While title to real estate cannot transfer without a deed and a closing, the closing merely carries out the provisions of the real estate agreement. Accordingly, it is the agreement in a real estate transaction that is of paramount importance as it creates the interest of the buyer to be conveyed by deed (note, however the “Doctrine of Merger” discussed in our March 31, 2014 post: Don’t Let Your Contract Disappear (Merge) Into Your Deed) and determines the rights and obligations of the parties, some of which may remain in play well past the closing.
What many buyers and sellers lose sight of (including the buyer in the recent Stark County Court of Appeals case- Sabatine BK Dev., L.L.C. v. Fitzpatrick Ents., Inc., 2017-Ohio-805), however is that the physical existence of a real estate contract does not guarantee its legal existence or enforceability.
I. REQUIRED ELEMENTS FOR ENFORCEABILITY: Even before the minutiae within the agreement form is analyzed and such issues as representation and warranty provisions are debated, covenants on how the property is to be operated between signing and closing are discussed and title and survey provisions are negotiated, you must ensure that your real estate contract will be enforceable. A real estate contract, like any contract is generally defined as a binding agreement or promise to do something. Basically, to be a valid, enforceable legal contract, five elements must be present:
A. Meeting of the Minds /Agreement. Agreement generally occurs when one party to a contract makes an offer or promises to do something and the other party accepts. For example, suppose a person offers to buy a property you have advertised by virtue of sending you a contract containing the terms upon which they would be willing to buy. There is no contract until the offer is accepted and signed by both the buyer and the seller. If the seller should choose to change any of the terms of the offer, a counteroffer has been created, which must then be accepted by the buyer to constitute an agreement.
B. Consideration. Consideration is anything of value promised to another when making a contract. It is a detriment incurred by the promisee and/or a benefit to the promisor. The money the buyer gives as a deposit and the terms for payment in the purchase agreement are valuable consideration on the part of the buyer; and the property, as well as the promise to deliver possession of the property upon receipt of the purchase price constitutes valuable consideration on the part of the seller. Payment, however, does not need to be in the form of money; it may be a trade of other real property or personal property, or a promise to perform an obligation.
C. Capacity. Capacity means that one is legally able to enter into a contractual agreement. As a general rule of law, minors, intoxicated persons and mentally incompetent persons cannot legally enter into valid contracts. If they do make themselves parties to contracts, the agreements are typically voidable.
D. Legality. For a contract to be enforceable, it must be for a legal purpose.
E. Definiteness. The terms of the contract, especially basic terms such as price, legal description, and closing date must be reasonably certain. A court must be able to look at the agreement and determine the parties’ obligations from within the “four corners of the document.”
F. Writing. All contracts dealing with the purchase or sale of real property must be in writing for a contract to be enforceable. (Note: contracts for the purchase or sale of personal property must be in writing if for more than $500).
II. SABATINE BK DEV., L.L.C. V. FITZPATRICK ENTS., INC., 2017-OHIO-805
The buyer in Sabatine found out, “the hard way” that all of the above elements must be present in order to constitute an enforceable contract, not just a majority, three out of five.
The facts of the case are as follows:
Plaintiff-appellee Fitzpatrick Enterprises, Inc. (“Fitzpatrick”) owned a number of parcels of land on Dressler Road, in Canton, Ohio, comprising a shopping center commonly known as “Thursday’s Plaza.” In January of 2015, defendant-appellant Sabatine BK Development, LLC (“Sabatine”) made an offer to buy one of those parcels (an out lot), formerly leased to Macaroni Grill.
In order to sell the Macaroni Grill site to Sabatine, the parties understood that Fitzpatrick would have to split off that property from other parcels at Thursday’s Plaza. In Sabatine’s proposed purchase offer, “Property” was defined as follows: “…certain real property and buildings with an address of 4721 Dressler Rd. NW, Canton, OH 44718; situated in Stark County, tax map/parcel number 1620800, consisting of approximately 2.2 acres of land, which shall be subject to a mutually agreeable replat of the property, as depicted on Exhibit A (formerly the Macaroni Grill) attached hereto and made a part hereof, …together with all rights and appurtenances pertaining to such real property…; and all improvements and structures situated thereon (collectively, the ‘Property’).” Sabatine signed its proposed purchase offer, although “Exhibit A” was not attached to the agreement. Fitzpatrick, however refused to accept Sabatine’s proposed purchase offer without an “Exhibit A”.
