Consideration is one of those wonderful legal concepts that everyone has heard of but few understand. Consideration is not a physical thing like money. It’s not a metaphysical thing like “love and affection.” Strictly speaking, it’s not even a separate “necessary” element of a contract. Consideration is an abstraction developed by courts as a means of determining what kinds of promises the law will enforce.

Consideration is really just a way to demand social utility by limiting the judicial enforcement of promises to those that involve an exchange for value. An exchange for value is another way of saying a real bargain. Asking whether there is consideration for a contract is the same as asking whether there was an actual bargain in which each party promised to give up or receive something of value to them. The legal definition of consideration is, of course, a lot denser.

Courts often claim consideration has multiple (usually three) elements. Accordingly, a promise is said to be “supported by consideration” if: 1) The promisee suffers legal detriment; 2) the detriment induces the promise; and 3) the promise induces the detriment. Just think bargain. My promise to sell you my house (parting with my house is a “legal detriment”) induces you to promise to give me money (parting with money is a “legal detriment”) and that is what induced me to sell you the house. It is simple, really: something for something.

Consideration is so simple a concept that it almost never has anything to do with modern real estate practices. Unfortunately, that hasn’t prevented the development of real estate myths about consideration. The most virulent of these myths is the one that real estate contracts are void unless earnest money is in hand at the time of offer because without earnest money there is no consideration.

Though often repeated, and even taught in some real estate classes, it just isn’t true that you need earnest money to have an enforceable contract for the sale of real property. My promise to sell my house induces your promise to give me money which induces me to sell you my house. The consideration is the promises themselves. Earnest money has nothing to do with consideration, though it is, of course, still a very good idea. Click here for a detailed discussion of earnest money.

One place consideration does sometimes play a role in real estate is in settlements or contract modifications. For instance, parties will often use termination agreements when deals fail. Often, these agreements contain promises not to sue. Often these promises are extended to the agents, not just the parties to the termination agreement.

Courts have ruled that such promises are not enforceable because they are not backed by consideration. They are not backed by consideration, courts reason, because the agents gain benefit without legal detriment. That is the case because the agents have nothing to bargain with for the parties agreeing not to sue them. It would be different if the agents were parties to the termination agreement and, for instance, gave up claim to a commission or right to sue the principals for damages.

Another place you sometimes see lack of consideration play a role in real estate is in contract modifications. If a party, who is already bound to perform under a contract, extracts a modification of some kind from the other party by threatening not to perform, the modification may be found unenforceable for want of consideration. That is the case because the party seeking the modification suffers no legal detriment by performing the contract because they were already legally obligated to do so. Anytime you see a one-sided exchange, think about consideration. Other than that, it is rarely an issue in real estate.
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