Tuesday, May 18, 2021
Deed Reformation – Correcting Mistakes After the Fact
Sometimes errors are made in real estate deeds involving conveyances of farm and ranch land. The mistake might be a minor one that goes uncorrected, or it could be significant one that means potentially thousands of dollars in lost acres or access rights or something similar. Is there a way to fix the error after it has occurred? Maybe.
The doctrine of reformation – it’s the topic of today’s post.
One of the core principles of contract law is that of equity. Sometimes the common law cannot adequately provide a remedy to a particular situation. That could mean that the law would be of no import to a well-deserving plaintiff. In the Earl of Oxford’s case in 1615, King James is quoted as saying, “Where common law and equity conflict, equity should prevail.” 21 ER 485 (1615). In essence, what the King was saying is that when an agreement has been entered into, but the contract, deed, or other instrument in its written form does not express what the parties actually intended, a court has equitable jurisdiction to reform the written instrument so as to conform to the parties’ intent. The court doesn’t rewrite the parties’ deal, it simply corrects the language to square it with the parties’ intent where there is no other adequate remedy at law. Of course, the evidence must sufficiently disclose the parties’ intent, and that the instrument, as written, doesn’t carry out that intent. And, there are some situations where reformation is not available. One of those includes governmental errors on the theory that there is no mutuality with individual members of the public.
For a court to reform a document, courts generally require that the document is the only document illustrating the parties’ intent and that there was a mutual mistake (including a mistake of law) at the time the document was executed. If there was a unilateral mistake with respect to a contract, it’s possible that the court could order the contract to be rescinded. Rescission doesn’t occur often, but it can apply if the unilateral mistake is coupled with fraud, misrepresentation or some sort of inequitable conduct on the defendant’s part. See, e.g., Boyle, et al. v. McGlynn, et al., 845 N.Y.S.2d 312 (2006).
In a recent court decision from Iowa, Midstates Bank, N.A. v. LBR Enterprises, LLC, No. 20-0336, 2021 Iowa App. LEXIS 391 (Iowa Ct. App. May 12, 2021), the court reformed a clerical error in a deed to reflect the legal description in the purchase agreement. The defendants owned two tracts of land, consisting of a 202-acre farm and a 32-acre homestead. The defendants had previously leased the farmland for rental income before deciding to sell the farmland to a cattle-feeding business run by their son and three other partners. After negotiating a purchase price, the defendants retained a life estate so that they could live in their house on the property for the remainder of their lives. The cattle-feeding business obtained a loan from the plaintiff bank to pay off the defendants’ mortgage on the property.
After the bank approved the loan, it hired a title company to prepare a warranty deed. Due to an error caused by the title company, the warranty deed did not match the life estate description in the purchase agreement. Rather than granting the defendants a life estate in the house on the property, the deed granted the defendants a life estate in the entire 234 acres. When the cattle-feeding business defaulted on payments two years later, the title company blocked a proposed sale, noting the deed named the defendants as life estate holders of the entire property. The plaintiff petitioned for reformation and claimed that the deed did not reflect the true intent of the parties because of the clerical error. The defendants argued that the plaintiff lacked standing to seek reformation of the deed.
The trial court reformed the deed to reflect that the defendants’ life estate was only in the house in which they currently resided. On appeal, the defendants maintained their argument that the bank lacked standing to seek reformation of the deed. The plaintiff argued that because it had a mortgage on the real estate, it had standing to bring the reformation action. The appellate court noted that the plaintiff would be required to allege some specific injury and injury in fact. The appellate court held that because the plaintiff paid off the existing mortgage and attached its security interest to the real estate, it had first priority upon default. Further, the appellate court held that the plaintiff’s security interest under the mortgage instrument was diminished, therefore injury in fact had been established.
The defendants also claimed that the plaintiff failed to prove that a clerical error created a mistake in the deed. The appellate court disagreed, noting that reformation is an equitable remedy when it can be proven that the instrument does not reflect the parties’ true agreement. On this point, the court concluded that the bank offered clear and convincing proof that the deed contained an error through a disinterested witness - the clerk at the title company. The facts also showed, the appellate court noted, that the defendants did not act as though they had a life estate in all 234 acres after the purchase agreement. Related to that fact, the appellate court determined that the purchase agreement did not merge into the deed because the parties did not agree to modify the life estate from the house in which the defendants resided to the entire property.
Consequently, the appellate court that the error in the deed could be reformed to reflect the life estate as described in the purchase agreement – it only applied to the house on the property and not the entire farm.
There are many court decisions where reformation of written instruments has been allowed as a remedy on the ground of mutual mistake. Reformation may occur to include land that was erroneously omitted or delete land that had been incorrectly included. It can also be allowed when the signature of a witness is required, or a seal is required that has been left out inadvertently. It’s an old legal doctrine that is still good law today.