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1404 Washington Street, LLC v. Riggins, Inc.

A-1682-08T3 (N.J. Super. App. Div. 2009) (Unpublished)

CONTRACTS; REFORMATION — Every contract in New Jersey, including real estate contracts, includes an implied covenant of good faith and fair dealing and where a deed does not accurately reflect the intent of the parties as stated in their sales contract, the deed may be reformed if the covenant would be violated by not doing so.

A contract to sell a gas station was executed twenty years before the closing took place. Because the seller planned on moving its operation across the street, the deed was to contain a restriction precluding the use of the property as a gasoline service station or automotive repair and service center. The closing was delayed for all of that time because the property required environmental remediation. Two days before closing, the seller’s attorney sent a copy of the proposed deed to the buyer’s attorney. The deed contained a provision more restrictive than the language called for by the contract of sale. No issue was raised regarding the restrictive language, and the closing took place. When the buyer received a copy of the recorded deed, he noticed the language of the restriction. After the parties could not agree as to whether the deed had to conform to the contract, a lawsuit ensued.

The lower court held there was “equitable fraud” and ordered that the deed be reformed to conform to the language within the contract. It concluded that even though the seller forwarded the deed two days before closing, it had a duty to advise the buyer of the changed language.

The seller appealed, but the Appellate Division affirmed on different grounds. It disagreed that the seller should have notified the buyer about the difference in language. The Court criticized the lower court for citing no authority for that proposition. However, it held that a more basic proposition applied to support the lower court’s conclusion – the duty of fair dealing. Every contract in New Jersey includes an implied covenant of good faith and fair dealing, and this duty applies to real estate transactions. Rather than imposing a specific duty of notice on the seller, the Court preferred to rely on the duty of fair dealing as a basis to require that the deed’s restriction reflect the stated intent of the parties. Accordingly, it concurred with the lower court that the deed had to be reformed. The Court declined to rule on the issue of whether the restrictive language in the contract precluded the new owner from using the newly acquired property in conjunction with other property. Since the buyer stated it had no present plan to utilize the property in this manner, and the parties agreed that the intent of the contract was to preclude competition for the seller’s gas station, the Court declared it would “leave to another day” the issue of whether the reformed language achieved that intent.

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