One can never be too careful in drafting business and property contracts. Unless remedies for a possible breach of the contract are carefully prepared by a business lawyer, unexpected consequences can occur. On December 6, 2011, the North Carolina Court of Appeals interpreted a contract to purchase condominiums. In The Vue – Charlotte, LLC, et al. v. Sherman (COA 11-595), an agreement for the purchase of condominiums contained a liquidated damages provision. The purchasers argued that because the agreements provided only that the seller may recover liquidated damages in the event of the purchasers’ default but also provided that the purchasers were entitled to any available equitable remedies in the event of the sellers default, there were no remedies available to the seller other than the liquidated damages. The Court of Appeals agreed with that argument and concluded as a matter of law that the seller was precluded from enforcing the agreement by specific performance.
In another case, the North Carolina Court of Appeals discussed the implications of a drafting mistake in a deed. In S.T. Wooten Corporation v. Front Street Construction, LLC (COA 11-649), a deed mistakenly described a conveyance of a “1-1/2 fee simple interest” in the property rather than the entire undivided fee simple interest that both the buyer and the seller contemplated. After the sale of the property, a bank made a large loan to the purchaser to fund development of the property and the bank’s deed of trust described the full undivided interest in the property as collateral for the loan. Subsequently, a subcontractor began work on the project. After the work began, the buyer and seller discovered the error and recorded a corrected deed conveying the full undivided interest in the property to the purchaser. Upon learning of the corrected deed, the bank recorded its deed of trust a second time.
When work was finished on the property and the subcontractor was not paid, the subcontractor filed a claim of lien on the property and filed a suit for money owed claiming that its lien had priority over the deed of trust of the bank with regard to the ½ interest in the property that had been mistakenly omitted from the original deed. After the subcontractor filed suit, the bank asserted a counterclaim seeking reformation of the 2006 deed between seller and purchaser and also seeking a declaratory judgment that the deed of trust was superior to the subcontractor’s lien.
The Court of Appeals found that the mistake in the original deed created a constructive trust in favor of the purchaser and that the subcontractor did not begin work or furnish any materials in reliance upon the error in the original deed. The Court of Appeals found that the trial court did not err in ordering reformation of the deed nor in declaring that the deed of trust was superior to the subcontractor’s lien.