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How the Statute of Frauds Applies to Real Estate Transactions

Instructor: Shawn Grimsley

Shawn has a masters of public administration, JD, and a BA in political science.

In real estate, you often don't have a deal unless it's in writing and signed. In this lesson, you'll learn about the statute of frauds and how it applies to real estate transactions.

Statute of Frauds & Real Estate Sales

Bill and Ted are old friends, and Ted is moving to Bill's town for a new job. Bill is selling his house, and Ted offers to buy it for Bill's asking price. Bill agrees and they shake hands to seal the deal. A few weeks later, Bill tells Ted he's changed his mind because someone came with a higher offer.

Ted's ticked and wants to enforce the contract, but he's out of luck because of the statute of frauds. The statute of frauds is a law in each state that mandates that, in order to be enforceable, certain contracts must be in writing and be signed by the person against whom enforcement of the contract will be sought.

Nearly all transfers of an interest in real estate fall under the statute of frauds. This is why Ted is out of luck. He and Bill may have shook hands, but Ted needs to have a written purchase agreement signed by Bill to comply with the statute of frauds. If he did, he could sue Bill for enforcement of the purchase agreement.

Keep in mind that a transfer of an interest in real estate isn't restricted to a sale that transfers all ownership in the property to someone else. For example, deeding mineral rights to real estate requires a signed writing. Also, giving a mortgage to a lender is a transfer of an interest in real estate and must be in a signed writing. Likewise, giving your neighbor an easement, such as the right to build a driveway on part of your land, also requires a signed writing.

Application to Leases

The statute of frauds extends to leasing real estate as well. Any lease that will not end within one year from its commencement must be in writing. In other words, leases of more than one year must comply with the statute of frauds. If the lease is one day less than one year, you don't need a signed lease (though you should get one anyway).

Let's say that Ray the renter and Larry the landlord orally agree that Ray can lease an apartment on a month-to-month basis. This is a periodic tenancy where Ray's lease is deemed to automatically renew each month unless he or the landlord has provided notice that the lease is being terminated. On move-in day, Larry changes his mind and refuses to let Ray move in.

Ray can enforce the lease because a periodic tenancy like Ray's need not be in writing so long as the relevant period is no more than a year - even if Ray occupies the apartment for more than a year. This is because the lease can technically terminate at the end of each period, but automatically renews if no one gives notice of termination. Since the lease is month-to-month, it falls outside the purview of the statute. Keep in mind, however, that if the relevant period is greater than a year, the statute of fraud requires a signed lease.

Exceptions

Partial performance is an exception to the statute wherein a court will enforce a contract if one side has partially performed. The degree of performance required for the exception to apply varies from state to state and whether the party seeking enforcement is the seller or purchaser. Generally, if a seller deeds the real estate to the purchaser, and the purchaser accepts the deed, a court will enforce payment of the purchase price.

States vary on the degree of partial performance by the purchaser necessary for the exception to apply. Some states require that the purchaser be in possession of the land and some states require both payment and possession. A few states will apply the exception if the purchaser is in possession of the real estate and has substantially improved it, such as building a house on a lot. Finally, some states pretty much find no degree of partial performance is sufficient.

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