The term "contract," signifies a written agreement by which a buyer and seller are legally bound. A contract is a mutual agreement between two partners for the performance of certain tasks or the fulfillment of some obligation. They can be lengthy and complex documents or short statements of just a few sentences - but they are always mutually agreed on by two parties who are said to be partners to the contract. All contracts possess specific elements that are either written down as an agreement or assumed by both parties.

Taken at the empirical level, a contract can be spoken of as a voluntary arrangement formed and consented to by at least two parties who agree to clearly stated and well defined terms and conditions for achieving a specific purpose and to assure mutual benefit - usually set out in writing or assumed based on the action of the parties' involved in the contract.

Contracts are common and every day occurrences for all of us. We can be said to have entered into a contract when we buy a bicycle from a store, for example - this is an instance of a basic contract between us and the party involved in selling the bicycle. This basic form of contract can be elucidated in this way, the seller has made an offer, for example, by stating "Bicycles for sale" on a board and we signal an acceptance when we buy the bicycle - "I'll take one"- we have entered into a contract. A basic contract in this case involved the buyer and seller acting voluntarily for mutual benefit, with the seller receiving money and the buyer getting the bicycle. Therefore all monetary transactions can be seen as basic contracts between parties for some mutual benefit.

The illustration above is the simplest form of a contractual agreement; however, many contracts and the contracting process itself can be extremely complex and layered. This is especially true when one is dealing with commercial transactions including the purchase and sale of real property in a market. It is important for buyers and sellers to understand the fundamentals that underlie the contracting process, even in real estate agreements, which can be complex and multi-faceted.

In every real estate agreement, the following major elements can be observed:

Offer and acceptance

This common contractual phrase encompasses the fundamental feature of every contract. The first term the "offer" is given by one party and the "acceptance" is the assent of the other party in the contract. In this simple relationship, the offer made must be given in terms that are easily understandable to both buyer and seller; likewise, the acceptance of the offer also needs to be understandable to both parties.

In the formation of the contract - the "offer" and the "acceptance" are necessary. The seller is normally the party who sets the negotiating process in motion by making an offer in most real estate negotiations, while it is usually the buyer who must come up with an the acceptance or a counteroffer in response to the seller's initial offer. The seller may give his or her assent to the response of the buyer by agreeing to the buyer's proposal, or the seller may reject it, or may even suggest another counteroffer. This counteroffer will then result in the automatic replacement of the original offer given by the seller.

Price or other duty

When one party understands the other party's offer and accepts it, the contract can be said to be complete. The fulfillment of the contract agreed to by both parties occurs when each of them have completed their obligations under the stated contract. When speaking of real estate deals, the buyer has the general obligation to pay for the property, while it is the obligation of the seller to deliver a deed to the property.


Contracts are not static and can be changed; however, terms of the contract that are modified must be done only with the agreement of both the buyer and seller to be valid under law.

Competency of parties

A valid contract is assured only if the buyer and seller are mentally and legally competent when entering into the contract. In this instance, the phrase "Legally competent" is the requirement to be of legal age, in the majority of jurisdictions, this age is 18 years or older for both parties to a contract. The phrase "Mentally competent" in this instance means the ability to make a reasonable decision or judgment, which is free from the effects of mental illness, free of the effects of drug dependency, or similar afflictions and not under mental duress.

Mutual benefit

To be complete, any contract must result in mutual benefit to both contracting parties. The seller getting the money and the buyer receiving the property in a real estate deal is an example of mutual benefit and fulfillment of a contract.


Bargaining position

For a contract to be legally valid, it is also essential for both buyer and seller to negotiate as equals. Legally binding contracts ensure the principle of fair play. Instances of contractual obligation under duress, where one of the party's to the contract comes into the agreement out of some compulsion to act due to a belief that he or she is without choices, or where he or she does not have a valid opportunity to fully comprehend the agreement, or where he or she finds the language in the contract too complex and technical and above his or her understanding, in such cases contracts may, in certain aspects, be declared invalid by the courts of law. This is because such deals have not been carried out by true "bargaining over the terms" pertaining to the contract. The term "contract of adhesion" is used when the language in which the contract was written cannot be clearly understood equally by both parties involved in the formulation of the contract.

Voluntary action

A contract signed under duress or pressure is not enforceable in a court of law. Such contracts are invalid in all modern jurisdictions.

Reciprocal benefit or "consideration"

The terms of a contract requires that each party fulfills something for the other party involved in the contract. The act of fulfilling a contract is termed "consideration." In this sense, the "consideration" can be take the form of the payment of a sum of money, it can involve an exchange of goods and services, and can even be an exchange of promises or oaths for some action to be taken in the future.

