In the busy world of commercial real estate, buyers and sellers may be unable to complete all contractual obligations before closing. In those instances, parties often identify certain “post-closing” matters in the contract. Typically, if those provisions are not carefully drafted to “survive” the closing, then the terms may merge with the deed and be deemed satisfied at closing. However, in a 2022 Oregon case, Freeborn v. Dow, the Oregon Court of Appeals identified a nuance to that rule and explained that certain contractual matters may survive closing and not merge with the deed, regardless of the presence or lack of a survival clause.
In Freeborn, the plaintiffs, sellers of real property in Redmond, Oregon, conveyed their property to the defendant (buyer) based on a contract that allowed the sellers to retain their residence on the property until a subdivision plat divided the land into two separate parcels. Upon the completion of the plat, the buyer would convey the residential parcel back to the sellers at no cost. The agreement went awry when the buyer later conveyed the full property to a third party who then initiated an eviction action against the original sellers. The sellers brought a claim for, among other things, breach of contract against the buyer, claiming the language of the contract had obligated the sellers to convey the residential parcel back to the sellers after the lot split. The buyer argued that the doctrine of merger extinguished the rights of the sellers under the contract because the deed did not reference the agreement to reconvey the residential parcel, thus allowing the buyer to sell the property free and clear of any such obligation. Though the trial court sided with the buyer, the appellate court reversed and ruled in favor of the sellers for two key reasons.
First, in Oregon, terms of “antecedent agreements” may be carved out from the doctrine of merger. If a purchase agreement for real property contains obligations that are not intended to be completed by the conveyance of the deed (for example, certain restrictions on use in the purchase agreement), then such obligations can survive closing and will not be subject to the doctrine of merger. As the court in Freeborn quoted from an earlier case, such agreements “might naturally be made as a separate agreement by parties situated as were the parties to the written contract.” In other words, the parties, practically speaking, entered into multiple, consistent agreements that are interpreted together.
Second, the buyer claimed that the statutory warranty deed used to convey title extinguished and superseded the terms of the purchase contract. The Oregon Court of Appeals rejected that argument, noting that, even if the effect of a statutory warranty deed were to operate as an integration clause, that integration is only applicable to the covenants that a grantor provides in such a deed. But such an integration does not automatically extend to all provisions of a contract.
In conclusion, the Oregon appellate court’s opinion in Freeborn highlights the risk parties take when they place too much faith in the doctrine of merger. Buyers and sellers alike should consult with experienced real estate counsel to carefully structure their contracts so that post-closing obligations are expressly designated to survive the closing and for a particular period of time. Otherwise, as was the case in Freeborn, seemingly “closed” deals can turn into lingering disputes.