Articles Posted in Contract

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In California, every contract includes an implied obligation not to do anything that prevents the other party from benefiting from the contract, and to cooperate if necessary for the other party.  This is called the implied covenant of good faith and fair dealing.  It does not create a new obligation but applies to those obligations which have been agreed on.  The Restatement of Contracts comments provide that the bad faith may be overt or may consist of inaction, and fair dealing may require more than honesty.  Sacramento Real Estate attorneys see the argument come up often in real estate contracts which end up falling out of escrow, and occasionally commercial leases in which the parties fail to cooperate.  Courts generally allow parties to use unfettered discretion, without restriction of the covenant, if the contract provides for unfettered discretion, and there is adequate consideration (162 Cal App. 4th 1107, 1121).  In a decision involving an office lease at 595 Market Street in San Francisco the tenant wanted to sublease the premises, and thought that the landlord breached the implied covenant by terminating the lease.  But the lease provided that the landlord could do so, so the tenant had covenanted away its argument.

 

covenant of good faith attorneyIn Carma Developers (Cal) Inc. v. Marathon Development, Carma entered a lease of the 30th floor of the building for ten years.  Carma’s business changed, its headquarters moved to Houston, and Carma submitted a proposal to the lessor to sublease a portion of the premises.  The Lease had a provision (set out below) that in such a case the lessor had the right to terminate the lease.  The Court first noted that it has been suggested the covenant requires the party holding such power to exercise it “for any purpose within the reasonable contemplation of the parties at the time of formation-to capture opportunities that were preserved upon entering the contract, interpreted objectively.”  It repeated to principles that have emerged:

1, breach of a specific provision of the contract is not a necessary prerequisite, and

2, nor is it necessary that the party’s conduct be dishonest. Dishonesty presupposes subjective immorality; the covenant of good faith can be breached for objectively unreasonable conduct, regardless of the actor’s motive.

 

The scope of the conduct required is governed by the purpose and terms of the contract.  The conduct may be expressly permitted, or at least not prohibited.

 

The tenant argued that the lessor could not in good faith terminate unless they had reasonable a reasonable objection to the proposed subtenant.  But the court found that this was contrary to the clear terms of the Lease.  “No obligation can be implied … which would result in the obliteration of a right expressly given under a written contract…”  Here, the landlord terminated the lease to capture the increased rental value of the property.  This was specifically permitted by the lease and was within the reasonable expectations of the parties.  There was no breach of the covenant of good faith and fair dealing.

 

 

Sacramento good faith attorneyLEASE PROVISIONS

Paragraph 15(a) provided in part: “Tenant shall not, without the prior written consent of Landlord, which consent shall not be unreasonably withheld, assign this Lease or any interest herein or sublet the Premises or any part thereof, or permit the use or occupancy of the Premises by any person other than Tenant.”

 

Paragraph 15(b) provided: “Before entering into any assignment of this Lease or into a sublease of all or part of the Premises, Tenant shall give written notice to Landlord identifying the intended assignee or sublessee by name and address and specifying the terms of the intended assignment or sublease. For a period of thirty (30) days after such notice is given, Landlord shall have the right by written notice to Tenant to terminate this Lease as of a date specified in such notice, which date shall not be less than thirty (30) days nor more than sixty (60) days after the date such notice is given. If Landlord so terminates this Lease, Landlord may, if it elects, enter into a new lease covering the Premises with the intended assignee or sublessee on such terms as Landlord and such person may agree or enter into a new lease covering the Premises with any other person; in such event, Tenant shall not be entitled to any portion of the profit, if any, which Landlord may realize on account of such termination and reletting. From and after the date of such termination of this Lease, Tenant shall have no further obligation to Landlord hereunder, except for matters occurring or obligations arising hereunder prior to the date of such termination.”

