On November 24, just 48 hours before the National Association of Realtors’ settlement agreement headed to final approval, the Department of Justice filed a statement of interest in the lawsuit.
The filing indicated that the DOJ did not participate in the underlying litigation, but it challenged the settlement’s provision that requires buyers and buyers’ agents to enter into a written agreement before touring a home. This provision raises concerns under antitrust laws that could be addressed in multiple ways, according to the DOJ’s statement.
The DOJ suggested rectifying the issue by eliminating the buyer broker agreement requirement or to disclaim that the settlement creates any immunity or defense under the antitrust laws. Otherwise, the court could clarify that the settlement approval affords no immunity or defense for the buyer-agreement provision. The DOJ believes the settlement could limit the ways buyer brokers compete for clients.
The final hearing is scheduled for November 26 in Missouri. The NAR said in a statement that it will advocate for a final settlement that day. The statement suggested that the settlement is not what the NAR wants, but that it is preferable to continued litigation and the uncertainty of a jury verdict.
We’ll see lots of news on this topic this week and next week!
In the meantime, Happy Thanksgiving wishes for you and your family!
Heads up, dirt lawyers, this is another case dealing with drafting issues. Please read it carefully and apply its concepts the next time you are asked to draft a right of first refusal.
Crescent Homes SC, LLC v. CJN, LLC* involved a contract for CJN to develop 32 lots in a subdivision for sale to Crescent Homes. Crescent Homes would build single-family homes on these lots for sale to homebuyers. The contract referenced a “Future Phase on adjacent property owned by CJN and contained the following paragraph:
“Right of First Refusal: At the Initial Closing, (CJN) will grant to (Crescent) a right of first refusal with respect to the lots cross-hatched and shown on Exhibit ‘A-2’ as “Future Phase” and any additional lots that may from time to time be annexed or otherwise included in the Subdivision. A memorandum of such right of first refusal in a form reasonabl(y) acceptable to the Parties will be recorded in the public records of Greenville County at the Initial Closing.”
CJN did not start development of the future phase because of cost concerns. Crescent brought a lawsuit for breach of contract asserting CJN delayed the initial closing by, most significantly, failing to maintain the lots free from trash and debris. Crescent sought specific performance and other remedies.
CJN entered into a contract with Douglas Clark making termination of the right of first refusal in the Crescent contract a contingency. When CJN provided a copy of the Clark offer to Crescent, Crescent responded by offering $700,000 to purchase the property and by filing a lis pendens. Crescent notified CJN that even though the right of first refusal was binding, Crescent was not required to exercise or waive it at that time because the initial closing had not yet occurred.
Crescent asserted that the right of first refusal had not been delivered and was not capable of being validly exercised at that time. Clark withdrew his offer for reasons unrelated to this controversy.
The initial closing took place and the parties began the process of developing the lots in the first phase of the subdivision.
CJN filed a lawsuit against Crescent seeking a declaratory judgment and alleging abuse of legal process. The suit alleged that that the right of first refusal was invalid and Crescent had filed four lis pendens for the ulterior purpose of preventing the sale of the future phase property to third parties. CJN also answered Crescent’s complaint asserting counterclaims of breach of contract and quantum meruit/unjust enrichment and seeking remedies of specific performance and monetary damages.
CJN filed a motion for partial summary judgment alleging the right of first refusal was void because it constituted a restraint on the alienation of the property. The Master denied the motion, finding factual disputes and novel issues required further inquiry.
CJN continued to market the property and obtained at least one additional offer. Crescent filed a motion to consolidate the cases. CJN amended its complaint, adding causes of action for tortious interference with a contractual relationship and unfair and deceptive trade practices.
The Master bifurcated the proceeding and tried CJN’s cause of action for a declaration that the right of first refusal was unenforceable. Crescent moved to dismiss, arguing no justiciable controversy as the matter was not ripe because the previous offers had been withdrawn.
The Master denied that motion and found the right of first refusal to be unenforceable because it was an unreasonable restraint on the alienation of an interest in land, stating “based on the language used in (the paragraph), the court is unable to interpret and/or give meaning to the parties’ agreement without substantially and significantly creating terms and conditions that the parties themselves could have and should have included.” This appeal followed.
The Court of Appeals held that the matter was justiciable once a bona fide offer had been made. Neither party provided cases regarding ripeness in which offers were made and subsequently withdrawn.
As to the enforceability of the right of first refusal, the Court stated that such a right does restrain an owner’s power of alienation, but the question becomes whether the right unreasonably restrains alienation.
The Court cited a prior case holding that a right of first refusal was unenforceable because it failed to identify the property it encumbered, failed to contain price provisions and failed to contain procedures governing the exercise of the right. The Court found those factors present in this case and affirmed the Master’s finding of unenforceability.
Dirt lawyers, a rule against perpetuities issues was also raised against the right of first refusal, but the Court held it did not have to reach that issue. That is drafting challenge that we will save for another day. The bottom line in this case is that drafting real estate documents requires a great deal of skill and continuing legal research. Be careful out there!
