March 01, 2002

Settling Real Estate Disputes: The Settlement Agreement (2002, 16:02)

Settling Real Estate Disputes: The Settlement Agreement

Probate and Property, March/April 2002, Volume 16, Number 2

By Dennis L. Greenwald

Once the parties have hammered out the basic terms of a settlement of a dispute, the parties and their counsel are eager to document and finalize their deal. The clients, often after having battled extensively— and expensively—want to conclude their fight quickly.  

Once the parties have hammered out the basic terms of a settlement of a dispute, the parties and their counsel are eager to document and finalize their deal. The clients, often after having battled extensively— and expensively—want to conclude their fight quickly. The lawyers are also motivated to finalize the settlement before a fickle client changes its mind. Many settlements are relatively uncomplicated, straightforward matters, such as settlements of personal injury claims, disputes over promissory notes, or simple breach of contract claims in which one party is paid cash and the parties concurrently exchange mutual releases. Settlement of a dispute involving a real estate transaction, however, often involves unwinding one transaction or creating a new transaction, or both. For example, title to property may need to be cleared; title policies (and endorsements) may need to be procured; possession may need to be delivered; governmental permits may need to be obtained; and the involvement of various third parties may be necessary to consummate the settlement.

Unlike a simple settlement in which the execution of the settlement agreement occurs concurrently with performance by each side, the settlement of a real estate dispute is often consummated in two stages. First, the execution of the settlement agreement occurs, and, second, the transaction contemplated by the settlement agreement is consummated. For example, one party might agree to sell the other party some property as part of the terms of a settlement. Such a settlement involves the creation and consummation of a purchase and sale transaction. In those instances, the settlement agreement is not self-executing; there is, in essence, an afterlife to the execution of the settlement agreement.

Because the settlement of a real estate dispute frequently involves dismantling or creating a new real estate transaction, or both, the real estate transactional lawyer is a critical part of the settlement process. Litigation lawyers who are not expert in real estate transactions may have difficulty not only in analyzing the feasibility of a proposed settlement structure but also may not possess the skills necessary to draft the transactional documents.

Structuring the Settlement

As a very general rule, when structuring the settlement of a real estate dispute, the simpler the structure, the better. Unlike the typical real estate transaction, in which the parties are motivated to collaborate to consummate a transaction that both parties desire, a settlement involves parties that have been adversarial and that will be less inclined to cooperate with each other any more than is absolutely necessary. In addition, in many real estate contracts one or both parties make representations and warranties, grant contractual indemnifications, or otherwise agree to obligations that will survive the closing of the transaction. In the settlement scenario, however, the parties usually want to be done with each other forever once a settlement is effected. For these reasons, the settlement transaction should generally be as simple as possible to avoid further entanglements between parties that, to put it mildly, simply are not getting along.

Contracts That Include Settlements or Releases

A settlement, or at least a release, is sometimes folded within the terms of a contract or a modification to a contract. Counsel should be wary of such provisions lest their client inadvertently compromise or release a claim. Although this situation can occur in almost any contractual relationship, one of the most typical instances occurs in loan modification agreements. When a borrower requests a loan modification, the lender is often unwilling to grant any concessions unless the borrower acknowledges that the lender is not in default, agrees that the borrower has no claims against the lender nor any right of offset against the amounts due the lender, and releases any claims that the borrower may have against the lender.

It is understandable why a party that is asked to grant a new concession under an existing contract might want a release. (In other words, "I’ll give you a concession, but my price is that you assure me that you aren’t holding any claims against me.") Nevertheless, 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 sometimes tries to include a contractual release of claims in which the buyer releases the seller from any liability in connection with defects in the property. The danger in such releases is that the buyer might inadvertently release the seller for the seller’s own fraud in failing to disclose defects known to the seller but unknown to the buyer. Even though language embodied in an original contract that purports to release fraud claims will probably not be enforceable, the buyer will not want to litigate that issue later on.

