Opinion
Hearing Granted March 15, 1961.
Opinion vacated 15 Cal.Rptr. 145. Leon J. Alexander, Los Angeles, for plaintiffs, respondents and cross-appellants.
Carl C. Cowles and Rimel & Johnston, Santa Ana, for defendants, appellants and cross-respondents.
GRIFFIN, Presiding Justice.
After extensive negotiations, plaintiffs, respondents and cross-appellants, husband and wife, on July 12, 1955, entered into a written contract with the Schroeders, defendants, appellants and cross-respondents (hereinafter referred to as defendants) to buy approximately 145 acres of land near Costa Mesa, owned by the defendants, at a total purchase price of $2,200 per acre. The exact acreage was to be determined by a survey to be made. The contract provides in part:
'Caplan and wife as Buyers will make, execute and deliver to the Sellers their promissory note for Fifteen Thousand Dollars ($15,000.00) payable Seven Thousand Five Hundred Dollars ($7,500.00) on or before three months after the date of this Agreement and the balance of Seven Thousand Five Hundred Dollars ($7,500.00) on or before six months from and after the date of this Agreement, with interest from the date of this Agreement until paid at the rate of five per cent (5%) per annum. This note shall be delivered to the Sellers outside of escrow and is given to Sellers as consideration for Sellers entering into this Agreement; but when said note is paid according to the tenor thereof the Buyers shall have credit for the principal sum thereof: to wit: $15,000.00 against the purchase price of the said real property, if the sale of said property is consummated, * * * If however, the sale is not consummated by reason of some default of the Buyers, said note and/or the moneys received in payment thereof shall be retained and collected by the Sellers as agreed consideration for entering into this Agreement.'
It is stipulated by the parties that during these negotiations and at the time this agreement was signed, all parties knew that geologic studies indicated that oil was probably present under defendants' land, and that oil companies had been trying to obtain leases in the area; that after the contract was made, but before January 12, 1956, two test oil wells were drilled in the vicinity of defendants' land and proved to be dry holes, and both plaintiffs and defendants knew this fact. Likewise, all By the terms of the written agreement, performance was required by January 16, 1956. Over plaintiffs' objections, considerable evidence was received (including plaintiff husband's own admission in his deposition which was received in evidence), showing a previous oral discussion or agreement to the effect that plaintiffs, the purchasers, desired to keep the escrow open for six months' time and extend the time for performance for that period, and that plaintiffs would be willing to pay to keep the escrow open for six months; that defendants said they did not want to tie up the property for such a long period of time and the only reason they consented to keep the escrow open for that length of time was because plaintiffs were willing to pay for it; that plaintiffs offered a lesser amount for this privilege but defendants refused the offer and plaintiffs well knew that if they had not offered to pay the $15,000 as indicated in this oral discussion, defendants would not have entered into the written agreement, because it would be impossible for them to accept other offers during the six months' escrow period. Plaintiff husband definitely testified in his deposition that from these oral discussions it was his impression that the $15,000 was not to be returned to him under any circumstances, the only exception being that if he purchased the property that amount would be applied on the principal.
The promissory note, dated and executed the same day as the written agreement, was subsequently paid, plus interest in the amount of $357.75. Escrow instructions were entered into on July 18, 1955. There was some controversy in reference to the survey which was subsequently adjusted. By the written agreement and escrow instructions, possession of the property was to be given to plaintiffs by December 1, 1955 and a non-exclusive right was given to plaintiffs to enter on the property for the purpose of exploring or drilling for oil prior to the termination of the six months' escrow period mentioned. Plaintiffs failed to comply with the provisions of the escrow instructions and agreement during the six months' escrow period and defendants filed a notice of cancellation of the escrow. It was terminated on April 20, 1956. Later in 1956 defendants sold all of the land which plaintiffs had agreed to buy to other parties; a portion of the property was sold at a price of approximately $3,250 per acre and the remaining portion at $2,500 per acre. Plaintiffs never took possession of the land and defendants continuously occupied it for farming purposes.