 

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When there has been a breach of contract or fraud related to a real estate contract, the injured party can either seek damages, or disaffirm the contract, treat it as rescinded (called rescission), and seek damages for the rescission. In the case of rescission, Civil Code Section 1689 permits rescission when the consent to the contract was given by mistake or obtained through fraud or undue influence exercised by the party as to whom he rescinds. The party that was harmed must offer to restore to the other party everything of value they had received under the contract. Sacramento real estate attorneys often see clients in difficult positions regarding returning everything of value – if it was a purchase contract, you have to give the property back though you have already made changes to it and it may now have encumbrances. If it was a loan contract, it is not always easy to give the money back, since it has already been spent. Nonetheless, rescission is a good remedy for undoing the damage done. Such was the case in an unusual situation in San Carlos when buyers bought a house for $2.35 million and spent $300,000 in renovations, but were able to rescind the purchase contract.

sacramento rescission attorney.jpgIn Wong v. Stoler (an UNPUBLISHED opinion), the Wongs bought a hillside home from the Stolers. After they moved in and renovations were underway, they were surprised to discover that they were not hooked up to the City’s public sewer system, but instead to a private system.

The sellers provided the Wongs with a transfer disclosure statement completed in 2002 by the prior owners, an updated 2008 transfer disclosure statement, and a supplemental sellers’ checklist, which represented to the Buyers that the property was connected to the City sewer. They did not tell the Buyers any details about recorded CC&Rs that discussed the private sewer system nor did they disclose the existence of a Homeowners Association.

About four months after taking possession, the Wongs first learned about the private system through an email from a neighbor. They tried to work out a more formal association with the neighbors, and also offered to dedicate the system to the City, but nothing worked out, so they sought to rescind the contract. This lawsuit was the result.

sacramento contract rescission attorney.jpgIn rescission of a real estate purchase, the seller must refund all payments received in connection with the sale. If the buyer has taken possession of the property, the buyer must restore possession to the seller. As consequential damages, rescinding buyers or sellers may recover such items as real estate commissions paid in connection with the sale], escrow expenses, interest on specific sums of money paid to the other party, and attorney fees in appropriate. The trial court decided this was too much. The Sellers had bought a new home and spent $100,000 in improvements, and the Buyers had spent three times that on their home.

The trial court found that the sellers acted fraudulently, but denied rescission, claiming that unwinding the transaction would be impractical and too burdensome on the sellers. Instead, it required the sellers to pay for any repairs or maintenance for the next 10 years. The buyers appealed.

The court of appeal overruled the trial court. Under Civil Code section 1692, once a court has determined that the contract was rescinded, “[t]he aggrieved party shall be awarded complete relief, including restitution of benefits, if any, conferred by him as a result of the transaction and any consequential damages to which he is entitled.” The fundamental principle ‘is that “in such actions the court should do complete equity between the parties” and to that end “may grant any monetary relief necessary” to do so.

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Real estate contracts contain covenants and warranties that the parties sometimes want to enforce after the sale has been concluded. Whether or not they are still enforceable is determined by whether the covenants were “merged in the deed.” The idea is that, once the Seller grants and Buyer accepts the deed, the deed is conclusive and all bets are off. The general rule is that any covenants in a contract between the parties are merged into the deed. If a covenant is not performed, then the rights of the parties depend on the terms of the deed. If the deed does not discuss the covenants, then whether these covenants survive and remain enforceable after closing depends on the intent of the parties. The starting point for figuring out the party’s intent is the language of the deed. When a provision in a deed is certain and unambiguous it prevails over an inconsistent provision in a contract of purchase pursuant to which the deed was given. Sacramento real estate attorneys commonly see situations where the intent is clear – the contract states whether the conditions survive, or do not. More troubling is the case where the contract is not so clear.

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In Rams Gate Winery, LLC v. Joseph G. Roche
, Rams Gate bought a Sonoma County winery property from Roche. As part of the agreement, the Roches agreed to provide
“[w]ithin ten days of the Effective Date” “written disclosure” of any “information known to Seller” regarding violations of “building, zoning, fire, health, environmental statutes, ordinances or regulations; [and] any known geological hazards; … soil reports, … geotechnical reports, … and all other facts, events, conditions or agreements which have a material effect on the value of the ownership or use of the Property….”
Escrow closed, and eventually the Buyer learned that there was a fault running through the property that limited its development. The Buyer claimed that, prior to entering the agreement, the Sellers had both a site plan and a geological report prepared, which both identified a fault or fault trace on the land, and which required the Sellers to relocate their winery’s building pad from its original planned location in order to provide a 50-foot setback. These were not disclosed to the Buyer.

The Buyer sued, and the trial court ruled for the Seller, finding that the disclosure requirement was “merged in the deed” when the parties closed escrow. Buyer appealed. The trial court ruling was on summary judgment, meaning the court said that there was no issue of fact which a judge or jury could go either way.

In this case the deed apparently had the typical language like “For a valuable consideration, receipt of which is hereby acknowledged, Seller Grants to Buyer the following described real property in the County…” The court found it a “rather pedestrian instrument addressing only “the mechanics of transferring title” and containing a legal description of the property conveyed.” It concluded that, from the face of the deed itself, it appears that not all of the terms of the contract were “merged” into the deed.

merged in the deed.jpgThe Sellers argued that the sole purpose for the disclosure covenant was to aid the buyer in doing its due diligence investigation to determine whether or not to go through with the deal. Once the buyer decided to close the transaction, it gave up any claim for breach of the disclosure obligation.

But the Buyers countered with a declaration stating that their understanding was that the covenants would survive closing. There was no agreement that the covenants and warranties would merge in the deed and be extinguished at the close of escrow. Rather, it was the buyers’ intention that these provisions in the purchase and sale agreement would continue to be enforceable after close of escrow.

The court of appeal agreed with the Buyers. The declaration provided by the Buyers should be considered in figuring out the parties’ mutual intent on the survival issues. Thought the purchase and sale agreement had several paragraphs that specifically provided for their own survival after close of escrow that alone does not compel the conclusion that no other provisions could survive without similar language.

I agree that there may be triable issues of fact. The fact that some of the covenants had language stating that they survive closing is a strong argument for the Sellers. But, stepping back and viewing from the distance, it appears that the Seller deliberately withheld these reports from the Buyer. The Seller had to relocate the site it planned to build on. This bad conduct may influence the factfinder enough to overcome the Sellers arguments at trial.

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Co-owners of property often enter agreements that include a right of first refusal. If one of the parties wants to sell their interest, and receives a bona fide offer, they must offer to sell to the co-owner on the same terms. Partition is a legal action which forces the sale of a property when co-owners cannot agree to another way to end the relationship. The right to partition can be waived by contract, either expressly or by implication. Parties entering a co-ownership agreement should consult with a Sacramento real estate attorney in drafting the agreement to ensure it will accomplish their goals, including waiver of the right to partition if that is what they want. In a decision regarding a Lake Tahoe vacation home valued at over $2.8 million, a truculent co-owner tried to argue that the right of first refusal waived the right to partition, but the court said no. If you want to waive all possibility of partition, you should clearly state that in your agreement.

sacramento right of first refusal attorney.jpgIn LEG Investments v. Boxler, the parties were 50% co-owners of a house on the water in Carnelian Bay. LEG was a general partnership, and Eppie Johnson (founder of Eppies restaurants and Eppies Great Race, the world’s oldest triathlon) was the general partner. The co-owners had a Tenant-in-Common Agreement, which included a right of first refusal.

The Right of First Refusal Language

“If and when either Owner decides to sell their [i]nterest in the Property and that Owner receives a bona fide offer for its purchase from any other person or entity, the other Owner shall have the first right of refusal to purchase the selling Owner’s Interest in the Property for the price and on the terms provided for in such bona fide offer.”
If the right was refused, “the selling Owner may enter into an agreement to sell the Interest to the offeror at the price and under terms no less favorable than those set forth in the notice of offer given to the other Owner.”

