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Oral Contracts are Enforceable in Indiana…
But Not if They Affect Real Estate
We often are asked whether or not contracts that are not in writing are enforceable. As a general rule, those types of contracts are enforceable, but there are certain types of agreements and contracts that are required by law to be in writing. One of those types of contracts is any contract which seeks to convey an interest in land.
This fairly well established principle of law was recently reaffirmed by the Indiana Court of Appeals in a case involving a land contract. Under a typical land contract, the seller retains legal title until the total contract price is paid by the buyer. Legal title does not vest in the buyer until the contract terms are satisfied, but so-called “equitable title” vests in the buyer when the contract is executed. It should be noted that the Indiana Supreme Court has previously determined that a land sales contract is similar to a mortgage, particularly if the buyer has paid more than a minimal amount of the contract price. This affects what the seller must due in order to remove the buyer from the property if the buyer does not fully satisfy the terms and conditions of the land contract.
In this new case, the two parties had entered into a land contract whereby the buyer would be making monthly payments until the end of the contract on November 30, 2010, when the unpaid balance was to be due in full unless renegotiated. As the end of 2010 approached, the two parties entered into an oral agreement to extend the monthly payments and delay the final balloon payment. At the trial, there was a dispute between the parties as to exactly were the terms of the oral agreement.
After entering the oral agreement, the buyer made 34 more monthly payments. In August 2013, the seller’s attorney asked the buyer to make the final balloon payment, but the buyer was unable to do so. The seller then sued to reclaim possession of the property.
At trial, there was conflicting testimony about exactly what the parties had agreed to orally in 2010. The buyer believed that he could continue to make payments until 2019, while the seller testified that the additional payments were a penalty for not having made the principal payment at the time that it was due. This disagreement became important in the court’s ruling.
The trial court awarded judgment in favor of the seller, and the Indiana Court of Appeals affirmed that ruling. Both courts relied upon the Indiana “Statute of Frauds” which requires that any contract which seeks to convey an interest in land is required to be in writing. Specifically,
“An enforceable contract for the sale of land must be evidenced by some writing: (1) which has been signed by the party against whom the contract is to be enforced or his authorized agent; (2) which describes with reasonable certainty each party and the land; and (3) which states with reasonable certainty the terms and conditions of the promises and by whom and to whom the promises were made. Furthermore, where a contract is required by law to be in writing, it can only be modified by a written instrument.”
Therefore, the parties’ oral agreement was not enforceable.
As with many things in the law, there are exceptions to this rule. There is a doctrine called “promissory estoppel,” which is based on the rationale that a person whose conduct has induced another to act in a certain matter should not be permitted to adopt a position inconsistent with that conduct so as to cause harm to the other person. In order for an estoppel to remove a case from the requirements of the Statute of Frauds, the party must show that the other party’s refusal to carry out the terms of that promise resulted not merely in a denial of the rights that the agreement was intended to confer, but the infliction of an unjust and “unconscionable” injury and loss.
As would be expected, the buyer in this case argued that his 34 additional payments of $300.00 in reliance upon the seller’s promise were enough to invoke the doctrine of promissory estoppel. However, as mentioned earlier, there was conflicting testimony on exactly what was agreed to at the time of the so-called “oral modification.” Because the trial court not determine what the actual agreement may have been, there was no “promise” to enforce, and therefore the court relied upon the Statute of Frauds’ requirements.
It is also noteworthy that the Court of Appeals referenced the part of the written contract that provided that no delay on the part of the seller in exercising his rights under the contract (including the right to declare a default if the terms and conditions of the written contract were not met by the buyer) would not act as any waiver or preclude the exercise of that option at any time after that default may have occurred. This is the type of “boilerplate” provision that people often will question the need to be in contracts. Here, the courts looked at that language to rule in favor of the seller.
The obvious lesson here is that if you have any transaction involving the transfer of an interest in real estate, that agreement, whatever it is, must be in writing signed by all of the parties whose interest in the real estate may be affected. Those types of contracts need not always be long or complicated, but they do need to be in writing, and as do any later modifications to those agreements.
If you have any questions or comments, please leave them below.
Concerns for Small Business:
Insurance Can Be a Savior
Today’s post focuses more on a practical business reality as opposed to a purely legal issue. Because we are celebrating Small Business Week, we will keep this blog post short as we know that all small business owners such as ourselves are always pressed for time and struggle to get everything accomplished while maintaining some sort of an otherwise normal life.
