What Constitutes a Bilateral Contract?
Imagine going to a party and ending up with someone in your house just because they were the last person home. Or selling your car without getting any money for it at all. These ideas are a bit ridiculous, yet that is how many people think contracts work. What I mean by that is that anyone who is confused about how a contract works fundamentally misunderstands the concept of consideration. Consideration is what forces someone to meet the terms of a contract. Simply put, consideration is the swap of something of value. So, when you tell your neighbor that you’ll let him borrow your lawn mower if he brings you his leaf blower when he’s done, that may not seem like much but it’s the consideration because you both know that the other is going to hold up their end .
This is why real estate transactions are based on bilateral or "two-sided" contracts. It isn’t enough for a buyer to agree to buy your home because there is no guarantee they will actually do it. Since there is no guarantee that the other side is going to provide consideration for the contract, real estate transactions include the reciprocal exchange of consideration. Without this, it would just be like asking someone to pay you $50 for the last slice of pizza you cooked for them a month ago – which is to say it’s unlikely that they’re going to do it just because you say they should.
Key Components of Bilateral Contracts
Every bilateral contract will include mutual promises, duties and obligations that must be fulfilled by the parties involved. Translated into the Real Estate world, for real estate brokers and real estate licensees, these generally include: consideration (price), competent parties (decision making abilities), mutual assent (agreement) and legal subject (real estate). All parties are familiar with these terms, but do they understand fully what they imply? Do you? If not, that’s OK, well explain the meaning in basic terms.
Consideration: is the benefit of being legally bound by the agreement (this is the reason for creating agreement). It’s probably more commonly known as "price". For Brokers and Agents, this is the commission.
Competent Parties: competent parties = competent decision making abilities. The parties must have the ability to understand the meaning of the agreement and the legal implications of what it is they are agreeing to, otherwise, they cannot be considered competent. Is this rare in the Real Estate world? Not really. We see it on a weekly basis.
Offer and acceptance: Do both parties understand the agreement? Do they know what constitutes a breach of contract? Do they understand what obligations they have agreed to? If not, then you may have a problem when it comes time for them to honor the agreement.
It is your duty as a Real Estate professional to make sure both parties understand what it is they are entering into. Clients will expect you to be able to explain any confusion as a matter of simple fact.
Bilateral Contracts v. Unilateral Contracts
When dealing with real estate, one must understand the nature of the binding agreements they are entering into. For those who follow and fully understand the language of leases and purchase agreements, it is not difficult to determine whether a necessary agreement is bilateral or unilateral. It is still imperative that all parties fully understand the terms of such agreements in order to ensure everything is properly carried out.
A bilateral contract is an agreement in which both parties make a promise to do something in return for the other party’s promise to do another thing or make a payment. With a bilateral contract, each party has a duty to perform an act and not performing the necessary act could lead to damages in court. Bilateral contracts are typical in real estate agreements and commonly referred to as a exchange of a lease for rent or sale for purchasing a property.
On the other hand, a unilateral contract is an agreement in which only one party legally has an obligation to take an agreed upon action. If the person who has made the promise does not perform, he or she will not be liable nor would they owe damages. This differs from a bilateral contract where nonperformance or breach could lead to damages of the other party. Usually, one will only enter into a unilateral contract if the potential benefits would outweigh the risk that the promise might never be redeemed. In real estate, this may sound like a person wanting to buy an unlisted property for a specific price. In this case, the seller is under no obligation to sell the property, the buyer is obligated to purchase at the specific price if the seller decides to accept the offer.
When entering into a contract one should be aware of whether it appears to be unilateral or bilateral and how that could possibly affect you. By knowing the difference, you are able to make better decisions regarding your real estate business.
Prominence of Bilateral Contracts in Real Estate Deals
The significance of bilateral contracts in real estate cannot be underscored enough. Real estate is concerned with a large number of transactions, from purchasing to leasing to lending and everything else in between. As previously mentioned, real estate transactions typically require a large investment, either for a purchase or lease, so there is little room for error. A bilateral contract provides that the seller and buyer (or lessor and lessee) are bound to each other by an enforceable agreement to do what is promised. Most parties that deal with real estate are doing so in a business sense, so they require security in their business transactions. To avoid any contention, a bilateral contract is essential, as it provides protection to the parties in case the selling party does not perform as agreed to in the contract. Under real estate laws, the contractual promise is legally enforceable, which can be advantageous to either party, depending on the situation.
Typical Terminology Found in Real Estate Bilateral Contracts
Real estate bilateral contracts typically incorporate the essential terms that reflect the obligations of both parties. The most common types of clauses in a commercial real estate bilateral contract include the description of the property, purchase price and payment terms, contingencies (such as surveys and inspections) and closing dates. The latest trend is to have an additional escrow clause in the bilateral contract in order to provide an additional layer of security regarding the earnest deposit.
The property description clause will include the name of the parties as well as the physical or legal land description, including the area, block and lot number or, in the absence of a municipal land description, the section, township and range number, along with general information about the property and the proposed use of the property. The parties may choose to include a reference to the exact location of the property including a metes and bounds description, the address and any other details.
