OFFERS TO PURCHASE – 1999 UPDATE
In 1999, the Massachusetts Supreme Judicial Court affirmed a Massachusetts Appeals Court ruling which effectively made Purchase and Sale Agreements obsolete once a Greater Boston Real Estate Board Form Offer to Purchase was executed by the proposed Buyer and Seller. The case is McCarthy v. Tobin, 429 Mass. 84 (1999) and it will significantly affect the way Offers to Purchase are negotiated.
The facts of this case are common to most residential real estate negotiations. The Buyer and Seller negotiated and later executed a Greater Boston Real Estate Board Form Offer to Purchase which contained the following information: (i) a description of the property to be sold, (ii) the purchase price, (iii) the amount of the deposit and the conditions under which it may be forfeited or returned, as applicable, (iv) the expiration date of the offer, (v) the manner in which the offer may be accepted, (vi) the nature of the title to be conveyed, (vii) the identification of the personal property to be conveyed, and (viii) the time and place for the delivery of the deed.
The Offer form also contained the following key provisions: (a) Section 3 of the standard provisions provided that the parties would execute "the applicable Standard Form Purchase and Sale Agreement recommended by the Greater Boston Real Estate Board" on or before a certain date, and when executed, the purchase and sale agreement would "be the agreement between the parties hereto," (b) Section 7 contained a provision inserted by either the Buyer or Seller (or most likely, the Broker) which provided "Subject to a Purchase and Sale Agreement satisfactory to Buyer and Seller," and (c) the Offer contained a standard provision providing that the Offer was "… a legal document that creates binding obligations," and if its terms were not understood, the parties should "…consult an attorney."
The Buyer and Seller ultimately failed to execute a Purchase and Sale Agreement and when the Seller later entered into a Purchase and Sale Agreement with a third party, the Buyer brought suit. The Massachusetts Appeals Court allowed the Buyer's specific performance claim, holding that the Offer to Purchase constituted a binding contract.
In its review of the Appeals Court decision, the Supreme Judicial Court discussed the standard to be applied when determining when an offer becomes a binding contract -– do the parties intend to be bound by the agreement? According to the Court, this analysis generally depends on the resolution of one question -- were all significant issues resolved in the offer? Will the purchase and sale agreement merely constitute "a polished memorandum of an already binding contract?" Id. at 87, citing Goren v. Royal Investments Inc., 25 Mass. App. Ct. 137 (1987).
In this case, the Court held that all significant issues between the parties had been resolved by the terms of the Offer and later negotiated changes to the Purchase and Sale Agreement were "ministerial and nonessential terms of the bargain," Id. at 87, citing Goren supra. Under the circumstances, the Court ruled that the parties intended to be bound by the terms of the Offer to Purchase.
So how can conveyancers and real estate brokers ensure that the Offer to Purchase is not later enforced against the parties? According to the Supreme Judicial Court, language should be inserted in the Offer to Purchase which clearly provides that the parties do not intend to be bound until a Purchase and Sale Agreement is fully executed. The Court recommended the following language set forth in the Appeals Court decision:
"The purpose of this document is to memorialize certain business points. The parties mutually acknowledge that their agreement is qualified and that they, therefore, contemplate the drafting and execution of a more detailed agreement. They intend to be bound only by the execution of such an agreement and not by this preliminary document," McCarthy v. Tobin, 44 Mass. App. Ct. 137 (1987), citing Goren, supra.
For further suggested changes to the standard Greater Boston Real Estate Board Form Offer to Purchase, see 28A Mass. Pr. (Eno and Hovey) 3d, §795.