Pursuant to A.R.S.§32-2124(E)(2), real estate licensees must have an understanding of the general purpose and legal effect of real estate contracts. Contract questions are by far the most common questions received by the Arizona Association of REALTORS® (“AAR”) Legal Hotline. This article will address some of the primary legal requirements of a real estate contract and some of the most common questions about contracts.

Minimum elements

For a valid contract to exist there needs to be an offer, acceptance, consideration and sufficient specificity so that the obligations involved can be ascertained. K-Line Builders, Inc. v. First Federal Savings and Loan Association, 139 Ariz. 209, 677 P.2d 1317 (App. 1983). The AAR contracts are designed to address these requirements in a uniform manner.

Statute of Frauds

Pursuant to the Statute of Frauds, a contract for the sale of real property must be in writing and signed by the party to be charged to be enforceable. A.R.S. §44-101(6).

The party to be charged is the party against whom enforcement of the contract is sought. Jolly v. Kent Realty, Inc. 151 Ariz. 506, 729 P.2d 310 (App. 1986).A “signature” may be a “mark, if a person cannot write, with the person’s name written near it and witnessed by a person who writes the person’s own name as witness.” A.R.S. §1-215(37).

Offer

An “offer” is a manifestation of willingness to enter into a contract made in a way that another person understands that agreement to the contract is invited and will conclude it. K-Line Builders, Inc. v. First Federal Savings and Loan Association, 139 Ariz. 209, 677 P.2d 1317 (App. 1983). When an offer or counteroffer is not supported by independent consideration, it may be withdrawn at any time prior to its acceptance. Bevins v. Dickson Electronic Corp., 16 Ariz. App. 105, 491 P.2d 494 (1971). Any statement clearly implying unwillingness to contract according to the terms of their offer, communicated before acceptance of the offer, is sufficient to prevent contract formation. Although the statute of frauds requires that an offer or counteroffer be in writing, the written offer or counteroffer can be verbally withdrawn. Executive Towers v. Leonard, 7 Ariz. App. 331, 439 P.2d 303 (1968). However, when withdrawing an offer, do so in writing if at all possible to avoid disputes.

Acceptance

“Acceptance” is agreement to the terms of an offer in the manner required by offer. K-Line Builders, Inc. v. First Federal Savings and Loan Association, 139 Ariz. 209, 677 P.2d 1317 (App. 1983). Acceptance of an offer must be on the exact terms as the offer, and any attempt to accept on terms materially different from the original offer constitutes a counter offer, which rejects the offer. Acceptance of an offer must be conveyed to be effective. Id.; Empire Machinery v. Litton Business Tel. Systems, 115 Ariz. 568, 573, 566 P.2d 1044 (1977). Silence does not ordinarily establish acceptance.

Consideration

Consideration need not be money, but may involve a promise for a promise. Carroll v. Lee, 148 Ariz. 10, 13, 712 P.2d 923 (1986). Consideration may be a benefit to a promisor or a detriment to a promisee. By Arizona statute, “[e]very contract in writing imports a consideration.” A.R.S. §44-121.

Sufficient Specificity

A contract must be clear and contain specific terms. All critical provisions must be specified and agreed upon. Savoca Masonry Co., Inc. v. Homes and Son Construction Company, Inc., 112 Ariz. 392, 542 P.2d 817 (1975) (“The court’s role is not that of contract maker. While custom, usage and implications can be used to prove a contract’s existence, they cannot be the basis for providing numerous essential elements of an agreement.”)

Property Description

Identifying the property that is the subject of the contract must be done with specificity. The general rule is that the property must be identified so that it can be ascertained. Ideally, the property should be described by legal description. However, listing the property’s street address is legally sufficient.

If at all possible, the property should be identified on the ground as well as in the contract, by staking and flagging or some other method. Identifying the property is particularly important when dealing with vacant land. For example, in Hill-Shafer Partnership v. Chilson Family Trust, 165 Ariz. 469, 799 P.2d 810 (1990), the buyer intended to purchase whatever legal description identified, regardless of size or location. The seller did not have similar intent, but intended to convey only certain property. The legal description in the contract described property other than that which the seller intended to convey. Therefore the court held there was no mutual assent, and no binding contract.

Fixtures and Personal Property

A fixture is an item that was once personal property, but is affixed to the real estate in such a manner as to become a part of the real property. Arizona employs a three-part test for determining when personal property, also known as chattel, has become a fixture: (1) annexation to the realty; (2) the chattel must have adaptability or application as affixed to the use of the real estate; and (3) an intention of the party to make the chattel a permanent part of the realty. Voight v. Ott, 86 Ariz. 128, 341 P.2d 923 (1959) (a buyer of real property also purchases the fixtures annexed thereto, but chattels are not part of the transaction unless specified in the purchase contract). To avoid ambiguity, the contract should specifically identify all items that are to be conveyed in the transactions. The AAR contract contains a list of fixtures and personal property to be conveyed; however, any additional items should be written added to the contract.

Parties

The parties to be bound to the contract should be set forth with specificity. If either party is a corporation, limited liability company, or partnership, all pertinent information about the entity should be included, such as the entity’s exact name, address, state of formation. If either party is an entity, the signer’s authority to bind the entity should also be ascertained.

