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.” The reason: the parties did not agree to a price for the Property, but only agreed to negotiate about the 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 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 other language in the agreement, could be used to calculate a definite purchase price.
The most critical paragraph was paragraph 2, which provided:
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 rezoned. Once rezoning was accomplished, LVH exercised its option and sent a draft purchase and sale agreement to Freeman, setting a purchase price of $2.5 million.
Freeman responded 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 refusing to sell the Property for $2.5 million. The trial court granted 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. It found that the Option Agreement was not enforceable and that summary judgment should have been granted to Freeman, dismissing LVH’s breach of contract claim.
The Court of Appeals 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 emphasized that all written terms in a contract must be construed together. Tennessee law does not allow a court to consider only certain parts of a written agreement while ignoring others.
Notably, the Court did not find the Option Agreement ambiguous. Instead, it concluded that the plain and unambiguous language showed that the parties intended to negotiate price in the future, and both understood they might not be able to reach an agreement.
In some cases, Tennessee courts can enforce a contract even when it lacks certain terms. For example, if the parties had agreed on a definite price and described the property adequately, but had not agreed on a closing date, a court would almost certainly enforce the contract. In that situation, the court would supply a commercially reasonable closing date—likely 30 or 60 days from the agreement date.
Tennessee courts will strive to uphold contracts, even when terms are missing, if those terms can reasonably be supplied by the court. This case, however, illustrates that Tennessee courts generally will not supply a price term.
If the parties have not agreed on a definite price—whether because they deferred agreement or otherwise—any breach of contract case will most likely end the same way this one did.