Legal Principles of a Contract

The seven legal principles to have a valid contract:

  1. Competent parties
  2. An offer and acceptance
  3. Consideration
  4. A lawful purpose
  5. In writing
  6. Signatures of the parties
  7. Adequate property description

Competent parties

The first requirement to have a valid contract is competent parties. To be a competent party, the person must be of legal age and be of sound mind. 

Offer and Acceptance

The second thing we must have is an offer and acceptance, which means the party is supposed to agree on the exact same terms. Keep in mind that the buyer always makes the offer first in a real estate transaction. So, when the offer is made, the buyer is the offeror or the giver of the offer. Likewise, the seller receives the offer upfront, so the seller is called the offeree, or the receiver.  If a seller decides to make a counter-offer back to the buyer, then the seller becomes the offeror. Since the buyer is now receiving the offer, that makes the buyer the offeree. All offers also must be presented to the seller. If a listing agent happens to receive two different offers at the same time from two different buyers, then what order must the seller's agent present these to their own seller client?  The listing agent must present all offers together at the same time. This gives the seller the opportunity to either accept one of the two offers, or reject, or possibly even counter on either one of the offers, but it is the seller’s call to make. Even if it's a ridiculous offer, such as a buyer offers $10,000 and a couple of pigs for a piece of property, that would still have to be presented to the seller because all offers must be presented to the seller client. 


A third item to have a valid contract is consideration. Consideration is something of value or a promise to pay money. The offer itself, when a buyer offers to pay $200,000 for a piece of property, is sufficient consideration for a contract. However, keep in mind, we do not have to have any earnest money to have a contract. Earnest money on a residential deal might be a couple of thousand dollars that a buyer puts down with the offer to show sincerity. This is particularly good to have and the more earnest money there is, the stronger the offer. However, earnest money is not required to have a valid contract. Contract law says there must be consideration, which is merely a promise to pay money.  So, although consideration is required for a valid contract, earnest money is not. 

Lawful Purpose

The fourth item for a valid contract is a lawful purpose. Every contract must be for a lawful purpose. 

In Writing

The fifth item deals with writing. Does that contract for real estate have to be in writing?  Not necessarily, but normally speaking real estate contracts must be in writing to be enforceable in court, due to a body of law called the statute of frauds. So, we could have a couple of farmers make a real estate deal, shake hands, and show up at closing, and it is verbal the entire time. If they close, that would be a valid contract. However, if one of the farmers backs out before closing, could the other farmer sue in court to force completion? No, because the statute of frauds says that if it is a contract for real estate, it must be in writing to be enforceable in court. 

Signature of the Parties

The sixth item to have a valid contract is to have the signatures of the parties involved in the real estate deal. 

Adequate Property Description

And finally, the seventh element is there must be an adequate description of the property. This is typically a legal description, but an adequate description is fine.

When it comes to preparing legal documents for a real estate transaction, only attorneys can prepare or draft legal documents, not real estate licensees.  Licensees may take preprinted contracts that have been approved by an attorney and fill in blank spaces such as sale price and closing date, but only attorneys can prepare legal documents.

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