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The Doctrine of Merger: A Vanishing Rule

The Doctrine of Merger (Merger Doctrine) is well established in the history of Illinois case law. It was developed in an effort to provide confidence in land sales and quiet litigation over the conveyance of property. Distilled, the Merger Doctrine provides that any agreements or contracts involved in the conveying of property are "merged" with the deed. The doctrine's name, then, is a bit of a misnomer. The deed does not so much merge as it does supersede all the ancillary and outside agreements and contracts. Whatever promises are not expressed in the deed are effectively nullified under the execution of the Merger Doctrine.

The Merger Doctrine still sees use in the state, although like many common law rules its position has changed over the years. As recently as 2008, the Illinois Supreme Court dealt with a case primarily focused on the doctrine, Czarobski v Lata, 882 NE2d 536 (Ill 2008). Czarobski is important not only as the most recent ruling involving the Merger Doctrine, but because it outlines how the doctrine has in many ways fallen out of favor. In Czarobski, the new homeowners sued to recover property taxes that were in excess of the credits for those taxes they received at closing. At the trial court level the home sellers argued that the Merger Doctrine applied, and their motion to dismiss was granted. The tax issue provided for within the contract, according to the court, was absorbed into the deed and lost. The appellate court disagreed, reversing the ruling and remanding it to the trial court. The issue was passed to the Illinois Supreme Court.

As a first priority, the Court described the ultimate effect of the doctrine when it is applied: "[t]he deed supersedes the provisions of the real estate contract and becomes the only binding instrument between the parties." Id. at 540. But this general rule was no longer sufficient to capture the effect of the rule, instead the Court needed to additionally express the policy that created the doctrine. "The Merger Doctrine evolved to protect the security of land titles… and brings finality to real estate contracts." Id. More importantly, the policy had long ago become insufficient to justify a concrete rule and the rule developed a variety of exceptions.

"[T]his court has recognized an exception or qualification to the merger rule where the contract contains provisions that delivery of the deed does not fulfill. As to those provisions, the contract is not merged in the deed, and the contract remains in force until the contract has been fully performed." Id. 540.

In Czarobski the Court was asked to support a new exception to the already weakened rule. In particular it confronted an appellate court case in which the court found on a similar issue that the merger rule applied.Chapman v Anchor Lumber, 823 NE2d 594 (3rd D 2005). The Chapman court based its argument on the conclusion that outside of the clear exceptions, the doctrine applied. "[O]ur supreme court has not sanctioned a broad mutual mistake exception to the Merger Doctrine... unless this case falls within the exception for independent contractual agreements not fulfilled by the deed's conveyance, the contract merges…" Id. at 596. The Illinois Supreme Court corrected this perception.

"Although Chapman is correct that this court 'has not sanctioned a broad mutual mistake exception to the Merger Doctrine,' we agree with the appellate court's observation here that 'neither has [this court] prohibited such an exception'… We note that several of our sister states have recognized fraud and mistake as exceptions to the doctrine." Czarobski at 540-541.

"[W]e discern no principled basis, and defendants offer none, for adopting a blanket rule of law that would prohibit a party, in an appropriate case, from arguing against application of the merger rule where the party claims that a mutual mistake or fraud existed at the time of conveyance of the deed." Id. 541. The court upheld the appeals court, ruling in favor of the mutual mistake and fraud exceptions, and applying them to the case at hand.

The case is indicative of the general turn in law relating to the doctrine. To find more successful cases in its application, one must generally look further back in time.

Czarboski demonstrates the most recent incarnation of the Merger Doctrine. The application of the doctrine now behaves as a sort of rebuttable presumption. In essence, a prima facie case is established by the performance of a real estate contract and transfer of the deed. At this point, it is assumed that the Merger Doctrine applies. It is at this stage that the opposing side can rebut this presumption in a variety of ways.Neppl v Murphy, 736 NE2d 1174 (1st D 2000).

