Making an Option Irrevocable: The Mere Performance of Due Diligence Isn’t Enough

A recent case out of California, Clever Hospitality, Inc. v. Patel, B264921, sheds light on the limits of due diligence to serve as consideration when it comes to making an offered option irrevocable. In that case, the Patels, the owner of a hotel, gave Clever, a prospective buyer, a 60-day option to buy the hotel. During that time, Clever indicated it was going to conduct due diligence. If, at the conclusion of its due diligence, Clever was interested in buying the hotel, it was supposed to exercise the option by depositing $150,000 into escrow. Clever used the 60-day period to perform significant amounts of due diligence, so much that Clever asked for an extension of the 60-day period. The Patels eventually refused the request and indicated to Clever once the 60-day period was over that, because Clever never deposited $150,000, the option had lapsed. However, the Patels and Clever continued to have contact regarding the hotel, although the Patels also told Clever that they were speaking to other potential buyers as well. Eventually, a few months later, the Patels sold the hotel to another buyer. Clever then sued the Patels for breach of contract. 

Clever’s main argument was that its time, effort, and money invested in its due diligence acted as consideration to render the Patels’ option irrevocable. The court, however, noted that the necessary consideration here had to be money or services that the Patels had bargained for. In this case, Clever’s due diligence only benefited Clever, not the Patels. After all, the Patels would have been quite content if Clever had performed no due diligence at all and instead just bought the hotel. 

Clever then argued that promissory estoppel should save it and render the option irrevocable. However, the court could find no evidence that the Patels ever made any promise to Clever that it would keep the option open. In fact, the evidence seemed to show that the Patels had indicated the opposite to Clever: that the option had expired and that they were talking to other buyers. Therefore, there was no promise for Clever to reasonably rely upon and promissory estoppel was inappropriate. 

Clever never at any time placed any money in escrow the way it was supposed to under the terms of the option. It seems as if Clever assumed that the Patels had no other serious buyers and that maybe there would be plenty of time for Clever and the Patels to work out a deal, and so the lapsing of the option didn’t seem to concern Clever all that much…until a sale to someone else had been consummated. This case serves as a warning: Due diligence alone might not be enough to save you from losing out on the object of that due diligence.