Chapter § 66.2 GROUNDS FOR LIABILITY

• Jurisdiction: Oregon

§ 66.2 GROUNDS FOR LIABILITY

The grounds for liability under a contract for the sale of land may be based on contract or tort theories. Contractual theories of liability arise out of warranties both express and implied in the contract of sale and the deed or instrument of conveyance. Tort theories are generally based on fraud or misrepresentation in the sale.

§ 66.2-1 Contract Theories of Liability

§ 66.2-1(a) Express Warranties

A contract for the sale of land generally contains express warranties that are written into the contract of sale or may sometimes be made through other representations or actions of the seller. The express warranties may relate to title to the property or the terms of the transaction. Express warranties are often items of much negotiation. Express warranties may be affirmative or negative, qualified or unqualified, or of short or long duration. In a commercial transaction, express warranties may cover, for example, environmental conditions, the status of leases, or the absence of litigation. In a residential transaction, express warranties may cover, for example, the physical condition of the property or the status of title. See, e.g., Form 16-1 (section 14, "Seller's Representations").

When express warranties are made in connection with a real estate transaction, they often are contained in the contract of sale and not in the conveyance itself. Thus, a consideration of express warranties relating to real estate may necessarily involve an analysis whether the warranties survive the delivery of the instrument of conveyance, or are merged into the delivery of the deed.

§ 66.2-1(a)(1) Doctrine of Merger

As a general rule, delivery and acceptance of a deed supersedes the contract of conveyance, which merges with the deed. Winn v. Taylor, 98 Or 556, 576, 194 P 857 (1921). Merger occurs only when a deed is both delivered and accepted, and does not apply when the purchasers reject a proffered deed because it does not conform to the parties' contractual agreement. City of Bend v. Title & Trust Co., 134 Or 119, 128, 289 P 1044 (1930) ("the test as to whether prior agreements relating to a conveyance of title merge in the subsequent deed is the fact of acceptance by the vendee of the conveyance as full performance of the contract"); Jule v. Walsh, 87 Or App 266, 270, 742 P2d 65 (1987).

The party attempting to avoid applicability of the merger doctrine must show that the parties did not intend merger. Smith v. Vehrs, 194 Or 492, 504-05, 242 P2d 586 (1952). When the deed supersedes the contract because of merger, the warranties or stipulations in the contract are likewise superseded, if the parties intended to surrender their stipulations. City of Bend, 134 Or at 126-27.

§ 66.2-1(a)(2) Exceptions to Merger Doctrine

§ 66.2-1(a)(2)(i) Promises Collateral to Agreement to Convey

The terms in an earnest-money agreement, such as express warranties, that do not go to possession, title, quantity, or emblements of land are considered collateral to the promise to convey and will survive merger if it can be shown as a factual matter that the parties did not intend the deed to be the final and exclusive agreement. Soursby v. Hawkins, 307 Or 79, 83-84, 763 P2d 725 (1988). For example, an agreement to furnish a well suitable for the buyer's household use was held collateral to the promise to convey, and thus did not merge with the deed, in Caldwell v. Wells, 228 Or 389, 396-97, 365 P2d 505 (1961). Similarly, covenants in an earnest-money agreement that a dwelling on the property was connected to a septic tank and working well, and that built-in appliances and systems were in good working order, were held to be collateral terms that did not merge into the deed. Archambault v. Ogier, 194 Or App 361, 368-70, 95 P3d 257 (2004).

On the other hand, a promise to convey an easement directly affects the owner's title and thus is subject to merger regardless of the parties' intent. Scott v. Curtis, 103 Or App 389, 392-93, 798 P2d 248 (1990). In Johnston v. Lindsay, 206 Or 243, 248-50, 292 P2d 495 (1956), a covenant regarding the boundary of the property was a covenant connected to the quantity of the land, and thus the covenant merged with the deed.

However, an agreement in a contract of sale remains enforceable after delivery and acceptance of the deed when the parties did not intend for the deed to memorialize their agreement on the use of the land conveyed. The court used a parol-evidence-rule analysis to determine the parties' intent in Land Reclamation, Inc. v. Riverside Corp., 261 Or 180, 183-84, 492 P2d 263 (1972). See also Clackamas Cnty. Serv. Dist. No. 1 v. Am. Guar. Life Ins. Co., 77 Or App 88, 93, 711 P2d 980 (1985).

