The California Supreme Court has ruled that a real property purchase agreement that contains a typical "free look" provision may, in fact, be an option contract. Moreover, if the buyer has not given the seller legal consideration for the option, the seller may be able to revoke the contract, to the consternation of the buyer. The ruling could have implications for similar agreements across the country.

In Steiner v. Thexton (California Supreme Court Case No. S164928), decided March 18, 2010, the court overturned an appellate court decision that had allowed a seller to revoke a purchase contract where the buyer had the "absolute and sole discretion" to terminate the contract, even though the buyer had expended considerable sums in obtaining approvals for a parcel split and development permits.

The Supreme Court agreed that the "Real Estate Purchase Contract" was merely an option because the "buyer was not obligated to do anything" during the three-year investigation period. However, it also found that in this case the option had become "irrevocable" by the seller because the buyer had taken substantial steps toward obtaining the parcel split and incurred significant expenses in doing so.

While the lower court was overruled in this case, a purchase agreement that gives the buyer the right to terminate for any reason during a typical "free look" period may be unenforceable if the seller decides to withdraw from the transaction. A buyer can protect itself by ensuring that adequate legal consideration is given, such as a separate cash payment or certain affirmative obligations of the buyer. Otherwise, a buyer may have only an unenforceable option agreement.

For more information, contact Gary York of Ballard Spahr's Los Angeles office at 424.204.4317 or 

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