4.1 Contract Types and Required Elements

Contract Classifications

Real estate practice runs on contracts, so the exam tests the vocabulary that describes them. A contract is a legally enforceable agreement between competent parties to do, or refrain from doing, a legal act.

The first cluster of test questions sorts contracts by how they form and how many parties promise to perform.

• Express - terms are stated, orally or in writing (a signed purchase agreement).
• Implied - created by the conduct of the parties, not words.
• Bilateral - both parties exchange promises (a sales contract: buyer promises to pay, seller promises to convey).
• Unilateral - one party promises to perform only if the other completes an act (an open listing, or an option contract).

Most purchase agreements are bilateral express contracts. Watch the classic trap: an open listing is unilateral because the seller owes a commission only if a broker actually produces a buyer.

The Five Required Elements

To be valid, a real estate contract must contain every one of the following. Missing any one usually makes the agreement void or voidable.

Table: Elements of a Valid Contract

Mutual assent is built from a valid offer and an unqualified acceptance. Any change to a material term is a counteroffer, which legally terminates the original offer. Consideration need not be money, but it must be legally sufficient; a recital of "$10 and other valuable consideration" is acceptable.

Valid, Void, Voidable, and Unenforceable

These four labels are heavily tested and easy to confuse.

• Valid - meets all elements; fully binding and enforceable.
• Void - never a contract at all (illegal purpose, or a party lacked capacity such as someone adjudicated insane). Has no legal effect from the start.
• Voidable - valid and binding until the protected party chooses to disaffirm. Examples: a contract signed by a minor, or one induced by fraud, misrepresentation, duress, or undue influence. The injured party may also choose to ratify it.
• Unenforceable - valid between the parties but a court will not enforce it, usually because it violates the statute of frauds (not in writing) or the statute of limitations has run.

Worked Example

A 17-year-old signs a purchase contract for a condo. The seller cannot escape; only the minor may disaffirm. If the buyer turns 18 and keeps making payments, that conduct ratifies the once-voidable contract, and it becomes fully binding.

Statute of Frauds and Equitable Title

The statute of frauds requires that contracts for the sale of real estate, and leases longer than one year, be in writing and signed by the party to be charged. An oral agreement to sell land is unenforceable, even if both parties admit to it.

Once a valid purchase contract is signed but before closing, the buyer holds equitable title - an ownership interest that ripens into legal title at closing. This is why risk of loss and specific performance questions hinge on the contract date, not the deed date.

Key numeric anchor: leases of 12 months or less can be oral and still enforceable; cross that one-year line and the writing requirement kicks in.

Offer, Acceptance, and Termination of Offers

The exam tests the precise life cycle of an offer. An offer is a promise conditioned on an act or return promise; it must be communicated, definite, and made with intent to contract.

An offer can be terminated before acceptance in several ways:

• Revocation by the offeror before acceptance is communicated.
• Rejection by the offeree.
• Counteroffer, which is both a rejection and a new offer.
• Lapse of time stated in the offer, or a reasonable time if none is stated.
• Death or insanity of either party, or destruction of the subject property.

Acceptance must be unqualified and communicated by the method the offer allows. The moment of a binding contract is when the last acceptance is communicated back to the offeror - a frequent test point when offers and counteroffers bounce back and forth.

Express vs. Implied and Executed vs. Executory

Two more pairs round out the classification vocabulary.

Table: Contract Status Pairs

A signed but unclosed purchase agreement is executory. At closing it becomes executed. Do not confuse "executed" (fully performed) with "executing" a document, which loosely means signing it; the exam uses the legal sense - fully performed.

Capacity, Reality of Consent, and Common Traps

Capacity means the parties are legally able to contract: of legal age, mentally competent, and not under a disqualifying condition. A person adjudicated incompetent makes a void contract; one who is merely impaired but not adjudicated may make a voidable one.

Reality of consent means assent was genuine. It is destroyed by:

• Fraud - intentional false statement of material fact relied upon.
• Misrepresentation - false statement made negligently or innocently.
• Duress - assent forced by threat.
• Undue influence - improper pressure from a position of trust.
• Mutual mistake - both parties wrong about a material fact.

When consent is defective, the contract is voidable by the injured party. Watch the trap that fraud makes a contract "void" - it is voidable, because the wronged party may choose to enforce it instead of walking away.