Contracts topic guide
Purchase and lease contracts: identify the promise, condition and payment
Start with what the parties actually agreed to do. A deposit is not the same as consideration, a contingency is not an automatic escape and a lease label is not a complete expense schedule. Separate the promise from its conditions before choosing an answer.
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The short answer
A purchase agreement organizes a sale and its performance requirements; a lease creates a possessory interest under the agreed term. Identify the parties, property, obligations, conditions, deadlines and required notices. Mutual promises can supply consideration without an immediate earnest-money payment. Lease types can describe different features at once: net concerns expenses, percentage and index concern rent calculations, and ground concerns what is leased. Read the actual lawful terms alongside mandatory law rather than treating a label or signed clause as the entire rule.
Reviewed for October 2026. PSI national V.B names addenda and amendments, purchase agreements, contingencies, leases and rental agreements, lease-purchase agreements and lease types. The whole Contracts category has 19 of the 100 scored national broker questions, not a separate quota for this page. Original scenarios stipulate their conditions and payment formulas. Illinois legal provisions control the state examples; general lease vocabulary is not a substitute for local or program-specific tenant protections.
Five checks for a purchase or lease question
- Identify the relationship and interest. Is this a sale agreement, tenancy, purchase option, future purchase obligation or transfer of an existing tenant's interest? A lease does not itself transfer the landlord's fee title, while a purchase agreement does not mean every closing obligation has already been performed.
- Identify the promise and condition separately. What must a party do, and what event affects a duty or election? Read the application, notice, cure, waiver and termination provisions. A contract can be binding while specified performance remains conditional.
- Identify the applicable writing and authority requirements. A practical agreement checklist is not a statement that every omitted drafting item automatically defeats formation. Land-interest rules, the separate one-year-from-making rule, electronic attribution and authorized signatures require their own analysis.
- Identify the payment basis. Separate earnest money, tenant security, rent, expense reimbursements, option consideration and any expressly granted purchase credit. Mark dollars per month, per year, per square foot or as a percentage of defined sales before calculating.
- Apply the lawful terms and required procedure. Read dates, notices and allocations, then check mandatory state, local and program rules. A signed clause does not override every legal protection. The licensee communicates and handles authorized documents and funds within the permitted role; disputed rights and custom legal drafting need appropriate legal review.
| Classification | What it describes | Read the document for |
|---|---|---|
| Gross or modified gross | How operating expenses are allocated | Included services, exclusions, reimbursements and adjustments |
| Net, double net or triple net | Specified tenant expense responsibility in addition to rent | Taxes, insurance, maintenance, structural work, caps and allocation |
| Percentage | Rent tied to defined business sales or earnings | Base, percentage, included sales, breakpoint and period |
| Index | Rent linked to an agreed index formula | Series, comparison dates, ratio, caps and floors |
| Graduated or step rent | Scheduled rent changes | Dates and specified amounts |
| Ground | A leasehold interest in land | Improvement rights, term and end-of-term treatment |
| Proprietary | Occupancy through a cooperative shareholder-tenant structure | Entity interest, occupancy agreement and obligations |
| Lease-option or lease-purchase | A purchase right or a purchase obligation alongside tenancy | Exercise, conditions, price, credits, financing and consequences |
The distinctions that matter
| Distinction | How it works | What to notice |
|---|---|---|
| Earnest money and consideration | The deposit has handling and performance terms. Consideration concerns bargained-for legal value and may consist of mutual promises. | A later deposit deadline does not automatically postpone every contract's formation. |
| Condition and promise | A specified event can affect a duty or election; a promise commits a party to do or refrain from doing something. | A financing contingency can coexist with a duty to apply on time. |
| Binding agreement and completed performance | An agreement may bind the parties before closing, title transfer or satisfaction of every condition. | A future closing or unresolved contingency does not automatically mean no contract exists. |
| Inspection and appraisal | Condition investigation and an opinion of value have different purposes and scopes. | Neither result automatically supplies a repair or cancellation right beyond the actual contract and applicable law. |
| Lease and license | A lease supplies a possessory estate or interest. A license ordinarily supplies permission to use property without that estate. | Do not assume that every permission is freely revocable in every legal setting. |
| Fixed term and periodic tenancy | A fixed-term estate has a definite agreed period; a periodic estate continues through successive periods under the governing terms and rules. | An estate for years can last only three months. Do not import one statewide notice clock from its name. |
| Assignment and sublease | An assignment transfers the entire remaining leasehold interest. A sublease retains a reversionary part of that interest with the original tenant. | Classification alone does not prove consent, a release or a novation. |
| Expense allocation and rent formula | A gross arrangement generally includes operating expenses in the stipulated rent; a net arrangement adds specified expenses to rent. Percentage or index provisions instead describe how rent is calculated. A modified gross arrangement changes the allocation through its actual terms. | An agreement can combine net expenses with scheduled or indexed rent. |
| Lease-option and purchase obligation | An option gives a purchase right that must be properly exercised; a purchase agreement can impose a duty subject to its actual conditions. | The rent-to-own label does not itself decide title, automatic credits or statutory coverage. |
Work through the facts
The deposit is due later
Assume the parties exchange enforceable mutual promises and satisfy the other applicable formation and writing requirements. The agreement makes earnest money due two days later.
