Chapter 11
LAND SALE CONTRACTS, MORTGAGES AND DEEDS
A. Statute of Frauds: The Statute of Frauds is applicable in all states to any contract for the sale of land, or for the sale of any interest in land. Therefore, either the contract itself, or a memorandum of it, must be in writing.
1. Memorandum satisfying: A memorandum of the parties’ agreement, summarizing some terms but not the entire oral agreement, will satisfy the Statute if it specifies the following: (1) the names of the parties; (2) the land to be conveyed; (3) normally, the purchase price; and (4) the signature of the party to be charged (i.e., the party against whom enforcement is sought). (Example: Seller writes a letter to Buyer, confirming the provisions of their oral contract for the sale of Blackacre. This letter will constitute a sufficient memorandum if Buyer seeks to enforce the contract against Seller, but not if Seller seeks to enforce it against Buyer.)
2. Part performance exception: There is one major exception to the Statute of Frauds for land sale contracts: under the doctrine of part performance, a party (either buyer or seller) who has taken action in reliance on the contract may be able to gain at least limited enforcement of it.
a. Acts by vendor: If the vendor makes a conveyance under the contract, he will then be able to sue for the agreed-upon price, even if the agreement to pay that price was only oral.
b. Acts by purchaser: Courts are split as to what acts by the purchaser constitute part performance entitling him to specific performance.
i. Possession plus payment: Many states hold that if the buyer takes possession, and also makes payments, this will be sufficient part performance that the seller will be required to convey the property.
ii. Improvements: Also, in many states, a buyer who takes possession and then either makes permanent improvements, or changes his position in reliance, can require the seller to convey.
iii. "Unequivocally referable" requirement: Most courts say that the buyer’s part performance must be "unequivocally referable" to the alleged contract. Thus the buyer must show that the part performance was clearly in response to the oral contract, and not explainable by some other aspect of the parties’ relationship. (Example: D orally promises to convey Blackacre to P if P will move in with D and care for D in his old age. P does so. P is distantly related to D. D dies without ever having made the conveyance. If P sues D’s estate to enforce the alleged oral agreement, P will probably lose because P’s part performance (moving in and caring for P) is not "unequivocally referable" to the oral contract, since P may have been doing it out of affection for a relative.)
B. Time for performance: In a suit for damages, the time stated in the contract will be deemed to be of the essence, unless the parties are shown to have intended otherwise. (Example: Seller refuses to close on the date specified in the contract. Buyer may bring a suit for damages for the delay, even if it is only a few days.)
1. Equity: But in a suit in equity (i.e., a suit for specific performance), the general rule is that time is not of the essence. Therefore, even if the contract specifies a particular closing date, either party may obtain specific performance though he is unable to close on the appointed day (so long as he is ready to perform within a reasonable time after the scheduled day). (Example: The sale contract specifies a November 1 closing date. Buyer has trouble lining up his financing, so he can’t close on November 1. The contract is silent about whether time is of the essence. By November 15, Buyer has his financing lined up, and asks Seller to close. Seller now refuses. In the absence of strong evidence that the parties intended time to be of the essence, Buyer will probably get a court to order Seller to convey even though Buyer missed the November 1 closing date.)
C. Marketable title: Nearly all land sale contracts require the vendor to convey a marketable title. (Even if the contract is silent on this issue, an obligation to convey a marketable title will be implied by the court.)
1. Definition of "marketable title": A marketable title is one that is free from reasonable doubt about whether the seller can convey the rights he purports to convey. Thus it is not sufficient that a court would probably hold the title good in a litigation. Instead, the title must be free from reasonable doubt so that the buyer will be able to resell in the future. The purchaser is not required to "buy a lawsuit".
2. Defects making title unmarketable: Here are some of the defects that might make title unmarketable:
a. Record chain: First, anything in the prior chain of title indicating that the vendor does not have the full interest which he purports to convey, may be a defect. (Examples: A substantial variation between the name of the grantee of record in one link and the name of the grantor in the following link is a defect. Similarly, a substantial variation in the description of the land between one deed and the next may be a defect.)
b. Encumbrances: Second, even if the vendor has valid title to the property, an encumbrance on the property will normally constitute a defect.
i. Mortgage or lien: Thus an outstanding mortgage would be an encumbrance making the title unmarketable. (However, the vendor has the right to pay off the mortgage at the closing, out of the sale proceeds.) Similarly, liens (e.g., a lien for unpaid taxes, or a lien gotten by a judgment creditor) are defects.
ii. Easement: An easement will be a defect if it reduces the "full enjoyment" of the premises.
iii. Use restrictions: Similarly, privately-negotiated use restrictions (e.g., a covenant whose burden runs with the land, to the effect that only residential structures will be built) can be a defect.
iv. Land-use and zoning violations: Most courts hold that violations of building codes are not encumbrances on title. But a violation of a zoning ordinance usually is treated as an encumbrance.
