Real Estate Finance Outline
Table of Contents
Weíll spend a fair amount of time in this class on cases involving residential real estate.?Weíll do this not because itís the main focus of this course: lawyers arenít even involved in it much anymore.?But weíll emphasize it because the rules are about the same as commercial real estate.? There are now some consumer protection rules in residential real estate.?The rules donít apply as harshly with commercial real estate.?The law assumes in that case that the parties have roughly equal bargaining power and can take care of themselves.?Residential real estate transactions are easy to understand, so itís easier to teach and learn the rules in that context rather than deal with a commercial transaction where we have to spend a lot of time on the facts.
NPR said the other day that
it is expected that there will be one foreclosure for every 117 mortgages
The law of real property and
the law of real estate finance, which is a subset, used to be almost entirely local, meaning peculiar to the
state where the property is located and in many cases, peculiar to certain
parts of the state.?There used to be
different practices in
Why was it the way it
was??Lawyers are typically licensed
locally.?Youíre admitted to practice in
The lawyer, especially in a residential transaction, has become less and less important, at least when it comes to the buyer and seller.?The lender and title insurance company are represented by counsel, but not the buyer and seller.?So the locality makes less of a difference.?Also, banks now operate nationally.?Depression-era bank restrictions and regulations have been relaxed, and you see more and more national lenders.?National lenders want standardization.?Every lender wants to standardize the process as much as possible to reduce transactions costs.?When you donít need separate processes and forms for different states, it doesnít cost as much.
Another change is the rise of
title insurance.?After World War II,
there was a big population increase and federal policies designed to encourage
people to buy single-family homes.?There
was a lot of development, especially out West, that was not near established
financial institutions.?The major
The Federal Housing
Authority, Fannie Mae, Farmerís Home Loan Board and so on are
act as a private corporation but are infused with public interest and public
policy.?Their debts are backed by the
federal government.?The FHA wants to
help finance this real estate development thatís going on, particularly
residential real estate development after the war.?They make a deal where they agree to buy
mortgages.?If you borrow some money in
All of these forces are
working to make the law of real property, at least in the context in which
weíre studying it, more and more homogeneous throughout the country.?Take for example the Restatement of
Mortgages.?Now we can study cases from
all different jurisdictions to determine what the law is.?We wonít just look at
Most of the lecture will be PowerPoint and the slides will be posted on TWEN.?So good.?E-mail him regular-like, not on TWEN.?Heís Braunstein.1.?In the subject line, no matter what youíre really asking, write ďREF??There will be a filter.
The exam will be similar to the one in Property.?There will probably be a regular essay section, a short answer section and a multiple choice section.?This exam will be open book.
Outline of the typical transaction
The typical transaction involves a contract.?Even simple real estate transactions are more complex generally than transactions involving personal property.?This is partly the result of tradition and partly the nature of the transaction itself that makes it more difficult.?The typical deal starts, from the buyerís perspective, with finding a property, with or without the aid of a real estate agent or broker.?In the overwhelming majority of cases, the seller has already contracted with a real estate broker.?The seller will have entered into a listing agreement that authorizes the broker to put up signs, etc. and hopefully bring buyers forward.
An aside: A real estate agent is a lesser qualification than a real estate broker.?An agent takes an exam and is licensed by the state to engage in that practice.?You donít need any experience.?But you have to do business with a real estate broker, who needs to have been practicing for a certain amount of time and have passed a certain more difficult exam.?So a real estate agent cannot practice on his or her own.?In terms of what weíre studying, there is no difference between the agent and the broker and so weíll use the terms synonymously for the most part.? Note how this is different than the meaning of broker that youíll find in BA.
Next, the parties come together and decide that theyíve agreed on the property and terms, and thus a contract must be prepared.?In residential transactions, the contract is almost always printed on a standard form that is published jointly by the Bar Association and the Board of Realtors.?Braunstein says itís not a bad contract.?The idea is that thereís not enough money involved in residential transactions to draw up a contract from scratch every time.?It doesnít justify having a lawyer involved because the transactions are pretty routine.?The parties can usually customize just a few clauses themselves.?In commercial transactions, however, form contracts are rarely used, even for relatively simple transactions.?Big transactions begin to justify the attorneys?fees involved and negotiations that bring the two sides together in their understanding of their agreement.
Why do you need a contract of sale??There are two things going on.?Banks donít want to get involved in a transaction until they know what the transaction is.?They donít want to process a loan until the property and terms are already determined (though this has changed in the last 10 years with prequalification).?Also, the buyer wonít want to commit to purchase until financing is secured.?The buyer doesnít want to unconditionally promise hundreds of thousands of dollars that the buyer doesnít have.?The seller has an incentive to have a contract as well, even if itís somewhat contingent.?The seller is going to essentially take the property off the market, and they want to make sure that the buyer is obligated to secure financing and do their best to close the transaction.
The other thing that distinguishes the transaction in the purchase of real as opposed to personal property is the question of title.?We separate ownership from possession in the law of real property.?Someone who is in possession of land may not own it or may not own the whole ďbundle of sticks??You must investigate title, which takes time and costs money.?Buyers donít want to take the time to investigate title and then find that the property is off the market.?Title insurance works by telling the title insurer what property you want.? They do a title search and then issue a title commitment, saying that if you buy the property they will insure title on the property.
Finally, we come to closing.?Closing describes two different things: it describes, at least in some cases, a kind of conference that takes place with the buyer, real estate agent and title company and frequently a bank representative.? You meet for the purpose of fully executing the transaction.?When we say a transaction is to close on a certain date, we mean that all of the obligations of the contract are to be performed on that date.?The obligations of the contract boil down to the buyer paying the money and the seller delivering the deed.?At that point the contract becomes executed and is no longer executory.? The deed is then transferred.?Then documents have to be recorded, particularly the deed and the mortgage.?Lawyers may handle this, but more frequently the title company takes care of it.?Closing memoranda and ďbibles?are prepared.?And thatís itÖunless thereís litigation.
Role of the lawyer
Lawyers donít play much of a role in residential real estate transactions anymore because theyíve been driven out by title insurance.?The most complex thing that the lawyer did was give an opinion of title.?Now thatís done by title insurance companies.?The reason for this is that has the real estate market has become more national, the demand for uniformity in documentation has become more important.? Title insurance is on a standard form published by one or two different land title organizations.?Because they are regulated insurance companies, title insurance companies must have a certain amount of assets to back their liabilities.
It is sometimes asserted that
title insurance is cheaper than a lawyerís title opinion, but Braunstein thinks
thatís not necessarily clear.?Title
insurance starts at $5 per $1,000 of value.?
As the purchase price goes up, the insurance premium goes down somewhat.?In
Residential real estate transactions
almost always go off without a hitch.?A
lawyer might say that someone is taking a risk in buying or selling without
legal advice, but the transactions very seldom result in litigation.?In
Who does the real estate broker represent??The broker typically represents the seller.?The broker isnít in a situation to advise the buyer, for example, ďyou shouldnít buy this property because thereís a potential title defect!?span style='mso-spacerun:yes'>?Itís hard for the broker to give independent advice to the buyer.?The broker represents the seller and it would be violating a duty to the seller to advise the buyer.?Also, the buyerís livelihood is contingent on closing the sale.?So this is an unlikely source of independent advice for the buyer.
Buyers frequently say that they donít need advice because the ďreal money?is coming not from the buyer but a lender who is putting up as much as 100% of the purchase price.?So if the title and appraisal are good enough for the lender, why arenít they good enough for the buyer??The bank looks at the collateral, but they also look at the borrower.?Banks look at the transaction differently from borrowers.? They know that a certain percentage of their loans will default and theyíll lose that money.?But this is built into the interest rate.?The bank can spread the risk over a whole bunch of people and a whole bunch of loans.?The individual buying the house is not able to do that so easily.
There are some things that the bank might not care about that might be important to you, such as aspects that donít affect the value of the real estate.? Maybe youíd like to build a swimming pool but there is a restrictive covenant against building a pool.?That wouldnít affect the value of the property to the bank, but it would affect its value to you.?The bank has no economic stake in whether you can use the property in the way you planned.?In most transactions, the bank has a ďcushion??The buyer makes a down payment in most transactions.?Even if there is a defect, the bank only cares whether the value of the collateral will be affected.?If the value is cut by 5% but the bank has, for example, a 20% cushion from the down payment, then they wonít care.?The risk of a bad title or undisclosed defect with respect to title turns out to be quite small, even though titles can be very complex.
There are four types of listing agreements, at least as courts see it:
What type of listing appears in the book on page three??Itís an ďexclusive sale and listing agreement??Says so right in the title.? But they also refer to the exclusive right to submit offers.?They have the exclusive right to ďreceipt for deposit??What does that mean??If someone gives the agent a check along with an offer, theyíll give a receipt for it and they can deposit the check in their checking account, earning interest.?So we have an exclusive listing.?The agent gets a commission if itís sold to anybody.? What are the duties of the agent?? They have to make efforts to sell the property and list it with the Multiple Listing Service.?What does that mean??Itís very vague.?Do they have to make their best effort??Reasonable efforts?? Do they have to try more than once?? If you were going to negotiate this contract, you might negotiate what efforts will be necessary.?This is pretty much the only duty the agent has!? The fact is that most agents will do what they told you they would do, but itís good to have it in writing.
What about the owner??What are the ownerís duties??The owner must cooperate.?What is the biggest pitfall??What happens if the owner doesnít provide good title??The owner still owes a commission!?Thatís a dangerous situation to be in, because most people donít understand what their title is!?In addition, most people donít have the cash to pay the commission unless a sale goes through.
When is the commission earned?
