REAL ESTATE TRANSACTIONS
FALL 2000
Three components to RET
1. transfer
2. financing
3. development
A transfer is effectuated usually through a sale. (Sometimes a gift/inheritance).
Financing involves finding capital to buy the real estate. Development involves taking
property in an underdeveloped state and improving it.
I. PRE CONTRACT ISSUES
The periods involved:
1. Pre-contract. Begin looking for property/approach broker
2. Contract entered into. Agreement to transfer title later on.
3. Executory Interval. Financing; checking title; inspections
4. Closing. The actual transfer of legal ownership of the property from one person to
another.
5. Post-Closing. Recording the deed. Resolve any disputes (unsafe property, others
claiming rightful ownership)
The Contract and Closing are the most important stages. Paper is involved.
The person involved in transferring real estate is the BROKER.
Usually the broker is working for the seller. A broker is defined as: a person who
specializes in gathering listing agreements for or selling particular types of property.
An examination must be taken to become a licensed broker. Once a broker you can
have salespersons under you.
Listing Agreement:
An employment contract between the seller and broker OR salesperson
Usually the listing agreements set out:
1. employment services of the broker
2. property identification
3. the broker’s duties (permit him to sell)
4. listing dates
5. commission
6. signatures
Usually a broker does not have the power to actually sell the property. He may secure
offers. In order to actually sell/transfer the property the listing agreement must state
this clearly.
Commissions may be due at contract signing not necessarily at closing. State it
clearly when the commission is due.
Listing agreements can be modified or changed and only imagination stops you.
Sometimes all you need is an acceptable offer for a broker to get a commission. Even
after listing period ends, a broker can still get one if he showed the buyer the
property.
TYPES OF LISTING AGREEMENTS
1. open listing “non exclusive”: broker can secure offers and owners can secure
offers. Other brokers can secure offers too. These are pretty rare. Whichever
broker secures offer, that broker gets it.
2. “exclusive agency”: broker can secure offers and so can owner. No other broker
can secure offers for commission.
3. exclusive right to sell: only broker can secure offers. The owner may not secure
offers. If he does, owner still has to pay commission.
4. net listing: this can be a part of any of the previous three types. It describes a
particular kind of commission. Instead of commission being a percentage, this
kind of commission is any amount over the agreed upon price. For example:
If price is 100k
Sold for 150k
Commission would be 50k
This isn’t very common and some states prohibit this type of commission
because: brokers will under appraise in order to get interest, hoping someone will
pay more than the price agreed upon. Also, brokers won’t accept buyers offers at
the list price.
Drake v. Hosley
Seller and broker into an agreement. Broker is the exclusive agency. Listing
period was 3/5-3/30.
Commission paid if Hosley found a buyer willing and able to purchase the
property. Hosley found three buyers. On 3/23 contract for sale was signed.
Closing would occur within ten days of “clear title.” Title report 4/3. But Title
Report came back that seller’s ex-wife had some kind of lien on property. Hosley
called the attorney for seller to ask about the lien. The attorney (Wickwire) said
the judgment could be paid with money from closing. Later on, Wickwire called
Hosley and said the closing must be made by 4/11. Hosley said he’d do his best.
Hosley then called wife’s attorney and attorney said deadline could be extended
until the end of the month. On 4/11 Wickwire called Hosley to set up closing.
Hosley said the buyers didn’t have the cash. Wickwire told Hosley he would tell
his client, Drake that the sale should be called off because buyers couldn’t
perform. On 4/11 letter mailed to Hosley calling off sale. Hosley received it
4/18. On 4/12 Drake sold property to someone else. Also on 4/12 Hosley went to
Wickwire’s office and gave him checks to close the sale on behalf of three buyers.
The checks were refused since property was already purchased. Hosley filed a
complaint wanting commission. He argues he fulfilled his listing agreement.
Court agrees and Hosley gets commission. A broker is entitled to commission if
“improper or frustrating conduct by the owner prevents title form passing.”
Drake argues that the court should adopt Dobbs. This is a minority viewpoint. A
real estate broker doesn’t earn a commission unless the contract of sale is
performed. This means there must be a closing. (Even under DOBBS, Hosley
still got it)
The traditional rule followed by the majority of jurisdictions is that a broker is
entitled to a commission when he produces a buyer ready, willing and able to
purchase property on the seller’s terms, even if the sale isn’t completed.
REAL ESTATE BROKER ISSUES
Licensing is set by the state
National and state associations that sets code of ethics
Must have brokers license to have people work under you
Commissions: depend on office policy
Collaborations with other agencies exist: MLS
On November 1, 2000, Oklahoma is changing some statutes
NO longer will the term “agency” be used.
Transactional brokers: can’t advocate one party’s position over the others.
Must express that broker is working for the seller or the buyer
Brokers do market analysis but to get appraisal of the property (for mortgage
purposes) use appraiser
Seller and broker meet so broker can prepare an evaluation and market analysis
Broker discusses the plan, instructs seller what to do: clean house, inspection
Seller agrees with the advertising strategy
The listing agreement at this point should be signed
Seller may list the property and other sellers contact the listing broker
Commission is then split from the proceeds of the sale
DOBBS RULE
Commission earned to a broker when?
(Earned meaning when is he entitled, different from paid (paid usually means
from the proceeds)
Dobbs/minority held: commission is earned at closing
Traditional/majority: commission is earned at the contract
Make sure the listing contract specifies this clearly
HYPO: Broker goes to best friend who wants to sell. You tell friend that you
know a buyer who wants to buy the house. Seller moves out, calls buyer and the deal is
done. Should there be a commission for broker? NO: didn’t sign a list agreement and not
even an oral arrangement was made.
MLS. Multiple listing service. Set up by trade associations. Members may use
them. Any listing property you get will be shared with other members. The service
provides information on property. All members use them to inform potential buyers.
Members should be honest with each other. Then there are list brokers and seller brokers
who split commission. Usually LB gives permission for SB to show a house.
MAKE SURE BUYER KNOWS WHO BROKER IS WORKING FOR
If your license expires while you are in the process of selling, you still get commission
Listing broker is agent of the seller. The selling agent is an agent of the listing broker or a
sub-agent of seller.
