Articles Posted in Contract

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Letters of Intent are often ambiguous documents in which parties set out certain key terms of a deal, usually with the intent there will be further negotiation and documentation. They may also be called a ‘term sheet’ or “memorandum of understanding,” and are used extensively in California real estate transactions and Leases as well as in business contracts. The parties usually do not intend this document to be enforceable in court – rather, it is intended to guide further discussions and execution of a formal agreement or approval of a third party. A party entering such a letter should consult with a Sacramento business attorney for guidance in drafting it. However, as open ended as the parties may make them, occasionally they are surprised when a court finds such a letter creates enforceable obligations between the parties. It all depends on the court’s view of the intentions and expectation of the parties. Among the issues considered are whether the parties agreed to the material terms, or left some for later agreement, making it an agreement to agree, and whether the parties intended not to be bound until preparation of a more formal agreement. The two decisions discussed below establish two important rules:

A. A Letter of Intent may be enforceable even if you plan to enter a formal contract. If the material terms of the deal are there, as well as intent, the Letter is enforceable; and,

B. A Letter of Intent may create a duty of the parties to negotiate in good faith, and failure to do so can result in damages.

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Standard in most form real estate contracts are provisions for liquidated damages. Not so common is the non-refundable deposit. A “liquidated damages” provision stipulates an estimate of what the damages would be in the event of a breach of a contract. It is generally valid, unless it can be shown that it was unreasonable under the circumstances at the time the contract was entered. A non – refundable deposit is generally not valid in a falling market. But there is an alternative!

nonrefundable deposit.jpgIn Bradford Kuish v. William W. Smith, Jr. There was a purchase contact for plaintiff to buy defendant’s Laguna Beach house for $14 million dollars. The contract required a non-refundable deposit, initially of $800,000; after some amendments to the escrow instructions, the deposit was reduced to $620,000, which was paid by the buyer. The parties extended the escrow a couple of times. Finally the buyer asked that the escrow be cancelled; the seller agreed. They then turned to a backup up offer to sell the property for $15 million, one million more than the plaintiff would have paid. The seller refused to refund the buyer’s $620,000 deposit, claiming that it was “non-refundable.” The buyer sued to recover the deposit.

The court started with Civil Code 3307:

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California generally goes by the American Rule for attorney fees- the parties are generally responsible for their own fees. In situations involving written contracts, however, they parties may provide for payment of attorney fees in the event on a dispute. I have written before regarding attorney provisions in:

—actions on commercial lease deposits;

–the CAR (California Association of Realtors) form & a failure to mediate; and —Promissory Notes and the breach of the implied covenant of good faith and fair dealing.

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The Subdivision Map Act generally prohibits the sale of any parcel of real property for which a map is required, unless a map compliant with its provisions has been filed. Government Code section 66499.30. However, the Subdivision Map Act does not prohibit parties to offer or enter into contracts for the future sale of divided portions of land without first filing subdivision maps as long as such contracts are expressly conditioned on compliance with the SMA before the close of escrow. A recent decision regarding land in Danville involved an option to buy real estate for which a subdivision map had not been recorded, and the contract was not expressly conditioned on compliance with the Act. parties contemplating an option should consult with a real estate attorney to fully understand the ramifications of their agreement. Here, they amended the Option Agreement to make it expressly conditioned on compliance with the Subdivision Map Act, and the court said it was therefore Legal and enforceable.

option agreement enforceable.jpgAn an option is an offer by which a promisor binds himself in advance to make a contract if the optionee accepts upon the terms and within the time designated in the option. In Sidney Corrie, Jr., v Elizabeth Soloway, Corries bought in 1994 an option to buy 7 acres of Danville property, part of a 16 plus acre parcel. There was a nonrefundable option fee of $100,000, plus payments of $5,000 per month during the term of the option. The owner of the property wrote a letter to the planning director of Danville authorizing Corrie to apply for a tentative map and create a separate parcel consisting of the option property -so, the parties knew about the requirement for a map. In 2009 the parties entered an agreement that expressly stated that the exercise of the Option was conditioned on the approval and filing of a final subdivision map or parcel map. Things went well, things went bad, a lawsuit followed and the owner claimed that the Option Agreement was void and unenforceable at its inception because it was not conditional on compliance with the Subdivision Map Act. The trial court agreed. The Court of Appeals did not.

