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Quote of the Day - I wish to be cremated. One tenth of my ashes shall be given to my agent, as written in our contract. - Groucho Marx
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What Kind Of An Agreement Does It Take To Buy Real Property?

How about this:  a written memorandum that sets out a short description of the property, the price ($16,750.00 listed, but was missing digits and meant by both parties to be $16,750,000.00).  The memorandum included a formula to determine the price, and was signed by the buyer and then followed by a letter confirming the terms, signed by both the seller and the buyer, together with a good-faith deposit.   

Don't get fooled by the missing digits; the parties both agreed the figure was meant to be $16,750,000.00.  Still think these writings were sufficient?  Here's a clue:  to create a legal, binding agreement requiring one party to sell property to another, you generally must have:  (1) a description of the property; (2) a description of the price; (3) a written document containing those terms; and, (4) the signatures of both parties.  So, except for the missing digits, it sounds simple enough, right? 

Nope.  Not even close.

It wasn't the missing digits that caused the problem.  Both parties agreed they meant $16,750,000.00.  It was the formula that caused the misunderstanding between the parties. 

The seller told the buyer the numbers that were in his rent rolls, who generated the final $16.750M price based on the formula.  The parties wrote down the terms of the deal and signed it.  The seller then sent the actual rent rolls to the buyer, who applied them to the formula in the written documents, and came up with a purchase price of $14,404,841.00, just over two million dollars short of the figure written in their agreement.

Needless to say, the seller wasn't happy with the shortfall, and refused to sell.  The buyer sued, claiming the agreement was sufficient to require the seller to sell the property at the $14 million figure, given the formula in the agreement.  The seller, on the other hand, claimed the purchase price was the one closer to $17 million.

This case isn't an easy one.  In the trial court, the sellers won, and the contract was determined to be insufficient to require the sale.  The court admitted evidence of the parties' explanation of the terms of the sale, and determined that the parties may have meant to apply the formula to the rent rolls to determine the final price or may have meant to actually set a firm purchase price in the document, and the formula was surplusage, which created a contract that couldn't be enforced because it was too vague.

In the appellate court, however, the buyer won because that court believed that the terms were sufficient, and could be interpreted by the testimony of the parties.

The Supreme Court disagreed, and ruled instead that while extrinsic evidence like the testimony of the parties is admissible to determine what the parties meant to do in their contract, any evidence outside the actual contract could not be used to contradict the terms inside the contract.  In this case, the import of the California Supreme Court's ruling meant that the price term, an essential element of the contract, was so ambiguous that no court could interpret what the parties were trying to do.

The moral of the story?  Hire someone who went to law school to draft complicated contracts, even if you don't think they're complicated. 

Printer friendly page Permalink Email to a friend Posted by J. Craig Williams on Saturday, March 03, 2007 at 10:02 Comments Closed (0) |
 
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