The merger doctrine is not absolute and its application will depend upon the equities and the parties’ intentions, the California Court of Appeal recently held in Hamilton Court, LLC v. East Olympic, L.P., 2013 WL 1613269 (2nd Dist., April 16, 2013).  The court reversed the application of the merger doctrine to an easement that was pledged as security for a deed of trust that was ultimately foreclosed upon.

Although this case involved a deed of trust, its holding is consistent with older California decisions that have addressed equitable considerations when considering the merger doctrine.  In short, simply because the merger doctrine could apply does not mean that it will be applied.  In California, the court will consider the intent of the parties and the equities in each case to determine whether to apply, or not apply, the merger doctrine.

Facts:  Prior to 1983, the defendant owned an entire city block in Los Angeles that contained multiple lots, several buildings and parking lots.  In 1983, the defendant sold most of the block to a third party (“Angelus Property”) and retained a portion of the block (“Wilder Property”).

Unfortunately, buildings on each respective property encroached onto the other property and the parties never completed lot line adjustments as intended.  In 1994, the parties entered into an Easement Agreement “in lieu of entering lot splits. . .to provide for mutual easements with respect to such encroachments. . .”  The Easement Agreement essentially created exclusive easements for each party with respect to their property and improvements.

In 2005, the Angelus Property was conveyed to plaintiffs.  Two months later, defendant sold the Wilder Property to one of the plaintiffs and a third party (who later quitclaimed its interest to the other plaintiff).  As part of the sale of the Wilder Property, the purchasers executed a promissory note and a “Deed of Trust” that created a security interest in both the Wilder Property and the easement.  Thus, as of July 2005 the plaintiffs held fee title to both the Angelus Property and the Wilder Property subject to the Deed of Trust that encumbered the Wilder Property and the easement.

In 2008, Plaintiffs ceased making payments on the note and defendant foreclosed on its Deed of Trust.  Plaintiffs later filed suit arguing that the defendant did not reacquire its easement rights through the foreclosure because, under the merger doctrine, the easements were extinguished in 2005 through plaintiffs’ joint ownership of both properties.

Merger Will Depend Upon The Equities Of Each Case:

The court acknowledged the “merger doctrine,” codified in Civil Code sections 805 and 811, that prevents a property owner from holding a servitude over that same property.  For example, if an easement over Blackacre exists to access Whiteacre, and the title to the properties are later held by the same owner, then under the merger doctrine the easement is extinguished.  The court noted that a “simple reading” of these statutes would support plaintiffs’ merger argument.

However, the court stated that the union of a lesser and greater estate, “does not always result in a merger.”  Citing to Miller &Starr,Cal.Real Estate (3d ed. 2006) 10:41, the court held that the doctrine of merger applies only when it prevents an injustice and serves the interests of the person holding the two estates absent evidence of contrary intent.

Here, the court concluded that the doctrine of merger did not apply because (1) the parties agreed otherwise and (2) the easement was pledged as security for the promissory note.  Also, the transfer the Wilder Property to the plaintiffs was based on an agreement not to jeopardize the collateral securing the loan.  The court concluded that the plaintiffs in effect stipulated that the merger doctrine would not apply so long as the Deed of Trust remained in effect.

In a concurring opinion, Justice Mosk argued for the creation of a “deed of trust exception” to the merger doctrine, though he noted that no priorCaliforniadecision had adopted that position.

Editorial Comment:  This case also highlights the difficulty in applying the merger doctrine, that was developed from common law over hundreds of years, to land parcels regulated by the Subdivision Map Act (SMA) and other land use regulations.  Simply because an owner holds title to adjacent lots does not automatically merge those lots, thereby negating a fundamental presumption of the merger doctrine.  As a practical matter, title investigators should not rely on absolute application of the merger doctrine inCalifornia.