Contracts are the cornerstone of every real estate transaction, so it’s essential to understand how they function. It is possible for a contract to be valid, void, or voidable. A legally enforceable contract is valid, but what does void and voidable mean? Is there a difference? The short answer is yes. Throughout this article, we will help you understand what is valid, void, voidable, what is the difference, and more.
What is a Valid Contract?
In order for a real estate transaction to be valid, all parties must sign a legally binding contract and exchange something of worth. There are four main elements of a valid real estate contract:
- The party must be the legal age of 18 or older and deemed mentally competent.
- The contract must be legal or hold a lawful purpose.
- A clear and specific consideration must be included in the agreement.
- The contract must hold mutual consent or be agreed upon by both parties.
What are Void Contracts?
A void contract is one that lacks all or one of the elements that make a contract valid. The contract is invalid at the time of its establishment and is not legally enforceable. Void contracts are not contracts because they lack an essential element of a contract and are thus unenforceable.
A void contract, in most situations, is void because it lacks one or more fundamental elements that would make it valid. Because it isn’t a legally binding agreement, neither party has to do anything to end it. When a contract directly violates contract law, it loses its enforceability. Neither side has the right to sue for failure to fulfill.
Here are some characteristics that may cause a contract to be void:
- The contract isn’t legally binding.
- The contract does not bind the parties in any legitimate way.
- The contract is unable to establish legal rights attached to affected parties.
- The contents within the contract are against the law.
- The contract does not include any form of compensation in any way.
Void Contract Examples
There are many different examples of void contracts. For example, a contract to sell narcotics would be void since selling drugs is an illegal action. Another example would be a contract to kill. Since killing is unlawful, a contract to kill cannot exist. Another example would be if one of the parties involved in a contract is legally declared mentally incompetent. Again, the contract cannot exist because it lacks an essential element.
What Are Voidable Contracts?
A voidable contract is a legal agreement between two parties that may be unenforceable for any number of reasons. Voidable contracts have the necessary elements to be enforceable, so they appear to be valid, but can be rejected by one party if the contract is discovered to have any number of defects.
Most real estate sales contracts include contingency clauses, making them voidable.
Here are some characteristics that may cause a contract to be voidable:
- One or both parties, change their mind about the agreement.
- One party was duped, pressured, or misled into signing the contract and uses their right to challenge its legality.
- One or both parties decide to rescind the consent.
- The contract was established under duress, fraud, deception, or coercion, making it voidable.
So in plain terms, contracts that are voidable have all of the necessary ingredients to be enforced, but allow one or both parties to nullify the contract. The process of ratification can be used to repair a contract that has been found voidable. Contract ratification necessitates agreement by all parties to new provisions that effectively eliminate the original contract’s primary issue of conflict.
Voidable Contract Examples
Let’s say you wanted to buy a house with a tree in the backyard to set up a swing for your children. Let’s say you signed a contract for a house that is supposed to have a tree in it, but now you show up, and the tree was cut down. This makes the contract voidable. Why? Because you can still buy the house. The contract still exists, you signed the paperwork, and maybe you don’t care that much about ending the contract. Since you have the option to continue with the contract, it is voidable.
What is the Difference Between Void and Voidable?
The terms void and voidable are frequently misunderstood and used interchangeably. A void contract differs from a voidable contract; although both may be nullified for similar reasons, they have their specific differences. Failing to recognize them could result in legal proceedings down the road. While there are some parallels between void and voidable contracts, significant variations must be understood.
Void contracts are not contracts because they lack an essential element of a contract and are thus unenforceable. Voidable contracts have the necessary elements to be enforceable, so they appear to be valid but can be rejected by one party if the contract is discovered to have any number of defects. See the difference?
A void contract is null and void from the beginning. In this situation, neither party can enforce a void contract because it is treated as if it never existed. When one party states a legal reason for canceling or revoking a voidable contract, it does not become invalid until the other party asserts a legal reason for canceling or withdrawing it.
What is an Unenforceable Contract?
A contract can be declared enforceable for a variety of reasons, including the circumstances we discussed earlier. If a contract is found to be unenforceable, the courts will not enforce it. It’s as simple as that. It is not legal. There are no grounds for the courts to apply the contract. If anyone breaches an unenforceable contract, the other party has no legal recourse.
Any contract agreement created between two parties for illegal actions is considered an unenforceable contract. For example, a contract between an illegal drug supplier for a specified supply of drugs provided to an illegal drug dealer. This type of formal agreement is illegitimate since it involves illegal goods and is considered unenforceable from its creation since it does not seek to serve a legal purpose.
What is the Difference Between Void and Unenforceable?
The term unenforceable is not specific, since there are many things that can make a contract unenforceable. A void contract is more specific as it tells us the status of the agreement. While a contract considered void is unenforceable, many contracts that are NOT void are also unenforceable. In other words, all void contracts are unenforceable; however, all unenforceable contracts are not void contracts.
Here’s a great example. Most contracts need to be in writing, but not all contracts are; some are verbal, meaning there are a few exceptions to that rule. So what happens if a contract needs to be in writing but is made verbally? Let’s say the agreement is perfectly legal (follows the four elements) but is not in writing. Is that contract void? No, because it still has those four essential elements we discussed earlier, making the contract valid, not void. It’s valid AND not void but is also not enforceable since it is not in writing. Make sense?
Remember, writing is not one of the four essential elements of a contract. It is required for real estate contracts because of the statutes of fraud, but verbal agreements exist, and you must be aware of them.
What to Know for the Exam
When it comes time for exam day, you need to be familiar with each type of contract. You need to know what valid, void, and voidable contracts are and what sets them apart from each other. For valid contracts, remember The Basic Elements of a Valid Real Estate Contract. If a contract lacks any or all of those elements, then it is a void contract. A voidable contract allows either party to cancel the agreement. The contract is valid at the time of its establishment, but it may be voided in the future. If you keep these basics in mind, you will have no issues with your real estate contracts!