Here We Go Again – Court Says Family Deal is “No Deal”

The Iowa Court of Appeals continues to deal with cases involving various aspects of contract law.  Recently, they have ruled (in spite of a clear statutory provision to the contrary) that a post-nuptial contract is invalid, that the purchase of a residence via sheriff’s deed was not good (allowing a lender to sit on the sidelines and create a huge problem).  Now, they have said that notice of forfeiture provisions governing a real estate contract cannot be waived via a separate written agreement which specified that the whole transaction was really was to be a gift of the property if certain conditions were satisfied.    

Here, the parents acquired an 80-acre tract of farmland in 2002.  To get the property, they had to pay $16,000 to other heirs.  To do that, the parents took out a note and mortgage on the property.  A few months later, Mom and Dad began the process of transferring the tract to one of their sons.  They had a lawyer prepare a standard real estate contract, consent to forfeiture of real estate contract, warranty deed, four promissory notes and a letter.  The documents were signed by all of the parties and provided for the transfer of the land to the son within five years subject to certain conditions – the parents reserved the right to forfeit the son’s rights if he didn’t satisfy the conditions (assume a pay off the balance of the $16,000 note, pay all real estate taxes, maintain insurance, maintain the property in good repair, and comply with certain oral understandings of the parties – the son had to quit drinking and driving illegally, help his Dad with farming activities and sign a $10,000 note for each of his siblings at the end of the five-year term).  The contract also specified that the deal was a gift, except for the balance of the $16,000 note that the son had to pay off.  Also, the contract said that the son could not assign the contract, convey it, gift it or otherwise dispose of any part of the property without the parent’s consent.  The son and his wife signed the consent to forfeiture of real estate contract, and a week later signed the real estate contract.  The forfeiture agreement said that if the son violated any term, condition or provision of the real estate contract, then the parents could record the consent as evidence of default and the real estate contract would be deemed completely terminated, and any amount previously paid would be deemed “rent.”  The agreement also specified that the son (and his wife) waived any required notice of default or any other defense that they might have.

The son complied with the terms of the deal for a time, but then Dad died and Mom paid off the balance of the $16,000 note early.  The son then got a divorce, and shortly thereafter Mom recorded the consent to forfeiture of the real estate, notifying the son the next day.  Neither the son, nor wife (the divorce had not yet finalized) claimed any interest in the property  - after all, a deal is a deal.  The son then executed a will leaving all of his property to his two daughters, and then unexpectedly died shortly thereafter.  About a month later, Mom sold the land to another son for $60,000.  About a year later, the son’s ex-wife, filed a petition seeking a declaratory judgment that either she or the estate were the equitable owners of the tract.  She claimed that Mom and Dad had entered into a binding contract to sell the land and that the forfeiture agreement was invalid under Iowa law.  The trial court disagreed, holding that the transaction was a conditional gift and not a contract.  Thus, Iowa real estate forfeiture law (Iowa Code Sec. 656) which provides for a 30-day notice, did not apply.  The court noted that the parents had set up a scenario involving a conditional gift to provide an incentive for their son to change his lifestyle, but that he had breached the conditions of the gift and Mom invoked her right to cancel the deal.  The court also ruled that a contract is a contract – the son and his wife had given up their right to notice of forfeiture via the separate agreement.  The ex-wife appealed.

On appeal, the court reversed.  The court held that the transaction involved a contract, not a conditional gift.  The court said a bargained-for exchange was involved that amounted to legal consideration.  That made the transaction a contract rather than a conditional gift.  Thus, the transaction became subject to the forfeiture provision of Iowa law – to forfeit a buyer’s interest, the seller must serve written notice on the buyer 30 days before forfeiture.  That forfeiture provision, according to the court, cannot be waived because it is against “public policy.”  There isn’t any Iowa statutory provision on this point, so the court cited the Restatement (Third) of Property (Mortgages), a 1939 California Court of Appeals case, and a 1989 Iowa Court of Appeals case, none of which are directly on point.  Because the transaction was structured as a real estate contract and Mom had not provided valid notice to the son of the forfeiture, the contract was not forfeited.  Fritz v. Fritz, No. 8-997/08-1088, 2009 Iowa App. LEXIS 204 (Iowa Ct. App. Mar. 26, 2009).

Note:   Again, the court ignored the intent of the parties in making its decision.  Indeed, that’s the “take-home” from all of the court’s recent contract-related decisions.  Parties would do well to make a point of that.  The court seems to have elevated legal formalism over equity in contract settings.