There were disputes between the parties immediately. Johnson complained that the Boxlers failed to clean the property and refused to pay for reasonable and necessary maintenance, landscaping, cleaning, and repairs. LEG offered to sell its interest to the Boxlers, but was declined. In 2005 LEG received an offer from a third party to buy its interest for $1.4 million. LEG, following the terms of the Tenant-in-Common Agreement, offered to sell its interest to Boxler under the same terms. Boxler refused. The sale to the third party did not close, presumably because his investigation of the Boxlers dissuaded him. LEG filed this action for Partition to sell the property, and have the court split the proceeds. Boxlers opposed, claiming the right of first refusal waived the right to partition. The trial judge agreed, but the Court of Appeals overturned the decision.

sacramento partition attorneys.jpgThe court of appeal first reviewed the law in this area. The original purpose of allowing partition was to permit cotenants to avoid the inconvenience and dissension arising from sharing joint possession of land. An additional reason to favor partition is the policy of facilitating transmission of title, thereby avoiding unreasonable restraints on the use and enjoyment of property. A co-owner of property has an absolute right to partition unless barred by a valid waiver. An agreement giving rights of first refusal to the other tenants may imply an agreement not to bring a partition action in lieu of a sale to the cotenants.

The court then noted that prior decisions have found that the right to partition had been modified by a right of first refusal “to the extent that before partition can be had the selling owner must first offer his interest to the co-owner. Upon the non-selling owner’s refusal or failure to exercise the right to purchase within a reasonable time, the seller has discharged his obligation to his co-owner and he may proceed with partition…”

The apparent purpose of a similar right of first refusal was “to retain for [the original parties] control of the admission of new co-owners.” Here, the Boxlers argued for a second purpose – it gave the non-seller cotenant the right to purchase the selling cotenant’s interest at the price of a fractional interest. However, the court found that interpreting this tenant-in-common agreement to allow partition after the non-selling cotenant has declined to exercise the right of first refusal, and the sale falls through, would not be contrary to either of these purposes. Since the third-party offer was for a fractional interest, it would have included a discount. If the no-selling owner declined to buy it at that price, they could not complaint if the frustrated owner brought an action for partition.

Photos:
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Individuals create LLCs, same with corporations, for ownership and investment purposes primarily to enjoy limited liability. If you invest $10 in an LLC and someone gets a huge judgment against the LLC, the most you could lose is your investment -the $10. The judgment creditor would not be able to come after you personally to collect the balance of their judgment. However, not all LLCs or corporations have assets from which a judgment may be collected. Sacramento area business and real estate attorneys are occasionally asked by clients withe judgments what can be done to go after the members, managers, directors or shareholders. As one group of LLC members recently discovered, if the LLC’s distributions to them leaves the LLC penniless and essentially dissolved, the creditor may collect from the members.

Yolo LLC attorney.jpgIn CB RICHARD ELLIS, INC. v. TERRA NOSTRA CONSULTANTS, the real estate broker was seeking their commission on sale of 38 acres in Murrieta for $11.8 million. While the broker had the property listed, the buyer made an offer. Before closing, either the listing ended or the LLC which owned the property fired the broker, it was not clear. The sale closed. A few days after the cash went from escrow to the seller LLC’s bank account, it all left the account and was distributed to the members. The broker arbitrated its dispute with the LLC (because there was an arbitration provision in the listing agreement) and obtained a judgment against the LLC. But, of course, the LLC had no money.

The broker than filed suit against the members. Its argument was in the Corporations code, which provides for liability in the event the entity has been dissolved. Applicable was the old Section 17350 (which was replaced by the equivalent section 17707.07) provides:

(a) (1) Causes of action against a dissolved limited liability company, whether arising before or after the dissolution of the limited liability company, may be enforced against any of the following:

(A) Against the dissolved limited liability company, to the extent of its undistributed assets, including, without limitation, any insurance assets held by the limited liability company that may be available to satisfy claims.

(B) If any of the assets of the dissolved limited liability company have been distributed to members, against members of the dissolved limited liability company to the extent of the limited liability company assets distributed to them upon dissolution of the limited liability company.

sacramento broker commission attorney.jpgIt was subsection (B) that the broker was looking at -over $11 million was distributed to the members. But, argued the members, this code section only applies when the corporation had been dissolved. Another section of the corporations code (old 17355, now replaced by 17707.1 ), states that an LLC shall be dissolved when it provides so in the operating agreement, when the members vote to dissolve, or a court issues a decree of judicial dissolution. None of these formal steps had occurred!

