Real Estate Transactions Outline

Introduction

Transactional work is practical in nature. Rather than looking backwards to piece together the facts of your client in litigation work, transactional work works with a client with an eye towards the future. In this case, your client has goals, aspirations, dreams, and a vision for growth. They simply need a lawyer to help those dreams become a reality. So, what do lawyers do that can help? For a real estate transaction, the lawyer needs to 1) strategically craft the proper documentation, 2) manage when the transaction occurs, and 3) mitigates the risk by identifying, reducing, and shifting the risk.

Types of Real Estate Transactions

Nowadays, there are typically two types of real estate transactions: residential and commercial.

Residential transactions have become more saturated with non lawyers where most of the legal work can be completed via standardized forms and basic online searches. As a result, residential transactional lawyers typically find success in one of two ways: 1) increasing the volume of their cliental and creating cheap standardized means of satisfying their needs, or 2) tacking residential real estate sales as a side job in connection with other forms of legal practice (such as estate planning).

Commercial transactions requires a much more extensive knowledge of market factors in addition to the legal knowledge. Consequently, the field has not been saturated with non lawyers because these transactions tend to be much more complex.

Real Estate Brokers

The first step of selling real estate is by finding the parties necessary to facilitate a sale (a seller and a buyer). A broker is often used to find these parties. Because of the sensitive nature of home-buying, brokers are often regulated by law. Many brokers become members of the National Association of Realtors (NAR). A member of the NAR is called a realtor. As such, many people consider brokers and realtors as synonymous.

Brokers are typically hired by the sellers and paid in a commission basis. The broker’s right to payment comes from an agreement between the seller and broker called a listing, which is often governed by the state where the deal is taking place (see the case below). There are four main types of listings that provide varying levels of control to the seller and the broker:

• Open listing – Any broker can sell and the first to sell gets the commission. If the property is sold by the owner (For Sale By Owner or FSBO), then no commission is paid.
• Exclusive agency – Only brokers from an agency can sell. If a sale is facilitated without the agency, then the agency is still entitled to their commission. However, if the sale is a FSBO, the agency receives no commission.
• Exclusive right to sell agreement – Only the hired broker has the right to sale. Any sales facilitated without the broker will still entitle the broker to a commission.
• Net Listing – A seller wants to recoup a sum of a property. The broker is entitled to set the listing price higher and recover any surplus made within the sale.

Many brokers utilize a Multiple Listing Service, where the listings can be placed online for all potential buyers to view.

Samann L.C. v. Victory Lodging, Inc.

For a commission to be paid, there must be a valid listing agreement between the parties.

Iowa law required that the commission is to be listed in a valid listing agreement. Here, there is no listing agreement. The oral agreement in addition to the addendum does not meet the requirements of a listing agreement. Thus, there can be no means of recovery for the commission total.

Real Estate Transactions Timeline

Precontract

“The informational stage.” This period is when the parties have identified each other and are exchanging information that is necessary to facilitate the sale but retain enough information for negational leverage. There may be mandatory disclosures, but this stage appears to be mostly a battle of wits.

Executory Contract

If the parties elect to go forward, they enter into an executory contract where the parties agree to complete certain tasks before closing. At this point, the doctrine of equitable conversion applies. That is, title is split between the buyer and seller. The seller has legal title and the buyer having equitable title.

Closing

At the end of the executory period, the parties meet to “close” the deal. Here, deed documents are transferred and payment is made. Along with the deed the seller is likely to provide covenants (warranties) to the buyer.

Postclosing

Finalizing all the paperwork by recording the transaction and obtaining insurance.

Brokers

Brokers Duties to Clients

Rangel v. Denny

The duties owed by a broker include:

• Performing the terms of the brokerage agreement
• Promoting the best interest of the client by seeking transactions at a fair price, presenting the property in a timely manner, and timely accounting for the client’s finances.
• Show reasonable skill in providing brokerage services.

Rowedder v. Helkenn

A real estate agent needs to act in the best interest of the client, inform the client of the value of the land, and attempt to sell the land for as much as possible. If the client wishes the land to be sold at a lesser value, the agent should do some investigating to determine why the client would want the lesser value.

Expert testimony is to be provided to determine what the duty of a real estate agent is. As stated above, a real estate agent needs to act in the best interest of the client, inform the client of the value of the land, and attempt to sell the land for as much as possible. If the client wishes the land to be sold at a lesser value, the agent should do some investigating to determine why the client would want the lesser value.

Brokers have a duty of reasonable care, diligence, and judgment to obtain the best possible outcome for their client.. These are very similar to the fiduciary duties owed that we learned in Business Associations.

