Caution When Negotiating A Contract For The Sale Of Real Estate

Commentary: The New Jersey Statute of Frauds requires that certain contracts be in writing. The most well-known type of contract subject to these requirements are contracts for the sale of personal property for $500 or more be in writing. In addition, contracts for the sale of real estate are generally required to be in writing. Quite surprisingly, however, under certain circumstances an oral agreement concerning the transfer of a real estate interest may be enforceable.

Specifically, an oral agreement concerning the sale of real estate will be enforceable where it is established by clear and convincing evidence that the following has been articulated (a) a sufficient description of the real estate; (b) the nature of the interest that is to be transferred; (c) the identity of the transferor and transferee of the interest; and (d) the existence of an agreement. The “agreement” can be found from this perspective even where the parties anticipated the drawing up of a written and more formal contract of sale.

If you think of a transaction for the sale of residential property, the above terms are generally agreed upon earlier on in the negotiations. What that means is that a buyer and seller arguably could be bound by an oral agreement for the sale of real estate even though they contemplated negotiating additional terms and incorporating them in a written contract of sale at a later point in the transaction.

Given this risk, parties to a real estate transaction in New Jersey should proceed cautiously and act with the understanding that they may be bound to their oral representations. There are a few things that can be done to lessen the risk that an oral agreement will be binding. First, they should avoid utilizing letters of intent or term sheets. But, if they do utilize such a document, they should explicitly state on its face that they do not intend to be bound by the terms therein until a written agreement is executed. In addition, when they are negotiating orally with respect to the terms, they should provide the other party to the transaction a short correspondence and/or email at the very outset that they do not intend to be bound to any terms as stated orally or any other writings until a formal contract for sale is executed. In this situation, they should also reiterate their position orally to the other side and take notes of these conversations. In these notes, they should make particular note of those items as to which they have not yet come to an agreement. Although the risk continues, this may help to generally preclude the Court from finding that an oral agreement for the sale and purchase of real estate is enforceable. Of course, this is a nonexclusive list. Further, none of these suggestions is a guarantee that the parties will be protected from such a risk, and the particular facts of each situation are critical in determining a legal strategy. However, they should be kept in mind when a real estate deal is being negotiated.

Comments/Questions: ljm@gdnlaw.com

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