What is a Memorandum of Contract?
A Memorandum of Contract is an instrument, typically a short form deed for recording purposes, that is used to give notice of the existence of a sales contract on an immovable property. In simple terms, by recording a Memorandum of Contract, the seller declares that he has contracted to sell the property to the buyer, and makes a public declaration that the seller does not have an existing right to sell the property to anyone but the buyer.
Because it is a public declaration, the Memorandum of Contract protects the buyer from a subsequent agreement to sell the same property to a third-party beginning at the date of recordation. The Memorandum of Contract differs from a judgment in that the recording of a judgment does not interfere with the rights of a subsequently innocent third-party purchaser.
The Memorandum of Contract does not affect the rights between the buyer and seller unless the seller has no title to transfer and the third-party purchaser is allowed to take a good-faith acquisition of an ownership interest. A Memorandum of Contract does not act as a lien against the property , and is not to be confused with a lien imposed by a court judgment. Specifically, the Memorandum of Contract does not attach itself to the property and does not impose any type of monetary lien claim against the property itself.
In the event the seller lacks an ownership interest in the property, the Memorandum of Contract permits the buyer to seek specific performance as a remedy against the seller, or alternatively, allows the buyer to recover damages against the seller. The form of the act is unique to Louisiana.
The Importance of Recording a Memorandum of Contract
Filing a memorandum of contract becomes significantly important when buyers and sellers have expectations, or rights, in the future performance of the contract. The memorandum of contract is also important for several reasons. First, the contract must be recorded and then referenced on the deed, which shows the chain of title to the property. If the contract is not recorded the law provides that it may not be enforced on third parties, like a bank or a future purchaser, without notice of the contract.
There are other situations where the buyer and seller may want to enforce the terms of the contract against a third party who later obtains an interest (e.g., lien) against the property at a time subsequent to the date of the contract. For example, the buyer and seller may want to enforce the prohibition not to build on the property. The buyer may want to have the right to require the seller to perform certain acts under the contract, such as install certain landscaping or fencing or provide for easements. Filing a memorandum of contract places the world on notice of the contractual relationship until the property closes.
If a bank has a security interest in your home and you are a qualified recipient of the loan modification plan at your mortgage company, your home could be in jeopardy. You should consider filing a memorandum of contract so that your bank cannot foreclose on your home before it closes without giving you credit for the purchase price. Filing will protect you if you are buying the property for less than the underlying debt amount.
Our office assists clients in preparing, filing and analyzing the appropriateness of a memorandum of contract considering all local, state and federal laws.
Central Components of a Memorandum of Contract in Real Estate
A real estate memorandum is a brief document that states the parties have agreed on the overall terms of a real estate transaction. For it to be legally effective, the memorandum must contain certain key elements including the:
Parties involved in the transaction. The memorandum must clearly identify the parties to the anticipated transaction. The real estate agreement, such as a lease, may have more than two parties (e.g. landlord, tenant and guarantor). Too often, the memo simply identifies the lessor and lessee and does not identify who the owner of the property is or simply identifies the owner of the property without identifying the lessee.
Property. The memorandum should include a detailed legal description of the property. In the case of a lease of space in a rental building, the memorandum will generally identify the space being leased by its street address, unit number, and sometimes even its square footage. The owner’s agreement may not say who the owner is, show a plat of the property, or disclose the seller’s name, if applicable.
Description of the interest acquired in the property. The document should identify whether the agreement is for the purchase and sale of the property, lease, or other interest in the property. The agreement should state the rights that will be assigned to the parties, and how the agreement can be terminated.
Agreement to convey or acquire or rights concerning real estate. It should be clear from the wording of the document that the parties intend for the document to memorialize their agreement concerning a real estate matter.
The above are essential components that should be in any memorandum of contract. Generally, any agreement by which an owner is conveying or acquiring a property interest must be reduced to writing and signed by the parties.
How to Draft a Memorandum of Contract
A Memorandum of Contract in a real estate transaction is usually prepared by the attorney for the grantor of the property. However, it is perfectly acceptable for the buyer’s attorney or, at the very least, the buyer’s agent, be involved in the preparation of the Memorandum. If a Commission Commercial Broker is preparing the Memorandum of Contract in a commercial deal, it is expected that the Commercial Broker will have received legal counsel on the preparation of the Memorandum prior to submitting it to the seller’s attorney.
The language in the Memorandum will be tailored to the transaction. A simple residential memorandum usually references the basic particulars (i.e. parties, subject matter, price, and other pertinent dates). This type of memorandum would usually not contain a more detailed recitation of the terms of an agreement if those terms were to be unknown for whatever reason. A commercial memorandum would usually consist of a more detailed recitation of the property to be sold; a more detailed recitation of the parties; and may include detailed recitations regarding the price and/or closing and conditions precedent or subsequent to closing.
