Because a particular Agreement and a Deed were recorded in the wrong order, the parties had to go all of the way to the Court of Special Appeals to sort out their rights. Because that Agreement was a “collateral agreement,” it was not subject to the presumption that contractual provisions merge into deeds and the terms of the deeds set forth the entire understandings of the parties.
Prime Venturers v. OneWest Bank Group, LLC, 213 Md.App. 122, 73 A.3d 361 (2013), involved the transfer of real property in Sykesville from Prime Venturers to David and Cheryl Leupens. The parties intended that the conveyance would include only 1.68 acres, but the property that Prime Venturers owned consisted of approximately three acres and was not subdivided. Therefore, they structured their transaction with a deed (the “Deed”) for the entire three acres to the Leupens and an agreement (the “Agreement”) that provided that when Prime Venturers was able to subdivide the 1.68 acre portion of the property, the Leupens would reconvey the balance of the property to Prime Venturers for $1.00. The Deed was in normal form and made no mention of the Agreement or of the understanding of the parties regarding the reconveyance. Both the Deed and the Agreement were dated July 30, 2003. Unfortunately, the Agreement was recorded before the Deed.
When the Leupens financed their acquisition, they encumbered only the 1.68 acre portion of the property. On January 11, 2007 they refinanced their original loan and gave a mortgage on the entire three acre parcel to their new lender, OneWest Bank Group, LLC. Shortly after Prime Venturers found out about the refinancing, it filed suit in the Circuit Court for Carroll County and sought a declaration of its right to a reconveyance.
After a hearing, the Circuit Court ruled for OneWest. The court determined that the Deed on its face was unambiguous and that the court should not look beyond the language of the Deed itself. The court noted that the Deed was the final document that was recorded involving Prime Venturers and the Leupens, and that a third party is only required to give effect to the order that documents are actually recorded, not how they were intended to be recorded. The Circuit Court held that although the Agreement may have created a contractual obligation between the Leupens and Prime Venturers, the Agreement did not restrict the transferability of the property. Therefore, the Circuit Court granted OneWest’s motion for summary judgment.
Prime Venturers appealed to the Court of Special Appeals. The Court stated that the primary issue in the case was whether the terms of the Agreement merged into the Deed, and it noted the basic rule that generally there is a prima facie presumption that the provisions of all documents relating to the sale of real property merge into the deed. However, the Court pointed to an exception to that rule: that where an agreement contains covenants that are collateral to the deed, or where the deed appears to be only a partial execution of the contract, the agreement is not discharged by merger.
Although the Court could not find any Maryland case that held that an agreement to reconvey property is collateral to a deed, it referred to such cases in other jurisdictions. The Court of Special Appeal held that “such a provision is a collateral agreement, and there is no presumption that an agreement to reconvey property merges into a subsequently recorded deed. Instead, the intent of the parties should be considered to determine whether the agreement merges in the deed.”
The Court further found that based on a reading of the Agreement there was no question but that the parties intended that the Agreement would survive the recordation of the Deed. The Court stated that when an agreement cannot be performed by the time that the deed is recorded, there is no presumption of merger. The Agreement, which related to the subdivision of the property after the Deed was recorded and the subsequent reconveyance of a portion of the property, could not have been performed at or by the time that the Deed was recorded; therefore, the presumption of merger was not applicable.
Accordingly, the Court of Special Appeals reversed and remanded the case to the Circuit Court for Carroll County.
PRACTICE NOTE: Had the Agreement been recorded after the Deed, there would have been no question that the terms of the Agreement would have survived the recordation of the Deed. In that case, OneWest would not have had an argument that it took its mortgage on the entire three acre parcel without regard to any interest that Prime Venturers had in any of the property. In order to direct that the Deed and Agreement be recorded in the proper order, Prime Venturers should have written a letter of instruction to the title company setting forth the order of recordation. However, sometimes even clear letters of instruction are not followed, and the decision of the Circuit Court would not have changed had Prime Venturers produced a letter that showed that the documents were recorded in the wrong order. On the other hand, Prime Venturers would have been able to protect its interest in the real property by including a clause in the Deed that stated that the Deed was subject to the terms of the Agreement. With such a provision in the Deed, OneWest would not have been able to raise the merger issue regardless of the order of recordation.
For questions about this, please contact Ed Levin at (410) 576-1900.