THE TOP TEN POINTS TO WATCH FOR IN COMMERCIAL REAL ESTATE CONTRACTS Point #4 “What’s the Purchase Price and How Is It Paid?”

Almost as important as “when do we close?” in a commercial real estate transaction is the question “how much will I be paid and how?”  Answering that question requires that the purchase price and terms of payment be clear.

The case of Therrien v. Larkins[1] graphically illustrates the problems that arise from purchase price ambiguity, particularly when purchase money financing is involved.  The interplay between the cash payable at closing and the terms of the financing described in the purchase and sale contract simply must be clear or else both parties can form radically different ideas of how the closing is to be conducted.

In Therrien, the parties and their broker whipped up a quick contract for the sale of real estate (on the Florida Bar/Florida Association of Realtors joint form, no less) for a full purchase price of $564,000, which was to be paid at closing “by cash or locally drawn cashier’s or official bank check(s)…”  That seemed simple enough – the problem was they just kept going.

The rest of the purchase price terms left a lot to be desired.  Despite the cash terms mentioned, Paragraph IV(d) of the form contract, entitled “seller financing,” was checked, and mentioned an attached addendum.  Paragraphs 3 and 4 of the addendum then proceeded to add additional layers of ambiguity to the deal. Those paragraphs provided the following:

3. If buyer does not close by January 26th, 2005 the buyer is to pay seller 12% interest, which is to be paid monthly. Failure to do so makes this contract null and void, and all monies paid are nonrefundable. [Emphasis added]

4. Seller will only carry a mortgage for an additional six months from January 26th, 2005. [Emphasis added]

After paying $21,000 in deposits that the contract (and the court) described as “nonrefundable,” the buyer arrived at closing without any additional cash at all.  Instead, he tendered to the seller a note and purchase money mortgage executed by the buyer’s wholly-owned entity for closing, Westview Place, LLC, in the amount of the balance of the funds owed under the contract.

Extrapolating from the other terms of the contract, the buyer’s note provided for a six (6) month balloon note, with 12% interest and interest-only payments to be made on a monthly basis until maturity.  The buyer argued that that paragraph 3 of the Addendum granted him the right to extend the closing date as long as he made monthly interest payments, and paragraph 4 allowed him to elect, at his option, to pay the purchase price at closing by tendering a six (6) month note and mortgage for $543,000.

The seller, of course, was horrified at this interpretation of the contract.  The seller thought that paragraph 3 only provided buyer with the option to elect either to close on January 26, 2005, or to extend the closing date for six months, so long as the buyer paid monthly interest payments of 12% on the purchase price until the extended closing date.  Moreover, to the seller, paragraph 4 only meant that the seller would carry the seller’s existing mortgage for an additional six month until the extended closing date, if the buyer elected the extension option.

How can two people look at the same contract and reach such radically different understandings of what it means?  Welcome to the world of commercial real estate finance, done badly.

Unable to resolve their dispute, the seller refused to close and the buyer sued for specific performance of the contract.  After trial, the trial court found for the buyer and awarded him specific performance of the contract, prompting the seller to appeal.  Unfortunately for the buyer, the Fifth District Court of Appeal found the buyer’s narrative unpersuasive.

The appellate court held that the opening words of paragraph 3 (i.e., “[i]f buyer does not close by January 26th, 2005….”) ruled out the possibility of the seller accepting any purchase money financing, because no closing would have taken place.   It follows, the court reasoned, construing paragraphs 3 and 4 together, that the “mortgage” mentioned in paragraph 4 “must refer to the existing mortgage encumbering the property,  because (obviously) Therrien would not be holding a mortgage from Larkins (or Westview) if a closing did not occur.”  Thus, the court concluded, paragraph 4 didn’t grant the buyer the right to tender a six (6) month note and mortgage at closing as “payment” of the purchase price and the buyer defaulted under the contract in demanding the right to do so.

The moral of this story is that, with a few clear(er) sentences the party drafting the contract could have saved everyone a failed transaction and thousands of dollars in legal fees.  The takeaway for us: don’t let the use of a form contract (even one designed for commercial transactions) lead to ambiguity between the (clear) pre-printed terms and the (ambiguous) typed or handwritten ones.  All of the business terms must work together to produce a transaction that’s enforceable the way the parties intended it.



[1] 959 So.2d 365 (Fla. 5th DCA, 2007)