Real Estate Contracts: 5 Essential Legal Elements to Enforce Law
Learn five essential elements for an offer to purchase a home to become a legally enforceable contract and mistakes to make a real estate contract voidable.
Although real estate contracts are increasingly more elegant and complex (such as the newly revised 2-T Offer To Purchase And Contract in January 2011) for licensed realtors in residential real estate, the basic legal requirements for a valid contract are still the same. Therefore, anyone involved in real estate should be aware of the five legal requirements of an agreement not to lose sight of the big picture while focusing on minor details in the process of purchasing a home, in addition to the basic protocol of accepting an offer and communicating effectively to create a legal contract.
Real Estate Contracts: Definitions of Types of Contracts and Forms that Exist
A contract, by legal definition, is an agreement between two people that is legally enforceable (the most common example in real estate is a contract to purchase). Contracts in a general discussion can be “express” in words (either written or oral) or “implied” from suggested conduct (such as ordering a meal in a restaurant with the knowledge that protocol implies a check and payment will follow). Contracts are often considered “express” in real estate ” in writing.
A rule called the “Statute of Frauds” requires important real estate events (such as the buying/selling or transfer of conveyance/use of property) to be in writing to be legally enforceable in court. It includes all offers to purchase and leases in North Carolina longer than three years (i.e. three years and a day). Therefore, a lease less than three years is still wise in writing but is not considered invalid or wrong if it is oral.
Also, contracts by nature can be executed (completed/done) or executory (still waiting to complete). By definition, a contract to purchase a home is still executory until closing, and more options are present for leaving or exiting an agreement. However, once closing has been completed on a property, an executed contract is legally solid and difficult to escape (unless significant signs of fraud apply).
Lastly, real estate contracts can be considered “bilateral” (actions expected of both parties – the most common scenario in real estate) vs “unilateral” (where only one party is obligated to perform). The best example of a unilateral agreement in real estate is the “option to purchase,” where the buyer has the option to act, while the seller is required to serve if the option is selected.
Real Estate Contracts – The Five Essential Elements to Create a Legally Enforceable Agreement
Despite the multitude of pitfalls and dangers left open in real estate with a simplistic real estate offer to purchase, in a court of law, there are genuinely only five elements needed to create an agreement:
- mutual assent (meeting of the minds)
- consideration
- legal capacity of both parties
- the lawful objective of the contract
- in writing
Mutual assent means that the buyer (offeror) and the seller (offeree) agree to all the terms and thoroughly understand the contract’s property, price, and duration. Therefore, no additional details or changes will be adjusted (i.e. no negotiations are allowed at this point – these are the final terms).
Consideration is a value exchanged for a commitment or provided in return for it. In real estate, this is usually in the form of money (cash, financed mortgage loans, etc.).
The legal capacity of both parties is more involved to discuss but means a legal adult over 18 of sound mind without undue duress or influence. Both parties must be of legal age (a minor cannot sell real estate without a legal guardian’s signature, however, in some instances, they may be able to purchase in cash if no lending is needed). The risk in dealing with a minor as a buyer is that the other party (the seller) is obligated to complete the process as any contract otherwise would proceed. Still, legally the minor could back out of the contract up until closing and make this contract voidable.
A contract signed by a person already labelled mentally insane is a void contract and not enforceable in law. However, an agreement signed by a person who is later deemed mentally incompetent could become voidable and be considered for its validity in court by the ill person if their interests are in question. Also, an exception could be regarded as a person intoxicated by alcohol or under the influence of drugs or otherwise not of sound mind.
Contracts entered under duress, or undue influence may also be voidable in court. Duress would indicate a person signed the agreement under fear of physical injury or harm to themselves or a close family or friend if cooperation was not received. Undue influence would apply if a party signed while another person took unfair advantage of them to affect the natural relationship with another party negatively.
The wronged party in the scenario (i.e. a son who disinherited land from a pair of brothers pushing a sick older sibling to sign in the hospital while the son was away). Both duress and undue influence fall under the legal capacity of parties to agree.
The lawful objective of the contract is simpler to explain. The contract has to be for a “legal purpose.” If the real estate transaction is against the law, it could not be legally protected in court.
Lastly, all real estate transactions involving buying and selling property must be in writing according to the Statute of Frauds requirement to protect against unfair and untrue testimony in court.
Binding a Party to an Offer to Purchase in Real Estate – Acceptance and Communication Requirements
A well-written contract is only a portion of what constitutes a legal offer to purchase – a request does not become an actual contract until the submission is received and accepted by the other party as is (i.e. the seller); the offer is signed by the seller and communicated back to the original party (either buyer or buyer agent) in acceptable protocols.
A counteroffer rejects an offer, creating a need for a new request to be re-initiated. Suppose a seller legally establishes a counteroffer (negotiating different terms such as sales price, earnest money deposit, or closing date). In that case, another offer could be submitted and accepted by a potential foreign buyer before the original buyer responds due to this detail. Thus, proper commencement of these steps can be critical to protecting a buyer in the offer process. Due to the number of more information in the protocol to offer and accept, another article will go into detail on “Home Offer To Purchase- Necessary Steps for Going Under Contract.”
Purchasing a home is an expensive investment. If the five essential elements of a legal contract are present – mutual assent, consideration, the legal capacity of both parties, lawful objective, and a written agreement – even a simplistic offer to purchase can be enforceable in court. A professionally licensed real estate agent should be advised to protect the interests of buyers and sellers for best results and avoid significant complications in any real estate transaction.
