4.1 Contract Types and Required Elements

Contract Types and Required Elements

A contract is a legally enforceable promise or set of promises. Real estate practice runs on contracts: listings, buyer-agency agreements, purchase agreements, options, leases, and escrow instructions. The national exam expects you to spot whether a contract is valid, and to classify it correctly, because the classification controls who can enforce it and how it ends.

The five essential elements

Every valid contract must satisfy these elements. Memorize them as a checklist and test each fact pattern against it.

Mutual assent and the mirror-image rule

Acceptance must match the offer exactly. If a seller lists at $420,000, a buyer offers $400,000, and the seller responds with $410,000, the seller has rejected the original offer and made a counteroffer. The original $400,000 offer is dead and cannot later be "accepted" by the seller. Each counteroffer revives the negotiation and gives the receiving party the power to accept, reject, or counter again. The exam loves chains: Offer A is met by Counter B, which is met by Counter C; only the live counter can be accepted.

Classifying contracts on three axes

Bilateral vs unilateral. A bilateral contract is a promise for a promise — both parties are obligated. A standard purchase agreement is bilateral: the buyer promises to buy, the seller promises to sell. A unilateral contract is a promise in exchange for an act; only one party is obligated unless and until the other performs. An open listing and an option contract are unilateral — the owner is bound, but the broker or optionee is not obligated to act.

Express vs implied. An express contract states its terms in words (written or spoken). An implied contract is created by conduct — for example, a buyer who keeps using a broker's services may imply an agreement to compensate.

Executory vs executed. An executory contract still has unperformed obligations (a signed purchase agreement before closing). An executed contract is fully performed (after closing, all duties discharged). Do not confuse "executed" in this sense with merely signing a document.

Void, voidable, valid, and unenforceable

These four words are tested as if they were interchangeable — they are not.

• Valid: meets all elements; fully enforceable by either party.
• Void: no contract ever existed (illegal purpose, or a party legally incompetent such as adjudicated insane). Nothing to enforce or rescind.
• Voidable: valid until the protected party chooses to rescind. Examples: a minor's contract (voidable by the minor), a contract induced by fraud, duress, or undue influence (voidable by the victim), or a misrepresentation.
• Unenforceable: the contract is valid in substance but a court will not enforce it, usually because it fails the Statute of Frauds (oral land sale) or the statute of limitations has run.

Worked trap: A 17-year-old signs a purchase agreement. The contract is voidable by the minor, not void — the adult seller remains bound, and the minor may choose to enforce or disaffirm it.

The Statute of Frauds in real estate

The Statute of Frauds requires certain contracts to be in writing and signed by the party to be charged. In real estate this captures: contracts for the sale of real property, leases for a term longer than one year, options to purchase, and (in most states) listing agreements. A short-term lease of one year or less can be oral. The remedy for a violation is not voidness — the contract is unenforceable, meaning a court will not compel performance even though the deal was real.

Offer, counteroffer, and termination of an offer

An offer can be terminated before acceptance by revocation (offeror withdraws before acceptance), rejection (offeree says no), a counteroffer (which rejects and replaces the original), lapse of time (a stated or reasonable deadline passes), or death/incapacity of either party before acceptance. Acceptance is effective when communicated to the offeror in the manner authorized; under the traditional mailbox rule, a mailed acceptance can be effective when posted, but most real estate contracts require actual delivery of the signed acceptance.

Earnest money is not consideration, and electronic signatures count

Earnest money is not a required element of a valid contract. The promises exchanged supply consideration; the deposit merely shows good faith and may serve as liquidated damages. A purchase agreement with $0 earnest money can still be fully valid.

Under the federal E-SIGN Act and state UETA, electronic signatures and records are legally enforceable for real estate contracts; a deal does not require ink on paper. The Statute of Frauds requires a writing and a signature, both of which an electronic record satisfies. An exam answer claiming an emailed, e-signed purchase agreement is automatically void is wrong.