Daily Development for Friday, February 2, 2007
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri

VENDOR/PURCHASER; MERGER BY DEED: Merger by deed does not apply where there is evidence of mutual mistake. Where buyer closes without providing for a change in tax prorations, as provided for in contract, buyer may later seek new proration based upon mutual mistake regarding accuracy of basis for tax proration, even though buyer could have discovered the truth through inspection of public records prior to closing.

Czarobski v. Latja, 2007 Westlaw 121127 (Ill. App. 1/18/07)

A residential sale contract provided that general real estate taxes would be prorated as of the date of closing. It went on to provide that prorations would be on the basis of 105% of the "last ascertainable bill. If said bill is based upon a partial assessment, or on an unimproved basis for improved property, a written agreement (with escrow) for final proration when the complete assessment information from the County Assessor shall be available shall be signed at closing by the parties hereto."

In fact, the figures used by the parties were based upon partial assessment figures for 2003. Sellers gave plaintiffs a credits for the 2003 and 2004 tax years, but the credits were only equal to about half of the actual taxes ultimately assessed to buyers. But buyers, unaware that the assessment was partial, did not seek an escrow agreement at closing, and no such agreement was signed.

When the buyers later sought additional payments for the prorated taxes, the sellers defended on the basis of merger by deed - the buyers had closed without an escrow agreement, and that was that, they argued. The buyers argued that there could be no merger by deed in the face of a mutual mistake of fact. The claimed that both partied operated under the belief that the 2003 taxes were a full assessment. The sellers responded that mutual mistake did not prevent operation of the merger doctrine under the Illinois precedent, but that, even if it did, the mutual mistake doctrine ought not to bar merger where the true information was available to the buyer upon inspection of the public records prior to closing.

The trial court agreed with the sellers and granted summary judgment.

On appeal: Held: Reversed.

The primary argument made by the sellers was that mutual mistake simply was no defense to the operation of the merger doctrine. Apparently there is a split in the appellate districts in Illinois on this issue, and the court chose to disregard authority from another district that held that mutual mistake did not affect the merger doctrine. The court commented that, although the doctrine of merger by deed is recognized in Illinois, it "is not favored by modern courts." It pointed to a case in which the merger doctrine was not applied where the property being sold was 4.3 acres less than the parties believed. Although the court did not say so specifically, it would appear that the buyer could have surveyed the property and discovered the shortfall. Nevertheless, buyer was not barred by merger from raising the problem after the closing.

In another precedent case, the court permitted a buyer to argue mutual mistake concerning the tax assessment, where, as here, the true tax information was spread in the public records prior to the closing. But another appellate district chose to ignore this case and denied relief concerning an error in tax assessment because, it concluded, mutual mistake was not a defense to application of merger.

In short, the court felt that the argument of mutual mistake was available to buyer, and that mutual mistake existed even when the borrower had constructive knowledge of the true facts.

Comment 1: The court apparently assumed (consistent with the conclusion of an appellate decision from the other district that it rejected in part) that an agreement as to tax prorations was not a "collateral agreement" and was, in fact, subject to the merger doctrine absent misrepresentation or mutual mistake.

Dirter Dale Whitman, author of a casebook on real estate transactions, demurs with this analysis, although he might concur in the result. In his view, the few decisions that go beyond title issues in applying the doctrine of merger by deed are simply wrong. The classic application of the doctrine was only to defects in title that the buyer accepted without objection, even though the contract gave assurances against such defects. Dale would leave things at that.

Dale does agree that waiver or, more appropriately, the contract doctrine of accord and satisfaction, might also apply to the analogous situation of the buyer agreeing to accept at closing a state of facts other than that warranted by seller in the contract. Of course, accord and satisfaction requires a "meeting of the minds - and thus actual knowledge of the defect. So there could be no accord and satisfaction in this case.

For a case that accepts mutual mistake as a defense to merger, but refuses to permit its use in a situation where the parties almost certainly were mutually mistaken, see Groff v. Kohler, 922 P.2d 870 (Alaska 1996) (The DIRT DD for 4/2/970 (Involving a promise in the contract to convey an easement to buyer at closing.)

Comment 2: For a case that applies merger, in a way, to title issues, see: . Richman v. Gehring Ranch Corp., 37 P.3d 732 (Mont. 2001) (The DIRT DD for 9/19/02) (Grant by seller, to "future buyers," of access rights to unspecified lands retained by seller, included in real property sales agreement, merged into deed of a portion of sellers land, which deed did not mention any rights. Thus purchaser's successors do not have any such rights against seller.)

For a case that does apply the merger doctrine to non-title issues, see Warner v. Estate of Allen, 776 N.E.2d 422 (Ind.App. 2002) (the DIRT DD for 2/21/03). (Under merger by deed doctrine, purchase agreement for sale of residential home merged into general warranty deed at closing; therefore, purchasers could not, pursuant to the purchase agreement, seek recovery of insurance proceeds from vendor's insurer due to hail damage that occurred before offer to purchase was made.) (The editor hated this decision)

Comment 3: Most courts avoid applying merger to non-title issue by concluding that the arrangement in question, although part of the real estate sale agreement, was "collateral" to the main point of that agreement. See, e.g. Spears v. Warr, 44 P.3d 742 (Utah 2002). (The DIRT DD for 9/19/02) (Where the parties to a sale of real estate planned on both finalizing an irrigation water agreement and transferring title after the delivery of deeds, the collateral rights exception to the merger doctrine applies to the water agreement. ) Also see: Bruggeman v. Jerry's Enterprises, Inc., 583 N.W.2d 299 (Minn. App. 1998). (The DIRT DD for 5/12/99) (Conditional repurchase agreement is a "collateral agreement.")

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