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First District Court of Appeal Takes A Bit of the Bite Out of the Merger Doctrine

In Ram’s Gate Winery, LLC v. Roche, Ram’s Gate bought a Sonoma County property intending to build a new winery. The sellers (Roches) had agreed in the purchase agreement to disclose facts having a “material effect on the value of the ownership or use of the Property,” including geological hazards.

 

After escrow closed, Ram’s Gate discovered an active fault trace on the property that substantially increased the cost of development, and sued the Roches for, among other things, breach of contract. The trial court granted summary adjudication in favor of the Roches on the breach of contract action finding that the warranties in the purchase agreement had “merged” with the recording of the deed and thus did not survive the close of escrow – the “merger doctrine.” The Roches were awarded their attorneys’ fees and costs, and Ram’s Gate appealed.

 

The general rule, long recognized in California, is that “where a deed is executed in pursuance of a contract for the sale of land, all prior proposals and stipulations are merged, the deed is deemed to express the final and entire contract between the parties.” (Bryan v Swain (1880) 56 Cal. 616, 618.) Thus, any and all previous duties of disclosure, unless specifically stated in the deed, are extinguished and deemed to have “merged” into the deed.

 

Historically, the merger doctrine has been criticized for its inherent unfairness. For example, in Ram’s Gate, the trial court ruled that “When the contract [i.e., deed] does not provide that the representations and warranties survive the closing of the transaction, [they] are treated as extinguished as of the closing date, and cannot thereafter give rise to liability.” As such, even though the Roches allegedly knew about the fault trace prior to closing, their duty to disclose this alleged material defect was extinguished because the duty was not specifically stated in the deed that was recorded at the close of escrow – if applied, a harsh result.

 

The First District Court of Appeal reversed, finding the merger doctrine “not as broad and absolute as some abbreviated statements of the doctrine might indicate.” “The crucial issue in determining whether there has been an integration is whether the parties intended their writing to serve as the exclusive embodiment of their agreement.”

 

The Court agreed “with those courts which have limited application of the merger doctrine to circumstances where the contractual terms are inconsistent with the deed, or where the parties clearly intend to have all contractual obligations subsumed by the recitals of the recorded deed.” This formulation mitigates the potential unfairness resulting from strict application of the merger doctrine.

 

Thus, whether the merger doctrine applies should be decided now based on (1) an analysis of the deed in comparison with, and in the context of, the prior contract to discern whether the contractual terms are inconsistent with the deed, and (2) examination of the parties’ intent as to whether the provisions of the prior agreement continue in force after the transfer of title.

 

Applying the above formulation to the case before it, the Court found that from the face of the deed there was no “obvious conflict” between the purchase agreement and the terms of the deed which would show that the disclosure warranty was merged into the deed. As such, the merger doctrine would not be applied.

 

Turning to the second prong – the parties’ intent – the Court found that the manager’s declaration established that Ram’s Gate believed the warranties and disclosure duties would continue after close of escrow. The declaration should therefore have been considered in determining the parties’ mutual intent on the integration and survival issue, which raised a factual issue to be determined at trial. Because there was a triable issue of fact as to the parties’ intent, the merger doctrine would not be applied in this case.

 

In the end, the Court took some of the sting out of a draconian and sometimes harsh law – the merger doctrine. As a result, courts are now permitted to examine both the purchase agreement and the deed side-by-side to determine if the contract terms are inconsistent with the deed. Courts are also permitted to accept extrinsic evidence to determine whether the parties’ intended all prior representations and warranties to be extinguished and “merged” into the deed at the time of closing.

 

Ram’s Gate Winery, LLC v. Roche (2015) 235 Cal.App.4th 1071

(06/15)