Errors and Omissions claims against real estate agents or brokers are often based on the Purchase Agreement and Sales Disclosures. Clients who feel their interests were not adequately protected often turn to filing a claim against their agent or broker. Often, claims arising from the Purchase Agreement are based on a legal concept called the doctrine of merger.
Here’s how to ensure that contract language is written to include the correct intent and help avoid real estate E&O claims.
The Real Estate Offer Contract and the Deed
In most states, real estate transactions are made up of a series of contracts governed by state specific regulations. Even though the majority of agents and brokers are not lawyers, you are nevertheless expected to interpret and provide contracts that protect your clients’ interests without fail.
To initiate a real estate transaction, you’ll typically complete an Offer to Buy or Purchase Agreement (“Offer”).The transaction is ultimately finalized by the execution of a deed, identifying the real estate parcel and documenting the actual transfer and its terms.
The Risks in Real Estate Contracts under the Doctrine of Merger
The doctrine of merger says that any requirements, guarantees, or other terms included in the Purchase Agreement may not exist once the deed is delivered, unless that intent is expressly indicated.
It’s common for the parties to misunderstand the purpose and enforceability of the contract documented in the Offer. Many fail to realize that, under the doctrine of merger, the terms of the Offer may not be enforceable after the parties execute the deed.
Under the doctrine of merger, a deed consummating a real estate transfer renders the terms in the prior Offer no longer enforceable — unless language to the contrary is specified in the Offer. The deed essentially voids or overrules the Offer Agreement, which means that the parties to the transaction cannot enforce the terms in the Offer after they execute the deed. This may not be what the parties intended when they outlined the Offer.
Often the terms and details buyers and sellers negotiate in the Offer are the most important to each party. Many would be shocked to learn that those terms may not be enforceable after the close, depending on the language used in the Offer and, perhaps, the deed. If the agent is also unaware of the nuances of these contracts, or fails to ensure or fully explain the exact terms of the deed transfer to a client, it’s easy to see how claims against the real estate agent or broker can occur.
Example of the Doctrine of Merger at Work
In these cases, the real estate transaction included an Offer, and the parties closed the transaction by the execution of a deed. Unfortunately, the parties later disagreed about what terms in the Offer were still enforceable after the closing.
There are typically limited exceptions to a doctrine of merger, but the party seeking to enforce a term under the Offer has the burden of showing that a merger (of all of the requirements in the Offer into the deed) was not intended. If a dispute over the enforceability of the Offer arises after the deed is executed, oral testimony about the parties’ intent is usually not admissible. But courts will consider some forms of written documentation in the Offer and the deed. Including specific language to show what terms from the Offer are enforceable even after the deed is executed will often suffice. Real estate agents must consult your state’s specific real estate regulations to understand which documentation is enforceable in your state.
Payton v. DiGiacomo – What’s Good for the Goose is Good for the Gander
The impact of the Iowa doctrine of merger was discussed in the decision of Payton v. DiGiacomo, 871 N.W.2d 703 (Iowa Ct. App. 2015), where the Sales Disclosure was also a factor. In Payton, the Purchase Agreement contained a remedies provision that purported to provide for attorneys’ fees in the event of a breach of that agreement:
REMEDIES OF THE PARTIES. If buyer or seller fails to timely fulfill the terms of this agreement, then the other party shall be entitled to utilize any and all remedies or actions at law or in equity which may be available to them (including but not limited to forfeiture, foreclosure, termination, rescission, or specific performance), and the prevailing party shall further be entitled to obtain judgment for costs and attorney fees.
Payton had bought a residential property from the DiGiacomos and, sometime later, suffered water damage from a leak in the home. Payton sued the DiGiacomos for breach of the Offer, alleging in part that they had not complied with sales disclosures referenced in the Offer. After Payton lost at the trial court, the DiGiacomos filed with the district court a request for attorneys’ fees pursuant to the remedies clause in the Offer.
The court denied the request for attorneys’ fees applying the doctrine of merger, finding that the terms in the Offer had “merged” into the deed, which did not include terms for remedies. In other words, the terms in the Offer did not survive because they were not detailed in the deed, nor could DiGiacomos show proof that it was the shared ‘intent’ that the Offer terms survive in the deed.
Yeboah v. Emans – No Recovery for Failure to Make Non-Mandatory Sales Disclosures
In Yeboah v. Emans, 832 N.W.2d 834 (Iowa Ct. App.), the buyers, Yeboah and Stueck, had sued the sellers, the Emans, alleging seller liability concerning a leak in the sunroom roof and the fact that four windows did not work.
The sellers presented an innovative argument that they had known of a prior leak but did not believe they had to disclose it. While still owners, the sellers had had no further problems after having the leak repaired. The sellers argued that under Iowa regulation (chapter 558A.4(1)) they were not required to disclose non-active problems.
The Court of Appeals rejected the sellers’ interpretation, citing regulation that disclosure of any known problems and any known repairs as well as the date of repairs and replacements is required. Because the sellers had not complied by reporting the prior problem AND the repair, the Court awarded damages to the buyers for the leaky sunroof.
With regard to the inoperable windows, the Court held that the disclosure requirements in Iowa Code chapter 558A did not apply. The Court reasoned that the window disclosure was a non-mandatory sales disclosure in Iowa. The Court held that liability for damages applies only to mandatory sales disclosures.
How to Avoid E&O Claims against Real Estate Agents Caused by the Doctrine of Merger
The examples above did not involve claims against real estate agents or brokers, but that doesn’t mean that you couldn’t be found liable in similar circumstances. What can you do to prevent the possibility of such a claim?
Communication and careful drafting of the Offer are the keys to preventing Purchase Agreement, disclosure and doctrine of merger claims.
First, clarify with the buyer what terms in the Offer the buyer wishes to remain enforceable even after execution of the deed.
Prepare the Offer and/or the deed so as to make clear the terms the buyer wishes to be enforceable following execution of the deed and transfer of the property. As illustrated by the cases above, this language must often be very specific.
In the cases discussed, the buyer was the party who wanted to enforce the terms of the Offer. And the buyer is usually the party who makes the Offer. That means that the buyer is usually the party required to prove that terms in an Offer remain enforceable after the transaction has concluded by the execution of a deed.
The paragraphs below are examples of contract language that may suffice to preserve the enforceability of the terms in an Offer after closing:*
INCORPORATION: The Sellers’ Disclosure of Property Condition Form required by [insert your state’s Code Chapter number] is incorporated herein as if fully and completely set forth herein.
SURVIVAL: The warranties, representations, covenants, agreements, duties and remedies contained herein shall survive the execution and delivery of this agreement, the closing of the transactions contemplated herein and the recording of any contract or deed conveying title to the buyers.
When you know about the potential hazards and can draft around them, it will help keep everyone on the same page and avoid E&O claims.
Having free contract review by a real estate attorney licensed in your state to review Offer and deed or closing contracts would be ideal to avoid claims in these situations. CRES members get on-call real estate attorneys ready to review contracts and answer questions 7 days a week. Learn more about how you can access our ClaimPrevent™ Hotline.
* The information and examples shared in this article are for education purposes only and do not constitute or intend legal advice. We recommend parties consult a real estate lawyer to review contract language or claim filings.
Bill Serangeli represents business clients, including real estate companies, banks and insurance companies, in commercial litigation and insurance defense matters. He currently serves as general counsel for various Boards of real estate licensees and regularly lectures on legal topics to bar associations and trade organizations on professional compliance issues and ethics. Bill is also active in professional community organizations including the Iowa State Bar Association and the Polk County Bar Association.