Even if an actual release of claims cannot be procured from the party receiving a concession in a contract modification, the party granting the concession may at least want to procure some acknowledgments. For example, suppose the buyer under a purchase and sale transaction requests an extension of time, either of the closing date or of a contingency deadline. The seller might require, as a condition to granting the extension, that the buyer acknowledge that the seller is in full compliance under the agreement and that the buyer is not aware of any outstanding claims of breach against the seller.

Scope of Releases

Releases generally come in two varieties: a limited, or special, release and a general release. A limited or special release releases only claims pertaining to certain identified matters. For instance, if the parties are in a dispute over a particular contract, they will typically release each other for all matters pertaining to the contract.

Many clients, however, will want to expand the scope by using a general release whereby the parties release each other from all claims pertaining to any and all matters or relationships. One advantage of a general release is that it precludes any future dispute about what was, and what was not, specifically released. The disadvantage is that a party giving the general release might have a claim against the released party that is unrelated to the subject of the pending dispute and, further, that the party giving the release is unaware of the claim (or neglects to recall it) at the time of the settlement.

Counsel should carefully advise a client that is considering giving a general release that the client will be releasing all claims pertaining to any relationship the client might have with the released party. Only if the client is absolutely certain that it has no other relationship with or potential claim against the released party should a client give a general release.

Releasor and Released Parties

A common error made by lawyers is to define too broadly the parties granting the release (releasors) or the parties being released (released parties). Obviously, the actual litigants and certain other parties directly involved in the subject of the dispute should be giving, as well as receiving, releases. 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 broader releases are often given without considering the fact that the party issuing such a release probably has no apparent, actual, or other legally recognized authority to release claims on behalf of any other parties. Purporting to issue such a release may, at best, be ineffectual. At worst, the releasor might ultimately be required to indemnify the released party for any claims that such third parties elect to pursue against the released party.

A simple example is illustrative. Assume a buyer and seller are in a dispute over a real estate purchase contract. When they settle their differences, they each purport to release the other on behalf of themselves "and their respective agents." But their respective real estate brokers may have claims completely independent of the claims of the parties to the contract. The releases by the contracting parties on behalf of their respective agents may be unenforceable against either of the brokers. If the buyer’s broker files a claim against the seller seeking to recover a commission or other damages, the buyer might have implicitly agreed to indemnify the seller for such a claim. Although the statutes of frauds normally preclude a broker from pursuing a claim against a party with whom the broker does not have a written contract, a buyer’s broker might have a claim against a seller under a sub-agency theory. Likewise, a seller’s broker might have a claim against a buyer if the purchase contract states, as some do, that if the buyer breaches, the buyer agrees to pay the seller’s broker’s commission.

There is a corresponding danger in too broadly defining the released parties. Just as the parties should not issue releases on behalf of themselves, their agents, employees, and stockholders, they also should not necessarily release claims against the other parties’ agents, employees, stockholders, and the like. If the releasor releases claims against such other third parties, the releasor might inadvertently release a number of people that the releasor really does not intend to release. This issue is most acute when issuing a general release because, literally read, the releasor party is releasing all of the agents, employees, and stockholders of the released party from any and all claims whatsoever. Obviously, a releasor does not want to release anyone who is not readily identifiable.

Understand, however, that the foregoing is for general consideration only. Indeed, there may be times when a party might justifiably insist that the releasor release claims on behalf of its employees, shareholders, partners, and certain other third parties. For example, a client in a dispute with a limited partnership may be worried that one of the limited partners will file a claim against it. Although one would think that the limited partners would have no claim independent of the partnership (and any derivative claim of a limited partner would have been released by virtue of the partnership’s release), the client may nonetheless want the partnership to bear that risk and indemnify the client.