There are lots of ways under the listing agreement in the book.?The agent gets a conclusive presumption that he or she caused the sale!?Does there have to be a sale in order to have a selling price??How could there be a selling price if the seller removes the property from the market??But there is a selling price listed on the contract.?How do we feel about the rules for when the agent earns the commission?? If youíre representing the seller, youíll want to change the paragraph about the commission in a number of ways.? If you wanted to make it clear that the agent only received the commission in the event that the sale closed, what would you say??What about the doctrine of preventing performance??If the agent brings in a good offer but you screw it up in some way, theyíve probably earned their commission.?Is it enough to say that the commission is due ďat the closing?or ďwhen the sale closes??What if the buyer defaults??Do we protect ourselves by saying that the commission is payable when the sale closes?? Wouldnít the court just imply a reasonable time??If the condition that was agreed upon never occurs, then the court will say that the commission is at a reasonable time.?Thus, youíve only really agreed on when the commission gets paid, not if it gets paid.
There are other elements you might want to change.?The agent want to be protected from being cut out of the deal by the buyer and seller waiting until the listing expires.?So they put language in saying that if you sell the property to anybody who they introduced you to, even after the six months is up, they still get the commission.? You would want to make the agent notify the seller in writing of everyone that they think they had introduced you to.?Also, it can be negotiated so that it only applies if there isnít another agent involved.? The rationale is that you shouldnít have to pay twice.
Drake v. Hosley ?There are more than two people who want to buy
property in North Pole,
The simplest way to buy
property is to pay cash out-of-pocket.?
One alternative is to borrow the money from the bank in exchange for the
mortgage.?To the seller, itís all the
same because they get cash.?But it might
be hard to find a bank in North Pole,
Hosley sues for his commission.?Does he get it??Yes!?
Whatís the rule of the case??The
commission is earned when the seller accepts the buyer: the seller is then estopped from saying that the buyer isnít suitable. ?/span>At that point, the seller becomes obligated to
pay the commission.?Whatís wrong with
that rule??What is the Dobbs rule??The Dobbs
rule requires performance,
that is, closing the sale in order for the commission to be earned.?Whatís the public policy here??The court says that people commonly
understand that you donít pay unless the sale closes.?So they make a new rule there for
What if you want to do business differently??What if the broker wants the commission as soon as a buyer is found and accepted by the seller??That seems to be the problem with the rule.?Some say that we want people to be able to contract any way they want.?But thatís not the sentiment of the consumer protection movement.?Should we have freedom of contract, or should consumers be protected from themselves??Other courts who have adopted the Dobbs rule have said that you can waive it, but itís kind of like a UCC requirement: you have to give lots of notice to the seller to assure that they know what theyíre getting themselves into.
What happens here??Does it matter what rule the
What was the deal about who Hosley represents?? Why did the court care??The court says that Drakeís attorney and Hosley canít agree to anything because they both represent Drake.? Whatever Hosley said, it doesnít make a difference because the agreement wasnít between the buyer and the seller.?This is how the court upholds summary judgment.?Does this make sense??Maybe Hosley talked to the sellers.?You can at least imagine that he did.?We donít get a trial to find out.?Maybe Hosley mediated an agreement.?But as a matter of law, the court finds that Hosley is not an agent of the purchasers and canít bind them.
But the court could have dealt with this differently.?The contract doesnít say that time is of the essence.?They could have said that closing on the 12th or the 13th is okay.?They could have said Drake is a creep who shouldnít be able to weasel his way out of paying the commission.?But they say that Drakeís attorney, Wickwire, and Hosley both owe their allegiance to Drake.?Even if the court adopts Dobbs, Hosley still gets his commission.?Most states use the old rule.?A minority have adopted Dobbs.?But Dobbs is the recent trend.?(CRASH!)
A problem on liability for commission
ďPursuant to a non-exclusive listing agreement, O places his property in the hands of B1, B2 and B3 for sale at $10,000.?B1 produces a buyer willing to buy the property for $10,000.?Before the contract is signed, B2 produces a buyer for $11,000.?So, O refuses to sign with B1ís customer and signs with B2ís instead.?Thereafter, B2ís customer suffers financial reverses and refuses to go through with the deal.?Thereupon B3 produces a buyer at $9,500.?O, disgusted with the whole thing sells to B3.?To whom does O owe a commission??o:p>
Under the traditional rule and under Dobbs, O will owe a commission to B1.?Under the traditional rule, he owes the commission to B2, but not under Dobbs.?He owes a commission under either rule to B3 since the sale actually went through.?Does it make a difference that itís for less money than he originally wanted to sell it for?? He could have held out for his $10,000 and not owed a commission to B3.
What about involuntary sales??What if the property is taken by eminent domain or foreclosed upon and sold at an auction??Do you have to pay a commission??Say the agent has an exclusive listing.?Is there anything in the contract that says the sale must be voluntary??Nope.?We donít intuitively like the idea of the seller having to pay a commission when there is an involuntary sale, but thatís what the contract provides for.?Many cases have held that in the case of involuntary sales the seller owes the commission.?That could be one thing you would want to change if you were an attorney representing the seller.
Who does the broker represent?
Typically, the broker
represents the seller.?But the law and
reality are totally out of whack.?
Generally, you call a real estate agent and ask to buy a house.?You want them to drive you around and show
typically think of that person as being your
agent.?Youíll ask if thereís anything
wrong with the house.?If the agent were
really the agent of the seller, then the agent would say: ďI canít discuss that
with you.?span style='mso-spacerun:yes'>?But thatís not the way that
the market works!?The agent, as a
factual matter, represents both parties.?
But as a legal matter, the agent owes a fiduciary duty to the
seller.?In litigation, sellers may claim
that agents violated an exclusive loyalty due to the seller.?Many states, including
There is a duty to disclose
the agency relationship.?There is a duty
to disclose material defects.?In many
Statute of frauds
There are two different kinds of real estate contracts.?Thereís the marketing contract (or purchase and sale agreement) and the contract for deed/installment contract.?The latter is not a purchase and sale agreement at all: itís essentially a mortgage or a security device like a mortgages.?Weíll put it off until after weíve already covered mortgages.?With the marketing contract, the parties contemplate that theyíll sign the agreement, which is highly conditional (like the one in the text), and then as soon as the contingencies are satisfied, there will be a closing, consideration will be paid in full, and the deed will be transferred.? So the contract wonít have a long life before being fully executed.?The contract for deed essentially says that the contract will remain in effect for a certain period of years, which may be a long time.?The legal title to the property will be in the vendor until the vendee pays the consideration in full.?The vendee will pay a certain amount of money per month.?If all payments are made, then the vendee keeps the property.?If the payments arenít made, the vendee gets tossed out and the vendor keeps the property.? Mostly, weíll be talking about the marketing contract.
The most frequently used
marketing contract in
Thereís an integration clause at the end of the contract.?Are such clauses effective for real estate contracts?? Is it legally enforceable to say that they canít amend their agreement??What about oral modifications??You can orally rescind, but you canít orally modify.?The agreement thatís youíre making doesnít have to do with the enforceability of the contract.? Braunstein thinks this is kind of dumb.? Modifications seem frequently more trivial than rescission.?Modifications are like a new contract: thatís why they have to be in writing.?But thereís an exception!?Thereís always the possibility of equitable estoppel.
This description would be inadequate for a deed because it doesnít describe one and only one parcel of land.? When weíre putting something into public records, we need a greater degree of certainty than when we have an agreement between two people.?Some courts, however, would say that the requirement is the same.?But this court doesnít adopt that standard.?This court takes a looser standard and says that the property only need be identified with reasonable certainty.?There must also be an indication of how much money was to be paid.?Itís not hard to determine the price.?So itís not specified precisely, but itís easy enough to compute.?There must be a promise, subject matter, consideration, and price.?Whatís the difference between the consideration, price, and promise??What else is left for consideration once price and promise are taken into account?? Braunstein thinks you need the price, and the essential promise which is to turn over the deed when the full payment has been made.
Was there really a contract for the sale of land here??Why wasnít it a lease??Well, it has this percentage rate.?It seems clear that there is a contract here and we know with some certainty what the terms of the agreement are.?There doesnít seem to be much reason not to enforce it.?Whatís the internal coherence requirement??How many documents are relied on here to prove the contract??The vendor kept copies of all the checks and a sort of ďmatrix?of records of payments.? The court puts all the writings together and say that all of them taken together constitute the note or memorandum required by the statute of frauds.?The court doesnít tell us much about internal coherence.?Normally, itís required that there is some reference in the writings that they deal with the same subject matter.?Thatís clear here in that many of the documents are copies of each other.
The executor claims that the price is inadequate.?Is that a statute of frauds claim??Keep in mind that when you win on the statute of frauds, all youíve done is establish that there was an oral agreement that the court can legally enforce.?You havenít proved your case, because this is a suit for specific performance.?You must prove all the elements that are required for enforcement of the contract.? So the defendant tries to claim that the contract is inequitable.?But the court says: this is an affirmative defense, and the defendant didnít introduce any evidence about it.?Inadequacy will be a successful affirmative defense if the price is shockingly inadequate.? But there was no evidence that would either shock or not shock the court.?If the price isnít inadequate, you must show some other way that the contract was inequitable.
What about the contract on
page 31, the ?/span>
What if there was an exchange of e-mails??What if this same note had been e-mailed to Diane and Jim and they had responded with ďOK??Would that be enough to have a writing that satisfies the statute of frauds??Can you electronically sign over the telephone?? Under the Electronic Records Act, the mark is defined in that it can be an electronic signal instead of a pencil or pen mark.?But there also still needs to be intent: was this mark intended to be a signature?
Does the statute of frauds require a contract to be in writing?? No!?Just a note or memorandum of the writing, and maybe not even that in the case of part performance.?Does the statute of frauds require the seller to sign the writing?? Not in most states.?Only the ďparty to be charged?needs to sign.?You donít know who has to sign the memorandum until you know whoís enforcing it.?If one party can enforce the contract, the other one canít necessarily enforce it too.?Itís perfectly conceivable that only one person will have signed the agreement, or note or memorandum of the agreement.?Thatís a very exceptional circumstance in the law.?Usually, if one person can enforce against the other, then there is mutuality of remedy and the other person can enforce too.?But only one side in this case can prove the contract exists!
Must the writing be introduced into evidence in any action to enforce the contract??Not necessarily.?The memorandum might have been destroyed.?You could just introduce evidence that there once existed such a note or memorandum.?Youíd need a pretty darn good explanation, but just because you donít still have the writing doesnít mean you have a legal difficulty with the statute of frauds; you just have an evidentiary difficulty.
