Posting for

Friday, August 11, 2000

by: Bert Rush

brush@firstam.com

and: Dennis Gonski

dollgonski@aol.com

STATUTE OF FRAUDS/TITLE UNDERWRITING/LEGAL DESCRIPTIONS

The Washington Supreme Court has held unenforceable a written agreement for sale of real property that describes the property by a business name and address, saying it violates the statute of frauds and can't be cured via court proceedings.

"Statute of frauds," as we know, is the common name for an English statute enacted in 1677, later incorporated into American law, and is now (in one form or another) part of the statutory law of almost every state. Its purpose is to prevent frauds and perjuries in the enforcement of contracts, by requiring that certain types of contracts (i.e., contracts for the sale of goods priced at $500 or more, contracts for the sale or conveyance of land, etc.) be in writing and signed by each party to be considered bound.

The statute of frauds is frequently raised as a defense in actions to enforce contracts. Even if the contract is "in writing," it may be argued that essential terms are missing, or ambiguous, so the writing as a whole is insufficient to satisfy the statute of frauds. On the other hand, some courts are willing to overlook the statute of frauds, by resorting to certain "rules" of contract interpretation, or by relying on the testimony of witnesses.

With this as background, the recent decision of Washington state's high court makes very interesting reading. The case is Key Design, Inc. v. Moser, 138 Wash.2d 875, 983 P.2d 653 (1999). Here's what happened.

Vince and Joni Moser were owners of Vince's Fitness Center in downtown Everett, WA. In mid-1996 Vince Moser began discussions with one Michael Miller about possible sale of the business to a company co-owned by Miller, known as Key Design, Inc. The business of Key Design was to invest in real property.

After discussions lasting six months, in December 1996 Miller presented to Moser a written "Real Estate Purchase and Sale Agreement," on a preprinted form, providing in part:

"REAL ESTATE PURCHASE AND SALE AGREEMENT

(Commercial and/or Investment)

(WITH EARNEST MONEY PROVISION)

THIS IS A LEGALLY BINDING CONTRACT.

READ BOTH FRONT AND BACK CAREFULLY BEFORE

SIGNING.

Everett, Washington Dec 23, 1996

The undersigned Purchaser, KEY DESIGN, INC.

agrees to purchase and the undersigned

SELLER agrees to sell, on the following terms,

the property commonly known as VINCE'S FITNESS

CENTER 1711 HEWITT Street in the City of

EVERETT, SNOHOMISH County, Washington, legally

described as (full and complete legal description

must be inserted prior to execution by parties):

[Left Blank]

1. PURCHASE PRICE. The total purchase price

is ONE HUNDRED FORTY THOUSAND AND NO/100 dollars

($140,000.00) payable as follows:

[Left Blank]

2. FINANCING. The offer [X] is [ ] is not

conditioned upon Purchaser obtaining financing....

...

5. CLOSING OF SALE. This sale shall be closed

on or before MARCH 14, 1997....

...

12. EARNEST MONEY RECEIPT. Agent hereby

receipts for earnest money in the amount of

$500.00 from the Purchaser in the form of

[ ] cash; [X] personal check; [ ] cashier's

check; [ ] promissory note...."

This Agreement was signed by the Mosers on December 31, 1996. On the same day, the parties signed a separate agreement for the sale of Vince's gym equipment for $15,000. The $500 earnest money under the first (real property) Agreement was not actually paid, but Key Design did pay $10,000 as a down payment under the second (gym equipment) agreement.

With the new year, there came another potential buyer, and on February 2, 1997, Moser signed yet another agreement to sell Vince's Fitness Center to one Creighton Kolbeck for $185,000. The very next day, Key Design paid the $500 earnest money due under its (real property) Agreement.

But, said Moser, there was no deal with Key Design. In a letter from Moser's (and Kolbeck's) attorney, Moser informed Key Design that he considered their (real property) agreement void because it did not contain a legal description of the property, and because the purchase price terms were ambiguous. (Although not mentioned in the Court's decision, we must assume Moser also repaid $10,500 to Key Design.)

