Volume 19, Number 6
September 2002


REAL ESTATE LAW

SETTLING REAL ESTATE DISPUTES: THE SETTLEMENT AGREEMENT

By Dennis L. Greenwald

Unlike most simple settlement agreements, the settlement of a real estate dispute often is consummated in two stages: execution of the settlement agreement, followed by the actual transaction contemplated by the agreement. For example, one party might agree to sell the other party a property as part of the terms of a settlement. Such a settlement involves the creation and consummation of both purchase and sale transactions.

Contracts and releases. A settlement or release sometimes is folded within the terms of a contract or a modification to a contract. Counsel should be wary of such provisions because either client can inadvertently compromise or release a claim.

Sometimes one party will want a release from the other party in the original contract. For example, in a purchase and sale contract in which the property is sold on an "as is" basis, a seller may include a contractual release of claims in which the buyer releases the seller from all liability in connection with defects in the property. The danger in such releases is that the buyer might inadvertently release the seller from the seller's own fraud in failing to disclose defects. Even though language embodied in an original contract that purports to release fraud claims might not be enforceable, the prospect of later litigation should be avoided.

Releases have two main categories: limited (or special) and general. A limited or special release frees only claims pertaining to certain identified matters; a general release covers all claims pertaining to any and all matters or relationships. Clients considering a general release should be warned that they are releasing all claims pertaining to any relationship the client might have with the released party. Generally, a client should give a general release only if absolutely certain it has no other relationship with or potential claim against the released party.

The parties. A common error is that lawyers may define too broadly the parties granting the release (releasors) or the parties being released (released parties). Of course, the actual litigants and other parties directly involved in the dispute will be named. But many releases provide that the party granting a release does so "on behalf of itself, its agents, employees, stockholders, partners, attorneys and representatives." These broad releases often do not consider that the party issuing the release probably has no legally recognized authority to release claims on behalf of any other parties, and the releasor could ultimately be required to indemnify the released party for any such claims. A corresponding danger is to broadly define the released parties.

Irrespective of whether the release is general or limited and how broadly the parties are defined, the settlement agreement should specifically state that any release excludes the release of the obligations of the parties under the settlement agreement itself.

Malicious prosecution. When the settlement involves pending litigation, lawyers sometimes include in the release a statement that the parties are releasing any claim against the other party (and its counsel) for malicious prosecution. This is a particularly sensitive issue for lawyers. Whether the releases are general or limited, if the parties' lawyers are not released from malicious prosecution claims, an argument could exist that a party still holds the right to pursue such a claim against the opposing counsel following execution of the settlement agreement.

Risk. The settlement agreement should include a statement that each party assumes the risk that the facts available to it at the time of the agreement's execution may turn out to be different from how they initially appear. Remember, the settlement agreement is supposed to resolve the disputes at hand fully and finally. For this reason, it is beneficial to preclude further claim by a party that the case was settled based on a mistake of fact or even, perhaps, on alleged fraudulent misrepresentations by the other party. It also follows that no representations should be made in a settlement agreement that could be construed as inducements to the other side and become the subject of a future claim.

Admission of facts or liability. Lawyers tend to recite extensive facts or alleged facts in the settlement agreement, usually in the "Recitals" section. Counsel should be wary of making statements that might constitute admissions of facts. An admission of a particular fact might be used by the other party, or by someone that is not a party to the settlement agreement, to support a claim at a later date. If admissions of factual allegations must be made, they should be as neutral as possible.

Similarly, there is no reason why either party should admit any liability and every reason why the parties should agree that no statement in the settlement agreement should be construed as an admission of any liability. It is better to state the facts as allegations or contentions made by each side and to state that each party disputes all or certain of the allegations made by the other party.

Representations and warranties. With two exceptions, it is best not to make representations or warranties in a settlement agreement. The first exception concerns representations by each party that all or any portion of the claims being released in the agreement have not been assigned or otherwise transferred. The second exception applies when a new or restructured transaction is contemplated as part of the settlement agreements.

Execution by counsel. Many settlement agreements include a signature block for counsel. The usual justification for requiring a lawyer's execution of the settlement agreement is that it proves the parties were represented by counsel and that they understood what they were signing. However, there are other ways of proving this. The settlement agreement can simply include an acknowledgment by the parties that they were represented by counsel and identify the respective counsel.

Revivor provision. As with other transactions, settlements can be subject to attack in bankruptcy as constituting a preferential transfer or a fraudulent conveyance. Therefore, it is appropriate to consider including a revivor clause providing that, if the settlement agreement is attacked as a fraudulent conveyance or preferential transfer, the party that received consideration may elect to treat the entire settlement as not having occurred.

Confidentiality provisions. Confidentiality provisions often require that the parties keep the terms of the settlement agreement confidential or that certain information disclosed during the settlement negotiations be kept confidential. Such a provision should expressly state that monetary damages would not be an adequate remedy at law and that the aggrieved party would be entitled to seek injunctive relief. If a confidentiality provision is used, it should be carefully drafted to allow a party to disclose confidential as well as other information to its accountant, financial advisors, legal counsel, prospective lenders, and the like.

Further acts provisions. A further acts provision requires each party to sign additional documents and perform such additional acts as may be necessary to consummate the transactions contemplated by the agreement. If there are concerns that all of the actions or all of the documents to be executed or delivered by a party have not been covered in the contract, some form of a further acts provision might be advisable. In the context of a settlement, however, the parties generally prefer that the possibility of further entanglements not linger. For that reason, further acts provisions should be used only sparingly in settlement agreements.


Dennis L. Greenwald is a partner at Greenwald, Pauly, Foster & Miller in Santa Monica, California.


This article is an abridged and edited version of one that originally appeared on page 30 of Probate and Property, March/April 2002 (16:2).


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