Although there is no statute setting forth standard time frames as to how long it will take to prepare a memorandum after execution of the contract, assuming that the parties have agreed in writing to prepare one and the terms are not subject to some other conditions (i.e. a title report), the memorandum should only take a few days to complete and record.
Filing a Memorandum of Contract: Steps and Costs
Once a memorandum of contract is executed, it will typically be recorded in the public land records by the party that places into the contract. Recording is often best practice for two primary reasons: (a) A memorandum placed into the public land records is considered record notice to future claiming parties and (b) An unrecorded real-estate interest is vulnerable to being defeated by competing claimants or bona-fide purchasers without notice of the underlying real estate agreement. When a memorandum is recorded , it becomes a matter of public records by which third parties can review and be aware of the recorded real estate agreement.
The procedure for perfecting a memorandum of contract by recording it into the public land records varies by jurisdiction. The proposing party will need to contact the county clerk’s office in the applicable county where the property lies to confirm the proper procedure. In most jurisdictions the procedure is fairly simple and straightforward. The foregoing parties will likely need to pay a nominal recording fee; however, this fee will vary by state and county and therefore should be confirmed beforehand. Some states have statutory requirements for the form and content of the memorandum; however, for purposes of this article only general guidelines will be considered.
Consequences of a Memorandum Being Unenforceable
Failure to honor a memorandum of contract in a real estate transaction can have significant legal implications for the party that fails to comply with the terms. Such failure may be considered a breach of contract, which can result in the aggrieved party seeking a remedy.
If a party breaches the terms of the agreement by failing to honor the memorandum, the other party may be able to bring a lawsuit for breach of contract seeking damages or specific performance. The court will consider whether the failure to honor the agreement has caused damages to the non-breaching party. Potential damages may include measurement of loss of bargain damages through expectation damages or reliance (out of pocket) damages.
Where the party that fails to honor the memorandum committed fraud, the non-breaching party may seek damages under tort law. A damages award from a tort action would be in addition to any award under a breach of contract claim.
In addition to any damage award, after a trial the court may also order specific performance. Specific performance refers to an order of the court requiring the breaching party to carry out the terms of its promise or obligation. Specific performance is an equitable remedy, as such, it is often only considered by the court after considering the injunctive relief (a court order that a party take some action or cease some action). Thus, the aggrieved party may be seeking both injunctive relief and specific performance.
A memorandum of contract is a written record of an oral contract and is used in real estate transactions as a way to enforce contracts when a closing is not completed. It can even allow the aggrieved party to still be able to exercise its rights against the signatory by filing a notice in the Registry of Deeds.
Common Questions on Memorandum of Contract
Q1: Is a memorandum of contract a deed?
A: No. A deed is an important legal instrument that carries extra execution and witnessing requirements. Often, a contract which has been executed as a deed will be referred to as being "under seal". Executing a deed will usually imply an intention by one or both of the parties to grant enforceable interests to parties not party to the contract. A memorandum of contract is a simplified version of a contract which itself does not have any specific evidential status. However, because it is a publically available document (unlike any underlying contract between the parties), a memorandum of contract can be a relatively formal and broadly recognised means of establishing the existence of enforceable rights and interests in property.
Q2: Can I cancel a memorandum of contract once it is registered at land registry?
A: Yes. You must have a good reason in order to do so and there are costs associated with cancelling a registered memorandum of contract but, this is generally possible so if you think you have a ground for doing so then you should consult a solicitor familiar with the process.
Q3: What is an example of good reason for cancelling a registered memorandum of contract?
A: You may need to cancel a memorandum of contract if there is an existing binding contract in place on the subject matter of the memorandum of contract and it would defeat the purpose of the contract to then enter into another contract on that same subject matter.
Q4: Can I grant rights other than rights to buy the property if I register a memorandum of contract?
A: As with any contract , the subject matter of a memorandum of contract can be quite broad and so the answer is yes. It is, however, important to be precise about what rights are being listed. This way you do not need to be concerned that your interests will be affected by other dealings that might occur with the underlying contract and land title. It is important to be aware that a memorandum of contract only gives rise to equitable interests and so the underlying contract (and not the memorandum of contract) will be the instrument enforcing the feature of the contract.
Q5: Why should I bother with a memorandum of contract?
A: One of the most recognised purposes for a memorandum of contract is to ensure that only a purchaser’s legal interests are entered onto the title of a property. The memorandum of contract will preclude any earlier or future interests from being entered onto the title. Of course, there are other purposes and benefits depending on your particular situation and these can be explained by a solicitor familiar with the process.