A recent California Appellate Court decision clarifies the legal principles governing a situation where, due to a lack of consideration paid by a buyer of real property, a purchase contract is an unenforceable option. In Steiner v. Thexton, a buyer and a seller entered into an agreement under which the buyer would buy the property for a certain price if certain approvals and permits were obtained but which the buyer was not obligated to pursue. The seller refused to close escrow and, when the buyer sued for specific performance, the Court held that the agreement was an unenforceable option which was not supported by any consideration. Hence, there was no binding “contract.”
Though the facts of this case may or may not be unusual, parties to real estate contracts, including brokers who look for compensation upon a successful close, should be attentive to the risks involved in any wholly “free look” agreement. Though it can be argued that most inspection contingencies have an implied condition that the buyer will expend time and effort inspecting the property, and will in good faith exercise his or her rights, if the wording of a contract does not specifically call for the buyer to perform such an inspection, and provides that the buyer can back out at any time in his or her absolute discretion, the enforceability of the agreement may be called into question. Legal counsel should be consulted for proper wording but, conceptually, it is always preferable to have the buyer undertake to part with at least some consideration at least in the form of a requirement to attempt to remove contingencies in good faith.