4.1 Contract Types and Required Elements

Contract Types and Required Elements

A contract is a legally enforceable agreement between two or more parties with legal capacity, in which each promises to do or not do some legal act in exchange for consideration. Real estate practice runs on contracts: listing agreements, buyer-representation agreements, purchase contracts, options, leases, and escrow instructions. The national exam tests whether you can identify the essential elements, classify the contract correctly, and apply the statute of frauds.

The five essential elements

Every valid contract must contain all five elements below. If any element is missing, the agreement may be void, voidable, or unenforceable.

Note the difference between mutual assent and a mere invitation to negotiate. An advertisement, a listing flyer, or a "for sale" sign is generally an invitation to make an offer, not an offer itself. The buyer makes the offer; the seller accepts or counters. Many exam questions hinge on identifying who actually made the offer and whether the response was an acceptance or a counteroffer.

Classifying contracts

The exam asks you to label contracts along three axes. Learn the pairings:

• Bilateral vs. unilateral. In a bilateral contract both parties make a promise (a purchase contract: buyer promises to pay, seller promises to convey). In a unilateral contract only one party promises, and the other accepts by performing. An option is the classic unilateral contract: the seller (optionor) promises to keep the offer open, but the buyer (optionee) is not obligated to buy.
• Express vs. implied. An express contract is stated in words, written or oral. An implied contract is created by the conduct of the parties (a buyer who occupies a home and pays rent monthly may create an implied periodic tenancy).
• Executory vs. executed. An executory contract has acts left to perform (a signed purchase contract before closing). An executed contract is fully performed (after closing, when title and money have changed hands). Do not confuse "executed" the legal state with "executed" meaning merely signed.

Four legal states

The statute of frauds

The statute of frauds requires that certain contracts be in writing and signed by the party to be charged in order to be enforceable. In real estate this captures contracts for the sale of real property and, in most states, leases longer than one year. A handshake deal to sell land is not enforceable even if both parties admit it existed.

Watch the mirror-image rule with offers. An offer terminates upon: revocation before acceptance, rejection, lapse of time, a counteroffer, death or incapacity of either party before acceptance, or destruction of the subject property. Acceptance is generally effective when communicated to the offeror in the manner specified.

Worked example — option pricing

A buyer pays a seller $5,000 for a 90-day option to purchase a property for $400,000. The option fee is consideration that keeps the offer open. If the buyer exercises and the contract states the option fee applies to price, the buyer owes $400,000 − $5,000 = $395,000 at closing. If the contract is silent, the $5,000 is typically retained by the seller separately and the buyer still owes the full $400,000. Read the application clause carefully — that one sentence changes the cash to close by $5,000.

Finally, distinguish capacity issues. A contract signed by a minor is voidable by the minor, who may disaffirm it; the adult party cannot. A contract signed by a person who is legally incompetent (for example, under a court-appointed guardianship) is generally void. And a contract for a clearly illegal purpose is void from inception. The exam rewards precise labels: do not call a minor's contract "void" when it is voidable, and do not call an unenforceable oral contract "void" when its elements actually existed.

Validity, Voidability, and Worked Capacity Issues

The required elements of any valid contract are often given as C-L-A-M-O: Capacity of the parties, Legal purpose, Assent (offer and acceptance, a meeting of the minds free of fraud or duress), Mutual consideration, and, where the statute of frauds applies, a writing signed by the party to be charged. Missing an element changes the contract's status.

• Void — no contract at all (illegal purpose; a forged deed). It cannot be enforced by anyone.
• Voidable — valid until the protected party rescinds (a minor's contract, or one induced by fraud). The innocent party may affirm or disaffirm.
• Unenforceable — valid between the parties but a court will not enforce it (an oral land-sale contract barred by the statute of frauds, or one past the statute of limitations).

Worked trap: a 17-year-old signs a purchase contract. The contract is voidable by the minor, not void — the adult seller is bound, but the minor may disaffirm before and shortly after reaching majority.