4.1 Contract Types and Required Elements

Every residential and commercial deal rests on a chain of contracts: a listing agreement, a purchase agreement, and often option or lease agreements. The exam rewards candidates who can quickly classify a contract and then confirm it meets the legal threshold for validity.

Four Ways to Classify a Contract

Express contracts spell out their terms in words, spoken or written. A signed purchase agreement is the classic example.

Implied contracts arise from the conduct of the parties rather than stated terms. A tenant who keeps paying and an owner who keeps accepting rent form an implied month-to-month tenancy.

Unilateral contracts trade a promise for a completed act. Only one party is obligated until the act is performed. An open listing that pays a commission only if the broker produces a buyer is unilateral.

Bilateral contracts trade a promise for a promise. Both sides are bound the moment they agree. Standard purchase agreements are bilateral because the buyer promises to buy and the seller promises to sell.

Quick Classification Table

Table: Contract Types

Notice that a single transaction can stack types: the purchase agreement is bilateral, but an exclusive-right-to-sell listing that pays regardless of who finds the buyer is bilateral too, while a pure open listing is unilateral.

The Five Required Elements

A contract is valid only when all five of these are present:

1. Mutual assent - a genuine meeting of the minds on the same terms.
2. Consideration - something of legal value exchanged by each side.
3. Competent parties - both have legal capacity to contract.
4. Legal purpose - the object of the agreement is lawful.
5. Offer and acceptance - a definite proposal accepted without change.

If even one element is missing, the agreement collapses into void, voidable, or unenforceable status.

Mutual Assent and the Counteroffer Trap

Mutual assent means both parties agree to identical terms. If the buyer believes the price is $312,000 and the seller believes it is $321,000, there is no meeting of the minds and no contract.

Assent is proven through a definite offer and a mirror-image acceptance. The moment the offeree changes a term - price, closing date, included fixtures - the response becomes a counteroffer. A counteroffer simultaneously rejects the original offer and proposes a new one.

Worked example: A buyer offers $300,000 with a 45-day close. The seller signs but writes in a 30-day close. That signature is not acceptance; it is a counteroffer. The original $300,000/45-day offer is dead and cannot be accepted later even if the buyer changes their mind. Only the seller's new 30-day terms remain on the table for the buyer to accept or reject.

Consideration Versus Earnest Money

Consideration is the legal value each side gives up. In a sale, the buyer's consideration is the promise to pay the price; the seller's is the promise to convey marketable title. A bare promise to make a gift fails for lack of consideration.

Earnest money is a good-faith deposit that signals seriousness and funds potential liquidated damages. It is not the legal consideration and is not even required for a binding contract. A $0 earnest money deal can still be enforceable if the five elements exist.

Capacity, Consent Defects, and Legality

Capacity asks whether each party may legally contract. Minors, intoxicated persons, and those judged incompetent can sign, but the resulting contract is voidable by the protected party. The competent adult on the other side is still bound; only the protected party may walk away.

Entities act through authorized signers. If an unauthorized person signs for a corporation or estate, the agreement may be unenforceable until ratified.

Consent must be free. Fraud, innocent misrepresentation, duress, menace, and undue influence each make a contract voidable by the injured party. Fraud is intentional deception; misrepresentation can be innocent yet still gives the victim the right to rescind.

Legal purpose bars contracts that require unlawful acts, such as concealing a known material defect or steering buyers by protected class. Those agreements are void from the start - no party can enforce them.

Void, Voidable, Unenforceable

• Void - no legal effect ever (illegal purpose, no real assent).
• Voidable - valid until the protected party cancels (minor, fraud, duress).
• Unenforceable - valid in substance but a court will not enforce it (an oral land-sale contract under the statute of frauds).

Common Exam Traps

• Treating a signed-with-changes document as acceptance instead of a counteroffer.
• Calling a minor's contract void when it is voidable.
• Assuming earnest money is required, or that it equals consideration.
• Confusing implied contracts (conduct) with express oral contracts (spoken words).

Executed vs. Executory and the Statute of Frauds

One more classification pair is heavily tested. An executory contract is still being performed — a signed purchase agreement before closing is executory because promises remain open. An executed contract is fully performed — after closing, the deal is executed. Do not confuse "executed" (fully performed) with merely "signed."

The statute of frauds requires certain contracts to be in writing and signed to be enforceable. In real estate this captures:

• Contracts for the sale of real property or any interest in land.
• Leases longer than one year (short leases may be oral).
• A listing agreement in most states.

An oral land-sale contract is not void — it is unenforceable, meaning a court will not compel performance, though the parties may voluntarily honor it.

Parol Evidence and the Equitable Conversion Doctrine

The parol evidence rule bars using prior oral statements to contradict the terms of a complete written contract. Once the parties sign an integrated purchase agreement, a buyer cannot testify "but the seller promised over the phone to include the riding mower" to override the writing. The lesson for practice: every inclusion belongs in the contract.

Upon a valid, enforceable purchase contract, equitable conversion gives the buyer equitable title immediately; the seller holds legal title in a kind of trust until closing. This doctrine explains why the buyer benefits from appreciation between signing and closing and, in many states, bears risk of loss — a point the exam links back to insurance and contingencies.