Real estate contracts - Creation and construction

Learning Outcomes

This article examines real estate contract creation and construction for the MBE, including:

• pinpointing when land sale agreements fall within the Statute of Frauds and what writings satisfy its memorandum requirement on the MBE;
• distinguishing sufficient from defective property descriptions and price provisions, and how courts interpret ambiguities and missing terms in exam hypotheticals;
• applying the implied covenant of marketable title, identifying common title defects, and recognizing circumstances that do not impair marketability for testing purposes;
• using the doctrine of equitable conversion to allocate risk of loss between contract and closing, including the effect of casualty loss, insurance, and party deaths in typical bar exam fact patterns;
• evaluating performance timing, tender, and merger by deed, and determining which contractual covenants survive closing under commonly tested rules;
• assessing available remedies for breach of a land sale contract, including expectation damages, rescission and restitution, specific performance with or without abatement, and enforceable liquidated damages provisions in MBE problem sets.

MBE Syllabus

For the MBE, you are required to understand land sale contract creation and construction, with a focus on the following syllabus points:

• Applying the Statute of Frauds to real estate contracts, including what interests are covered, the writing requirement, essential terms (parties, property description, price), and signature (including agents).
• Identifying exceptions to the Statute of Frauds, particularly the doctrine of part performance and related equitable doctrines.
• Understanding the implied covenant to deliver marketable title, what constitutes unmarketable title (e.g., defects in record chain, encumbrances, zoning or building code violations), and what does not.
• Analyzing the timing of the marketable title requirement, tender of performance, the seller’s right to cure, and the buyer’s remedies for breach.
• Applying the doctrine of equitable conversion to determine risk of loss and the effect of death of buyer or seller between contract and closing.
• Evaluating remedies for breach of a land sale contract, including expectation damages, rescission and restitution, specific performance, and liquidated damages provisions.
• Understanding the doctrine of merger by deed and which contract covenants survive closing as collateral promises.

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. Which of the following agreements for the transfer of an interest in land is generally required to be in writing under the Statute of Frauds?
   1. A lease for six months.
   2. An agreement granting an easement for two years.
   3. A license to use land for a weekend event.
   4. An agreement to build a fence on a property line.
2. Under the doctrine of equitable conversion, who typically bears the risk of loss if property under contract for sale is destroyed without fault before the closing date?
   1. The seller, because legal title has not yet passed.
   2. The buyer, because equity regards the buyer as the owner once the contract is signed.
   3. Neither party; the contract is automatically rescinded.
   4. The party who was in possession at the time of the loss.
3. A seller contracts to sell Blackacre to a buyer. The contract is silent regarding the quality of title. Before closing, the buyer discovers a recorded mortgage on Blackacre that the seller did not disclose. The buyer refuses to close. Which statement is most accurate?
   1. The buyer has breached the contract; the mortgage does not make title unmarketable.
   2. The seller has breached the implied covenant of marketable title.
   3. The contract is voidable due to mutual mistake.
   4. The seller is entitled to specific performance with an abatement for the mortgage amount.

Introduction

Contracts for the sale of land are governed by specific rules distinct from general contract law or the UCC rules for the sale of goods. The MBE tests your understanding of these specific requirements, particularly those related to the enforceability of the agreement (Statute of Frauds), the essential terms and interpretation of the contract, the quality of title the seller must deliver (marketable title), the allocation of risk before closing (equitable conversion), and the available remedies upon breach. A valid land sale contract requires offer, acceptance, consideration, and compliance with the Statute of Frauds.

Key Term: Land Sale Contract
An executory contract under which a seller promises to convey real property to a buyer in exchange for the buyer’s promise to pay the purchase price, usually at a later closing where a deed is delivered.

A typical land transaction has two distinct stages:

• The contract stage, when the parties sign the land sale contract; and
• The closing stage, when the deed is delivered and the price is paid.

Most of the rules in this article govern the contract stage. At closing, the deed usually replaces (or merges with) the contract, so understanding what survives merger is also critical.