Lawyers Acting as Brokers

Depending on the state, lawyers can act as brokers without a broker’s license at varying degrees of control.

In re Roth

An attorney can act as a broker without having a license if the broker actions are merely incidental. There can be no dual compensation. Additionally, if an attorney is also a licensed broker, the practices must be separate and there can be no dual compensation.

The Pre-Contract Stage

The Pre-Contract Stage

Understanding Consequences

Simple rules may have some big consequences. So, it is up to the attorney to not only understand the rules, but know what impact those rules may have in the long run.

For instance, rules that every contract needs to have is:

• A grantor and grantee (seller and buyer)
• The right to assign rights unless otherwise stated (can’t assign more than you have)

Letters of Intent, Options, and Enforceability

Real estate contracts are conducted by contract. Consequently, contract rules such as the parol evidence rule and the statute of frauds apply to those transactions.

A letter of intent is an expression from a buyer expressing the intent to purchase a property. Typically, in return, the seller will take the property off the market while the buyer contemplates making the purchase. The added benefit of a letter of intent to is take the property off the market while preliminary negotiations are taking place.

Options similarly provide the buyer with the option to purchase for a limited period of time. Buyers typically provide consideration (payment) for an option so the house is removed from the market while the buyer comtemplates the purchase.

Although letters of intent and options have the same result, letters of intent are more risky. If something goes wrong, a court may see a letter of intent as an enforceable contract, causing the buyer to make a purchase (or most likely provide damages) for a property they do not want.

GMH Associates, Inc. v. Prudential Realty Group

There was no enforceable oral contract. The oral discussions made between Prudential and GMH was not an offer which was later accepted by GMH. Even if it was an offer, the offer was rescinded before it was accepted. Instead, the discussions were made in continued negotiations, Prudential was asking GMH to make an offer.

Because no enforceable contract was made, no fraudulent representations could have been made that caused GMH to enter into a contract. Additionally, estoppel doesn’t work because the original letter of intent said that any party could back out at any time and the property was being sold as is.

Neddermeyer v. Neddermeyer

Exercise occurs when notice is provided, there is nothing in the law that requires the purchase be made within the time provided in the option. As such, he properly exercised the option in time.

Negotiating The Contract

Once the parties have reached an agreement, they execute a contract for sale and enter into the executory period. This is the period where the parties are most busy, as they perform their obligations under the contract before the closing date (the end of the contractual relationship).

Most states, if not every state, require this contract to satisfy the statute of frauds. That is, the contract must be put in writing and sufficiently describe the essential terms of the agreement (parties, price, intent to sell). This is because the statute of frauds applies to contracts for the sale of land.

Equitable Conversion and Allocation of Risk

When the contract for sale is executed, each party obtains an interest in the property. The seller retains legal title and possession of the property while the buyer has an equitable title. Along with this interest comes with certain rights, which could increase the risk of damages to the other party. Consequently, these risks are usually mitigated in the contract (e.g., provisions limiting the ability to transfer rights during the executory period).

Buyers also have an inherit amount of risk as it is assumed that they take on the risks of any negative consequences that occur during the executory period. However, with the development of insurance, this risk has been minimized. Typically the seller obtains insurance which money is put into a trust. Because the seller is double protected by this point (with the assumption that the risk will be allocated to the buyer plus the purchase of insurance), the insurance money can be used to benefit the buyer if anything were to occur.

However, most of the time, the purchase agreement is most likely going to allocate the risk to the seller.

Estate of Clark

Ms. Clark was afforded a life estate of the home of her mother in her will. However, that was only a present intent, and not actually a life estate. A real life estate occurred the following February. Before the life estate occurred, the home was sold to another family. Clark’s mother died shortly thereafter and Ms. Clark brought this suit, wishing to claim title to the home.

The court denies that there was a life estate created before the sale of the home. Consequently, the buyers had an interest in the home before Ms. Clark did. Because that interest transferred before the life estate was granted, Ms. Clark’s mother’s interest had also transferred. Therefore, Ms. Clark’s mother had not rights to grant a life estate at that time and Ms. Clark has no interest in the property.

Krotz v. Sattler

Krotz was selling land to Sattler. There were three neighboring parcels up sale. Two of them were sold quickly while the third was not. After execution of the contract and purchase of two of the three parcels, Sattler began working on the land. During this process, he went through the parcel that was not yet purchased. Krotz brought this action for trespass against Sattler. A directed verdict was afforded to Sattler’s benefit.

Sattler had equitable title of the land. This however, did not give him a possessory interest in the land and thus his entry was trespass. Despite his trespass, he is still entitled to a directed verdict because any damage to the land would go against the party with equitable title. Because Sattler had equitable title and damages would have been to his cost, the trespass does not change the outcome (no need to reward the seller twice). Thus, the trial court is affirmed.

