Dakota County District Court

File No. C8-95-7999

Richard J. Gabriel, 175 W. Lafayette Frontage Road, Suite 200, St. Paul, MN 55107-1487 (for Respondent)

Frank T. Mabley, Greenstein, Mabley & Wall, L.L.C., 2803 Lincoln Drive, Suite 300, Roseville, MN 55113-1312 (for Appellant)

Considered and decided by Short, Presiding Judge, Davies, Judge, and Foley, Judge.

Appellant, seller of a vacant residential lot, challenges the trial court's order ruling that warranty in purchase agreement did not merge into the deed at closing, and therefore that appellant is liable to respondent purchasers for breach of the warranty. We reverse.

In September 1992, the three met with the vacant lot's owner, appellant Dr. John Lamey,[1] who indicated he was willing to sell. Dahlstrom drafted a purchase agreement for the property using a form approved by the Minnesota Association of Realtors. The Cruzes were intent on building a rambler-style home, and thus wanted some assurance that the soil would permit construction of a 12-course basement that such a house apparently requires. Therefore, Dahlstrom wrote an addendum to the purchase agreement that states:

Seller warrants that the property is buildable with a standard 12 course basement and sound footings. Any costs that exceed these standards, due to unstable or unsuitable soils conditions, would be re-imbursed to the buyers by the sellers.

Lamey wanted to limit his liability under this addendum, so Dahlstrom added the following language:

If soils conditions warrant additional cost of more than $1,000, then this P.A. could be null and void at the option of the seller.

The closing took place on November 9, 1992. The deed did not recite the purchase agreement's warranty of buildability or the related addendum.

Property excavation began the next day, November 10, 1992. The diggers reached ground water within five feet of the surface and, after further investigation, it became clear that the 12-course basement could not be built. The Cruzes demanded that Lamey either assume all costs of a revised house plan or rescind the sale. Lamey refused to do so, arguing that the purchase agreement expired at closing (under the doctrine of merger), and that therefore the warranty was no longer in effect and could not be enforced.

The Cruzes went ahead with a revised building plan and then reasserted their claim against Lamey for breach of the contractual warranty provision. Prior to the bench trial, the parties stipulated that if the Cruzes prevailed, the damages sustained would be $10,000.

The trial court held that the warranty had not merged at closing and was therefore enforceable. In support of its ruling, the court found that the purchase agreement did not grant the Cruzes the right to go on the premises for soil testing prior to closing. The court also pointed to the fact that certain preprinted contingencies in the agreement, which if not satisfied or waived resulted in the agreement becoming null and void, had been lined-out. One of these contingencies referred to soil testing. The trial court reasoned that the elimination of these contingencies "clearly provide[d] for the survival of the subject matter of these contingencies past closing" and reflected recognition by both parties that the soil testing could not have been performed before closing. (Dahlstrom testified that Lamey was aware that the construction lender would not permit any testing on the land prior to closing because of concerns about its lien priority.) Lamey appeals from the trial court's order, arguing (among other things) that the warranty was no longer enforceable because the purchase agreement had merged into the deed at closing.

Directly related to this is the rule that

[t]he intent of the parties to a written instrument is only relevant when the language of the instrument is ambiguous or reasonably subject to more than one interpretation.

Resolution Trust Corp. v. Kahn, 501 N.W.2d 703, 705 (Minn. App. 1993), review denied (Minn. Aug. 16, 1993). As the trial court's order suggests, the analysis of the merger issue should be conducted by reference only to the language of the agreement.

Bernard v. Schneider, 264 Minn. 104, 107-08, 117 N.W.2d 755, 757 (1962).

In order to rebut the presumption, there must be some evidence that the complaining party reserved his or her contractual rights for future negotiations.

Resolution Trust, 501 N.W.2d at 705.

A. General Application

The Cruzes do not dispute that the deed fails to recite the warranty contained in their purchase agreement. Therefore, we begin our analysis with a presumption that the warranty did not survive closing.

