By Michael J. Spithogiannis, Esq. & Floyd Grossman, Esq.Email MichaelEmail Floyd
A lawsuit is the last thing you would expect when signing a real-estate contract. And if litigation does ensue, you would expect a court to follow established rules of contract interpretation and hold the parties to what they signed. Here we examine a recent court decision which seems to disregard a basic rule of contract law: a court determining the intent of contracting parties should not look to any evidence outside the contract unless the writing is unclear.
Last year, the Appellate Division, Third Department, decided Prendergast v. Swiencick,[1] based on what the Court perceived was a common practice in residential real-estate sales rather than enforcing the contract as written.
By statute in New York, all that is necessary to create a binding enforceable real-estate contract is a signed writing clearly describing the property, and specifying the sales price. There are, however, many other issues covered by real-estate contracts: closing date; how the purchase price will be paid; mortgage-loan contingency; title issues; defaults. Indeed, many pertinent issues are addressed to reflect clearly the intent of the parties without having to rely on anything outside the contract to determine what they meant.
If the parties’ full intent is ascertainable from the contract, considering evidence outside the writing – parol evidence – is not permitted to explain what the parties meant. Parol evidence can be in the form of oral or written communications evidencing how business was done in the past, or a common practice under similar circumstances. But here’s the key: only if a court decides, in the first place, that the writing is unclear, may parol evidence be considered. Although this is a bedrock principle of contract interpretation, we find examples where the rule has been disregarded or overlooked.
In Prendergast, the seller sued her buyer under a written contract for failing to close on the agreed-upon closing date. The buyer argued she was not required to close, because mortgages against the property had not been satisfied. The buyer argued that under their contract the seller was required to deliver title on the closing date free from all mortgages.
The seller argued that, even though the mortgages were unsatisfied, the buyer’s interests could have been protected. To this point, the seller made arrangements to satisfy the mortgages by using the buyer’s purchase money, after which the lenders would issue satisfactions for recording. Indeed, part of the service a title-insurance company can provide is to attend the closing, verify the amounts owed to lenders, pick up checks to satisfy the mortgages, deliver payment to lenders, and obtain mortgage satisfactions. A title insurer could then insure the buyer’s title as of the closing date, even if the mortgages were satisfied after closing. These procedures are indeed common practice in real-estate closings. Accordingly, the sale could have been completed even though the seller did not comply with the contract.
But the contract had no requirement that the buyer purchase title insurance or avail herself of a title company’s closing services.
Was the buyer compelled to follow this common practice even though the contract itself did not require her to do so? Who breached the contract? Was it the seller who failed to satisfy existing mortgages? Was it the buyer who refused to tender the purchase price, buy title insurance, or consent to post-closing satisfaction of the mortgages?
In Prendergast, four out of the five Justices ruled in favor of the seller, concluding that the buyer could not refuse to close. The Court reasoned that the parties used a standard-form, real-estate contract, which “reflect[ed] the parties’ intent to embrace the common practice over the years in the real-estate closing realm” with respect to existing mortgages.[2] In other words, the buyer was found to have agreed to something that was not actually stated in the contract. Not only did the buyer forfeit her down payment, but she was held liable for the difference between the contract price and the lower price the seller received from a subsequent buyer.
What is troubling is that the Court’s majority did not first find any ambiguity in the contract, which would have justified considering parol evidence.
One Justice dissented, pointing out that the majority did not find the contract ambiguous, needing clarification. Moreover, he did not agree that the “standard form real estate contract necessarily incorporate[d] the common practice in the real estate industry such that those practices are given more weight than the language of the contract itself.”[3] He opined that the contract’s express terms should control even if common practice might have facilitated the transfer of title. He concluded that the seller was in breach.
Whether the majority’s decision to rely on parol evidence without first deciding that the contract was ambiguous is simply an anomaly or heralds a departure from long-established, contract-interpretation principles remains to be seen. So far, no courts have cited Prendergast as authority for the point discussed.
If there be a moral to our story, it is that real-estate contracts – indeed, all contracts – should be carefully considered, negotiated and drafted so as to avoid – as far as practicable – unintended consequences.
Weiss Zarett Brofman Sonnenklar & Levy, P.C. is a Long Island law firm providing a wide array of legal services to the members of the health care industry, including corporate and transactional matters, civil and administrative litigation, healthcare regulatory issues, bankruptcy and creditors’ rights, and commercial real estate transactions.
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[1] 183 A.D.3d 945 (3d Dep’t 2020).
[2] 183 A.D.3d, at 947 (emphasis added).
[3] 183 A.D.3d, at 954.