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REAL ESTATE
FREQUENTLY ASKED QUESTIONS
Residential
Landlord/Tenant Law
Download
A Guide to Residential
Tenants' and Landlords' Rights and Responsibilities.
What is
necessary for a valid Real Estate Contract?*
In writing
A real estate contracts
must be in writing to be enforceable. The
Statute of Frauds
requires real estate contracts to be in writing to
be enforceable. Additionally, a real estate
contract must:
- Identify the
parties: The full name of the parties must be
on the contract. In a sales contract, the parties
are the seller(s) and buyer(s) of the real
estate, who are often called the principals to
distinguish them from real estate agents, who are
effectively their intermediaries and
representatives in negotiation of the price. If
there are any real estate agents brokering the
sale, they are typically listed also as the real
estate brokers/agents who would earn the
commission from the sale.
- Identify the real
estate (property): At least the address, but
preferably the legal description must be on the
contract.
- Identify the
purchase price: The amount of the sales price
or a reasonably ascertainable figure (an
appraisal to be completed at a future date) must
be on the contract.
- Include signatures:
A real estate contract must be entered into
voluntarily (not by force), and must be signed by
the parties, to be enforceable.
- Have a legal
purpose: The contract is void if it calls for
illegal action.
- Involve Competent
parties:
Mentally impaired, drugged persons, etc. cannot
enter into a contract. Contracts in which at
least one of the parties is a minor are voidable
by the minor.
- Reflect a meeting of
the minds: Each side must be clear and agree
as to the essential details, rights, and
obligations of the contract.
- Include
Consideration:
Consideration is something of value bargained for
in exchange of the real estate. Money is the most
common form of consideration, but other
consideration of value, such as other property in
exchange, or a promise to perform (i.e. a promise
to pay) is also satisfactory.
Notarization by a notary
public is normally not required for a real estate
contract, but many recording offices require that a
seller's or conveyor's signature on a
deed
be notarized to record the deed. The real estate
contract is typically not recorded with the
government, although statements or declarations of
the price paid are commonly required to be
submitted to the recorder's office.
Sometimes real estate
contracts will provide for a lawyer review period
of several days after the signing by the parties to
check the provisions of the contract and
counter-propose any that are unsuitable.
If there are any real
estate brokers/agents brokering the sale, the
buyer's agent will often fill in the blanks on a
standard contract form for the buyer(s) and
seller(s) to sign. The broker commonly gets such
contract forms from a real estate association
he/she belongs to. When both buyer and seller have
agreed to the contract by signing it, the broker
provides copies of the signed contract to the buyer
and seller.
Offer and acceptance
As may be the case with
other contracts, real estate contracts may be
formed by one party making an offer and another
party accepting the offer. To be enforceable, the
offers and acceptances are normally in writing and
signed by the parties agreeing to the contract.
Often, the party making the offer prepares a
written real estate contract, signs it, and
transmits it to the other party who would accept
the offer by signing the contract. As with all
other types of legal offers, the other party may
accept the offer, reject it - in which case the
offer is terminated, make a counteroffer - in which
case the original offer is terminated, or not
respond to the offer - in which case the offer
terminates by the expiration date in it. Before the
offer (or counteroffer) is accepted, the offering
(or countering) party can withdraw it. A
counteroffer may be countered with yet another
offer, and a counter-offering process may go on
indefinitely between the parties.
To be enforceable, a real
estate contract must possess original signatures by
the parties and any alterations to the contract
must be initialed by all the parties involved. If
the original offer is marked up and initialed by
the party receiving it, then signed, this is not an
offer and acceptance but a counter-offer.
Deed specified
A real estate contract
typically does not convey or transfer ownership of
real estate by itself. A different document called
a deed is used to convey real estate. In a real
estate contract, the type of deed to be used to
convey the real estate may be specified, such as a
warranty deed or a quitclaim deed. If a deed type
is not specifically mentioned, "marketable title"
may be specified, implying a warranty deed should
be provided. Lenders will insist on a warranty
deed. Any liens or other encumbrances on the title
to the real estate should be mentioned up front in
the real estate contract, so the presence of these
deficiencies would not be a reason for voiding the
contract at or before the closing. If the liens are
not cleared before by the time of the closing, then
the deed should specifically have an exception(s)
listed for the lien(s) not cleared.
