What is Privity of Estate
A privity of estate refers to the mutual or successive relationship between two or more parties that respectively hold an interest in the same subject by virtue of a deeds, grants, and other instruments. Thus, privity of estate exists where there is a connection between parties and the same third person with respect to property.
In the context of landlord-tenant relationships, a leasehold interest typically creates a relationship between the lessor and lessee while the lessee is in possession of the real property. Here, privity of estate is established because the landlord remains the owner of the real property and the lessee is a party in possession. Neither party can close the estate without the consent of the other . In other words, the parties have legal obligations and personal rights that are related to their interests in the same subject matter.
Furthermore, a transfer of interest in a leasehold property may dissolve the only privity of estate the tenant had with the lessor. This may result in the tenant being a tenant at sufferance. A tenant at sufferance does not have a lease, but continues in possession of the property without any agreement with the landlord. Similarly, a subletting terminates the privity of estate between the landlord and the tenant. In some states, a mere assignment of lease will not terminate the privity of estate that existed prior to the assignment.
What is Privity of Contract
Privity of contract is a concept that comes to us out of contract law and states that only the parties to the contract themselves have legal rights and obligations under the contract. The origins of this concept can be traced back to medieval England. Privity of contract in England can be traced back to the 18th century, which has been defined as "the privy or close, as that of a husband and wife, or of a man and wife, together with all which they shall be in law."
The concept of privity of contract has come to mean that only the parties to the contract are bound by it and may enforce it against each other. Simply stated, it is the mutual relationship in consequence of which each party is bound to the other.
Privity of contract may exist in relationships between people who are not parties to the contract. In Brady v. 151490 Ontario Ltd. (1989) 66 O.R. (2d) 193 (C.A.) the Court held that a claimant did not have standing to sue under an agreement to which it was not a party. The issue was whether the Agreement signed by the appellant and respondents A and B (the purchasers), gave rise to privity of contract between the appellant and the respondent, A’s father (R) and whether the appellant was entitled to enforce the implicit undertaking. The Court found that where an action is brought on a contract, it must be brought by a party to the contract.
In Canada, the Supreme Court of Canada in ITO-International Terminal Operators Ltd. v. Miida Electronics Inc., [1986] 1 S.C.R. 752 held that a clear intention of the contracting parties can give rise to a third party beneficiary. That is, a binding contract made in consideration of some benefit accruing to the third party (the beneficiary), will in certain circumstances, at the election of the third party, be enforceable against the promissor by the third party, unless it was a condition precedent to the attachment of the third party that such benefit first accrue to the promisee absolutely. The Court held that, in this case, there was no language in the third party beneficiary clause in the agreement indicating that any amount earned by the corporation, having regard to the totality of its business, was to be pooled with the amounts earned by the promisee.
A more common method for privity to be created is through assignment. An assignment is a transfer by one person to another of the rights created by a contract. An assignment terminates only the assignor’s rights under the contract but leaves the obligations under the contract unchanged. If the counter-party to the contract has promised to perform certain obligations to the assignor and the assignor first assigns its rights to performance by the counter-party under the contract, the assignee may enforce the contract against the counter-party once the counter-party is notified of the assignment.
The Distinction Between Privity of Estate and Privity of Contract
A key difference between them is their distinct legal application. Privity of contract applies in the context of contractual agreements while privity of estate applies to a physical interest in another person’s property. They are distinct legal concepts with different legal implications for parties involved in a property transaction or contractual obligations.
In the context of a property or real estate transaction, privity of estate matters when the resulting relationship is to be preserved (leases) or when a seller has a retained interest by way of mortgage or other form of security. A mere mortgagee, in the absence of explicit agreement to the contrary, is not liable for obligations that are successors of a contractual obligation (as opposed to obligations under the contract itself). A buyer of a property subject to a lease is not liable for obligations that form part of the existing lease itself, if they arose before it became the tenant. However, a purchaser of a lease (which is assigned by the landlord’s consent) will be liable for obligations that flow from the agreement appointing it as tenant, and will be liable for these obligations directly to the landlord.
