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Reprinted by permission of the Lower Bucks Chamber of Commerce, Outlook Magazine, January 2017.
Lawyers are expensive. Most bill for their services by the hour, and there is no question, that can really add up. It is understandable to wonder if it is really worth spending money on legal representation on the purchase or sale of your home? Unfortunately, the answer sometimes comes at the end of the transaction, when it’s too late, the damage is done, and your options are limited.
The purchase of a home is usually the most expensive transaction one makes in a lifetime. It has also become much more complicated with mortgage financing, title issues, homeowners’ associations, etc. Often, the buyer or seller assumes that the form contract is standard and has protections “built in.” They may also rely solely on the real estate agent and title agent to look out for their best interest.
A lawyer who is well versed in real estate and contract law is the best equipped to focus entirely on protecting your interests. A lawyer does not have the pressure to make sure the deal closes; is independent from the pressure of sales and commissions; is able to read the Agreement of Sale, listing agreement, mortgage commitment, title searches and commitment and other related documents with an understanding of your interest and goals.
Unlike other states, including New Jersey, real estate contracts and closings in Pennsylvania are primarily done without the assistance of a lawyer. The real estate agent locates the perfect home, and buyer signs the contract, which is typically pre-printed As a seller, you finally decide to sell your house and you’ve selected the most successful agent in your area. You sign the pre-printed listing agreement. Usually, there is little time to read any of these documents in advance and, in my experience; they are seldom read unless a problem develops post-closing. Over the years, I have seen a number of these issues come back to haunt parties to these transactions, when it is too late to do anything to resolve them.
Some of the potential pitfalls are:
• Buyer may discover that a release is included in the Agreement of Sale which bars pursuit of claims that may develop later or limits remedies.
• Buyer did not realize this limiting language was included in the signed document
• Seller failed to realize that, per the listing agreement, the agent’s right to a commission may extend longer than seller intended or understood.
• Seller may not be able to timely change agents if seller thinks the home is not getting the attention it requires.
• Seller may not realize that a commission is due if the home is condemned and seller receives compensation.
• Seller may not realize that the Seller’s Disclosure Statement, as signed one night at the kitchen table, was not detailed enough and is being used against seller years later in litigation with the buyer that “loved” their home.
Unlike some states, there is no an attorney review clause in the standard Pennsylvania Agreement of Sale. Once you have signed it, it is binding and enforceable against you.
Unlike most commercial real estate purchases, there is no broad due diligence period in a residential real estate purchase. There are provisions for inspections and some contingencies, but they are time limited and tightly worded. Unlike a commercial transaction, you can’t terminate a residential real estate contract because you aren’t comfortable with an easement or local zoning restriction.
There are ways for parties to a residential real estate sale to use the services of an experienced real estate attorney efficiently in such a manner as to minimize legal fees, while protecting themselves from potentially costly problems down the road . It is not necessary to hire a lawyer “soup to nuts”, instead, it is wise to narrow the services to those most critical to protecting your interests, such as:
• You should have a lawyer review all documents before you sign them. Important changes are usually allowed and you will know beforehand what you are signing.
• Your disclosure statement will be accurate and will not be used against you.
• Your title searches will be reviewed by someone who understands them and will point out a title defect or use restriction that may require that you walk away from the deal.
• At closing, your lawyer can be on call to handle any issues that develop at the closing table.
When you consider what is at stake, and the potential pitfalls associated with the purchase or sale of a home, there is no reason to take the chance that everything will work out and go smoothly, when you can retain a lawyer to be available when needed and as needed without incurring substantial fees.
Reprinted with permission from the December 30, 2016 issue of The Legal Intelligencer. (c) 2016 ALM Media Properties. Further duplication without permission is prohibited.
Historically, the courts of the Commonwealth of Pennsylvania have been loathe to blur the distinction between tort and contract. The gist of the action doctrine, well formed and frequently litigated, precludes recasting contract claims as tort claims or claims of negligent performance of contractual duties. The courts have specifically held that parties to business agreements such as partnership, shareholder or LLC operating agreements may contract away or severely limit fiduciary duties owed by partners, directors and managers. Notwithstanding these long standing and often contested principles of law, the Pennsylvania Supreme Court is set to address an emergent trend toward the expansion of duties imposed by contract through the implication of the duty of good faith and fair dealing in the context of business relationships. Specifically, the Court has granted allocator on the issue of whether “the implied covenant of good faith and fair dealing” applies to “all limited partnership agreements under Pennsylvania law.” Assuming the Court answers the question in the affirmative, as have the Courts in neighboring Delaware in a similar cases involving business governance agreements, the bright line between tort and contract will dim.
