Real Estate Contracts — Real Property

Sofia orally agrees to buy a lakeside lot in Franklin for $120,000. Nothing is ever put in writing. She pays $30,000, moves a cabin onto the lot, and spends the summer building a dock. Then the seller, Devi, tries to back out, saying nothing was signed so there is no deal. Can Sofia hold her to it?

Yes. But look closely at what Sofia gets, because this is where candidates lose the point. She gets the lot. She does not get a check. Buying land is a two-step process with a gap in the middle, and almost every question here lives inside that gap. By the end of this episode you will place any land-deal problem on that timeline.

Here is the route, and it follows the timeline. First, forming a contract the law will enforce, which means the Statute of Frauds and its escape hatches. Then the executory period, where equitable conversion decides who eats a fire and whether a missed closing date matters. Then closing, where marketable title comes due and merger changes the rulebook. Then remedies, and defective houses.

Start with the shape of the deal. First the buyer and seller sign a contract of sale. Then, weeks or months later, they meet at closing, where the seller hands over a deed and the buyer hands over the money. The stretch in between is the executory period, and during all of it the contract, not the deed, is the rulebook.

Every rule here is keyed to a position on that timeline. Before signing, ask about formation. During the gap, ask about risk and timing. At closing, ask about title. After closing, ask whether the contract still exists.

Formation first. A contract to sell land must be in writing to be enforced. That is the Statute of Frauds, and the Restatement (Second) of Contracts states it at § 125. It does not demand a formal, lawyer-drafted document. It requires some written memorandum of the agreement, signed by the party to be charged.

That last phrase does real work. The party to be charged is the one you are trying to hold to the deal, which means the defendant. If a buyer sues the seller, only the seller's signature matters, and the buyer's own signature is beside the point. Flip the suit around and you need the buyer's. The Statute never requires both.

What must the writing contain? Just enough to show a real bargain was struck. The essential terms. The parties, who is buying and who is selling. A description of the land good enough to identify the parcel. The price, or an agreed method for calculating it. Words showing an intent to buy and sell. And the signature of the party to be charged.

Everything else can be filled in by default rules. The closing date, the form of deed. But price is special. For a land sale most courts will not supply a reasonable price the way they might for goods, so a memorandum that never fixes the price usually fails.

Now the escape hatches, because the Statute exists to prevent fraud, not to enable it. It is a shield, not a sword. The most heavily tested exception is part performance. It lets a buyer enforce an oral land contract when she has done things that only make sense if a contract really exists.

Courts look at three kinds of acts. Paying some or all of the price. Taking possession. And making substantial improvements. Most courts require two of the three, and possession is usually the anchor. The theory is that these acts are unequivocally referable to a sale. People do not move onto someone else's land and pour money into a new roof unless they believe they own it.

Two cautions. Paying money alone is almost never enough, because a refund cures that. The acts must point unmistakably to a land deal. And part performance is an equitable doctrine, so it wins the buyer specific performance, a court order to convey. Not damages. A buyer who only wants a check cannot use part performance to rescue an oral contract.

Which is Sofia. She took possession and made valuable, permanent improvements, acts that make sense only if she bought the land, so a court sitting in equity will order Devi to convey. Note what she gets. The lot itself, not a damages check.

Three other routes bind an unwritten contract. Full performance by the seller, who once he conveys can enforce the promise to pay. Estoppel, where a party seriously relies to their detriment. And judicial admission under oath.

Now into the gap. The moment a valid land contract becomes enforceable, equity performs a quiet piece of magic called equitable conversion. It treats the buyer as already the real owner, holding equitable title, and the seller as holding bare legal title as security for the purchase money. The seller's interest has been converted into personal property, a right to be paid.

That is not a mere label. It decides two very testable questions. Quick challenge on the first. The house burns down after signing but before closing, and nobody is at fault. Who eats the loss?

Under the majority rule, the buyer. Because equitable conversion already made him the owner, he must still go through with the purchase and pay the full price for the charred remains. Most courts do let him claim the benefit of any casualty insurance the seller collected. A sizable minority reject that as too harsh and follow the Uniform Vendor and Purchaser Risk Act.

That act keeps the risk on the seller until legal title or possession has passed. Franklin's version, § 3, says it plainly. If neither has passed and the property is destroyed without the buyer's fault, the seller cannot enforce the contract and must return what the buyer paid. If either has passed, the buyer still owes the price.

