Drafting of MOU – Memorandum of Undertaking Meaning

An MOU is an official agreement between at least two parties. Generally carried out by organisations (including but not limited to governmental, public, private, and corporate entities), the document acts as a flexible arrangement to work together. Often confused with the Memorandum of Undertaking meaning, the fundamental purpose of MOU is that it initiates the process of developing a contract, and negotiations are crucial for developing an MOU between two companies. Both parties need to arrive at a consensus regarding the task at hand through negotiations and produce the document, which then acts as a benchmark while drafting the actual contract. 

The MOU is majorly used for real estate and property agreements. Buyers and sellers of property generally engage in drafting MOU as an initial form of the final contract that acts as an instrument providing the parties’ intent regarding entering into the transaction. Considering this, the Memorandum of Understanding format for property differs from one drafted for business purposes. To understand the differences, you can also look at the different memorandum of understanding between two parties sample drafts and drafts for real estate transactions available online.

2. Features of MOU

You may be confused about the purpose and identity of an MOU, primarily due to the presence of other similar documents, such as MOA, AOA, LOI, and MOI. Clarifying its features can help you to understand how to differentiate an MOU from other similar documents.

• Legally non-binding: A memorandum of understanding is not legally binding. It only acts as an informal agreement that the two parties have negotiated and decided. While it is less formal than a legally binding agreement or contract, it is considerably more formal than verbal agreements and handshakes. This means that the document cannot be presented in the court of law as a legally binding document and cannot be enforced with the help of the law.
• Does not provide any substantial rights: Continuing from the previous feature, an MOU also does not give any of the involved parties any substantial rights regarding the contents included. In the case of real estate MOUs, this means that even if you have agreed upon certain conditions and drafted an MOU after negotiations, it does not provide you with any rights whatsoever regarding the property. To finalise any such conditions and terms, you are needed to enter into a formal and legally binding contract with the other party or parties.
• Contains mention of a formal and final agreement to be drawn later: Since the MOU is just an informal record of negotiations, it includes mention of a more formal, permanent, and legally binding agreement to be drawn up later. In this regard, the MOU clearly states the lack of legal liability based on the terms and clauses mentioned. Instead, it acts as a point of reference for the final agreement for later.
• Monetary exchanges make it binding on associated parties: In India, the MOU becomes binding for the parties involved in an exchange of monies that had been conducted during the drafting process. This means that if you have made an advance payment to the seller or the real estate agent while drafting up the real estate MOU through negotiations, the seller is bound to honour the document’s terms until an official agreement is drawn up.

3. Stepwise Process of Drafting MOU

• Step 1: Identify the kind of agreement you need to enter into. If there is a need to continue or add to an existing agreement, then identify the clauses and areas that will change in the old agreement through the new agreement. However, you need to make sure that the older agreement is still valid and whether there are clauses regarding the proposed action regarding the relevant property in the new agreement.
• Step 2: Identify whether you need a Memorandum of Understanding for the desired purpose or whether Memoranda of Agreements is more appropriate. Gather all the information that is necessary for the Memorandum of Understanding draft. If you have determined the MOU to be more suited, then gather information such as the parties associated, the purpose of the agreement, duration for validity and any particular circumstances to be considered.
• Step 3: Develop Terms and Conditions for your MOU based on the information collected through the previous steps. For this step, you will need to refer to the legal guidelines associated with such documents in India. For ensuring compliance with such legal policies, you can enlist the help of legal counsel and consultants.
• Step 4: Negotiate with the other party to arrive at specific dates for starting and terminating the agreement. Also, develop a set of penalty clauses if the agreement, which will later act as a guide for a legal contract, is not followed correctly.
• Step 5: Consult your legal counsel or search the internet for a Memorandum of Understanding form or a sample MOU for business collaboration. A sample of the MOU format obtained online can act as a proper benchmark that you can use to draft your agreement. Additionally, you can also ask your legal counsel for relevant MOU templates, which can help you draft your agreement correctly. Such a sample of memorandum of understanding can help you to identify the information that is needed to be included in the document. This signed MOU will then assist the development of a legally binding and formal contract.

After you have collected all such information, you can easily draft the MOU as per your requirements. Referring to the various templates and samples can allow you to beware of not missing out on crucial components. Lastly, collect the signatures of all responsible personnel belonging to all associated parties to complete the drafting process. You can refer to sample MOU for real estate transactions for better understanding, which can be obtained from both the online repository or through legal counsels and real estate agents. Properly consulting such samples and consultations from experts can enable you to draft your own real estate MOU efficiently.

4. Legal Considerations of an MOU

The primary legislation that governs the drafting of agreements and contracts is The Indian Contract Act, 1872. Due to an MOU being a less formal version of a legally binding contract, the drafting of MOUs also falls within the guidelines of the same legislation. You need to familiarise yourself with certain basic aspects of this law to ensure that you are drafting the MOU as per legal guidelines and adequately respect and follow the various requirements of the instrument.