Key Term: Statute of Frauds
A legal doctrine requiring certain types of contracts, including those for the transfer of an interest in land for more than one year, to be in writing and signed by the party to be charged to be enforceable.

Statute of Frauds Requirements

To be enforceable, a contract for the sale of land must generally satisfy the Statute of Frauds. This requirement applies to:

• Contracts to sell land or any interest in land.
• Options to purchase land.
• Leases for more than one year.
• Agreements to grant easements or other nonpossessory interests for more than one year.

Short-term leases (e.g., month-to-month or one-year leases) and licenses are usually outside the Statute.

The Required Writing or Memorandum

The Statute of Frauds does not require a formal contract; a signed memorandum is sufficient if it contains the essential information. A land sale contract typically satisfies the Statute of Frauds if there is a writing (or multiple writings that clearly relate to the same transaction) that:

• Identifies the Parties: Clearly names or identifies the seller and the buyer. Initials, trade names, or other reasonably identifying designations are usually sufficient.
• Describes the Property: Provides a description sufficient to identify the subject property. A formal legal description is not required; an address, lot number, or other description that reasonably identifies the parcel is usually sufficient.
  Parol evidence may be admissible to clarify ambiguities but not to supply a completely missing description.
• States Essential Terms: Includes the price and manner of payment, if agreed upon.
  • If the parties have not agreed on a price, some courts will infer a reasonable price, especially if the contract refers to “market value,” but this is less common than with goods under the UCC.
  • The writing must at least show that a price was agreed, even if the exact dollar amount is to be fixed later (for example, by appraisal).
• Is Signed by the Party to Be Charged: Must be signed by the party against whom enforcement is sought (typically the defendant).
  • The signature can be handwritten, typed, stamped, or electronic, as modern statutes like UETA permit.
  • On the MBE, assume an agent’s signature is sufficient only if the agent’s authority to sign for the party is itself in writing (the “equal dignities” rule).

Multiple documents—such as emails, letters, and a broker’s listing—can be read together to form the required memorandum if they clearly refer to the same transaction and at least one is signed by the party to be charged.

Effect of Noncompliance

Failure to satisfy the Statute of Frauds does not make the contract void; it makes it unenforceable at the election of the party to be charged. Either party may still perform voluntarily. The buyer may also recover restitution (for example, deposits or the value of improvements) even when specific performance is barred.

Exception: Part Performance

An oral land sale contract may be enforced in equity under the doctrine of part performance if the conduct of the parties unequivocally proves the existence of the contract. Courts focus on acts that would be unlikely unless a contract existed.

Most jurisdictions require at least two of the following three acts by the buyer:

• Payment: Payment of all or a substantial part of the purchase price.
• Possession: Taking possession of the property.
• Improvements: Making substantial, permanent improvements to the property.

These acts must be unequivocally referable to the contract; they cannot be readily explained by some other relationship (for example, a tenancy or a family arrangement). If part performance is established, the remedy is usually specific performance, not damages.

Key Term: Part Performance
An equitable doctrine that allows enforcement of some oral land contracts when the buyer’s conduct (payment, possession, improvements) clearly indicates the existence of a contract, despite noncompliance with the Statute of Frauds.

Equitable and Promissory Estoppel

Even where the classic part-performance elements are not satisfied, courts sometimes enforce an oral land contract under equitable estoppel or promissory estoppel where:

• One party reasonably and foreseeably relies on the other party’s promise; and
• Injustice can be avoided only by enforcement.

These doctrines are applied sparingly on the MBE but can appear where, for example, a seller lures a buyer into costly reliance while repeatedly promising to sign a deed.

Modifications and Oral Rescission

If a written land contract is later modified, the modification must be in writing if:

• The contract as modified still falls within the Statute of Frauds; or
• The modification itself concerns an essential term (such as price or property description).

An agreement to rescind a land sale contract, however, is generally enforceable even if oral. Rescission returns the parties to their pre-contract positions and does not itself transfer an interest in land, so most courts do not require a writing.