After making significant changes to Sabatine’s proposed purchase offer (including adding a provision for non-exclusive parking at Thursday’s Plaza), and attaching a site plan as “Exhibit A”, Fitzpatrick signed what became its counteroffer (by virtue of the changes to the offer) and sent it to Sabatine’s agent on January 15, 2015.
Approximately four months later, and two days before the end of the purchase agreement’s extended due diligence period, Sabatine submitted a counteroffer to Fitzpatrick’s January counteroffer. Sabatine’s May counteroffer called for exclusive parking (which would reduce the number of parking spaces available to all of the Thursday’s Plaza tenants), access for ingress/egress to the remainder of Thursday’s Plaza, and a split-off of the property from two separate parcels. Fitzpatrick rejected Sabatine’s May counteroffer, which had been offered and summarily rejected a month earlier. In a letter dated May 18, 2015, counsel for Fitzpatrick notified Sabatine that seller’s January 15, 2015 counteroffer was being terminated and withdrawn.
On May 28, 2015, Fitzpatrick filed a complaint for declaratory judgment, requesting the trial court officially declare the agreement between the parties a non- enforceable contract, and accordingly, void so that Fitzpatrick could sell the property to someone else, without worry of any interference from Sabatine. Sabatine filed an answer and counterclaim for breach of contract, promissory estoppel, and breach of fiduciary duty. The trial court granted judgment in favor of Fitzpatrick, holding that there was never an enforceable agreement as there was no meeting of the minds. The trial court also found that Sabatine failed to prove all of the elements of its claim for “promissory estoppel.”
In Ohio (and most other jurisdictions), promissory estoppel is the exception to the general rule of contract enforceability; namely, a “quasi-contractual concept where a court in equity seeks to prevent injustice by effectively creating a contract where none existed.” Stickler v. Keycorp, 8th Dist. No. 80727, 2003-Ohio-283, at ¶ 18. To establish a claim of promissory estoppel under Ohio law, the plaintiff must prove the following elements: (1) a clear and unambiguous promise; (2) reliance upon the promise by the promisee; (3) reliance by the promisee that is both reasonable and foreseeable; and (4) injury to the promisee as a result of the reliance. Rigby v. Fallsway Equip. Co., Inc., 2002-Ohio-6120. While the Sabatine decision does not elaborate on Sabatine’s failed promissory estoppel claim, presumably, factors (1) and (3), above were not met due to the fact of there being multiple counter offers, without clarity on the subject of exactly what property would be transferred, and what parking and access rights would attach.
The Stark County Court of Appeals in Sabatine, did, however clearly explain why it agreed with the trial court’s decision (declaring the subject purchase agreement, unenforceable). According to the court of appeals, “Like the trial court, we find there was never a meeting of the minds as the parties never agreed on an essential element of the transaction, to wit: the real estate to be transferred.” The court reasoned that while Fitzpatrick finally added an Exhibit A, making the contract definite, it also added new, material terms, effectively creating a counteroffer proposal to the buyer, which was rejected, by virtue of Sabatine’s submittal of a counteroffer (in May) to Fitzpatrick’s January counteroffer. As aptly summarized by the court of appeals, “An acceptance which changes the terms of the contract does not create a binding contract because it constitutes a counteroffer.”
Even assuming, arguendo, that Sabatine established the essential elements of the contract, the court of appeals, nonetheless, found the parties did not have an enforceable agreement because embedded within Exhibit A was an unsatisfied condition precedent (an event that must occur before an obligation in the contract will become effective) calling for a mutually agreeable re-plat, which could never be satisfied since the parties disagreed upon how the property would be split, parking and access rights…
Based upon the foregoing, the court of appeals in Sabatine held that “the trial court did not err in concluding there was never an enforceable agreement between the parties.”
What is the moral of this story?
It is not enough to “say it in writing,” and have a signed document as evidence thereof. Real estate contracts must also be definite, especially with regard to material terms such as what property is being transferred. All too often, buyers and sellers rush to sign an agreement and leave the exhibits until later. This is not illegal or immoral; however, if there is no later agreement on the subject matter of an exhibit, particularly the “description of the property exhibit,” you could be the proud owner of a contract, without the rights that go along with it.
Remember also, that signing an offer, but sending it back with signed or initialed modifications (another common practice) is a counter offer, not an acceptance of the original offer.
In other words, odds are that an unenforceable real estate contract will not generate a purchase or a sale, only scratch paper and a lot of legal fees.