$100 independent consideration in purchase agreements
Shaun James
Our office has received two purchase agreements this week for commercial real estate in which the buyer has identified $100 as independent consideration for the seller in the event the buyer terminates the agreement during diligence. Is this becoming a new trend, or is there some new case law around that is the reason for this addition?
Any insights appreciated.
Shaun Michelle James
Attorney
Smith Slusky Pohren & Rogers LLP
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Phone 402.392.0101 Direct 402.505.8104 Fax 402.392.1011
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Rory O'Bryan
Yes, that is my experience with Texas also. I presume it is due to common law decision at some time in the past that an earnest money contract with conditions where all earnest money is refunded lacks consideration or lacks mutuality and therefore is not enforceable.
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Waxman, David
If buyer can get out of the agreement for any, or no, reason, then I would imagine it is because the agreement may be considered illusory without separate consideration.
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From: nyclar...@googlegroups.com [mailto:nyclar...@googlegroups.com]
On Behalf Of Kevin Peterman
Sent: Wednesday, November 08, 2017 10:17 PM
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Subject: Re: [nyclarealprop] $100 independent consideration in purchase agreements
A practice in Texas as I remember.
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Nelson, Laurie C.
On Nov 9, 2017, at 7:20 AM, Kevin Peterman <kevinjoh...@gmail.com<mailto:kevinjoh...@gmail.com>> wrote:
A practice in Texas as I remember.
Our office has received two purchase agreements this week for commercial real estate in which the buyer has identified $100 as independent consideration for the seller in the event the buyer terminates the agreement during diligence. Is this becoming a new trend, or is there some new case law around that is the reason for this addition?
Any insights appreciated.
Shaun Michelle James
Attorney
Smith Slusky Pohren & Rogers LLP
sja...@smithslusky.com<mailto:sja...@smithslusky.com>
Phone 402.392.0101<tel:(402)%20392-0101> Direct 402.505.8104<tel:(402)%20505-8104> Fax 402.392.1011<tel:(402)%20392-1011>
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Jim Henegan
Some people take the position that contracts in which the Buyer can terminate for any reason during the due diligence period are options to purchase the property and require some non-refundable earnest money to be enforceable.
If the Buyer spends a significant amount of money on plans, seeking approvals and other due diligence matters, that can constitute consideration.
In California I have seen Buyers make $500 of the earnest money non-refundable.
Here is a link to an article discussing a California case voiding a contract for lack of consideration.
http://www.nossaman.com/court-invalidates-purchase-agreement-option-lacking-consideration
"In Steiner v. Thexton (2008) 163 Cal. App 4th 359, the California Court of Appeal for the Third Appellate district found that a document entitled "Real Estate Purchase Contract" did not, in fact, constitute an agreement for the purchase and sale of real property, but, rather, constituted an option. The court further held that since the option lacked consideration, it constituted nothing more than an ongoing offer of the seller to sell the property, which could be withdrawn at any time prior to its acceptance or exercise."
The following was posted on Dirt after the case was reported:
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
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.
http://dirt.umkc.edu/SEP2008/DD_09-15-08.htm
Jim Henegan
Senior Counsel
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James Carolan
Jim Carolan, Partner
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-----Original Message-----
From: nyclar...@googlegroups.com [mailto:nyclar...@googlegroups.com] On Behalf Of Nelson, Laurie C.
Sent: Thursday, November 09, 2017 8:33 AM
To: nyclar...@googlegroups.com
Subject: Re: [nyclarealprop] $100 independent consideration in purchase agreements
SMA
Way back when I functioned in a brokerage capacity, we used to present contracts all the time with “due diligence periods permitting termination for any reason”. The expenses involved in “due diligence” were then and are now considerable. I don’t remember that a seller could terminate during a buyer’s due diligence period. Seems to me it would make sense if a seller received a “back-up” offer which could become effective IF and ONLY IF “due diligence period termination” occurred. Often a due diligence “free look” included time to seek a financing commitment – in my personal experience when working with developers that was a big part of their investment in a project. In addition, when I sell my own property, I am willing to enable a buyer a “due diligence free look” when I think the buyer is REALLY interested. In fact, recently, I offered someone exactly that – a “free look” at circumstances with which they were not familiar, and they backed out – was glad that happened because within two weeks another buyer can along and, having upped the price in the interim, closed at 30% higher than the first price.
SO, from the perspective of an observer of litigation, more recently, involving tax appeals in Florida, I wonder if any appeal is based upon the actual merits of the situation OR may be based upon upholding a lower court’s perspective of governing law – which may not always be as insightful as practical experience might dictate. I’ve heard arguments made that were different than universal understanding of certain principles or perspectives. Nothing ever is totally black and white! Put two attorneys in the room, and there might be two different perspectives leading down two different roads which can lead to difference outcomes in litigation. Add to “human” influences that judges are human too and have their own understandings, it’s not always clear that an appeal decision necessarily is related to every possible circumstance or interpretation.
Therefore, with all due respect to lawyers involved in litigation, sometimes perspectives and approaches may be based upon personal understandings which may be debatable. NOT every interpretation is totally inclusive, necessarily, of all applicable information. And, every state may have different nuances in “contracts” and how such agreements are enforced. What I would want, in response to a “due diligence with a free look” provision is a copy of every document, report, etc. obtained by the buyer during the period so I might have a better understanding of how the subject property can be used or changed. Of course, it also would mean more responsibilities related to disclosures!
SMA
_______________________________________________________________________________________
Sheila M. Anderson, Principal
Commercial Property Services, Inc.
Licensed Real Estate Broker
305-372-9200 / 352-245-7441
Profile: http://www.floridapropertytaxappeals.com/cps-president-broker.htm
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Richard Kalish
In California, when the Supreme Court grants a hearing on an appeal from the Court of Appeal, the Court of Appeal decision is deemed immediately withdrawn and cannot be cited. The 2008 decision by the Court of Appeal in Steiner v. Thexton was therefore withdrawn and is replaced by the Supreme Court’s 2010 decision in Steiner v. Thexton at 48 Cal.4th 411, 226 P.3d 359. Even before the Steiner case was decided, I was involved in Texas deals in which Texas counsel insisted on inserting an independent consideration provision in the purchase agreement. These provisions are nearly universal now in California real estate purchase agreements. Particularly when representing the buyer, it would be a mistake not to have one in the agreement. Whatever you think about the logic of the rule, $100 is a small price to pay for insurance against having it applied against your client.
Richard Kalish
KALISH NEXON LLP
1108 Fifth Avenue, Suite 320
San Rafael, CA 94901
Direct: 415-530-2982
Benny L. Kass
We always do what we call “break-up” fees here in Washington, dc. Client signs a contract, and the tenants exercise their rights under a law known as TOPA (tenant opportunity purchase). Client has spent time and money doing due diligence so clients wants seller to pay something – and it always much more than $100??
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Benny L. Kass, Esq.
Kass Legal Group PLLC
4301 Connecticut Avenue NW, Suite 434
Washington, DC 20036
Please note that our office has moved. Our new address is 4301 Connecticut Avenue, NW, Suite 434, Washington, DC 20008.
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From: nyclar...@googlegroups.com [mailto:nyclar...@googlegroups.com] On Behalf Of Kevin Peterman
Sent: Wednesday, November 08, 2017 10:17 PM
To: nyclar...@googlegroups.com
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