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Offer to Purchase Real Estate
Buyer and Seller Beware - It's a Binding Agreement
Often times I receive my first telephone call
from a Buyer (purchasing a house) or a Seller (selling a home) after they have
signed an Offer to Purchase. Most real estate brokers use the Greater Boston
Real Estate Board Form or a similar form "Offer to Purchase" which contains a
provision that the parties will subsequently execute a Purchase and Sale
Agreement (by a particular date) which will then became the agreement of the
parties. Most people assume that if the negotiations between the parties break
down and a Purchase & Sale Agreement cannot be agreed to then the Offer to
Purchase terminates and the obligations of both parties will not be enforceable.
The Supreme Judicial Court of Massachusetts has found, however, that the Offer
to Purchase can create a binding obligation which can be enforced by the courts.
In McCarthy v. Tobin, 429 Mass. 84 (1999), the
SJC awarded the Buyer of a property (whose Offer to Purchase was accepted and
signed by the Seller) the remedy of specific performance - (ordering the Seller
to sell the property to the Buyer pursuant to the terms of a signed Offer to
Purchase) even though the parties did not agree on a Purchase & Sale agreement
within the time specified for in the accepted Offer to Purchase. The Seller had
subsequently accepted another (more advantageous) Offer to Purchase from a
different potential Buyer. The court, in ordering that the property be sold to
the Buyer of the first signed Offer to Purchase, found that the Offer to
Purchase, which described the property and the purchase price, created a binding
obligation. The Court reasoned that the parties had intended to be bound and
that "the purpose of a final document (the Purchase & Sale Agreement) is to
serve as a polished memorandum of an already binding contract".
The Court's decision should serve as a clear
instruction to both Buyers and Sellers that the Offer to Purchase is a serious
(and binding) legal document. Any material terms that either party desires to
have as part of the Purchase & Sale agreement should be contained in the Offer
to Purchase. Particularly poignant examples of material provisions that should
be included in an Offer to Purchase are contingencies for 1) Mortgage Financing,
2) a satisfactory home inspection (including lead paint, radon and wood boring
insect infestation) and 3) Septic System Compliance (Title V). Since the vast
majority of South Shore properties are serviced by private septic systems rather
than town sewer systems it is vitally important to thoroughly address this
issue. The cost of a new or upgraded system can make what initially looked like
a good deal a deal that is not what a Buyer or Seller wants. The Offer to
Purchase should address responsibilities of the Buyer and Seller in the event a
septic system does not satisfy state environmental requirements (Who will be
responsible for the cost of a new or upgraded system? What if a mortgage
interest rate expires pending such an upgrade or new installation?). While most
real estate brokers do a good job attempting to cover all such material
provisions the most prudent course of action is to consult with a legal
professional prior to entering into a contract for what is usually one of, if
not the, largest transaction of a person's life. An Offer to Purchase is a
binding agreement enforceable by Massachusetts courts - caveat emptor (Buyer
[and Seller] beware!).
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