Contract Conditions

Warranties and representations are statements about the property, which if false, would give the other party a cause of action.

Covenants are promises that the party will or won’t engage in certain actions about the property.

The contract conditions are the requirements of the party as they go through the executory period (e.g., subject to good title, inspections, financing, etc.).

Louisiana Real Estate Commission v. Butler

The Butler’s (buyers) put down a $12,500 downpayment on a home. They conditioned purchase of the home on whether they were able to get financing in the amount “to be determined” but at an interest rate of 8.5%. Unfortunately, the Butler’s were unable to get financing, requested the return of the downpayment but were denied. This lawsuit followed.

The Butler’s did not condition performance on the price of the property, only on the interest rate. There was no evidence that the Butler’s were unable to get a certain interest rate, only that they were unable to get financing. As such, they were in violation of the contract and the sellers are entitled to retain the downpayment.

Contract Stage

Conditions of the Property

Quantity

The amount of property to be transferred, usually described by acres or square feet. This amount could also be described by boundary lines.

Perfect v. McAndrew

If the lot is purchased in gross, then the buyer takes the risk of the quantity of the property, unless there is proof that the seller used fraud, concealment, or misrepresentation.

The land was to be purchased in gross (as a whole) rather than a price per acre. This was shown by the ambiguous language of the contract supplemented by the actions of the parties. Nobody discussed the acreage until the survey. The mention of the acreage in the sale was merely to add to the description of the land. The lack of the phrase “more or less” is not deterministic of whether the property is purchased in gross or as a price per unit.

Quality

Safety, structural soundness, environmental condition of the land, condition of operating systems, disclosing inaccurate information, disclosing material defects, etc.

Duty to Disclose Material Defects

Material defects could be physical in nature, but recent cases have shown that stigma associated with the property could also lead to a material defect.

Van Camp v. Bradford

A patent defect in a property is something that is easily discoverable if a reasonable search of the property is conducted. On the other hand, a latent defect in a property is something that is not easily discoverable when a reasonable search is conducted.  Usually, a seller has the duty to disclose latent defects.

According to Van Camp, a latent defect and a material misrepresentation about the defect could give rise to a cause of action.

Additionally, “as is” contracts only apply to the patent defects of the property unless there is fraud.

Today, in residential transactions, there is a disclosure form that the seller must fill out when selling the property. If the seller makes a misrepresentation on the form for defects that they know or should have known (do a reasonable inquiry), they can be liable for those representations.

For the rule stated above, it is very possible that a jury could find that an affirmative request for information was made and that Bradford did not provide a truthful statement. As this information was material (would have affected Van Camp’s willingness to purchase), there was a duty to disclose truthfully.

Land Descriptions

Types of Descriptions

There are three main types of descriptions. Essentially, a good description will describe one and only one parcel of land.

Metes and Bounds

The metes and bounds method describes the boundary lines of the parcel. This usually begins at the corner of the parcel (known as the point of beginning), and direction is made by reference to the true north and south lines of a compass (e.g., North 90 degrees west is straight west). For each direction, you measure how far the boundaries travel in that direction. Curves are based on circles, and irregular boundaries may be carved based on geographical features. To complete a sufficient legal description, the drawer needs to return to the point of beginning (called the close). In other words, this method looks at the measurements and angles of the boundaries to draw out a parcel of land.

Even the systems below could be described in metes and bounds, but the other methods tend to be shorter and are still proper legal descriptions.

Surveyors employ this system.

Government Survey System

This system was developed by Thomas Jefferson. What it does is essentially divides the United States into squares based on intersections of longitude (principal meridian P.M.: north-south) and latitude (baseline: east-west). The units are called townships and sections. A township is a 6×6 mile square with 36 sections inside (each a 1×1 mile square, or 640 acres). The description denotes the location of the township in reference to the baseline (known as the range) and the P.M. Sections can further be divided into subsections based on the description. There subsections can further be described by denoting where the parcel is located in relation to the center of the section.

An example of this description could be: NW 1/4, § 1, T.3N, R.2W, 5th P.M. This translates to: The Northwest quarter of the first section of the township 3 North and range 2 West of the 5th principal meridian.

Most farm land is described in this way.

Plats

This system is a description of the lots of land, as set out on subdivision maps as part of the public land records.

An example of this description would be: LOT 3 in [Subdivision] PLAT 4, in [City, County, State].

Most residential and commercial land is described in this way.

