Lessons From A Failed Land Development Deal
Developing land is often complicated. The would-be developer must take into account a host of considerations, not the least of which are: (a) property acquisition; (b) financing; (c) zoning; (d) presence of environmentally critical areas; (d) local development codes; (e) subdividability; (f) bureaucracy and politics of local jurisdictions; (g) market forces; (h) title issues; (i) legal and physical access; (j) availability and cost of utilities; (k) boundary/survey issues; (l) easements; (m) liens and encumbrances; (n) restrictive covenants; (o) environmental contamination; etc. Developers frequently value the land in large part based upon its prospects for subdivision and eventual resale of smaller lots (either improved or unimproved).
A recent unpublished decision from Division 3 of the Washington State Court of Appeals, Park South LLC v. Denali Construction LLC et al., provides a great case study in how a property development deal digressed into costly and avoidable litigation. There, Park South LLC (“seller”) entered into a contract in 2018 to sell six large undeveloped parcels to Taylor Mountain LLC (“Buyer”). The buyer deposited $25,000 in earnest money, which the seller retained after the purchase failed to close. A few months later, the buyer and seller decided to change their arrangement to a joint venture in which they would both contribute to getting one of the six parcels subdivided into buildable residential lots. The seller would contribute up to $1M towards the costs of the subdivision, and the buyer would hire various contractors to complete the work. The main contractor, Denali Construction LLC (“contractor”), had as it sole member one of the two owners of the buyer. The buyer entered into a contract with contractor to “furnish and perform all work” on the project for $1M. Buyer and seller agreed to evenly split the profits from the sale of the finished lots. Within weeks after the joint venture agreement was signed, a Spokane County hearing examiner approved an application from one of the buyer’s subcontractors to modify a plat (including the parcel which was the subject of the joint venture agreement) to allow the contemplated subdivision, subject to some conditions. However, those conditions significantly increased the cost of the project. The buyer and the contractor took the position that seller should be on the hook for these additional costs, but seller refused. In the course of that dispute, the buyer brought up the seller’s retention of the $25k earnest money from the prior failed sale, taking the position that it was wrongful.
The parties eventually resolved their dispute be entering into a new purchase agreement in 2019 (“2019 PSA”). The 2019 PSA terminated the joint venture agreement, and provided that buyer would purchase 7 parcels from seller (inclusive of the one which had been the subject of the joint venture agreement). The parties agreed that the old $25k earnest money deposit would roll over to constitute the buyer’s earnest money deposit for the 2019 PSA. Importantly, the 2019 PSA provided that the buyer “has had full and ample opportunity to thoroughly review, inspect, and evaluate the Property and any improvements, and is completely satisfied with the status and condition of the Property and fully acknowledges that [buyer] is purchasing the property, expressly, on an ‘as-is’ basis. . . . [buyer] expressly waives its right to receive any disclosure statements.” The 2019 PSA also specifically advised the buyer to “investigate whether there is a sufficient water supply to meet [buyer’s] needs.”
Unfortunately the 2019 transaction again failed to close, due in large part to most of the property not having water availability. The seller declined the buyer’s request for another extension of the closing date, and got stuck paying the liens of the contractor’s subcontractors, which related to developing the property. Once the purchase transaction finally fell apart, the contractor recorded a lien for $770,995 against the seller’s property, prompting the seller to sue the buyer, and contractor, and the contractor’s owner. The buyer and contractor both counterclaimed against the seller, asserting that the seller had wrongfully retained the $25,000 earnest money, that the seller had been unjustly enriched by the improvements to the seller’s property, and that the contractor should be entitled to foreclose on its claimed lien.
At trial, the buyer claimed that the seller repudiated the contract by failing to disclose a water accessibility issue which allegedly rendered five sixths of the property undevelopable. The trial court sided with the buyer and the contractor, awarding the earnest money to the buyer, finding that the seller had been unjustly enriched by over $432k of added value to the seller’s property, and that the contractor’s lien was enforceable. However, the Court of Appeals reversed. The Court found that the seller had not breached the contract, and that the buyer was not entitle to the earnest money back because the buyer expressly agreed that it was purchasing the property as-is, and that buyer was completely satisfied with the condition of the property. The buyer and the contractor in the 2019 PSA disclaimed any claims against the seller. The buyer also waived any right to receive disclosures from the seller. The contractor’s lien was also filed late, so was unenforceable.
Potential developers can learn many lessons from the Park South case, including, inter alia: (1) Failing to perform due diligence on feasibility of development can have dire consequences; (2) waiving a right to disclosures should not be taken lightly; (3) be mindful of how costs can spiral out of control; and, perhaps most of all: (4) have a competent real estate lawyer review you contract! An ounce of prevention can be worth many pounds of cure.
The lawyers at Beresford Booth have a wealth of experience in drafting, reviewing, and litigating contracts related to real estate. We would be happy to assist you.
To Learn More about Lessons From A Failed Land Development Deal, please do not hesitate to contact us at info@beresfordlaw.com or by phone (425) 776-4100 for assistance.
