Option To Sell Real Estate Becomes Irrevocable After Buyer Seeks County Approval of Lot Split

In Steiner v. Thexton, (— Cal.Rptr.3d —-, Cal., March 18, 2010), the California Supreme Court considered whether an option to purchase real estate that granted the potential buyer the “absolute and sole discretion” to terminate the transaction was revocable after the potential buyer pursued the county’s approval of a parcel split as contemplated by the agreement. The Supreme Court held that an option is valid only if there is consideration provided for the option, and the potential buyer’s efforts to obtain county approval of the parcel split “cured the initially illusory nature of the promise and thereby constituted sufficient consideration to render the option irrevocable.”

Facts

Martin A. Steiner is a real estate developer who expressed interest in purchasing and developing 10 acres of land owned by Paul Thexton. Thexton owned a total of 12.29 acres. In order to sell the 10 acres, county approval was needed for a parcel split and development permits. Thexton had previously rejected another person’s offer to buy the property for $750,000 because that offer required Thexton to obtain permits and approval for the parcel split.

The agreement between Thexton and Steiner provided that Thexton would sell Steiner the 10-acre parcel for $500,000 within three years if Steiner decided to purchase the property after he pursued permits and county approval for the parcel split at his own expense. The agreement provided that Steiner was “not obliged to do anything” and could cancel the transaction at any time at his “absolute and sole discretion.” Steiner was not obligated to make any payment to Thexton for the option rights.

After the parties entered into the agreement, Steiner and his partial assignee (collectively, “Steiner”) spent thousands of dollars pursuing county approvals. Initially, Thexton cooperated with these efforts. However, before the three-year period had passed, Thexton told Steiner he no longer wanted to sell the property. Steiner brought a lawsuit against Thexton seeking specific performance of the agreement. The trial court concluded the agreement was not enforceable against Thexton because it was not supported by consideration. The Court of Appeal affirmed the trial court’s decision.

Decision

The California Supreme Court reversed the lower court’s decision. The Supreme Court found that the sales agreement was an option to purchase property, which is a unilateral agreement in which the owner offers to hold open an offer to sell property for a fixed period of time in exchange for consideration received from the potential buyer. After the lapse of the specified time, the offer is withdrawn. But if the offer is timely accepted, an enforceable two-party contract for the sale of the land is created.

The agreement required Thexton to hold the offer open for three years. Steiner, in turn, “had the power to accept the offer by satisfying or waiving the contingencies and paying the balance of the purchase price.” However, Steiner was not obligated to do anything under the agreement.

The question before the Court was whether there was sufficient consideration so that the option was rendered irrevocable. The Court held that there was. Even though the option had not yet ripened into a purchase contract, because Steiner had neither satisfied nor waived all of the contingencies nor deposited the remaining balance of the purchase price, the option “may nonetheless be irrevocable for the negotiated period of time if sufficient bargained-for consideration is present.”

There are two requirements that must be met in order to find consideration: (1) “The promisee must confer (or agree to confer) a benefit or must suffer (or agree to suffer) prejudice;” and (2) “the benefit or prejudice ‘must actually be bargained for as the exchange for the promise.'” The question here was whether Steiner conferred or agreed to confer a benefit or suffered or agreed to suffer prejudice that was bargained for in exchange for the option to purchase the 10 acres. The Court found that as a matter of law, Steiner’s “part performance of the bargained-for promise to seek a parcel split created sufficient consideration to render the option irrevocable.”

The 12.29-acre parcel needed to be divided before Thexton could sell a portion to anyone while still retaining two acres for himself. Thexton did not want to go through the process to split the parcel. The Court found that Steiner’s efforts to split the parcel conferred a benefit on Thexton and also constituted prejudice to Steiner. These efforts and expenditures “cured the initially illusory nature of the promise and rendered the option irrevocable.”

Questions

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