Are "Binders" Enforceable?

Most real estate transactions begin in earnest with the signing of what is commonly referred to as a "binder". The realtor insists on it because, in the realtor's mind, the binder ensures the realtor's commission. The purchaser and seller want it because, in their minds, the binder memorializes the deal they have just agreed to and binds each of them to the terms. The problem with the binder is the fact that the very enforceability of this type of document, which in the minds of the parties is meant to be a precursor to a more formal agreement, is questionable and can only be answered by examining the language of the binder and if not answered fully there, resorting to an analysis of the intent of two parties with perhaps very different intents.

If the binder satisfies the requirements of a contract in general, and the Statute of Frauds in particular, the parties may be bound to its terms.¹ The enforceability of the binder may surprise the parties who, in many cases have not consulted an attorney with regard to the content of the binder and in most cases have, unwittingly, left out clauses necessary for their protection. On the other hand, a binder lacking the formality required of a contract, may not bind the parties at all and thereby disappoint a seller or purchaser. The binder may also, depending on the situation, support a broker's claim to commission earned even if the deal is not consummated.²

As Milton Friedman the author of "Contracts and Conveyances of Real Property states: "Sometimes they are enforceable, sometimes they are not, and often they are so doubtful that nobody can confidently predict their effect until the outcome of a lawsuit. In no case are they satisfactory."

Enforceability first depends on the essential elements of a contract being present in the binder. These elements are usually held to be:

1. identification of the parties;
2. mutual promises;
3. a description of the subject matter; and
4. price and consideration.

Identification of the parties and mutual promises are rarely at issue, however, when dealing with real property, a description of the subject matter, although seemingly simple, can be. It is a requirement that the property be described with reasonable certainty. If a proper legal description is given, there will likely be no dispute, beyond the legal description however, there is considerably less certainty as to what constitutes reasonable certainty. The general rule as to sufficiency of description is that it must identify the property or supply the "key" to identification (parole evidence will be admissible to identify the property where there is such a basis in the description, although no parol evidence will be permitted to add to or vary the description).

Some of the confusion that can stem from descriptions of real property in binders are illustrated by the following examples which were originally supplied by Bruce J. Bergman in his article entitled, Real Estate Binders - Lawyer Beware, New York State Bar Journal, November, 1979 p. 550:

1. A description of the "Joe Jones House" may be clarified by parol evidence but not if Jones owns more than one house, in which event the description would be insufficient.
2. Where a binder attempted to incorporate by reference a description in two title policies, even though incorrectly referred to as two "deeds" it was upheld by a court.
3. Where the property is part of a seller's larger parcel, a recital of dimensions or area without delineating the boundary between the subject of the sale and the property to be retained will cause the binder to fail.
4. A description of the property by street and number, such as "32 Main Street" may be sufficient, but not always. For example, the highest court in the State of New York ruled upon the adequacy of a street number description and found it adequate. However, in a later case, the description in the agreement was:

"Property known as and by the street number 1141 Bedford Avenue, being an 8 family brick and stone apartment building on a lot about 33 x 95 irregular."

In actuality, the dimensions were 33 feet, 1-1/4 inches fronting on Bedford Avenue, 93 feet 10 inches deep on the northerly side, tapering to a width of 14 feet 1-1/2 inches in the rear. The Court's ruling was that the actual description was not in compliance with the contract and the buyer was not required to complete the purchase.

Most binders found not to be enforceable fail due to inadequacy in expressing the consideration and terms of payment. The following examples again provided by Bergman, illustrate this particular problem.

1. In a case where the binder read in pertinent part:

   "The price is $32,625, payable $12,625 cash; balance of $20,000 to remain on 1st mortgage for 5 years. The sum to be paid on signing of contract to be agreed upon. The balance of cash payment on passing of title (giving date)"

    

   The court ruled that in this instance the amount to be paid on contract was an essential element which had not been agreed upon. Hence, no contract was said to exist.

    

2. A binder provision compelling seller to pay taxes and assessments which would become liens upon title closing, except current taxes, would be too ambiguous as to its effect on an assessment payable in installments over a period of years.
3. Terms calling for purchaser to "assume" existing assessments is too vague to determine if purchaser could deduct their amount from the purchase price.
4. Mention of a monetary consideration payable "as per terms agreed" violates the Statute of Frauds. There might very well be an oral agreement as to the amount, but it is unincorporated in the writing.
5. Where payment of the purchase price is to be deferred to a future time, but the due date is not specified, the binder will be unenforceable. (Perhaps incongruously, where a balance was made payable "on terms to be agreed", the binder was valid if the purchaser tendered cash).
6. A clause providing for payment of (30% in cash while deferring the balance "to be agreed upon with interest not exceeding 6% would be unenforceable as insufficient explanation of terms of payment.
7. Where a purchase money mortgage is to be taken back but no rate of interest or maturity date is specified the majority rule is that the agreement is too vague to be enforceable. The minority view, followed in New York and New Jersey, will imply interest at the legal rate with payment due on demand. The minority presumption, however, will not prevail if some other part of the proposed agreement indicates an intention not to create a demand obligation.

