Does this qualify as "Consideration"?

Question

Two coworkers I know have agreed to the sale of a house - the one is retiring and selling it to the other.  They are not using an agent.  The Seller appears to be friends with a person at the title company who is facilitating the transaction.

They signed a purchase agreement .  Oddly, NO DEPOSIT was stipulated or requested by the seller or demanded in the purchase agreement.  However the purchase agreement states the buyer will pay for a home inspection.  A home inspection was performed and paid for by the BUYER.

The Seller has since received other offers and seems to be contemplating those.  Additionally she is refusing to pay for pest repairs stemming from a pest report even though the agreement states she shall. All in all the Seller is emboldened by the other offers and increasingly uncooperative. She further mentioned that the Buyer "has no earnest money deposit" so if she (the Buyer) wants to back out i can always go with another offer.  The Buyer is concerned the Seller may sidestep their agreement altogether, going with another offer because the Seller believes the lack of deposit relieves her of any obligation to the agreement.

Initially I thought that with no deposit there is no "consideration" thereby making the contract unenforceable.  However after doing some research I am wondering if the Buyer paying for a home inspection per the agreement (which provides benefits to both parties) MAY QUALIFY as consideration since there is a (non monetary) value exchange to the Seller by way of providing a third party inspection to be used in the disclosure and sale of the property.

I'm curious if anyone has encountered this type of issue before?

See also:
http://www.nolo.com/legal-encyclopedia/consideration-every-contract-needs-33361.html

Dion DePaoli · Answer

In general a binding contract requires:

1. Parties capable of contracting; 
2. Their consent; 
3. A lawful object;
4. A sufficient cause or consideration

Note that the above does not include a mandatory escrow deposit but rather 'consideration'.  Earnest money is a form of consideration but not the only form.

California Civil Code Section 1605 defines "consideration" to be the following:

Any benefit conferred, or agreed to be conferred, upon the promisor, by any other person, to which the promisor is not lawfully entitled, or any prejudice suffered, or agreed to be suffered, by such person, other than such as he is at the time of consent lawfully bound to suffer, as an inducement to the promisor, is a good consideration for a promisor.

When the Buyer makes the offer and the Seller accepts the offer the Buyer suffers a prejudice.  The prejudice is purchasing the property in accordance with the terms and conditions of the contract.  That is consideration.

A formal escrow deposit is not required to create a binding contract.  It certainly makes things clear and easy to understand and a little easier to enforce but it is not a requirement to create a binding contract.

The seller may not like the answer and if the seller does not sell, the buyer would have to sue for Specific Performance.  That can get messy with residential transactions as they can move quickly if the Seller contracts and attempts to close with another buyer.  If you know the Seller has entered into another contract to replace the current Buyer's they may want to look into putting a lien by way of the contract on the property to cloud title to dirty the water a little bit so the Specific Action can takes it course.  This is opposed to trying to unwind the second buyer's sale.

Dave Toelkes · Answer

In my simplistic view, the seller is giving the buyer a piece of real estate in exchange for some amount of money.  The consideration being exchanged is the seller's property for the buyer's money.  There is consideration and the sale contract is binding even though no earnest money deposit is involved.

Just how I see it.

Bryan Hancock · Answer

Great post by Dion above.

Here is my layman's view based on a few business law classes:

Consideration = bargained-for exchange => NOT a gift

So in theory anything that could keep the "agreement" from being a gift should apply.  Many contracts have clauses like, "for good and value consideration, the sufficiency of which is hearby acknowledged" or some such.

It seems strange to me that California would REQUIRE one to get the other party's signature to cloud title.  The party that has to defend the cause of action is likely in an inferior position if there is a disagreement that would prompt a suit.

William Morgan · Answer

Great insight guys.

RE Memo: Aah, but alas this is California.  To my knowledge a Memorandum can't be filed without the Sellers signature.

Bill Gulley · Answer

Dion makes a good point to your shadow dealings, filing a memorandum of an accepted sale contract would certainly muddy the waters, but let the seller know it's being filed and that may prevent her from entering into other agreements. It also puts the ball in her court to abide by the contract or force you to remove the cloud, initially at her expenses. There is the possibility a judge would not buy your argument, but laying out money toward performance would probably be a liability to the seller. IMO, your filing would be prudent, but there is never a guarantee what floats in the eyes of any judge.

All in all, I'd make the filing and have a release handy if things started going the other way and see if you could guide her as initially agreed. :)

William Morgan · Answer

Bill, let me first clarify, there was both a Pest inspection and a home inspection.  The Home inspection being paid for by the Buyer as per their purchase agreement. The Pest inspection noted minor issues requiring action which the (now emboldened) Seller appears to be discarding, while hinting at discarding the agreement altogether.

I initially thought that there was no benefit to the Seller (and that may still be the case).  However, in Kaliforinstan the Seller is required to disclose considerable information about the condition of the house and potential hazards to the property. The Home Inspection aids the Seller to this end and will henceforth be part of any recent transaction of the property. ( I believe but am not certain that a home inspection, if conducted, becomes part of the required disclosures thereafter). Therefore my thought is that this Home Inspection could be the "benefit" to the Seller that qualifies as consideration.  This inspection likely costs $300-400 and will be required in future disclosure of the property.

I honestly don't think a legal battle would come from this transaction.  However, from a "Bargaining in the Shadow of the Law" standpoint if the Seller realizes that the contract is arguably valid and still enforceable She will likely be less emboldened and probably hold up to her end.

Bill Gulley · Answer

How did the seller benefit from the pest inspection? Was that a benefit to the seller, a benefit that is easily determined in dollars? Probably not.

I also see you are in the Republic of Cali, so what a judge may consider consideration may stem from some other aspect of the contract if adequate consideration was involved, but sounds to me like it's that ten dollars together with other good and valuable consideration thing, if the consideration recited is not sufficient for the scope of business to be conducted, your seller may not be bound at all.  :)

Does this qualify as "Consideration"?

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