When entering a purchase transaction, buyers understand that their deposit money is at risk should they decide to terminate for reasons not explicitly outlined in the contract. But what happens when a seller attempts to terminate an Offer to Purchase contract? Below, Jamaica Plain attorney Jeremy McHugh explains the risks and related case law:
Caveat Venditor: McCarthy v Tobin: Seller Beware
In the case of McCarthy v. Tobin,, the Supreme Judicial Court of Massachusetts (SJC or the Court) held that an Offer to Purchase may be a binding contract, notwithstanding the failure of the parties to execute a subsequent P&S Agreement. In Tobin, the Court deemed a P&S Agreement referenced in an Offer to Purchase (OTP) to be merely a "polished memorandum of an already binding contract." As a result, the buyer could enforce the right to purchase the property despite the fact that the seller never signed a P&S Agreement, but only a two page Offer to Purchase, even though the execution of the P&S was recited as a condition of the offer.
How did this happen?
First, the seller’s attorney provided the initial P&S draft to buyer’s counsel at 5PM on the day prior to expiration of the P&S deadline, and subsequently effected a waiver of the deadline by continuing to negotiate the terms of the P&S. Secondly, the court applied existing precedents to determine that , notwithstanding seller’s refusal to sign the P&S or accept the deposit, the buyer still had a right to complete the purchase on the terms of the offer. If explicit language to the contrary had been included in the Offer- such as “this offer is NOT a final agreement- it is only a preliminary memorandum in contemplation of a final purchase agreement,” then the result could have been different. But, absent such language, the court found that the offer was a final and legally binding agreement for the sale of the property to the buyer.
Generally speaking, this case means that you need to be very careful in drafting and reviewing offers to purchase, and the best practice would be to have all offers reviewed by counsel prior to execution. The case demonstrates that legal precedent sometimes produces counterintuitive results. Common sense assumptions about the likely outcome of a legal challenge can be dead wrong.
Appellate History of the Case
In 1998, the Massachusetts Appeals Court concluded that John J. McCarthy (Buyer) was entitled to specific performance of a contract to purchase real estate from Ann G. Tobin (Seller). The lower court had decided that Tobin had no obligation to sell the property to McCarthy, instead ruling in Tobin, who had agreed to sell the property to a third party, subsequent to signing the OTP with McCarthy. The Appeals court reversed this trial court decision, holding that the OTP was a firm offer that became a contract binding on the parties when it was accepted and signed by the Seller. Tobin appealed this decision, and it was ultimately affirmed by the SJC.
Facts of the Case
On August 9, 1995, McCarthy executed an Offer to purchase real estate, on a standardized Greater Boston Real Estate Board (GBREB) form. As the SJC later confirmed, the OTP included all material terms of the deal: a description of the property, the price, earnest money deposit requirements, limited title requirements and the time and place for closing. The Offer also stated that the parties "shall, on or before 5 PM on August 16, 1995, execute the applicable Standard
Form Purchase and sale Agreement recommended by the GBREB, which shall be the agreement between the parties hereto."
Tobin signed the OTP on August 11. On August 15th, after 5PM, Tobin's lawyer sent a draft P&S by fax to McCarthy's lawyer. Six days later, on August 21st, McCarthy’s lawyer responded by fax, proposing certain changes to the P&S, relating to such things as burden of risk of casualty prior to closing, assurances relating to title, the condition of mechanical systems, etc. On the 22nd, the lawyers discussed proposed revisions. There was no discussion at any time of extending the P&S signing deadline, and Tobin's lawyer did not object to the expiration of the deadline. After further discussions, on Friday August 25th, buyer’s counsel informed seller’s counsel that the agreement was acceptable that it would be signed and delivered the following Monday.
On Saturday the 26th, Tobin accepted an OTP from a third party, named DiMinico. McCarthy's lawyer subsequently delivered the signed P&S and a deposit to Tobin's broker on Monday the 28th, but was informed that the agreement was late and Tobin had already accepted another offer. Tobin signed a P&S Agreement with Diminico in September, 1995, and McCarthy filed suit in the trial court for specific performance prior to closing of the Diminico sale.
On appeal to the SJC, the issue was whether the OTP between Tobin and McCarthy was a binding contract, despite the fact that the seller never signed the P&S Agreement.
It is a basic tenet of contract interpretation that the intent of the parties controls.
The SJC upheld the Appeals court decision, finding that when they signed the offer, the parties intended to be bound by their agreement, reciting that "if the parties have agreed upon all material terms, it may be inferred that the purpose of a final document which the parties agree to execute is to serve as a polished memorandum of an already binding contract."
In other words, under these circumstances the Court found that the P&S Agreement should be considered as merely a "polished memorandum of an already binding contract."
How did the court arrive at this decision?
The Court found that McCarthy's revisions to the P&S were “ministerial and nonessential terms of the bargain," and did not impact the material terms of the deal sufficiently to operate as a counter offer or repudiation of the existing agreement. Thus, the seller was not excused from performing her obligations under the agreement- namely, conveying the property to the buyer on the date set for closing.
Additionally, notice was printed on the OTP that the offer created “binding obligations." The court rejected seller's contention that the “obligations” were merely to "bargain in good faith", instead holding that the offer created the far more concrete obligation to actually convey the property to the buyer upon delivery of the purchase funds on the day of closing.
The court also found that Tobin waived the right to enforce the deadline for signing the P&S. At the outset, the deadline of August 16th for execution of the P&S was a condition subsequent, meaning that without a signed P&S by that date, the parties’ obligations to each other would be extinguished. However, the court found that Tobin waived the condition for the following reasons:
(1) Her lawyer voluntarily undertook the task of drafting the P&S Agreement, but did not send a draft to the buyer until 5PM on the day before the deadline, such that it was "impossible" for the buyer to sign before the deadline; (2) Tobin’s lawyer did not object to the passage of the deadline in the ensuing discussions, but instead continued to work with buyer's counsel after the expiration of the deadline on a P&S agreement mutually satisfactory to both parties; and (3) Having determined that Tobin had waived the deadline, the court further found that time was no longer of the essence, and that the buyer's subsequent tender of the signed agreement with the required deposit was timely and within reason.
So, even though the parties explicitly conditioned their Offer contract upon execution of a mutually satisfactory P&S agreement, it turned out that the seller lost the right to cancel the deal when his lawyer first sent the P&S draft too close to the deadline, and subsequently continued to negotiate terms of the P&S with buyer's counsel.
Conclusion
If you want to ensure that you have the further flexibility of cancelling an offer contract, you should ensure that specific language is included in your OTP as recommended by the Court. Conversely, if you want to ensure that an offer remains a binding contract even in lieu of an executed P&S, include the words “binding contract,” exclude any language to the contrary, make certain that the initial draft is circulated long before the expiration of the deadline, and be secure in the knowledge that legal authority supports your right to insist on moving forward with the transaction even if the other party refuses to cooperate in negotiating and signing a mutually satisfactory P&S Agreement.
Of course, these suggestions are not intended to serve as specific legal advice in any particular situation, and the wisest and safest course of action is to obtain legal advice from a licensed attorney prior to signing an offer contract.