Friday, June 26, 2009

Virginia's Statute of Frauds and Real Estate Transactions

In Virginia, whether a contract must be in writing in order to be legally enforceable depends on the nature of the contract: the Code of Virginia includes a "Statute of Frauds" (here, at §11-2) which lists nine "categories" of agreements which can only be enforced in court if the agreement is "in writing and signed by the party to be charged or his agent." (** An important parenthetical: in addition to the categories in §11-2, a separate statute (§8.2-201, here) requires a writing in connection with the sale of goods for more than $500, unless specific exceptions apply).

The sixth of the nine categories -- and one which is frequently the subject of disputes and litigation -- is agreements involving either (1) the sale of real estate or (2) leases of real estate for a period of more than one year.

The Supreme Court of Virginia analyzed the applicability of the Statute of Frauds in the real estate setting in the 2008 decision of Moorman v. Blackstock (276 Va. 64).

In Moorman, various members of an extended family (the Moormans) owned 194 acres on Smith Mountain Lake in Franklin County. Beginning in November 2002 and until July 2004, the Moormans and a part-time real estate developer (Blackstock), and their respective attorneys, engaged in a lengthy series of letters, faxes, and e-mails about the possible sale of the 194 acres to Blackstock. Included in the correspondence were various drafts of a purchase and sale agreement by which Blackstock would purchase the property subject to his agreement to put restrictive covenants in place which would limit the nature of future development.

One member of the Moorman family, David, became the "spokesperson" for the others in the ongoing negotiations with Blackstock (in an ancillary discussion, the Court addresses the question of whether the other family members had legally designated David as their agent, with corresponding authority to sign documents on their behalf, and concludes that the requirements of an agency designation had not been met).

The dispute arose because, during the pendency of the negotiations with the Moormans, Blackstock expended time and money (including purchasing a neighboring parcel) in the belief that he had a "deal" on which he could rely. When, ultimately, the Moormans signed a contract with someone else, he sued them and argued, among other things, that the Statute of Frauds requirement of a "writing signed by the party to be charged," had been satifsfied because of the various correspondence and draft agreements that had been exchanged.

The Supreme Court, however, viewed things differently. In particular, said the Court, the draft agreements transmitted from David Moorman and his lawyer to Blackstock were just that: drafts. According to the Court, a number of crucial provisions remained undecided throughout the negotiations, including the nature of the restrictive covenants and development plans that would apply to the property after its transfer to Blackstock. Moreover, the parties and their attorneys had manifested a clear intent to eventually sign a formal contract, signed by all of the Moormans rather than just David, and no such "finalized" contract was ever signed.
An important lesson of the decision in Moorman is that the Statute of Frauds requirement that certain contracts be in writing still has plenty of teeth, even in the age of instant communication by way of e-mail and fax. Put differently, two parties can negotiate at great length (in Moorman, for almost two years!) and send numerous documents back and forth, but unless they ultimately reach "mutual assent" on a particular document, and then sign their names to it, they are unlikely to have entered into a legally enforceable written contract.

As a final note, the Moorman decision also examines the equitable doctrine of "estoppel," and we'll save an examination of that issue for a future post.