The Court of appeal said get lost. The purpose of section 17350 was designed to prevent unjust enrichment of LLC members, when the members have received assets which the LLC needs to pay creditors. Here, there was a de facto dissolution, and the broker could make the claim against the creditors. Otherwise, an LLC could be free to distribute all its assets, and then the next day vote to dissolve, with the members escaping free and clear.

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Judicial reference, unlike arbitration, works within the court system. A lawsuit is filed, and the judge appoints a referee to assist in the case, or decide it on their own. Parties can agree, in their contracts, that disputes are to be determined by a general judicial reference. This means the entire dispute is to be resolved by a referee. An advantage of judicial reference over other forms of dispute resolution (read ‘binding arbitration’) is that a referee’s decision is treated like a judge’s decision for purposes of appeal. On the other hand, an arbitrator’s decision cannot be appealed for errors of fact or law, as I have railed about several times in this blog. But as some parties found out in a 2011 decision, a judicial reference provision is not a guaranty that the dispute will be decided by a referee, and parties interested in reference should consult with a Sacramento business and real estate attorney as to what is possible. In this case the California Supreme Court concluded that a judge could decline to appoint a referee if there is a possibility of conflicting rulings on a common issue of law or fact.

Sacramento judicial reference attorney.jpgIn Tarrant Bell Property, LLC v. The Superior Court, 120 residents of a mobile home park in Alameda County sued the park owners complaining that they had not maintained the common areas of the park and subjected residents to substandard living conditions. Of those residents, 100 residents’ leases had a provision that provided that disputes were to be resolved, first, by arbitration, or should the arbitration provision be found to be unenforceable, by general judicial reference. Key here is that the remaining 20 residents, 17% of the total, had leases that did not require arbitration and reference.

The plaintiffs asked the judge to order arbitration or reference, the park owners opposed either. The trail court judge refused to order arbitration or reference. The opinion does not describe why the court denied arbitration, but focuses instead on denial of reference.

The concern was that, with two groups of plaintiffs one having the lease provision and the other not, there was a possibility of inconsistent judgments:

Woodland  judicial reference attorney.jpg“Ordering two groups of real parties in interest to try their cases in separate but parallel proceedings would not reduce the burdens on this court or the parties, result in any cost savings, streamline the proceedings, or achieve efficiencies of any kind. The parties would be required to conduct the same discovery, litigate, and ultimately try the same issues in separate but parallel forums. A general reference would thus result in a duplication of effort, increased costs, and potentially, delays in resolution. Moreover, it would not reduce any burden on this Court, which would almost certainly have to hear, and decide, all of the same issues.”

The Court of Appeal did not overturn the decision, and neither did the Supreme Court. The Supreme Court started with the judicial reference statutes, Code of Civil Procedure Sections 638 +. Section 638 provides that the court may appoint a referee if the parties agreement states that the dispute shall be heard by a referee. “May” is permissive, meaning that the court has discretion, even if the parties agreement states “shall,” which does not allow for discretion.

Thus, the court will not follow the intent of the parties, (at least 83% of them), in refusing to enforce a provision for judicial reference that they had in their leases. The facts here, where there were 120 different lease contracts, are not common for most contracting parties. But a common scenario where the problem would arise is a real estate purchase contract. Often, when there are real estate sales disputes, the brokers are included as defendants. But, the brokers are not parties to the purchase contract. Thus, a judicial reference provision would apply only to the dispute between the buyer and seller, but not between the plaintiff and broker.

