SEAL. It Does Mean Something. But It Better Be On The Signature Line, Not On The Notary Line

The North Carolina Court of Appeals took on the question of the meaning of the term “Seal” in Burton v. Williams, issued on January 19, 2010. The Court of Appeals reiterated the long standing rule in North Carolina that the presence of the term “Seal” on a instrument raises a presumption that the instrument is supported by consideration. However, the Court of Appeals clarified that the “Seal” must be appear next to the signatures of the parties to the instrument, not with the notary’s official stamp.

In Burton v. Williams, Mr. Williams purchased a house from Mr. Burton. Mr. Burton provided seller financing for $160,000 of the $185,000 purchase price to Mr. Williams. As part of the seller financing, Mr. Williams executed a promissory note and deed of trust in favor of Mr. Burton. A couple of years later, Mr. Williams approached the elderly Mr. Burton and asked that Mr. Burton sign a “payment release agreement” whereby the note would become null and void and Mr. Burton would be released “of any and all remaining financial obligations” to Mr. Williams in the event Mr. Burton died prior to Mr. Williams completely repaying the note. The word “Seal” was not present beside the signature lines on the payment release agreement. The word “Seal” was present in the notary acknowledgement on the “payment release agreement.”

The Estate of Mr. Burton brought this action to have the “payment release agreement” ruled void for lack of consideration. The Trial Court granted the Estate’s Motion for Directed Verdict. Mr. Williams appealed the ruling.

The Court of Appeals upheld the trial court’s directed verdict. In doing so, the Court of Appeals reasoned that a trial court can direct a verdict in favor of a party that has the burden of proof in a matter when one of following three “recurrent situations” are established: (i) the non-movant establishes the proponent’s case by admitting the truth of the basic facts upon which the claim of the proponent rests, (ii) the controlling evidence is documentary and the non-movant does not deny the authenticity or correctness of the documents, or (iii) there are only latent doubts as to the credibility of oral testimony and the opposing party has failed to point to specific areas of impeachment and contradictions. The Court of Appeals agreed that this case presented the second recurrent situation because the parties had stipulated to the evidence to be presented at the trial and thus “everyone has conceded that [the release] is the document that is the basis of the agreement and as a matter of law, it is not a valid contract, there being absolutely no consideration specified.”

In this case, the Court of Appeals recognized that the payment release agreement failed to recite any consideration for the new agreement to release Mr. Williams from having to continue to make payments on the note in the event Mr. Burton died prior the note being paid in full. In particular, the Court of Appeals noted that the payment release agreement stated that it reflected the entire understanding of the parties and thus consideration could not be present outside of the terms of the agreement.

Mr. Williams tried to argue that consideration was proven because the word “Seal” was located in the notary acknowledgment. The Court of Appeals refused to bite on this argument. Instead, the Court of Appeals noted that the word “Seal” was not present next to the signature lines and thus the document was not executed under seal.

Importantly, the Court of Appeals reasoned “[D]efendant cites no authority, and we have found none, suggesting that a notary public’s acknowledgement is equivalent to a party’s execution of an instrument under seal.” Rather, the Court of Appeals found that the notarial seal’s purpose “is to authenticate the document to which it is duly affixed and to provide prima facie evidence of the notary’s official character.”

Brokers, Take Good Notes On Your Conversations With Your Clients. Those Conversations Could Be Grounds for a Contract.

According to the Court of Appeals in Scheerer v. Fisher, an opinion released on January 19, 2010, the North Carolina Real Estate Commission rules have no bearing on whether an oral agreement to compensate a real estate broker for services provided is enforceable. In essence, the effect of this decision is that a broker can bring an action to recover compensation for his brokerage services even if the agreement to provide such services was not in writing.

A look at the facts of the Scheerer case shows the import of this rule. In Scheerer, David Scheerer, a broker, informed Jack Fisher, a developer, that two developments, Highland Forest and Indian Ridge Preserve, were for sale. Scheerer had done work for Fisher in the past and apparently thought Fisher would be interested in these two developments. Scheerer was right about that fact and Fisher ended up instructing Scheerer to investigate the cost of developing the two developments and to negotiate terms with the owners of the two developments. On March 20, 2007, Fisher, as a member-manager of an entity named Renaissance Ventures, LLC, executed purchase contracts to buy the two developments. The purchase contracts included a provision that stated the seller of the developments would pay Fisher a two percent (2%) commission. Fisher and Renaissance Ventures orally agreed that Scheerer would be paid another two (2%) percent commission because of his role as the buyer’s procuring agent.