In any transaction for the acquisition, disposition or encumbrance of an interest in real property, both husband and wife must sign the contract for the community property to be obligated. A.R.S. §25-214 (C)(1). “A conveyance or incumbrance of community property is not valid unless executed and acknowledged by both husband and wife, except unpatented mining claims . . ..” A.R.S.§33-452. Therefore, both husband and wife must sign all contracts and other agreements relating to the transfer of real property, including modifications of the contract. In the alternative, “either husband or wife may authorize the other by power of attorney to sign the contract on his or her behalf. A.R.S.§33-454.

The parties should be adults. “Adult” means a person who has attained the age of eighteen years. A.R.S.§1-215(3); A.R.S. §1-215(19) (“Majority” or “age of majority” means the age of eighteen years or more.)

The parties should also be competent. Generally, in order to invalidate a contract based on incompetency, the owner must have been incompetent at the time of the execution of the contract. See Golleher v. Horton, 148 Ariz. 537, 541, 715 P.2d 1225 (App. 1985). Further, be aware that the incompetency of an individual will invalidate a general or special power of attorney, (i.e., for specific property) unless the power of attorney is a durable power of attorney that specifically states that the power of attorney will not be affected by the incompetency of the principal. A.R.S. §14-5501. 
However, the parties need not be literate or able to read the contract. The general rule is, absent misrepresentation, an illiterate person who fails to have a contract he signed read to him by a person available to read the contract cannot thereafter claim that he did not assent to its provisions. Betancourt v. Logia Suprema DeLa Alilanza Hispana-Americana, 53 Ariz. 151, 86 P.2d 1026, modified, 53 Ariz. 263, 88 P.2d 83 (1939).

Purchase Price

The terms of payment and the amount of the purchase price is clearly an essential element of a purchase contract. The purchase price, earnest money, down payment and any financing contingency should be specified.

Close of Escrow

The close of escrow date is an important date that should be specified in the purchase contract. Both parties will likely make significant plans based upon the close of escrow date and may have simultaneous closings on other properties.

Generally, in a contract for the sale of real property, time is usually not regarded as being of the essence. Miller v. Long Family Partnership, 151 Ariz. 306, 308, 727 P.2d 359, 361 (App. 1986). Time should be considered of the essence in a contract when:
“1. Express recital in the parties’ contract. [citations omitted]
2. Where, from the nature of the subject matter or fluctuations in the value or from the terms of the agreement, the treatment of time as a non-essential will produce a hardship, and delay by one party in completing or in complying with a term would necessarily subject the other party to serious injury or loss. [citations omitted]
3. An express notice, given by a party who is not in default to the other party who is in default, requiring the contract to be performed within a stated time, which must be a reasonable time according to the circumstances of the case.” Id.

The AAR contract contains an express recital that “time is of the essence” and that the close of escrow date is a material term. However, be aware that the courts may not give such a clause effect, unless the close of escrow date is truly a material term. Therefore, if a client is considering canceling a contract over the objections of the other party due to a failure to close, advise independent legal counsel.

Contingencies

A contingency is a clause that requires the completion of a certain act before the parties are obligated to perform. A contingency clause is also known as a “condition precedent.” The AAR contract contains a financing contingency, which is the most common contingency in a real property contract. When an express contingency fails, the contract will not be enforced. Connor v. Cal-Az Properties, Inc. 137 Ariz. 53, 668 P.2d 896 (App. 1983).

Contingency clauses must be drafted precisely because contingencies are a common source of ambiguity and frequently become the subject of dispute. Contract language is ambiguous when it can be reasonably interpreted in more than one way and the meaning cannot be determined within the “four corners” of the contract. A court will interpret an ambiguous contract term by trying to determine the intent of the parties at the time of the contract.
At a minimum, a contingency clause should specify the terms of the contingency, the exact time in which the contingency must be fulfilled, and the rights and obligations of the parties if the contingency is not met. The following are some important considerations when drafting a contingency:

• What is the contingency?
• Who does it benefit?
• When must the contingency be satisfied?
• How is the contingency satisfied?
• What happens if the contingency is not satisfied?

As a general rule, a party may waive any provision of a contract that is solely intended for his benefit. Pruitt v. Pavelin, 141, Ariz. 195, 685 P.2d 1347 (App. 1984). In other words, the buyer can waive a financing contingency, but the seller cannot.

Escrow Instructions

The AAR contract is used as escrow instructions. Escrow instructions constitute a conveyance device “designed to carry out the terms of a binding contract of sale previously entered into by the parties.” Young v. Bishop, 88 Ariz. 140, 353 P.2d 1017 (1960). Consequently, escrow instructions cannot in any way alter the terms of the underlying purchase contract “unless the parties specifically and clearly state such alteration or modification in writing with specific reference to the fact it changes the original contract.” Allan v. Martin, 117 Ariz. 591, 574 P.2d 457 (1978).

Boilerplate

The AAR contract contains pre-printed or “boilerplate” language. However, the form is often revised or supplemented to address issues unique to the particular transaction. Where written provisions of the contract are inconsistent with the printed or “boilerplate” provisions, the written provisions will prevail. Autonumerics, Inc., v. Bayer Industries, Inc., 144 Ariz. 181, 696 P.2d 1330 (App. 1984).

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