"Deal or No Deal: Proving Oral Real Estate Contracts". Published March 24th, 2008.
Stephen Hankin's article published in The NJ Law Journal: "Deal or No Deal: Proving Oral Real Estate Contracts". Published March 24th, 2008.
DEAL OR NO DEAL: PROVING ORAL REAL ESTATE CONTRACTS
By: Stephen Hankin*
In this current real estate market of anxious sellers and change-of-heart buyers, attorneys need to be particularly conscious of New Jersey's 1996 Statute of Frauds amendment validating oral land contracts. Now, for the first time in modern history, an oral contract for the sale of land can be established if there is clear and convincing proof of its existence, a sufficient description of the realty, nature of interest to be conveyed and identification of the parties. Prant vs Sterling, 332 N.J Super. 369 (Ch. Div.), affirmed d.o.b., 332 N.J. Super. 292 (App. Div.), certif. denied, 166 N.J. 606 (2000); N.J.S.A. 25:1-13b. It is especially difficult to understand the reason for the revision given New Jersey's continued insistence that a valid contract for the sale of personal property for $500 or more must take the form of a signed writing. N.J.S.A. 12A:2-201(1). Nonetheless, the amendment is something with which practitioners must cautiously learn to deal.
This article first focuses upon the decisions construing claims based upon the amendment. With that as a backdrop, we next pinpoint the criterion which must be considered to prove (or to disprove) a binding oral agreement, provide a few cautionary practice tips and then suggest a further legislative revision.
* Mr. Hankin, a member of Hankin Sandman & Palladino of Atlantic City and Cape May Court House, New Jersey, concentrates in complex commercial transactions, real estate, land use, environmental law and related trial and appellate practice. Case Law Summary
Prant is the first of only three reported decisions construing the amendment. There, a summary judgment dismissal of a buyer's claim was affirmed mainly because negotiations on items other than price continued following the date of the alleged oral agreement and the draft contract was accompanied by a letter stating it had yet to be reviewed by the seller. However, there was a memorandum of agreement providing This is to confirm our understanding and document our agreement, the diary of a co-trustee of the seller reflected the deal was definite and that another trustee had told the buyer the seller's entire family had agreed, checks were actually tendered by the buyer and placed into an escrow account, the buyer retained an environmental testing firm and executed a draft contract and the parties' attorneys did not immediately become involved after the initiation of the negotiations. Prant signaled New Jersey's intention to place a strong emphasis upon the amendment's clear and convincing standard and bore out the statement in Brill vs Guardian Life Insurance Company, 142 N.J. 520 (1995) that our judges are made of sterner stuff than to deny summary judgment for fear of reversal.
Four years later in McBarron vs Kipling Woods, LLC, 365 N.J. Super. 114 (App. Div. 2004), the denial of a seller's motion for summary judgment was understandably upheld because in addition to a tape recording which disclosed the seller repeatedly admitting a binding verbal agreement had been reached, there was a long course of oral dealings between the parties, the seller allegedly told the buyer's builder there was a binding deal, no attorneys had been enlisted and thus draft contracts were not in the process of being exchanged, in reliance on the seller's assurances the buyer had secured two mortgage commitments and the seller allegedly reneged when he received a significantly higher offer from another buyer. It was only in the context of these strong, substantiated proofs - rather than in dilution of Prant - that the court held whether a binding oral agreement exists is solely a matter of intent determined in large part by a credibility evaluation of witnesses. Id. at 117.
The same year in Morton vs 4 Orchard Land Trust, 180 N.J. 118 (2004) the Supreme Court affirmed the summary judgment dismissal of a buyer's suit for specific performance. Drawing upon the New Jersey Law Commission's 1991 Report and Recommendations Relating to Writing Requirements for Real Estate Transactions, Broker's Agreements and Suretyship Agreement, Morton references a handful of objective, commonsense factors which should be analyzed to determine a seller or buyer's intention to be bound:
• The circumstances surrounding the transaction
• The nature of the transaction
• The relationship between the parties
• The parties' contemporaneous statements, and
• The parties' prior dealings, if any.
