LEGAL MATTERS

What are the differences between an
Offer to Buy or to Sale, a Promise to Purchase
and Sale Agreement and a Private Purchase
and Sale Agreement?
By María G. Silva-Rojas, Chantal de Lourdes Gómez-Ruiz and Zulma Viera-Camacho
• Robles Lazo y Gallardo Law Firm • Photos by Jesús de Avila • April 2009

The purpose of this article is to explain and visualize the benefits and the risks between an (i) Offer to Buy or to Sale, a (ii) Promise to Purchase and sale Agreement and a (iii) Private Purchase and Sale Agreement, in order to know which agreement is the best to enter according to the particular circumstances of each case.

OFFER TO BUY & OFFER TO SALE

• What is an Offer to Buy and an Offer to Sale?
  
  It is NOT an agreement but an unilateral proposal submitted by the Offeror to a third party, that contains the Terms and Conditions of the agreement the offeror whishes to enter with a third person (the Offeree) who can accept it or reject it.
  
  It is very important to mention that under Mexican Law, if the Offeree who received an Offer does not want to accept it exactly as it is, but he or she is interested in the transaction and submits a Counter-Offer, that Counter-Offer is considered as a new Offer to the original Offeror who can accept it or reject it, but the original Offeror is not abide any more by the Original Offer’s terms.

• Which ones are the effects of issuing an Offer to Buy or an Offer to Sale?
  
  By issuing an Offer, either to buy or to sale, the Offeror is obliged to fulfill the obligations established in the Offer in case the Offeree accepts it.
  
  In case you received an offer and did not accept it but sent back a Counter-Offer, then you become an Offeror and you are obliged to fulfill the obligations established in your Counter-Offer (considered now an Offer under Mexican Law) in case the original Offeror accepts your Counter-Offer.

• Which ones are the effects of accepting an Offer?
  
  By accepting an Offer, both parties are obliged to fulfill the obligations as established in the Offer and the accepted offer would have the effects of a Promise to Purchase and Sale Agreement, which is explained below.
  
  In case you did accept the Offer but conditioned it to the acceptance of a Counter-Offer, it is not a valid acceptance under Mexican Law as previously explained.

• Can I withdraw an Offer?
  
  Only if the Offeree receives the withdrawal before he or she receives the Offer.

• For how long can an Offer be valid?
  
  In case you established a specific period of time for its validity that would be it. In case you did not, the Offer would be valid for 3 calendar days plus the time required to mail the offer to the Offeree.

PROMISE TO PURCHASE AND SALE AGREEMENT

• What is a Promise to Purchase and Sale Agreement?
  
  It is a fundamental contract by means of which a person (called the Promising Seller) and another person (called the Promising Buyer) obligate themselves to execute, within certain period of time, a Definitive Purchase and Sale Agreement, that they cannot or do not want to execute at the moment. In this previous agreement, both parties establish the main characteristics of the Definitive Agreement (the price, the object to be purchased and the time to execute the Definitive Agreement).

• What are the effects of a Promise to Purchase and Sale Agreement?
  
  The Promise to Purchase and Sale Agreement generates reciprocal legal obligations for both parties; the principal objective of this contract is to execute the Definitive Agreement in the future.
  
  The only effect that this agreement creates for the parties is the right to demand the celebration of the Definitive Agreement and consequently it allows them only to demand the fulfillment of the obligations exactly as contemplated in the Promise Agreement.

• Which are the requirements of validity of the Promise to Purchase and Sale Agreement?
  
  In accordance with the Jalisco Civil Code, the validity of this Agreement is subjected to the following requirements:
  
  a. The contract must be in a writing document evidencing the agreement between both parties.
  
  b. The Definitive Agreement that both parties are willing to celebrate in the future must not be considered illicit or illegal by any way or case.
  
  c. This agreement must establish a certain period of time for the execution the Definitive Agreement or subject it to a specific condition.
  
  d. It has to contain the characteristics of the Definitive Agreement.

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PRIVATE PURCHASE AND SALE AGREEMENT

• What is a Private Purchase and Sale Agreement?
  
  It is a contract by means of which a person (called the Seller) sales to another person (called the Buyer) who buys, an item in exchange of the payment of a price that is paid by the Buyer to the Seller.
  
  The Purchase and Sale Agreement can be executed as a Private Agreement or as a Public one when formalized through a Public Deed. The difference is that the first one is executed solely by the parties, sometimes with the presence of one or more witnesses, and the second one is executed before a Public Notary, who is invested by the Government with special authority to act as an Official Witness, and who, in order to appear as such, has to be sure that the parties fulfilled some special requirements or obtained certain documents.

• When is it required to execute a Purchase and Sale Agreement through a Public Deed?
  
  According to the Jalisco Civil Code –and most of the other Mexican States Civil Codes–, a Purchase and Sale Agreement of a Real Estate shall be formalized in a Public Deed before a Public Notary.

• Which ones are the effects of missing the formality required by the Civil Code for the execution of a Real Estate Purchase and Sale Agreement?
  
  If the parties fail to formalize the Purchase and Sale agreement before a Public Notary in a Public Deed, but the parties actually voluntarily agreed to execute the contract, then the agreement binds the parties even though it misses the formality required by law to be valid. The risks involved by the parties by not having the agreement formalized in a Public Deed are the following ones:

1. It cannot be recorded before the Public Registry of Property and therefore, it will have effects only for the parties entering it, and not before third parties (i.e. creditors, employees, etc.).
   