Note that the statute of frauds is an affirmative defense.?The statute of frauds doesnít require a single writing.?What about a judicial agreement??If the purpose of the statute of frauds is evidentiary, then if you admit there was a contract thereís probably sufficient evidence that the contract existed.?That ought to be enough.?But whatís wrong with that??It encourages perjury!?Instead of saying that we had an agreement but itís not in writing, you simply lie!? The states split on this.?There are at least some states where a judicial admission would not be enough and could not be used to satisfy the statute of frauds for that reason.
If the statute of frauds is not satisfied, it doesnít necessarily mean that there is no contract.?The purchaser can still get rescission and restitution.?You could argue, however, that this is based on an idea of unjust enrichment.?But then there is also the part performance doctrine.?Even if you have the statute of frauds, there are lots of exceptions, such as easements by implication or necessity that donít have to be in writing but are enforceable.
There are three acts of part performance, and you need two of them: (1) partial payment of the price, (2) taking possession, and (3) making substantial improvements on the land.?Which of these are actually performance??Is partial payment of the purchase price performance of the contract??It depends on when the payment is due under the contract.?It sounds like, usually, that would be performance of the contract.? But not taking possession: you can own land and never even see it.?And not making improvements, for the same reason.?Why should the vendor care if you make improvements to a house that theyíre selling to you??So the last two arenít typically performance of the agreement.? So it might be a good doctrine, but the name is confusing.
Roundy v. Waner ?The mother and daughter get into a fight!?The court finds that there was part performance.?What was the part performance??The daughter paid part of the purchase price, made some repairs, and took possession.?There are lots of things that would establish the part performance doctrine.?We have all three of the things we just mentioned!? The court will enforce the agreement and the parents lose their house!?The theory for the part performance exception is to protect reliance and prevent unjust enrichment.?Does this make much sense??In practice, weíve gone much further than protecting the reliance interest.?But here, they invested $2400 and got the whole house, which gives them a lot more than their reliance interest.?Why donít we just give them $2400 instead of the whole benefit of the bargain??The second rationale the court uses is that people donít do these acts unless they believe that the house is going to be theirs forever.?If you use the evidentiary requirement, itís a higher burden of proof because the acts canít be ambiguous.?Anytime you have these acts, there will be a question as to whether there is a temporary right of possession as opposed to a sale.
We left off talking about part performance.?We mentioned the three traditional elements listed as part performance.?But only the first one is really performance.?The part performance in Roundy v. Waner was that the Waners had made improvements to the property, made some payments, and perhaps taken possession.? Did the Roundys ever really intend to sell the property??Why do we give specific performance??Thatís kind of an anomaly, at least if the intent is to prevent unjust enrichment.?Also, did Mr. Roundy agree to any of this stuff??It seems like only Mrs. Roundy was in on it.?How does the husband lose his interest in the house, unless Mrs. Roundy is his agent?
Braunstein has two problems with this case: (1) where you have a family or neighbor relationship, it may seem inappropriate to demand a writing in the way you would in a commercial transaction.?That may justify some exceptions to the statute of frauds in those kinds of transactions, although thatís not what the court talks about.?(2) The judges seem confident that there was a contract made, but was there one really?? Did the parties contemplate the consequences of a contract??Wherever you have an exception to the statute of frauds based on acts, you must remember that acts are inherently ambiguous.?You never really know exactly why people do what they do.
Can a vendor use the part performance doctrine to enforce an oral contract against a purchaser??The Waners paid some money and made some improvements.? Is that enough to set up an estoppel against them??If theyíre willing to walk away from the deal, is there any sense in which theyíve been unjustly enriched??Not really.? Thereís no basis for equitably estopping the Waners from denying the contract.?If they want to deny it, you can argue that they should be able to.?Could you prove acts of reliance on behalf of the vendor?? In this particular case, it looks like it only goes one way.?What if you use the evidentiary theory of part performance??Wouldnít you have to say yes??Arenít the Waners? acts pretty good evidence that there was a contract??Isnít it evidence thatís as good as a writing??So it depends on which theory you hang your hat on.? We ask: ďDo we have evidence thatís as good as a writing??span style='mso-spacerun:yes'>?If the answer is yes, we enforce the contract.
There are also other acts
that could potentially constitute part performance, but theyíre just not
mentioned as often.?Lots of acts could
satisfy either the evidentiary or unjust enrichment rationale that would lead
you to conclude that thereís a contract.?
Braunstein is persuaded by these three acts because in
In the end, Braunstein thinks we should get rid of the statute of frauds.? When we enforce it, weíre frustrating the intention of the parties.?We if say there was a contract but itís not enforceable because it doesnít meet the formal requirement of a writing, then we frustrate the parties?intentions because we think itís very important for the parties to put their agreement in writing.? Braunstein thinks that there are enough reasons to put agreements in writing such that we wonít cause any contracts that were previously written to be oral.?Itís debatable whether the statute of frauds adds anything; but we know it subtracts.?If youíre going to have the statute of frauds, why have the part performance exception at all, then??If youíre going to have it, why not just say ďwe have the statute of frauds and will enforce it??The law is of two minds on the statute of frauds.
Buyerís remedies and sellerís remedies are basically mirror images of each other.?That seems logical: in the event of a breach they should have essentially the same remedies.? The buyerís first remedy is specific performance, which means requiring the parties to do whatever they agreed to do.? The essential requirement for specific performance is that the buyer cannot be in breach of the contract.?As long as the buyer has performed all the buyerís obligations under the contract and as long as the seller is capable of conveying the property under the contract, specific performance will be awarded.? But what if the seller has sold to someone else who is a good faith purchaser for value without notice??At that point, the seller no longer owns the property and canít convey it.?The person who owes the seller isnít obligated to convey it.?If the seller says: ďI promise to sell you my 100-acre farm? and it turns out that the farm is only 47 acres, then thereís no specific performance (except specific performance with abatement, about which more later) because they canít legally convey what they promised to.
The next remedy is damages: the benefit of the bargain.?That means, for the buyer, the market price (on the date the closing should have occurred) minus the contract price.?That usually wonít yield much money because fair market value is just what a willing buyer and seller will agree to when reasonably well informed and not under compulsion.?Compensatory damages are unlikely to lead to a large recovery except in exception circumstances.?When weíre talking about marketing contracts, itís unlikely that there will be a big fluctuation in the value of the property during the short life of the contract.? These damages are also difficult to ascertain.?The market price and date of breach will require expert testimony because you must bring in an appraiser to say that the buyer had a really good deal.?Opinion testimony is less reliable than evidence from an actual market transaction.
Next up, we have unilateral rescission with restitution.?This isnít mutual rescission.?Instead, the breach gives the buyer the choice to declare the contract at an end.? The buyer would be entitled to recover whatever earnest money deposit had been made, with interest, and out-of-pocket costs specifically related to the transaction.?But the damages are always limited by Hadley v. Baxendale.?But costs reasonably within the contemplation of the parties and that are site-specific should be recoverable as a result of rescission.
The hardest and least important remedy is foreclosure of the vendeeís lien.?This exists only in some states.?The vendee has parted with money.?In the meantime, the vendor not only breaches, but goes bankrupt.?How does the vendee get the money back from the vendor?? The vendeeís lien is a way to get the deposit back by having the property sold.?The only time this has any relevance is when you have bankruptcy or insolvency.?Otherwise, you just get a judgment against the vendor and go through the usual process to have the judgment enforced.
Sellers are traditionally also entitled to specific performance under certain circumstances.?For the buyer, money damages are exactly the opposite.?We assume a rising market and subtract the contract price minus the market price.?The seller can also unilaterally rescind and retain the deposit.?When we talk about these remedies as being comparable, is it really true that this is similar to the rescission right that the buyer has?? Who ends up better off as a result of rescission??What does the buyer get??They only get back their own earnest money.?But if the seller rescinds, the seller gets the buyerís earnest money!? The sellerís right of rescission is actually much better than the buyerís right.
What if the deposit is greater than actual damages or there are no damages??What if the value of the property has increased, but for some reason the buyer has decided not to go through with the deal anyway??Does the seller still get to keep the deposit?? It wouldnít seem fair for them to, but they get to keep the deposit anyway.?This does strike Braunstein as unfair.?He would try to write the contract to change the remedies if possible to put the buyer and seller on an equal footing.?He also thinks that the seller shouldnít get to keep the buyerís deposit if the seller wasnít injured.?The only potential benefit is that you donít have to go through a whole trial if the seller just wants to keep the deposit.?That doesnít necessarily mean that if youíre a buyer with a small deposit that you can walk away from the deal for cheap: you must check your contract.
The seller also has a vendor lien.?This may have no practical importance, though it has some theoretical importance, especially when it comes to equitable conversion.?When you enter a deal, the seller has legal and equitable title.?But once you enter into a contract, the buyer has equitable title and the seller has only ďbare?legal title.?When the buyer breaches, you have a situation where the equitable title is still in the buyer and there needs to be some way to reclaim it and get it back to the seller.?The foreclosure of the vendorís lien is the way that itís done.?Braunstein doesnít know of any circumstance where this would actually come up.
Donovan v. Bachstadt ?What is the measure of damages when the vendor is unable to convey because his title is not marketable??Was this an intentional or unintentional breach of contract??Braunstein says that itís irrelevant.?The English rule, followed by about half of American jurisdictions, is that even though youíre entitled to benefit of the bargain damages generally, youíre not entitled to such damages in this one area.?How come??How do we justify this??You might have a bad title for reasons you donít appreciate.?Maybe you gave someone an easement, servitude, or real covenant that rendered your title unmarketable, but you didnít really understand that this was happening.?The idea is that if people donít get it, you shouldnít punish them for it.
But in the
The court points out that this is a default rule only, meaning that the parties can contract around it.?Thereís no public policy here; itís just a matter of how the court will interpret the agreement if the parties donít specific otherwise.?Who has the burden of brining up the issue in negotiations?? The court says that the seller has this burden if the seller wants to be protected in the event that he doesnít have marketable title.?Since the seller knows best about his own title, you can make a strong argument that this is where the burden ought to be.
