In yet another head-scratching court of appeal ruling, investors were given a shocking and sobering reminder that common sense has nothing to do with the law. The court ruled that despite a clear, unambiguous provision in a written purchase agreement between two “very sophisticated businessmen, especially in real estate”, stating that a $620,000 deposit is “nonrefundable”, that deposit is refundable. In other words, the court ruled a written agreement should have the exact opposite meaning from that which both parties intended when they signed on the dotted line.
Courts repeatedly remind litigants of two well-established public policies: (1) they want their rulings to promote predictability in contracts in commercial transactions, and (2) they are loathe to re-write contracts. Yet, this particular ruling seems to fly in the face of both of those policies.
I could give you a detailed statement of facts and explain to you the court’s reasoning in reversing the lower court’s ruling on this issue. However, those details would probably just further confuse non-lawyers (if you want to read the entire case, click the link at the end of this article).
Perhaps the most important lessons to take away from this ruling are:
1. No matter how “sophisticated” an investor you think you are, you ALWAYS, ALWAYS, ALWAYS must use a lawyer before you sign any document involving real estate.
2. In this particular situation, had the parties used a liquidated damages clause or an option to purchase instead of drafting their own “nonrefundability” clause, it appears the court would have ruled differently. So, if you’re a seller, next time you want to make sure a buyer’s deposit is nonrefundable (after an agreed date), it may be better to use a liquidated damages clause or an option to purchase.
3. It’s not enough to use just any lawyer. You must strive to find a lawyer who stays on top of new court decisions affecting their practice area. How can you tell? One way is if that lawyer sends out periodic educational updates, like this, on important new court rulings.
Our office routinely assists our clients in negotiating and documenting purchase and sale agreements. If you need assistance in this area, please do not hesitate to call Jeff Lerman at 415.454.0455, x234 or e-mail him at [email protected]. If you are a broker, please forward this to your clients. They need this information and will appreciate it.