CNE Contract Law & Agreement Drafting 2 — Questions and Answers
Question 1: When a buyer submits a counteroffer in response to a seller's listed price, the legal effect is:
- The original offer remains open for 72 hours
- The original offer is rejected and replaced by the new terms (Correct answer)
- The buyer must raise their offer by at least 1%
- Both parties are bound by the listing price
Correct answer: The original offer is rejected and replaced by the new terms
A counteroffer legally rejects the original offer and substitutes new terms; the original offeror is under no obligation to accept the counteroffer.
Question 2: What is 'specific performance' as a legal remedy in contract disputes?
- A financial penalty paid to the prevailing party
- A court order requiring the breaching party to fulfill the contract terms (Correct answer)
- An arbitration process for resolving contract disputes
- A clause requiring inspections to be completed within 10 days
Correct answer: A court order requiring the breaching party to fulfill the contract terms
Specific performance is an equitable remedy compelling the breaching party to perform their contractual obligations, often sought in real estate transactions because land is considered unique.
Question 3: The 'statute of frauds' requires that real estate contracts must be:
- Witnessed by two independent parties
- In writing and signed by the parties to be charged (Correct answer)
- Filed with the county recorder within 30 days
- Reviewed by a licensed attorney before execution
Correct answer: In writing and signed by the parties to be charged
The statute of frauds mandates that contracts for the sale of real property must be in writing and signed by the party against whom enforcement is sought to be legally enforceable.
Question 4: What does 'escrow' refer to in the context of a real estate transaction?
- The seller's net proceeds after commission
- A neutral third party holding funds and documents until closing conditions are met (Correct answer)
- The buyer's right to inspect the property
- The agent's fiduciary duty to the client
Correct answer: A neutral third party holding funds and documents until closing conditions are met
Escrow is a legal arrangement in which a neutral third party holds assets—such as earnest money and closing documents—on behalf of the transacting parties until all contract conditions are satisfied.
Question 5: What distinguishes a 'void' contract from a 'voidable' contract?
- A void contract can be ratified; a voidable contract cannot
- A void contract has no legal effect; a voidable contract is valid until a party elects to rescind it (Correct answer)
- A void contract requires court approval to cancel; a voidable contract does not
- A void contract is only used for commercial properties; a voidable contract for residential
Correct answer: A void contract has no legal effect; a voidable contract is valid until a party elects to rescind it
A void contract is legally without effect from inception (e.g., illegal contracts), while a voidable contract is valid and enforceable unless the aggrieved party—such as a minor—chooses to rescind it.
Question 6: In contract law, 'novation' occurs when:
- A party breaches the original agreement
- An original party is replaced by a new party, releasing the original party from obligations (Correct answer)
- Both parties agree to extend the closing date
- A contingency is removed and the contract becomes firm
Correct answer: An original party is replaced by a new party, releasing the original party from obligations
Novation substitutes a new party or obligation for an original one, extinguishing the original party's liability and requiring consent from all parties involved.
Question 7: What is a real estate 'option contract'?
- A contract that allows the MLS to list multiple properties at once
- An agreement giving a buyer the right, but not the obligation, to purchase a property within a specified period (Correct answer)
- A clause requiring the seller to accept the highest offer received
- A financing arrangement between buyer and lender
Correct answer: An agreement giving a buyer the right, but not the obligation, to purchase a property within a specified period
An option contract grants the buyer the exclusive right to purchase property at an agreed price within a set timeframe, but the buyer is not obligated to do so; the seller is bound during the option period.
CNE Contract Law & Agreement Drafting 2
When a buyer submits a counteroffer in response to a seller's listed price, the legal effect is: