Court Untangles Real Estate Transaction That Goes Awry
Written by: Alan Nochumson
Unlike many other states, in Pennsylvania, there is no formal process in place for an attorney to review an agreement of sale in a real estate transaction. For instance, in New Jersey, an agreement of sale is merely voidable once entered into by the seller and buyer and will not become binding upon the parties until each of them have the opportunity to have an attorney review and comment on the agreement of sale. This process not only encourages “attorney review” as it is called from the inception of the real estate transaction, but once an attorney is retained the parties will likely have the benefit of legal counsel during the due diligence period and beyond.
A judgment recently issued by a trial court judge in Westmoreland County, Pa., in Martello v. Stoner, 2013 Pa. Dist. & Cnty. Dec. LEXIS 203 (September 20, 2013), illustrates why parties to a real estate transaction should always retain an attorney.
In Martello, shortly after Anthony Martello purchased the piece of property, Raymond J. Stoner made an offer to purchase the property for an amount higher than for what the property was purchased and that offer was then accepted, the opinion said.
In order to memorialize their understanding, in late 2006, Stoner prepared the written agreement of sale, which the parties executed. The agreement of sale contained a “time of the essence” clause, but no fixed time for Stoner to purchase the property, the opinion said.
Under the agreement of sale, Stoner was obligated to pay $1,000 to Martello in the form of a security deposit, the opinion said. According to the opinion, the agreement of sale provided for a liquidated damages clause, whereby the parties agreed that Martello would retain the security deposit paid by Stoner to Martello in the event Stoner did not purchase the property.
While Stoner paid the security deposit of $1,000 to Martello, the parties never closed on the real estate transaction, the opinion said. Instead, the parties entered into a lease agreement in early 2008, whereby Stoner agreed to lease the property from Martello. The lease agreement provided for a month-to-month tenancy, with each party being able to terminate the term of the lease upon advance notice of 30 days, the opinion said.
While occupying the property, Stoner expended significant sums of money to make improvements to the property, the opinion said. According to the opinion, this work was performed without the benefit of governmental permits.
Because Stoner failed to pay the rent due under the lease agreement, Martello evicted him from the property in mid-2012, the opinion said.
Martello also filed a complaint against Stoner seeking the amount owed under the lease agreement for the unpaid rent. In response, Stoner filed a counterclaim in order to compel Martello to sell the property to him, for reimbursement of the money he claimed he paid to Martello under the agreement of sale, and for Martello to pay him for the improvements he made to the property.
After a bench trial took place, the trial court judge issued a memorandum opinion.
The trial court judge first pointed out that the agreement of sale was drafted by Stoner and, as the drafter of the agreement of sale, the terms of the agreement of sale would be strictly construed against him.
The trial court judge noted that the agreement of sale did not contain a date in which Stoner had to purchase the property. However, since the agreement of sale included a “time of the essence” provision, the trial court judge concluded that Stoner had to purchase the property within a reasonable period of time and, because he failed to do so, Stoner defaulted under the terms of the agreement of sale he had drafted and, thus, was not entitled to purchase the property from Martello any longer.
The trial court judge also believed that the parties intended for the lease agreement to override the agreement of sale.
With that being said, while the trial court judge found that Stoner defaulted under the agreement of sale by failing to purchase the property, he did not believe Martello was entitled to the security deposit of $1,000 that Stoner paid him under the agreement of sale. Rather, the trial court judge reasoned that, since the lease agreement served to replace and extinguish the agreement of sale, the $1,000 should be applied toward the lease agreement.
It is unclear from the opinion whether Stoner occupied the property after the agreement of sale was executed by the parties and if he made any payments to Martello, other than the already-mentioned security deposit of $1,000, prior to the parties entering into the lease agreement.
Nonetheless, the trial court judge concluded that all payments made by Stoner to Martello were made pursuant to the lease agreement, not the agreement of sale, and Stoner was not entitled to reimbursement of these payments because he had, in fact, received the benefit of leasing the property from Martello.
Furthermore, the trial court judge held that Stoner owed Martello money under the lease agreement for the unpaid rent.
As for the improvements made by Stoner, the trial court judge refused to credit him for all of the improvements he made to the property.
First of all, the judge pointed out that Stoner did not have a contract with Martello to perform this work on the property and, as such, Stoner would only be equitably entitled to the value of the benefit he gave to Martello for the work performed.
At trial, Stoner submitted invoices for the materials he purchased and proof of purchase as evidence of the benefit he conveyed to Martello.
The judge stated that the proof of value of the benefit conferred is not established by the amount of money expended by Stoner for the materials purchased and the work performed, but rather must be shown through an increase in the value of the property as the result of the improvements being made.
While the judge did not dispute the amount of money Stoner paid for the materials and that work was performed on the property, the judge did not believe Stoner increased the value of the property as much as he argued since most of the work was cited as being deficient and without governmental approval by the local government.
In doing so, the trial court judge only credited Stoner for a fraction of the cost for the work he performed on the property.
In the end, the trial court judge entered a judgment in favor of Martello and against Stoner because the amount of money Stoner owed under the lease agreement for unpaid rent exceeded what the judge believed was the increased value of the property for the work Stoner performed.
LESSONS LEARNED
The trial court’s ruling in Martello illustrates why every party to a real estate transaction should be represented by legal counsel.
It seems to me that at the time the lease agreement was entered into by the parties in Martello, they should have clearly terminated the agreement of sale either by expressly providing for that in the lease agreement or by entering into a separate termination agreement. This would have avoided any potential misunderstanding going forward as to the relationship between the parties.
As for the work performed on the property, this is not an uncommon occurrence. Many times, tenants or individuals in possession of a property perform work on the property. It is incumbent upon the individual performing the work to obtain the written approval of the owner of the property, in order to ensure what compensation is received for the work performed. On the flip side, a property owner must be vigilant when such work is being performed. In addition to making sure governmental approval is obtained, the property owner must confirm that there is adequate insurance that covers the property owner should an accident occur while the work is being performed.
Reprinted with permission from the January 21, 2014 edition of The Legal Intelligencer © 2014 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.
