WHO CARES ABOUT THE STATUTE OF FRAUDS?

                                          SOMETIMES, NOT CARING CAN BE COSTLY

            A concept that investors rarely discuss is the Statute of Frauds.  What is the Statute of Frauds, and how could it affect my deal?  The Statute of Frauds is legislation, and it comes from early English law.  The statute was created in the seventeenth century, when real estate transactions were relatively infrequent and many people could not read or write.  The purpose of the statute was “the Prevention of Frauds and Prejudices,” and this meant that people should be required to have written proof of their intentions in real estate deals so that frauds on the unwary could be avoided.

            In Washington, the Statute of Frauds applies to brokerage agreements and agreements for the transfer of interests in land.  Such agreements must be signed, in writing and sufficient for the intentions of the parties to be understood.  If a transaction does not meet this requirement it is void. 

            What can this mean for investors?  We know that a purchase and sale agreement is the usual starting point in an investment deal.  In a purchase and sale agreement there needs to be an agreed statement of what the parties are contracting to purchase and sell, namely the specific real estate involved.

            What happens if the parties sign a purchase and sale agreement, and the prospective buyer pays a substantial earnest money deposit, but the parties never really agree at the outset on how much property the seller is selling and the buyer is buying?  The result may surprise you.  This happened in a recent case from Eastern Washington.

            A seller hired a broker to list a large undeveloped parcel near Quincy for sale, but the seller wanted to retain a 3.93 acre portion of the property for his own use.  The listing agreement described the property as “included in Farm Unit 182”, and consisting of 30.12 acres.  The total parcel was 43 acres.  A developer made an offer to purchase the 30.12 acres and included a provision allowing him to purchase the 3.93 acre portion of the remaining area later if the seller decided to develop that property.  That offer was not accepted, but after a period of time another offer by the same purchaser was accepted, again reciting the area to be purchased as 30.12 acres, but omitting any mention of the 3.93 acres and including a $50,000 earnest money on a purchase price of $1.65 million.  The purchase and sale agreement was written with this second description of the sale.

            Some conditions needed to be satisfied before closing could occur, and after about a year closing was scheduled.  The purchaser went to the closing appointment and then refused to close because, among other things, he claimed that the 3.93 acres that had been omitted from the description of the sale should have been included.  Both sides filed lawsuits against each other.  The seller sought to have the sale completed and the purchaser sought rescission of the contract and refund of the earnest money.

            The court decided that the contract did not satisfy the Statute of Frauds because of the ambiguity surrounding whether the missing 3.93 acres was or was not in the deal.  One would think that if the court decided that the agreement was void for failure to meet the Statute of Frauds, then the purchaser should receive back the earnest money, right?  Wrong.  The court said that it was the purchaser’s burden in order to receive back his $50,000 earnest money to prove that the seller was not “ready, willing and able” to proceed to closing of the agreement.  The court further said in order to do that the buyer had to prove that the agreement legally included the 3.93 acres.  The court recognized that the sides held opposing views of what the agreement actually included.  Given that all parties recognized it was impossible for the party with the burden to meet it under the circumstances, practically the case means that the buyer is out his $50,000 earnest money.

            The lesson of this case is that “buyer beware” of a real estate contract that does not adequately describe the real estate that is to be purchased and sold.  This information is provided for education only and may not be construed as legal advice.