The Merger Doctrine and Surviving the Closing
Sight-reading[1] is a crucial skill for a professional musician. Many auditions include a sight-reading “test,” to see whether the musician can perform at a high level with little rehearsal time. By testing sight-reading, it is possible to separate out musicians who have learned one or two pieces very well for an audition from more versatile musicians who are able to learn music quickly.
A musician usually has 30 to 60 seconds to look at the music before sight-reading it. An experienced sight-reader would use that time to study the key[2], time signature[3], tempo[4], dynamics[5], and general character of the music, and only then would look at the actual notes. Inexperienced musicians frequently bypass the key signature, time signature, tempo markings, dynamics, and articulation as being unimportant “boilerplate”. Instead, they rush to try to play the notes without a foundation, with disastrous results.
When reviewing real estate contracts, many people act like an inexperienced musician sight-reading music. They gloss over contract language that doesn’t look specific to their deal. Believing the language to be "boilerplate" to be “standard,” contracting parties think there is no need to read, much less negotiate it. In reality, “boilerplate” sections are important, and contracting parties can get burned by not reviewing and negotiating them.
This is one of a series of posts discussing typical “boilerplate” terms and how they impact real estate contracts.
Surviving the Closing
Most real estate contracts contain a section called “Survival” among the “boilerplate” sections at the end of the contract. This section might read:
In addition to any Section expressly stated to survive the Closing, notwithstanding anything in this Agreement to the contrary, Sections 3.2, 4.5, and 6.7 shall survive the Closing of the transaction contemplated by this Agreement for one year after the Closing Date.
Sometimes, “survival” language will appear at the end of a specific section, such as the following:
Notwithstanding anything else in this Agreement to the contrary, Section 1.2 shall survive the Closing or earlier termination of this Agreement for one year.
Both types of survival provisions result in certain contract provisions continuing to remain in effect after the closing.
The difference is that the first example is a separate section of the real estate contract which likely is designed to gather together all the sections that “survive” in a single place. The second example includes “survival” language in the section to which it applies. Both are equally effective in causing contract provisions to continue to continue even though the transaction has closed or the real estate contract has terminated.
Why do Some Things Need to Survive the Closing?
It may not be difficult to recognize a “survival” clause in a real estate contract, but it’s not as obvious why survival provisions are important.
Survival language is necessary because of something called the “merger doctrine.” Under the merger doctrine, all discussions, negotiations, and agreements, including the real estate purchase contract, are “merged” into the deed. Once the deed is delivered, the only obligations between the buyer and seller of real estate are those set forth in the deed–unless they agree in writing to the contrary.
This is where the survival clauses come into play. There are things that the parties to a real estate purchase contract do not intend to be merged into the deed. For instance, there might be an agreement to do a post-closing reconciliation of the closing pro-rations once actual numbers are available. Or, the buyer may be relying upon certain representations and warranties of the seller in accepting the deed and closing. Usually there is an indemnification clause in real estate purchase contracts under which each party agrees to indemnify the other for expenses relating to their period of ownership. Without survival language, all those obligations would be merged into the deed and would vanish at closing.
Although the focus on survival language is on merger into the deed, parties should remember that if they terminate a real estate contract without closing, they terminate the entire contract. If there are contract terms, such as confidentiality obligations, which they want to survive contract termination, those should be included in a contract survival clause.
How to Choose What Should Survive the Closing
Yet, there are things which the parties do not to arise after the closing. For instance, the seller would not want the buyer to be able to complain about the condition of the property months after the closing. Rather, property condition is something which the buyer should determine during its due diligence period before closing.
When the parties review the real estate purchase contract, they should be on the lookout for obligations which by their nature, need to survive the closing and delivery of the deed and be sure that the contract states that those terms survive the closing and do not merge into the deed. Although these items will vary depending upon the transaction, some obligations which parties might want to survive the closing are:
- Indemnification obligations where each party agrees to be responsible for operating expenses relating to that party’s period of ownership.
- Utility bills, which sometimes cannot be exactly determined as of the closing date. The parties will want to be able to “true up” the utility bills after the closing so each pays its share.
