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A court recently held that a trial will be required to decide if an oral agreement for the sale of real estate is enforceable � even though the parties had specifically contemplated a document that was never executed. McBarron, et. al. v. Kipling Woods, L.L.C., et. al., Doc. No. A-162802T2, decided and approved for publication on Jan. 2, 2004, highlights the continuing problems in the enforcement of verbal agreements for the transfer of real property, and demonstrates that the stated goals of the revised Statute of Frauds as applied to real property have not been achieved. In fact, it can be said that the revised statute renders the proper administration of justice more unlikely than the prior statute, even with its once perceived deficiencies. Background McBarron arose out of the trial court’s granting of a motion for summary judgment in favor of the defendant, the owner of the property. The trial court had determined that, at best, there was an oral agreement of sale conditioned upon the subsequent execution of a written agreement. As no writing was completed, the court below declared the oral agreement invalid. The plaintiffs’ record consisted mainly of the certification of James McBarron, Esq., one of the proposed buyers of the property. The lengthy quotations from the certification contained in the decision establish that as a price for a subdivided lot had been agreed upon; it was a “done deal.” However, it was not disputed that the owner specifically stated that it wanted a written agreement drafted by its designated counsel � though somewhat confusingly, it was still a done deal. The certification further alleged proof of a taped telephone call initiated by McBarron to a principal of the owner, Mr. Jost, which established these facts. (The effect or applicability of RPC 4.2 governing communications with represented parties was not addressed by the court or the parties.) Jost told McBarron in the taped conversation that his three brothers, as members in the limited liability company which owned the property, wanted to accept a substantially higher offer that had been made for the property prior to a written contract being drawn and signed, resulting in the rejection of the plaintiffs’ alleged contract. On appeal, the plaintiffs argued that a valid oral agreement is not vitiated merely because of “the mere anticipation of a written memorialization.” The Appellate Division agreed. The 1991 Report The Statute of Frauds governing real property, N.J.S.A. 25: 1-10, et seq., was amended in 1995, effective on Jan. 5, 1996. The bill sponsor and the Assembly Judiciary, Law and Public Safety Committee, both provided statements with the bill which acknowledged that although writings generally were required for real estate and other certain transactions, “agreements may be enforced without a writing under certain limited circumstances set forth in the bill.” The statutory revisions arose out of the recommendation of the New Jersey Law Revision Commission Annual Report of May 1992, pp. 5-7, incorporating as Appendix F the Commission’s “Report and Recommendations Relating to Writing Requirements for Real Estate Transactions, Brokerage Agreements, and Surety Agreements” of December 1991. The 1991 report criticized the then-existing Statute of Frauds, which had been adopted in New Jersey 200 years earlier. Much of the language of the statute was derived from the English Statute of Frauds of 1677. Although the statute had been designed to prevent perjuries, its fraudulent misapplication had led to judicially created equitable remedies such as estoppel and constructive trust. The 1991 report sought to address the perceived problem that “a good deal of this interpretative case law is conflicting and inconsistent.” Under a revised statute, the draftsmen suggested that a parol agreement would be “enforceable between the parties to the agreement if it can be proved by clear and convincing evidence. . . . The standard for enforceability is not tied to ancient equity law but to modern evidence law.” The resulting legislation, N.J.S.A 25: 1-13, entitled, “Enforceability of agreements regarding real estate,” provides that: An agreement to transfer an interest in real estate or to hold an interest in real estate for the benefit of another shall not be enforceable unless: a. a description of the real estate sufficient to identify it, the nature of the interest to be transferred, the existence of the agreement, and the identity of the transferor and transferee are established in a writing signed by or on behalf of the party against whom enforcement is sought; or b. a description of the real estate sufficient to identify it, the nature of the interest to be transferred, the existence of the agreement, and the identity of the transferor and transferee are proved by clear and convincing evidence. The problems with this language are clear. Perhaps most significantly, the consideration to be paid for the transaction need not be written, or even stated to have a binding agreement. The 1991 report relied upon an 1874 amendment to the Statute of Frauds stating that the legal consideration need not be specified in writing, but could be proven by other legal evidence, and concluded that the purchase price “need not be included in the writing establishing the agreement.” As ultimately enacted, N.J.S.A. 25:l-13 does not even require that the price be established by clear and convincing evidence. In such case, the court would be required to establish a fair market price based upon hearing the competing testimony of expert appraisers. As the statute now is written, if A and B agree in a taped conversation that A will transfer ownership of Blackacre to B, either party may apply to the court for enforcement of the agreement and prevail. Nothing else is required by the statute for an enforceable agreement to convey real property. Under the same hypothetical, assume that the agreement includes a purchase price. Either party may again seek judicial enforcement. However, for a closing to actually be accomplished, many other terms will have to be decided by a court. While under general contract law a court would not be authorized to impose essential terms, the absence in the statute of any terms other than the identity of the buyer, seller and property