Can a seller send out multiple contracts of sale to two or more purchasers when selling an apartment or house? This has been a long standing debated issue in real estate and the answer is grounded in basic contract law and a variety of ethical considerations.
A purchase and sale agreement (or contract of sale) is a contract between the home seller and the home purchaser. To understand the responsibilities and obligations of the two parties, you must have an understanding of the concepts of “offer and acceptance” and “meeting of the minds.” A seller may list a property for sale (ex. $500,000). A prospective purchaser may make an offer ($490,000). At this point, the seller has the option to either accept the offer or decline the offer. If the offer is accepted, the concept of offer and acceptance has been attained. If the offer of $490,000 is declined by the seller, there is no acceptance and, accordingly, no agreement. If the seller counter-offers with $495,000, the purchaser has the option to accept or reject the counter-offer. Provided the parties are in agreement with the same sales price, there is offer and acceptance.
But there is more to an offer and acceptance on the price of the property. The parties also must agree to a variety of other points. Among the most common is the closing date, financing, and possible repairs. Even though the parties have agreed to a sales price, if the parties cannot agree to other important points, there is not a “meeting of the minds.” To make matters even more complicated, the fact that an offer is accepted by a seller does not bind the parties. In New York, the contract of sale must be in writing and must be signed by both parties. A transaction is not set in stone until it has been signed by both parties – until then there is no legal obligation between the purchaser and the seller. This can cause a great of anxiety among purchasers in New York. A purchaser typically signs a contract first and delivers it to the seller. If the seller receives a better offer from a second buyer before the seller countersigns the contract, the seller can decide not to sign the contract with the first purchaser and proceed with the second buyer. With the foregoing in mind, a seller can negotiate with more than one purchaser at a time.
Until a contract is fully signed, the seller has the option to proceed with whomever they want. A seller could have verbally accepted an offer but while the contract is being negotiated, a second purchaser can enter the picture, offer a higher purchase price and the seller can enter into an agreement with the second purchaser leaving the first purchaser with no deal. Similarly, a purchaser can offer to purchase two or more properties. A purchaser can consider all and pick one that works best for them after the details have been finalized. But until the purchaser enters into a contract with one seller, the purchaser is not obligated to proceed with the transaction.
The seller cannot however enter into two written contracts. The seller cannot enter into a new second contract unless the first contract has been cancelled. A contract can be cancelled if a purchaser fails to proceed to closing or if a condition has not been met (ex. Securing a mortgage, acceptable building inspections or receiving co-op board approval). Many contracts contain a contingency clause and the seller and purchaser must be careful in including these clauses in the contract. The seller and purchaser must consult an attorney who is familiar with contingencies and seek appropriate advice in such circumstances.
There have been instances where a seller can enter into a second contract even after signing a first contract but only in instances where the conditions of the first contract have not been met or termination of the first contract. For example, if the first contract is conditioned upon the purchaser obtaining financing and fails to receive the financing, the first contract can be cancelled and the second contract can be inserted in its place provided the second contract contains a clause that provides that the second contract becomes valid only after the first contract is cancelled.
Negotiating multiple transactions simultaneously may raise a separate concern for a seller. In most cases, a real estate broker or agent will handle the offer and acceptance proceedings between the seller and purchaser. The broker is obligated to relay all offers to the seller. It is up to the seller to decide which offer to accept. But the more important issue is when a broker is entitled to receive his or her commission. In New York, the broker is entitled to receive a commission upon bringing a ready, willing and able purchaser to the seller. If a seller verbally accepts an offer from one purchaser but enters into a contract with the second purchaser, the broker may be entitled to a commission on the first transaction. If a purchaser continues to negotiate the sale price or other details of the transaction and another purchaser has agreed to pay the seller’s sales price with a second purchaser, a broker will not be entitled to a commission on the first transaction. A seller should make sure that the broker agreement contains a clause that a broker commission is only earned and paid when the title transfers to the purchaser.
