As a California attorney focused on business and real property transactions, I often see the word material appear in contracts—frequently, and often with significant implications. But what does it actually mean in practice? And why does it matter so much?
This post unpacks the word material as it’s used in contracts, disclosures, and enforcement, with examples and citations to California law. We’ll also explore how savvy contract drafting—especially by sellers—can shift the significance of materiality in deal contingencies.
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The Legal Weight of “Material”
In contractual terms, material refers to something that is significant or essential to the matter at hand. It’s not just any fact or breach—it’s one that would influence the decision-making of a reasonable person or have a substantial effect on the transaction.
For example, in the context of real estate and business sales, sellers have a duty to disclose material facts—those that would affect the value or desirability of the property or business to a reasonable buyer.
Under California law, material facts have been described as those that “have a significant and measurable effect on market value (in regards to real property). (Karoutas v. HomeFed Bank (1991) 232 Cal.App.3d 767) Similarly, in Reed v. King (1983) 145 Cal.App.3d 261, the court held that the seller’s failure to disclose that a murder had occurred on the property years prior could constitute a failure to disclose a material fact—because it might affect the market value or the buyer’s decision to purchase.
In the case Borba v. Thomas (1977) 70 Cal.App.3d 144, a seller of a business committed a misrepresentation of a material fact when the seller assured a buyer that there would not be a problem with the buyer obtaining approval from a government agency for water use. This was an untrue statement. The true fact that it could or would be a problem was a material fact that would cause a reasonable person interested in buying a business that would rely on such water use to decide whether or not to buy the business.
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Material Breach vs. Technical Breach
We also see the word “material” to qualify or help define types of breaches of agreements. Not all breaches are created equal. California courts often distinguish
between material breaches—those that defeat the purpose of the contract—and technical or minor breaches, which may not justify termination or rescission. Material breaches have been described as something that goes to the heart of a contract.
Example:
- A buyer fails to deposit earnest money on time (but does so a day later and proceeds with the transaction). This might be a breach, but probably not material.
- A seller, however, misrepresents or conceals a known environmental hazard at the property—that’s almost certainly material and may give the buyer grounds to rescind or sue.
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Negotiating Around “Materiality” in Deal Terms
Because the concept of materiality can be subjective, sellers often want to reduce the scope of facts or issues that could derail a deal. One common strategy is to narrow the buyer’s termination rights to only “material” matters.
Consider a clause like:
“Buyer may terminate this Agreement based only upon the discovery of a material adverse condition not previously disclosed in writing.”
This kind of language aims to prevent buyers from walking away based on inconsequential or cosmetic issues. Sellers may also try to control disclosure obligations by qualifying representations with materiality thresholds:
“Seller represents that there are no material lawsuits pending against the Business…”
This way, the seller avoids being liable for minor disputes that don’t meaningfully affect the transaction. For example, a minor invoice dispute filed in small claims court should normally not be a material fact that affects whether a business sells or not (for most businesses). However, what if that business was being sold for a relatively small amount, like $10,000? Well, in California small claims courts currently have jurisdiction to award damages upwards of $12,250 (depending on the type of person or entity suing). So that small-small claims matter, might not be so small or immaterial after all.
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Conclusion
In deal-making, words matter. Few words carry more weight than material. Whether you’re negotiating a disclosure obligation, deciding whether a breach justifies cancellation, or managing contingencies, understanding (and properly defining) materiality is essential.
As always, careful drafting can reduce ambiguity—and litigation risk. And in California, where disclosure duties and buyer protections are robust, sellers should tread thoughtfully when limiting what qualifies as material.