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S ECTION T WO
CONTRACT F ORMATION
& NEGOTIATION
Outline:
Introduction
Fundamental Contract Principles 101
Offer & Acceptance
Requisites of an Offer
Acceptance
Submitting Offers to Seller
Due Diligence Fee & Earnest Money Deposit
Negotiations - How Binding?
Hypotheticals & Discussion
Learning Objective: Upon completing this Section, brokers should have a much better
understanding of how and when enforceable contracts for the purchase or sale of property are created, the effect of oral negotiations in the offer and acceptance process, and the scope of a broker=s authority when acting as an agent for a buyer or seller.
INTRODUCTION
It really is quite astonishing the number of brokers who either don=t understand or have forgotten the fundamentals of offer and acceptance and contract formation! At one time they knew it, because it was taught in the broker prelicensing course and tested on the state licensing examination, and most individuals acquiring a license since 2006 had to complete a thirty hour postlicensing course devoted to contracts and closing. So is it ignorance, or merely eagerness to believe that one has successfully negotiated an agreement that leads too many brokers to prematurely announce Awe have a deal@ only to later learn that, actually, we don=t? But having announced that the parties have a contract establishes certain expectations that people often begin acting in reliance upon and when they learn that the assertion, i.e., we have a contract, is in fact false, they tend to be upset, both brokers and consumers. Arguably, brokers falsely proclaiming a
contract might be guilty of misrepresentation (whether negligent or willful) or being unworthy or incompetent to act as a real estate broker, both violations of License Law [G.S. 93A-6(a)(1) & (8).] This Section will briefly review $ the essential elements of a contract, $ the concepts of offer and acceptance, $ what constitutes acceptance, $ the effect of negotiations, whether oral, written or electronic and by whom, $ the scope of an agent=s authority to bind his/her principal, and $ comments regarding the payment of due diligence fees and earnest money. Hopefully by the end of this section, brokers= memories will be refreshed, confusion eliminated, and misrepresentations concerning whether there is a contract significantly reduced.
F UNDAMENTAL CONTRACT P RINCIPLES 101
Terminology
The law of contracts comes to us from English common law which, literally, is hundreds of years old and very well established. A A contract @ may be defined as a deliberate agreement between two or more competent parties supported by legal consideration to perform or abstain from performing some act. If the agreement meets specific legal requirements, then it will be binding on the parties and enforceable in a court of law. The person extending the offer is called the offeror and the person receiving the offer is the offeree (analogous to donor who makes the gift and the donee who receives the gift). These roles may change several times during the course of the negotiations. Generally, contracts may be express , i.e., stated in words whether orally or in writing, or implied from the conduct of the parties indicating their intent to be bound. However, within the real estate arena, all contracts for the purchase and sale of real property and most contracts to lease real property must be in writing to be enforceable because of a law known as the Statute of Frauds that comes to us from the English common law. In North Carolina, the Statute of Frauds is found in General Statute ' 22-2 which states in relevant part:
AAll contracts to sell or convey any lands ... and all other leases and contracts for leasing land exceeding in duration three years from the making thereof , shall be void unless said contract, or some memorandum or note thereof, be put in writing and signed by the party to be charged therewith, or by some other person by him thereto lawfully authorized.@
While the statute states that the attempted contract is Avoid@ if not in writing, most courts today treat the oral agreement as voidable and unenforceable, rather than void from the outset. It is this statute that renders oral agreements relating to the transfer of a real property interest unenforceable, and thus virtually meaningless , absent voluntary performance. That is, if the parties choose to voluntarily perform their oral agreement, there is nothing that prevents the property interest from being transferred; it=s just that if either party refuses to do what they orally agreed to do, the non-breaching party will not be able to enforce the oral agreement in a civil action. The purpose of the Statute of Frauds (which extends to certain contracts other than just those for the transfer of real property) is to prevent perjury, forgery, dishonest conduct and false testimony regarding the subject matter of the covered contracts.
is evidenced by his/her signature and the date s/he signs. There must be this Ameeting of the minds@ where all parties understand and agree to all material terms of their negotiated agreement. As stated in the North Carolina Real Estate Manual, 2013-2014 edition (p.363): ... Mutual assent is gathered from a reasonable meaning of the words and acts of the parties and not from their unexpressed intentions or understandings. The
parties = state of mind is not the controlling factor. One who accepts or signs an
instrument which on its face is a contract is deemed to assent to all of its terms and cannot escape liability on the ground that he or she has not read it. The terms of the written agreement will control unless there is a legally recognized mistake of fact or a person has been induced to sign an instrument because of undue influence, duress, overreaching, or an unfair or deceptive trade practice. Manifestation of mutual assent is usually accomplished through an offer communicated to a person and that person=s acceptance communicated back to the person who made the offer.
