Beverly Way Associates v. Barham

• Decision Date: 12 December 1990
• Docket Number: No. B044557,B044557
• Citation: 276 Cal.Rptr. 240,226 Cal.App.3d 49
• Court: California Court of Appeals Court of Appeals
• Parties: BEVERLY WAY ASSOCIATES, Plaintiff and Appellant, v. Phyllis BARHAM, Defendant and Respondent.

Page 240

276 Cal.Rptr. 240

226 Cal.App.3d 49

BEVERLY WAY ASSOCIATES, Plaintiff and Appellant, v. Phyllis BARHAM, Defendant and Respondent.

No. B044557.

Court of Appeal, Second District, Division 4, California.

Dec. 12, 1990.

Inman, Weisz & Steinberg and Drew E. Pomerance, for plaintiff and appellant.

Judith E. Deming, for defendant and respondent.

EPSTEIN, Associate Justice.

This case presents a single principal issue for resolution. It is whether, in a contract for the sale of real estate, the buyer's communicated rejection of a "satisfaction" condition precedent to its obligation to purchase terminates the contract so that the buyer cannot later waive the condition and enforce the agreement. We conclude that it does. We therefore affirm the decision of the trial court, which reached the same conclusion in its order sustaining a demurrer to the buyer's suit to enforce the contract.

FACTUAL AND PROCEDURAL SUMMARY

This case reaches us on the basis of a successful assertion of a general demurrer without leave to amend. "In assessing the sufficiency of a complaint against a general demurrer, we must treat the demurrer as admitting all material facts properly pleaded." (Glaire v. LaLanne-Paris Health Spa, Inc. (1974) 12 Cal.3d 915, 918, 117 Cal.Rptr. 541, 528 P.2d 357.) Since the demurrer was sustained without leave to amend, we are also mindful of the policy that "the allegations of the complaint must be liberally construed with a view to obtaining substantial justice among the parties." (Youngman v. Nevada Irrigation Dist. (1969) 70 Cal.2d 240, 244-245, 74 Cal.Rptr. 398, 449 P.2d 462.)

The verified complaint in this case incorporates a series of documents by reference that thoroughly chronicle the agreement of the parties. The following summary is based on that pleading, including its incorporated annexes.

In July 1988, the defendant Phyllis Barham ("seller") owned a residential building in Long Beach. On July 7, 1988, she executed a contract to sell the building to plaintiff, Beverly Way Associates, a California general partnership, ("seller"). The purchase price was $3,900,000. The contract provided for the opening of escrow and for a closing within 60 days thereafter. There was no "time is of the essence" provision.

Paragraph 5 of the agreement ("contingencies") provided that the "Buyer's obligations to purchase the Property shall be conditioned upon" approval by the buyer of a number of specified inspections and documents, and delivery of clear title and conveyance documents at the close of escrow. The most important provision in the agreement, for purposes of our review, is paragraph 5(a) ("Approval by Buyer of Inspection and Documents"). The initial portion of that provision states:

"Buyer (and Buyer's consultants) shall have twenty-eight (28) business days after receipt of each of the following items in which to inspect and approve (and Seller shall immediately upon acceptance of this offer deliver to Buyer true copies of the following documents and access to Property to inspect) and it shall be a condition to Buyer's obligation to close escrow that Buyer shall have approved...."

There follows a listing of seven categories of matters to be approved. The fourth of these includes a "certified ALTA survey of the Property showing all improvements thereon and the location of all exceptions to the title referred to in the preliminary title report."

Although the 60-day provision in the contract would have had escrow close by mid-September, the parties continued to take actions called for under the agreement for a considerable time thereafter. The seller furnished the material required in paragraph 5 on November 15, 1988. On December 2, 1988, a date well within the 28-day period for buyer approval, the buyer wrote the seller rejecting the land survey.

The buyer's letter recites that it had received the Survey delivered by the seller, and advised that "We reluctantly disapprove of the matters disclosed on the Survey and relating to the Property." The following six paragraphs describe the reasons for the rejection in detail. The principal concern appeared to be that a concrete electrical room was constructed on one of the garage parking spaces, and that this reduced the parking spaces to a number below the amount shown on the tract map. According to the buyer's letter, "This fact and its implications represent a serious matter affecting the lawful use, value, title, utility, financeability and marketability of the Property."

