Is an Offer to Purchase Real Estate a Binding Contract?
The home buying experience often includes an Offer to Purchase. It tends to be a fill-in-the-blank form, available to purchase, completed by the buyer, often with the assistance of a real estate agent. The Offer to Purchase should identify the subject real estate, seller, buying price with a schedule of payments, deposit requirements, and any other contingencies (mortgage approval, home inspection, septic system inspection, test of private well water, etc.).
The buyer will sign and submit the Offer to Purchase to the seller. If the seller signs the buyer’s Offer to Purchase exactly as submitted, the Offer to Purchase becomes a contract. There is usually a window of time from when the Offer to Purchase is accepted to when a Purchase and Sale agreement is signed.
This window of time presents an opportune moment for disputes to arise. In the unfortunate event that a dispute does arise, buyers and sellers find themselves asking, “Is the Offer to Purchase a binding contract?”
The courts in Massachusetts look to the intention of the parties to resolve such disputes. Specifically, a court will analyze whether the buyer and seller intended to be bound by the terms of the Offer to Purchase. As a part of that analysis, courts examine whether there was agreement upon all material terms of the transaction. See McCarthy v. Tobin, 429 Mass. 84 (1999).
Material Terms
In the context of buying/selling real estate, material terms often include but are not limited to identification/description of the real estate to be conveyed, its purchase price, deposit requirements, title requirements, and the time and place for closing. Material terms can also include contingency clauses set forth in rider pages to the Offer to Purchase, such as a home inspection verifying that the structure is free from any serious structural, mechanical, or other defects.
Purchase and Sale Agreement
Offers to Purchase often include a clause that states that the parties agree to execute a subsequent Purchase and Sale agreement satisfactory to buyer and seller. Courts are consistently unconvinced by the argument that an Offer to Purchase cannot be binding because the parties agreed to execute a subsequent Purchase and Sale agreement, and such an agreement was never executed.
Failure to execute a subsequent, more detailed Purchase and Sale agreement does not automatically negate the enforceability of an Offer to Purchase that contains all the material terms of an agreement for the sale and reflects the intention of the parties to be bound.
A court may be convinced that an Offer to Purchase is not binding if the Offer to Purchase makes clear that the buyer and seller intend to be bound only to a subsequently executed Purchase and Sale agreement, not by the preliminary Offer to Purchase document. See Goren v. Royal Investments Inc., 25 Mass. App. Ct. 137 (1987).
Future Events and Formulas
Let us say that for some reason, the Offer to Purchase doesn’t explicitly state a key term, such as the purchase price, land boundaries, or both. Instead, the Offer to Purchase provides some mechanism for determining those terms, such as a formula or procedure.
When parties to an Offer to Purchase specify that formulas or procedures, though contingent on future events, serve to restrict present uncertainties to rights and obligations, a court is likely to find that the Offer to Purchase is binding. See Lafayette Place Assocs. v. Boston Redevelopment Auth., 427 Mass. 509 (1998).
Remedies — Specific Performance or Deposit Forfeiture
Should a court find that a buyer and seller intended to be bound to an Offer to Purchase and that one of the parties breached the contract, the Offer to Purchase may be enforced by a court-ordered specific performance. Specific performance can be more easily thought of as a court order for the transfer of title or an interest in property.
It is more likely to be granted in favor of a buyer who sues a seller for walking away from a deal. The reason is that sellers often agree in the Offer to Purchase that their remedy for buyer’s breach is limited to forfeiture of buyer’s deposit. Such a clause is referred to as a liquidated damages clause. A seller may not seek specific performance against a buyer if the seller agreed to a liquidated damages clause. Sellers rarely, if ever, seek specific performance against a buyer, and instead elect to keep buyer’s forfeited deposit as their remedy.
Unless an Offer to Purchase is decisively clear, disputes regarding its enforceability are highly dependent on the specific facts of each case. Should you find yourself in such a dispute, it is best practice to confer with an attorney regarding your specific case so that you may achieve the best result.