It is always important that any written contract clearly reflect the parties’ intentions. Parties are likely to be held accountable to the specific contract terms even if, in hindsight, they turn out differently than what they intended. This is best illustrated in the 2021 case of Southern California School of Theology v. Claremont Graduate University (60 Cal. App. 5th 1).
Southern California School of Theology (“SCST”) purchased land from Claremont Colleges (“Claremont”) for $107,500. The deed from Claremont to SCST contained a number of conditions, one of which was that if SCST ever wanted to sell the property, that it must first offer the property to Claremont (the “First Offer Clause”) on the terms and conditions contained in a 1957 Agreement executed at the same time. The 1957 Agreement stated that the purchase price was to be the lower of (1) the fair market value of the property when the offer notice is given, or (2) the original purchase price plus the cost of all taxes, assessments and improvements paid by SCST less depreciation and obsolescence.
In 2015, SCST provided an offer notice to Claremont to buy the property but the parties could not reach an agreement. SCST subsequently marketed the property and received multiple offers on it. Claremont filed a lawsuit against SCST to enforce the First Offer Clause. At that time, the fair market value of the property was about $40 million, but the value based upon the First Offer Clause formula was about $3.5 to $4 million. Obviously, SCST did not want to sell the property to Claremont for $4 million.
SCST sued Claremont to invalidate the First Offer Clause, arguing, among other things, that enforcement of this clause would cause a forfeiture to SCST of $36 million. The trial court agreed and ruled that (1) Claremont did have an enforceable right to purchase the property, but that doing so for $4 million would be an unreasonable forfeiture, and (2) Claremont actually had a right of first refusal to purchase the property on whatever terms Claremont proposed to sell to a third party (meaning at fair market value).
SCST appealed and the appellate court overturned the trial court ruling. The appellate court determined that there was no forfeiture because contracts “are, by their very nature, allocations of risk and responsibility as between the parties.” It determined that SCST expressly agreed, in the First Offer Clause of the 1957 Agreement, to “bear the risk that the property either increased in value or decreased.” In addition, the appellate court ruled that Claremont had the right to purchase the property using the specific formula in the First Offer Clause and that by doing so “each party would receive that for which they bargained, and that to which they agreed.”
This last part perfectly states the importance for each party to understand what they are agreeing to and that they will be held to that agreement.
This article is written by Patrick Casey, who is a business attorney with the JRG Attorneys At Law firm in Monterey. You may reach the author at (831) 269-7114 or at patrick@jrgattorneys.com.
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