Test Bank Answer Key
Chapter 6 Contracts
TRUE/FALSE
1. A minor’s contract is voidable at the election of the minor.
2. A contract entered into between an adult and a minor is unenforceable by both parties.
3. Illiteracy of a party renders a contract unenforceable.
4. Lack of knowledge or inability or failure to read a contract does not make a person mentally
incompetent.
5. An executor has limited power to buy and sell real property on behalf of the estate.
6. An executor always has the power to buy and sell real property on behalf of an estate.
7. The sale of property by a limited partnership requires that the limited partners sign the contract.
8. A contract entered into by a trustee must be approved by the beneficiaries of the trust.
9. A person being appointed to act under a power of attorney must be a lawyer.
10. Generally, powers of attorney are automatically revoked by the death or insanity of the
principal.
11. All contracts must be in writing to be enforceable.
12. Not every contract must be in writing to be enforceable.
13. A real estate contract must be in writing to be enforceable.
14. The amount of money damages for a breach of contract is the difference between the contract
price and the market value of the real property at the time and place of default.
15. The amount of money damages for a breach of contract is the difference between the contract
price and the market value of the real property at the time the suit is brought for breach of
contract.
16. Requiring a party to perform under a contract is known as rescission.
17. Termination of a contract and reimbursement for expenses is known as specific performance.
18. Liquidated damage provisions contained in contracts are always enforceable.
19. Liquidated damage provisions contained in a contract are designed to punish a party for
not performing.
20. The liquidated damage provisions in a contract are generally enforceable provided they do not
result in penalty.
21. A real estate agent or broker, in order to earn a commission, must be the procuring cause
of the sale.
22. An agreement whereby an owner hires a broker to sell real property is known as a
power of attorney.
23. An agreement whereby an owner hires a broker to sell real property is known as a
listing agreement.
24. An open listing entered into between an owner and an agent precludes the owner from selling
his or her own property.
25. Under an exclusive listing, an owner hires only one broker to assist in the sale of the
real property.
26. Under an exclusive listing, an owner still reserves the right to sell the real property and
avoid a commission.
27. A listing agreement whereby the owner hires a broker to sell the property and the owner agrees
that if the property is sold, even if through the owner’s efforts, the commission is owed is
known as an open listing.
28. A listing agreement whereby an owner hires only one broker to assist in selling the property
and the owner agrees that if the real property is sold, even if through the owner’s efforts, a
commission is owed is known as an exclusive right–to-sell listing.
29. A real estate broker owes to his or her client a duty to exercise all of the affairs of the client in
good faith and with loyalty.
30. A real estate broker is not a fiduciary.
31. A principal does not owe any duties and obligations to an agent.
32. A real estate broker can have only express authority.
33. A real estate broker may have both express authority and implied authority.
34. A real estate broker’s implied authority is that authority given to the broker in the listing
agreement by the owner of the property.
35. A real estate broker cannot represent both the seller and the purchaser in a transaction.
36. In many states, a real estate broker may be able to represent both the seller and the purchaser in
the same transaction.
37. An owner’s basis in his or her property is the net sales price received by the owner from the
sale of the home.
38. An owner’s basis in his or her property will always equal the owner’s depreciation of
the property.
39. A real estate broker may be able to place a lien against an owner’s property to secure unpaid
real estate commissions.
