Signing a written contract with someone includes an unspoken agreement to be reasonable. A court recently found that this means property sellers must be reasonable in their decisions about whether to allow the buyers to extend escrow.

The buyer contracted to purchase 86 acres from the seller, to subdivide it and build homes on the lots. At the outset, the buyer agreed to close escrow within two years; as time went on, it became clear that the permit situation was complicated and that it would take much longer than two years to obtain the planning permissions to subdivide the property, which needed to be in place before escrow could close.

The buyer upped his initial $150,000 deposit by an additional $315,000, and the seller agreed to extend escrow for five years, and expressly agreed that future extensions would not be unreasonably denied.

Five years and $5 million later, the buyer was still chasing after those governmental permissions. Imagine the shock and horror when the seller then refused to grant another two-year extension! Oh, and imagine the double shock and triple horror when the city agreed to issue permits only five months after the seller’s refusal to extend the deal!

The seller’s position was that the buyer didn’t try hard enough to get the permissions. The buyer’s position: Are you kidding me? You (seller) said you wouldn’t unreasonably withhold consent to more extensions.

The trial court sided with the buyer, finding that the seller had acted in bad faith, and exercised the discretion — given to him by the contract — unfairly and in a way that damaged the buyer’s rights. The appeals court agreed and went even further, stating that since the law abhors a result that would make one party unfairly forfeit its property, it made even more sense to find for the buyer.

Siding with the seller would have made the buyer forfeit $5 million, plus $465,000 in deposit money. By the same token, under a verdict for the seller, he would get to keep the buyer’s deposit plus the land — with the new permits. And, according to the California Court of Appeal, that just wouldn’t be prudent.

Based on the California Court of Appeal decision in Peak-Las Positas Partners v. Bollag.

Tara-Nicholle Nelson is author of "The Savvy Woman’s Homebuying Handbook" and "Trillion Dollar Women: Use Your Power to Make Buying and Remodeling Decisions." Ask her a real estate question online or visit her Web site, www.rethinkrealestate.com.

***

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