Other than the real estate purchase
and sale agreement, the deed is the most important and often misunderstood
document utilized in a real estate transaction. Like a certificate of title for
an automobile, the deed is the document that actually transfers the title of
real estate from one to another. Unlike a certificate of title for an
automobile, however, the deed contains a specific legal description of the
property; and may also contain warranties of title; reservations (e.g., right
to reserve an easement over the property); and restrictive covenants (e.g.,
“this property may only be used for residential purposes”). Also unique to
deeds vs. certificates of title (and bills of sale to transfer other personal
property) the deed can, unwittingly erase protections or provisions in the real
estate contract that the parties thought they would have after closing due to a
principle of law entitled the “doctrine
of merger by deed”.
The general doctrine of merger by deed holds that whenever a
deed is delivered and accepted without qualification pursuant to a sales
contract for real property, the contract becomes merged into the deed and no
cause of action upon said prior agreement exists. The purchaser is limited to
the express covenants of the deed only.
As with all general rules of law, of course there are
exceptions to the rule. The first main exception is the “collateral exception”.
“Provisions in the contract that are collateral to and therefore independent of
the main purpose of the transaction are not merged in the deed. An agreement is
collateral if it does not concern the title, occupancy, size, enjoyment,
possession,or quantity of the parcel of land conveyed. If the
agreements concern the use or enjoyment of the land, they are not collateral to
the purchase agreement and are merged upon acceptance of the deed.” Westwinds Dev. Corp. v. Outcalt, 2009-Ohio-2948
(11th Dist. Ct. of App.).
Fraud and mutual mistake on the part of the
original parties to an instrument are also exceptions to the doctrine of merger
by deed. In such cases, the equitable remedy of reformation is available where it is shown that the written
instrument does not express the true agreement entered into between the
contracting parties by reason of fraud or mistake common to them. Equity,
however, will not make a new contract for those who executed the writing sought
to be reformed.
Two relatively recent cases in Ohio illustrate
the need to make sure that deeds clearly mirror the intent of the parties
contained in their real estate agreements.
In Wasserman
v. Copsey, 2013-Ohio-1274 (6th Dist. Ct. of App.), the
Wassermans purchased an agricultural strip of land from the Copseys at auction
in 1988. The real estate contract described the land as “75 acres more or less”,
and there were boundary flags placed at several points along the perimeter of
the property, indicating an acre or so less than 75 total acres. The deed
conveying the land, however, identified the parcel as being “75 total acres”.
In 2009, in anticipation of selling the property, the Wassermans had the
property surveyed, which survey showed 75 total acres and different boundaries
than had been set out at the day of auction. The Wassermans then brought a
“quiet title” action to seek court affirmation of their 75 acre parcel in
congruence with the 2009 survey, and the doctrine of merger by deed. The
Copseys appealed, claiming mutual mistake. The trial court agreed with the
Wassermans, upholding the merger doctrine, and finding no admissible evidence
of mutual mistake. The 6th District Court of Appeals
affirmed, finding the trial court’s exclusion of evidence in the form of the
boundary flags and contract language proper because “when a deed is delivered
and accepted without qualification pursuant to a sales contract for real
property, the contract becomes merged with the deed and no cause of action upon
the prior agreement exists”.
In Mong
v. Kovach Holdings, LLC, 2013-Ohio-882 (11th Dist. Ct. of App.),
Joseph Mong sold land to Kovach Holdings in 2009, pursuant to a contract of
sale which provided, among other things,
the following clause: “Gas + oil royalty reserved by present owner”. The
deed, however, provided no specific reservation of royalties language. The deed
merely stated that the property is subject to “conditions and restrictions of
record.” Mr. Mong brought suit after he was denied the royalty payments he was
seeking. He claimed the deed should be reformed to provide for the reservation
of royalties, due to a mutual mistake. Kovach Holdings defended the law suit on
the basis of the doctrine of merger, and that there was no mistake on their
part. Kovach further stated that it knew of the expiring reservation of
royalties made by Mr. Mong’s seller; the then “present owner of the royalties”,
and it would not have bought the property if Mr. Mong was going to reserve the
royalties after the prior reservation expired.
The trial court in Mong (affirmed by the 11th Dist. Ct. of App.) first
established that the doctrine of merger by deed is alive and well in Ohio and
most other jurisdictions. Further, reservation of mineral rights was not a
collateral issue, and there was no reservation of royalties clause in the deed.
The court then reasoned that there was no evidence of mutual mistake. Contrary
to Mong’s position, the court explained that by its reading of the real estate
documents, the contract of sale did not express an intent contrary to the terms
of the warranty deed. The contract provided that oil and gas royalties were
reserved by “the present owner.” The court took that to mean the present owner
of the royalties (Mr. Mong’s predecessor in interest) vs. the present owner of
the property. Since the predecessor’s (soon to expire) royalty agreement was of
record, the court reasoned that the deed provision (subject to “conditions and
restrictions of record”) actually mirrored the contract language.
What is
the moral of this story? There are two morals to this doctrine of
merger story. The first is a common theme articulated in a featured category of
articles on this Blog: Watch your
language. Namely, “Say what you mean precisely, or a judge will tell you
what you meant”. Clearly, Mr. Mong should have reserved the royalties to
himself, the Seller vs. an undefined “present owner”. Even more clearly, Mr.
Mong should have inserted “survival language” in the contract to the effect: “the terms and conditions of this
contract shall survive the closing, and not be merged into the deed”. Buyers
and sellers can provide that all provisions survive, or negotiate which
provisions survive and which do not, as well as negotiate survival periods.
The second moral to this story is to “respect the deed.” The
deed should not be thought of as a mere formality. Buyers should request a
draft of the deed prior to the end of diligence periods. Even better would be
to attach a draft deed as an exhibit to the contract so buyers can be sure they
are getting what they fought hard for at the contract stage.
In other words, don’t let your contract rights disappear
(merge) into your deed.
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