6.3 Real Estate Sales Contracts, Counteroffers & Contingency Clauses

Offer, Acceptance, and Counteroffer Mechanics

The formation of a valid contract requires mutual assent through offer and acceptance. In contract law, the party making an offer is the offeror, and the party receiving the offer is the offeree.

Offer Rules and Communication

1. Definite Terms: An offer must be sufficiently clear and definite regarding parties, property description, purchase price, financing terms, and closing date.
2. Effective Acceptance: Under the common law "mirror image rule," acceptance must be absolute, unqualified, and identical to the terms of the offer. An acceptance is legally effective only when communicated back to the offeror or the offeror's authorized agent before the offer lapses.
3. Revocation (Withdrawal) Before Acceptance: An offeror may revoke an offer at any time prior to communication of acceptance, even if the offer explicitly states it will remain open for a designated period (e.g., "open for 48 hours"). Unless separate consideration was paid to hold the offer open (creating an option), an offer without acceptance confers no rights and may be unilaterally withdrawn at will.

Legal Impact of a Counteroffer

When an offeree receives an offer and accepts it on modified terms, alters the price, changes the closing date, or introduces new conditions, the legal response is a counteroffer.

• Automatic Rejection: A counteroffer operates as an immediate legal rejection and total termination of the original offer. Once rejected by a counteroffer, the original offer is dead and cannot subsequently be accepted unless resurrected by the original offeror.
• Reversal of Roles: The counteroffer creates a brand new offer. The original offeree becomes the new offeror, and the original offeror becomes the new offeree, possessing the sole power of acceptance or rejection.

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Equitable Title vs. Legal Title

When a buyer and seller sign a valid, binding bilateral contract of sale, title ownership splits into two distinct legal concepts:

• Legal Title: The actual ownership of the freehold estate, represented by the deed. The seller retains legal title throughout the executory contract period as security for the payment of the purchase price.
• Equitable Title: The buyer's beneficial and insurable interest in the real estate created immediately upon the execution of a binding contract of sale.
  • Because the buyer holds equitable title, the buyer can obtain title insurance commitments, obtain homeowner's hazard insurance, and seek the remedy of specific performance in equity to compel the conveyance of legal title.
  • If either the buyer or seller dies during the executory period, the contract survives: the deceased seller's heirs are legally bound to deliver the deed, and the deceased buyer's estate is obligated to complete the purchase.

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Risk of Loss Before Closing

New Jersey has not enacted the Uniform Vendor and Purchaser Risk Act, and no New Jersey statute allocates casualty risk during the executory period. (N.J.S.A. 46:5-1 governs how certain words in quitclaim deeds are construed; it has nothing to do with risk of loss, and a citation to it for this rule is simply wrong.) Two rules operate instead, in this order:

1. The contract controls. Whatever the parties write governs. The New Jersey Realtors Form 118 Risk of Loss paragraph provides that the risk of loss or damage to the property by fire or otherwise, ordinary wear and tear excepted, is the seller's responsibility until the closing. Because Form 118 is used in the great majority of New Jersey one-to-four-family resales, the practical answer in a real transaction is that the seller carries the risk until closing.
2. If the contract is silent, the common law applies. New Jersey follows the majority rule under the doctrine of equitable conversion: once a specifically enforceable contract is signed, the buyer is the equitable owner and therefore bears the risk of loss, even without possession. The seller may enforce the contract, subject to crediting the buyer with insurance proceeds the seller collects.

Exam trap. Two different answers are correct depending on what the question supplies. If the fact pattern references the standard New Jersey contract form, the seller bears the risk until closing because the form says so. If the fact pattern states that the contract is silent, the equitable-conversion default puts the risk on the buyer. Any option that credits 'the Uniform Vendor and Purchaser Risk Act' as New Jersey law is describing a statute this State never adopted.

Broker practice point. Because the allocation is contractual rather than statutory, risk of loss is one of the provisions attorneys most frequently rewrite during the three-business-day attorney review window. Advise buyers to bind hazard insurance effective at contract signing rather than at closing: equitable title is an insurable interest from the moment the contract becomes enforceable.

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Earnest Money Deposits & Broker Escrow Regulations

An earnest money deposit (binder) demonstrates the purchaser's good faith. While not legally required for contract validity, it is standard practice.