The purchase price and payment terms clause describes the purchase price, deposit amount and balance, payment due dates, interests, types of payment, etc. This is usually one of the more complex and onerous clauses in a real estate bilateral contract.
The latest trend is to also include the escrow clause into the bilateral contract. Generally the agreement specifies that the buyer will provide the seller with its deposit (earnest money). In the event the buyer does not follow through and buy the property, typically, the seller will retain the deposit. However, using a third party (escrow holder) to hold the deposit is increasingly being adopted by many brokerages in order to ensure all parties to the bilateral contract are protected. The realtors will be the signatories to the bilateral contract and the escrow agreement. Upon receipt of the deposit, it will be securely held by the escrow holder in accordance with the terms of the agreement. The buyer must provide the escrow holder with a written authorization before the deposit can be released from the escrow account. The escrow holder will release the deposit once it has received a direction from the seller if the buyer(s) is in breach after the inspection period and is not prepared to proceed with the purchase and sale. The escrow holder will return the deposit to the buyer if the seller is in breach, as well as upon joint instructions to release the deposit by the buyer and seller or upon an order from the court.
The closing dates clause is used to determine the dates both parties are required to complete their obligations under the contract. That said, vague clauses such as "Time is of the essence" clauses, which require that all the conditions and obligations of the contract are strictly enforced can be used to justify a claim for breach of contract as a result of a delay in meeting a condition under a contract.
Legal Concerns and Legality of Bilateral Contracts
Bilateral contracts are enforceable in court and can be considered legally binding for a specific period. However, the legal principle of mutual consideration must exist to make it enforceable. As a legally binding contract, a bilateral contract forces parties to perform as expected and broken into two contracts. The legal consideration protects both parties, considering that it is an obligation for two parties as opposed to a unilateral contract that forces a single party to act.
In the case of real estate , the buyer and seller are bound by the agreement made in a bilateral contract. In some instances, either party may move to enforce the agreement if the other person does not hold their end of the bargain. Real estate contracts often include specific timelines to further hold the parties to their obligations. These agreements are legally binding unless it is explicitly noted that there is no right to action. Even if a buyer or seller makes an offer to make the deal, it is not final until the other person agrees.
Drafting a Strong Bilateral Contract – Next Steps
When drafting a bilateral contract in real estate, there are certain steps that should be taken to ensure that the contract serves its purpose and creates an enforceable agreement. A bilateral contract is an agreement in which both parties agree to fulfill certain obligations. It is important that all details be included to avoid future disputes.
The first step is to outline the general agreement. This means explaining the agreement in detail and writing about what the premises include in order to be as comprehensive as possible. A third party who reads the contract should be able to understand what each party intends to receive under the agreement.
Next, consider the applicable laws. There are many different agreements that may be covered under legislative laws that relate to real estate. It may be necessary to consult with a real estate attorney to ensure that all legal requirements are clearly stated.
The final step involves revising the contract after it is drafted. After several drafts and revisions, the final draft should be one that clearly states the intentions of both parties. If there is still uncertainty about certain terms, an addendum may be drafted explaining how the terms will be interpreted.
After the contract is drafted, both parties should sign it and have it witnessed. Both parties should consider adding contingencies for issues such as financing, insurance, and inspections. This will help both parties ensure that they are fully protected and that no misunderstandings occur that can cause future problems.
How to Troubleshoot Bilateral Contract Disputes
Although the goal of parties entering into a bilateral contract is to avoid disputes, the reality is that conflicts can and do arise. Some of the most common issues involving real estate bilateral contracts are:
The above are just some examples of how disputes might be resolved through performance or legal action.
If you are having difficulty in getting the other party to perform, it’s generally wise to gently remind the other party of his or her obligations under the contract. This can sometimes be accomplished by a simple email, a letter, or a phone call, depending on the parties’ relationship. Sometimes this is all it takes to get the other side back on track with performance. If, after a reasonable amount of time, the party still has failed to perform, you will likely have to take further action.
Depending on the type of breach, the party not in default may have several options. Common options include suspension or termination of the other party’s performance under the contract, bringing an action for damages in court or obtaining a court order (injunction) requiring performance.
If the default is minor or does not have a significant impact on the contract as a whole, and if you choose to continue to perform, you should always make it known that you are not waiving your rights regarding the default. For example, if a party is late in making a payment under a contract, by continuing to perform despite the late payment, you are not waiving your right to declare a default based on the untimely payment. If a party is clearly in default, yet the other party continues to allow the other party to perform without notice of termination, this could be interpreted as a waiver of performance and a relinquishment of the non-defaulting party’s rights under the contract.
A party that is in breach or defaults under a contract is liable to the other party to the extent that the breach or default caused the other party loss or damage. For example, if the breaching party’s action or inaction, or failure to meet contractual obligations, increased costs for the other party (lost profits, increased costs of construction, cost of delay, etc.), the other party can seek these costs in a lawsuit against the breaching party. Conversely, if the non-breaching party fails to mitigate against damage caused by the contractual default, recovery may be limited to the amount that should have been mitigated. Despite this requirement to mitigate, however, there are some damages that a non-breaching party cannot reduce through mitigation.
