A real estate contract is a legally binding document that outlines terms agreed upon when two or more individuals negotiated a real estate transaction. It contains information such as the parties involved, price and terms, contingencies, acceptance date, expiring date, and homestead classification. A real estate contract aims to clarify the home buying process or renting while offering protection to both the buyer and seller.
Types of Contracts in Real Estate
1. Purchase Agreement
A purchase agreement is a contract between a buyer and seller outlining the terms and conditions of the sale of a property.
The buyer, refers to an individual, a business, or even a real estate agent. Similarly, the seller can be a homeowner, a realtor, or a corporation.
Besides elements common to real estate contracts, purchase contracts include the purchase price, earnest money, contingencies, financing terms, and the closing date.
Depending on the exact details of a transaction, you might need one of the following specific types of purchase agreements.
2. Rental Agreement
A rental agreement is a contract between a property owner and a tenant who wants to take temporary possession. The agreement outlines the terms and conditions under which the tenant can lease the property for a short duration, typically less than a year.
Key elements of rental agreements include the property description, the rent amount, contract duration, security deposit, utility payments, and termination conditions.
There are several types of rental agreements, including the following:
- Residential rental agreement: A contract between a landlord and tenant outlining the terms and conditions for renting a residential property.
- Commercial rental agreement: A contract between a landlord and a business tenant outlining the terms and conditions for renting commercial property, such as office space, retail locations, or warehouses.
- Month-to-month agreement: An agreement that renews monthly until either party terminates, such as a tenant renting a single-family home in Los Angeles, with either party having the right to terminate with a 30-day written notice.
- Short-term/vacation rental agreement: An agreement to accommodate short stays, typically less than 30 days. For example, newlyweds on their honeymoon renting a vacation rental home through Airbnb.
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3. Lease Agreement
Lease agreements, like rental agreements, outline terms for the lease of a property. In contrast to short-term rental agreements, lease agreements are long-term contracts
These are some of the different types of lease agreements:
Fixed-term lease agreement: An agreement for a specific period, with the tenant committing for the entire term with penalties for premature termination.
Lease-Purchase Agreement: A lease-purchase agreement gives the tenant the right to purchase the leased property at a later date. Payment of an upfront option fee gives the tenant exclusive rights to the purchase.
Absolute net lease agreement: A strict commercial lease where the tenant is responsible for all property-related costs, including base rent, property taxes, insurance premiums, maintenance costs, and structural repairs.
Sublease agreement: This agreement allows a tenant to rent out all or part of a leased property to another person or business (the subtenant).
Commercial lease agreement: An agreement for renting property for commercial or business purposes.
4. Power of Attorney
A power of attorney agreement is used to grant a person or persons the authority to make legal and financial decisions on another person’s behalf.
Key agreement elements include the principal (person granting the authority), agent (person or entity getting the authority) and their responsibilities, scope of authority, duration, effective date, incapacity clause (for durable power of attorney contracts), and governing law.
Depending upon the situation, you can use different power of attorney agreements:
- General Power of Attorney: Gives broad authority for legal and financial matters
- Limited Power of Attorney: Grants authority for a specific purpose, such as selling real estate.
- Durable Power of Attorney: Remains in effect even if the principal becomes incapacitated.
5. Real Estate Partnership Agreement
Partners use real estate partnership agreements when they decide to work together to purchase and manage properties.
Key elements include details of parties involved, capital contributions, ownership structure, responsibilities, profit/loss distribution, decision-making authority, terms of the partnership, buyout clause, and amendments.
6. Listing Agreement
A listing agreement is a contract between a property owner and an estate agent/broker that gives the agent the right to list, market, and sell the property on the owner’s behalf.
Key contract elements include details of parties involved, property description, listing price, agent’s commission, type of agreement, duration, and the responsibilities of the seller and the agent.
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Key Elements of Real Estate Contracts
For legal enforceability, a real estate contract must meet the following requirements.
Offer and Acceptance
A legal contract requires a party (the offerer) to make an offer the other party (the offeree) accepts.
This requirement provides for mutual understanding of the terms of the contract and a clear intention of entering into a legal relationship. It also implies voluntary acceptance, as opposed to acceptance made under duress.
In the real estate context, for example, a contract would be formed when a buyer (offerer) makes an offer and a seller (offeree) accepts the offer.
Consideration
Consideration, in legal terms, refers to something of value. A valid contract involves an exchange of consideration. This exchange provides support to the contract.
For example, an owner sells a house in exchange for suitable compensation: the seller’s consideration is the house, and the buyer’s consideration is the money they pay for the house.
Capacity
Here, capacity refers to legal capacity, or the valid authority to enter a legal agreement.
In personal dealings, a minor, a person under the influence of drugs, or a person unable to understand contract language, does not have legal capacity.
In business dealings, a person not authorized to conduct business and sign contracts on behalf of a corporation lacks legal capacity.
Legality of Purpose
Another requirement for a valid contract is the legality of purpose and compliance with relevant laws and regulations.
Conclusion
Understanding real estate contracts in Kenya is essential for protecting your interests in any property transaction. Whether you are buying, selling, or leasing, a well-drafted contract, coupled with thorough due diligence, can help you avoid legal disputes and ensure a smooth transaction.