Real Estate Finance Outline


Table of Contents


Contracts for the sale of land. 2

The listing agreement 5

Part performance. 10

Buyerís remedies. 11

Sellerís remedies. 12

Specific performance. 13

Equitable conversion. 14

Real estate finance. 17

Structuring the transaction. 18

Historical development of the mortgage. 19

Equity of redemption. 20

Theories of mortgages. 31

Transfer and discharge. 43

Transfers by the mortgagor. 43

Transfers by the mortgagee. 44



Contracts for the sale of land


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 outstanding in Ohio.?Braunstein finds that difficult to believe!?That would mean that over time, everyone will get kicked out of their homes!?So thatís a big number.?Some of the devices that the federal government uses to make housing more affordable have actually had the opposite effect.?Take ARMs for example: as interest rates start to go up and adjustable rates rise, people canít make the payments and go into foreclosure.?Weíre going to go to a foreclosure auction.?When we do foreclosure, weíll learn the rules, but also ask whether the rules make sense.?Theyíre designed to protect the borrower, but are the rules effective?


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 Cleveland than in Columbus or Cincinnati.?But an Ohio lawyer certainly would not think of representing someone buying real estate in another state.? Even today, youíll generally hire local counsel to assist you.?But the practice of this area of law has really become much more national in the last 30-40 years for a number of reasons.


Why was it the way it was??Lawyers are typically licensed locally.?Youíre admitted to practice in Ohio or maybe two states.? As far as lawyers are involved, it must be a local practice.?The same thing was traditionally true for banks and savings & loans.?They were licensed locally and they only loaned in the area in which they did business.?There were local lenders under local law, and that worked to insulate the law of one state from another.?But things have changed!


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 New York and Chicago banks couldnít loan money to build houses in California.?Insurance companies stepped up to the plate!?Theyíre national lenders.?They have lots of money to invest and could invest nationally.? The insurance companies thought: how do we know title opinions are any good??What if an attorney makes a mistake??Will the attorney be able to pay the damages suffered due to a bad title opinion??Lending insurance companies like Prudential and Equitable decided not to rely on local lawyers, but instead buy insurance themselves.?Once you take a lawyer out of giving an opinion on title, they have less of a role in transactions.


The Federal Housing Authority, Fannie Mae, Farmerís Home Loan Board and so on are federally-chartered organizations.?They 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 California and that bank runs out of money to lend, then thatís okay, but the next person who wants to buy a house wonít be able to.?So the FHA buys the mortgages.?Whoever the home purchaser was will owe the FHA the money, and the FHA will give the money back to the bank.?The FHA has a big demand, just like the insurance companies, for uniformity.? When the FHA is buying mortgages, they want every single one to be the same so they donít have to read each one.? They want to know if itís a certain type of FHA-approved mortgage, and then theyíll know that itís acceptable.? Banks insist on these because even if they donít decide to sell the mortgage to the FHA or Fannie Mae, they might, and they insist that virtually all mortgages be on the FHA form.?So even though the FHA doesnít have the authority to prescribe what a mortgage says, in practice, they have a lot of power.


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 Ohio cases, whereas 20 or 30 years ago thatís almost all we looked at.?We will also spend time on the most important forms, as found in the back of the book.?Weíll ask how various cases would have been decided under an FHA mortgage, for example.


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


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 Chicago, by contrast, title insurance is more like $1 per $1000.?Most of the difference goes as a commission to the title insurance agent, not to the person who is actually insuring it.?The way lawyers did it was that the lawyer would search the title and come up with an opinion.?The lawyer would take all the documents that he or she had looked at and put them in a binder: this would be the abstract of title.?This would either be given to the lender if there was a mortgage, or if there was no mortgage (or when it was paid off) it would be held by the purchaser.?The next time there was a sale, the abstract would be given to the next lawyer, who would update it to the date of the new sale.? This would continue as the property was sold, and the abstract got to be quite thick.?As long as you donít lose the abstract, the process was actually quite simple and inexpensive.?Once you donít need a lawyer to explain the hard stuff, the routine parts of the transaction drop away.?So lawyers are, for the most part, out of the residential real estate business.


