Don’t Forget Contract Basics

basics

By K. Michelle Lind

Arizona law requires real estate licensees to have an understanding of the general purpose and legal effect of real estate contracts. However, contract questions are by far the most common questions received by the Arizona Association of REALTORS (AAR) legal hotline every year. Many of these questions can be answered by applying basic contract law.

MINIMUM ELEMENTS

For a valid contract to exist there needs to be an offer, acceptance, consideration and sufficient specificity so that the obligations involved can be ascertained. The AAR contracts are designed to address these requirements in a uniform manner.

STATUTE OF FRAUDS

The Statute of Frauds requires a contract for the sale of real property to be in writing and signed by the party to be charged. The party to be charged is the party against whom enforcement of the contract is sought. A signature can be a mark, if a person cannot write, with the person’s name written near it and witnessed by a person who writes the person’s own name as witness. Electronic signatures are also legal.

OFFER

An offer is a willingness to enter into a contract expressed in such way that the other person understands that agreement to the offer is invited and will result in a binding contract. When an offer or counteroffer is not supported by independent consideration, it may be withdrawn at any time prior to its acceptance. Any statement clearly implying unwillingness to contract according to the terms of their offer, communicated before acceptance of the offer, is sufficient to prevent contract formation. Although the Statute of Frauds requires that an offer or counteroffer be in writing, a written offer or counteroffer can be verbally withdrawn. However, when withdrawing an offer, do so in writing if at all possible, to avoid disputes.

ACCEPTANCE

Acceptance is agreement to the terms of an offer in the manner required by offer. Acceptance of an offer must be on the exact terms as the offer. Any attempt to accept on terms materially different from the original offer constitutes a counteroffer, which rejects the offer. Acceptance of an offer must be conveyed to be effective; silence does not ordinarily establish acceptance.

CONSIDERATION

Consideration need not be money, but may involve a promise for a promise. Consideration may be a benefit to a promisor or a detriment to a promisee. By Arizona statute, “[e]very contract in writing imports a consideration.” A.R.S. §44-121.

FIXTURES AND PERSONAL PROPERTY

A fixture is an item that was once personal property, but is affixed to the real estate in such a manner as to become a part of the real property. Arizona employs a three-part test for determining when personal property, also known as chattel, has become a fixture: (1) the chattel is affixed to the real estate; (2) the chattel has adaptability or application to the use of the real estate; and (3) the party intended to make the chattel a permanent part of the real estate. Voight v. Ott, 86 Ariz. 128, 341 P.2d 923 (1959). To avoid ambiguity, the contract should specifically identify all items that are to be conveyed in the transactions. The AAR contract contains a list of fixtures and personal property to be conveyed. Any additional personal property to be conveyed should be written into to the contract.

PARTIES

The parties to be bound to the contract should be set forth with specificity. If either party is a corporation, limited liability company or partnership, all pertinent information about the entity should be included, such as the entity’s exact name, address and state of formation. If either party is an entity, the signer’s authority to bind the entity should also be ascertained.

In any real estate transaction, both husband and wife must sign the contract for the community property to be obligated. A.R.S. §25-214 (C)(1); A.R.S.§33-452. Therefore, both husband and wife must sign all real estate contracts, including contract modifications. In the alternative, “either husband or wife may authorize the other by power of attorney to sign the contract on his or her behalf.” A.R.S. §33-454.

The parties should also be competent. Generally, in order to invalidate a contract based on incompetency, the owner must have been incompetent at the time of the execution of the contract. Further, be aware that the incompetency of an individual will invalidate a general or special power of attorney, (i.e., for specific property) unless the power of attorney is a durable power of attorney that specifically states that the power of attorney will not be affected by the incompetency of the principal. A.R.S. §14-5501.

BOILERPLATE

The AAR contract contains pre-printed or “boilerplate” language. However, the form is often revised or supplemented to address issues unique to the particular transaction. Where written provisions of the contract are inconsistent with the printed or “boilerplate” provisions, the written provisions will prevail.

K. Michelle Lind is an attorney and the chief executive officer for the Arizona Association of REALTORS, the largest trade association in Arizona, representing more than 46,000 members. Visit www.aaronline.com for more information about other issues affecting Arizona REALTORS and property owners. This article reflects only the opinion of the author and is not intended as definitive legal advice.


For additional information on legal contract issues, visit the legal hotline page of the AAR website at https://www.aaronline.com/manage-risk/legal-hotline/.