Surveys

A survey is to look over the land (both physical and written) to ensure that the boundaries are correctly described. Most of this is for legal purposes, to ensure that the court knows who owns what. There are several reasons why to have a survey conducted:

1. To show the existence of the property as legally described
2. Determine the relationship between adjoining parcels: who owns what and make sure that there are no gaps
3. To show any discrepancies between the deed and the physical property
4. Determine whether fences and other property improvements are in the right location
5. To discover unrecorded easements
6. Understand how water usage or changes may affect boundary lines

Adequacy of the Description

The legal description of the property must satisfy the statute of frauds to be valid. However, the question is just how in depth the description needs to be for the deed, the purchase agreement, or other documentation. This sufficiency question is determined by the courts in each jurisdiction. But it is always better to be safe than sorry. Attorneys should error on the side of being more descriptive rather than generalized.

In Contracts

TR-One, Inc. v. Lazz Development Co.

The parties entered into a contract which Lazz Development Co. backed out of. When the plaintiff filed the lawsuit, the defendant sought summary judgement, arguing the description was too general causing the contract to be void. Below is the description:

Approximately 48 acres of vacant land located at 89 Mount Tom Road, Pawling, New York.

The specific plot of land was to be determined later. The court said that it was impossible to determine with any certainty which parcel of land was involved in the contract. Consequently, the statute of frauds was not satisfied and summary judgment was merited.

In Deeds

Walters v. Tucker

When there is no ambiguity in the deed, stick to what the deed says.

The defendant argues that the ambiguity comes from the application, and the deed should be dually interpreted from the words and how the ground functions. However, the court refuses to adopt that approach. Instead, the deed is clear, the Eastern border of Lot 13 is clear, making it a simple determination to know where the Western border should be (50 feet West of the Eastern border).

McGhee v. Young

The monuments hold more authority than descriptions in the deed.

Most of the time in the legal world, paper controls and physical aspects need to conform to the physical reality. However, that is not the case here. It is too impractical to request everyone to alter their physical monuments to line up with a paper description, especially when they have been relying on those lines for years. Thus, physical monuments in the land will trump over descriptions in the deed.

Marketable Title and Deeds

Marketable Title

The default rule is that the buyer has an implied right to marketable title. That is, the title of the land is marketable, free of defects at the time of closing. Consequently, if there is a defect, the seller is responsible for the damages caused by the defect. Marketable title is also an implied condition, that is, a breach of marketable title means the buyer can get out of the contract without breach.

However, the parties can agree to terms that alter what kind of defects may be acceptable. When the parties agree to these terms, it is called a contract title. For instance, if the buyer is satisfied with insurance covering the defects, then the seller’s obligations may also be satisfied (insurable title). Record title is where the parties gather proof of ownership by looking at deeds and others recorded (another form of contract title).

Encumbrances and Encroachments

An encumbrance is a nonpossessory interest in the property owned by a third party. For instance, if a mortgage is on the property, the lender does not have a possessory interest, but they do have a nonpossessory interest. Other examples of encumbrances include: easements, covenants, equitable servitudes, marital property rights, tax liens, etc. The basic rule is that an encumbrance on the property makes it unmarketable.

An encroachment is when an improvement of the property extends beyond what is permissible for the property to do, typically in the form of a trespass on another’s rights. For instance, if there is an easement or a setback on the property and an improvement extends over the easement or setback boundary, the improvement is encroaching on another’s rights. The general rule is that an encroachment renders the title unmarketable.

Staley v. Stephens

Any infringement on the setback zoning requirements renders title unmarketable.

The Staleys were selling to the Stevens. Together, the parties agreed to the purchase of the Staleys’ home. The home sat upon a lot  that contained a restrictive covenant that the home must contain a 10 foot setback from the property. Additionally, a zoning provision required all homes in the area to have a 8.5 foot setback. Here, the property was only 8.4 setback from the property line. So, regardless of the controlling provision, the home was encroaching on the setback. Upon learning of the encroachment through a survey, the Stevens failed to purchase the home because the Staleys would not obtain a waiver of the setback provision by the other landowners in the area.

This was a clear violation of the restrictive covenant and the zoning provision. However minor, the home was encroaching on the rights of others rendering title unmarketable.

Deeds

For a deed to be effective, it needs to include the names of the grantor and grantee, contains words of grant (what kind of conveyance), describe the land to be affected, and is signed by the grantor. Additionally, there must be an intent to deliver, delivery, and acceptance of the deed to be effective.

Warranty Deeds and Quitclaim Deeds

A general warranty deed is a deed where the seller is liable for any express warranties made during the entirety of the chain of title. That is, the grantor is taking on all the risk for the entire lifetime of the property. A special warranty deed is where the seller is liable for any express warranties made during the seller’s ownership of the property. A quitclaim deed is where there are no covenants in the deed, the buyer is taking the deed “as is” and bears the risk of any defects.

