Contracts

Contracts are the machinery of every transaction a licensee touches: the listing, the buyer representation agreement, the purchase offer, the option, the lease. This area supplies about 18 of 150 salesperson questions and 24 of 200 broker questions, 12 percent of each exam, because a licensee who cannot tell void from voidable will mishandle real deals. The broker exam adds the trust accounting behind deposits and the commercial lease variations.

§ 7.1What makes a contract, and what breaks one

Four elements, and only four. A writing is not one of them, it is required only for contracts within the statute of frauds. Capacity excludes minors, persons of unsound mind, and persons deprived of civil rights (Civ. Code § 1556), a minor being anyone under 18. A minor cannot contract about real property at all, so a minor's deed or purchase contract is void from the start and ratification cannot cure it, while the minor's other contracts are merely voidable, disaffirmable before majority or within a reasonable time after (Fam. Code §§ 6701, 6710). Unsound mind runs on two tiers: a person entirely without understanding cannot contract at all, though liable for the reasonable value of necessaries, while a contract made short of that, before any judicial determination of incapacity, is not void but subject to rescission (Civ. Code §§ 38, 39).

Consent is destroyed by duress, menace, fraud, undue influence, or mistake, each making the contract voidable at the injured party's election, never automatically void (Civ. Code § 1567). Actual fraud is broader than a false statement: suppressing a known truth counts, and so does promising with no intention of performing (Civ. Code § 1572), while puffing is opinion and not actionable. If any part of a single consideration is unlawful, the entire contract is void (Civ. Code § 1608). Consideration is any benefit conferred or prejudice suffered as an inducement, mutual promises qualify, courts do not weigh adequacy, and a written instrument is presumptive evidence of it (Civ. Code §§ 1605, 1614).

§ 7.2The classification vocabulary

• Valid binds and courts enforce it. Void has no effect from the start, as with a minor's deed. Voidable binds until the protected party rescinds, as with fraud. Unenforceable may be otherwise valid but courts will not enforce it, the classic example being an oral land sale (Civ. Code §§ 1550, 1567, 1624).
• Executed means fully performed on both sides. Executory means performance is still owed, so a purchase agreement in escrow is executory until closing.
• Express terms are stated in words, spoken or written. Implied terms are shown by conduct, so an oral agreement is express (Civ. Code §§ 1619, 1621).
• Bilateral trades a promise for a promise. Unilateral trades a promise for an act, accepted only by performing. An open listing and an option are unilateral, a purchase agreement and an exclusive right to sell listing are bilateral.

§ 7.3The statute of frauds and the clock to sue

An agreement to sell real property or any interest in it, and a lease longer than one year, is invalid unless it, or some memorandum of it, is in writing signed by the party to be charged or that party's agent (Civ. Code § 1624(a)(3)). The line is more than one year, so an oral one year lease is enforceable. An agreement that cannot be performed within a year of its making also needs a writing, and under the equal dignities rule an agent signing a real property contract for a principal needs written authority signed by the principal.

Under an oral listing the broker has no enforceable commission claim, not even after the sale closes. But the statute bars enforcement, it does not erase the deal: a fully performed oral contract stands, and part performance can pull a partly performed oral land contract out of the statute in equity.

§ 7.4Offer, acceptance, and when the contract forms

An offer needs contractual intent, communication to the offeree, and definite terms. Advertisements are invitations to negotiate, so the buyer's purchase offer is usually the first true offer. Acceptance must be absolute and unqualified, and any change to price or terms is a counteroffer that rejects and extinguishes the original offer (Civ. Code § 1585). An offer may be revoked any time before acceptance is communicated, even if it promised to stay open, unless that promise was bought as an option (Civ. Code § 1586). An offer also dies by lapse of time, failure of a condition precedent, the offeror's death or incapacity, or rejection (Civ. Code § 1587). Silence is never acceptance, and only the offeree can accept. Timing favors the accepting party: an acceptance is effective when put in the course of transmission by an authorized medium, a revocation only on receipt (Civ. Code § 1583), though standard California forms typically require delivered written acceptance instead.

