Although I sent this, and received it in my inbox, some have indicated that they didn't get it, so I'm trying again.

Daily Development for Monday, November 12, 2001

By: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
prandolph@cctr.umkc.edu

VENDOR/PURCHASER; CONDITIONS; GOOD FAITH AND FAIR DEALING: Where contract is conditioned on purchaser's satisfaction with the condition of a property as set forth in a professional report, and the purchaser indicates dissatisfaction, a court may inquire as to whether such dissatisfaction is objectively reasonable, but not whether the buyer had other reasons to withdraw that actually motivated the buyer in rejecting the contract.

Zygar v. Johnson, 10 P.3d 326 (Or. Ct. App. 2000).

Seller brought action against purchaser for breach of earnest money agreement relating to the sale of real property for purchaser's refusal to complete the purchase of such property. The Circuit Court entered summary judgment for the purchaser and seller appealed

A handwritten amendment to the sales agreement stated that the agreement was "subject to" purchaser's approval of pest and dry rot report. The report showed needed repairs, and seller was willing to make the repairs. Buyer's broker later reported to Seller's broker that Buyer was withdrawing from the deal because Buyer's fiancee just didn't like the house When Buyer failed to complete the contract, Seller sued for damages.

The appeals court affirmed summary judgment for Buyer, finding that there was no unresolved material factual issue requiring a trial

The court found that the terms of the handwritten provision at issue were unambiguous and that the sale of the property was subject to the approval of the report by the purchaser. It rejected the notion that an ambiguity was created requiring resolution at trial due to the fact that the typewritten portion of the agreement also addressing the inspection report allegedly allowed Seller to avoid termination of the contract if Seller agreed to pay for the work recommended in the report. The court followed a statutory rule of construction that where there are two provisions in a contract that may give rise to different interpretations, the handwritten provision controls and supersedes the typewritten provision according to an Oregon statute on contract interpretation. Therefore, the Court held that there was no ambiguity between the provisions and the purchaser was entitled to cancel the contract based on his dissatisfaction with the report.

Seller alleged that there was an issue of fact concerning the motivation of Buyer in withdrawing based upon the condition. It claimed that there would be a breach of the implied covenant of good faith if the purchaser had reasons other than the report that really controlled its decision.

Although the court acknowledged that every contract contains an implied covenant of good faith and fair dealing, it pointed out that the implied covenant cannot contradict an express term of the contract. A party invoking an express contractual right to terminate under certain conditions does not violate the implied covenant of good faith and fair dealing. In support of its reasoning, the court also referenced the seller's acknowledgment that the house on the property was not sound in all respects and that it could not be sold "as is." Seller did not allege that the purchaser's disapproval of the report would have been unreasonable, only that it was not the real reason for withdrawing from the contract. But the court responded that Buyer here had the unqualified right under the contract to cancel the sale even if there were other reasons for terminating the sale. Therefore, any dispute as to motive was immaterial and did not justify a trial.

Comment 1: Obviously, from a practice standpoint, Buyer's agent had no business discussing Buyer's motivation for withdrawing from the agreement. If Buyer suffered litigation costs here, it might consider whether the agent should bear those costs. This undoubtedly was a psychological factor leading to the continuation of the dispute, and of course drove Seller to doubt the bona fides of Buyer's termination based upon the report. It is possible, however, that Seller would have sued anyway, or at least it is possible that Buyer can't prove whether this was so or not. Therefore, although as a matter of fairness, Buyer might look to the agent, as a matter of litigation strategy, the editor wouldn't recommend suing.

Comment 2: Although the court doesn't hold that Buyer could reject the report even if the report did not show unacceptable problems, it does not give the Seller the right to cure the conditions and remove the problem. This is certainly an important contribution to enforcement of contract expectations in the face of the good faith doctrine, and the Editor welcomes it.

Compare: Bennett v. Waffle House, Inc., 711 So.2d 370 (Miss. 2000) (The DIRT DD for 1/21/01) (Mississippi Supreme Court develops concept that landlord cannot terminate lease on basis that strikes a court as a "pretext" to enable landlord to relet premises at higher rent, even when the basis is a clear default of the existing lease.)

Readers are urged to respond, comment, and argue with the daily development or the editor's comments about it.

Items in the Daily Development section generally are extracted from the Quarterly Report on Developments in Real Estate Law, published by the ABA Section on Real Property, Probate & Trust Law. Subscriptions to the Quarterly Report are available to Section members only. The cost is nominal. For the last six years, these Reports have been collated, updated, indexed and bound into an Annual Survey of Developments in Real Estate Law, volumes 1‑6, published by the ABA Press. The Annual Survey volumes are available for sale to the public. For the Report or the Survey, contact Maria Tabor at the ABA. (312) 988 5590 or mtabor@staff.abanet.org

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