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March 2010

Real Estate Purchase Options in California: Steiner v. Thexton

By Blog, Real Estate Law

As noted in my last blog post, the California Supreme Court just reversed the appellate court decision in the case of Steiner v. Thexton, Ca. Sup. Ct., 03-18-2010, 10
C.D.O.S. 3391
.  This is good news for developers and other buyers of real property in California, although there are still some traps that will catch the unwary.

Real property purchase agreements in California are often drafted with broad due diligence or feasibility provisions that allow the buyer to terminate the agreement, and get the deposit back, for any reason in the buyer’s sole discretion.  These “free look” provisions are valuable to prevent disputes over whether a buyer is entitled to terminate the agreement.  The buyer simply has the right to terminate for any reason or no reason, as long as notice of termination is given within a specified period.

As made clear in the Steiner case, under California law such agreements are not purchase agreements at all, despite what they are often called.  Instead, these are actually option agreements, with the seller obligated to hold open its offer to sell on the stated terms of the agreement, and the buyer holding the power to accept or reject the offer.  And for an option agreement to be irrevocable, so that the seller cannot retract his offer, the buyer needs to have given the seller legal consideration for the option to purchase the property.  If there is no option consideration given by the buyer, then the option can be revoked by the seller at any time until it is unconditionally accepted by the buyer.  This is where the court of appeals and the Supreme Court parted ways in the Steiner case.  Even though Steiner had expended substantial sums of money in reliance upon his “contract” to buy the property, the appellate court held that Steiner had given no consideration for his option, and so therefore the seller, Thexton, could unilaterally terminate the agreement.  The Supreme Court disagreed, and held that Steiner’s actions in seeking a parcel split that was required before the property could be sold was sufficient to render his option irrevocable, particularly since that was an important component of the deal to Thexton.

The Supreme Court’s decision, while good for developers and other buyers, raises many issues that will need to be resolved in subsequent cases.  In the meantime, however, buyers should be sure that their purchase agreements are drafted to avoid inadvertently creating a revocable option. To do so, buyers need to either (i) pay actual consideration for the option, or (ii) undertake a clear affirmative obligation to do something that confers a benefit on the seller or imposes a burden on the buyer.  Since one of the underlying advantages to a broad due diligence clause is avoiding disputes, buyers may want to avoid committing to affirmative legal obligations.  Our advice is to use a clause similar to the following, which provides for a portion of the deposit to be retained by the seller if the buyer decides not to go forward with the transaction:

“In the event the sale of the Property as contemplated hereunder is consummated, the Deposit shall be credited towards the Purchase Price.  In the event the sale of the Property is not consummated because of the failure of any condition or any other reason other than a default under this Agreement on the part of Buyer, the Deposit (less the amount of $__________ (the “Contract Consideration”)) shall be returned to Buyer and, notwithstanding anything to the contrary contained in this Agreement, the Contract Consideration shall be paid to and retained by Seller for and in consideration of Seller’s entering into this Agreement.  Buyer and Seller agree that the Contract Consideration together with the mutual covenants and agreements herein set forth are adequate to prevent this agreement from constituting a revocable option to purchase the Property.”

The amount of the "Contract Consideration" need not be large, but should be more than nominal.

Thomas B. Jacob, Real Estate Group

Independent Contractor Audits: Six Required Steps Before Lawsuit for Refund

By Blog, Business Law, Employment Law

n California, the Employment Development Department (“EDD”)investigates misclassification of employees and, if misclassification is found, can issue an assessment against the offending business to recover tax related withholding the employer should have paid but didn’t (including unemployment and state disability insurance payments, employment training taxes, and personal income tax) and penalties. Now, a California Court of Appeal has emphatically warned employers about the administrative steps they must follow if they intend to challenge the EDD assessment in court and seek a refund of the tax related payments.

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Shareholder Disputes – Part I: Voluntary Dissolution of a California Corporation

By Blog, Business Law

Disputes among shareholders are common. While there may be shared objectives at the time a business incorporates, changes in the shareholders’ respective long and short term goals can change over time leading to disagreements. When this occurs, if the parties are not able to negotiate a satisfactory resolution, California corporations’ law provides certain legal mechanisms allowing or forcing the corporation to dissolve and liquidate. Using these mechanisms can involve a number of strategic implications. This is the first in a series of blogs that will summarize the general principles of voluntary and involuntary dissolution and statutory buy-out procedures.

