Don’t Let Your Contract Disappear (Merge) Into Your Deed

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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