Real Estate Broker Alerts

Broker Alert #1:

An important warning about the use of
a written Offer to Purchase Real Estate

An executed Offer to Purchase MAY BE BINDING

The Massachusetts Supreme Judicial Court has decided, in the case of McCarthy v. Tobin, [McCarthy v. Tobin, 706 N.E.2d 629 (Mass. 1999) that the parties to an Offer to Purchase Real Estate Form were bound by the terms of the Offer Form.

McCarthy and Tobin signed the document (the "Offer") on a preprinted Greater Boston Real Estate Board form which included a description of the property, purchase price, deposit requirements, title requirements and time and place of closing. The Offer stated that the parties "shall execute [a] Purchase and Sale Agreement which when executed shall be the agreement between the parties." In addition, a typewritten insertion in the Offer stated "Subject to a Purchase and Sale Agreement satisfactory to Buyer and Seller." Immediately above the signature line on the Offer was the statement "NOTICE: This is a legal document that creates binding obligations."

The Court held that since the Offer Form contained an offer to purchase, an acceptance of the offer, the purchase price, a description of the property and a closing date, it was binding contract reflecting the parties' intent to buy and sell the property.

Justice Ruth Abrams wrote, "If the parties have agreed upon all material terms, it may be inferred that the purpose of a final document (Purchase and Sale Agreement) which the parties agreed to execute is to serve as a polished memorandum of an already binding contract."

Abrams found that the main issue in this case was whether the execution of the OTP created a binding contract. According to the judge, "the controlling fact is the intention of the parties. " Abrams further found that "if parties specify formulae and procedures that, although contingent on future events, provide mechanisms to narrow present uncertainties to rights and obligations, their agreement is binding."

The use of an Offer to Purchase should be considered very carefully and may result in litigation when transactions fall apart during the negotiation of the comprehensive purchase and sale or lease agreements.

If an Offer to Purchase is to be used and is not intended to be a binding agreement then language something like the following - which was recommended by the appeals court in its McCarthy v. Tobin decision - should be used.

"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."

And, even if the deal subsequently falls apart, there is still a real possibility that the disappointed party may seek to invoke McCarthy v. Tobin and attempt to have the OTP deemed legally binding.