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 Franklin County, there are, on average, about 2,000 real estate transactions a month.?In absolute terms, thereís a lot of litigation, but itís a very small percentage of the transactions.?Braunstein isnít sure that lawyers add much to the cost.?Does the title insurer perform the function that the lawyer used to??Not really.? If you go and buy life insurance, the life insurance company doesnít tell you to live a healthy life.?They just say: give me the money, and hereís your policy.?Thatís the way title insurance companies work.?There is no ďadvice?function.?The title insurance companies write the policy, which often means a lot less than the insured thinks, and the title agent typically doesnít explain it.?If thereís a tough question, the title agent will probably advise getting a lawyer.


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.


The listing agreement


There are four types of listing agreements, at least as courts see it:


  1. The exclusive right to sell ?this is the most common, and certainly the one that the real estate agent or broker most wants to get.?This means that the broker gets a commission if the property is sold to anyone, by anyone.? They get paid, for example, even if the property gets sold to a relative who you knew anyway.
  2. Exclusive agency ?this means that if any agent is involved in the transaction, they get a commission even if the listing agent was not involved.?But if the property is sold without the help of an agent, then there is no commission due.
  3. Open listing ?this is a listing where you tell the agent: ďIf you bring me a satisfactory buyer, I will pay you a commission.?span style='mso-spacerun:yes'>?It is open in the sense that it is open to all agents.?Itís not enough just that the property be sold for the agent to collect their commission: the agent must be the procuring cause of the sale.?We wonít get into the meaning of that term, but essentially it means the proximate cause of the sale.?Real estate agents disfavor these listings, and itís not hard to see why.?If you have an exclusive listing, you donít have to do anything because you can simply hope another agent comes forward.?With an open listing, you can do a lot of work and come away with no money if some other agent comes forward as the procuring cause of the sale.
  4. Net ?the broker gets to keep any amount that he receives above some agreed amount to be paid to the owner.?This type is rather rare.


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, Alaska!?So first, Drake signs an exclusive listing agreement with Hosley.?A purchase agreement is signed such that they are to close within 10 days of getting evidence of clear title.?The thing is that Drake owes some money to his ex-wife.?How will that be handled??Well, he was going to pay off his ex-wife as soon as the property is sold.? Good title is considered at the time of closing.?Sometimes you can get good title by using the proceeds of the sale to pay off any liens on the property.?So they get evidence of clear title.?Then Drakeís attorney and Hosley apparently agree to expedite the closing.? Thereís no closing on April 11th, and then on April 12th, Drake sells to another person.?Did Drake really find a buyer between April 11th and April 12th??No way!? Someone probably came and told him they would pay more if he could weasel his way out of the contract.?On April 12th, Hosley tenders performance.


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, Alaska!?Or maybe you have bad credit.?Maybe the seller will say: ďOkay, Iím the bank!?span style='mso-spacerun:yes'>?The buyer buys a down payment and then agrees to pay the seller in installments.?At the end of the day, as far as the buyer is considered, itís pretty much the same.? But the seller has some cash plus a promissory note secured by the mortgage to pay the balance.


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 New Jersey.


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 Alaska court adopted?? It doesnít because performance was still tendered.?Thus, the court argues, the buyer attempted to perform and thus, according to Dobbs, the seller defaulted.?We assume that the result is that Drake must pay two commissions: one to Hosley and one to the agent who secured the eventual sale.?Did Drake deserve this?


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 you places.?You 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 Ohio, have changed the law such that agents can represent the buyer, the seller, or both.?The requirement is that the agent must deliver a disclosure form, usually at the time the offer is submitted.


There is a duty to disclose the agency relationship.?There is a duty to disclose material defects.?In many states, including Ohio, there are statutory requirements that the seller must disclose material defects.?This was pushed for by agents so they could get off the hook for having to disclosure bad stuff.


Statute of frauds


England didnít have any kind of recording system until 1925.?Then they had a registry system.?The idea is that you can look at title and know exactly who owns what.?The purpose of the statute of frauds was to start a publicly maintained recording system that would enable people to ascertain the title to real property, which you canít do without writings: you canít make a public record out of livery of seisin.


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 Columbus is on the Columbus Bar Association website.?Note that on page 20 there is a seller disclosure and buyer inspection clause.? Whatís the point of that??Whatís the ulterior motive??One purpose is to get hidden defects out on the table.?The main force for getting this included is protection for the agent.?This clause requires the seller to disclose everything and submit to the buyer the sellerís disclosure form.?Real estate agents are in a legally untenable position: they represent the seller, and their loyalty is to the seller, but they also have a duty to disclosure material defects to the buyer.?That creates big time conflicts of interest!?Whatís happened is that the standard form contract is used to attempt to shift the liability for failure to disclose exclusively on the seller and get the real estate agent off the hook.


