One of the main principles of the law of contract is that there must be an offer, acceptance, consideration and some intention to enter into a binding relationship. An agent can enter into a legally binding contract with a landlord, tenant or third party with nothing in writing. In other words, a verbal agreement.

In the case of an agency agreement, it is the agent who makes the offer and the landlord who accepts. The risks around verbal contracts are apparent; therefore, in pre-contract discussions, the agent must stress that contracts commence only when an agreement is signed and completed. The same would apply to the offer of a tenancy or even an agreement to 'hold' a property for a prospective tenant.

For there to be a valid contract, several elements must be present:

Offer and acceptance
Consideration
Intention to be legally bound
Capacity
Must be lawful

Offer and Acceptance

For a contract to be formed, the parties must reach mutual assent. This is typically achieved through an offer and an acceptance which does not vary the offer's terms. Still, if a purported acceptance does change the terms of an offer, it is not an acceptance but a counteroffer and, therefore, simultaneously a rejection of the original offer.

A typical example in a landlord and agent situation would be the agent offering to manage the landlord's property in return for a commission payment based on rent received. The landlord can accept or reject the offer or counteroffer (perhaps for a lower commission), which the agent can accept or decline.

Consideration

Consideration is something of value given by a promissory to a promisee in exchange for something of value provided by a promisee to a promisor. Typically, the thing of value is a payment, although it may be an act, or forbearance to act, when one is privileged to do so, such as an adult refraining from smoking.

Consideration must be given as part of entering the contract, not prior as in past consideration. For example, in the early English case of Eastwood v. Kenyon [1840], the guardian of a young girl took out a loan to educate her. After marriage, her husband promised to pay the debt, but the loan was considered past consideration. In the early English case of Stilk v. Myrick [1809], a captain promised to divide the wages of two deserters among the remaining crew if they agreed to sail home short-handed; however, this promise was found unenforceable as the crew were already contracted to sail the ship.

Typically in an agency situation, consideration will be the deduction of a set commission percentage from any rent received and will also include any agreed fees.

Intention to be legally bound

Both parties must intend to be legally bound by the terms of the contract. In commercial agreements, it is presumed that parties intend to be legally bound unless they expressly state the opposite.

Capacity

Sometimes the capacity of a person or company to either enforce contracts or have contracts enforced against them is restricted. For instance, tiny children may not be held to bargains they have made on the assumption that they lack the maturity to understand what they are doing; errant employees or directors may be prevented from contracting for their company because they have acted beyond their power. Another example might be mentally incapacitated people, either by disability or drunkenness. In these cases, the contract is either void or voidable.

In the case of an agency situation, the landlord must be capable of letting the property in question, for example, through ownership of the freehold or some other permission (with no additional interest that may override the ability to grant a tenancy such as some further tenancy already in place).

Must be lawful

For a contract to have been properly formed, the purpose of the contract must be lawful. For example, an agreement which purports to allow a person to park a motorised vehicle on double yellow lines on a public highway is unenforceable because the law provides such an act is unlawful.

In an agency setting, a contract term would be invalid if it said the landlord would not have to repair a broken boiler in a rented property where a particular agent managed the property.

The contracts used and entered into by agents regularly are:

Terms of business
Tenancy agreements
Employment contracts
Contracts with third parties such as sub-contractors

The contracts used and entered into by agents regularly are:

Terms of business
Tenancy agreements
Employment contracts
Contracts with third parties such as sub-contractors

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