Posting for

Monday, September 18, 2000

by: Bert Rush

brush@firstam.com

MERGER DOCTRINE/EASEMENTS/TITLE UNDERWRITING

The Minnesota Supreme Court has held a parking easement extinguished, by the doctrine of merger, when both the dominant and servient estates came into common ownership of one fee owner—despite the owner’s apparent intentions to the contrary.

Me, surprised? Oh, you betcha! The case is Pergament v. Loring Properties, Ltd., 599 N.W.2d 146 (1999). Here’s what happened.

In September 1986, BSR Properties contracted to purchase a property from Willow Street Properties, that was improved with an apartment building, office building and parking lot.

Later, in November 1987, the City of Minneapolis approved BSR’s plan to subdivide the property into two parcels: One with the apartment building, and the other with the office building and parking lot.

In December 1987, BSR acquired fee title to the parcel with the apartment building. This acquisition was financed through a mortgage loan from Midwest Federal Savings and Loan. As a condition to the financing, Midwest Federal required (and BSR obtained from Willow Street Properties) a parking easement for the benefit of the apartment building over eight spaces in the parking lot adjacent to the office building. The parking easement thus became part of the security for the Midwest Federal mortgage.

In July 1988, BSR acquired fee title to the parcel with the office building and parking lot. This acquisition was financed with a mortgage loan from Canada Life Assurance Co.

By late 1990, BSR was apparently in some distress and, in December 1990, it gave a deed in lieu of foreclosure to Canada Life for the parcel with the office building and parking lot. According to the Supreme Court opinion, the deed in lieu "mentioned" the parking easement. The details of this "mention" aren’t given, but it appears it was implied that the interest being conveyed to Canada Life would be subject to the parking easement.

In September 1993, Canada Life sold the parcel with the office building and parking lot to Loring Properties. The parking easement was not mentioned in the deed but, again according to the Court’s opinion, it was "referred to" in a title insurance policy obtained by Loring Properties in connection with the purchase.

In February 1997, BSR sold the parcel with the apartment building to one Brian Pergament. This acquisition was financed so that the Midwest Federal mortgage was satisfied and released. Again according to the Court’s opinion, the deed from BSR to Pergament "mentioned" the parking easement, but, said the Court, Pergament was unaware of the easement until sometime later. Also, according to the Court’s opinion, "(f)rom the date the easement was created, all parking spaces in the parking lot were used exclusively in conjunction with the office building and were never assigned to nor used by apartment residents."

Pergament soon learned of the parking easement, and he requested that Loring Properties designate eight spaces for apartment residents’ use. Loring responded by prohibiting them from using any of the spaces.

Pergament filed suit for a judicial declaration to enforce the parking easement. The trial court ruled in favor of Pergament on a motion for summary judgment and, later, the court of appeals affirmed the trial court decision.

Loring Properties appealed, and the Supreme Court reversed the lower court decisions, holding that the parking easement was extinguished when BSR became the owner of both the dominant (apartment building) and servient (office building/parking lot) estates, under the doctrine of merger.

The Court explained,

"Under the merger doctrine, an easement that

benefits the dominant estate and burdens the

servient estate is extinguished when fee title

to each estate is united in one owner. ... In

his treatise, The Law of Real Property, Professor

Powell explains that the reason for the doctrine

is that one cannot have, indeed has no need for,

an easement in property one owns in fee."

(Citations omitted.)

Likewise, the Court said, "(o)nce extinguished, an easement is not revived or reinstated when referred to in a subsequent conveyance." (Citations omitted.)

Noting that the lower courts had agreed with Pergament’s argument that this easement was saved from extinguishment by the "mortgage exception" to the merger doctrine, the Supreme Court disagreed. The Court explained that the mortgage exception is recognized to protect the interest of a mortgagee in the dominant estate, when dominant and servient estates are merged and easements would otherwise be extinguished. But, said the Court, the exception does not go so far as to prevent extinguishment of easements where, as here, the interest of the protected mortgagee does not become "possessory" (as through foreclosure or a deed in lieu) but is instead paid off and released.

With that, the Court directed that judgment be entered in favor of Loring Properties.

