Real Estate & Land Use Newsletter: Entitlement Contingency in Purchase Contract Ruled to Be Unenforceable Option


In May 2008 the California Court of Appeal issued a decision with potentially draconian consequences in Steiner v. Thexton, 2008 WL 2191300 (Cal. App. 3d Dist.). The Court of Appeal held that a real estate purchase contract containing a contingency allowing the buyer the absolute and sole discretion to terminate the contract if the buyer were unable to obtain entitlements for the development of the subject property was ?really an attempt to create an option agreement,? which failed for lack of consideration. When Thexton, the seller, informed Steiner, the buyer, that he no longer wanted to sell the property, Steiner had already made a $1,000 deposit into escrow and completed 75%- 90% of the work needed for his desired entitlements. Nonetheless, the Court of Appeal ruled that Thexton had the right to terminate the contract unilaterally because, as ?an option not supported by any consideration,? it was unenforceable against the Seller. As to the $1,000 deposit in escrow, the Court of Appeal found that it did not constitute consideration because it was applicable against the purchase price if Steiner elected to proceed with the purchase. Since the attempt to create an option failed due to lack of consideration, the ?contract? was, according to the Court of Appeal, ?nothing more than a continuing offer to sell that could be revoked by Thexton at any time.?

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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