Privity of estate deals with the nature of the parties’ relationship while privity of contract deals with the parties’ obligations. Privity of estate graphically could be illustrated by a tenant and its landlord, or owner and its mortgagee, where both parties have rights residing in the land. Privity of contract would refer to their obligations to each other under the contract (lease, mortgage, loan agreement, etc). While they are two sides of the same coin, or two similar but distinct concepts, they are often confused.
Privity of contract and privity of estate arise in the context of a sale of land because an agreement for the sale of land must be made in writing. The existence of a privity of contract or privity of estate with respect to the subject of the contract (in this case, the land) may mean that certain obligations transfer with the property once bought.
Landlord and Tenant Legal Ramifications
The legal implications of privity of estate and privity of contract heavily impacts whether a landlord or tenant is subject to liability to a third party (whether that is a trespasser or a guest of the tenant). This section will examine those effects, first of privity of estate, then of privity of contract.
Privity of Estate
Generally, a landlord is not liable for third person injuries that occur on the rented property, as the landlord has no duty to maintain what is outside the premises. See Zamora v. Columbia County, 601 So. 2d 246 (Fla. 1st DCA 1992). However, that liability may be imposed when the landlord has a retained control of certain parts of the leased land or premises. Smith v. Koss, 45 So. 2d 486 (Fla. 1950); see also Ketteman v. Mad Dog, Inc., 784 So. 2d 553 (Fla. 1st DCA 2000). Those retained elements could include stairways, elevators, washrooms, and any structures used for a common purpose by all the tenants of a property.
Another element to take into consideration is whether the common area is under the control of a separate party, as in the case of a building with apartments, where the separate party is a company that manages the building on behalf of the landlord. Where the landlord has completely disposed of the estate to the separate party, only that separate party can be held liable for any injuries or incidents that take place within the area under its management. See Bamford v. Modern Woodmen of America, 94 Fla. 515 (Fla. 1928). Such is often seen in office buildings or other large properties that have a management company separate from the landlord. Another option for the landlord who wishes to retain liability for the common areas of a property is to create an authorization that gives the landlord access as needed. See Zamora v. Columbia County, 601 So. 2d 246 (Fla. 1st DCA 1992). This element is not a strict necessity if the lease specifically provides that the landlord has full access.
There are also certain exceptions in Florida law that can hold a landlord liable for the condition of the property, including situations where: the landlord or his servants employs an independent contractor to do work in those common areas; the landlord directly participates in creating dangerous conditions; or the landlord leases out portions of the property over which he retains control. Corzo v. Newport Club, Inc., 400 So. 2d 521 (Fla. 3d DCA 1981). In situations where the landlord intentionally interferes with either a prospective or current tenant’s use or enjoyment of a rental property, Florida law may allow the suit to proceed. Ivey v. Sherwood Village Apartments, Inc., 340 So. 2d 952 (Fla. 1st DCA 1976). Yet, there are other elements that can reduce a landlord’s liability for the property if the landlord has made any disclosures to third parties. For example, if a lease states the following:
Landlord makes no representations, warranties or covenants for any alleged toxic substances in the leased premises. Tenant will have the right to inspect the premises, and to obtain sufficient information concerning any environmental issues [it] feels are necessary for the purposes of assessing the risk of purchasing the [property].
To the extent that there are toxic or hazardous materials on the property, landlord will not be liable to tenant or any third parties, and tenant will waive any claims it may have against landlord for any such toxic or hazardous materials that are contained in, spilled on, or removed from the premises.
All of these factors can be used to limit liability for a party you contract with, or to hold that party more liable than the property owner. See Dyer v. Florida Medical Clinic, P.A., 9 So. 3d 688 (Fla. 2d DCA 2009); Ashwood Group v. One North Brookhaven, 100 So. 3d 681 (Fla. 3d DCA 2012) (upholding the validity of a similar clause). A final caveat to this applicability is that in general, only parties to a contract can enforce its terms.
Privity of Contract
With regard to what a landlord can hold tenants to for their time on the property, privity of contract allows a landlord to take action against the tenant for any obligations created in a lease. This allows a landlord to initiate an eviction proceeding or a claim for unpaid rent, as well as any other claims that the tenant is obligated to fulfill.
