Legal Guide

Contracts: Don't Assume - Trust but Verify

by: Jeffrey P. Blumstein

Before you enter into a binding, written contract, make absolutely sure that you nail down all business issues that are important to you. If an oral representation is made to you, check it out and satisfy yourself that it is accurate. Even if you do this, the best protection is to have every important representation included in the contract as an obligation of the other party. This can be done by way of "covenants" or "warranties." Then, if the representation does not prove to be accurate, you will be in a position to either refuse to perform the contract, or to sue for breach of a contract to recover the value of what was promised, but not provided.

A good example of the pitfalls of not following these suggestions is demonstrated in a recent case. I represented clients who entered into a contract to sell rental property that abutted a private stretch of beach. Tenants of the property had always been able to use the beach freely without cost. However, at the time they acquired the property, our clients had no enforceable agreement or easement permitting their tenants to use the beach. At the time the contract for sale was entered into many years later, a private beach association was being formed. The beach association intended to limit beach access to its members. However, the association documents were unclear as to the terms and cost of membership.

The sales contract was silent regarding any questions of future beach access or membership in any beach association. The purchasers did not contact the beach association prior to entering into contract to seek clarification of any of these issues. After the contract was finalized, but before the closing, the beach association indicated for the first time that a condition of membership would include payment of a large unexpected initiation fee.

The seller made time of the essence for a closing date. The purchasers took the position that it was our client's absolute obligation to pay the initiation fees before the closing and provide them with a perfected membership in the beach association. Our clients declined, since that was not an obligation that they had specifically agreed to in the contract. The purchasers refused to close; our clients cancelled the contract; the purchasers filed a lawsuit.

Almost two and a half years later, the case came to trial. During that time, the value of the property had almost doubled. To avoid additional litigation costs, and the possibility of an appeal after trial, our clients agreed as a matter of compromise to give the purchasers less than eight percent of the appreciation that the property had enjoyed since the date of the original closing. Within a week of the settlement, the property was under contract for a higher sum.

The moral of this tale, which is applicable to any contract negotiation, is "trust but verify." If you cannot verify your satisfaction, then get the other side to warrant or covenant that what you want is either the case, or will be the case. If you cannot obtain that type of agreement, then be aware of the potential risk that you face in going forward. Courts will not make better contracts for parties after the fact than the one the parties actually entered into.

Szaferman, Lakind, Blumstein, & Blader, P.C.
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