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.


Shelton v. Williamson ?This is a suit for specific performance.?This is an installment contract because land is being purchased in installments.?The purchase price is $357 per acre.?Is this contract complete enough to enforce??When is the deed to be delivered??You can infer that the contract was that the deed was to be delivered when the final payment had been made, which would make it look more like an installment contract than a marketing contract.?Does the contract of sale have to be in writing??No, but there must be something in writing thatís evidence that there was a contract.?The statute of frauds clearly does not require that the contract be in writing.?It does require that some note or memorandum of the contract be in writing.?There can be some terms that are oral or determined by the courts, but there are some terms that must be in the note or memorandum in order to make it enforceable.?But what are these terms??How specific were they here???0 acres land in the rearĒÖnot very specific.?They also have a legal description.?But there are lots of Section 31s, lots of Township 27s and Ranges 28, all over the country!?But we can combine this with information from the taxing authority.? Once we know itís in a county or municipality, then we know where the land is.


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>Rabbit Bay?contract?? Does this letter satisfy the ďessential?elements to satisfy the statute of frauds??Itís clear that a sale is intended.?We know that the promise is for a sale.?The memorandum must be signed by the party to be charged.?Is ďLove Barb?a signature??Whatís a signature??Is it a mark that is intended to give legal significance to the document?? That seems to be the case here, but the letter seems pretty informal.?It looks kind of like a preliminary negotiation.?But Diane and Jim call up and want to buy the property.?If they back out, then Barb is stuck because there is no memorandum signed by them.


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.


Part performance


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 England, they didnít like deeds, partly because many of them couldnít read, but also because they liked livery of seisin.?These part performance factors are similar to livery of seisin in many ways.? Historians have argued that the statute of frauds, even at the time it was passed, contemplated these kinds of exceptions.?These exceptions appear in the cases almost as soon as the statute of frauds was passed.


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


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.


Sellerís remedies


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 United States, you get benefit of the bargain damages in this situation, just like all others.?Whatís the rationale for this??The idea is that title searches are a lot easier now than they were in the past.?But itís still inefficient to have two of them done rather than one.?The recovery on warranties is restitution: you donít get benefit of the bargain damages.?One advantage of the English rule is that it treats the pre-deed and post-deed situations the same way.?The problem with warranties of title is that they last a very long time.?The contract will last a short period of time and damages are knowable.?The odds of an astronomical change in property value are very slight.? Warranties of title are considered real covenants and pass from one purchaser to the next.?If these warranties allowed benefit of the bargain damages, the liabilities would become entirely unknowable.?The American rule seems preferable.?The difference is nominal damages versus benefit of the bargain damages.


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.


Specific performance


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 Ohio, you simply must serve the summons on the adverse party and the doctrine kicks in.?Then changes in title after that date will have no effect on the ultimate judgment.


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.


Equitable conversion


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 New York law.?The seller wanted to get out of the contract.? The court said that the damage wasnít material because the buyer wasnít buying the building: the buyer planned to tear the building down as soon as the land was purchased.?So one of the circumstances is what the intended use is by the buyer.?Maybe the building that was destroyed wasnít a material part of the consideration.


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.


Fulton v. Duro ?The vendor sells land under an installment sale contract.? Then a judgment is entered against the vendor.?We have a situation where legal title is in the vendor.?The vendor fails to pay a bill, for example, and a judgment is entered against the vendor.?Once a judgment is entered against you, it becomes a lien against all of the real property thatís owned by the judgment debtor in that county.?Its priority dates from the date the judgment is recorded.? The lien holder could go to court and ask that the property be sold at public auction and have the judgment paid out of the proceeds.?Now letís say that the vendee continues to make payments on the contract and sells it to another vendee.?Is the property, in the hands of vendee #2, subject to the judgment lien??Vendee #2 will check the title before purchasing the property and heíll see the lien.?But once we say that vendee #1 has good title, it means he can alienate it.? One way of looking at this is to say that under the doctrine of equitable conversion the real property is in the hands of the vendee, and the judgment lien only applies to real property.?At the time of the judgment, there was nothing the vendor owned that the lien could attach to.


