A merger in real estate can occur in two ways; firstly, when the interest in a property converges, such as when a tenant on a real estate property makes an offer to the landlord and becomes the new owner, then this is a type of merger.
Secondly, when several adjacent properties are combined into one large parcel of land such as through re-platting, then this is a merger of titles. These two types of mergers are the most common in the real estate industry.
Execution of Mergers in Real Estate
The main principle behind mergers in any industry including real estate is based on the fact that an entity that is considered of lesser value is absorbed by a larger entity that is regarded as being of higher value. For example, a tenant to a property purchases the property and is now the owner, his position as a tenant is now considered to be less important, or insignificant as compared to his new position as the landlord. This is the main assumption underpinning all merger activities in the real estate sector and in other industries.
Explanation of the Merger Doctrine
The doctrine of merger typically only applies to agreements regarding the transfer of title. This means that other agreements that relate to different aspects of the property such as the physical condition of the building are not annihilated as they are not merged and can be enforced even after the transfer of title.
For example, let’s say that you identified a piece of land that is not yet developed and were interested in buying. After contacting the seller, you realize that the land is zoned residential, however, you want to use the land for commercial purposes by creating a sports center for the surrounding community. Upon further consultations with local experts you realize that the land can be rezoned to commercial for you to build the recreational center.
Therefore, you ask the seller to get the land rezoned to commercial before you buy it and you sign a purchase agreement explicitly stating this as a pre-condition to you buying the property. However, after several weeks of waiting for the local authorities to rezone the property, or to deny the seller’s application for the rezoning you decide to buy the land despite this small hitch.
Shortly thereafter, the seller tells you that since you are now the new owner having received the deed to the property, it is now your duty to follow up with authorities regarding the rezoning. You feel shortchanged as the seller had promised to have the land rezoned and he has now transferred his obligations to you. You approach your attorney with your complaints and he calmly tells you that the seller is no longer legally bound to honor his initial promise as it was not stipulated in the deed transfer documents.
According to the merger doctrine in real estate all prior agreements and conditions are regarded as having been merged into the title deed once it is executed; this also includes the purchase agreement. Once the deed has been executed the previous purchase agreement is annulled and the rights of both the seller and the buyer are now governed by the terms stipulated in the deed.
The only way that an obligation will be carried forward from the purchase agreement is if it is also stated in the deed.
Could the Merger Doctrine change in Future
In the past, most courts have ruled in favor of applying the merger doctrine as it is, but this trend might be changing. For example, in a recent Court of Appeals decision in Minnesota, the court ruled in favor of a provision in the purchase agreement that allowed the seller to repurchase the land he sold after a specific period, if the buyer had not started developing the property.
The buyer argued that the repurchase option had merged into the deed after the deal was closed and that it was no longer a valid obligation. However, the court ruled that the repurchase option was a condition that was supposed to be executed after the deed was transferred and as such the option was still valid.
The seller was allowed to enforce the repurchase option and buy back the property from the buyer who had not developed it. This decision indicates that the courts are now considering that not all obligations under a purchase agreement die when the deed is executed.
Application of the Merger Doctrine to Easements
Easements are typically merged into the new property once adjoining pieces of property are merged into one and the need for the easement no longer exists. You cannot revive an easement by citing the previous agreements that existed before the merger as they are no longer valid. This is a widely accepted concept by courts in most jurisdictions and the only way to establish an easement on a previously merged property is to create a new easement through the official channels.
All landowners should know that once they extinguish an existing easement through the merger doctrine, they cannot reestablish the easement by simply subdividing the land at a later date. This is because according to the law, once an easement has been terminated through a merger, it cannot be simply reinstated through subdividing the property.
However, you can create a new easement once you subdivide the merged property through methods such as implication and reservation, or through an express grant.
