4.1 Contract Types and Required Elements

Nearly every step of a transaction rests on a contract: the listing, the purchase agreement, the option, the lease, and the buyer-broker agreement. The national portion expects you to recognize contract types on sight and to test any agreement against the elements that make it enforceable.

Classifying Contracts

Contracts are sorted two ways: by how they are expressed and by how many parties promise to perform.

• Express contract: terms are stated in words, written or spoken.
• Implied contract: the agreement is inferred from conduct, not words.
• Bilateral contract: a promise is exchanged for a promise, so both sides are obligated from the start.
• Unilateral contract: a promise is exchanged for an act, and the second party is bound only once the act is performed.

Most purchase agreements are express and bilateral. An open listing is the classic unilateral example: the seller promises a commission only to the broker who actually procures a buyer.

Table: Contract Classifications

The Five Required Elements

A contract is valid only if all of the following exist. Memorize them as a checklist:

1. Competent parties - each party has legal capacity (adult age, mentally competent).
2. Mutual agreement - a meeting of the minds shown by a clear offer and matching acceptance. Also called mutual assent or consent.
3. Consideration - something of legal value promised or given by each side.
4. Legal purpose - the objective and terms must be lawful.
5. In writing when required - the statute of frauds forces real estate sales contracts and most leases over one year into writing.

If an element is missing, the contract is void, voidable, or unenforceable, depending on which element fails.

Offer, Acceptance, and the Counteroffer Trap

Mutual agreement requires an offer that is clear and definite and an acceptance that matches it exactly. This is the mirror image rule: any change to a material term is not an acceptance at all.

When the seller changes the price, the closing date, or who pays a cost, the seller has made a counteroffer. A counteroffer does two things at once: it rejects and terminates the original offer, and it creates a new offer that only the original buyer can now accept. Power to accept flips back and forth with each counter.

An offer can also end before acceptance through revocation by the offeror, rejection by the offeree, lapse of a stated time, or the death or incapacity of either party before acceptance. Once any of these happens, there is nothing left to accept.

Consideration Is Not Earnest Money

This distinction is a frequent test item. Consideration is the legal value each party gives - for the buyer, the promise to pay the purchase price; for the seller, the promise to convey title. A bilateral purchase agreement has consideration the moment both promises are exchanged.

Earnest money is a good-faith deposit that signals the buyer is serious and provides a fund the seller can pursue if the buyer defaults. It is helpful but not legally required, and a contract with a tiny deposit, or none, can still be fully valid. Do not confuse the deposit with the consideration.

Capacity: Void Versus Voidable

A contract signed by a minor or a mentally incompetent person is voidable by the protected party, not automatically void. The minor may enforce it or disaffirm it; the competent adult on the other side is bound. Contracts signed under fraud, duress, menace, or undue influence are likewise voidable by the injured party. By contrast, a contract for an illegal purpose is void from the start - no party can enforce it.

Worked example: counting backward

A seller lists at $400,000. A buyer offers $380,000. The seller signs but writes in $392,000 and moves closing up two weeks. That is a counteroffer; the buyer's $380,000 offer is dead. If the buyer initials the $392,000 and the new date, a contract forms at $392,000. If the buyer instead writes $388,000, the seller's $392,000 counter is now dead and the seller holds the power to accept.

Common Exam Traps

• Treating a counteroffer as a mere negotiation that leaves the original offer alive - it does not.
• Calling a contract with a minor "void" when it is voidable by the minor.
• Assuming every contract must be in writing; only those within the statute of frauds must be.
• Equating earnest money with consideration.
• Forgetting that acceptance must be communicated to be effective.

Contract classifications the exam tests

Beyond the required elements, the exam asks you to classify contracts along several axes. A bilateral contract exchanges a promise for a promise (both parties are obligated, as in most purchase agreements), while a unilateral contract offers a promise in exchange for an act (an open listing, where only performance earns the commission). An express contract states its terms in words, written or spoken, while an implied contract arises from conduct.

Contracts also vary in enforceability. A valid contract has all required elements and binds both parties. A void contract was never enforceable, such as one for an illegal purpose. A voidable contract is valid but one party may cancel it, for example a contract signed by a minor or one induced by fraud or duress. An unenforceable contract was valid in form but cannot be enforced in court, classically because it violates the statute of frauds by lacking a required writing.

The required elements remain offer and acceptance (mutual assent), consideration, legally competent parties, lawful object, and, for real estate, a writing. Acceptance must be communicated to the offeror to form the contract, and any change to the offer's terms is a counteroffer that rejects the original. Sorting a fact pattern into the correct classification is a reliable exam point.