Morton similarly relied upon the Commission's Report in citing examples of conduct both indicative and not indicative of an intent to be bound, such as if the parties engaged in lengthy negotiations for the sale of a costly office building by the exchange of draft contracts, or, conversely, if the parties had prior hand shake deals which they have honored. In refusing to find the existence of a binding oral contract, Morton found significant the provision in the broker prepared contract, signed only by the buyer, that it was binding only upon parties who sign it and that the signed contract had to be delivered to the parties. 180 N.J. at 128-129.
A lengthy string of unpublished opinions following Morton are instructive in establishing relevant criterion to ascertain an intent to be bound and underscore that the required analysis involves a weighing of the need to avoid trapping parties in contractual obligations they never intended against the desire to enforce and preserve agreements that were intended [to be] binding... Teachers Insurance & Annuity Association vs Tribune, Co., 670 F. Supp. 491, 497-8 (S.D. N.Y. 1987). See Alampi vs Pegasus Group, LLC, 2008 WL 140952 (N.J. Super. A.D.) (affirming grant of summary judgment given absence of clear and convincing proof of essential terms); Moscato vs C.B.P.B. Associates, 2007 WL 2247398 (N.J. Super. A.D.), certif. denied, 193 N.J. 277 (appeal after trial affirming existence of oral agreement and imposing constructive trust based upon uncontradicted proof of true owner's possession, payment of initial deposit for home and payment of all subsequent mortgage costs, controlling of sale listing, conducting of sale negotiations and gratuitous transfer); Loder vs Neppl, 2007 WL 4118310 (N.J. Super. A.D.) (affirmance of trial court judgment finding oral agreement where parties had lengthy informal relationship, dealt orally in their leasehold relationship, had not involved attorneys in their dealings, the deal was sealed with a kiss and handshake, essential terms agreed upon and seller issued fax with words selling price); Alliance Media Group, Inc. vs Great Outdoor, Inc., 2007 WL 2247419 (N.J. Super. A.D.) (emphasizing the importance of DRAFT on written proposals as evincing an intent not to be bound absent a signed agreement); Gruber vs Rixford, 2007 WL 1425498 (N.J. Super. A.D.) (summary judgment reversed in action seeking resulting trust because of fact question whether downpayment was a gift, loan or investment and where defendant stated it was an investment and he was refinancing to buy out plaintiff's interest); Lawton vs CVS Pharmacy, 2007 WL 980451 (D. N.J) (oral agreement between counsel settling case for transfer of land enforced where buyer's counsel confirmed settlement amount, the amount of settlement but not the due date for payment found to be an essential term, and seller found to have had a change of heart); Hogan vs Condinho, 2006 WL 2164416 (N.J. Super. A.D.) (noting that the absence of essential terms from a preliminary agreement is persuasive evidence of an intent not to be bound by it and refusing to enforce oral agreement to sell a 100% interest in land when admittedly only agreed to by a 50% tenant in common owner); Corigliano vs Fernicola, 2006 WL 1042374 (N.J. App. Div.) (buyer denied specific performance after trial despite the fact that he had tendered a downpayment, the seller had signed a preliminary agreement containing an $850,000 sales price, the required downpayment and the closing date and the seller had removed a for sale sign, cancelled a previous appointment with a potential third party purchaser and gave the buyer blueprints of the house and because the nature of the preliminary agreement suggested it anticipated a formal contract); Sakol vs M & L Investments, 2006 WL 1344319 (N.J. Super. Ch.) (pointing out the significance of a seller's acceptance of buyer's downpayment in the context of an allegedly frivolous lawsuit); Surf and Turf Development, LLC vs Cestone, 2006 WL 3025512 (N.J. Super. A.D.) (affirmance of summary judgment for seller where essential terms of the proposed written agreement were the subject of negotiations after the date the oral agreement had allegedly occurred, [p]laintiff did not attempt to enforce the alleged oral agreement until negotiations ended without a written contract and seller's attempt to sell property to others after failed efforts to complete a written agreement not found to be probative); On the Hill Realty, LLC vs Kelly, 2005 WL 1252340 (N.J. Super. Ch.) (R. 4:6-2(e) motion denied where buyer of catering business demonstrated seller had secured an ad in a magazine for buyer, introduced buyer to sales staff as new owner, granted buyer permission to have buyer's sales representatives present to book future parties and in reliance buyer placed magazine ads, hired a manager and closed his other business); LëEsperance vs Devaney, 2005 WL 3092849 (N.J. Super. A.D.) (no oral agreement found due to absence of agreed-upon consideration, nature of interest to be conveyed, and absence of any prior course of oral dealings); Paterson 2003, LLC vs Maragliano, 2005 WL 1010503 (N.J. Super. Ch.) (finding actions taken by attorneys for seller and buyer in oral negotiations are binding on clients and oral contract established where buyer signed contract, paid deposit, performed inspections and his counsel following oral consummation practiced subterfuge and foot dragging by play[ing] hard to get and act[ing] one way for months and then suddenly adopt[ing] a position 180∞ opposite its prior actions).
