CNE Contract Law & Agreement Drafting 1 — Questions and Answers
Question 1: What is a 'contingency clause' in a real estate purchase agreement?
- A penalty for late closing
- A condition that must be met for the contract to become binding (Correct answer)
- A clause requiring the buyer to pay closing costs
- A provision extending the contract term automatically
Correct answer: A condition that must be met for the contract to become binding
A contingency clause specifies a condition—such as financing approval or a satisfactory inspection—that must be fulfilled before the contract is legally obligated to proceed.
Question 2: Which of the following is NOT a required element for a contract to be legally enforceable?
- Offer
- Acceptance
- Notarization (Correct answer)
- Consideration
Correct answer: Notarization
The essential elements of a valid contract are offer, acceptance, consideration, and mutual assent; notarization is typically not required for enforceability unless specified by statute.
Question 3: In contract law, 'consideration' is best defined as:
- The price listed in the MLS
- Something of value exchanged between parties to a contract (Correct answer)
- The agent's commission rate
- The closing date agreed upon by both parties
Correct answer: Something of value exchanged between parties to a contract
Consideration is the bargained-for exchange that each party gives to the other, which can be money, services, property, or a promise to act or refrain from acting.
Question 4: What does 'time is of the essence' mean when included in a real estate contract?
- The transaction must close within 30 days by law
- All deadlines in the contract are strictly enforced and material (Correct answer)
- The seller has priority over competing offers
- The agent must respond to all offers within 24 hours
Correct answer: All deadlines in the contract are strictly enforced and material
When 'time is of the essence' is specified, all dates and deadlines are treated as strict conditions, and failure to meet them may constitute a material breach allowing the other party to terminate.
Question 5: Which type of contract clause limits a buyer's remedy if the seller defaults to retaining the earnest money deposit?
- Indemnification clause
- Liquidated damages clause (Correct answer)
- Acceleration clause
- Subordination clause
Correct answer: Liquidated damages clause
A liquidated damages clause pre-determines the amount of damages for breach; in many real estate contracts this caps the buyer's remedy at forfeiting or recovering the earnest money deposit.
Question 6: An 'as-is' clause in a purchase contract primarily serves to:
- Waive the buyer's right to conduct any inspections
- Shift the risk of known and unknown property defects to the buyer (Correct answer)
- Require the seller to disclose all material defects
- Guarantee the buyer a lower purchase price
Correct answer: Shift the risk of known and unknown property defects to the buyer
An 'as-is' clause means the buyer accepts the property in its current condition, transferring the risk of defects to the buyer, although sellers typically still must disclose known material defects.
Question 7: A contract modification that changes one party's obligations must generally include what to be enforceable?
- Only the buyer's signature
- New consideration from the party benefiting from the change (Correct answer)
- Approval from the listing broker
- A court filing within 10 business days
Correct answer: New consideration from the party benefiting from the change
Contract modifications generally require new or additional consideration from the party seeking the benefit of the change; otherwise the modification may lack mutuality and be unenforceable.
CNE Contract Law & Agreement Drafting 1
What is a 'contingency clause' in a real estate purchase agreement?