Contract Basics

An agent must have a working knowledge of contract law because every aspect of the business deals with contracts. A contract is an oral or written agreement to do or not to do a certain thing.

Many oral contracts are valid and enforceable. However, most contracts involving real estate must be in writing to be enforceable.
The statute of frauds determines the documents that must be in writing to be enforceable. In most states, real estate documents such as sale contracts, deeds, and mortgages must be in writing.

Some states allow an oral listing for less than one year. But in order to be compensated, a brokerage firm needs an employment contract in writing to collect compensation. Therefore it is in an agent's best financial interest to have a written listing agreement.

Many real estate contracts contain a time for performance. For example, a listing contract contains an expiration date, an offer contains a time period, and a sales contract contains a date at which time the buyers must inspect the property and secure a mortgage commitment and a closing date. In the case where a time period is not specified, the law will give a reasonable time to complete the contract.

When the phrase "time is of the essence" is written in the contract, it means that everything must be done within a specific time. If the requirement is not met, the promisor will be held to have breached the contract and the rescission by the promisee would be justified.
An "as is clause" in a contract means the buyer is buying the property as he sees it, with all existing conditions. The seller is still bound to disclose property defects, but not to make repair.

An assignment is the transfer of contract rights from one party to another. This could be the transfer of a right, title, or interest in a property.

A contract is assignable unless the contract or state law forbids it. Personal service contracts are usually not assignable. The party transferring the contract is called the assignor; the party receiving the transferring contract is called the assignee. For example, two years ago you entered into a five-year lease agreement and opened your business. Today, a party wants to buy your business.
 If you sell your business, and assignment is permitted by your lease contract, you may assign your lease to the new owner. If the lease is assigned, you are the assignor and the new owner is the assignee. The landlord would now expect the lease payment from the new owner.

An assignment does not relieve the assignor from liability unless novation has been granted. Novation is the substitution of one contract for another and releases liability. Just remember "nova" is Latin for "new", hence "novation", a new contract.
A liquidated damage clause is a contractual provision that determines in advance the measure of damages if a party breaches the agreement.

In a sales contract, the earnest money may be considered liquidated damages if the parties so agree. That is, if the buyer breaches the agreement, the seller may keep the earnest money.

Specific performance is court action to force the completion of a contract. For example, if all the requirements of a contract have been met, and the seller refuses to sell the property, the buyer may sue for specific performance. Brokers do not sue for specific performance.

The rescission of a contract occurs when there is an agreement between the contracting parties to waive all the remaining duties and to terminate the contract. In essence, it would be returning the parties to the same legal position they were in before entering into the contract.