Property II

Land Transfer

Executory Interval

An executory period is a time gap between the time that the transferring parties bind themselves by signing a purchase and sale contract and the time of closing.

Broker

There are two rules as to when a broker earns his commission, differing when it is the buyer's fault the sale did not close:

  • The traditional/majority rule:
    A broker is entitled to a commission when he produces a buyer ready, willing, and able to purchase the property on the seller's terms, even if the sale is not completed.
  • Dobbs Rule

    The Dobbs rule says that a real estate broker does not earn a commission unless the contract of sale is performed, and he has not produced a ready, willing and able buyer if the buyer refuses or is unable to perform at closing. However, the broker has not produced a ready, willing, and able buyer if the seller is the reason the deal did not close.

Drake.

Statute of Frauds

A statute of frauds is a defense that prevents the enforcement of a land transfer transaction or a lease longer than one year unless there is a signed written memorandum listing the price, parcel, and parties.

Neither a legal description of the property nor the parties' full names are required, only enough to identify them.

Restatement Second of Contracts § 129
Restatement Second of Contracts § 129

Action in Reliance; Specific Performance

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A contract for the transfer of an interest in land may be specifically enforced notwithstanding failure to comply with the Statute of Frauds if it is established that the party seeking enforcement, in reasonable reliance on the contract and on the continuing assent of the party against whom enforcement is sought, has so changed his position that injustice can be avoided only by specific enforcement.

Copyright, The American Law Institute

Traditionally, land transfers have been governed by the doctrine of caveat emptor, saying that the seller of land was not liable for defective conditions unless he gave an express warranty that the premises were free of defects or the seller committed fraud by affirmatively misrepresenting the condition of the premises.

However, the overwhelming majority of states have adopted some variant of the seller's duty to disclose "material" facts that are known to the seller but are not "readily observable" by the buyer.

Equitable Conversion

Under the traditional equitable conversion rule, the risk of loss is placed on the purchaser as soon as the contract is made.

Under the Massachusetts rule, the risk of loss is placed on the seller until the closing or a taking of possession.

Under the Uniform Vendor and Purchaser Risk Act, if all or a material part is destroyed without the buyer's fault, the risk of loss is on the seller until the closing or a taking of possession.

A contract can provide another rule than a state's default.

Recording Act

A recording act regulates who has priority when there is a subsequent bona fide purchaser.

Recording acts override the common law first-in-time principle says that the first person to possess property is the true owner.

There are three types of recording acts:

  1. Pure Race

    Pure race statutes state that the grantee that records the title first will prevail over the other.

    Two states (NC & LA) have pure race recording acts.

  2. Pure Notice

    Approximately half of the states have pure notice recording acts, which state that a subsequent purchaser will prevail over a prior grantee as long as he does not have some form of notice of the prior claimant.

    The subsequent purchaser is not required to record his title.

  3. Race-Notice

    Roughly half of the states have race-notice recording acts, which are like pure notice statutes, as they state that a subsequent purchaser will prevail if they do not have notice of a prior claimant, but they also require the subsequent purchaser to record his title.

Shelter Rule

The shelter rule extends protections from a recording act to a subsequent grantee of the bona fide purchaser, even if that grantee would not qualify as a bona fide purchaser himself.

Notice

There are three types of notice.

For the recording system to provide notice effectively, deeds must be recorded accurately so searchers can find them. Defects in a deed can affect its validity or its recordability.

Idem Sonans

The doctrine of idem sonans states that where a name's sound is substantially preserve, bad spelling will not invalidate its effect.

Some jurisdictions do not apply the doctrine of idem sonans and simply hold that any misspelling will invalidate inquiry notice.

Belmont.

Gaps in the chain of title due to inheritance or devise do not invalidate inquiry notice, even if the heirs or devisees do not record their interests.

Forgery invalidates a deed.

Invalid delivery invalidates inquiry notice, but courts generally hold that the recording of a deed creates a rebuttable presumption of valid delivery.

States are split whether a deed with defective acknowledgment provides defective notice, but some states have "curative" statutes deeming the deed valid after a certain number of years.

Chain of Title Problems
  • Wild Deed

    A wild deed is one that is not properly connected to the chain of title because a predecessor a failed to record his deed.

    Courts have uniformly ruled that a wild deed does not provide constructive notice to subsequent purchasers.

    A subsequent purchaser should ensure that the seller has properly recorded his title before purchasing and thus that he does not record a wild deed.

  • Deeds recorded too early or late
  • Multiple chains of title from a common owner

The traditional rule is that a deed provides constructive notice to subsequent purchasers even if the recorder misindexes it, but some courts have held that a misindexed deed does not.

Marketable Title Act

Roughly one-third of states have adopted marketable title acts,which extinguish title interests that have not been recorded within a reasonable period. (Thirty years under the Uniform Marketable Title Act.)

