Summary
refusing to allow purchaser to rescind based on recorded memorandum of lease, which was missing statutory elements, where purchaser failed to view the lease
Summary of this case from Oxford Mining Co. v. Ohio Gathering Co.Opinion
No. 90-1423
Submitted May 22, 1991 —
Decided August 14, 1991.
APPEAL from the Court of Appeals for Marion County, No. 9-88-39.
On March 4, 1985, plaintiff-appellee, G/GM Real Estate Corporation, a.k.a. G/G Real Estate Corporation ("G/GM"), and defendant-appellant, Susse Chalet Motor Lodge of Ohio, Inc., n.k.a. Chalet Susse International, Inc. ("Susse"), signed a sales agreement ("Agreement") for a motel and restaurant owned by Susse in Marion. The purchase price was $1,000,000. The Agreement provided for Susse to take back a second mortgage of $250,000. G/GM was obligated to secure funds for the balance of the purchase price. G/GM had intended to convert the motel rooms into condominium units and then sell the individual units as investments. The property would continue to be operated as a motel, but, evidently, the profits would be divided among the unit owners.
The Agreement called for a downpayment of $25,000, which was made. Further, the sale was to close ninety days after the Agreement was signed. There was a provision that allowed the closing date to be moved back thirty days upon payment of an additional $10,000. G/GM exercised that option, extending the closing to July 4, 1985. G/GM subsequently asked that the closing be moved to July 9, which Susse agreed to do at no additional cost. G/GM then made a further request for an extension, this time to July 12. Susse agreed on the condition that another $10,000 be deposited with the seller. The payment was made on or about July 10 with a check from President Harding Inn Corporation, a company formed by one of the former principals in G/GM.
On July 11, 1985, one day prior to the closing, the Wexford Land Title Agency, Inc. ("Wexford"), which had been retained by G/GM, issued a commitment for title insurance through the First American Title Insurance Company of New York. In Schedule B, Section 1 of the commitment, there was a list of seven items that the title company required to be completed, including No. 6: "Proper affidavit cancelling Lease from Susse Chalet Motor Lodge of Ohio, Inc. to Hospitality Systems, Ltd., dated June 28, 1979, and recorded on July 27, 1979, in lease Vol. 37, page 903, Marion County Recorder's Office, Marion County, Ohio." The reference was to a "memorandum of lease" that the parties subsequently agreed did not comply with R.C. 5301.251, the statute setting forth the requirements for recording a lease, and should not have been accepted for recording. Thomas R. McGrath, an attorney and president of Wexford, testified at trial that he had discovered the memorandum during his title search the last week of June and conveyed that information to all the parties. He also testified that he asked Susse for an affidavit stating that the lease had been canceled for noncompliance with its terms as "* * * just good, prudent underwriting," even though he felt the memorandum presented no risk from a title insurance perspective.
R.C. 5301.251 requires:
"In lieu of the recording of a lease, there may be recorded a memorandum of such lease, executed, attested, and acknowledged in accordance with section 5301.01 of the Revised Code which shall contain the names of the lessor and the lessee and their addresses as set forth in said lease, a reference to such lease with its date of execution, a description of the leased premises with such certainty as to identify the property including the reference provided for in section 5301.011 of the Revised Code, and the term of the lease, together with any rights of renewal or extension thereof, and the date of commencement of the term or the manner of determining the same as set forth in such lease.
"A memorandum of lease thus entitled to be recorded may also set forth any other provisions contained in the lease, or the substance thereof, and shall be constructive notice of only that information contained in such memorandum.
"Sections 317.08, 5301.251, and 5301.33 of the Revised Code shall not be construed to affect the enforcibility, validity, or legal effect of instruments recorded in said lease records prior to August 9, 1963."
Although the parties met as scheduled for the closing on July 12, 1985, the sale did not close. Appellant alleges that G/GM was unable to tender the purchase price, thus breaching the Agreement. Appellee contends that appellant had breached the Agreement by failing to produce a marketable title, thereby nullifying the requirement that appellee tender the purchase price. There were additional negotiations on the morning of July 13, but the parties were unable to come to terms on a new agreement. Susse subsequently sold the motel on September 13, 1985 for $1,050,000 — $50,000 more than the price agreed to between G/GM and Susse.
