Purchasing property and building a home – contracts definitions & types
In the process of purchasing property and building a home you will be signing many contracts and purchase orders (a form of contract). Accordingly, it is important for you to understand some of the legal aspects of a contract and the contracting process.
For our purposes, we will use the definition of a contract taken from Real Estate: Principles and Practices (South-Western, 1987) by Maurice A. Unger, a professor of Real Estate and Business Law at the University of Colorado.
Generally, a contract is an exchange of promises or assents by two or more persons resulting from an obligation to do or refrain from doing a particular act, which obligation is recognized or enforced by law.
A contract may be formed when a promise is made by one person in exchange for an act or the refraining from doing of an act by another. The substance of the definition of a contract is that by mutual agreement or assent the parties have created legally enforceable duties or obligations that did not exist before.
If all the terms of the contract have been fulfilled, it is said to be executed. If something in the contract remains to be done, it is said to be executory.
2. Real Estate
We also need to define what real estate is as it relates to contract law. It is very important to understand the technical meaning of the term. Real estate is land, dirt, rocks, and trees. If you have a piece of property that is unimproved, it is real estate. If it had a house on it when you bought it, both the property and the house are real estate. If you buy the property without a house on it and you add a house, the house is real estate. Real estate is the natural land and any improvements that are on it.
What real estate is not is personal property that is not part of the improvements or not yet part of the improvements.
Your fire insurance policy or your homeowner’s or builder’s risk policy will cover the improvement in your real estate. As you build the foundation, the policy will cover the foundation; as you build the first floor, the policy will cover the first floor; and when you build the house, the policy will cover the completed house. But, before it becomes attached to the house, the material to be used is personal property.
So, if you’re building your house and someone delivers twelve windows to your job site and six of them are installed and six are on the ground, and there is a fire that night, your builder’s risk policy will cover the windows in the house because they are part of the real estate. But it will not cover the windows on the ground, because they are personal property. It is possible to add a provision to your insurance policy (known as a rider) that covers building material stored on the site. Accordingly, it is important that you understand the concept of real property, the distinctions between real property and personal property, and the legal and insurance ramifications associated with the distinctions between the two.
B. TYPES OF CONTRACTS
1. Oral vs. Written
Many people think that contracts must be in writing, but they don’t have to be. Let’s say that you drive up to a gas station on a hot summer day, and say, “Fill ’er up,” and the attendant pumps gas into your car and then says, “That will be fifteen dollars.” And you reply, “No deal. We didn’t have a contract.” Who wins?
He wins. “Fill ’er up!” is an oral contract.
You go into a restaurant. You order a meal. “I’ll take the filet, I’ll take the asparagus, I’ll have a coke.” The waitress serves all of this and gives you a bill. Are you obligated to pay? Absolutely.
So an oral contract clearly can be a contract, and it can be as binding and enforceable as a written contract.
2. Affirmation by Action
A contract need not even be oral. You drive into the same gas station, but now it is pouring down rain. The kid comes running out. Your windows are rolled up and you signal with your hands: “Fill ’er up!” And he signals: “okay.” He puts the gas in. Do you have a contract? Yes. It was implied. And an implied contract is an enforceable contract.
Similarly, if you go into a restaurant and you start eating the buffet, that binds you. It is an implied contract.
Sometimes a contract that is not a contract at the time can become a contract at a later date. For example, if you say, “Let’s sign the documents now,” and you don’t, and then you subsequently perform as if the contract had been signed, that is called affirmation by action. Your subsequent actions may ratify a contract.
3. Executory vs. Executed
An executory contract is one in which there is something still to be done—and it is very important in real estate. Most contracts are executory. Something still remains to be done. When the terms and conditions of the contract are completed, it is said to be executed.
If you sign a contract to buy a piece of property, it is an executory contract because you have agreed to buy that piece of property in the future and the seller has agreed to sell you that piece of property in the future. Generally there are some conditions and terms that have to happen in the interim. You are both bound by the terms and conditions, but they are things to be done in the future. When you settle on your property and you give the owner the consideration and he gives you a deed, that transaction then becomes an executed contract.