Real Estate Law Alert
Thomas B. Jacob October, 2008
Your Real Estate Purchase Contract or Option May Be Void
Alert: If you are party to a real estate purchase contract, or an option to purchase, involving property that was not subdivided as a legal parcel when the contract was signed, the contract may be unenforceable and void.
Developers and other purchasers of real property often enter into purchase options or contingent purchase agreements for property that has not yet been legally subdivided under the California Subdivision Map Act (“Map Act”). Many of these buyers now find themselves unable or unwilling to close on these transactions at contract prices that no longer make any sense in today’s market. Based on an important 2007 case that I alerted some of you to last year, these buyers may have an alternative that they and their sellers are not aware of. As the real estate slowdown continues, and credit availability becomes tighter and tighter, we thought it would be good to revisit this case since some of you may be a party to such an agreement.
case is Black Hills Investments., Inc. v. Albertson’s, Inc. (2007) 146
Many, perhaps a
majority, of purchase contracts for undivided property will fail to meet the
hyper-technical requirements of the
1. Buyers may be in a position, even if their contingency periods have expired and their earnest money has gone hard, to refuse to close and to get their “non-refundable” deposits back. Because these agreements are held to be void, which effectively means that they never legally existed, it does not matter that the agreement may provide for the deposit to be non-refundable. In this time of tight credit and unsure real estate markets this could be a welcome exit strategy for some buyers. Sellers, on the other hand, need to be aware of the situation and seek ways to amend their agreements to bring them into compliance with Map Act requirements.
2. It is not enough to validate these agreements if only one party’s obligation to close under the agreement is conditioned upon compliance with the Map Act. There needs to be a non-waivable provision that prohibits the close of escrow unless the Map Act requirements have been satisfied. The exact language of the contract is critical, since small differences in wording can result in drastically different outcomes for the parties.
3. Often, a developer uses an option to
tie up property while he or she seeks entitlements, including subdivision
approval. While an option is not a
binding purchase agreement until the option is exercised, it is an agreement
that is binding on the seller to sell the property if the option is exercised
by the buyer. If neither the exercise of
the option, nor the obligation to close under the resulting purchase agreement,
is expressly conditioned upon legal creation of the parcel under the Map Act,
this would seem to create the same situation as presented in the
4. The Map Act applies to any sale, lease or finance of real property. If property being ground leased was not a legally subdivided parcel at the time the ground lease was executed, the lease may be void. It is unclear whether the subsequent construction of a building on the leased property will make any difference in the analysis. And any loan commitment made before the legal creation of the parcel anticipated to serve as security for the loan may also be void.
The information contained in this Real Estate Law Alert is general in nature, and does not constitute legal advice or create an attorney-client relationship. For specific questions or additional information regarding this topic, please contact:
Thomas B. Jacob
Thoits Law, A Professional Corporation
400 Main Street, Suite 250 •
Telephone: (650) 327-4200 • Facsimile (650 325-5572 • www.thoits.com