A memorandum of agreement is a proposed transaction summary that is circulated to lawyers and brokers representing both the buyer and the seller after an accepted offer has been negotiated.
The purpose of this document is to inform the lawyers representing both parties what the real estate agents have negotiated in terms of price, contingencies and other basic terms.
In New York City, the term deal sheet is more commonly used vs memorandum of agreement, but they are essentially one and the same. It’s more common to see the term memorandum of agreement used in suburban or rural areas such as Westchester County, NY.
No. A memorandum of agreement is not binding because it is simply a proposed transaction summary that is circulated after an offer has been accepted.
In New York as in many other states, accepted offers and any summaries or outlines of the accepted offer are completely non-binding.
The only time that an accepted offer and the accompanying memorandum of agreement becomes binding is after a purchase contract has been mutually and fully executed by both the buyer and the seller.
However, beware of any non-standard offer to purchase forms or memorandums of agreement that require a signature or have contract like language.
Even though offers are traditionally emailed in many states like New York and are completely non-binding, sometimes you’ll see a quirky listing agent ask buyers to sign a custom submit offer form.
Do not agree to do this, and ask your lawyer to review any custom offer submission form that has the slightest hint of contract-like language.
Otherwise, casually signing a memorandum of understanding or agreement that also has contract-like language can land you in court if you decide to back out of the accepted offer.
Though rare, there is precedent for this in some states. For example, in McCarthy vs Tobin in Massachusetts, a seller who signed an offer to purchase form with contract-like language decided to sell instead to a different buyer who came in with a higher offer. Even though the seller never counter-signed the purchase contract, courts ruled in favor of the buyer because the seller for some misguided reason decided to sign an offer to purchase form originally.
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Breaking a memorandum of agreement is fairly common, and can happen simply if the buyer has second thoughts or changes his or her mind before signing the purchase contract. In a similar vein, the seller will often break a memorandum of agreement simply because he or she got another, better offer during contract negotiations with the original buyer.
As a result, it’s best for buyers to view an accepted offer and a memorandum of agreement as nothing more than a handshake on price and general terms, subject to due diligence and contract negotiation.
Sellers should take accepted offers lightly as well, and should certainly continue showing the property until a binding contract has been executed.
What are the consequences of breaking a memorandum of agreement?
Since a memorandum of agreement is non-binding, there are generally no legal consequences for breaking one. However, backing out of an accepted offer can cost money.
That’s because the buyer pays out of pocket for a home inspection typically before a contract is signed, during the due diligence phase. There may be other sunk costs as well. For example, the buyer’s attorney may have paid for a title search during the due diligence and contract negotiation phase.
There are social costs as well for both agents and principals for breaking a memorandum of agreement. The parties backing out of an accepted offer may be viewed as not being serious buyers, or even unprofessional by their counter-parties.
In a similar vein, the agent may view his or her own client as not being serious about buying or selling if the customer keeps backing out of accepted offers.
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