Court Refuses To Look Beyond Written Agreement Of Sale
Written by: Alan Nochumson
In most situations, before real estate is transferred from the seller to the purchaser, the parties to the real estate transaction enter into a written agreement of sale. Under the most ideal of circumstances, the seller and purchaser are competently represented either by a real estate agent or legal counsel so that all of the material terms and conditions of the agreement reached by the parties are neatly and methodically contained within such a written agreement of sale.
Most, if not all, written agreements of sale include an integration clause which declares it to be the complete and final agreement between the parties. The existence of such a clause is conclusive proof that no varied or additional conditions exist with respect to the performance of the contract beyond those that are in the writing. An agreement that has such a clause is deemed an integrated contract and any previous negotiations between or representations made by the parties are of no legal consequence.
A recent decision handed down by the U.S. District Court for the Eastern District of Pennsylvania in Charlton v. Gallo illustrates why a purchaser cannot rely on terms and conditions which are not provided for within an agreement of sale which contains an integration clause.
In the summer of 2006, Ryan Gallo Tree Service, Inc., a company wholly owned and operated by its namesake, entered into an agreement of sale to purchase three parcels of real estate located in Chester County, Pennsylvania from Vaughn and Deborah Charlton. According to the opinion, the total purchase price for the parcels was $1.25 million which was financed through a loan in the amount of $1 million from Wilmington Savings Fund Society, secured by a first mortgage on the purchased properties and an interest-only balloon note in the amount of $250,000 to the Charltons secured by a second mortgage on the purchased properties and a mortgage on Mr. Gallo’s personal residence in Delaware.
Although his company was purchasing the properties, both Mr. Gallo and his company agreed to become legally obligated to make the payments due under the balloon note, the opinion said.
When Mr. Gallo and his company ceased making the payments due under the balloon note, the Charltons filed a mortgage foreclosure action on his residence in the Superior Court of Delaware, the opinion said.
The parties eventually stipulated to dismissal of the state court action. Thereafter, the Charltons commenced an action in federal district court for breach of contract against Mr. Gallo and his company under the balloon note. Mr. Gallo and his company then filed an answer and counterclaim against the Charltons and, after a motion to dismiss, an amended counterclaim. The Charltons then moved to dismiss the amended counterclaim.
According to the opinion, the amended counterclaim was premised upon alleged misrepresentations made by the Charltons during the course of the negotiations and an alleged mistaken belief on the part of Mr. Gallo and his company regarding the “buildability” of the properties given the undisclosed wetlands and a protected flood zone, the ease with which to obtain zoning approval for development after the purchase, Mr. Charlton’s relationship with the township allowing faster zoning approval, and the fair market value of the properties.
FRAUDULENT INDUCEMENT?
The federal district court first addressed whether the Charltons fraudulently induced Mr. Gallo and his company into consummating the real estate transaction.
As the federal district court explained, “fraud in the inducement occurs where ‘the party proffering evidence of additional prior representations does not contend that the representations were omitted from the written agreement, but, rather, claims that the representations were fraudulently made and that but for them he would never have entered into the agreement.”
“In Pennsylvania, the parol evidence rule bars evidence of prior representations in a fully integrated written agreement. Where a written contract contains an integration clause, ‘the law declares the writing to be not only the best, but the only evidence of the parties’ agreement. The purpose of an integration clause is to give effect to the parol evidence rule: Thus the written contract, if unambiguous, must be held to express all of the negotiations, conversations, and agreements made prior to its execution, and neither oral testimony, nor prior written agreements, or other writings, are admissible to explain or vary the terms of the contract.”
The federal district court pointed out that, since the written agreement of sale contained such an integration clause, the parol evidence rule barred any evidence of the alleged prior fraudulent misrepresentations or omissions. In doing so, the federal district court ruled that the claim for fraud in the inducement could not proceed as a matter of law.
Regardless, the federal district court was obviously persuaded by the fact that each of the representations Mr. Gallo and his company complained of in the amended counterclaim were expressly dealt with in the agreement, such as flood plains and wetlands issues, zoning issues, release of claims related to conditions of the property, and the property being sold as-is.
FRAUD IN EXECUTION?
The federal district court next confronted the claim of fraud in execution contained in the amended counterclaim. According to the opinion, Mr. Gallo and his company also alleged fraud in the execution of the agreement of sale because they mistakenly believed terms covering buildability and zoning were included in the written agreement itself.
In Pennsylvania, “[f]raud in the execution applies to situations where parties agree to include certain terms in an agreement, but such terms are not included, and the defrauded party is mistaken as to the contents of the physical document that it is signing. Fraud in the execution of a writing must be proven by clear and convincing evidence.”
The federal district court determined that the allegations made by Mr. Gallo and his company in the amended counterclaim amounted to nothing more than a claim for fraudulent inducement and not for fraud in the execution. The federal district court stated that Mr. Gallo and his company did not specifically plead that the Charltons promised, or the parties agreed, that guarantees as to zoning or land use would be included in the agreement but were not, nor did they argue that they bargained for the terms to be included or that they did not understand the language of the agreement. As such, the federal district court held that the claim for fraud in the execution should be dismissed as well.
MUTUAL MISTAKE ALLEGED
In the amended counterclaim, Mr. Gallo and his company also alleged that the agreement should not be enforced as a result of mutual mistake committed by the parties.
“Mutual mistake exists where both parties to a contract are mistaken as to the existing facts at the time of execution. The doctrine only applies where the mistake: (i) relates to the basis of the bargain; (ii) materially affects the parties’ performance; and (iii) is not one as to which the injured party bears the risk.”
In the amended counterclaim, Mr. Gallo and his company allege that the parties were mistaken as to the actual value of the purchased properties and that Mr. Charlton had the ability to obtain the zoning, variances and permits necessary for the properties to be used in the manner for which they were being purchased.
The federal district court pointed out that Mr. Gallo and his company did not allege any support for their blanket assertion that the actual value of the property was significantly less than the contract price.
Moreover, the federal district court flatly rejected the argument that an erroneous prediction of future events could even qualify as such a mistake.
LESSONS LEARNED
The federal district court’s ruling in Charlton speaks volumes about why every material term and condition of a real estate purchase should be contained within the written agreement of sale itself. Most, if not all such written agreements include an integration clause, thus limiting the scope of the agreement reached by the parties to the four corners of the written document read and signed by the parties. Courts are unwilling to delve beyond these four corners, unless in the most drastic circumstances. For that reason, sellers and purchasers should ensure that the written agreement actually memorializes their meeting of the minds.
Reprinted with permission from the April 19, 2010 edition of The Legal Intelligencer © 2010 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited. For information, contact 877-257-3382, reprints@alm.com or visit www.almreprints.com.
