Daily Development for Monday, March 26, 2001

VENDOR/PURCHASER SPECIFIC PERFORMANCE;: Purchaser is not required to tender the purchase price in order to enforce the purchase agreement, where vendor informs purchaser before the scheduled closing date that vendor cannot perform, so that purchaser's tender would be futile.

Kessler v. Tortoise Development, Inc., 1 P.3d 292 (Idaho 2000).

Richard Kessler ("Kessler") and Gerald Kingen ("Kingen") decided to build a multiscreen movie theater, which Kessler would operate, and a restaurant, which Kingen would operate, and in June 1991, they purchased real property upon which to build the theater/restaurant project. In the spring of 1992, Geoff Bushell ("Bushell") formed Tortoise Development, Inc. ("Tortoise") to assume the project and to develop it.

Tortoise entered into a contract with Avery Construction, Inc. ("Avery") to construct the theater at a guaranteed maximum price of $974,623 in April 1994 and proceeded with construction work.

In July 1994,Tortoise entered into a purchase and sale agreement with Kessler for the purchase of the theater unit. (Note that at this time Tortoise did not own the real property underlying the construction, but the parties apparently understood that Tortoise would acquire the land from Kingen and Kessler before completing the sale agreement.) The sale agreement between Tortoise and Kessler provided that Kessler had made an earnest money deposit of $140,000, with the sale to close upon completion of the construction project. Kessler had not in fact made the earnest money payment, but the parties simply noted the anticipated payment on the form agreement.

Tortoise was unable to secure financing and Avery ceased work on the project in July 1994. In the same month, Bushell experienced financial difficulties and Kingen agreed to buy Tortoise and assume the project, based upon Avery's representation that construction costs would not exceed $974,623.

Based upon Kingen's financial statements, Tortoise secured financing and Avery recommenced work on the project for Tortoise. In August 1994, Kingen and Kessler contracted with Tortoise to transfer the real property to Tortoise. As consideration, Kessler received a credit toward the purchase of the completed theater unit and was no longer required to pay the earnest money deposit. Kessler and Tortoise executed an addendum to this effect.

In December 1994, Kessler was permitted to customize the theater for operation and in March 1995, a certificate of occupancy was issued, allowing Kessler to begin operations. Tortoise deposited into escrow a warranty deed to the real property. Kessler took immediate possession pursuant to a pre closing lease and began customizing the property to commence theatre operation. Prior to closing, Avery and others filed a series of liens against the project and Tortoise could not obtain marketable title for closing despite attempts to bond around the liens.

Although Tortoise was ultimately able to obtain releases for the liens, it was forced to pay over $500,000 in excess of Avery's guaranteed maximum price.

Kessler filed suit for specific performance of the agreement with Tortoise.

This enabled Kessler to buy the property from Tortoise substantially below Tortoise's invested costs.

The trial court originally determined that specific performance was not available under the purchase and sale agreement, due to the fact that remedies provisions in the form agreement seemed to establish exclusive remedies. For instance, one of the remedies clauses provided that, in the event that seller was unable to deliver marketable title, buyer's sole remedy was return of the earnest money. The trial court therefore granted summary judgment in favor of Tortoise. The Supreme Court found that the questionable contract language was ambiguous, and that the trial court could take futher evidence on the availability of specific performance.

On remand, the trial court determined that specific performance was appropriate. It noted that, although the remedies language was unambiguous, the language assumed that the $140,000 was actually paid.

Subsequent documents indicated that the earnest money had not been paid, but was being treated as a "credit" due to other benefit conferred by Kessler. This led the court to conclude that the "sole remedy" language was not intended to apply in cases in which no earnest money had in fact been paid.

The court therefore ordered specific performance, but only on the condition that Kessler share in the higher construction costs made necessary by the payment of the liens. The court noted that some of the liens might have been questionable, but that Tortoise's payment of them was reasonable due to the necessity to clear title in order to carry out the whole deal Kessler appealed.

The Supreme Court of Idaho affirmed the decision of the trial court. The Court held that the findings of fact supported the trial court's ruling that specific performance was warranted since the location of the project was uniquely suited to a theater. But, it also upheld the trial court's determination to condition specific performance on payment by Kessler of a portion of the extra expenses borne by Tortoise (and, by extension, by Kingen) in "bailing out" the project. It was inequitable for Kessler not to share in the unexpected construction cost, noting that Kingen saved the project Kessler and Bushell were unable, took over Tortoise, and placed Kessler in the theater on schedule as set in the contract, at substantially more than the contract price to construct the building.

Comment 1: What the editor finds interesting here is the recognition of the notion that specific performance can be ordered for a contract other than that written out by the parties. That is essentially what happened here, although it was labelled "conditional specific performance." There is some precedent for this, for minor variations. Sometimes the seller has received more, sometimes less. It has gone both ways.

Here, the court, mysteriously, does not tell us, exactly how much "share"

of the extra costs must be borne as a condition for the buyer's specific performance, although surely the trial court did establish a figure.

Therefore, we don't know exactly what order was affirmed or how much variance there was from the original contract.

Comment 2: The parties made two trips to the state supreme court to get an order that probably was about what they would have achieved through common sense settlement negotiations. An important reason for this was the fact that the form document used by the broker buyer to set up this deal was wholly unsuited for a transaction of this complexity. Clearly these parties, engaged in a very involved multimillion dollar project, should have had competent counsel from the start. The recitation of facts suggests strongly that they did not obtain legal counsel at all.

Although, as recent posts have demonstrated, brokers continue to have hostility to lawyers largely because of our trial lawyer counterparts, the fact is that they need us just as we need them. I wouldn't recommend that a lawyer try to soft sell a buyer into buying the lawyer's property.

Just not our expertise. I also wouldn't recommend that a broker undertake a nonstandard transaction (and almost all commercial deals are non standard) without a real estate specialist lawyer. Like Andy Grannatelli used to say: "You can pay me now . . . or you can pay me later."

VENDOR/PURCHASER; SPECIFIC PERFORMANCE: Although a buyer normally must show that it was ready, willing and able to perform at the scheduled closing in order to qualify for an order of specific performance, the court will not make such a requirement when the seller had already demonstrated, prior to the scheduled closing, that it would be unable to perform itself.

Kessler v. Tortoise Development, Inc., 1 P.3d 292 (Idaho 2000).

The facts of this case are set forth in a separate discussion under the same heading. This discussion deals with a separate argument, made by Tortoise, that Kessler could not obtain specific performance because Kessler could not demonstrate that it was in a position to close on the contract on the day scheduled for closing.

The court held that it was the established law that a party need not show that it was able to perform if the other party had earlier demonstrated that it would not be able to deliver.

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