The deal looked good, very good, thought Brad Brown. He had just agreed to sell his house and the surrounding 10 acres to one J. P. Grimsley. Brad would net $2.3 million on the deal and no one would miss the 200 year old home after Grimsley had constructed 100 new, upscale condos. There was only one problem: Brad had agreed two weeks earlier to sell the same property, for far less money, to his neighbor, Mrs. Everts.
Brad had entered into an Offer to Purchase Real Estate (“OTP”) with Mrs. Everts (the “Everts OTP”). The OTP was based on a form provided by the local real estate board. It described the property being sold, set forth the purchase price ($1.8 million), and listed the amount of Mrs. Everts’ deposit made with the offer, as well as the circumstances under which Brad, as seller, could retain the deposit. The Everts OTP also described how the offer was to be accepted, when it would expire, what personal property was included in the sale, and when and where a closing would take place. There was also a financing contingency under which Mrs. Everts agreed to use reasonable effort to obtain mortgage financing and had the right to cancel the deal if financing was unavailable.
Also included in the Everts OTP were a provision stating “Subject to a Purchase and Sale Agreement satisfactory to Buyer and Seller” and a statement, just above the signature lines, which read, “NOTICE: This is a legal document that creates binding obligations. If not understood, consult an attorney.”
In the two weeks after signing the OTP, Mrs. Everts had applied to three lenders for financing. She also sent Brad a proposed Purchase and Sale Agreement (“P&S”) which contained additional, relatively minor terms, none of which conflicted with the provisions of the Everts OTP.
Having obtained a better offer, Brad sent Mrs. Everts a letter explaining that the deal was off. Given that they had signed only an OTP and not a P&S, Brad assumed that returning her deposit would free him of any obligation to Mrs. Everts. He was surprised to receive, by return mail, a summons, a complaint seeking to enforce the Everts OTP and a motion for a preliminary injunction barring him from selling the property to anyone else. In her court papers, Mrs. Everts took the position that the OTP was binding, even though the parties never signed the contemplated P&S. Is she right, or is Brad correct that the provision “Subject to a Purchase and Sale Agreement satisfactory to Buyer and Seller” made clear that the parties would only be bound after they signed a P&S? Can an OTP, by itself, ever function as a binding contract?
Whether an OTP is an enforceable contract to sell depends on the language of the OTP and the conduct of the parties. The specifics of each case will determine whether an OTP is binding. “The norm in real estate transactions has been that where the parties sign a writing contemplating the later execution of a purchase and sale agreement, they do not intend to be bound until that time.” Trolio v. Friedman, 2005 WL 1683601, *2 (Mass. Super. 5/3/05), quoting Levenson v. L.M.I. Realty Corp., 31 Mass. App. Ct. 127, 130 (1991). However, in McCarthy v. Tobin, 429 Mass. 84 (1999), the Massachusetts Supreme Judicial Court noted that “the controlling fact is the intention of the parties.” Id. at 87. In that case, the seller argued that the OTP was not binding because it contained a provision requiring the execution of a P&S. The Court disagreed, noting that,
[i]f … the parties have agreed upon all material terms, it may be inferred that the purpose of the final document which the parties have agreed to execute is to serve as a polished memorandum of an already binding contract.
Id. at 87. The seller further argued that by seeking to add to the P&S several provisions that were not in the OTP, the buyer had manifested an intent not to be bound by the OTP. Rejecting this argument, the Court explained that the suggested additions were ministerial and did not concern materials terms of the sale. According to the McCarthy Court, its conclusion that the OTP was binding was bolstered by the notice in the OTP which stated that the OTP created binding legal obligations. The Court recommended that if the parties to an OTP do not want to be bound until the execution of a more formal document, they should say so expressly.
Courts in a number of other cases have held that OTPs were binding. In Brosio v. Schirmer, 69 Mass. App. Ct. 1115, 2007 WL 2284487, *1 (8/9/07) (unpublished), the Appeals Court affirmed a ruling that an OTP was binding, noting that it contained all material terms. The Court rejected the argument that the OTP was not binding merely because it referred to the parties’ intent to later execute a P&S, noting that the OTP did not provide that the parties’ obligations would be extinguished if a P&S were not signed. In Kurker v. Shoestring Properties Limited Partnership, 68 Mass. App. Ct. 644, 653-56 (2007), the Court held that an OTP was binding because it included all necessary material terms. Also relevant was the conduct of the parties after signing the OTP. They had gone forward with expensive work, indicating that they believed the OTP to be binding. The Kurker Court also rejected the argument that the OTP was not binding merely because it referred to the parties’ intent to later execute a P&S, noting that the OTP did not provide that the parties’ obligations would be extinguished if a P&S were not signed. Similarly, in Fallon v. Batchelder, 60 Mass. App. Ct. 1110, 2004 WL 42243, *1-2 (1/8/04), the Appeals Court held that an OTP was binding because it contained all material terms and the terms not contained were not material. In Gilchrist v. Fitzgibbons, 2007 WL 6940042 (Mass. Super. 10/22/07), the Court also held an OTP binding. Like the Everts OTP, and that in McCarthy, the OTP in Gilchrist included a provision that the parties would execute a P&S and also included a notice that the OTP created binding legal obligations. Although the buyer had sought to include additional terms in the P&S, the Court held that none of those terms was so material as to indicate that the parties had not reached full agreement when they signed the OTP. It also rejected the seller’s claim that the OTP was subject to an unfulfilled condition subsequent (execution of the P&S), noting that the Appeals Court in Kurker had found that a provision did not create a condition subsequent.
