Ch5. Real Estate Transactions and Contracts — Purchase Agreements and Lease Law

The Real Estate Purchase Contract

Contract Formation

Contract types: A real estate purchase contract is a bilateral, executory contract.
The Statute of Frauds requires real estate contracts to be in writing and signed to be enforceable.

Essential contract elements:

Identified parties (buyer and seller)
Legal description or clear identification of the property
Purchase price and payment method
Closing date (when title transfers)
Contingencies (financing, inspection, appraisal)

Transaction Timeline

Purchase contract signed + earnest money deposited
    ↓
Contingency periods (inspection, financing, appraisal)
    ↓
Contingencies removed / satisfied
    ↓
Final walkthrough
    ↓
Closing: funds transfer + deed recorded → title passes
    ↓
Possession delivered (per contract terms)

Earnest Money

Earnest money (good faith deposit): Shows the buyer’s serious intent; typically 1–3% of the purchase price.

If buyer backs out:

Within contingency period → full refund of earnest money
After contingencies removed → seller may keep the earnest money as liquidated damages

If seller backs out:

Buyer is entitled to a full refund of earnest money
Buyer may also sue for specific performance (forcing the sale) or compensatory damages

Earnest money = $20,000
Buyer cancels after contingency removal → seller keeps $20,000
Seller cancels → buyer gets $20,000 back + possible damages

Residential Landlord-Tenant Law

Residential tenants are protected by state landlord-tenant statutes and, at the federal level, by the Fair Housing Act.

Key Tenant Protections

Implied Warranty of Habitability: Landlord must maintain the property in a livable condition throughout the tenancy.

Security deposit limits: Most states cap deposits at 1–2 months’ rent; must be returned within 14–30 days after move-out with an itemized deduction statement.

Notice requirements for entry: Landlord typically must provide 24–48 hours’ written notice before entering (except emergencies).

Lease Renewal Rights

Varies by state and local ordinance:

Month-to-month tenancy: Either party can terminate with 30 days’ notice (some cities require 60+ days)
Just-cause eviction requirements: In many rent-controlled jurisdictions, landlords need a qualifying reason to terminate a tenancy
Rent increase limits: Cities with rent control cap annual increases (e.g., San Francisco, New York, Los Angeles)

Leasehold Estates vs Freehold Estates

Category	Estate Type	Description
Freehold	Fee Simple	Absolute ownership; inheritable, transferable
Freehold	Life Estate	Ownership for someone’s lifetime; reverts or remainders
Leasehold	Estate for Years	Fixed-term lease; ends at a specific date
Leasehold	Periodic Tenancy	Automatically renews month-to-month or year-to-year
Leasehold	Tenancy at Will	Either party can terminate at any time
Leasehold	Tenancy at Sufferance	Holdover tenant; landlord can treat as trespasser or create new tenancy

Commercial Leasing Basics

Gross Lease: Landlord pays all operating expenses; tenant pays a flat rent.

Net Lease:

Single net (N): Tenant pays rent + property taxes
Double net (NN): Tenant pays rent + taxes + insurance
Triple net (NNN): Tenant pays rent + taxes + insurance + maintenance (most landlord-favorable)

Modified Gross: Expenses split between landlord and tenant per negotiation.

Percentage Lease: Used in retail; tenant pays base rent plus a percentage of gross sales.

The US Title and Recording System

Title: Legal ownership of real property.

Recording acts: States protect buyers and lenders who record their interests:

Race-notice statute (most common): First to record without notice of prior claims wins
Notice statute: A subsequent buyer without notice of a prior unrecorded claim prevails
Race statute (a few states): First to record wins, regardless of notice

Title report (preliminary report): Ordered from a title company; shows all recorded liens and encumbrances.

Title insurance:

Owner’s policy: Protects buyer against title defects
Lender’s policy: Protects lender (required by virtually all mortgage lenders)

Deed types:

General Warranty Deed: Maximum protection; seller warrants title against all claims
Special Warranty Deed: Seller warrants only against claims arising during their ownership
Quitclaim Deed: No warranties — transfers whatever interest the grantor has

Implied Warranty of Habitability ★★★★★ : A landlord’s non-waivable duty to maintain rental property in a livable condition. Breach allows tenant to withhold rent or repair-and-deduct in most states. Memory tip: Habitability = landlord’s baseline duty, always

Earnest Money Rules ★★★★★ : Buyer cancels within contingency period → full refund. Buyer cancels after contingencies are removed → seller keeps deposit as liquidated damages. Memory tip: Remove contingencies carefully — earnest money is at risk

General Warranty vs Quitclaim Deed ★★★★☆ : General warranty = full protection for buyer. Quitclaim = no promises — just transfer of whatever interest the grantor holds. Memory tip: Warranty deed = guarantee; Quitclaim = no guarantee

Practice Quiz

Q. A buyer wants to close on a house. What must happen at or before closing to transfer ownership?

The seller must deliver a signed deed to the buyer, the purchase price must be paid, all outstanding liens must be paid off or assumed, and the deed must be recorded in the county recorder’s office. Recording provides constructive notice to the world of the new ownership.

Q. A property has a recorded mortgage. The buyer’s agent sees it in the preliminary title report. What risk does this create, and how is it handled at closing?

The recorded mortgage is an encumbrance on the title. At closing, it must be paid off from the seller’s proceeds before a clear title can be delivered to the buyer. The title company will coordinate payoff and obtain a lien release. If the mortgage is not cleared, the buyer takes title subject to the lien.