Contract Law Basics
The elements every valid contract needs, and the difference between void, voidable, and unenforceable.
Nearly every real estate transaction is built on a contract — the purchase agreement, the listing agreement, the lease. The national exam tests contract law as its own subject, separate from any state-specific form requirements, because the underlying doctrine is the same everywhere.
The essential elements
A valid contract generally requires all of the following. Missing even one and there's no enforceable contract at all:
- Offer
- A clear proposal of terms, communicated to the other party.
- Acceptance
- Unconditional agreement to those exact terms — a "yes, but" is a counteroffer, not an acceptance.
- Consideration
- Something of value exchanged by each side — doesn't have to be cash, but has to be real.
- Capacity
- Both parties must be legally able to contract — of sound mind and legal age.
- Legality
- The contract's purpose must be legal — a contract to do something illegal is unenforceable regardless of the other elements.
Void vs. voidable vs. unenforceable
These three terms get mixed up constantly, and the exam knows it:
Void — no contract ever existed; it has no legal effect from the start (e.g., a contract for an illegal purpose).
Voidable — a valid contract exists, but one party has the legal right to cancel it (e.g., a contract signed by a minor).
Unenforceable — a valid agreement exists, but a court won't enforce it because of some external defect, like failing the Statute of Frauds.
The Statute of Frauds
Real estate contracts generally must be in writing and signed to be enforceable — this requirement comes from the Statute of Frauds, a rule found in some form in every state. A verbal agreement to sell a house, however sincere, is generally not enforceable in court even if everyone agrees on what was said.
Remedies for breach
When a party breaches a real estate contract, the non-breaching party generally has several possible remedies, and the exam expects you to know which one fits which situation:
- Specific performance
- A court order forcing the breaching party to actually complete the transaction — available for real estate more readily than for most other kinds of contracts, precisely because every parcel of real property is considered legally unique, so money alone may not make the non-breaching party whole.
- Compensatory damages
- Money intended to cover the actual financial loss caused by the breach.
- Liquidated damages
- A specific dollar amount the contract itself pre-sets as the remedy for breach (commonly, the buyer's earnest money) — enforceable only if it's a reasonable estimate of actual likely harm, not a punishment.
- Rescission
- Canceling the contract entirely and returning both parties to their position before it was signed.
Courts are generally reluctant to order specific performance for an ordinary goods contract — money damages are usually an adequate substitute, since one replaceable item is much like another. Real property breaks that assumption: no two parcels are identical, so a court is far more willing to force the actual sale through rather than settle for money instead.
Electronic signatures
Under the Uniform Electronic Transactions Act (UETA), adopted in some form in nearly every state, an electronic signature generally carries the same legal weight as a handwritten one, and a contract generally can't be denied enforceability merely because it was signed electronically. This matters on the exam because a fact pattern testing whether a contract is valid will sometimes include an e-signature specifically to see whether you treat it as a defect — it isn't one.
Assignment, novation, and discharge
A contract's rights and duties don't always stay put:
- Assignment transfers the contract's rights to a new party, but the original party can still generally remain liable unless released.
- Novation substitutes a new party entirely, with the original party released — this requires everyone's agreement, not just the assigning party's.
- Discharge ends the contract — through full performance, mutual agreement, or breach.
Assignment and novation get confused constantly. The one-line test: does the original party stay on the hook? If yes, it's an assignment. If they're released entirely, it's a novation.
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