Browse Proptionary encyclopedia

Build your real estate vocabulary to be able to communicate and invest more effectively and professionally.

Valid

DEFINITION

Legally enforceable.

EXPLANATION

The components of a valid contract are:

Offer

Acceptance

Consideration

Competent parties

Mutual consent

Goals of contract are legal

A contract must have all of these components in order to be enforceable. If a component is missing, the contract is incomplete and therefore, void.

The Offer

In order for a contract to be initiated, there must be an offer with a definitive course of action. Usually, this course of action is the exchange of money, goods, or services. An offer represents the terms to which one party is willing to agree, and includes all details related to the course of action. This includes the service or product in question, the price, the payment structure, and involved parties.

An offer’s terms must be specific. For example, a valid contract cannot simply list a property’s purchase price as “to be determined.” If an exact price cannot yet be given, the contract must give a specific range or method for calculating price. An example would be a clause that states: “the purchase price will use the average price per square foot as the basis for the final sales price.”

If the contract does not have a definitive closing date, a reasonable time period will apply.

An offer is not a legally-binding document until it is accepted.

Right of First Refusal

The right of first refusal refers to a party’s legal right to have priority in entering a contract ahead of another party. If a party with the right of first refusal matches, or exceeds, the price of a competing party, the party with the right of first refusal has the right to buy the product or service.

In the context of real estate, this means that a buyer with the right of first refusal has the opportunity to match a competing buyer’s offer on a property before the seller accepts it.

Case Review: Ellis v. Chevron U.S.A., Inc. (1998)

The case, Ellis v. Chevron U.S.A., Inc. (1998) 201 Cal.3d 132., involved a dispute over the right of first referral.

A property owner (Ellis) was under a lease contract with Chevron which gave Chevron the right of first refusal. A company named Pep Boys submitted a purchase offer to Ellis, which included a $3,000 monthly rent, the construction of a new building on the site, and the acquisition of an adjacent site. Ellis presented Chevron with Pep Boys proposal.

Chevron was willing to match the $3,000 per month; however, it was not willing to pay the costs of construction for the new building or the acquisition of the adjacent property. Ellis proceeded to terminate his agreement with Chevron and accept the Pep Boys offer. Chevron sued Ellis for not accepting its offer.

The Superior Court argued that because Ellis had followed the correct procedures for tenants with a right of refusal, Ellis was free to accept Pep Boys offer.

Case Review: Hartzheim v. Valley Land and Cattle Co. (2007)

The case, Hartzheim v. Valley Land and Cattle Co. (2007) 153 Cal.4th 383., involved a dispute regarding a right of first refusal clause.

Hartzheim was a lessee of the property owned by Valley Land and Cattle Company who had a right of first refusal clause in his contract. At some point, the owner of Valley Land and Cattle Company transferred the land to his children and grandchildren. This was done in an attempt to reduce taxes and begin estate planning. However, Hartzheim claimed that he had been deprived of his right of first refusal and sued.

The Superior Court ruled that an argument for the right of first refusal could not be applied in this scenario. Although Valley Land and Cattle Company’s property was transferred, it was only transferred with the intent of managing the partnership’s tax obligations and estate planning. As the transfer was not made to deliberately avoid their contractual obligation of offering the lessee the right of first refusal, the court ruled in favor of Valley Land and Cattle Company.

Offer Expiration

Most offers give the offered party a specific time period in which to respond. In the event that the deadline is reached without action, the offer expires and its terms are revoked.

Typically, a seller has three days to respond to a buyer’s purchase offer. However, the buyer can extend or shorten the seller acceptance deadline, if necessary.

For example, a buyer agrees to keep an offer open for two weeks for the purchase of a seller’s house. If the seller does not respond to the buyer’s offer by the end of that two-week period, the offer automatically expires. Even if the seller ultimately decides to sell the property after the two-week period, the original offer is terminated. Therefore, the transaction will not occur unless the two parties agree to change the date or terms of the offer.

If an offer does not indicate an expiration date, the offer can be rescinded after a reasonable period of time based on the transaction and its terms.

Revocation

An offer can be rescinded any time prior to the offering party’s acceptance.

For example, suppose a buyer makes an offer on a seller’s house, but the seller needs a few days to think it over. The buyer can legally revoke his or her offer prior to the seller’s stated acceptance of the offer.

To revoke a contract, the offering party and offering party’s agent must inform the offered party and offered party’s agent. Revocation occurs when the offered party receives the revocation, not when the offering submits the revocation.

For example, say a buyer wishes to revoke an offer he made to a seller. He sends a revocation on the first of the month, but the seller doesn’t receive it until the fifth. If the seller accepts the buyer’s contract prior to the fifth, the offer is valid and legally enforceable.

Alterations to Contract’s Subject

An offer will also be terminated in the event that any alterations are made to the subject of the contract.

For example, if a buyer made an offer on a seller’s property, but that property is subsequently destroyed in a fire, the buyer’s offer is no longer valid.