Irrespective of whether the release is general or limited, and independent of the scope of the parties released, 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 is of pending litigation, lawyers sometimes include a statement in the release that the parties are releasing any claim against the other party (and their counsel) for malicious prosecution. This issue is of particular sensitivity to lawyers because, regardless of whether the releases by the parties are general or limited, if the lawyers for the parties are not released from claims of malicious prosecution, an argument might exist that a party still holds the right to pursue such a claim against the opposing counsel following the execution of the settlement agreement.

The specific answer to this, of course, is dependent on applicable state law, and there is a very strong argument that a general release or a limited one that releases claims relating to the litigation constitutes a de facto release of claims for malicious prosecution—whether against the parties to the litigation or their counsel. This is because a claim of malicious prosecution against a lawyer must, arguably, be supported by a validly existing claim against the client, which claim will have been released. Moreover, the parties arguably intended, by their release of claims against each other with respect to the litigation, to release any malicious prosecution claims against each other’s respective counsel. Nevertheless, specifically including counsel in the release is an ounce of prevention that can only help.

Covenants Not to Sue

Many settlement agreements include not only a release by the parties, but also a separate covenant by the parties not to sue on any of the claims that are released. Although these covenants not to sue are somewhat commonplace, they should be unnecessary, if not superfluous. If a claim is released, there is no basis for filing a lawsuit; accordingly there should be no reason for a party to covenant not to sue based on a released claim.

Assumption of Risk About Facts

It is advisable that the settlement agreement include a statement that each party assumes the risk that the facts available to it at the time of execution of the settlement agreement may turn out to be different from what it then believes. Remember, the settlement agreement is supposed to resolve the disputes at hand fully and finally. For this reason, it is beneficial to preclude any further claim by a party that the case was settled based on a mistake of fact or even, perhaps, based 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. As discussed more fully below, one exception to this is a representation by each party that all or any portion of the claims that are being released have not previously been assigned.

No Admission of Facts or Liability

Lawyers have a tendency to recite extensive facts or alleged facts in the settlement agreement, usually in the "Recitals" section. Although stating the factual context in which the settlement has arisen makes good sense, counsel should be wary of making any statements that might constitute an admission of certain 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 there are going to be admissions of factual allegations, the admitted facts 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 generally better to state the facts as allegations or contentions made by each side and perhaps even 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 generally best not to make any representations or warranties in a settlement agreement. The first exception is a representation by each party that all or any portion of the claims that are being released in the settlement agreement have not been assigned or otherwise transferred. The second exception is when a new or restructured transaction is contemplated as part of the settlement agreement. For example, if the parties agree to a purchase and sale transaction as part of the settlement, then certain representations and warranties might be necessary as part of that transaction.

Execution by Counsel

Many settlement agreements include a signature block for counsel for the respective parties, preceded by words "approved" or "approved as to form" or similar language. No legitimate justification for requiring counsel to sign a settlement agreement has ever been explained to this author. Indeed, in advising a client on whether to sign a document, it would be prudent first to determine the precise reason for and legal ramifications of the client’s doing so. Yet lawyers routinely sign settlement agreements themselves without being able to explain what their execution of the document means, much less what, if any, consequences might ensue.

The usual justification for requiring a lawyer’s execution of the settlement agreement is that it proves that the parties were represented by counsel and that they understood what they were signing. Although it may be beneficial to have such evidence, lest a signatory later argue that he or she misunderstood what was signed or was taken advantage of, there are other ways of proving this. The settlement agreement could simply include an acknowledgement by the parties that they were represented by counsel and even identify their 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. Even outside of bankruptcy, a transaction can be construed as a fraudulent conveyance in violation of the applicable state’s Uniform Fraudulent Conveyance (or Transfer) Act. It is therefore appropriate to consider including a revivor clause to provide 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. In short, the settlement agreement would fundamentally be unwound. A revivor provision is more likely to be enforceable, of course, in the situation in which one party pays another as part of a settlement. When the settlement involves complicated transactions between litigants and nonlitigant third parties, the enforceability of such a revivor provision becomes more dubious—if only from a practical standpoint. It would be difficult, if not impossible, for example, to unwind a transaction after title has been conveyed and, perhaps, subsequently conveyed to a bona fide purchaser. Unwinding the release of judgment liens, attachments, levies, and the dismissal of the underlying lawsuit poses similar problems. There are many scenarios in which, even though the underlying claims might be revived, the original security for such claims has been released and there exists no practical way to resurrect that security.

