Georgia Legislative Update on Enforceability of CRE Contracts

In the summer of 2018, the Georgia Court of Appeals interpreted a case, which altered Georgia law on whether contracts memorialized in writing may be altered, rescinded, or otherwise terminated by mutual oral modification. The case at issue, Crop Production Services, centered upon a personal guaranty issued to induce an institutional lender to loan money for equipment and supplies, but bore potential implications for all real estate contracts. Georgia, like the majority of states in the U.S., expressly requires contracts for the sale, disposition, finance or transfer of real estate to be in writing. This requirement is one component of Georgia’s Statue of Frauds, which expressly requires seven types of agreements to be in writing, codified at O.C.G.A. § 13-5- 30, and stating in relevant part:

(1) A promise by an executor, administrator, guardian, or trustee to answer damages out of his own estate;
(2) A promise to answer for the debt, default, or miscarriage of another;
(3) Any agreement made upon consideration of marriage, except marriage articles as provided in Article 3 of Chapter 3 of Title 19;
(4) Any contract for sale of lands, or any interest in, or concerning lands;
(5) Any agreement that is not to be performed within one year from the making thereof;
(6) Any promise to revive a debt barred by a statute of limitation; and
(7) Any commitment to lend money.

Most institutional lenders or developers, as a matter of practice, have required modification of a contract for sale or finance, to state how the original agreement has been altered in writing and be signed by the parties. The critical issue in this case, which transformed the industry’s understanding of when stipulating changes to the original contract in writing is required under Georgia law, was what happens when an agreement is terminated? More specifically, what happens when one party seeks to terminate an agreement and the other party agrees verbally, but that agreement does not make it to paper?

The overarching legal framework, under which guaranties are formed and enforceable, broadly applies to all contracts for real estate and finance; so while the court interpreted Georgia law exclusively as it pertained to a personal guaranty, the implications of the court’s determination apply to any real estate contract. The guaranty at issue in the case was a personal guaranty to a lender, for the benefit of a borrower to acquire and maintain a farm and farming equipment. Years into the loan, the guarantor went to a branch of the lender and met with the branch manager stating he no longer desired to answer for the debts of the borrower and wanted to terminate his personal guaranty. The branch manager verbally assented to the termination, however the lender sought repayment of the loan from the guarantor when the borrower defaulted years later.

At the case inception, the trial court found in favor of the lender and held that the guarantor must answer for the debts of the borrower, despite the in-person termination of his obligations. The Georgia Court of Appeals, however, entirely reversed this ruling, and found in favor of the guarantor. The Court of Appeals held that Georgia’s legal framework mentioned nothing about modification or terminations as required writings and, in effect, the oral agreement between lender and guarantor released the obligation.

After the Georgia Appeals’ ruling in Crop Production Services, Georgia law was very much in flux; as effectively the court decided that, although Georgia law prescribes agreements must be written for them to be effective or enforceable, there is no express legislative requirement for an agreement to be terminated or modified in writing. The implications of this ruling meant that under Georgia law, any agreement for a sale or interest in real property (or any of the other seven agreements referenced earlier) could be terminated by spoken word alone, making the original agreement unenforceable. As a practical matter, this left a hole in the law in which any borrower, guarantor, tenant, or seller could state years into an agreement that at some point there was an oral modification, which was not captured in writing; that scenario would be a factual determination, which the law entrusts juries to make. In other words, every disagreement regarding the terms of a real estate agreement would have to be litigated and decided by a tribunal.

In January, based upon the hole in the statute that the Appeals’ decision left open, the state legislature proposed an amendment to the Georgia Statue of Frauds as SB 37 , which would require that any agreement to terminate any of the seven types of contracts, which in Georgia are subject to the Statute and must be executed and agreed to in writing, must now also be terminated and/or modified in writing.

Accordingly, real estate practitioners and providers should, as a matter of course, ensure that final agreements to amend, modify, rescind or terminate any agreement for any interest in real property be properly memorialized in writing in order to avoid undue litigation, and comply with what will soon be Georgia Law.

SB 37 passed on Crossover Day and has been approved by both the House and Senate of Georgia’s General Assembly. The bill was tendered to Governor Brian Kemp for signature on April 9, 2019.

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Meghan R. Gordon is an attorney at Miller & Martin where she focuses her practice in the areas of commercial real estate and business law, providing counsel to institutional lenders, developers, investors and businesses in a variety of transactional matters. As a member of the Commercial Department, she concentrates on the acquisition, leasing, financing and disposition of industrial, office, hotel and retail projects. She is licensed to practice in Georgia and Florida. You may reach Meghan at meghan.gordon@millermartin.com.

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Author: CREWATLANTA

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