Contract Performance and Enforceability
Once a contract exists, the next question is whether it can be enforced and how it can be performed or terminated. This section covers contract status, breach, remedies, and the statute of frauds.
Contract Status Categories
Executed contract - A contract that has been fully performed.
Executory contract - A contract that has not yet been fully performed. Most purchase agreements are executory until closing.
Valid contract - Meets all requirements and is enforceable.
Void contract - Has no legal effect from the beginning.
Voidable contract - Valid unless one party with legal rights cancels it.
Unenforceable contract - Valid but cannot be enforced in court due to a legal defect.
Status Comparison
Table: Contract Status Comparison
| Status | Meaning | Example |
|---|---|---|
| Executed | Completed | Deed delivered and funds paid |
| Executory | Not yet completed | Contract before closing |
| Void | No legal effect | Illegal purpose |
| Voidable | One party can cancel | Contract with a minor |
| Unenforceable | Valid but not enforceable | Oral contract for land sale |
Breach of Contract
A breach occurs when a party fails to perform. Common real estate breaches include:
- Buyer fails to secure financing and cannot close.
- Seller refuses to convey clear title.
- Either party misses a deadline when time is of the essence.
Remedies for Breach
Remedies aim to place the injured party in the position they would have been in if the contract was performed.
- Rescission - Cancel the contract and restore both parties to their original positions.
- Damages - Monetary compensation for losses.
- Specific performance - A court order requiring performance. Common in real estate because property is unique.
Damages Types
Table: Damages Types
| Type | Purpose | Example |
|---|---|---|
| Compensatory | Cover actual losses | Lost deposit or costs |
| Liquidated | Pre-agreed amount | Earnest money forfeiture |
| Punitive | Punish wrongdoing | Rare in contract disputes |
Liquidated damages clauses are common in purchase agreements and often specify that the seller keeps the earnest money if the buyer defaults.
Time Is of the Essence
Time is of the essence means deadlines are critical. If the contract states this, missing a deadline can be a breach. If it is not stated, courts may allow reasonable delays.
Statute of Frauds (Writing Requirement)
The statute of frauds requires certain contracts to be in writing to be enforceable. Real estate contracts are almost always required to be in writing because they involve interests in land.
Common contracts that must be in writing include:
- Purchase agreements
- Option contracts
- Leases longer than one year (varies by state)
Electronic Contracts and Signatures
Electronic signatures are generally valid if the parties consent and the signature can be attributed to the signer. Most states recognize electronic signatures through federal and state laws.
Exam Traps
- Confusing void and voidable contracts.
- Assuming an oral real estate contract is enforceable.
- Forgetting that specific performance is common in real estate.
Summary
Know the contract status categories and how breaches are handled. Focus on remedies, time is of the essence, and the statute of frauds.
Contract Performance in Practice
Real estate contracts usually involve multiple stages of performance. The buyer performs by securing financing, completing inspections, and paying the purchase price. The seller performs by providing marketable title and delivering the deed.
If either side fails, the contract may be terminated or enforced in court. Many disputes are resolved through contract clauses that set out remedies in advance.
Rescission vs. Specific Performance
Rescission is used when both parties agree to cancel or when the contract has a defect that makes it unfair to enforce. It is common when contingencies fail.
Specific performance is common when a buyer wants a unique property and the seller refuses to close. The court can order the seller to perform, but cannot force personal services.
Example: Financing Contingency
A buyer cannot obtain financing by the contingency deadline. If the contract includes a financing contingency, the buyer can cancel and recover the deposit. If no contingency exists, the buyer may be in breach and lose the deposit.
Enforceability Checklist
Use this list for exam questions:
- Is the contract in writing when required?
- Are the parties competent and legal?
- Are all essential terms included (price, property, parties)?
- Has a deadline been missed under a time is of the essence clause?
If the answer to any of these is no, the contract may be unenforceable or in breach.
Additional Remedies and Defenses
Contracts can be modified or discharged by agreement. A novation replaces a party with a new one. An accord and satisfaction is an agreement to accept a different performance. An assignment transfers contract rights, while a delegation transfers duties. The original party remains liable unless released.
Mitigation of damages requires the harmed party to reduce losses. A seller should make reasonable efforts to resell a property rather than allow damages to grow.
Statute of Frauds Exceptions (General)
Some states recognize partial performance or estoppel as exceptions. If one party has performed and the other accepts the benefit, a court may enforce the agreement. These exceptions are state-specific, so focus on the general rule: contracts for real estate must be in writing to be enforceable.
Exam Application Check
If a question asks whether a contract can be enforced without a writing, the safest national answer is no, unless a recognized exception applies.
A contract that has been fully performed is called:
Which remedy is most common in real estate because property is unique?
Which contract type is valid but can be canceled by one party with legal rights?
The statute of frauds generally requires which contract to be in writing?
4.3 Sales Contracts and Contingencies
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