On the other hand, Massachusetts courts, even after McCarthy, have often held that OTPs were not binding on the parties. In Villa v. Holmgren, 83 Mass. App. Ct. 1114, 2013 WL 616873 (2/20/13) (unpublished Rule 1:28 opinion), the Court held that the prospective purchaser’s effort to impose new terms when negotiating the P&S, which materially differed from those in the OTP, indicated that the OTP was not intended to be a final agreement between the parties.
In Corkery v. Scofield, 69 Mass. App. Ct. 1114, 2007 WL 2230368, *1-2 (8/3/07) (unpublished Rule 1:28 opinion), the Court held that an OTP was not binding because it lacked language indicating that it was legally binding, used unfamiliar contract language (rather than a common real estate form as in McCarthy), and lacked some material terms such as closing date and location. The Court also relied on the conduct of the parties after execution of the OTP, pointing out that the buyer’s attorney had prepared and sent to the seller a proposed P&S which contained new material terms not addressed in the OTP. Corkery, 2007 WL 2230368, quoting Blomendale v. Imbrescia, 25 Mass. App. Ct. 144, 146 (1987).
In Dibiase Builders, Inc. v. Campbell, 65 Mass. App. Ct. 1106, 2005 WL 3209811, *1-2 (11/30/05) (unpublished Rule 1:28 opinion), the Court again held an OTP not binding based in part on the fact that, after the OTP was signed, the parties’ P&S negotiations encountered disagreement on a “new element” that had not been discussed or agreed upon in the OTP, thus indicating “that the … offer did not contain the essential and final terms of the transaction…. The essential terms of the sale remained unsettled , the parties never reached an accord, and they did not intend to be bound by their preliminary agreement.” Id. at *2.
In Coldwell Banker/Hunneman v. Shostack, 62 Mass. App. Ct. 635 (2004), the Appeals Court also held that an OTP did not bind the parties, relying on evidence that their later negotiation of an P&S encountered disagreement on a material term, even though one version of that term had been included in the OTP. The Court stated:
The plaintiff secured an offer from a Mr. and Mrs. Jaffe (also referred to as the buyers). A written offer to purchase (OTP) was signed by the Jaffes on April 20, 2001, which, at the insistence of the seller, included a clause relating to the use of the garage on the property by the seller for storage: “seller retains the right to use the garage for storage for up to 60 days after the closing.”
No P & S was executed….
[H]ere, as in Germagian v. Berrini, 60 Mass.App.Ct. 456, 803 N.E.2d 354 (2004), when the buyers received back the executed OTP from the seller, their conduct indicated that they did not intend the OTP to be a binding contract because there was no agreement on a material term. … Rather, they insisted on negotiating conditions under which the garage could be used for storage instead of incorporating the unadorned clause, “seller retains the right to use the garage for storage for up to 60 days after the closing,” specified in the OTP.
If the storage clause were not material, McCarthy might control. But the summary judgment record makes it clear that the storage clause was material to the seller and her husband because of their particular situation.
Id. at 635-39.
In Germagian v. Berrini, 60 Mass. App. Ct. 456 (2004), the Court held an OTP not binding based on: (1) the fact that the parties had not reached agreement in the OTP on a closing date and (2) the conduct of the buyer after signing the OTP, in that he did not attempt to commence the process leading to financing of the purchase, waiting instead for a P&S to be completed. Id. at 460.
In Sanborn v. Hirsch, 25 Mass. L. Rptr. 167, 2009 WL 323392 (Mass. Super. 1/13/09), the Superior Court held that an OTP was not binding, in part because it expressly provided that the parties “shall execute a Purchase and Sale Agreement, not as a formality, but as a complete expression of the parties’ intentions which, when executed, shall become the agreement between the parties.”
The Superior Court in Trolio held an OTP not binding, citing Blomendale for the proposition that the “introduction of … new elements signified that ‘the parties did not intend to be bound by the preliminary document.’” 2005 WL 1683601, *2-3. The Trolio Court held the OTP not binding based on the limited information in the OTP, the intent of the parties to execute a P&S (as evidenced by the buyer returning to the seller’s house the next day with a draft P&S), and the fact that the parties subsequently negotiated various material terms of the transaction.
Finally, in Mulkerrin v. Smith, 2002 WL 31747420 (Mass. Super. 12/5/02), the Superior Court held that an executor was not bound by an OTP. The OTP was a Greater Boston Real Estate Board standard form and contained language indicating that it was a binding agreement, addressed material terms of the transaction and required the parties to execute a mutually acceptable P&S prior to the closing date. After the OTP was signed, the attorney for the executor forwarded a proposed P&S which included two additional terms, one conditioning the sale on the executor obtaining a license from the court and the other conditioning the sale on the seller not receiving a higher offer. The buyer rejected those conditions.
The Mulkerrin Court held that the OTP was not binding, relying primarily on the fact that the proposed P&S had introduced new material terms, not agreed to in the OTP, by conditioning the sale on obtaining a license from the court.
The foregoing case law suggests that the OTP signed by Brad Brown and Mrs. Everts is binding. The Everts OTP was executed on a commonly used real estate form and contains all of the common material terms of a real estate transaction. Further, it contains a notice that execution of the OTP creates binding legal obligations. Although the OTP also contemplates the execution of a P&S, the draft P&S provided by Mrs. Everts contained no new material terms, instead adding terms that were minor and ministerial. Mrs. Everts also conducted herself as though the OTP were binding, applying for financing in the two weeks following execution of the OTP.
McCarthy and its progeny sends a clear warning that an Offer to Purchase Real Estate can be, and often is, a binding contract. Accordingly, an OTP should be drafted with as much care and precision as a P&S. It is, therefore, highly advisable to consult an attorney early in the sale process, before making or accepting an offer.