requires court imposition in order for the statute to function as contemplated by the Legislature. Normal contractual provisions, concerns, representations and obligations include condition of title; the form of deed; inspections of structures; environmental conditions (oil tanks, spills, radon, asbestos); zoning; state and local governmental approvals; site improvements; mortgage contingencies; flood zones; environmental compliance and waivers; lead paint; off-site conditions; Megan’s law disclosures; broker commissions; closing dates; deposits; damages; maintenance; rent adjustments; security deposits; risk of loss; and a closing date. Court-Written Contracts Under the existing statute, a court will be obligated to decide some of these issues (e.g., the deed representations and closing date) and may be required to decide many others to the extent the participants will not. Far from imposing a missing term of a contract, courts may be obligated to essentially write the contract. With regard to the specific language of the revised statute, the 1991 report provided that the traditional exceptions to the Statute of Frauds of “part performance” and “detrimental reliance” had been rejected as “unnecessarily limiting.” Another criticism of the former statute contained in the 1991 report was that the “judicially created exceptions to the writing requirement . . . have been inconsistently applied, resulting in uncertainty and confusion as to how the statute will be applied in individual cases.” Paradoxically, it is difficult to conceive how the more imprecise test of clear and convincing evidence of essentially only an agreement in concept (i.e., seller will sell and buyer will buy) will lead to more certainty. The opposite result appears more likely. For example, the 1991 report also specifically hypothesized the difference between the sale of a multimillion dollar office building with draft contracts being exchanged, and the sale of building lots in which there had been past performance with only a “handshake” and without any written documents. In the former case, it was thought to be unlikely that the parties intended to be bound without a writing. In the latter case, it was believed that it could be shown that they intended to be bound without a writing. However, in Prant v. Sterling, 332 N.J. Super. 369 (Ch. 1999), an exchange of draft contracts over a number of years did not prevent one party’s filing of a lawsuit seeking to enforce a verbal agreement for the sale of a large commercial tract and the exchange of collateral parcels. Similarly, Jost made an explicit statement to McBarron that he wanted a contract drawn by his attorney. In part of the conversation taped without his knowledge, which is not referenced in the decision, Jost stated, “absolutely, we got a deal, of course we � it’s not a written contract, naturally I’d be done, do you know what I mean.” An objective interpretation of that phrase suggests that Jost did not believe himself bound to an existing and legally binding agreement, but rather someone who believes he is still negotiating between competing bidders subject to a written agreement. Nevertheless, a trial will be required to determine if the owner is bound without the written contract. It also is interesting to note that the Appellate Division did not cite to the 1991 report to support its decision regarding the absence of a contemplated writing memorializing the oral agreement. Rather, it relied upon a 45-year old decision not involving real estate, Comerata v. Chaumont, Inc., 52 N.J. Super. 299 (App. Div. 1958). To further support the proposition, the court also stated, “We find no reason to treat oral contracts for the sale of property differently from other contracts.” Purchaser Power The court’s perception notwithstanding, there are reasons to distinguish real property contracts from other contracts. One principal reason is the grossly disproportionate power a buyer in litigation maintains because of the uniqueness of real property. Unlike ordinary contract claims involving monetary damages, the buyer of real property has the right to sue for specific performance and to place a lis pendens against the property. See N.J.S.A. 2A: 15-6. The seller’s property is thereby encumbered, with no relief by posting a bond to free the property for sale. Instead, while the litigation takes years to reach trial, at best, it is highly improbable that the seller may transfer its property, take financing against it and so on. In the meantime, the buyer simply holds its claim at the alleged contract price while ordinarily the value of the property increases, and the buyer is affected only perhaps by an ultimate increase of financing costs. Thus, a seller has a substantially greater motivation to settle the lawsuit, even if it believes or knows that the claim of an oral contract has no factual basis. For example, the lis pendens in McBarron was filed on Nov. 14, 2001, and remains in place pending trial. In assessing the impact of the litigation on the parties, it is by no means an even playing field for the buyer and seller. Another problem with respect to many real property contracts are the various disclosures legally required by the seller, for example, lead paint, off-site conditions, and so on. These disclosures are required to be in writing, and given their nature, it is extremely unlikely that they would ever be made orally. Consequently, a buyer of real property will be in a much better position to reject the contract at any time based on the absence of the disclosures. On the other hand, the seller may be bound. This absence of mutual remedies is yet another disparity under the present statute. Conversely, when a written contract exists, the chances of the required disclosures being in place are far greater, as the services of an attorney or licensed realtor are likely to be employed. It is further submitted that even the 1991 report reference to the “limited circumstances” exception to the writing requirement of the Statute of Frauds requires erring on the side of requiring a writing in most cases. The “handshake without a writing” hypothetical in the 1991 report also suggests that Jost’s specific reference to a written agreement establishes the absence of a meeting of the minds that the oral agreement was to be the full agreement. There can be little