Daily Development for
Tuesday, July 22, 1997

by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law

STATUTE OF LIMITATIONS; REFORMATION: A ten year statute of limitations on actions involving a "contract in a conveyance affecting real property" applies to an action for reformation of a ground lease.

Diocese of Bismarck Trust v. Ramada, Inc., 553 N.W.2d 760 (N.D. 1996).

In 1972, the Trust leased property to Ramada. There were negotiations for Ramada to have an option, and that the option price would be subject to a cost of living adjustment. The ground lease payments themselves included a percentage of the gross subject to a maximum that also subject to a cost of living adjustment. In working out details of the option, Ramada inadvertantly modified the lease calculation in such a way as to place a low cap on the cost of living adjustment. All parties agree that this was an inadvertant error, and that the Trust signed the final version of the lease without reading it and without actual knowledge of the error.

In 1982, Ramada sold its motel and assigned the ground lease to a third party partnership. The lease computation did not result in an amount in excess of the cap until 1989, when the Trust discovered the problem.

In 1993 the Trust finally obtained actual knowledge of the problem and brought a suit to reform the maximum rental clause and collect back rent for certain specified years. The trial court applied the twenty year statute of limitations on actions founded upon title to real estate or to rents or services therefrom, and that the statute ran from the point at which the Trust knew or should have known of the problem. It concluded that the Trust was not barred because it did not read the instruments and discover the problem when it executed the lease in 1991.

The Supreme Court, however, held that the twenty year statute did not govern equitable claims such as those seeking reformation of lease terms. Instead, the court applied the ten year statute dealing with "a contract contained in any conveyance or . . . instrument affecting the title to real property" because it concluded that a lease is generally considered a contract and a conveyance on interest in land.

The court concurred that the mere fact that the Trust had executed the lease with the problem language in it did not mean that the Trust "should have had knowledge" of the problem at that time. But it remanded for a determination of whether there were other times at which the Trust should have discvoered the problem.

Not surprisingly, the partnership argued that any right to reform the instrument was cut off when it obtained the interest of Ramada in 1982 as a bona fide purchaser without actual notice of the problem. The court, however, upheld the lower court's determination that the partnership had constructive knowledge of the lease terms because its principals did read the lease and should have understood that it couldn't mean what it said.

Comment 1: The obvious lesson here is that you don't mess with the Catholic Church in North Dakota. Note that the partnership was viewed as being on constructive notice that the language of the lease had a defect, while the Trust was not on constructive notice that the language of the lease did not conform to the agreement it had reached with Ramada, even though the Ramada changes apparently were written onto the copy of the original draft and readily observable by one familiar with the deal who looked at the document.

Comment 2: Another interesting conclusion is that a dispute concerning the interpretation of a rental provision in a lease concerns a "contract contained in a conveyance . . . affecting the title to real property." The court says that a lease is a conveyance of an interest in land, but it is not classicaly regarded as a conveyance of title to land. The court is straining to reach its result, and this is bound to create mischief in future cases.

Comment 3: A dissenting judge disputes the court's interpretation on another ground - that the dispute is about rents, and not about the passing of the real estate interest. The editor cannot agree with the dissent's criticism, since the statute says that it applies to a "contract contained in a conveyance . . . " Clearly the rent agreement is "contained in" the lease, and the statute would apply if the lease was indeed a "conveyance . . . affecting title." The editor is not convinced that a lease ought to be so described.

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 Survey volumes are available for sale to the public. For the Report or the Survey, contact Stacy Walter at the ABA. (312) 988 5260 or stacywalter@staff.abanet.org

Items reported here and in the ABA publications are for general information purposes only and should not be relied upon in the course of representation or in the forming of decisions in legal matters. Accuracy of data and opinions expressed are the sole responsibility of the DIRT editor and are in no sense the publication of the ABA.