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Let’s get this out of the way – the only essential terms for a real estate sale contract are the identities of the buyer and seller, the property in question, and the purchase price. Essentially, that is the law in California. Of course, the courts have found ways around the rule, but the trend of the law favors carrying out the parties’ intent once the court has determined that the parties had intended to make a contract. The courts will hear evidence of the parties’ intent to explain essential terms. (Okun v. Morton, 203 Cal. App. 3d 805) Sacramento real estate attorneys are occasionally asked about contracts in which all the standard details are left out, and asked how to enforce, or deny, the contract. When there is no time for payment specified, I always advise the “a reasonable time” is inferred, whatever that means in the circumstances. Such a situation was addressed by the Supreme Court when a tenant wanted to enforce a purchase option that was included in the lease.

sacramento real estate purchase attorney.jpgIn Patel v. Liebermensch, the tenants leased a condo in San Diego. The lease included the following purchase and sale option:
“Through the end of the year 2003, the selling price is $290,000. The selling price increases by 3% through the end of the year 2004 and cancels with expiration of your occupancy. Should this option to buy be exercised, $1,200.00 shall be refunded to you.”
The option contract did not specify the time or manner of payment, which the landlord claimed rendered the agreement unenforceable. The court of appeal decided that, while it might be reasonable in some circumstances to imply standard terms on these points into the contract, here it was not, because the seller contemplated conducting a 1031 exchange (which would have specific timing requirements) which involved serious tax consequences.

The Supreme Court disagreed, finding the option real estate purchase contract enforceable. The seller’s undisclosed intentions are not considered part of the contract.

It first noted that the equitable remedy of specific performance cannot be granted if the terms of a contract are not certain enough for the court to know what to enforce. (Civ.Code, § 3390, subd. 5)

In the absence of express conditions, custom determines incidental matters relating to the opening of an escrow, furnishing deeds, title insurance policies, prorating of taxes, and the like. “The material factors to be ascertained from the written contract are the seller, the buyer, the price to be paid, the time and manner of payment, and the property to be transferred, describing it so it may be identified.” However, the manner and time of payment may be determined by “reference to custom and reason when the contract is silent on the question, unless the contract includes seller financing provisions that are not sufficiently clear enough to protect the seller.”

el dorado real estate option attorney.jpgThe court concluded that, since time and manner of payment are terms that may be supplied by implication, they are not material elements that must appear in writing in every real estate sale agreement. What is for sure is that in a contract for the sale of real estate the delivery of the deed and the payment of the purchase price are dependent and concurrent conditions; the happen at the same time, and not without each other.

Civil Code section 1657 applies here to interpret of the contract: “If no time is specified for the performance of an act required to be performed, a reasonable time is allowed. If the act is in its nature capable of being done instantly–as, for example, if it consists in the payment of money only–it must be performed immediately upon the thing to be done being exactly ascertained. The purchase price is deemed payable upon delivery of the deed.

Thus, the case was sent back to the trial court to determine what a “reasonable time” for payment was. To determine this, the parties will have to have evidence from real estate professionals, testifying as experts, as to what a reasonable amount of time is standard in San Diego residential sales for escrow to close.

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California commercial leases often include options for renewal of the lease beyond the initial term. Option terms can provide the duration of the renewal, and describe the future rent, or provide a mechanism for calculating the rent to be paid. But, frequently commercial lease attorneys encounter leases that are not so specific. They can describe the procedure for exercising the option, and the future term or terms, but only provide that the rent was to be as agreed upon. Lessors and landlords do this to provide some assurance to the potential tenant that they may be able to stay in the location for another tenant without committing themselves to rent terms, or even that this tenant. The tenant who has not consulted a real estate attorney enters the lease with the false comfort that they have the right to stay if they want. Such was the case in a Supreme Court decision where the tenant, who had made significant improvements to the property, learned that they did not have a right to stay.

ElDorado real estate and leasing attorney.jpgIn Ablett v. Clausen the Lease provided these option terms:
the lessees ‘shall have the first right and a prior option to secure a lease upon said premises before the same are offered to any other person, firm or corporation for lease or rental and that said option shall contemplate a lease for a period of five (5) years upon terms to be then agreed upon.’
The landlord and tenant had some disputes about grading in the parking area of the property where the tenant had the ‘Rite Spot’ restaurant;, and the landlord’s refusal to allow the tenant to remodel the restaurant. So, the landlord told the tenant that they would NOT renew the lease on expiration – the option was terminated. The tenant filed suit to have the court declare they were entitled to another five year rental, under the same terms and conditions.