- Consideration need not be an immediate cash deposit.
- The promised deposit has a separate performance deadline.
Answer: Do not declare no contract solely because the deposit has not yet been paid. A later failure to pay needs its own contract and legal analysis.
A financing condition with an application duty
The stated clause requires a specified loan application within five business days and specified notice if financing fails. The buyer ignores the application requirement and later says any financing refusal automatically excuses performance.
- The promised application step and financing event are separate.
- The clause includes procedure, not just a loan-result label.
Answer: The refusal alone does not establish compliance or entitlement to a refund. Read the actual condition, performance and remedy terms; do not decide the private dispute from the label.
The low appraisal starts a process
The price is $360,000 and the appraisal is $348,000. The supplied clause allows termination only after timely notice and an unsuccessful price-resolution period.
- The difference is $12,000.
- The clause expressly requires more than a low number.
Answer: Follow the notice and resolution steps before applying the stated termination right. Do not invent an automatic $12,000 seller reduction or buyer cash obligation.
An inspection report is not a repair agreement
During the stated inspection period, a report identifies several issues. No term says the seller must repair every listed item. The buyer has the objection and election rights specified in the clause.
- The report provides information.
- A repair obligation, election and notice must come from the applicable terms and law.
Answer: Use the actual process. The report alone does not rewrite the bargain or decide every statutory disclosure or habitability question.
An entire remaining leasehold
A tenant transfers its entire remaining two-year leasehold interest and retains no reversionary period. Assume the question asks only for the transfer classification.
- The entire remaining interest is transferred.
- The stated facts leave no retained leasehold period.
Answer: This is an assignment. Required consent and continuing contractual liability are separate; landlord consent alone does not necessarily release the original tenant.
A shorter transfer
A tenant with two years remaining transfers possession for one year and retains the final year of its leasehold. Assume no other feature changes the simple classification.
- The tenant retains a reversionary part of the term.
- It did not transfer the entire remaining leasehold.
Answer: This is a sublease on the stated facts. Do not use the label to assume that every required consent was obtained.
Annual square-foot amounts, monthly payment
An express commercial lease charges $24 per square foot per year in base rent and $9 per square foot per year in specified expense reimbursements on 1,500 square feet. The question asks for equal monthly payment of those charges only.
- Annual base: 1,500 × $24 = $36,000, or $3,000 monthly.
- Annual specified expenses: 1,500 × $9 = $13,500, or $1,125 monthly.
Answer: The stated monthly total is $4,125. The net-lease nickname does not add an unstated roof, utility, tax or other charge to this calculation.
Percentage rent above a stated breakpoint
The supplied formula is $3,000 monthly base rent plus 5% of defined monthly sales above $60,000. Sales for the month are $100,000.
- Sales above the stated breakpoint: $100,000 - $60,000 = $40,000.
- Additional rent: $40,000 × 0.05 = $2,000.
Answer: Total rent under this formula is $5,000. Applying 5% to all sales and then adding the base would answer a different clause.
An expressly supplied index ratio
The exercise defines new rent as $2,000 multiplied by a supplied current index of 315 divided by a supplied base index of 300, with no cap, floor or other adjustment.
- The ratio is 315 / 300 = 1.05.
- $2,000 × 1.05 = $2,100.
Answer: The stated new rent is $2,100. The numbers are hypothetical inputs, not a current CPI observation or a universal index-lease formula.
A purchase choice is not an automatic credit
An express lease-option gives the tenant a purchase right during the stated period. It contains no automatic rent-credit term. The tenant assumes all rent reduces the purchase price and title transfers without exercise.
- The option and rent obligations are separate.
- The stipulated agreement supplies neither automatic credit nor automatic transfer.
Answer: Apply the actual exercise, price and credit provisions. Do not infer a completed sale from the rent-to-own description; covered installment transactions require their own statutory analysis.