3. Agreement and notice: But the parties may agree that certain kinds of defects will not constitute unmarketable title. This agreement will normally take place in the contract of sale. (Example: Buyer and Seller agree that a particular easement held by X across the property will not render title unmarketable. The court will enforce this agreement.) Also, the buyer may be held to be on notice of certain defects, and therefore held to have implicitly agreed to take subject to them (e.g., where a right of way across the property is very visible to anyone who looks even casually at the property).
4. Time for measuring marketability: Unless the contract specifies otherwise, the vendor’s title is not required to be marketable until the date set for the closing. Thus the vendor may sign a contract to sell property which he does not yet own (or on which there are several defects in title), and the purchaser cannot cancel the contract prior to the closing date because of this fact.
D. Remedies for failure to perform: Where one party fails to perform a land sale contract, the other party may have two remedies: (1) a suit for damages; and (2) a suit for specific performance.
1. Damages: If one party breaches a land sale contract, the other may almost always sue for money damages. Generally, P recovers the difference between the market price and the contract price (the "benefit of the bargain" rule).
2. Specific performance: Usually, an action for specific performance may be brought against the defaulting party, whether the defaulter is buyer or seller. Most commonly, the seller changes his mind, and buyer is able to get a decree of specific performance ordering seller to convey the property. (Each parcel of land is deemed unique, so the court presumes that money damages would not be adequate to compensate the buyer.)
3. Deposit: If buyer is unable to close on the appointed date, most courts do not allow him to recover his deposit (on the theory that a suit to recover a deposit is in effect an action at law, and time will be deemed to be of the essence in a suit at law).
E. Equitable conversion: For many purposes, the courts treat the signing of the contract as vesting in the purchaser equitable ownership of the land. (Conversely, the vendor is treated as becoming the equitable owner of the purchase price.)
1. Risk of loss: Most courts hold that since the vendee acquires equitable ownership of the land as soon as the contract is signed, the risk of loss immediately shifts to him. This is true even if the vendee never takes possession prior to the casualty. (Example: S contracts to sell land to B. Prior to the closing, while S is still in possession, a hurricane destroys the house located on the land. Most courts hold that the loss falls upon B — B must still pay the agreed-upon purchase price, and does not receive any abatement of price, nor does he get his deposit back.)
a. Exceptions: But courts following this majority rule have a couple of key exceptions to it: (1) the vendor bears any loss resulting from his own negligence; and (2) the vendor bears the loss if at the time it occurred, he could not have conveyed title (e.g., because his title was unmarketable).
b. Insurance: But very importantly, courts who place the risk of loss on the purchaser give him the benefit of the vendor’s insurance.
II. MORTGAGES AND INSTALLMENT CONTRACTS
A. Nature of mortgage: A mortgage is a financing arrangement, in which the person buying property (or one who already owns property) receives a loan, and the property is pledged as security to guarantee repayment of the loan.
1. Two documents: There are two documents associated with every mortgage: (1) the "note" (or "bond"); and (2) the mortgage itself.
a. The note: The note is the buyer’s personal promise to make the repayments. If there is a foreclosure against the property and the foreclosure sale does not yield enough to cover the outstanding mortgage debt, the note serves as the basis for a deficiency judgment against the borrower for the balance still due.
b. Mortgage: The mortgage itself is a document which gives the lender the right to have the property sold to repay the loan if the borrower defaults. Since the mortgage in effect gives the mortgagee an interest in the land, the mortgage is recorded.
2. Sale of mortgaged property: Usually, when mortgaged property is sold the mortgage is paid off at the closing. But property can be sold without paying off the mortgage, either by: (1) having the purchaser take "subject to" the mortgage; or (2) having the purchaser "assume" the mortgage.
a. Sale "subject to" mortgage: If the purchaser merely takes "subject to" the mortgage, he is not personally liable for payment of the mortgage debt. True, the mortgagee can foreclose if the buyer does not make the payments. But the mortgagee may not sue the buyer for any balance still remaining on the loan after foreclosure; that is, the mortgagee may not get a deficiency judgment against the purchaser. (But the mortgagee may in this instance sue the original mortgagor for this balance.)
b. Assumption: If the new buyer assumes payment of the mortgage, he is liable, both to the original mortgagor and to the mortgagee, for re-payment of the mortgage loan. Thus the mortgagee can get a deficiency judgment against the assuming purchaser.
