Lessons From Trial: WORDS MATTER when Drafting Real Estate Documents

I recently had a trial over a relatively simple real estate document (that, just to be clear, I played no part in drafting).

The Owner and Buyer negotiated the terms of an option to purchase real estate.

The Investor and Buyer negotiated terms that they both thought were plain.

No one thought that the deal would go sour.

But it did.

It went sour because both parties (apparently) interpreted the document very differently, with very different consequences.

The real estate contract contained an ambiguity. It had two different provisions that contradicted each other.  So we ended up fighting over the “true interpretation”  in trial.

The net effect – both sides incurred attorney fees and wasted a day in trial.

Unfortunately, my client’s experience is fairly common. Words in real estate documents need to be carefully drafted. Case in point:

The case of Matter v Verstraete, published on December 3, 2015.

You can check it out here

Facts:

• Plaintiffs, tenants, entered into a lease that began on September 5, 2009, and continued until October 31, 2015.
• The property was subject to a mortgage in favor of defendant Deutsche Bank.
• The lease was amended on August 5, 2011. Plaintiffs were granted a right of first refusal (“ROFR”) and Option to purchase the property.
• Defendant Deutsche Bank purchased the property at a sheriff’s sale held on October 4, 2011.
• On June 13, 2012, plaintiffs and defendant Deutsche Bank entered into a consent judgment, which held that defendant Deutsche Bank had to honor the original terms of the lease between plaintiffs and the original owners.
• On May 22, 2013, defendant Deutsche Bank sold the property to defendant George Verstraete.
• Plaintiffs claimed they wanted to “exercise their Option to purchase”
• Defendant, Verstraete, sued to evict Plaintiffs.
• Plaintiffs sued – they basically said “Bank! you forgot to let us know you were selling the Property so that we could exercise our ROFR!”
• The Trial Court held “there was nothing in the express terms of the lease preventing the bank from selling the property during the original lease term.”
• Plaintiffs Appealed.

LAW – INTERPRETING A CONTRACT

“The first step in contract analysis is to determine the intention of the parties. Quality Prods & Concepts Co v Nagel Precision, Inc, 469 Mich 362, 375; 666 NW2d 251 (2003). “[A]n unambiguous contractual provision is reflective of the parties’ intent as a matter of law” and must be enforced as written. Id. “In interpreting a contract, courts must give the words their plain and ordinary meanings,” and they may not “impose an ambiguity on clear contract language.” Coates v Bastian Bros, Inc, 276 Mich App 498, 503; 741 NW2d 539 (2007).”

A RIGHT OF FIRST REFUSAL IS NOT AN INTEREST IN LAND.

The Court analyzed the lease agreement and found that “Paragraph 17 of the lease only grants plaintiffs an option to purchase the “residence during the lease term period.” Id.

Further –  “It does not restrict the owner’s right to sell the property. Nor did it give plaintiffs an interest in the land under which they could deny the sale of the property to others.” Id.

The Tenants thought they had an interest in land sufficient to allow them to purchase the Property and keep the Bank from selling it to a third party. But according to the agreement they signed, they had no such right.

Take away: Pay careful attention to real estate documents. Words Matter.