The letter continued with an expression of hope that the problems just recited could be surmounted with "some effort, additional time and expense." Rather than cancel, the buyer proposed "some alternatives to keep the deal alive."

Two alternatives were put forward. The first proposed that the seller give the buyer an option until July 1, 1989 to purchase the property for the original price. In return, the seller would have the right to recover $50,000 of the $75,000 deposited in escrow in the event that the buyer should fail to exercise the option.

The second alternative would have reconstructed the agreement into a lease-purchase arrangement, under which the buyer would take possession of the property and pay rent to the seller, and would have an option to purchase "before a certain specified date."

The letter closed with a request to the seller to "advise as to how you wish to proceed with this transaction."

According to the complaint, there was no further communication between the parties until February 2, 1989. On that date, the buyer sent the second letter pertinent to the case. In this correspondence, it advised The seller then instructed escrow to immediately prepare cancellation instructions and to transmit them to the parties for their inspection. The buyer demanded that seller go forward with the original sale transaction. The seller refused, and the buyer sued for specific performance. (May 19, 1989.) It also filed a lis pendens. The seller demurred and moved to expunge the lis pendens. The demurrer and motion were heard together on July 21, 1989. The demurrer was sustained. The trial court concluded that "By disapproving the survey on December 12, 1988, plaintiff buyer terminated the contract and cannot sue on same. The court is satisfied that, if plaintiff were granted leave to amend, it would not plead around exhibit D." (The December 2, 1988 letter.) The court therefore declined to grant leave to amend. It also expunged the lis pendens. This appeal followed. ¹

                that "We are prepared to waive our objections to such items and to proceed to close escrow within 45 days of Ms. Barham's confirmation to us and to escrow that this will be satisfactory to Ms. Barham."   The reference to "such items" was to the problems discussed in the December 2, 1988 letter
                

DISCUSSION

Both sides to this appeal treat the buyer's right of approval under paragraph 5 of the contract as a condition precedent in favor of the buyer. They are quite correct in that characterization.

Section 1436 of the Civil Code (a part of the original 1872 codification) defines a condition precedent as one "which is to be performed before some right dependent thereon accrues, or some act dependent thereon is performed." Although the Restatement avoids the terms "condition precedent" and "condition subsequent," preferring the word "condition" alone to define the former concept (see Rest.2d Contracts, § 224, com. e), the definition it provides is essentially the same for purposes of the issue in this case: "A condition is an event, not certain to occur, which must occur, unless its non-occurrence is excused, before performance under a contract becomes due." (Rest.2d, Contracts, § 224.) This is consistent with the view of the text writers (see 5 Williston, Contracts (3d ed. 1961) §§ 666A, 675A, pp. 141, 189; 3A Corbin, Contracts (1960) § 647, p. 102; 1 Witkin, Summary of Cal.Law (9th ed. 1987) Contracts, § 729, p. 659) and with the national majority view (see Annot., Sale of Realty--Conditions--Financing (1962) 81 A.L.R.2d 1338). It also is consistent with the California authorities. (See Mattei v. Hopper (1958) 51 Cal.2d 119, 122, 330 P.2d 625; Kadner v. Shields (1971) 20 Cal.App.3d 251, 257, 97 Cal.Rptr. 742.) Finally, we find it significant that the contract language tracks the California statutory definition of a condition precedent as well as the Restatement definition. Paragraph 5(a) specifically provides that "it shall be a condition to Buyer's obligation to close escrow that Buyer shall have approved" of the items specified in the further provisions of the subparagraph, including the property survey.

We turn to an examination of the nature of the buyer's power to approve the condition precedent and to the effect of its disapproval.

Most of the textual and case material on "satisfaction" conditions precedent turns on whether an objective or subjective standard is to be used in reviewing the reasonableness of its exercise, whether good faith is required, and whether such clauses render agreements that include them unenforceable. (See Rest.2d, Contracts, § 228 (objective standard preferred); Williston, supra, 675A (honest judgment required; contracts generally...