§ 66.2-1(a)(2)(ii) Fraud and Mistake

Merger does not apply when there is a mutual mistake in execution of the deed, or when a grantee has been fraudulently induced to accept a noncomplying deed. Weatherford v. Weatherford, 199 Or 290, 296, 257 P2d 263 (1953); City of Bend v. Title & Trust Co., 134 Or 119, 289 P 1044 (1930). A mutual mistake in the deed may negate the intent for the deed to supersede the purchase agreement. Jensen v. Miller, 280 Or 225, 232, 570 P2d 375 (1977) ("defendants did not intend to extinguish their right to contractual attorney fees by accepting the warranty deed in view of the fact that the defect in the deed itself was unknown to either party at the time of its delivery"). Mutual mistake will not be found when the mistake is only that of the complaining party in executing a warranty deed without expressly reserving the contractual agreement in the deed. Weatherford, 199 Or at 296.

§ 66.2-1(a)(2)(iii) Antecedent Promises

An antecedent promise of performance to be rendered after conveyance does not merge with the deed. Stan Wiley v. Berg, 282 Or 9, 17, 578 P2d 384 (1978).

§ 66.2-1(a)(2)(iv) Nonmerger (Survival) Clause

When a contract containing warranties relating to real property expressly states that the warranties will survive the closing and will not merge in the deed, the warranties do not merge into the deed. See 14 Powell on Real Property § 81A.07 (Michael Allan Wolf, ed. 2009) (citation not verified by publisher).

PRACTICE TIP: In drafting a purchase and sale agreement containing particular negotiated covenants or express warranties, the attorney should expressly state that those warranties or covenants are intended to survive closing.

§ 66.2-1(b) Implied Warranties

§ 66.2-1(b)(1) Implied Warranty of Habitability

In addition to recognizing express warranties in real estate sales, the Oregon courts also recognize an implied warranty of habitability. This warranty applies only in residential sales, not commercial sales, and only between the purchaser of a new single-family residence and the seller if the seller is the builder of the residence. Yepsen v. Burgess, 269 Or 635, 640-41, 525 P2d 1019 (1974). See generally Fundamentals of Real Estate Transactions §§ 8.6-8.7 (Oregon CLE 1992 & Supp 2001).

The sale by a builder of a new residential home carries an implied warranty of professional construction and fitness for habitation. In Yepsen, the Oregon Supreme Court held that the ordinary rule of caveat emptor does not apply to such a sale. The rationale was that the usual assumption, that there is an arm's-length transaction between a seller and a buyer of comparable experience and skill, does not apply when the seller is also the builder of the house and the purchaser does not have equal knowledge or equal access to information concerning the construction of the house. The court adopted a case-by-case approach to warranty issues such as applicability to industrial structures, statutes of limitations, and privity. Yepsen, 269 Or at 640-41.

In Cabal v. Donnelly, 302 Or 115, 122, 727 P2d 111 (1986), the court held that a claim for breach of implied warranty of habitability sounds in contract, not tort. Thus, a successful claim for breach of the implied warranty of habitability entitled the winning party to attorney fees under an earnest-money agreement with an attorney fee provision.

§ 66.2-1(b)(1)(i) Contracts for Construction of Custom Homes versus Sales of New Homes

The implied warranty of habitability does not extend to a purchaser who contracts with a builder to build a single-family residence on the purchaser's property. Chandler v. Bunick, 279 Or 353, 358, 569 P2d 1037 (1977). The court found important differences between contracts with an owner to build a custom house and contracts for the sale of a new, already built house. "We are satisfied that our decision in Yepsen [(see § 66.2-1(b)(1))] was correct, but we are not willing to extend its principles to other settings so long as we remain unconvinced that there is a demonstrated need to do so." Chandler, 279 Or at 358.

§ 66.2-1(b)(1)(ii) Condition of the Land versus Seller's Work on the Land

In Yepsen v. Burgess, 269 Or 635, 525 P2d 1019 (1974), the court drew a distinction between conditions of the land (which are not subject to warranty) and the product of a builder's work on the land (which may be subject to warranty). The case involved a septic tank and drain field system that, although not part of the house itself, were "the product of the builder's work upon the land in conjunction with the construction and sale of the structure" and thus subject to the warranty. Yepsen, 269 Or at 642.

In Cook v. Salishan Properties, Inc., 279 Or 333, 338-40, 569 P2d 1033 (1977), the court declined to extend the implied warranty of habitability to the lease or sale of undeveloped subdivided land from commercial developers when the land is sold for the purpose of building a home on the lot. The court reasoned that, unlike the sale of a new home, "[l]and is accessible for inspection before it is purchased" and there is no general expectation that a subdivider-developer would provide a lot free of latent defects. Cook, 279 Or at 338, 340. The court left open the question whether the decision would be different in a suit...