Worked Example 1.1

Seller orally agrees to sell her farm, Greenacre, to Buyer for $300,000. Buyer pays Seller a $30,000 deposit, moves onto the farm with Seller's permission, and builds a new barn at a cost of $50,000. Seller later refuses to convey the deed. Can Buyer enforce the oral contract?

Answer:
Yes, likely. Although the contract is for the sale of land and thus within the Statute of Frauds, Buyer's actions constitute part performance. Buyer paid part of the price, took possession, and made substantial improvements (the new barn). These acts unequivocally indicate the existence of a contract, making the oral agreement specifically enforceable in equity despite the lack of a sufficient writing.

Worked Example 1.2

Buyer and Seller sign a written contract for the sale of Blackacre that satisfies the Statute of Frauds but does not specify a closing date. Ten days later, Buyer and Seller orally agree to rescind. The next day Seller contracts in writing to sell Blackacre to Third Party, who later closes. Two days after that, Buyer tells Seller she changed her mind and wants to proceed under the original contract and sues Seller for breach. Is the oral rescission valid?

Answer:
Yes. An agreement to rescind a land sale contract generally need not be in writing because it does not create or convey an interest in land; it merely terminates contractual rights. The original written contract was effectively rescinded, so Seller did not breach by selling to Third Party.

Essential Terms and Contract Construction

Even when the Statute of Frauds is satisfied, a land sale contract must be sufficiently definite and is subject to rules of construction and interpretation.

Property Description and Ambiguity

A property description is adequate if it allows a court to identify the land with reasonable certainty, possibly with the aid of extrinsic evidence. Ambiguities are construed:

• Against the drafter, particularly if one party had much greater bargaining power.
• In a manner that makes the contract work, if reasonably possible, rather than voiding it.

If the description is so vague that the court cannot determine what land is being sold, the contract is void for indefiniteness.

Price and Financing Terms

Price is usually an essential term in land sale contracts. Courts may:

• Enforce a contract that sets price by an objective standard (“appraised value,” “tax valuation,” “average of three appraisals”).
• Decline to enforce a contract that omits any reference to price or mechanism to determine it, especially if the parties clearly contemplated a fixed price.

Financing terms (such as interest rate or mortgage assumptions) are important but not always essential. If the parties agree that the buyer will “obtain financing” but specify nothing further, courts typically imply a reasonable mortgage on customary terms.

Time for Performance and “Time Is of the Essence”

If the contract does not specify a closing date, the law implies that performance must occur within a reasonable time. What is reasonable depends on circumstances (for example, the need to arrange financing or clear title).

• Time is not automatically “of the essence.” Missing a scheduled closing date is usually not a material breach unless:
  • The contract expressly states that “time is of the essence”; or
  • The circumstances show the parties intended strict timing (for example, rapid resale to a known third party).

If time is of the essence, a party who fails to tender performance on the closing date is in material breach and cannot demand performance from the other side.

Key Term: Time Is of the Essence
A clause making timely performance a material condition; failure to perform by the stated time is a material breach rather than a minor delay.

Implied Duties and Disclosures

Land sale contracts carry several implied obligations:

• The seller must deliver marketable title at closing (discussed below).
• The seller must not commit waste or materially alter the property between contract and closing.
• In many jurisdictions, especially for residential property, the seller has a duty to disclose latent material defects known to the seller and not readily discoverable by the buyer on reasonable inspection.

“As is” clauses do not protect a seller who actively conceals defects or makes material misrepresentations.

Marketable Title

Unless the contract specifies otherwise, every land sale contract contains an implied covenant that the seller will deliver marketable title at the closing.

Key Term: Marketable Title
Title reasonably free from doubt—that is, title that a reasonable, prudent buyer would accept and that does not expose the buyer to a substantial risk of litigation.

Marketability does not require a perfect record; the focus is on whether a reasonable buyer would face significant risk of losing the property or having its value materially reduced due to title problems.

