Contract FAQ: Formation & Title

 

Question: The basic facts are as follows:

  1. Seller lists.
  2. Buyer 1 makes an offer.
  3. Seller makes counter-offer with an acceptance deadline.
  4. Buyer 1 counters the Seller’s offer.
  5. Buyer 1 learns that Seller has received a competing offer from a Buyer 2 and to avoid losing the property to Buyer 2 . . .
  6. Buyer 1 purports to accept the Seller’s counter-offer from step 3 within its acceptance deadline.

Answer: Under “black letter” contract law, the Buyer’s acceptance of the Seller’s counter-offer after step 4 does not form a contract with the Seller. The Buyer’s counter in step 4 is a rejection of the Seller’s offer in step 3 and terminates Buyer 1’s power to accept the step 3 offer.

The Restatement (Second) of Contracts discusses the effect of a counter-offer on the original offer. Section 36 states:

‘ 36. Methods of Termination of the Power of Acceptance

(1) An offeree’s power of acceptance may be terminated by

[a] rejection or counter-offer by the offeree . . .

Section 39 goes on to state:

‘ 39. Counter-offers

(1) A counter-offer is an offer made by an offeree to his offeror relating to the same matter as the original offer and proposing a substituted bargain differing from that proposed by the original offer.

(2) An offeree’s power of acceptance is terminated by his making of a counter-offer, unless the offeror has manifested a contrary intention or unless the counter-offer manifests a contrary intention of the offeree. [Emphasis added.]

For section 39, the authors of the restatement give the following example:

Illustration:

1. A offers B to sell him a parcel of land for $5,000, stating that the offer will remain open for thirty days. B replies, “I will pay $4,800 for the parcel,” and on A’s declining that, B writes, within the thirty day period, “I accept your offer to sell for $5,000.” There is no contract unless A’s offer was itself a contract (see ‘ 37), or unless A’s reply to the counter-offer manifested an intention to renew his original offer.

There do not seem to be any Colorado appellate cases directly addressing this issue. But we suggest that this absence of precedent does not make the law unclear. Instead, it may reflect that the conclusion that no contract is formed is so clear that it is not litigated.

Question: Does the Real Estate Commission approved contract form give the buyer the ability to terminate the contract at some date prior to closing if title problems are not cleared up prior to that deadline? In other words, do the title inspection paragraphs work like the property condition due diligence section (10) creating a “Title Resolution Deadline” prior to closing?

Answer: No. The mechanism set up in the Real Estate Commission approved form is that, pursuant to sections 9(a) and 9(b), the buyer has the ability to provide notice of title dissatisfaction. Section 9(d)requires the seller to make a reasonable effort to cure a title defect. (This is different from section 10.) The seller has until the closing to do so. If the problems are not corrected, the contract terminates on the closing date unless the title deficiencies are waived by the buyer. Unless the seller agrees otherwise, the buyer is obligated until the closing date, the date by which the seller will either have corrected or not corrected the title deficiencies.

A version of this article appeared in the Colorado REALTOR® News, the monthly publication of the Colorado Association of REALTORS®.

Jon Goodman is a shareholder with Frascona, Joiner, Goodman and Greenstein, P.C., a Colorado law firm. His practice areas include Real Estate,Brokerage Law, Contracts, Land Use, Leasing, Real Estate Title, Association Law, Business Law, and Finance. Contact Jon Goodman.

Disclaimer — Content is general information only. Information is not provided as advice for a specific matter, nor does its publication create an attorney-client relationship. Laws vary from one state to another. For legal advice on a specific matter, consult an attorney.

JONATHAN A. GOODMAN