After the sale to Kolbeck, Key Design filed suit against the Mosers and the Kolbecks for breach of contract, specific performance, and to set aside the deed to the Kolbecks, among other things. This suit contained the legal description of the property as "Lots 14 and 15, Block 666, Plat of Everett, according to the plat thereof recorded in Volume 3 of Plats, Page 32, Records of Snohomish County, Washington."

In their Answer to the complaint, the Mosers and the Kolbecks admitted "to the legal description of the property (in question) as stated in the complaint."

On cross motions for summary judgment, the trial court ruled in favor of the Mosers and the Kolbecks, finding that the Agreement did not satisfy the requirements of Washington's statute of frauds because, even though it was in writing, the Agreement didn't contain "all essential terms necessary for the formation of an enforceable agreement for the...sale of real property."

Key Design appealed directly to the Supreme Court, and the Supreme Court affirmed the trial court decision.

First, the Court discussed the requirements of Washington's statute of frauds governing real property (RCW 64.04.010), saying that "'(i)n a long line of decisions, we have held that, in order to comply with the statute of frauds, a contract or deed for the conveyance of land must contain a description of the land sufficiently definite to locate it without recourse to oral testimony.'" (Citations omitted.)

Specifically, in Martin v. Seigel, 35 Wash.2d 223, 212 P.2d 107 (1949), the Washington Supreme Court explained:

"In the interests of continuity and clarity of

the law of this state with respect to legal

descriptions, we hereby hold that every contract

or agreement involving a sale or conveyance of

platted real property must contain, in addition

to the other requirements of the statute of

frauds, the description of such property by the

correct lot number(s), block number, addition,

city, county, and state."

Refusing to depart from this fifty year-old rule, the Court held that the Moser-Key Design Agreement was fatally defective because it did not contain a sufficient legal description of the land, i.e., including lot and block numbers.

Second, the Court likewise refused to consider the defendants' admission, in their Answer, that the land referred to in the Complaint was the very same land intended to be covered by the Agreement. After reviewing cases from other jurisdictions said to represent a trend favoring recognition of such "judicial admissions," the Court said there was no "fraud" or inconsistency in the defendants' admitting the legal description while denying the existence of the Agreement as a whole. In other words, said the Court, the Mosers were entitled to consider the Agreement with Key Design as "tentative" because it lacked a sufficient legal description.

Third, the Court held there were insufficient grounds for reformation of the contract, because there was insufficient evidence of a mutual mistake by the parties. Instead, the Court cited the testimony of the Mosers that "they did not intend to include a legal description because they did not believe the agreement was meant to be binding; instead, it was considered a step in the negotiation for the sale of the property."

As might be expected, this was a split decision, with five justices in the majority, three justices concurring but issuing dissenting opinions about the reasonableness of the "Martin rule," and one straight dissent. The three concurring dissenters apparently believed there were other defects in the Agreement sufficient to render it unenforceable, such as failure to spell out payment terms.

Comment: This strikes me as a very strange decision. I doubt many other courts (in other states) would go as far in applying their statute of frauds in a real estate setting. More on this below.

But no matter how one views the result, this case is another fine example of how difficult it is to predict the outcome of an action for specific performance--especially where a written contract is unclear about essential terms.

And what does this case tell us about relying on a power of attorney in connection with a real estate transaction? Should the power (which must be in writing anyway) include a complete and accurate legal description of the land?

And...how will the traditional statute of frauds pertain to the recently enacted Electronic Signatures in Global and National Commerce Act? Safe to assume it will apply to e-contracts in the same way as to written contracts--which is to say that an e-contract will have equal dignity and must meet the same requirements as the paper kind--but look out for conflicts of law issues where e-commerce is done across state lines.

Returning to the first point--how other states view the statute of frauds--Dennis Gonski (outside counsel/Fairfield, NJ) reports that the Garden State may now have the most liberal rule of all: "Handshake Agreements to Sell Land." The case reported by Dennis is Prant v. Sterling, 753 A.2d 758 (1999). To view this timely offering, just click on the URL below.