The trial court ruled in favor of the tenants, so the landlord appealed. The tenant argued that the provision, ‘first right and prior option’, does not in any way qualify the right of renewal. The court first noted that terms as ‘first privilege’, and ‘first right’, and concluded that such provisions do not give the lessee an absolute right to a renewal, but one conditioned upon the lessor’s leasing the property, in which case the lessee may have first refusal.

Sacramento real estate option attorney.jpgThe landlord argued that the option provision does not give even a conditional right to a renewal, but is too uncertain to be enforced; it is just an agreement to contract in the future, which is not enforceable. Here, the court noted that the rule is that where “either party by the terms of the promise may refuse to agree to anything to which the other party will agree, it is impossible for the law to affix any obligation to such a promise.” There are some court decisions which find that when the only term of a lease which still requires the parties’ agreement is the rent, there can be an exception allowing the court to determine a reasonable rent. But here, the Supreme Court found this permissible only where there are some ascertainable standards in the option for the court to decide the terms of the lease. That is not the case here. The original Lease was nine pages long, yet the only term provided by the option provision is how long the renewed lease would last. There is neither discussion of rent, nor a standard by which it may be calculated. Thus, the terms were not specific enough to be enforced.

This opinion takes a long time to get to what was really the obvious conclusion – where the option requires the parties to agree in the future, it is false comfort for the tenant to think they have a right to renew the lease.

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Sometimes possible real estate buyers do want to close the deal unless they can obtain certain benefits, such as a zoning change, or lot split. To lock up the property and make their investment worthwhile, they enter an option contract. An option is a unilateral contract under which a property owner, for consideration, agrees to sell its property to another (optionee) if, within a specified time period, the optionee elects to exercise the right to purchase. The owner has made an irrevocable offer to sell at the specified terms in return for the consideration. To be enforceable, the option contract must have consideration paid by the optionee, and sufficiently describe the purchase terms – parties considering such a deal may want to consult with a Sacramento real estate attorney to ensure its enforceability.

The optionee is not required to buy, but if they follow the terms for exercising the option, it becomes a simple purchase contract. Otherwise, it expires. In one court decision, the question arose of whether there was adequate consideration, or just an illusory promise that was not legally binding. the buyer had an escape clause that did not require him to do anything. The plaintiff who then decided not to sell was disappointed to learn that the buyer’s part performance made the promise binding.

Sacramento option contract attorney.jpgIn Steiner v. Thaxton, Steiner entered a contract to buy 10 acres of bare land. However, the agreement provided that Steiner could cancel the deal at any time at his sole discretion. It states:

“It is expressly understood that [Steiner] may, at [his] absolute and sole discretion during this period, elect not to continue in this transaction and this purchase contract will become null and void.”

He proceeded to seek county approval for a parcel split, and to obtain development permits, spending thousands of dollars. The seller then said he did not want to sell, and the buyer sued for specific performance of the contract.

The court first concluded that the contract was in fact an option. When the owner binds himself to sell on specified terms, and leaves it discretionary with the other party to the contract whether he will or will not buy, it constitutes simply an optional contract. Thus, the question arose as to whether there was consideration for the option.

Was There Consideration?

Civil Code section 1605 defines consideration as “Any benefit conferred, or agreed to be conferred, upon the promisor, by any other person…as an inducement to the promisor”

In our case the promisor is the owner of the land.

Thus, there is a 2-part test in order to find consideration:

1– The promisee must confer (or agree to confer) a benefit or must suffer (or agree to suffer) prejudice.

2– the benefit or prejudice must actually be bargained for as the exchange for the promise.

option contract attorney.jpgHere, part 1 was accomplished – the buyer/optionee’s promise to seek a parcel split may have been illusory at the time the agreement was entered into, but he subsequently undertook substantial steps toward obtaining the parcel split and incurred significant expenses. The effort provided a benefit to the seller/optionor, and was a prejudice suffered by the buyer.

