Daily Development for Thursday, May 12, 1999

By: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
prandolph@cctr.umkc.edu

DEEDS; MERGER DOCTRINE; REPURCHASE OPTION: The merger doctrine does not apply to a repurchase agreement that is both a condition subsequent and collateral

to a subsequently executed deed.

Bruggeman v. Jerry's Enterprises, Inc., 583 N.W.2d 299 (Minn. App. 1998).

Seller conveyed commercial property to purchaser pursuant to an option agreement exercised by purchaser. The option agreement had a repurchase option provision in the event purchaser failed to develop the property within two years of closing. After the two years had passed, seller attempted to exercise its repurchase option. Purchaser argued that since neither of the executed deeds referenced the option agreement or any rights arising thereunder, and since the option agreement itself did not contain an express survival clause, the merger doctrine effectively extinguished any post-closing repurchase rights.

The Court of Appeals held that the merger doctrine did not apply to a repurchase agreement that is both a condition subsequent and collateral to a subsequently executed deed. The Court of Appeals based its finding on four factors.

First, the court noted that in In re Brown's Estate the Minnesota Supreme Court stated that: "The rule does not necessarily apply to acts not made conditions precedent, and are to be performed in the future, and continue as a charge upon the estate granted." Id. at 122. Second, the court found it persuasive that there appeared to be a uniform stance in favor of such an exception to the merger doctrine by other courts that had addressed the issue. Third, the court concluded that fundamental rules of contract law support the application of a "condition subsequent" exception to the merger doctrine. Fourth, while the court did not find it necessary to decide whether the merger doctrine applies to singularly collateral agreements, it was persuaded that when an agreement is both a condition subsequent and collateral, the merger doctrine does not apply. The court also held that the lack of a survival clause did not alter its conclusion that the form of agreement demonstrated the intention of the parties to create an obligation that survived execution of the deed.

Comment: The editor includes this case as part of his continuing crusade to demystify the concept of merger by deed and reduce it to a simple matter of contract interpretation. It is quite common that a buyer may accept a deed to resolve a closing with knowledge that it does not embody all of the buyer's expectations. This acceptance may represent a waiver of the other contract conditions that the deed did not fulfill. It may not.

The courts need some way to discern when the buyer has waived his claims and when he hasn't. To do so, the courts turned to the concept of merger, which had operated classically at common law as a mechanical doctrine causing (depending upon your point of view) all manner of mischief to the preservation of the dynastic expectations of landed families or bringing about all kinds of benefits in the form of greater transferability of estates.

It was useful to use the title of "merger" to describe the notion that the courts will assume that where a buyer accepts a nonconforming deed without complaint, he is waiving his other objections unless he preserves them. This probably described the usual circumstance, and it was appropriate to create a rule putting the burden upon the buyer to identify when he was not waiving other claims. Such a device was nothing more than a convenient interpretive tool.

But the consequence of using the draconian and mechanical common law concept to describe this interpretive tool may have been to elevate it to a level of mystery inappropriate for modern transactions. Cases have found merger where it is unlikely that the buyer rationally intended to give up claims. The consequence has been that parties negotiating deals have had to negotiate "merger proofing" survival language into their documents, adding cost and time to the negotiation process.

Here, for instance, the parties were forced to invest in an appeal because it was not clear that the merger doctrine would apply in the event of a condition that clearly affected title, but probably both parties understood remained viable, since it was the essence of the transfer understanding. If the trial court had focused only on the issue of probable intent, instead of mechanical rules, these costs would not have been incurred. Actually Minnesota probably is near the forefront in the modernization of the merger rule. The rule causes even more trouble elsewhere.

Comment 2: The editor has suggested giving this interpretive device a new, less draconian sounding name. The editor has suggested "Bubba," a name that the editor always associates with friendly, well-intended folk. (Maybe he hasn't met enough Bubbas in his lifetime). This case is a good example of how Bubba should work. Even though the repurchase option obviously goes directly to the heart of title, and one would generally expect that acceptance of a deed with knowledge that the title is inadequately described would constitute a waiver of the missing features, it seems clear that in this case the buyer was not making such a waiver, and the court properly refused to apply Bubba.

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 Survey volumes are available for sale to the public. For the Report or the Survey, contact Maria Tabor at the ABA. (312) 988 5590 or mtabor@staff.abanet.org

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