G/GM subsequently sued Susse and others in the Court of Common Pleas of Marion County, alleging breach of contract. Susse counterclaimed. By the time the case came to trial, Susse was the only defendant remaining, and the only issues remaining were whether either or both of the parties had breached the Agreement and which party was entitled to the $45,000 deposited. The trial court found that Susse had met its obligations under the Agreement by tendering a "good and marketable title." The court ruled that the memorandum of lease, which had formed the basis for G/GM's objections to the title, was recorded improperly and therefore was a nullity. Further, the court ruled that G/GM had been placed on actual notice of the existence of the lease and had an affirmative duty to inquire as to its terms. Failure to do so, the trial court held, resulted in G/GM being charged with the knowledge of the facts it could have acquired, including the fact that, whatever other problems the lease might have had, it had expired of its own terms. Finally, the court held that, even if the memorandum of lease could be considered an encumbrance on the title, Susse had complied with the terms of the Agreement by supplying a title insurance commitment without exception. The court held that a provision in the Agreement requiring Susse to indemnify G/GM for any disputed encumbrance had been met through the title insurance commitment.
On the counterclaim, the trial court found that G/GM had breached the Agreement by failing to produce the funds at closing. The court then ruled that the initial $25,000 deposit should be retained by Susse as liquidated damages per the Agreement. The $10,000 deposit made June 3, 1985, for the first extension of the closing date also belonged to Susse per the Agreement, which provided for one such extension. Finally, the court held that G/GM had not established any right to the second $10,000 deposit, which came from a check drawn on the President Harding Inn account. Consequently, the court held, G/GM had no claim for the return of the funds and, therefore, Susse was entitled to keep the payment.
Upon appeal, the Court of Appeals for Marion County reversed the trial court. The court of appeals, relying on Novogroder v. Di Paola (1919), 11 Ohio App. 374, 30 Ohio C.C.(N.S.) 421, held that the memorandum of lease, while a nullity for failure to meet the statutory recording requirements, was nonetheless a "cloud on the title." Although the appellant had supplied an affidavit certifying the termination of the leasehold interest, the court of appeals held that action was ineffective in removing the cloud because the affidavit had not been recorded as of the closing. The court of appeals further held that the language of the Agreement could not be construed to allow the commitment of title insurance to supplant the requirement for "good and marketable title," which the court equated with cloudless title, citing Novogroder. The appellate court also found that G/GM was entitled to restoration of the entire $45,000 deposited.
This cause is now before the court pursuant to the allowance of a motion to certify the record.
Spurlock, Sears, Pry Griebling and G. Scott McBride, for appellee.
Ashworth McKinniss and Ted M. McKinniss, for appellant.
The court would be reluctant to call the precedents in this case elderly, being mindful of adjectives that might be perceived as pejorative, but they were found in volumes yellowed at the margins that left a trail of velvety silt when disturbed.
The question is which trail to follow. The Court of Appeals for Marion County chose the venerable Novogroder v. Di Paola, supra. For the reasons set forth, we choose instead the analysis of our nineteenth century colleagues found in Rife v. Lybarger (1892), 49 Ohio St. 422, 31 N.E. 768.
This case sounds in contract, one for the sale of real estate. The terms of that contract set forth in Section 1, Article XV what the seller was obligated to provide: "* * * a Limited Warranty Deed conveying fee simple title, good and marketable, free and clear of all mortgages or deeds of trust * * *."
Does the existence of the improperly recorded memorandum of lease represent an impediment of the sort contemplated by the quoted portion of the contract? We think not. There is no dispute that the memorandum did not meet the statutory requirements for filing and, therefore, should not have appeared on the record of title at all. Though appellee cited the memorandum at the closing as a "defect or encumbrance" that rendered the title unmarketable, in fact, the alleged "defect or encumbrance" was a lapsed lease whose recording itself was defective. Further, a lease that is not binding on the purchaser would not render a title unmarketable. See Zackman v. Dick (1913), 1 Ohio App. 36, 24 Ohio C.D. 450, 15 Ohio C.C. (N.S.) 593. There is also little dispute, in the words of the trial court's lucid memorandum of decision, that "* * * the closing would have taken place but for the failure of plaintiff to produce the funds."
The contract did not require the appellant to produce a cloud-free title as asserted by the court of appeals' opinion. Even the Novogroder decision, relied upon by that court, noted:
"This contract was peculiarly worded; but it is not the province of the court to make contracts, but to enforce them. It is true that Novogroder may be captious, and his lawyers and his present counsel may be hypercritical, but if he contracted for a cloudless title he has a right to have a cloudless title. * * *
"* * *
"* * * If this suit were based on a contract requiring simply a marketable title, the question which we would have to solve would be different." Id. at 377-378, 30 Ohio C.C.(N.S.) at 423-425.
