THE NAKED TRUTH ABOUT CONSIDERATION

by Brett M. Woodburn, Esq.

Real estate licensees in Pennsylvania consistently are taught that the elements to form a contract include offer, acceptance, consideration and delivery.  Through the Legal Hotline, we receive calls from Realtors® across the Commonwealth offering us a cross-sample of their beliefs, practices and procedures about such issues.

There is a belief among some licensees that the deposit due at the signing of the agreement, as identified in Paragraph 2 of the ASR, is the consideration that supports the underlying transaction.  There also appears to be a (more limited) perception that a listing agent does not have to present a written offer to the seller if the deposit check (or a copy of the deposit check) does not accompany the offer.

Let me debunk both of these myths as false.

Generically, consideration is the bargained-for-exchange between buyer and seller.  While there is no legal requirement that the buyer give money to the seller, there is a legal requirement that the buyer and seller each suffer a detriment that the other has requested.  In other words, the buyer must relinquish something that the seller has asked the buyer to relinquish, and the seller must provide something that the buyer has asked the seller to provide.  In the real estate profession, the buyer relinquishes money, and the seller relinquishes title to the land.

In the overwhelming majority of real estate transactions today, the seller’s consideration is the promise to convey title to the real estate; the buyer’s consideration is the promise to pay the negotiated purchase price.  These promises will be performed at the time of settlement, which is also agreed upon between buyer and seller.  The down payment, hand money, good-faith money (or any of the other terms referencing the deposit) is nothing more than a down payment to be applied toward the purchase price.  It is not the consideration on which the transaction is based, and, importantly, the deposit money can be zero.

All real estate licensees have a legal obligation to present all written offers, notices or communications in a timely manner.  The only exception to this mandate occurs when (a) the  seller’s property is under contract; (b) the waiver of this obligation is in writing; and (c) the waiver meets State Real Estate Commission rules and regulations.  Note there is nothing that permits a licensee to refuse to present a written offer to their seller if no deposit is identified in the agreement or no check accompanies the offer.  In fact, refusing to present an offer in a timely manner may amount to a licensing violation and subsequent sanctions.

Realtors® also have an ethical duty to present offers to their clients in accordance with Article 1 of the National Association of Realtors® (NAR) Code of Ethics.  Standard of Practice 1-6 states, “Realtors® shall submit offers and counter-offers objectively and as quickly as possible.”  Standards of Practice 1-7 and 1-8 address the continuing obligations of listing and selling agents to present offers and counter-offers, as well as the circumstances where such obligations might be relieved.  In addition to a potential licensing violation, a Realtor® may also face a grievance alleging an Article 1 violation for refusing to present a written offer to their seller if no deposit is identified in the agreement or no deposit check accompanies the offer.

It is a rare occurrence when a lawyer can answer a question without “it depends.”  For your reading enjoyment:

Is the deposit money identified in Paragraph 2(A)(1) of the ASR consideration that supports the offer to buy the property in question?

Answer:  No.  The purchase price (or more accurately, the promise to pay the purchase price) identified in Paragraph 2(A) of the ASR is the buyer’s consideration that serves as the counterpart to the promise to convey real estate.

A promise to convey and a promise to pay.  When we have both, the contract is “fully clothed.”

In 1853, Pennsylvania Supreme Court Justice George Washington Woodward penned, “a promise to convey is only one part of a contract; without the counterpart, it is nude.” A promise to convey and a promise to pay.  When we have both, the contract is “fully clothed.”

Mr. Woodburn is an attorney with Caldwell & Kearns, which serves as general counsel to PAR. A portion of his practice is dedicated to providing advice and counsel to real estate licensees and representing and defending real estate salespersons and brokers in civil lawsuits and licensing claims across the Commonwealth. He routinely counsels real estate professionals as one of the voices of the PAR Legal Hotline.