Find the one operative fact the statute turns on, here whether title or possession passed. And a well-drafted contract usually settles it with an express risk-of-loss clause, which controls over either default.

Equitable conversion also sorts out death during the gap. The seller's heirs take legal title but hold it only to convey, and the buyer's estate must still fund the purchase.

Next, timing. Contracts set a closing date, and you might assume missing it by a day is a breach. In land deals, usually not. Courts presume that time is not of the essence, so the closing date is a target rather than a hard deadline. A party ready to perform within a reasonable time after that date can still enforce the contract.

The presumption can be overcome three ways. The contract expressly says time is of the essence. The circumstances show the parties meant a firm date, like rapidly swinging land values or a buyer who must close by a set day. Or one party, after the date passes, gives notice fixing a new firm date and declaring time now of the essence.

And delay is never truly free. Even when time is not of the essence, a party who closes late can owe damages for losses the delay actually caused, like extra loan interest or lost rent. When time is of the essence, missing the date is a material breach that can forfeit the deal, and often the deposit.

Now the seller's central promise. Every land sale contract carries an unwritten promise, implied by law unless the parties agree otherwise, that at closing the seller will deliver marketable title. Marketable does not mean perfect. It means title reasonably free from the risk of litigation, the kind a well-informed buyer advised by counsel would accept and pay fair value for.

Three families of problems make title unmarketable. First, defects in the record chain. A gap, a forged deed, a missing link, or an outstanding interest never cleared. Title resting only on adverse possession, never confirmed by a quiet-title judgment, is generally unmarketable, because the buyer cannot prove it from the records.

Second, encumbrances. Mortgages, tax or judgment liens, easements, restrictive covenants, significant encroachments. Each is a third-party right burdening the land, so each ordinarily makes title unmarketable, unless the buyer agreed to take subject to it. Third, existing violations of law. A current zoning or building-code violation counts, though the mere existence of zoning laws does not, because every parcel is zoned.

Then three refinements. A mortgage does not breach the promise before closing, because the seller pays it off from the sale proceeds. Some courts hold that a visible, beneficial easement the buyer knew about does not impair marketability. And the buyer can waive defects by agreeing to take subject to listed encumbrances.

Now the timing trap, and it is a favorite. Marketable title is owed at closing, not one day earlier. During the executory period the buyer cannot rescind merely because the seller does not yet have clean title. The seller is entitled to use the entire period, right up to closing, to cure defects and pay off liens.

If closing arrives and title is still unmarketable, the buyer must first tell the seller and give a reasonable chance to cure. If it is not fixed, he may rescind and recover the deposit, sue for damages, or take the flawed title with an abatement, a reduced price reflecting the defect.

Then closing happens, and the rulebook changes. Under the doctrine of merger, when the buyer accepts the deed, the contract merges into the deed and stops being an independent source of rights about title. The contract's promises, above all marketable title, are extinguished and replaced by whatever the deed itself says.

The consequence is stark. After closing, a buyer who discovers a title defect can no longer sue on the contract's marketable-title promise. He must rely on the covenants of title in the deed, and if the deed was a quitclaim, which carries no title covenants at all, he may have no remedy. Merger is not absolute. Collateral promises survive, and fraud is never washed away.

Remedies now. Because every parcel of land is treated as unique, money is presumed inadequate, and specific performance is the signature remedy. A buyer ready, willing and able to pay can force a reluctant seller to convey. And here is the part students forget. The seller can get specific performance too, under mutuality of remedy.

To put the other side in breach you normally must tender your own performance, because these are concurrent conditions. But tender is excused when it would be an empty gesture. If the seller's title is hopelessly defective, the buyer need not tender. A clear repudiation excuses it too.

If a party wants money instead of land, the measure is the benefit of the bargain. The difference between contract price and market value at the time of breach, plus foreseeable losses. Seller breaches, the buyer recovers value minus price. Buyer breaches, the reverse.

One split to know. Under the majority American rule the buyer gets full benefit-of-the-bargain damages even for an innocent failure of title. A minority follow the older English rule, limiting him to the deposit plus expenses.

Last on remedies, the earnest-money deposit. Contracts often let the seller keep it if the buyer defaults. That is a liquidated-damages clause, enforceable only if damages were hard to estimate and the amount is a reasonable forecast of the loss, not a penalty. Courts commonly treat around 10% of the price as presumptively reasonable.