*South Carolina Court of Appeals Opinion 6093 (November 20, 2024)
Court of Appeals holds arbitration clause unconscionable
Photo from PalmettoBluff.com
315 Corley CW LLC v. Palmetto Bluff Development* involves an appeal from Beaufort County arising from the sale of real estate in the Palmetto Bluff Development to homeowners who ultimately became plaintiffs in this case.
Palmetto Bluff is a planned residential community. Purchasers, by accepting deeds, automatically become members in the Palmetto Bluff Club. Club membership is further memorialized by a Club Membership Agreement. The governing terms of the Club are set out in the Club Membership Plan. The Club is a for-profit entity which retains the power, according to the parties, to unilaterally change its fees and policies with no input from Club members.
In 2017, a clause was added to the Membership Agreement stating that disputes surrounding the Membership Agreement will be resolved by mandatory arbitration in accordance with the rules of the American Arbitration Association (AAA), applying the substantive law of South Carolina.
In 2020, several homeowners complained that the Club was planning to make changes that they understood would limit the ability of their short-term tenants to use the Club’s facilities. After failed mediation attempts, this lawsuit was brought in 2022. The plaintiff homeowners then demanded arbitration.
Later in 2022, the homeowners asked the circuit court to stay arbitration and sought summary judgment on the alleged invalidity of the arbitration clause. The defendants moved to compel arbitration. The lower court held that the arbitration clause was invalid because the agreement was unconscionable.
The Court of Appeals agreed that the agreement was unconscionable because the homeowners lacked a meaningful choice in entering the agreement and because the agreement can be unilaterally modified.
The Court cited cases to the effect that whether one party lacks a meaningful choice in entering the arbitration agreement typically speaks to the fundamental fairness in the bargaining process. Courts consider the relative disparity in the parties’ bargaining power, the parties’ relative sophistication, whether the parties were represented by independent counsel, and whether the plaintiff is a substantial business concern. Contracts of adhesion, according to these cases, are standard form contracts offered on a take-it-or-leave-it basis with terms that are not negotiable. However, contracts of adhesion are not per se unconscionable. Instead, adhesion contracts are not unconscionable in and of themselves so long as the terms are even-handed.
The Court of Appeals held that the contract at issue is unconscionable because there is no conceivable potential for bargaining power on the part of those whom the provisions purport to bind. There was an absence of meaningful choice. The Court also held that the agreement was oppressive and one-sided because it limited the award of treble damages, regardless of whether they are construed as compensatory or punitive.
I recommend that South Carolina dirt lawyers read this case in detail and apply its guidelines in drafting documents for developer and builder clients.
*South Carolina Court of Appeals Opinion 6074 (Filed July 24, 2024, Refiled November 13, 2024)
In the Matter of Bush* resulted in a disbarment of a dirt lawyer who used a common “robbing Peter to pay Paul” scheme to steal from clients. The case involved three disciplinary complaints.
The first complaint revolved around the failure to wire $334,000 to a lender to pay off a mortgage in a real estate closing. The lawyer eventually admitted he used the money to replace funds he misappropriated from another closing.
The second complaint arose when the lawyer issued a closing protection letter and a title insurance commitment despite the fact that his title insurance company had suspended him as an agent and his title insurance agency license had expired. The lawyer received funds for this closing but, again, failed to satisfy the prior mortgage. The lawyer eventually admitted he used the funds to pay off the underlying mortgage for the closing described in the first complaint.
After the lawyer was placed in interim suspension by the Supreme Court, he responded to a third client whose mortgage had not been satisfied that, “I am going to plow back in to this and let me talk with some colleagues about a way to get a better resolution quickly.” The lawyer did not tell the third client that he had failed to satisfy her mortgage. Instead, he provided false information to the client regarding the status of the debt. The lawyer finally admitted that he had stolen the funds.
It’s amazing that a few bad apples continue to employ these deceptive techniques that eventually come to light. It is impossible to hide this type of scheme forever because the economy always ebbs and flows. Even a small economic downturn can result in the failure of the next closing to materialize. Without the funds from the next closing, the mortgage from the prior closing is never paid, and the house of cards falls quickly. In this case, the lawyer’s former title insurance company received a claim from one of the lenders who was not paid. A title insurance complaint will also cause the house of cards to fall quickly.
Lawyers, please read this case carefully as a model of what not to do! Be careful out there!
Late in 2023, this blog discussed multiple class action lawsuits across the United States attempting to hold brokerage companies responsible for conspiring to keep residential real estate commissions artificially high. We have a development.
A Federal judge in Missouri said on October 31 that he will approve a $110 million settlement with nine brokerage companies. In May, a similar $208 million settlement was approved. And two more orders are expected in November, when the same judge weighs a pair of settlements against the National Association of Realtors and HomeService of America.
This blog also discussed last November that a similar class action was brought in South Carolina. Dirt lawyers, I would love to know what you are seeing in your markets. Are commissions now being negotiated to avoid the potential liability? I’d love to hear what’s going on out there.
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