Further, even when a party has breached a contract, the innocent party is not always entitled to any damages. For instance, sometimes the party may only be entitled to a refund of the amounts paid under the contract, despite sustaining more significant loss or damage. If the breach is essentially irreparable or if specific performance is not practical, the aggrieved party may not be able to make a claim for damages, but may only be entitled to receipt of any refundable payments made under the contract.
Whether it be by contract language or filed pleadings, a person behaving as an aggrieved party must include either a request for specific performance or a request for damages. Both fall under the general damage category known as "expectancy damages" which seeks to put a party in the position that he or she would have been in had the contract been performed. Specifically, a demand for "expectancy damages" seeks to recover the benefit that the party expected to receive had the contract been performed. While damages for breach of contract are generally classified as "expectancy damages," courts may also cover consequential damages, equitable remedies and reliance damages under the "expectancy damages" umbrella.
It is important to note that there are legal limits on the types of damages that parties can seek in the event of a breach. Further, some contracts contain clauses that limit the parties’ ability to seek certain losses following a contract breach.
Examples of Bilateral Contracts in the Real Estate Field
Two recent cases provide clarity on the effect of bilateral contracts. In the first case, an option agreement was unenforceable after the developer’s bankruptcy because the options were not exercised within the applicable period. For years, a real estate investor owned and leased various properties under a triple net lease arrangement. During this time, the real estate market substantially improved, significantly increasing the value of the property. The investor believed its investments were exceeded only by its lease revenues. While several leases had clauses requiring tenant approval for the sale of the property, one lease contained a more traditional option provision that required the tenant’s consent for lease renewal and purchase of the property. The tenant exercised its option, which was set to expire 60 days after written notice, by sending a letter of intent to purchase within the term. After negotiations, the tenant withdrew the offer, and the investor sued to enforce the option agreement with the landlord as a necessary party. The lower court ruled the option was unenforceable because the investor failed to preserve its rights under the lease. Reversing, the Maryland Court stated: We believe the correct outcome here is that the option was enforceable against [the landlord], and [the developer] purchased the real estate on the terms and conditions set forth in the Lease…. The Lease, in Section 22(b), states that all of the covenants of the Lease are binding upon and inure to the benefit of [the parties] and their respective successors, assigns, heirs, executors, administrators and other legal representatives. Moreover, the Lease has been executed; sealed; delivered; and recorded in the Office of Land Records. This Lease is a bilateral contract, which could be specifically enforced. The court found the lease was enforceable, even without the tenant’s approval, because the developer "agreed to sell the property to the landlord on those selfsame terms and conditions" as specified in the lease. Moreover, "[t]he lease is effective and enforceable against the [landlord] even if it is not enforceable against [the tenant]." The second case involved remedial duties of the lender and appraiser to the developer. A developer waits important due diligence information before purchasing and developing a residential condominium project. To help ensure the success of the project, the developer enters into a loan agreement with a lender to finance the project and to engage an appraiser to render an appraisal of the property. The appraisal is incorporated as part of the loan agreement , and the appraisal concludes that the selected project site is "well suited for the purposeful development of high-rise condominiums," and the project is "a great investment opportunity for any development team to take on." Angstrom Realty purchased the project site. After the project failed, Angstrom sued the lender and appraisers for breach of contract. The trial court found for the defendants on claims that the lender and the appraisers breached the lender’s contract as well as the ‘implied duty of reasonable care.’ In an analysis of the contract liability, the court stated: The defendants neither cite nor discuss…any case of a lender being held liable for breach of contract based on an appraisal being incorporated into a loan agreement. Having found no such cases, we cannot ascertain the nature of damages for which a developer might be entitled to such a breach of contract claim. Nothing in the loan agreement imposed a duty upon [the lender] to verify the adequacy or accuracy of the appraisal provided by [the appraisers], and nothing in the loan agreement imposed a duty upon [the lender] to question the adequacy or accuracy of [the appraisers] appraisal once it was provided. The loan agreement incorporated [the appraisers] appraisal for its truth and accuracy. We hold that the trial court correctly found that [the lender] did not breach its contract with Angstrom. As to negligence, the court held: To the extent that this is a claim for negligent misrepresentation, we note that the defendants did not overstate the value of the project, but rather overstated the feasibility of the project…. [B]y incorporating the appraisal into the loan agreement, [the lender] assumed a duty to Angstrom to furnish an accurate appraisal. A lender’s duty of care extends to any foreseeable borrowers and [the lender] should have known that [the appraisers] appraisal would be read and relied upon, at least in part, by Angstrom, a foreseeable borrower. [The developer] could reasonably expect that any appraisal accompanying the loan document would reflect a competent analysis of the property being purchased. [The developer] alleged in its complaint that it became aware of the appraisal as part of the loan agreement, not as a part of seeking out an appraisal. The court did note that the advice of counsel provision, allowing for the loan to be closed "only in the event that counsel to [the lender] shall be satisfied in all respects" with all of the documents, including the appraisal to be delivered, limited the duty of care of the lender.