Wednesday, October 12, 2022

Seller Beware: An Executed Offer to Purchase Property May be Enforceable

Meghan E. Hall

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.

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