What about compensatory damages for the vendee??Itís usually the difference between the market price and contract price on the date of breach.?With respect to the buyer, that rule makes sense.?But when it comes to the seller, the rule about the date on which you fix damages is more problematic.?The court says that it may not always be measured that way.?When you have a buyer who has turned around and resold the property, the damages may be measured by actual lost profits.?The damages may also include lost opportunities, particularly improvements made by the vendee while in possession.?Thatís a pretty open-ended contingent liability for the vendor as well.?What does the court do with the interest rate here??Rates were high and rising rapidly when this case was decided.?It was 1982.?It was expensive to borrow because lenders pay out uninflated dollars and get inflated dollars back.
The last paragraph of this case says that what you have to do is not look at just the value of the house, but also the value of the house with the added benefit of a low-interest mortgage attached to it.?Then you subtract from that the purchase price specified in the contract.
This is a great, powerful
remedy!?It allows you to hold someoneís
feet to the fire.?If the vendor sues for
specific performance, it means that the vendee has to keep prepared to purchase
the property while the suit is pending.?
They must keep their financing in line.?
They probably canít purchase another home during the suit, since most
people canít afford to have two of them.?
In terms of negotiating, the ability to get specific performance is very
powerful for the vendor, just as it is for the vendee.?The vendee can essentially force the vendor not
to sell to anyone else.?Anyone who buys
would buy subject to the pending suit.?
If the vendee gets specific performance, the person who purchases while
the suit is on will lose it.?Thus, itís
hard to sell the property when a suit is going on and specific performance is
being sought.?An aside: ?span
class=SpellE>lis pendens?means pending
litigation.?Once a lawsuit is filed and
you take advantage of this doctrine, then the judgment relates back to the date
the lawsuit was filed.?Sometimes you have
to give notice to trigger the doctrine, but in
Centex Homes v. Boag ?Thereís this huge condo complex. ?/span>Whatís a condo??You own ďfrom the paint inward?in fee simple.?From the paint outward, thatís all common areas and owned by someone else.? So you have some of the advantages of ownership combined with some of the advantages of renting.?The Boags take a pretty strong approach when Mr. Boag gets transferred.? Why didnít they try to negotiate something??What does Centex want??They want specific performance, or, in the alternative, they want to keep the earnest money as liquidated damages.
Why might the vendee be granted specific performance in a case like this??All property is considered unique in the eyes of the law.?But are these units unique??Is that self-evident??Some land may be suited to only one purpose or has attributes that make it different from all or most other land.?But this rationale is not really factually supported, in Braunsteinís opinion.?Itís much easier for the vendee to get specific performance than it is for the vendor.? So what if Centex had told the Boags that theyíre out of luck, and so the Boags sue for specific performance??Would the result have been different?
At the end of the day, if you order specific performance, what does the vendor get??They get money anyway!?Itís just that they get a different (presumably higher) amount of money than they would get with their remedy at law.?So from the vendeeís perspective, land and money arenít fungible.?But the vendor gets money either way.?So the uniqueness of land argument doesnít seem to make much sense in this case, and it doesnít seem to make much sense in the general case.? Why should the vendor get specific performance??How about the idea that itís only fair that each side should have the same remedies?? If one person can get it, it seems like the other person ought to be able to get it.?This argument has some force and appeal, but Braunstein doesnít think itís a strong argument.?The court in this case says that itís enough to have mutuality of obligation.?They say that as long as the contract is not illusory, that is, both parties have obligations, then thatís enough in terms of treating the parties fairly.?But the method by which we enforce those obligations doesnít necessarily have to be the same.
The damage remedy may not fully compensate the vendor because there are things that are not included, or else it is hard to compute what the damages were.?It may also be the case that itís hard to determine the market price of the property.? The property may be illiquid: maybe no one will want to buy it.?We might say that when the vendor decides to sell, all of the vendorís risks are bargained away to the vendee.?When you force the vendor to seek damages, you place those risks back on them.
Mahoney v. Tingley ?Cheap property here!?The buyer breaches the contract and the seller wants damages.?What does the buyer say??The seller gets to keep the $200 deposit.?Whatís the sellerís argument??He argues that the damages provided for in the agreement arenít his exclusive remedy.?He says that if you construe the clause the way the court did, itís a penalty and thus against public policy.?That means he gets to sue for his actual damages, not liquidated damages as set forth in the contract.? The court says the liquidated damages clause wasnít a penalty at all.?It will be tough to get a liquidated damages clause thrown out for being too low!?Youíre trying to say that itís a penalty because itís too low.
But what if itís too high??Then itís probably out.?But when is it too high??When itís way out of line with actual damages and you could have figured out actual damages ahead of time.?You calculate as of the time the parties enter into the contract.?The thing that actually seems to drive the courts is whether you did a reasonable pre-estimate of what the damages would be if there were a breach.?So whatís called a penalty seems to depend to a large extent on the custom in the community.? If a 10% deposit is customary, then a clause that requires forfeiture of that deposit will be upheld, but forfeiture of a 20% deposit will be held to be against public policy.
Does the court screw this case up??Does the court interpret the agreement properly??The court interprets this agreement as an election between liquidated damages and specific performance.?The property had already been sold, so the vendor no longer owned the property.?Specific performance is no longer possible.?Then the court says that the only remedy available is liquidated damages.? But is that what the contract really says??Arguably not.?You can enforce an agreement by seeking damages, right??It seems to Braunstein that the court kind of went off on a tangent.? When you bring a suit for damages, youíre brining a suit to enforce the contract.?Thatís every bit as much an enforcement action, according to Braunstein, as is a suit for specific performance.?Canít we interpret the contract to mean that the seller gets liquidated damages or else can sue for more if the liquidated damages arenít enough?
Weíre skipping time of performance and time to be conveyed.?The former, he figures weíve already covered; the latter, weíll get to later.
In every contract involving the sale of real estate, there is an implied covenant that the vendor will deliver marketable title.?Marketable title means good title, one that a majority of lawyers in a particular jurisdiction would advise a purchaser to accept without discounting the price due to some defect in the title.?You donít need perfect title, just a good one.
This is a very odd doctrine, and itís the kind of thing that creates traps if youíre not aware of the doctrine.?Most people think that the risk of loss is on the seller until you complete the purchase: as long as youíre in the contract stage, if something happens to the property you get out of the contract.?But the doctrine of equitable conversion is to the contrary.?Itís an old, stupid law.?There are lots of proposals to change it.?We have the idea that as soon as the contract is signed, equitable title is in the purchaser.?The purchaser is considered to be the owner.?The vendor still has legal title to the property, but not equitable title.?If the property is damaged, for example, then the purchaser (as the owner of the property) suffers the loss, just as all owners do.?But most people donít think that way, so the doctrine has the potential for causing problems.?Around the time of hurricanes, you get lots of cases along these lines.?Whatís weíre doing is recharacterizing real and personal property: thatís the ďconversion??The vendor starts with real property, and the vendee starts with personal property (money).?When the contract is signed, the vendor is said to have only personal property (the proceeds of the sale) and the vendee is said to have real property (in equity): the title to the real estate.
If thereís no clause in the contract allocating casualty loss, then who has it??The vendee does, because we consider the vendee the owner of the property.?This doesnít seem consistent with regular peopleís expectations.?Pretty much every real estate contract written by a lawyer shifts the risk of laws and eliminates the conversion rule.?If people do this without an attorney, they probably wonít even think of discussing this.?This isnít consistent with the way people generally insure real property!?The vendor is the one who is likely to have the insurance, and the vendee wonít get the insurance until the contract closes.? The vendee might fail to take the usual precautions that an ordinary vendee would.
Note that this doctrine doesnít apply when the vendor causes the damage.?You canít burn your own house down and then ask for the full purchase price.?It also doesnít apply when equitable title has not yet passed to the purchaser, for example, if the title is not marketable or a condition specified in the contract has not been fulfilled.?If the vendor is entitled to specific performance, the law treats it like it has already occurred.?But if the vendor is not entitled to specific performance, then the effects donít kick in.
When we say the purchaser has the risk, we mean that the purchaser has no right to rescind and is obligated to complete the purchase at the agreed price.? In the contract on p. 21, we see that the risk of loss is on the seller until closing.?Thatís more in line with ordinary peopleís expectations, at least with a marketing contract as opposed to an installment sale contract.?Then the contract tries to make a distinction between major and minor damage, using the figure of 10% of the purchase price as a cutoff.?If the damage is greater than 10%, the buyer can choose to proceed if the seller agrees to repair or to back out of the transaction.?If the damage is less than 10%, the buyer must proceed unless the seller doesnít promise to fix the damage in writing.
If the vendor has the risk of loss, the purchaser can rescind.?Weíll talk about this doctrine more when we get into title, but the other possibility is that the purchaser has the right to specific performance, but doesnít want to have to pay full price.?The purchaser may want specific performance with abatement.? They may want the transaction to go through, but they donít want to pay full price.?If the damage or defect is not substantial, the buyer has the right to specific performance with abatement.?This usually comes up when the vendor agrees to sell 1,000 acres of land when it turns out he only has 998 acres.?Itís the buyerís choice of remedy to sue for specific performance in the first place, and equally so to sue for specific performance with abatement.