   
2. This means that any third person, who is not a party of the Private Agreement, is not obliged to respect the rights arising from such contract.
   
   
3. There are some Taxes that cannot be paid on time, thus generating fines.

• What are the effects of a Purchase and Sale Agreement between the parties?
  
  A Purchase and Sale Agreement, even if it is a private one that lacks the formality required by the law, creates binding obligations among the parties, and therefore: (a) The Seller is obliged to transfer the ownership of the sold item to the Buyer –according to the terms and conditions of the agreement–; and (b) The Buyer has the obligation to pay the price –according to the terms and conditions of the agreement–. This means that:

1. In case the Buyer fails to fulfill his or her obligations under the agreement, specially the payment of the Price as agreed by the parties, the Seller is not obliged to formalize the agreement in a Public Deed, which means that the Seller will remain appearing as the owner of the Real Estate before the Public Registry of Property.
   
   
2. In case the Seller fails to fulfill his or her obligations under the agreement, specially the formalization of the Purchase and Sale Agreement in a Public Deed so it can be recorded and/or the delivery of the possession of the Real Estate under the terms agreed by the parties and if the Buyer can prove that he or she has fulfilled his or her obligations under the agreement, then the Buyer can take the matter to a court of law and file a lawsuit calling the “Pro-Forma Action” asking the Seller to formalize the agreement before a Public Notary and to deliver the possession of the Real Estate, as agreed.

• What is the importance of having a Real Estate Private Purchase and Sale Agreement formalized?
  
  One of the requirements to have a title of a Real Estate recorded before the Public Registry of Property is to have it duly formalized in a Public Deed.

• What is the importance of having a Real Estate Title Recorded before the Public Registry of the Property?
  
  In the Mexican Legal System, there is a Governmental institution called the Public Registry of Property which was created with the purpose of making public certain acts and facts, principally in reference with Real Estate properties and which assist any person to know who is the legal owner of any recorded property, and if there are any liens, encumbrances or any other kind of special acts (such as lease agreements or easements) recorded for a specific property.
  
  The Public Registry of Property’s Law, allows only one recorded owner or co-owners for each Real Estate (a property cannot be recorded twice under different names), and one of the principles of said Law is the one of “Order or Precedence” which means that in case there are two or more acts filed to be recorded in reference with the same property, the one submitted first in time, will have the right to be recorded, and once it is recorded, the other one will be rejected (or will take a second place, in case of a lien).
  
  It is important to mention also, that according to Mexican Laws, if a person appears recorded as the owner of a Real Estate he or she can sale the property, even if he or she has sold it previously through a private agreement to somebody else, or even through a Public Deed but such deed is not recorded yet on behalf of the new owner. In case this happens, the “Order or Precedence” is very important because the first person to get his or her title recorded is the one that will be considered as the new owner of the Property. In this particular case, the person whose title is rejected but actually executed a Purchase and Sale agreement with the previous owner is entitled file a lawsuit against the Seller, asking him or her to reimburse the paid price plus interests, damages and losses, if applicable, and also can file charges before the Public Prosecutor by the Fraud committed by the Seller.

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CONCLUSSIONS

• Which are the most important differences between an Offer to Buy or to Sale and a Promise to Purchase and Sale Agreement?

1. Since an Offer is not an agreement, it obliges only the person who issues it; a Promise Agreement obliges both parties.
   
   
2. As soon as an Offer is accepted in each and every one of its terms and conditions, it becomes –in a practical way of speaking– a Promise Agreement.

• Which are the most important differences between the Promise to Purchase and Sale Agreement and the Private Purchase and sale Agreement?

1. The Promise Agreement states that the Definitive Agreement shall be executed in a future, on the other hand, the Private Purchase and Sale Agreement, is the Definitive Agreement which lacks the formality required by law.
2. The Private Purchase and Sale Agreement creates an obligation that can consist on “giving”, “doing” or “not doing” the items or acts contemplated in the contract, while the Promise Agreement only creates an obligation of “doing” which consists on the execution of the Purchase and Sale Agreement.
3. The Promise Agreement can be entered when the parties do not have yet all the permits, licenses, authorizations or any other specific requirement that they need to fulfill in order to enter a valid Purchase and Sale Agreement.

• When is it advisable to execute an Offer to Buy or to Sale?
  
  When you do not have any possibility of negotiating directly the terms and conditions of the agreement with the other party, and even though, you want to let them know that you are interested in buying or selling a specific property under certain terms and conditions.

• When is it advisable to execute a Promise to Purchase and Sale Agreement?
  
  When you can negotiate the terms and conditions of the Purchase and Sale Agreement with the other party but you cannot or do not want to execute the Definitive Agreement because:

1. The parties do not have yet all the permits, licenses, authorizations or any other specific requirement that they need to fulfill in order to enter a valid Purchase and Sale Agreement (nonetheless, if you are the buyer and you are paying part or the total price, you would be better protected if you enter a Purchase and Sale Agreement, even if it lacks the formality required by law); or
   
   
2. The parties do not want to execute the Purchase and Sale Agreement at that specific date even though they want to be obliged to execute the agreement in the future. (i.e. The Buyer does not have the money yet, but he or she is working on getting it; The Seller is building up a condominium of which, he will sell a specific Unit, etc.)

Robles, Lazo y Gallardo - Law Firm
E-mail: jgallardo@rlg.com.mx

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