March 09, 2020 Articles

Boilerplate Pitfalls in Real Estate Contracts and How Courts Interpret Boilerplate Provisions

The importance of careful review cannot be overstated.

By Gregory D. Call, Michelle D. Gambino, Howard K. Jeruchimowitz, Marianne L. Simonini, and Paul F. Stibbe

Blind use of boilerplate in real estate contracts can result in costly litigation in which judges and jurors lacking first-hand knowledge of the parties’ contractual intentions decide the fate of your case based on provisions that were inadequately considered or negotiated during contract drafting. This article explores the pitfalls of boilerplate provisions to which even the most sophisticated parties and attorneys routinely fall victim and how courts will interpret such provisions.

Boilerplate Binds

“The first rule that courts must apply when construing contracts, including real estate contracts, is to look to the plain meaning of the words of the contract.” D. R. Horton, Inc. - Torrey v. Tausch, 610 S.E.2d 151, 152–53 (Ga. Ct. App. 2005). Therefore, it is imperative that parties read and understand the entire contract before signing, as the terms in that contract are binding. This includes boilerplate provisions. Ryan v. Delbert Servs. Corp., No. 5:15-cv-05044, 2016 U.S. Dist. LEXIS 121246, at *16 (E.D. Pa. Sept. 8, 2016) (“Of course, boilerplate in consumer contracts is routinely enforceable—modern commerce depends upon it.”); Star Leasing Co. v. Indus. Transp., Inc., No. 09 CVH 03-4809, 2010 Ohio Misc. LEXIS 509, at *10–11 (Ct. Com. Pl. July 27, 2010) (determining a detailed, sophisticated master lease executed at arm’s length by two businesses was enforceable despite use of boilerplate; stating that “even a contract with boilerplate provisions is still enforceable as long as it is not ‘unconscionable’ meaning there is ‘an absence of meaningful choice on the part of one of the parties together with contract terms which are unreasonably favorable to the other party’”).

To avoid unintended consequences, boilerplate provisions must be parsed through and explicitly considered, just like any other matter-specific clause contained in the contract. Key boilerplate provisions to look for are discussed below.

Procedural Boilerplate Provisions

Pay close attention to boilerplate default provisions to ensure your client’s rights are protected to the greatest extent possible. The default provision should provide for written notice to the defaulting party with an opportunity to cure, a notice address, when the notice is deemed delivered, as well as the cure period during which time a defaulting party may remedy the default without penalty, termination, or both. Certain types of defaults favor shorter cure periods to advance your client’s interests.

Procedural provisions governing litigation logistics are also important and frequently overlooked. It is common for real estate contracts to include alternative dispute resolution provisions with a “cooling-off” period in which the parties give notice of a claim and request a meeting of executives or pursue a nonbinding mediation before commencing further action. To the extent these provisions are included, parties must strictly define the form of notice, who must participate, when the pursuits must be completed, and, for mediation, how the mediator will be selected. Arbitration provisions that serve as a litigation substitute are also common. As with other alternative dispute resolution mechanisms, the parameters, such as arbitrator selection, timing, limitation of issues, discovery, and the type of decision, should be delineated. The governing rules also should be specifically identified, such as American Arbitration Association, ADR, JAMS, or the set of rules preferred by a preselected arbitrator. While these provisions seem like innocuous efforts to avoid costly litigation, these proceedings are themselves frequently costly and do not always fully resolve the case, in which event the case will proceed to litigation anyway.

A few other key provisions to consider in light of your client’s needs include jury waivers, forum and jurisdiction selection clauses, and conflict and choice of law provisions. Parties frequently waive their rights to juries without giving the decision any thought during execution. A number of factors should be considered before executing such a waiver, including the complexity of the matter and reputational positioning of the parties. Moreover, although a majority of jurisdictions allow such waivers(see, e.g., Leasing Serv. Corp. v. Crane, 804 F.2d 828, 832 (4th Cir. 1986)), a minority of jurisdictions view them as voidable (see, e.g., Grafton Partners L.P. v. Superior Court, 116 P.3d 479, 482–84 (Cal. 2005)). Pay attention to forum selection clauses because of the potential costs involved with litigating far away from where your client is headquartered or principally operates. At a minimum, the parties must ensure a substantial relationship of the forum to the matter. Finally, verify that the choice of law selected is most beneficial to your client’s position to ensure disputes will be resolved in your client’s favor and the law does not conflict with a fundamental policy of the forum state.

Substantive Boilerplate Provisions

Integration clauses within real estate contracts are particularly important to evaluate, as the clause recites that the agreement is complete and integrated such that parol evidence will not be considered if the document is not ambiguous. If your client is worried about the other party applying a contractual provision contrary to the discussions and drafts leading up to contract execution, you may want to exclude such a clause, as it could serve to bar testimony about those discussions, drafts, and intentions. In addition, check your jurisdiction, as some jurisdictions, such as California, have a particularly liberal viewpoint on allowing extrinsic evidence even with integration clauses. See Riverisland Cold Storage, Inc. v. Fresno-Mader Prod. Credit. Ass’n, 291 P.3d 316, 318 (Cal. 2013) (holding that extrinsic evidence could be admitted even though there was “no dispute in this case that the parties’ agreement was integrated”).

