THE DONE DEAL

Two SJC rulings point out hazards in standard forms

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The Boston Globe
Reprinted with permission from: Karen Curran Globe Correspondent

    Costly and lengthy conflicts in buying or selling a home can occur when, in the rush to get the deal done, you skim the fine print contained in standard real estate forms: the offer to purchase and the purchase and sale agreement. Two recent Massachusetts Supreme Judicial Court rulings underscore the importance of fully understanding the implications of signing these contracts. One couple is facing the loss of a Boston waterfront penthouse for which they paid $575,000 and now may be worth in excess of $1 million as a result of a Supreme Court ruling involving an offer to purchase. Another couple will lose a $17,750 deposit because they backed out of a purchase and sale agreement when they were unable to sell their own home, even though the seller resold the home for more money within two weeks. Philip Lapatin, counsel for the Greater Boston Real Estate Board (GBREB), said in both cases the state's highest court allowed the parties to get exactly the bargain they had in writing. When an offer to purchase becomes a contract is a complicated area of real estate law. A recent SJC decision makes it clear that the offer to purchase, the first document typically signed between buyers and sellers, is as legally binding a contract as the more lengthy purchase and sale agreement. "I don't think 90 percent of the buyers believe they are bound until they sign a full purchase and sale agreement," said Shepard Davidson of Lane Altman & Owens. Davidson represented Robert and Juliann DiMinico, the couple who may be required to vacate their Burroughs Wharf condominium by summer after having lived there almost a year and a half. As a result of the SJC decision, John McCarthy Jr. will have the right to purchase the unit under the terms of an offer to purchase he signed on Aug. 5, 1995. McCarthy made an offer to purchase Ann Tobin's condominium at Burroughs Wharf in Boston for $526,000 on Aug. 5, 1995. Tobin accepted and signed the offer. Language was added which stated: "Subject to purchase and sale agreement satisfactory to both buyer and seller." The parties were required to sign the purchase and sale agreement by 5p.m. on Aug. 16. The first draft of the purchase and sale agreement was not faxed by Tobin's attorney until after 5p.m. on Aug. 16. McCarthy's attorney made some changes and additions and by Friday, Aug. 25, both attorneys agreed by telephone that the terms were acceptable. McCarthy delivered a signed purchase and sale agreement to Tobin on Monday, Aug. 28, with an additional deposit. In the meantime, Tobin received another offer. On Saturday, Aug. 26, Tobin signed a second offer to purchase with Robert and Juliann DiMinico for $575,000; that is $49,000 more. McCarthy sued.

    In court, Tobin's attorney's argued that because Tobin did not sign the purchase and sale agreement by the deadline stated in the offer, there was no contract. A Massachusetts Superior Court judge agreed and ruled (May 1996) Tobin had not obligation to sell. However, The Massachusetts Appeals Court overturned that decision (February 1998) after an appeal was filed by McCarthy. Appeals Court Judge Jerald Gillerman wrote that first, McCarthy and Tobin had agreed to all of the material economic terms of the sale in their original offer, meaning that the parties had agreed to price, what was included in the sale and the timing of the sale. Second, the court said the language on the offer to purchase form stating, "NOTICE: This is a legal document that creates binding obligations" was intended to convey to the parties there was an agreement to sell. The DiMinico's appealed the case to the Massachusetts Supreme Judicial Court. Robert Diminico said of the dispute "My wife and I fell in love with the unit and were thrilled when the broker called us to tell us it was back on the market…Neither the broker, Ms. Tobin, or anyone else told us that Mr. McCarthy was claiming he still had a right to buy the unit until after we had signed a contract to purchase it and paid a deposit." On March 2 the Supreme Judicial Court confirmed the Appeals Court decision stating that the McCarthy's were entitled to buy the unit under the terms of the offer to purchase. Their rights were unaltered by the fact that Tobin later entered into a purchase and sale agreement with the DiMinicos. Further, the DiMinicos were aware of McCarthy's legal claim to the property at the time they purchased the unit. The DiMinicos are very frustrated and disappointed. It would seem Mr. McCarthy has a very good chance of getting his wish," said Davidson. Davidson has requested a rehearing with the SJC, but it is unlikely to be granted. J. Gavin Cockfield, who represented McCarthy in the matter, recommends that if you as the buyer or seller wish to negotiate further terms and conditions through an attorney, that you put "safe harbor" language in the offer to purchase stating you only intend to be bound when the purchase and sale agreement is signed.

    A second Supreme Court ruling confirms that, if you aren't prepared to forfeit the deposit you put down on a new home, make sure you follow through to the letter with the terms of your purchase and sale agreement. GBREB counsel Lapatin called the SJC ruling very exciting, "This decision overturns over 10 years of cases where the courts questioned the enforceability of liquidated damages clauses in real estate contracts," Lapatin said. Liquidated damages is an attempt to estimate in advance the money that has to be paid if one party defaults. On March 18, 1994, John and Pamela Kelly signed an offer to purchase a home located at 10 Ostego Rd. in Worcester from Steven and Merrill Marx for $355,000. In May of 1994, both parties entered into a signed purchase and sale agreement. The Kellys gave a total deposit of $17,750 to bind the agreements. On Aug. 9, 1994, the Kellys notified the Marx couple they were unable to sell their home on Metcalf Street and that they should pu the Ostego Road property back on the market. Clause 18 of the signed purchase and sale agreement stated: "If the BUYER shall fail to fulfill the BUYER'S agreements herein, all deposits made hereunder by the BUYER shall be retained by the SELLER as liquidated damages." The purchase and sale agreement did not contain any language making purchase of the Marx couple's home subject to the sale of the Kelly's own home. On Aug. 24, 1994, the Marx couple accepted the offer of a second buyer and sold their home to them on Sept. 20 for $360,000. The Kelly's wanted a refund of their $17,750 deposit. The Marx couple refused because they claimed they were entitled to keep the deposit under Clause 18. The Kellys disagreed and filed a lawsuit in Worcester Superior Court. On Dec. 14, 1995, Justice Daniel F. Toomey ruled in favor of the Marxes. He wrote in his decision, "At the time of its acceptance, the clause was objectively fair to both parties" and went on to say that the loss of money on the seller's part was not a condition to enforcing the paragraph, but simply the failure of the buyer to meet the conditions of the purchase and sale agreement. The Kellys appealed the decision in Massachusetts Appeals Court and in May of 1998, the decision was reversed in their favor. In making his decision, Judge George Jacobs wrote that the Marxes suffered no net loss and in fact may have gained financially as a result. He cited the principles of contract law that liquidated damages must compensate for loss rather than punish for breach. The Marxes then appealed the decision to the Massachusetts Supreme Judicial Court, and on Feb. 26, 1999, the court reversed the Appeals Court ruling saying, "The deposit, five percent of the purchase price, was a reasonable forecast of the defendants' (Marxes') losses that would result if the buyers (Kellys) were to breach the contract." The court pointed out a potential loss could have been suffered by the Marxes if they had had to wait to find another buyer or the real estate market changed and their home value decreased. Because potential losses are difficult to predict, this clause which is standard in real estate purchase and sale agreements eliminates the uncertainty and potential lawsuits that would arise if the buyers and sellers of each agreement had to prove actual damages. The litigation between the Kellys and Marxes lasted for almost five years.