MULTIPLE CHOICE
1. Which of the following is not a requirement for a valid contract?
A. Mutual agreement
B. Signatures of the parties
C. Lawful purpose
D. Consideration
2. Which one of the following lacks legal capacity to enter into a binding contract?
A. Partnership
B. Executor
C. Corporation
D. Mental incompetent
3. For which of the following persons would a power of attorney most likely be used?
A. Trustee
B. Minor
C. Agent
D. Mental incompetent
4. Which of the following is most likely not a defense to the enforceability of a contract?
A. Illiteracy
B. Mental incompetency
C. Violation of trust instrument
D. Infancy
5. Which of the following is/are grounds for revocation of a power of attorney?
A. Revocation by express act of principal
B. Revocation by death of principal
C. Appointment of new agent for the same purpose
D. All of the above
6. The remedy for breach of a real estate contract that requires that the defaulting party perform its
obligations under the contract is known as
A. liquidated damages.
B. specific performance.
C. rescission.
D. time of the essence.
7. The remedy of rescission provides the injured party under a real estate contract with the
following relief:
A. Contract is terminated and party is entitled to reimbursement for expenses.
B. Contract is terminated with no reimbursement for expenses.
C. Contract is terminated and injured party is entitled to recover lost profits.
D. None of the above
8. The measure of monetary damages for breach of a real estate contract is computed as follows:
A. The equivalent of the purchase or sale price
B. The difference between fair market value of the property and contract price at time of
default
C. The difference between fair market value of the property and contract price at time of
lawsuit
D. Reimbursement for any expenses incurred by injured party
9. Seller enters into a contract with purchaser to sell real property for $100,000. Purchaser defaults
on the contract, and at the time of default, the fair market value of the property is $90,000.00.
Seller shall be entitled to recover from purchaser the following money damages:
A. 0
B. $100,000
C. $10,000
D. $90,000
10. Seller and purchaser enter into a contract to purchase real property at a fair market value of
$100,000. Seller refuses to perform the contract, and at the time of seller’s default, the fair
market value of the property is $110,000. The purchaser can recover from the seller the
following money damages.
A. $100,000.
B. 0
C. $10,000
D. $110,000
11. A section of a contract which provides that, in the event of default, the purchaser is entitled to
$10,000 from the seller is known as a
A. rescission provision.
B. “time is of the essence” provision.
C. specific performance provision.
D. liquidated damage provision.
12. An agreement whereby an owner of real property hires a real estate broker to help the owner
sell the property is known as a
A. power of attorney.
B. rescission agreement.
C. listing agreement.
D. mutual agreement.
13. A listing agreement whereby an owner hires only one broker or agent to assist in selling the real
property and the owner agrees that if the real property is sold, even if through the owner’s
effort, a commission is earned by the broker or agent is known as a(n)
A. open listing.
B. exclusive-right–to-sell listing.
C. multiple listing.
D. none of the above.
14. Seller offers to sell their home to a purchaser for $70,000. The purchaser responds that he will
buy the home for $60,000. The seller refuses the purchaser’s offer to buy for $60,000. After
that refusal, the purchaser offers to buy the home for $70,000. At this time, what is the legal
relationship of the parties?
A. There is a contract to purchase the home for $70,000.
B. There is an offer to purchase the home for $70,000.
C. None of the above.
D. All of the above.
15. Which of the following is generally not a duty that a principal owes to an agent?
A. Duty to compensate the agent for his or her work
B. Duty to follow the instructions of the agent
C. Duty to reimburse the agent for expenditures
D. Duty to indemnify the agent against any third-party claims
16. Which of the following cannot be added to an owner’s basis in a home?
A. The cost of putting a new roof on the home
B. The cost of building a garage
C. The cost of having the gutters cleared of leaves
D. The cost of adding an additional bathroom
SHORT ANSWERS
1. Pat Purchaser purchased a home from Sonja Seller. Sonja represented that the basement did not
leak. Pat discovered a few months after the purchase and a hard rain that the basement did leak.
Pat hired a building inspector to examine the basement and was told that it had been leaking for
some time and it would be expensive to fix the problem. Pat did nothing about it at the time. A
year later, after another hard rain, Pat sued Sonja and demanded rescission of the sale, return of
her purchase money, and reimbursement for the expense of a deck that Pat built on the home
following the purchase. Will Pat be able to rescind the sale? Explain your answer.
2. Alan offers to sell his home to Jenna for $200,000. Jenna responds to Alan that she would buy
the home if he would have the home painted and a new roof installed, all at his expense. Has
Jenna accepted Alan’s offer? Explain your answer.
3. Susan gives her daughter Kathy a power of attorney to sell a lakefront lot for $100,000.00.
Pursuant to the power of attorney, Kathy contracts for and sells the lot. The buyer makes out a
check for the lot in Kathy’s name. Kathy cashes the check and keeps the money. Has Kathy
breached any duty to Susan?