The buyer(s) signing the
real estate contract are liable (legally
responsible) for providing the promised
consideration for the real estate, which is
typically money in the amount of the purchase
price. However, the details about the type of
ownership may not be specified in the contract.
Sometimes, signing buyer(s) may direct a lawyer
preparing the deed separately what type of
ownership to list on the deed and may decide to add
a joint owner(s), such as a spouse, to the deed.
For example, types of joint ownership (title) may
include tenancy in common, joint tenancy with right
of survivorship, or joint tenancy by the
entireties. Another possibility is ownership in
trust instead of direct ownership.
Contingencies
Contingencies
are conditions which must be met if a contract is
to be performed.
Contingencies that suspend
the contract until certain events occur are known
as "suspensive conditions". Contingencies that
cancel the contract if certain event occur are
known as "resolutive conditions".
Most contracts of sale
contain contingencies of some kind or another,
because few people can afford to enter into a real
estate purchase without them. But it is possible
for a real estate contract not to have any
contingencies.
Some types of
contingencies which can appear in a real estate
contract include:
- Mortgage contingency -
Performance of the contract (purchase of the real
estate) is contingent upon or subject
to the buyer getting a mortgage loan for the
purchase. Usually such a contingency calls for a
buyer to apply for a loan within a certain period
of time after the contract is signed. Since most
people who buy a house get a mortgage loan to
finance their purchase, mortgage contingencies
are one of the most common type of contingencies
in real property contracts.
- Inspection contingency
- Purchase of the real estate is contingent upon
a satisfactory inspection of the real property
revealing no significant defects. Contingencies
could also be made on the satisfactory repair of
a certain item associated with the real estate.
- another sale
contingency - Purchase or sale of the real estate
is contingent on a successful sale or purchase of
another piece of real estate. The successful sale
of another house may be needed to finance the
purchase of a new one.
- appraisal contingency -
Purchase of the real estate is contingent upon
the contract price being at or below a fair
market value determined by an appraisal.
Lenders will often not lend more than a certain
percentage (fraction) of the appraised value, so
such a contingency may be useful for a buyer.
-
72-hour kick out
contingency -
Seller contingency, in which the seller accepts a
contract from a buyer with a contingency
(typically a home sale or rent contingency where
the buyer conditions the sale on their ability to
find a buyer or renter for their current property
prior to settlement). The seller retains the
right to sell the property to another party if he
so chooses after giving the buyer 72 hours notice
to remove their contingency. The buyer will then
either remove their contingency and provide proof
that they can consummate the sale or will release
the seller from their contract and allow the
seller to move forward with the new contract.
Date of closing and
possession
A typical real estate
contract specifies a date by which the closing must
occur. The closing is the event in which the money
(or other consideration) for the real estate is
paid for and
title
(ownership) of the real estate is conveyed from the
seller(s) to the buyer(s). The conveyance is done
by the seller(s) signing a deed for buyer(s) or
their attorneys or other agents to record the
transfer of ownership. Often other paperwork is
necessary at the closing.
The date of the closing is
normally also the date when possession of the real
estate is transferred from the seller(s) to the
buyer(s). However, the real estate contract can
specify a different date when possession changes
hands. Transfer of possession of a house,
condominium, or building is usually accomplished by
handing over the key(s) to it. The contract may
have provisions in case the seller(s) hold over
possession beyond the agreed date.
The contract can also
specify which party pays for what closing costs. If
the contract does not specify, then there are
certain customary defaults depending on law, common
law (judicial precedents), location, and other
orders or agreements, regarding who pays for which
closing costs.
Condition of property
A real estate contract may
specify in what condition of the property should be
when conveying the title or transferring
possession. For example, the contract may say that
the property is sold as is, especially if
demolition is intended. Alternatively there may be
a representation or a warranty (guarantee)
regarding the condition of the house, building, or
some part of it such as affixed appliances, HVAC
system, etc. Sometimes a separate disclosure form
specified by a government entity is also used. The
contract could also specify any personal property
(non-real property) items which are to be included
with the deal, such as washer and dryer which are
normally detachable from the house.
