Updated July 31, 2020:

Requisite Elements in Forming a Contract

A legally binding agreement, a contract occurs usually between two parties. For it to be legally binding, contracts must have the following:

  • A meeting between the parties.
  • Consideration.
  • A purpose to establish legal relations.
  • Both parties must have the ability to create a contract.
  • The parties must freely agree to the contract.

In addition, an offer and acceptance must occur. An offer is a willingness to join the contract under specific terms. Its intention is to become binding once the offeree accepts the contract. There are three components to an offer.

  • It lists the terms.
  • The person making the offer (offeror) is willing and bound to the terms.
  • It gives the offeree the power to hold the offeror accountable.

When it comes to the offer, there are several key pieces.

  • Acceptance. This occurs when all the terms are agreed upon in the offer.
  • Consideration. This is when something of value is given in exchange for a promise.
  • Intention. This means both parties create legal relations.
  • Capacity. Minors and mentally incapacitated people don't have the ability to enter a contract, although certain contracts remain binding on minors.
  • Consent. Both parties must freely agree to the contract.

Promissory letters or notes are legal and similar to a common law contract. The letters or notes must contain an offer and acceptance. With legal promissory notes, the contract includes the amount of money or capital loaned as well as repayment terms.

Promissory notes also contain terms and conditions related to the agreement. It includes the total amount of money loaned, interest rate, and repayment timeline. Once both parties agree and sign to all the conditions, the promissory notes fulfill elements found in legally binding contracts.

Crafting a Promissory Note

You can create promissory notes to address different types of lending situations. However, you must make sure they have the necessary aspects to fulfill the legalities of a contract so they remain legally binding.

Promissory notes serve as a promise to repay a loan. There is no collateral assigned to satisfy the notes if the borrower defaults. Instead, legal promissory notes can serve as a way to repossess the vehicle or property.

Mortgages as a Promissory Note

In addition, you can use promissory notes for more complex and larger amounts of money or property. One form of a promissory note is a home mortgage.

Mortgage notes cover larger amounts of money and remain secured by the purchased property. Mortgage notes are typically more complex because of the involvement of lending organizations as well as government guidelines pertaining to real estate lending.

Why Buyers May Cancel a Contract

A common reason for real estate deal defaults is due to financing. For instance, an appraisal contingency gives buyers protection and a chance to walk away from the sale if the home doesn't appraise for a specific price. If it appraises for a lower amount, the lender usually cannot secure as much financing as hoped.

Other potential contingencies include a home passing the inspection, a buyer's home selling before the closing date, or the home going through a title search. Sellers have some protection out of contingencies, such as time limits for financing. However, most contingencies protect the buyer.

If buyers want to walk away from the deal due to unmet contingencies, they can usually get their escrow money back. However, if the contingencies are met, the buyer remains obligated to fulfill the contract. Otherwise, the buyer forfeits escrow money or even the full value of the contract.

Why Sellers May Cancel a Contract

Sellers can cancel a contract if both parties agree upon provisions included in the contract. Sellers might want out of a contract if a higher offer came in. In that instance, buyers decide if they want to let the sellers out of the contract. If the buyers don't want to let the sellers out, the sellers remain bound to the contract.

For sellers who refuse the deal and want out completely, buyers can take them to court to fulfill the contract or for compensation for costs such as a home inspection. Otherwise, if the higher offer is enough, the seller can buy the buyer out of the contract.

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