What Makes a Contract?

Historic definition of a contract is an offer and an acceptance supported by consideration. The acceptance must be on same terms as the offer and consideration has been watered down to be almost any promise, payment or performance. Florida judges repeatedly explain that a contract requires a meeting of the minds of the parties on all essential elements.

That seems simple enough, but over the years there has been much argument about what is an essential element. The argument starts when one party wants to get out of the deal. Sometimes disagree on the definition of “essential.”

Acosta v. District Board of Trustees is an interesting case. Students who graduated from a community college sued the college for fraud and breach of contract. In the school’s letter to the students accepting them into the program, the director of the program advised that the tuition costs would increase over the current level because of increased costs. The director went on to explain that the program “should be a very economical program and be under $6,000 for the two years of education.” The director asked the students to sign the acceptance letter which included a statement that they were “aware of the increase in the cost of the program.”

The director later informed the students that due to specific additional staff and equipment upgrades semester tuition would be increased by $2,800 and that the total cost for the program would be $18,543.10. Before the students started classes and before any tuition was paid, the college held an orientation at which the college repeated the explanation of the increase in tuition. Two students decided not to attend but all 31 of the students suing the school proceeded with the program, paid the tuition and graduated.

The students lost at trial and on appeal. The appellate court explained that although essential terms of the contract can vary widely according to the nature and complexity of the transaction, price is generally recognized as an essential term. Since there was no price quoted in the acceptance letter signed by the students, no contract was formed and there could be no claim for breach of contract. The appellate court made short work of the fraud and other claims noting that no firm promise was made as to cost of the program.

Price is often the issue when an option to purchase is involved. Under an option to purchase, one party has the right to purchase property but is not contractually obligated to purchase until giving the owner notice that option to purchase is being exercised. In many cases, price is not set but a formula or method provided to determine price. Appraised value is often used.

In Contos v. Lipsky, the lease gave the tenant an option to purchase the property. The option provided that price would be the “true market value at the time of exercising the option.” The lease provided that landlord and tenant would each select an appraiser and the two appraisers would select a third appraiser and true value would be the amount agreed upon by all three appraisers. The issue was how to treat the remaining term of the lease.

The lease was apparently favorable to tenant as it was below-market rent and after exercised an extension option did not expire for 26 years. All the appraisers agreed that the value of the property should be determined by calculating the present value to the owners of future earnings from rent plus the present worth of the owner’s reversionary interest to equal what an investor would pay for the property at time the option to purchase was exercised. The owner argued the lease should be ignored because it would and when the tenant bought the property.

The court explained the issue is whether the lease merged into the deed for purposes of determining value. The court explained, intent of the parties was controlling and unless the agreement made it clear the court would look to best interest of the party acquiring both lease and title. Best interest of the tenant was the formula used by the appraisers and the court decided that the lease did not merge into the deed for purposes of determining value of.

A different appellate court reached somewhat a different conclusion in Palm Pavilion of Clearwater v. Thompson. In the Thompson case, the tenant had an option to purchase at fair market value by each party selecting an appraiser who would select another appraiser, each appraiser would provide a price and the purchase price would be the average. The tenant’s appraiser valued the property encumbered by the lease. The landlord argued to the contrary and the appellate court agreed with the landlord.

The appellate court  stated that it may not really disagree with the Lipsky decision because of differences in contract language. The option in Lipsky was to purchase “the leased premises” but the option in Thompson was to purchase “the property.” The court explained “leased premises” meant value of the premises as leased.

A few weeks ago, the 2nd District Court of Appeal decided Certified Motors v. Aventine Hill. The defendant in that case exercised an option to extend the lease. The lease was silent as to the rent to be paid if the option was exercised. One might think failure to include rent for the option term or a formula to determine rent would be fatal, but the court didn’t see it that way. The court ruled that if the option said nothing about rent to be paid, rent would be the same as under the original term. The landlord is likely not too happy with that result.

These cases emphasize the importance of good drafting and careful reading before signing documents. Although a contract requires a meeting of the minds on all essential terms, determination of terms and agreement may be by a court. It is better to make sure documents are clear and unambiguous before signing.