Mutually agreeable or standard form?

Recently asked question: Why do some offers have 'subject to a mutually agreeable P&S' specially noted?  Isn't that just inherently part of the deal? Does it matter?

The answer is no, it’s not inherently part of the deal.

In Massachusetts, most Realtors and agents use a standard template when they’re writing offers. Here in MA, the purchase process is often a two-step process: First the offer is executed, in which a date/time is set to execute the Purchase & Sale (P&S) agreement. The P&S, once executed, will supersede the offer. However, in Massachusetts, thanks to the ruling in Tobin vs. McCarthy, an offer is binding, even if the P&S isn’t signed, as long as the offer signals for a “standard form” P&S. The standard form offer states that, in agreeing to this offer, both parties agree to execute a “standard form Purchase and Sale agreement”. In Massachusetts, when a seller signs this standard offer and the deposit is delivered, that seller has no recourse to back out of the deal.

I’ve often seen buyers or buyer agents alter the offer by replacing “standard form” with “mutually agreeable”. How does this change the offer? Can the buyer still force the sale if the seller wants to back out? Would Tobin v McCarthy apply?

We asked Real Estate attorney, Jeremy McHugh for his (always) unvarnished opinion on the matter. Here’s what Attorney McHugh had to say:

In Massachusetts, most Realtors and agents use a standard template when they’re writing offers. Here in MA, the purchase process is often a two-step process: First the Buyer and Seller sign the “Offer to Purchase (OTP)” , which specifies a deadline to execute the Purchase & Sale(P&S) agreement. The P&S, once executed, will supersede the offer. However, in Massachusetts, thanks to the ruling in Tobin vs. McCarthy, under most circumstances, an OTP for real estate is considered a binding contract, even if the parties never sign a P&S Agreement. In fact, according to the MA Supreme Judicial Court, the P&S Agreement is deemed to be merely a “polished memorandum of an already binding contract (the OTP).” Considering this precedent, it’s vital for Buyers and Sellers to include everything that is truly important to them in the OTP, because once the OTP is signed, there is generally no right on either side to insist on any further material, substantive contract terms or contingencies. This result is the same whether the OTP states that it is subject to a “mutually satisfactory P&S Agreement,” or similar language. Of course, there are exceptions to this rule, but in the vast majority of transactions, based on the standard language of the MA Offer forms, the OTP will not contain language sufficient to transform it from a binding contract into a preliminary agreement subject to further re-negotiation of substantive, material terms. In fact, the Mass. Appeals Court suggested a clause that would effectively transform the OTP from a binding contract to a preliminary agreement subject to further serious negotiation:

“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."

Clearly, the intent of both parties to the OTP must be explicitly articulated in an unambiguous fashion to prevent an OTP from becoming a complete, and binding contract upon execution. For further discussion of the legal technicalities, see

http://www.mchughlawboston.com/blog/2016/10/19/caveat-venditor-mccarthy-v-tobin-seller-beware

Now, we’ve drafted and negotiated countless successful OTPs for Buyer and Seller clients, and we’ve never included any language similar to the above, and never seen an Offer from a fellow Realtor with it either.

Why would that be?

Partly, it’s because all parties involved in a real estate purchase need to be able to rely upon the essential material terms of the Offer at the moment it is executed, due to the monumental life changes and financial stakes that a real estate transaction entails for both Buyer and Seller. Another likely reason is that for Buyers, their offer would hold far less weight with the Seller in competition with other Offers lacking the qualifying language. If a Buyer was up front about an intent to re-negotiate major contract terms after signing the Offer, most Sellers would be much less likely to accept the Offer. So, considering the legal and ethical context of the OTP for real estate in MA, it’s something of a bait and switch tactic for either party to execute the typical OTP and then attempt to re-negotiate major contract terms or insist on new provisions or contingencies not explicit in the OTP. It’s very uncommon for parties to engage legal counsel prior to signing an OTP, so it is extremely important to work with an experienced, knowledgeable Realtor when submitting, negotiating, and finalizing a Massachusetts Offer to Purchase Real Estate.

Everything from the loan amount for a mortgage contingency, to Radon testing, to review of building permits, must be clearly set forth in the Offer, if you want to reserve the unquestioned right to include it in the P&S Agreement that supersedes the Offer. Now, how can a 2 page OTP contract expand into a 15 page P&S Agreement without adding any additional material terms? That’s a question for another blog, but it does once again highlight the importance of working with a realtor with experience and knowledge of the customary application of relevant legal principles to a Massachusetts real estate sale. The bottom line for today is, you cannot assume that you’ll be able to insist on any major contract terms in a Massachusetts P&S Agreement, if you didn’t include those terms in the Offer to Purchase.