Defects Rendering Title Unmarketable

Common defects include:

• Defects in the Record Chain of Title:
  These include gaps in the chain, forged or improperly executed deeds, deeds recorded out of order, or conveyances by persons lacking capacity or authority.
  Title acquired by adverse possession is generally considered unmarketable until a quiet title action or similar proceeding establishes the possessor's rights of record.

• Encumbrances:
  Mortgages, liens, easements, profits, restrictive covenants, outstanding options, and similar interests generally make title unmarketable unless:

  • The contract expressly allows them (“subject to all easements of record”).
  • The buyer expressly or impliedly waives them.
  • They will be removed at closing.
  • Seller’s Right to Cure:
    A seller typically has the right to satisfy existing mortgages or liens at the closing using the sale proceeds. If the lien will be discharged contemporaneously with closing, it does not render title unmarketable.
  • Easements:
    An easement that significantly interferes with ordinary use or reduces property value (for example, a private right-of-way across the yard) usually renders title unmarketable.
    However, a known or visible beneficial easement (for example, a standard utility easement serving the property) may not, especially if customary in the area.

• Encroachments and Boundary Problems:
  Encroachments of structures across boundary lines can make title unmarketable if they are substantial or likely to lead to litigation. Minor encroachments sometimes do not, particularly if they can be easily cured.

• Zoning and Building Code Violations:
  Zoning or building restrictions themselves do not make title unmarketable.
  But an existing violation of zoning, subdivision, or building regulations—such as an illegal addition that violates setback requirements—does render title unmarketable, because the buyer faces enforcement action and possible removal costs.

• Outstanding Future Interests or Leases:
  If holders of outstanding future interests (such as remaindermen) or existing tenants have not joined in the contract, and their interests will not terminate at or before closing, title is unmarketable unless the buyer agreed to take subject to them.

What Does Not Make Title Unmarketable

Title is not rendered unmarketable by:

• A quitclaim deed; marketability depends on the state of title, not on the type of deed the seller proposes to give.
• Public land use restrictions (zoning, environmental laws) that are being complied with.
• Small defects that pose no realistic threat of litigation and do not materially affect value.

Timing and Tender

• The seller is not required to deliver marketable title until the closing date.
  A buyer cannot rescind before closing based on unmarketability unless it is clear that the defects cannot reasonably be cured by closing.
• The buyer must ordinarily notify the seller of defects and give a reasonable opportunity to cure.
• Both parties must be ready, willing, and able to perform (tender of performance), unless the other party has anticipatorily repudiated or clearly cannot perform.

Remedies for Unmarketable Title

If the seller cannot deliver marketable title at closing (and the buyer did not waive the defect):

• The buyer may rescind the contract and recover any deposit plus reasonable expenses (like title search costs).
• The buyer may seek damages, typically measured by the difference between the contract price and the fair market value at the time of breach, plus consequential damages.
• In many jurisdictions, the buyer may elect specific performance with an abatement of the purchase price to reflect the defect if the buyer chooses to take the property notwithstanding the defect.

Merger Doctrine

Once the buyer accepts the deed at closing, the contract merges into the deed.

Key Term: Merger Doctrine
The principle that, at closing, contract provisions concerning title and quantity or quality of the estate merge into the deed, so the buyer’s claims thereafter are based on the deed’s covenants rather than the contract.

After merger:

• The seller is no longer liable under the implied covenant of marketable title; the buyer’s recourse is limited to any express covenants of title in the deed (for example, general warranty covenants).
• Separate, collateral promises in the contract (such as an agreement to repair the roof or to remove debris) may survive merger if they are independent of title and the conveyance itself.

Worked Example 1.3

Seller agrees in a written contract to sell Blueacre to Buyer, closing in 60 days. The contract requires marketable title. A title search reveals a restrictive covenant prohibiting commercial use, recorded 50 years ago. Blueacre is currently zoned residential, and Buyer intends residential use. Is title unmarketable?