In April 2007, Fisher and Renaissance Ventures unilaterally rescinded the purchase contracts. After the rescission, Fisher negotiated an agreement with Anthony Antonio whereby Antonio would enter into contracts to purchase the developments for a much lower price than Fisher had negotiated and then would assign the contracts to Fisher. Fisher did not inform Scheerer about this arrangement. However, Fisher maintained communications with Scheerer about what Fisher may offer for the developments in the future.

In October 2007, Highland Forest Partners, LLC, a new holding company formed by Fisher, purchased the developments. Fisher did not pay Scheerer or his company a commission for their role in procuring the properties for Fisher.

Scheerer, and his company, Mountain Life Realty, LLC, filed an action against Fisher and Renaissance Ventures for breach of an express contract to pay Scheerer a commission. The trial court granted Fisher and Renaissance Ventures motions to dismiss for failure to state a claim upon which relief could be granted. In this opinion, the Court of Appeals reversed the trial court.

Fisher and Renaissance Ventures based their refusal to pay Scheerer a commission on Rule A .0104(a) of the North Carolina Real Estate Commission Rules. This Rule provides that:

Every agreement for brokerage services in a real estate transaction…shall be in writing and signed by the parties thereto….Every agreement for brokerage services between a broker and a buyer or tenant shall be express and shall be reduced to writing and signed by the parties thereto not later than the time one of the parties makes an offer to purchase…real estate to another…A broker shall not continue to represent a buyer or tenant without a written, signed agreement when such agreement is required by this Rule.

Based on this Rule alone, it is clear that the North Carolina Real Estate Commission takes the position that an agreement to compensate a broker needs to be in writing.

However, the Court of Appeals took a different view on the matter and reversed the trial court in Scheerer. In doing so, the Court of Appeals adopted the reasoning of the Western District of North Carolina in McAlister v Hunter, 634 F.Supp.2d 577 (W.D.N.C. 2009). The Court of Appeals agreed with the McAlister Court and found that a violation of the Rule A. 0104(a) of the North Carolina Real Estate Commission Rules opens a broker to discipline, but has no bearing whether or not an enforceable agreement exists. The Court of Appeals noted that the Real Estate Commission Rules do not state that (i)“no action shall be brought” on an oral contract, (ii) that oral contracts are “void,” “invalid,” or “not valid,” or (iii) that no oral brokerage contract “shall be valid.” As a result, the Court of Appeals recited the fact that oral contracts to compensate real estate brokers for their professional services have never been required to be in writing under the Statute of Frauds in North Carolina and thus need not be in writing to be enforceable.

The Scheerer opinion could serve as a saving grace to preserve a disputed commission for any real estate broker who begins doing work for a prospective client without first securing a written engagement agreement. However, in light of this opinion, it would be wise to expect that the North Carolina Real Estate Commission is going to be strict in enforcing its Rule that is contrary to the conclusion in Scheerer. One would expect that the Real Estate Commission will not think twice about handing down disciplinary action for failure to obtain a written engagement agreement. Thus, in order to be safe and to avoid this potential disciplinary action by the North Carolina Real Estate Commission, brokers would be wise to always get a written engagement agreement for every client as soon as possible.

If It Smells, You Better Investigate

The North Carolina Court of Appeals added further strength to the doctrine of Caveat Emptor on April 7, 2009 when it handed down its opinion in Sunset Beach Development, LLC v. AMEC, Inc., et al., ____ N.C. App. ____, ____675 S.E.2d 46, 52 (2009)".The key point for real estate professionals to learn from this case is that if something seems amiss, you better investigate.

In Sunset Beach, the developer plaintiff entered into a contract to purchase a 453 acre coastal tract from an entity named GGSH Associates. The contract was contingent on GGSH providing the developer with a wetlands delineation approved by the Army Corp of Engineers which did not vary more than three acres over or under twenty-five acres. If the variation in the wetlands delineation varied by more than three acres, the parties were required to renegotiate the price.

