Monday, February 4, 2013

FAILURE TO FILL-IN A BLANK MAY RENDER CONTRACT UNENFORCEABLE

(on the facts of Bertovich v. St. John, 2012-Ohio-475)


What is the Statute of Frauds?

In Ohio (and most other jurisdictions), the “Statute of Frauds” (originating from a 1619 Act of Parliament) basically establishes that certain contracts must be memorialized in a signed writing to be enforceable. Specifically, Ohio’s Statute of Frauds (ORC §1335.05) provides, in pertinent part that: “no action shall be brought …upon a contract or sale of lands… or interest in or concerning them,… unless the agreement upon which such action is brought, or some memorandum or note thereof, is in writing and signed by the party to be charged therewith...”. There are limited, “equitable” exceptions to the rule, such as “part performance”, “unjust enrichment” and “promissory estoppel” that courts have imposed in order to avoid unfair legal remedies. See “An Oral Contract to Buy Real Estate is not Worth the Paper it is not Written on” — Ohio Real Estate Blog, April 30, 2010.

What writing is sufficient to satisfy the Statute of Frauds?

More perplexing than whether or not a writing exists, is the question of what writing is sufficient to satisfy the Statute of Frauds? The general law in Ohio is that in order for a real estate contract to comply with the Statute of Frauds, it is necessary that the signed contract or memorandum: (1) identify the subject matter; (2) establish that a contract has been made (both parties to the contract must assent to its terms and have a “meeting of the minds” as to those terms); (3) identify the subject matter of the contract (i.e. the property); and (4) state the essential terms with reasonable certainty.

What are the essential terms of a real estate contract?

In Ohio, courts have identified the essential terms of a real estate contract as: “the identity of the parties to be bound; the subject matter of the contract; consideration; a quantity term and a price term”. What is not essential? According to recent Ohio court decisions, a written contract for the sale of land need not include the character of the deed to the executed, specify who should pay taxes on the sale or state whether a mortgage must be given to secure the purchase money in order for the contract to still comply with the Statute of Frauds. Additionally, the contract does not violate the Statute of Frauds because the writing does not state a specific date of performance (i.e. closing date) or because of the failure to designate the nature of the interest being conveyed (See, e.g., Davis v. Meyers, 2012-Ohio-1518 (in such case, the buyer is entitled to demand that a marketable title shall be given).

Should buyers and sellers be that concerned?

With all this court authority seemingly watering down the Statute of Frauds, should buyers and sellers be that concerned regarding the specifics of their contracts (beyond price, and identification of the property)? The answer is definitely YES, for two basic reasons. First, the general rule in Ohio is that when the parties have clearly agreed to the “critical terms” of a real estate transaction, the court may determine on its own the meaning of any ambiguous or uncertain terms. While courts will typically factor in to their decisions, what they believe the parties mutual understanding to be, the custom or practice in the trade, and other established legal principles, more often than not, a court’s determination of the parties’ understanding does not match up with the parties actual understanding and someone goes home from court unhappy.

The second reason for concern is that there is no hard and fast rule or finite list as to what is and what is not an “essential” term of a real estate contract. While we know that price and property description are essential terms, and that the closing date is a non- essential term, there are limitless provisions that could be deemed essential by a court of law, the absence of which could render the contract unenforceable.

Fill in (or delete) those blanks!-Bertovich vs. St. John, 2012-Ohio-475

One recent example of why you should worry about missing terms in a real estate contract is the holding in the recent Eight District Court of Appeals case of Bertovich vs. St. John, 2012-Ohio-475. The Bertovich decision involved a residential form contract that included the following provisions: “Seller agrees to comply with any and all local governmental point-of-sale laws and/or ordinances. Seller will promptly provide Buyer with copies of any notices received from governmental agencies to inspect or correct any current building code or health violation. If applicable, Buyer and Seller shall have _____ days after receipt by Buyer of all notices to agree in writing which party will be responsible for the correction of the building code or health violations. In the event Buyer and Seller cannot agree in writing, this agreement can be declared null and void by either party”. A handwritten addendum to the contract provided the following language: “Buyer shall assume all costs associated with and related to the sale of the property and transfer of title”.

The issue (as between Buyer and Seller) in Bertovich centered around who was to pay for point-of-sale violation repairs. The Seller argued that the addendum clause, requiring buyer to pay for all costs, included the obligation to pay for any point-of-sale repairs. The Seller explained that the parties did not fill in the blank in their contract because that section was inapplicable, and the addendum should have erased any doubt as to responsibility for costs and repairs. The Buyer argued that it was only planning to assume the repair cost of the driveway which was already known, not the costs to cure point-of-sale violations. According to the Buyer, the Seller had the legal obligation to comply with point-of-sale laws, so there was no need to fill in the blank regarding point- of-sale inspection repairs. When the Seller told the Buyer he would not pay for any such repairs, the Seller cancelled the inspection, and the Buyer repudiated the agreement. Thereafter, the Buyer bought a house from a different seller and sued St. John for damages.

The trial court in Bertovich held (which holding was affirmed by the Eighth District Court of Appeals) that the Bertovich purchase agreement was violative of the Statute of Frauds, and therefore unenforceable. The courts did not focus on whether or not the making of point-of-sale inspection repairs (and the time to determine who is to pay for same) was an essential term of a real estate contract. Rather, the trial court and appellate court looked at the contract as a whole and determined that the terms of the contract (taken together) were not sufficiently certain because they could not provide the basis for determining the existence of a breach and for giving an appropriate remedy. The courts acknowledged that while they did have the authority to determine the meaning of ambiguous or uncertain terms in a contract, they could not make a contract for a buyer and seller by determining what their agreement was with regards to certain, non-ambiguous terms. Since point-of sale-repair was a performance term of the Bertovich contract, and since there was no agreement as to when it was to be performed and by whom, the contract would be deemed unenforceable as a violation of the Statute of Frauds.

To many reviewers of this case, the Bertovich contract was sufficiently clear and should not have been deemed violative of the Statute of Frauds. The contract clearly provided that the Seller was to comply with point-of-sale laws. Most of these laws require the owner/seller to repair any violations. While Mr. Bertovich (the Buyer) did contract to pay “all costs”, that provision is typically interpreted as a closing cost provision (survey, conveyance fee, etc.) not an obligation to cure a seller’s point-of-sale violations. True, there was a blank that was not filled in regarding the time period to agree upon correcting violations after receiving notices to that effect. However, how is that applicable when there were no notices involved? In fact, the clause itself begins with the words “If applicable”. It is difficult to understand how an inapplicable term becomes a missing, essential term of the contract, rendering it unenforceable. Even the Eighth District Court of Appeals recognized the Bertovich decision could have gone the other way by stating: “even assuming there was a contract and a breach, Buyer did not incur any damages”. No ambiguity or argument with these words. It turns out that Mr. Bertovich bought a comparable property in lieu of St. John’s property, and paid less than he would have, had his original deal been completed.

Moral of the Story

The moral of this story? Review carefully all real estate contracts, and fill in all the blanks (if applicable). Delete inapplicable clauses. Clearly establish who is to perform all obligations and who is to pay to fulfill them. A legal professional is best equipped to do this. Having a contract be deemed definite enough to not run afoul of the Statute of Frauds is only half the battle. The other is to “say what you mean precisely, or a judge may tell you what you meant” (See miscellaneous articles under the heading “Watch Your Language” at Ohio Real Estate Blog).





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