Last week, we put tried to put down a foundation for understanding the deed merger doctrine. In its simplest (but very inadequate) formulation, it stands for the proposition that once a buyer accepts a deed to the purchased property, whatever promises, representations, warranties or the like preceded the deed are “history.” At least, that’s what sellers would like the doctrine to be. A more appropriate explanation as to what happens when property is conveyed by a deed is the following: “When a provision in a deed is certain and unambiguous, it prevails over an inconsistent provision in a contract of purchase to which the deed was given.” [Johnson v. Ware (1943) 8 Cal.App.2d 204, 206.]
It’s all a matter of intent – what did the parties (buyer and seller) intend to happen? Therefore, what the deed merger doctrine really says is that where it can be shown that there was no intent to preserve an earlier promise, representation, etc., those promises, representations, etc. become no longer actionable once the deed is delivered.
The way “intent” (or “lack of intent”) is found begins with an examination of the deed and then is quickly followed by examination of the agreements that led to the deed.
Those readers who saw last week’s posting will remember that the impetus for this discussion of the deed merger doctrine came from a very recent California court decision (Ram’s Gate Winery, LLC v. Roche, which can be seen by clicking HERE. Last week’s blog posting, something that would be a useful prerequisite to today’s posting, can be seen by clicking HERE. The facts of that case give us a good example of what the deed merger doctrine is all about.
An existing winery was put up for sale. Along came a buyer with a desire to build new, separate winery buildings on the land. In the purchase agreement, the seller obligated itself to provide: “‘written disclosure’ of any ‘information known to Seller’ regarding violations of ‘building, zoning, fire, health, environmental statutes, ordinances or regulations; [and] any known geological hazards; . . . soil reports, . . . geotechnical reports, . . . and all other facts, events, conditions or agreements which have a material effect on the value of the ownership or use of the Property . . . .’”
The sale took place; the deed was delivered and accepted.
There turned out to be earthquake issues, seriously affecting the buyer’s ability to construct the new winery buildings in their intended locations. The seller had knowledge of the issues because when it put up its own buildings on the land 18 years earlier, it obtained both a site plan and a geological report, and each identified a fault or fault trace on the land. In fact, based on the plan and report, the seller was forced to relocate its own winery buildings in order to comply with a governmentally-required 50 foot setback requirement.
The buyer sued, but lost in the lower court. We can’t tell you the final outcome of this case because, on appeal by the buyer, the California Court of Appeal explained the law to the lower court and told it to “try again,” this time with the correct understanding of the law in front of it. For that reason, and because the facts about “who knew what and when” are yet unknown, Ruminations will now need to veer from the story and return to the legal principles. [Those who read last week’s postings already know of our confession that this subject is a little “wonky.”]
Now, Ruminations may be ignorant, but it isn’t stupid. We know that several hundred, perhaps a thousand, readers have been shouting at us: “Why are you wasting our time? The whole thing is simple. Just say which representations, etc. will survive closing and that’s the end of the matter. Don’t you see that every day? Don’t we fight over what survives and for how long?” Yes, that’s all true, but the purchase agreement in the earthquake fault case did exactly that. It specifically said that certain representations would survive closing. The obligations to disclose that whole list of things, including the earthquake related items, were not one listed as surviving the closing. Yet, the appellate court, unlike the lower court, said: “Not so fast, listing what survives closing and not listing other items is not the end of the story.” That’s why Ruminations is burning so many electrons over the issue (today’s equivalent of cutting down trees).
Yes, while listing some items as surviving closing and not listing others is one “clue” as to what the parties intended, it is neither a conclusive clue nor the only one. “Thus, whether the merger doctrine applies should be decided based on (1) an analysis of the deed in comparison with, and in the context of, the prior contract to discern whether the contractual terms are inconsistent with the deed, and (2) an examination of the parties’ intent as to whether the provisions of the prior agreement continue in force after the transfer of title.”