After the contract was executed, GGSH hired a consultant to prepare the wetlands delineation. At the same time, the developer hired the same consultant to perform a wetlands delineation on three other adjoining tracts that the developer had also purchased or was going to purchase and to produce a composite map of all four tracts. It is important to point out that during this time GGSH provided the developer with a key to the tract of property that allowed the developer with “unfettered access” to the tract.

At some point before closing, GGSH entered into an undisclosed agreement with the consultant whereby it agreed to pay the consultant $90,000 as long as the sale occurred for the original purchase price. GGSH’s consultant forged the name of a prior employee of the Army Corp of Engineers on the maps he prepared.

Upon their review of the composite map, the developer’s engineers and members raised concerns regarding the wetlands delineation. Specifically, the engineer was concerned (i) that “the wetland[s] information received was not sufficient for design due to the lack of information concerning wetland size, type, and directional/distance ties to an established boundary,” (ii) that the only date on the map was January 9, 1989, (iii) that the Army Corps had not issued a separate letter of wetlands certification, (iv) that the composite map was signed by an individual who did not work for the Army Corps at the time the composite map was prepared, and (v) that the composite map had no legend for the delineations even though a legend was required by the Army Corps. At no time did the developer contact the Army Corps to inquire about the authenticity or accuracy of the Composite Map.

After closing, the Army Corps sent a letter stating it had never received verified wetlands delineation from the consultant and requiring that work on the tract had to stop.

The Court of Appeals in Sunset Beach Development held that the developer did not reasonably rely on any misrepresentations made by the GGSH because (i) the developer had an opportunity to inspect the tract and (ii) the GGSH had not resorted to any artifice which was reasonably calculated to induce the purchaser to forego investigation action. Specifically, the Court of Appeals noted the developer had been given unfettered access to the tract so they had ample opportunity to inspect the tract. Further, the Court of Appeals noted that the following actions did not constitute an “artifice to induce” the developer into foregoing further investigation into the wetlands delineations: (1) GGSH making statements to the developer that the tract contained approximately twenty-five acres of jurisdictional wetlands, (2) GGSH’s representations in the contract that there were no known violations of environmental laws on the tract, and (3) GGSH entering into an undisclosed agreement with the consultant for a conditional payment of $90,000.00.

In its decision, the Court of Appeals focused on the fact that the developer never took any real steps to investigate whether the composite map was accurate. In essence, the Court of Appeals recognized that the composite map was so flawed that the developer could not have reasonably relied on it. This fact coupled with the fact that the Court of Appeals noted that both parties were sophisticated parties who had experience dealing with coastal real estate emphasized that the fact that the Court of Appeals is of the opinion that sophisticated parties know that they better conduct their own due diligence rather than rely on assertions from the adverse party.

New Law Requires Slight Changes to Deeds

Senate Bill 405(SL 2009-454) became effective in North Carolina on January 1, 2010. Senate Bill 405 slightly changes the requirements for deeds in North Carolina, apparently in order to facilitate accurate property tax appraisals. The following information is now required to be included on deeds in North Carolina: (i) The name and mailing address of each grantor and grantee and (ii) A statement whether the property being conveyed includes the primary residence of a grantor. Although this information is now required on deeds, the new N.C. Gen. Stat. Sec. 105-317.2 specifies "[f]ailure to comply with this section does not affect the validity of a duly recorded deed."

Senate Bill 405 also tweaks N.C. Gen. Stat. Sec. 105-228.32 by adding a sentence that states as follows: "It is the duty of the person presenting the instrument for registration to report the correct amount tax due." It will be interesting to see what the implications of this "tweak" will be and whether or not litigation grows around possible violations of this new duty. Will Register of Deeds offices start making the person presenting an instrument for registration put their name on the document? Will we see municipalities taking actions against persons who present instruments for registration and fail to report the correct amount of tax due under this statute?

Time Is Of The Essence, Or Maybe Not

On December 22, 2009 the North Carolina Court of Appeals handed down its latest interpretation regarding the effectiveness of “time is of the essence” clauses in real estate contracts in the case Phoenix Limited Partnership of Raleigh v. Sarah W. Simpson, et al. Click here to read it.