We disagree with the trial court's determination that the purchase agreement here reflects an intention to preserve the warranty. The warranty is prefaced by a provision stating only that the "purchase agreement is contingent upon" the warranty, and the clause limiting liability to $1,000 similarly provides only that the "P.A. could be null and void at the option of the seller." (Emphasis added.) Further, the agreement does not contain "survival language" expressly preserving the warranty, which is particularly notable because it does contain a survival clause for certain general warranties.

The trial court's analysis focuses on the issue of whether the Cruzes had an opportunity to test the soil prior to closing. First, it points to the fact that the following two preprinted contingency provisions in the purchase agreement were crossed out:

Buyer obtaining at BUYER/SELLER [circle one] expense, percolation tests which are acceptable to Buyer.

Buyer obtaining at BUYER/SELLER [circle one] expense, soil tests which indicate that the property may be improved without extraordinary building methods or cost.

The trial court viewed the elimination of these contingencies as indicating the parties' intent to allow soil testing to be completed later than the closing date. However, these provisions refer more to the issue of who will pay for the testing. The handwritten addendum to the contingency list more thoroughly detailed the soil issues. In light of the warranty and related limitation in the addendum, which make express reference to the purchase agreement alone, we do not believe that the elimination of the contingencies described above could be considered to raise an ambiguity on the merger issue.

The trial court also ruled that the elimination of these provisions left the respondents with no right to go on the premises to conduct testing prior to closing. We believe that the trial court overlooked line 37 of the agreement which expressly allows "access to the property for testing and surveying purposes."

B. No "Collateral Agreement" Exception

At least some jurisdictions hold that an exception to the merger rule applies where the contractual term at issue is "a collateral agreement intended to be performed other than by delivery and acceptance of the deed." Sullivan v. Eginton, 406 N.W.2d 599, 601 (Minn. App. 1987). This potential exception appears to have first been discussed in Hubachek v. Estate of Brown, 126 Minn. 359, 363, 148 N.W. 121, 122 (1914), where the court stated that

[t]he [merger] rule does not necessarily apply to acts not made conditions precedent, and are to be performed in the future, and continue as a charge upon the estate granted.

We are unconvinced that the "collateral agreement" exception has been adopted in Minnesota. The Sullivan and Brown cases did not apply the exception because the agreements were found not to be "collateral." The only Minnesota case cited by respondents in which the exception was applied is Clarke v. State Bank of Park Rapids, No. C9-90-2296, 1991 WL 96654 (Minn. App. 1991). At least two published Minnesota cases have expressly rejected the collateral agreement exception. See Resolution Trust, 501 N.W.2d at 706 ("collateral * * * obligations are also extinguished by the merger doctrine"); B-E Const., Inc. v. Hustad Dev. Corp., 415 N.W.2d 330, 331 (Minn. App. 1987) (same), review denied (Minn. Jan. 20, 1988); see also Mangan v. Shun, No. C4-88-1377, 1989 WL 444 at *2 (Minn. App. 1989) (noting that collateral agreement exception "expressly rejected" in B-E Constr.). The Resolution Trust and B-E Constr. cases clearly enunciate the rule that any terms and conditions discussed or exchanged outside the deed that are not reserved and continued by the terms of the deed are, in the absence of fraud or mistake, deemed waived.

Even if the collateral agreement exception does exist in our law, the warranty in question was made a condition precedent to the right to enforce the purchase agreement, and thus under Brown, the merger doctrine still applies. We conclude that the warranty was a condition precedent because it is part of a list of contingencies that, if not satisfied or waived, were to result (expressly) in the purchase agreement becoming null and void.

Because we reverse on the merger issue, we need not address Lamey's other arguments.

Reversed.

[ ]^* Retired judge of the Minnesota Court of Appeals, serving by appointment pursuant to Minn. Const. art. VI, § 10.

[ ]¹ For tax purposes, appellant placed the property in trust for his son prior to the transaction and transferred it as trustee.