Article

Note: To provide a down payment pending closing for the purchase of land from K.G. Cornwall, LLC (Seller) that had been divided into 120 agerestricted adult townhouses at a price of US$10,320,000.00, Beazer Homes Corp. (Buyer), obtained a standby LC for US$150,000.00. The LC was referred to in the real estate contract as a "deposit" and the contract does not otherwise discuss the LC than to state that it was to be held in "escrow." The contract provided that the closing was to occur within 45 days after the site plan was approved and all conditions were fulfilled. It also provided that after two years had passed without a closing, either party could cancel. The contract contained a standard socalled "integration" clause providing that it represented the entire agreement and that it could not be amended except by a signed writing.

Before the closing was scheduled, the LC expired and it was neither renewed nor replaced. Buyer did not appear at the closing and claimed that the seller was unable to convey satisfactory title to the property. Seller sued Buyer for breach of contract and both parties moved for partial summary judgment. The U.S. District Court for the Southern District of New York, Brieant, J., granted Buyer's motion.

Noting that the contract provided that it was complete and exclusive and could not be modified except by a signed writing, the Judge declined to reform the contract. He ruled that there was no contractual obligation on the part of the Applicant/ Buyer to renew the LC and no obligation of the escrow agent to warn the parties of its pending expiration.

"We look in vain in this detailed Agreement, drafted by experienced real estate practitioners, for any expressed provision requiring the Buyer to renew the Letter of Credit, which as delivered contained, as most do, an expiration date. Indeed, the Letter of Credit is not described and the only reference thereto is in that portion of the Agreement pertaining to the Escrow of the Deposit..."

"We cannot imply the existence of an oral understanding that the Buyer would renew the Letter of Credit when it expired. It must have been readily apparent to these sophisticated real estate investors and their experienced real estate lawyers that the Letter of Credit might well expire by its terms before the conditions precedent to title closing had been satisfied. They should have made provision in their Agreement for this likely foreseeable event, and simply failed to do so. The facts do not support a finding of mutual mistake or fraud or overreaching, which would allow this Court to reform the documents by imposing a duty to renew the Letter of Credit or alternatively, to pay the Deposit, in cash, and Buyer is not found to be in default for failing to do so."

Comment:

This opinion illustrates a common situation: Parties to relatively sophisticated contracts sometimes neglect to provide detailed provisions regarding LCs that are related to deals and are integral forms of payment or assurance.

[JEB/krp]

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