Nearly seven years after parties signed a non-form agreement entitled "Real Estate Purchase Agreement", the California Supreme Court has found that sufficient consideration supports this agreement to render it an irrevocable option. (Steiner v. Thexton (March 18, 2010) page 1 (PDF) 48 Cal.4th 411.) This Steiner v. Thexton opinion presents a cautionary tale for those involved in preparing, interpreting or enforcing real estate agreements.
Paul Thexton, who resides on 12.29 acres of land in Sacramento County, California, had already rejected a $750,000 offer to purchase 10 of his 12.29 acres by a buyer who wanted Mr. Thexton to first obtain the necessary parcel split, when he was approached by Martin Steiner who wanted Mr. Thexton to sell him the 10 acres for $500,000. Mr. Steiner, unlike the previous buyer, offered to obtain, at his own expense, all of the permits and authorizations necessary to split the parcel. After the split and the purchase, Mr. Steiner would have approximately 10 acres to develop, and Mr. Thexton would have approximately 2 acres upon which to reside.
Mr. Thexton agreed, and paragraph 7 of the "Contingencies" section of the ensuing Steiner-Thexton Real Estate Purchase Agreement (the "Agreement") reads as follows:
"It is the intent of Buyer that the time period from execution of this contract until the closing of escrow is the time that will be needed in order to be successful in developing this project. It is expressly understood that the Buyer may, at its absolute and sole discretion during this period, elect not to continue in this transaction and this purchase contract will become null and void."
(Steiner, footnote 2, 48 Cal.4th 415, emphasis added.)
The Agreement that was signed on September 4, 2003, gave Mr. Steiner up to September 1, 2006, to complete the parcel split, and specifically obligated Mr. Thexton to keep his offer open for up to three years. (Steiner, 48 Cal.4th 419.)
On its face, the Agreement appeared to place all of the obligations on Mr. Thexton and no obligations at all on Mr. Steiner. The Agreement appeared to give Mr. Steiner the option of either
diligently pursuing the proposed lot split and development project or doing nothing at all for a period of three years, while at the same time requiring Mr. Thexton to remain ready, willing and able to sell at the agreed price and terms.
In October, 2004, however, Mr. Thexton changed his mind. He asked the title company to cancel escrow and told Mr. Steiner he no longer wanted to sell. Steiner then sued for specific performanced and Thexton claimed, among other things, that the Agreement constituted an option unsupported by consideration.
The trial court agreed with Thexton, finding that the unilateral nature of the Agreement (the classic feature of an option) rendered it an option, that the option was not supported by any consideration because Mr. Thexton had received nothing of value in exchange for granting the option, and that the option was, therefore, not enforceable against Mr. Thexton. The Court of Appeal agreed with the trial court, concluding that the Agreement was an "unsuccessful attempt to create an option and was therefore merely a revocable offer." Steiner v. Thexton (2008) 163 Cal.App.4th 359, 375, (superseded by Steiner v. Thexton, March 18, 2010).
The California Supreme Court did not agree that the Agreement was merely a revocable offer.
First, the court pointed out the difference between a unilateral contract and a bilateral contract by using the California Association of REALTORS' explanation that a common "form of real estate contract binds both parties at the outset (rendering the transaction a bilateral contract) while including a contingency, such as a loan or inspection contingency, that allows one or both parties to withdraw should the contingency fail . . . [and] only if the contingency fails. (Steiner, 48 Cal.4th 419.) The Steiner-Thexton Agreement was, the court found, unilateral and an option because it placed no obligation whatsoever upon Steiner.
An option, though, can be either revocable or irrevocable. In order to be irrevocable, an option must be supported by consideration, and the consideration must be bargained-for.
"Civil Code section 1605 defines consideration as 'Any benefit conferred, or agreed to be conferred, upon the promisor, by any other person, to which the promisor is not lawfully entitled, or any prejudice suffered, or agreed to be suffered, by such person, other than such as he is at the time of consent lawfully bound to suffer, as an inducement to the promisor . . . . '"
(Steiner, 48 Cal.4th 420)
In other words, Mr. Steiner's revocable option could be rendered irrevocable either by an agreed payment by Steiner to Thexton (a "purchase" of Steiner's option from Thexton) or by Steiner's suffering some agreed detriment (some "prejudice") as an inducement to Thexton's promise.
But, in this case, as pointed out by the trial and appellate courts, isn't it true that all we have is Mr. Steiner's promise to buy 10 acres of Mr. Thexton's land after three years and after a lot split, and only if Mr. Steiner doesn't change his mind?
Yes.
On the day the Agreement was signed, the court noted:
It is true that Steiner's promise to undertake the burden and expense of seeking a parcel split may have been illusory at the time the agreement was entered into, given the language of the escape clause.
(Steiner, 48 Cal.4th 422.) Yet the court concluded that, nonetheless, once Martin Steiner incurred costs in pursuance of the lot split, the promise ceased to be illusory and the option became irrevocable.
But, I thought that the "prejudice" to the "promisee" had to be "bargained for"?
Yes; and in this case, it was. The promise that Mr. Steiner would pursue a lot split (if at all) at his own expense was critical to Mr. Thexton's agreement to sell. Mr. Thexton had already demonstrated, by rejecting a higher offer, that he would not sell without a lot split, and that he would himself not pursue a lot split. Therefore Mr. Steiner's promise to suffer the expenses of a lot split was essential to Mr. Thexton's promise to sell the 10 acres. Although Mr. Steiner was not obligated to incur any expense at all (because of the Agreement's "escape clause") once he did incur expenses, Mr. Thexton's unilateral promise to sell became irrevocable.
"Thus, both elements of consideration were present. First, the effort to obtain the parcel split clearly conferred a benefit on Thexton and constituted prejudice suffered by plaintiffs. Second, the promise to pursue the split was plainly bargained-for and induced Thexton to grant the option. Accordingly, plaintiffs' part performance cured the illusory nature of their promise."
(Steiner, 48 Cal.4th 422, emphasis in original.)
(The Supreme Court reversed the Court of Appeal and sent the case back to the Court of Appeal for further proceedings, specifically noting that not all of the available defenses to plaintiffs' claims were considered or resolved in this appeal.)
My Thoughts:
Please note the Supreme Courts' reference to the California Association of REALTORS' explanation that a "common form of real estate contract" (i.e., the California Association of REALTORS ("CAR") standard Residential Purchase Agreement, RPA-CA) binds both the buyer and seller at the outset, rendering the transaction a bilateral contract, not an option.
And the Supreme Court's reminder that an "'. . . option based on consideration contemplates two separate [contracts], i.e., the option contract itself, which for something of value gives the optionee the irrevocable right to buy under specified terms and conditions, and the mutually enforceable agreement to buy and sell into which the option ripens after it is exercised.'" (Steiner, 48 Cal.4th 420, quoting Torlai v. Lee (1969) 270 Cal.App.2d 854, 858, emphasis added.)
Accordingly, practitioners who are preparing an option to purchase or an option to lease should use both the CAR Option Agreement standard form (OA) in combination with a standard form purchase agreement or lease agreement.
Finally, brokers and agents, if your clients wish to venture outside the four corners of CAR's standard forms, please counsel them to seek the advice of an attorney.
Certainly the greater the buyer's "investment" in the deal, as represented by their releasing their deposit to the seller before close of escrow, the greater the likelihood the buyer will actually close the deal?
