Real Estate - Contracts
( Originally Published 1911 )
Contracts a legal and commercial necessity.—The law has provided that in order that such frauds as the failure to perform a deliberate engagement shall not be perpetrated, certain transactions shall be reduced to writing. This statute is scattered through the law books of various states in appropriate places. In relation to real property the provision usually is substantially to the effect that a contract for the leasing for a longer period than one year or for the sale of any real property or interest therein is void unless the contract or some note or memorandum thereof expressing the consideration is in writing subscribed by the lessor or grantor or by his authorized agent.
Contracts wise and safe.—There are men who in spite of the statute will carry out their oral agreements, but the requirements of the law are so well known and so easily accepted that no man having made a bargain to purchase or sell real property, should hesitate to have that bargain expressed in a writing which will comply with the law and make an enforceable contract. The requirement that a contract shall be reduced to writing means that the entire understanding shall be reduced to writing. It is a principle of law that all the negotiations are presumed to have been embodied in the writing, and that whatever preceded the written agreement and is not expressed there, was not a part of the final bargain.
Contracts a commercial necessity.—There is also a commercial necessity that a bargain to buy and sell real estate shall be reduced first to a contract relating to future acts. Bargains for the purchase and sale of real estate are always important transactions to the persons concerned in them, and no matter how professional the parties may be, are not carried out with-out deliberation. The purchaser is not prepared to pay his money without waiting to ascertain whether the seller can convey that which is the subject of the bar-gain. It is necessary too before closing a purchase to make financial arrangements to gather the money from the places where it is deposited or the investments into which it has been put; and it is often necessary that the seller remove from his title such encumbrances or rights of others as will enable him to deliver the property. For these reasons it is the almost invariable rule that the matter be reduced to an executory contract.
The broker should endeavor to bring his parties to the place where the contract is to be drawn in such accord and with the elements of the bargain so well understood that he can hand to the person who is to draw the contract complete instructions for putting the bargain in writing; but it is not always possible to bring the bar-gain to that state of perfection, and frequently when the parties get together there will be some detail to be discussed or some term to be finally settled.
Definition of a contract.—A contract is a deliberate engagement between competent parties, upon legal consideration, to do or abstain from doing some act. In the real estate business when we speak of a contract, we arrogate that word, which is a generic legal word, to our business: we mean a contract for the sale of real property. When we speak of an exchange contract, we mean a contract for the exchange of real property.
Essential elements of a contract.—(a) It is essential to a contract that there be competent parties. A man cannot make a contract with himself. A con-tract implies reciprocal relations between two or more parties. In order that there be competent parties to a contract it is essential that they be parties who are free to contract. A person who is incapable on account of lunacy of caring for his own affairs is not a competent person to make a contract. A person who is under the legal age is not a competent party to a con-tract. An executor or other fiduciary who by the terms of his trust or by reason of the limited nature of his powers will not be able to perform the obligation into which he enters is not a competent party to a contract.
When entering into a contract with a person other than an individual acting in his own behalf, it is the part of prudence to inquire whether that other party is a competent party, able to contract and perform his obligations. When dealing with an executor, a trustee or a person who purports to act as attorney for an-other, it is necessary to inquire as to the limits of his authority. It may be that persons who are incompetent at the time they propose to enter into an agreement can be authorized by legal proceedings to carry through the transaction. An infant may be incompetent to contract to sell property, but, by proper proceedings of a court, his guardian may be authorized to make the contract and convey the property. Similarly a trustee who has no right to sell a property, may be authorized by a court to enter into an agreement and to sell.
(b) It is essential to a contract that there be de-liberate engagement, that is, that there be a promise and an acceptance of that promise-and that implies futurity. If A give something to B, that is an accomplished fact. It is not a contract, but a transfer.
A contract implies the element of doing or abstaining from doing something in the future.
(c) Another essential element in a contract is consideration, which means that there shall be some change in the condition or position between the parties. If A promise B a house, and B give no promise in return, that is a mere promise without consideration. Consideration is found in a promise when the party who tries to enforce the promise has changed his position in some manner or given something of value or some enforceable promise in order to induce the other to enter into the obligation.
The simplest form of consideration is money payment for a promise. Consideration may also consist of an enforceable promise. If A agrees to sell B a house, and B agrees to buy it and pay for it, B's enforceable promise to buy and pay the price for the house is consideration. There may be a third kind of consideration where A makes B a promise, and relying on that promise B changes his position or incurs secondary obligation; but this kind of consideration is not often found in real estate contracts.