Quality of goods/acceptability of subject matter

One very reasonable expectation connected to every contract is that the goods to be delivered or the "subject matter" to be purchased or exchanged is not defective or otherwise untenable. A contract involving the sale of a house is without occupancy permit, is a case in point, in this case, it would mean that the property sold cannot be utilized as a home, and therefore the seller's "goods" - in this case, the house - is unlikely to be acceptable. The contract in such a case would be a failure, and the purchaser will have the right to sue for damages in a court of law.

However, legal limitations exist, on the concepts of "use" as well as "damages" in contracts between two parties. The limitation on the concept of "use" is that the buyer actually employs the product purchased for the general purpose intended. This is an important limitation as a home seller has no obligation to ensure that the property being sold is capable of functioning as a nuclear dump or a distillery - the seller's only obligation being ensuring its serves its purpose as a residential home if it is marketed as a residence. The concept of damages, are also limited to repairs or compensation deemed reasonable by law.

Discovering a defect

Contractual problems can also crop up with respect to the concept of "on notice," problems that concern the presence of any defects in goods sold as well as fixing responsibility for the repair or maintenance of any goods that are traded. When speaking of "defects" in terms of real estate contracts, the term can be said to involve title problems as well as the material or physical condition of the property being sold.

The seller is usually the person who must ensure the absence of title defects during the contractual process itself. Therefore, the seller has the responsibility of resolving all problems that arise for the buyer that can possibly or actually prevent the buyer from obtaining a complete and clear title. These defects in the title may be invalid or questionable prior deed, liens or unreleased judgments. There are exceptions to this as well, and the major exception being sales that involve "quitclaim" deeds - these are deeds sold in which the seller makes no warranties and perhaps does not own the property itself.

The problem may lie with the condition of the property being contracted and not the title at other times. In such cases, if visual inspection or other reasonable examination itself plainly shows the defective nature of the property - the purchaser may be put "on notice." When the buyer puts the seller on notice, it also means that he or she cannot at a later time claim to be unaware of the existence of the defect in what was traded. When the seller is already aware of the defect, and if it has not been detected by the buyer, the seller in general has the responsibility of informing the purchaser of the problem before the contract is agreed upon.

Language for breach

Contracts are made daily, and they are also broken on a daily basis as well. Some of the reasons that difficulties or problems might arise lie in the fact that one side of the contracting parties might not "perform." A wide range of reasons could possibly lie behind this failure to perform or an event may occur that makes performing impossible, or perhaps the buyer and the seller may disagree with regard to the exact meaning of a clause or phrase in the contract itself.

The failure to perform may at times be considered very serious as to constitute a breach of contract. If such an instance occurs, the contract is termed as having been "broken," and this leads to a "breach of contract" on the part of one party. When speaking of real estate contracts, they usually come with clear provisions that define specific breaches of contract and provide remedies in case one of the contracting parties fails to perform in terms of the contract.


Another important aspect of contracts is that all signatories to a contract must be legally qualified to enter into the contract and have the capacity and authority to sign. The signature must be valid for the contract to be legally binding.

In this instance, the term "capacity" constitutes the requirement that all signatories to the contract are of legal age and possess a sound mind and are otherwise legally free to enter into the contract. In this instance, the term "authority" of the parties concerns the requirement that an individual who signs the contract actually has the right to bind himself or herself or legally represent others in the contract. The issue of authority can become tricky when corporations go into contracts - for example, a question may arise about whether a particular corporation has the right to purchase or sell real estate? Similarly, such specific issues can also come up when contracts concern partnerships involving two parties - what is the authority of the signing partner or partners? in such cases, and such issues can also arise when multiple owners are involved in a contract - it can become difficult to determine, whose signature is necessary for a contract to be valid and whose signature, if at all, can be left off when the contract is signed.

All valid signatures on any given contract must be clear and discernible. They must correctly state the name of the person who is involved in the contract and the signature must match the name that is typed or written into the body of the contract - the signature must also be made as a free and informed choice by each signatory.


It is also important to consider the matter of "damages" whenever a contract is broken for any reason whatsoever. Such situations are usually resolved by established practices, the majority of real estate contracts establish how specific breaches and damages are to be handled in case of a dispute arising from a problem - this is better than leaving problems to be resolved thorough endless debates between the two contracting parties.

When speaking of payment for damages, these may range from small symbolic sums to the giving of huge monetary awards for major breaches of contract. The language in the contract is one principal factor taken into account for resolving the dispute by courts that are assessing breaches and damages in such cases. Along with the specific language employed in the contract, the courts may also enquire into the conduct of the parties. Courts also assess if all the elements for a valid contractual agreement were present when the contract was written. Only after all such assessments are conducted will the courts pass judgment in the case.

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