Duties owed to the seller
(FIDUCIARY)
1. loyalty to client
2. brokers can’t self deal
3. full disclosure of all facts material to principal’s acceptance of an offer (keep
client informed and make sure broker discusses all reasons why acceptance
should be avoided. For example, if buyer is broke)
4. duty of confidentiality: don’t tell buyer anything about seller. Seller needs
cash fast!
5. disclosure regarding representation: all parties sign a document making sure
they understand broker relationships. See handout 2A
BROKER’S DUTY TO PURCHASER
Easton v. Strassburger
Easton purchased a home in California. Later the land shifted causing house to have
severe damage. Buyer learns agent knew “red flags” indicating warning signs of soil
problems. Seller’s brokers sued for negligence: not claiming brokers knew for
misrepresentation of fact (FRAUD) but for negligence. Duty to conduct a reasonable
investigation. Court held liability will extend to this. Good public policy: brokers know
more about house and area than a buyer. Be careful because liability extends to seller.
Screw the buyer and the buyer will sue the broker and the seller.
In California, as a result of this case there is a significant obligation the seller’s broker
has to purchaser. She must disclose material facts and, thanks to Easton, reasonably
investigate and disclose defects. In California, brokers worried about these requirements.
SOLUTIONS: get seller to fill out disclosure forms. In Oklahoma, seller’s fill out forms
that state brokers not on the hook if these defects are found…(handout 2)
Oklahoma also has limited broker’s duties by using these forms. Some states, including
Oklahoma have eliminated fiduciary duties.
The known problems are still responsibility of broker!
In Oklahoma there is no duty to make an independent investigation.
II. CONTRACT PERIOD
Sometimes, there is no requirement to get a contract for land:
1. gift
2. will/inheritance
3. adverse possession
Most of the time you are selling land so you will need a written contract
Ways to refer to the contract for sale of land:
Purchase and sale agreement
Short term contract
Earnest Money Contract
Deposit Receipt
Binder
Marketing Contract
Offer and Acceptance
(buyer has put money down but this isn’t necessary)
Sometimes there is an installment contract (aka contract for deed, long-term sale)
This is when buyer wants seller’s property but can’t get money and banks won’t
give the buyer money. Seller agrees to let buyer pay off in installments. Deed
given at close of this period.
WHY MUST CONTRACT BE IN WRITING?
Both parties can be assured that behavior is justified and because large amounts of
cash are being exchanged. There is a legal obligation under law to have the
contract in writing.
STATUTE OF FRAUDS
The transfer of all interests in land must be in writing.
Schwinn v. Griffith
Barnes was the owner of property and she was old. A conservator was appointed
to help manage her property. C hires auctioneer to sell land. (Auctioneer has to be a
broker) He conducts a public auction. Prior to auction, people were free to walk around
the lots and inspect them. Before final sale:
1. must be approved by judge
2. zoning must be as is
3. high bidder on lot 1 gets first choice for lot 2
Griffith (buyer) wins auction. Gives a blank check to daughter. Auctioneer drafts
agreement and wants Griffith to sign it. Daughter takes this to Griffith. Griffith decides
he doesn’t want to sign. C sues for specific performance. Griffith defends:
SOF. No writing signed by him. He is free and clear and is using the SOF as a way to
get out of this.
In Schwinn, the auctioneer put items in writing and Griffith refused to sign. Griffith
believed he could walk away. His defense was SOF (no writing)
C argues:
1. SOF doesn’t apply to auctions
2. Even if it does apply requirements met, the agreement signed by auction satisfies
the statute’s requirements
Court decided auctions are unique, but the SOF must apply. Can’t disregard the language
“every contract for the sale of any land shall be void unless the contract is in writing” No
exemption for auctions of RP
(argument 1 is lost)
Even if it does apply no signature of buyer so state’s SOF not met: under this state’s law
(MN) only seller must sign. The seller and auctioneer both signed.
Vendee must only accept the delivery of the vendor’s writing (to prevent fraud)
Even though vendee (Griffith) doesn’t accept, the auctioneer acts as a buyer’s agent and
this action will bind Griffith
The bidder (Griffith) needed to come in and stop the memo of sale from being
signed
Even if you can’t find a writing, if you can prove one existed previously it can still bind
parties (hard to prove). Some courts require contract no matter what
The writing can be very informal but must contain the following terms:
Reasonable identification of parties (buyer and seller)
Reasonable identification of land
Words showing intent to buy and sell
Signature(s) required: some states require signature of seller others require
buyer and some states require both
sometimes a rubber stamp, letter head will suffice!
Price and method of financing are not necessary
PART PERFORMANCE
Big exception to SOF
Even if no writing exists, but some act by one or both parties that wouldn’t have
occurred without some agreement.
Roundy v. Waner
The R’s conveyed title to W (their daughter and son-in-law)
Did this because R needed financing on home and too old to get it themselves.
W held legal title and R got equitable (like a trust)
When R wanted legal title back later on, the W wouldn’t return it
Roundy continued
Kids holding property in trust.
Agreement that kids would reconvey the land when parents requested.
Parents requested and kids said NO because of agreement that occurred in 1968 (it was a
conversation)…”We’ll give you equitable title as well.”
The Roundys deny this and even if it did take place Roundys argued because this wasn’t
in writing, it violates the SOF
Kids argue: You did convey and even if SOF applies, there is an EXCEPTION: PART
PEFORMANCE
The kids (Waners) argue that consideration exists for (oral) contract:
Past kindness
Payment of debts
Assumption of notes
Repair promises
NONE OF THESE IN WRITING
Court agreed SOF is applicable but partial performance takes a land sale out of SOF
(Very rare for statute to mention part performance, but Idaho does)
PART PERFORMANCE in this case:
Daughter helping mother with finances
Debts being paid off by Waners
Wanders repairing the property
The oral agreement, even though no SOF was upheld
Even though no written contract, only oral, the kids got everything in FSA
For part performance to exist, courts look for certain things:
Possession (plus)
Payment of all or part of purchase price
Making improvements on property
The most important factor needed to be proved is probably payment, absent a writing
Usually a seller doesn’t care about possession. In an actual contract, payment language
included. Not “I promise to possess the house.”
