Court Allows Extrinsic Evidence To Clarify Purchase Contracts
The California Supreme Court has recently ruled that a court may consider evidence other than what is stated within the four corners of a written contract to clarify the parties' agreement. C.A.R. participated in this case by filing an amicus curiae or "friend of the court" brief urging California's high court to reach the decision it did. As C.A.R. pointed out to the Supreme Court, extrinsic evidence must be used to resolve ambiguities commonly found in real estate transactions to prevent parties who have second thoughts from escaping their contractual commitments.
This case involved a multimillion dollar sales transaction between two experienced real estate investors. The parties were not represented by real estate agents nor did they use a standard-form contract. Instead, they drafted a handwritten "Contract for Sale" for three buildings which stated the price as "approx. 10.468 x gross income[,] estimated income 1.600.000, Price $16,750.00" (underline in original). That the parties omitted a zero in the $16,750,000 price was not at issue.
Before entering into this contract, the buyer was in possession of the buildings' rent rolls. Yet, it was not until many weeks after entering into the contract when the buyer requested a price reduction to $14,404,840, because his review of the rent rolls revealed that the rental income was only $1,375,404 (not $1,600,000). The seller refused to reduce the price, and so the buyer sued for specific performance.
In his lawsuit, the buyer testified that "approx." modified the purchase price, not the 10.468 multiplier, and that "gross income" meant the actual gross annual income. The seller, however, argued that the Statute of Frauds, which requires real estate contracts to be in writing, prohibited the court from considering the buyer's testimony or any evidence other than the written contract.
The Supreme Court disagreed. It decided that when ambiguous terms in a memorandum are disputed, a court can consider extrinsic evidence to clarify those terms with reasonable certainty. In this particular case, however, the court decided that the buyer's testimony was not enough to establish his interpretation with reasonable certainty. The parties' memorandum contained, even underlined, the intended price of $16,750,000, whereas $14,404,840 was not in writing. Furthermore, that the price would vary based on a later review of the rent rolls was not in writing. Indeed, the court would have given the buyer's interpretation more credence if the rental income was yet to be determined, but in this case, the buyer was already in possession of the rent rolls before entering into the contract.
Compliments of the California Association of Realtors!
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