The court of appeals did not cite to the earlier Rife decision for its characterization of Novogroder, but there can be little doubt where the Novogroder court found its phrasing:
"`Captious objections to the title ought not to prevail, when made by a purchaser who seeks to avoid the performance of his contract.'" Rife, supra, 49 Ohio St. at 429, 31 N.E. at 770, quoting Walsh v. Barton (1873), 24 Ohio St. 28, 40.
Captiousness, absent a contract provision to support it, will not be viewed any more kindly today than it was one hundred eighteen years ago. The real cloud here was the one employed by the appellee in its attempt to divert attention from its failure to secure financing for the purchase. Paraphrasing the language of Rife, supra, we hold that an objection to a title must have some substantive merit in order to defeat a claim for specific performance of a contract for the sale of real estate made by a vendor charged with producing "good and marketable" title. A title need not be free of any possible defect in order to be marketable, but must be in a condition as would satisfy a buyer of ordinary prudence. An improperly recorded memorandum of lease intended to provide notice of a lease that has lapsed by its own terms, or has been cancelled for breach of its conditions, does not constitute a defect sufficiently substantive to warrant a purchaser's refusal to perform his obligations under a contract for sale of real estate.
There remains an issue of the burden of inquiry in an instance where a question is raised as to the marketability of title. The trial court held that a purchaser who has actual notice of a purported defect in a title has an affirmative duty to make a reasonable inquiry to determine the nature and effect of that defect. Failure to make such reasonable inquiry, the trial court held, will result in the purchaser being charged with all the facts that could have been learned had the inquiry been made. However, the trial court cited no authority to support that position and there appears to be none in Ohio directly on point. But Cambridge Prod. Credit Assn. v. Patrick (1942), 140 Ohio St. 521, 24 O.O. 546, 45 N.E.2d 751, while not a real estate case, lends substantial support to the concept espoused by the trial court:
"`* * * [T]he proposition is established by an absolute unanimity of authority, and is equally true both in its application to constructive notice, and to actual notice not proved by direct evidence but inferred from circumstances, that if the party obtains knowledge or information of facts tending to show the existence of a prior right in conflict with the interest which he is seeking to obtain, and which are sufficient to put a reasonably prudent man upon inquiry, then it may be a legitimate, and perhaps even necessary, inference that he acquired the further information which constitutes actual notice. * * * Finally, if it appears that the party has knowledge or information of facts sufficient to put a prudent man upon inquiry, and that he wholly neglects to make an inquiry, or having begun it fails to prosecute it in a reasonable manner, then, also, the inference of actual notice is necessary and absolute.'" Id. at 532-533, 24 O.O. at 551, 45 N.E.2d at 756-757, quoting 2 Pomeroy's Equity Jurisprudence (5 Ed.) 619, Section 597. Also, "* * * [the purchaser] cannot act in contravention to the dictates of reasonable prudence, or refuse to inquire when the propriety of inquiry is naturally suggested by circumstances known to him." Kirsch v. Toizier (1894), 143 N.Y. 390, 397, 38 N.E. 375, 377. In the instant case, "reasonable inquiry" would have revealed that the actual lease evidenced by the memorandum of lease had lapsed by its own terms, not to mention the breaches of its conditions asserted by appellant in an affidavit provided to appellee's title company. As the record makes abundantly clear, the real problem was a lack of funds to close the sale, not an unmarketable title. Consequently, we find a breach of the Agreement by the appellee. The trial court cogently analyzed the disposition of the funds at issue. The $25,000 downpayment represented liquidated damages for a breach under Section 1, Article X of the Agreement; the first payment of an additional $10,000 was in return for an extension of the closing date, according to the provisions of Section 2, Article XVII of the Agreement. The payment was to be applied to the purchase price at the time of closing. Absent closure, logic and the reasoning of Ritchie v. Cordray (1983), 10 Ohio App.3d 213, 10 OBR 287, 461 N.E.2d 325, support the finding that the money belongs to appellant. The payment was consideration for the extension of time for closing. Appellee would receive credit against the purchase price only if it purchased the property; otherwise, the payment belonged to appellant in return for allowing more time for closing. The second $10,000 payment was made by President Harding Inn Corp., which the record indicates was involved in this transaction, but is not a party to this lawsuit. Nor is there is any evidence in the record that appellee is the assignee of President Harding Inn Corp. Thus, appellee can have no claim for the return of funds, even though the parties agree that the second payment was made to benefit appellee in terms of buying more time. Appellant is entitled to keep the second payment as well.
The judgment of the court of appeals is reversed, and the judgment of the trial court is reinstated.
Judgment reversed.
MOYER, C.J., SWEENEY, HOLMES and H. BROWN, JJ., concur.
DOUGLAS, J., concurs in judgment only.
RESNICK, J., dissents.