You should also carefully evaluate disclaimers of reliance in real estate contracts because they provide that a purchaser, lessee, etc., performed its own due diligence prior to entering into the contract and therefore is not relying on any statement, representation, or promise not expressly set forth in the agreement. This provision has served to bar claims for fraudulent inducement and negligent misrepresentation. See Circle Ctr. Dev. Co. v. Y/G Ind., L.P., 762 N.E.2d 176, 177–79 (Ind. Ct. App. 2002) (holding in the context of a landlord/tenant dispute over unpaid rent that a motion for judgment on the pleadings should have been granted as to tenant’s counterclaim for fraudulent inducement to enter the lease because the tenant had signed an integration and no-reliance provision in the lease, precluding it from alleging prior misrepresentations as the basis of its fraud claim).

Two other boilerplate clauses that are often included in real estate contracts but that are difficult to enforce are no oral modification clauses and further assurance provisions. While no oral modification clauses seek to preclude a party from asserting that the parties orally agreed to modify a contract, “[t]he general rule in most jurisdictions is that parties to a written contract may alter or modify its terms by a subsequent oral agreement even though the contract precludes oral modifications.” Park v. Dealers Transit, Inc., 596 F.2d 203, 204 (7th Cir. 1979); see also Babrow Palumbo Sales, Inc. v. Broan-Nutone, LLC, No. 04CV5334, 2007 U.S. Dist. LEXIS 250, at *12 (E.D.N.Y. Jan. 4, 2007). Similarly, parties frequently include a clause that each party shall use commercially reasonable efforts to take all such actions that are necessary or appropriate to carry out the agreement. However, enforcing such a provision can be difficult because of the additional litigation to determine what is commercially reasonable and whether a particular obligation was included in the provision. See, e.g., 97th St. Holdings LLC v. E. Side Tenants Corp., 918 N.Y.S.2d 421 (N.Y. App. Div. 2011) (subscription required) (additional obligation related to a sale of real estate could not be imputed from “generalized language found in the contract’s further assurances clause” as that “would amount to a reformation of the contract without basis”). Therefore, it is prudent to be specific about each party’s obligations.

You should also consider the merits of severability, anti-waiver, and drafting clauses. A severability clause seeks to keep an agreement in force even if a provision or term is invalid, illegal, or unenforceable. However, courts frequently invalidate the severability clause if the unenforceable provision was essential to the contract. Regarding anti-waiver provisions, while a party may seek to ensure that its own inaction in enforcing its rights in one instance will not prevent enforcement as part of future breaches, the anti-waiver provision itself remains waivable based on performance. This is important to remember in the landlord/tenant context. Parties also frequently declare that the document shall be construed without a presumption against the drafting party, but the parties may want to consider going a step further and including a specific statement that the contract is a product of negotiations between the parties and any ambiguity will not be construed against any specific party.

Damages Boilerplate Provisions

Limitations on damages in a real estate contract are especially important. Liability limitation clauses could seek to limit a party’s contract or warranty claims but exclude negligence or other types of claims. For instance, a notable clause is one that limits a party’s liability to its equity in a property and insulates parent companies and affiliated entities from claims arising out of the agreement. Such a provision could substantially limit the aggrieved party’s ability to recover meaningful damages. Parties also will frequently limit the recovery of consequential or punitive damages, restricting recovery to direct damages. You should carefully weigh whether such a provision is in your client’s best interests because these clauses are routinely enforced. See, e.g., Westlake Fin. Grp. v. CDH-Delnor Health Sys., 25 N.E.3d 1166, 1178 (Ill. App. Ct. 2015) (enforcing limitation of liability provision excluding indirect lost profits but not direct lost profits). Liquidated damages provisions are also important to consider because they can provide a false sense of security to a client regarding potential damages on a breach. Liquidated damages provisions will be limited to what is reasonable compared with actual loss. Restatement (Second) of Contracts § 356 (1979) (“Damages for breach by either party may be liquidated in the agreement but only at an amount that is reasonable in the light of the anticipated or actual loss caused by the breach and the difficulties of proof of loss. A term fixing unreasonably large liquidated damages is unenforceable on grounds of public policy as a penalty.”). Defining clearly what damages are essential to the business can ensure maximum collection under a liquidated damages provision.