Clear and Convincing Standard
The amendment's imposition of a clear and convincing standard deserves brief but special discussion because under summary judgment motion practice [a]n issue of fact is genuine only if, considering the burden of persuasion at trial, the evidence submitted by the parties on the motion, together with all legitimate inferences therefrom favoring the non-moving party, would require submission of the issue to the trier of fact. R.4:46-2(c). [emphasis added] This enhanced standard also embraces proof of the existence or scope of an agent's actual, implied or apparent authority to bind either the seller or the buyer in oral negotiations. Lobiondo vs O'Callaghan, 357 N.J. Super. 488 (App. Div.), certif. denied, 177 N.J. 224 (2003).
Clear and convincing evidence must establish in the mind of the trier of fact a firm belief or conviction as to the truth of the allegations sought to be established. Matter of Purrazzella, 134 N.J. 228, 240 (1993). The belief must be so clear, direct and weighty and convincing as to enable [a judge or jury] to come to a clear conviction, without hesitancy, of the precise facts in issue. Matter of Seaman, 133 N.J. 67, 74 (1993). Clear and unequivocal is synonymous with clear and convincing. Aiello vs Knoll Golf Club, 64 N.J. Super. 156, 161 (App. Div. 1960).
Proving the Oral Deal
Fairly synthesized, all of the decisions construing the 1996 amendment adopt a common- sense, objective rather than subjective, approach in determining whether a seller or buyer intends to be bound without a signed contract. Counsel should thus explore and be guided by the following criterion both in pre-litigation consultations with the client and during the discovery stage.
Considerations Common to the Seller and Buyer • Whether the parties have dealt with one another in the past and if so, in what manner
• The number and places of any meetings with each other and what was discussed at each
• The substance of any recorded and unrecorded statements, electronic communications and writings between each other, municipal officials, neighbors, co-workers, accountant, financial advisor, etc.
• Whether the initial offer was in writing as well as all other meaningful communications or, conversely, whether they were entirely or for the most part oral
• The existence of any draft agreements, signed or unsigned, and whether they are labeled as drafts or proposals
• Whether any draft agreement contains provisions requiring that an agreement be signed before becoming binding or disclaiming any prior oral agreements between the parties
• Whether written communications between respective legal counsel (wisely) have caveats providing that no binding agreement shall exist until and unless a signed writing occurs or that any draft first needs to be client-reviewed and approved in writing
• Whether there was any failure or undue delay by either party to disavow the existence of an agreement
• Whether the nature or complexity of the agreement is of the type usually reduced to a signed writing (e.g.., substantial purchase price or downpayment, or existence of seller financing or other contingencies)
• Whether there were items remaining to be negotiated following the date of the alleged oral contract and, if so, whether they are essential
• The parties' real estate sales/purchase history, including their methodology of transacting business (e.g., Did they historically negotiate and reach verbal deals themselves-)
• Whether there have been requests between the parties for performance (e.g., Did the seller request the downpayment immediately when the alleged oral contract was reached-)
• The existence of any notes in the parties' business or personal calendars, diaries or files
• The existence and substance of the parties' electronic or other written communications (including the scope of work in any fee agreement) to their legal counsel (assuming discoverability)
• Whether the transaction was referred to legal counsel for the preparation of an agreement (NOTE: Under Goldman vs Shapiro, 16 N.J. Super. 324, 327 (App. Div. 1952) that negotiating parties contemplate the preparation and signing of an agreement is some evidence of their intent not to be bound without one.)
