What Investors Should Know About Contracts – the Basics
Attorneys often prepare formal and detailed contracts. Sometimes, business is done with a handshake and no lawyers. There are also contracts in between those extremes, written by the parties in the deal or from a template found in cyberspace. Such contracts may work well. Quite often, however, a bad contract becomes a problem. Many contracts are flawed. These include some that attorneys draft. They may be poorly written and lacking important terms.
Regardless of the type of contract you use, it’s critical to understand the obligations of both sides and what’s necessary to make a contract legally binding and enforceable, should a dispute arise. This article will discuss the basics of what makes a valid contract. Then, we’ll use a lawsuit I handled as a case study to understand an important principle in contract law that often arises.
The Elements of a Contract
For any contract to be enforceable, it must have certain elements. There needs to be an offer, acceptance, consideration and specificity about the essential terms of the deal. We’ll unpack all of this as follows.
Every contract starts with an offer. This means little more than the plain meaning of the word “offer” in everyday use. An offer may be defined as a proposal to do something. Offers are made with the expectation of acceptance, rejection or a counter offer.
To have a valid contract, there must be a clear acceptance in response to the offer. This means the other side agrees to the whatever is offered. The legal term describing this is a “meeting of the minds.” For the contract to be enforceable, both sides must clearly agree to the same terms of the deal without misunderstanding.
There must be some benefit given in exchange for a promise. This is known as consideration. Each side of the deal must give something of value to the other. It’s often money. However, consideration could be a promise to do something or to refrain from doing something.
If you make a promise in a contract, you can’t be legally obligated to perform without receiving consideration in return for your promise. For example, you can promise to give someone money and then change your mind. That’s not an enforceable contract. It’s an intent to make a gift, which is revocable.
Option To Purchase
A common contract in my real estate legal practice, known as an option to purchase, can help explain consideration. A seller gives a buyer the right to purchase a property for a certain price over an agreed period of time. For example, the owner may promise to sell their property for $200,000 within one year, if the buyer exercises that option to buy. What the buyer receives is the right to buy the property under certain terms while the seller keeps it off the market for the rest of the world.
For the promise to sell to be enforceable, the buyer must give consideration to the owner. Otherwise, the owner would be giving something of value—the right to purchase their property—without getting anything in return. Also, the buyer wouldn’t be obligated to exercise that option to buy at all.
To make an option contract binding, the buyer pays an option fee. The option fee may be applied as a credit toward the purchase price, but not necessarily. It’s also important to understand that consideration need not be significant. A very small amount to money, called “nominal” consideration, may be sufficient.
Additionally, an option fee does not have to be non-refundable to be valid consideration. Courts have ruled that paying a refundable option fee to the seller does involve giving up something of value. This is because the buyer is denied access to their money during the option period.
Clear and Specific Terms
The final requirement for a valid contract is the essential terms of the deal must be clear and specific. What’s considered “essential” to an agreement varies with each deal. In a contract for the purchase and sale of real estate, there are special requirements.
Florida, like other states, has a “Statute of Frauds” (SOF). This law is found in Florida Statutes Chapter 725.01. Although, many oral contracts are enforceable, the Florida SOF states that certain types of contracts, including those for the sale of real property (and leases for a term greater than one year), must be in writing and signed by the party against whom enforcement is sought.
Contracts for the sale of real estate in Florida also have other requirements. The contract must contain a description of the property specific enough to identify it. The financing terms also must be described, with the purchase price being the most critical term.
A Step Beyond the Basics–Case Study
Now that you understand the basic elements of a contract, we can review a concept that comes up often in contract law. A common issue in contract disputes involves the interpretation of unclear terms.
When interpreting vague language in a contract, the law says it should be interpreted in a manner against the party who prepared the contract. This is based on a common sense notion of fairness that one shouldn’t benefit from their own sloppiness in writing a contract. A true-life example helps illustrate this concept.
Several years ago, I took a pro bono case representing tenants renting a mobile home at a trailer park. The case was an eviction filed against my clients based on various alleged violations of park rules, though they were paying the rent.
I filed a counter suit to the eviction for breach of contract. The contract at issue was between the park owner and my clients. They used a form mobile home purchase agreement with some unique terms hand written-in by the seller, who was unquestionably the more experienced and sophisticated party in the deal.
The contract involved the renovation of, and transfer of title to, a mobile home. The landlord owned the mobile home, which was in disrepair and not in ready-to-rent condition. My clients agreed to improve it, at their expense. In exchange for this promise, and upon completion of the improvements, the owner promised to transfer title to my clients. The deal was, “you fix it, you own it.” My clients lived in the mobile home and rented the lot while doing the renovation.
Vague Contract Terms
The vague contract terms in dispute read that “title will be transferred and only then, upon completion of driveway (concrete) and bathroom.” The landlord argued that the work done was substandard and not of the quality she expected to trigger the title transfer under the deal.
At trial, I argued that the vague contract language must be interpreted in favor of my clients and against the landlord who wrote it. We also offered photos of the work done and argued that to fulfill such a vague requirement as “complete the bathroom,” the tenants only had to do a reasonable job, not build the Taj Mahal, as the landlord expected.
The judge agreed with us. We won the counterclaim and a court order transferring title. It was an unsatisfying victory, however, because we lost the eviction suit. That led to the strange result of my clients becoming title owners of the mobile home, while being required to remove it from the park, which they couldn’t afford to do. Justice is can be flawed and unsatisfying.
This article should help anyone signing a contract understand the basic requirements to make it enforceable along with knowing an important legal concept in contract interpretation. If you’re going to sign or prepare a contract or find yourself in a dispute, call me to discuss how we can help you avoid or solve legal problems.