Contracts

The four elements, and what is not an element

A valid contract requires capable parties, mutual consent, a lawful object, and sufficient consideration. Four elements, and nothing else belongs on that list.

A writing is not a fifth element of validity. It is a requirement of enforceability under the statute of frauds for certain contracts, which is a different thing. An oral listing can be a perfectly valid contract that simply cannot be enforced for a commission. Notarisation and recording are never elements of validity at all, and any answer choice that includes them is wrong.

Mutual consent means a genuine meeting of the minds, freely given. It is defeated by fraud, duress, menace, undue influence or mistake, and each of those makes the contract voidable rather than void.

Capable parties

Legal capacity. A minor's contract is voidable by the minor. A person adjudged incompetent cannot contract at all, and that contract is void.

Mutual consent

Offer and acceptance, freely given, with the acceptance mirroring the offer exactly. Any change to a material term is a counter-offer.

Lawful object

An unlawful object makes the contract void from the beginning. The law will not enforce it for anyone, and no ratification can save it.

Sufficient consideration

Something of legal value exchanged. It need not be adequate in a commercial sense, and courts do not weigh the bargain, but it must exist.

Void, voidable, unenforceable, valid

Four states, and the exam tests the boundaries between them constantly. A valid contract meets all four elements and binds both parties. A void contract never had legal effect, as with an unlawful object or a party adjudged incompetent. A voidable contract is valid and binding until the party with the power to escape elects to disaffirm it. An unenforceable contract is valid in substance but cannot be enforced in court, most commonly because the statute of frauds required a writing there was not.

The key insight about voidable is that only one party holds the power. A minor may disaffirm their contract, but the adult party may not. A party defrauded may rescind, but the party who committed the fraud may not.

The statute of frauds in real estate

Three categories matter for this exam. Any contract transferring an interest in real property must be in writing. Any lease for more than one year must be in writing. And any agreement authorising or employing an agent to buy or sell real property for compensation must be in writing and signed by the party to be charged.

That third category is the one with a twist. An oral listing may still create agency duties, so the agent owes the seller loyalty, confidentiality and the rest, but it will not support a lawsuit for the fee. Candidates who assume no writing means no relationship get this backwards.

A lease of exactly one year, and a month-to-month rental agreement, fall outside the writing requirement.

Offers, counter-offers, and the mailbox rule

Acceptance must mirror the offer exactly. Any change to a material term is a counter-offer, and a counter-offer rejects and extinguishes the original offer. The original offeror is then free to accept, counter again, or walk away, and crucially the counter-offeror can no longer bind them to the original terms. Candidates lose this one by treating a date as immaterial.

Acceptance is effective on dispatch when sent by an authorised means. Revocation of an offer, by contrast, is effective only on receipt. That asymmetry is the entire point of the mailbox rule: an offeror who posts a revocation after the offeree has posted an acceptance is too late, because the contract already formed.

An offer also terminates automatically on the death or incapacity of either party before acceptance, on expiry of the time stated, on rejection, on counter-offer, or on revocation communicated before acceptance. Once a contract has formed the position reverses: a real property contract generally survives death and binds the estate, because the obligations are not personal in nature.

Listing agreements, and the California requirements

Four listing types. An exclusive right to sell pays the listing broker no matter who finds the buyer, including the seller. An exclusive agency excludes other brokers but leaves the seller free to sell it themselves without a commission. An open listing may be given to any number of brokers and pays only the one who procures the buyer, terminating automatically on a sale by the owner. A net listing sets the seller's net and lets the broker keep the excess.

Net listings are lawful in California but heavily disfavoured, because they set the broker's interest directly against the client's. The broker must disclose the actual amount of compensation before the seller becomes obligated, so the seller can judge whether the arrangement is fair.

Two California requirements attach to every exclusive listing. It must contain a definite, specified termination date, and taking one without a date is a ground for discipline. And an automatic extension clause is prohibited, because it defeats the purpose of the termination date. A safety or protection clause is different and is lawful: it entitles the broker to a commission if the property sells within a stated period after expiry to a buyer the broker introduced and registered in writing.

Buyer representation agreements

An exclusive buyer representation agreement is enforceable when it is written, signed, given a definite termination date, and clear about how compensation is calculated and by whom it may be paid. The seller's agreement is not required for the buyer's own contractual obligation to exist.

Since the industry-wide changes to how buyer compensation is negotiated, setting the amount expressly in this agreement rather than assuming it flows from the listing side has become standard practice. That shift is worth understanding conceptually as well as for the exam, because it changes who the buyer's obligation runs to.

Breach, remedies, and liquidated damages

Specific performance compels a party to complete the contract rather than pay money. It is available in real estate because every parcel is legally regarded as unique, so money is not an adequate substitute. Buyers seek it far more often than sellers, since a seller's loss can usually be measured in cash.

Compensatory damages put the injured party in the position they would have occupied. Rescission unwinds the contract and returns the parties to their prior positions, which is the remedy for a contract voidable for fraud or mistake.

Liquidated damages fix the amount recoverable in advance. On a one-to-four unit residential property the buyer intends to occupy, California presumes the clause valid up to 3% of the purchase price. The clause must be set out in at least ten-point bold type and separately signed or initialled by both parties, which is why it appears as its own signature line on the standard form. Anything above 3% requires the seller to prove it was reasonable.

Contingencies and how a contract ends without breach

A contingency is a condition precedent. The contract exists, but the obligation to close does not mature until the condition is satisfied or waived. If the condition fails and the party acts within the stated period, cancellation is the lawful exercise of a right rather than a breach. Missing the deadline usually means the contingency is waived, which is why timelines matter so much in practice.

Contracts also end by full performance, by mutual agreement to rescind, by novation, by operation of law, or by impossibility. Assignment and novation are the pair worth separating carefully: assignment transfers rights but leaves the assignor secondarily liable unless expressly released, while novation substitutes a party or an obligation and releases the original party entirely. Novation requires everyone's consent, which is what makes it novation rather than assignment.

Advance fees, a distinctly California topic

An advance fee is a fee collected before services are rendered for promoting the sale or lease of property, and California regulates it heavily because of historical abuse in listing-for-a-fee schemes.

The advance fee agreement and all related materials must be submitted to the Commissioner at least ten calendar days before they are used. The funds are trust funds and must be handled as such, which means a trust account and the full record-keeping regime. And the broker must give the principal a verified accounting at least quarterly.

This topic is listed separately in the DRE outline, which is a strong signal that it is tested. It is also the kind of detail no national study guide contains.

Interpretation and the promissory note

Where a contract's terms are ambiguous, the ambiguity is construed against the party who drafted the language, a rule known as contra proferentem, on the reasoning that the drafter had the opportunity to be clear. Handwritten terms generally prevail over typed, and typed over preprinted, because they represent the parties' more specific and more recent intention. Ambiguity makes a contract interpretable, not void.

The promissory note appears in this area rather than in Financing. The note is the evidence of the debt and is the principal instrument. The deed of trust is the security instrument that pledges the property. A note can exist without security, as an unsecured loan, but a security instrument is meaningless without an underlying obligation.

A holder in due course takes a negotiable instrument for value, in good faith, and without notice of any defect or defence, and can enforce it free of most personal defences the maker might have raised against the original payee. Real defences such as forgery, infancy and material alteration still work. This doctrine is what makes notes freely saleable on the secondary market.