Assuming the criteria mentioned herein have been met the next issue confronting anyone attempting to: (i) rely on a binder; or (ii) persuade a court it should not be made to, is the qualifying language of the binder itself.

For example, subjecting the binder to "details to be worked out", (so long as it contains the basics: parties, subject matter, mutual promises, price and consideration, discussed infra) in one jurisdiction at least was held to have no effect on the otherwise valid agreement. If there was later a disagreement on those "details", one of the parties may be saddled with something he would not have agreed to but for a binder substituting for a full contract.³

Specific language in a binder that the parties are not to be bound "until execution of a formal agreement" has been honored by courts but the language "subject to a formal contract" may be interpreted differently. Courts may have to determine on a case by case basis whether the intention of the parties was to be immediately bound, with the "formal contract" simply a more detailed version of the basic understanding they had reached (in that case they very well might be bound), or was the intention not to be bound at all until execution of the more formal writing (in which case they would likely not be bound had the more formal contract never been executed.

Conclusion

While the foregoing problems are the most common, they do not by any means complete the list of litigated language in binders. Where the time for closing has been left out, it's been fought over in court with the court agreeing to fix a reasonable time. But, where the parties have contracted to close title at a time to be mutually agreed upon, an essential element is missing, rendering the agreement unenforceable. Neglecting provisions for the apportionment of taxes, insurance, rents and mortgage interest will not void the binder because the law will supply provisions, albeit terms the parties would not have preferred.

Yet, in spite of advice to the contrary and the aforementioned pitfalls, prospective sellers and buyers, at their broker's insistence, continue to sign binders because: "there are several other buyers interested", "the deal is too good to pass up", "it's a seller's market", "it's a buyer's market", "it's customary", "it's required", "the seller/buyer is demanding it". In which case, attempts can be made to qualify although the more unclear the language of the qualifier (as with "subject to a more formal contract") the less likely the qualifier is to be effective. A clearly worded provision in the document, such as "subject to the approval of counsel" or, even, "this binder not to be effective unless and until specifically approved by seller's (or buyer's) attorney" would likely serve to negate the binder's effect until that approval was obtained.⁴ The most practical service an attorney can render a client who wants to sign a binder is to make himself available for formal contract negotiations. If a seller or buyer wants to be bound, let them be bound by an agreement that contains the detail and safeguards needed for a contract.

¹ N.Y. Gen. Oblig. Law § 5-703.

² In Ramos v. Lido Home Sales Corp., 148 A.D.2d 598, 539 N.Y.S.2d 63 (2d Dep't 1989), the court held that a binder did not satisfy the Statute of Frauds because it failed to identify the seller, did not set a closing date or specify the quality of title to be conveyed, and merely provided that more formal contracts would be drafted to recite complete terms and conditions. When a "binder" designated the parties, described the subject matter, stated the time and terms of payment, provided a closing date, and was subscribed by the party to be charged, it contained all the elements of a contract and satisfied the requirements of the Statute of Frauds. Thus, it was subject to specific performance upon payment of the purchase price. However, see Dickson v. Mitchell, 87 A.D.2d 697, 448 N.Y.S.2d 861 (3d Dep't 1982) where the court stated that even when a binder designated the parties, identified the property, and recited the price and terms of payment, it was held to be unenforceable because after it was signed the parties continued to negotiate. Taken as a whole, the court concluded that the circumstances suggested that there was no meeting of the minds and that the parties did not intend for the binder to evidence the entire agreement. It grounded its decision, however, on the failure of the binder to satisfy the Statute of Frauds.

³ In Da Silva v. Musso, 53 N.Y.2d 543, 444 N.Y.S.2d 50, 428 N.E.2d 382 (1981), the purchaser sued for specific performance of a binder. The binder was based on the mistaken belief by both sides that a mortgage on the property would remain in effect. The sellers were unaware (or had forgotten) that pursuant to an extension agreement they had executed two years earlier, the entire balance of the mortgage was to become due if the property was sold. The error was discovered when the parties met with their attorneys for the signing of a formal contract. The court of appeals enforced the binder, saying that specific performance could not be denied when the mistake resulted from the sellers' own carelessness and was not contributed to by conduct of the purchaser unless it would cause considerable hardship or if the purchaser must itself have been aware of the mistake. The fact that the sellers would have to raise the cash to pay off the mortgage was not, per se, such a hardship as to mandate denial of specific performance.

⁴ West's McKinney's Forms Real Property Practice §3:15, Hon. Robert F. Dolan