Over the past few years the insurance issue has been discussed at length in the media and among small business owners as the health insurance requirements have continued to increase and put administrative demands and financial pressures on businesses of all size. Aside from health insurance, worker compensation, and general liability insurance, there are a number of other insurance products that are available to small businesses that can help provide some protection to the financial strength of the business as well as help to minimize the disruptions caused by unforeseen circumstances that every business will face.
Most small businesses do not have the financial capital or reserves to deal with unforeseen issues that arise that necessitate having to retain attorneys, perhaps paying for accidents or even failed contractual relationships. Dealing with these issues requires the small business to dip into its operations accounts and thereby keeps that money from being used for more useful purposes such as growing the business or compensating the owners and employees for work previously performed. As we all know attorneys’ fees can also cause a significant disruption in a business’s financial planning, as most small businesses do not set aside a legal budget as part of their business planning. These legal expenses can often be incurred even if your business is completely correct in its legal position because it will cost money to prove that you are correct, and even then you have the lost time and other resources that you have to contribute to proving that you are correct.
For certain types of unforeseen circumstances, there are a number of insurance coverages available of which you may not be aware. These can include things for cybersecurity, employment practices and directors’ and officers’ liability coverage. While not every company is going to need every type of insurance, working with a talented and reputable insurance agent (no, I am not a licensed agent or in the industry at all) should help a business determine what coverages, and in what amounts, would be appropriate for the particular business. Explain your business to your insurance agent and let that agent do his or her job and guide you in selecting the coverages and limits that would be appropriate for your company.
After you do obtain coverage you should become familiar with exactly what those coverages are and what they might cover. If you ever have a question, you certainly should err on the side of notifying the insurance company of a potential claim and that company will certainly let you know if the coverage is available. You should also be willing to look at the policy carefully as well as any exclusions that are part of the “standard” policy before purchasing it. There are often many “endorsements” that are available that will take care of exclusions that are in a standard policy, but which may be important to your particular business.
Nobody likes to pay for insurance, but when it is needed everyone is glad to have it. It usually only takes one covered claim to justify many years of paying the premiums for the various insurance policies necessary for your small business. Hopefully your business will never need to file a claim, but business owners and managers can rest more easily knowing that the proper coverages are in place.
Understanding Title Commitments
If you have ever had any involvement in a real estate transaction, including the sale or purchase of a home, you were likely aware that a title company was involved in the transaction, although you may have been confused regarding the title company’s exact role. Title companies perform a variety of functions including: (i) acting as a third party escrow agent (holding earnest money until closing), (ii) preparing documents required to convey title to real estate in your State (deed, vendors affidavit, sales disclosure forms, etc), (iii) preparing the settlement statement that details the various closing costs and credits and the amount of money that must be paid by the buyer at the closing, (iv) conducting the closing itself, and (v) issuing title insurance.
While each of these functions are important, this blog will concentrate on the means by which a title company issues title insurance. Title insurance comes in two forms, owner’s policies and lender’s policies. An owner’s policy is issued to the owner of the property and insures that no interests in the property exist when the buyer takes ownership of the property. A lender’s policy is issued to the owner’s lender that financed the acquisition of the real estate and insures the priority of the lender’s mortgage lien as of the recording of the mortgage.
It is critical that the buyer and the buyer’s lender understand the condition of the title of real estate before closing on a purchase. Other interests in the real estate can significantly decrease, or even eliminate, the value of property. Fortunately, the title company will provide a preview of the interests in real estate before the closing in the form of a title commitment that will allow you to determine if there are any issues that must be addressed.
Most title commitments follow a similar format that is broken up into Schedules. Schedule A provides the basic information for the title policy to be issued, including:
- Commitment or Policy Number – the title company’s internal reference for your file.
- Effective Date of Commitment – the date through which the title company has searched the public records for the parcel of real estate. Any liens appearing in the public records will not appear in the search but will be insured against by the title company.
- Property Address – this is the common address for the property (i.e. 123 Main Street, Indianapolis, Indiana).
- Legal Description of Real Estate – real estate records are based on the legal description for real estate rather than common addresses. The legal description is a means by which the exact dimensions of a parcel can be determined. Such legal descriptions are typically based on surveys and/or plats and provide a totally unique and specific description of your parcel, even if there are two Main Streets in your town.
- Policy or Policies to be Issued – will note whether an owner’s policy and/or lender’s policy is to be issued. May also note the amount of the policies (typically the purchase price for the owner’s policy and the amount of the mortgage loan for the lender’s policy)
- Owner – the current owner of the real estate as of the date of the search.
