By Rob Hofmann
Each Sale Transaction is Unique
Real property purchase and sale transactions are so common place that it may be hard to justify paying a lawyer to review, let alone prepare, the applicable documentation. This is especially true when the transaction appears straightforward and the broker is taking a healthy cut off the top. Why pay an attorney when boilerplate agreements are readily available for little or no cost from the broker/agent, online, or even the local stationary store? Given that the broker or agent is precluded from giving legal advice, there are any numbers of reasons.
Granted, many if not most real estate purchase and sale transactions move forward pretty much the way the parties anticipated. Even if you are well versed in the intricacies of real estate law, there are many, many aspects of the transaction that can go wrong – and when such a deal goes awry, it generally goes sideways, particularly during times of an eroding real estate market.
Recent Example: Assignment of the Purchase Agreement
The ability of the parties to assign the purchase agreement exemplifies the potential for unexpected and unintended problems. In California, absent an agreement between the parties otherwise, the purchase agreement is generally assignable by either the buyer or the seller to other parties anytime after the agreement is signed but before the close of escrow. The thought of suddenly dealing with an unknown third party should make any potential seller take pause. The original buyer may ultimately remain liable for its agreed to obligations under the purchase agreement should the assignee buyer not perform. However, the time and money involved to enforce such obligations will at a minimum be time-consuming and costly and will likely turn the deal upside down entirely for the seller. The issue becomes even more problematic if the seller is carrying the financing on the proposed purchase.
Even sophisticated sellers can run into problems. Case in point, the Court of Appeal, Second Appellate District, recently ruled in favor of an assignee buyer on the appeal of a summary judgment motion even though the assignee buyer did not exist when the purchase agreement was assigned. 02 Development, LLC, v. 607 South Park, LLC (2008) 159 Cal.App.4th 609.
At issue was the enforceability of a purchase contract to sell a hotel for $8.7 million. The seller originally agreed to sell the hotel to a limited partnership. Prior to the close of escrow the limited partnership assigned its interest in the purchase agreement to a limited liability company that, as of the time of the assignment, had not yet been formed. The seller argued on appeal that 1) there was no enforceable contract between itself and the assignee buyer because the assignee buyer did not exist at the time of the assignment, and 2) the assignee buyer presented no admissible evidence that it could financially close the purchase transaction. The appeals court ruled against the seller on both counts.
First, the court concluded that as a matter of law the assignee buyer could enforce a pre-formation contract made on its behalf upon ratification by the subsequently formed entity. Thus, the assigned agreement is a valid contract between the seller and the assignee buyer. As to the financial wherewithal of the newly formed assignee buyer, the court concluded that the seller could not repudiate the agreement in advance. Therefore, absent a showing by the seller that the assignee buyer would be unable to arrange the necessary financing to close the transaction on time, the assignee buyer must be given the opportunity to perform. The court further awarded the assignee buyer its costs on appeal. This entire matter could have been avoided with a properly drafted nonassignment clause in the purchase agreement.
The foregoing is but one of an infinite number of issues that can arise in even the most routine real property purchase and sale transactions. Few parties to such a transaction would dare to proceed (even absent a mandatory lender requirement) without title insurance. The involvement of a qualified real estate attorney is at least as important. An ounce of prevention …
Rob Hofmann is an associate with Abbott & Kindermann, LLP and is a member of the City of Davis Planning Commission, and a member of the San Joaquin Valley Air Pollution Control District Hearing Board. For questions relating to this article or any other California land use, environmental and planning issues contact Abbott & Kindermann, LLP at (916) 456-9595.
The information presented in this article should not be construed to be formal legal advice by Abbott & Kindermann, LLP, nor the formation of a lawyer/client relationship. Because of the changing nature of this area of the law and the importance of individual facts, readers are encouraged to seek independent counsel for advice regarding their individual legal issues.