Be Careful What You Agree To

It turns out that courts will not save those who enter into a contract that turns out to be a really bad deal.

A recent case from the Pennsylvania Superior Court, 10 Zelt Street Trust v. Grayson, highlights that. The background of the case is not overly complicated. The 10 Zelt Street Trust offered for sale a residential property it owned. After some negotiations, the trust and Phillip W. Grayson agreed to a purchase price and Grayson provided a check for $100,000 as the deposit. Grayson took possession of the property and moved in with his family. It does not appear that any Realtors^® nor attorneys were involved in the transaction.

A few months later, the parties met to finalize the deal. However, the deal did not close at this time. Instead, Grayson provided a second deposit of $48,000 and the trust prepared a one-page, handwritten sales agreement that included the total purchase price, a settlement date and a statement that all deposits paid are nonrefundable. Both parties signed this agreement of sale.

Unfortunately, the deal never closed and the trust first sued for breach of contract. Grayson brought counterclaims against the trust for conversion, fraud and seller disclosure violations. The trial court held the handwritten agreement was enforceable and awarded damages to the trust based on its breach of contract claim. The trial court also held the trust failed to disclose known material defects and awarded damages to Grayson as well.

This was not the end of the litigation. Several months later, the trust again sued Grayson, this time for possession of the property. Grayson filed a counterclaim arguing it would be unjust to allow the trust to take back the property and keep the $148,000 in deposits Grayson paid. The trial court found in favor of the trust and Grayson appealed to the Superior Court.

The Superior Court affirmed that the trust can retake possession of the property. Oh, and the trust was also able to keep the $148,000 in deposits paid by Grayson. Both of these outcomes resulted from the enforceability of that handwritten contract.

Grayson’s arguments that it would be unjust to allow the trust to retake possession of the property and keep the deposits were rejected. Both the trial court and the Superior Court were sympathetic to Grayson’s predicament and recognized he made a bad deal. However, the Superior Court held that “contracting parties are bound by their agreements, irrespective of whether they embody reasonable or good bargains.”

Whether Grayson understood the significance of the contract term about nonrefundable deposits did not matter. Grayson signed the agreement stating the deposits were nonrefundable. Had Grayson turned to a Realtor^® or an attorney, it is highly unlikely he would have made the same deal.

But even bringing in a Realtor^® is not always enough to protect a party from a bad deal. More than a few times we have heard PAR Legal Hotline callers asking about bad contract terms after signing the Agreement of Sale. Waiving inspections or the mortgage contingency, not excluding/including certain items of personal property on the Agreement of Sale or plenty of other issues can quickly turn what seemed like a good deal into a very bad deal.

Once you have a signed the Agreement of Sale, whether it is a good deal or a really bad deal, the parties are locked in on their rights and options. At that point, what is “fair” or “just” or “right” or what someone assumed no longer really matters, in part, because those opinions are often a matter of perspective. A really bad deal for a buyer may be a great deal for the seller.

What matters is what is included within the agreement itself and little else. This is why we routinely recommend consulting with an attorney for any changes you want to make to the Agreement of Sale.

Sometimes what appeared to be a good deal turns into a bad deal because of a mistake. And yes, you will make mistakes. But no matter why a deal is bad for your client, your first conversation should be with your broker. You also need to think about whether you need to notify your errors and omissions carrier, even if no claim will be submitted. Oftentimes, an E&O carrier can offer helpful guidance for resolving a situation instead of making it worse, thereby avoiding a claim.

From there, you need to speak with your client and possibly the agent for the other side of the transaction. Fortunately, in many instances something can be worked out between the parties. In instances where you cannot, buckle in because it may be an interesting ride.