Classification of Contracts
November 9, 2020
How are contracts created?
Most contracts are created on an express basis, which simply means both parties will clearly state their intentions. This will be like a typical seller and buyer who signed a sales contract for a piece of real estate. A second way a contract can be created is on an implied basis, which is created by your actions. For example, when a licensee says to a buyer, “Stick with me; I'll get you the best deal in town,” this implies that the licensee is going to be a buyer's agent. If the licensee wants to be a buyer's agent, it should be an expressed, written agreement to represent that buyer, not anything that is simply implied in conversation.
Let’s also discuss how many parties are involved in making promises in a real estate contract by contrasting a unilateral contract with a bilateral contract. A unilateral contract is a one-way promise. We have two parties involved, but only one person is making a promise such as an option contract. With an option contract, a seller is saying to a buyer, I'll sell this property to you. And the buyer is saying, maybe I'll buy it; it's my option. So, it is a one-way promise. There need to be two things right up front: a definite sale price, and a definite timeframe. So, a seller might say to a buyer, I will sell you my property for $500,000 for the next year. And the buyer says, okay, let me think about that for one year. Therefore, this would be a valid option agreement. Normally in an option contract, the seller will want some type of option money or consideration for allowing the buyer to think about buying the property. In our example, it was for one year. So, if we have a $500,000 sale price, let's assume that the seller would require the buyer to put up 10% option money in order to sign the option agreement. That would be $50,000. The $50,000 stays with the seller, regardless of whether or not the buyer ever exercises the option. That's the seller’s consideration for letting the buyer think about it for one year. The buyer does not have to buy because, once again, it's the buyer's option. But if the buyer does not buy the property within that one-year timeframe, the buyer does not give the option money back; that stays with the seller.
So, a unilateral contract is a one-way promise, a promise for action. Whereas a bilateral contract is a two-way promise. A bilateral contract is a typical transaction between a seller and the buyer who both signed a contract to purchase a piece of property. The seller says I will sell the property to you and the buyer says I will buy the property from you as well. That would be a bilateral contract.
To determine when the phase of the contract is finished, we need to contrast an executory phase with an executed phase. Executory means the promises have been made but are not complete. This would be termed a contract pending on a real estate contract. This is a situation where the seller and buyer have signed the contract, but have not yet closed. When the sellers and buyers show up at closing, then the contract becomes what we call executed, and that means all promises would be complete. Finally, time is of the essence is a clause in many contracts that simply says the dates and times are especially important and should be met, if at all possible. If the dates and times are not met, then the contract might be able to be voided.
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