Riders
Riders (or addenda) are
special attachments (separate sheets) that become
part of the contract in certain situations.
Earnest money deposit
Although, it is not
absolutely required for a valid real estate offer
or a contract, an earnest money deposit from the
buyer(s) customarily accompanies an offer to buy
real estate. The amount, a small fraction of the
total price, is listed in the contract, with the
remainder of the cost to be paid at the closing.
What
is a Mechanic's lien, and how is it enforced?*
A mechanic's
lien
is a
security interest
in the
title
to
property
for the benefit of those who have supplied labor
or materials that improve the property. The lien
exists for both
real property
and
personal property.
In the realm of
real property,
it is called by various names, including,
generically, construction lien. It is also
called a materialman's lien or
supplier's lien when referring to those
supplying materials, a laborer's lien when
referring to those supplying labor, and a
design professional's lien when referring to
architects or designers who contribute to a work
of improvement. In the realm of
personal property,
it is also called an artisan's lien. The
term "lien" comes from a French root (via
William the Conqueror),
with a meaning similar to
link;
it is related to "liaison." Mechanics liens on
property in the United States date from the
1700s.
Reasons for existence
With respect to real
property, mechanic's liens are purely statutory
devices that exist in every state. The reason
they exist is a legislative public policy to
protect the contractors. More specifically, the
state legislatures have determined that, due to
the economics of the construction business,
contractors and subcontractors need a greater
remedy for non-payment for their work than merely
the right to sue on their contracts. In
particular, without the mechanics' lien,
subcontractors providing either labor or
materials may have no effective remedy if their
general contractor isn't sufficiently financially
responsible because their only contractual right
is with that general contractor. Without the
mechanic's lien, the contractor would have a
limited number of options to enforce payment of
the amounts owed. Further, there is usually a
long list of claimants on any failed project. To
avoid the specter of various trades, materialmen
and suppliers attempting to remove the
improvements they have made, and to maintain a
degree of equality between the various lienors on
a project, the statutory lien scheme was created.
Without it, Tradesperson A may try to "race"
Supplier B to the courthouse, the project site or
the construction lender to obtain payment. Most
lien statutes instead mandate strict compliance
with the formalized process they create in return
for the timely resolution and balancing of claims
between all parties involved - both owners and
lien claimants.
Creation
Mechanic's liens exist
to secure payment for services, labor and
material on both personal and real property.
However, the creation and enforcement mechanisms
differ depending on whether real or personal
property is involved. The law of mechanic's liens
on real property governs the creation and
enforcement of these liens on items of personal
property that have been attached to real property
in such a way as to be a
fixture.
Creation and
Enforcement - Personal property
The English
common law
recognized mechanic's liens respecting only
personal property. The lien was created by the
fact of the artisan working on the personal
property item or attaching additional material to
it. However, to maintain the lien, the artisan
had to retain possession of the article until he
or she was paid. If the property were returned to
the owner before that time, the lien was lost.
The lien was enforced by a sale of the property
and applying the sale proceeds to payment of the
amount owed for the workmanship. The sales were
non-judicial, i.e., they were held in the same
way as a sale of property pawned for a debt....
Some 34 states now
appear to have statutes providing for mechanic's
liens on personal property[1]
Creation, Perfection,
Priority and Enforcement - Real property
Mechanic's liens on the
title to real property are exclusively the result
of
legislation.
Each state has its own laws regarding the
creation and enforcement of these liens, but,
overall, there are some similar elements among
them.
Real property of the
government (public property) is ordinarily not
subject to the claims of private parties.
Therefore, unless the state specifically so
provides, mechanic's liens do not attach to the
title owned by the state or its administrative
subdivisions, such as cities. Similarly,
mechanic's liens under state law are invalid on
federal construction projects. To protect
subcontractors and suppliers federal projects,
where the contract price exceeds $100,000.00, the
Miller Act requires general contractors to
provide a
surety bond
which guarantees payment for work done in
accordance with the terms of the contract. Many
state and municipal governments similarly require
contractors on public works projects to be
bonded.
