Few processes in the practice of real estate brokerage are more important for a broker to understand than those relating to negotiating contract offer and acceptance. While many considerations arise between buyers and sellers during negotiations, three deserve special attention:
• Knowing when a legally binding contract between a buyer and a seller has been formed;
• Clear communication by each party to the contract throughout the period of negotiation;
• Timely and complete notice of acceptance when all parties have reached agreement.
Know When Contract is Binding
Buyers and sellers rely upon brokers to guide them through offers and counter-offers of price and terms, to know the difference between potentially binding and non-binding proposals, and to inform them when a contractual relationship has been established.
Consider this example illustrating the difference between a non-binding proposal and a potentially binding offer or counter-offer:
The listing agent, having received and presented an offer to the sellers, sends an email to the buyer agent stating, “My clients have reviewed your buyers’ offer and they are unable to accept it. However, they would accept an offer of $225,000 with the same terms in your clients’ original offer.”
A few hours later the buyer agent sends an email back stating, “I spoke with my buyers and they will pay the $225,000 your clients are looking for; we have a deal. I will have the amended paperwork to you first thing tomorrow.”
The buyer agent tells the clients that they “have a deal” and the next morning emails the amended offer signed by the buyers to the listing agent. Later that day, another email arrives from the listing agent:
“My sellers have received a second offer, so we are now in a multiple-offer situation. My clients are asking the buyers to submit their highest-and-best offer.”
The buyer agent emails the listing agent stating the belief the buyers are “under contract” (they are not) and the buyers expect the sellers to honor the deal. The listing agent advises the sellers that they are free to consider another offer (which they are) and the sellers subsequently accept the offer of the second buyer.
Clear Communication
Here the buyer agent mistakenly believes that because the necessary terms for a contract were in writing between the brokers, a binding contract was formed. It is important to understand that “negotiations” between the brokers, even those in writing, will generally not bind their clients to a contract since brokers do not generally possess the necessary power or authority. (This may not be the case when the buyer and seller negotiate in writing, as a binding contract can then be formed).
Also, in this example, clarity in both oral and written communications is vitally important for a broker. When you as a broker propose possible terms on your client’s behalf, use language to signal that it is a non-binding proposal: “The seller will consider an offer of $225,000 upon the same terms,” or simply “This is a non-binding proposal.”
Although emails between brokers regarding contract terms should never be interpreted as a binding agreement between the principals, avoiding ambiguity is in everyone’s best interest. Brokers should always advise clients that contracts are not binding unless accepted and signed by all the parties, with any changes initialed and approved by all parties.
Notice of Acceptance
Finally, in the example, there was no clear notice of acceptance. This is the final step in forming a binding contract, and can be made orally or in writing. It is the notice given to the offeror that the offeree has signed and accepted the offer, and a binding contract has been formed. It does not mean that a broker is accepting on their client’s behalf.
When a broker gives notice of acceptance, he or she is communicating that the seller has signed and accepted the buyer’s last offer as written (without any changes to the terms) and the parties are under contract. A broker simply stating “we have a deal” does not, by itself, create a contract. The broker giving notice of acceptance should always be clear as to whether or not the contract in the possession of the seller is signed and the broker receiving notice of acceptance should always ask.
Brokers often raise the issue of whether it is ethical for a seller (or buyer) to consider other offers when they have made a “commitment” to a buyer (or seller). Until a binding, written contract is formed, the parties are free to consider other options.
This article came from the Feburary 2013-Vol43-3 edition of the bulletin.