Egli v. Troy

602 N.W.2d 329 (Iowa 1999).

Engli discovered Troy building on their property, so they sued. Turns out Troy and Ransom had purchased the property from Greve by special warranty deed. Engli is arguing that they had erected a fence and that Greve had acquiescenced to the new boundary. If true, then Greve would have created the issue during her ownership, creating liability for herself of any litigation between Engli and Troy and Ransom.

Types of Covenants

Present Covenants

A covenant about the deed as it stands at the time of conveyance. That is, if the deed is conveyed and the covenant was false at that time, the breach occurred at the time of delivery. Additionally, these covenants do not run with the land. These include:

Seisin, the grantor covenants that he is conveying land that he properly owned.

Right to convey, the grantor promises that he had the legal right to convey the property.

Covenant against encumbrances, the grantor promises that there are no encumbrances on the land.

Future Covenants

These are covenants that protect the grantee from something that could happen in the future. Further, these covenants do run with the land (future successors also have the same rights by a general warranty deed). These include:

Covenant of quiet enjoyment, the grantor promises that the grantee may possess and quietly enjoy the land. A breach occurs if the grantee is evicted by someone who has a better title.

Covenant of warranty, the grantor warrants the title of the property, and the covenant is breached if the grantee loses possession of the land.

Covenant of further assurances, the grantor promises to give “further assurances” to ensure the grantee retains what they rightfully received. A breach occurs if the grantor fails to give further assurances. Breaches of all other covenants are for damages, but breach of this covenant is for specific performance.

Public Records

Title Search Process

Title search begins by knowing who has owned the property throughout history. This is called the chain of title.

Types of Recording Acts

Recording a deed doesn’t make it valid, it just gives future purchasers notice of who owns the property. There are three different types of recording acts.

Race Statute

“The first to record wins.” Only Delaware, Louisiana, and North Carolina have pure race statutes.

A conveys to B and C. C records first, C wins.

Notice Statute

“The last bona fide purchaser wins.” A bona bide purchaser is a subsequent buyer who takes the property without notice of another party’s interest (because the previous purchase was not recorded).

A conveys to B and then to C (both bona fide purchasers). B records. C records. C will win.

Notice can be found through actual notice, constructive notice (regardless of actual notice, purchaser is deemed to have been notified—typically through a recording), or inquiry notice (should have asked and the facts would have readily presented themselves).

Race-notice Statute

“The first bona fide purchaser to record wins.” So to win, a purchaser must pay value, without notice of prior claims, and record first.

A conveys to B and then to C (both bona fide purchasers). B records. C records. B will win.

Bona Fide Purchasers

Record Notice

If a property is properly recorded, any potential purchaser has constructive notice of those interests.

Pelfresne v. Village of Williams Bay

A village sued Schiessle saying the property was unsafe and sought an order to raze (tear down the buildings on the property), notice was provided that legal action was pending on the property. Schiessle sold the property to two others who were added onto the litigation. Based on a technicality, the case was dismissed, but promptly refiled. However, the Village failed to file a notice that litigation was pending. The two others sold the property to another. Then the Village obtained the raze order and a monetary judgment, but failed to record the order on the property. At this point, the third party sold to Pelfresne (the nephew of Schiessle).

The defendant may have had actual notice because he was the nephew of Schiessle, but the facts are not present. Further, there is no constructive notice because the raze order was missing from the proper location within the records. However, he may have been on inquiry notice because red flags would have been raised because of the situation—the judgment against several owners of the land and Pelfresne’s relationship to Schiessle.

Shelter Rule

Chergosky v. Crosstown Bell, Inc.

The rule is that if you acquire a property from a bona fide purchaser, then a subsequent purchaser will also be a bona fide purchaser (even if they had knowledge of the transactions).

Title Assurance

Typically assurance comes in one of three forms (1) abstracts, (2) title opinions or certificates, and (3) title insurance. Each product also has different rights and protections for the purchaser.

Abstracts

A title abstract is a written analysis of the property in question extending back towards the chain of title (complete). Today, most abstracts extend between 20–40 years, depending on the jurisdiction (extending further to show any potential encumbrances such as a mortgage or easement) (root title). Most abstracts are also arranged chronologically. Additionally, abstracts do not opine on whether title is good, but instead leaves it to the reader to interpret its meaning.

