Do You Know the Terms of Your Contract?

April 28, 2013

When entering any contract it is important know the terms of the contracts. When dealing with real estate contracts, it also important to make sure that the property is capable of being used for your intended purposes. A seller is not responsible if you ultimately cannot use the space for your intended purposes as long as he or she did not lie to you or misrepresent the property in some way.

Take for example the case of Hong v. Somerset Associates. In this case, Thomas Hong and his partners, (Buyers) sued Somerset Associates (Sellers) for fraud and an unreasonable liquidation clause. The Buyers intended to purchase the property as a commercial investment and rent out residential units. It was learned after the paperwork was signed that the Sellers had withheld information regarding the possibility of a rent control ordinance being enacted in the area. The Buyers wanted the contract rescinded, which cancel the contract as if it were never created. This would also cancel the liquidation clause which requires any party which breaches the contract to pay the other person twenty five thousand dollars in damages.

In the first part of the case the court decided that there was no fraud. While this is information that could effect the desire to purchase the building, it does not make renting out residential units impossible. Therefore, the sale of the building for the intended purpose was still proper and the Buyers could still use it. Ultimately, the court found that the Seller did not actually do anything fraudulent.

In the second part of the case the Buyers focused on the liquidation clause, claiming that it was unreasonable and therefore should be invalidated. Historically in California, liquidation clauses were disliked and therefore severely limited when tested in court. However, California laws have been updated with basic requirements for liquidation clauses in different types of contracts. Therefore, at the time of this case, as long as the clause met the statutory requirements it would most likely stand. The law required things such having the liquidation clause at a certain size so that it was noticeable within a contract and requiring all parties or their representative to initial by the clause as proof that they read it. The purpose of the additional law was to make sure all parties are aware of the clause and its consequences. In this case the contract met all statutory requirements, therefore without a valid reason to break the contract, the Buyer was required to pay the Seller damages for choosing the break the contract.

Real estate contracts can be especially difficult to navigate because there is always a possibility, however small, that changes in the area could effect your business. Market changes will always effect your business, whether it is worth picking up and moving your business is really up to you. An attorney can review your contract with you and help you choose your best options. An attorney can also be a great resource before signing a contract to help you decide if the terms of your agreement. If you are the Sacramento area and in need of a real estate attorney, please contact our office.