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Is a Letter of Intent Really Necessary?

By Blog, Business Law

Is a letter of intent (aka memorandum of understanding, term sheet, summary of principal terms, or heads of agreement – all referred to as a “LOI”) for a sale or acquisition of a business, or other M&A transaction, worth the paper it’s written on? Why spend time and money on negotiating and drafting a LOI that is, for the most part non-binding?

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California Supreme Court Overturns Steiner v. Thexton

By Blog, Real Estate Law

In Steiner v. Thexton (2008) 163 Cal. App 4th 359, the California Court of Appeal held that a document entitled “Real Estate Purchase Contract” was not in fact an agreement for the purchase and sale of real property.  Instead, the court held it was an option agreement that was not enforceable by the buyer.  Since the “buyer” could terminate the agreement at any time prior to closing, the court felt that the option was not supported by the required consideration.  The seller was thus allowed to terminate the agreement after the buyer had expended time and money
This ruling caused much concern in the California development community, since many California purchase agreements drafted by developers provide for an unrestricted right of the developer to terminate the agreement if he or she determines that development is not feasible.
Today, the California Supreme Court overturned the Court of Appeals, in Steiner v. Thexton, Ca. Sup. Ct., 03-18-2010, 10 C.D.O.S. 3391.  The Supreme Court held that while the agreement in question was indeed an option, it was enforceable by the buyer because the buyer’s actions were sufficient to provide the necessary legal consideration for a binding contract.
We will post an analysis of the new decision shortly.
Thomas B. Jacob, Real Estate Group

Peer2Peer Software, Confidential Information and Employment Policies

By Blog, Business Law, Employment Law, Intellectual Property Law

Employers should be alert to yet another web-based activity that should be addressed in its technology policies and practices.
In January of this year the Federal Trade Commission sent a letter to 100 companies warning each of them that “sensitive personal information from or about your customers and/or employees has been shared from your computer network…to a peer-to-peer file sharing (P2P) network.”  Then, the FTC described specifically the files that were available to all users of that P2P network.  This was not the first time the FTC has raised an alarm about the potential damage that can occur if P2P network software is installed on a company’s server.  But what does this mean to a business in practical terms?  It could mean a breach of security in a businesses’ network that results in the loss of private information or its trade secrets or other proprietary, confidential information, AND the violation of state and federal laws prohibiting the disclosure of private information.
President Obama was unknowingly involved in a recent example of the potential problem.  It was widely reported last year that P2P software may have been used to obtain all of the blueprints and avionic specifications for President Obama’s helicopter, Marine One.  One commentator has described P2P networks as a “conduit for hackers to enter a network or computer, access personal and confidential information, as well as deploy viruses or worms.”
P2P technology is for group sharing, most commonly used by millions to share music, video and documents through sharing programs such as Bit Torrent.  Each user of the software (usually free and downloaded to a computer) can obtain information shared by others.  When the settings are configured incorrectly, however, other data on a user’s computer may become available to the other users of the P2P software.  Anyone can join these networks, and “millions of computers could be connected at one time,” as the FTC has warned in its publication Peer-To-Peer File Sharing: A Guide for Business.
The potential risks associated with P2P software mean that employers should review their policies regarding their employees’ use of and access to the company’s computers and network, and review their internal security systems.  An employer’s policy decision will be influenced by its culture, but the importance of protecting against disclosure of the company’s proprietary information and private information relating to its employees and customers must be given great weight.  The FTC’s publications discuss various methods to control the installation and use of P2P software and to protect confidential information (see also, P2P File-Sharing: Evaluate the Risks).   But whatever policy decision is made should be supported by policies and procedures that unambiguously inform the employees of the limitations and prohibitions.  Those policies should apply not only to the employee’s use of his or her computer and access to the company’s servers and network from the office location, but also to the employee’s remote access to the system.  In addition, administrative security controls should be applied to monitor the network, consistent with the policy.
Stephen C. Gerrish, Employment Group

Thoits Law Blog – Privacy Policy

By Blog, Uncategorized

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Thoits Law Blog – Terms of Use

By Blog, Uncategorized

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