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Agreement to Agree on Price in the Future Makes Agreement Unenforceable

In a recent case, the Court of Appeals of Tennessee concluded that an option agreement for the purchase of 12 acres of land in the Wedgewood-Houston area of Nashville (“Property”) was nothing more than an unenforceable “agreement to agree” since the parties did not agree to a price for the Property, but only agreed to negotiate about price after the optionee exercised its option. (As a matter of full disclosure, Pepper Law represented the prevailing party, the defendant, Freeman Investment, LLC (“Freeman”)).

The plaintiff in the case, LVH, LLC (“LVH”), and Freeman signed an Option Agreement. The Option Agreement gave LVH a period of time to conduct due diligence to determine if the Property was suitable for development. The Option Agreement contained some language, which, standing alone and without reference to any of the other language in it, could be used to calculate a definite purchase price. The most critical paragraph in the Option Agreement with respect to the issues in the case was paragraph 2 which provided:

  1. Option Price. To be mutually agreed upon by Buyer and Seller within thirty (30) days following the expiration of the Option Period, at a price of $20,000 per residential unit (upon project completion) that can reasonably be developed on the property ….

Another paragraph provided that the earnest money paid by LVH “shall either be refunded to [LVH] in the event [LVH] terminates this agreement or [LVH] and [Freeman] cannot agree to an Option Price or partnership terms.”

After the Option Agreement was signed, LVH undertook its due diligence to determine the developability of the Property for residential use and had the Property re-zoned to allow its development for residential purposes. After the re-zoning was accomplished, LVH exercised its option and sent a draft purchase and sale agreement to Freeman, which agreement contained a purchase price of $2.5 million. Freeman then informed LVH that it would sell the Property for $9.75 million.

LVH sued for breach of contract alleging that Freeman had breached the Option Agreement by not selling the Property for $2.5 million. The trial court granted a summary judgment to LVH and entered an order of specific performance requiring Freeman to convey the Property to LVH for $2.5 million. Freeman appealed.

The Court of Appeals reversed the trial court’s finding that the Option Agreement was enforceable and held that it should have granted a summary judgment to Freeman dismissing LVH’s breach of contract claim. The Court of Appeals found, and held, that the Option Agreement was a mere agreement to agree because it left the price to be determined by future negotiations.

In reaching its decision, the Court of Appeals pointed out that all written terms in a contract had to be construed together. It is long-standing Tennessee law that a court may not ignore certain parts of the written contract while considering others. Notably, the Court of Appeals did not find the Option Agreement ambiguous, but found that the plain and unambiguous language in it established that it was the intent of the parties that they would negotiate in the future and that both understood that they might not be able to agree upon a price.

In some cases, Tennessee courts can enforce a contract even when it lacks terms. For example, a Tennessee court would almost certainly enforce a contract for the sale of the same land involved in this case if the parties had agreed on definite price, the property was adequately described, but the parties had not agreed on a closing date. In such a case, the court would supply a term consistent with commercial practice (probably 30 or 60 days from the date the parties reached their agreement.)

Tennessee courts will strive to uphold contracts, even when they lack terms which must be supplied by a court. This case, however, is illustrative of the fact that Tennessee courts generally will not supply a price term.  If the parties have not agreed on a definite price, whether because they agreed to agree on price in the future, or otherwise, the result in any ensuing breach of contract case will most likely be the same result as in this case.

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