With that as its touchstone for solving the question of “was the breach of the disclosure obligation extinguished when the property changed hands,” the appellate court reviewed the deed and declared it to be a “rather pedestrian instrument.” We all know what it meant. Very few deeds “say” anything about what happens to all that “stuff” that was in the purchase agreement. Perhaps there is a take-away to be gleaned at as this point and that is: maybe deeds should say that the grantee releases all claims based on the purchase agreement or anything else occurring before the delivery of the deed other than representations and warranties expressly set forth in “such and such” agreement and specifically described as surviving transfer of the property, but only until such time as set forth in that agreement. This isn’t really from left field. Sellers of environmentally challenged properties frequently put similar text in deeds and the corresponding purchase agreements say that’s what is going to happen.
We think the reason this is not the common practice is because most people are (properly) weary from negotiating every little point and don’t want to add more “stuff” to the negotiation list. After all, deeds have been “pedestrian instruments” since time memorial, and we don’t need to open more fronts in this “battle” we’ve created for ourselves. At least, that would be a common feeling. Ruminations would agree, with one caveat, and that is “If it is really important, get it in the purchase agreement and in the deed.”
Back to business.
A pedestrian instrument, by its nature, will say nothing that conflicts with the purchase agreement. So, to express it in terms of the earthquake-fault case, the deed included nothing that obviously showed the disclosure warranty was merged into it.
Now, what about the intriguing notion that identifying certain provisions of an agreement as “surviving” does not evince a conclusion that nothing else “survives”? After all, doesn’t deliberately doing so manifest the parties’ intent that only those provisions identified as surviving would? The seller vigorously asserted that, but unsuccessfully. It argued that because some warranties set forth in a particular paragraph expressly were to “survive the Close of Escrow [ed. Note: California talk for ‘closing’] and the execution and delivery of the Grant Deed and Bill of Sale,” this “evince[d] a very clear intent of the parties” that the disclosure warranty did not survive the closing.
The (successful) buyer, however, was able to introduce extrinsic evidence (i.e., evidence from other than the purchase agreement) that it, the buyer, understood that the disclosure warranties would survive the closing. It pointed out that there was no agreement that those warranties wouldn’t survive the closing or that they would “merge” into the deed. This was sufficient for the Court of Appeals to send the dispute back to the trial court. Importantly, the appellate court set forth this principle of law, as applied to the situation before it:
“The fact that several paragraphs in the Purchase Agreement specifically provided for their survival does not, as a matter of law, compel the conclusion that no other provision could survive without a similar recital.”
If that is dissatisfying to any reader, then try this one on for size. The appellate court had another, independent way to support the buyer in this dispute. And, it’s something else to be considered when drafting agreements. What it did was to accept the buyer’s argument that the disclosure warranty had been breached before the closing and that the buyer’s cause of action actually accrued before closing. Further, that breach was not extinguished by the closing. It didn’t matter that there were no apparent damages at the time of the breach because whatever damages were later discovered actually occurred at the time of the breach, not at the time of discovery.
Now, as today’s blog posting grinds to its conclusion, we get a chance to explain why last week we, once again, made a big deal about how far we’ve moved from the days of the enfeoffment ceremony (which was pure “conveyance”) and have now engrafted significant contractual elements into agreements for the purchase and sale of real estate. You see, there is another BIG exception to the deed merger doctrine. It is the “collateral rights exception.” This “exception” says that if a provision in a purchase agreement is “collateral to the deed,” that provision will not merge into (not be extinguished by) the deed. Basically, if a provision in a purchase agreement concerns “title,” it is merged into the deed (because deeds are instruments of conveyance). If not concerning “title to the property,” the deed (an instrument of conveyance, not contract), leaves it undisturbed.
So, is there a final take away from this week’s and last week’s postings? Yes: “Say (write) what you mean and mean what you say (write).”
The best way to find the intent of the parties is for them to write it out, and write it out clearly. It is very unlikely the dispute over the earthquake fault non-disclosure would have seen two courts and giant legal bills had the purchase agreement clearly said that from and after closing, neither party could make any claim or institute any action against the other based on a breach of any covenant, warranty or representation in the purchase agreement unless the purchase agreement expressly provided that such covenant, warranty or representation survives closing and then no such claim or action can be instituted after the end of the survival period. Basically, bar both the claim and the action.