What is a voidable contract in real estate?

A voidable contract is a particular legal concept and can have a huge impact on a real estate transaction. It differs from other legal contract status like valid, void, and unenforceable agreements.

It refers to a legal binding contract that is valid and enforceable unless one party, with the proper legal grounds, chooses to cancel or make it void for specific legal reasons. For real estate professionals and exam-takers, mastering this topic is essential for navigating real-world transactions and acing licensing exams.

This guide dives deep into voidable contracts, explaining their characteristics, examples, differences from other contracts status, and implications in real estate.

Definition of voidable contract

A voidable contract is a formal agreement between two parties that remains enforceable until one party decides to void it. This decision is typically based on legal grounds such as breach on contract terms, fraud, misrepresentation, duress, or lack of legal capacity when signing.

For example, a buyer may void a contract if the seller fails to disclose critical defects in a property. Similarly, a minor who enters into a real estate agreement has the right to disaffirm the contract upon reaching the age of majority.

What makes a voidable contract unique is that it starts as a valid and enforceable agreement. Only when the disadvantaged party chooses to act does the contract become void.

Characteristics of voidable contracts

Voidable contracts have specific characteristics that set them apart:

1. Legally binding until voided: The contract remains valid and enforceable unless canceled by the aggrieved party.
2. Option to ratify: The affected party can ratify the agreement once the underlying issue is resolved.
3. Grounds for voiding: The common reasons are fraud, coercion, undue influence, misrepresentation, duress or incapacity.
4. Possibility of rectification: Both parties may agree to amend the contract, resolving its defects and making it enforceable.

Void vs. voidable contracts: a deeper dive

It is crucial that real estate practitioners and future licensing exam takers understand the difference between void and voidable contracts. They may seem similar at first glance, but the legal implications are vastly different.

Void contracts

A contract is void when it can’t be legally enforced from the beginning. It lacks one or more essential legal elements, making it invalid under the law. Examples include:

• Agreements that involves illegal activities (e.g., selling stolen property).
• Contracts signed by a person declared legally incompetent at the time of signing.
• Agreements with terms that are vague or impossible to fulfill.

Void contracts have no legal standing and cannot be enforced by either party.

Voidable contracts

In contrast, a voidable contract starts as valid and enforceable. However, it can be canceled by the aggrieved party if legal grounds exist. Examples include:

• A contract of sale induced by misrepresentation, e.g. false representations of property.
• Contracts involving minors or individuals under undue influence.

The key difference lies in enforceability. Void contracts are null from the outset, while voidable contracts remain valid until one party decides to void them.

What is disaffirmance?

Disaffirmance is the legal right to rescind a contract, making it null and the parties free of their obligations. Often, those who have this right are individuals who were never legally able to enter the contract initially, such as minors.

How it works

Disaffirmance can be expressed in two ways:

• Directly: By providing a written or verbal statement explicitly rejecting the contract.
• Indirectly: Through actions that show the intent not to fulfill the agreement, such as failing to perform required duties.

For instance, if a minor signs a lease agreement, they can later disaffirm the contract by notifying the landlord in writing or simply moving out without fulfilling the lease terms.

Limitations of disaffirmance

Disaffirmance must occur within a reasonable timeframe, especially after the individual reaches legal capacity. Once a contract is ratified, either explicitly or implicitly, it can no longer be disaffirmed.

In real estate, disaffirmance is a safeguard that protects vulnerable parties from being unfairly bound to agreements they couldn’t fully comprehend or legally consent to.

Examples of voidable contracts in real estate

To further illustrate, here are real-life scenarios:

1. Misrepresentation: A seller advertises a property as move-in ready, but the buyer discovers major electrical issues after signing. The buyer can void the contract due to material misrepresentation.
2. Legal incapacity: A 17-year-old signs a contract to purchase property. Upon turning 18, they choose to disaffirm the contract, citing their age at signing.
3. Fraud: A buyer provides falsified financial documents to secure a contract. Upon discovery, the seller can void the agreement.

These cases demonstrate how voidable contracts allow fairness and protect parties from deceptive practices.

How can a voidable contract become valid?

A voidable contract can become valid and fully enforceable if the party with the right to void it chooses to ratify the agreement. Ratification occurs when the aggrieved party accepts the contract despite its initial defects or decides to take actions that affirm its validity.

Ratification methods

1. Explicit ratification: This occurs when there is a clear statement, either in writing or verbally, that the party is willing to continue with the contract. For example, where a buyer originally had a valid reason to rescind a real estate contract because of misleading information, but later affirms, following negotiations about it, this express ratification confirms the agreement.
2. Implicit ratification: This happens when the party’s actions demonstrate an intention to uphold the contract. For example, a minor who signed a lease and continues to live in the property and pay rent after reaching the legal age of majority implicitly ratifies the agreement.

When ratification happens

• Resolution of defects: If the cause for voidability, such as misrepresentation or undue influence, is resolved to the satisfaction of the aggrieved party, they may ratify the contract.
• Passage of time: In some cases, failure to void the contract within a reasonable time frame can result in ratification by default.

Legal capacity and ratification

Contracts signed by minors or people who cannot legally make contracts become valid if they agree to them after they can legally contract. For example, a 17-year-old who makes a real estate deal can agree to it when they turn 18, which makes it enforceable from that point on.

Implications for real estate professionals

For agents, understanding voidable contracts is essential for avoiding disputes and maintaining client trust. Key strategies include:

• Ensuring transparency and accuracy in property representations.
• Confirming all parties’ legal capacity to enter agreements.
• Documenting all disclosures and ensuring they are clear and complete.

Proactively addressing potential issues reduces the likelihood of voidable contracts and fosters successful transactions.

Summing-up

Voidable contracts play a pivotal role in real estate, offering a means for parties to challenge agreements compromised by fraud, misrepresentation, or undue influence.

For real estate exam-takers, mastering voidable contracts is critical. Focus on their characteristics, differences from void contracts, and practical applications in real estate scenarios. This knowledge equips you not only to ace your exam but also to navigate transactions confidently in your future career.