Executory Contract

An executory contract is a contract that is not fully executed, meaning that some obligations need to be performed by one or both parties in order to complete the contract. Under this type of contract, if either party fails to perform their obligations, the other party can claim a breach of contract.

Examples of an Executory Contract

Here are some examples of executory contracts:

• Real estate leases. The real estate contract specifies that the landlord must provide space, and the tenant must pay rent.
• Equipment leases. The lessor provides working equipment, and the lessee pays for using the equipment.
• Development contracts. A property owner seeks the development of their property, and the developer provides the work.
• Intellectual property. A licensor provides intellectual property, and a licensee agrees to use it within the scope of the license.

Executed vs. Executory Contract

The term “executed” refers to the signing and completing of a legal contract. The term “executory” refers to a contract that is in progress or the potential for completion of the contract in the future

Therefore, an executed contract is one that is fully completed. In other words, both parties have fulfilled the obligations of the contract. Often an executed contract can be completed in one immediate transaction. An example is the sale of a smart TV. If a store is selling a smart TV for $600, and a customer pays $600 for the TV, the purchase contract is executed. The store has $600, and the customer has the new TV.

However, an executory contract is one that is ongoing. An example is a rental agreement for an apartment. In this case, both parties agree to provide their end of the contract until the lease expires.

Executory Contracts in Real Estate

A real estate agreement or contract is considered fully executed once all parties have signed the necessary documents. In a real estate purchase, the contract is completed at closing.

An executory contract in real estate is a contract that has remaining actions or obligations to be completed. A rental lease is one example since the landlord must continue to provide space, and the renter must continue paying rent.

Another example of an executory contract in real estate is the escrow process. In escrow, a neutral third party holds money and property until tasks such as seller’s full disclosures, home inspections, clearing of the title, and the final walk-through have been completed and reviewed by all parties.

What Do You Need to Know Before Signing an Executory Contract?

Before signing an executory contract, both parties should be sure to read and fully understand all the terms and obligations of the agreement.

The terms and conditions of the executory contract stipulate the following:

• the full names of the parties involved
• the actions each party must take
• the conditions involved in completing those actions
• the timelines for completing the actions

Terms that typically are part of an executory contract in real estate include financing terms, the payer of closing costs, seller assistance, home inspections, inclusion or exclusion of appliances, closing date, and the timeline for the sale of the buyer’s current home.