When is an Offer To Purchase Enforceable as a Contract?

The availability of real estate in Massachusetts has been historically low, driving prices higher, creating bidding wars, and making it difficult for buyers to find suitable properties to purchase. Amidst this hot real estate market, buyers and sellers must protect their interests when making or accepting an offer to purchase.

Many sellers mistakenly believe that the offer to purchase real estate is a mere formality and is unenforceable absent a binding contract, and that the contract is only enforceable when a purchase and sale agreement is executed by both the buyer and seller. However, an offer to purchase can be enforceable as a legally binding contract when it contains the essential terms of a real estate transaction.

Understanding an Offer to Purchase Real Estate

An offer to purchase, sometimes known as a letter of intent, is often the first step in a legally binding contract to purchase real estate. This document sets the foundation for the purchase and sale agreement and, ultimately, the closing. Once the document is signed by all parties, it becomes legally enforceable. Any mistakes made here can have long-lasting consequences. In certain circumstances, the offer to purchase can be enforceable as a legally binding contract, even if a more formal purchase and sale agreement was contemplated.

Hunneman Real Estate Corp. v. The Norwood Realty Inc.: Intent to Be Bound Can Create an Enforceable Contract

In Hunneman Real Estate Corp. v. The Norwood Realty Inc., a case handled by Attorney Harkavy, plaintiff Hunneman, a franchisee of Coldwell Banker, attempted to acquire the assets of The Norwood Realty, Inc., a real estate brokerage firm owned and operated by defendants Robert and Rose Marie Phillips.

Hunneman and the Phillipses had been engaged in negotiations to purchase the assets owned by the Norwood. These negotiations culminated with Hunneman and the Phillipses signing a letter of intent dated January 5, 1995, which set a purchase price of $500,000. The letter provided for the signing of a purchase and sale agreement and an “outside closing date” of February 15, 1995.

The closing date passed without a signed purchase and sale agreement. A letter dated February 24, 1995, and two earlier versions purporting to amend the letter of intent were prepared by counsel for Norwood and the Phillipses, signed by Hunneman, and returned to counsel for Norwood. The proposed amendment increased the purchase price to $675,000, but was never signed by Norwood or the Phillipses. Instead, on March 17, 1995, Norwood sold its assets to a third party for $675,000.

On appeal of a Motion for Summary Judgment, the court noted that the central issue was whether the letter of intent was a binding agreement or whether it was merely “an agreement to agree” and, therefore, unenforceable as a matter of law. In matters of contract law, Massachusetts courts place great reliance on the intention of the parties. Here, the parties’ desire to be bound by the offer to purchase was expressly stated twice in the letter of intent. The primary contingency to be resolved was the recognition of Norwood’s need to deliver the assets “free and clear of all encumbrances,” which required the sale of assets to satisfy their financial obligations and avoid bankruptcy.

The letter of intent looked to the parties’ attorneys to prepare a purchase and sale agreement that would be signed as late as the closing date of the transaction. Finding that “the aim of contract law is to gratify, not to defeat, expectations that arise out of intended contractual agreement,” the court determined that a jury could find the letter of intent to be a binding contract.

Buyers and Sellers Should Include Protective Language to Avoid Being Bound by a Letter of Intent

Buyers and sellers, even in a residential purchase, should be sure to read and understand all terms and conditions set forth in an offer to purchase real estate. Parties who wish to retain an exit strategy in the event they change their mind should include specific language that suggests they do not intend to be bound by an offer to purchase until a more formal purchase and sale agreement can be prepared and executed by all parties.