Investors may not care about a lot of legal terms (legalese), but most investors know the term “statute of frauds” – that when there is no written contract for real estate, no contract exists; in other words, a court can’t enforce an oral contract for real estate. It is from this understanding that when an investor gets sued by a partner for an interest in real property, they are quick to argue that there was no written contract and therefore the other party is barred from any relief. While the statute of frauds could apply, that is not the end of the discussion. As lawyers all know, there are exceptions to every rule.
The statute of frauds is an old legal doctrine that a contract for real property cannot be enforced against a party unless that person signed an agreement in writing. Now a signature can take many forms, including merely initials, and a written agreement can be anything from notes on a napkin to a 30page contract. However, the gist is that there must be a written document that sets forth the important terms, and that document must be acknowledged or agreed to by the party to be bound.
In a typical real estate sale, this happens every time. A buyer submits a formal written contract to the seller and then the seller signs the contract. The contract sets forth what property is being sold, the purchase price as well as the date of close of escrow. Those are the most important terms. The contract will also contain other terms, such as disclosures and contingencies. Now, think for a second about the situation where a buyer and a seller are negotiating. Even if they have agreed to all of the material terms, unless they put that agreement into writing and sign it, neither party is bound. A seller could still sell the property to someone else or the buyer could elect not to do anything. Neither party could enforce the contract against the other – because there was no written contract for real property. The statute of frauds has very logical underpinnings – it would be impossible for a court to enforce terms that were only discussed orally, and also parties need a clear demarcation when they have passed negotiations and actually entered into a binding contract.
In a related, but different circumstance, we regularly see business partners sue each other over real estate. Maybe one partner had title in their name and the other wants to be put on title. Maybe one partner wants to force a sale or get their equity, but they aren’t on title. When the party that is not on title sues the titleholder, things get messy. We have been on both sides of this litigation and the short story is that it’s a complicated mess.
The partner who is on title always points to the statute of frauds and argues that there is no written agreement and thus the other partner can’t file suit. They basically claim that although they did work together, there was nothing in writing and thus the other party is prohibited from any recovery. While the statute of frauds would appear to bar this type of lawsuit, there are exceptions to the rule based upon constructive trust, equitable principles and partnerships. A court may impose a constructive trust whenever title to property has been obtained through “fraud, misrepresentation, concealment, undue influence, duress or through any other means which render it unconscionable” for the holder of legal title to continue to retain and enjoy its beneficial interest. This gives the court great latitude to give relief to the person who is not on title. Further, if partners are in the business of sharing profits from the purchase and sale of lands, the statute of frauds wouldn’t bar lawsuits between partners. This is because the lawsuit wouldn’t be over a specific property, but rather one partner would be suing for his alleged interest in the “partnership.” Please note that this is an oversimplification and there are complicated nuances to these arguments.
The lesson here is: (1) document relationships between parties; and (2) even if you think a rule applies, it may not. In the legal world, exceptions are the law.
By Mark B. Zinman, Zona Law Group