Offer To Purchase May Be A Contract

In a typical real estate sale, a seller contacts a broker. The seller of course expects that the broker has the knowledge of both the procedure to sell real estate and the proper contacts. With luck, the seller will be right. The seller and broker enter into an agency agreement called a listing. Then there is a lot of involvement with sub-agents of the broker. These sub-agents are cooperating or showing brokers who simply show the property to the prospective buyer. Buyers usually contact these sub-agents to view certain properties. If a buyer wishes to buy the property, he or she enters into an offer to purchase (OTP). It is at this stage that both parties, the seller and buyer, must be very careful since this offer to purchase may be construed as a binding contract among the parties. Of course, if it is the intent of the parties to be bound, then there is no problem. However, at this stage the parties regularly assume that they have not bound themselves and can easily rescind on the offer.

Historically, OTP’s were simply an agreement to enter into another agreement; the second agreement being the final purchase and sale. Massachusetts has held that such OTP’s expressly contemplate the execution of a later, formal purchase and sale agreement and this reveals an intention not to be bound until the subsequent agreement is executed. This is commonly the parties’ understanding. Ordinarily, the parties do not believe they are entering into a binding contract for the sale and purchase of real estate until they sign the purchase and sales agreement. The buyer often has the understanding that he can only lose the deposit and no more. As the Massachusetts Appeals Court has recently told us, this is not accurate.

The Massachusetts Appeals Court case of McCarthy v. Tobin, 1998 WL 51719, recently decided the issue of whether a buyer and seller were bound by the OTP where both parties signed the agreement or whether the parties were not bound until they executed the contemplated purchase and sale agreement.

In this case, Tobin, the seller, wanted to sell his Boston condominium. McCarthy, a buyer, offered $526,000 for the condo unit (with regard to the price, keep in mind we are dealing with property in Boston and not Fall River). Both Tobin and McCarthy entered into a OTP real estate on a printed form published by the Greater Boston Real Estate Board. The OTP stated the price, deposit, a description of the property, the expiration of the offer, the nature of the title, what personal property was included, and several other provisions. The OTP stated a time of when the parties would enter into a purchase and sale agreement and stated that it was “a legal document that creates binding obligations. If not understood, consult an attorney.” Finally, both parties signed the agreement.

Before the date the purchase and sale was to be signed, Tobin received a second OTP from the DiMinicos who offered Tobin $50,000 more for the condo. Tobin, wanting to earn another $50,000, subsequently signed a purchase and sales agreement with the DiMinico’s. Although Tobin signed an OTP with McCarthy, Tobin had yet to sign the purchase and sale agreement with McCarthy. Before the Tobin/DiMinico closing could occur, McCarthy sued Tobin to enforce the OTP that was signed by him and Tobin.

The judge had to decide who is entitled to the property. Would it be Mr. McCarthy who had a signed OTP or the second buyer, the DiMinicos, who not only signed the second OTP, but had signed a purchase and sale agreement with Tobin. The judge held that Mr. McCarthy was entitled to the property and ordered against both Tobin and the DiMinicos.

Typically, a buyer is the one backing out from a deal with a seller attempting to enforce any agreement between the parties. However, in this case, the buyer was attempting to make the seller sell the property to him – a fairly unique situation.

The judge noted that when the parties signed an OTP that stated all the terms and conditions that were material to the contemplated transaction, and on its face stated that the parties understood that the instrument created “binding obligations” then a binding agreement had been reached.

Overall, where the parties intend to be bound by the preliminary agreement (the OTP) and the OTP has the substance of a contract there is a strong likelihood that the parties will be bound by that OTP. As such, before you sign such an agreement you should without doubt be sure to seek the advice of counsel regarding the contractual liabilities or obligations that attach to the OTP.