Last section. When a house turns out to be a lemon, classify the seller first, because that label decides everything. A builder-vendor, a developer or contractor who builds a new home and sells it, gives an implied warranty of quality. He impliedly promises the house was built in a workmanlike way and is fit to live in. The modern trend even lets a later buyer sue the builder for latent construction defects.

A seller of an existing home is treated very differently. The starting point is caveat emptor, no implied warranty. But the modern majority has cut that back sharply. Today's ordinary seller is liable if she affirmatively misrepresents a material fact, if she actively conceals a defect, or if she fails to disclose a known latent material defect.

That last one is the big modern development. A serious problem the seller knows about, that materially affects value, and that the buyer could not reasonably discover. Innocent silence about an unknown or obvious problem is fine. Deliberate silence about a known hidden one is not.

Which brings us to the as-is clause. Second quick challenge. A seller knows the basement floods badly every spring and has painted over the water stains. The contract sells the house as is, with all faults. Does that clause protect her?

No. An as-is clause can validly shift the risk of the property's ordinary condition and disclaim implied warranties of quality, but it has firm limits. It never protects a seller from fraud, from active concealment, or usually from failing to disclose a known latent material defect. As is means she will not make repairs. It does not mean she may lie or hide things.

A word on authorities, because this episode named no case, and that was deliberate. Almost everything here is common-law doctrine that goes by its own name rather than a case caption. The Statute of Frauds. Equitable conversion. Merger. The exam will not ask who decided any of it. It gives you a timeline and asks what the rule produces.

If you keep only three things, keep these. The party to be charged is the defendant, so only that signature matters. Marketable title is owed at closing, which disposes of most premature-rescission questions. And accepting the deed merges the contract's title promises away, which disposes of most late ones.

Now the traps. One. Part performance buys specific performance, not damages. An oral contract enforced this way gets the buyer a conveyance in equity, never a check at law. Two. Marketable title is owed at closing, not during the executory period. A buyer who panics and rescinds early because a lien still shows on the records has jumped the gun.

Three. A mortgage is not a marketability breach before closing, because the seller pays it off from the proceeds. Four. Merger wipes out the contract's title promises once the deed is accepted, so afterward look to the deed's covenants. Five. Time is not of the essence is the default, so do not treat a missed closing date as an automatic breach.

Six. An as-is clause never shields fraud, active concealment, or usually a failure to disclose a known hidden defect. And seven. The party to be charged is the defendant. Only that party's signature needs to be on the memorandum.

Time for the quick check, and this one comes straight from the BARGO question bank. A buyer purchased a house and accepted a quitclaim deed at closing, paying the full price. The contract had promised marketable title.

Months later he learned that a neighbor holds a valid recorded easement across the backyard, predating the sale, an encumbrance that would have made the title unmarketable. He sued the seller on the contract's marketable-title promise. Can he recover?

Option one. No, because accepting the deed merged the contract's title promise into the deed. Option two. No, because an easement of record can never make a title unmarketable. Option three. Yes, because the contract's marketable-title promise survives the closing indefinitely. Pause here if you want a moment.

The answer is option one. Once the buyer accepts the deed, the contract's promises about title merge into it and are extinguished. His title rights now come only from the deed's covenants, and a quitclaim carries none at all, so he has no contract remedy and likely no deed remedy either.

Now the wrong answers, and the first is instructive. Option two says the easement was never a defect. Wrong. A recorded easement is a textbook encumbrance that does impair marketability. It is the timing, not the defect, that defeats him. Option three misstates merger, the very rule that ends the promise at closing. There are more than thirty more questions on this topic, each explained like that.

Five things to take away. One. Place the problem on the timeline first, because position decides the rule. Two. To form the contract you need a writing with the essential terms, signed by the party to be charged. Or part performance, which buys the land, never a check.

Three. In the gap, equitable conversion puts the risk of casualty on the buyer under the majority rule, and time is presumed not of the essence. Four. At closing the seller owes marketable title, and not one day before.

Five. After closing, merger ends the contract's title promises, and specific performance is the signature remedy for both sides. Which brings us back to Sofia, who never signed a thing and still gets her lakeside lot. Possession, a cabin and a dock told the truth about the bargain. Next time, Mortgages and Foreclosure.

Practice this topic with more than 2,900 exam-style questions, free to start, at nextgenbargo.com. This episode is for education and exam preparation only, not legal advice, and we are not affiliated with or endorsed by the NCBE or any bar examining authority.