The residential purchase agreement, historically the deposit receipt, stays the buyer's offer until the seller's unqualified acceptance is communicated to the buyer or the buyer's agent, and at that moment becomes a binding bilateral contract, doubling as deposit receipt and joint escrow instructions. Contingencies such as financing, appraisal, and inspection must be pursued in good faith and, under standard California forms, are removed by an affirmative signed writing rather than expiring on their own, with a failed contingency letting the protected party cancel and recover the deposit. A time is of the essence clause makes deadlines material, so unexcused lateness is a breach, though accepting late performance can waive strict timing.

§ 7.5Deposits and liquidated damages

Earnest money is not consideration and is not required, since the mutual promises are the consideration, so a zero deposit contract still binds. The deposit is a trust fund: within three business days it must reach a neutral escrow, the principal, or the broker's trust account, by the next business day when the broker is the escrow holder. A check may be held uncashed until acceptance only if it is nonnegotiable or the offeror gave written instructions, with the seller told at or before acceptance (10 CCR 2832). Applying deposit money to a commission without authority is conversion, and mixing it with personal funds is commingling (Bus. & Prof. Code § 10176(e)).

On a purchase of one to four residential units the buyer intends to occupy, liquidated damages up to 3 percent of the price are valid unless the buyer proves the amount unreasonable, and above 3 percent invalid unless the seller proves it reasonable (Civ. Code § 1675). That is a burden shifting presumption, not a cap. The clause must be separately signed or initialed by each party and, if printed, appear in 10 point bold type or contrasting red print in 8 point bold (Civ. Code § 1677). Work the arithmetic: price $650,000, deposit $25,000. Three percent is $19,500, so on buyer default the seller presumptively keeps $19,500 and must prove reasonableness to keep the extra $5,500. Elsewhere the rules differ: a commercial clause is valid unless proven unreasonable when made, a residential lease clause is void unless actual damages were impracticable to fix (Civ. Code § 1671(b), (d)), and a new attached condominium in a project of ten or more units adds a mandatory accounting and refund within 60 days after escrow terminates (Civ. Code § 1675).

§ 7.6Listing agreements

Under an open listing, given to any number of brokers, only the procuring cause earns the fee, the owner may sell alone and owe nothing, and any sale terminates all open listings. It is unilateral and needs no termination date. Under an exclusive agency listing the one named broker is paid if any agent sells, but the owner may sell through the owner's own efforts commission free. Under an exclusive right to sell listing the broker is paid no matter who procures the buyer, including the owner. Every exclusive must contain a definite, specified termination date, automatic extensions and until sold terms violate the rule, and claiming a fee without the date is a discipline ground (Bus. & Prof. Code § 10176(f)). There is no statutory maximum listing length, only the definite date. A net listing, where the broker keeps everything above the owner's named net, is lawful only if the full compensation is disclosed before or when the principal binds themselves, since the violation is the secrecy, not the structure (Bus. & Prof. Code § 10176(g)).

A listing is the broker's employment contract, not the salesperson's, and as a personal services contract it cannot be assigned to another broker without the owner's consent. A salesperson may accept compensation only from their responsible broker (Bus. & Prof. Code § 10137). A safety clause preserves the fee when, within a stated period after expiration, the owner sells to a prospect the broker introduced during the term, usually conditioned on a delivered list of protected names and ended by relisting with another broker. Printed compensation forms for one to four units or a mobilehome must carry the 10 point boldface notice that commissions are negotiable and not fixed by law, with no preprinted rate (Bus. & Prof. Code § 10147.5). A listing ends by expiration, performance, mutual agreement, or operation of law, including the death of the owner or the broker, since agency dies with either party.

§ 7.7Buyer representation agreements, options, and first refusal

This is newer than most prep materials, so trust the statute. It does not reach leases, sales of state or federal land, or loan brokerage. The agreement may not exceed three months, implemented as 90 calendar days counted from the day after the final signature. Sign on April 15 and day one is April 16, making July 14 the last day. Renewals must be written, dated, signed by all parties, and again capped at three months, automatic renewal is banned, and a violating agreement is void and unenforceable. The cap does not apply when the buyer is a corporation, limited liability company, or partnership (Civ. Code § 1670.50, 10 CCR Article 18.1).

