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In the Matter of Yates

368 N.J. Super. 226, 845 A.2d 714 (App. Div. 2004)

DEEDS; TRUSTS—A parent taking a deed as custodian for a child as part of the parent’s estate plan, can reasonably be treated as having created a trust over which the parent has control such that the parent can sell the property later if the proceeds are retained in trust for the child’s benefit.

A father purchased a home. Although he was the sole source of the funds for the purchase, the deed named him as “custodian” for his son. He bought the house because he wanted to provide a home for his son and his son’s mother. He took title in his own name as part of his estate tax planning.

The son and the son’s mother had lived in the house for less than two years when the son’s father entered into an oral contract to rent the house to an unrelated party, as a monthly tenancy with an option to buy. The agreement was that the tenant would be responsible for routine maintenance and the owner would pay the real estate taxes and insurance. Because the property was in a state of disrepair, it was agreed that the tenant would have the right to perform major renovations to the property. There was no time limit for exercising the option to buy, but both parties understood that it needed to be exercised within a reasonable time.

Over the next ten years, the tenant made numerous property improvements. When the tenant was ready to buy, the house’s owner orally agreed to honor the option price. The tenant applied for a mortgage and the bank wanted to see a written purchase contract. In response, the owner prepared an “Offer to Purchase Real Estate,” which the tenant signed. Then, when the tenant got the mortgage commitment, he was unhappy with some of its terms because the loan was more costly than expected. The tenant spoke with the owner, and they agreed to postpone the closing so that the tenant could accumulate money and thereby be able to post a larger down payment. That would reduce the carrying charges.

Two years later, the son died, leaving the owner and the son’s mother as equal beneficiaries of the estate. A month after that, the tenant was ready to close on the property, but the owner told the tenant, for the first time, that they would now have to deal with the son’s estate because of the way in which he had originally taken title. He agreed that the tenant could defer rent payments. Rent would then be adjusted at closing. The mother, now the administrator of the estate, refused to sell the property because of the rent owed. She commenced eviction proceedings. The tenant moved out in accordance with the eviction demand, but filed a complaint for specific performance.

The lower court first held that the statute of frauds afforded the son’s estate a complete defense to specific enforcement of the original oral contract. It then held that the statue of frauds also afforded a complete defense to the written real estate contract because the proper transferor was not identified in that agreement. The lower court also believed that, even if the written contract was otherwise enforceable, the tenant had breached it by failing to close within the thirty days called for by the contract.

On appeal, the Appellate Division first considered the legal effect of the father taking title “as custodian” for his son. When a parent takes title to real estate in the name of his or her child using personal funds, a gift is presumed. Despite this presumption, a court must determine the intention of the gift by examining the totality of the circumstances. Here, taking title as custodian showed the intention to create some sort of trust. Because this was done as part of the father’s estate planning (intending to avoid taxation) the Court held that the father intended to create an irrevocable trust. The Court took into account that, at the time of the purchase, the son was only three years old. Subsequent events led the Court to infer that the father did not intend that the trust would always consist of the house itself, but that he intended to retain the power to sell the property, as trustee, and then invest the sales proceeds for his son. As a result, the Appellate Division held that the father was entitled to sell the property on behalf of his son, and that his son’s estate was bound by the oral purchase option agreement.

The Court also held that the statute of frauds could not be used as a defense to avoid the oral contract because the tenant relied on the agreement when restoring the premises. The Appellate Division also disagreed with the lower court’s conclusion that the statue could be asserted to avoid the written agreement because it failed to show that the father was acting in a representative or trust capacity. Instead, it held that the owner was clearly identified as the transferor. He held legal title to the property when the contract was made, and signed the agreement as transferor. The father could not have raised the statute of frauds as a defense before or after his son’s death. The statute cannot be invoked to work an injustice, and the Court held that injustice would be the result if the tenant were denied his right to buy the property for which he had devoted much of his time and money to improve.

Finally, the Court disagreed with the lower court’s ruling that the tenant had breached the written agreement by failing to close within thirty days. Oral agreements that do no more than extend the time for performance are enforceable unless the original contract had made the closing date time of the essence. Thus, the oral agreement between the owner and the tenant, delaying the closing, was legally binding. When parties do not set a specific time for performance, the law infers that their contract will be performed within a reasonable time. Here, the Court felt that the unusual circumstances justified a two-year extension.

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