If you hold an option to purchase property or a right of first refusal, its enforceability depends on a rule Massachusetts changed in 2004. Before that year, a document executed “under seal” could bind a promise without any actual consideration. The seal itself satisfied the requirement. In Knott v. Racicot, 442 Mass. 314 (2004), the Supreme Judicial Court ended that treatment for option contracts.
This alert explains what a seal is, what the court changed, and what the change means for the enforceability of option agreements today.
What a “Seal” Is
A seal is a mark on a legal document that, historically, made a promise binding without a separate exchange of value. In earlier centuries, a party pressed wax onto the document and stamped it with a personal signet. The law treated a sealed document as automatically supported by consideration, which is the value each side gives to make a contract binding. The seal substituted for that value.
Over time, the wax impression gave way to a printed circle, the letters “L.S.” (for locus sigilli, the place of the seal), or words in the document such as “under seal,” “witness my hand and seal,” or “given under my hand and seal.” Eventually, reciting the phrase was sufficient. A form contract stating that it was executed “under seal” received the legal effect of a sealed instrument even without any physical seal.
Where an option or right of first refusal contains language of this kind, it asserts that the promise is binding without any actual consideration. In Massachusetts, that assertion was once effective. For option contracts, it no longer is.
What Knott v. Racicot Changed
In Knott, the Supreme Judicial Court abolished the seal as a substitute for consideration in option contracts. It adopted the rule followed in most states: an option is binding only if it is in writing, signed by the party granting it, recites consideration for the option, and proposes a fair exchange within a reasonable time. Under this rule, the seal is no longer sufficient. Consideration is required.
Two aspects of the decision are significant.
First, the court applied its ruling prospectively. It did not void the option before it, because the parties had signed years earlier in reliance on the prior law. Options signed after 2004, however, are governed by the new rule, without that reliance protection.
Second, the option in Knott was enforced under the new rule because it satisfied the required elements. It was signed, recited consideration, stated fair terms, and set a reasonable time. It was enforceable even though no payment was actually made, because a written recital that consideration was given is itself evidence of that fact against the party who signed. That recital carries some weight, but it is a limited basis on which to rest a property right.
What the Change Means for Enforceability
If an option signed after 2004 relies on a seal alone, without consideration, the seal will not preserve it. The option is subject to challenge as an unenforceable promise, and a party seeking to avoid the transaction may raise that defense.
One qualification applies. Because a written recital of consideration is evidence of consideration, an option that recites consideration and states fair terms is not automatically void, even if no payment changed hands. Reliance on that recital alone, however, remains a weak position. Stronger support comes from consideration that actually changed hands, or from an option that is part of a larger transaction, such as a lease or a purchase and sale agreement.
Points to Confirm in an Option Agreement
The following items bear on enforceability under current law:
Whether the agreement relies on seal language. Language such as “under seal” no longer supplies consideration for an option, and enforceability should not depend on it.
Whether consideration supports the option. For a standalone option, value should actually change hands, and the document should accurately reflect it.
Whether the option is part of a larger transaction. An option or right of first refusal contained in a lease, or executed together with a purchase and sale agreement, is generally supported by the consideration for that larger transaction, so separate consideration for the option is usually unnecessary. Note that Knott itself involved a standalone right of first refusal, so the decision does not directly address this point.
Whether the required elements appear on the face of the document. The option should be signed by the grantor, recite consideration, state fair terms, and set a reasonable time limit.
Whether the exercise mechanics are sound. Recent Massachusetts option cases tend to turn on how an option is exercised, including notice, timing, and procedure, rather than on consideration.
Recommendation
Knott v. Racicot is more than twenty years old, and its rule is now settled, but agreements drafted or copied from older forms may still depend on the prior treatment of the seal. If you hold or are negotiating an option or a right of first refusal, we recommend that an attorney review the agreement to confirm it is enforceable under current Massachusetts law.
David J. Murphy is the Managing Attorney of Murphy PC, a Boston-based real estate and business law firm, and is Of Counsel to McDermott, Quilty, Miller & Hanley LLP. With over 20 years of experience, David counsels developers, sponsors, owners, and investors in commercial real estate transactions throughout New England and other states, with a focus on joint ventures, preferred equity, and complex deal structuring. He can be reached at dmurphy@murphypc.com or 617.993.0650.
This article is for general informational purposes only. It is not legal, financial, or investment advice and does not create an attorney-client relationship. Consult a licensed attorney before acting on anything discussed here. This may constitute attorney advertising.