(d) A contract can be on any kind of fabric, and does not require to be written in ink, so long as it is reasonably permanent. It is necessary that the writing be subscribed, that is, the person to be charged with the performance of a contract or obligation which is required to be in writing must subscribe his name or put at the end of the record or instrument some character intended to authenticate it. It may be in any characters that can be understood between the parties and in any language. Contracts are enforceable in the courts of the United States so long as they can be translated and made understandable to the courts. The per-son who subscribes may write his name or he may make a mere X or other authenticating mark. The subscription is complete when the mark has been made. The words, " his mark" which will sometimes be seen written about the mark are not part of the subscription, but are a mere memorandum written by some-body else for the purpose of identifying the instrument afterwards.
(e) In order that contracts be enforceable, it is not necessary that they be witnessed or acknowledged. If they contain a complete agreement between competent parties, upon proper consideration, and are subscribed by the person to be charged, they are complete.
Forms of contracts.—There are many forms of contracts in use. The one selected for consideration and reproduced below is that in use by the leading title insurance companies of New York. It is a form which seeks to embody in the printed matter all of those stipulations which are usually found in real estate contracts and leaves blanks to be filled in with the matter which varies in each contract.
Divisions of a contract.—This contract has four main divisions:
1. A statement of the parties;
2. A statement and description of the property which is the subject of the bargain;
3. The terms of the financial settlement;
4. Certain miscellaneous stipulations, including the fixing of the time and place for the conclusion of the bargain.
Date.—A date is not necessary to any legal instrument, and therefore it is not necessary to a contract. It is a mere memorandum for the convenience of the parties, and the date and time make no difference to the effect of an instrument.
There is no common law Sunday in the United States.
Those things are prohibited to be done on Sundays and legal holidays which statutes prohibit, and if there be no statutory prohibition against the transaction of the business of making contracts or the sale of real property on Sunday or on a holiday, a contract made on such a day is good and enforceable.
Statement of the parties.—In this instrument the parties to a contract are designated as the seller and the purchaser. In some forms of contract they are referred to as the party of the first part and the party of the second part, and in others, as the vendor and the vendee. These are all mere designations to avoid repeating the names of the purchaser and seller.
These two parties are looking at the bargain from different points of view. One has agreed to buy a definite thing and is about to put down money to bind his bargain and to show his good faith. The other, having that definite thing for sale, is about to bind him-self at some future day to deliver that property and in the meantime not to sell it to anyone else, thus depriving himself during the time between the signing of the contract and the delivery of the deed of the opportunity of making a better bargain for his property. Each party must necessarily look somewhat to the character, relation, good faith and ability of the other.
Examination of title the first care of purchaser. —The first thing the purchaser wants to know is what security he is going to have for the earnest money which is almost invariably paid when the contract is entered into, and his first precaution should be to ascertain whether the seller appears to be the owner of the property. That cannot be done absolutely, but it can be done to a sufficient extent to make it a fair commercial risk to pay the money. The purchaser can ask the seller to produce his deed, if he has one. If not, he can ask when and where the property was bought, and can then consult some reliable real estate index, or the records of title insurance company to ascertain whether the seller appears to be the latest person in whose name the property has been put.
When the seller is a trustee or corporation. If a seller purports to be dealing as a trustee, the purchaser should ascertain the instrument under which he claims to be acting, get a copy of it, and see whether the trustee is or is not able to sell the property. It may be that an executor, trustee or guardian has not authority to sell at the time the contract is made, but may by appropriate action of a court be so authorized. In that case the contract should be so conditioned that if the proper authority do not approve and authorize, the parties are not bound to each other.
When a corporation purports to act as seller, the purchaser should ascertain whether the officer who intends to sign the name of the corporation and to receive the money is authorized by the corporation. He may be authorized by a general by-law or specifically authorized by resolution, and if he is dealing in good faith, he will not object to disclosing the source of his authority.
Earnest money may be placed with bank or trust company.—If the purchaser does not know the man who takes his money and cannot ascertain that he is the owner or has a right to contract and deliver the property, he can try to arrange that the earnest money be placed in a trust company or bank or title insurance company until it be ascertained that the seller has a right to contract and deliver.