3. Foreclosure: Foreclosure is the process by which the mortgagee may reach the land to satisfy the mortgage debt, if the mortgagor defaults.
a. Judicial foreclosure: Usually, foreclosure is judicially supervised — the foreclosing mortgagee must institute a lawsuit, and the actual foreclosure sale takes place under supervision of a government official (usually a sheriff).
b. Private foreclosure sale: Some states allow the mortgage lender to use a document called a "deed of trust" rather than a "mortgage." The deed of trust allows the lender (or a third person) to hold the property as "trustee," and to sell it in a private sale if the borrower defaults. However, the private sale must be held in a commercially reasonable manner so as to bring the highest price possible — if the lender does not do this, he will owe damages to the borrower in the amount that the borrower might have gotten back (representing the borrower’s equity above the mortgage amount) had the sale been a commercially reasonable one.
B. Installment contracts: Land can be bought under an installment contract. The buyer makes a down payment, and pays the rest of the purchase price in installments (usually monthly). Here, the buyer does not receive his deed until after he has paid all (or, sometimes, a substantial portion) of the purchase price.
1. Forfeiture: If the installment buyer defaults, the seller does not need to go through complex foreclosure proceedings — he can just exercise his contractual right to declare the contract forefeited (in which case the seller theoretically gets to keep whatever has been paid on account). But modern courts often hold that if the buyer has paid a substantial portion of the purchase price, and the seller would be unjustly enriched by a complete forfeiture, ordinary foreclosure proceedings (applicable to mortgages) must be used.
III. DEEDS
A. Nature of deed: The deed is the document which acts to pass title from the grantor to the grantee.
1. Merger: Under the doctrine of merger, most obligations imposed by the contract of sale are discharged unless they are repeated in the deed. (Example: The contract calls for merchantable title, in the form of a warranty deed. Buyer carelessly accepts a "quitclaim" deed which makes no warranties. Buyer will not be able to sue Seller on the contractual provision if the title turns out to be defective — the contractual provisions are extinguished and replaced by whatever provisions are contained in the deed, under the merger doctrine.)
2. Two main types of deeds: There are two basic types of deeds: (1) the quitclaim deed, in which the grantor makes no covenant that his title is good (he merely passes on to the grantee whatever title he in fact has); and (2) the warranty deed, in which the grantor makes one or more promises about the state of the title.
B. Description of the property:
1. Types of description: There are three main ways of describing land in a deed. Their use varies by region and type of land:
a. Metes and bounds: A "metes and bounds" description begins by establishing a starting point (usually based on a visible landmark or "monument"). Then a series of "calls and distances" is given, each of which represents a line going in a certain direction for a certain distance. (Example: "From the southwest corner of East and Main Street, then running north 50 degrees 26 minutes for 273 feet, then west 59 degrees 8 minutes for 100 feet," etc.)
b. Government survey: In many rural areas, especially west of the Mississippi, the description method uses the U.S. government survey. Land is divided into six-mile-square tracts called "townships"; each township is divided into 36 one-mile-square tracts called "sections"; each section contains 640 acres, each of which can be directly referred to.
c. Plat: The "plat" method relies on the recording of a map or "plat" of property by a developer, in which the plat shows the location of individual lots. (Example: "Lot 2 in Block 5 in Highwood, a subdivision platted on a map filed in the Register’s Office of the County of Westchester on June 13, 1910.")
2. Interpretation: In interpreting the description of the land conveyed, the court attempts to ascertain the intent of the parties.
a. Construction in grantee’s favor: Courts tend to interpret the deed in a way which is most favorable to the grantee (i.e., the document is construed against the grantor, since the grantor usually drafts the deed).
C. Formalities: Deeds must meet certain formalities, which vary from state to state.
1. Signature: The grantor must place his signature on the deed. The signature of the grantee is generally not necessary.
2. Attestation or acknowledgment: In most states, statutes require the deed either to be "attested" to (i.e., witnessed by one or more persons not parties to the transaction) or to be notarized.
D. Delivery of deed: For a deed to be valid, it must not only be executed, but also "delivered." But this "delivery" requirement does not necessarily refer to physical delivery; what is required is that the grantor use words or conduct evidencing his intention to make the deed presently operative to vest title in the grantee.
1. Not revocable: If the delivery occurs, title passes immediately to the grantee. Thereafter, return of the deed to the grantor has no effect either to cancel the prior delivery or to reconvey the title to him. The only way the title can get back to the grantor is if a new, formally satisfactory, conveyance takes place.
E. Covenants for title in warranty
deed: If the deed is a "warranty" deed (as opposed to a
"quitclaim" deed, which merely conveys whatever interest the grantor has without
making any promises), the grantor is held to be making various promises about the state of
his ownership. These promises are called "covenants for title."