Further damages issues to be mindful of are whether an attorney fee provision is included because the fee-shifting will not occur unless provided for through a contract or by statute or rule, as well as whether that provision is mutual. The more specificity included with attorney fees provisions, the more likely it is they will be enforced. In addition, it is often the case that landlords want to avoid a duty to mitigate damages, but the enforceability of such a provision will depend on what jurisdiction you practice in; while a common-law duty to mitigate exists, some states have allowed parties to contractually waive those duties. See, e.g., Bus. Sys. Leasing, Inc. v. Foothills Auto. Plaza, Inc., 886 F.2d 284, 287 (10th Cir. 1989) (subscription required) (holding that, under Maryland law, the parties could enter into a contract to waive the duty to mitigate damages); Sowell v. Int’l Interests, LP, 416 S.W.3d 593, 602 (Tx. App. 2013) (concluding that allowing a contracting party to choose to waive failure-to-mitigate defense does not violate Texas public policy).

How Courts Will Interpret Boilerplate

Courts apply the typical rules of contract interpretation to real estate contracts with equal force as in other contexts, as discussed above. “The best evidence of what parties to a written agreement intend is what they say in their writing.” Greenfield v. Philles Records, Inc., 780 N.E.2d 166, 170 (N.Y. 1992). To that end, the evaluating court will apply the following common rules of construction:

  • Objective intent of the parties. See Mellon Bank, N.A. v. Aetna Bus. Credit, Inc., 619 F. 2d 1001, 1009 (3rd Cir. 1980); Restatement (Second) of Contracts § 200(b).
  • Words are given usual and ordinary meaning. See Bukuras v. Mueller Grp., LLC, 592 F.3d 255, 262 (1st Cir. 2010).
  • Courts will not rewrite or remake the parties’ agreement. See Slatt v. Slatt, 477 N.E.2d 1099, 1000 (N.Y. 1985).
  • Reasonable, commonsense construction will be used. See Fishman v. LaSalle Nat’l Bank, 247 F.3d 300, 302 (1st Cir. 2001).
  • A lease or agreement will be construed as a whole and as a rational business instrument. See Bank v. Int’l Bus. Machs. Corp., 145 F.3d 420, 430 (1st Cir. 1998); Int’l Klafter Co., Inc. v. Cont’l Cas. Co., Inc., 869 F.2d 96, 99 (2d Cir. 1989).
  • There is a preference to give effect to all terms and avoid surplusage. See Meeting House Lane, Ltd. v. Melso, 628 A.2d 854, 858 (Pa. Super. Ct. 1998); Restatement (Second) of Contracts § 203(a).
  • Punctuation and grammar matter. See, e.g., Deerskin Trading Post v. Spencer Press, Inc., 495 N.E.2d 303, 307 (Mass. 1986) (under grammatical rules of construction, the modifying clause is usually confined to the last antecedent in the sentence).
  • Ambiguity is construed against draftsperson. See, e.g., Walters v. Nat’l Props., LLC, 699 N.W.2d 71, 75 (Wis. 2005); Restatement (Second) of Contracts § 206.
  • Specific terms govern over general terms. Royal Ins. Co. v. Orient Overseas Container Line Ltd., 525 F.3d 409, 420 (6th Cir. 2008); Restatement (Second) of Contracts § 203(c).
  • Specifically negotiated terms control over standard terms. Royal Insurance Co., 525 F.3d at 420; Restatement (Second) of Contracts § 203(d).
  • Exceptions and provisos dictate scope. See Chesapeake Energy Corp. v. Bank of N.Y. Mellon Tr. Co., N.A., 773 F.3d 110, 115 (2d Cir. 2014).
  • Construction will seek to avoid forfeiture. See Zaid Theatre Corp. v. Sona Realty Co., 797 N.Y.S. 2d 434, 436 (N.Y. App. Div. 2005).

The words themselves, interpreted under the rules of construction listed above, typically will be dispositive of issues before the court. However, to the extent a contract is ambiguous on its face, or in jurisdictions where courts are permitted to examine extrinsic evidence to ascertain whether the contract is ambiguous, courts may consider parol evidence. Parol evidence includes evidence of preliminary agreements or drafts exchanged during negotiation of the lease, evidence of course of performance or course of dealing, and evidence of custom usage in a trade. See Restatement (Second) of Contracts §§ 214–223.

Conclusion

The importance of carefully reviewing boilerplate cannot be overstated, including ensuring that all provisions reflect your client’s true intentions under the clearest and most commonsensical reading of the provisions, as well as understanding your jurisdiction’s limitations and rules. This will support a more expeditious resolution of a dispute over a provision, may avoid litigation, and may give your client the advantage in any potential disputes.

Gregory D. Call is a partner at Crowell & Moring LLP in San Francisco, California. Howard K. Jeruchimowitz is a litigation shareholder and Paul F. Stibbe is a litigation associate at Greenberg Traurig, LLP, in its Chicago, Illinois, office. Michelle D. Gambino is a litigation shareholder in Greenberg Traurig’s Northern Virginia office. Marianne L. Simonini is vice president of closing and due diligence at Heitman, LLC, in Chicago, Illinois.


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