Title Assurance

Title assurances assure a buyer that he will get marketable title.

Marketable Title

Marketable title is a title not subject to reasonable doubt of defects that would decrease its market value.

There are generally three defects that can make title unmarketable:

  1. Flaw in the seller's title
  2. The existence of an encumbrances on the property not reasonably knowable to the buyer
  3. Events that have deprived the seller of title

Physical defects normally cannot constitute title problems.

The existence of public restrictions do not affect marketability, but courts are split as to whether a violation of these can.

  • However, private restrictions can.

Courts are split on whether adversely possessed title is marketable.

Courts are roughly evenly split between two rules as to what the damages are for defective title.

  • English Rule

    Under the English Rule, the buyer is limited to a return of his money.

  • American Rule

    Under the American Rule, the buyer may recover benefit-of-the-bargain damages—typically the contract price minus the fair market value at the time of the breach.

Pre-Closing

A contract will typically contract that the seller will provide marketable title. If a title search reveals a defect in the seller's title, the buyer may choose to rescind the contract, seek enforcement of the contract with a price reduction, or sometimes seek to recover damages resulting from the breach.

Merger

Post-Closing

Warranty Deed
General Warranty Deed

General warranty deeds warrant against unknown defects of title with six covenants of title, but they can still be subject to excepted encumbrances.

Six Covenants

Most deeds contain six types of covenants.

Three are breached, if at all, at the time the deed is delivered.
Three are breached, if at all, at some later time.

Present Covenants

Present covenants are breached, if at all, at the time the deed is delivered.

Seisin

Seisin is the right to immediate possession.

The substance of the covenant of seisin is usually a promise that the grantor actually owns the property rights that the deed purports to convey.

Right to Convey

The covenant of right to convey warrants that the grantor has the legal right to transfer title.

Against Encumbrances

The covenant against encumbrances warrants that there are no encumbrances on the land which would decrease its value.

Encumbrances, as defined for marketable title, generally apply to deed covenants against encumbrances.

Marketable Title

Marketable title is a title not subject to reasonable doubt of defects that would decrease its market value.

There are generally three defects that can make title unmarketable:

  1. Flaw in the seller's title
  2. The existence of an encumbrances on the property not reasonably knowable to the buyer
  3. Events that have deprived the seller of title

Physical defects normally cannot constitute title problems.

The existence of public restrictions do not affect marketability, but courts are split as to whether a violation of these can.

  • However, private restrictions can.

Courts are split on whether adversely possessed title is marketable.

Courts are roughly evenly split between two rules as to what the damages are for defective title.

  • English Rule

    Under the English Rule, the buyer is limited to a return of his money.

  • American Rule

    Under the American Rule, the buyer may recover benefit-of-the-bargain damages—typically the contract price minus the fair market value at the time of the breach.

Future Covenants

Future covenants are breached, if at all, at some later time.

Warranty

The covenant of warranty is a grantor’s promise to defend and indemnify a grantee who suffers an interference with his possession of the land by a person who has superior or paramount title.

The covenant of warranty is practically the same as the covenant of quiet enjoyment.

Quiet Enjoyment

The covenant of quiet enjoyment warrants that the grantee’s possession and enjoyment of the property will not be disturbed by anyone holding superior title.

Practically the same as the covenant of warranty.

Further Assurances

A covenant of further assurances is a promise to take any future actions that may be needed to perfect the title which the original deed purported to convey.

Unlike the other covenants, the covenant of further assurances may also be enforced by specific performance.

Special Warranty Deed

Special warranty deeds warrant against unknown defects of title caused by the grantor with six covenants of title, but they can still be subject to to excepted encumbrances.

Six Covenants

Most deeds contain six types of covenants.

Three are breached, if at all, at the time the deed is delivered.
Three are breached, if at all, at some later time.

Present Covenants

Present covenants are breached, if at all, at the time the deed is delivered.

Seisin

Seisin is the right to immediate possession.

The substance of the covenant of seisin is usually a promise that the grantor actually owns the property rights that the deed purports to convey.

Right to Convey

The covenant of right to convey warrants that the grantor has the legal right to transfer title.

Against Encumbrances

The covenant against encumbrances warrants that there are no encumbrances on the land which would decrease its value.

Encumbrances, as defined for marketable title, generally apply to deed covenants against encumbrances.

Marketable Title

Marketable title is a title not subject to reasonable doubt of defects that would decrease its market value.

There are generally three defects that can make title unmarketable:

  1. Flaw in the seller's title
  2. The existence of an encumbrances on the property not reasonably knowable to the buyer
  3. Events that have deprived the seller of title

Physical defects normally cannot constitute title problems.