This is not a difficult standard to meet, and has become gradually more and more lenient as new case law has emerged. The primary question is whether the contract issue is in some way separate from the deed.Id. at 1180 "[T]he threshold issue in any case involving the Merger Doctrine as a defense is whether the contractual provision at issue is collateral to and independent of the provisions in the subsequent deed; if so, there is no merger." Id. Such independent issues have been held to include warranties as to the quality of property or assets with the property. One could prove this not only by arguing that the issue is separate, but by a similar but perhaps easier standard, that the provision was not at the core of the transfer. Daniels v Anderson, 642 NE2d 128 (Ill 1994). The exact latitude this gives in avoiding the doctrine of merger is clear from some of the decisions applying it. Courts have held an easement created by contract but not in the deed could survive the Merger Doctrine. Id. They have excluded promises of the condition of components of the property such as heating systems, and contract agreements involving promises to construct a building on the property. All of these were determined to be a separate issue, or not at the core of the deed transfer.

Certainly as far back at the 1990s it was already becoming clear through case law that the doctrine was losing its influence in court proceedings. Fitton v Barrington Realty Co., Inc., 653 NE2d 1276 (1st D 1995). TheFitton court noted that "[t]he doctrine of merger is not popular with modern courts," and described multiple exceptions carved into it, including the prior mentioned exceptions for ancillary contracts, mistake, and fraud. This sentiment has been echoed by other Illinois courts. Premier Title Co. v Donahue, 765 NE2d 513 (2nd D 2002). The Premier Title Co. court phrased it in the following manner: "Although still a part of Illinois law, the Merger Doctrine is disfavored by modern courts." Id. at 518.

The trend in current law is that unless the provisions at issue are clearly within the classical range of the Merger Doctrine, they are much more likely to be placed in an exception and the application of the doctrine denied. The doctrine appears to stand on the brink, preserved only through the necessity of stare decisis. "Although the doctrine is not favored by modern courts, it has not been rejected by Illinois courts… Nevertheless, it is not without its exceptions." Coughlin v Gustafson, 772 NE2d 864 (1st D 2002). The modern court's hostility toward the doctrine, or at least its reluctance, is best seen not through its verbal demarcations, but through the variety of exceptions it has created.

Assuming a real estate transfer has occurred, the doctrine is automatically at issue if one of the parties raises it. The court must then proceed to consider whether the issue is 'incidental,' or alternatively, if it is at the core of the transfer of the deed. This is a particularly effective method of avoiding the doctrine since in Illinois, it can be legitimately argued that a deed deals only with the transfer of good title, and anything outside this limited definition cannot be subject to the doctrine. "[T]he main purpose of the deed… is to transfer good title." Coughlin v Gustafson Board of Directors of Bloomfield Club Recreation Ass'n v Hoffman Group, Inc., 712 NE2d 330 (Ill 1999). Even if the issue is held to be at the core of the transfer, there are still further exceptions to the doctrine. Courts will even consider the intent of the parties. "[W]hether and to what extent the sales contract merges into the deed… is also a matter of the parties' intent." Id. If the dispute is over a term not mentioned in the deed, Illinois courts may construe this absence to also be sufficient to overcome the doctrine. Daniels v Anderson, 642 NE2d 128 (Ill 1994). In Daniels, the court found that the deed's failure to mention the contract issue was sufficient to bring it outside the scope of the Merger Doctrine.

At the culmination of all these steps, where a court finds that at a fundamental level the doctrine of merger applies, there are still the aforementioned exceptions involving mutual mistake and fraud, exceptions that have been clarified this year as being expansive and broad in their coverage. Such mistakes have been held to include everything from disagreements on the prorating of taxes, Holec v Heartland Builders, Inc., 600 NE2d 489 (2nd D 1992), to the number of acres to be conveyed, Hagenbuch v Chapin, 500 N.E.2d 987 (3rd D 1986).

So while the doctrine has certainly not been completely eroded by the changes in law, it seems clear that it is making its way gradually toward extinction—or at least inefficaciousness. Courts now openly describe the Merger Doctrine as being disfavored as a solution to real estate contract disputes, and have created massive exceptions that undercut the original purpose of the rule. At its inception the rule was meant to solidify the transaction between buyer and seller and quiet the title to property. Now, however, issues of mistake and fraud allow dissatisfied purchasers to bring their claims before the court, and the doctrine's scope gradually constricted rather than expanded. The merger rule, as it once demanded that a deed supersede ancillary promises, has now been superseded by its own exceptions.