Title Opinions

A title opinion is written by an attorney who has reviewed the abstract and opines on whether the legal title is marketable based on the information gathered in the abstract. Attorneys who create title opinions could be liable for negligence, based on malpractice standards, while those who prepare abstracts are generally not liable (depending on the jurisdiction).

Title Insurance

Title insurance is provided to insure the purchaser against any title defects on the deed. When creating policies, the insurer conducts a search (rather than the abstractor).

What’s better, title insurance or title opinions? Title insurance may protect the purchaser better financially (being fully liable to insured defects while an attorney is only liable for malpractice), but does limited amounts to repair any defects in the title.

How is title insurance different from other types of insurance? Most insurance types will insure against future events, but title insurance will insure only against past events.

Vestin Mortgage, Inc. v. First American Title Insurance Company

A notice of intent to create a special improvement district (SID) and levy future assessments does not fall under the insurance policy, affirmed.

Vestin provided two loans to The Ranches. Title of the property was insured by First American. Before the loans were made, the city had filed a notice of intent to create a SID in the area where the property was located. The SID would levy assessments against any sale of the property (a future event). Eventually, The Ranches defaulted on their loans and Vestin foreclosed. When they attempted to sell to another party, they discovered of the incoming assessments and the buyer backed out. So, Vestin attempted to file a claim, saying the assessments affected marketable title. These claims were denied and Vestin sued.

Vestin argues that the creation of a SID was a defect on the title falling under the provision of the insurance policy. However, First American argues that the policy covers only actual assessments before the policy was issued. Because the SID occurred after the policy was issued, First American argues they are not liable.

Here, the court agrees with First American. Notice of the assessment does not create a lien, only actual assessment. Because the actual assessment occurred after the policy was issued (and title insurance does not insure against future events), the lien falls outside the scope of the policy. Further, the assessment only affects Vestin’s ability to sell the property, but it does nothing to affect the title, Vestin still has full title.

Improving the Title Record System

There are two main flaws with the current title system. First, the ease of adding records into the system is convenient but allows for stale claims that have no value other than blocking a transaction years in the future. Second, other factors off the record may influence the possessory interest of a recorded property (adverse possession, nondelivery, fraud, etc.). Title standards, title curative acts, and marketable title acts are relevant attempts to improve on these flaws.

Title Standards

A title standard is a standard or rules utilized for how an attorney examines a title to see if a title is sufficient. The main purpose of the standard is to eliminate future objections based on technical and often minor details within the title. The logic is simple, if everyone follows the same standards, all the titles will be the same format and lack flaws. If there are flaws, they are easy to point out.

For instance, standards may address whether names spelled differently has an impact on the validity of the title; or the standards consider the attitudes of attorneys; etc.

United States v. Morales

If there is no question about whether the person with a different spelling or name is the same individual, the deed is valid.

Linda Morales is arguing the government has no interest because the deed transferred to him was never valid. This is because there were discrepancies in the name utilized during the transfers. However, the court rejects this argument because there is no question the person listed in the deed is in fact the same individual.

Title Curative Acts

When a recorded document has defects, the curative acts in essence “cures” these defects after a certain passage of time. That is, deeds with the defects are considered valid if not challenged within a specified period of time.

Marketable Title Acts

To remedy stale interests, a marketable title act limits the time a search needs to be conducted, typically either 30, 40, or 50 years. That is, the attorney only needs to look back 30–50 years (depending on the jurisdiction) for title defects. Anything older than that is considered invalid, thus making the title more likely to be marketable. There are exceptions to marketable title acts, most notably: interests of governments, railroad easements, mineral rights, and visible easements are still valid.

Matissek v. Waller

In 1971, the developer platted a subdivision and created covenants where anyone building an airplane hanger on the property had to be made with masonry. There was also an amendment in 1977 but the same restriction stayed in place. Throughout time, property was transferred and only sometimes mentioned restrictions. Matissek purchased the property in 1995 (the deed did not mention any restrictions) and attempted to build a hanger with metal siding. Another resident complained.

According to the MRTA, marketable title is free of restrictions after 30 years unless reaffirmed in certain ways.

Matissek does not believe he is bound by these covenants because the 1971 covenants had expired and were not reaffirmed because the deeds did not specifically mention the restrictions or where they could be located. The court agreed. Additionally, the 1977 restrictions did not count because they were dependent on the 1971 restrictions.

Contract Remedies

Damages and Forfeiture of Payments

There are several different types of damages and ways to calculate those damages. For instance, damages could include expectation loss, the monetary value parties were to gain had the contract proceeded without breach. However, these types of damages can be expensive to litigate, difficult to calculate, and difficult to recover in the case of a successful litigation. Rather than go through the complexities most contracts contain a provision requiring earnest money and stating that retention of the earnest money as satisfactory damages in the event of a breach. In other words, retaining or forfeiting the earnest money is a type of liquidated damage for a breach of contract.