Consideration: AConsideration@ is the Abargained for exchange@ forming the basis of the parties=
agreement, i.e., what am I getting out of this and what are you getting out of this? There must be some Athing of value@ passing between the parties that supports their agreement, because absent an exchange of value, one party would be acting gratuitously. In a bilateral contract, the exchange of promises typically is sufficient consideration C I promise to purchase and you promise to sell. Because only one promise is made in a uni lateral contract, such as the traditional option to purchase, the person receiving the benefit of the promise must give the promisor literally some thing of value, typically a sum of money, in exchange for the promisor=s promise to do or not do some act. Courts rarely will review the sufficiency of the consideration, but will confirm its existence.
Legal Capacity: All parties to an agreement must be legally capable of entering into a contract.
Conditions that will render a person incapable of contracting include: being a minor (less than 18 years of age); or being mentally incompetent at the time of signing the contract; or being so intoxicated that one does not know what s/he is doing (viewed as akin to mental incompetence if one can=t understand the nature and consequences of one=s acts). Related issues that may impact capacity and whether an agreement is set aside or enforced include fraud or misrepresentation, mutual mistake of material fact, undue influence, overreaching, duress or unfair and deceptive practices, but this is beyond the scope of our present focus. Suffice it to say that the presence of any of these factors may render the contract voidable by the party who lacked capacity.
Lawful Objective: To be enforceable in a court of law, agreements must be for a legally
permissible purpose, rather than illegal, and each party must be able to accomplish that purpose. If the purpose of the agreement will cause any party to commit a crime, whether misdemeanor or felony, then that agreement/contract typically will not be enforced by the courts. Similarly, a contract to sell real property where the named seller doesn=t hold legal title to the property may not be enforceable as the seller had no ability to accomplish the stated objective unless the purported seller was under contract to purchase that property and upon acquiring title would then convey it to the named buyer (which condition should be clearly stated in the contract with that buyer).
In Writing: While written agreements tend to diminish confusion regarding each party=s rights
and obligations under the contract and are always recommended, only those agreements relating to subject matter covered by the Statute of Frauds must be in writing to be enforceable. Thus, an agreement to sell real property must be in writing; an agreement to lease a single family home for one year is not required to be in writing to be enforceable in a court of law, because it concludes less than three years from its making.
O FFER & ACCEPTANCE
Requisites of an A Offer @
In essence, an offer is one party volunteering to promise some act or thing, coupled with a request for something from another party that is to be the agreed exchange for the promise or its performance, namely, the consideration. The Asomething@ may be an act, a forbearance, a promise to act, or a promise to forbear acting in a particular way. An offer must be definite and certain in its terms; the intent underlying the offer must be that it will legally bind the offeror if it is accepted. A valid offer must be an unequivocal promise, certain in its terms, that manifests a present, serious contractual intent, and if it pertains to real property, it must be in writing to comply with the Statute of Frauds.
Where there is no act or thing requested in exchange (consideration) to support the offer, then the offer and any resulting Acontract@ may be held A illusory .@ From a legal standpoint, an illusory offer is no offer at all; one has the illusion of being under contract, but the contract is unenforceable because the essential contract law element of consideration/bargained for exchange is missing. An example is a traditional option to purchase contract with no option fee paid to the owner. If the owner is receiving nothing in exchange for promising not to sell this property to any other person for the next 90 days, then why should the owner be compelled to honor that gratuitous promise?
To comply with the Statute of Frauds , an offer and any resulting contract for the purchase of real estate must be in writing and: $ identify the parties to the contract by individual legal name; $ identify the subject matter of the contract; $ contain all material terms and conditions; and $ be signed by the party to be charged with performance.
Rule A.0112 - Offer & Sales Contracts
Parties to a contract (buyer/seller; owner/lessee) need only ensure that their contract to sell/purchase real property or lease real property for more than three years satisfies the Statute of Frauds requirements enumerated above. Licensees should recall, however, that in addition to complying with state law, they are subject to Commission Rule A.0112. The opening paragraph of this rule states: (a) A broker acting as an agent in a real estate transaction shall not use a preprinted offer or sales contract form unless the form describes or expressly requires the entry of the following information ....
that point have a valid, enforceable contract, right? Not yet. Why not? Because the offer in virtually all real estate transactions is requesting a reciprocal promise from the offeree (rather than the performance of some act), acceptance of the offer is not complete upon all offerees signing the offer.
