Patel v. Liebermensch (Aug. 21, 2007, D048582 [4th Dist, Div. 2]) __ Cal.App.4th __;

By William M. Flieshhacker

In this case, the Fourth District Court of Appeal of California addressed the issue of the enforceability of an option contract that did not include essential terms regarding the time and manner of payment.  The court held that the evidence showed that the parties continued to negotiate these terms (and terms related to the amount of the deposit, the escrow period, and the payment of escrow expenses) following the tenant’s notice that he was exercising the option.  The court found that these key terms could not be added by the trial court by implication, thus rendering the option contract unenforceable.

The case concerns a condominium unit owned by the defendant, Morris Liebermensch, which he had rented to the plaintiff, Sunil Patel.  In coming to terms on a rental agreement, the parties had agreed that the plaintiff would have an option to purchase the property at a specified price.  After paying rent for a year, the plaintiff gave notice that he was exercising his option to purchase the property.  In response, the defendant sent the plaintiff a draft real estate purchase agreement, specifying that the sale would be “as is,” that the plaintiff would need to make a 10% deposit, and requiring an escrow period of 90 to 120 days to allow for a 1031 tax exchange.  Plaintiff responded to this draft agreement with a new draft that changed some of these terms relating to the deposit, length of escrow, and payment of escrow expenses.  This draft was not accepted, and the negotiations stopped.  Instead, the plaintiff filed the action seeking specific performance of the option contract.

Following a trial, the matter was submitted to the jury to resolve the factual issue of (1) whether the parties had entered into a option contract giving plaintiff the right to purchase the property; and (2) whether the terms of the option contract were sufficiently clear to enable the parties to carry out the objectives of the contract.  The jury ruled in favor of the plaintiff on both questions, and the trial court entered a judgment ordering specific performance of the option contract for the stated price.  The trial court’s judgment required that the defendants deliver a deed transferring marketable title, and that the transaction be completed no later than 60 days from the date of the mailing of the notice of entry of the judgment.

The Court of Appeal reversed the trial court judgment.  The court’s analysis focused on the legal requirements and unique nature of an option contract.  In order to be enforceable, an option contract must contain all the material contract terms contained in the ultimate contract of sale.  The essential terms include (1) the parties, (2) the terms of the option; (3) the identity of property; and (4) the price and method of payment.  The court stated that if all of these terms are not specified, and left for future negotiation, the option is not enforceable because there would not be a complete, unambiguous contract between the parties at the time the option is exercised.

There was no dispute that the option contract sufficiently identified the parties, the property, and the price.  Nor was there any dispute that the option contract did not include terms related to time and manner of payment, as the parties continued to negotiate these terms, after the plaintiff exercised the option.  Thus, according to the court, the issue boiled down to whether the trial court could add these essential terms by implication, as it had done in fashioning the judgment requiring a cash sale and a 60?day escrow.

The court concluded that the trial court had erred in that the record did not support a “conclusion that time and manner of payment were only standard terms that could have been implied in the contract, because the parties continually expressed their own economic conditions to each other and did not concede or compromise on them.”  The evidence supplied by both parties showed that both the plaintiff and defendant viewed these terms as essential and material to the deal, and that more then the purchase price and identity of the property were essential terms.

Thus, the court concluded that “the trial court did not have an adequate basis to conclude that a binding purchase contract had previously been reached on all material terms, such that only a statement that the option was being exercised was enough to create a bilateral contract.”. William Fleishhacker is an attorney in the Real Estate, Land Use and Environmental Practice Group in the firm’s San Francisco office.

For more information please contact William Fleishhacker.  William Fleishhacker is an attorney in the Real Estate, Land Use and Environmental Practice Group in Sheppard Mullin’s San Francisco office.