Understanding Contracts: Types, Elements, and Legal Effects with a Focus on Real Estate Contracts
A contract is a legally binding agreement between two or more parties that creates an obligation to perform or refrain from performing certain acts. There are two main types of contracts: unilateral and bilateral contracts. A unilateral contract is one in which only one party is obligated to perform, such as a reward for finding a lost item. In contrast, a bilateral contract is one in which both parties are obligated to perform, such as a sales contract where the buyer agrees to purchase and the seller agrees to sell a property.
An express contract is one in which the terms are explicitly stated, either in writing or verbally. On the other hand, an implied contract is one in which the terms are not explicitly stated but are inferred from the actions or conduct of the parties. Offer and acceptance are the two essential elements of a contract. The offer is a proposal to enter into a contract, while acceptance is the agreement to the terms of the offer. After acceptance, the parties must fulfill their obligations under the contract.
Contracts can be classified into four legal effects: valid, void, voidable, and unenforceable. A valid contract meets all the legal requirements and is enforceable. A void contract is not enforceable from the beginning, such as an agreement to commit a crime. A voidable contract can be voided by one of the parties, such as a contract with a minor. An unenforceable contract cannot be enforced due to a legal technicality, such as a contract that violates public policy.
Real estate contracts have five essential elements: offer and acceptance, consideration, legal purpose, capacity, and mutual assent. Offer and acceptance were explained earlier. Consideration is the exchange of something of value, such as money, for property. The legal purpose requires the agreement to be lawful and not against public policy. Capacity refers to the legal ability of the parties to enter into the contract. Mutual assent is the meeting of the minds between the parties regarding the terms of the contract.
There are four types of real estate listing agreements: open listing, exclusive agency listing, exclusive right-to-sell listing, and net listing. An exclusive right-to-sell listing is preferred by most real estate agents because it gives them the exclusive right to sell the property and earn a commission regardless of who finds the buyer. This motivates agents to work harder to find a buyer and close the deal. In contrast, an open listing allows multiple agents to compete for the sale, which may result in a lower level of effort by each agent.
In conclusion, understanding the types, elements, and legal effects of contracts is essential in any business transaction, particularly in real estate. By being familiar with the different types of listing agreements, real estate agents can choose the one that suits their client’s needs and provides them with the best incentive to close the deal.