Death / Incapacity

If the original offering party in a transaction dies, his or her offer is no longer valid. This also applies to an offering party who becomes mentally incapacitated.

If, however, the offering party is a corporation and only one of the officers in the transaction dies, the offer remains enforceable.

Acceptance

A contract becomes legally enforceable when the offered party notifies the offering party of his or her acceptance. Acceptance indicates a clear willingness by the offered party to be bound by the contract.

By law, acceptance takes place immediately upon receipt or confirmation by the offered party. In California, an offered party can accept an offer either verbally or in writing, although it is highly advisable to do so in writing.

Fax and email are considered reasonable methods for communicating acceptance. Offered parties can scan an email or sign a special electronic signature pad.

Civil Code Section 1583 states that mailing an acceptance offer is also acceptable. It is advisable for an offered party to retain a confirmation of mailing an acceptance offer, however, such as a postal receipt or a signature for a certified mailing transaction.

If a proposed contract contains a specific provision about how to indicate acceptance, this provision must be met in order for acceptance to be valid.

The offered party must clearly communicate his or her acceptance of an offer with no ambiguity. For example, statements such as “I love the deal, but let me look it over with my wife” or “I’ll only do it if you reduce the price another $2,000” do not communicate acceptance. Similarly, an offer cannot contain a silent acceptance clause (i.e. “if I don’t hear from you within 10 days, the property is mine”).

Only the offered party or the offered party’s legal representative (i.e. power of attorney) may accept an agreement. The contract is not valid if a different person accepts the agreement. Similarly, acceptance can only be communicated to the offering party, the offering party’s real estate agent, or the offering party’s legal representative.

Contracts are enforceable only when the accepted offer is the original offer. If additional terms or amendments are introduced into the contract by the offered party, the offering party has the right to reject acceptance of the contract.

Time is of the essence is an implied clause that contracts contain. This specifies the date by which a party is required to fulfill a condition or finalize the transaction. Failure to do so constitutes an unacceptable breach of contract.

“Offers” made in real property advertisements — such as those found in the multiple listing services or the local newspaper — are simply a means to begin negotiations. They do not constitute a legal offer and therefore, a party cannot “accept” them as such.

Counteroffer

A counteroffer is a form of negotiation in which the offered party responds to an original offer’s terms with additional changes or provisions. Essentially, the offered party rejects the offering party’s terms and submits a new offer with different terms.

In the event of a counteroffer, the acceptance period of the contract is terminated and there is no acceptance. Instead, there is a new offer and a reversal of roles between parties: the original offered party is now the offering party who is dictating the terms of the contract, and the original offering party is now the offered party in a position to either accept or reject those terms.

For example, assume a buyer puts in an offer to buy a seller’s property with a 45-day inspection period. However, the seller counters that provision with an offer for a 30-day inspection period. The seller now becomes the offering party, and the buyer becomes the offered party.

Conditional Acceptance

A conditional acceptance is a form of acceptance that is subject to a certain action being performed, or a term of an offer being altered. Conditional acceptance is similar to a counteroffer in that the introduction of a new condition changes the original offer and initiates a new offer.

Rejection by the Offered Party

Should the offered party reject the offering party’s offer, the option of acceptance is terminated.

Should the real estate transaction be an auction, the auctioneer, also known as the offered party, can reject any offer. In auction’s there are minimum bids that offering party’s must surpass in order to qualify for the purchase and therefore the acceptance of the offered party. Auctions without a reserve are a type of auction whereby the auction will be granted to the highest bidder, assuming the bids surpass the minimum requirement. An offer to purchase real property in auction may not constitute a sale, even if the offer is the highest bid, unless the auction was without a reserve price.

Case Review: Roth v. Malson (1998)

The case, Roth v. Malson (1998) 67 Cal.4th 552., featured a discrepancy over a counteroffer.

A buyer (Roth) and seller (Malson) were in negotiations over the purchase of an acre of land. Malson had listed the property for $47,600. Roth made an all cash offer of $41,650 with a 30-day closing period. Malson countered Roth’s offer with an offer of $44,000, and Roth accepted. Upon signing, however, Roth added new language to the contract.

Shortly thereafter, Malson notified Roth that he would no longer be selling the property. Roth brought a lawsuit against Malson for breaching the terms of their contract. He sought specific performance to require Malson to sell.

In court, the judge ruled that the original contract was not valid because Roth had added additional items to the agreement. This created a counteroffer, rather than acceptance. Because a counteroffer must be accepted by the opposing party — and it was not when Malson decided to no longer sell — the contract was not valid. Therefore, Malson was not required to perform the specific performance of selling the house.

Consideration

The next component of a valid contract is consideration. Consideration is the exchanged value between parties in a contract, or the reason each party enters the contract. It legally defines the roles of each party contingent on performance.

The most common type of consideration is an agreement to act in return for the other party’s act. This typically involves the exchange of one party’s money for the other party’s services, property, objects, ideas, or future acts.

For example, let’s say Roger offers to pay Mary $3,000 to design his home. If Mary accepts Roger’s proposal, there is consideration. Mary is receiving $3,000, while Roger gets a newly designed home.

