The facts examined arise quite frequently in real property transactions:
Martin Steiner purchased 10-acres of a 12.29-acre parcel owned by Paul Thexton. Thexton indicated that any potential buyer would have to be responsible for obtaining the necessary approvals for a parcel split to allow Thexton to sell the 10-acre parcel and live on the remaining two acres. Steiner and Thexton entered into a written agreement for the sale of the 10-acre parcel that required Thexton to sell the 10-acre parcel to Steiner by September 2006 if Steiner so chose, after Steiner pursued, at his own expense, governmental approval
of the parcel split. Steiner deposited $1,000 of earnest money in escrow, to be applied to the purchase price if Steiner chose to purchase the property, or to be returned to Steiner if he terminated the transaction. The agreement also contained certain contingencies, including an absolute termination right for Steiner:
Steiner pursued the parcel split and the governmental approvals and Thexton initially complied with several requests made by Steiner, including executing applications to the county planning department. Ultimately during the term of the contract Thexton decided he no longer
wanted to sell and contacted the title company to cancel escrow. Shortly thereafter, and after allegedly spending almost $60,000 Steiner obtained approval for a tentative parcel map from the county and filed suit seeking specific performance of the agreement.
The trial court and Court of Appeal found that the agreement was unenforceable as a matter of law “because it is, in effect, an option that is not supported by any consideration.” The California Supreme Court affirmed in part. It found the agreement was an option but reversed the finding that the option was not supported by consideration. It held, since there was consideration for the option the option became irrevocable. The Supreme Court also determined that Steiner’s promise was illusory until he partly performed by seeking the required approvals for the parcel split.
The majority of real property transactions are structured to give one side or the other, or both, the ability to cancel the transaction To avoid real estate purchase and sale agreements being deemed unenforceable after Steiner, parties have two alternatives: (1) ensure the option is irrevocable; or (2) limit the purchaser’s termination right to prevent the promise to purchase from being deemed illusory and thus, deemed an option.
If you are in doubt about the structure of a real estate transaction contact Israel & Samuels, LLP and have the contract reviewed before you sign on the dotted line.
An ounce of prevention is worth a pound of cure.
The information presented is not intended to be, and does not constitute, “legal advice.” Because each situation varies, and only brief summary information is provided here, you should not use this information as a basis for action unless you have independently verified with your own counsel that it applies to your particular situation.
