That's Not a Contract 

By Sonia M. Younglove  

A recent case, Steiner v. Thexton (2008), provides a cautionary tale for parties who think they are cleverly drafting a real estate purchase contract to serve their best interests. Steiner, a real estate developer, was very interested in purchasing and building several residences on 10 acres of land owned by Thexton. Steiner convinced Thexton to sell the land to him for $500,000, provided Steiner decided to purchase it by September 2006 after pursuing "expeditiously and at Steiner’s own expense the county approvals and permits." • The contract drafted by Steiner titled "REAL ESTATE PURCHASE CONTRACT" was signed in 2003 and contained several very relevant provisions: $1,000 deposit placed into escrow applicable toward the purchase price; "Buyer shall have no direct financial obligation to Seller during this [maximum of three years] investigation period"; "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 proceeded expeditiously, spending thousands of dollars in the effort to subdivide the land. About a year after signing the agreement, the seller, Thexton, canceled escrow and Steiner sued for specific performance. The trial court determined that the contract was unenforceable against Thexton "because it is, in effect, an option that is not supported by any consideration."

The 3rd District Court of Appeal affirmed the trial court’s ruling. Despite the title as a purchase contract, the contract appeared to be an option contract because Thexton agreed to sell the property to Steiner for a stated price for a period of time up to three years (the "investigation period") and Steiner retained the "absolute and sole discretion" to elect not to continue with the transaction. The unilateral nature of the contract is a feature of an option contract. A purchase contract is bilateral in nature, binding both parties to perform under the contract.

However, every contract requires "consideration." Steiner argued that all his expenditures during the investigation period constituted a "consideration substitute" and had he decided not to purchase the property after obtaining all the government permits, Thexton would have retained this "benefit." Nevertheless, the court of appeal did not agree with Steiner’s analysis: "Consideration must be measured as of the time the contract is entered into." Since Steiner retained the absolute discretion not to proceed at any time during the transaction, that meant he wasn’t bound to undertake any work or expense at all at the time the contract was signed. Thus, there was no consideration for the option contract, making it unenforceable. Had Steiner simply stated in the contract that the $1,000 deposit was a nonrefundable option consideration, he most likely would have prevailed.

Finally, Steiner argued that the court of appeal should apply the doctrine of promissory estoppel to avoid injustice since Thexton would benefit from all of Steiner’s work ("between 75 and 90 percent of the work needed for the county approvals"). However, the court of appeal focused on the fact that Steiner retained the ability to walk away from the agreement at any time—a power he gave himself in the agreement that he drafted. "There is no injustice in a resolution of this case that effectively accords the reciprocal right to Thexton."

July 1st State Law: No Cell Phone to Ear While Driving

>> A reminder to all who regularly use a cell phone while driving: On July 1, a California law went into effect restricting the use of cell phones in automobiles and other motor vehicles. This new state law imposes a prohibition on the use of a cell phone when driving a motor vehicle unless the phone is designed and configured to allow hands-free listening and talking, and is used in that manner. A number of exceptions to this prohibition are as follows: (1) contacting a law enforcement agency or a public safety entity for emergency purposes; (2) calls by an emergency services professional in an authorized emergency vehicle; and (3) certain digital two-way radios when driving a commercial vehicle until July 1, 2011.

The fine for a first offense is $20 and, for any subsequent offense, $50. Any infraction is not a violation point for DMV purposes (i.e., won’t impact auto insurance). This law added California Vehicle Code Sections 12810.3 and 23123. 
 

Q&A

Q. I heard that I can now represent an investor-buyer when buying a property in foreclosure. Is that correct?

A. Yes. Prior to the case, Schweitzer v. Westminster Investments, the surety bond requirement made it virtually impossible to comply with the home-equity sales contracts law (HESC). This law, found in California Civil Code Sections 1695 et seq., is triggered when all of the following conditions exist: (1) the property is residential one-to-four units, and (2) the owner currently resides in one of the units, and (3) an NOD (Notice of Default) has been recorded against the property, and (4) the buyer does not intend to live in the property (the buyer is an investor).

Under the Schweitzer holding, a buyer’s agent may represent investors without obtaining the bond required by HESC. Of course, all the other requirements of HESC, such as use of a special contract, still apply. REALTORS® can find all the details of the requirements of HESC in the C.A.R. legal article, "Notice of Default and Investor-Buyer Transactions: Home Equity Sales Contracts," available at http://car.org/legal.

Sonia M. Younglove, Esq., is C.A.R. senior counsel.