By: Miriam J. Baer, Deputy Legal Counsel
Have you ever been involved in a real estate transaction in which you were not certain whether the parties had a binding contract? Perhaps the buyer and seller had reached an oral agreement when another buyer made an offer on the property. Maybe one of the parties got "cold feet" and wanted to back out of the deal even after signing the contract.
To determine whether parties have an enforceable contract, you must be familiar with two basic concepts of contract law: the Statute of Frauds and the concept of acceptance.
Every state has a law known as the "Statute of Frauds," which requires certain contracts to be in writing in order to be enforceable. Included in the North Carolina Statute of Frauds are certain long-term leases and all contracts for the sale of land or any interest in land. To be enforceable, these leases and contracts must also be "signed by the party to be charged"; i.e., the person against whom you want to enforce the contract.
So, if one party has not signed a purchase contract, and has only orally agreed to its terms, he or she may not be held to the agreement. This means that if a buyer makes a written, signed offer to which a seller has only orally agreed, the agreement is not enforceable. If the seller receives a second offer, he is free to accept it.
The second important concept in determining whether you have an enforceable contract is that of "acceptance. " Along with "offer" and "consideration, " "acceptance" is required in every contract between two or more parties in order for the contract to be legally valid.
Generally, it is easy to determine when you have an "offer" in a real estate transaction. In North Carolina, a buyer usually makes the initial offer in writing, (often on the standard Offer to Purchase and Contract form), signs the offer and presents it to the seller or the seller's agent.
Likewise, "consideration" - something of value given to induce the other party to enter the contract - is usually not an issue in real estate contracts. Typically, the buyer promises to give money or property to induce a seller to convey real property. (This does not mean that earnest money is required to form an enforceable contract; the parties can form an enforceable contract without the buyer giving earnest money provided the other requirements are met.)
The remaining issue in real estate contracts, then, is the question of whether "acceptance" has occurred.
Only when a contract has been properly accepted does it become enforce able. To achieve a valid acceptance, a contract for the sale of real estat( must meet two elements: "signature' and "communication of acceptance."
1. Signature
While a full signature is preferred, any mark will suffice - including initials or even an 'Y' (for instance, when one of the parties is unable to write) - as long as it is made with the intent of the signer to be bound to the contract. There have even been cases in which a letterhead was considered a sufficient signature for a party.
Similarly, the signature does not have to appear at the bottom of the document. Although it is preferable for the signature to be at the bottom, the contract will still be valid if the signature appears elsewhere. A party can therefore initial a contract at the side (as when rewriting a counteroffer) and be bound to the contract.
2. Communication of Acceptance
Signature alone is not sufficient to constitute a valid acceptance: the accepting party must also communicate acceptance to the party who made the last offer or counteroffer.
Assume, for example, that a buyer makes a written, signed offer which is delivered to the listing agent and then to the seller. The seller likes the offer exactly as written and signs it. Has a binding contract been created? No! The seller has not communicated acceptance back to the buyer. The contract will not be binding until the buyer (or the buyer's agent) learns of the seller's acceptance.
Unless the parties have agreed to a particular method of communication, communication of acceptance can be made in any manner that is convenient for the parties, and can even occur accidentally. Therefore, in a typical residential sales transaction, communication of acceptance can be made orally, e.g., by calling and advising the buyer of acceptance. This oral acceptance does not violate the Statute of Frauds because the contract itself has been written and signed. It is only the communication of acceptance that is oral.
(Note that delivery of the contract document is not required to make a contract enforceable. The contract is formed at the time of communication. The real estate agent does, of course, have a duty to provide copies of the contract to the parties under the Real Estate License Law.)
Because communication must be made to the other party in the transaction or to the other party's agent, it is important to know whether the real estate agents involved represent the buyer or the seller.
a. Communicating acceptance of a buyer's offer or counteroffer
Suppose that a seller signs a buyer's written offer and then tells the listing agent that he has accepted the offer. Is the seller's statement to the listing agent sufficient to create a binding contract'? No. The seller has communicated acceptance only to his own agent, not to the buyer or to the buyer's agent. So, the contract is not yet enforceable.
Assume then that the listing agent tells the selling agent that the seller has signed and accepted the buyer's offer. Has communication of acceptance been accomplished? The answer depends upon which party the selling agent represents. If the selling agent is a subagent of the seller, communication to the selling agent does not create a binding contract. However, if the selling agent is a buyer's agent, communication to him is as good as communication to the buyer herself: the contract is enforceable once the buyer or the buyer's agent learns that the seller has signed the buyer's written, signed offer.
b. Communicating acceptance of a seller's counteroffer
Now suppose that the seller rejects the buyer's offer but makes a written, signed counteroffer. To accept the seller's counteroffer, the buyer must do two things: (1) sign the counteroffer, and (2) communicate acceptance back to the seller or to the seller's agent. A signature, without communication, does not create a contract. Conversely, communication of acceptance, without a signature, does not create a contract.
Remember that communication of the buyer's acceptance must be made to the seller or to the seller's agent or subagent. If a buyer communicates acceptance to his own agent, i.e., a buyer's agent, no binding contract has been created.
c. Oral negotiations
Often after the buyer makes an initial written offer, all subsequent negotiations are communicated orally through the real estate agents involved in the transaction. This practice is acceptable, but may delay reaching a binding agreement. A "gentlemen's agreement" is unenforceable; to be binding, the terms must be put in writing and signed by the parties.
In a "nutshell"
A contract for the sale of land is enforceable only if (1) it is in writing and signed; and (2) an offer has been made, is supported by consideration and is properly accepted. Acceptance requires not only the written signatures of the parties, but also communication of acceptance from the party accepting the last offer/counteroffer to the party (or party's agent) who made it