Uniform Vendor and Purchaser Risk Act
This Act provides that when
neither legal title nor possession has been transferred, and all or a material
part is destroyed or taken in eminent domain, then the vendor canít enforce the
contract and the purchaser is entitled to recover her earnest money or any
price paid.?So if neither possession nor
title has passed, the risk of loss is still on the vendor.?But what is a ďmaterial part??It means different things in different
circumstances.?There is a case where the
building was destroyed and the buyer wanted to proceed with the contract
anyway.?It came up under
What happens if the damage is not material??The risk stays on the buyer because there is no provision in the Uniform Act that would change it.?Whatís material to a very wealthy person or not material to a very wealthy person may be very material to someone who has less money.?So for non-material damage, the equitable conversion doctrine continues to apply.?Can the purchaser get abatement under the Uniform Act if damage is not material?? The common law applies. ?/span>If the purchaser would be entitled to specific performance with abatement under the common law, then the purchaser is entitled to it here.?Can the purchaser recover other expenses and costs??Is the specific performance remedy exclusive??Weíre talking about material damage.?Thereís nothing here that precludes the vendee from other remedies.? But it would be unlikely that the vendee would be entitled to damages as well, because weíre assuming that the difficulty was not caused by the vendor.?The doctrine of mutuality of obligation says that if the vendor doesnít have the right to seek other damages, then the vendee shouldnít be able to either.
How is the
situation described different from
Do the two rules seem consistent??If the statute says that a judgment attaches to any interest in real property, then thatís easy.?If the statute says that the judgment attaches to any real property of the debtor, then it might be trickier.?But Braunstein says that this is the former case, and the court made it more complicated than necessary.?The two results seem consistent: (1) the vendee, not the vendor, is considered the owner when the lien is based on a judgment against the vendor and (2) we do consider the vendee to be the owner when the lien is against the vendee.?The doctrine of equitable conversion leads to the same result.
Insurance and equitable conversion
The courts try to find a way around the insurance issue.?The difficulty is that insurance is a personal contract.?Itís a contract between the insurer and the insured.?It doesnít benefit anyone else.?The insurance company doesnít want to pay off to the vendee, even if the vendee has the risk of loss.?Thatís pretty uniform, good law.?Some courts will say: thatís fine, but once the insured gets the money, the vendor holds the money in trust for the vendee.?This is a way of ameliorating the harsh effect of equitable conversion.? At least to the extent that there was insurance, the vendee will be protected to that extent.?It might not be the full amount of the loss, but at least it helps to some degree.
Who has suffered a loss??What if the insurance company says that the vendor is the only person thereís a contract with, and they say that the vendor hasnít suffered a loss because under the doctrine of equitable conversion the loss falls to the vendee??These issues are discussed in the notes.?How does insurance come into play in these situations?? You can get around this by simply contracting around it.?You agree to keep the risk of loss with the vendor until closing, the transfer of possession, or whatever.
One more characterization issue: what if the vendor dies, leaving all of his real property to the son and all his personal property to the daughter?? Who gets what??What does the son get??He gets legal title, subject to the purchaserís claim based on the contract.? The son must deed the land.?The daughter gets the purchase price.?That doesnít seem fair!?Wouldnít this have surprised the vendor before his death and frustrate his intent after his death??Itís a bad result!?What happens if itís the other way around, and the purchaser dies, having left all his real property to his son and all his personal property to his daughter?? The daughter has to pay the purchase price, and the son gets the land!?Again, that frustrates the testatorís intention.?But thatís the way the doctrine would work.?If the purchaser agreed to pay cash, then it doesnít matter whether the purchaser dies during the executory period of the contract or after itís executed.?But it the purchaser finances the transaction, the result is different!
We have two parties: a mortgagor and a mortgagee.?There is a promissory note between them that is the principal obligation: namely, the obligation to pay back the money.?Itís pretty much that simple.?You give me $100,000, and I promise to pay it back.?But you may not want to rely just on my word.?So in addition to the promissory note, you have a mortgage.?The mortgage is a lien for the repayment of the loan.?If you donít pay on the promissory note, the mortgaged capital serves as collateral.?The note is the ďdog?and the mortgage is its ďtail??When the dog ďdies? so does the ďtail??When the note is satisfied, the mortgage goes away.
If there is a default, then the lender has an option.?The lender can either (1) sue on the promissory note, saying: just pay me my money, or (2) foreclose on the mortgage, have the property sold, and get the proceeds of the sale to satisfy the note.?If thatís not enough, the mortgagee can sue on the note.? Or the lender can do both at the same time.?Up until recently, these were all options of the mortgagee.?As we proceed, a lot of the notions of consumer protection from torts and contracts have been incorporated into the law of real estate finance.?When we get to foreclosure, we will find that there are some limitations designed to protect borrowers.?But for now, it works well to look at these as options the mortgagee has.?There are two sets of obligations: the promissory note and the mortgage.?The purpose of the mortgage is to aid in collection, and the way that happens is by foreclosure.?But there is another set of obligations if you donít want to use the mortgage in aid of collection.
There are many different ways to pay off a loan.?What does the promissory note say??It tells you that you must repay, and it says how you must do so.? You can enter into a loan for 90 days, at which point all interest accrued and the principal is paid all at once.? Thatís very unusual for a long-term mortgage, though.?It doesnít make sense!?You could also have level payments with interest only: pay the interest each year, and then pay the principal back at the end of the loan.?This type of loan is used frequently for a commercial loan where the loan wonít be in place for a very long time.?But these arenít used very often in residential real estate transactions.? These were used before the Great Depression, when the idea of interest-only was more popular.?Mortgages were much shorter in length.?But interest-only led to a lot of defaults, and a kind of cascading effect.?You could have a level payment that is some arbitrary amount.?You could pay interest plus a certain amount of principal each month, followed by a payment of the remainder of the principal at the end of the loan.?This is used with income-producing property.? You pay the interest plus a given amount of the principal.?You negotiate based on what the income of the building is.
The last and most common way to pay off the loan is the fully amortized mortgage, meaning that once you establish a term and an interest rate, you do a calculation.?If you make a payment of a certain amount, then at the end of the term, the mortgage will be paid in full: principal and interest.?Itís a constant payment of the same amount every month, and by the time you make the last payment, the loan is fully repaid.?The last payment will be the same amount that the first one was.? This is the most common mortgage, especially for residential transactions.
We went over the kinds of payment arrangements you can have with a mortgage.? Thereís one more: you donít have to amortize the mortgage over the term of the mortgage.?You can do smaller payments but then pay off the rest of the total as a lump sum at the end of the term: a ďballoon?or ďbullet??This is primarily done when you have seller financing due to the fact that interest rates are high or the buyer doesnít have enough money for the down payment.?The seller will finance the purchase price, but will only agree to finance for five years or so.
When you start out paying a mortgage, youíre paying mostly interest and little principal, but then it gradually shifts over the term of the mortgage.? Each month, the interest is getting smaller because itís calculated on the outstanding principal.?The interest is calculated each month based on what you owe at the time.?As you pay less interest, you take the difference and put it into playing for principal.?This makes up the amortization curve.?The slope of the curve is relatively flat at the top: you pay a lot of interest in the first few years and not so much principal.? But near the end, youíre paying primarily principal rather than interest.?You donít have a month where you pay more principal than interest until you get a good ways towards the end of the term.?What does this say about refinancing??People do it all the time.?When interest rates go down, people refinance.?But when you refinance, you move back to the beginning of the curve!?Remember that the interest is tax-deductible, while the principal is not.?If you refinance and donít take cash out and you keep your payment the same, then youíll end up better off: youíll pay off the loan faster.?If you take money out, youíre even worse off: itís like you go further back than where you started!
There is a very strong policy
(that Braunstein doesnít understand) in favor of encouraging people to buy
houses.?The idea is that itís good for
people to own houses.?It may be good for
people to own something, but why
houses in particular??Historically, it
may make sense with World War II veterans needing a place to live.?We wanted to enhance their ability to buy
houses.?You can argue that we overconsume housing: when you compare savings rates in the
You can reduce your payments by reducing the amount of principal you borrow.? You could also try to get a lower interest rate.?There are many programs designed to reduce interest rates.?For example, the state borrows a bunch of money at 3-4% and then reloans it to home buyers for 4-5%.?The state makes a little money and the homebuyer gets an interest rate lower than what they would be able to get on their own.
Another way to make the interest rate lower is to have the Fed fiddle with the interest rate.?The interest rate equals the true cost of money (an absolutely safe investment, with no inflation, about 2-3%) plus the inflation risk plus the cost of credit risk.? The federal government may intervene to reduce the risk of certain loans by insuring them, shifting the credit risk from the mortgage lender to the federal government.?Note that there have been mortgage devices created to reduce inflation risk, like ARMs.?If you can adjust the rate of the mortgage every year based on an index, then you take less of a risk with respect to inflation.? Also, it doesnít seem to make sense to pay extra for a 30 year mortgage when youíre only going to live there for seven years.
Also, the longer you have to repay the loan, the less youíll pay every month.?However, the total cost of the mortgage will also be greater over the life of the loan.? You could also change the amortization rate so that your monthly payment is lower, but then you have the balloon/bullet coming at you at the end.
What options do the parties have in terms of the particular transaction, say a house for $125,000??First, you can have a cash sale.?Buyer gives the money, the seller gives the deed, the buyer records the deed, and thatís it.?Second, you could have a cash sale while paying off an existing mortgage.?The seller delivers the deed, the buyer pays the money.?Then the seller goes and uses the cash to pay off the mortgage.?The buyer could get a new loan and use it to pay cash.?The buyer secures the loan with the deed.? The buyer could also take over the sellerís old loan instead of having it paid off.?If the old loan was a good deal, the buyer may want to keep it alive.
You could also have seller financing, in whole or in part.?The buyer could pay a cash down payment plus a promissory note and mortgage for the balance in exchange with the deed to the property (encumbered by the outstanding mortgage).?In that situation, the seller wears two hats.? The seller basically is the same person as the lender to the buyer.?You could combine seller financing and taking over an existing mortgage.?If the buyer doesnít have enough money for the down payment, the buyer might take over the existing mortgage and then have the seller finance the down payment.?The buyer could give the seller an additional note and a second mortgage.?ďSecond mortgage?refers to the priority with which the mortgagees get paid off.?These priorities are based on time.
