in case the default does take place.  In this situation, the predetermined sum of money is liquidated damages.  The earnest money deposit frequently is treated as liquidated damages in case of a breach of the sales contract by the buyer, even though the seller may also retain the right to sue for additional damages.