Daily Development for Tuesday, August 3, 1999

By: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri

VENDOR/PURCHASER; EXTENSIONS: Contract extension agreement, contingent upon buyer's deposit of additional earnest money, is a valid independent agreement to extend the time for closing, and buyer cannot "backtrack" to original closing date simply by failing to produce the agreed upon additional earnest money.

Sage Technology, Inc. v. Nationsbank N.A. South, 509 S.E.2d 694 (Ga. App. 1998).

Buyer agreed to buy certain land from Seller for $1.8 million. Over time, Buyer put up $100,000 in forfeitable earnest money payments. There were defects in title, of which Buyer was aware, and the parties agreed that Seller would produce a "limited warranty deed," (a term unfamiliar to the editor). The contract had a "time of essence" clause."

Although, according to the court, the nature of the deed stipulated by the parties did not require Seller to have good title, there apparently was a good deal of discussion about title defects and Seller agreed to cure certain of these defects. A few days before scheduled closing, the parties agreed in writing to extend the closing for an additional month, and Buyer was required to make an additional payment of earnest money in the amount of $25,000 within two days of the extension agreement.

Buyer alleged that, after the signing of this agreement, it discovered that Seller had withheld information concerning certain defects in title that had been "papered over" and Buyer therefore refused to put up the additional money.

Seller declared the contract terminated due to the failure to pay the additional earnest money and sought to retain the earnest money. Buyer sued for its return. Trial court granted summary judgment for Seller, and Buyer appealed.

On appeal: held: Affirmed. The most interesting element of Buyer's argument was the claim that the extension agreement constituted an option on the part of Buyer to extend the contract by paying additional earnest money or to demand simply that Seller perform on the original date. As it didn't pay the money, Buyer claimed, the original contract terms were binding, and Seller could not declare Buyer in breach because Seller was not in a position to deliver good title as agreed.

Although, as noted, the court elsewhere holds that Seller did satisfy whatever title requirements existed, the court appears to assume here, for purposes of argument, that Buyer's claim that Seller couldn't close on the original date was accurate. The court nevertheless concludes that Buyer's defense is insufficient, because the original date was irrevocably altered by the extension agreement, which became binding not as a consequence of the actual payment of the additional earnest money, but by Buyer's promise to pay that money within 48 hours.

The court also rejected the buyer's argument that the extension agreement didn't require timely performance because it didn't include a "time of essence clause" or a forfeiture provision. Where the amendment modified only the closing date and not the provisions regarding the earnest money deposit in the event of default, the original provisions with respect to still controlled time of essence and earnest money forfeiture still controlled.

Comment 1: The editor is curious about the "limited warranty deed" in Georgia and why this device insulated Seller from a requirement of marketable title.

Comment 2: The court obviously viewed the Buyer as a defaulter scrambling to recoup from a deserved consequences, and the interpretation of the extension agreement should be read in that light. But the editor includes the case as a Daily Development as a drafter's warning. Clearly it might be possible for a party with an extension right triggered by a payment of an additional earnest money to view this right as an option, and not as a binding performance obligation. The court doesn't so construe the arrangement here, emphasizing that clarity of drafting is vital in these cases. Last minute "patch ups" often do not adequately anticipate possible changes in circumstance as well as the original contract language, which was drafted with more time and thought. A good drafter who is aware of the danger of drafting under pressure will recognize the tendency in such situations to plan only for the anticipated course of events, and to ignore other possibilities, and will resist that tendency as much as negotiations comfortably permit.

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 16, 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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