Mistakes to avoid
- No earnest money means no consideration. Mutual promises may supply consideration. The deposit obligation still matters on its own terms.
- Every contingency means the contract does not exist yet. A binding contract can contain conditional duties or elections.
- A low appraisal automatically ends the agreement. Apply the actual notice, resolution, election and other requirements.
- The document controls, so every signed waiver is valid. Mandatory law can limit what the parties may allocate or waive.
- Every license is always revocable at will. Permission without an estate and its enforceability are separate questions.
- An assignment automatically releases the original tenant. Consent, transfer and release are different issues.
- Triple net has one universal allocation. Read each stated expense, responsibility, reimbursement and limit.
- Percentage rent always means base plus a percentage of all sales. Use the actual formula, sales definition, breakpoint and period.
- Lease-option and lease-purchase labels settle the transaction. Read the actual rights, obligations, credits, title provisions and applicable statute.
Check your understanding
These are original teaching questions, not recalled or predicted PSI questions. Answer first, then explain why the other choices fail.
1. Assume enforceable mutual promises and all other formation requirements are satisfied. Earnest money is due two days later. What follows from no immediate deposit alone?
- The seller owns every future deposit automatically
- The writing requirement disappears
- It does not by itself defeat consideration or formation
- There can be no contract
Show answer and explanation
Answer: C. It does not by itself defeat consideration or formation
Mutual promises can supply consideration. A later deposit requirement is a separate obligation, and its breach or remedy must be analyzed on its own terms.
2. A financing clause requires a timely application and specified failure notice. Which statement is sound?
- A loan refusal alone does not prove compliance with every required step
- The application duty is irrelevant
- The broker can waive both sides' rights
- Any refusal automatically supplies a refund
Show answer and explanation
Answer: A. A loan refusal alone does not prove compliance with every required step
The event and the required procedure are different. The question does not establish all satisfaction, waiver, default or refund facts.
3. A $360,000 contract appraises at $348,000. The stated clause requires notice and an unsuccessful resolution period before termination. What is the best next analysis?
- Apply the specified process rather than automatic cancellation
- Require every buyer to pay $12,000 cash
- Require every seller to reduce price by $12,000
- Treat the appraisal as a signed amendment
Show answer and explanation
Answer: A. Apply the specified process rather than automatic cancellation
The $12,000 difference is arithmetic, not an automatic legal remedy. The clause supplies the stipulated procedure.
4. An inspection report lists defects. The supplied agreement grants an objection and election process, not an automatic repair promise. What governs?
- The broker's unilateral repair choice
- An unwritten rule requiring all repairs
- The specified process alongside applicable law
- Automatic termination without any notice
Show answer and explanation
Answer: C. The specified process alongside applicable law
The report informs the contractual process. It does not alone establish a repair agreement or eliminate other legal duties.
5. A tenant transfers its entire remaining leasehold interest and retains no reversionary part. The question asks only for classification. What fits?
- Sublease
- Assignment
- Novation automatically
- License
Show answer and explanation
Answer: B. Assignment
The entire remaining interest is transferred. Consent and release are separate; the classification does not automatically end the original tenant's obligations.
6. A tenant with two years remaining transfers a one-year possessory interest and retains the final year. What is the simple classification?
- Automatic release
- Fee sale
- Sublease
- Assignment of the entire remaining estate
Show answer and explanation
Answer: C. Sublease
The retained reversionary portion distinguishes the stated sublease from an assignment of the entire remaining leasehold.
7. A tenancy is expressly for a definite three-month term. Which study classification can apply?
- Automatic periodic tenancy in every jurisdiction
- Fee-simple ownership
- Estate for years
- Only a tenancy lasting at least twelve months
Show answer and explanation
Answer: C. Estate for years
Estate for years describes a definite term and can be shorter than one year. Notice and renewal still depend on the governing agreement and law.
8. A lease states that it renews through successive monthly periods until properly terminated under applicable rules. What is described?
- Automatic sale contract
- Fee estate
- A fixed one-time term with no continuation
- Periodic tenancy
Show answer and explanation
Answer: D. Periodic tenancy
The successive periods distinguish periodic tenancy. The question does not supply a universal Illinois notice period or authorize self-help possession.
9. A commercial tenant pays base rent plus expressly allocated property tax, insurance and maintenance. What is the common label, with exact terms controlling?
- A fixed estate classification alone
- Pure percentage lease only
- Triple net lease
- An automatic sale-leaseback
Show answer and explanation
Answer: C. Triple net lease
The categories commonly support triple net terminology. The document and applicable law, not the nickname, determine the exact obligations and limits.