How is the situation described different from Fulton??The judgment lien had been recorded in Fulton before the vendor sold.?What else?? The lien was against the purchaser, not the vendor.?The action is brought against the purchaser from the vendee.?Is this a risk of loss case??No, itís a characterization issue.?We must decide whether the vendee has any interest in real property.?If the vendee, who was the debtor, has any interest in real property, then the judgment lien will attach to that interest, and anyone who purchases from the vendee will take the property encumbered by that judgment lien.?On the one hand, the court could say that bare possession is an interest in real property, or the court could say that under the doctrine of equitable conversion, the vendee had equitable title and so the judgment lien attaches to the equitable title the vendee has and follows the property into the hands of any subsequent vendee.


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!


Real estate finance


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 United States to savings rates in other countries, itís lower, and one reason is that we invest so much in housing.?We do that, in turn, because the government subsidizes it.?Is this such a great place to invest money as a society??Itís sort of a Jeffersonian democracy ideal: a farmer who owns his own land is a better citizen for being an owner.?But why is it so much better to own a house than to save money or invest in stock?? This policy is reflected in how to make mortgage payments smaller.


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.


Structuring the transaction


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.


Schrader v. Benton ?Schrader is the buyer and Benton is the seller.? The sales price of the condominium was $44,500.?They made a deal for $7,000 in cash and $37,500 to be financed in a wraparound mortgage.?There is an old mortgage to Amfac for $31,800, $7,000 in cash, and the wrap is $37,500 even though thatís not the new money being advanced by the seller.?How much money is the seller actually advancing??Heís advancing $5,700.?If it were a cash sale, he would get $12,700, but in reality, with the loan, heís only getting $7,000 cash.?So the new loan is only $5,700.?The loan was amortized over 30 years, but due in three years.?At the end of the third year, when the mortgage must be paid off, we find some of it has already been paid.?The balance on the mortgage at the end of the three years will be $36,657.? Payments have been made on the Amfac mortgage, and the balance of that one will be $30,181.? So the seller gets $6,476 in net cash.? Where does the $776 come from?? The Amfac mortgage is amortizing more quickly than the new wraparound mortgage.?The Amfac mortgage principal amount goes down by $1,600 while the Benton wraparound principal is only reduced by $843Öthe difference is the extra $776.?Itís a great deal!?Itís like a 20% return overall, even though theyíre only charging 9%.


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.


Historical development of the mortgage


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!


Equity of redemption


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 Ohio, by custom, donít approve auction sales of real property until three days after the auction.


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 United States, in almost every circumstance, prohibits strict foreclosure (except maybe Vermont).?Instead, foreclosure by sale is required, the benefit of which is two-fold: (1) you generate cash under circumstances controlled by the law so that there is some assurance of reasonableness of the manner in which the sale is conducted.? (2) The cash is distributed to the parties to whom itís due.?The mortgagee only gets the amount of the debt outstanding, and if there is any surplus it will go to junior mortgagees, and then to the mortgagor in the value of the mortgagorís equity.?But how often is there any surplus??There is no surplus in a majority of cases.?If the proceeds from the sale of the property donít satisfy the debt in full, the debtor will be personally liable for the balance.


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 Ohio).?This developed during the Depression with the idea that people were losing their property, and if people could just wait a little while, values would bounce back up (but this was overoptimistic ?it took until the 1950ís for the prices to reach pre-Depression level).?The idea was that the person foreclosed upon had time to raise the money to get the property back from the purchaser at the auction.


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.


Mortgage foreclosures


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, such as California, and others where theyíre never used, like Ohio.?The reason for this device is not to get around the equitable right of redemption.?Itís designed so that the lender can purchase at the lenderís own foreclosure sale.? In some states, mortgagees couldnít bid at their own sale, meaning that they couldnít control the property anymore.? So this device was created to allow the person who would be the mortgagee to purchase at the lenderís own foreclosure sale.?This also gives the lender the option whether to go through judicial foreclosure or to exercise the power of sale, which happens by statute and without much intervention by the courts.?Three people are involved: the grantor is the same as the mortgagor.?The trustee is the new person in this transaction, but the trusteeís sole job is to get the deed to the property and then to reconvey it to the grantor when the deed of trust is paid off.?The ďtrust form?is borrowed for the purposes of getting around restrictions in certain dates.


Mortgage substitutes


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.


Title assurance


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 Ohio, if you call something a ďwarranty deed? all the statutory warranties are automatically included.