Concern of sellers less than that of purchasers.—Sellers usually do not criticize their purchasers with the same particularity that purchasers criticize sellers. Very often the seller knows nothing about his purchaser except his ability to pay down the stipulated amount, and frequently that is sufficient and sellers are content with it. If a man stipulates that he shall have $1,000 down, and agrees to deliver his property within thirty days, knowing that if the purchaser does not comply with the rest of the terms of the contract, he will forfeit the $1,000, the seller often feels repaid for his trouble and expense and for the fact that his property has been off the market for that time.
Very often the person who signs the contract is not the real principal, and may be a person without financial responsibility and without ability to respond to the contract except so far as to forfeit the earnest money. If this fact be known to the broker who is employed by the seller, he should let his employer know of it. He may not be able to disclose the name of the real principal, having learned that in a confidential manner, but it is his duty to let the seller know that he is dealing with a dummy, and thus give him an opportunity to take care of himself in the rest of the terms of the contract. If the seller has sufficiently protected himself by getting such a deposit as earnest money as will compensate him in case the purchaser is not able to complete the bargain, he does not very much care whether the signer of the contract be a dummy or not.
When seller must know the responsibility of purehaser.-If, however, the property be of peculiar value, or sold on a rising market, or with a small down payment, it may very well happen that the seller desires to know more of his purchaser than that he is able to pay the earnest money, and will try to ascertain his responsibility.
"Witnesseth, that the seller agrees to sell and convey." " "Witnesseth" means very little. If it were not there the contract would proceed just as well. It is almost the last vestige of legal verbosity to be found in the instrument.
"Sell and convey:" The agreement is not only to sell, but to make the necessary conveyance. What kind of conveyance that may be and how it may be expressed will be reverted to again. Practically, as soon as the contract is signed, the purchaser becomes the owner of the property. That relation is not important unless something unforeseen happens; as, for instance, if the seller become insolvent or incompetent.
"And the purchaser agrees to purchase."—This is the reciprocal consideration. The earnest money is not a payment for the contract, but a payment of part of the purchase price. The consideration for the promise to sell and convey is the promise to purchase, which implies that the purchaser will pay for the property.
"With the buildings and improvements thereon." —These are not necessary words to a contract, as real property includes the land as far down as you can go, including all mines in it, and as high as structures can be built connected to the land. It is well, however, to leave these or equivalent words in the contract that there may be no doubt between the parties.
Description.—The description is the most difficult and the most important part of a real estate con-tract. The seller has been talking about something as seller, and the buyer has been talking about something as buyer, and as many minds as there are to the contract, so many different points of view can there be as to the description of a piece of property. The most important thing in drawing contracts is to express the description of the subject-matter in such manner that the contract can be performed by the seller, and that the description shall be the true expression of the intention of the buyer.
(a) The simplest case to be found is that illustrated in the diagram, which shows a vacant lot (X) with no encroachments by or on it. Here there can hardly be any difference in the point of view. This lot may be described at length, as in a deed, but sufficient description would be: "Lot on the southerly side of 2nd Street, distant 125 feet westerly from the westerly side of B Avenue, being twenty-five feet wide in front and rear by one hundred feet in depth, the side lines being parallel with B Avenue."
(b) If, however, the lot is one which the seller has purchased from a map, and his deed calls for a lot known as "Lot Number ten on the map of the D estate," in that case the seller and purchaser will look at the transaction from different points of view. The purchaser has made his offer upon the understanding that he is buying a lot twenty-five by one hundred, and his position is perfectly plain. The seller looks at the proposition from the point of view that while he thinks he is selling the thing that the purchaser is offering to buy, he has always in mental reservation the fact that he is offering to sell that thing as he owns it. If he has any doubt, or if he learns that there is a limitation upon his ownership, or uncertainty as to the quantity, it is his interest to see that the contract expresses the facts. It requires considerable experience in order to know what is material and what is immaterial. In this case, if the map be inaccurate the quantity of land contained in "Lot ten" may vary so as to be more or less, and the parties may look at such a situation from two sides. Very often a stipulation will be made that the buyer will take less than the absolute amount he intended to buy, but not less than a certain quantity.
The most frequent stipulation made is the words "more or less." These words are very elastic, and mean just what they say, that the thing which the seller is able to give and which the purchaser will receive must not be substantially different from the dimensions as they were represented. A variance of an inch or so in width may be substantial, whereas a variance in depth may make no difference in the commercial value of a lot. It is all a question of reasonableness, and no general rule can be given. If the variance be of such a character that the usefulness of the lot is impaired so that it cannot be as conveniently used as if it were of full size, that variance would excuse the purchaser from taking, even if the contract read "more or less." Whereas, if the variance be of such character or the lot of such size that it is as useful for the purpose for which it is fitted with or without the variance, then the subject of the bargain has not been disturbed, and the purchaser would be compelled to take the property.
