Lawyers
Is a memorandum of understanding a binding document?
A memorandum of understanding is a document signed between a buyer and a seller of a real estate property, indicating certain details regarding the transaction. In many cases, the parties see it as some kind of expression of intent but not a binding contract, are they right?
By Igal Mor, Adv. & Notary
Accuracy in Legal Advice. Excellence in legal support.
What is a memorandum of understanding?
Signing a memorandum of understanding is a very common thing, which has become a kind of accepted preliminary stage in real estate transactions. The purpose of this document is to constitute kind of expression of intent on the part of the parties regarding the execution of the transaction: the buyer assures himself of the price of the property and the seller the willingness of the buyer to purchase the property. However, more than once, after drafting a memorandum, one of the parties changes his mind, then the question arises as to what is the legal status of the memorandum, or in other words, whether it constitutes a binding contract.
memorandum of understanding - is it a binding contract?
In many cases a memorandum of things is considered a binding contract, with the court mainly examining two parameters. First, whether there is a consummation on the part of the parties to the transaction and whether there is agreement on the material details of the transaction (such as price and dates) when these two are met, it is likely that the document will be considered a binding contract. We emphasize that this determination can stand even if details are missing in the memorandum and even if the parties have explicitly stated that a sales contract or final agreement will be signed between them later.
The risk that it will be decided that the memorandum of understanding is an agreement that binds both parties, becomes even more valid while many people search and download “sample memorandum” / “memorandum for sale”.
Receiving monetary compensation
Most of the public assumes that a memorandum of things is not a binding document, however as we see, it is not necessarily so. When one of the parties regretted and sought to withdraw from the transaction and the court ruled that the memorandum of understanding constitutes a binding contract, then that party in breach of contract for all intents and purposes. Therefore, he will be obligated to abide by the agreement, that is, to purchase a property that he does not want, or to provide monetary compensation to the seller and this can reach very high amounts due to the value of a real estate transaction.
Dangers for the buyer
Signing a memorandum of understanding is usually done at a stage when the buyer has not had time to perform critical preliminary checks, for example issuing necessary documents. Therefore he does not know what the condition of the property is and he may later discover various problems which will make him want to withdraw from the transaction. For example, because the property has a mortgage that the seller cannot remove. This means that the buyer does not get a mortgage on the apartment. If it is determined that it is a binding contract, then the buyer is therefore in big trouble.
memorandum of understanding - problematic for the seller as well
It is common to think that signing a memorandum of understanding mainly endangers the buyer, but it can also be problematic for the seller. For example: the seller may find out in retrospect that the consideration offered for the property is not high enough, for example due to the fact that he has to pay an improvement levy at a significant cost. If the memorandum of understanding he signed is considered a binding contract, then without the buyer’s consent, he will not be able to withdraw from the price he has undertaken.
memorandum of understanding - to sign or not to sign - that is the question!
In light of all the above, the question arises whether it is worth signing a memorandum of things for the sale of an apartment. On the one hand, if the buyer does not sign, the seller may sell the property to someone else and miss a good deal. If the seller refuses to make a memorandum of things, the buyer may find another property. On the other hand, there is a great deal of difficulty in signing this document. The buyer can tie himself to an asset he does not yet know enough about and the buyer may find himself obligated to a price that is too low, for which he will not be able to bargain. If so what is the answer? Each party should contact a real estate attorney for legal advice.
Seek legal advice
The importance of the lawyer in a real estate transaction cannot be overstated, since it is one of the most expensive and complex transactions there is. Any mistake can cost the parties a lot of money so it is so important not to act without getting legal advice. This is of course also true of the issue of remembering things that as we have seen can be considered a binding contract for everything, for all its meanings. Therefore, do not sign this document without obtaining the advice of a professional and experienced real estate lawyer, who will give his opinion on this matter and accompany you throughout all stages of the transaction.
In this section we explained the importance of legal advice in a real estate transaction. In order not to get into a legal position where you will be liable for taxes or breach of agreement, it is advisable to consult a lawyer who specializes in real estate matters before contacting a Realtor or before signing a memorandum of understanding, agreement or document of any kind.
Our real estate department specializes in legal accompaniment of real estate transactions in Jerusalem and beyond. We will perform the legal preliminary checks and guide you in what you should check about the apartment to ensure it meets your requirements. When you decide on the apartment you wish to purchase, we will negotiate the terms of the transaction on your behalf, draft the contract on your behalf, and register the property rights in your name.
