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Specific Performance of an Option Contract to Purchase Real Property is Barred Absent Agreement on All Material Terms

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By:  Richard H. Herold

On November 14, 2017, the Court of Appeals (Division 1), in Offerman v. Granada, LLC, 2017 WL 5352664, reversed a trial court order directing specific performance of an alleged option to purchase real property, holding that the alleged option was too indefinite to be specifically performed because the parties did not agree to all of the material terms of the option.

Tenant-Purchaser Offerman executed a two-year lease with Landlord-Seller Granada, which granted Offerman “the option to purchase [the] property…for a sales price to be determined at that time by an independent appraiser acceptable to both Tenant and Landlord. (Terms and Conditions to be stipulated by both parties at such time).” (emphasis added).  Offerman timely advised Granada he intended to exercise the option, asked Granada to name an appraiser, and, when Granada did not respond, Offerman tendered a $240,000 appraisal to exercise the option.  Granada did not retain an appraiser but instead simply demanded $350,000 to close the sale.  After a bench trial, the Court determined that Offerman was entitled to specific performance, and, as the parties had not agreed to certain terms, held a second evidentiary hearing to resolve the form of judgment, therein naming a title agency to handle the escrow, setting a closing date, allocating the transaction fees between the parties, and ordering Granada to pay for the property inspection.

The Court of Appeals reversed the trial court as the parties had not agreed to all of the material terms, noting the following deficiencies:  (1) as to pricing, the selected appraiser had to be “acceptable” to both parties, yet there was no agreed mechanism for resolving the parties’ resulting impasse; and (2) as to terms, the parties “did not establish a means to determine the many other remaining undefined terms (for example, the option was “silent as to the timing of payment or closing, the terms of payment (earnest money, down payment, financing, and allocation of closing costs), condition of title upon conveyance, method of conveyance, and whether escrow would be handled by a title agency.”  In short, because the option specifically deferred the establishment of its “Terms and Conditions” to the end of the lease term, that rendered it unenforceable by specific performance as a mere agreement to agree at “the completion of the 24-month lease.”

The Court of Appeals thus concluded that the trial court lacked authority to “flesh out an option agreement that lack[ed] certainty,” emphasizing that clearly defined, material terms are “even more critical when an option is concerned,” and remanding the case for further proceedings.