Contract Law

A contract is an enforceable legal agreement to do (or not to do) a specific action.

Expressed or Implied Contracts

Contracts can be either expressed or implied. In an expressed contract the parties overtly declare
their intentions either in writing or orally. In an implied contract, a contract is created by the
actions of the counterparties. Example, when ordering food in a restaurant from a menu, you
imply that you will pay when the bill is presented.

Bilateral or Implied Contracts

Contract can also be bilateral or unilateral. A bilateral contract is created when a promise is
exchanged for a promise. Real estate sales contracts are bilateral contracts. The seller agrees to
sell and transfer title in exchange for the buyer’s promises to pay. A unilateral contract is created
when a promise is exchanged for performance. An example of a unilateral contract is an open
listing agreement. Here the seller promises to pay a commission to a broker for presenting an
acceptable buyer, negotiating an agreement, and closing property.

Valid, Void, and Voidable Contracts

Contracts can also be:

 Valid contract – meets all the requirements of law and is binding and legally enforceable
in a court on the parties involved.
 Void contract – is, in fact, not a contract and does not bind the parties to the contract.
 Voidable contract – is a contract that is able to be made void by one (or both) of the
parties to the agreement. Not meeting an essential element of a valid contract can make a
contract voidable.

Essential Elements of a Valid Contract

There are five essential elements of a valid contract:

 Legally competent parties

 Mutual agreement (a meeting of the minds)
 Lawful objective
 Consideration
 Must be in writing when required by law
Parties to a contract must be legally competent for the agreement to be binding. Parties that are
deemed not competent to form a contract include, but are not limited to:

 Minors – the definition of minors varies by state. For example, in the state of Alabama,
an individual 19 years old or older is deemed to be an adult. The exception here is if an
individual is 18 and married. In this circumstance, the individual is deemed an adult.
 Intoxicated (medication, drugs, alcohol, etc.) individuals are deemed incompetent to form
a contract.
 Individuals that have been adjudicated incompetent by a recognized court are deemed
incompetent and cannot form a contract.

The element of mutual agreement (aka: mutual consent, meeting of the minds) requires that there
must be mutual willingness on the part of the parties when the agreement was formed. There
must not be fraud, misrepresentation, or mistake.

For mutual consent, there must be an offer, an acceptance, and delivery of that acceptance (i.e.,
communication of acceptance) back to the original offeree. Offeror is the individual making an
offer. Offeree is the individual receiving the offer from the offeror. Any change in the terms
made by the offeror by the offeree is deemed a counteroffer.1 All prior offers are extinguished
by a counteroffer.2

Upon the receipt of an offer, and offeree can: (a) accept, (b) reject, or (c) counter. If accepted,
the offeree needs to communicate this acceptance to the offeror. Without communication of the
acceptance, a contract is not formed.3

Additionally, for the standard of mutual consent, there must not be fraud, which is act of trying
to deceive an individual in order to induce them in a contract. Withholding pertinent information
or purposely providing incorrect information to induce an individual to induce them to form a
contract are both deemed as fraud.4

Mutual consent also includes the issues of:

 Innocent misrepresentation – here a misrepresentation not made purposely can still be

employed to disaffirm the agreement. As an example, the seller thinks the school zones
are one set of grade, middle, and high, when, in fact, they are a different set of grade,
middle, and high schools.
 Mistake – is narrowly defined by law. It does not include ignorance, inability, or poor
judgement. Mistakes flow from ambiguities in the agreement, which fail to allow a
meeting of the minds to take place.
 Duress – undue duress, menace, or undue influence (unfair advantage) can be used to
make an agreement void.
 Contractual intent – the parties must have contractual intent, precluding jokes from
becoming binding.
Contracts must have lawful intent. This is so because the courts hold no jurisdiction to enforce
an agreement that is unlawful in nature.

For a contract to be enforceable, it must be accompanied with consideration. Consideration

demonstrates that an agreement has been met between parties. Consideration can be monetary in
value but in real estate contract the consideration is typically a promise to purchase coupled with
a promise to sell.5

A Statute of Frauds is put forth in every state with the purpose of mitigating litigation by
requiring certain contract be reduced to writing. All states require contracts involving an interest
in land (purchase, rent, etc.) to be reduced to writing. Failing to reduce a real estate agreement
makes the agreement void.

Contract Performance

Contracts are executory (being possible to bring to fruition), executed (completed), and execute
(process of bringing a contract to fruition).

Amendments to a contract can be made by way of a novation, which is done with the mutual
consent of all parties to the contract.

If material damage to the property occurs and the possession nor title has been passed, then the
contract can be made voidable. However, parties can agree to insurable interest upon the
forming of the contract, making the purchaser liable for damages caused by third parties or
nature. Be careful to understand your rights and obligations concerning materials damages
before entering into an agreement.

Breach of Contract

When one party refuses to perform without legal reason, this is known as a breach of contract.
The harmed party has six alternatives:

 Accept partial performance

 Rescind the contract
 Sue for specific performance
 Sue for money damages
 Agree to mutually rescind
 Accept earnest money as liquidated damages

In all but a few cases, it will be the buyer seeking to breach the contract. It is rare in a real estate
transaction to successfully sue a purchaser for failing to perform. A successful suit for money
damages is even less rare. Accepting partial performance might be wise. For example, a
contract calls for the closing to be by a certain date. It might be better for the seller to accept a
later closing date as opposed to remarketing the property and accept this later closing as partial
performance. Rescission on the part of the seller is rare as they will have incurred damages by
removing their property from the market and awaiting closing. The only real course of action for
a harmed seller is to keep the earnest money as liquidated damages.

Earnest money accompanies each agreement and is held in a third-party trust account upon the
formation of a contract. The monies are owned by neither party to the contract and the
disposition of the earnest money is governed by the contractual agreement.

Note that legal descriptions and explanation above come from several sources and Dr. Johnson’s
personal experience as a broker. All use at their own risk and are recommended to consult an
attorney concerning legal matters.

Endnotes
1
In fact, all counteroffers are new offers.
2
Always be careful when making a counteroffer because the original offered terms cannot be unilaterally returned to on
your part.
3
An offeree can rescind their acceptance of the terms any time prior to delivery of the acceptance to the offeror.
4
Caveat emptor (buyer beware) places the burden of discovery on the buyer. Caveat emptor has been eroded in many states
but remains strong in Florida with exceptions for health and safety issues. Thus, how a buyer (or their representative) asks a
question and how (or how not) the seller (or their representative) answers a question can have serve repercussions to the
parties involved in the transaction.
5
The promise to sell coupled with the promise to buy creates an equitable interest and it is this equitable interest that creates
the consideration.