Both under contract law and pursuant to the provisions of the standard form contract, acceptance is not complete until the last offeree has actually signed the offer and that fact is communicated to the last offeror or his/her agent. Once the offeree=s written acceptance has been communicated to the last offeror, then the parties have an enforceable contract, but until acceptance is communicated to the last offeror or his/her agent, that offeror may still withdraw his/her offer even though it has been signed by the offeree. The contract itself defines A Effective Date @ as AThe date that: (1) the last one of Buyer and Seller has signed or initialed this offer or the final counteroffer, if any, and (2) such signing or initialing is communicated to the party making the offer or counteroffer , as the case may be.@ [Note that all changes should be initialed by both parties to confirm each party=s awareness of and consent to that modified provision.]
This reality is also expressed in the Real Estate Commission=s brochure on A Offer & Acceptance ;@ in response to the question: A Once the seller has signed my offer, does it become a contract? @ {How many brokers would say A yes , you=re under contract!@?} The stated answer is: ANo. It does not become a binding contract until the seller (or the seller=s agent) has notified you (or your agent) that the seller has signed it. If your agent informs you that the seller has Averbally@ accepted or will accept your offer but has not yet signed it, there is no enforceable contract .@ (Italics added.)
Methods of Communicating Acceptance
The offeree=s signing and acceptance of the offer may be communicated to the offeror by various methods unless the offer dictates how acceptance should be communicated, in which event the offeree must utilize the specified method(s). Otherwise, after all offerees have signed the offer, the offeree or his/her/their agent may communicate the offerees= acceptance by any of the following methods:
- Oral communication by telephone or in person;
- Personal delivery of the signed offer or other written notice of acceptance;
- Via mail * (traditional US Postal Service or special delivery);
- Facsimile (fax) machine or electronic mail (email).
In the case of facsimile or email, delivery is deemed complete upon receipt of the communication by the recipient=s equipment or server, not when the recipient actually reads it. A notable exception to the Aupon receipt@ rule, is when notice of acceptance is mailed via post to the last offeror, in which case the A mailbox rule @ applies. In essence, it provides that so long as the envelope was properly and legibly addressed to the recipient and adequate postage prepaid, then notice is deemed Adelivered@ the moment the sender relinquishes control and deposits it with the mail service. The AEffective Date@ of the contract would be the date of mailing and the offeror is precluded from retracting or withdrawing the offer once notice of acceptance has been deposited with the mail service. The mailbox rule only operates within the context of communicating notice
of acceptance of a contract. It is becoming of less relevance, given the immediacy afforded by electronic communications.
Lastly, brokers are reminded that under both the common law of agency, the terms of their written agency agreements with the consumer, and the terms of the standard form contracts, notice to a party (seller, buyer, lessor, lessee) may be accomplished by communicating that notice to that party=s agent.
Submitting Offers to Seller
Under the law of agency, a seller = s agent ( listing agent or seller = s subagent ) has a duty to
communicate (present) all offers on a listed property to the seller (principal) as soon as possible
and to disclose to the seller all information in the agent = s possession that might affect the seller = s
decision to accept an offer. In addition, Real Estate Commission Rule 21 NCAC 58A. requires all licensees to A... immediately, but in no event later than five days from the date of execution, deliver to the parties thereto copies of any contract, offer, lease or option affecting real property.@ It is important to note that this Commission rule applies to all agents involved in a transaction regardless of whom they represent or from whom they will receive compensation.
These requirements mean very simply that a seller = s agent (or subagent) must immediately
present all offers to the seller and must inform the seller of any matter that might affect the seller=s decision. The agent cannot withhold or delay the delivery of offers or information. Understand as well that merely telling the client what the main terms of the offer are does not in any way excuse or delay the five day delivery requirement. A copy of the document must be delivered to the client, whether personally, by electronic transfer, postal service or other means.
Example: Sally Seller lists her property with Bob Broker with an asking price of $319, and authorizes him to list the property with a multiple listing service. Bob finds a prospect who is fairly interested in the property and who probably will make an offer of $315, after checking with his father about helping out with a downpayment. In the meantime, Zippy Smith, a competing broker who is also a member of the multiple listing service, contacts Bob Broker and delivers to him an offer to purchase the property from a third party who is willing to pay $315,500 for the property. Because Bob does not want to split the commission with Zippy, he places the offer in his desk drawer and does not tell Seller about it. Bob hopes that his prospect will come through with an offer soon and that he won=t have to present the offer from Zippy=s prospect. Bob=s action constitutes both a violation of agency principles and of Real Estate Commission Rule A.0106.
