Notes

A contract is a promise made by one person to another to do something or
to refrain from doing something. A person who takes part in a contract is
referred to as a party to the contract. The contract promise may be madt>
by only one of the parties, or a separate promise may be made by each o._.
the parties. The promise each party makes is called that party's contractual
obligation. An offer to perform a contractual obligation is called a tender.
A contract must meet certain requirements to be legally valid. If the con,
tract is valid, each party has the duty to perform their specified contractual
obligations. A party who does not fulfill the promise made-who defaults
in completing the contract terms-will be liable to the other party for
breach of contract.
A real estate listing agreement and a real estate purchase contract are examples
of the most common types of contracts used by real estate agents. Listing
agreements were covered in Chapter 6. This chapter will examine a typical
form of real estate purchase contract. We begin with definitions of some of
the terms we will use throughout this chapter. They include:
• Executory and executed contracts
• Express and implied contracts
• Bilateral and unilateral contracts
• Valid, void, voidable, and unenforceable contracts
Executory and
~xecuted Contracts
Express and Implied
Contracts
Bilateral and Unilateral
Contracts
Chapter 7 Contracts 183
A contract is said to be an executory contract when some future contract
obligation is yet to be performed. A listing agreement is executory, because
the real estate broker must find a buyer for the listed property in order to
earn the compensation promised by the seller. Until the sale is closed, a real
estate purchase contract also is executory. The buyer must find financing for
the purchase, and other conditions must be met before title is transferred.
When all of the contract obligations have been performed, the transaction
is completed and the contract becomes an executed contract.
Note: Don't be confused by use of the word execute to mean contract perfor,
mance as well as the signing of a document. For example, after the terms of
a property listing agreement have been decided on and prepared in written
form, both seller and broker execute the agreement by signing it. Then, the
parties execute the agreement by performing all of its obligations.
An express contract is a contract of words established by an oral or a
written agreement in which the parties declare their intention to make a
contract. An implied contract is established by the conduct of the parties,
without a specific oral or written agreement.
• FOR EXAMPLE Wanda and William South moved to Imperial City but never
notified the local waste disposal company to start service at their address. The
Souths leave their trash out at the usual pickup time, and it is removed by the disposal
company. Can the waste company bill them for the service?
Yes. By making use of the waste disposal company's service, the Souths made an
implied contract to pay for the service.
In a bilateral contract, both parties make a promise to do something or to
refrain from doing something and both are obligated to perform. In a uni~
lateral contract, only one party promises, and only that party is obligated to
perform. The promise is accepted by the performance of the other party.
• FOR EXAMPLE Hearth Homes is offering an extra incentive to agents to
attract more buyers to the newest Hearth Homes subdivision. For every sale that
is closed before Labor Day, the selling agent will earn an extra $1 ,000 commission.
This offer is advertised in a flyer sent to each brokerage office. Broker Luis
brings a client to the Hearth Homes subdivision, and the client purchases a home.
The sale is finalized on August 31. Is Luis entitled to the $1,000 bonus?
Yes. Because broker Luis met the terms of the unilateral offer, he is entitled to the
extra compensation.
184 California Real Estate Principles Eighth Edition
Valid, Void, Voidable,
and Unenforceable
Contracts
The typical real estate purchase contract is bilateral. One party promises
to transfer the right of ownership or use of real estate, and the other partY
promises to pay some form of compensation for that right. ,_
A valid contract can be created easily, if all of the required elements are
present:
1. The parties must have the legal capacity to enter into a contract.
2. There must be an offer by one party and acceptance of that offer by
the other party.
3. There must be a lawful object to the contract.
4. There must be some form of consideration, or payment, supporting
the contract.
5. The contract may have to be written.
Each of these elements is discussed in the next section, "Elements of a
Contract."
A void contract is one that has no legal effect from its inception. An agreement
to do something that is illegal is void.
A voidable contract is one that may be disavowed by one or both parties
depending on the circumstances. An example of a voidable contract is on~
that someone signs while intoxicated.
An unenforceable contract is valid on its face, but its enforcement would
violate some law. An example is an oral contract on a matter that the law
requires to be in writing. An oral contract to purchase real estate is unenforceable,
no matter what its terms, because it is oral and not written. The
kinds of contracts that require a written agreement will be covered later in
this chapter.