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TOPIC 3.1: ARIZONA CONTRACT SPECIFICS

Learning Objective: Explain the process and specific elements required to draft

an Arizona contract, including when to recommend client contact with other

professionals, and defining valid, void, and voidable contracts.

Arizona Contract Specifics

Most blank contract forms note that they are intended to be legally binding.

Many also contain lines encouraging signers to seek advice from attorneys, financial planners,

and tax advisers. Arizona law requires real estate licensees to give their clients the same

advice from outside professionals, and actual and potential clients need to understand the

enforceable nature of contracts once signed by all parties. Arizona salespeople and brokers

should remind clients they are encouraged to seek the advice and services of attorneys, etc.,

whenever appropriate.

A contract form used by Arizona real estate professionals may also include preprinted

disclaimers regarding the legal limitations to contract templates. While Article 26 of the

Arizona constitution says licensees shall have the right to “draft or fill out and complete”

legally binding transactions incidental to a real estate transaction, very few brokers or

salespeople actually draft contracts from blank sheets of paper to getting signatures.

There is an old stereotype of a real estate person writing a contract from scratch on the hood

of a car. Slow to die, that doesn’t represent the modern contract writer who primarily fills in

blanks on a preprinted template. Today’s contract forms are often written, closely examined,

and finally approved by a group of highly experienced attorneys, real property lenders, title

and escrow officers, and regulators before being made available to licensees. Then, real estate

brokerages, professional associations, and licensing schools offer workshops and training

sessions on the revised contractual documents.

While the modern Arizona real estate licensee seldom composes a contract, salespeople and

brokers must fully understand contract forms and be able to convey the meaning of the

provisions found in them to parties to the agreement. Effective real estate practice suggests

discussing the content of the document and potential impact of information put in them at

least three times. Once to discuss the content found in the document, a second time when the

writer says this is what will be put in the contract on behalf of the client, and a third review of

the completed document prior to signatures.

After the final review with clients, the principals in the transaction should be directed to

read the entire document word-for-word before signing. The client should be told to contact

the contract writer with any concerns or lack of understanding of anything written in the

document.

Valid, Voidable, and Void Contracts

In general contract law, four elements are necessary for a contract to be valid. These are:

„. Agreement

„. Consideration

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„. Contractual capacity

„. Legality

In general contract terms, two or more parties must agree to enter into a contractual

relationship, i.e., one party offers and the other accepts; legally sufficient consideration

must support the promises made by the parties; the law must recognize the parties to the

transaction as legally capable to qualify as competent parties; and the contractual actions must

comply with the rules of legal actions and not endanger the public welfare.

Arizona Contract Requirements

Arizona’s model for a valid contract requires expansions of general contract law elements and

consists of:

„. Offer and acceptance

„. Valuable or good consideration

„. Competent parties

„. Legal use

„. In writing

„. Signatures

Meeting of the Minds in Arizona

A valid Arizona real estate contract requires a meeting of the minds. Also called “offer

and acceptance” or “mutual assent,” this includes a valid offer, voluntary and unqualified

acceptance, plus an understanding of the terms of the contract—and their impacts—by all

parties.

A party to a contractual transaction may not be under duress, i.e., forced to enter into the

contract. If a signer is under duress, the signer does not have a meeting of the minds or

mutual assent because entry into the contractual relationship is not voluntary. The party or

parties making the offer are called the offeror, and the offeree is the person who whom the

offer is presented. An offer needs to be both specific and comprehensive. The offeror intends

for the offeree to be bound by the full terms of the offer if is accepted.

Arizona Consideration

Valuable consideration is something of value being offered in exchange for something else. In

Arizona real estate, the offeree is frequently hoping to exchange money or another property in

exchange for clear title to a specified property.

Good consideration exchanges “love and affection” for something of value. A good example of

good consideration is the transfer of a title to a third party as a gift. Consideration specified at

the time of contract negotiation strengthens a contract.

Like deeds in many states, Arizona’s warranty deed cites consideration as part of their

boilerplate. Grantors (those receiving title to property) receive warranty deeds in cases of

voluntary alienation. Voluntary alienation is where a grantor transfers a title voluntarily and

with the consent of the party or parties receiving the title. Many Arizona purchase contracts

specify a seller shall convey the real property via a warranty deed.

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One common deed in Arizona cites nominal consideration and full consideration. It states,

“for the amount of $10 or more and other valuable consideration…” the title and all rights

of interest is conveyed. The $10 is a nominal or token amount, whereas the “other valuable

consideration” is the remainder of the purchase price.

Earnest money, described on purchase contracts and provided at the time of submission to

sellers, strengthens the offer. Often, the licensee/contract writer requires payment in the form

of a money order, cashier’s check or personal check from the buyer prior to submission of the

offer to the seller. A photocopy of the check may be included with the purchase contract to

show that there is an actual check, and the physical check is held with a broker until both the

buyer and seller agree to the offer.