Illustrative Case Law Examples
The distinction between privity of estate and privity of contract becomes apparent when considering the case law. In Manitoba, the plaintiffs in Rozic v. DSS Consulting (1981) Ltd. et al., 2000 MBQB 26 ("Rozic") found this out the hard way when they were unable to recover from a builder in tort because they signed a contract which contained an exclusion clause, despite the fact that the negligence had taken place before the contract was entered into. As the Court explained: "Section 9(2) of The Sale of Goods Act provides: 9(2)"Where damage (as defined in subsection (4)) is caused to a person (in this section called ‘the claimant’ ) by the fault (as defined in subsection (4] ) of another person (in this section called ‘the wrongdoer’ ), then, subject to subsections (3) and (4), whether the claimant’s claim against the wrongdoer is grounded in contract or otherwise, the wrongdoer is liable to make the same reparation in respect of such damage to the claimant as he would have been liable to make if the wrongdoer were solely responsible for the causing of the damage." Thus a tort claim is available even when a subsequent exclusion clause applies, if the negligence occurred before the contract imposing the exclusion clause was entered into. In contrast, the exclusion clause in the case at bar did not save the defendant in Wrobel v. Dronyk , 2004 MBQB 86 ("Wrobel") from being liable to a third party where there was no privity of estate because both the landlord and tenant had negligently allowed water to drip into the plaintiff’s apartment. Rather, the tenant’s lease only excluded liability in respect of water damage "not arising from the negligence of" the landlord. The Court held that the exclusion clause did not attract the defence of ex turpi causa. The defence of ex turpi causa, however, is available to landlords in such situations if and when they can establish that they had no control whatsoever over the property and the damage arose solely from the negligence of the tenant: Pridham v. Quick, [1908-1914] 3 W.W.R. 651, which cited Western Canada Theatre Co. v. Victoria Theatre Co., [1912] 1 W.W.R. 535, 20 D.L.R. 369 (BC S.C.). Furthermore, as the Court in Rozic went on to explain, privity of contract is not absolute. "It is well established that both the landlord and the tenant generally owe a duty of care to all lawful visitors to the demised premises. Richards v. Grogan[1986] 1 W.W.R. 115. However, both parties will be liable for their own torts, not jointly, unless they are acting jointly and are in consultation or agreement when the tort was committed." (Emphasis added) In the end, as can be seen by the case law, the courts will not hesitate to draw an arbitrary line between the parties where there is no privity of estate present and a breach of the contract is the only factor in play between the plaintiff and the defendant.
Real Estate Transaction Practical Considerations
Whether you are the original party entering into a contract or lease, or whether you take the place of another party in subsequent transactions, it is always good to have advice so that everyone is aware of the implications of their privity of estate and/or privity of contract, and avoids giving up any rights that they want to keep. A few practical considerations for buyers and sellers, landlords and tenants: Buyers should be highly selective during their due diligence and not be afraid to make their offer subject to any specific information which may have an impact on their rights under the purchase and sale agreement. Sellers should never sign a release which is being handed out by the buyer without great care. Sellers should make sure they have actually received all consideration contemplated by the earlier agreement. Landlords should make sure they continue to insist on Tenant estoppels from any party making an offer to purchase the property before it is actually sold and without regard to whether or not any Tenant release is offered by the Purchaser. Tenants need to understand that there is a significant difference should the owner of their property lose it; that is, via foreclosure, for example. Practical consulting, after even one bad tenant experience could save significant grief after the transaction is closed.
Conclusion: Significance of Both Issues
In conclusion, a clear understanding of both the doctrines of privity of estate and privity of contract remains important for lawyers, landlords and tenants as well as all individuals and corporations engaged in dealings with contracts and real property interests. Privity of estate alone is not a sufficient basis to hold a party to existing agreements . For its part, and despite the widespread acceptance of doctrine, courts seem reluctant to rely on it as a bar even to subsequent agreements. Neither doctrine is, by itself, a substitute for contractual privity. Accordingly, for contracting parties to most effectively maximise their potential liability or protect their legitimate expectations, particular care should be taken to expressly stipulate, or otherwise secure, the legal relationship between all relevant parties.
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