The Seattle Times reports today defaulted commercial loans are hitting local lender P&Ls. The commercial loan default wave is barley news worthy at this point. A number of local banks have been hit with cease and desist letters from the Feds in recent weeks. What’s interesting is that Seattle-Bellevue-Everett metro had the nation’s highest delinquency rate for construction and land loans in the second quarter of this year. I don’t think you can blame the developers, at least not all of them. Clearly lenders have been reckless in their evaluation of project viability and employment of funds held in their trust. When a lender approves a deal based on pro forma development costs and income with no basis in reality, backed by other projects from the same developer that are also based on blue sky pro forma income, at some point someone needs ask hard questions or put on the breaks. But no one did. Why is that? It’s way more fun to just make deals and get paid. No one wants to be accused of being a deal breaker. Plus, if your favorite developer is in obvious trouble, or is clearly cooking the books, that next loan may be all it takes to pull out of the tail spin. Right? Well, it sure doesn’t look like now.

The Mastro “friends and family” investor debacle grinds on. Does anyone have a clue how many other friends and family of other developers are in line for the big burn on limited liability company investments here in Washington State, regionally or nationally? Between your mom and pop developers, syndicators, 1031 exchange partnership members, and REITs, all of whom have heavily leveraged the savings of their investors, there is still a lot of blood being spilt with no tourniquet in sight. Some investors were well disclosed; most not creating a real liability issue for the sponsors. As a side question, why isn’t security law compliance part of the due diligence on a commercial loan application when it should be obvious based on a surface examination of the entity closing the loan that investor funds are at risk? I think a close examination would show that security law violations have been flagrant and widespread in the past decade locally and nationally. Which gets us back to the problem of today’s defaulted commercial loans – as long as the rising tide is lifting boats, no need to ask hard questions or disclose uncomfortable realities. A couple years ago everyone’s financial statements in these deals looked like rock stars. Now you have projects and partnerships in default and foreclosure with no end in sight. Lost are deferred salaries, retirement plans, college education funds, and saving. Despite the continuing reports that the economy is recovering, I think we have a very long, long way to go before all the trouble commercial assets shake out of the system. And the analysis didn’t take an economics degree to figure out in the first place. Assigning unrealistic cap rates to nonexistent income on marginalized deals based on beating the next guy to market never made much sense to me. I guess no one wants to be accused of being a deal killer or having a bad attitude. So scratch that. That’s all for now.

Last month Division 2 of the Washington Court of Appeals upheld the proposition that a real estate purchase and sale agreement lacking specific terms is unenforceable. In 16th Street Investors LLC v. Morrison, (unpublished opinion) the court found the PSA did not create a legal obligation for the seller to sell, but rather an agreement to agree, and in doing so reversed the trial court’s decision ordering specific performance of the contract.

This case involved the proposed sale of redevelopment property in downtown Vancouver, Washington. The property was one of several acquired by a speculator and promoter of a revitalized downtown Vancouver. As part of the sale Mr. Morrison wanted an option to purchase a condominium in the redeveloped property if there was a residential component.

The buyer and seller executed a purchase agreement. The buyers completed their due diligence and ordered the closing agent to prepare closing documents. Upon examination, Mr. Morrison felt that the language granting his right to purchase a condominium was unacceptable. He refused to close. The buyer’s sued and the trial court ordered specific performance. Mr. Morrison appealed the trial court’s decision.

The Court of Appeals examined the essential terms of a real estate contract, stating that they generally include the “subject matter of the agreement, the consideration and terms of payment.” Hubbell v. Ward, 40 Wn.2d 779, 787, 246 P.2d 468 (1952). When a contract contains all of the material and essential terms of a future contract such that a court can ascertain what the parties must do to constitute performance, then the court may order specific performance. Hubbell, 40 Wn.2d 787.

The Hubbell court separately enumerated 13 specific material factors in a real estate contract (involving structures, not just land): (a) time and manner for transferring title; (b) procedure for declaring forfeiture; (c) allocation of risk with respect to damage or destruction; (d) insurance provisions; (e) responsibility for: (i) taxes, (ii) repairs, and (iii) water and utilities; (f) restrictions, if any, on: (i) capital improvements, (ii) liens, (iii) removal or replacement of personal property, and (iv) types of use; (g) time and place for monthly payments; and (h) indemnification provisions. Hubbell, 40 Wn.2d at 782-83; Kruse v. Hemp, 121 Wn.2d 715, 722, 853 P.2d 1373 (1993).

The court found that the purchase and sale agreement proposed by Morrison contained all of the material elements. However, the court found that a memorandum attached the PSA expressing Morrison’s desire to purchase a condominium to be “ ‘an agreement to do something which requires a further meeting of the minds of the parties and without which it would not be complete.’ “ Keystone Land & Dev. Co. v. Xerox Corp., 152 Wn.2d 171, 175, 94 P.3d 945 (2004) (quoting Sandeman v. Sayres, 50 Wn.2d 539, 541-42, 314 P.2d 428 (1957)). Agreements to agree are unenforceable in Washington. Keystone, 152 Wn.2d at 175.

In looking at the purchase agreement with memorandum as an organic whole, the Court of Appeals decided that because one part of the agreement – the condominium carve-out – was not specific enough to determine what the parties intended, the whole contact failed.

Quite often we see terms added to a standard purchase agreement using NWMLS Form 34 Addendum/Amendment to Purchase and Sale Agreement. This case is a reminder that hastily drafting resulting in ambiguous terms can lead to an unenforceable agreement if one of the parties later decides to back out of the deal. In this case as late as after all conditions have been met and the parties are at the closing table.