It is not often when an appellate court publishes a decision that affects AREIA members. Therefore, when we receive such a ruling, it’s important for investors to be aware of the decision and how it impacts their business. In November, the Arizona Court of Appeals overturned a lower court ruling regarding option agreements. Ultimately, the Court of Appeals said that the option agreement was too vague on its terms and therefore it was not enforceable for the buyer to sue the seller for specific performance. Now, this doesn’t end the discussion, and the case will be sent back for further litigation, but there are important points to learn from the decision.

In the case of Offerman v. Granada, a tenant signed an option to buy the leased property, for a price to be set by a third party independent appraiser at the end of the 24-month lease term. The specific language at issue, provided, “At the completion of the 24-month lease, the Tenant has the option to purchase [the] property . . . for a sales price to be determined at that time by an independent appraiser acceptable to both Tenant and Landlord. (Terms and Conditions to be stipulated by both parties at such time). The tenant got his own appraiser, who set the price at $240,000. The owner refused to sell the property for $240,000 and refused to get his own appraiser. Ultimately, the tenant sued the owner for specific performance and asked the court to force the sale of the home. The trial court ruled in the tenant’s favor and ordered specific performance – in other words, the court ordered the owner to sell the home for $240,000. The Arizona Court of Appeals reversed the judgment and held that the option lacked essential terms and was thus unenforceable.

The court found that by saying the terms and conditions were to be stipulated in the future, the parties’ left the terms too vague to enforce. While the law will imply some standardized terms into an otherwise complete contract, merely stating that the terms are to be agreed upon later, without anything further, is not enough. The court noted that at trial, the tenant testified that he anticipated that an additional written purchase contract would be required to effectuate the sale. The appellate court noted that to order the specific performance, the trial court had to conduct a hearing to create the additional terms that were not in the agreement. For example, the appellate court noted that the contract did not identify a title agency, how fees were to be divided, division of taxes and association fees, lien releases and escrow fees. Further, there were no language of whether a seller’s disclosure was necessary. Based upon all of these missing terms, the court refused to order specific performance.

It is important to remember that the court did not rule on whether the parties had a contract or whether it had been breached – the appellate court merely said that the option was so vague that specific performance was unavailable. They left open the possibility that the tenant could still sue the seller for damages. It was stated, recognizing that contract terms may be “certain enough to provide the basis for the calculation of damages but not certain enough to permit the court to frame an order of specific performance.” Therefore, the investor/owner may win and get to keep the property, but they may still be liable to the tenant for financial damages.

In a footnote, the court stated that because neither party raised the issue, it was not deciding whether the tenant could have sought an injunction to force the seller to agree upon an appraiser. This is an interesting note and possible suggestion to those practicing in the area. If the tenant had sought this, and set the value of the home, it may make any claim for damages easier.

As we always say, whenever you enter into a contract, make sure the essential terms are included. To determine this, do the same analysis this appellate court did – can you read the contract and describe how the sale is to be concluded? If not, specific performance may be unavailable and damages may be the only remedy.

By Mark B. Zinman, Attorney
Williams, Zinman & Parham P.C. (Zona Law Group)