Offers to Purchase Real Estate in Massachusetts: Buyers and Sellers Beware

The process of purchasing or selling real estate, whether a residential or commercial property, consists of many steps, all of which require careful thought and consideration by both parties to the transaction. One of the first steps in the process of purchasing and selling real property, the significance of which many underestimate, is the execution of an Offer to Purchase (“OTP”).

In the residential setting, most homebuyers are guided through the OTP by their real estate broker, who actually completes the form on their behalf. In most cases, only after acceptance of the OTP by the seller, do both parties seek representation by legal counsel for the drafting and negotiating of the Purchase and Sale Agreement (“P&S”) and representation at the closing.

While the process described above is typical, it may not be the wisest course of action, especially in light of a 1999 decision by the Massachusetts Supreme Judicial Court (“SJC”) in McCarthy v. Tobin, 429 Mass. 84 (1999), in which the Court found that under certain circumstances an OTP may be considered a contract that creates binding obligations, even if the OTP states that the execution of a P&S in the future is contemplated. Accordingly, as has always been our practice, we strongly recommend that homebuyers and sellers consult with and have their attorney review an OTP before signing.

Generally, an OTP sets forth certain terms and conditions in connection with the purchase and sale of real estate, such as: the parties to the transaction; the description of the property; the purchase price; a date by which a P&S will be signed; and any contingencies of the transaction including home inspections and mortgage financing. In most transactions, the parties insert all of the aforementioned terms and conditions in the OTP, but still look to the execution of the P&S as the final expression of their agreement. Unfortunately, many sellers and buyers fail to realize that an accepted OTP in Massachusetts may be considered to be a contract that creates binding obligations, or in other words, if one party decides not to execute the P&S for reasons other than those specifically set forth in the OTP, a court can require the breaching party to fulfill the terms and conditions of the OTP without the execution of a subsequent agreement.

Typically, when a contract dispute arises between two parties, the court will look to whether the parties intended their agreement to constitute a binding contract. The standard OTP form created by the Greater Boston Real Estate Board (“GBRB”), and utilized for many of the residential transactions in Eastern Massachusetts has various clauses that, when read together, actually contradict each other regarding the intention of the parties. For example, the OTP usually recites the date by which the parties will execute a P&S and that the offer is subject to the execution of a P&S satisfactory to the buyer and seller. This clause, when taken alone seems to indicate, and Massachusetts courts have ruled prior to McCarthy, that the parties’ agreement to execute a subsequent contract does not create binding obligations under the OTP, because the parties anticipate additional negotiation about material terms which will ultimately be memorialized in the P&S.

The P&S provision of the OTP is difficult to reconcile with the reality that many OTPs already contain most, if not all of the material terms of the parties’ agreement. Further, the GBRB standard form OTP actually warns the parties above the signature line with the following statement: “NOTICE: This is a legal document that creates binding obligations. If not understood consult an attorney.”

In McCarthy v. Tobin, the Supreme Judicial Court reconciled the contradiction described above by finding that an OTP was a binding contract, regardless of the clause in the OTP which contemplated the later execution of a P&S. In McCarthy, the parties executed an OTP which included the essential terms of the transaction, called for the signing of a P&S by a certain date, and stated, “which, when executed shall be the agreement between the parties thereto.” Id. at 85. In addition, the parties added additional language, “Subject to a Purchase and Sale Agreement satisfactory to the Buyer and Seller.” Id. The OTP also included the standard GBRB form clause inserted above the signature line, as referenced above.

In McCarthy, after the expiration of the deadline by which the OTP called for the execution of the P&S, the seller’s attorney sent the buyer’s attorney an initial draft of a P&S. A few days later the buyer’s attorney sent his proposed revisions to the seller’s attorney. Neither attorney discussed an extension of the deadline for signing the P&S, nor did the seller’s attorney object to the fact that the deadline had already passed. A few days later, on a Friday, the buyer’s attorney informed the seller’s attorney that the buyer would sign the P&S and deliver it to the seller for his signature on Monday. However, on Saturday, the seller accepted another OTP from a second buyer who offered $50,000 more than the original buyer. Accordingly, the original buyer, McCarthy, sued the seller, Tobin, on the theory that the parties had already entered into a binding contract, the OTP.

As in the decisions decided by Massachusetts Courts before McCarthy, the SJC focused its analysis on the intention of the parties to create a binding agreement. Tobin argued that the parties did not intend to be bound because they contemplated executing a later P&S and had not agreed to all of the material terms of the transaction. McCarthy claimed that all of the essential terms of the parties’ agreement were included in the OTP and the execution of a P&S was merely a formality.

Both the Massachusetts Appeals Court in an earlier decision, and the SJC, found in favor of McCarthy and held that even though many of the terms of a P&S may still require negotiation, in this instance, the terms upon which the parties had already agreed in the OTP were the material terms of their agreement, and further, that any other terms which would be incorporated by the P&S would be, “subsidiary, nonessential and ministerial.” In addition, because all of the essential terms of the parties’ agreement were included in the OTP, the court placed greater weight on the clear notice printed on the GBRB form warning both parties that the document created binding obligations and should be reviewed by an attorney.

It has been suggested, by an earlier case and the Appeals Court in its McCarthy decision that if the parties do not wish to have the OTP serve as a binding contract that they insert language into the OTP that expressly conveys the parties’ intention not to be bound. McCarthy v. Tobin, 44 Mass. App. Ct. 274, 279 (1998) quoting Goren v. Royal Invs., Inc., 25 Mass. App. Ct. 137, 142-143 (1987). If the parties expect the P&S to be the final expression of their agreement, an attorney would be the most qualified person to draft the appropriate language clearly describing a client’s intent.

Perhaps even more problematic, is the form used by realtors on the North Shore of Massachusetts. The North Shore Association of Realtors, Inc. (“NSAR”) has created a form, used when making offers, which is entitled “Contract to Purchase.” This form also sets forth the parties, purchase price, closing date, inspection and mortgage financing contingencies, however, there is no provision calling for the execution of a subsequent agreement, or P&S. In addition, the North Shore form expressly states, “Upon acceptance by the Seller, this shall become the contract between the parties…”

The North Shore form is an even stronger example why one should consult an attorney before signing. Because the North Shore form is entitled Contract to Purchase, there is no mention of the execution of a P&S, there is express language stating that once accepted the form is the contract between the parties and there is a warning that the form creates binding obligations, a court, in considering a similar dispute, is likely to be even more inclined than in McCarthy to find the existence of a binding contract without the execution of a subsequent P&S.

Taking into consideration the decision in McCarthy, we continue to advise our clients, whether they are buyers or sellers, whether it be a residential or commercial transaction (as many parties use the GBRB form for offers to purchase commercial properties as well), or whether the OTP is that suggested by the GBRB, NSAR, or any other organization, that they have their attorney review the same, before execution. By determining a client’s ultimate goals, or special issues pertinent to a certain property, or a specific transaction, at the outset, an attorney will be better prepared to protect his or her client’s interests and advise of any risks that may be involved in presenting an OTP to a seller, or accepting one as presented by a prospective buyer.