March 23, 2016
As a real estate attorney, I many times take for granted that experienced real estate professionals — Realtors, lenders, and investors — understand the fundamentals of real estate law. And many times I am proven wrong in that assumption.
Just a few weeks ago, I again learned this lesson from real-life experience.
In that scenario, the parties signed a document entitled “letter of intent” for a million-dollar-plus property. The document identified the property in question, the purchase price and the timing for the closing.
Later, the seller obtained another offer on the property and took the position that our “Letter of Intent” was not binding. We took the opposite position and vigorously acted to enforce the newly-formed contact.
How is that so?
Statute of Frauds
First, we have extensively explored on this site the requirements of every state in the union that contracts for the purchase and sale of real estate (i) must be in writing and (ii) must be signed by the “party to be charged” therewith (i.e., the party who is to be sued on the contract). Grafton v. Cummings, 99 U.S. 100, 106 (1878); Smith v. Williams, 396 S.W.3d 296, 298 (Ky. 2012); Sanders v. McNutt, 72 N.E.2d 72, 75 (Ohio 1947). You may read more about that here.
What writing constitutes a contract?
Virtually any document that evidences a meeting of the minds between parties on the material terms of a transaction and that complies with the statute of frauds will be a binding contract for the purchase and sale of real estate. McGeorge v. White, 174 S.W.2d 532, 533 (Ky. Ct. App. 1943); Beasley v. ANG, Inc., 10th Dist. Franklin No. 12AP-1050, 2013-Ohio-4882, ¶ 8 (Ohio Ct. App., Nov. 5, 2013).
The title of the document does not matter. The paper on which the contract is memorialized does not matter. Whether it is written in pen, pencil, or crayon does not matter.
It simply matters that the material terms are in the document, the document is in writing and the document bears the signature of the “party to be charged therewith.”
Memoranda of understanding and letters of intent
Certainly, though, a document entitled so innocuously as a “letter of intent” or a “memorandum of understating” would not in and of itself be a binding agreement, right? Wrong.
Sometimes the terms of a document — such as a letter of intent or memorandum of understanding — may say in the text that it is not binding upon the parties unless and until they sign a contract drafted by their attorneys and signed by the parties. In such instance, by its own terms, the document is not a binding contract. See, e.g., John Wood Group USA, Inc. v. ICO, Inc., 26 S.W.3d 12, 17 (Ct. App. Tx. 2000) (“the parties expressly stated that the letter agreement ‘is not binding,’ with the exception of certain enumerated paragraphs”); Christ v. Brontman, 175 Misc. 2d 474, 477 (S.Ct. N.Y. 1997) (“Generally, if the language in the contract so provides, a real estate sales agreement which is subject to the approval of attorneys is not binding and enforceable until approved by the attorneys.”).
But in the absence of such “saving” language, a writing is a binding agreement on the terms set forth in such writing.
Again, the title of a document, or its brevity, could lead a buyer or seller to believe it is intended to be non-binding, and simply preliminary. Buyers and sellers are lulled into erroneous understanding that the informal nature of the document, the shortened text, and/or the title mean that the document is not binding unless and until further documentation follows, carefully reviewed or drafted by counsel. This is simply false as a matter of law.
Lot Reservation Agreements
This same logic extends to “Lot Reservation Agreements” in the context of a buyer-builder relationship. A one-paragraph agreement that seems to be just a quick way to tie up a piece of property for a few weeks or months could in fact give rise to binding obligations assuming the agreements comply with other contract principles.
Principle extends to other agreements
Although the focus of this article is the purchase and sale of real estate, its contents could just as well apply to other legal transactions such as real estate leases, options, easements and license agreements, and to non-real estate transactions such as equipment leases, and the sale of a company or its assets.
The back of an envelope
We learn in law school that a buyer and seller can memorialize a contractual agreement on any type of paper, including the back of a used envelope.
About 20 years ago, to my surprise, I ended up being involved in a “back of the envelope” case. There, the buyer sat on one side of a table and the seller’s Realtor was on the other side of a table. The Realtor wrote out some basic bullet-point contract provisions, being the address of the subject property, the price and the closing date, on the back of a used legal-sized envelope. The buyer, on the other side of the table, signed the document upside down! — he didn’t even bother turning around the writing and reading it. A judge found that that crazy-looking instrument constituted a contract binding upon that buyer.
The lesson: It simply does not matter what kind of paper the contract is memorialized upon or even where and how the terms are written on that piece of paper.
As we frequently caution our clients, “it’s a dangerous world out there.” You must carefully consider the consequences of your actions and those acting on your behalf.