What does it mean to have a “Valid Contract”? This is a legally binding document that sets out the rights and obligations of each party. These rights and obligations can vary as each state may have different rules and regulations, but Federal Law is also included. When you’re in the commercial real estate business, you need to make sure that you understand the essential basics of a valid contract.
What Must Your Contract Include?
In general terms, the contract is used to outline the terms of the agreement between a buyer and a seller. In most cases, the contract will be drawn up by the Seller’s lawyers. However, as a wise Commercial Real Estate practitioner, you should invest in developing your own contracts. You should also consider joining MTIP Systems when you can get access to the contracts I use to transact on real estate deals.
The information included in the contract will cover matters below, but other factors may be taken into consideration depending on which state the property is in: Expansion of buyer(s) and seller(s) details included in most contracts:
- Purchase price of the property
- Any financing being used for the purchase
- Any fixtures and fittings being sold with the property
- Closing and possession details, i.e., the dates of the expected completion of the sale/purchase
- Conflict resolutions to avoid potential issues which may be prejudicial a party’s interests
Below we summarize the top 6 elements of a valid contract you need to be aware of:
- Contract Offer
Firstly, you need to have an “offer.” This means that a buyer(s) has made an offer of purchase to the seller(s) of the property to purchase said property for a fixed amount of money. According to the 1950 Contracts Act, an offer is the first element of a contract. For example, in real estate, when a buyer offers the seller of a property a specific value and the sellers then need to acknowledge and either accept, reject, or counter offer. The offer is essentially the proposal of a contract.
- Contract Acceptance
The seller(s) of the property will have accepted the offer of purchase from the buyer(s), and the amount of the purchase is agreed by both parties and is a binding figure. If the buyer(s) are using any finance to purchase the property, details of the Lender would also need to be included in the contract. The Lender will require Title Insurance, and this must be approved by the Lender. It is usually paid by the buyer(s) and generally protects only the Lender’s interests. It is taken out to ensure that in any title dispute, the Lender’s financial interests are secure. This is regulated by the American Land Title Association. Subject to any contingencies, a purchase contract becomes legally binding on execution by the parties and delivery to the seller of any consideration (payment) required on execution.
- Contract Consideration
Consideration means laying out the terms of what is being offered in the contract, i.e., the boundaries of the property and any restrictions or requirements that go with said property. It should also include details of any additional items included in the sale, such as equipment being left by the seller. Where there are warranties on any of the fixtures and fittings being sold, then the details of these must also be passed over to the buyer(s) and included in the contract. If the property is leasehold, the contract will include full details of the leaseholder, and a copy of the lease will need to be attached. All easements should be included in the contract. An easement is a non-possessory right to use and/or enter on to the real property of another without possessing it. Typically, this is the right of way which one landowner may enjoy over the land of another, i.e., if part of a driveway crosses part of a neighbor’s driveway. Essentially, the consideration is an exchange of something, whether it is a monetary figure or something else.
- Contract Mutuality
Mutual agreement and specification in the contract’s full details of what is expected of each party(ies) in the contract. Mutuality, in this context, simply means that a valid contract requires promises and obligations from both seller and buyer. If these are not included, a dissatisfied buyer may argue that they have the right to terminate their agreement to purchase the property because the signed agreement lacked any Mutuality. Overall, mutuality is the reciprocation of a clearly listed obligation for both parties.
- Contract Capacity
This is the legal confirmation that all the parties are both mentally able to understand what is being signed and agreed upon the agreement in the contract. In every state, a minor cannot sign a contract, and someone with dementia would not have the mental capacity to sign being deemed to not fully understand what they were signing. Also, In a commercial contract, a Treasurer, for example, must prove that they are actually the Treasurer and that they have the authority to sign on behalf of a company in order to sell the property. Again in the case of someone selling a property where the owner is deceased, it would be necessary to prove that they have the legal authority to act in the estate of the deceased with regard to the sale. If there is any doubt about the capacity of the seller, you must do some more due diligence.
- Contract Legalities
This means that the contract has to be a legal document and that it conforms with the rules and regulations in place with regard to a property contract, appertaining to both Federal Law and to the laws of the state in which the property is being sold. A contract between parties that involves fraud upon another would not be valid. Once a contract is valid, and it satisfies all of the required elements, this then becomes legally enforceable. This means that the parties can be legally required to perform per the terms of the contract. Should a party to the contract not perform by the terms or by the deadlines set out in the contract, they would be in default and could be legally required to perform or pay damages to the other parties. The seller of the property is responsible for maintaining and insuring the property until completion of the sale. A contract must be legally binding, and it cannot be fraudulent in any way.