In Ranch O, LLC v. Colorado Cattlemen’s Agricultural Land Trust, 2015 WL 795050 (Colo. Ct. App. 2015) (unpublished), the Colorado Court of Appeals held that a conservation easement that mistakenly referenced an individual, as opposed to a limited liability company created by the individual, as the easement grantor was nonetheless valid. The Court of Appeals also affirmed the District Court’s reformation of the easement to reflect the limited liability company as grantor.

Background

Mr. Walker conveyed certain ranch property to a limited liability company (LLC) of which he was the sole manager and 99% membership owner. Sometime later, Mr. Walker purported to donate a conservation easement on the ranch to the Colorado Cattlemen’s Agricultural Land Trust (land trust). The conservation easement deed was signed by both parties and recorded, but it incorrectly stated that Mr. Walker, rather than the LLC, was the easement grantor.

Thirteen years later, the LLC sold the real property, expressly subject to the conservation easement, to Ranch O. Ranch O reportedly paid a reduced price for the ranch that reflected the existence of the easement restrictions. Soon thereafter, however, Ranch O filed suit, arguing that the conservation easement was invalid and had no force and effect because the owner of the property (the LLC) had not created the easement.

Mr. Walker and the land trust were unaware of the error in the deed regarding the grantor’s identity until Ranch O brought it to their attention just before filing suit. At the time of the easement’s donation, the land trust had not obtained title insurance.

The District Court held that the conservation easement was valid and reformed the deed to reflect the LLC as the easement grantor. Ranch O appealed, and the Colorado Court of Appeals affirmed the District Court on a number of grounds.

Reformation Based on Mutual Mistake

The Colorado Court of Appeals first noted this general rule:

if a conveyance or encumbrance document fails to reflect that the conveyor is functioning in a fiduciary or representative capacity, and that person does not have a personal or independent interest in the subject property, the document is considered as having been executed in the fiduciary or representative capacity.

Although noting that this general rule “appears to be applicable here,” the Colorado Court of Appeals declined to decide the case on that basis because neither party had raised and the District Court did not address this general rule.

Instead, the Court of Appeals concluded, as did the District Court, that the parties to the conservation easement made a mutual mistake of fact and reformation was the appropriate remedy. The court explained, in part, that:

[Mr.] Walker and the Land Trust clearly and unequivocally intended that the grantor of the conservation easement be the owner of the subject property. Accordingly, reformation did not insert a new term that was never in the parties’ minds, nor did it rewrite the parties’ agreement. Rather, the reformed Conservation Deed represented the true agreement of the parties and gave effect to their actual intentions.

The court rejected Ranch O’s argument that the mistake was not mutual because the land trust was ignorant of the LLC’s existence when it acquired the easement while Mr. Walker was not. The court explained that “parties can be mutually mistaken regarding a contracting party’s identity even when their mistakes on that issue are not identical.”

The court also rejected Ranch O’s argument that Colorado’s conservation easement enabling statute, which provides that a conservation easement “may only be created by the record owners of the … land,” precluded reformation because it required the land trust to confirm the property’s ownership before accepting the conservation easement. The court found no authority supporting the assertion that negligent failure of a party to know or discover facts precludes reformation for mutual mistake, and noted that reformation accomplishes the purpose of the enabling statute.

Reformation Did Not Violate Policies and Purposes Behind Race-Notice Statute

The Colorado Court of Appeals also disagreed with Ranch O’s contention that reformation of the conservation easement deed violated the policies and purposes behind Colorado’s race-notice statute. The court explained that the purpose of the race-notice statute is to protect purchasers of real property against the risk of prior secret conveyances and allow them to rely on title as it appears of record. The statute makes an exception, however, for unrecorded documents of which the parties have notice. Ranch O had actual notice of the conservation easement deed before it purchased the subject property—the deed to Ranch O advised, in bold type and all block capital letters, that the subject property was encumbered by the conservation easement and gave the easement deed’s recording date and reception number. Accordingly, the easement deed was valid against Ranch O pursuant to Colorado’s race-notice statute, and thus, reformation of the deed was not contrary to the purposes and policies of that statute.

The Colorado Court of Appeals acknowledged that, in certain circumstances, a bona fide purchaser of real property can defeat a claim for reformation—i.e., the equitable claim for reformation based on mutual mistake “is subject to the rights of good faith purchasers for value and other third parties who have similarly relied on the finality of a consensual transaction in which they have acquired an interest in property.” In this case, however, Ranch O acquired the property with actual knowledge of the easement, even though the instrument was defective, and it could not ignore an instrument of which it had actual notice. To hold otherwise, said the court, would run counter to the notion that reformation is an equitable remedy that should be available when fairness demands such relief. Reforming the deed, explained the court, effectuates the intent of the parties and does not prejudice Ranch O in any way, given Ranch O’s actual knowledge of the existence of the conservation easement.

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