In Phoenix, the plaintiff entered into a five year agreement (the “Contract”) with the defendants to lease a property that was used as a surface parking lot in Raleigh, North Carolina (the “Property”). The Contract included a call option that granted the plaintiff an option to purchase the Property and a put option that granted the defendants the option to require the plaintiff to purchase the Property. If either option were exercised, the Contract dictated that the purchase price for the Property would be the greater of $853,781.60 or the fair market value of the Property as of the date the option was exercised. The Contract provided that the fair market value of the Property would be determined as is typical in a lot of real estate contracts: each party would pick an appraiser and those two appraisers would pick a third appraiser; and the fair market value would be the average of the two closest appraisals. If either option were exercised, the contract required that closing would take place 180 days following the date the option was required. Importantly, the contract also included the following clause: “With respect to the performance of the obligations and duties in this Section [relating to the options], time is of the essence.”

On September 13, 2000, the defendants provided plaintiff with the required notice that the defendants were exercising the put option. The closing date established by the Contract was March 13, 2001. On December 8, 2000, a Phase I Environmental Assessment for the property reported the existence of multiple environmental issues that required a further Phase II Environmental Assessment. Prior to March 13, 2001, the appraisers issued a report estimating the fair market value of the Property to be $947,500.00. The appraisal report also included a note that the value would be adjusted downwards if the environmental issues on the Property continued. No closing occurred on or before March 31, 2001. However, on March 26, 2001, the defendants executed a general warranty deed and delivered it to the Plaintiff’s attorney (the “Deed”). The Deed was stamped copy and did not contain a notary seal or stamp.

On April 17, 2001, the Phase II Environmental Assessment report was completed and it revealed groundwater contamination on the Property. On April 26, 2001, the parties met to discuss the status of the transaction. On July 12, 2001, the defendants’ realtor informed the plaintiff that the defendants had hired a consultant to conduct further environmental tests to determine the source of the contamination. On December 21, 2001, the defendants’ realtor informed plaintiff that it had been determined that the groundwater contamination was caused by former dry cleaning activities conducted on the Property. The defendants realtor also informed the plaintiff that the defendants intended to enter the Property into the North Carolina Dry-Cleaning Solvent Act program.

On August 18, 2004, more than 3 years later, during which time there were no discussions between the parties, the plaintiff’s attorney sent a letter to the defendants inquiring about the Property. The defendants responded on September 23, 2004 that the Property had been put on the market for sale. On January 21, 2005, the defendants entered into an agreement to sell the Property to a third party for $1,352,560.00.

What did the North Carolina Court of Appeals Decide Based On These Facts?

1. An interlocutory Order of the Trial Court granting specific performance and requiring a party to convey a property affects a substantial right, and thus offers an immediate right of appeal.

-The Trial Court in this matter granted plaintiff’s Motion for Partial Summary Judgment and determined that the plaintiff was entitled to specific performance of the Contract. The Trial Court ordered that defendants convey the Property to plaintiff upon the tendering of the purchase price of $947,500.00. Other issues remained in the matter so the ruling was interlocutory; however, the Court of Appeals held that the defendants were entitled to an immediate appeal because a substantial right was affected by the interlocutory ruling.

2. A “time is of the essence” clause is waived when a party (i) does not insist on closing on the contract’s specified closing date and (ii) makes statements and takes actions manifesting an intent that closing should occur at some unspecified later date.”

-The Court of Appeals noted that the defendants offered no evidence that the defendants ever told the plaintiff that the defendants were insisting that closing take place on March 13, 2001. The Court of Appeals also noted testimony from the defendants that they expected closing to occur after March 13, 2001. Furthermore, the defendants made clear to the plaintiff that they would keep the plaintiff advised as to their efforts to rectify the environmental issues on the Property. The Court of Appeals found that these “undisputed facts establish conduct that naturally would lead plaintiff to believe that defendants had dispensed with their right to insist that time was of the essence with respect to closing on the property.

3. The clock to determine a reasonable period of time in which to complete performance under a contract does not begin to run until the seller advises the buyer that the seller is ready, willing, and able to close.

-The defendants argued that the plaintiff did not attempt to close on the Contract within a reasonable period of time because the plaintiff waited more than 3 years to try to close on the contract. However, the Court of Appeals agreed with the plaintiff’s argument that the defendants by their conduct indicated to plaintiff that they had elected to address the contamination on the Property rather than reduce the purchase price to reflect their liability for contamination on the property. Based on this position, the Court of Appeals determined that the defendants needed to notify the plaintiff that the defendants had completed cleanup of the Property and were ready and able to perform under the Contract before the reasonable period of time clock started.