Daily Development for Monday, July 12, 1999

by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri

VENDOR/PURCHASER; BINDERS: Offer to purchase real estate is a binding contract despite provision requiring execution of a purchase and sale agreement and provision stating "Subject to a Purchase and Sale Agreement satisfactory to Buyer and Seller", when the OTP includes the purchase price, a description of property and states "This is a legal document that creates binding obligations."

McCarthy v. Tobin, 706 N.E.2d 629 (Mass. 1999).

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."

After negotiation of the Purchase and Sale Agreement Tobin the McCarthy, but before its execution, Tobin accepted DiMinicos offer to buy the property. Subsequently, Tobin and DiMinicos executed a Purchase and Sale Agreement. McCarthy filed an action for specific performance asserting that the Offer between McCarthy and Tobin is a binding agreement to sell the property to McCarthy. The DiMinicos intervened.

Upon motion for summary judgment, the motion judge determined McCarthy had no right to specific performance. The Appeals Court remanded for entry of judgment in favor of McCarthy. The DiMinicos appealed to the Supreme Judicial Court (the "SJC"). The SJC upheld the Appeals Court's decision and granted McCarthy's claim for specific performance. They noted that the material terms of the agreement between the parties were included in the Offer and that the Offer contained a notice of its binding nature. Therefore, they concluded the Offer reflected the parties intention to be bound. In a footnote, the SJC referred to the Appeals Court's suggestion that if parties do not intend to be bound by an OTP until the Purchase and Sale Agreement is executed they "should speak plainly". See, McCarthy v. Tobin, 690 N.E.2d 460, n.10 (Mass.App.Ct. 1998).

Tobin argued that McCarthy had raised matters during the negotiation of the final purchase agreement that went beyond customary resolution of the remaining issues, and that this voided the original agreement. The court responded that the issues discussed by McCarthy's lawyer were "ministerial and nonessential terms." The changes relating to a statement that all systems on the property were operating, and various representations regarding title, including indemnification agreement for the title company as to matters of mechanic's liens and parties in possession.

Tobin argued that McCarthy did not deliver the executed purchase agreement on the date agreed, although the contract included a "time of the essence" clause. Tobin argued that McCarthy's lawyer and Tobin's lawyer had agreed that the executed contract would be delivered on a Saturday, and instead it was delivered on a Monday. The court responded that this dispute was moot, because the "time of essence" clause had been waived, and the two day delay, if it existed, was within normal tolerances when time is not of the essence. The court noted that Tobin's own lawyer had delivered a proposed form of purchase agreement at a time beyond the original agreed time for execution, and then participated actively in revision and negotiation beyond that time. Under these circumstances, the court concluded, time was no longer of the essence.

Comment 1: There are a number of useful holdings here for parties engaged in disputes over properties "sold out from under" a contract. As we have a state supreme court decision, this is a good one for the precedent file.

Comment 2: On the central ruling that the Offer was a binding contract, we have the standard problem that DIRT DD's have confronted several times earlier. How can it be said that matters of title security are not "central" to the parties' agreement. If the buyer did not obtain satisfaction of title questions, wouldn't the buyer be entitled to withdraw? Is the court suggesting that the Buyer has agreed in advance to accept any position on title that the court deems reasonable and regular?

Comment 3: Once again, we have the issue of legal documents being manipulated by nonlawyers. It is far better to have approved industry standard form documents, even if they fall short of a fully negotiated agreement, than it would be to have brokers or (God forbid) the parties themselves drafting the contracts. Brokers, fearful of "buyers' remorse," or overbidding such as occurred here, don't want to wait until the lawyers negiate the final agreement to conclude that they have a deal. So they pretend, with the tacit agreement of the court here, that it is possible to agree on a real estate sale without resolving the issues of title.

Comment 4: Recognizing the fractious dynamics of the home selling business, the Editor concludes that the Boston Real Estate Board approach, which does permit the parties to continue to involve lawyers in the title review but otherwise resolves the purchase a sale issues, probably is an acceptable compromise for consumer contracts. Unfortunately, the court here does not indicate that we have a "consumer contract." It simply describes the subject of the contract as "certain real estate."

It's hard to know what the court should have done differently, however, if this was a commercial contract, since the contract said on its face that it created "binding legal obligations." What the heck did the seller think this language meant, if not that it was bound to sell to the buyer if the buyer made no more than reasonable demands for clear title?

In the Editor's view, however, if this was a commercial contract, the real culprit here was the sales advisor probably a broker, who introduced the use of the "standard form," probably a residential form, into a commercial transaction. Brokers ought not to be committing their clients to sales agreements for "non standard" kinds of property which describes most commercial property by means of binders when the parties are both going to go to lawyers later. Anyone with experience in such real estate knows that once the lawyers get down to involvement in the contract itself and the title matters in particular, all sorts of issues are likely to arise, and arise properly. Commercial real estate deals are not cookies and should not be produced through cookie cutters. Brokers who advise their clients otherwise are giving bad advice, and perhaps should be responsible when things go wrong.

Items in the Daily Development section generally are extracted from the Quarterly Report on Developments in Real Estate Law, published by the ABA Section on Real Property, Probate & Trust Law. Subscriptions to the Quarterly Report are available to Section members only. The cost is nominal. For the last six years, these Reports have been collated, updated, indexed and bound into an Annual Survey of Developments in Real Estate Law, volumes 16, published by the ABA Press. The Annual Survey volumes are available for sale to the public. For the Report or the Survey, contact Maria Tabor at the ABA. (312) 988 5590 or mtabor@staff.abanet.org

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