When is a Real Estate Contract Legally Binding?

A recurring client query in recent weeks, particularly in light of the recent circumstances arising from the COVID-19 pandemic and its consequent economic impact, has focused on the question as to when a contract for the sale of property becomes legally binding and therefore enforceable.  Firstly, this depends on the jurisdiction of the contract, as real estate contract law varies from state to state.  In Ireland, this particular matter is governed primarily by section 51 of the Land and Conveyancing Law Reform Act 2009 (“the 2009 Act”) and the Law Society’s General Conditions of Sale (2019 Edition).

Section 51 of the 2009 Act sets out the minimum formalities for a legally binding real estate contract in Ireland.  Firstly, the contract must be in writing; section 51 specifically prohibits the institution of legal proceedings to enforce a contract for the sale of land unless the agreement is evidenced by a note or memorandum in writing.  Furthermore, the contract should at a minimum recite the full description and tenure of the subject property, the consideration to be paid by the purchaser and the names of the parties to the agreement.  Prudent conveyancing practice dictates that a contract should be drafted and specifically tailored to the property in sale, thereby disclosing all relevant matters (such as occupational tenancies, rights of way, charges secured against the property, etc.); this will put the purchaser and the purchaser’s solicitor on notice of any specific matters which affect the subject property, as required by the General Conditions of Sale.

Section 51(3) of the 2009 Act is interesting; it provides that unless there is an express provision in the contract to the contrary, payment of a deposit in money or money’s worth is not necessary for a legally enforceable contract.  It is common in cases where land or property is sold for a relatively small sum (e.g. the sale of a car parking space or a small plot of land), that the entire purchase price is transferred in one single payment on closing the sale.  Nevertheless, most contracts for the sale of property include a specific provision for the payment of a deposit and therefore, if applicable, the relevant deposit should be transferred by the purchaser to the client account of the vendor’s solicitor when the purchaser signs the contract.  The deposit will then be held in the client account of the vendor’s solicitor pending completion.

The next aspect to consider is whether the parties involved have sufficient legal capacity to enter the contract.  Any natural persons who are parties to a contract for the sale of property must be over 18 and of sound disposing mind.  The question of capacity to contract in a commercial law context arises when registered companies enter into contracts, and there are a couple of issues which require consideration.  Firstly, it is important to ensure that any such corporate entitles, which are party to the contract, are properly incorporated and duly registered with the Companies Registration Office or the equivalent authority in the relevant jurisdiction of incorporation.  Secondly, the company must have the power to enter into the particular contract; this will be evident from the company constitution (formerly known as the company’s memorandum and articles of association).  Thirdly, the persons signing the contract on behalf of the company must have sufficient authority to do so; again, this power should be contained in the company’s constitution.

A real estate contract may be between two parties or more; usually, there are only two parties involved (i.e. the vendor and the purchaser), although there may be multiple parties to the contract for more complex transactions.  Also, a nominated agent, trustee or attorney may sign the Contract on behalf of a party if appointed for that purpose.  In this regard, the other party should ensure that the nominated agent, trustee or attorney executing the contract is in fact properly appointed, as this may subsequently cause difficultly in the event of a dispute and it is sought to enforce the contract against that party.

There are a number of stages involved in a conveyancing transaction before a legally binding and enforceable contract are in place.  The initial phases of a property transaction usually comprise as follows, which I will explain in further detail below:

  1. payment of booking deposit to estate agent;
  2. vendor’s solicitor drafts contract;
  3. purchaser’s solicitor reviews the contract and title documents, and thereafter raises pre-contract enquiries, which must be dealt with by the vendor’s solicitor;
  4. purchaser signs contract and pays balance deposit to vendor’s solicitor;
  5. vendor counter-signs contract; and
  6. contracts exchanged.

In a sale by private treaty, when a purchaser’s offer is accepted on a property, invariably the first step is for the prospective purchaser to pay a booking deposit to the estate agent.  This is usually a sum specified by the estate agent, which is held by the estate agent in trust on behalf of the vendor.  It should be noted that the payment of a booking deposit does not impose any obligation on either the vendor or the purchaser at this stage and is paid on a “subject to contract” basis; therefore the booking deposit is fully refundable until such time as a binding and enforceable contract is in place, and either party may walk away from the sale prior to that point.

By contrast, in an auction sale or in a private treaty sale which is ‘off market’ where there is no estate agent involved, then generally there is no booking deposit paid by the purchaser; the full amount of the contract deposit as specified by the terms of the contract (i.e. generally 10% of the purchase price) is usually paid directly to either the auctioneer or the vendor’s solicitor at the appropriate time.

The next step is for the vendor’s solicitor to draft the contract, which is provided together with a copy of all relevant title deeds to the purchaser’s solicitor.  The contract should be drafted specifically for the property in sale, and should disclose all relevant matters relating to that property, including evidence that the vendor has legal title to sell the subject property.

