When will a Court treat two separate written contracts as a single agreement? In Johandes v Crowell (Click here for a PDF), decided by the Michigan Court of Appeals on April 27, 2010, the seller and buyer entered into two contracts — one for the sale of real estate (a house) and the other for the sale of personal property located on the real estate (such as kitchen appliances). The sale of the real estate and the personal property were supposed to close simultaneously.
The buyer defaulted and failed to complete the purchase, and the seller then filed a lawsuit. The purchase agreement provided that the seller could retain the earnest money deposit as liquidated damages. In addition to keeping the deposit, the seller sought damages for the buyer’s failure to complete the purchase of the personal property. The Court of Appeals held that because the two contracts were really a single agreement, the seller was limited to keeping the deposit. The Court stated:
Because the two contract were intended to operate together to spell out a single transaction, the trial court did not err in concluding that the provision in the one for personal property tying its closing to the closing on the contract for real property indicated that there was requirements to close on the former if there was no closing of the latter.
The Court of Appeals looked at several factors to conclude that there really a single agreement between the seller and the buyer: (1) The contracts were drafted simultaneously. (2) The sale of the real estate and personal property were supposed to occur simultaneously. (3) Much of the personal property being sold consisted of fixtures or large equipment that was intended to remain with the house, such as kitchen appliances, a washer and dryer and a hot tub. Based on these factors, the Court of Appeals ruled that, “The structuring of the transaction into separate contracts for the sale of certain real property and related personal property resulted in a single agreement composed of two complementary components.”
It is common to have multiple related agreements as part of a business or real estate transaction. The lesson of this case is that the contracts must not only be read separately, but they must be read together as a whole. The contracts should specify how a default under one agreement affects the other agreements.
This article was written by Mark S. Demorest, Managing Member of Demorest Law Firm.