In this action, plaintiffs alleged and claimed $5,000 punitive damages plus one-half of the surveying cost for failure of defendants to comply with their agreement, and alleged in the alternative that they should be granted relief from forfeiture and allowed the return of the $15,000 plus interest from April 20, 1956. Plaintiffs also claimed a credit of $750 paid by defendants to defendants' real estate broker on the first sale agreement and alleged defendants paid no additional commission on the second sale.
At the opening of the trial, plaintiffs abandoned any claim that defendants breached the contract and admitted that plaintiffs did breach it and that such breach was willful and contended only that plaintiffs were entitled to a portion of the $15,000 paid by them to defendants, plus interest as indicated. Respective counsel stipulated that plaintiffs willfully defaulted in their obligations under the terms of the contract and the court so found. The court also found that the note was delivered to the sellers outside of escrow and was given to the sellers as consideration for sellers' entering into the agreement, but that this amount should apply to the purchase price if the sale was consummated and that if the 'sale is not consummated by reason of some default of the Buyers, said note and/or the moneys received in payment thereof shall be retained and collected by the Sellers as agreed consideration for entering into this Agreement'; that the parties' intentions were in accord with this stipulation and the agreement and that plaintiffs made no claim and did not believe they had a right to the $15,000 until after they had consulted their attorney; that the only actual damages suffered by defendants as a result of plaintiffs' default were a survey charge of $472, $75 in title insurance charges, attorney's fees of $1,500 in connection with the preparation of the agreements, and real estate broker fees of $750.
The trial court found, generally, in accord with the facts above related; that plaintiffs paid defendants $15,357.75 pursuant to the terms of the note; that plaintiffs knew and understood that without the execution and delivery by them of the said note for $15,000, defendants would not have executed the contract of sale nor the escrow instructions; that defendants represented to plaintiffs, and both plaintiffs and defendants intended, that the delivery of the note and the payment thereof should constitute consideration for defendants' entering into the contract and escrow instructions aforesaid, provided that if the plaintiffs performed the contract they would be given credit in the sum of $15,000 against the purchase price of the land and that neither plaintiffs nor defendants intended that any part of the sums paid should be refunded or credited to plaintiffs if plaintiffs did not perform the contract, but, on the other hand, their contract was that the said $15,000 was to be paid to defendants as consideration for and to induce defendants to enter into said contract and escrow instructions; that defendants intended, and plaintiffs knew defendants intended, that the $15,000 was to constitute consideration for entering into the agreement to sell; that defendants suffered damages in the total sum of $2,325; that the fair and reasonable market value of the real property the subject hereof was at all times material to this litigation of the value of $2,200 per acre; that the value of the right which plaintiffs acquired when defendants signed said agreement of purchase and sale, i. e., the right to purchase the Schroeder lands at any time between July 22, 1955 and January 12, 1956, a period of six months, for the sum of $2,200 per acre, was not less than $15,000, and said right had a fair and reasonable value of not less than $15,000.
After some oral discussion of the holding of the case of Freedman v. The Rector, 37 Cal.2d 16, 230 P.2d 629, 31 A.L.R.2d 1, the trial judge remarked that he was reluctant to follow plaintiffs' interpretation of that case, since it was an unjust rule as applied to the facts in this case, but hoped this appellate court would make some distinction, under the findings made by it, and hold that the true intent of the agreement was that an option was created; that the option did have a value and that the Freedman decision did not apply. Apparently the findings were made with this thought in mind. However, believing the Freedman decision governed in this case, it then concluded that plaintiffs could not legally contract to pay, nor pay, consideration to induce defendants to enter into the said contract of purchase and sale and escrow instructions, and the said sum of $15,000 so paid by plaintiffs to defendants must therefore be held to be a fund from which defendants could recoup any loss or damage sustained by defendants on account of plaintiffs' failure to perform said contract of purchase and sale and carry out and comply with said escrow instructions and that to permit defendants to retain more of said $15,000 than the $2,325 Judgment was rendered for plaintiffs in the amount of $13,032.75, plus interest at 7% from April 20, 1956, and it was ordered that plaintiffs were entitled to relief from forfeiture. On a motion for new trial, the court modified the judgment, providing that interest be allowed only from January 24, 1958 in the sum of $1,327.81.
