4.2 Contract Performance, Breach, and Enforceability

Once a contract is valid, the exam shifts to what happens during its life: how parties perform or discharge their duties, what counts as a breach, the remedies available, and the writing rules that determine whether a court will enforce the deal at all.

The Statute of Frauds

The statute of frauds requires certain contracts to be in writing and signed to be enforceable. In real estate this captures contracts for the sale of land, options, and leases longer than one year (the threshold tested most often). An oral sale of land is not void, but it is unenforceable in court.

Memorize the one-year lease line. A 9-month oral lease is generally enforceable; an 18-month oral lease is not. Listing agreements are also commonly required to be written by state license law, even though they are services contracts rather than land transfers.

Ways a Contract Is Discharged

Contracts end in several ways. The exam wants you to distinguish them:

• Performance: both parties do what they promised (the normal ending at closing).
• Substantial performance: minor deviations still allow enforcement with an offset for damages.
• Mutual rescission: both agree to cancel and return to their prior positions.
• Novation: a new contract or new party substitutes for the old one.
• Assignment: rights transfer to another party (duties may remain).

Discharge Methods Compared

Breach of Contract

A breach is failure to perform without legal excuse. A material breach goes to the heart of the bargain (the seller refuses to convey), while a minor breach is a small deviation. Time-is-of-the-essence clauses make deadlines strict, so missing a date can itself be a material breach.

Remedies for Breach

When one party breaches, the injured party may pursue:

1. Specific performance — a court order to complete the sale, available because each parcel of land is unique.
2. Compensatory damages — money to cover actual losses.
3. Liquidated damages — a pre-agreed sum (often the earnest money) the parties set in advance.
4. Rescission — cancel the contract and return deposits.

Liquidated damages must be a reasonable forecast of harm, not a penalty. If a buyer defaults and the contract names the $15,000 earnest money as liquidated damages, the seller typically keeps that sum and waives other claims, rather than suing for additional losses.

Statute of Limitations

The statute of limitations sets the window for filing suit. Once it expires, an otherwise valid claim becomes unenforceable. This is why a verbally promised commission, even if morally owed, often cannot be collected once both the writing rule and the time limit work against the broker.

Worked Example: Damages Math

A buyer in breach forfeits a 2% earnest deposit on a $385,000 home. Deposit = 0.02 x $385,000 = $7,700. If the contract names this as liquidated damages, the seller keeps $7,700 and the deal is discharged, regardless of whether the seller later sells for more or less.

How Contracts Are Discharged

A contract ends in one of several ways the exam likes to compare. Performance is the normal completion of all terms. Substantial performance occurs when minor details remain but the essential bargain is met, allowing the contract price minus the cost to cure. Mutual rescission unwinds the deal by agreement and returns the parties to their pre-contract positions. Accord and satisfaction substitutes a different performance the parties accept as full settlement.

A contract is also discharged by operation of law through bankruptcy, the statute of limitations running, or impossibility of performance such as the destruction of the property.

Assignment vs. Novation

Transferring contract rights confuses many candidates. An assignment transfers a party's rights and most duties to a new party, but the original party usually remains secondarily liable if the assignee defaults — unless the contract forbids assignment. A novation substitutes a new party or a new contract and fully releases the original party from further liability, which requires the consent of all parties. Quick test: if the question says the first party is "off the hook," it is novation; if the first party is still on the hook as a backup, it is an assignment.

Most real estate purchase contracts are assignable unless they expressly say otherwise.

Liquidated Damages and Time Is of the Essence

Many purchase contracts include a liquidated damages clause stating that if the buyer defaults, the seller keeps the earnest money as the agreed, pre-set measure of damages, in lieu of suing for actual losses. To be enforceable the amount must be a reasonable estimate of harm, not a punitive penalty. A time is of the essence clause makes every stated deadline strict: missing a closing date by even one day can be a material breach, so the exam treats a casually missed deadline as default when this clause is present. Without it, courts often allow a reasonable extension.

Pair these with the remedies hierarchy — specific performance, compensatory damages, liquidated damages, or rescission — and you can answer most breach questions correctly.

Common Exam Traps

• Calling an oral land sale "void" when it is unenforceable.
• Forgetting the one-year lease threshold under the statute of frauds.
• Confusing novation (releases the original party) with assignment (usually does not).
• Believing money damages are the only remedy; specific performance applies because land is unique.

Key Takeaways