No one will possess or make repairs unless you paid
seller can also use part performance if buyer reneges. Courts are split as to whose
performance must be shown
REMEDIES
The remedy granted is usually specific performance rather than damages. WHY?
Because part performance is an equitable doctrine and specific performance is an
equitable relief
Seller and buyer of real estate are entitled to damages.
If it’s the seller seeking damages, he’ll want money damages
If it’s the buyer seeking damages, he’ll want specific performance
Both may just want restitution
Formula for breach in real estate transaction: the non-breaching party gets the
benefit he’d receive had the contract been performed (the benefit of the bargain)
Examples: Seller and Buyer agree to contract price of $100k
The value of the property is $120k
If buyer breaches, the seller will sue. The seller will not get anything.
NO damages. It is the difference between the FMV and contract price.
If seller breaches, the buyer would get 20k
NOW, if the FMV is $80k…
If buyer breaches, the seller will get $20k
If seller breaches, the buyer can walk away.
General damages: huge split when vendor acts in good faith but breaches because
clouded title
Special damages can also be considered if damages are foreseeable (HADLEY V.
BAXENDALE)
Donovan v. Bachstadt
Seller couldn’t get clear title for buyer. After an agreement about financing (seller agreed
to help buyer finance)
Seller was in breach and now buyer wants damages.
Buyer wants the damages to be the difference in interest rates
REMEDIES
1. damages: benefit of the bargain. Getting what you would’ve had the contract been
executed
2. specific performance
3. restitution: putting the parties in a pre-contract position. Getting back out of
pocket expenses.
General damages: benefit of the bargain (example)
110k is FMV
100k is K
IF buyer breaches, seller would get nothing (seller can now make more)
IF seller breaches, buyer would get 10k
Watch out for other factors besides FMV.
Court will give weight to factors such as what the buyer will do to property.
If buyer is only going to resell the property, buyer may not get as much money
If there is a rapidly declining market
Try and get the best damage calculation by figuring these type of situations
In Donovan:
English rule: buyer recovery limited to restitution if seller breached in GOOD faith by
failing to convey marketable title. Seller couldn’t have known about cloud on title.
If seller did this would trigger damages
American rule: anytime seller breaches the buyer can get general damages. Innocent
purchaser should get damages irrespective of good or bad faith
The buyer in Donovan not limited to restitution and court used American rule
rationale.
The court used classic damage calculation. Difference between FMV of property that
could’ve been acquired (K) and the FMV of property at breach
Note: you can always contract around the remedy! (Liquidated damages)
SPECIAL DAMAGES
Incidental or consequential:
Figure loss profits/sales (commercial property)
FORESEEABILITY: HADLEY V. BAXENDALE.
Put stuff in K about what the buyer will do with property, that way you can get
good damages because they’ll be foreseeable.
(if a seller gets title exam and buyer breaches, seller won’t get this as a damage
because inevitably seller will have to oops, do it again with a new buyer!)
Centex v. Boag
Centex wanted Boag (buyer) to finish closing but Boag moving to Chicago.
Centex sues and wants SP. Finish the transaction. Afterwards, Boag can do
whatever he wants with property.
SPECIFIC PERFORMANCE ARE WHEN A REMEDY AT LAW IS
INADEQUATE OR DIFFICULT TO MEASURE.
Centex’s condo complex has basically the same features. Buyer didn’t want SP.
Seller did.
At common law, SP given all the time (land is unique, land is everything, land is
what makes you, every man dies, not every man truly lives, it is why that bastard
Edward Longshanks was in Scotland and why William Wallace kicked his ass)
Today, that rule hasn’t changed. Land is unique.
Buyer would want SP more than seller. Seller is the one giving up the land (so
how unique is it in his eyes?) Seller, in case of a breach, should be happy with
money.
This court finds buyers need SP more than sellers. Buyers couldn’t get unique
piece of land anywhere else. This court not sympathetic towards the seller and
will give him damages. Don’t need mutuality of remedies. Damages in this case
are easy to calculate and will be adequate.
If seller breached in this case, could buyer get SP? Maybe. But condos aren’t
really unique. Determine what buyer will do with condo
SP usually a buyer’s remedy:
If seller breaches (lied about amount of acres) the buyer will get the reduced
amount and won’t have to pay as much. This is SP with abatement
Although the trend is for seller not to get SP in some circumstances he might:
Seller needs to get rid of the home fast! Moving property is a hassle and to get
the most money SP is a pretty good way.
Reasons why buyer may not get SP:
1. economically unjust to force seller to build something that may not be done.
seller promised buyer penthouse, but seller can only build 2 story building
2. buyer knew about a previous K or clouded title
3. K for land is 10k and FMV is 100k
4. buyer is going to resell and not live in the house
LIQUIDATED DAMAGES
Buyer puts down payment on home and if buyer breaches seller can just keep the
earnest money.
“self-help damages”
IF BUYER DEFAULTS, SELLER MAY FORFEIT EARNEST MONEY AS
LIQUIDATED DAMAGES- a typical LD clause
5 issues
1. is clause valid
2. does it preclude the assertion of other remedies
3. if lower than actual damages can seller get shortfall
4. if too high above actual damages, must seller give some back
5. if not mentioned can seller keep down payment anyway
Buyer and Seller K
Buyer puts 200 down
K worth 20k
FMV on day of breach is 10k
With a LD clause buyer would be out 200
Without one, buyer could be out 10k
Mahoney v. Tingley
Seller cannot avoid the LD agreement if it is fair. The seller drafted it.
The sum is reasonable, not a penalty.
LD may limit other remedies depending on contract language. “MAY” doesn’t
prevent seller from seeking other damages….”SHALL pay LD” does.
Note 3, pg 61: when is reasonableness measured? Time of K. Courts shouldn’t
interfere with bargaining process of the parties. Prospective reasonableness at time of
K or determine if negotiations are fair.