The Court first distinguished other decisions which held that later actions did not change the illegality of the contract. Here, the parties took action to correct the illegality of the initial option agreement. The court did not believe that allowing the parties to correct a technical violation by agreeing to an amendment to the option contract would allow the Subdivision Map Act to be circumvented. No public policy prohibits parties from abandoning a void, illegal contract for a new enforceable contract covering the same subject. There is no bright line rule that the parties’ subsequent conduct cannot save their transaction from being illegal.

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The California Association of Realtors has published a set of transaction forms (“CAR” forms) for nearly every potential real estate contract. These fill-in-the-blank forms are intended to allow agents to prepare standard contract documents without the risk of being accused of practicing law. They are routinely revised and often the changes are not obvious. Anyone with prior experience with the forms should be sure to check which edition they are currently using or interpreting, as the provisions may be different that what they are used to. If necessary, buyers and sellers of real estate should consult with a Sacramento real estate attorney be better understand what their contract language will mean in their deal. A common area of concern is the release of contingencies. If the sale is contingent on something, that something has to happen for the contract to be further enforceable. An example is a contingency to obtain a loan on certain terms. If the buyer cannot obtain it, then they can call the deal off. However, they can decide to accept a loan under different conditions, and waive the contingency.

Sacramento real estate lawyer.jpgThe C.A.R. forms used for residential purchase agreements since the October 2002 revision have eliminated the last vestige of “passive” removal of contingencies common in the older forms. The new forms all utilize “active” written removal of contingencies, such that satisfaction of the underlying condition is not enough; there must be a written removal before a contingency is, in fact, removed. If a party does not remove it in writing, it is incumbent on the other to serve a Notice to Perform. Until all contingencies are removed in writing, Sellers always have a right to cancel. Other than the risk of cancellation, there is no penalty to the holder of the contingency if the underlying event occurs but the contingency is not removed in writing. The older C.A.R. Purchase and Sale form copyrighted 1983-1985, is different.

Older C.A.R. Forms Allowed “Passive” Removal of Contingencies

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Commercial tenants entering lease in California are usually required to pay their proportionate share of “common area maintenance,”, or CAM charges. The CAM charges are always characterized as an estimate- at the end of the year the landlord determines the total costs incurred for the year, and then apportions them out to all the tenants. However, if it is a new development, sometimes not even built, the lessor must base the Common Area Maintenance charges on true estimates- what they predict will happen based on experience on other projects, or otherwise a best guess. At the end of the year, they figure out the real charges, and usually the tenant has to make up a big deficit. Sacramento and Placer real estate attorneys are frequently consulted regarding CAM charge disputes; often, there is a big jump in the charges, and the tenant can’t believe they are justified. In a recent decision, the parties entered a letter of intent regarding an unbuilt project. Even though the CAM charges which were described were clearly described as an estimate, the landlord was surprise when the court said the landlord may be liable for fraud and breach of the covenant of good faith and fair dealing.

Sacramento commercial lease CAM.jpgIn Thrifty Payless Inc. V. The Americana at Brand, LLC, Thrifty entered a letter of intent to enter a lease of property from Americana. The project had not been built yet, but Thrifty had experience with Americana on other leases, and the CAM charges were reasonably accurate. The Letter of Intent (“LOI”) Americana proposed stated three estimates- property taxes, insurance premium, and common are maintenance. The CAM estimate was $14.50. Thrifty crossed out $14.50 and wrote that a budget was to be presented to Thrifty. Americana responded with a budget, saying that Thrifty’s pro rata share would be 2.2% of the budget, or $14.50. The parties entered the lease agreement. Of course, American ended up charging Thrifty much more for the three line items, including CAM charges at 5.67% of the total instead.

In the lawsuit, Thrifty alleged that Americana knew the representations were not true at the time they were made, or were made with no reasonable basis to believe that they were true. Thrifty alleged that its reliance was reasonable because of their prior experience with Americana. Citing other decisions, Thrifty claimed that estimates that the party should have known were inaccurate were grounds for misrepresentation. Thrifty found out that Americana was telling other potential tenants that Thrifty was paying a higher percentage that 2.2%, and that Americana had cut a deal with a theater to charge it less that its pro rata square footage rate. Great evidence!