Defendants appealed from the judgment and judgment as modified and plaintiffs cross-appealed from the portion of the judgment awarding defendants certain damages as an offset and the judgment as modified in respect to interest.
These are the main questions presented on this appeal and in support of them plaintiffs rely principally on the cases of Freedman v. The Rector, supra, 37 Cal.2d 16, 230 P.2d 629; Royer v. Carter, 37 Cal.2d 544, 233 P.2d 539; Pitzer v. Wedel, 73 Cal.App.2d 86, 165 P.2d 971; and Phelps v. Brown, 95 Cal. 572, 30 P. 774.
The Freedman case involved an action by the prospective purchaser for specific performance of a contract for purchase of realty. A deposit of $2,000 was paid down by him. The agreement was repudiated by the plaintiff on an unjustified claim of failure of the seller to clear the title. The trial court found on substantial evidence that plaintiff's breach was willful. Defendant cancelled the escrow. Defendant later sold the property to another for a greater amount and plaintiff demanded return of the down-payment. The portion of the judgment denying specific performance was affirmed but as to the return of the deposit the trial court denied plaintiff restitution. The question on appeal was the right of plaintiff to the return of any part of his down-payment. The Supreme Court there held in this respect that although section 3275 of the Civil Code provides that:
'Whenever, by the terms of an obligation, a party thereto incurs a forfeiture, or a loss in the nature of a forfeiture, by reason of his failure to comply with its provisions, he may be relieved therefrom, upon making full compensation to the other party, except in case of a grossly negligent, willful, or fraudulent breach of duty.'
the damage provisions of the Civil Code in reference to punitive and exemplary damages, together with the policy of the law against penalties and forfeitures, provide an alternative basis for relief independent of section 3275, supra. It held that [37 Cal.2d 16, 230 P.2d 633]:
'The provision of the contract providing that on plaintiff's default defendant could retain the down payment cannot be enforced as a valid clause providing for liquidated damages.'; that 'Although such a provision in a contract for the sale of real property is presumptively valid, if the down payment is reasonable in amount, * * * when as in this case the evidence establishes that it would not 'be impracticable or extremely difficult to fix the actual damage', * * * such a provision may not be enforced as one for liquidated damages.' (Citing authority.)
In Rodriguez v. Barnett, 52 Cal.2d 154, 160, 338 P.2d 907, although the Supreme Court held the mere recitation that the right of the seller to retain this deposit was in consideration for executing this agreement is insufficient to establish meaningful separate consideration, it said there was an exception to that rule where the retention provision indicates the right to retain a deposit was given as consideration for allowing the condition of disapproval on plaintiff's performance or as a payment for an option to withdraw. The evidence and findings in the instant case definitely show a separate consideration and a prior executed oral agreement between the parties that if the sellers would enter into a subsequent agreement respecting the sale of the property, allowing the purchasers Folden v. Lobrovich, 171 Cal.App.2d 627, 341 P.2d 368, 369 involved a lease agreement. There, the court said:
'Plaintiffs bought, for the sum of $2,400, the privilege of having defendant's store building available for their use and occupancy for a 10 year term should they be able to negotiate leases of the other properties. Having failed to secure such leases, the contract has, by its express terms, been fully performed and is at an end.'
and then it says, citing Kuhlemeier v. Lack, 50 Cal.App.2d 802, 123 P.2d 918, where 'the lessee was, by the terms of the lease, given the right to terminate the lease prior to its stated term,' section 1670 of the Civil Code is inapplicable and that:
"The fact that the parties have used the word 'forfeit' in the lease is not determinative of their interest. * * * The fact that in the present case the lessee has agreed to relinquish or 'forfeit' a right to a sum of money, instead of to pay a sum of money, does not alter the situation. In either event the payment of money, or the relinquishment of the right to demand the return of money, constitutes the consideration for the option to terminate the lease."
See also Ramish v. Workman, 33 Cal.App 19, 164 P. 26; A-1 Garage v. Lange Investment Co., 6 Cal.App.2d 593, 44 P.2d 681; Thompson v. Swiryn, 95 Cal.App.2d 619, 213 P.2d 740; Ace Realty Co. v. Friedman, 106 Cal.App.2d 805, 236 P.2d 174; Wood v. Hipwell, 107 Cal.App. 680, 290 P. 1040; Bacciocco v. Curtis, 12 Cal.2d 109, 82 P.2d 385; Parigian v. Citizens Nat. Trust & Sav. Bank, 42 Cal.App.2d 773, 110 P.2d 117.