LIQUIDATED DAMAGES
1. Is LD clause valid? As long as its not punishment. AS LONG AS IT IS
REASONABLE. As long as actual damages are difficult to gauge
2. Does it preclude vendor’s assertion of other remedies? Depends on language of
LD clause. IF clause gives an option then courts will uphold it. Buyers and
vendor’s argue on this point
3. IF LD amount is too small can seller get the short fall? Depends on courts view
of LD
4. What if LD provision is larger then actual damages suffered by seller? Depending
on the court, may force seller to refund part or all. Ca. ct. held up to 3% of price
is reasonable, other courts may find as much as 20%. General rule: anything up to
10% is in ball park, over this amount courts scrutinize. (examine factors such as
FMV)
5. What if K says nothing about retention of earnest money can vendor keep it?
Maybe. Tell client a LD clause should be drafted. Do it carefully to make sure
other remedies can be obtained. Construed against drafter. Some courts say if LD
clause in K and buyer breaches, you got to determine if you are going to use LD
clause or sue. Other courts state that earnest money should be returned and tehn
sue
6. During executory interval:
The number one rule of buyer is to get financing and pay
The number one rule of the vendor is to deliver clear title
General rule with respect when performance must be rendered:
If K sets forth a time, it controls. If K silent it must be in a reasonable amount of
time. What if neither party performs by closing date in K? Depends on if time is of
the essence. Generally time is of the essence, meaning: seller can sue for damages
caused by the delay OR other party doesn’t have to complete transaction
Merely setting the time for performance isn’t making time of the essence it must be
expressly stated.
If time is not of the essence parties must perform in a reasonable time
If neither party performs, time can keep going until one party does something that
triggers other party’s performance responsibility.
Century 21 v. Webb
Seller owes 5k to Citicorp (a lien). Doesn’t have clear title.
She agrees to sell to buyer in installments. Because of lien, buyer balks. They want it
paid off. Won’t buy house until marketable title. Neither party performs. Buyer sends
letter ready to perform but seller doesn’t do anything. Court dismisses the suit
because neither one tendered (did anything)
No party performs and time not of the essence: court extends for reasonable time
If K states time is of the essence and no one performs then both discharged
MARKETABLE TITLE
Title free from doubt if you are buying property. You don’t have to worry about future
lawsuits.
Title court would force on an unwilling buyer
Title a reasonably prudent purchaser would buy
Need to be sure title clear at time of transfer. Buyer may get benefit of bargain
Defects in title:
Don’t own what you purport to own (life estate rather than FSA)
Encumbrances (not specified)
Adverse possession (events that make title unclear)
Title checking:
Go to lawyer who will do examine or get abstract.
Get title insurance: if title looks clear a title insurance company will insure
property, that way it’ll pay if any problems occur
You can always contract around title: “Buyer will take property as is.” Maybe will
mean a reduction in price. OR transfer perfect title and buyer pays more.
If title is marketable (or in doubt) get title insurance just in case something
happens. Then the risk would be off seller.
Laba v. Carey
When a purchaser agrees to take title subject to easements and other covenants of
record which are not violated, that title is what the seller is obligated to tender.
Make specific in contract regarding encumbrances, otherwise what the insurance
company may insure/not insure must be complied with.
III. EQUITABLE CONVERSION
Let’s say Owen owns BA
At pre-K stage:
Owen is owner of BA and has legal and equitable title. He has FSA
If something happens to BA he has responsibility
At closing:
Buyer is now owner. He has FSA.
What about area in the middle? The executory period?
Who is responsible for events?
EC is a doctrine that kicks in after K signing but before closing.
At this point in time, Owen has legal title to property and buyer has equitable title
During this period, Owen dies leaving a will:
All RP to A
All PP to B
Technically, Owen has title, so A would get legal title to RP. Once closing occurs,
A must transfer title to buyer. B gets the money (PP) from the sale.
Buyer’s will:
All RP to A
All PP to B
After K signing, Buyer dies.
BA goes to A, but B upset some of his PP (money) must be spent on the RP
Cannefax v. Clement
8/28/81: Barker K to sell RP to Hodge
8/85: Clements got a JL on RP
9/85: K completed. Hodge got deed gave it to Cannefax.
Following K before closing JL is filed. What kind of property interest do Barker’s
have?
Barker’s only have PP. JL only good for RP so can’t enforce it on Barker. (They
Only have PP).
Some jurisdictions are split on issue and will attach the JL to vendor during the EI
The buyer may be stuck with the JL (buyer should walk away)
SOLUTION FOR CREDITORS: they would get to garnish vendor’s proceeds or
Buyer pays creditors directly
Mini-review
No transaction:
Owen owns everything in FSA
Vendor gives deed to buyer
Buyer suffers all risks and JL may attach.
He has property in FSA
Problem is the executory interval. Between K and closing
This is when EC kicks in.
V is said to have PP (legal title) proceeds will be given to seller
B is said to have RP (equitable title)
If something happens (fire) buyer could be responsible during this period.
Vendor has legal title still. Isn’t vendor still owner and have interest in RP? Yes.
Even though EC calls it PP, title is for RP.
JL can only get RP so lien won’t get vendor’s interest
In Cannefax, the creditor of the vendor can’t attach a JL because vendor has PP.
The solution is for creditors to get proceeds of sale.
Oklahoma: can enforce JL against the vendor. Won’t enforce JL against vendee
RISK OF LOSS
Traditional RULE: if property during EI is destroyed, loss on buyer (RP owner)
If fire destroys property before closing, the buyer still has to pay. Hopefully
Buyer has insurance. IF not buyer pays for property and cost to repair.
BUY INSURANCE.
Kind of makes sense for seller to bear the risk. He still carrying title and has
possession BUT seller can drop insurance during EI. Why pay premiums
anymore?
Don’t have to adopt this rule, jurisdictions may change it OR K around it.
If a party at fault, that party bears the risk.
Some states: only when title transfers does buyer assume the risk. (Minority rule)
UNIFORM VENDOR ACT (OKLA): risk of loss on vendor until title or closing
occurs.
Gilles v. Sprout
Court found in equity that proceeds seller got from insurance for fire could go
towards buyer’s purchase of the house.
