Morgan Miller Blair

In the May 28, 2008 opinion for the case of Steiner v. Thexton, the California Court of Appeal held that a buyer was not entitled to specific performance because the real estate purchase agreement was a failed option agreement that lacked consideration.

 The buyer, a real estate developer, entered into an agreement with an owner of real property which allowed the buyer to purchase the property at a specified price if the buyer elected to purchase the property after pursuing county approvals and permits to subdivide the property.  Although the agreement provided that the buyer would “expeditiously” pursue the subdivision of the property, it also expressly provided that the buyer was not obligated to do anything and could abandon all efforts to seek entitlements and cancel the contract at any time by providing seller with notice and any work performed up to the date of such notice.  Through August of 2004, the seller cooperated with buyer’s efforts to seek entitlements pursuant to the agreement, but in October 2004, the seller asked the title company to cancel the escrow stating that he no longer wanted to sell the property.  The buyer continued to seek entitlements for the property, opposing the cancellation of escrow, and ultimately obtained approval for a tentative map. 

 The Court of Appeal held that the purchase agreement was merely a failed option agreement because the buyer had no obligation to purchase the property and the buyer did not pay any consideration for the right to purchase the property, creating a unilateral, unenforceable contract.  The court noted that, although the buyer did deposit $1,000 into escrow, that deposit did not constitute consideration for the buyer’s right to  purchase the property because the agreement provided that such sum would be applied toward the purchase price and be refunded to the buyer if he elected to terminate the contract.  While the buyer argued that the work done, and expenses incurred, by buyer in pursuing entitlements for the property conferred a benefit on the seller and amounted to consideration to support the contract, the court held that the language of the contract refuted the concept that such work and expenses could be consideration for the option because the buyer had the absolute right, at any time, to elect not to continue with the transaction.  Since the contract lacked consideration, the buyer was not successful in obtaining specific performance of the contract and the seller did not have to sell the property to buyer.

 While it is common for purchase agreements to contain contingencies in favor of the buyer, it is important that if the contract permits the buyer to terminate the agreement for any reason, that the contract expressly describes the consideration being exchanged between the parties and provides that the parties have agreed that such consideration is sufficient for the bargain struck between the parties.  If the contract permits the buyer to terminate the contract at any time, without payment of any consideration, the contract will be deemed to be unenforceable for lacking consideration and the buyer will not be able to specifically enforce the contract.