The case of Hanaway v. Parkersburg Group, L.P. 132 A.3d. 461 (Pa. Super. 2015) arises out of a limited partnership agreement for the development and sale of real estate. The complaint alleges various breaches of fiduciary duty, conversion and contract based on the general partner’s sale of real estate at below market value to a separate entity also controlled by the general partner and involving many of the same limited partners as had invested in the original limited partnership – to the exclusion of the plaintiffs. All tort claims based on breach of fiduciary duty were found to be time barred. Further, the trial court granted summary judgment on the contract claims. On appeal to the Superior Court, plaintiffs argued that the trial court erred in granting summary judgment on breach of contract claims by finding that the provisions of the limited partnership agreement granting the general partner exclusive right to manage the business affairs of the partnership negated the duty of good faith and fair dealing. Plaintiffs argued the covenant is implied in every contract and imposes on each party a duty of good faith and fair dealing in its performance and enforcement, notwithstanding the grant of exclusive management rights.
The Superior Court held that the implied covenant of good faith and fair dealing imposed the duty to exercise a contractual obligation, even a contractual obligation expressly conferring the exercise of discretion, must be exercised in good faith. “Good faith” was interpreted to mean “faithfulness to an agreed common purpose and consistency with the justified expectations of the other party; it excludes a variety of types of conduct characterized as involving bad faith because they violate community standards of decency, fairness or reasonableness”. The Court went on to describe the implied duty as requiring “honesty in fact in the conduct of the transaction concerned”. Thus, the Court concluded that the general partner’s sale of partnership assets at below market rate for its own benefit and the benefit of its like minded limited partners to the detriment of others may constitute a breach of the implied duty and an issue for trial which should not have been dismissed on summary judgment.
The Pennsylvania Supreme Court’s impending decision will undoubtedly be guided by precedent from the Delaware Supreme Court and the statutory preservation of the duty of good faith and fair dealing even in the face of the right to contract including the right to limit other duties- even fiduciary duties. Delaware has adopted both a Revised Uniform Limited Partnership Act and a Limited Liability Company Act which permit parties to business agreements within the scope of those Acts to limit fiduciary duties owed to each other and the business. The Limited Liability Company Act goes so far as to confirm the premise that managers in an LLC owe fiduciary duties to each other under law by default, but allows for modification of such duties in the operating agreement. The Revised Uniform Partnership Act, while allowing for a contractual waiver of fiduciary duties, specifically rejects waiver of the covenant of good faith and fair dealing. Accordingly, while the parties are free to modify the fiduciary relationship with regard to management of business entities traditionally governed by contract, the implied covenant of good faith and fair dealing remains. That premise was confirmed by the Delaware Supreme Court in Gerber v. Enterprise Products Holdings, LLC 67 A.3d 400 (Del. 2013). In Gerber, the Supreme Court explained that the implied covenant “seeks to enforce the parties’ contractual bargain by implying only those terms the parties would have agreed to during their original negotiations had they thought to address them”. Gerber, at 418.
The blending of tort and contract in the Pennsylvania Superior Court’s analysis in Hanaway is clearly evident by the Court’s summary conclusion that the breach of contract claims should have been preserved for the jury. Although directly addressing the breach of contract claim, the Court applied tort principles by finding that the evidence, if credited, could support a finding that the Defendant orchestrated the sale of partnership assets at a price below market value for its own benefit. The Court then concluded such sale could have constituted a breach of the contractual duty to exercise management of the limited partnership in “good faith”. Hanaway, 132 A.3d at 476.
A Supreme Court opinion which imposes the duty of good faith and fair dealing to all agreements governing business relationships will have far reaching implications. Clearly, if breach of contract can be successfully alleged in a business setting under circumstances described in Hanaway, the statute of limitations analysis is substantially modified. Owners of a minority business interest may no longer be limited to a two year statute. Business practitioners and drafters of organizational documents who once believed a disclaimer of fiduciary duty was sufficient must now reconsider the inclusion of a “good faith” definition. For litigators, the permissible theories of damage claims in business disputes concerning internal governance documents are expanded.
Although the Hanaway Superior Court decision is at odds with many traditional notions of separation between tort and contract, any Supreme Court determination that excludes the principal of good faith and fair dealing from business agreements would be at odds with the overarching and recognized principle that the duty is “implied in every contract”. Further, any such ruling would be at odds with recent precedent from the Supreme Court of Delaware.
Tom Donnelly is a Partner of the firm. His practice focuses primarily on commercial litigation and transactions, employment disputes and personal injury. To learn more about the firm or Tom Donnelly, visit www.ammlaw.com.
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