Michigan Court of Appeals Upholds Implied Covenant of
Good Faith and Fair Dealing in Land Contract Dispute
By: Gregg A. Nathanson, Esq.
The Michigan Court of Appeals recently upheld the importance of acting in good faith and fair dealing in a case involving a land contract dispute. The Court ruled a seller could not act in bad faith in order to avoid performing under the contact.
What happened? The buyer and seller had a bona fide dispute as to the land contract balance. The buyer made all installment payments timely. There was an issue as to the interest rate and also whether a portion of the payments should have been made directly to the seller’s mortgage lender. The buyer sued the seller, asking the court to determine the balance due and order specific performance, by requiring the seller to deliver a warranty deed to the buyer upon payoff. The trial court found that it was premature to decide the case since the buyer never tendered a check for what they believed to be the remaining land contract balance. The buyer appealed, and the Michigan Court of Appeals reversed.
The Court of Appeals first addressed, what is land contract. A land contract is an “executory contract in which legal title remains in the seller/vendor until the buyer/vendee performs all of the obligations of the contract while equitable title passes to the buyer/vendee upon proper execution of the contract.” When the buyer/vendee has fully performed, the seller/vendor must convey the property to the vendee by appropriate deed. A land contract is a contract for the sale of land governed by the Michigan statute of frauds and must be in a signed writing, even though the parties are free to mutually waive or modify one or more contract terms.
The Court then turned to analyzing the implied covenant of good faith and fair dealing. The Court found an implied agreement written into every real estate contract that one party will not place an obstacle in the way of the other party’s performance. Here, the seller would not provide a final payoff for the amount owed and said he would not have accepted payment anyway. By taking this position, the seller breached his duty of acting in good faith and dealing fairly with the buyer. The seller’s bad faith placed an obstacle in the way of the buyer’s performance.
The Court then discussed the doctrine of anticipatory repudiation. If, before the time of performance, a party to a contract unequivocally declares their intent not to perform, then the other, innocent party has the option to either sue immediately for breach of contract or wait until the time of performance. Here, since the seller breached first by declaring he would not accept a check from the buyer for the amount the buyer believed he owed at the end of the land contract term, this excused the buyer’s nonperformance of not tendering payment to the seller. As a result, the buyer was entitled to have the Court issue a declaratory judgment to determine the balance due under the land contract, and order specific performance obligating the seller to provide the buyer with the warranty deed upon receipt of the land contract payoff.
The take away: There is an implied covenant of good faith and fair dealing in real estate contracts, even if it is not an explicit covenant set forth in the written agreement signed by the parties. Brokers owe their principals – both buyers and sellers – a fiduciary duty of reasonable care and diligence, including acting in their principal’s best interest. This includes advising the principal to act in good faith and deal fairly with the other side. It’s not just a good idea, it’s the law.
For further information, contact Gregg A. Nathanson, Esq., an attorney at the law firm of Couzens Lansky, 39395 W. 12 Mile Road, Suite 200, Farmington Hills, Michigan 48331.
248-489-8600 or gregg.nathanson@couzens.com.