In addition to presenting signed offers, a seller = s agent (or subagent) also must promptly
inform the seller of any possible offers that may be forthcoming. Such information may be extremely important to the seller.
Example: X has interested Smith in purchasing a residence listed with X=s firm although Smith has not signed an offer to purchase the property yet. Y of another firm phones X and informs him that he has a prospect who is very interested in purchasing, and that he will be preparing an offer with the prospect that evening. After this phone call, X hurries over to Smith=s house, convinces Smith to make a formal offer to purchase the property, and promptly delivers Smith=s offer to the seller without informing the seller that another
AA broker shall not disclose the price or other material terms contained in a party=s offer to purchase, sell, lease, rent, or option real property to a competing party without the express authority of the offering party.@
To disclose terms of an offer to one or two buyers, but not to other competing buyers, gives the first two buyers an advantage over the others. If the seller doesn=t want to accept any of the offers as presented, s/he may instruct the listing broker to notify all buyers that the seller has received multiple offers and invite each buyer to submit his/her highest and best offer, if they have not done so already, by a certain time and date when the seller will reevaluate the offers received
and make a decision. The listing broker with the seller = s permission may also outline any terms
the seller might favorably consider, so long as the information is given to all. Note that this rule is not limited to sales transactions, but applies to ANY offers received by a broker, including offers to lease, rent, exchange or option to purchase property.
Understand as well that the mere fact that the owner has received more than one offer is not a material fact that the listing broker must disclose to any of the prospective buyers. A
listing broker must first obtain the owner = s consent before mentioning to anyone that the owner
has received or is considering more than one offer. In a seller=s market, the owner may want this information disclosed so buyers are aware that there are several people who are interested in the property. However, in a buyer=s market, where there are numerous available properties that satisfy a buyer=s needs, a buyer may decide not to even make an offer on a property if s/he knows another offer is pending or is coming in, as s/he does not want any competition when negotiating a purchase or lease. Rather than assume s/he may disclose that there are multiple offers, the listing broker must obtain the owner=s consent to share that information and should share the same information with everyone to treat all fairly, equally, and honestly.
Multiple Contracts?
Once an owner accepts an offer and enters into a contract, it generally is not a good idea for that owner to accept a later offer if the pending contract has not been terminated, unless the second acceptance is in a back-up or qualified capacity. Thus, in the past, it was rare for an owner to have multiple contracts C offers, yes; contracts, no. Brokers still should not commonly encounter multiple contract situations unless they are involved in short sale transactions. The Commission has long maintained that a listing broker in a short sale transaction must notify the lienholder upon the seller=s receipt of any offer, even if the seller already has accepted an offer that is being reviewed by the lienholder. Different lienholders have different practices; apparently some are now instructing sellers to go ahead and sign any and all offers acceptable to the seller and send them to the lienholder for its consideration and approval. It is absolutely critical, however, that the standard Short Sale Addendum (Form 2A14-T) be attached to these offers/contracts to protect both parties. The short sale addendum has been substantially revised and Paragraph 6 has several provisions that address AOther Offers/Additional Contracts.@ The underlying theory is that the seller can=t sell without the lienholder=s consent and the lienholder will only approve one of the many contracts and reject all others, thus protecting the owner against liability that otherwise would attach for contracting to sell the same property to multiple buyers.
Due Diligence Fee & Earnest Money Deposit
In discussing a broker=s receipt of trust monies belonging to others, it should be understood that the brokerage trust accounts typically will be in the name of the company and the broker-in-charge will be held strictly accountable for oversight and management of that account. Associated brokers usually will not have access to the trust account and must be instructed how they are to handle such funds under office policy while offers are being negotiated. It is not recommended that associated agents be allowed to retain the check in the transaction file during negotiations. Further, brokers-in-charge are reminded that Commission rules require a provisional broker who receives trust monies to deliver all such monies upon receipt to their broker-in-charge , so provisional broker do not have the option of holding and safeguarding funds.