Miscellaneous Provisions

As in other contracts, settlement agreements typically contain various boilerplate provisions. It would be impossible to address all of those provisions in this article, but two in particular merit discussion.

Confidentiality Provisions

Confidentiality provisions are sometimes included. These usually require that the parties keep the terms of the settlement agreement confidential and sometimes require that certain information disclosed during the settlement negotiations be kept confidential. If such a provision is to be used, the provision should be subject to equitable relief, which means that the provision should expressly state that monetary damages would not be an adequate remedy at law and that the aggrieved party should be entitled, among all of its other rights and remedies, to seek injunctive relief.

The chief problem with confidentiality provisions is that they often do not provide any practical benefit, other than a psychological deterrent. Once the confidentiality provision has been violated, it is too late, as the saying goes, to "uncrack the egg." Thus, it may be too late for injunctive relief to be of any value, and monetary damages may be too speculative to be enforceable or may simply be nonexistent.

Some contracts tie the confidentiality covenant to a liquidated damages provision. Many jurisdictions, however, permit enforcement of a liquidated damages provision only if it can be demonstrated that, at the time of execution of the contract, it was difficult or impossible to estimate the actual damages a party would suffer and that liquidated damages constituted a fair and reasonable estimate of damages. Imposing a liquidated damages concept on a confidentiality provision can be problematic because it may be difficult to argue successfully that the agreed-upon amount of liquidated damages actually represented a fair and reasonable estimate of the actual damages. Liquidated damages might look more like a penalty, and contractual penalties are generally disfavored by courts. Nevertheless, many lawyers include such a confidentiality provision merely for the "in terrorem" effect, thinking that the mere threat of a lawsuit would be sufficient motivation to keep a party from breaching it.

If a confidentiality provision is to be used, it should be carefully drafted to allow a party to disclose confidential information, among others, to its accountants, financial advisors, legal counsel, prospective lenders, and the like.

Further Acts Provisions

Another standard provision that needs to be considered carefully is a so-called further acts provision. Although the precise scope of such a provision varies, a further acts provision basically requires each party to sign additional documents and perform such additional acts as may be necessary to consummate the transactions contemplated by the agreement. When the lawyers are concerned that they have not identified in the contract all of the actions required to be taken or all of the documents to be executed or delivered by a party, some form of a further acts provision may be advisable. In the context of a settlement, however, the parties generally prefer that there be no possibility of further entanglements. For that reason, further acts provisions should be used only sparingly in settlement agreements.

A vague or overly broad further acts provision can be a powerful weapon in the hands of a party that wants to delay the closing of a transaction, dredge up claims of breach, or otherwise use such a provision as a sword (or shield) in litigation. As a result, ironically, a further acts provision, which is designed to compel the parties to perform in a manner consistent with the intent of the contract, can be used by one party to avoid contractual obligations by contending that performance is excused because the other party is not performing the further acts required.

Conclusion

The most common mistake lawyers make when settling real estate disputes is assuming that these disputes easily fit within the settlement mold for simple disputes. Real estate disputes are rarely simple and often involve unwinding, reviving, or creating a real estate transaction. That real estate transaction may, or may not, have anything to do with the original dispute between the parties. In any case, counsel should always bear in mind that there are really two contracts rolled into one—one is a settlement and the other is some form of real estate transaction.

 

Dennis L. Greenwald is a partner at Greenwald, Pauly, Foster & Miller in Santa Monica, California, and a chair of the Section’s Condition of Premises Committee (K-1).