What is a Memorandum of Contract?
A memorandum of contract (also called a memorandum of agreement or notice of contract) is a shortened version of a purchase contract that is recorded with the county recorder's office to provide public notice that a buyer has an equitable interest in a property. The memorandum does not disclose the full contract terms (particularly the purchase price) but puts the world on notice that the property is under contract.
Why it is used
The primary purpose is to prevent the seller from selling the property to someone else while the original contract is in force. Once a memorandum is recorded, a title search will reveal the recorded interest, and no title company will insure a sale to a different buyer without the memorandum being released or the underlying contract being terminated.
Wholesalers sometimes record memorandums to protect their contract position during the disposition period. If a wholesaler has a property under contract and the seller receives a higher offer from another buyer, the seller might be tempted to breach the wholesale contract. A recorded memorandum creates a cloud on title that prevents the seller from closing with anyone else.
Contents of a memorandum
A typical memorandum includes: the names of the buyer and seller, the property legal description and address, the date of the underlying contract, a statement that the parties have entered into a purchase agreement, and the signatures of both parties (or at minimum, the party recording it). The purchase price and other sensitive terms are not included.
Controversy in wholesaling
Recording a memorandum is controversial in the wholesale community. Some wholesalers view it as essential protection. Others argue it creates friction with sellers, may not be enforceable if the underlying contract is assignable (some states view the wholesaler's interest as too contingent to constitute a recordable interest), and can create title complications if the memorandum is not properly released after the deal closes or terminates.
Some states explicitly allow memorandums of contract (Texas has precedent supporting their recordability). Others have laws that penalize the filing of frivolous or fraudulent liens, which could apply if a memorandum is recorded without a legitimate contract interest. Consult a real estate attorney in your state before recording.
Releasing a memorandum
When the contract closes, terminates, or is assigned, the memorandum must be released through a recorded release document. Failure to release a memorandum after the contract ends can result in a cloud on title that the seller must resolve through legal action, potentially exposing the person who filed the memorandum to liability.