Due Diligence Fees and Option Fees
Due diligence fees and option monies are similar; they are payable directly to the owner of the property to provide consideration for the period of time during which the buyer may decide to terminate the contract, i.e., the due diligence period, or during which the optionee may decide to purchase the property. As mentioned earlier in the discussion of consideration and unilateral, bilateral, and illusory contracts, most legal scholars agree that some option fee or other consideration must be paid to support a traditional option contract, and many believe the same logic applies to the payment of the due diligence fee under the current Standard Form 2-T. In part to address this concern, Standard Form 2-T expressly states that if the parties agree that no due diligence fee will be paid or only a nominal sum, e.g., $25.00, then all parties
A... expressly waive any right that they may have to deny the right to conduct Due Diligence or to assert any defense as to the enforceability of this Contract based on the absence or alleged insufficiency of any Due Diligence Fee, it being the intent of the parties to create a legally binding contract for the purchase and sale of the Property without regard to the existence or amount of any Due Diligence Fee.@
Thus, must a buyer offer to pay a due diligence fee to the owner-seller? Not according to the terms of the standard form. Can either party argue that the lack of a due diligence fee invalidates the contract? Supposedly not, since the contract states that each party has waived or relinquished the right to use the lack of a due diligence fee as an argument to avoid the contract. How a North Carolina court will interpret that clause and assess the element of consideration
remains to be seen. Standard Form 2-T states that $x of the purchase price will be paid A ...BY
DUE DILIGENCE FEE made payable to Seller by the Effective Date .@
Brokers Handling Due Diligence Fees
How is a broker supposed to handle due diligence fees? Rule A.0116(a)(4) states: (4) A broker may accept custody of a check or other negotiable instrument made payable to the seller of real property as payment for an option or due diligence fee, but only for the purpose of delivering the instrument to the seller. While the instrument is in the custody of the broker, the broker shall, according to the instructions of the buyer, either deliver it to the seller or return it to the buyer. The broker shall safeguard the instrument and be responsible to the parties on the instrument for its safe delivery as required by this Rule. A broker shall not retain such an instrument for more than three business days after the acceptance of the option or other sales contract.
offer to purchase or lease; the date of such acceptance of such offer or lease shall be set forth in the purchase or lease agreement.
The rule allows but does not require a broker to hold and safeguard a check or other negotiable instrument for earnest money or tenant security deposit until the parties have actually entered into a contract, at which point the mandatory three banking day clock starts to tick. Earnest money received in the form of cash must immediately be deposited into a broker=s trust account, as the three banking day clock for cash always begins to tick upon the broker=s receipt, regardless of the purpose of the payment.
If the offer states that the earnest money is submitted with the offer, then the check or payment should be with the offer. If the buyer doesn=t want to write a check for the earnest money initially and have some broker hold and safeguard it during negotiations, then the buyer might select the other alternative, which is to pay any initial earnest money deposit within five days of the Effective Date and not even worry about writing a check until the parties are successfully under contract. Another alternative would be to pay an A(additional) earnest money@ payment (which may be the initial payment) at a later specified date. In any event, an escrow agent should never sign acknowledging receipt of earnest money or any other monies until s/he either has received
something s/he can deposit or verifies wire transfer of the amount into the escrow agent = s trust
account. What about a back-up contract situation or multiple contract/short sale transaction? As in all contract cases, the parties will be bound by their agreement and if and when earnest money must be paid will depend on the terms of each contract. If the parties don=t want to pay any deposits until sometime well after the Effective Date, such as when the contract becomes primary, then the contract needs to say that.
Three Banking Day Rule
How do these various payment options interface with a broker = s obligation to deposit
earnest money within three banking days of receipt or contract formation as required by Commission Rule A.0116? A broker=s three banking day clock usually commences upon the broker=s receipt of trust monies, as one cannot deposit what one does not possess. Thus, where the earnest money check is tendered with the offer and already in the broker-escrow agent=s possession, that broker may safeguard the check pending contract formation, upon which event the broker=s three banking day clock begins. If, however, the contract provides that the buyer will pay the earnest money within five days of the Effective Date, then the broker-escrow agent=s three banking day clock will commence upon the broker=s receipt of the funds, not the Effective Date.
Example: The seller accepts and signs the buyer=s offer at 10pm on Wednesday, June 26, 2013 and the listing agent faxes a copy of the signed offer to the buyer=s agent at 8:30am on Thursday, June
- Earnest money is to be paid within five days of the Effective Date. (Is the Effective Date June 26 or 27?) Buyer writes a check payable to the listing company on Sunday, June 30, and gives it to his buyer agent who delivers it to the listing agent on Tuesday, July 2. Queries: 1) Was the earnest money timely paid by the buyer?