Creation and
perfection
Under the statutes, the
lien is usually created by the performance of
labor or the supplying of material that improves
the property. Just what type of contribution
counts as a valid basis for a mechanics lien
varies, depending on the particular state statute
that applies. Some common examples are:
-
-
-
Lumber yards,
plumbing supply houses and electrical
suppliers;
-
-
- Offsite fabricators
of specialty items that are ultimately
incorporated into the project.
Often, there is no
simple dividing line that is useful in every
state, or even in every case, for determining
this eligibility. Deciding whether a party has a
legitimate lien right may depend on examining
court cases that have either upheld or rejected
lien claims in the same state.
Unlike other security
interests, in most states, mechanic's liens are
given to contractors and material suppliers who
may or may not have a direct contractual
agreement with the owner of the land. In fact,
this is often the norm because in most cases, the
owner of the land contracts only with a general
contractor (often called a "prime contractor").
The general contractor, in turn, hires
subcontractors ("subs") and material suppliers
("suppliers") to perform the work. These subs and
suppliers are entitled to liens on the owner's
property to secure their payment from the general
contractor.
However, to have an
enforceable lien, it usually must be "perfected."
This means that the holder of the lien must
comply with the statutory requirements for
maintaining and enforcing the lien. These
requirements, which contain time limits, are
generally as follows:
-
- Providing the
required
preliminary notice
to the property owner disclosing the
entitlement to the lien (some states).
-
- Filing notices of
commencement of work (some states).
-
- Filing notices in
the required public records offices of the
intention to file a lien if unpaid (some
states).
-
- Filing the notice
or claim of lien in the required public
records offices within a specified period of
time after the materials have been supplied
or the work completed (all states). The law
varies from state-to-state on both the
triggering event and the timing of this. Some
states require the filing within a period
measured from the time when the claimant
completes its work, while others specify the
event as being after all work on the project
has been completed. The filing time periods
after the triggering event vary, with 4-6
months being common.
-
- Filing a lawsuit to
foreclose the lien within a specified time
period.
Priority respecting
other interests
The statutes creating
mechanic's liens usually give them a higher
priority with respect to other interests in the
title than the law gives most real property
security interests. Among other things, priority
is the attribute that determines which of several
competing security claims will have the first
claim to the funds of a
foreclosure sale.
In this context, the priority of a mechanic's
lien is determined either by the time the lien
attaches to the title to the property or by the
point in time to which it "relates back." With
some exceptions, the lien attaches or relates
back to a time prior to the time that any notice
of it appears in the public records. In many
states, this is specified as the time when the
first visible construction commences on the
building site. In others, it is when the contract
is executed for the work to be done. In still
others, each contractor or supplier's lien
attaches at the time when it commences its own
work. Therefore, persons dealing with the owner
of the title to the property risk having their
interests unexpectedly subject to mechanic's
liens of which they had no knowledge.
Enforcement
Mechanic's liens are
enforced exclusively through judicial foreclosure
sales, i.e., through court proceedings similar to
mortgage foreclosures. The court must determine
whether the requirements of the statute have been
met and, if so, the priority of the mechanic's
lien being foreclosed relative to the other liens
or encumbrances on the title. Once that is
determined, the court will order the property
sold and the proceeds of the sale applied to the
liens in the order of their priority.
*Permission is
granted to copy, distribute and/or modify this
document under the terms of the GNU Free
Documentation License, Version 1.2 or any later
version published by the Free Software Foundation;
with no Invariant Sections, with no Front-Cover
Texts, and with no Back-Cover Texts.
_____________
Aaron Morris is a Partner with the law firm of Morris & Stone, LLP, located in Santa Ana, Orange County, California. He can be reached at (714) 954-0700, or
by email. The practice areas of Morris & Stone include employment law (wrongful termination, sexual harassment, wage/overtime claims), business litigation (breach of contract, trade secret, partnership dissolution, unfair business practices, etc.),
real estate and construction disputes, first amendment law, Internet law, discrimination claims, defamation suits, and
legal malpractice.
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