The California Court of Appeal has just published a decision holding a seller liable for acting unreasonably in refusing to extend escrow in a commercial real estate sale.  This case has important implications for brokers and their clients in the common situation where the buyer seeks an escrow extension, because the court here extended escrow against the seller’s wishes, and ordered the seller to pay the buyer’s attorney fees incurred in litigation.

In Peak-Las Positas Partners v. Bollag(March 16, 2009, 2d Civil No. B2105091),   The transaction involved 4.5 acres of land in Santa Barbara, which the buyer wished develop along with an adjoining parcel.  The Purchase and Sale Agreement specified that escrow would close upon approval of a lot line adjustment and no later “than two years after the Opening of Escrow, unless extended by mutual consent of Buyer and Seller.”  The lot line adjustment was delayed repeatedly as the City of Santa Barbara first required an annexation, then multiple project redesigns.  In 2001, the buyer extended the escrow to five years, in an amendment that called for a non-refundable deposit equal to 98% of the purchase price.  The amendment provided for future escrow extensions “by mutual consent of Buyer and Seller, which mutual consent shall not be unreasonably withheld or delayed.”  The buyer proceeded to spend almost $5 million in project costs, but needed an additional escrow extension in order to obtain the City’s approval.  The seller refused to give any further extensions, and thus kept his property and the $465,000 deposit.

The important lesson for brokers and their clients is that the court carefully examined the seller’s proffered reasons for refusing the extension, found them to be unreasonable, and on that basis extended the escrow over the seller’s objection.  (The seller claimed he was concerned about landslide liability, cloud on title, and privacy, but the court found these to be after-the fact rationalizations because the seller wanted to keep the land and the deposit.)  While this particular Purchase and Sale Agreement expressly stated that consent could only be withheld on reasonable grounds, the court’s decision reaches further, and implies that reasonableness may be required for any refusal to extend escrow, at least if the contract does not expressly state that consent may be withheld for any reason or no reason at all.  Typically all contract terms imply an obligation of good faith and fair dealing, and here the court extended that to requests for escrow extensions.

The pre-contract lesson to be learned here is that a seller who wants the right to refuse an escrow extension for any reason at all should insist on clear contract language that the extension may be refused in the seller’s sole and unfettered discretion, for any reason or no reason at all.  Without such language, any refusal will be subject to second-guessing by the court as to whether the rejection was reasonable under the circumstances.  Conversely, the buyer will likely want a contract term that states that consent may not be withheld unreasonably.  While such a condition will likely be implied into the contract (in the absence of “sole discretion” or similar language discussed above), the buyer will be better protected if the reasonableness standard is explicit.

The post-contract lesson to be learned here is that, assuming there is no language stating that consent may be withheld in the seller’s sole discretion, a seller should tread carefully in refusing contract extensions.  Sellers who refuse to extend escrow must be confident that they have reasonable grounds for doing so.  In case of doubt, sellers are well advised to consult with counsel.