Most Real Estate Purchase Contract Unenforceable

May 30, 2008

Most Real Estate Purchase Contracts UNENFORCEABLE

The Court of Appeal in Sacramento ruled on Wednesday, that the standard and customary real property contract which immediately binds the seller but does not bind the buyer until the buyer completes its investigations and inspections and either accepts the condition of the property or waives those contingencies, is unenforceable against the seller!

The Court reasoned that since the seller is bound by the contract but the buyer is not, that such a contract really is a disguised option. An option agreement is at all times revocable by the seller/optionear, until the buyer/optionee pays consideration for the option. The buyer's promise to purchase the property does not count as long as the buyer retains the right to cancel. The buyer's promises to perform investigation and inspections are for the buyer's own benefit and usually the details are left to the buyer's discretion. If these "obligations" of the buyer are not sufficiently specific and stated to be for the benefit of the seller, such that the seller could go into Court and obtain a judgment specifically enforcing such obligations against the buyer, then for purposes of supporting an option against being revocable by the seller, they are not obligations or consideration at all.

Similarly, the deposit is not consideration, since it is credited against the purchase price and is refundable until the buyer waives all contingencies. So any time before that happens, it also cannot be consideration to keep the purchase agreement/option from being revocable by the seller.

This actually makes sense. Although the Court did not discuss it, I always have been bothered by the idea that real property contracts could specifically be enforced against the seller to force him to sell the subject property, even while the buyer retained the right to walk away from the deal and the buyer could not be forced to pay the purchase price.

The solution is simple. In order to really tie up the seller and prevent the seller from having the unilateral right to cancel the contract, pay the seller for the option. It does not require much. $1000.00, $2500.00, or $5000.00 should be enough. If the seller wants any more than that for the option, the contract could provide that in the event the buyer did not exercise the option, that the seller would buy back the title report, phase I hazardous materials report, and any other studies the buyer had arranged and paid for, in exchange for a payment coincidentally equal to the option payment.

The case is very likely to be appealed to the California Supreme Court, but even if the Court were to accept such an appeal, the decision is not likely to change. The essence of a contract is that both sides are bound. One promises to buy, the other promises to sell. As long as either side has the right to walk away from the deal, it is an option and not a contract, and options require consideration. To bind your seller, make sure you pay him or her for the option.