Finally, we have wrapping around an existing mortgage loan.?The terminology isnít really helpful.?This is really a combination of seller financing and keeping the existing mortgage in effect.?The difference is that the new mortgage is for the total amount thatís being lent.?The new, second mortgage will represent the total purchase price minus whatever cash is paid.?The second mortgage is for the full purchase price less the down payment instead of the difference between the existing mortgage and the new mortgage.? The seller has the advantage of being in control, because the buyer makes a payment that is sufficient to pay the old mortgage and the new one.?Then the seller pays the old lender.?The seller knows if payments arenít being made and if a loan is about to go into default.? When the buyer does it, the seller may not find out about a default until itís too late to do anything about it.? For a wraparound to be beneficial, you must be able to keep the old loan in effect, and that loan must have a lower interest rate than current market rates.?Both of those are highly problematic in the current environment: wraparounds arenít important right now.
How does the seller make money on a wraparound??The seller is really loaning $110,000 and really getting paid $885 a month.?What the seller is doing is not loaning his own money: heís reloaning the money from the old lender at a higher interest rate.?Heís borrowing money from the old lender at a lower interest rate and then reloaning it at a higher rate.?If the old loan was at 7% and reloan it at 9%, then youíre making a lot of interest on the ďnew money??The return to the lender is quite high!?At the same time, the interest rate paid by the borrower is below market rate.?The borrower and seller do well, but the original lender suffers.?Lenders will object to this!?Theyíll object to any situation where the buyer takes the property encumbered by an existing loan when rates have gone up.?These were very popular when it was harder for lenders to enforce ďdue-on-sale?clauses.?Now, this kind of financing has become less popular and valuable.
Wraparound mortgages were very popular back in the day!?The seller got a great return on their investment, and the buyer got a good deal too.?Only the bank got screwed.?Amfac didnít like the deal!?If they could get the money back, they could relend it at current rates.?They could lend it to the Schraders or someone else entirely.?They would like to get rid of old, low interest rate loans.?They exercise their ďdue on sale?clause, which is included in virtually every mortgage contract prepared by a commercial lender.?These clauses may not be present in mortgages made by individuals, or you may be able to bargain around them.?The ďdue on sale?clause is required to make a loan saleable to FHA, Freddie Mac and Fannie Mae.
The court said that the buyers could either pay all cash or could assume the existing loan on terms acceptable to Amfac and then pay the sellers the $12,700.?This is all the same to the lenders.?The court says that the buyers could assume the mortgage, pay $7,000 cash, and give the seller a second mortgage for $5,700 due in two years.?The court of appeals doesnít like this!?They say that the trial court abused their discretion in offering this option to the Schraders.?The problem here was that the parties bargained without considering the ďdue on sale? clause.?The only way to negotiate an arrangement like this is to bring the lender in to the negotiations.
With a wraparound mortgage, the buyer gives the seller a note and mortgage for the entire amount of the indebtedness.?The buyer makes payments on that loan at whatever rate they agreed upon.? The seller would take a portion of those payments and pay them to the original lender.?The seller is in a position to assure that the payments are made on time.?But if you do a second mortgage and the buyer doesnít pay, the seller has no way of knowing until he gets a notice that the mortgage is in default.
The original mortgage started as a fee simple subject to a condition subsequent.?The mortgagor has a right of entry and the mortgagee has a fee simple that can be defeated by the mortgagor paying off on time.?That means that if the mortgagor is late, at all, and time is of the essence, then the condition can never occur.? The mortgagee becomes the owner of a fee simple absolute and the mortgagor has nothing.?There is a great potential for an inequitable result here!?If the mortgage is small with respect to the value of the real estate, the mortgagee gets a windfall.?If the debt has been paid down, the mortgagee also gets a windfall.?The mortgagor gets screwed!
The courts of equity come in
and develop the concept of the equity of
redemption (more specifically, the equity of tardy redemption).?The
mortgagor can come in late and pay the mortgage, even though the law courts
wouldnít have allowed it.?The courts of
equity say: ďYouíre late, but so what??span style='mso-spacerun:yes'>?
You originally had to provide a good reason, but later you didnít really
need to.?But that creates another set of
problems.?The mortgagees say that if
youíre late but have the right to pay off the mortgage, how late can you
be??How do you terminate the
equity??The doctrine that the courts
come up with is a process for foreclosing the equity of redemption.?Everybody talks about foreclosing the
mortgage, but itís not really the
mortgage thatís being foreclosed.?
Whatís being foreclosed is the further exercise of the equity of
redemption, that is, your right to
pay off the mortgage.?The result is that
the court sets an ďoutside date? which is essentially the date of sale.?The court orders that the sheriff seize and
sell the property at public auction.?
That is the date beyond which the mortgagor cannot exercise the equity
of redemption.?The courts in
When we looked at the mortgage as a fee simple subject to a condition subsequent, it was very much like strict foreclosure, meaning that the mortgagee is not required to sell the property.?The mortgagee, upon declaring a default and foreclosing the equity of redemption, simply becomes the owner of the property.?But the problem with that is that the mortgagee may get a windfall because whatever equity the mortgagor has in the property is lost and held in its entirety by the mortgagee.
Almost every state in the
There is a so-called rule against ďclogging??Mortgagees would sometimes demand that mortgagors waive the equity of redemption.?This was found to be against public policy and would not be upheld.?The assumption is that the mortgagor and mortgagee have unequal bargaining power and that the law will be entirely circumvented if we allow these waivers to take place.?The circumstances under which the courts find an attempted waiver can be surprising.? Courts look very closely at mortgage deals to look for anything that looks like a waiver of the equity of redemption.
Before default and
acceleration, you have the legal right of redemption: you may have the right to
pre-pay, you may have to wait until a specified date, but the law lets you
eventually take the property free of the encumbrance and hold it in fee simple
absolute.?After default but before
foreclosure, there is the equitable right of redemption, which is what weíve
just been talking about.?After
foreclosure, you have a statutory
right of redemption in some states (mainly Midwestern farm states not including
Any time you create a right in the mortgagor, you create a risk in the mortgagee.?The mortgagee will try to protect itself from that risk by raising interest rates or changing some other term of the mortgage.?Thereís no free lunch here!?The person who buys the property at the foreclosure sale in a state with statutory redemption will probably get it at a discount because theyíre taking subject to statutory restrictions.?That increases the personal liability for the person who suffers the foreclosure.?The farm lobby is powerful!?The farm states all get two senators.
An acceleration clause says that in the event of a default, the whole amount of indebtedness becomes due.?You must have an acceleration clause in the note for this to be allowed.?It would be very risky to foreclosure prior to acceleration: you would only get the payments in default, not the entire balance.
A mortgage is a right to get paid out of the proceeds of that sale in preference and priority over everybody with a subordinate right.?That means that if you have a mortgage on certain real property, you get paid before the unsecured creditors of the mortgagor.? You get paid before the other people that may own an interest in the property that is junior in time to yours.? The property gets sold at foreclosure.? What is the state of title of the purchaser??The purchaser at foreclosure gets the title as it existed immediately before the original mortgage was entered into.?Thatís important!?This is part of the definition of a mortgage.?In the overwhelming majority of cases, the original mortgage ceases to exist; the purchaser at foreclosure takes free of the first mortgage.?When we get to the problem of omitted junior lien holders, weíll find that the mortgage will be considered to still be in existence for certain purposes.?What if a second mortgagee forecloses??Who owns what??The purchaser at foreclosure gets the title as it was just before the mortgage was entered into, namely, they take the property encumbered by the first mortgage.?[See hypo in slides]
Junior mortgages are more risky because you get paid second.? Whatís a less obvious reason??The second mortgagee canít control the timing of the foreclosure, and that may be important.?If youíre in a situation where your judgment as the lender is that if you wait you can sell the property for more money later than now, and if youíre in control of the foreclosure process, then you can decide to wait.? But if youíre the second mortgagee, you canít control the timing.?The first mortgagee is in control.?If you have a sale by the first mortgagee, the purchaser will pay no more than fair market value.?But if you have a sale by the second mortgagee, you buy for fair market value minus the value of the first mortgage.?When the second mortgage forecloses, the first mortgagee receives none of the proceeds of the sale, but the mortgage is still in effect.?The first mortgagee can foreclose later.
Deeds of trust
This is a not a mortgage substitute.?There are some states where these are common,
These are designed to avoid the equity of redemption.?One is the covenant not to coney or encumber the property.?The bank asks the mortgagor to promise not to convey the property to anyone else or use it for collateral in any other transaction.?Itís not a very powerful device, but it at least keeps some property there that will be available to satisfy the bankís personal judgment.? The second thing you can do is just lie.?Instead of a mortgage, the borrower conveys the property to the lender without reference to a loan, but with a secret agreement that it is a mortgage.?This doesnít work either, but the idea is that in the event of a default, you donít have to go through foreclosure or sale or anything else.? These kinds of deeds are actually quite easy to set aside if you can prove this arrangement.?Finally, you have the installment or land sale contract.? This looks like a purchase agreement, but in substance itís a mortgage.?Law treats the last two as mortgages.?The first one is not treated by a mortgage.?You have a cause of action for breach of contract, but you donít have the priority that a mortgage would have given.
The three types of deeds
The warranty deed ?this contains the five or six warranties that weíll be talking about.?This one contains the most promises.?You warrant, for example, against all encumbrances.?If there is an encumbrance, the warranty is breached.
The limited warranty deed ? this doesnít warrant that a predecessor in interest didnít mess up the title.
The quitclaim deed ?this says, in essence, Iím conveying to you whatever I own.?If I own nothing, you get nothing.?If I own an unencumbered fee simple, then you get that.
All three of these deeds are, in essence, contracts.
Warranties of title
Warranties of title are just
contracts.?Theyíre only as good as the
solvency of the person who makes the warranty.?
It can be a long time before any defect is discovered!?It could be hard to collect at the time you
find out the title is bad.?Also, you
donít really know what the state of the title is.?Youíre just being promised that the other
person has good title.?You donít get any
evidence of the truth of the promise.?
