‘Chose in action’ does not follow land

The Supreme Court of Virginia revived a former landowner’s claim after finding that its right to recover for a broken lease covenant didn’t follow its sale of the land.

The defendant cited statutory and case law to argue that its former landlord conveyed all rights — including the right to sue for breach of its lease — by deed to a third party. The circuit court granted summary judgment and dismissed the case.

But Justice Teresa M. Chafin said the circuit court erred, noting that both parties’ arguments were misplaced.

“In this case, the issue is not whether the lease merged with the deed,” Chafin wrote. “Instead, the issue is whether the deed extinguished or transferred [plaintiff’s] right to sue [defendant] for property damage arising from an alleged breach of the lease. We conclude that it did not do so.”

The case in Oreze Healthcare v. Eastern Shore Community Services Board (VLW 023-6-013).

Broken covenant

Oreze Healthcare operated an assisted living facility for adults with behavioral health issues. After its administrator’s license was suspended, Oreze faced shutdown and the eviction of its residents.

To avoid shutdown, the Eastern Shore Community Services Board, or ESCSB, agreed to lease Oreze’s facility and provide care until a permanent solution was reached. Per the lease, ESCSB agreed to keep the facility “in a clean, safe and tenantable condition[.]”

However, during ESCSB’s lease term, some of Oreze’s buildings were damaged when different water systems froze and burst. ESCSB never remedied the water damage before terminating its lease.

Oreze sued ESCSB for breach of contract in the Portsmouth Circuit Court. It alleged that ESCSB breached the lease through several actions or failures to act regarding the flood damages.

Dismissed

While its suit was pending, Oreze conveyed the property at issue to a third party by general warranty deed. ESCSB moved for summary judgment, arguing that Oreze couldn’t pursue the claim because the deed had conveyed that right to a third party.

ESCSB cited Virginia Code §§ 55.1-301 and 55.1-303, which state respectively that a “deed conveying land” encompasses “all the estate, right, title, and interest, both at law and in equity, of the grantor in or to such land” and “all buildings, privileges, and appurtenances of every kind belonging to such land” unless otherwise specified.

ESCSB relied on the Supreme Court of Virginia’s 1986 decision in Goodson v. Capehart, which held that “the language in a deed will be construed to pass to the grantee the greatest estate which the language employed is capable of conveying.”

Further, ESCSB looked to 1912’s City of Lynchburg v. Mitchell, in which the Supreme Court of Virginia held that a grantor’s pre-existing claims against a third party were transferred to the grantee.

Oreze contended that Mitchell didn’t stand for the proposition that a real property deed necessarily conveyed to the buyer causes of action related to contracts or property damage.

The facts in Mitchell and Goodson were distinguishable, Oreze argued. The Mitchell grantor didn’t sue before the conveyance and separately assigned its claims to the buyer; Goodson involved an internal conflict between two deed provisions.

At the motion hearing, Oreze asserted to Judge Brenda C. Spry that the terms “right” and “privilege” in Code §§ 55.1-301 and 55.1-303 only encompass a grantor’s rights to the real property itself, not claims for prior damage.

Spry granted summary judgment to ESCSB, holding that Oreze failed to reserve its claims in the deed.

On reconsideration, Spry said “per the Deed … [Oreze] conveyed all of its rights in connection with the property, including its rights to maintain the current claims, during such sale.”

Oreze appealed.

Not extinguished

On appeal, Oreze posited that the circuit court wrongly disregarded Virginia’s merger doctrine in finding that it failed to reserve its breach of contract claim.

Chafin said that argument was “misplaced.”

“The merger doctrine — ‘long recognized by the Court’ — ‘“deals with extinguishing a previous contract by an instrument of higher dignity,’ the deed,”’” she explained.

“The merger doctrine simply does not apply here,” she wrote. “It is concerned with agreements pertaining to a conveyance between a grantor and grantee, of which ESCSB is neither.”

The lease wasn’t a “a collateral agreement ‘made in connection with the sale,’” Chafin said.

“Even more pertinently, however,” she noted, “a deed could not extinguish an agreement that had already been terminated.”

Here, the issue wasn’t whether the lease merged with the deed.

“Instead, the issue is whether the deed extinguished or transferred Oreze’s right to sue ESCSB for property damage arising from an alleged breach of the lease,” she explained. “We conclude that it did not do so.”

Rather than follow the land, Chafin said the right to recover upon a broken covenant remains intangible personal property called a “chose in action.”

“In Virginia, ‘[a]ny right which has not been reduced to possession is a chose in action,’… a ‘classic example’ of which is a ‘contractual right’” she described, adding that they are “‘owned’ by the possessor of the right to recover” and may be assigned.

In this case, the justice recognized that Oreze possessed the right to recover against ESCSB for breaching its lease.

Thus, Oreze owned its claim against ESCSB as a chose in action that didn’t transfer to a third party simply by execution of the deed.

Not assigned

While Oreze could have assigned its right to the claim, the deed was silent about it.

“Absent provisions effecting an assignment,” the justice said, “the deed could neither extinguish Oreze’s right to pursue the claim nor transfer the claim to the third party.”

She faulted ESCSB’s reliance on Code §§ 55.1-301 and 55.1-303 because those statutes govern rights attached to land and Oreze’s claim wasn’t a right appurtenant or belonging to the land.

“For the same reason, the rationale in Goodson that a deed passes the ‘greatest estate which the language employed is capable of conveying’ is inapposite to a right that is not part of the estate,” the justice pointed out.

She agreed that Mitchell was distinguishable because the grantor separately assigned its claims in addition to the conveyance of property.

“The same cannot be said here, where Oreze conveyed the property by general warranty deed with no assignment to the third party of claims that Oreze possessed against ESCSB,” Chafin wrote.

“As a chose in action that belonged to Oreze that did not run with the land, the breach of contract claim did not transfer with the property upon execution of the deed, and it was unnecessary for Oreze to expressly reserve the claim,” the justice said.

Having found no assignment of any claims in the deed, Chafin said that Oreze retained the right to pursue its breach of contract claim against ESCSB and remanded the case to the circuit court.