Criticism: insurance is personal. Buyer should have gotten his own. Even though
it could’ve been a windfall for seller, who cares.
9/27-9/30: Intro to mortgage financing. See Handout 5. This isn’t going to be on exam!
Schrader v. Benton
Seller bought a condo for 34k
7%
30 year mortgage
payments: 226/month
the underlying mortgage
Later on….
Sold condo to the buyers (Bentons)
Sold it for 44,500
The buyers put 37,500 down and paid the rest 7k in cash
The deal was to pay the Schraders at 9% for 30 years.
After three years though the balance would be due!!
So they had to pay 37,500- payments already made.
Buyer liked the deal better interest rates than he could get at bank
Seller liked the deal, better return: getting more than they have to pay on under-lying
mortgage. Then they’ll get a bunch of cash at balloon payment.
Everyone happy but the bank, AMFAC. There was a due on sales clause. This meant that
if seller sold the house, they’d have to pay off balance of mortgage. Or AMFAC gave the
seller choice of letting the buyer assume mortgage. The buyer didn’t mind this!
Bank loosing out because interest rates are 15%. Let buyer assume mortgage (not make
seller pay). The buyer would have to pay 7% of the remaining balance.
To avoid this kind of stuff: DRAFT.. if third parties do not consent, the deal is off
IV. DEFAULT
Someone defaults:
Mortgagor hasn’t paid interest and principal when it becomes due or the mortgagor does
something he isn’t supposed to do: build something, illegal activity.
Mortgagee may accelerate the mortgage. Pay up today OR foreclose and sell.
If not enough is raised to pay off mortgage, a personal judgement could attach.
For foreclosure sales: public auctions. Pay off expenses, mortgagees and anything left
goes to mortgagor (RARE)
Private sales are rare because of dishonesty. Banks are obligated by law to have
minimum bids on private auctions
Due on sales clause: get them in a rising interest market
Pre-payment penalty clause: in a dropping market
(6 states prohibit prepayment penalties in resident mortgages)
MORE ON FORECLOSING
Mortgage agreement:
FMV is 75k (pays 10k)
Mortgage of 65k (SENIOR)
Mortgagor pays it down to 60k (pays 5k)
Then:
Gets a JUNIOR mortgage for 12k
What happens when a default occurs?
If default occurs on SENIOR mortgage, bidder steps into the shoes of mortgagor
He can bid as high as 75k (the FMV). If bidder did, the mortgagee (bank) would
be paid (60k) and there would be15k leftover. So JUNIOR mortgagee could get
its 12k. Anything left over would go to original mortgagor
REAL WORLD THOUGH, Bidders aren’t going to pay FMV
Instead:
Bidder-buyer offers 50k. There is a deficiency. Bank is out 10k still. Bank takes
the 50k plus bank would have to go after original mortgagor for remaining
money: remember original mortgagor signed a “note,” (promise to pay) allowing
a personal action.
JUNIOR mortgagor would get nothing, but maybe a personal action
What happens if default occurs and it’s the second one (JUNIOR)
Bidder-buyer takes the property subject to the first mortgage (SENIOR)
The foreclosure sale extinguishes the JUNIOR one but note the SENIOR one.
SO, the Maximum bidder should offer is 15kk because he’ll have to assume the
60k mortgage.
If not enough is bid, the original mortgagor is still on the hook and the JUNIOR
will go after the original mortgagor. The senior mortgage is assumed by the
Bidder
second mortgages are risky and a lot of extra interest is calculated as a
result
At common law, mortgagor’s had harsh penalties:
Mortgagors gave mortgagees title to property, but
“If A pays off B, then A can get title back”
The mortgagor isn’t in “possession” completely, because at common law the way the
mortgagor would earn money is by farming the land. If mortgagee didn’t get money by
LAW DAY then he gets FSA (the mortgagor had to pay it off no excuses)
TODAY: mortgagor in default and foreclosure sale ordered. M can redeem by paying
everything off. This is called redemption.
Default---redemption period-----foreclosure
Even after foreclosure some states allow statutory redemption. The M can get property
back from bidder. Bidders hate it because it is a cloud on title. But it prevents lenders
from under-bidding b/c to redeem all you got to do is pay sales price.
Theories of Mortgage
Title: mortgage is a transfer of title to lender
Lien: lender only has a security interest
Intermediate: title transfers at default
Under title theory the mortgagee doesn’t have possession in the traditional sense. May
have a right to collect rents and profits of land. Mortgagee has “bare” legal title.
Under lien theory the mortgagee retains no legal title only a security
Under intermediate theory if mortgagor defaults then mortgagee can reenter and take
possession, meaning has a right to profits during the period between default and
foreclosure.
What if property is a JTWROS, where there has to be unity of time, title, possession and
interest? If A mortgages to bank, under title the JTWROS is destroyed and it becomes a
T/C. (bank and B)
Under lien theory, if A dies B gets all because bank doesn’t get title.
Mortgage substitutes
Deed of trust: mortgagor is a trustor and transfers a deed to trustee (agent of the lender).
Equitable title is held by mortgagor and lender’s agent.
Why this is an alternative to traditional mortgage? If mortgagor defaults, trustee transfers
full title to mortgagee. Speeds up the foreclosure process.
Installment K: similar to mortgage where seller won’t give deed to buyer until principal
and interest paid off. If not, seller will retain the title and gets house back. The buyer is
required to pay taxes and keep insurance on the house.
CONDITIONS IN CONTRACTS
A covenant is a promise made and a condition is when an obligation to perform a
covenant is dependent upon the happening of an event.
“I’ll buy if I secure proper financing.” The purchaser isn’t liable for breach if he can’t get
proper financing.
In the Bushmiller v. Schiller case, the court held a purchaser can’t use the conditional
clause as a way of getting out of obligation. There’s gotta be good faith to secure
financing.
V. DEEDS (CLOSING TIME)
Early on deeds weren’t considered necessary. Old common law way: livery of seisin.
That’s where the grantor would give dirt to the grantee in a ceremony performed on the
land. Deeds are a modern day occurrence.
