One of the oldest legal sayings is “caveat emptor” (“buyer beware”). However, sellers must beware too (“caveat venditor”). A recent decision from the United States District
Court of Massachusetts serves as an important reminder to sellers (and buyers) that a binding agreement to convey real property can be made at the offer stage, without a finalized and executed purchase and sale agreement. See Ritter v. Johnson, 2022 WL 2873086 (D. Mass. 2022) (Slip Op.).
This decision reaffirms
the decision in McCarthy and serves as a reminder that a buyer may
enforce a real estate transaction based on an executed offer to purchase and
imperfect negotiations, even when a contemplated purchase and sale agreement is
not executed.
In Ritter, the
buyers submitted an offer to purchase (“Offer”) a certain property on Martha’s
Vineyard. The Offer specifically identified the property, the purchase price,
the date for execution of a purchase and sale agreement, the closing date, as
well as indicated that time was of the essence. Additionally, the Offer listed
several contingencies including the sale by the buyer of some property in
Virginia, the delivery of a Title 5 test by the seller, and the signing of a
“mutually acceptable” purchase and sale agreement. Importantly, the Offer
explicitly stated that it was a legally binding contract and that it would be
enforceable both at law and in equity if the seller failed to fulfill his
obligations under the agreement. Both parties, apparently satisfied with the
terms and represented by counsel, executed the Offer.
Following the execution
of the Offer, the parties engaged in imperfect negotiations of a purchase and
sale agreement and endeavored to satisfy most of the contingencies listed in
the Offer (including remitting the deposit, the sale of the buyer’s Virginia
property, and the seller’s delivery of the Title 5 results). However, when it
came time to sign, the seller refused and sought to terminate the transaction.
The seller’s stated basis for the termination of the transaction was that he
signed the Offer without his wife’s assent.
As a result of the
Massachusetts resident seller’s unilateral termination of the Offer, the
Virginia resident buyers brought suit in federal court for the seller’s breach
of contract (i.e. the Offer), breach of the covenant of good faith and fair
dealing, and promissory estoppel. Following summary judgment, the Court held that the Offer was enforceable
because (i) the language reflects the parties intent to bound by stating “this
is a legally binding contract”, and (ii) if the seller does not fulfill his
“obligations under this agreement, said agreement shall be enforceable both at
law and in equity.” Additionally, the Court held that the Offer contained all
material terms (i.e. description of the property, the purchase price, deposit
requirements and closing date) that were sufficient to establish a binding
Offer, even though the seller argued that the offer did not include all
material terms because it did not address two material aspects of the
transaction. Namely, how rental income from a lease of the property would be
allocated and the seller’s use of the property after closing. The Court,
however, found that these terms were not so essential to the transaction as to
be material because there was no reference to them in the Offer.
In finding that the buyer
was entitled to summary judgment on the breach of contract claim, the District
Court relied heavily on the Massachusetts Supreme Judicial Court’s decision in McCarthy
v. Tobin (1999). In McCarthy, the SJC held that if parties have
agreed upon all material terms, the offer is enforceable and the purchase and
sale agreement serves as a “polished memorandum of an already binding
contract.” While the seller argued that the Offer was not enforceable because
the parties did not satisfy all the contingences set out in the Offer,
specifically the signing of a “mutually acceptable” purchase and sale
agreement, the District Court disagreed. Like McCarthy, the Offer in Ritter
included the sufficient material terms to the agreement. That is where the
parties agree to the material terms for the transaction and indicate the intent
to be bound by those terms, the offer to purchase is an enforceable agreement.
As noted in McCarthy,
“[i]f parties do not intent to be bound by a preliminary agreement until the
execution of a more formal document, they should employ language” to that
effect). Id. at 88, n.3; see also the Massachusetts Appeals Court case Goren
v. Royal Investments Inc., (1987) (noting to prevent offer from becoming
enforceable contract, one should include provision noting document’s purpose
and parties intend only to be bound by execution of more detailed agreement,
not by preliminary document).
This decision reaffirms
the decision in McCarthy and serves as a reminder that a buyer may
enforce a real estate transaction based on an executed offer to purchase and
imperfect negotiations, even when a contemplated purchase and sale agreement is
not executed.
An associate in the
litigation department of the Boston and Quincy based law firm of Moriarty,
Troyer & Malloy LLC, Meghan is an
experienced real estate litigator representing clients in all Massachusetts
trial courts, including the Land Court, and the Massachusetts Appeals Court.
