California Real Estate SalespersonContractsHard
A purchase agreement requires the buyer to obtain financing as a condition of closing. Before the loan is approved, a new state law is passed that makes it illegal to finance or transfer that specific type of property. Neither party is at fault. What is the legal effect on the contract?
- AThe contract automatically converts into an option contract
- BThe contract remains fully enforceable and the buyer must find alternative financing
- CThe contract is discharged by impossibility of performance
- DThe seller may sue the buyer for specific performance
Show answer & explanationAnswer & explanation
Correct answer: C. The contract is discharged by impossibility of performance
When a new law makes performance of a contract illegal or impossible through no fault of either party, the contract is discharged by impossibility (or impracticability) of performance, relieving both parties of their obligations.
Why the other options are wrong
- A. Nothing converts the agreement into an option merely due to a change in law.
- B. The contract cannot remain enforceable if performance has become illegal.
- D. Specific performance cannot be ordered when performance is now illegal.
Discharge by Impossibility of Performance
A contract is discharged when an unforeseen event, such as a change in law, makes performance objectively impossible or illegal through no fault of either party.
- Also called supervening illegality
- Differs from mere difficulty or increased cost of performance
- Releases both parties from further obligations
Memory trick: New law makes it illegal—the deal is dead, not delayed