When is a contract not a contract?

Dear Benny: I just became a real estate agent and already have a potential problem. My client signed a contract to buy a nice house, and the seller also signed. It now appears the seller has found a better buyer and is claiming there is no contract. He has offered to refund the earnest money deposit if my client signs a release. My question: Exactly what is a contract? What makes it legal and enforceable? - Nicole Dear Nicole: I cannot provide legal advice, and suggest you immediately discuss the situation with your manager. But let me provide you with a brief explanation of what a contract is. There is a very ancient legal concept called the "Statute of Frauds." Oversimplified, and as it applies to real estate, this means that in order to have a binding contract to purchase or sell real estate, there must be a written document. Oral contracts will usually not be enforced by the courts. In most jurisdictions in the U.S., when a potential buyer makes a written offer to purchase a house, the seller has three options: - The offer can be accepted, in which case there is a contract. - The offer can be rejected. - The offer can be met with a counter-offer. This means that while the seller is interested in pursuing negotiations with the potential purchaser, there are terms in the offer that are not acceptable to the seller. If a seller makes a counter-offer, the buyer then has the same three options. Most real estate transactions are smooth, and work out successfully. However, once in a while, a major dispute arises between the parties, and litigation starts. The first thing any court will want to determine is whether there is a valid contract for the purchase and sale of the real estate. In order to have a binding, legal contract, three basic elements are required: - An offer: Typically, the buyer makes an offer. It has been determined by many courts that an advertisement in the local newspaper offering a house for sale at a particular price is not an offer but merely an invitation for the public at large to make a bid - an offer - on the property. Similarly, if a department store accidentally advertises a large TV for $20 instead of $200, the courts take the same position that it is only an invite to make an offer. - Acceptance: The second element needed to make a contract binding is acceptance. Ultimately, there will either be no deal or someone will accept an offer or a counteroffer and there will be a contract. Acceptance must be in writing. However, in recent years, with modern technology, real estate forms have authorized acceptance by fax or by email. Dropbox is often used. However, to be on the safe side, any fax or email must be followed up with a written document containing an original signature. - Consideration: The third basic element of a contract is called "consideration." This is an elusive concept. Generally, it refers to money. The buyer has put down a good-faith earnest-money deposit with the broker or with their attorney, and this constitutes good consideration. However, what happens if no money is put down with the offer? Does it mean there is no binding contract even if the seller signs the offer? Not really, since consideration also has been interpreted to be "something of value." In this case, the buyer has stopped looking for another house, in the belief there is a binding real estate contract, and the seller has taken the house off the market, based on that same belief. Thus, there would still be a valid contract, although it is always wise to put down some money as the good-faith earnest-money deposit when you present an offer to purchase real estate. The lesson to be learned: Put everything in writing. If you want certain items to convey with the house - such as the washing machine, curtains, or even the lawn mower - make sure these items are specifically listed in the sales contract. Don't leave anything to faith - or to oral promises. So, Nicole, why is the seller claiming no contract? No one likes to get involved in litigation, but if the only reason the seller wants out is to sell for a higher price, I would suggest your client retain an attorney to immediately file a lawsuit for specific performance. Also, the attorney - to make sure there is a cloud on the seller's title - should file with the court and on the local land records a document known as "lis pendens." That means "lawsuit pending" and puts the world on notice there is a problem with title. Hopefully, your standard real estate sales contract contains language that in the event of litigation, the prevailing party will be awarded legal fees against the loser. That's a provision I recommend go into every sales contract. ----- Benny Kass is a practicing attorney in Washington, D.C. and in Maryland. He is not providing specific legal or financial advice to any reader. He wants readers to e-mail him, but cannot guarantee a personal response. He can be reached at:mailbag@kmklawyers.com. Published: Thu, Dec 31, 2015