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 What Is a Real Estate Contract?

A real estate contract is a legally binding agreement relating to the sale and purchase, or rental of real property. Real property is fixed property. The property may be residential, such as a home, or the property may be commercial, such as retail space in a shopping mall.

Under a real estate contract, if a party to the contract does not comply with one or more of the terms of the agreement, the other party may be awarded money damages by a court or other relief, e.g., eviction. Money damages compensate a party for financial losses they sustained because of the other party’s breach. Eviction returns possession of the property to the landlord.

Who Are the Parties to a Real Estate Contract?

In a real estate contract for the purchase or sale of land, the seller is the party who wishes to sell a piece of property, and the buyer is the party who wishes to buy it.

In a contract for the rental of property, the party seeking to lease, or rent, the property to another is the landlord, or lessor. The lessee, or tenant, is the party who wishes to lease the property from the lessor.

What Are the Contents of a Real Estate Contract?

A real estate contract names the parties, and describes the land, dwelling or other structure, or space, e.g. retail or office space, to be purchased or rented. The contract also includes the price the buyer or lessee has agreed to pay for the sale or rental. The contract is also likely to include language that addresses how payment will be made and when payment is due.

Depending on the property being transferred, real estate purchase contracts can be tens of pages long. Usually, the seller holds on to the title until the entire purchase price has been paid in full. Then the buyer, or their mortgage lender, obtains title. This is the role that escrow plays in many real estate purchase transactions. The seller puts the title in escrow where it is held until the buyer places the full payment in escrow. When both parties have fulfilled their escrow obligations, the transaction closes, or is completed.

Among other details that a real estate purchase contract might contain are:

  • Dates for the closing of the transaction and transfer of possession of the property to the buyer;
  • Insurance details regarding who provides coverage at what points in the transaction;
  • Possibly conflict resolution procedures that must be used, such as mediation or arbitration, if there is a dispute;
  • Options for terminating the transaction before it closes.

Leases can be equally long and as complicated as some real estate purchase contracts. The exact contents depend on whether it is a commercial lease or the lease of residential property. However, there are some commonalities. A lease would include a precise description of the property to be leased, the names and addresses of all the parties, the terms for payment, e.g., amount, frequency, and the consequences if payment is not made. A lease would also include the precise dates that define the term of the lease, which is how long it is in effect.

A lease might also provide that a security deposit must be paid and the terms for the return of the deposit at the end of the lease. A commercial lease might provide who is responsible for the maintenance of the features of the property, with the landlord assuming some responsibility and the tenant assuming responsibility for others.

Both commercial and residential leases might also contain rules regarding the tenant’s use of the property. For example, both are likely to prohibit tenants from engaging in any illegal activity. A residential lease will likely require the tenant not to disturb other tenants, especially during nighttime. A commercial lease may also ban certain activities on the part of the tenant and permit others.

Many real estate contracts include warranties. A warranty is a promise by the seller or lessor, usually relating to the property’s condition. The law implies the most common warranties in leases. In a residential lease, a warranty of habitability, promising to provide the leased premises in a condition that is fit for a residential dwelling, i.e., with heating, plumbing, free of vermin and pests, and the like, is implied. Otherwise the contents of a lease depend on the nature of the property that is rented.

In a commercial lease, a warranty of suitability for purpose is implied by the law in some states. This warranty means that the lessor must deliver to the lessee premises suitable for the lessee’s purpose, e.g., a structure that is free from defects and in a sound condition, ready for the tenant to make their intended commercial use of the structure.

What Happens When a Party Breaches a Real Estate Contract?

If one of the parties to a real estate sales transaction breaches the contract, the other party may file a lawsuit in civil court claiming money damages. Money damages are an amount of money that compensates the non-breaching party for the value of what they lost as a result of a breach. The value of the monetary damages is determined by the judge or jury depending on the evidence produced to prove damages by the party seeking to recover damages.

If a tenant fails to pay as promised for a lease agreement or otherwise violates the lease, the landlord may file an unlawful detainer action to recover unpaid rent and evict the tenant from the premises so it can be leased to someone else.

How Does a Court Determine the Value of Damages in a Contract of Sale?

Usually, the amount of damages awarded for a breach of a real estate sales contract is determined by the “fair market value” concept. The standard definition of “fair market value” is the price that a buyer would pay a seller who is willing to sell a parcel of real estate. Factors such as how the property is currently being used, the appraised value, the market conditions at the time and the condition of the property determine the fair market value.

Of course, the seller may breach the contract as well. For example, the seller may promise in the contract to deliver a residential property that is free from defects. After paying for the house, the buyer may take up residence and discover structural defects that require costly repairs. In these circumstances, the buyer may be entitled to recover damages. These damages can be measured by the difference between the price the parties agreed on and the property’s actual value in its defective condition.

How are Damages Under a Lease Agreement Determined?

Under a lease or rental agreement, a tenant may breach the agreement by failing to pay rent in the amount and with the frequency demanded by the lease. The lease may require a tenant to pay a specified amount as a penalty, in addition to the rent that is owed.

For example, a lease may require a tenant to pay the rent due, plus a penalty of $50, if the rent is not paid within two weeks of its due date. A court may not award penalty damages if it determines that the amount is unreasonable or excessive. If it is not excessive, a court may well award the landlord the rent they are owed plus the penalty amount specified in the lease as well.

A lessor may also breach a lease. A common breach by landlords is breach of the warranty of habitability. The tenant may be entitled to damages if the lessor commits this breach. Damages may include some portion of the rent paid when the uninhabitable property. Additional damages may include punitive damages. Damages may be awarded for physical harm, if the lack of habitability caused injury or disability to the tenant.

Am I Guaranteed to Recover Damages?

Neither party is ever guaranteed to be awarded the damages they claim in a real estate lawsuit. In every lawsuit, the party seeking damages must prove the amount of damages to which they are entitled under the applicable law. Damages must be measurable and shown by the evidence to be awarded.

For instance, if a buyer claims damages because they are “really upset” that a deal did not go through, the damages would not be awarded. The monetary value of being “really upset” cannot be measured, and, in addition, the law does not allow recovery of damages for emotional distress or mental anguish in breach of contract or unlawful detainer actions.

Do I Need a Lawyer to Protect My Rights?

A person who is thinking of suing for breach of a real estate sales contract should consult an experienced contract attorney to discuss their case. An experienced attorney can assess your position and tell you your options, assist you with preparing a complaint or defense, and can represent you in court.

If you are a landlord or tenant, you would want to consult a lawyer who is experienced in landlord-tenant law, who could possibly negotiate a resolution to a conflict or represent you in court.

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