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I have written several times about the finality of Arbitration decisions, and haw they cannot be overturned even if the Arbitrator did not follow the law, or ignored the facts. Also discussed here has been the plight of the unlicensed contractor, and how he is not entitled to be paid, and has the give the money back, no matter how much work he did or how much he spent on the project. In both cases, parties should be sure to understand their situation, and may want to consult with a Sacramento and Yolo real estate and construction attorney. Both issues came together recently in a case were the arbitrator did not require the unlicensed contractor to disgorge his compensation. The court said the Arbitration Award was invalid.

arbitration award sacramento attorney.jpgIn Mouris Ahdout v. Majid Hekmatjah et.al., A Family Limited Partnership and Braum were the sole members and owners of a LLC. They formed the LLC to develop and sell a condominium project on property the had owned. The LLC Operating Agreement specified that the LLC would enter an agreement with BIDI (Braum Investment & Development, Inc.), general contractor, to execute contracts and purchase orders to develop the project. Braum, member of the LLC, owned BIDI. Braum was also designated the manager of the LLC. BIDI did not have a Class B Contractor’s License, required under California law to build a commercial building.

The LLC operating agreement also said that BIDI was not to get any fees for acting as general contractor. However, the profit-sharing allocations under the Operating Agreement gave Braum an additional 25 percent allocation, so BIDI was actually getting paid for acting as general contractor.

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The business judgment rule is a policy under California law which protects directors of corporations in certain circumstances. It contains two parts. The first part is statutory, which protects directors from personal liability if they act, in good faith, in a manner such director believes to be in the best interests of the corporation and its shareholders and with such care, including reasonable inquiry, as an ordinarily prudent person in a like position would use under similar circumstances.

The conditions are that-

(b) In performing the duties of a director, a director shall be entitled to rely on information, opinions, reports or statements, including financial statements and other financial data, in each case prepared or presented by any of the following:

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An acceleration clause in a loan document or promissory note is a provision that requires the entire amount of the unpaid principal and interest to become due when the specified event occurs. There are two kinds. First, in a typical Promissory Note, the entire amount may become due in the event of default in payment of an installment, or any other violation of the terms of the loan documents. The other kind, typical in mortgages and real estate loans, may require the entire balance to become due on sale of the property that is security for the debt. Parties with concerns about an acceleration clause should consult with a Sacramento business or real estate attorney to understand how it applies in their own circumstances. It was the first type of acceleration clause that was the subject of a recent decision, in which a lender was surprised that his acceleration clause (and the higher rate of interest it included), could not be invoked.

sacramento business attorney acceleration.jpgIn JCC Development v. Hyman Levy, Levy was a ‘philanthropist’ who was negotiating with JCC to purchase and operate a Jewish Community Center. He deposited $2.7 million into escrow. The negotiations took longer than expected, so the parties agreed that the $2.7 million would be converted to a loan to JCC, secured by a mortgage on the property. The promissory note provided for interest at the rate of 5%. The acceleration clause provided that, on acceleration, interest would increase to the legal maximum. It stated:

“If: (I) Maker shall default in the payment of any interest, principal, or any other sums due hereunder, or (ii) Maker shall default on performance of any of the covenants, agreements, terms or provisions of the deed of trust securing this Note… then, at Lender’s option, all sums owing hereunder shall, at once, become immediately due and payable. Thereafter, interest shall accrue at the maximum legal rate permitted to be charged by non-exempt lenders under the usury laws of the State of California.”

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I had written last week about the right of first refusal common in partnership agreements, and how it may affect the sale of a majority interest in the Sacramento Kings to a Seattle Group. If you are involved in a partnership agreement contemplating a sale of an interest, you should consult with an experienced Sacramento business attorney.

Sacramento business lawyer right of first refusal.jpgThe NBC sports blog ProBasketballTalk has published what it believes is language from the Kings governing partnership agreement. It is as follows:

Section 7.3. Right of First Opportunity.
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