Understanding Contract Creation
- Offer and acceptance
- Revocation of an offer
- Termination of an offer
- Assignment of a contract
- Contract preparation
Offer and acceptance:
The mutual consent required for a valid contract is reached through the process of offer and acceptance: The offeror proposes contract terms in an offer to the offeree. If the offeree accepts all terms without amendment, the offer becomes a contract. The exact point at which the offer becomes a contract is when the offeree gives the offeror notice of the acceptance.
An offer expresses the offeror’s intention to enter into a contract with an offeree to perform the terms of the agreement in exchange for the offeree’s performance. In a real estate sale or lease contract, the offer must clearly contain all intended terms of the contract in writing and be communicated to the offeree.
An offer gives the offeree the power of accepting. For an acceptance to be valid, the offeree must manifestly and unequivocally accept all terms of the offer without change, and so indicate by signing the offer, preferably with a date of signing. The acceptance must then be communicated to the offeror. If the communication of acceptance is by mail, the offer is considered to be communicated as soon as it is placed in the mail.
Counteroffer By changing any of the terms of an offer, the offeree creates a counteroffer, and the original offer is void. At this point, the offeree becomes the offeror, and the new offeree gains the right of acceptance. If accepted, the counteroffer becomes a valid contract provided all other requirements are met.
Revocation of an offer:
An offer may be revoked, or withdrawn, at any time before the offeree has communicated acceptance. The revocation extinguishes the offer and the offeree’s right to accept it.
For example, a buyer has offered to purchase a house for the listed price. Three hours later, a family death radically changes the buyer’s plans. She immediately calls the seller and revokes the offer, stating she is no longer interested in the house. Since the seller had not communicated acceptance of the offer to the buyer, the offer is legally cancelled.
Termination of an offer:
Any of the following actions or circumstances can terminate an offer:
- Acceptance: the offeree accepts the offer, converting it to a contract
- Rejection: the offeree rejects the offer
- Revocation: the offeror withdraws the offer before acceptance
- Lapse of time: the offer expires
- Counteroffer: the offeree changes the offer
- Death or insanity of either party
Assignment of a contract:
A real estate contract that is not a personal contract for services can be assigned to another party unless the terms of the agreement specifically prohibit assignment.
Listing agreements, for example, are not assignable, since they are personal service agreements between agent and principal. Sales contracts, however, are assignable, because they involve the purchase of real property rather than a personal service.
State laws define the extent to which real estate brokers and agents may legally prepare real estate contracts. Such laws, referred to as “broker-lawyer accords,” also define what types of contracts brokers and agents may prepare. In some states, brokers and agents may not draft contracts, but they may use standard promulgated forms and complete the blanks in the form.