• The length of time after the initiation of negotiations before referral to respective legal counsel
• Whether either party relied on the transaction in a manner either known or unknown to the other (e.g., formation of purchasing entity, moving plans, hiring of employees, sale of other land, other contractual undertakings, etc.)
Additional Conduct Relevant Only to the Seller
• The removal of any For Sale sign
• The cancellation of the broker's or seller's sale advertisements
• Whether the seller consents to the buyer's possession
• Whether the seller consented to access to property by the buyer's professionals (surveyor, environmental consultant, construction inspections, etc.)
• The existence of statements by the seller to the buyer's appraiser, environmental consultant, surveyor, contractor, architect or others on the buyer's behalf who may have visited the property
• The seller's interest in purchasing or leasing new property, including conversations with real estate brokers or prospective lenders
• The existence of any statements to seller's secured lender regarding the proposed satisfaction of indebtedness from the buyer's proceeds
• The acceptance/use/ratification of any downpayment or other performance by the buyer
• Whether any documents were supplied by the seller to buyer such as a title report, survey, environmental inspection, land use or construction permits, architectural plans, leases, deed and the like.
• The existence and timing of any attempt to sell the property to third parties for a significantly higher price or on better terms
• Any efforts to sell the land to third parties after the date of the alleged oral agreement, including statements made to prospective third party buyers
• Whether the person who allegedly verbally agreed had the requisite authority and/or was the sole owner of the property
Additional Conduct Relevant Only to the Buyer
• Whether there was a request for:
- a survey
- a building inspection
- an environmental inspection
- a title commitment
- mortgage financing
- an appraisal
- an architectural study
• Whether there was a cessation of or continued interest in purchasing other real estate
• Whether there were conversations with the prospective contractor, municipal zoning officer or other official concerning the use and/or construction upon the land
• Whether the buyer made any application for land use approval
• Whether there was a tender of the downpayment or other form of performance
• Whether there was any participation in seller's land use application
Not only because it is prudent (and required for a new client) but as well because it may be discoverable, the scope of professional duties in the fee agreement should encompass the conduct of negotiations in order to conclude a binding contract. Since the mere anticipation of a signed agreement does not preclude a valid oral agreement where all of the essential terms have been agreed upon, and because an attorney can unwittingly bind his client, at the outset of representation counsel should inform the other party's attorney in writing that his client does not intend to be bound absent a mutually executed agreement and that he has no binding authority otherwise. Every draft should also contain a heading reflecting this. When a party is not represented by counsel and the transaction is being negotiated by the parties themselves, counsel should similarly advise the client in writing of the pitfalls of private oral negotiations and at the very least direct or have the client direct a letter to the buyer or seller stating his intent not to be bound without a signed contract prepared by counsel. Lastly, during negotiations counsel should make contemporaneous notes of every conversation with the other party's attorney and, where possible, by letter or e-mail memorialize every conversation with the suggested caveats. This is an amendment which dictates the defensive practice of law.
A Further Legislative Revision-
If no objective criterion exists to satisfy the clear and convincing standard, a buyer's or seller's unsupported assertion that the other orally agreed to a deal and shook hands on it should not be sufficient to survive summary judgment. Collins Realty Co. vs Sale, 104 N.J. Eq. 138 (E. & A. 1929) (pointing out the insignificance of competing testimony in satisfying a high burden of proof). Under these circumstances, a credibility determination is simply not warranted. Hopefully, trial judges will be cognizant of the very narrow circumstances in which McBarron calls for a trial on the issue of intent not only because of the unrecoupable costs of litigation but as well because of the burdens a seller must endure resulting from a lis pendens. Given those burdens, the ability of a buyer or seller to claim the other agreed to a deal and to feign reliance, the immunity afforded to those who file a baseless lis pendens and the judicial reluctance to award sanctions under R.1:4-8, our Legislature would be well advised to revise the Statute of Frauds further to require an award of fees and costs to the prevailing party for a claim seeking to enforce a wholly oral agreement for the sale of land