Daily Development for
By: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of
Of Counsel: Blackwell Sanders Peper Martin
Kansas City,
prandolph@cctr.umkc.edu
VENDOR/PURCHASER; TITLE:
Vendors of residential real property are not entitled to invoke the
protection of an escape clause contained in the purchase agreement to excuse
their failure to deliver good and clear record and marketable title to the
property when they are in a position to resolve the identified title defects
and fail to do so.
In May, 1997, the parties entered into a standard form
purchase and sale agreement published by the Greater Boston Real Estate Board
(the "Agreement") for the sale of residential property owned by the
sellers.
The Agreement provided that it would be void in the event
that the sellers were unable to convey title in accordance with the provisions
of the Agreement, unless the sellers elected to use reasonable efforts to
remove any title defects. Closing was
set for August 29.
Then an apparent game of chicken ensued. Buyer wanted to postpone the closing for two
weeks. Seller refused. Then, one day before the closing, buyer's
counsel faxed seller's counsel to indicate that he had "just
received" a title report and that there were three items that needed to be
cleared. The defects were an
outstanding lease on a portion of the property, a sewer assessment, and an
outstanding mortgage to the parents of the sellers. Buyer's counsel inquired as to whether the
defects would be cured.
Seller's counsel faxed a response that afternoon indicating that he
did not believe that these defects affected marketable title. He stated that the lease, dating from 1931,
was terminable with notice, the sewer assessment had long since been paid, and
the mortgage was to his own clients, the parents, and he would shortly have an
executed discharge, which he could use contingent upon receipt of payment from
the closing proceeds. Seller's counsel
closed by saying that his side was ready to close the next day, that the
existing title concerns did not affect marketability, and that seller would
hold buyer in breach if buyer didn't close.
Buyer's counsel responded on the morning of the closing day,
maintaining that the three title issues did affect marketability, and required
that they be cleared.
Seller's counsel promptly faxed back, indicated that the
letter terminating the lease would be delivered at closing, that the assessment
discharge would be produced at closing, and that, although he did not have the
mortgage discharge, sellers would agree to an escrow for the entire proceeds of
the sale until the discharge was received.
At
Four days letter, sellers' counsel wrote to buyer's counsel
claiming that a buyer had defaulted and that sellers were retaining the deposit
and claiming no further responsibilities on the contract. The letter indicated that sellers were putting
the property back on the market.
Buyer, for some reason, appeared at the closing office on
September 29, prepared to close. Seller
didn't show. The court doesn't tell us
what led up to this little side show.
Buyer than filed an action for specific performance, damages, and breach
of the implied duty of good faith and fair dealing.
The trial court held that the sellers had committed a breach
of the agreement and had acted in bad faith by failing to discharge the
mortgage and deliver good and clear title to the property. The sellers appealed, arguing that the
Agreement stated that it automatically became void in the event they were
unable to deliver good and clear record and marketable title to the property.
The
In addition, during negotiations, the sellers insisted they
could provide a termination of the lease and a release of the sewer assessment
on the date originally set for closing.
These defects were technical in nature and could have been removed at any
time. The sellers failed to present any
probative evidence that through no fault of their own, they were unable to
deliver good and clear record and marketable title to the property. As a result, the escape clause in the
Agreement was inapplicable and the sellers breached the Agreement by failing to
deliver good and clear record and marketable title as required by the
Agreement.
Comment 1: The
court's ruling was correct, since sellers did not show that they were ready and
able to perform, and buyer had reasonable cause to believe that they wouldn't
be, sufficient for buyer to be a "no show."
Comment 2: The case
probably would have gone the same way even if the sellers had produced the
release letter and assessment discharge at the closing time. The simple facts that there had been no prior
communication with the lessees and the termination letter had not yet been sent
would likely be enough to warrant the conclusion that the lease continued as a
cloud on title. Even escrowing the sale
proceeds would not necessarily have been enough to clear the 1993 mortgage,
since there was no payoff statement. Who
knew exactly what was owed under that mortgage?
In any event, again, as the court notes, all of this could have been
addressed long before the day of closing, and the sellers' failure to get it
done tends to belie any assurances that there is not problem.
Comment 3: Editor, a lawyer himself, cannot help but wonder if the clients in either case were well served by their lawyers here. A rapid fire exchange of "line drawing" faxes on the eve of the scheduled closing, followed by confrontation, lawsuit and an appeal, do not appear to be the most efficient way to resolve what appear to have been eminently resolvable issues. In fact, (dare I say) the editor wonders whether this would have gone down the same horrendous way in a jurisdiction in which only brokers were involved with the deal. We don't know enough about the deal or the players, of course, to make any final judgment, but this does seem to be a situation in which a few billable hours of conciliation might have avoided hundreds of hours of legal confrontation.
Readers are urged to respond, comment, and
argue with the daily development or the editor's comments about it.
Items in the Daily Development section
generally are extracted from the Quarterly Report on Developments in Real
Estate Law, published by the ABA Section on Real Property, Probate & Trust
Law. Subscriptions to the Quarterly Report are available to Section members
only. The cost is nominal. For the last six years, these Reports have been
collated, updated, indexed and bound into an Annual Survey of Developments in
Real Estate Law, volumes 1‑6, published by the ABA Press. The Annual
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