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Deerhurst Estates v. Meadow Homes Inc.

Decided: November 10, 1960.


Goldmann, Freund and Hetfield. The opinion of the court was delivered by Freund, J.A.D.


[64 NJSuper Page 140] This is a suit to recover damages for an alleged breach of warranty in a contract for the sale of land. The issues of liability and damages were determined separately by the Law Division, pursuant to R.R. 4:43-2. The two trials, heard without jury, resulted in findings that defendant had breached certain warranties and was liable to plaintiff in the sum of $29,700. Defendant appeals from both of these judgments.

Plaintiff corporation is owned by Joseph Lenkowsky, who on June 14, 1954 entered into a written contract with defendant Meadow Homes, Inc. (Meadow), represented by its owner, M. Michael Meadow, for the purchase of 267 lots in East Brunswick Township, the purchase price amounting to $425 per lot. On June 18, pursuant to express permission contained in the contract, Lenkowsky assigned his interest to plaintiff. On August 2, 1954 defendant conveyed the lots to Deerhurst Estates (Deerhurst) for $40,000 cash, taking a three-year note secured by a purchase money mortgage for the balance.

While the contract of sale contains 11 warranties and representations, the significant ones for the purposes of this appeal are sections 3(b) and 3(d), which read as follows:

"3. Seller represents and warrants that:

(b) The sub-division as outlined in the above mentioned site plan has been tentatively approved by the Planning Board of East Brunswick Township and all other agencies having jurisdiction over sub-division of lands.

(d) There is no regulation under or provision of zoning, Planning, Building Permit, Building Ordinances of East Brunswick Township which is inconsistent with the original submission of the entire sub-division by seller as outlined by the above site plan as to lot sizes, street layout, grades, street improvements, or other requirements so that there is nothing in said ordinances or regulations thereunder that will prohibit the filing and approval of the remaining 7 sections and the erection thereon of buildings similar to those erected in Sections I and III and similar to the plans filed or proposed for Sections IV and V."

Deerhurst alleged, and the trial court found, 50 N.J. Super. 140 (Law Div. 1958), that both of the above warranties were breached, and that plaintiff was thereby put to great additional expense in enlarging 198 of the 267 lots and otherwise complying with more stringent official specifications than the warranties would have led Deerhurst to expect. In stating his conclusion that Meadow did not have the promised "tentative approval," the trial judge ruled as a

matter of law that the parties' use of the phrase, "tentative approval," in section 3(b) of the contract, was a reference to N.J.S.A. 40:55-1.18, a section of the Municipal Planning Act of 1953, which took effect on January 1, 1954. The judge declined to consider parol evidence proffered by defendant in an effort to demonstrate that by use of the word "tentative" the parties had merely intended a synonym for "preliminary" and not a word of art. Said the judge (at 50 N.J. Super. 144-145):

"There is sharp conflict in the testimony as to whether the cited statute, supra , was specifically referred to by the contracting parties in connection with the phrasing of paragraph 3(b) of the document, and whether or not declaration was then made on behalf of defendant that no approval had been had by it under such statute and that defendant in that respect could sell and was offering to sell only what it had and no more. In view of the conclusions of law herein arrived at, a finding of fact upon such conflict would be without significance, for the reason that what would be thus established would tend to show not the sense of the writing but an intent wholly unexpressed therein."

Before considering Meadow's assertion that the trial court erred in the above ruling, we must examine defendant's initial argument. Meadow's contention is that since Deerhurst, through its agent, Lenkowsky, concededly had full knowledge of the alleged false warranty prior to receipt of the deed, the subsequent acceptance of the deed constitutes a waiver of the right to recover damages for the false warranty. In the alternative, Meadow argues that upon learning of the breach, Deerhurst was faced with an election, and because it elected to proceed with the closing of title, it is estopped to deny that Meadow has adequately performed.

Although many of the terms of the contract of sale, including the pertinent warranties, sections 3(b) and 3(d), were not expressly incorporated in the deed, it is clear that defendant cannot rely on the traditional notion of merger by deed -- that in contracts for the sale of land, acceptance of a deed is deemed prima facie full execution of an executory contract to convey. Long v. Hartwell , 34 N.J.L. 116

(Sup. Ct. 1870); Dieckman v. Walser , 114 N.J. Eq. 382 (E. & A. 1933). In the first place, covenants which are collateral to and independent of the contract form an exception to the doctrine of merger. A covenant may be considered collateral either because it has no relation to the title, possession, quantity or emblements of the transferred lands, Dieckman v. Walser, supra , 114 N.J. Eq. , at p. 386, or because delivery of the deed is only a part of the performance contemplated by the contract. Curtiss-Warner Corp. v. Thirkettle , 99 N.J. Eq. 806 (Ch. 1926), affirmed 101 N.J. Eq. 279 (E. & A. 1927); Campbell v. Heller , 36 N.J. Super. 361, 367 (Ch. Div. 1955). It does not appear to be seriously contested that the relevant warranties in the instant case are collateral to and independent of the contract. But cf. Bogert v. Citizens First National Bank and Trust Co. , 131 N.J.L. 218, 224 (E. & A. 1944). All doubt is eliminated, however, by section 5 of the contract, which provides that:

"All terms and conditions and warranties not performed before or at closing of title shall survive said closing and remain in full force and effect."

This contractual clause evidences conclusively an intention that the warranties here involved should survive the transfer of certain of the rights and obligations from contract to deed. It is the intention of the parties which is to be given effect, as the doctrine of merger is simply a rule of presumed intention. See West Paterson Sand & Gravel Co. v. Great Notch Corp. , 107 N.J.L. 309 (E. & A. 1931); Annotation, 38 A.L.R. 2 d 1310, 1317 (1954); Restatement, Contracts , ยง 240(2)(b) (1932). But while section 5 effectively ensures that none of the rights and obligations contained in the contract of sale will be extinguished by their omission from the deed, it does not in itself preclude a waiver of, or election to forego, any of these rights.

Meadow urges that Deerhurst, having learned prior to the closing of title that Meadow had not obtained and was not

going to obtain "tentative approval" (in the statutory sense of the term), was faced with the choice of whether to proceed with the contract or to rescind and sue for fraud and deceit. Meadow insists that, by electing to proceed, Deerhurst waived all rights accruing by way of the breach.

Meadow has confused the remedy for fraud and deceit with the remedy of action on the contract for breach of warranty. They are mutually exclusive. Bankers Indemnity Insurance Co. v. Henry Henkel & Sons , 118 N.J. Eq. 244, 247 (Ch. 1935). That this action is of the latter variety is clear from both the pretrial order and the opinion of the court below. 50 N.J. Super. , at p. 141, supra.

In the instance of a fraudulently induced contract, a knowing misstatement has been made, on the basis of which the defrauded party signs the instrument. Assuming that the contract is still executory when knowledge of the fraud is obtained, the majority view requires the defrauded party either to affirm the contract or to rescind it. See Annotation, 13 A.L.R. 2 d 807, 856 (1950). The theory behind this position is that if the defrauded party chooses to proceed with the contract as it stands, he has suffered no injury by reason of the fraud. Lembeck v. Gerken , 86 N.J.L. 111, 117 (Sup. Ct. 1914). Rather than allow the injured party "to speculate upon the fraud of the other party * * * [and] recover for self-inflicted injuries * * *," the law concludes that he has waived his right to damages for the fraud. Thompson v. Libby , 36 Minn. 287, 31 N.W. 52 (Sup. Ct. 1886). An alternative theory is that the decision to proceed with performance in the face of the fraud amounts to the making of a new contract. Simon v. Rossier ...

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