In Ohio, the warranties are listed at R.C. 5302.06.?ďThe grantor covenants with the grantee, his heirs, assigns, and successorsÖĒ?This means that the all of the covenants run with the land.?In some states, the present warranties donít run with the land; only future warranties.? This statute says that both past and future warranties run with the land.? The importance of that is that if A transfers to B and B transfers to C, thereís a breach, and Aís the one with the money, you want to be able to sue A.?We donít want C limited to an action against his immediate predecessor in interest.? It is warranted that ďhe is lawfully seized in fee simple of the granted premises?


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 Ohio, there are still dower rights in limited circumstances.?If itís a married person, the spouse must execute the deed.?You include the grantee and their tax mailing address.?You describe the land, which is often a plat in a subdivision.?It could also be a ďmetes and bounds?description, where you start at a certain place and then follow a certain path.?You also mention if there are any restrictions such as encumbrances, reservations, exceptions, and so on.?You also include a reference to the instrument by which the grantor obtained the property.?Also, if you note that the person is married, you have the spouse release dower rights.? The form says that only the signature of the grantor is necessary, but in fact to get the deed recorded, you must get an acknowledgement in front of a notary.?The only way to be sure that the grantor is really who they say they are by way of the notaryís gatekeeping function.


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 feudal England, but itís a problem today.?Unless you have some way of checking title, you have no way of knowing if A sold the property.?The presumption is always that the first transferee wins.?The burden switches to the second transferee to show that there is an exception to the common law rule, namely, the Recording Acts.?These acts vary a little by state.?Typically, they require that the second transferee be in good faith.?In order for the second transferee to win, the second transferee must be innocent.?They must not have known about the earlier transfer.


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.


Race statute ?this is the simplest.?This creates a race to the courthouse.?Whoever gets there first, wins!?These statutes are only used in Louisiana and one of the Carolinas.?There is a Louisiana case that says that it doesnít even matter if you were B and you knew of the sale to A.?If B runs down to the courthouse and records first, he wins, and thereís nothing wrong with B treating the O to A transfer as void.?This seems very harsh!


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.


Ohio has a notice-race statute mostly, but when you talk about mortgages, Ohio has a pure race statute.?Whoever records their mortgage first has the priority.? Mortgagees like this a lot!?Fraud is actually very rare!?Usually problems arise under the Recording Acts because people were neglectful rather than fraudulent.


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.


Recording defects


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 Colorado.?You must (2) take without notice.?(3) There must be a recordable instrument.?So if O grants property to A and it goes unrecorded, then O gives the property to B as a gift, then B isnít a bona fide purchaser.?Then B records.?If B isnít a purchaser, then it doesnít matter what statute we have: B is a donee, so the Recording Acts donít apply to B, and thus the common law applies.?A wins by ďfirst in time, first in right?? What if O gives to A as a gift, then sells to B but the deed isnít recorded, then A records and then B records.? So A wasnít a BFP, but B is.?Who wins??B wins because B didnít have notice of the A transaction when he bought.?If you rely on the common law, gifts are actually the best way to get property!?Thereís nothing wrong with the gift, and A will be protected by the common law, but A better record, because as long as itís unrecorded youíre at risk of losing out to a subsequent purchaser for value.


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 Franklin County, starting in 1980, all of the title records are on microfiche.?At some date after that, the records were computerized.


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 United States or to when Ohio became a state.? They go back 40-60 years plus the statute of limitations for adverse possession.?So after a certain period of time, you wonít have to look at the old records at all.?The old records are ďtruly disgusting??Theyíre nasty!?Theyíre kept in large books (both indices and records themselves).?Without an index, it would be utter chaos.?The indices are kept in huge books.?Everything in them is handwritten.?They take up a whole floor in the county building on Fulton and High.


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 United States, you give the tract a number.?Then you write down every transaction that occurs involving that land.?You donít have to worry about ďwild deeds? because itís all right there!?But there are two problems with the tract index: (1) Itís expensive to administer because you must make sure that each document is being recorded under the right tract.?There must be someone in the office who can double check these things, especially considering that one big tract in 1900 could be 1,000 little tracts in 2000.?Keeping track of the tracts is not an easy process.?In the western United States, we divided up the land into squares (township) with the Northwest Ordinance.?The entire western United States has been surveyed this way.?The problem is that if you have a survey based on metes and bounds, it becomes impossible to have a tract index.?We started out not being able to use a tract index even though many western states could have done so early on.?There may be a simultaneous tract index maintained in some states, but it is not the official index.


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.


ďWild?deed problems


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