Under New Jersey Real Estate Commission regulations (N.J.A.C. 11:5-5.1):

• Special Trust Account: Every broker of record maintaining an escrow account must establish a separate, dedicated trust/escrow checking account in an authorized New Jersey financial institution.
• Deposit Timelines: Unless otherwise stipulated in the contract, a broker must deposit client trust funds into the escrow account within five (5) business days of receipt.
• Severe Violations:
  • Commingling: Mixing brokerage operating funds, personal funds, or commission monies with client escrow funds (strictly prohibited).
  • Conversion: Using client trust funds for unauthorized purposes, such as paying brokerage bills or sales commissions (a criminal offense and automatic grounds for license revocation under N.J.S.A. 45:15-17).

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Handling Multiple Offers and Counteroffers

The PSI content outline gives multiple offers their own line item, and broker-level candidates are expected to know both the mechanics and the ethics.

The governing principles

1. Every written offer must be presented. A licensee may not screen offers by price, financing type, or the identity of the offeror. Under N.J.A.C. 11:5-6.4(g), every written offer received during the listing term must be transmitted to the owner within 24 hours of receipt by the firm, and any oral acceptance must be secured in writing within 24 hours.

2. Back-up offers follow a separate rule — note the direction of each notice. N.J.A.C. 11:5-6.4(h) defines a back-up offer as a written, signed offer received while a previously executed contract or lease is pending and has already survived attorney review. An offer received while the earlier contract is still within attorney review is not a back-up offer and is presented under (g). For a true back-up offer:

   • The licensee who receives it must notify the offeror — the back-up buyer, not the listing broker — in writing that the property is the subject of a pending contract of sale or lease. That notice may not disclose the price and terms of the pending contract.
   • A copy goes to the listing broker only when the licensee who took the back-up offer is not licensed with the listing broker, and it is delivered at the time the offer is presented.
   • Whenever a licensee transmits a back-up offer to the owner, the licensee must advise the owner in writing to consult an attorney before taking any action on it.
   • Each of those written notices is retained as a six-year business record under N.J.A.C. 11:5-5.4.

   The classic distractor reverses the first notice, making the receiving broker notify the listing broker that a pending contract exists. The rule runs the other way: the person who must be told a contract is already pending is the back-up buyer making the offer.

3. The seller decides the strategy, not the agent. The seller may accept one offer, counter one offer, counter several offers simultaneously, or reject everything. The licensee's job is to explain the risk of each path in writing — most importantly that countering multiple buyers at once can create two binding contracts if more than one accepts.

4. Disclosure of the existence of multiple offers is a seller decision. Whether to tell competing buyers that other offers exist, and whether to disclose their terms, belongs to the seller, subject to the licensee's overriding duty not to misrepresent. Announcing offers that do not exist is fraud and independently sanctionable under N.J.S.A. 45:15-17(a).

5. Fair housing applies to offer handling. Consistent treatment of every offeror is not merely good practice; a pattern of steering sellers away from buyers using government-backed financing or from members of a protected class is a fair housing violation.

Counteroffer mechanics. A counteroffer is a rejection of the original offer plus a new offer. The original offer dies and cannot be revived by later acceptance — the original offeror must re-offer, or the counterofferor must withdraw the counter and re-accept. Power to accept passes to the party who received the counter. In New Jersey, revisions a licensee makes on the instrument itself must be initialed by all parties under N.J.A.C. 11:5-6.2(a)5, and revisions not reflected on the instrument must be made by signed amendment or addendum with a clear copy delivered immediately.

Escalation clauses. A clause that automatically raises the buyer's price above a competing bona fide offer by a stated increment up to a cap is not prohibited in New Jersey, but it forces the seller to disclose the competing offer to prove the escalation was triggered — which the seller may not wish to do. Advise clients to obtain counsel before using one; the attorney review period is designed for exactly this.

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Lease-Purchase and Lease-Option Agreements

The outline separates two arrangements that consumers routinely confuse.

Broker cautions specific to New Jersey

• Two contracts, one transaction. A lease-purchase or lease-option is a lease and a purchase contract. If a licensee prepares it and the property is a one-to-four-family residence, the attorney review clause under N.J.A.C. 11:5-6.2(g) applies, and a licensee-prepared residential lease of one year or more independently requires the statutory lease attorney-review language.
• Do not draft the terms. Rent credits, option consideration, price-setting mechanisms, default remedies, and recording of the option are legal drafting. A licensee who writes them is engaged in the unauthorized practice of law.
• Title and lien risk during the term. A tenant-buyer with years of accrued rent credits has no protection if the owner takes out a new mortgage or a judgment lien attaches. Recording a memorandum of option is the customary protection and is an attorney's task.
• The deposit is still trust money. Option consideration and rent credits held by the broker are funds of others and must reach the trust account within five business days under N.J.A.C. 11:5-5.1(e).