Steiner v. Thexton: Partial Performance Makes Option Irrevocable

California’s highest court has considered a developer’s lawsuit seeking specific performance of an option contract.

In 2003, Martin Steiner (“Developer”) sought to acquire 10 acres of a 12.29-acre lot owned by Paul Thexton (“Owner”) for the purpose of developing several residential properties. The Owner had previously turned down offers of $750,000 for the land because those offers had required the Owner to obtain the necessary approvals and permits to subdivide the land.

The Owner and Developer entered into an agreement where the Developer would pay the Owner $500,000 for the land if the Developer decided to purchase the land after obtaining the necessary permissions to subdivide the land. The agreement had a three-year term and imposed no obligations upon the Developer, allowing him to cancel the agreement at any time.

The Developer began the process of obtaining the necessary approvals, allegedly spending $60,000 during the approval process. The Owner signed the necessary documents, but when the Developer had created a tentative development plan, the Owner attempted to cancel the agreement. The Developer proceeded with his efforts and apparently received approval for the development plan.

The Developer filed a lawsuit seeking specific performance of the contract with the Owner. The Owner argued that the contract was an option contract not supported by consideration and therefore was unenforceable. Following a bench trial, the trial court judge ruled in favor of the Owner. The court found that the agreement was unenforceable because the Developer could cancel the agreement at any time and the contract conferred no benefits upon the Owner; therefore the contract lacked sufficient consideration. The appellate court affirmed, and the Developer appealed.

The Supreme Court of California reversed the lower courts and ruled that the Developer’s partial performance of the contract had made the option contract irrevocable by the Owner. First, the court looked at the Developer’s argument that the contract was not an option contract. An option contract is an agreement that binds one party to specific terms but does not impose an obligation on the other party. In a real estate option contract, the seller agrees to hold the property open for a fixed price for a specified time in return for a certain price, which the other party can accept and create a binding contract.

Looking at this contract, the court determined that the agreement was an option contract. The agreement gave the Developer absolute discretion to decide whether to proceed with the agreement while obligating the Owner to hold the offer open for three years. Since those are the elements of an option contract, the court agreed with the lower courts that the agreement between the parties constituted an option contract.

Next, the court considered whether the Developer had contributed sufficient consideration to make the option irrevocable. An option can become irrevocable for the agreed upon period of time (here, three years) if there is sufficient consideration. “Consideration” is a promise by one party to confer a benefit on the other party or suffer some sort of prejudice. In order to be valid, a contract must be supported by consideration from both parties. If the option contract is not supported by consideration, then it is unenforceable.

The court ruled that there was sufficient consideration from the Developer to require the Owner to keep the purchase option open. Initially, the Developer had not offered any consideration in support of the option contract, as the agreement imposed no obligations upon him, and so the contract had been unenforceable. However, the Developer undertook a substantial step towards obtaining approval for the division of the Owner’s land, including spending significant amounts of money. These expenditures conferred a benefit upon the Owner and constituted prejudice by the Developer.

The Developer’s partial performance of the option contract converted the originally non-binding promise by the Owner to hold the offer open for three years into an irrevocable offer. The Developer’s actions were the bargained-for benefit sought by the Owner when the parties entered into the contract and so the owner had received the benefit that he had sought. Thus, the court reversed the lower courts and sent the case back to the lower courts for further proceedings.

Steiner v. Thexton, 226 P.3d 359 (Cal. 2010).

Editor’s Note: The California Association of REALTORS® submitted an amicus curiae brief in support of the Developer.

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