Handshakes and Promises Not Enough to Vary Written Contracts

Podcast Episode 15: “Parol Evidence Rule.” In this episode we revisit a sad truth: people lie. You are not allowed to use verbal evidence to vary a written contract, so get all promises in writing when buying and selling real estate. Don’t remove conditions especially a, ‘subject to financing’ condition, until you are satisfied you … Continue reading Handshakes and Promises Not Enough to Vary Written Contracts

Podcast Episode 15: “Parol Evidence Rule.”

In this episode we revisit a sad truth: people lie. You are not allowed to use verbal evidence to vary a written contract, so get all promises in writing when buying and selling real estate. Don’t remove conditions especially a, ‘subject to financing’ condition, until you are satisfied you have the appropriate financing.

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Can You Change an Offer to Purchase with a Verbal Promise?

An experienced real estate investor had a portfolio of 10 properties. That was good, but he decided commercial properties were his next strategy. He began negotiating on a commercial building. In friendly conversation with the husband and wife owners, he discovered that they were also selling their personal residence.

As it turned out, our investor was looking for a new personal residence, so he took a look. It was just what he wanted, and he wrote an offer, conditional on inspection and financing. The purchase price was $2 million and, between frenzied boom times and a substantial portfolio, financing was taking longer than expected.

Our investor got an urgent call from the seller’s wife saying that if they didn’t remove conditions on their new house, they would lose it. Could our investor please remove his financing condition? Of course, they said, if he couldn’t get financing, they would never hold him to the deal.

After some thought, our investor agreed and promptly forgot about it. Condition day was Friday. On Monday, he had a panicked call from the seller asking, “where was the subject-to removal?” “Sorry, I forgot, I’ll send it today.”

You can probably guess the rest of the story. Financing took another two months, prices had dropped, and the bank said the property was worth $1.3 million… not $2 million! Therefore, unsatisfactory financing. Long story short, the sellers held our investor to the signed contract.

 

Verbal Agreements vs Formal Contracts in a Court of Law

A lawsuit was launched, and, at the end of a three-day trial, the judge found for the sellers. He believed the seller’s wife that she never said anything about not holding our investor to the contract. The judge was also upset with our investor for participating in mortgage fraud.

Damages were assessed at $500,000. Even if the judge had believed our investor that the sellers said, “don’t worry, we’ll never hold you to it,” the he would likely have applied an ancient rule of law known as the Parol Evidence Rule:

Verbal evidence is inadmissible to vary or contradict the terms of a written agreement.

In Wheeler, Kelly, & Hagny v Curtis, cited at 158 Kan 312, the Supreme Court of Kansas, in 1944, adopted these words, with extensive quoting from other cases:

“Parol evidence of an agreement consisting of mere oral promises made previously or concurrently with the execution of a written contract of sale of land is inadmissible to charge the vendee with the payment of more than the expressed consideration, when the amount to be paid plainly appears from the face of the instrument.

As a general rule all prior oral negotiations are deemed to be merged in a written agreement, and the terms of such agreement cannot be contradicted, altered, added to, or varied by parol proof.”

In Canada, where the rule is also applicable, the Alberta Court of Appeal, in Gainers Inc. v. Pocklington Financial Corporation, 2000 ABCA 151, published at The Canadian Legal Information Institute, described it as follows: “When the deal is complete in the written contracts…., other evidence (parol evidence) is inadmissible to vary or contradict a clear written contract.”

 

Lessons Learned:

Remember the Parol Evidence Rule: Verbal evidence is inadmissible to vary or contradict the terms of a written agreement.
Courts are about law, not justice.
Never remove conditions unless you and only you are satisfied with your diligence on those conditions.

 

When it comes time to make an offer to purchase in Alberta, get strong legal counsel to protect your interests. Contact Barry now!

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“ContractLaw” image by US Army used under a Public Domain dedication.