The other systems for title assurance give you at least some evidence
that the person who is saying the title is good has
actually checked to some degree if thatís the true state of affairs.?So warranty titles are a little ďflaky? itís
a ďband-aid??In most states, including
It is warranted that the property is ďfree and clear from all encumbrances??What are encumbrances??Theyíre bad things like mortgages, easements, leases: anything that takes away one of the sticks out of the bundle of sticks that constitutes a fee simple absolute.?The only thing that isnít considered an encumbrance is if you own less than you purport to convey in the deed.?The most important encumbrance would be a monetary encumbrance such as a mortgage or judgment lien.?It is warranted that ďhe has good right to sell and convey the same??This comes up in situations involving corporations.? Maybe only the president has the power to transfer real estate, but the deed is signed by the vice-president or secretary.
The grantor also ďwarrants? the title: this means that it is promised that no one with a paramount title to the grantor will evict the grantee.?The grantor also promises to ďdefend?the grantee and his heirs and successors.?Thatís kind of tricky: if you sue someone to defend your title, you can sue the grantor for attorneyís fees.?But if you lose, you have to pay your own attorneyís fees.
General warranty deed
You donít have to use the
form in R.C. 5302.05, but if the legislature gives you a form that will work, why reinvent the wheel??Itís very short, too.?You put in the personís name, and then their
marital status.?Why does the marital
status matter??You want to know who has
to execute the deed.?In
Brown v. Lober ?What are they claiming as the breach of the covenant here??They thought they had all the coal rights, but the grantor reserved two-thirds of the rights.?They claim that the covenant of warranty has been breached.?The court holds that there was no constructive eviction.?The coal company searched the title and found there was a reservation of two thirds of the interest in the coal.?The plaintiffs claim that this constitutes an eviction because the grantor didnít tell them about this reservation.?But the court holds that this isnít an eviction because the plaintiffs werenít denied possession of the subsurface.?One thing that doesnít constitute eviction is the fact that you turned out not to have good title: you must have more than just that.?Was there a breach of the covenant of seisin??Absolutely.?They didnít own it, because the grantor had reserved two-thirds of the coal.?They lose because the statute of limitations for bringing an action for breach of the present covenant had started to run on the date of the delivery of the deed, which was over ten years ago.?This seems like an odd position for the plaintiffs to be in.?They say itís too late to bring the action for breach of covenant of seisin, but itís too early for them to bring an action for quiet enjoyment.
This is an example of a case where it was not prudent to rely on the lender.? The surface was enough collateral to rely on for the loan, and so they didnít care about the subsurface rights.? But once we get past the statute of limitations on the covenant of seisin, the likelihood of an actual eviction based on this title defect gets increasingly less probable.?If they havenít shown up in ten years, they probably wonít show up at all.?To award damages in a case like this creates a substantial risk of miscalculation: you might be awarding damages for a bad thing thatís never going to occur.?Why not just live with the uncertainty??In that way, what the court does here makes sense.?Say the coal company starts mining the coal, and then the person owning the outstanding two-thirds interest shows up and complains.?What result then??Would we advise the coal company to start mining the coal??If the seller has the means to pay the previous grantor, then they reimburse the person who really owns the two-thirds.?Doesnít that require that the person who owns the two-thirds to come forward and claim it??The other reason to start mining the coal is because the only way that theyíre ever going to clear up their title is to acquire the coal by adverse possession.? But in order to possess the coal, you must use it in some way.
What damages would they be entitled to when the true owner comes forward?? Can they get the value of the coal?? They basically get rescission.?In whole or in part, what the grantee will get as a remedy for the breach of covenants of title is the consideration that the grantee paid.?Basically you just unwind the transaction.?If I bought the land for $10,000 and it turns out that the grantor didnít own any of it, I get the $10,000.?If I happened to build a factory on that land or the value of the land went way up, itís just too bad.?You donít get expectation damages, you just get back what you paid.?In this case, however, at worst, only a portion of the land will be lost.?The only defect we know of has to do with the subsurface rights.
Letís say the purchase price is $50,000 and the value of two-thirds of the coal is $75,000.?How much does the grantee recover from the grantor??You wonít get more than rescission, and in fact youíll get less.? You havenít lost everything; youíve only lost a portion.?Your loss is greater than the consideration youíve paid.?You would think that in the case of this partial loss you would get the $50,000 back.?What youíre entitled to is some ratio of the value of the coal relative to the value of the entire property that you purchased.?Letís say the true value of the property is $150,000, so youíve lost 50% of the value of the property.?Thatís your recovery: you get 50% of the consideration paid.?Thatís not a great remedy for several reasons.?Youíre not getting back your entire damages.?Youíre getting nothing for improvements made to the land or future appreciation.?These breaches of covenant can be outstanding for a long time.?It doesnít seem fair to make people bear a contingent liability for a long time for a large and hard-to-determine amount.?So we limit liability to return of the consideration.
What the court does makes sense, but it creates a problem in terms of mining this coal.?They take a risk if they mine it in that the people who truly own the coal could show up, claim conversion, and attempt to get punitive damages.
The Recording Acts
These are remedial
legislation that create an exception to the common law.?
But they donít replace the
common law.?The common law says ďfirst
in time, first in right??If I sell to A on day 1 and B on day 2, A wins at common law because A
bought first.?This wasnít a problem in
The purpose of the Recording Acts is to protect people who acted in good faith and property in commerce.?The person must say that they took without notice and for value.?The property wasnít just given to the transferee.? Finally, the property right at issue must be one capable of being recorded.?This is the interplay between the statute of frauds and the Recording Acts.?The statute of frauds says that if you will transfer an interest in real property, it must be in writing.?The Recording Acts say that you better record the writing or else it wonít count.?But there are exceptions to the statute of frauds.?In any case where your interest is based on an exception to the statute of frauds, that is, an interest that can be created without a writing, itís also an exception to the Recording Acts, and you revert to common law.
ďFirst in time, first in right?is the rule unless you can take advantage of the Recording Acts.?You can do so if the interest was created by an instrument.?If you have an instrument, itís capable of being recorded.? But if thereís no instrument, thereís nothing to record, and thus an exception to the Acts.?Take some hypotheticals: O conveys the property to A on the first day.?On the second day, O conveys the property to B.?Whoís the owner of the property??First in time, first in right under the common law, so A owns the property.?You canít sell what you donít own!?O doesnít have the right to convey the property to B because heís already sold it to A.?Heís committed a tort!?He doesnít have the right to do what heís done, but he does have that power, to convey a good title to B even though he didnít own the property at the time.? The source of that power is the Recording Acts: the whole panoply of acts that make up the Recording Acts.? These statutes, taken together, are designed to create a public record of land ownership.?We want the public to be able to rely on these records with some degree of confidence.?Thatís why we must give O the power to convey a title that he doesnít own.
Three types of recording statutes
Notice statute ?this requires that B, the subsequent purchaser, pay value and take without notice.?It doesnít say anything about B recording; itís not necessary for B to record.? Take the example of O grants to A, then to B, and B is without notice and pays value.?It turns out, under a notice statute, B is the owner of the property!?Does that mean B doesnít have to record??No.?If O tries to transfer to C without notice then C is the subsequent purchaser and will prevail over B.?The Recording Acts donít create a criminal penalty for not reporting, but they create a very strong incentive to record.?Until you record, your title is at risk from subsequent good-faith purchasers.?But the Recording Acts create no incentive to ?span class=SpellE>unrecord? or ďerase??There is no provision to erase.?The public record gets longer and longer.?There is no editing process thatís even permitted.?There are certain procedures that are followed, but thatís all.? The best way to give notice is to record: everyone who deals with the property has constructive notice of whatís recorded about that property as long as itís recorded properly.?So once you record, no one else can take without notice.
?this is the simplest.?This creates a
race to the courthouse.?Whoever gets
there first, wins!?These statutes are
only used in
Notice-race statute ?this one is the most popular, and itís a combination of the two above.?In states with this statute, the subsequent person who wants to be protected must give value, take without notice, and record first.?There are variations on these, but theyíre not particularly important.?Sometimes there are grace statutes: as long as you record within 30 days, it will be retroactive to the date of the deed.?These were designed for the times when it took a long time to get to the courthouse.? Many closings actually take place at the courthouse.
So the incentive is to record as soon as you buy.?How do you do that??You use a title insurance company and do escrow.?The seller says: donít deliver the deed until you have the cash.? The buyer says: donít deliver the cash until you have recorded the deed and checked and made sure that no one got in line ahead of them.?The third party makes sure that both buyer and seller were honest.
ďAll unrecorded conveyances are void as against a subsequent good faith purchaser for value.?span style='mso-spacerun:yes'>?What kind of statute is this??Itís a notice statute.?It doesnít talk about having to record anything.?Is an unrecorded conveyance void as against anybody??What about as to O??What if you add: ďÖwho records first??Then itís a notice-race statute.?If you donít meet all the requirements, youíre back to the common law and whoever was first in time will prevail.?What if you get rid of the ďgood faith?part??What kind of statute is it then??Itís pretty much a race statute.?But make sure to read the cases on this statute.?Thereís a lot of judicial interpretation involved.?Courts generally donít like pure race statutes.?In some states, there may be statutes that appear to be just race, but courts will find notice implied.
Letís say A buys on day 1, B buys on day 2, then A records on day 3 and B records on day 4.?B is a BFP (bone fide purchaser).?If B didnít have notice on day 2, it doesnít matter what happens after that in a notice jurisdiction.?Once B records, nobody else can be a BFP.?With a race statute, A wins.?In a notice state, B wins because he was a BFP at the time B obtained the deed.?In a ďnotice-race?state, A wins because he got to the courthouse first.
Interests outside the Recording Acts
We have mentioned some of them: short-term leases are not usually recorded.?The law says that we protect the tenant because theyíre going to be gone soon anyway.? Adverse possession has no document; it happens by operation of law.?Thereís no penalty for non-recording and no requirement for recording.?Itís the same thing with prescriptive and implied easements, dower, and curtesy.
When you have unfiled mechanics?liens, you have an owner and a contractor who is going to build something.? The contractor enters into contracts with subcontractors, laborers and material suppliers.?The problem is that the contractor doesnít get paid, or gets paid but doesnít pay the other folks.?If you just go by the law of contracts, the other folks have no claim. Theyíre in privity of contract with the contractor.?They can sue the contractor if they want, but they have no claim against the owner because thereís no contract between the owner and any of those people.?Unjust enrichment may or may not help.?Therefore, the law creates a lien in favor of the subcontractors and others.
