Tennessee Real Estate Contracts Guide for the Exam

# Tennessee Real Estate Contracts Guide for the Exam

Contract law is heavily tested on the national section of the Tennessee PSI exam. You also need to understand how Tennessee-specific requirements, including the Residential Property Disclosure Act, interact with standard purchase agreements.

The Five Elements of a Valid Contract

Every enforceable real estate contract in Tennessee must have:

1. Mutual assent (offer and acceptance): A definite offer accepted without modification. A counteroffer terminates the original offer.
2. Consideration: Something of value from each party — the purchase price from the buyer, the promise to convey title from the seller.
3. Capacity: All parties must be at least 18 years old and mentally competent.
4. Legal purpose: The contract's subject matter must be lawful.
5. In writing: Tennessee's Statute of Frauds requires real estate contracts to be written and signed to be enforceable. Verbal purchase agreements are not binding.

Types of Real Estate Contracts

Purchase and Sale Agreement: The primary residential transaction document. Specifies price, closing date, earnest money, contingencies, and what personal property is included.

Listing Agreement: Creates the broker-seller relationship. Tennessee uses primarily exclusive right-to-sell agreements. Must have a definite expiration date — open-ended listing agreements are not enforceable.

Option Contract: A unilateral contract giving the buyer the right to purchase at a set price within a specified period. The seller cannot sell to another party during the option period.

Right of First Refusal: Gives a party the right to match any offer the seller receives before the seller can accept it.

Lease-Option: Combines a lease with an option to purchase. Common in Tennessee residential markets as a rent-to-own vehicle.

Contract Status Terms

• Executory: Performance is still owed by at least one party (any signed contract before closing)
• Executed: All parties have fully performed (after a successful closing)
• Void: Never valid — lacks a required element or has an illegal purpose
• Voidable: Valid but rescindable by one party (contract signed by a minor; contract induced by fraud)

The Tennessee Residential Property Disclosure Act and Contracts

The Tennessee Residential Property Disclosure Act requires sellers of 1-4 unit residential properties to provide buyers with a completed disclosure form before or at the time a contract is signed. The disclosure is not a warranty — it reveals what the seller knows about the property's condition.

If a seller fails to provide the required disclosure, the buyer may have the right to void the contract before closing.

Earnest Money in Tennessee

Earnest money is a deposit from the buyer demonstrating good faith. It is held by the listing broker (or the buyer's broker per agreement) in a trust account. Earnest money handling is governed by TREC rules — commingling earnest money with operating funds is a license law violation.

Breach of Contract Remedies

If the buyer defaults, the seller may retain earnest money as liquidated damages (if the contract so provides) or sue for specific performance.

If the seller defaults, the buyer may demand the return of earnest money and sue for specific performance or monetary damages.

Specific performance is available in real estate because each property is legally unique.