4.1 Contract Types and Required Elements

What a contract is

A contract is a legally enforceable agreement between two or more parties to do, or refrain from doing, a specific act. Real estate practice runs entirely on contracts: listing agreements, buyer-representation agreements, purchase agreements, leases, and options are all contracts.

Exam questions test whether a given agreement is enforceable, what type it is, and how the offer that created it began and ended. Memorize the element list first, then layer the classifications on top.

The five essential elements

Every valid contract requires all five of the following:

• Offer and acceptance (also called mutual assent or a meeting of the minds).
• Consideration — something of legal value exchanged by each side.
• Legal capacity — parties must be of legal age and mentally competent.
• Legal purpose — the objective must be lawful.
• Consent — agreement free of fraud, duress, menace, undue influence, or mistake.

The statute of frauds writing rule

For most contracts the five elements are enough. Real estate adds a sixth practical requirement: the statute of frauds requires that contracts for the sale of real property—and leases longer than one year in most states—be in writing and signed by the party to be charged, or they are unenforceable in court.

A verbal agreement to buy a house can satisfy all five elements yet still fail because it is not written. This is the single most-tested wrinkle in this section.

Consideration is required; earnest money is not

Consideration is the bargained-for exchange. It can be money, a promise, a service, or forbearance (giving up a right). A common trap: students think earnest money is required to form a binding purchase contract. It is not. Earnest money is merely good-faith evidence of intent; the buyer's promise to pay the price is valid consideration on its own.

Classifying contracts

Exams ask you to label a contract three ways at once.

By how terms are stated

• Express contract — terms stated in words, written or spoken (a signed purchase agreement).
• Implied contract — terms inferred from conduct (a buyer who lets a broker show homes and then buys may imply intent to compensate).

By how many promises are exchanged

• Bilateral contract — a promise for a promise; both parties are obligated. Most listing agreements and purchase contracts are bilateral.
• Unilateral contract — a promise for an act; only one party is obligated until the other performs. An option and an open-listing 'pay if you produce a buyer' arrangement are classic unilateral contracts.

By stage of completion

• Executory — something is still left to do (purchase contract before closing).
• Executed — fully performed by all parties (after closing). Do not confuse executed (performed) with merely signed.

Contract validity status

Know these four states cold—they appear in nearly every contracts question.

• Valid — meets all elements; fully enforceable.
• Void — no legal effect from the start (e.g., illegal purpose, or a deed forged with no consent). A void contract cannot be ratified.
• Voidable — valid and binding on one party, but the protected party may disaffirm it. Contracts signed by a minor or induced by fraud or duress are voidable by the injured party.
• Unenforceable — otherwise valid but barred from court enforcement (an oral land-sale contract under the statute of frauds, or one past the statute of limitations).

How offers begin and end

An offer is a definite proposal. Acceptance must mirror it exactly (the mirror-image rule). A change in terms is a counteroffer, which rejects the original and creates a new offer.

An offer terminates by: acceptance, rejection, counteroffer, revocation by the offeror before acceptance, lapse of time, or death or incapacity of either party before acceptance.

Worked scenario: Seller lists at $300,000. Buyer offers $285,000. Seller counters at $295,000. The $285,000 offer is now dead. If the buyer then says 'I accept the original $300,000,' there is no contract—the original was already gone and only the $295,000 counter is live.

Express vs. implied authority and the mailbox rule

Acceptance of a written offer must usually be communicated to be effective. Under the common-law mailbox rule, an acceptance sent by an authorized method can be effective when dispatched, but most modern purchase contracts require receipt of the signed acceptance, so treat communication as the safe answer.

Watch the difference between a counteroffer (changes terms, kills the prior offer) and a mere inquiry ('would you consider a later closing?'), which does not reject the original offer. Only a genuine change of terms destroys the prior offer.

The Statute of Frauds and Required Writings

The statute of frauds requires certain contracts to be in writing and signed by the party to be charged. In real estate this captures the agreements that matter most.

Table: Writing Required vs. Often Oral

An oral land-sale contract is not void; it is unenforceable, meaning a court will not compel performance. Partial performance, such as a buyer taking possession and making improvements, can sometimes overcome the statute, but candidates should answer that the writing controls.

Five Required Elements of a Valid Contract

Every enforceable contract needs all five:

1. Offer and acceptance (mutual assent) - a true meeting of the minds.
2. Consideration - something of legal value exchanged; earnest money is evidence of consideration but is not itself required.
3. Legally competent parties - of age and sound mind.
4. Legal purpose - an illegal object makes the contract void.
5. Genuine assent - free of fraud, misrepresentation, duress, menace, or undue influence.

Reality of Consent Traps

• Fraud is an intentional misstatement of a material fact; it makes the contract voidable by the victim and can support rescission and damages.
• Innocent misrepresentation lacks intent but can still allow rescission.
• Duress and undue influence also make a contract voidable, not void.

Worked distinction: a contract to sell stolen goods has an illegal purpose and is void. A contract a teenager signs is voidable by the minor. Telling the two apart, void versus voidable, is one of the most frequently tested points in the contracts unit.