Jun 15th, 2011
While the real estate recession lingers on, one segment of the market is hot and competitive: buyers seeking to snap up great deals. This has led to a situation we haven’t seen since the height of the real estate bubble: multiple buyers going after the same property. While the winner is generally determined by whose purchase offer is accepted first, sellers and their agents are finding themselves in lawsuits by angry buyers who lost out yet who claim their offer was “accepted”. To clear some of the confusion, the following analyzes the law in California on when is a purchase offer actually accepted and enforceable.
WHAT MAKES A VALID OFFER? - Real Estate law, indeed all contract law, is based upon a relationship of “Offer” and “Acceptance”. To be effective, a real estate Purchase Offer must at a minimum identify: 1) the Subject of the offer, ie: the Property; 2) the Consideration, ie: the purchase price to be paid; 3) the Time for performance, ie: the closing date; 4) it must be in writing; and 5) it must be delivered to the Seller or their authorized agent. Once a Purchase Offer is delivered, the Seller then has a “Power of Acceptance”. They can accept it as is; they can reject it totally; or they can respond with different terms, ie: a counter-offer. In most instances of residential purchase in California, prospective Buyers use forms created by the California Association of Realtors (CAR) which provides for these terms as well as many other terms that generally must be agreed upon by Sellers and Buyers to reach a clear and unambiguos agreement and to comply with California laws.
AN ACCEPTANCE MUST BE UNQUALIFIED – To be effective, an acceptance must meet the terms proposed by the offer exactly, precisely, and unequivocally. It must be unconditional, and it cannot add new terms or conditions. A qualified acceptance is a counteroffer. An offer is not accepted if the acceptance adds a new condition. An offer qualified by new terms or conditions becomes a counteroffer and accomplishes a rejection of the offer. After a counteroffer, the original offer may not be accepted by the offeree.
A COUNTEROFFER MUST BE ACCEPTED IN FULL TO BE ENFORCEABLE – The counteroffer is a new proposal that must be accepted by the original offeror. A counteroffer that is not accepted by the original offeror-counterofferee has no further legal significance, and no legal relationship is created. However, on acceptance of the counteroffer by the counterofferee, a contract is formed that is binding on and enforceable against the counterofferor. A counteroffer includes the terms and conditions of the original offer. When an offeree makes a counteroffer, all of the terms of the original offer are incorporated into the counteroffer, except as modified by the counteroffer. Effect of a counteroffer to two offerees - When a counteroffer is made to two or more persons, each has the capacity to accept the offer. A counteroffer to two or more offerees that provides for an acceptance by the highest bid is binding on the counterofferor.
METHOD OF ACCEPTANCE IS GOVERNED BY THE TERMS OF THE OFFER – When the method of communication is permitted by the terms of an offer and is reasonable under the circumstances, an acceptance, on being placed in the course of transmission, is legally effective to create a contract. To be considered “in the course of transmission,” the acceptance must be placed beyond the control of the offeree. However, an offeror can prescribe the method of acceptance to be used. Real estate purchase contracts, including the CAR contracts, generally specify a method of acceptance that must be followed. When the method of acceptance is specified by the offeror, no other method is sufficient. When an offer does not require a specific mode of acceptance, any reasonable and usual method is acceptable. If an offer merely suggests a permissive method of acceptance, any reasonable manner of acceptance is effective. The offeror can specify that an acceptance is not effective until received by the offeror. When an offeror does not want to be bound to a contract without knowledge and does not want to assume the risk of actual receipt, the offer can provide that the acceptance will not become effective until it is actually received by the offeror or the offeror’s agent. With such a provision, no contract is formed unless the acceptance is actually received by the offeror or the agent prior to the termination of the offer.
THE CAR RESIDENTIAL PURCHASE AGREEMENT (5/10) contains the following terms:
1) “Acceptance” means the time the offer or final counter offer is accepted in writing by a party and is delivered to and personally received by the other party or that party’s authorized agent in accordance with the terms of this offer or a final counter offer.
2) “Delivery” means the personal receipt by Buyer or Seller or the Individual Real Estate Licensee for that principal (unless other terms are stated). The means of that delivery can be by messenger, mail, e-mail, fax, etc.
3) “Terms and Conditions of Offer” includes the language: “Seller has the right to continue to offer the Property for sale and to accept any other offer at any time prior to notification of Acceptance”.
BOTTOM LINE: To create a binding and enforceable real estate purchase contract: 1) the Purchase Offer must be clear in its terms; 2) the Acceptance must be in writing and agreeing to the exact same terms; and 3) the Acceptance must be delivered to the offeror using the method stated in the offer.
WHAT IS NOT AN ACCEPTANCE: The simple answer is any response to the offer that does not meet the above definition. For example:
1) An oral acceptance does not create a contract for the sale of real estate (Statute of Frauds – must have a writing). However, other types of contracts including rental agreements can be created orally;
2) A phone call “I’m coming to your office to accept” – it’s just an oral acceptance;
3) When there is no real meeting of the minds: the writing says it’s accepted but the communication conveying it states that there are other terms.
AVOIDING LAWSUITS – There is no realistic ability to assure that no-one will sue another to enforce what they believe is an acceptance. Winning that battle is another thing. Often the filing of a lawsuit can be strategic to scare the Seller and competing Buyers. If there is some reasonable grounds, this can be effective especially since such lawsuits tie up the property’s title (Lis Pendens). Such grounds can include:
1) The terms of the offer state one method of acceptance but the Seller or their agent states another – this is not uncommon with REO sales where the terms require written acceptance of the offer by the Seller but requires communication to be e-mailed through Seller’s agent;
2) Written acceptance was delivered to agent’s office but agent didn’t personally know of it. Is the acceptance enforceable? Possibly, but not if the terms of the offer require delivery to Seller, ie: agent is not authorized to bind the Seller so acceptance is not valid until received by Seller (unless Seller has withdrawn prior counter-offer or accepted other offer first.
The information presented in this Article is not to be taken as legal advice. Every person’s situation is different. The key here is that if you are a party or agent involved in a dispute over a real estate contract, get competent legal advice in your State immediately so that you can determine your best options.. If you’re an agent, be sure to check your E&O coverage for when you must report possible claims. You could get sued by both sides.
Here at BPE Law, we have over 50 years experience assisting and representing brokers, agents, buyers, and sellers in real estate transactions and disputes of all kinds. We know what we’re doing and we can work seemlessly with your insurors if needed. If you have specific questions about your transaction, feel free to contact me at firstname.lastname@example.org. Or give us a call at (916) 966-2260.