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Absolutely Nonrefundable (Or Not)
by Ron Davis

Failure to strictly comply with California law governing real-estate transactions has prevented the owner of San Diego commercial property from retaining the deposit of an investor.

The commercial property, owned by Albertsonís, Inc., is destined for development as a shopping center, and the investor, Black Hills Investments, Inc., had hoped to purchase two parcels of the property.

During negotiations for the parcels, Black Hills committed $133,000 in earnest money. The contracts provided that the earnest money was ďabsolutely nonrefundable for any reasonĒ except for default by Albertsonís.

Before the closing date, however, Black Hills decided to back out of the deal and so informed Albertsonís. When Albertsonís refused to return the earnest money that Black Hills had paid, Black Hills sued, claiming that the contract for sale of the two parcels was void because it violates state law governing the subdivision of land.

That state law allows a buyer of real estate to void the sale under certain conditions. One of those conditions is the sale of any parcel of land prior to the recording of an approved map. And Black Hills argued that Albertsonís had not legally recorded the parcels before the sale.

Details of the transaction between Albertsonís and Black Hills show that three weeks before recording the parcel map, Albertsonís had sold the two parcels to Black Hills. Therefore, Albertsonís agreement to sell the two parcels of then unsubdivided property apparently violated state law.

In defending its actions, Albertsonís claimed that the contract with Black Hills contained a provision that ďexpressly conditionedĒ the terms of the sales contract so that it complied with the requirements of law.

A California appellate court disagreed with Albertsonís, explaining, ďA buyer has the right under law to void a contract to sell real property that Ďhas been divided in violation of the provisions of real estate lawí and may exercise that right at the buyerís sole option within one year after the date of discovery of the violation.... The undisputed facts in this case establish that the contracts, which we hold as illegal because they violate the law governing the subdivision of land, involved the sale of two parcels of real property that had not been subdivided at the time Albertsonís and Black Hills executed the contracts.Ē

The court therefore ordered Albertsonís to refund the earnest money, plus attorney fees and court costs. (Black Hills Investments, Inc. v. Albertsonís, Inc., 53 Cal.Rptr.3d 263)

Decision: January 2007
Published: March 2007



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