If you do work on a property and donít get paid, you have a lien (like a mortgage) for whatever amount is owed to you.?You have a certain number of days (usually 60 or 75) in which to file that lien and record it.?Hereís the killer: if you record within that certain number of days since you last did work, it relates back in time to the date you first worked.?Therefore, your priority is from the date the work first commenced.?This means that you can buy property and find out that there are mechanics?liens that were filed after you bought the property but the priority relates back to before when you bought it, and thus your property is subject to the lien.
If you search the public records diligently and donít find anything, you may still take subject to this unrecorded stuff!?How do you protect yourself from interests outside the Recording Acts??Dower is tough, because all you can do is look at the deed.?But unfiled mechanics?liens, especially if theyíre significant, you can actually come out and look and see if work has been done in the last 75 days.
You also canít rely 100% on things being present in the public record to say you have good title.? Forged and undelivered deeds are void, though many states have statutes saying that if a deed is recorded, that is conclusive evidence as to subsequent purchasers that the deed was delivered.?If the deed was not acknowledged or acknowledged ineffectively (like if it was notarized wrong), then it wasnít capable of being recorded.
If you search the public records and find out that John Doe has a power of attorney for Jane Smith and then you see that John Doe has executed a deed within the powers granted by the power of attorney, then everythingís okay.? But if Jane Smith died or became incompetent between the issuance of power of attorney and the time of the deed, then the deed is no good.?Even though you see the deed and even though there is no way you can tell that any recording defects exist, the deed is void and transfers nothing to the grantee.?These are ďoff-record?risks.?The only way to protect yourself is with some kind of insurance whether that be a guarantee from an attorney, title insurance, or otherwise.?But the Recording Acts canít protect you from this stuff.
To be a bona fide purchaser
for value, you must (1) pay value.?This
is not designed to protect donees (people who take by
gift or inheritance).?Itís designed to
allow property to be used freely in commerce.?
The only exception is in
Is a mortgage a purchase??Will banks and commercial lenders tolerate a situation where theyíre not protected by the Recording Acts??No way!?The legislature will protect them!?What if O grants to A by an unrecorded deed, then B lends money to O, and then gets a mortgage from O for no consideration??Is B a purchaser for value??The mortgage wasnít given in consideration of any value.?It doesnít have to be much to support the mortgage.? He could give a little bit of consideration, and that would be enough to make B a purchaser.?The consideration doesnít have to be fair or anything, it just has to be valuable.?What if itís the same situation except O gives B a deed to satisfy the debt??Is B a purchaser for value??Then thereís plenty of consideration.?B had a right to money and gave it up, and O had a right to property and gave it up.?Weíll look at this again when we study deeds in lieu of foreclosure.
What does it mean to be a bona fine purchaser such that youíre a subsequent purchaser for the purpose of the Recording Acts??A purchaser buys something.?But mortgagees can also be purchasers.?We also want to know whether you parted with consideration or whether the consideration was preexisting.
How can B get notice of Aís rights??There are four ways: (1) actual knowledge, (2) recorded documents, (3) persons in possession, or (4) the duty to inquire from any of the above.?The principal basis for the Recording Acts is constructive or actual notice from recorded documents.?If you look in the record, youíll see things and have notice that way.?But even if you donít look in the record, youíre still deemed to know what you would have known if you had looked.?In order to get notice from the person in possession, it must be somebody other than youíd expect.?So whatís really the difference between a race jurisdiction versus a race-notice or notice jurisdiction??If youíre in a race state, you only have to look at the public record.? If an earlier deed is not of record, you know that youíll win.?In a race-notice jurisdiction, you must look not just at the public record, but also the property itself.?If notice is required, then if there is someone in possession inconsistent with the record title, youíll be deemed to know that for the purposes of determining whether youíre a bona fine purchaser.
You may not know everything, but you may know something.?There may be a recorded document that you actually see, but itís defective.?Or you might see someone on the property who isnít the person selling it to you.?A defectively recorded document still gives you notice of something: someone is claiming an interest in the property.?Once you see that, youíre required to make a reasonable investigation, and youíre charged with notice of anything that a such an investigation would reveal.?Thus, you might not have complete notice, but you may have enough notice to require you to dig deeper.?Only certain documents can be recorded, as specified by the statutes, but the recorder will accept virtually anything.?Frequently, when there is a dispute concerning title, an affidavit will be recorded saying a certain person claims interest in the property.? That doesnít charge you with notice because itís outside the statute, but it creates the duty to investigate the claim in the affidavit to see if theyíre valid or not.
Letís say a neighbor informs a potential buyer about an unrecorded deed.? Then you have actual notice.?Letís say O gives A an unrecorded easement, then O takes out a mortgage with X, and the mortgage mentions the easement.?The mortgage is recorded.?The easement itself isnít recorded, but a purchaser, if they search the record, will be charged with at least inquiry notice of the easement.?Of course, what constitutes a reasonable inquiry is a question of fact.?But if you donít see the mortgage, then youíre not charged with inquiry notice and youíll take free of the easement.
One of the most common forms of notice is when you have someone in possession whose possession is inconsistent with the record ownership. ?/span>For example, thereís a transfer from O to A thatís unrecorded.?O goes to sell the house to B, but A is in possession.?B is charged with notice that something is wrong in a race-notice or notice jurisdiction.?This happens all the time.?What happens if it turns out that A is really Oís son??Is that possession inconsistent with the public record?? Maybe A has a short term lease.? Youíre on notice that there is a lease if you say that there is a tenant, and you are also on notice of anything that a reasonable inquiry would reveal about the lease.?That means you probably have to talk to all the tenants or look at all their leases.?When people buy commercial buildings that are rented, they must get information on all the tenants and whatís called an ďestoppel letter?from each tenant saying that they are only a tenant.
How the Recording Acts work
Lawyers donít do a lot of the
title search, but they do a lot of litigation with title insurance
companies.?Title insurance companies
typically do the title search.?Lawyers,
when litigating or negotiating must understand how the system works.?The way we do it is probably the worst
possible way.?The system is improving,
but itís happening slowly.?In
Nobody is going backwards and
trying to put all of the title
records on computer for two reasons: (1) Itís time consuming and difficult with
a tremendous potential for error.?The possibility
for transposing numbers or misspelling somebodyís name is great.?You might make things worse!?(2) Gradually, as a result of the statute of
limitations and other curative legislation, old titles become irrelevant.?Lawyers and title companies donít search back
to the founding of the
The best way to do this sort
of a fully computerized system would have been to have a tract index.?The tract index
is simple.?Assuming you can identify the
tract, which is not hard in the western
The grantee-grantor index is difficult to use, but easy to maintain.? You make a copy of the record thatís filed, and then fill the index.?The clerk doesnít need a lot of special training and shouldnít have to exercise any discretion.?In the index, you have the type of instrument, the granteeís name, the grantorís name, information on where you can find the document, and what tract of land the document relates to.?The grantee index is same thing, except for how theyíre alphabetized.?The grantorís index is alphabetized under the grantorís name; the granteeís index is alphabetized under the granteeís name.
How to do a title search
The whole premise of the system is that you canít own the property unless you were the government or unless you were previously a grantee.? Somebody must have conveyed the land to you.?Your goal is to establish a chain of title.?You want to say, starting today in 2004, we have a method of search to determine everyone who has been an owner or owned an interest in a certain property from some date forward.?You want to find that whoever youíre interested in now (for example, the buyer is interested in the seller) is the current owner.?So you work backwards.?You only know who the current owner is.?When we looked at the general warranty deed, it included a blank for the book and page of the prior instrument.?That can aid your title search.
So you start in the grantee index, starting today, and you look backwards in time.?At some point, you should find that O, the person youíre getting ready to buy from, was a grantee.?You get the deed itself and make sure itís valid.?Then youíre done with looking under Oís name in the grantee index.?If itís B that was Oís grantor (you find a transfer from B to O), then you must ask: how did B become the owner of the property??At some previous date, B must have been a grantee.?So you look in the grantee index under Bís name.?You keep looking and find that B was a grantee and A had previously conveyed the property to B.?So you start looking under Aís name.?You keep looking back until you find a patent (a deed from the government) or you just look back the customary time period in the jurisdiction where youíre working.? Youíll find that the grantor was previously a grantee, and then whoever conveyed the property to that earlier grantor was herself a grantee, and so on.
So weíve established a chain of title!?But that doesnít give you the whole picture!?The next problem is that under the Recording Acts, O only has good title if O and everyone in the chain of title was a bona fine purchaser.?So if weíre in a race-notice jurisdiction, we must look at B and make sure that Bís deed was recorded prior to any other deed from A.?We must make sure that no one in this chain of title sold the property to someone outside of the chain of title prior to selling it to the next person in the chain of title.?We have to make sure A didnít sell to X before A sold it to B.?So the next step is to start with A, look in the grantorís index, and search until we find the recorded deed to B.?If we find a deed to X before the deed to B, then we have big problems!?That would mean that B, at least in a race-notice or race jurisdiction, is a ďloser?and didnít get good title!?In a notice jurisdiction, it will be a little more complicated.?But if we assume that the deed from A to X was recorded before the deed to A and B, then B loses everywhere.
Once you find the deed from A to B and you find nothing intervening (from the date A acquired the property until A transferred to B), you stop searching under Aís name and start searching under Bís name.?Youíre no longer concerned with any transfers from A because at this point weíve discovered that B was first to record and thus has ďwon?? So you start searching under Bís name and search until you find a transfer from B to O.?You shouldnít find anything intervening.?That would mean that O acquired good title.?Then you search under Oís name from the time O acquired title until the present, which would mean that O is the owner of an unencumbered fee simple absolute.?Itís not going to be this simple or clean in practice, though.
There are a lot of possibilities of transfers that you wonít find using the standard technique that weíve just discussed.?What if the deed isnít indexed at all??What if you have a deed from O to A that is recorded, but not indexed, then you have a deed from O to B.?B has two choices: B can look through every