10. On 1,500 square feet, stated annual charges are $24 per square foot base rent and $9 per square foot specified expenses. Equal monthly payment of those charges is what amount?
- $4,125
- $49,500
- $1,125
- $3,000
Show answer and explanation
Answer: A. $4,125
Annual combined charge is 1,500 × $33 = $49,500; divide by twelve for $4,125. The quoted rates are annual, not monthly.
11. The express monthly formula is $3,000 base plus 5% of sales above $60,000. Defined sales are $100,000. What rent results?
- $5,000
- $2,000
- $3,000
- $8,000
Show answer and explanation
Answer: A. $5,000
Excess sales are $40,000; 5% is $2,000. Add $3,000 base. The $8,000 answer incorrectly applies the percentage to all sales under a different formula.
12. The express rent formula is $2,000 × 315 / 300, with no other adjustment. What results?
- $2,315
- $2,100
- $3,000
- $1,904.76
Show answer and explanation
Answer: B. $2,100
The supplied index ratio is 1.05, so rent is $2,100. These hypothetical inputs do not establish a current index or a universal adjustment formula.
13. Which statement about lease classifications is sound?
- Ground always specifies every expense payer
- Proprietary always means the tenant holds a deed to the unit
- Expense allocation, rent adjustment and the leased interest describe different features
- A net lease can never have indexed rent
Show answer and explanation
Answer: C. Expense allocation, rent adjustment and the leased interest describe different features
Labels can overlap. A land lease can have net expense terms and scheduled or indexed rent. A cooperative shareholder's occupancy right is distinct from a condominium unit deed.
14. A valid lease-option grants a purchase right during its stated period but no automatic rent credit. What should not be assumed?
- Financing and conditions require reading
- Rent and option rights have separate terms
- Every rent payment automatically reduces the purchase price
- The exercise terms matter
Show answer and explanation
Answer: C. Every rent payment automatically reduces the purchase price
A purchase credit must come from the actual lawful agreement or applicable rule. An option label does not itself transfer title or impose an immediate duty to buy.
15. One agreement grants an unexercised purchase option without an obligation to exercise. Another expressly creates an enforceable future purchase promise subject to stated conditions. What is the key distinction?
- Neither agreement can involve a tenancy
- A purchase right differs from a purchase obligation; the actual terms and conditions matter
- Both automatically transfer fee title immediately
- Every optionee must purchase before exercise
Show answer and explanation
Answer: B. A purchase right differs from a purchase obligation; the actual terms and conditions matter
An option supplies a right that must be properly exercised; it does not itself impose a duty to exercise. The second scenario expressly supplies a purchase promise. The labels do not decide current installment-statute coverage, credits, financing or title transfer.
Common questions
What should I check in a purchase agreement?
Identify the parties and authority, property, price, consideration, included items, deposit, financing, conditions, notices, closing, possession, risk and remedies. This is a practical reading checklist, not a claim that every listed drafting item is invariably a separate formation element or that a signed form is always enforceable.
Does a purchase contract need earnest money to be binding?
Not necessarily. Mutual promises can supply consideration. A stipulated later deposit obligation can still be important, and failure to perform it requires its own analysis. Distinguish formation, enforceability, breach and authorized disbursement rather than treating them as one question.
Who receives disputed earnest money?
Do not assume that any alleged buyer default makes it the seller's property or that the broker decides the legal dispute. The agreement and the authorized paths under the Illinois escrow rule matter. This page does not replace the full dispute procedure or assert that one identical release method applies to every file.
Does a contingency mean there is no contract?
Not necessarily. A binding agreement can make a particular duty or election depend on an event. Read the protected event, promised effort, deadline, notice, satisfaction, waiver and remedy provisions. Financing, inspection, appraisal and review clauses do not all operate identically.
Does a low appraisal or inspection result cancel the sale?
Not automatically. The examples supply particular notice, resolution or election terms. Apply them. A report alone does not create every proposed repair, price change, extra-cash obligation or cancellation right. Other applicable law remains separate.
Must purchase agreements and leases be in writing in Illinois?
The land-interest and separate one-year-from-making rules require careful reading. Do not infer that a quick land closing is exempt from the applicable signed-writing rule, or that every short oral arrangement is automatically void. Longer leases generally raise the land-interest writing issue; a shorter term alone does not resolve every other writing requirement or exception. Electronic records can qualify when the applicable agreement, attribution, authority and substantive requirements are met.
What is the difference between a lease and a license?
A lease creates a possessory estate or interest under its term. A license ordinarily permits use without that estate. That distinction does not establish that every permission can be revoked freely in every situation. The actual arrangement and governing law matter.
