Basics of Contract Law
A contract is a legally binding agreement between at least two parties. This article covers the basic elements of a contract including offer, acceptance and consideration.
What is a Contract
A contract is an agreement recognised by law and may be spoken, written, a mixture of both or made by implication from the parties’ conduct.
The three most important elements of a legally binding contract are:
- An offer
- Acceptance of the offer
- Consideration - payment or some other exchange
There needs to be an intention to create a legal relationship with both parties legally able to make the contract (capacity) and acting freely to do so. Both the offer and the acceptance must be communicated to the other party.
Estate agents enter into contracts with sellers. They set out the terms and conditions of business, state what the agent does and what they will be paid.
Land and property contracts must be in writing and all terms of the contract must be on one document, signed by both parties, including:
- The address or a description of the land/ property
- The price
- The names of the parties.
An offer is made and accepted ‘subject to contract’, so neither party are committed until contracts are signed by both parties.
Invitation to Treat, Offers and Counter Offers
Placing a property advert or putting a price on a detail sheet does not constitute an offer to a buyer to accept the price and buy the property at that price. This is in fact an invitation by the seller to treat (or to negotiate).
The buyer can make an offer that the seller may accept or reject.
If a buyer makes an offer at a reduced price, the seller may reject the offer or make a counter offer that the buyer can accept or reject. The buyer may make a further counter offer that, for example, specific items are included in the sale creating a conditional acceptance.
Acceptance
If a seller accepts the offer, a contract can be created. For a contract to be created there must at least be:
- An offer
- Unconditional acceptance of the offer
- Consideration - payment
If an offer is accepted, the acceptance must be unconditional. If, however, an offer is accepted with a condition on the acceptance, this is not a binding acceptance. It is a counter offer.
Consideration
The consideration or agreement can be defined as the price of the promise made in the agreement. It may not be money and can be property, goods or even a holiday. If it is money, it need not reflect fair value. For example, if a seller wants to sell their Rolls Royce for £1 even though it is worth £50,000 they can do so and any contract made at £1 would be legally enforceable.
Ending a Contract: Agreement & Performance
The two main ways a contract is likely to end are by agreement or the purpose of the contract is fulfilled; performance. A contract may also end by breach (where one party breaks the terms of the contract) or frustration (usually when something occurs which is the fault of neither party and the contract cannot be fulfilled).
Many contracts have a clause within them covering the situation when one party wishes to bring the contract to an end. This can be done as long as the procedure in the contract is followed. E.g. in many estate agent contracts the seller may end the contract by giving two weeks’ notice. If they adhere to this, the contract will come to an end.
Once a contract is fulfilled, it will end and the estate agent fee is due.