Another type of consideration is a party agreeing not to act in some way, even when the party has the legal right to do so.

For example, assume Driver X rear-ends Driver Y’s car, incurring damages of $900. To avoid having to claim the accident on his insurance, Driver X pays Driver Y the $900 to get his car repaired. In this example, Driver Y’s consideration is getting his car repaired (via the $900), whereas Driver X’s consideration is Driver Y not reporting the damages to the insurance company.

Although consideration must be clearly defined in a legally-binding contract, the legal system rarely enforces such clauses unless one of the parties brings a lawsuit. Should the consideration of a contract be unfair, unlawful, or otherwise immoral, the courts may allow the injured party to terminate the contract.

Competent Parties

An enforceable contract requires all parties entering into a contract to be competent and have the legal capacity to do so. Contracts are enforceable unless a party can prove that he or she was incompetent at the time of the contract’s execution.

With few exceptions, adults are considered competent parties. This includes:

Currently incarcerated individuals

Formerly incarcerated individuals

Alien citizens

Currently and formerly incarcerated individuals maintain real property rights. Those who are incarcerated can even acquire or convey property while in jail.

Examples of legally incompetent parties include:

Minors

Mentally incapacitated

Under the influence

California law assumes that a minor does not have the legal capacity or experience to engage in real estate transactions. In the event that a minor does enter into such a contract, his or her minor status make it unenforceable.

The exception to this rule is an emancipated minor. An emancipated minor is an individual under the age of eighteen who is no longer a dependent of a parent or legal guardian, and thus, has the legal authority to make decisions for themselves.

In the event that a mentally incapacitated person needs to refinance their mortgage or buy or sell property, he or she must do so under the discretion of the courts. A person who executes a contract while under the influence of substances can void that contract.

Mutual Consent

All parties involved in a contract must consent to entering into a contract.

Consent is achieved by a mutual understanding of the terms of an agreement. All involved parties must be aware of their responsibilities and obligations, and they must express their desire to enter into a contract of their own volition.

A contract must also be consented through actions. This is most commonly done through signing the contract, oftentimes with a seal. A seal is a mark used to authenticate a signature on a contract.

Conversely, a letter of intent — or illusionary contract — only expresses a buyer’s intent to purchase property, rather than his or her commitment. Such a letter does not verify mutual consent or legally bind parties.

Goals of contract are legal

If any contract provision violates the law, or unfairly prevents someone from engaging in legal activity, the contract is unenforceable.

Civil Code Section 1644 states that words contained in a contract will be understood with its most simple explanation. This means that courts and other legal bodies must be able to easily understand a contract’s provisions. If a contract may be interpreted with multiple meanings, only the legally enforceable interpretation will be used. Parties may also have the ability to legally cancel the contract.

For example, assume Mary sells a bakery to Susie. In the purchase contract, Susie may require a non-competing clause that prevents Mary from starting a different bakery that sells the same items or is on the same block. However, Susie cannot include a provision that denies Mary the right to ever open up another bakery.

If a law changes and makes the activity within an executed contract illegal, the contract is no longer valid.

If there are multiple contracts that are intended to supplement each other, and a portion of one contract is illegal, only the enforceable provisions will remain.

For example, say Bradley employs Cupertino Drywall to develop his subdivided land. Cupertino Drywall begins the process of installing drywall. Then Bradley discovers that he does not have the proper permits from the city to continue the project. Therefore, the project itself is illegal, but Cupertino Drywall is still entitled to retain payment for services provided. Their contract with Bradley is legal, and therefore, they should not be held liable for Bradley’s failure to obtain the proper permitting.

In the event that both parties are guilty of an illegal violation, the less guilty party will typically have the right to recover for damages.

Case Review: Sterling v. Taylor (2007)

The case, Sterling v. Taylor (2007) 40 Cal.4th 757., involved a legal dispute over the definiteness of a sales contract.

A buyer (Sterling) bought a property from a seller (Taylor). The transfer of property did not include a formal purchase agreement. Rather, the transaction was documented with a handwritten memorandum entitled “Contract for Sale of Real Property”. The memorandum listed the property’s sales price as $16,750,000, and the rental income as $1,600,000 a year. Using those figures, it indicated that the return on the property was approximately 10.468%.

The memorandum included signature lines for both Sterling and Taylor. Sterling signed his name, Taylor did not. Ultimately, Taylor signed the agreement indicating that it was agreed, accepted, and approved.

However, prior to the close of the sale, Sterling discovered that the property’s actual rental income was $1,375,404 a year (not $1,600,000). To compensate for this difference, Sterling countered Taylor’s asking price with an offer of $14,404,841. Taylor rejected the offer. Sterling sued, alleging a breach of contract.

The Superior Court contended that the terms of the agreement were ambiguous. The original signed contract indicated a purchase price of $16,750,000. This was separate from Sterling’s proposed changes based on the discovery of the property’s actual rental income. The court ruled in favor of Taylor.

[quiz-new]