By Robert M. Steeg

When your attorney is poring over every word of a purchase agreement that you are about to enter into, and you are getting frustrated with the way the attorney is fretting over small details, think about the case that partner Robert Steeg is about to describe. Your attorney is protecting your interests by worrying about the meaning of every phrase.

1100 S. Jefferson Davis Parkway, LLC v. Williams

In the case of 1100 S. Jefferson Davis Parkway, LLC v. Williams, recently decided by the Fourth Circuit Court of Appeal, Richard H. Williams signed a purchase agreement for the acquisition of certain real estate located in New Orleans, Louisiana, from 1100 S. Jefferson Davis Parkway, LLC, the seller. The purchase agreement provided for an “inspection period” of 30 days, during which the purchaser was allowed to conduct inspections of the property “by experts or others of his choosing.” The purchase agreement allowed the purchaser to terminate the contract if it was not satisfied with the condition of the property as reflected in the inspection reports, and the purchase agreement further required the purchaser to provide the seller with a copy of all inspection reports upon completion of the inspections.

The purchase agreement also contained a handwritten provision specifically providing for a “due diligence period” of 30 days.

The purchaser proceeded with his examinations of the property. In order to meet requirements being imposed upon him by the tenant to whom he intended to lease the property, the purchaser needed to obtain a flood elevation certificate showing that the property met certain elevation requirements. Because there was going to be some time delay in obtaining the flood elevation certificate, the purchaser requested an extension of time. The seller and purchaser executed a written extension of time for the “inspection period,” with all other terms and provisions of the contract to remain the same.

Ultimately, the flood elevation certificate proved unsatisfactory to Mr. Williams’ intended tenant, and Mr. Williams attempted to terminate the contract on that basis. Mr. Williams requested the return of his deposit.

The seller did not see things the same way. Although the facts are not totally clear, it appears that the seller was never informed about the fact that the purchaser would not be interested in buying the property if the purchaser was unable to consummate a lease with this particular intended tenant. The seller considered purchaser’s termination to be improper, kept the deposit as liquidated damages, and sued the purchaser for additional damages. Ultimately the seller sold the property to another purchaser for $259,000.00 less than Mr. Williams had been willing to pay.

How the Case Played Out in the Courts

The Fourth Circuit Court of Appeal affirmed the judgment of the trial court, holding that the purchaser wrongfully terminated the purchase agreement. The Court held that the “inspection period” was different from the “due diligence period.” The flood elevation certificate was not an “inspection report” because it simply revealed the property’s elevation statistics, rather than providing any opinion or judgment by an “expert or others.” Further, Mr. Williams had failed to provide a copy of that document to the seller, as was required with respect to all “inspection reports.” Because the flood elevation certificate was not an “inspection report,” the purchaser could not terminate the purchase agreement within the “inspection period” based on the flood elevation certificate.

The Court explicitly held that if the purchaser had wanted to terminate the purchase agreement on account of the flood elevation certificate, he would have to take that action during the “due diligence period.” However, the extension of time did not cover the “due diligence period.” It only covered the “inspection period.” Purchaser’s notice of termination was given after the expiration of the “due diligence period,” and therefore was untimely and ineffective.

The Court therefore found that the purchaser wrongfully failed to purchase the property, and it therefore allowed the seller to keep the deposit. Because the purchaser was not found to be in bad faith, the seller was not allowed to recover any damages in excess of the deposit. The seller was allowed, however, to recover its attorney’s fees.

Why Words Matter in a Purchase Agreement

It is doubtful whether any of the parties genuinely realized that the purchase agreement contained two distinct time periods for examination of entirely separate aspects of the property–one for examination of the “inspection reports” and the other for examination of all other “due diligence” items. It is even more unlikely that the parties genuinely realized that the extension of time would apply only to the “inspection period” and not to the “due diligence period.”

But that is what the words in the contract said, and the Court held that by using these two different phrases—“inspection period” and “due diligence period”—the parties must have intended them to cover different things. By explicitly extending one of them without the other, the parties must have intended for the time extension to cover only the “inspection period.”

Courts have to assume that words have meaning and that the parties choose their words deliberately. The purchaser, Mr. Williams, was unsuccessful in arguing that he understood the “inspection period” and the “due diligence period” to be the same thing. His contract had used each of the phrases, and had treated them differently. Mr. Williams was held to the specific, particular words that appeared in the purchase agreement that he signed.

Filed under: Commercial Real Estate, Industry News, Purchase and Sale
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