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What Constitutes A Contract?

Written by on Sunday, 10 March 2002 6:00 pm

Q. I am a real estate broker and have just been asked a question which is puzzling to me. A seller listed his property with another broker, and the listing states that the seller will sell the house for $450,000, in its “as is” condition, settlement to take place on April 1, 2002. A Ten Percent earnest money deposit was required by the seller.

A prospective buyer – who happens to be an attorney – told me to send the seller a letter, accepting the offer. This attorney told me that since the seller had made an offer, there would be a valid, binding contract when we accepted the offer and gave the listing broker the requisite earnest money deposit.

I told the attorney that, although I am not a lawyer, I did not believe this would constitute a valid contract. The attorney is absolutely convinced that it would.

Can you assist in this dispute? Incidentally, the house ultimately sold for several thousand dollars more to another party.

A: You are absolutely right. There is no contract.

This highlights the problem of applying the legal principles we learn in law school to real life situations.

In law school, we were taught that in order to have a valid, binding legal contract, three elements were required.

First, there must be an offer.

Second, there must be an acceptance of that offer.

The third vital element of a contract is consideration. Usually, consideration is in the form of money, such as the earnest money deposit. But the law books also define consideration as something of value other than dollars. For example, if a potential seller takes the house off the market based on the contract, or if the potential purchaser refrains from looking for another house, in my opinion this would also constitute valid consideration so as to make a contract between the parties. However, to be on the safe side, money is still the best consideration.

Many years ago, and to be exact in 1676, the British Parliament enacted a law called “An Act for the Prevention of Frauds and Perjuries”. This law was transported to the English colonies in America and is now known as the Statute of Frauds.

Oversimplified, the Statute of Frauds requires that in order for certain contracts to be valid and enforceable, they must be in writing. And real estate contracts are included in this category. The Statute of Frauds has been incorporated into the Uniform Commercial Code, which has been adopted (with some variations) in all 50 States in the Union.

In general, the law reads as follows:

Except as otherwise provided in this section, a contract for the sale of goods for the price of $500 or more is not enforceable by way of action or defense unless there is some writing sufficient to indicate that a contract for sale has been made between the parties and signed by the party against whom enforcement is sought or by his authorized agent or broker. (Emphasis added).

Now let’s analyze the question. Your attorney client believes that the seller has made an offer, and since it is in writing, the Statute of Frauds is not applicable. But it was not signed by the party against whom enforcement is sought (i.e. the seller) nor is it signed by a real estate broker.

On these facts alone, it is my opinion that no such contract was entered into.

However, there are other legal arguments which would defeat the position that there is a contract.

First, the Courts have long taken the position that such writings are merely invitations for someone to make an offer – they are not offers themselves. The classic cases are where department stores inadvertently advertise that a television set is being sold for $50 when the ad should have read $500. The Courts have consistently taken the position that this is only an invitation by the department store for a potential buyer to make an offer, and that buyers cannot take advantage of the lower price claiming that there is a contract. Of course, many department stores may opt to honor the erroneous price, but for public relations purposes – and not based on legal principles.

Another legal argument which defeats the concept that there is a binding principle is the fact that in order to have a binding contract, the parties to that contract must have agreed on all essential terms of that contract. Recently, the District of Columbia Court of Appeals wrote:

For there to be an enforceable contract, there must be mutual assent of each party to all of the essential terms of the contract... This mutuality of assent is often referred to as a “meeting of the minds”. The failure to agree on or even discuss an essential term of a contract may indicate that the mutual assent required to make or modify a contract is lacking. (Malone v Saxony Cooperative Apartments, 2000).

The attorney believes he has a contract. But have they reached the essential “meeting of the minds” on all issues. Have they determined who will pay the recordation/transfer tax required by the local Recorder of Deeds? Have they agreed on provisions relating to remedies in case one party defaults? Have they reached agreement on whether the property will be vacant on the date of settlement?

These are important provisions which must be included in any real estate contract, and since they obviously were not included in the listing placed by the seller, there is no real estate contract.

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  About the author, Benny L. Kass

Individual news stories are based upon the opinions of the writer and does not reflect the opinion of Realty Times.