The earnest money should be written to the selected title company and then delivered to the

title company when escrow is opened. Arizona salesperson licensees should never hold or

directly receive money from clients for real estate functions and services.

Earnest money is inherently refundable or credited to buyers unless there is a buyer breach

of the contract. Earnest money is offered to show that buyers are earnest in their offer and

to discourage buyer defaults. It is also a form of consideration that many licensee/contract

writers see as necessary in a strong initial offer.

Competent Parties

Competent parties are those with the capacity to enter into a contract.

To enter into a valid contract in Arizona, parties to the contract must be the legal age of

majority (with one exception) and of sound mind. The age of majority in Arizona is 18. An

exception is an emancipated minor, defined as a person at least 16-years-of-age who has been

legally emancipated from parents or guardians, is financially self-sufficient, able to buy food,

shelter, and healthcare, and is a resident of Arizona. There is some debate as to the status of a

contract signed by a minor. Some say is it voidable, and others believe it automatically void.

It should be void since the contract is lacking one of the requirements of a valid contract:

competent parties/capacity to enter into a valid contract.

Sound mind means the signer is free from the influence of drugs, including alcohol,

prescription drugs, or illegal chemical substances. A signer also may not be insane,

incarcerated (in jail or prison), or a ward of the state (fully supported by the government). In

Arizona, only a court of law can declare someone legally insane.

Legal Use

Parties in Arizona may not contract to do something illegal.

The Arizona Residential Landlord and Tenant Act (ARLTA) provides definitions of rental

dwellings, and illegal uses can be interpreted as use for clandestine drug laboratories (meth

labs), growing of marijuana for illegal sale or distribution, “chop shops” for disassembling

stolen vehicles to resell parts, gambling facilities, keeping unlawful or prohibited animals, and

other common illegal activities found in rental properties.

Discovery of illegal use of rental properties results in not only contract violations, but arrest

of the lessee, and may have caused significant damage to the rental property. The Arizona

lease contract writer needs to understand she may not allow illegal activities, but also may

not write anything into a lease that violates the ARLTA. The Arizona contract writer is also

prohibited from drafting and including any provisions that waive landlord or tenant rights

and responsibilities under the ARLTA.

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Similar restrictions also apply to people purchasing real property for illegal use. In cases where

investors purchase land for an illegal subdivision and a salesperson or broker is aware of it,

the brokerage and all licensees involved may share in the liabilities and be subject to license

discipline actions, civil suits, and even criminal penalties.

In Writing

Most Arizona real estate contracts must be in writing, as per the statute of frauds. As a result,

the majority of Arizona contract require signatures. The statute of frauds dates back to the late

1600s. It is based on the idea that fraud is less possible or probable if contractual document

contents are spelled out in writing. Documents in writing, as per the statute of frauds, are

enforceable in a court of law. The statute of frauds physically lists the documents which must

be in writing and includes most real estate contracts. Arizona will also enforce oral lease

agreements of less than one year, but they are not enforceable under the statute of frauds. In

an oral lease, acceptance of the conditions of the lease agreement is made by transfer of the

key and possession of the rental unit.

Signatures

In addition to the parties to the transaction, most Arizona contracts also require the names

and signatures of the salesperson and designated broker. Completed documents are dated at

the time of signing as well.

Some Arizona contract forms also require initials of the parties to the transaction on

important clauses and conditions found in the contract as well as on each page. These indicate

the parties read, understand, and acknowledge the information and conditions found in those

paragraphs and on those pages.

In Arizona, one owner of a property may initiate a contract such as a listing agreement or

purchase agreement. Ultimately, however, all owners appearing on a deed will need to sign

contracts that transfer the real property.

A valid contract then meets all contractual requirements, and a void one is missing one or

more of the elements discussed earlier. Void contracts are not enforceable on any party to the

contract. Common actions which make contracts void in Arizona include the minor status of

a signer, a mistake, fraud, and misrepresentation. Also included are duress, undue influence,

or unconscionable elements in contracts.

A voidable contract is considered valid unless voided. It contains all elements required of a

valid contract, but extenuating circumstances challenge its validity. The innocent party to the

voidable contract can choose to honor or void it. Likewise, an unenforceable contract may

have also had all the elements of an enforceable contract, but be unenforceable in a court of

law due to some conflicting rule of law.

The preprinted content in most real estate contracts makes them valid if filled out properly.

The boilerplate has been developed by committees of attorneys, real estate licensees, title

company representatives, lenders, and other expert professionals. It is then up to the Arizona

licensee/contract writer to fill in blanks in a manner that supports the document’s validity.

Many contract forms allow buyers and sellers to terminate with a legal excuse. Legal excuses

include property condition issues, changes to loan programs, and missed deadlines. These

lawful contract cancellations are agreed upon when all parties to a contract sign it.

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