CONSIDERATION IS NOT ESSENTIAL TO TRANSFER A DEED
Deed doesn’t have to recite anything about consideration. Usually they do as a formality,
so courts won’t even question it. But it is just a formality. The policy behind this: don’t
want it because then people wouldn’t be able to give land to charity etc.
Concerns the courts sometimes have: fraud or people taking advantage of each other.
REQUIREMENTS OF A DEED
1. shall be in writing
2. signed by grantor (grantee presumed to “sign” by accepting)
3. grantees should be identified
4. identify type of title: JTWROS, T/C etc
5. description of the property, including exceptions (already in contract usually)
6. usually a recitation of consideration, but just a formality
7. a granting clause (be careful with language. Don’t say “strip of land, “ when you
mean an easement. Could get messy! Especially if land is sitting on top of oil
field)
Intent of parties usually prevails
DELIVERY AND ESCROW
For a deed to have legal effect, it must be delivered
Delivery is an act plus intent
DOCTRINE OF MERGER
The deed swallows the contract and any promises breached must be sued using the
deed. Reasons why: if you were unhappy, shouldn’t accept the deed in the first place.
Sue under the K. If you sue after the deed you got to sue with what the deed provides.
Contract is already performed upon getting the deed. Deed may not have a lot of
remedies to sue under, so write in what you can.
If the contract has conditional delivery than no merger can occur
INTENT the most important factor in whether delivery occurs.
If you hand someone a deed and say, “Check this out for any mistakes.” No delivery,
even though there’s an act, there’s no delivery.
If you have intent then even though grantor didn’t physically hand the grantee the deed it
is okay. (If grantor is handicapped or something)
COURTS ALWAYS PRESUME DELIVERY OCCURS BUT IT’S A REBUTTABLE
PRESUMPTION
Oral conditions imposed by grantor at delivery time to grantee. What are the effects?
Minority rule is that there is no delivery (intent rules). Majority is that the oral condition
is “dropped.”
It is possible to convey a future interest in property, but still need present intent to do this.
Wiggell v. Cheney
No present and immediate intent to deliver the deed.
A LITTLE REVIEW SESSION
Piece of paper contains this language:
O to A, I transfer BA to you, A.
Signed /s/ O
This is a deed. It has all pre-reqs. Signature; description of property (BA); description of
grantee (A); words of conveyance.
O has nothing. Title has transferred to A. A now has legal and equitable title in FSA. A
can do anything he wants with property
O to A, I want you to have BA when I die, A.
Signed /s/ O
This is probably a holographic will. A has paper in his lock box.
Nevertheless O still has title to BA- legal and equitable. A only has a hope for property.
There is no deed because no present intent. Language stated here shows no present intent,
just future.
O to A, I transfer BA to you, A, but I reserve a life estate in BA
Signed /s/ O
This is not a deed and not a will. Kind of between the 2 now.
Courts state it’s a deed. There is present intent to transfer to A. It is a deed to A as
remainder. O has life estate.
Split owners: O owns present interest. A has future interest
O remains on BA until he dies. But can’t transfer BA away---limited to what O can do
A can’t move onto BA while O alive. A may sue for waste caused by O
Wiggell court found it was scenario 2. No present intent. Trying to make it work like a
will. Maybe it would work as a will in this jurisdiction. Not in Oklahoma (need date)
Courts sometimes construe it as scenario 3 for policy reasons. Give the grantee a break
(close relationship between grantor and grantee; grantee had the key to the lockbox)
ESCROW: the custodial relationship a disinterested third party has with grantor and
grantee. Takes deed and won’t give to grantee until conditions are met.
Delivery must be accepted by grantee and at this point title transfers
If you rip it up it, you still may be able to claim the transfer took place. Nullification
doesn’t occur.
Grantee’s heirs would come in and argue delivery completed
Note: even to re-convey, grantee needs to write a brand new deed.
How can grantor prove no delivery because of grantee’s act of ripping deed up: NO
INTENT TO ACCEPT
DEFECTIVE DEED
How can one not validly transfer title? Deed is defective
Execution (fraud)
Delivery
Drafting
WHAT ARE THE REMEDIES
Characterization
MINOR
Inconsequential
SUBSTANTIAL
Consequential
Failure to get required signatures
No seal
type of title not specified
forgery
EQUITY CAN COME IN AND REFORM
STATE CURATIVE STATUTES
If major defect, depends on party claiming the problem
Grantor can set aside transfer OR grantee can cancel it
BFP (Bona fide purchaser)
What happens when grantee transfers to a second purchaser BFP
Bona fide purchaser: must have paid value for property AND doesn’t have notice of
defect
If defect is VOID BFP may get nothing
If defect is VOIDABLE BFP could prevail and keep it
A deed that is forged is VOID
FRAUD in inducement: misrepresentation certain facts (“transfer title to me to avoid
judgment creditors”) VOIDABLE
Fraud in factum: misrepresent the document itself: sign this will as my witness (it is a
deed) SPLIT decision: some VOID others VOIDABLE
Check what you are signing!
Capacity issue: if on record is VOID if off record is VOIDABLE
VOIDABLE and in BFP’s hands, the grantor can get money from the grantee
VI. QUALITY OF TITLE
warranties/promises made pertaining to property
1. warranties relating to physical condition of land (warranties of quality)
2. warranties relating to intangibles (title)
quality: thought of as implied
title: described in deed
Stambovsky v. Ackley
Buyer purchased a home in upstate NY. Contract for sale signed, but no closing. During
the EI, buyer finds out house is haunted. Wants to rescind. Wants down payment back.
Seller told everyone else but not buyer about the house. Articles in magazines etc.
Value could eventually go down. Can’t later sell it.
Purchaser won. Even though there is notion of caveat emptor, there is no way of knowing
this type of defect. Barring seller telling him, buyer wouldn’t know.
Traditional rule: any property as warranty of quality
Today: extend mainly to NEW private residential property
Caveat emptor: purchaser takes “as is” but sometimes defects do not fall under this
doctrine
In Stambovsky, seller publicized the fact ghosts live in the house. Fact the defects are
latent made court move this way. Consider the economic effects of this type of home.