- When did the listing agent=s three banking days begin and what is the final date by which the check must be deposited into the broker=s trust account?
NEGOTIATIONS - H OW BINDING?
Brokers all too frequently tell their principals that the principal no longer is free to accept some other offer or do some other act because the broker , on behalf of the principal, has negotiated an agreement with the broker representing the other side. In fact there was an article in the January/February 2013 REALTOR magazine titled AE-mail Could Be Binding@ that discussed a Massachusetts Superior Court ruling on a preliminary issue in Feldberg, et.al. v. Coxall. In discussing the issue in the case, the article commented (p. 37):
... attorneys representing the buyer and seller exchanged a series of emails about the deal, the last one attaching a revised, but unsigned, offer to purchase. When the seller pulled out of the deal, the buyer sued, claiming the deal had been sealed in the last e-mail. The seller argued that nothing had been signed, as required under ... the Statute of Frauds ... and sought dismissal of the claim. [Italics added.]
The series of email negotiations in the Feldberg case were between the seller-owner=s corporation (unclear whether with Mr. Coxall himself or his corporation=s attorney) and the attorney/ law firm representing the purchasers. Whether an attorney has the authority to bind his client to an agreement will be influenced by what authority the client-principal has conferred, which may or may not be in writing, the rules of the State Bar, and perhaps custom and practice.
The standards governing attorneys = conduct are completely distinct from those governing real
estate brokers, and attorneys = ability, if any, to obligate their principals is not precedential for
brokers.
The other interesting note about the Feldberg case was that the Court was ruling on an exceptionally narrow preliminary issue as to whether the continued registration of a lis pendens notice/order was appropriate. The Court concluded that the plaintiffs had met their burden and were entitled to the lis pendens until the case could be heard on its merits, at which time seller=s motion to dismiss for failure to satisfy the Statute of Frauds would be heard and interpreted in light of the Uniform Electronic Transactions Act (UETA). The Court commented:
...[Defendant=s] arguments about the alleged insufficiency of the parties= e-mail communications to meet the Statute of Frauds and to show an intent to be bound are substantial and may well prevail .... There is some authority treating, as open, the question whether e-mails, coupled with an unsigned draft agreement, can satisfy the UCC requirement of a signed writing, although the Court in that case found that the particular e-mails from the defendant evidenced no intent to be bound to a contract with the plaintiff. See May Trucking Co. v. Northwest Volvo Trucks, Inc. , 238 Or.App. 21, 241 P. 3d 727 (2010), review denied, 350 Or.App. 130, 250 P.3d 922(2011).... In truth, the Courts have not yet set forth rules of the road for Athe intersection between the seventeenth-century statute of frauds and twenty-first century electronic mail.@ [citing May supra.] ... The Uniform Electronic Transaction Act is one attempt to do so. It applies Ato transactions between parties each of which has agreed to conduct transactions by electronic means.@
The question was unanswered in this case, as the parties apparently reached an agreement resolving their dispute prior to a trial on the merits. However, in the 2001 case of Shattuck v.
Ruling
A Motion for Summary Judgment is appropriate when there are no genuine issues of material fact for a fact-finder, whether judge or jury, to determine; in other words, the facts are undisputed and when the law is applied to those facts, then one party is entitled to judgment as a matter of law C the granting of a judgment summarily. Basically, the defendants= argument was that they never signed or initialed the counteroffer, and thus there was no writing signed by the party to be charged as required by the Statute of Frauds. Plaintiff attempted to argue that Tom=s email assertion that the buyers were Aexcited about their new home and agree to the counteroffer@ was a sufficient writing to satisfy the Statute of Frauds and thus obligate the buyers since Tom was their agent. Plaintiff argued that there were genuine questions of material fact as to whether: A) Tom acted with actual or apparent authority, B) there was a valid contract and C) the writings were sufficient to satisfy the Statute of Frauds.
