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Deal or No Deal?

By Peter Tolensky                                         September 14, 2006

A hot real estate market requires its players to act quickly. A potential purchaser may have a short window of opportunity within which it can tie up a piece of property. A vendor may be interested in canvassing the market prior to committing to a specific purchaser or a specific sale price. In either of these contexts the parties must understand whether or not they have consummated a deal through their communications. What legal requirements must be established to create an enforceable deal to buy and sell real estate?

Here is the Contracts 101 refresher. At a minimum, for an enforceable deal to buy and sell real estate to exist there must be agreement on: (1) the parties (who is the vendor and who is the purchaser?), (2) the property (what is being sold?) and (3) the price (how much and on what terms?). If any of these three items are uncertain there is no deal. Typically, an acquisition deal is made by the purchaser tendering an irrevocable offer to the vendor setting out these terms, and the seller accepting the offer within the stipulated time period. Provided that the deal contemplates land being transferred in exchange for money (otherwise known as "consideration"), the deal is made upon acceptance. The party receiving the offer must accept the offered terms unamended; otherwise, any amendment will be considered a counteroffer which requires further acceptance by the initial offering party.

In determining whether or not such an agreement is enforceable, the way in which the deal is made is just as important as the substantive terms of the deal. A common misconception is that for an agreement to sell real estate to be enforceable it must be in writing and signed by the vendor and purchaser. In British Columbia, this is not exactly the rule. While a written agreement signed by vendor and purchaser is the typical way in which a land acquisition deal is made, it is not the only way.

Under Section 59 of the Law and Equity Act there are three separate instances where a contract concerning the sale of real estate will be considered enforceable. The first instance is where the agreement is evidenced in writing and such written item has been signed by the vendor. So the purchaser’s signature on the written item (i.e. the napkin) is not necessary provided that the evidenced agreement accurately reflects the terms that were offered and accepted by the parties. Of course, a formal written agreement of purchase and sale signed by both parties will also be caught under this rule.

The other two instances where an enforceable agreement will be found to exist apply to agreements that are not evidenced in writing but are evidenced by behavior. First, an agreement exists where the vendor has acted in a manner that indicates that an agreement has been made. The act by the vendor in this instance will include the vendor’s acquiescence in the purchaser’s act. For example, the payment of deposit monies from purchaser to vendor and the vendor’s subsequent deposit of such monies will make an unwritten agreement enforceable. Of course, finding the evidence – that there was a "meeting of the minds" as to price, parties and property – may be difficult in the absence of documents.

The second behavior based test is a little more complex. It applies to a situation where one party has a reasonable belief that an agreement has been made. Based on this belief, the party then does something that would thereafter make it inequitable if the agreement is not enforced. As a simplified example, if a purchaser made a verbal offer to purchase a contaminated development site that was verbally accepted by the vendor, and, as part of the agreed deal, the purchaser, at its cost, remediated the site prior to closing, the purchaser would be able to enforce the agreement against the vendor. Nonetheless, it is unwise for the purchaser in this instance to proceed with its work without a written agreement being in place, as real life events rarely fit nicely into legal tests and a properly prepared agreement is recommended to avoid uncertainty. The key understanding is that a party’s actions could result in the making of an enforceable agreement, even if it is not in writing. An unwilling vendor must be careful to not put itself in such a position.

The preferred method to ensure that a party does not end up with an unwanted agreement is to negotiate with third parties using a letter of intent. A properly drafted letter of intent will explicitly purport to be non-binding. Thus, the parties should not be concerned with making an unintended deal until a definitive agreement of purchase and sale is signed and delivered. A sample letter of intent is provided on our website. While our sample letter of intent is non-binding with respect to the deal points, we have made provision for its terms related to the negotiation of the deal, including confidentiality and exclusivity, to be binding from the outset.

There may be instances where a party may be unable to get a formal agreement of purchase and sale in place and will seek to enforce an agreement based on one of the behavioral tests discussed above. Obviously, it is always more prudent and certain to get it in writing – with the parties, the property and the price clearly spelled out. If a party would rather work out all of the details prior to making a deal, that party should ensure that all communications made in connection with the subject matter (other than the terms governing the negotiation itself) are made in a non-binding context, preferably under a letter of intent.

- Peter Tolensky   

(with research from Shauna Towriss, Articled Student)


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