When Is a Contract Really a Contract?

• June 18th 2013

by Craig Davitian

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This article was originally published in March 2011.

When a contract for a home purchase actually becomes official is a reasonable concern for both buyers and sellers, as the date of the contract is the starting point for calculating the contract's contingencies and deadlines.

A prior client who was selling his home in Georgetown recently reached out to ask my opinion as to whether his house was actually under contract. He explained that he had accepted the buyer's initial offer, accepted all of the offered terms and had initialed and signed the paperwork in all the appropriate places. Upon signing the last page, his agent told him that the house was under contract, and she canceled plans for the next open house.

A few hours later, the agent called to say that the buyer's offer had not included a couple of legally necessary disclosures (soil and lead-paint) and the buyer had missed two initials. The client asked if the house was still under contract and the agent said yes.

But in fact, it wasn’t. Real estate contracts are not binding until all terms are accepted (even the seemingly unimportant ones) and the last party to sign delivers the contract to the offeror.

In the case above, the contract was not binding for two reasons: (1) the offer the seller thought he was accepting was not valid because it lacked certain legal disclosures, and (2) his acceptance was not official because the buyer's missing initials created outstanding terms.

Further confusion can arise by thinking a ratified contract is a binding contract. The term "ratification" is used with real estate contracts, but not generally used in business contracts. A "ratified" contract is one where the parties have agreed in writing to all of the offered terms, however it is not binding until it is delivered to the offeror. It's a technical point (a gap in time, so to speak) but a period ripe for one party to mistakenly think there is a binding contract when one does not exist.

A good way to avoid any confusion on this point is to make the contract as clear as possible. A contract that is vague, confusing, has open terms, is based on verbal exchanges, or has misleading terms, is not a contract at all. If language is added to a contract form, aim for simple, easy-to-understand terms. If it's confusing when written, it's only going to become more confusing when read later by others.

Buyers or sellers who will be traveling during contract negotiations should know that most pre-printed real estate contract forms allow for delivery (and thereby acceptance) by either the buyer/seller or their agent. If you will be traveling during negotiations, strike any language that allows delivery to your agent to be considered the same as delivery to you. This allows for additional time to respond to counter-offers while you are traveling.

Why is all this important? Assume the seller in the example above believes the contract is binding when it is not. The agent cancels the open house and the seller, relying on having a contract, plans on getting out and looking for his next home. The buyer, realizing there is not a contract in place, continues his search for a home, finds one he likes better, and instructs his agent to pursue the new listing. The seller is then left without a buyer and greatly disappointed.

Craig Davitian is an attorney with the Davitian Law Firm and is licensed in the District of Columbia and Maryland. This information is not legal advice and is offered for educational purposes only. Feel free to Craig at craig@cldlawfirm.com.

This article originally published at http://dc.urbanturf.production.logicbrush.com/articles/blog/when_is_a_contract_really_a_contract/3201.