In an aggressive market, bidding wars are not uncommon. Sellers may be flooded with multiple offers and consequently may accept more than one offer and instruct attorneys to send out more than one contract. For a seller, there is never a guaranty that the buyer’s accepted offer will ultimately result in a signed contract of sale as neither party is bound until a fully signed contract has been executed and delivered. Many sellers accept back up offers. Similarly, a buyer may find another property they like better or decide against signing the contract after discovering an issue as part of their due diligence or property inspection. If the first transaction is not signed and a second contract is out, presumably it will take less time to finalize a backup offer. If one purchaser continues to negotiate the sale price and another purchaser has agreed to pay the seller’s sales price, the first purchaser may lose the transaction.
When there is substantial activity on the sale of a property, the seller can arrange for a “best and final offer” or a “sealed bid.” Prospective purchasers will submit their best and final offer to purchase a property. A sealed-bid auction is a type of auction process in which all bidders simultaneously submit sealed bids to the seller by a certain date, so that no bidder knows how much the other auction participants have bid. The highest bidder is usually declared the winner of the bidding process. However, even when a purchaser submits the highest sales price, a sale is not enforceable until a contract of sale is signed by both parties.
For many purchasers who know they are involved in a multiple contract situation, it is a race to the finish line, one sometimes that many purchasers are not even aware of. Purchasers may be upset when they find out they are competing with others. And if they do not sign in time and lose the purchase, there are limited rights a purchaser may have against the seller (i.e. unless a contract is signed and delivered, neither party can enforce a sale or purchase).
What happens when a seller receives a signed contract and continues to wait to see if better offers are received? There is nothing to prevent the seller from doing this. However, to prevent waiting indefinitely for a fully signed contract and to prevent the seller from shopping the offer, the purchaser may want to put a time limitation when the contract must be signed by the purchaser. A purchaser can set time limits when a contract can be counter-signed by a seller (for example, the contract may provide that the fully executed contract must be delivered in three business days to the purchaser after it is delivered to the seller). This may prevent the seller from shopping the transaction during the signing period. In addition, a purchaser can sign a contract, deliver it to the seller and any time prior to receiving back a fully executed copy of the contract, can rescind the contract. Sellers need to be aware of this if they become tempted to delay the return of the contract if other parties are interested.
Is sending two or more contracts ethical or even fair? Any purchaser could understand that a transaction could fall apart over anything from financing, closing date or unknown structural defects or due diligence issues. However, most purchasers believe that while an accepted bid is not binding, it is an agreement to proceed in good faith until a contract is fully executed. If the purchaser incurs expenses (legal fees, inspection fees, bank fees) and the seller selects a second purchaser, these expenses cannot be recouped unless the seller is sympathetic with the disappointed purchaser by compensating for all or a part of these out of pocket expenses.
If the seller asks the seller’s attorney to send out two or more contracts at the same time to different purchasers, it also raises an ethical question for the attorney. There is no law or statute which prevents a seller’s attorney from sending out two or more contracts. If a purchaser’s attorney asks the seller’s attorney if they are sending out two or more contracts, the seller’s attorney will be in an awkward position to either tell the truth or hedge as the answer may adversely impact the seller. There is no legal obligation to tell the buyers that there is more than one accepted offer or that contracts negotiations are proceeding simultaneously with a second purchaser. If a seller is upfront about sending out more than one contract, many purchasers may walk away from such scenarios as they will have no interest in paying their attorney to continue to complete due diligence, negotiate the contract and have other related expenses for a transaction that may be lost (ex. Inspection fees, loan application fees, appraisal fees, etc.). if they know the seller is pursuing other purchasers. For those purchasers who proceed with the understanding that there are multiple purchasers, the purchaser should instruct his attorney of the multiple offers and that their deal takes priority over others transactions that the attorney may be handling for other clients because the first signed contract wins.
Purchasers who are under a multiple bid scenario should think about what they can do to improve their chances of receiving a fully executed contract. For example, the purchaser may want to raise the bid, waive the mortgage contingency, accept the seller’s closing date or allow the seller to rent back the property for a period of time after closing.
In conclusion, it is legal for sellers to entertain multiple offers and send out several contracts at once. While this may not suit every seller’s moral considerations, the reality is that this scenario occurs quite often. The market will usually dictate what each side can and cannot get away with. It is advisable for purchasers to be well prepared and informed about this possibility ahead of time.
*DISCLAIMER. Nothing herein is offered as legal advice. All information in this article is for informational purposes only. Please consult with an attorney before taking any legal actions.