An option is a unilateral contract in which the optionor, for consideration actually paid, holds an offer open at fixed terms for a stated time. Only the optionor is bound, the optionee may walk away losing only the option money, and on exercise the option ripens into a bilateral purchase contract. Because consideration made it a contract, a paid option is irrevocable during its term and survives the optionor's death, binding the estate, unlike a bare offer, which death revokes. A right of first refusal is weaker: the holder cannot force a sale and only gets to buy, typically by matching a bona fide outside offer, when the owner elects to sell. A licensee holding an option inside the licensee's own listing may exercise it only after written disclosure of the full profit and the principal's written consent to that amount (Bus. & Prof. Code § 10176(h)).

§ 7.8Leases and security deposits

Four leasehold estates: an estate for years runs a fixed term and ends automatically without notice, a periodic tenancy rolls until proper notice, an estate at will takes at least 30 days written notice (Civ. Code § 789), and a tenancy at sufferance is a holdover without consent. If the landlord accepts rent from a holdover, renewal on the same terms is presumed, capped at one month when rent is monthly and one year in any case (Civ. Code § 1945). Gross leases leave property charges on the landlord, net leases shift expenses to the tenant, percentage rent rides retail gross sales above a breakpoint, and a ground lease is a long term lease of land the tenant builds on. Compute percentage rent on the overage only: base $2,500 plus 4 percent of sales above $60,000, with $95,000 in sales, is $2,500 plus 4 percent of $35,000, totaling $3,900. Leases are capped at 99 years for a city or town lot and 51 years for agricultural land (Civ. Code §§ 718, 717). An assignment transfers the entire remaining term with the assignor still secondarily liable unless the landlord grants a novation, while a sublease transfers less, leaving the original tenant fully liable as the subtenant's landlord.

The small landlord exception requires a natural person, or an LLC of natural persons, owning no more than two residential rental properties totaling no more than four units. Deposits cover unpaid rent, damage beyond ordinary wear and tear, and cleaning to the move in level, never normal wear. Newer still, the landlord must photograph the unit after possession is returned and before repairs, effective April 1, 2025, and at the start of tenancies beginning on or after July 1, 2025 (Civ. Code § 1950.5(g)). No deposit may be labeled nonrefundable, and bad faith retention risks up to twice the security on top of actual damages (Civ. Code § 1950.5(n), (m)). Brokers should know the commercial contrast: nonresidential deposits are uncapped by statute and run on 30 day deadlines, with the excess over one month's rent back within two weeks when only unpaid rent is claimed (Civ. Code § 1950.7).

§ 7.9Remedies, substitution, and the money behind the file

On breach the injured party may seek money damages, compel the transfer through specific performance, accept the breach and cancel, or rescind and restore both sides to their starting positions. Rescission lies for mistake, duress, menace, fraud, undue influence, and failure of consideration, and the rescinding party must act promptly on discovery, give notice, and restore everything of value received, so a defrauded buyer cannot keep the property and recover the price too (Civ. Code §§ 1689(b), 1691). Specific performance rests on the presumption that money cannot adequately relieve the breach of an agreement to transfer land, conclusive for a single family dwelling the claimant intends to occupy and rebuttable for all other real property (Civ. Code § 3387). Novation substitutes a new obligation, debtor, or creditor with intent to extinguish the old, so all parties must consent and the released party is truly out (Civ. Code § 1531). Assignment is the contrast: rights are generally assignable without consent unless the contract forbids it or the duty is personal, the assignee takes subject to existing defenses, and the assignor stays secondarily liable until a novation releases them.

Finally, fees collected before the work is done. An advance fee is any fee collected for licensed services before the service is fully performed, defined by timing rather than amount (Bus. & Prof. Code § 10026). Advance fee materials may be required 10 calendar days before use, and using barred materials is a misdemeanor, up to $2,500 or six months in county jail per use (Bus. & Prof. Code § 10085). Collected advance fees are the principal's trust funds, withdrawable only when actually spent for the principal or five days after a verified accounting is mailed, with quarterly accountings and treble damages for misuse (Bus. & Prof. Code § 10146). Behind every deposit sits broker housekeeping: separate records per beneficiary reconciled monthly to the bank record (10 CCR 2831.1, 2831.2), no more than $200 of broker funds in trust with earned fees swept within 25 days (10 CCR 2835), and records kept three years from closing, or from the listing date if the deal died (Bus. & Prof. Code § 10148).