Uzan v. 845 Un Limited Partnership

When the contract results from lengthy negotiation between represented parties with equal bargaining power, and there is no evidence of overreaching, then a breach could result in the forfeiture of the down payment pursuant to the contractual terms.

Liquidated damages may only be made if the totals are reasonable and if calculating other damages would be difficult.

In 1998, the defendant began to sell condominiums at The Trump World Tower. The plaintiffs purchased four total units on floors 89 and 90 before construction began. Because the plaintiffs purchased several units, they were able to successfully negotiate the total price down by 7 million to 32 million. As part of the agreement, the plaintiffs were obligated to make a 25% down payment, 10% at the time of contracting and the remaining total to be made in two installments of 7.5% 12 and 18 months later. In the event of a default, and failure to cure, the defendant could retain the down payment as damages.

After 9/11, the plaintiffs began to worry about another terrorist attack on The Trump World Tower because of its location and prominence. Consequently, they failed to close and defaulted. After failure to cure, the defendants terminated the agreements and retained the 25% down payment.

At trial, the defendants were successful in obtaining a summary judgment grant for 10% of the down payment, but the rest of recovery was denied. So, defendant appealed.

Due to the rule stated above, the defendant was entitled to the full recovery of the 25% down payment.

Equitable Remedies

• Specific Performance. A request for specific performance is that the court will require the parties to perform as promised. To do so, the party requesting specific performance must show that they were ready, willing, and able to perform at the time a breach occurred.
• Reformation. If there is an error in the contractual terms, reformation could be requested to correct the error. To do so, the error must be a mutual mistake between the parties (the actual intent of the parties was not reflected).
• Rescission. Rescission is when one party terminates the contract (without breaching) and may occur on grounds of fraud, misrepresentation, or mutual mistake.
• Equitable Liens. A lien on either the purchase price or down payment secured by title on the property.

DiGuiuseppe v. Lawler

Specific performance requires the one enforcing performance to be ready, willing, and able to also perform.

DiGuiseppe was to purchase over 750 acres from Lawler at 40,000 per acre. The downpayment was to be made a three stages (1) 100,000 at contract signing, (2) 100,000 upon submission for zoning, and (3) 400,000 upon approval of zoning that was acceptable as applied for. Zoning was approved for a different purpose other than that applied for but it was still acceptable. DiGuiuseppe failed to make the 400,000 deposit and so Lawler sought to terminate the contract. Despite the termination efforts, DiGuiseppe attempted to complete the purchase.

At trial, a jury awarded damages, but DiGuiseppe waived the damages in exchange for specific performance, which was permitted by the judge. This decision was appealed and he lost.

There was no finding that DiGuisepppe was actually ready, willing, and able to perform. Although he was willing, he was lacking the cash necessary to perform at the time. So, specific performance was not an appropriate remedy.

Potter v. Oster

Oster had purchased property from Stark and sold the homestead on the land to the Potters on an installment contract basis. Then, Oster sold the remaining land to Bishop. Bishop failed to pay Oster, who in turn failed to pay Stark. Consequently, all parties were kicked off the land (including the Potters who had made all their payments in time). Here, the Potters are seeking to rescind the contract they had with Oster and recover restitution damages because Oster was unjustly compensated for the installment contract (rent being cheaper than the installment contract would have been).

The focus was putting the parties back to where they were before the enforcement of the contract. Any other remedy options would not have done that so rescission was the best remedy.

Executory Period

Introducing Mortgages

Courts found it necessary to protect borrowers (mortgagors) from lender (mortgagee) control. As such, if the mortgagor missed a payment, they had the opportunity to redeem themselves by paying the mortgage back in a timely manner. This was called the right of redemption. However, to protect mortgagees from unlimited redemption rights, courts created the foreclosure, that is, foreclosing the mortgagors right to redeem within a reasonable timeline.

With time, however, mortgage law has developed intro three different title theories. Despite the differences, they are essentially treated the same.

• Title theory: The mortgagee maintains title of the property (also bears risk of ownership).
• Lien theory: The mortgagee maintains title to the property only at foreclosure (mortgagor maintains title and risk of ownership).
• Intermediate theory: The mortgagor maintains title and risk of ownership until default, at which time title automatically transfers to the mortgagee.

Doctrine of Waste

When more than one party has an interest property, the doctrine of waste applies. The doctrine says that one owner may not damage the property at the expense of the other interests. This doctrine applies to cotenants, landlords, tenants, mortgagors, etc. Additionally, the doctrine applies to maintenance and improvement of the property. There are two different kinds of waste, voluntary and permissive. Some courts, such as California, only allow the waste doctrine if the waste was caused in bad faith. The case below outlines the rule for what is bad faith waste.

