4.1 Contract Types and Required Elements
Key Takeaways
- A valid contract requires offer and acceptance (mutual assent), consideration, legal capacity, legal purpose, and (for real estate) a writing under the Statute of Frauds.
- Contracts are classified as express vs. implied, bilateral vs. unilateral, and executed vs. executory; a listing is typically bilateral, an option is unilateral.
- Void contracts have no legal effect; voidable contracts can be disaffirmed by the protected party; unenforceable contracts are valid but cannot be sued upon.
- The Statute of Frauds requires real estate sales contracts and leases over one year to be in writing and signed by the party to be charged.
What a contract is
A contract is a legally enforceable agreement between two or more competent parties to do, or refrain from doing, some legal act in exchange for consideration. The national exam treats contract law as foundational: listings, buyer-representation agreements, purchase agreements, options, and leases are all contracts, so the same validity rules apply to each.
The five essential elements
Every valid contract must contain all five elements below. Missing even one can render the agreement void or voidable.
| Element | Meaning | Common exam trap |
|---|---|---|
| Offer & acceptance (mutual assent) | A clear offer and an unqualified acceptance — a "meeting of the minds" | A counteroffer rejects the original offer and creates a new one |
| Consideration | Something of legal value exchanged by each party | Consideration need not be money; a promise counts |
| Legal capacity | Parties are of legal age and sound mind | A minor's contract is voidable by the minor, not void |
| Legal purpose (legality of object) | The objective must be lawful | A contract to violate fair-housing law is void |
| In writing (real estate) | Required by the Statute of Frauds | Oral listing may be valid but is hard to enforce |
Notice that earnest money is not one of the five essential elements. A purchase contract is valid without earnest money as long as consideration (the mutual promises) exists. The exam tests this directly.
Classifying contracts
The exam expects you to sort contracts along three axes.
- Express vs. implied — An express contract states its terms in words (written or spoken). An implied contract is created by the parties' conduct, such as a buyer who continues using a service after the trial ends.
- Bilateral vs. unilateral — A bilateral contract is a promise for a promise; both parties are obligated (a typical purchase agreement). A unilateral contract is a promise in exchange for an act; only one party is obligated until the other performs. An option is unilateral: the seller must hold the price open, but the buyer is not obligated to buy.
- Executed vs. executory — An executed contract is fully performed by all parties. An executory contract still has duties outstanding. A signed purchase agreement before closing is executory; after closing it is executed.
The validity spectrum
Four terms describe how enforceable an agreement is. Confusing void and voidable is the single most common contract error on the exam.
| Term | Definition | Example |
|---|---|---|
| Valid | Binding and enforceable; has all five elements | Properly signed purchase agreement |
| Void | No legal effect from the start | Contract for an illegal purpose |
| Voidable | Valid until the protected party disaffirms | Contract signed by a minor or under duress |
| Unenforceable | Valid but cannot be enforced in court | Oral land-sale contract (Statute of Frauds) |
A voidable contract is enforceable unless and until the protected party acts to cancel it. A void contract was never a contract at all.
The Statute of Frauds
The Statute of Frauds requires certain contracts to be in writing and signed by the party against whom enforcement is sought ("the party to be charged"). For real estate, this captures:
- Contracts for the sale of real property or any interest in it.
- Leases longer than one year.
- Agreements that, by their terms, cannot be performed within one year.
A one-year lease can be oral; a 13-month lease must be written. Listing agreements are commonly required in writing by state license law even when the Statute of Frauds might tolerate an oral version. The exam usually answers the question with the stricter writing requirement.
Earnest Money, Options, and Genuine Assent
Three refinements on the elements appear repeatedly.
First, earnest money is evidence of the buyer's good faith and a potential source of liquidated damages, but it is not required for a valid contract; the mutual promises supply consideration. A purchase agreement with $0 earnest money can still be enforceable.
Second, an option contract is a separate, unilateral agreement: the optionee pays option consideration (often non-refundable) for the right, but not the obligation, to buy at a set price within a set time. The optionor must hold the offer open. Worked example: a buyer pays $5,000 for a 90-day option to purchase at $400,000. If the buyer exercises, the $5,000 is often credited to price; if not, the seller keeps it and the buyer owes nothing more.
Third, even when all five elements exist, genuine (mutual) assent can be defeated by fraud, misrepresentation, mistake, duress, menace, or undue influence. These make a contract voidable by the injured party. A contract signed under threat is voidable; a contract for an illegal purpose is void from the start. Distinguishing void (no effect ever) from voidable (valid until disaffirmed) is the single most-tested contract concept.
Capacity, Legality, and the Statute of Frauds Applied
Two elements generate their own question clusters.
Legal capacity turns on age and mental competence. A contract signed by a minor is generally voidable by the minor (the adult party is still bound), and the minor may disaffirm. A contract with a person legally adjudicated mentally incompetent is typically void, while one signed by someone merely intoxicated or temporarily impaired is usually voidable. Corporations and partnerships contract through authorized agents; a contract signed without authority may not bind the entity.
Legality of object voids any contract whose purpose is illegal — a listing that requires discrimination, a loan at a usurious rate, or an agreement to perform unlicensed brokerage. No element can rescue an illegal purpose.
Worked Statute-of-Frauds application: A landlord and tenant orally agree to a 18-month lease. Because the term exceeds one year, the Statute of Frauds requires a writing; the oral 18-month lease is unenforceable as written, though courts may treat occupancy as a shorter periodic tenancy. By contrast, an oral 11-month lease is enforceable. The test reliably hides the one-year line inside a lease-term fact pattern, so check the duration first whenever a contract is oral.
Earnest Money, Options, and Genuine Assent
Three refinements on the elements appear repeatedly.
First, earnest money is evidence of the buyer's good faith and a potential source of liquidated damages, but it is not required for a valid contract; the mutual promises supply consideration. A purchase agreement with $0 earnest money can still be enforceable.
Second, an option contract is a separate, unilateral agreement: the optionee pays option consideration (often non-refundable) for the right, but not the obligation, to buy at a set price within a set time. The optionor must hold the offer open. Worked example: a buyer pays $5,000 for a 90-day option to purchase at $400,000. If the buyer exercises, the $5,000 is often credited to price; if not, the seller keeps it and the buyer owes nothing more.
Third, even when all five elements exist, genuine (mutual) assent can be defeated by fraud, misrepresentation, mistake, duress, menace, or undue influence. These make a contract voidable by the injured party. A contract signed under threat is voidable; a contract for an illegal purpose is void from the start. Distinguishing void (no effect ever) from voidable (valid until disaffirmed) is the single most-tested contract concept.
A 17-year-old signs a contract to buy a condominium. Which best describes the contract's status?
A seller signs an agreement giving a buyer the right, but not the obligation, to purchase a lot for $120,000 within 90 days. This is an example of what type of contract?