Ensuring post-closing performance

By Albert G. Marquis, Esq.

A few years ago, I represented a client in a jury trial. When the case began, the issue appeared to be simple: What amount should the seller be required to pay for his failure to construct off-site improvements and stub out utilities to the property?

The contract for the sale of commercial vacant land appeared to be clear. The seller would receive cash at closing. Within 90 days, the seller would construct all of the off-site improvements and bring the utilities to the property.

As it turned out, the cost of bringing utilities to the property was much more than anyone had anticipated. The Las Vegas Valley Water District required a waterline loop (connecting the ends of two water lines) with a 12" diameter pipe. NDOT required the excavation and replacement of 12' of pavement (rather than 12" of pavement as anticipated). Instead of costing the anticipated $25,000, utilities and off-sites cost $250,000.

The seller, having received the purchase price, balked. He hemmed and hawed, stalled and delayed, attempted to renegotiate and eventually forced the buyer to contract to have the services performed himself. The buyer then turned around and sued the seller for the $250,000.

In actuality, the seller didn’t have much of a defense. Therefore, he created a defense by “manufacturing” claims against the buyer. Soon we were into full blown litigation, and the case actually had to be decided by a jury. Each side ended up spending about $100,000 in attorneys fees.

At first blush, it is difficult to conceive of a way in which the buyer could have protected itself any better than it did. There was a written contract between the parties. The contract required the seller to construct the off-sites and install the utilities at the seller’s expense. What could be clearer?

Regardless of clarity, sometimes a written contract is simply not enough. A party to the contract may decide that it is more to his economic advantage to breach the contract than to perform. To prevent this, the other side needs to make it more expensive not to perform.

In hindsight, our buyer should have withheld a portion of the purchase price until the seller had performed. As it was, the seller had pocketed 100% of the sales proceeds, and he simply did not want to part with any further funds. Had a sizeable portion of the proceeds remained in escrow, chances are the seller would have installed the off-sites and utilities so he could get his money.

Therefore, if either party to the contract is required to make any significant performance after closing, retain some sort of leverage. Retain a portion of the purchase price in escrow, which will be released only upon performance. That option is certainly better than a jury trial.