The question of reasonable variance is more difficult with vacant land than with improved property. Vacant land is intended for improvement and is bought by measurement. Its usefulness is in the clouds, and in order that it may become income-bearing a structure must be put upon it. To the purchaser of improved property it makes very little difference whether the lot be twenty-five feet or 24'11"; it is all there, and brings the same rent. While the words "more or less" afford some leeway, they afford very little more than if they were not in the description, especially where the land is vacant and unimproved.
(c) When a person makes an offer for a piece of improved property, there are three things he offers to buy: First, the land; second, the structure as a rent producer or as a thing capable of occupancy; third, the right of permanently maintaining that structure upon the property. The case of a rectangular lot with a house in the middle of it is as simple as that cited in (a). Such cases are found in suburban places and outlying parts of cities, but when we come to the crowded parts of cities, where houses are built contiguous to one another, descriptions are more difficult.
(d) If there be a house on the lot' known as number 105, which exactly fits the lot, the seller does not care whether he puts into his contract the description of the lot or the house : they are equal to each other. That is the seller's point of view. The buyer, on the other hand, wants to be assured of two things—that the property is of the size represented to him, and that it is the structure which he thought he was buying. The seller might then appropriately add to the description of the lot: "Said premises being known as 105 Second Street," which has added nothing to the description but identification.
(e) If the lot on which stands house number 105 Second Street be diminished by a structure which is on. a neighbor's land, but encroaches on the lot, it would be dangerous to attempt to sell that lot in the form already given. In cases of that sort there are two forms of description. The contract may :be drawn: "All that lot of land with the building and improvements thereon, known as 105 Second Street." That would be complete from the seller's point of view, but the purchaser might ask for identification or for limitation of dimensions. The seller can accede to a statement that the lot is 25' wide, more or less; and he can accede to a statement that it is 125' west of B Avenue, more or less; or, if he wants to be safe both against the possibility of a rejection for misrepresentation as to size, or the possibility of being charged with trying to sell more than he has, he can describe the lot as 24' 10" in width and known as 105 Second Street.
(f) The owner may be in possession of all of the lot, but his house may encroach upon his neighbor's lot, he having an easement or right to keep his wall there. In that case if he were to describe the property as "105 Second Street" he would be describing something which was 25'2" in width, and the purchaser might very well say that he agreed to buy all of the house and all of the lot, and the seller would be held to deliver 25'2" when he only had title to 25' and an easement over the 2". A proper form of description would be: "All that lot of land with the building thereon erected, beginning 125' west of B Avenue," and then describe it as if it were a vacant lot, letting it follow as a matter of inference and of law that all that is appurtenant to the lot will go with it—in this case, the easement or right to maintain a wall upon a neighbor's land. Then, although the house and lot are not equivalent, the seller having described the lesser of the two, is able to comply with his contract. If, for any reason, the purchaser require identification of the lot with the building, then it is necessary for the seller's protection that while acceding to that requirement he provide or state in his contract something to the effect that he does not convey all of the land upon which the building stands. He may say that the building encroaches 2" on his neighbor's land, but he conveys a good right to maintain it there.
Selection of form of description.—No general rule can be given for writing descriptions. The selection of the form of description and the use of words can be acquired only by practice, and must be governed by knowledge of human nature and the subject and course of the negotiations. In some cases in order to satisfy the parties, it is necessary to quote a full description from a deed.
In modern practice there are no superfluous words in instruments which are drawn by skilled draughts-men. Every word means something, and every word if omitted or changed would change the sense.
Property sold subject to tenancy.—A contract containing a description of house No. 105 Second Street would entitle the purchaser to receive the title to that house in fee simple absolute, but the seller does not always own his property as free and clear as that. The most common limitation is the occupancy of tenants. If property is improved and income-bearing and under lettings to tenants, in describing the property, it is necessary to give its limitations, and add after the description a statement as to the hiring or letting upon which the property is held by those from whom the income is derived.