On reviewing the contract and title provided, the purchaser’s solicitor is tasked with raising pre-contract queries, which may comprise an extensive set of queries depending on the complexity of the title relating to the subject property.  The vendor’s solicitor has responsibility for responding to the pre-contract enquiries, which may require providing clarity on certain aspects of tile or furnishing further documentation.

Once all pre-contract enquiries have been adequately dealt with by the vendor’s solicitor, the purchaser is usually advised by his or her solicitor on all relevant aspects of the transaction and whether the subject property has good marketable title.  If proceeding, the purchaser signs both parts of the contract, which are returned to the vendor’s solicitor.  If buying at auction, the purchaser usually signs both parts of the contract in front of the auctioneer as soon as the bid is accepted, and the contracts shall be immediately counter-signed by the vendor or an agent on behalf of the vendor.

At this point, the purchaser is obliged to pay the balance contract deposit, if applicable, as per the terms of the contract.  In a sale by private treaty, usually the purchaser pays a 10% deposit of the purchase price to the vendor’s solicitor on the signing of contracts; this is calculated in accordance with the booking deposit (if any) already paid to the estate agent.  When buying at auction, generally the 10% contract deposit is paid by the purchaser to the auctioneer on signing contracts; the amount of the deposit is usually specified by a term of the contract.  However, as mentioned above, the lack of a deposit does not prevent the enforcement of a legally binding contract.

The next step is for the vendor to counter-sign the contract, which is then exchanged with the other party (i.e. one part of the executed contract, duly signed by both the purchaser and the vendor, is returned to the purchaser’s solicitor) with the vendor retaining the other part of the executed contract.  Once contracts are exchanged, there is a legally binding and enforceable contract in place, and all parties to the contract are legally bound to complete the sale in accordance with the terms of the contract; in default, the parties can be compelled to complete on foot of a court order for specific performance and a failure by the purchaser to complete may risk forfeiture of the contract deposit already paid.

However, parties are generally free to negotiate and agree any clause in the contract, provided the terms are not deemed to be illegal, unfair, or unenforceable.  Accordingly, for instance, the parties may agree to include a special condition in the contract to the effect that either party may rescind the contract on the occurrence of certain events.  A common example is to include a special condition re loan approval in circumstances where the purchaser is securing a loan in order to finance the purchase; such a clause generally entitles either party to rescind a signed contract without any penalty or forfeiture of deposit in circumstances where a purchaser is unable to secure loan approval or drawdown within a certain date.

The purchaser’s solicitor may also seek to retain control of the “Date of Sale”, it being noted that the Date of Sale, as defined in the Law Society’s General Conditions, is not necessarily the date of the contract, but rather the date which the contract becomes binding on the parties.  Accordingly, a purchaser who signs a contract and sends it to the vendor, is relying on the vendor to counter-sign the contract and complete the exchange.  In certain circumstances, there may be a delay between the date which the purchaser signs the contract and the date of exchange; and this leaves the purchaser in an unenviable position if there is an undue delay prior to exchange.  Therefore, it may be worthwhile in certain instances to have a special condition in the contract to control the date of exchange or to stipulate an alternative method of exchange, such as for example where contracts are exchanged at a meeting in person or simultaneous exchange on completion.

The procedure for completion is set out in the contract and the Law Society’s General Conditions of Sale.  Completion of the sale is usually straightforward and should follow shortly after exchange of contracts.  The Closing Date is defined in the contract and the General Conditions, which is either a specified date agreed between the parties or five weeks from the Date of Sale, being defined as the date upon which the contract for sale becomes binding on all parties.  If there is a legally binding contract in existence, and one of the parties fails to complete, then there are certain options available to the other party, such as instituting legal proceedings for specific performance, or rescinding the contract and withholding the deposit.

Therefore, in summary, section 51 of the Land and Conveyancing Law Reform Act 2009 requires that a real estate contract must be in writing and must be signed by the party against which it is being enforced or an agent on their behalf.  Once contracts are exchanged, there is a legally binding and enforceable contract in place, and all parties to the contract are legally bound to complete the sale in accordance with the terms of the contract.

Generally, the timeline for signing and exchange will differ depending on whether the property is sold at auction or by private treaty, and also depending upon the nature and complexity of the specific transaction.  Other considerations for a binding contract are also contingent upon the specific terms of the contract and what is agreed between the parties; therefore, it is imperative to obtain prior legal and tax advice before signing a contract for the sale of property.

How we can help

If you have any queries or concerns, or would like to discuss the above in further detail, please feel free to contact Aidan McMahon in our Real Estate Department on amcmahon@bhsm.ie / +353 (0)1 440 8300.

This article is for general information purposes.  Legal advice must be obtained for individual circumstances.  Whilst every effort has been made to ensure the accuracy of this article, no liability is accepted by the author for any inaccuracies.

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