In addressing Plaintiff=s arguments, the Court, citing prior case law, noted that principals are only liable on contracts made by their agent with a third party in three instances, namely: when the agent is acting within the scope of his actual authority or within the scope of his/her apparent authority, or when the principal ratifies the agent=s unauthorized act. Actual authority is that authority which the agent reasonably believes s/he has and may be implied from the words and acts of the parties. However, citing a 1981 North Carolina Supreme Court case, the Court stated the general rule that AA real estate agent in North Carolina, absent special authority, does not have the power to bind his principal in a contract to convey real property .@
In the instant case, the Kurtzes had signed NCAR Form 201, AExclusive Right to Represent Buyer.@ Mr. Kurtz testified that while he and his wife had authorized Tom to negotiate a contract, they had not conveyed any permission or authority to enter into a binding contract on their behalf. Such permission should be in the written agency agreement and most likely would require a formal Power of Attorney granting the broker the authority to accept contracts in the Kurtzes= stead, which Tom acknowledged he had not been given. Thus, there was no actual authority. The Court also held that there was no apparent authority either, as Tom=s emails were A... no more than notifications ...@ to seller/listing agent that the defendants had agreed to the counteroffer, that Tom had received a faxed copy of the check, and that he expected to receive the initialed offer shortly. Thus, the Court concluded that the trial court had properly granted summary judgment for the defendants.
Recommended Practice
In light of the foregoing, it would appear that absent express written permission from the principal, a real estate broker in North Carolina has no authority to actually enter into contracts on behalf of his/her principal. Nevertheless, as suggested in the Realtor article, brokers might consider including some type of disclaimer in the email or document basically stating that the content is for discussion or negotiating purposes only and that a contract will only be created once it has been signed and accepted by all the parties. If the communications are electronic, the disclaimer might also include a statement that permitting the agent to communicate via email should not be construed as consent by the principal to conduct the transaction electronically.
What is a Valid Signature?
As can be surmised from the Shattuck case, while the Statute of Frauds requires that agreements/contracts be signed by the party to be charged, the law no longer necessarily requires the handwritten signature of a party. Since the adoption in North Carolina of the Uniform Electronic Transaction Act (UETA) in 2000, electronic signatures may be sufficient if the parties have agreed to conduct their transaction electronically. State law defines an A electronic signature @ as A an electronic sound, symbol or process attached to, or logically associated with, a record and executed or adopted by a person with the intent to sign the record .@ (G.S. '66-312(9).)
More simply, an e-signature is any method that indicates that the person who claims to have written the message is actually the author and that the message received is in fact the one sent. Merely typing one=s name at the end of an email constitutes a valid signature. Nonetheless, because anyone may type anyone=s name, a prudent brokerage practice is to require encrypted digital signatures. This practice adds a security feature that helps verify that the person signing is who s/he claims to be and not an imposter just signing that person=s name, although signatures are not required to be encrypted to be valid and binding.
H YPOTHETICALS & DISCUSSION
With the foregoing background, let us now consider different fact situations and apply the principles reviewed herein to the facts presented. The answers will be discussed on the following pages after hypothetical #3.
Case #1:
Buyer agent physically delivers an offer on behalf of his buyer client to the listing agent along with a $300 due diligence fee check payable to the seller and a $2000 earnest money check payable to the listing company. Buyer agent provides no other instructions to the listing agent. The listing agent reviews the offer and faxes it to her seller who has already relocated to Colorado for employment purposes. Believing the seller will view the offer favorably, the listing agent deposits the earnest money check into her trust account. Two days later, buyer contacts his broker to learn the status of the pending offer and to inform his broker that he=s found another property he likes better. Buyer agent telephones the listing agent and notifies her that the buyer has withdrawn his offer and would like his checks for the due diligence fee and earnest money back please.
- May buyer withdraw his offer?
- What if the seller had signed the offer without making any changes and had faxed it back to her listing broker?
- May the listing broker refund the earnest money 48 hours after deposit? Did the listing broker violate the Commission=s trust account rules?
Case #2:
Same facts as first paragraph in #1 above; however, ten minutes before the buyer contacts his agent 2 days later, the buyer agent receives a phone call from the listing agent informing him that the sellers have accepted the buyer=s offer and the parties are under contract. Buyer agent
Discussion
Case
May the buyer withdraw his offer? Yes, because neither the buyer nor his buyer agent have been notified by the seller or listing agent that the seller has accepted.
What if the seller had signed the offer without making any changes and had faxed it back to her listing broker? Even under this scenario, the buyer could still withdraw his offer because neither he nor his agent were notified of the seller=s acceptance prior to them telling the listing agent of buyer=s decision. The last offeror virtually always has the right to withdraw or retract an offer so long as s/he communicates the withdrawal to the offeree or the offeree=s agent before the offeree notifies the offeror that they have accepted the offer by signing it. The seller returning the signed offer to her agent does not constitute notice to the buyer or his agent. Had the seller faxed or emailed copies of the signed offer to both her listing agent and the buyer=s agent (assuming facsimile and email are authorized means of communicating notices pursuant to the final page of the parties= contract), then the buyer would not have been able to withdraw the offer, even if neither he nor his agent had yet retrieved the fax or email, so long as it had been received by buyer broker=s equipment or server.