Can an estate for years last less than one year?
Yes. The term refers to a definite period fixed in advance; it can be measured in months or days. Periodic tenancy instead continues through successive periods under its governing terms. Do not derive one notice deadline, renewal outcome or holdover remedy solely from the label.
Does an assignment release the original tenant?
Not automatically. Transferring the entire remaining leasehold, obtaining required consent and obtaining a release are separate issues. A sublease retains a reversionary part of the original tenant's interest. The actual lease and applicable law govern restrictions and continuing obligations.
What expenses does a triple net tenant pay?
The term commonly refers to allocated taxes, insurance and maintenance or operating costs in addition to base rent. Read the actual provisions for structural work, replacements, utilities, common areas, caps and reconciliation. Neither every expense nor every remedy can be inferred from three letters.
Does percentage rent always include a breakpoint?
No universal formula is supplied by the label. An agreement may define a base, percentage and specified sales basis in different ways. Apply any breakpoint and period actually provided. Base plus a percentage above a threshold is different from base plus the same percentage of all sales.
How do index and graduated rent differ?
An index clause uses the agreed benchmark and calculation. A graduated or step clause specifies changes at stated intervals. The contract may contain caps, floors, dates and other conditions. The index example uses supplied hypothetical numbers, not current inflation data.
How do ground and proprietary leases differ?
A ground lease concerns a leasehold interest in land; improvement rights and end-of-term treatment require the document. A proprietary lease concerns occupancy in a cooperative shareholder-tenant structure. Neither label by itself supplies every expense allocation, and cooperative occupancy is not automatically a condominium deed.
Does rent-to-own guarantee credits or title?
No. Read whether the arrangement grants an option, imposes a purchase obligation or meets a statute's installment-transaction definitions. Exercise, consideration, credits, financing and title terms matter. Cushing illustrates why substance matters, but it applied an older Act; it does not prove that every current rent-to-own arrangement falls under the present Installment Sales Contract Act.
Can a lease waive every landlord responsibility?
No. Mandatory law can limit a signed clause. For example, Illinois Section 705/1 generally invalidates specified lessor-negligence liability exemptions but expressly excepts a nonresidential lease provision exempting the lessor from property-damage liability. Do not convert either the prohibition or its exception into an unlimited rule for every residential or commercial waiver. Local and program protections can add requirements.
May a real estate licensee draft a custom legal solution?
Brokerage authority is not unrestricted authority to practice law. Quinlan distinguishes the limited completion of simple customary preliminary forms from legal drafting and judgment. A template alone does not authorize every instrument or clause. Stay within the permitted role and obtain appropriate legal review for custom drafting or a disputed interpretation.
What practice score proves readiness on this topic?
No validated readiness or booking threshold is assigned to this set. PSI places these subjects within Contracts, which has 19 of the 100 scored national broker questions. Use the original questions to identify errors in classification, conditions, units and procedure, then practice with fresh facts.
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Official sources and scope
PSI supplies the named scope. Illinois sources supply the stated writing, escrow, document and legal-practice boundaries. The California DRE chapter and IAAO glossary supply general lease vocabulary, not California notice or remedy rules applied to Illinois. Cushing interpreted an older installment-contract statute; current statutory definitions require a separate coverage analysis. The rent formulas and amounts are original hypothetical inputs, not market quotes or ready-to-use contract clauses.
- Illinois Courts contract instructions: foundational contract concepts
- Chicago Bar Association v.Quinlan & Tyson,34Ill.2d116(1966)
- 68Ill.Adm.Code1450.775: written agreements
- 740ILCS80/2: land-interest writing requirement
- 740ILCS80/1: one year from making
- 815ILCS333: applicable electronic records and signatures
- 68Ill.Adm.Code1450.750(h): known earnest-money controversy
- California DRE chapter 9, printed 135-140: general lease vocabulary, not Illinois deadlines
- 765 ILCS 705/1: negligence liability waivers and nonresidential exception
- 765 ILCS 67/5: current installment transaction and seller definitions
- Cushing v. Willis, 2018 IL App (5th) 170444: substance under the older Act
- Patel v. McGrath: tentative requests and an existing review clause
- Whitelaw v. Brady: an ordinary offer and a separately supported option
- CFPB: appraisal and home inspection serve different purposes
- IAAO third-edition glossary: gross, net, percentage, ground, proprietary and graduated leases
- PSI June 24, 2026: National V.B purchase and lease contracts
This is exam preparation, not advice for a specific transaction. State law and the applicable facts control. Our editorial and corrections process explains how to report an issue.