Sufficient Bargained-for Consideration Will Render a Real Estate Option Irrevocable
The California Supreme Court reversed Steiner v Thexton (2008), 163 Cal. App. 4th 359 (Steiner), a recent case which caused a lot of buzz in the real estate community.
In Steiner, the California Court of Appeals held that a real estate purchase contract must be construed as a revocable option contract when (i) the seller is required to sell property to a buyer at a stated price for an undefined period, and (ii) the buyer retains the absolute and sole discretion to walk away from the deal without paying the seller a cent.
The Supreme Court held inSteiner v Thexton (2010), S164928 that indeed a purchase contract terminable at the buyer’s discretion is an option if the Seller has agreed to be bound for a specific period of time. However, the Court also held that the option is irrevocable for the negotiated period “if sufficient bargained-for consideration is present.” In order to find consideration, the Court opined that two requirements must be met: (1)the buyer must confer a benefit upon the seller OR incur a detriment upon itself, and (2)such benefit or detriment must have induced the seller to grant the option.
In Steiner, the Buyer agreed to incur a detriment (i.e., he agreed to undertake the burden and expense of seeking a parcel split). Thus, the first requirement was met. The court also noted that: “It is undisputed that a parcel split of the 12.29 acres was necessary for Thexton to be able to sell a portion of his land to anyone while still retaining a two-acre parcel for himself to live on. There is also no dispute that Thexton did not want to have to go through the process of obtaining the parcel split himself. Indeed, he had previously rejected an offer $250,000 more than Steiner was to pay It is clear then that a critical part of Thexton’s willingness to sell was that Steiner would bear the expense, risk, and burden of seeking the parcel split.” Thus, the Court concluded, the second requirement was also met.
Even if the Buyer did not absolutely agree to complete the lot split because the Buyer could terminate at any time, the fact that the Buyer later performed the acts cures that infirmity. The court advises that:
“In conclusion, we hold plaintiffs’ part performance of their bargained-for promise to seek a parcel split cured the initially illusory nature of the promise and thereby constituted sufficient consideration to render the option irrevocable.”
While the Court’s decision to overturn the Court of Appeal allows the real estate community to breathe a collective sigh of relief, we continue to recommend that buyers make a small nonrefundable payment (as little as $100) as consideration for an option right to insure that the option will be irrevocable by the seller and to avoid litigation on this matter.
The above article is provided for informational purposes only. It is not legal advice, nor does it create an attorney-client or any other relationship. You should always contact an attorney for legal advice applicable to your particular situation.