Usually courts let buyers rescind/ collect damages when sellers actively conceal (cover
cracks with dry wall, lie about a septic tank)
Trend is going to more active disclosure
Easy to get if seller is actively concealing the defects
What is a material fact? Usually things already in existence. Can’t hold seller liable for
unplanned zoning changes. Maybe the fact house had a murder in it, is by a crack house,
is a crack house.
Can’t discriminate in housing: who you buy or lease to: FAIR HOUSING ACT
Evans v. J. Stiles
Evans brought property from Stiles
Upset because new house had bad brick, they sued for damages
Jury found for Evans “not workmanlike quality” a warranty
Builder warrants: construction is in a good workmanlike manner AND suitable for human
habitation
A/C reversed because still inhabitable
SC of TX held: the 2 are independent
Buyer able to rescind
Oates v. Jag, Inc.
THE DUTY RUNS WITH LAND
A subsequent buyer sued the builder because of a bunch of defects: violation of building
codes; bad pipe; bad wood.
Court let the buyer sue for negligence and found privity of K doesn’t matter
Some jurisdictions won’t extend past initial purchaser though and mandate privity
Builder/vendor in new construction promises 2 things:
1. using workmanklike contruction
2. AND the house is inhabitable
These are implied warranties
The reasons they are implied is because builders are in a better position than the buyersthey know more than buyers do about quality
If courts do have a hard time allowing subsequent purchasers from recovering they will
stick with privity concept. Otherwise the implied warranties will mean if the defect is
LATENT (not obvious) then the buyer can recover. The builder has knowledge/should
have known about problem
One way builders could escape liability in privity jurisdictions is to actually move into
the homes they build themselves!
Tyrus v. Resta
Trying to put into K disclaiming warranty. Only if the language is clear and unambiguous
can you do this. If this occurs, market prices will drop. If house is 650k and no
warranties, heck, I’ll pay 50k
Court didn’t find any waivers in this agreement.
To get them, state them clearly. Make them clear. Only way to do away with implied
warranties is to state it.
Bridges v. Ferrell: Okla case. Waiver of Express warranties do not displace implied
obligations. Has to be clear that implied ones are relieved as well.
LENDER LIABILTY: some courts will allow purchaser to go after the “deep pocket”
The financial institution of the builder may get nailed if there was adequate control of the
builder. This was the holding in Conor v. Great Western Savings
(Note this is rare)
UTLA: uniform law. Applies warranties to even commercial realty. No state has adopted
this
Warranties to external providers: Homeowners Warranty Corp. (HOW) Insurance
coverage providing warranties. This fell by the way-side in the 80s
TITLE COVENANTS IN DEEDS (Not about realty, but legal notion that title is
clear)
Deed covenants are found in the actual deed (the document transferring property)
They are called warranties of title OR title covenants
The covenants must be expressed in deed: means that deed must be a WARRANTY
DEED, not a quit claim deed
1. quit claim deed: made with no title covenants. No promises made. Conveys what
grantor has. No claims if grantee gets kicked off the land by a grantor
remainderman. You pay less for this type of property
2. warranty deed: making promises in the deed that title is good.
3. special warranty deed: claiming as the grantor when I owned the land there were
no problems.
THE SPECIFIC COVENANTS ARE:
present ones:
covenant of seisin: grantor has possession of the land (good or bad) OR grantor owns the
estate in land that deed purports to convey.
If the grantor is an AP and makes warranty deed, is there a breach of this
covenant? NO under first view. MAYBE under second view since possessor
doesn’t know what type of title he is possessing
right to convey: like seisin. Have a right to convey the land. Don’t just have possession.
Tenant wants to convey his remainder of lease, but landlord prohibits it.
against encumbrances: no outstanding interest in third parties.
future ones:
covenant of quiet enjoyment and covenant of warranty: promise that grantee gets good
and unencumbered property. Grantee won’t get evicted by seller/agent; seller’s agent or
person with paramount title.
To breach the quiet enjoyment/warranty you have to have an eviction: someone with
paramount title needs to cause interference (must have both)
further assurances: grantor promises to keep up with grantee and anything new or needed
to be added to deed will be made by grantor (THIS IS ONLY EXPRESSED
COVENANT NEEDED)
Only way to sue using covenants is if you can find grantor, hard to do.
Other methods of ensuring deed is okay: title insurance or title exams
REMEDIES WHEN COVENANT IS BROKEN
What happens when there is a breach?
Damages are what the grantee is entitled to, but how much?
If someone comes onto grantee’s property and says “this land is mine.” There has been an
eviction. So quiet enjoyment has been breached. All the grantee can get is what you gave
at closing. Not fair if the value of the property has gone up with grantee’s efforts.
Remember, if you are claiming a breach of marketable title (contract claim) must be done
before closing occurs. The duty to deliver marketable title occurs at closing. Afterwards,
you have to sue using covenants.
(Marketable title doesn’t mean perfect title. It means the ability to transfer property that a
reasonable lender would loan money on)
Under breach of marketable title, the remedies are:
rescind
damages (benefit of bargain, attorneys fees, foreseeable damages)
specific performance
For deeds:
no specific performance (only for further assurances, make the grantor include
them) Only damages!
Brown v. Lober
Eviction is relevant for future covenants. Breached when eviction occurs.
1957: warranty deed to P. Deed purported to transfer all coal rights/ FSA
1974: P sold to Coal Co. the coal rights. P made 6k.
Coal CO. does title search and discovers a paramount owner has 2/3 interest. So only
pays P for 1/3 or 2k.
P sues the grantor’s estate(heirs)
Covenants P sues under
covenant of seisin: grantor promised he owned estate (could’ve been a breach but
there is a SOL limitation of 10 years) Didn’t work. Grantee should have examined
title more
Covenant of right to convey: ability to transfer land.
Covenant against encumbrances: would be breached but didn’t raise it
Covenant of quiet enjoyment: no facts to show eviction. No interference from person
with paramount title. Can’t bring claim until someone interferes.
