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Mary and Abby have been best friends since high school. Abby is a lawyer and Mary is a real estate broker. Mary lives in Baymont. One day, Mary called Abby about a potential real estate investment. “I know about a house and 150 acres on Highway 1 about five miles outside of town that can be purchased for $500,000 if we act quickly,” Mary told Abby. “Why would I want to invest in property in Baymont?” Abby replied? “This isn’t just any old property….I overhead Big Ray telling one of the boys that all the property out that way is sitting on shale and it is about to become the next big natural gas field” Mary exclaimed! . “Now you have gotten my attention. So you think it is going to be worth a lot more than $500,000?” Abby replied. “Let’s just say that if that land is located over that shale formation, you and I can retire to anywhere we want whenever we want.” Mary laughed.
Mary and Abby decided that Abby would prepare a contract to purchase the property in her name and that they would form a partnership and, after closing, Abby would convey the property to the partnership. Abby drafted an agreement entitled Real Estate Purchase Agreement. (the “Agreement”) The Agreement provided that Abby, as Purchaser, would have 30 days after execution to perform any studies and review title, survey and any other matters and, if for any reason, the Purchaser did not want to purchase the property, the Purchaser could terminate the Agreement. The Agreement also provided that there would be $5,000 earnest money deposit to be held by the title company and that the $500,000 purchase price would be paid in cash or by wire transfer at the closing.
Mary took the Agreement to Dr. Jones, the 89 year old widower who owned the property. Dr. Jones was happy to see a full price contract and that the Purchaser was Abby. He remarked that he knew he could rely on Abby to do a good job with the contract because Abby’s uncle, old Judge Coot, had represented Dr. Jones in the past and been one of the best lawyers in town in his day. “If she is half the lawyer her uncle was, I know everything has been done right” Dr. Jones stated as he quickly signed the Agreement without looking at anything other than the first page where the purchase price was stated, and the signature page where he signed. Mary also had Dr. Jones sign a listing agreement stating that Mary would be paid a 6% commission on the sale of the property. Mary did not tell Abby about this listing agreement or that she would be receiving this commission.
Each of the following questions should be answered separately. Do not assume facts from one question apply to other questions. I am positing differing factual scenarios and asking you to respond based upon those scenarios.
Question One: Assume that before the Agreement closed and title transferred to Abby, the Seller discovers that the property is located above a potentially valuable shale formation. He comes to you to ask your advice because he believes the property is worth a lot more than the $500,000 purchase price. What additional facts and circumstances would you need to know to advise him concerning his rights and potential causes of action? Based upon the facts as you know them from the problem and the answers to the question concerning additional facts and circumstances you would need to know, what are his options at this time and how would you advise him to proceed? How would your advice change if the Seller did not discover that the property was located over the shale formation until after the transaction had closed?
Question Two: Assume that before the Agreement closed, but after the expiration of the review period, the town of Baymont passes an ordinance prohibiting any drilling in the city limits. Can Abby terminate the Agreement and receive a refund of her earnest money? What additional information would you need to know to be able to answer this question?
Question Three: Assume that Mary and Abby have formed their partnership before closing and that half of the money to be used to purchase the property is Mary’s. Their understanding is that as soon as the deal closes, Abby will execute a deed to the partnership conveying the property to the partnership. Abby cannot attend the closing and so she gives to Mary a power of attorney authorizing Mary to sign any closing documents on her behalf. At the closing, the Seller signs a Deed
that Abby prepared, but tells the Title Company to attach to the Deed an Exhibit setting forth any exceptions to title in the title policy and to add a sentence saying that the conveyance is subject to any matters on that Exhibit. Mary calls Abby to explain what is happening. Abby is very busy about to go into court for a big case. She tells Mary not to worry, that deeds are always subject to the stuff in the title policy. Abby does not tell Mary that Abby had not reviewed the title commitment because she had been so busy and had assumed that Dr. Jones owned the property free of encumbrances since he had lived on it for so many years. Abby had intended to look at the title work at closing.
After the closing, the Title Company records the Deed and Abby and Mary meet for drinks to celebrate their coup. Mary hands to Abby the closing documents and, as she is looking them over, Abby’s face turns white. The exhibit to the Deed states that the Seller had previously conveyed the mineral interests to Big Ray and therefore is not conveying any of the mineral interests to Abby. In addition there are judgment creditors with liens against Dr. Jones in the amount of $200,000 and the conveyance is also subject to these liens.
When Mary asks Abby what is wrong, Abby screams “How could you be so stupid? Didn’t you read this Deed and the exhibit before you signed all the closing documents? Dr. Jones already sold the minerals and there are judgments against him.” Mary yells back, “Don’t call me stupid. You are the lawyer here. You told me it was ok to close.”
Abby also notices that the closing statement shows a commission paid to Mary in the amount of $30,000. She tells Mary that she wants half the commission since this is supposed to be a joint purchase. Mary refuses saying she earned the commission and it is hers.
Since you are the best real estate lawyer in town, both Mary and Abby approach you to determine their rights and defenses against each other and Dr. Jones as a result of the facts set forth in this Question 3. Obviously you cannot represent both against each other. Just first assume you only represent Mary and give her your advice. Then assume you represent Abby and give her your advice. You should discuss additional information that would be relevant to your advice.