DIRT DEVELOPMENT for Wednesday, February 18, 2009
Daniel B. Bogart
Donley and Marjorie Bollinger Chair in Real Estate Law
Chapman University School of Law, Orange, California
VENDOR/VENDEE; MARKETABLE TITLE; MUTUAL MISTAKE: Buyer may rescind contract to purchase property where seller is unable to deliver access right across property reflected in a permanent easement.
Hinton Hardwoods, Inc. v. Cumberland Scrap Processors Transport, LLC, 2008 WL 5429569 (Ky. App. 2008)
Cumberland entered an option to purchase certain real property y from Hinton on July 17, 2006. Cumberland provided Hinton with a $10,000 non refundable deposit as consideration for the option, which was to last for thirty days. Three days before expiration of the option, Cumberland delivered a proposed purchase contract to Hinton. The parties negotiated the key terms to the contract, and agreed on a purchase price of $565,000. The contract also provided, as one would expect, that Cumberland could do a title search and that the seller, Hinton, would provide a survey. The case opinion is not explicit, but it appears that the contract for purchase and sale of the property was signed that day, on July 17, 2006.
The broker involved in the transaction located a lawyer to do the legal work and close the deal. In addition to preparing closing documents, the lawyer prepared the title commitment and performed a title search. The lawyer did not discover any title defects.
However, before closing, (and before the time period for noticing title defects ended) a problem emerged. The Cumberland representatives observed on the survey that the sole public road used by Hinton to access the property did not actually extend to the property. Instead, the public road stopped at a railroad line owned by R.J. Corman. The subject property did have a driveway that physically crossed the railroad line, and connected the property to the public road. However, there was no recorded ingress, egress easement permitting the driveway.
In other words, purchaser could not be guaranteed that it would have the right following closing to access the property from the public road.
Cumberland relayed its concern to Hinton, and Hinton contacted the railroad company, R.J. Corman. Corman agreed to grant a ten year access right to cross the railroad line to Hinton, which would then be transferred to Cumberland upon the purchase of the property. There was testimony that the ten year crossing right was “standard” in the industry. However, this proposed title fix did not satisfy the purchaser. As a result, Cumberland gave its formal notice that it objected to the seller’s state of title on October 18, 2006, and further gave the Hinton 20 days to correct the problem. Presumably, nothing short of a permanent easement would have satisfied Cumberland.
Hinton’s lawyer responded on November 3, 2006. In his letter, the seller’s attorney stated that Hinton never promised Cumberland access to the property or that the property would meet the public road. Furthermore, Hinton stated through its lawyer that it did not have notice prior to the transaction that the property lacked access rights.
To make matters more compelling, in anticipation of the sale of their property, Hinton (which was a family business) “dismantled their family lumber mill and went out of business.” Because Cumberland was dissatisfied with the state of title on the Hinton property, Cumberland decided instead to enter into a purchase transaction for another property. (This alternative property was partly owned by the broker. Prior to closing of that transaction the broker sold its part interest to the other owner of that tract.)
The seller, Hinton, now out of business, brought an action for specific performance against the purchaser, Cumberland, along with an action for fraudulent misrepresentation. (Readers will not be surprised to learn that the seller also brought a breach of duty of fiduciary duty action against the broker, as well as tortious interference with contract.)
The trial court granted summary judgment for the purchaser, Cumberland, and also held that any damages for Hinton be limited to the liquidated damages specified in the contract. Furthermore, the trial court found that the purchaser and seller were both operating under a mutual mistake of fact: that the property carried with it a perpetual right of access to the public road. This mistake barred the Hinton’s demand for specific performance, and provided the Cumberland with the right of rescission.
The Kentucky Court of Appeals affirmed the trial court.
The court repeated black letter law regarding mutual mistake: that both parties must be mistaken about a material fact to the transaction. Citing a string of older Kentucky cases, the court explained that if parties act on a mutual mistake, by definition they have not reached a meeting of the minds. Thus, the contract was unenforceable.
In this case, the parties all understood that Cumberland intended to put the property to industrial purposes, and that access was crucial. The court acknowledged that, even in the absence of a written agreement, the railroad had for years permitted Hinton to cross the tracks. But the court viewed this behavior as permissive and subject to revocation by the railroad at any time.
Furthermore, by its own testimony, Hinton suggested that it was unaware that it did not possess the right to cross only reinforced the court’s conclusion that both parties were acting on a mistaken understanding of the facts.
The court sealed the deal by stating that a reasonable business person would not accept title to this particular property in the ordinary course of business, due to the lack of access. The property was therefore held unmarketable.
Comment 1: Perhaps Hinton could have claimed it had a prescriptive easement right, and that its prescriptive easement cured any issue regarding marketable title. Hinton was in the habit of crossing the property and did so for a period of time. Its use was open and continuous, although one might argue that its use was permitted by the railroad. Assuming, however, that Kentucky requires hostile intent for prescriptive easement to arise then Hinton’s admission that it was unaware that it did not have a right eliminates prescription. In any event, some jurisdictions require marketable title to be clear from the record itself, so the fact that a right emerges from adverse possession or prescription would be inadequate (California follows this rule). Other jurisdictions are more generous.
Editor’s Comment: Don’t forget also that the appeals court stated that the prior use of the railroad right of way was “permissive,” which kills a prescriptive easement claim.
Comment 2: This court states that marketable title is that title which “enables the record owner not only to hold the land, but to hold it in peace and, if he or she wishes to sell the land, to be reasonably sure that no flaw or doubt will arise to disturb is market value.” Not all courts would agree with this definition. Some courts hold that the mere fact that property is landlocked does not mean that the seller lacks marketable title. See for example Sinks v. Karleskint, 474 N.E. 2d 767 (Ill. App. 1985). According to Sinks, title can be marketable even if the property does not have much value on the market. There is a difference, according to Sinks, between a legal determination of marketability and the fact that property without access has a low dollar value. The only question is whether the seller has fee simple absolute (or fee simple subject to permitted exceptions) and whether there is the likelihood of litigation over the ownership of the tract. In Cumberland, Hinto
n owned the property in fee simple and, unless the purchaser trespassed, there would be no litigation.
Editor’s Comment: Perhaps one could distinguish Sinks by noting that there was a road physically attached to the property and an apparent appurtenance. Recently, the editor believes, DIRT discussed a case in which improvements on the property overlapped onto a neighboring parcel. The consensus appeared to be that this was a marketability problem, even though the title to the property described in the contract was good title.
Comment 3: Cumberland, the purchaser, drafted the contract. It could have made access an explicit contingency but it failed to do so. The appellate court did not think this a good excuse, largely because, as drafted, the contract gave Cumberland the right to inspect title and required Hinton to deliver a survey. The whole point of these rights and obligations, suggests the court, is to discover problems just like the one found in the case. What good is the right to inspect title and to review a survey if, having found a problem based on these rights, Cumberland must nevertheless close? Legal custom probably matters here, and the author is unaware of what Kentucky lawyers typically demand in purchase agreements of this kind. However, the author thinks that the purchaser could have protected itself. True, Cumberland contracted for the right of a title inspection and review of a survey. But Cumberland assumed that the court would adopt Cumberland’s view of the definition and n
ature of an encumbrance or defect in title. Access rights are crucial, and the contract could easily have required the seller to spell out these rights and demonstrate access to and from the property.
Editor’s Comment: Note, once again, that everyone apparently accepted that the process for exercising the option involved the development of a sales agreement, with conditions. It appears that none of this was in the option itself, as it should have been. Customs apparently vary wildly about what an optionee can demand once it accepts the option.
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