Answer:
Yes. Even though the covenant aligns with current zoning and Buyer's intended use, a recorded restrictive covenant is an encumbrance that generally renders title unmarketable unless waived. It restricts future use and exposes the owner to potential litigation if violated. Buyer can notify Seller of the defect and demand its removal or waiver before closing, or rescind if it's not cured.

Worked Example 1.4

Seller contracts to sell Greenacre to Buyer. Before closing, Buyer discovers that a neighbor’s garage encroaches two feet onto Greenacre. The encroachment has existed for years and likely violates the lot’s side-yard setback. Buyer refuses to close and seeks rescission. How should a court treat the encroachment?

Answer:
The encroachment likely renders title unmarketable because it creates a substantial risk of litigation and may require removal or an easement to resolve. Unless the contract contemplated such encroachments or Buyer waives the defect, Buyer may rescind and recover her deposit.

Equitable Conversion and Risk of Loss

The doctrine of equitable conversion addresses the allocation of risk and ownership interests between the signing of the land sale contract and the closing.

Key Term: Equitable Conversion
A doctrine holding that once an enforceable land sale contract is signed, equity regards the buyer as the owner of the real property, while the seller holds legal title in trust as security for the purchase price.

Risk of Loss

• Majority Rule: Under equitable conversion, the buyer bears the risk of loss if the property is destroyed or damaged (without fault of either party) between contract signing and closing. The buyer must still pay the full contract price unless the contract provides otherwise.
• Minority Rule (Uniform Vendor and Purchaser Risk Act): Some states place the risk of loss on the seller until either legal title or possession passes to the buyer. If neither title nor possession has passed when the casualty occurs, the seller bears the loss.

Key Term: Risk of Loss
The question of which party (buyer or seller) must bear the economic consequences when the property is damaged or destroyed between contract formation and closing, absent fault.

Insurance and Casualty Proceeds

If the risk of loss is on the buyer but the seller has casualty insurance:

• The seller may collect the insurance proceeds, but in equity the seller is often required to credit those proceeds against the purchase price if specific performance is ordered.
• The buyer may also be able to insist on taking the property and receiving an assignment of the seller’s insurance claim.

If the risk is on the seller under the minority rule, the buyer can usually rescind or enforce the contract with an abatement.

Death of a Party Before Closing

Equitable conversion also affects who takes the property or the sale proceeds when a party dies between contract and closing:

• If the buyer dies, the buyer’s equitable interest in the land passes to the buyer’s real property beneficiaries or heirs, while the seller still looks to the buyer’s estate (personal property) for the purchase price.
• If the seller dies, the seller’s legal title passes to the seller’s heirs, but they hold it subject to the contract; the purchase money is treated as personal property in the seller’s estate.

Worked Example 1.5

Seller and Buyer sign a valid contract for the sale of Whiteacre. Before closing, a fire (without fault) destroys the house on Whiteacre. The jurisdiction follows the majority equitable conversion rule. Buyer still wants the land. May Buyer compel Seller to convey, and must Buyer pay the full price?

Answer:
Yes. Under the majority rule, once the contract is signed, Buyer bears the risk of loss. Buyer can obtain specific performance of the contract and must pay the full purchase price despite the destruction of the house, unless the contract allocates the risk differently.

Worked Example 1.6

Same facts as above, but the jurisdiction has adopted the Uniform Vendor and Purchaser Risk Act, and Buyer has not yet taken possession. The fire occurs before closing. Who bears the loss?

Answer:
Under the Act, the risk of loss remains on the seller until legal title or possession passes. Because Buyer neither had possession nor legal title when the fire occurred, Seller bears the loss. Buyer can rescind or enforce the contract with an appropriate abatement of price.

Remedies for Breach

If either party breaches the land sale contract, the non-breaching party has several potential remedies.

Key Term: Specific Performance
An equitable remedy ordering a breaching party to perform the contract as agreed, commonly granted in real estate contracts because each parcel of land is considered unique.

Key Term: Liquidated Damages
A contractual clause fixing the amount (or formula) of damages in the event of breach, enforceable if it is a reasonable pre-estimate of probable loss and not a penalty.

