Does the following qualify as financial consideration?  Several
contracts are entered to sell lots upon completion of a subdivision. 
The contracts inappropriately do not allow for contingencies and have
no due date.  Checks equivalent to 1% of the sales price are accepted
but never cashed, escrow is never opened and the purchasers are free
to leave at any time. A couple of the contracts have additional
notations that the deposit checks won't be cashed until the
subdivision is complete.  The purchasers are aware of ongoing
difficulties and are finally notified after almost two years that the
project will not be completed because it does not qualify for a
construction loan. However, the purchasers are willing to remain
indefinitely because they have no money tied up or at risk.  Is this
sufficient consideration to enforce the contracts or to sue for
breach? What case history is available to support the seller's
position?  Note:  The California Dept of Corporations does not allow
escrow companies to hold escrow deposit checks for extended periods
without cashing to be a valid escrow, so I have been told.

---

Clarification of Question by realestater-ga on 31 Dec 2004 08:01 PST

When the project is canceled, the original uncashed deposit checks are returned.

---

Clarification of Question by realestater-ga on 31 Dec 2004 08:05 PST

The answer wanted is case history that supports no consideration.

---

Request for Question Clarification by joey-ga on 07 Jan 2005 01:16 PST

I'm a little confused.  Has there been a breach, and/or does the
purchaser want to sue?  Or, are you just asking in case the purchaser
does ever attempt to sue?

I'll do some case research tomorrow, but my gut feeling based on
traditional doctrines of consideration is that there *would* be
consideration here.

The purchasers are contracting for an "option" to buy the land,
reserving it, but with the right to leave.  In exchange for the
option, they are guaranteeing to provide the seller 1% of the purchase
price if they back out, but not before the subdivision is finished. 
The seller is purchasing no such similar "option to back out" and so
has no associated right.  The fact that a check was handed-over is
irrelevant: the contract could merely have been written to say, "if
Purchaser cancels the agreement, he agrees to pay Seller 1% of
purchase price at the time the agreement is cancelled."  The paper
check itself isn't consideration, but the promise to pay in the future
IS.

It's a fallacy to say that the purchasers have no money at risk.  They
have no money tied up, as you suggest; but assuming the subdivision is
ultimately built, they're obligated to pay 1% of the purchase price if
they back out -- that's *their* consideration in exchange for the
seller's promise not to sell the lot to someone else.

That being said, were the purchasers to sue for breach (i.e. the
subdivision wasn't finished and they're angry), damages would be
minimal: they've paid nothing because the checks weren't cashed.  The
most that could be sued for would be the losses they incurred by
relying on the agreement -- for instance, if land prices have gone up
significantly in the two years and a similar lot in a similar
subdivision goes for $25k more than they had planned to pay in the
seller's subdivision, the seller conceivably could be forced to pay
the difference.

--Joey

---

Clarification of Question by realestater-ga on 07 Jan 2005 10:32 PST

The purchasers have already filed a suit.  An "option" requires
consideration the same as a contract.  There was no guarantee or
obligation that the 1% or any other deposit or damages would be paid
or forfeited to the seller for any reason at any time. In fact, hand
written notes by the purchasers on some of the contracts and some of
the checks said the checks could not be cashed until the subdivision
was finished, which it never was.  These contracts acted as
reservations more than anything else.  The purchasers are angry that
the subdivision was never completed since land values did go up. A
bank referred by one of the builder purchasers did their analysis and
felt the ratio of cost to finished valuation did not meet their
criteria for a construction loan.

The purchasers were kept informed at all times and knew of the
problems as they were encountered. A meeting was even held and the
purchasers (who were builders and businessmen)were told that the
project did not qualify for a construction loan, that the future was
unknown and that there were no more personal funds to continue. No one
stepped forward and offered a solution.  Their uncashed checks were
later mailed back with an explanation that the subdivision could not
be finished and would be sold.  The purchasers sued for specific
performance, fraud and damages.

---

Clarification of Question by realestater-ga on 07 Jan 2005 11:05 PST

Let me make one change.  At the last meeting when the problems were
put on the table, a neighbor who would have benefited by our new road
offered enough money to finish. However, he set the condition that the
purchasers pay their proportionate share of the increased development
costs.  It would have been about a 16% increase due upon completion. 
The valuation of the property had already appreciated beyond that
amount.  However, the offer was rejected by the purchasers.

Given the questions of fraud involved, I don't feel comfortable giving
too much legal opinion here, and Google prohibits us from providing
specific legal advice.  I would strongly suggest that you consult a
California attorney.

That being said, I believe that a court would consider the deposit
checks consideration for the option.  A deposit check as a reservation
IS considered an option.  For an example case, see Southern Christian
Leadership Conference v. Al Malaikah Auditorium Co., 281 Cal.Rptr.
216.  It notes that "acceptance of a deposit check . . . means that it
holds and guarantees" those terms.  In that case a producer reserved a
date in a concert hall with a $1,000 check (which, unlike in your
case, was cashed), though the deposit was very shortly returned when
the concert hall backed out.  The court found that the initial check
qualified as consideration for an option.

Your contention that only a sheet of paper was transferred doesn't
make sense looking at it from the intent of the parties in advance. 
The purchasers (and you) clearly saw their check as a deposit, as a
reservation.  That it wasn't to be actually cashed until the
development was finished doesn't change the fact that you had the
right to cash that check if they were to back out (that's the common
definition of a "deposit check").

However, while California hasn't had any cases that I can find
involving a held-but-not-cashed check, there are some examples of
postdated checks (which mimic your situation).  A California court
accepted a NY opinion noting that "In accepting a postdated check the
payee is looking to the promise of payment in the future, that it is
no more than a mere promise to discharge a present obligation at a
future date."  Wilson v. Lewis 165 Cal.Rptr. 396 (Cal.App 1 Dist.
1980).  The same court considers a postdated check an extension of
credit (as it will be paid later), but by no means inadequate as
consideration.  It seems to validate my contention that a check to be
cashed later is considered a promise to pay later; thus it would be a
promise to pay in exchange for a promise to hold open the option (a
bilateral contract).  You say that there was no obligation for them to
actually pay the 1% at any time, but their likely understanding
ex-ante (at signing) and court precedent in California indicates
otherwise.

Thus, I think you would have a very tough time convincing a judge that
the agreement is void for inadequate consideration.

In my opinion, the better course for you to take would be to
investigate mutual mistake of fact (both parties mistaken that the
development would be built) and impossibility.  I also believe their
fraud charge is terribly weak as you kept them informed throughout the
process.

On damages, however, a plaintiff has the obligation to mitigate his
damages.  Your purchasers knew for months that there were difficulties
and after the loan application collapsed there were other options for
them to receive their property with an additional payment that would
be less than the 16% extra cost of other similar property.  It's
conceivable that a court, if it finds you liable and awards damages,
would only require that you pay the difference between what they were
to pay for your land and the added cost that would have been applied
if they'd agreed to the modifications after the loan failed.

Good luck in your case.

--Joey