- Taxes, which also may not be determined as of the closing date. This is particularly true in states where taxes are paid in arrears so the tax rate might not be determined until after the closing date.
- Pending claims that involve the land, such as tax appeals or an insurance claim for casualty damage might impact both the buyer and seller. The seller would want to be sure to be able to get its share of the proceeds from the proceedings.
- Representations and warranties on which the buyer relies in accepting the deed should survive the closing. Even in an “as-is” sale, the buyer relies on the seller’s representation that it is being honest and truthful in its disclosures about the property. Those basic representations should survive the closing even if the deed is accepted “as-is.”
The parties should expect to negotiate both what survives the closing and how the survival is accomplished. They need to agree whether the survival language will be in the real estate purchase contract or whether it will be in a separate certificate signed at closing. Many attorneys prefer a separate agreement to address representations of fact and to insert survival language in the contract for future covenants, such as indemnification obligations and post-closing “true-ups.” After the closing, it is easier for the parties to look at a short agreement, rather than to re-read the entire contract, to determine their obligations.
If there is to be a separate agreement signed at closing, that should be a condition to closing in the real estate purchase contract. The parties should agree to the exact content and language of the separate closing document well in advance of the closing. Often, the closing document is negotiated along with the real estate purchase contract.
At the same time, the parties should consider whether there are provisions they would want to continue were the real estate purchase contract to terminate without a closing. Commonly, provisions which survive the termination of a real estate purchase contract include confidentiality and indemnification provisions.
Another important term to negotiate is the length of the survival period. In many of the contracts that is a hotly contested term. Without a stated limitation on the length of the survival period, the provision will survive for period in the applicable statute of limitations period. This doesn’t usually meet the parties’ needs.
Statutes of limitations vary from state to state and more importantly, depending upon the type of claim. A statute of limitations for fraud might extend for only from one to four years, depending upon the state. However, statutes of limitations for claims based upon written contracts can extend for 10 or even 20 years.
Most parties to real estate transactions want certainty. They don’t want to have potential liability under their real estate transaction to continue for a decade or more. Typically, they also will want for all claims to be subject to the same time limitation (although this does not have to be the case).
Therefore, it is important that the parties consider how long they reasonably would need to discover and pursue a breach of one of the surviving contract provisions and come to agreement on a cut-off date for those claims. The time limitation should be clearly stated in the real estate contract in every location where there is a survival clause.
Don’t Ignore the Boilerplate!
Survival clauses should not be overlooked as "boilerplate," as those clauses are critical in determining the parties’ post-closing duties to each other. Parties should work with their attorneys to make sure that they understand what merges into the deed and what survive the closing, as well as their ongoing responsibilities resulting from that language.
© 2018 by Elizabeth A. Whitman
DISCLAIMER: The content of this blog is for informational purposes only and does not provide legal advice to any person. No one should take any action regarding the information contained in this blog without first seeking the advice of an attorney. Neither reading this blog nor communication with Whitman Legal Solutions, LLC or Elizabeth A. Whitman creates an attorney-client relationship. No attorney-client relationship will exist with Whitman Legal Solutions, LLC or any attorney affiliated with it unless and until a written contract is signed by all parties and any conditions in such contract are fully satisfied.
[1] Sight-reading involves playing music without having seen and frequently, not having heard it, previously.
[2] Key refers to the collection of eight notes, representing a scale, upon which a piece of music is based. There are 30 possible keys of music in traditional Western music.
[3] Time signatures are indicated by two numbers aligned vertically, like a fraction without the line in between the digits. The top number indicates how many beats in the measure, and the bottom number indicates what type of note is given one beat.
[4] Tempo refers to how fast music the music is played. Tempo markings are written in Italian and range from Largo or Lento for very slow to Presto for very fast.
[5] Dynamics refer to how loud the music is played, as well as increases and decreases in loudness. Dynamics are indicated by abbreviations of Italian words, such as pp for pianissimo (very soft) or mf for mezzo forte (medium loud). Changes in dynamics may be indicated by a symbol which looks like a stretched out greater than or less than sign.