Daily Development for Monday, September 15, 2008
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Husch Blackwell Sanders
Kansas City, Missouri
dirt@umkc.edu

VENDOR PURCHASER; CONSIDERATION; ILLUSORY CONTRACTS:  "Real Estate Purchase Contract" was no more than an unenforceable option agreement that failed for lack of consideration because buyer had no obligation to perform at all.

Steiner v Thexton (2008) 163 CA4th 359, 77 CR3d 632 (Cal. App. 2008)

Steiner desired to acquire and develop a 10 acre parcel from Thexton's. This required subdivision of Thexton’s  12-acre parcel. In September 2003, Steiner persuaded Thexton to sign a document entitled "Real Estate Purchase Contract," which offered to purchase the 10 acres for a specified amount on successful subdivision of the parcel.  The contract would remain open for three years. 

The agreement provided that Steiner would obtain all necessary government approval and permits at his own expense.  But  Steiner was not obligated to do anything and could abandon the project at any time. Even the deposit that opened the escrow was applicable to the purchase price or refundable. Although Steiner agreed that he would deliver to Thexton any work already performed if he abandoned the project, the agreement did not require Steiner to perform that work in the first place. In May and August 2004, Thexton cooperated by signing, as property owner, documents required by the county planning department. In October 2004, Thexton cancelled the escrow. Steiner continued seeking county approval and sued for specific performance of the Real Estate Purchase Contract.

The agreement set an outside deadline for buyer to purchase, September 10, 2006, about seven months after the contract date.

Following the bench trial, the trial court, noting that the unilateral nature of the contract was the classic feature of an option agreement, decided that the contract could only be construed as an option agreement.  Even as an option agreement, however, the contract failed for lack of consideration. Steiner could walk away from the deal in his sole discretion. The agreement was no more than a continuing offer to sell that could be revoked at any time.

Moreover, the court rejected Steiner's claim for promissory estoppel. Promissory estoppel was not pled in the complaint and no amendment had been sought. In any event, even though Steiner did obtain approval of a tentative map at some expense, the equities were not in his favor. Steiner was never obligated to seek the approvals; nothing prevented his abandoning the project. The elements of promissory estoppel were not established.

On appeal: Affirmed. 

Reporter’s Comment:  The sentence highlighted in the court's extensive quoting of the contract language is the one saying that the buyer has "absolute and sole discretion [to] elect not to continue." (The opinion also highlights the next sentence, that payment is due "upon successful completion of subdividing," but I am not sure why.) I would conclude from the highlighting that this is the language not to use if you want to be sure that your putative purchaser has not entered into a "disguised option," as the court called it, or an illusory contract, as it might also be considered. Certainly, that language is a red flag. Could a nearly similar deal have been concluded, with a different judicial result, if that language had been eliminated or perhaps replaced by clauses that said some of the efforts that the buyer was intending to undertake were being treated by the parties as consideration to the seller?

As written and interpreted, this agreement was a dream for the seller. Under it, the buyer intended to - and apparently, in fact, did - perform considerable work obtaining entitlements for the property, while the seller was free to wait until the last minute and then withdraw. I wish that someone would come along and make an offer like that to me.

Editor’s Comment: Although, at trial, Thexton argued that there could be no estoppel because there was no benefit to him, the stated facts indicate that Thexton had sought to sell the property for $750,000, but the buyer would have required Thexton to do the subdividing.  Later, when Steiner subdivided, Thexton got the benefit of that.  Although Thexton testified that he intended to live on the property and didn’t benefit from the subdividing, the fact is that Thexton had twice attempted to subdivide and sell.  The editor believes that there was a mutual benefit to be derived from Steiner’s subdivision efforts.  Perhaps the court should have reviewed the estoppel question a little more thoroughly. 

The Reporter for this item was Roger Bernhardt, writing in the California CLE Real Property Reporter.
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