Seller and purchaser look at this matter also from different standpoints. The seller looks at it from the point of view of protecting himself against being required to deliver the property subject to any tenancy greater. than the lettings subject to which he owns it. The purchaser desires to know two things 'with relation to the occupancy of tenants, the length of term and the rent they are paying; and upon these subjects he requires the most specific information. He would require the contract to add after the description; e. g., "Subject to a tenancy expiring November 1st, 1908, at a rental of $100 a month." That is specific. It may be that the property is occupied upon monthly tenancy only, and the purchaser requires a statement to that effect. It may be that the terms of hiring cannot be expressed succinctly. They may be contained in an elaborate instrament of lease, and then it may be sufficient to say: "Subject to a lease to— (here naming the party or par-ties to the lease) dated-,–(here insert the date of the lease) ;" and then add something by way of identification which would be particular and would operate to protect both parties to the bargain.
Restricted property.—Another important and frequent limitation upon ownership which it is necessary to provide for in a contract is restrictions upon use. It happens frequently that when property is in the course of development from suburban to urban property or from country or acreage property into suburban, in order to further that development the future use of the property is restricted by appropriate instrument. Frequently a covenant is inserted that it may not be appropriated to certain uses, which are generally known as nuisances. Sometimes property will be restricted more stringently—that no tenement house be put upon it, that it be used for residences only, that nothing but private houses for the use of one family only or for the use of not more than two families be constructed upon the property. These are all frequent restrictions, and all have influence upon the values of property.
Restrictions enhance or detract from the values of property, according as they are appropriate or inappropriate to the present situation of the property or according as they do or do not seem to deprive the property of the opportunity for future development.
Property which is restricted in its use need not be taken by the purchaser unless the contract contains a stipulation that it shall be taken subject to such restriction, so it is to the seller's interest to see that the restriction be inserted in the contract. It is to the interest of the purchaser to see that the contract be specific. A form of contract which contains the stipulation, "Subject to any restriction there may be on it" is manifestly unfair, because in most cases the purchaser does not take in the fact than an important stipulation of that sort is run in with the ordinary printed matter. The purchaser should consider every word of a restriction, and should never buy property subject to a restriction under the representation that it does not amount to anything. Every restriction amounts to something: some of them amount to a great deal. The seller who tries to get a purchaser to take property subject to a restriction of which he claims that it is not now binding by reason of "change of neighborhood" is taking a very dangerous position, both for himself, if be contracts to deliver free of restriction, and for his purchaser if he leads him to purchase believing that the neighborhood has changed.
In order that restrictions be useful to the purchaser and act as an enhancement of value, there must be an element of mutuality. If a man buy a piece of property restricted to the use of dwelling houses only, he ought to have assurance in his contract or in the character of the neighboring improvements that the restriction is appropriate to the property, and that the surrounding property is similarly restricted. In framing restrictions connected with the development of a tract, it is wise not to make them perpetual, but to make them run out at a definite time. Neighborhoods are frequently retarded in their proper development because of the fact that there are restrictions which were put on to run without limit of time, as to which it cannot be said the neighborhood has so far changed that the restriction need not be enforced, but still the property does not sell at its full value.
A restriction that property may be used for the purpose of dwelling houses means any kind of a dwelling, including private dwellings, flats, apartments, apartment hotels, anything that is used for human habitation. A restriction that property may be used for private dwellings means a dwelling for the use of one family only. A restriction against the use of property for tenement houses is very difficult to construe.
Easements: An easement is a right over or to the use of part of property in favor of another adjacent property. If A own a lot and B have a right to walk over it to reach the street, B's right is known as a "right of way," and if A were selling his lot, he should provide in the contract that it is sold subject to that easement.
A party wall right arises either by agreement or where one man owns sufficient land for two or more structures, constructing them with a common wall, so that the wall is upon the dividing line between the two lots, and partly on each, the buildings on both sides being supported by the wall. The owner of each building has an easement in the other's lot to the extent that he has a right to have the wall remain as long as it will stand, and to have support for any structure which he may put upon the property, provided he does not bur-den the wall so as to impair its usefulness. The owner of each lot may build on the wall to its full width as high as he pleases, but he cannot extend the wall further back or forward on the lot. Where property is sold subject to a party wall right, the contract should so stipulate.
It may be that the wall is entirely upon the lot which is being sold but must support a neighbor's building. In such a case, the neighbor's right is known as a beam right. Cases frequently arise where one building has a right to drain over another. When a property is subject to either of these rights, the contract should so pro-vide.
Appurtenances go with the property whether specifically mentioned in the contract or not ; but all things to which a property is subject which may detrimentally affect its price or impede its use should be put into the contract by the seller, so that they may not be objections to the title.