Comment: What surprises me about this case is that the Court announces a strict rule of extinguishment after a merger, without apparent regard for the intentions of the parties nor any equities that may be involved.

There was one dissenting opinion, by a Justice who argued (among other things) that the doctrine of merger is a "’flexible, equitable doctrine,’ the application of which depends on the facts or circumstances of the particular case at issue, including the intent of the parties." (Citations omitted.) I would agree.

So how could BSR have preserved the easement after merger? In December 1990, when it gave the deed in lieu to Canada Life, BSR could have reserved the parking easement for the benefit of the parcel with the apartment building (then owned by BSR)—in effect creating the easement anew.

I wonder how many other states’ courts have considered this particular issue—and how they’ve ruled. It seems more common for the merger issue to arise in cases where a lender with two or more mortgages against property has acquired fee title through foreclosure of a junior mortgage, the issue then being whether the lender’s interest as fee owner is merged with its interest as mortgagee under the senior mortgage(s), extinguishing the unforeclosed mortgage(s). The answer has generally been "it depends on the intentions of the lender," as best I recall.

The lesson here is that there may be a strict rule of extinguishment under the doctrine of merger, and that mortgagees may be treated differently than ordinary purchasers.

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Following Monday's posting, Greg Holbrook (Salt Lake City) writes:

By virtue of the fairly recent (July, 1999) Utah case of Miller v. Martineau & Co., 983 P.2d 1107, it appears Utah leans toward the "it depends on the intentions of the parties" side of the applying of the merger doctrine, at least where the interest of the mortgagor in the mortgaged property is transferred to, or acquired by, the mortgagee. In the Martineau & Company case, the Utah Court of Appeals recognized that before the merger doctrine would be applied, such application must be " . . . expressly declared, or it may appear from the conduct of the parties, the circumstances of the transaction, and the particular equities of the case. In any event, however, the intention must be clear." And if it isn't clear, then the question of merger becomes a question of fact. Given the tone of the court's opinion in this regard, I am of the opinion that if we were faced with a transaction involving the merger, or not, of two estates and there are intervening interests or other reasons, apparent under the circumstances, to question a merger, and it is not clear what the parties want done ("expressly declared"), I believe the safer course would be to default to the merger doctrine not being applied.

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Following Monday's posting, Jim Dondero (Grand Rapids, MI) writes:

From your description of the facts, it sounds as though the oblique "mention" of the easement in the subsequent conveyances were a little too vague and ambiguous to pass muster. Stronger and more definitive language such as "save and except" or "reserving unto grantor" might have left the court no other option than to hold in favor of preserving the easement. And, the court may have been biased against the lender/grantee because the rule of law, as I recall, is that the merger does not occur until the "common owner" conveys without preserving the easement.

Craig Macauley (National Accounts/Boston) writes:

My comment is that the application of the Merger Doctrine by the MN Supreme Court is antiquated. We are frequently asked to insure old easements on servient estates under common ownership with the dominant estates as the respective parcels could be conveyed separately in the future. What if the easement specifically stated it was to run with the land?

Reply by Bert Rush: I'm guessing that if the easement, as originally created, was expressly stated to "run with the land," this would not have made a difference in the Court's analysis. And, by not telling us more about how the easement was "mentioned" in deeds following the merger, I interpret the Court to be telling us that it almost doesn't matter. The Court seems to favor a very strong policy for extinguishment of easements by merger of the dominant and servient estates.

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Following Monday's posting, Bill Kramer (Republic Title/Dallas) writes:

The doctrine of merger is one of presumed intention in Texas and is subject to rebuttal if merger is challenged. However, we try to require when we know what is going on a statement of intent in the conveyancing documents that could result in the merger of the estates, stating either that the grantee intends that the estates be merged or that the grantee intends that the estates not be merged. This has been especially true when ground leasehold interests and the fee are combined.

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Following up on Monday's posting, Alan Rubin (Uniondale, NY) writes:

It appears to be the law in New York that when ownership of the dominant and servient estates come into the same person(s) or entities, any easement that had previously existed is extinguished by the merger. See, 5 Warren's Weed New York Real Property, Easements, Section 11.15 (Matthew Bender, 1999).