Buyer’s Remedies

If the seller breaches (for example, by refusing to convey, conveying to someone else, or being unable to deliver marketable title):

• Expectation Damages:
  The standard measure is the difference between the contract price and the property’s fair market value at the time of breach, plus consequential and incidental damages (such as title search and inspection costs). Some jurisdictions limit damages when the seller’s breach is in good faith and based on an honest title mistake, allowing the buyer to recover only out-of-pocket expenses.

• Specific Performance:
  Because land is unique, buyers frequently seek specific performance to obtain the property itself. If title is unmarketable but the buyer still wants the property, many courts will grant specific performance with abatement (a reduction in price) to reflect the title defect.

• Rescission and Restitution:
  The buyer may undo the contract, recover the deposit, and possibly recover the value of improvements made in reasonable reliance on the contract.

Seller’s Remedies

If the buyer breaches (for example, by failing to pay or to close without excuse):

• Expectation Damages:
  The seller’s damages are typically the difference between the contract price and the fair market value (or resale price) at the time of breach, plus consequential damages (for example, carrying costs and broker’s fees on a failed sale).

• Retention of Deposit (Liquidated Damages):
  Contracts often provide that the seller may retain the buyer’s deposit as liquidated damages if the buyer defaults. Courts generally uphold such clauses if the amount is reasonable in light of anticipated damages.
  A deposit of up to 10% of the purchase price is commonly presumed reasonable on the MBE.

• Specific Performance:
  Sellers may seek to compel the buyer to pay the price and accept the deed, though courts are sometimes less inclined to grant specific performance to sellers (especially if damages adequately protect the seller’s interest).

Worked Example 1.7

Buyer agrees to purchase Blackacre from Seller for $500,000, paying a $50,000 deposit. The contract states that if Buyer defaults, Seller may retain the deposit as liquidated damages. Buyer unjustifiably refuses to close. At the time of breach, Blackacre’s market value has fallen to $460,000. Seller keeps the $50,000 deposit and does not resell. Is the liquidated damages clause enforceable?

Answer:
Likely yes. The deposit is 10% of the purchase price, a percentage often upheld as a reasonable estimate of potential loss (price drop, carrying costs, and resale expenses). Seller may retain the $50,000 as liquidated damages without proving actual damages, and Buyer cannot recover any portion of the deposit.

Key Point Checklist

This article has covered the following key knowledge points:

• Real estate contracts must generally satisfy the Statute of Frauds (writing, essential terms, signature), and the writing can consist of multiple related documents.
• Part performance (payment, possession, improvements) and equitable estoppel can be exceptions to the Statute of Frauds in equity.
• Land sale contracts must include sufficiently definite essential terms (parties, property, price), and courts construe ambiguities to preserve reasonable bargains.
• “Time is of the essence” is not implied; it must be clearly stated or strongly inferred to make timing a material condition.
• Land sale contracts include an implied covenant of marketable title, meaning title reasonably free from doubt or substantial risk of litigation.
• Defects like serious chain-of-title problems, encumbrances (mortgages, easements, covenants), significant encroachments, and zoning or building code violations can render title unmarketable.
• The seller must provide marketable title only at closing; the buyer must notify the seller of defects and allow a reasonable chance to cure.
• The contract merges into the deed upon closing; post-closing claims about title are governed by deed covenants, while collateral promises may survive merger.
• Equitable conversion generally places the risk of loss between contract and closing on the buyer (majority rule), but some states keep the risk on the seller until title or possession passes.
• Remedies for breach include damages (contract price vs. market value), rescission and restitution, retention of deposit as liquidated damages (if reasonable), and specific performance, often with abatement for title defects.

Key Terms and Concepts

• Land Sale Contract
• Statute of Frauds
• Part Performance
• Marketable Title
• Merger Doctrine
• Time Is of the Essence
• Equitable Conversion
• Risk of Loss
• Specific Performance
• Liquidated Damages