A Note from the Legal Helpdesk: A Primer on Alabama Contract Law
Part 1: Offers
May 7, 2019
Introduction: The law of contracts affects our daily lives. From the “terms of service” for the use of apps on your phone, to ordering a cup of coffee, our common activities implicate contract law frequently. When real estate professionals are hired to buy or sell a house, the process is heavily impacted by contract law.
The Legal Helpdesk is publishing a two-part series of articles examining the main components of Alabama’s contract law so that REALTORS® can better assist clients and run better businesses. The first article deals with the most basic element of a contract - the “offer” - and the second will deal with additional contract concepts of importance.
Elements of a Contract: A contract is an agreement between parties that is enforceable by a court. The necessary elements of a contract are:
1) an offer and an acceptance,
2) consideration, and
3) mutual assent to terms essential to the formation of a contract.[i]
In this article, we will discuss the first element, offer and acceptance, along with other, related fundamentals that REALTORS® should keep in mind.
Offer and Acceptance
The general concept of an “offer” is pretty straightforward – a person or entity offers to do or not do something. But, an offer alone does not create an enforceable (i.e., binding) contract; as mentioned above, the offer must be accepted, or agreed to, by another party.[ii]Acceptance “must be manifested by something,” like a signature or behavior ratifying the agreement.[iii]
Example - To illustrate the concept of an offer and acceptance, an example would be when you, the real estate agent, and another person sign an agency agreement. In that case, it’s easy to see you have offered something (your services) and the other party has accepted those services (shown by their signature).
Things to Know and Tips to Remember
- Binding Agreements – Written and Verbal
The general rule is that an offer and acceptance need not be in writing to be binding unless a law specifically requires it. However, at times, an offer and acceptance must be in writing to be enforceable. In the real estate context, the Alabama Statute of Frauds (“the Statute”) requires contracts for the sale of real estate to be in writing.[iv]So, the Statute prevents the enforcement of oral agreements concerning the sale of land, even though both parties may acknowledge the existence of such an agreement.[v]Thus, any conversations or terms a person thinks are part of a property transaction are superseded by the written purchase agreement for that property.
Exception– There is an exception in the Statute allowing someone to enforce an oral agreement for the purchase of real property called the partial performance exception. That exception requires 1) a person pay some or all of the purchase price and 2) that person is put in possession of the land by the seller.[vi]
As owners and brokers of real estate companies, REALTORS® might enter into other agreements necessary to carry on the business. For these other agreements, relying on verbal agreements can be risky because, if and when disputes arise, the precise terms of those agreements are not available for future reference, leading to “he said/she said” arguments.
- Seller’s Agent’s Duty to Disclose Offers
As you know, sellers’ agents are duty-bound to present offers to their clients.[vii]Because binding purchase agreements must have a written offer with written acceptance, verbal offers can lead to confusion for real estate agents. A recent court case in Alabama suggests that real estate agents must report verbal offers to the client as well as written offers. In the case, the court held an auctioneer liable for not communicating to the seller a verbal offer that was more than the final bid at auction. The holding was based on the agent’s “fiduciary duty” to their client, rather than license law. The Legal Helpdesk discussed this case in a previous issue of the Judicial Monitor, which can be found here.
Typical contracts for REALTORS® include agreements with clients and purchase or lease agreements. All of these have to be in writing.[viii]So, the “offer and acceptance” will be clearly laid out in the terms of the agency, lease, or purchase agreement.
In practice, REALTORS® may receive written and verbal offers, and while any offer (written or verbal) received by a listing agent should be submitted to a seller,[ix]sellers should be informed that verbal offers or written offers without signatures to purchase real estate are not binding.
- Negotiations Put in Writing
REALTORS® rarely participate in a real estate transaction where the terms of the sale are not put in writing and signed by the buyer and seller. However, the concept applies to negotiations. Be careful about discussions that take place before the sale. Some parties could try to claim that promises were made even though they are not reflected in the purchase agreement. If not in the purchase agreement, these terms are not valid under the Statute.
The Legal Helpdesk previously wrote an article about the importance of written terms in a real estate transaction (including the use of email and text messages), which can be found here.
See you next week for part II of this series, which will discuss other important concepts in contract law, including consideration, mutual assent, and breach of contract.
[i]See Strength v. Alabama Dep't of Fin., 622 So. 2d 1283, 1289 (Ala. 1993).
[ii]Martin v. Black's Executors, 21 Ala. 721, 729 (Ala. 1852).
[iii]Southern Energy Homes, Inc. v. Hennis, 776 So. 2d 105, 108 (Ala. 2000)(emphasis in opinion).
[iv]Ala. Code § 8-9-2(5). Under the statute, every contract for the sale of lands, tenements or hereditaments, or of any interest therein, except leases for a term not longer than one year, unless the purchase money, or a portion thereof is paid and the purchaser is put in possession of the land by the seller, must be in writing. The agreement or some note or memorandum thereof expressing the consideration must be in writing and subscribed by the party to be charged therewith or some other person by him thereunto lawfully authorized in writing.
[v]See Casey v. Travelers Ins. Co., 585 So. 2d 1361 (Ala. 1991).
[vi]Ala. Code § 8-9-2(5).
[vii]Offers themselves are mentioned twice in Alabama’s license law. In one part, the law requires real estate agents “to present all written offers in a timely and truthful manner,” when they are “assisting a party in the negotiation of a real estate transaction.” Ala. Code § 34-27-84(a)(5). The regulations issued by the Alabama Real Estate Commission reiterate that sub-section stating that “[a] real estate licensee who is acting as an agent for a principal shall transmit to his principal all written offers received regarding the property under consideration.” Ala. Admin. Rule 790-X-3-.08. In that same section the law requires a listing broker, or his or her agents, to “accept delivery of and present to the consumer all offers, counteroffers, and addenda.” Ala. Code § 34-27-84(c).Real estate agents are also required to “disclose to the client all information known by the licensee that is material to the transaction and not discoverable by the client through reasonable investigation and observation,” except for information they are prohibited from disclosing due to confidentiality requirements. Ala. Code § 34-27-85(a)(2); see also Ala. Code § 34-27-84(a)(3). The REALTOR® Code of Ethics simply provides that REALTORS® must convey offers and counter-offers, but does not specify written or verbal. NAR Code of Ethics Article 1, Standard of Practice 1-6.
[viii]Ala. Code § 34-27-82(b); see also Hight v. Byars, 569 So. 2d 387, 389 (Ala. 1990).
[ix]Alabama license law requires listing agents to submit offers to the seller. Ala. Code §§ 34-27-84(a)(5); 34-27-84(c).
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