Is it only going to be one covenant that is breached? No always argue in the alternative
depending on the breach. SOL may get present ones but if there is an eviction could get
quiet enjoyment covenant.
VII. DAMAGES
Hillsboro Cove v. Archibald
Archibald conveyed to Weinstock parcel B
Archibald conveyed to Hillsboro parcel A
A
B
Problem is B(Weinstock) is entitled to more (has a thirty foot strip of land into A’s
property. A in process of building condo complex (Hillsboro). Court ruled A only
entitled to 6k (representing the value of the strip). A had already spent about 49k
developing the project. What should happen—Weinstock should just sell this parcel to
Hillsboro.
Do a better search!
Damages capped at closing value
VIII. TITLE ASSURANCE METHODS
Besides covenants (don’t only rely on this) Get: title insurance and get title examination
Worse type of buyer: no exam, waives warranties (gets quit claim)
Best type of buyer: demands perfect title, gets exam, demands warranties, gets insurance
Usually buyers fall in between
TITLE EXAM/SEARCH
process:
start at courthouse. (The library)
the recorder of deeds (the librarian)
The recorder doesn’t know everything. He checks-in deeds that affect property in a
particular county. He’ll lead you in the right direction.
It is a time consuming process because it requires looking in a bunch of different books.
check indexes; pull books (a lot of different ones). Sometimes you can use an abstract
someone else has already done, but not necessarily complete.
You never have to have a valid recording to have a valid deed. Although you can have a
bad deed regardless it is recorded.
Need a recording to:
presume delivery; protect you against other claimants to the same piece of property
(resolves priority battles)
WHEN YOU GET THE DEED, GET THE THING RECORDED
day 1: O------------A deed
day 2: O-------------B deed
WHO WINS?
The common law approach was that A would get land. O didn’t have anything to transfer
to B on day 2. (First in time is first in rights)
Now it depends on the jurisdiction you are in (Recording acts)
1. Race statutes/acts
In this recording act, whomever records first gets the land. B could win out even though
he got it on day 2 by getting to the courthouse first. It is a race to the recorder
2. Notice statutes/acts
Last BFP gets the land. Both A and B paid value and if B had no notice
(actual/constructive) then B would get the land.
3. Race-notice statutes/acts
First BFP to record wins. If B records first he gets the land.
Note: once you have an effective recordation, there is no BFP.
Oklahoma has a race-notice statute
day 1: O to A (pays value/no recording) BFP
day 2: O to B (pays value) BFP
day 3: O to C (pays value/has notice) not a BFP but records first!
Race state: C would get it, he is first to record
Notice state: B would get it, she is last BFP
Race/notice state: either A or B whoever records first
O--------ezmt-----A
O---deed----B
A needs to record for B’s land to be encumbered. If A (BFP) never records and no notice
by B, then B gets it FSA.
Which statutes are the best?
Notice may be the best one. If the last BFP doesn’t have notice, then that means the
previous purchaser hasn’t done anything with land. And the policy is to keep land
moving and productive.
You should record: deeds; long-term leases; easements.
Oklahoma case
O to grantee BA (short term period—land for loan)
Grantee never recorded.
Defendant forged a deed and recorded it.
A forgery is void.
However, SOL is 2 years. Court held that the 2 years is from day of discovery, not the
date of recording.
Not fair to make owners have to check to make sure stuff like this doesn’t happen
Who is protected under a notice statute? THE BFP
Who is protected under the race statute? Whoever records first.
BFP
one who pays value. Value must be proportionate to value of the land. If land is 18k
cannot pay 2k. Consider other forms of consideration: family and/or you worked the
land, cared for owners.
Constructive notice: doesn’t occur if misfiled. Charged with notice if it is filed and you
don’t look (person wouldn’t be a BFP).
TITLE INSURANCE
There is a lot of stuff to be concerned about- get title insuranceadverse possession, adverse use, implied easements, wills
A form of risk allocation. If deed screwed up purchaser will be covered.
Title insurance: pay one premium unlike life/casualty insurance where you pay premiums
continually. Title insurance risk is more preventable by doing an exam however other
types of insurance are not preventable. Never know when Jennifer Lopez’s butt will get
burned.
EXTRA STUFF
FAIR HOUSING ACT
Old rule: people who own property at one time could discriminate. It is your property
and you could do with it what you want.
New rule: Restrictions apply. LL and sellers have limits on discriminating.
THE FHA was established in 1968.
SECTION 3604 is the heart of the FHA
Can’t discriminate against any person or group in connection with advertising,
negotiation, sale or rental of a dwelling on the basis of race, color, religion, sex, familial
status, handicap or national origin.
3603 ARE THE EXEMPTIONS TO THE RULE
Will not apply to single family home sold or rented by owner provided that owner does
not own more than three at a time (limits the ability of builders to discriminate). If only
one then not impacting the market as much. Must be for sale by owner with no outside
help such as a real estate broker. You also are forbidden to advertise. Can’t have a sign
in front yard “NO BLACKS”
If owner lives in the dwelling you are allowed to bring in people that you want. Cannot
be bigger than a four family dwelling.
States have their own FHAs and can be broader than the federal law.
Familial status: whether or not you have children
Can a LL refuse to rent to an unmarried couple? Maybe. Use something like religious
freedom of LL. He doesn’t believe that unmarried couples should live together. Best way
to go is that state law doesn’t allow this type of discrimination. Statute dictates no
discrimination because of marital status.
Can a LL refuse to rent to a homosexual couple? They have no protection. Could evict if
LL sees something going on. States may not allow discrimination though.
You can require X to have a certain income level. But make sure you are not trying to
mask a prohibitive motive.
STUFF ON SECURING A MORTAGE: SEE HANDOUT 10
Borrower is a person who needs money
originator is an entity that makes initial loan, does the credit checking, analyzes the risk.
Originator can keep loan OR sell the mortgage and note to the secondary market.
Secondary market: could be life insurance companies, federally chartered institutions.
Must be conforming loans: these are loans that are in conformity with regulations
promulgated by feds.
Who sells the mortgages? Entities who are not capital rich. Mortgage companies do the
grunt work and then sell them off to a bank.