Schedule B – Section 1 of the title commitment provides a checklist of items required by the title company at or before the closing in order for the title company to issue a policy. For example:
- The buyer must pay the purchase price.
- All taxes owed through the closing must be paid.
- Execution of deed, sales disclosure form, and vendor’s affidavit by the required parties at closing.
- Any state specific requirements regarding specific language to be included in the Deed may also be referenced.
Schedule B – Section 2 of the title commitment provides a list of the title exceptions. Examples include:
- Mortgages of record, likely including the seller’s lender’s mortgage.
- Recorded easements affecting the property.
- Any unpaid property taxes.
- Covenants, conditions and restrictions affecting the real estate.
- Any recorded leases.
Schedule B – Section 2 exceptions must either be resolved by the closing (i.e. past due property taxes paid, seller’s mortgage lien paid off at closing with the sale proceeds) or else they will be exceptions to the title policy. For example, if an easement running across a portion of the purchased property is not released, the buyer will take the property subject to the easement. And given that the easement is listed as a Schedule B – Section 2 exception, your title policy will not provide coverage for removal of the easement. The title policy only insures against liens and encumbrances that are not listed in Schedule B – Section 2 (i.e. the expense of removing a prior unreleased mortgage from the owner that sold the parcel to your seller that is not listed in Schedule B – Section 2 will be the title company’s responsibility).
Questions or comments? Ask me below.
This is Why You Incorporate
Individuals looking to start a business often question whether it is worth the hassle and expense of actually setting up a corporation and drawing up the necessary papers to establish that corporation particularly when the business is “just me.” Traditionally the reason for going to that trouble and expense focuses on making sure that the individual, and therefore that individual’s personal assets, cannot be seized by creditors of the business in order to satisfy debts owed by that company. If the company has not been set up and run as a separate legal entity, then the law looks at the company’s assets and the individual’s assets as being one and the same, and a creditor of the company can look to the person’s individual assets to pay any debt owed to that creditor.
Nevertheless, people still question whether it is truly worth it to incorporate. We generally counsel people that it is well worth spending a little money to help protect personal assets; almost like an insurance policy that you buy and hope that you never have to use. At the same time, after the corporation has been established, it must not co-mingle its assets with those of the individual owners. In other words, it is important to keep things in separate “buckets” so that there can be no question what assets belong to the company and what is the property of the individuals. The more “blurred lines” there are, the more chances there are that a company’s creditors will look to the personal assets of the owners.
A recent Indiana case has reinforced the principle that Indiana courts recognize the separation between a company and its individual owners. This is true even if there is only one owner of the corporation. The case actually involved a classic slip and fall that was suffered by the president and sole owner of a corporation. That corporation was a tenant in a commercial building. The corporation had the same name as the owner. In the lease, the corporation had agreed that the landlord was not liable to the “tenant” due to any negligence of the landlord. Believe it or not, these types of releases are enforceable under Indiana law when included in commercial leases.
The lease at issue in this case was signed by the person who had fallen, but he signed in a representative capacity, i.e., as the president of the corporation/tenant.
After the slip and fall occurred and the president of the corporation was injured, he filed a lawsuit against the landlord for negligence in failing to clear the snow and ice from the sidewalk in front of the building. The landlord filed a motion asking the court to rule as a matter of law that the release in the lease prevented the injured individual from filing the lawsuit due to his relationship with the tenant. The trial court and the Indiana Court of Appeals both rejected the landlord’s argument. The Indiana Court of Appeals noted that the lease was only between the tenant corporation and the landlord. The injured person was not a party to the contract. In addition, the Court of Appeals rejected the landlord’s argument that the plaintiff and his corporation were “interchangeable” because the corporation was a small professional corporation that bears the same name as the plaintiff. On this issue, the court specifically noted:
If we accepted this argument, the corporate form of numerous professional corporations in this state, such as medical and legal practices, could and would be ignored routinely. That is not a tenable result, and it is contrary to the laws providing for the creation of such corporations and their recognition as legal entities separate from their creators, shareholders, and officers.
The Court of Appeals therefore ruled that the injured individual’s lawsuit could proceed against the landlord. While there may be other reasons why that individual may not succeed in the lawsuit, the important point made by this decision is that courts will continue to recognize that a corporation, even if it consists only of one person, is a separate legal entity from the individual owner of that corporation, and will continue to be recognized as such so long as the owner follows the proper formalities and does not “blur the lines” between the business of that corporate entity and the owner’s personal business. Therefore, it is well worth the effort and limited expense involved in establishing a separate legal entity to protect not only one’s individual assets, but also potential claims that the individual may have against others.