By Glen Hansen
Real estate buyers and sellers often draft very simple contracts to express their mutual intentions. Courts will enforce such contracts if the terms are certain enough for the court to know what to enforce. But what if important terms and conditions are missing in the written contract? What standard or customary conditions will a court read into such agreements? The Supreme Court addressed that issue in the recent case of Patel v. Liebermensch (2008) 45 Cal.4th 344, where the parties’ signed purchase contract was silent as to the length of the escrow period.
Defendants Morris and Zita Liebermensch owned a condominium unit that Plaintiff Sunil Patel was interested in leasing. Liebermensch faxed Patel a proposal that stated:
We propose to rent our condominium at 7255 Navajo Road, Apt. #370, San Diego, CA 92119 at a monthly rate of $1,400.00 starting August 7, 2003 for one year ending August 6, 2004; with a security deposit of $1,200.00 and the following option to buy: “Through the end of the year 2003, the selling price is $290,000. The selling price increases by 3% through the end of the year 2004 and cancels with expiration of your occupancy. Should this option to buy be exercised, $1,200.00 shall be refunded to you.” Please indicate your acceptance by signing below and returning to me at the above referenced fax.
Patel signed the proposal, with a handwritten amendment providing an option to renew until August 2005. Liebermensch prepared a form rental agreement, adding a paragraph stating “OPTION TO BUY IS ATTACHED.” Patel and Liebermensch signed the agreement. Liebermensch also signed the option proposal and initialed Patel’s amendment.
In July 2004, Patel sent Liebermensch a notice that he was exercising the option to purchase for the agreed price of $298,700. Patel wrote that he and his wife were “anxious to complete the purchase as soon as reasonably possible so as to take advantage of the current interest rates.” Liebermensch sent Patel a purchase agreement, dated August 16, 2004, referring to the parties’ option agreement and Patel’s notice exercising the option. The purchase agreement included an “as is” clause, a requirement of a 10 percent deposit with the escrow company, and a specification that “The SELLER will require ninety (90) days or sooner to close escrow with the right to extend the closing for an additional thirty (30) days if necessary in order to exercise a 1031 exchange.” However, the parties had not previously discussed the subject of a tax-deferred exchange under 26 U.S.C. section 1031. Patel responded with a proposed agreement in which the “as is” clause was qualified by giving the buyer an option to cancel if not fully satisfied, and which provided that if the seller required more than 30 days to close escrow, the deposit would be reduced to $5,000 and the seller would “be responsible for all escrow and other expenses after 30 days of opening escrow.” Liebermensch rejected this proposal. Patel then signed Liebermensch’s original purchase agreement and sent it to Liebermensch. However, Liebermensch did not respond. Patel filed suit, seeking specific performance of the option agreement.
While the trial court entered judgment granting Patel specific performance, the Court of Appeal, Fourth Appellate District reversed in a split decision. The majority reasoned that the Liebermensches were bound by the terms of the option contract only if it included all the essential terms of a real estate purchase contract. The majority concluded that, while it might be reasonable in some circumstances to imply standard terms on these points into the contract, here the parties’ ongoing dispute over economic conditions after Patel exercised the option demonstrated they had never agreed on all material terms of the transaction. The Supreme Court unanimously reversed the judgment of the appellate court and affirmed the trial court’s award of specific performance.
In its decision, the Supreme Court addressed two issues.
First, the Supreme Court held that the manner and time of payment could be implied in the purchase agreement between the parties. The Supreme Court recognized that the equitable remedy of specific performance cannot be granted if the terms of a contract are not certain enough for the court to know what to enforce. But equity does not require that all the terms and conditions of a proposed agreement be set forth in the contract. In the absence of express conditions, custom determines incidental matters relating to the opening of an escrow, furnishing deeds, title insurance policies, prorating of taxes, and the like. In this case, the manner and time of payment are matters that may be determined by reference to custom and reason. The escrow period was not a necessary term in a contract of sale, and the time of payment is a contract term determinable by implication as a matter of law. Pursuant to Civil Code section 1657 and existing case law, a reasonable time for payment may be implied in the contract for the sale of real property, and the purchase price is deemed payable upon delivery of the deed.
Second, the Supreme Court chided the majority of the court of appeal for basing its decision on the parties’ conduct. The appellate court majority decided that the parties’ unsuccessful attempts to complete the transaction showed the option agreement did not represent a meeting of the minds on all essential terms. The Supreme Court disagreed. In this case, the Liebermensches bound themselves to the option contract’s terms when they signed it. They could have provided for an extended escrow period in the contract, but they didn’t. Here, there was mutual assent to a contract which was sufficiently certain so that the trial court was within its power in decreeing specific performance.
Because the 60-day escrow period that was ordered by the trial court was ultimately upheld on appeal, the Liebermensches may not be able to achieve their desired 1031 exchange. The lesson to be learned is that if buyers or sellers of real estate want specific conditions of sale, they have the responsibility to include that in the contract before they sign the deal.
Glen Hansen is a senior associate at Abbott & Kindermann, LLP. For questions relating to this article or any other California land use, real estate, environmental and/or 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.