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When Does A Contract Become A Binding Contract?

Written by on Tuesday, 07 April 2015 1:36 pm

Question: We signed a contract to sell our house, and gave the buyers certain time limits. From the date of "contract ratification" they had 7 business days to have the house inspected, and 30 days in which to obtain financing.

Exactly what constitutes "ratification"? A REALTOR® friend told us that a contract is ratified when all parties sign off on the contract document, but a lawyer friend said it starts when all contingencies have been removed.

Who is right?

Answer: Depending on the language in your real estate sales contract, it is possible that both of your friends have given you good advice.

Let's look at how a contract is formed. The potential buyer likes your house and submits a written offer to you. This is often done through any real estate agents involved in the transaction.

When a seller receives an offer, he has three options:

accept it as it was written;

reject the offer completely, or

counteroffer. It should be pointed out that this does not always relate to the price of the house; for example, the offer may propose that settlement will take place in three months, while the seller wants it to occur earlier (or later).

If there is a counteroffer, the process starts all over again. The recipient of the counter has the same three options.

Once the parties reach agreement on all issues, some people would take the position that there is a ratified contract. But others would argue: "wait a minute, since the buyer can get out of the contract because of the various contingencies, the contract is really not final (i.e. ratified) until all those contingencies have been removed and the buyer and seller must go to settlement.

In the Washington metropolitan area, this problem is solved if you use the Regional Sales Contract. Paragraph 28, entitled "Definitions", specifically states that the "Date of Ratification means the date of final acceptance in writing of all the terms of this Contract (not the date of expiration of removal of any contingencies".

On the bottom of the last page of the contract, there is a line for filling in this ratification date. Since so many conditions depend on this date, every real estate sales contract must identify this in clear terms.

On the other hand, if you are not using the Regional Sales contract, your lawyer may actually be correct. Your buyer has a contingency for a home inspection as well as for obtaining mortgage financing. In law, these are referred to as "conditions subsequent". There is a sales contract but it can be declared void if certain conditions do not pan out. If the inspection report is unsatisfactory to your potential buyer, he may be able to get out from under the contract and get a refund of his good faith deposit. In fact, many buyers will not allow the deposit to be cashed until after the home has been inspected.

So if the contract can be voided after it has been signed by all parties, many people take the position that the contract is not fully ratified until all contingencies have been satisfied and removed.

Why is determing the ratification date so important?

In a typical real estate transaction, the sellers are relying on the buyer going to settlement within the time spelled out in the contract. The sellers need the money in which to purchase their next house. If they cannot meet their deadlines, they may be in default on their purchase contract and could forfeit their deposit.

So sellers will often include the following language in the contract:


This generally means that if you agree to settle on July 20h, unless that day is a holiday or a weekend, settlement must take place on that date.

It also means that all time limits are carved in stone -- unless the parties mutually agree to any extensions. If the home inspection contingency says 7 business days, if the buyer does not act within that time frame, he cannot use the home inspectors report as a means of getting out from under the sales contract.

There are many time-related issues involved in a real estate contract, such as:

  • financing contingency;
  • review of condominium documents;
  • sale of purchasers home first;
  • date of settlement;
  • appraisal contingency;
  • obtaining a gift letter or a pre-qualification letter from a lender

Whether you are a buyer or a seller, you must understand these time constraints. I generally recommend that both parties prepare and agree on a calendar of events relating to the sales contract. If both buyer and seller are on the same page regarding these time deadlines, there should be less confusion as the parties move toward settlement.

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  About the author, Benny L. Kass

Individual news stories are based upon the opinions of the writer and does not reflect the opinion of Realty Times.