In Peak-Las Positas Partners v. Bollag, (— Cal.Rptr.3d —, Cal.App. 2 Dist., March 16, 2009), a California Court of Appeal considered whether the seller of real property who refused to extend the escrow period for the purchase of the property acted unreasonably and in bad faith. The Court of Appeal concluded that the seller acted unreasonably and in bad faith because the stated reasons for not extending the escrow period were either inconsistent with his previous actions, or were merely subjective justifications.
Peak-Las Positas Partners (“PLP”) owns, with plans to develop, a 10-acre parcel of land in Santa Barbara, California. Michael Bollag (“Bollag”) owns an adjoining 86-acre parcel located uphill from that of PLP, upon which he has a private residence. In 1999, PLP and Bollag entered into a Purchase and Sale Agreement with Joint Escrow Instructions for PLP’s purchase of 4.5 acres of Bollag’s property for $475,000. Once escrow opened on July 23, 1999, PLP paid a nonrefundable deposit of $150,000. The escrow period was for two years unless extended by the mutual consent of both parties.
PLP had difficulties with the City of Santa Barbara (“City”) for the approval of certain development requirements because the property was not yet incorporated into the City. Before the City would annex the property, the City required that PLP redesign its project. As a result, the initial close of escrow was set to expire before PLP could get City approval. Consequently, in 2001, PLP and Bollag entered into an amendment to the purchase agreement extending escrow for an additional five years. The amendment required that PLP pay an additional $315,000 towards the purchase price, and provided that any future escrow extensions be “by mutual consent of the Buyer and Seller, which mutual consent shall not be unreasonably withheld or delayed.”
The City required that PLP make more project changes, which cost PLP close to $5 million in funds. Even after PLP’s additional efforts, on March 8, 2006, the City voted against approval of the project. While PLP continued to meet with the City to make the City’s desired changes, PLP requested another two-year escrow extension from Bollag. Bollag, however, refused to consent to the escrow extension. Although eventually the City approved PLP’s plan, Bollag had refused to extend escrow.
PLP sued Bollag asking the trial court to require Bollag to execute the second escrow extension. At trial, Bollag argued that he acted reasonably in refusing to grant the escrow extension because it was unclear whether the project would ever be approved, and he was concerned about landslide liability. The trial court disagreed with Bollag and found that he had acted unreasonably in not consenting to the escrow extension and that he breached the purchase agreement. The trial court extended the escrow agreement to July 23, 2008.
The Court of Appeal began with a discussion of the legal standard to be applied to Bollag’s conduct for his refusal to extend the escrow period. The court explained that Bollag’s actions were to be reviewed for good faith and objective reasonableness. In other words, Bollag’s decision not to extend the escrow period could not be based on “personal taste, convenience, or sensibility,” but rather must be based on an objectively commercially reasonable standard.
The Court of Appeal then looked at Bollag’s conduct in light of the good faith and objective reasonability standard. The court noted that Bollag told PLP that he did not care how long the project took to complete, but still refused to extend the escrow. Bollag’s actions were inconsistent. Also, the court pointed out that if Bollag’s actions were found to be reasonable, PLP would lose $465,000, or 98% of the purchase price of the property, and the $5 million in project costs. On the other hand, Bollag would keep the $465,000 and the 4.5 acre parcel. The court found such a result to be abhorrent.
Bollag argued that he reasonably decided not to extend the escrow period because of concerns over liability from landslides. The court pointed out, however, that Bollag was fully aware of possible landslide liability when the first amendment to the purchase agreement was signed, and that substantial landslide mitigation measure were proposed.
Next, Bollag argued that his decision not to extend the escrow period was in good faith and objectively reasonable because PLP delayed the process of getting City approval. The court disagreed and said that PLP diligently responded to the City’s requirements.
Bollag also argued that his actions were in good faith and objectively reasonable because the open escrow clouded the title to his property making financing options difficult. The court rejected this argument because during the time of the open escrow, Bollag was able to obtain two $5 million loans and a $5.5 million revolving line of credit on his property.
Further, Bollag argued that the security and privacy of his personal residence was compromised by the project. To the contrary, the court found that the completed project would actually increase security and privacy for Bollag.
Bollag also argued that PLP breached the purchase agreement by: (1) failing to place a fence across the project line, (2) intending to remove, and building too close to, eucalyptus trees on Bollag’s property, and (3) failing to advise Bollag of the project’s status. The court rejected all of these arguments. First, the placement of a fence between PLP’s property and Bollag’s 4.5 acres would frustrate the development of the project. Second, there was credible evidence that the trees on Bollag’s property would remain with the agreed setback from the project. Third, PLP did continue to advise Bollag of the project’s status.
In conclusion, the Court of Appeal found that Bollag’s actions were in bad faith and objectively unreasonable in light of the circumstances surrounding the project. Furthermore, the court found that the trial court correctly ordered the extension of the escrow to July 23, 2008.
If you have any questions concerning the content of this Legal Alert, please contact the following from our office, or the attorney with whom you normally consult.