May the listing broker refund the earnest money 48 hours after deposit? Did the listing
agent violate the Commission = s trust account rules?
The listing agent did not violate any Commission rule; since she had not received any instructions from the buyer or buyer agent regarding either deposit/fee, she was free to apply her own judgment. Recall, Rule A.0116(a)(3) allows a broker-escrow agent to hold a non-cash earnest money deposit pending contract formation for exactly this reason, but it does not require the broker to wait until a contract is successfully negotiated.
It would not be prudent for the broker to refund the earnest money upon notice that the buyer has retracted the offer, since she only deposited the check into the brokerage trust account two days earlier. Obviously the broker has the physical ability to write a check and refund the deposit, but until the broker knows that the buyer=s check has been honored, she should not refund monies until she can verify that the funds actually were deposited into the broker=s trust account. Otherwise, she runs the risk of refunding the deposit, only to learn that the buyer=s original check was dishonored, leaving her with a trust account shortage.
Case
1) May the buyer withdraw his offer at this point (following listing agent = s telephone call to
buyer agent)? No, the buyer=s right to withdraw or retract his offer only exists until the point that the buyer or his agent receives notice of the seller=s acceptance. The moment that the buyer agent was notified of seller=s written acceptance, the buyer=s right to withdraw the offer was extinguished.
2) What must the listing agent do if the buyer rushes to the listing agent = s office and
demands the return of the check for the due diligence fee? So long as a due diligence fee check or other negotiable instrument is in the possession
of any broker, the broker is to obey the buyer = s directives. Thus, even though the buyer and
seller are now under contract and the seller is legally entitled to the due diligence fee, the listing
agent nonetheless is supposed to return the buyer = s original check or negotiable instrument to the
buyer. Really? Yes. Isn=t the buyer in breach of contract? Yes. Could the seller sue the buyer for the amount of the due diligence fee? Yes, and most likely claim their court costs and a portion of the seller=s attorney fees, if any. Nonetheless, the broker need not be involved in the dispute of right and wrong; the broker merely needs to follow the buyer=s directive so long as the check or negotiable instrument for the due diligence fee is in a broker=s possession.
Understand that if a broker accepts cash for a due diligence fee then that cash must be deposited immediately into the broker=s trust account and once in a broker=s trust account, the disputed funds rule applies, rather than the exception in Rule A.0116(a)(4), as there is no piece of paper (i.e., check) to merely hand back to the buyer.
- What if the buyer demands the return of the earnest money check? The broker is not obligated to return the earnest money and in fact should not, as the parties are legally under contract and the check is already in the broker-escrow agent=s possession, so the three banking day clock starts ticking immediately. The exception discussed in #2 above is limited only to checks for due diligence fees or option fees.
4) What if the listing agent, when asked whether everyone had signed, had replied A Well,
yes, they = ve already accepted and they = re on their way into the office now to sign the
papers. @ Would that affect any of the foregoing answers?
Yes B it changes all of the last three answers, as the situation is identical to Case #1. There is no enforceable contract at the time the buyer notifies his agent that he wants to withdraw his offer because the sellers have not yet signed the offer and may still change their minds. Notice of alleged acceptance prior to actual signatures from/by all necessary parties negates the purported acceptance because it has not yet occurred. Notice of acceptance must follow signing of the offer by the last party.
THE FIRST QUESTION TO ASK when told A we have a deal @ or something similar SHOULD BE A HAS EVERYBODY SIGNED? @ If the answer is A not yet, @ then we DON = T have a deal!
How might the buyer agent assist in this situation if in fact the sellers had signed and there was a valid contract at the time the listing agent telephoned the buyer agent? The buyer agent may wish to educate his buyer-consumer to the reality that the buyer does appear to be under contract and the seller thus is entitled to the due diligence fee and could sue the buyer for the amount, plus additional costs that only make it more expensive for the buyer. If the buyer doesn=t want to purchase the property, he still has the right to terminate the contract so long as his due diligence period hasn=t expired. Thus, the buyer should be encouraged to allow the buyer agent to return the due diligence fee check to the listing agent to send to the seller, along with a notice informing the listing agent that the buyer is exercising his right to terminate the contract. Buyer