The existence of public restrictions do not affect marketability, but courts are split as to whether a violation of these can.

  • However, private restrictions can.

Courts are split on whether adversely possessed title is marketable.

Courts are roughly evenly split between two rules as to what the damages are for defective title.

  • English Rule

    Under the English Rule, the buyer is limited to a return of his money.

  • American Rule

    Under the American Rule, the buyer may recover benefit-of-the-bargain damages—typically the contract price minus the fair market value at the time of the breach.

Future Covenants

Future covenants are breached, if at all, at some later time.

Warranty

The covenant of warranty is a grantor’s promise to defend and indemnify a grantee who suffers an interference with his possession of the land by a person who has superior or paramount title.

The covenant of warranty is practically the same as the covenant of quiet enjoyment.

Quiet Enjoyment

The covenant of quiet enjoyment warrants that the grantee’s possession and enjoyment of the property will not be disturbed by anyone holding superior title.

Practically the same as the covenant of warranty.

Further Assurances

A covenant of further assurances is a promise to take any future actions that may be needed to perfect the title which the original deed purported to convey.

Unlike the other covenants, the covenant of further assurances may also be enforced by specific performance.

Title Insurance

Title insurance is a contract made with a third-party company which agrees to defend and indemnify against future losses the buyer due to latent defects in the title.

Mortgage

A mortgage is a type of secured loan in which real property is used as collateral.

The legal effect of a mortgage depends on the state.

Lien Theory

A majority of states follow lien theory, under which a mortgage is seen as merely a lien on the secured property.

This does not sever a joint tenancy.

Under this theory, a mortgagee is not entitled to possession before foreclosure.

Title Theory

Some states treat a mortgage as a conveyance of the property to a lender which is returned when the debt is discharged.

In a title theory state, the mortgage has the theoretical right to take possession of the secured property without foreclosure.

If there are multiple liens on property, generally liens are given priority based on who was first-in-time to file the lien on the deed.

  • However, the purchase money mortgage has priority has a priority over other liens.

Mortgage contracts usually have due on sale clauses.

Due on Sale Clause

A due on sale clause requires that any outstanding payment on a loan be repaid when a mortgaged property is transferred.

In the absence of a due-on-sale clause, one may still buy the property subject to the mortgage or may agree to assume the mortgage. (Bottom of 793)

Deed of Trust

A deed of trust is when a third-party trustee holds title to the property and sells it in the event of a default to repay the creditors.

About half the states recognize the deed of trust.

Installment Land Contract

An installment land is when a buyer agrees to pay the purchase price in installments over a period of years. The buyer typically receives possession of the property during the contract period, but the seller retains title to the land during this time and transfers it at the end thereof.

Installment land contracts usually contain a clause stating the seller has the right to terminate the contract in the event of a default, regaining possession without legal process and retaining all previous payments.

Installment land contracts are often used as an alternative to a mortgage, but some states treat land installment contracts as mortgages.

Some states have provided recourse for the naturally harsh consequences of installment land contracts, such as allowing the buyer to redeem the property or to challenge the forfeiture provision.

Foreclosure

A foreclosure occurs when there is a default on a mortgage.

In the event of a default, there are three options:

  1. Strict Foreclosure
    • Classical approach where the mortgagee takes possession of the property.
    • While still theoretically available in a few states, most foreclosures involve a foreclosure sale.
  2. Judicial Foreclosure
    • Judicial foreclosure is when one uses the judicial process to take possession of the property and sell it in a public sale.
    • Available in every state
  3. Non-Judicial Foreclosure
Redeem

In either type of foreclosure sale, the mortgagor has the right to redeem the mortgage by paying the entire balance of the debt. Some states provide a statutory right of redemption, allowing the mortgagor to redeem the property even after the foreclosure sale.

Right of Reinstatement

Contracts can and some state statutes do allow for a right of reinstatement, allowing a mortgagor to cure his default by paying all past-due amount.

This generally must be done early in the contract early in the foreclosure process. Illinois's statute requires it to be paid within 90 days of receiving notice.

If a sale's value exceeds the balance of the mortgage, the extra must be paid to the mortgagor.

  1. Judicial Foreclosure

    Judicial foreclosure is where a full judicial proceeding is used to take possession of and effect a public sale of the foreclosed property.

    Judicial foreclosure requires joining all person with interests junior to the mortgagee. If one is not joined, his interest will not be terminated.

    Process of judicial foreclosure:

  2. Non-Judicial Foreclosure

    Some states allow mortgage contracts to grant the mortgagee the power to sell the property in the event of a default.

    These non-judicial foreclosures, also known as foreclosures by power of sale, allow the mortgagee to conduct a public sale of the property on his own, but still require notice to be given to the interested parties.

    If it is deed of trust mortgage, the sale would be conducted by the trustee instead.