doubt that the preparation of the actual agreement would have led to additional negotiations in which Jost’s attorney would have participated and addressed many of the issues above referenced. The paradox of having a done deal and still being very clear that a writing would be required is troubling with respect to real estate because the contract does require further negotiation. A reasonable, objective real estate attorney would not consider a deal done if the parties have agreed only to what the statute requires, plus a purchase price. That would only be the beginning of the negotiation. In this case, McBarron is an attorney and Jost had his attorney involved. Both parties reasonably knew there was more drafting to be done. The McBarron Court found, “whether a valid oral contract was made or whether oral agreements were intended not to bind the parties until a written contract was executed, is solely a matter of intent determined in large part by a credibility evaluation of witnesses.” It then properly cited the “legion” of cases holding that summary judgment is improper under such circumstances. As a result, based upon the verbal statements, the seller’s property will be encumbered at least through the time of trial � now in year three of the litigation � if it can afford to leave it encumbered for that long. Consequently, the buyers are in a much better position to extract a favorable settlement. Uncertainty and Confusion Abounds The McBarron case demonstrates that the statute’s goals of reducing results that are “inconsistently applied, resulting in uncertainty and confusion as to how the statute will be applied in individual cases,” will not be achieved. Though unquestionably there have been some unfair results under the prior statute, any statute that has substantially withstood the test of time over three centuries ought to have earned respect. The historical cases that have provided no equitable or legal grounds for relief in perceived unfair situations are a real and unfortunate cost of having much more overall societal certainty with regard to real property transactions. Most people believe that when it comes to real estate, there is a requirement to “get it in writing.” Absent a writing, reasonable reliance properly has been difficult to establish. Is there any doubt that the belief of a required writing reduced the number of court challenges involving real property, and reduced what would have been even more court congestion? Is there any doubt that as time passes, and as the knowledge that oral agreements are binding for the conveyance of real estate becomes more generally known, the number of court challenges in this area will increase? The 1991 report stated of the revised statute: “The standard for enforceability is not tied to ancient equity law but to modern evidence law.” Though certain rules of evidence have changed over the centuries, the human capacity to allege untruths to gain an economic advantage has not changed. How many sellers will have the financial ability to hold their property for the years required to defeat a spurious contract claim at trial? What happens to the family who shows their home on a Sunday afternoon � seeking to relocate for a job opportunity � and ends up facing an allegation of a verbal agreement to sell on Monday morning? What happens to the commercial developer facing such a claim with an approaching mortgage due date? These individuals do not have the time for the courts to grant all favorable inferences to the plaintiffs, and wait for a trial date years away. They may be forced to settle claims that are frivolous or fraudulent. A strong argument may be made in favor of returning to the very narrow exceptions to the prior Statute of Frauds, as suggested by a dissenting opinion in the 1991 report. At a minimum, some type of nonverbal evidence � a signed writing, or a taped conversation � which establishes by clear and convincing evidence the substantial components of an agreement to convey real property, ought to be required to survive a motion for summary judgment. The 1991 report quoted, though did not follow, the 1931 dicta of the Court of Errors & Appeals, in Johnson Lambert, 109 N.J.Eq. 88, 90 (E. & A. 1931): “It is well settled that the memorandum in writing of a contract for the sale of lands must contain the full terms of the contract � that is, the names of the buyer and seller, the subject of the sale, the price, the terms of credit, and the conditions of the sale, if any there be.” Instead of requiring anything close to the full terms, the statute as adopted in 1995 requires only what were believed to be the “minimal requirements.” “Who and what” are not enough to bring a real property transaction to closing. Additionally, to survive summary judgment, there ought to be a required showing by clear and convincing evidence that the parties expressly waived an intention to reduce their agreement to writing. With such a requirement, McBarron would have been decided differently. Jost’s statement that he wanted his attorney to reduce the agreement to writing is an example of prudence required in land transaction. Most people will have a professional review a real estate contract prior to signing. This review should lead to the proper issues being addressed. In the absence of a writing, only if there is clear proof of an agreement not to have a written contract, should the transaction have even a chance of enforcement. For the Statute of Frauds for real property to serve as a proper legal guide for the future, substantially more than a case-by-case adjudication of what may be clear and convincing verbal evidence is needed. It should not be a court’s obligation to impose the bulk of the customary contract provisions. The statute should address the mutuality of remedies, and parity between buyers and sellers. Except in the truly narrowest of circumstances, the Statute of Frauds as applied to real property ought to continue to require a writing. The defense of a frivolous or fraudulent claim against real property once again must be expeditious, powerful and certain. Our society will be better protected over time in this manner, even if a few people experience what the McBarrons did. Edwards is a partner at Price, Meese, Shulman & D’Arminio of Woodcliff Lake.

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