There is a marked distinction between an option to purchase and an agreement of sale and purchase. As was said in Caras v. Parker, 149 Cal.App.2d 621, 626, 309 P.2d 104, 107 (quoting from Menzel v. Primm, 6 Cal.App. 204, 209, 91 P. 754):
"The distinction between a contract to purchase or sell real estate and an option to purchase is that the contract to purchase or sell creates a mutual obligation on the one party to sell and on the other to purchase, while an option merely gives the right to purchase within a limited time without imposing any obligation to purchase."
The written agreement in the instant case appears to create a mutual obligation on the '* * * their contract was that said $15,000 was to be paid to defendants as consideration for and to induce defendants to enter into the said contract and escrow instructions.' (Emphasis ours.)
In Bacciocco v. Curtis, supra, 12 Cal.2d 109, 82 P.2d 385, it is said that where the money paid is in the form of a bonus or consideration for the execution of a lease, the lessor may retain it, upon termination, but if it is a deposit as security for the performance of the terms of the lease, it is treated as a provision for a penalty and the lessor cannot keep the same upon the lessee's breach. See also Warming v. Shapiro, 118 Cal.App.2d 72, 75, 257 P.2d 74.
The fact that such a separate oral agreement may be sustained is indicated in Wolfe v. Heller, 86 Cal.App.2d 696, 699, 195 P.2d 36, 37, where it is said:
'Appellant contends that there was no meeting of the minds, and that no contract existed between and parties. It is true, as argued by appellant, that the escrow instructions of plaintiff and defendant, being different in substantial respects, did not constitute an agreement between them. It appears, however, from other circumstances that there was an agreement between the parties regarding the conditions under which plaintiff paid the $2500 to defendant; and that defendant was entitled to retain the $2500.'
In Rodriguez v. Barnett, supra, 52 Cal.2d 154, 160, 338 P.2d 907, 910, it is said that:
'The mere recitation that the right of the seller to retain this deposit was in consideration for executing this agreement, is insufficient to establish meaningful separate consideration.' (Emphasis ours.)
This statement in itself indicates that had there been a separate agreement and separate consideration for the execution of the written agreement, the decision might have been otherwise. In Wolfe v. Heller, supra, 86 Cal.App.2d 696, 702, 195 P.2d 36, 39, it is stated:
'The provision as to liquidated damages in the agreement here involved is valid. The property was of the approximate In that case, the court apparently held that the deprivation of the right to sell property is a detriment which has a value. The testimony in the instant case was that this right had a value of $15,000 and the court so found.
Under the evidence and findings, no unjust enrichment resulted, particularly where the right to six months' time for performance had a value of $15,000, and plaintiff conceded this fact and this sum was established and found to be the consideration for such extension, and plaintiffs obtained that for which they bargained. It was not a security deposit for the performance of the written agreement. Fabares v. Benjamin, supra, 180 Cal.App.2d 264, 4 Cal.Rptr. 359; Walker v. C. C. Bintz & Shaw, Inc., 3 Utah 2d 162, 280 P.2d 767, 31 A.L.R.2d 9.
That an oral agreement affecting and placing a condition upon execution and delivery of a subsequent written agreement may be shown by extraneous evidence is beyond question. Tolson v. Griset, 186 Cal.App.2d 497, 9 Cal.Rptr. 110, and cases cited. Accordingly, the trial court was authorized in this action to take evidence as to the surrounding circumstances and intention of the parties. Asia Inv. Co. v. Levin, 118 Wash. 620, 204 P. 808, 32 A.L.R. 578.
In view of the conclusions here reached, the question of the date when interest became due and the merits of plaintiffs' appeal from a portion of the judgment becomes unnecessary to decide.
Judgment reversed and the trial court is directed to enter judgment for the defendants.
SHEPARD and COUGHLIN, JJ., concur.