When is Final Really Final?

First National Mortgage Company v. Federal Realty Investment Trust

By Randy Sullivan

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When real estate negotiations turn hot, offers and counter-offers move quickly, often with more focus on the terms of the transactions than the legal niceties. That can be an expensive mistake, as one developer found recently when a ‘Final Proposal’ morphed into a binding deal.

This case focused on the question of whether the parties have a binding real estate purchase agreement. This issue arises regardless of whether the real estate market is up or down. Here the case arose because of the recent downturn in the real estate market. Specifically, the issue was whether a document titled “Final Proposal” bound the parties, or whether it was merely an agreement to agree.

The breach of contract action concerned commercial property known as Santana Row in San Jose. The alleged contract was reached between a developer (the buyer) and a mortgage company (the seller). The alleged agreement was a single page, nine-paragraph document. The document labeled Final Proposal identified the monthly rent the buyer would occupy the land under a ground lease. It also identified the amount of the annual yearly increases in rent. Since there was a current tenant, the buyer was to compensate the seller for having to buy out that tenant. The Final Proposal also permitted the seller to exercise a call option that would require the buyer to purchase the property at any time within the next 10 years.

The parties’ execution of the Final Proposal was preceded by offers, and counter-offers. Similarly, after the execution of the Final Proposal, the parties continued to negotiate in order to arrive at a more formal agreement. The negotiations also involved an outright sale of the property. After the seller terminated the lease with the pre-existing tenant, they demanded reimbursement from the buyer. The buyer refused and stated that a number of significant issues were outstanding and that they did not yet have a binding agreement in place. The seller prevailed at the trial and was awarded $15.9 million in damages.

On appeal, the Ninth Circuit concluded that this Final Proposal was not merely an agreement to agree. The court concluded that the single-page Final Proposal was a binding agreement, because: (1) the Final Proposal states that the parties are accepting the agreement subject only to approval of a more formal agreement; (2) the Final Proposal did not have a non-binding clause that the buyer included in prior drafts; and (3) the term “proposal” did not render it an agreement to agree, because through the parties’ course of negotiations they went from a “‘Counter Proposal, to a ‘Revised Proposal’, to a ‘Final Proposal’”.

The second issue concerned the buyer’s statute of frauds defense based on the fact the Final Proposal did not explicitly state the length of the ground lease. However, on appeal, the court held that because the Final Proposal allowed the buyer to buy the property within 10 years and allowed the seller to compel the purchase within 10 years, the jury’s finding that implicitly the lease term was 10 years was supported by substantial evidence.

The last issue concerned the amount of damages awarded the seller. This dispute arose after the downturn in the real estate market had begun. Interestingly, the seller recovered damages for 10 years of lost rent, and lost profit damages based on the call option. More importantly, the seller received lost profits based on the date of the breach of the Final Proposal. As a result, the seller recovered 10 years of lost rent, and lost profits based on a valuation date that was 10 years prior to the termination of the lease. This undoubtedly was a significant result for the seller, since the market has declined.

Having – and heeding — legal advice throughout the negotiation process can avoid such problems.

Whatever your real estate law needs, Patton & Sullivan LLC has the expertise to keep your plans on track.

A version of this article has appeared in the State of California Real Property Law Section’s E-Bulletin.

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Randy Sullivan, a partner at Patton & Sullivan LLC, specializes in business and real estate litigation.

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