Memorandum of Understanding — Why Is It Not Recommended?

It is common for people to be in the middle of negotiations to purchase a property, and naturally it takes time to prepare the contract with its many details. The broker [there are brokers who have the parties sign that the time for payment is after the signing of a memorandum of understanding] or other interested parties pressure the sides, claiming that during the time until the contract is signed, another person may purchase the property. They therefore suggest signing a basic memorandum of understanding, and afterward the details of the transaction will be finalized in a contract with an attorney. The question arises whether this is recommended.

The practical reality of a memorandum of understanding

A memorandum of understanding is a short document that the two parties prepare in writing, usually stating only that the main points have been agreed upon, before all the details have been finalized to the point of signing a detailed contract with an attorney. It should be known that, under the law, an undertaking to make a real-estate transaction requires a written document and final intent. The memorandum of understanding must include the principal details of the sale transaction: 1. the identities of the parties; 2. a description of the property and its location; 3. the amount of consideration; 4. the payment dates; 5. the date of transfer of possession.

The Minchat Yitzchak (Responsa, vol. 6, siman 170, letter 21) maintains that a memorandum of understanding has the status of a deed of sale.

Disadvantages of writing a memorandum of understanding

A memorandum of understanding made according to the above conditions is a legally binding document that binds the parties to the terms of the transaction explicitly agreed upon within it. One cannot retract from an agreement that has been reached and later improve one’s positions in the negotiations, since the parties are bound to the transaction. And since it does not include all the details, this opens the door to disputes and litigation, which can amount to high costs.

Retracting from a memorandum of understanding may be impossible; alternatively, it is sometimes accompanied by the payment of compensation or by litigation, the cost of which is high. One must also know that the date of signing the memorandum of understanding is the relevant determining date from the perspective of the tax authorities, as this is the time when the parties entered into the transaction [regarding the obligation to report the transaction to real-estate taxation authorities, which is within 30 days, and regarding payment of purchase tax, which is within 60 days]. Likewise, the buyer can register a cautionary note on the property by virtue of the memorandum of understanding, which cannot be removed without his consent.

This is especially so because the reality is that, generally, before signing a memorandum of understanding, the parties do not seek professional advice in order to examine the current status of the rights in the property [liens, pledges, attachments, demolition orders, claims, building rights, tax liabilities], nor do they put in place securities for the performance of the transaction [such as irrevocable powers of attorney, guarantees, trust arrangements, and the like]. Afterward, when they are about to sign a contract, problems with the sale and difficulties in carrying out the transaction may come to light. And if one of the parties wishes to withdraw, he is already within the transaction.

Recommendation not to sign a memorandum of understanding

In light of the above, since a memorandum of understanding is legally binding when the conditions detailed above are met, and is considered a full-fledged contract both with respect to registrations and with respect to tax payments, it is therefore recommended not to sign a memorandum of understanding at all. And one who nevertheless wishes to sign a memorandum of understanding or any other document would do well to consult an expert dayan who understands these matters.

Sources: The Taz (Even HaEzer, siman 50, se’if katan 12, within his discussion) maintains that one may retract from “main points”; and so it is ruled by Rabbi Akiva Eiger (Responsa, second edition, siman 75). The Beit Shmuel (Even HaEzer, question 12) disagrees and maintains that one may not retract after “main points.” The Rema (Even HaEzer, siman 50, se’if 6) ruled that if they accepted a kinyan on condition that documents be written, one may object to the document; and the Chelkat Mechokek (se’if katan 14) wrote that one may even retract from the match itself, since he said “on condition.” The Rema (Choshen Mishpat, siman 243, se’if 7) ruled that when they made a kinyan on condition that a document be written, and one party retracted before the writing of the document, the law is that the kinyan is void. The Sema (se’if katan 13) wrote that this is specifically when he said “on condition.” The Minchat Pitim (Even HaEzer, siman 50, se’if 6) concludes that when writing “main points,” the parties may retract.

Torat HaMishpat

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