Beware the Merger Doctrine: Rights in a Real Estate Contract can be Lost under the Doctrine of Merger
In a typical real estate transaction the parties enter into a purchase agreement that contemplates a closing where the real estate is transferred by a deed. What happens to the obligations stated in the purchase agreement after the deed is delivered? Under the so-called "merger doctrine" those obligations likely disappear and are no longer enforceable. For example, you negotiate a purchase agreement to buy a parcel of undeveloped land that is zoned agricultural. You include in the purchase agreement a requirement that the seller rezone the land before the closing to enable you to build a small office building. The seller fails to rezone the land, but you close anyway and accept a deed from the seller. You will not be able to sue the seller after the closing to enforce the rezoning requirement in the purchase agreement. The merger doctrine says that all prior negotiations and agreements--including that purchase agreement--are deemed "merged" into the deed. The prior purchase agreement disappears, so to speak, and the rights of the parties are governed solely by the deed. Unless that deed restates the obligation that was in the purchase agreement, the obligation ceases to exist. The merger doctrine has had a long and consistent history of enforcement in Minnesota, but a recent decision of the Minnesota Court of Appeals may be signaling a change in how the doctrine is applied.
History of the Merger Doctrine
The "present" definition of the merger doctrine in Minnesota dates back to a 1914 Minnesota Supreme Court case, In re Brown's Estate, which concerned the sale of land in western Hennepin County for residential development. In the purchase agreement, the seller promised that before the closing, he would secure an agreement with the Minneapolis Street Railway Company that would give future lot owners the right to ride the railway into Minneapolis for a nickel. The seller failed to secure the nickel fare before delivering the deed, but the buyer accepted the deed anyway. Later, the buyer tried to enforce the seller's obligation to secure the nickel fare. The court ruled that the purchase agreement had merged into the deed, that the deed was the final agreement of the parties and that therefore, the seller's obligation to secure the nickel fare was unenforceable.
Recent Cases Under the Merger Doctrine
Until very recently, cases decided by the Minnesota Court of Appeals have enforced the merger doctrine consistent with In re Brown's Estate. In a 1987 court of appeals decision, a purchase agreement for the sale of an office building obligated the seller to ensure that before the closing, a certain amount of square footage would be unoccupied in the building. The seller did not fulfill this obligation before the closing. When the buyer tried to enforce the seller's obligation after the closing, the court of appeals ruled that the obligation had merged into the contract for deed and could no longer be enforced.
A 1988 court of appeals decision applied the merger doctrine when a buyer tried to enforce a seller's obligations to install development improvements in a residential subdivision. The court said the obligations no longer existed because they were merged into deeds transferring the lots to individual buyers. The court recognized that while the merger doctrine may produce what appear to be harsh results, the buyer in this case could have easily "protected its rights by insisting on a specific provision in the deeds, presumably in the nature of a warranty or covenant."
Again in 1993 the court of appeals addressed the merger doctrine and enforced it, this time to excuse a buyer under a contract for deed from an obligation to pay the seller's mortgage payments. The buyer defaulted under the contract for deed and deeded the property back to the seller. Later, the seller attempted to sue the buyer for failing to make the mortgage payments that were required under the contract for deed. The court of appeals said that when the buyer deeded the property back to the seller, that deed was the final agreement between the buyer and the seller. The earlier agreement that contained the buyer's obligation to make mortgage payments merged into the later deed.
The lesson of Brown's Estate and these recent decisions of the court of appeals is that an unperformed obligation in a purchase agreement is not enforceable after the closing and the delivery of the deed. You may need to insist on the obligation being carried over into the deed itself or you may need to consult with your attorney about incorporating "anti-merger" language into the purchase agreement and deed if you want purchase agreement obligations to survive after the closing. But the certainty of how the merger doctrine applies may have been undercut by a more recent court of appeals decision.
Possible Changes in the Doctrine
A decision filed on September 1 signals an apparent change in the way that the court of appeals may view the merger doctrine. The court ruled in Bruggeman v. Jerry's Enterprises, Inc. that the merger doctrine did not cut off a repurchase option contained in a purchase agreement after the closing. The buyer and seller had entered into a purchase agreement for an undeveloped parcel of land which contained a repurchase option. The option allowed the seller to buy the land back from the buyer "if Buyer has not commenced construction of improvements on the Property within two years (2) after . . . Buyer exercises its option to purchase the Property." Two years after the closing, the seller made a demand to repurchase the property. The buyer refused to sell back the property. The buyer believed that the repurchase option no longer existed because it had merged into the deed. The seller sued and the trial court agreed with the buyer that the merger doctrine cut off any repurchase option by the seller.
The court of appeals reversed and said that the repurchase option still existed. The court distinguished between purchase agreement obligations that it characterized as "conditions precedent"--obligations that were to be fulfilled before the closing--and "conditions subsequent"--obligations that were to be fulfilled in the future after the closing. The court said that only conditions precedent were cut off by the merger doctrine, not conditions subsequent. The court said the repurchase option was a condition subsequent because the buyer was supposed to fulfill an obligation after the closing--construct improvements on the property. Relying on cases from other states, the court concluded that the condition subsequent survived merger and could be enforced.
The court also said that the repurchase option was a "collateral agreement" because it required something to be done that had "no necessary relation to the main subject of the agreement." The court concluded that because the repurchase option was also a collateral agreement, the merger doctrine should not apply. This is new law in Minnesota and it creates potential uncertainty concerning application of the merger doctrine. Future court decisions undoubtedly will be needed to determine whether a particular purchase agreement obligation is "collateral", a "condition subsequent", or a "condition precedent". Only when this question is answered will it be possible to know if the merger doctrine applies. Law that had been fairly straightforward, certain and predictable for the past 100 years or more, may have become, as a result of this recent court of appeals decision, less straightforward, certain and predictable. Regardless of whether your interest is to make sure that certain obligations survive the closing or are cut off and merged into the deed at the closing, attorney assistance now becomes critical to achieving the desired result.