Buyers' beware: The doctrine of merger and non-mandatory disclosures

Bill Serangeli, William Serangeli, Iowa Real Estate & Lande Use, Dickinson Law Firm, Des Moines Iowa

Posted on 04/10/2017 at 12:00 AM by William Serangeli

Despite growing criticisms that Offers to Buy or Purchase Agreements (“Offers”) are becoming too long and complicated for the professional real estate licensee to explain to her or his client or for a seller or buyer of residential property to understand, the basic form of Offers may be subject to the doctrine of merger and thus have unintended consequences for the buyers and sellers. The doctrine of merger eliminates the buyers’ and sellers’ remedies provided in the Offer once the transaction has closed unless careful drafting of the Offer is undertaken to avoid the impact of this doctrine.  

In Lovlie v. Plumb, 250 N.W.2d 56, 62 (Iowa 1977) the Iowa Supreme Court held that a contract for the conveyance of real estate, absent any showing to the contrary, is deemed to have been merged in and to a subsequent deed. As stated by the Iowa Supreme Court:  

“It is broadly true that a contract to convey land becomes presumably merged in the subsequent deed executed in performance thereof and this is so even though the terms and conditions of the deed be not identical with those of the contract.”  ***** Though it be generally true that, in all matters of conflict between them, the deed speaks and the contract is silent yet for some purposes the contract may be and is kept alive and enforceable”

While there are limited exceptions to this doctrine of merger, the burden rests always on the party asserting that they have remedies under the Offer to show that a merger was not intended. This is typically done in the actual drafting of the Offer so as to avoid another impediment, the parole evidence rule.

The impact of the doctrine of merger was recently discussed in the Iowa Court of Appeals decision of Payton v. Digiacomo, 871 N.W.2d 703 (Table), 2015 WL5285740. In Payton, the purchase agreement contained a remedies provision that provided:

“14 REMEDIES OF THE PARTIES. If buyer or seller fails to timely fulfill the terms of this agreement, then the other party shall be entitled to utilize any and all remedies or actions at law or in equity which may be available to them (including but not limited to forfeiture, foreclosure, termination, rescission, or specific performance), and the prevailing party shall further be entitled to obtain judgment for costs and attorney fees.” 

Peyton had brought a breach of contract claim against Digiacomo with regard to their 558A disclosures and lost. The Digiacomos as the sellers then filed with the district court an application for attorney fees pursuant to the remedies clause cited above. The trial court denied the request for attorneys’ fees and the Digiacomos appealed. 

The Diagiacomos relied upon Iowa Code Section 625.22 to support their application for attorneys’ fees. That code section provided:

“When judgment is recovered upon a written contract containing an agreement to pay an attorney fee, the court shall allow and tax as part of the costs a reasonable attorney fee to be determined by the court.” 

Rather than reach the merits of the Digiacomos’ request for attorneys’ fees, their appeal was decided on the issue of the doctrine of merger. 

As stated by the Iowa Court of Appeals:

“It is fundamental that when a deed is accepted in compliance with the terms of a real estate contract, the contract is merged in the deed.” Dickerson v. Morse, 212 N.W.2d 933, 934 (Iowa 1927). That presumption is subject to “many qualifications, one of which is that the collateral agreements or conditions not incorporated into the Deed or inconsistent therewith will be deemed to survive for the purpose of enforcement.” Phelan v. Peeters, 152 N.W.2d 601, 602 (Iowa 1967) (concluding contract requirement that seller pay paving assessment did not merge into deed). The burden of proof to show the parties did not intend the contract would merge into the deed is on the party challenging the merger. Gray, 174 N.W. at 590.”

How this affects a typical buyer was made clear. Payton, in his losing struggle with the sellers, had argued that the written Offer entered into between Payton as the buyer and the sellers required the sellers to make the disclosures provided for under Iowa Code Chapter 558A. Payton pressed the argument that the disclosure statement is incorporated into the Offer and that there was a violation of Iowa Code Chapter 558A causing damage to him as the buyer and that the Offer provided the prevailing party with a right to recover attorneys’ fees. 

Although the Offer included a paragraph that provided the parties with an opportunity to check a box to identify any addendums that were attached to the purchase agreement, and that box was marked “yes” with a reference to the seller’s disclosure of property condition form, the Court of Appeals was not persuaded. The Court of Appeals found that there was nothing in the offer that required the sellers to make disclosures under Iowa Code Chapter 558A. As a consequence, the Iowa Court of Appeals held that the remedies paragraph, including the provision for attorneys’ fees, did not survive the merger with the deed and granted neither the sellers nor the buyers the right to rely upon the remedies paragraph in the Offer for their claim to recover attorneys’ fees. Because of the application of the doctrine of merger, the Digiacomos were prohibited from invoking the remedies clause set out in the Offer in support of their claim for attorneys’ fees. 

The situation is even more dire when attempting to rely upon the disclosure provisions of Chapter 558A of the Iowa Code. In Yeboah v. Emans, 832 N.W.2d 834 (Table), 213 W.L. 1453231, the Iowa Court of Appeals again limited the remedy based upon the seller’s disclosure of property condition form. The buyers, Yeboah and Stueck had sued the sellers, the Emans, for fraud by concealment, fraud by false disclosure, misrepresentation, negligence and statutory liability under Iowa Code Chapter 558A concerning a leak in the sunroom roof and presence of four windows that did not work. 

The approach by the sellers was novel. The sellers contended that although they had knowledge of the leak, that the leak was not subject to disclosure because it was fixed and they experienced no further problems. The sellers’ claim was that Section 558A.4(1) does not require disclosure of non-active problems. The Court of Appeals rejected this strained interpretation of 558A.4(1) citing the Iowa Administrative Code 193E-14.1(6) requirement to disclose any known problems and any known repairs as well as the date of repairs and replacements. Thus the Court affirmed the damages awarded to buyers with regard to the sunroof leak. 

In turning to the issue of damages with regard to the inoperable windows, the Court held that Section 558A is inapplicable although the sellers’ disclosure form contained disclosures specifically deal with the windows. The rationale of the Court was that the window disclosure was a non-mandatory disclosure and as a non-mandatory disclosure, no seller would be subject to liability and damages under Chapter 558A as damages can only be premised upon required disclosures.

This then left the homebuyers with non-statutory avenues for relief. Those being common law fraud and negligence claims, both of which had previously been rejected by the trial court and therefore not available to the buyers as a means of obtaining compensation for the defective windows.

The compounding factor of both the doctrine of merger and the non-mandatory disclosure decisions, is that it is incumbent upon a buyer’s agent to craft an Offer which will be excluded from and not subject to the doctrine of merger. 

If not already contained in the brokerage’s standard Offer, it is suggested that the paragraphs similar to those set forth below be added as a standard Offer:

“INCORPORATION: The Sellers’ Disclosure of Property Condition Form required by Iowa Code Chapter 558A is incorporated herein as if fully and completely set forth herein.

SURVIVAL: The warranties, representations, covenants, agreements, duties and remedies contained herein shall survive the execution and delivery of this agreement, the closing of the transactions contemplated herein and the recording of any contract or deed conveying title to the buyers.” 

The material in this blog is not intended, nor should it be construed or relied upon, as legal advice. Please consult with an attorney if specific legal information is needed. 

- William Serangeli


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