Referential offers
It is not inconceivable, when marketing a property in an environment of multiple offers, that a Seller may encounter what is generally referred to as a “benchmark purchase price offer.” A multiple offer situation arises when a subject property simultaneously attracts multiple Buyers, who then proceed to submit their respective offers. Since Buyers are unaware of the price and terms of competing offers, a referential purchase price clause may seem like the optimal solution, but in fact it is not.
The objective of the reference purchase price offer is to take advantage of the next highest bona fide offer that is acceptable to the Seller. The offer contains a clause that reads, in general terms, as follows: “The purchase price is $1,000 above the price offered in the closest competitive bona fide offer acceptable to Seller up to a maximum of $350,000. Seller agrees to provide a copy of such nearest competing offer upon acceptance of this offer”. The referential purchase price offer, therefore, is an intelligent way by which the Buyer endeavors to establish a purchase price by reference to the prices contained in the offers of the competition. As can be reasonably expected, there are many variations in the wording of reference purchase price clauses.
The problem with these types of offers is that there is a strong possibility that neither Seller nor Buyer will seek legal recourse should either of them default on completion, due to the wording of the referenced purchase price clause. . The main case is a 1985 decision of the English House of Lords, which held that benchmark offers are invalid. Since then, this case has been adopted in the Common Law, at least as far as referential bidding is concerned. The general principle of law holds that an offer from a bidder whose definition depends on the offers of others is invalid and unacceptable. The reason is that this type of bid is inconsistent and potentially destructive of the very bidding process in which it is submitted.
Whether the focus is on the referential purchase price offer or the bidding process, there are enough similarities for a Seller to worry about when it comes to referential offers. One approach that could be used to circumvent the problems that arise when faced with benchmark purchase price offers would be for the Seller to respond with an Exhibit, which removes the benchmark purchase price clause and inserts a fixed price for an identical amount in its place. The benefit to the Seller is, of course, that it will not be in a position to have to reveal the closest highest offer to the Buyer, but whether this will be acceptable to the Buyer is an entirely different matter.
What all this means in a multiple offer scenario is that, in the event that a reference purchase price offer arises, the Seller must evaluate its legitimacy, the enforceability of the offer and the bona fides of the contract. Unquestionably, therefore, the Seller that accepts such an offer will assume an extra risk, the measure of which may very well reside in the offers that the Seller has decided to reject in favor of the referential purchase price offer. A risk that ultimately may not be justified.
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