Secondly, part 2 was accomplished -the promise to obtain a parcel split was bargained for and induced the seller to enter the contract. There was evidence that the seller told the buyer that it was important to him that any potential buyer seeks to obtain a parcel split.

Thus, the court concluded that the buyer’s part performance cured the illusory nature of the contract; thus there was sufficient consideration for the option, and that it was enforceable.

The steps that probably took place were a) the buyer tied up the property at a specific price, b) he signed a deal with another person to buy from him all or part of the finished product, with lot split and permits completed, and then c) he began the process of obtaining the development rights. There was a third party who interned in the lawsuit, because the buyer had assigned some of his rights.

Detailed terms of the purchase contract are set out in the footnotes of the opinion. But this begs the question – why did the parties not just enter an option contract? A nominal cash consideration could have been paid; after all, the seller has now tied up his property to some extent.

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A condition in a contract is a fact, the happening or nonhappening of which creates or extinguishes a duty on the part of the promisor. If the promisor makes an absolute or unconditional promise, he must perform when the time arrives. But if the promisor makes a conditional promise, he must perform only if the condition precedent occurs. The promise may be dependent upon the performance of another condition, in which case they would be dependant and concurrent conditions. In this case neither party is in default until one party performs or tenders performance. In the typical real estate contract seen by Sacramento real estate attorneys, delivery of the deed and payment of the purchase price are dependent and concurrent conditions. There must be performance or tender thereof by one party to put the other in default. In a recent decision, the court agreed with the swindled would-be buyer, who argued that return of their $3 million dollar deposit was an independent condition
Sacramento real estate contract attorney.jpgIn Rutherford Holdings, LLC v. Plaza Del Rey, Rutherford contracted to buy a mobile home park from Plaza, and provided a deposit of $3 million dollars. The agreement provided that the deposit was nonrefundable unless Plaza materially breached the purchase agreement or failed or refused to close.

Prior to the closing date, Plaza told the buyer that Plaza could reduce its property tax bill for the year if it was not in this contract for sale. The contract would increase the value that the tax was based on. If they did not close by the closing date, the tax would be based on a lesser value. Plaza promised the buyer that they would sell the property after the closing date, and after Plaza filed it tax returns. The buyer agreed! The closing date came and went and neither party performed; Plaza never tendered the deed to Rutherford, and Rutherford never tendered the full purchase price to Plaza. Plaza paid less in taxes, then said they would not sell the property to Rutherford, plus they were keeping the deposit, ha ha! This suit followed.

The court first noted that in a contract for the sale of real estate the delivery of the deed and the payment of the purchase price are dependent and concurrent conditions. Where the parties’ contractual obligations constitute concurrent conditions, neither party is in default until one party performs or tenders performance. However, here, the buyer argued that the seller’s obligation to return the deposit was independent of the Buyer’s promise to pay the full purchase price. If the two covenants are independent, breach of one does not excuse performance of the other. The buyer’s failure to place the money in escrow did not excuse Plaza’s failure to return the deposit.

El Dorado real estate contract attorney.jpgIn this case the Court was looking at whether the Complaint sufficiently described a legitimate claim. Where an ambiguous contract is the basis of an action, the parties are expected to provide their own interpretation of its meaning. If their interpretation is not clearly incorrect, the court accepts as correct plaintiff’s allegations as to the meaning of the agreement.

Here, the purchase agreement can be reasonably interpreted to mean what the Buyer has claimed. “While [that] interpretation … ultimately may prove invalid,” at the pleading stage, it is sufficient that the agreement is reasonably susceptible of this meaning.” Thus, the Buyer had properly made the claim that return of the deposit was an independent condition, and should have been returned. It’s too bad this buyer had to go through the appeal process at this stage of the lawsuit. The seller seems to be a real con artist, convincing the buyer to let the contract lapse with a promise to sell on the same terms, then keeping the $3 million dollar deposit.

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