1. The covenants: The covenants fall into three basic groups:
a. Seisin and conveyance: The covenants of "seisin" and of "right to convey" mean that the grantor has an indefeasible estate in the quality and quantity which he purports to convey. (Example: These covenants might be breached if the grantor purported to convey a fee simple absolute, but actually only owned and conveyed a fee simple subject to condition subsequent or a fee simple subject to an executory limitation.)
b. Against encumbrances: The covenant "against encumbrances" is a promise that there are no encumbrances against the property, that is, no impediments to title which do not affect the fee simple but which diminish the value of the land. (Examples: Mortgages, liens, easements and use restrictions are all encumbrances, so if the grantor gives a deed containing a covenant against encumbrances, the existence of any of these will constitute a breach of that covenant.)
c. Quiet enjoyment and warranty: The covenants of "quiet enjoyment" and "warranty" represent a continuing contract by the grantor that the grantee will be entitled to continued possession of the land in the future. (Example: These covenants would be breached if a third person not only asserted that he had paramount title, but commenced proceedings to eject the grantee.)
2. Present vs. future covenants: Be sure to distinguish between: (1) present covenants; and (2) future covenants.
a. Present covenants: The covenants of seisin, right to convey, and against encumbrances are present covenants. They are breached, if at all, at the moment the conveyance is made. Thus a breach can occur even though there is no eviction — all the grantee needs to do to recover on the claim is to show that title was in fact defective on the date of the conveyance.
b. Future covenants: By contrast, the covenants of quiet enjoyment and warranty are future covenants. They are breached only when an eviction occurs. (Example: Grantor conveys Blackacre to Grantee under a warranty deed. Ten years later, Grantee discovers that X has a paramount title to that held by Grantor. This is a breach of the present covenants (seisin, right to convey and against encumbrances), even though there is no eviction. But it is not a breach of the future covenants (quiet enjoyment and warranty), because X has not tried to evict Grantee.)
3. Statute of limitations: The main reason for distinguishing between present and future covenants involves the statute of limitations. The statute starts to run on a present covenant at the time the conveyance is made. It starts to run on a future covenant only when an eviction occurs. Therefore, if many years pass from the time of the conveyance, and the grantee discovers that someone has paramount title, the grantee is likely to be out of luck: the time for suing on the present covenants is likely to have passed (since that clock started running at the time of the conveyance), yet there will be no breach of the future covenants if the holder of the paramount title has not attempted to eject the grantee. (Thus on the facts of the above example, Grantee is likely to be out of luck, with his present covenants time-barred and his future covenants not yet breached due to the absence of any ejectment action by X.)
4. Enforcement by future grantee (running of covenants): A second reason for distinguishing between the present and future covenants concerns whether the covenant runs with the land, i.e., whether it is enforceable by subsequent grantees.
a. Present covenants: The present covenants usually do not run with the land.
b. Future covenants: But the future covenants do run with the land.
Example: O conveys to G1 under a warranty deed. G1 conveys to G2. G2 discovers that X has always held a paramount title superior to O’s. G2 cannot sue O on the present covenants (seisin, right to convey and against encumbrances), because these do not run with the land. But he may sue O for breach of the future covenants (warranty and quiet enjoyment). (But remember that these future covenants will not be breached unless X actually sues to eject G2.)
5. Measure of damages: If the grantor breaches any of these warranties, the grantee’s recovery is generally limited to the purchase price paid — the grantee may not recover for any appreciation in the value of the land since the conveyance.
F. Warranty of habitability: Most courts today recognize an implied warranty of habitability on behalf of the purchaser of a new residence against a professional builder who built the house. (Example: Developer, who is in the business of building homes, sells a home to P. Shortly after P moves in, he discovers that the foundation is cracked and the roof is structurally unsound. In most states, P may sue Developer for breach of the implied warranty of habitability.)
1. Used homes: The buyer of a used home cannot sue the prior "amateur" owner. But the second buyer may, in most states, sue the original builder for breach of the implied warranty of habitability, provided that: (1) the defect was not obvious at the time of the second purchase, and (2) the defect occurred within a reasonable time after construction of the house. (Example: On the facts of the above example, if P sold the house to P1, P1 could sue Developer if the foundation and roof problems were not obvious at the time of the P-P1 sale, and occurred within a reasonable time after Developer built the house.)
1. Co-ops: The term "co-operative" or "co-op" usually refers to a means of owning an apartment house. The building is owned by a co-operative corporation. What the lay-person thinks of as an "owner" of an individual apartment unit is really a shareholder in the corporation. Each shareholder is entitled to enter into a "proprietary lease," in which the corporation is lessor and the shareholder is lessee. The lessee is generally required to pay his portion of the building’s mortgage interest and principal, and various "carrying charges" used to defray the maintenance and operating costs of the building.
2. Condominium: The condominium or "condo" is a form of ownership in which each individual resident holds a fee simple in a certain physical space or parcel, but all the residents collectively own certain "common areas." In the typical "horizontal" condo structure (e.g., two-story townhouses spread over a large parcel), each individual resident might own the soil upon which his townhouse stands, but he would not own the surrounding lawns, swimming pool, etc. — these would be held by the condominium association.