• The clause regarding the legally binding nature of an MOU: It has been established that generally, an MOU is not a legally binding clause and does not hold gravity in the court of law. However, exceptions of this can be observed in cases where the parties involved specifically include a clause that confirms the legally binding nature of the document and makes it valid in the court of law. This means that if you enter into a negotiation with your seller that you want to be legally acknowledged till the formal contract is drawn up, you can negotiate with the seller or buyer and include such a clause that ensures the legal validity of the document.
• Ingredients of a valid MOU: You can draft up an MOU between yourself and the other party only to be refuted regarding its validity if even one of the three elements is missing – Offer, Acceptance and Consideration. From this, it can be observed that in order for an MOU to be legally binding, it needs to fulfil the three conditions:
  1. Offer: The document needs to include evidence that a valid offer has been made that is acceptable to all parties included.
  2. Acceptance: The MOU also needs to reflect that the same valid offer provided has been accepted by all the involved parties. This acceptance needs to present the actual intentions of the parties to follow through with the requirements and contents of the MOU diligently. Without evidence of such acceptance, the document loses credibility and validity.
  3. Consideration: Lastly, the MOU also needs to present consideration where the parties have successfully acted upon similar MOUs.
• Dispute resolution through MOU: Similar to the insertion of the clause for making the document legally binding, you can also include clauses regarding dispute resolution within the MOU itself. Including such clauses will help to ensure that the other party you are dealing with regarding the transaction of real estate is bound to follow through with the contents of the MOU as per The Indian Contract Act, 1872.
• Fulfilment and unfulfillment of the MOU: While drafting the MOU, you may come across situations where the MOU either fulfils the conditions of The Indian Contract Act, 1872 or fails to fulfil them.
  1. If the conditions of the act are sufficiently fulfilled, then the obligations and conditions stated are enforced through The Specific Relief Act, 1963.
  2. If the conditions are not fulfilled sufficiently, then enforcement of the same becomes difficult. However, even in such cases, you can rightfully approach the court of law on the basis of either ‘Principles of Promissory Estoppel’ or ‘Equity’.

5. What are the Components of an MOU?

There are a number of components of a traditional MOU agreement. Although different kinds of MOU imply minor changes in the content that is required to be included, certain features and requirements stay consistent regardless of the form of MOU. The document should clearly reflect all the mentioned features in order to prevent conflicts in the following negotiation stages.

• Details of parties: The name and specific details of all parties involved are crucial to be mentioned.
• Purpose of agreement: The purpose of reaching the desired agreement should be clearly specified.
• Financial details: The capital contribution of all parties and the financial compensation details between the parties should be clearly specified. Any penalties due to non-compliance with the agreement should also be included.
• Roles and duties of officials: Individuals responsible for the task addressed through the agreement have to be mentioned.
• Record keeping: Metrics in place to monitor the project progress according to the agreement is also crucial to be mentioned.
• Closure: Information such as the final personnel responsible is crucial to be included.
• Duration of validity: The duration for which the agreement would be valid, and circumstances and issues that would lead to termination of the agreement are also necessary to be included.
• Agreement of all parties: Agreement of all parties in the form of signatures and dates of signing are also required to be mentioned. Along with signatures from both parties, witnesses from both sides are also required to be present for signing and sign the document accordingly.

In the case of MOU for real estate and property, the need to include conditions associated with buying or selling the property, clauses regarding ownership, costs associated, and relevant laws are also required to be addressed. Furthermore, a clear record of financial transactions that have already occurred along with the remaining charges to be paid must also be mentioned in the document. 

6.The Essential Guide to Using a  Memorandum of Understanding

In the course of drafting an MOU for real estate deals and transactions, you need to be aware of how to use the document to ensure that you can sufficiently access your rights and fulfil obligations. While the drafting process can be done by observing an MOU template for services and real estate transactions available online, this article will guide you through the process of using an MOU after you have finished drafting.

1. You can use the MOU as an instrument of stating the interests of the parties regarding the purpose of drafting the MOU. For instance, if you wish to purchase a property or a house, then drafting the MOU can be much more simple and considerably less complex than drafting the contract. While the contract is essential for finalising the transaction, you can use the MOU as a less informal confirmation of your intentions regarding the purchase and the seller of the house. Thus, you can rest assured that the intentions of the seller regarding selling the unit to you are genuine and documented.
2. While entering into real estate transactions and dealings, you may be made to think that the MOU is not credible since it is not legally binding. However, keep in mind that MOUs hold considerable power, especially since it is drafted as an alternative to the more powerful and legally binding contract. Thus, when purchasing a house or real estate, you need to draft an MOU to ensure that it acts as the main instrument to be followed regarding the transaction till a formal agreement has been reached and drafted.
3. You can also use the MOU as a preliminary protection tool by stating the duties and responsibilities of yourself and the other parties. For better safeguarding of your rights, while entering into the real estate contract, you can also negotiate with the other party and include a dispute resolution clause. In this manner, you can use the MOU as a tool to protect yourself from any disputes and ensure that the other party acts properly in accordance with their intentions stated in the document. As a result, you can protect your own interests regarding the transaction even before entering into a legally binding and official contract with the other party.

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