Monday, January 23, 2006
Referential Offers
One type of offer Sellers can do without.
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It is not inconceivable, when marketing a property in an environment of multiple offers, that a Seller might come across what it is generally referred to as a ‘referential purchase price offer’. A multiple offer situation arises when a subject property is simultaneously appealing to multiple Buyers, which then proceed to submit their respective bids. As Buyers are unaware of the price and terms of competing offers, a referential purchase price clause may seem like the optimal solution – but , in fact, it is not.
The thrust of the referential purchase price offer is to piggyback on the next highest bona fide offer that is acceptable to the Seller. The offer contains a clause that reads, in general lines, as follows: “The purchase price is $1,000 above the price offered in the nearest competing bona fide offer acceptable to the Seller to a maximum of $350,000. The Seller agrees to provide a copy of such nearest competing offer on acceptance of this offer”. The referential purchase price offer, therefore, is a clever way by which the Buyer endeavors to establish a purchase price by reference to prices contained in competing offers. As it can be reasonably anticipated, there are many variations in the wording of referential purchase price clauses.
The problem with this kind of offers is that there is a very good chance that neither the Seller nor the Buyer may pursue a legal remedy should either of them default at completion, due to the wording of the referential purchase price clause. The leading case is a 1985 decision of the House of Lords in England, which held that referential offers are invalid. This case has since been adopted at Common Law, at least insofar as it applies to referential bidding. The general principle of law holds than an offer by one bidder which is dependent for its definition on the offers of others is invalid and unacceptable. The rationale is that this type of offers is inconsistent with and potentially destructive of the very tendering process in which it is submitted.
Whether the focus is on the referential purchase price offer or on the bidding tendering process, there are enough similarities for a Seller to be concerned when dealing with referential offers. An approach that could be employed to circumvent problems involved when confronted with referential purchase price offers would be for the Seller to counter with an Addendum, which deletes the referential purchase price clause and inserts a fixed price for an identical amount in its stead. The benefit for the Seller is, of course, that he will not find himself in a position to have to disclose to the Buyer the nearest highest offer, but whether this will be acceptable to the Buyer is an entirely different matter.
What this all means in a multiple offer scenario is that in the eventuality that a referential purchase price offer comes around the Seller will have to assess its legitimacy, the enforceability of the offer and the bona fide of the contract. Unquestionably, therefore, the Seller that accepts such an offer will take an extra risk, the measure of which may very well lie in the offers that the Seller has decided to disregard in favor of the referential purchase price offer. A risk this that ultimately may not be warranted.
The thrust of the referential purchase price offer is to piggyback on the next highest bona fide offer that is acceptable to the Seller. The offer contains a clause that reads, in general lines, as follows: “The purchase price is $1,000 above the price offered in the nearest competing bona fide offer acceptable to the Seller to a maximum of $350,000. The Seller agrees to provide a copy of such nearest competing offer on acceptance of this offer”. The referential purchase price offer, therefore, is a clever way by which the Buyer endeavors to establish a purchase price by reference to prices contained in competing offers. As it can be reasonably anticipated, there are many variations in the wording of referential purchase price clauses.
The problem with this kind of offers is that there is a very good chance that neither the Seller nor the Buyer may pursue a legal remedy should either of them default at completion, due to the wording of the referential purchase price clause. The leading case is a 1985 decision of the House of Lords in England, which held that referential offers are invalid. This case has since been adopted at Common Law, at least insofar as it applies to referential bidding. The general principle of law holds than an offer by one bidder which is dependent for its definition on the offers of others is invalid and unacceptable. The rationale is that this type of offers is inconsistent with and potentially destructive of the very tendering process in which it is submitted.
Whether the focus is on the referential purchase price offer or on the bidding tendering process, there are enough similarities for a Seller to be concerned when dealing with referential offers. An approach that could be employed to circumvent problems involved when confronted with referential purchase price offers would be for the Seller to counter with an Addendum, which deletes the referential purchase price clause and inserts a fixed price for an identical amount in its stead. The benefit for the Seller is, of course, that he will not find himself in a position to have to disclose to the Buyer the nearest highest offer, but whether this will be acceptable to the Buyer is an entirely different matter.
What this all means in a multiple offer scenario is that in the eventuality that a referential purchase price offer comes around the Seller will have to assess its legitimacy, the enforceability of the offer and the bona fide of the contract. Unquestionably, therefore, the Seller that accepts such an offer will take an extra risk, the measure of which may very well lie in the offers that the Seller has decided to disregard in favor of the referential purchase price offer. A risk this that ultimately may not be warranted.
Luigi Frascati
Real Estate Chronicle