Fait v. New Faze Development, Inc.

Bad faith waste occurs if there is destruction of property when there were no economic pressures to do so.

There was no economic pressure for the demolition so a jury could find for bad faith.

Mortgage Markets

Ever since the housing bubble burst beginning in 2007, housing markets have been much more cautious with who they approve mortgage loans. As such, there are factors and standards (underwriting standards) mortgagees consider before offering a mortgage. These include subjective analysis of willingness to pay and objective evaluation of ability to pay. Ability is often measured by a credit score (a score of 660 and above is likely to gain normal loan pricing). Additionally, ability is measured by the amount of debt the applicant has. Mortgagees do not like giving loans to people where the mortgage would be more than 31% of their gross monthly income or their total debt payments exceed 43% of their gross monthly income.

Mortgage Financing

Financing the purchase of a property is circular.

1. The seller gives a deed to the buyer
2. The buyer offers a downpayment to the seller
3. Buyer then receives a mortgage from their lender for the remaining balance
4. Balance is paid to the seller in full.
5. Seller then provides their mortgagee with cash to satisfy any outstanding mortgage on the property.
6. Any leftover cash after the mortgage is satisfied goes to the seller.

Walsh v. Catalano

Plaintiff Walsh made a downpayment to the seller for the purchase of the property. Finalization of the sale was contingent on the purchaser getting a firm commitment, which did not become firm until an appraisal was conducted. If the purchaser was unable to get a commitment, the downpayment would be returned. Although the purchaser obtained a contingent commitment, hurricane Sandy hit and the resulting appraisal was not sufficient to obtain a firm commitment. When the seller failed to return the down payment, this lawsuit was initiated.

Summary judgment is granted here because the purchasers did not obtain a firm commitment in accordance with the contract terms.

Malus v. Hager

Malus is the buyer and the plaintiff. Their contract included a contingent provision on obtaining a mortgage commitment. There was another provision that if the buyer failed to close, then the escrow money would be liquidated damages. Although the plaintiffs originally got a commitment, he lost his job before closing and the bank revoked the commitment.

Here, the plaintiff failed to get a commitment before the time outlined in the contract. So, the defendant gets to keep the liquidated damages.

Mortgage Types and Transactions

Before understanding the different mortgage types, there are three concepts that need to be understood: Points, annual percentage rate (APR), and mortgage insurance. One thing to keep in mind as we explore these concepts is that lenders count these loans as investments and will do all they can to maximize their return while balancing the risk.

Points and APR

Another word for a point is a fee, typically called a “loan processing fee.” The calculation for a point is pretty straight forward, one point being equal to one percent of the loan amount. If the unit is to be discussed smaller, it is called a basis point where 100 basis points is equal to one point. There are several ways these fees are made by the borrower: they can be paid in cash, deducted from the loan amount, or increase the interest rate to accommodate the fee over time (called a yield spread premium).

The APR is a calculation of all fees and interest rates to provide a “real” rate of interest. Disclosure of the APR is required by the Real Estate Settlement Procedures Act (RESPA) so borrowers can compare rates.

Mortgage Insurance

Mortgage insurance protects the lender from a borrower default, foreclosure, and recovery of funds that is less than the outstanding debt. Typically, this insurance is required by the lender if the loan exceeds 80 percent of the appraised property value.

There are two types of mortgage insurance: publicly funded and private.

Public funded insurance is provided either by the FHA (Federal Housing Administration) or VA (Department of Veterans Affairs). This insurance is only provided for property where the purchase price is smaller, and other guidelines must be satisfied. This insurance will fully recover the lender if the borrower defaults.

Private mortgage insurance (PMI) is typically obtained by the borrower paying a premium to the lender. This insurance is often required if borrower cannot pay up to a 20 percent down-payment. However, if the borrower obtains the insurance then pays off the debt until the outstanding balance is less than the 80 percent property value, the borrower can discontinue the insurance. This insurance may only partially cover the lender if the borrower defaults, most covering only 20–25 percent of the appraised value.

Mortgage Types

Fixed Rate Mortgage (FRM)

The FRM is where the mortgage interest rate is fixed throughout the life of the loan. During the life of the loan, the borrowers monthly payment goes towards two things: (1) paying interest, and (2) paying the principal. This process is called amortization. Unfortunately for buyers, amortization schedules are designed to front load the interest. That is, most of the early payments cover interest rather than principal. So, borrowers who wish to pay off their debt sooner are mainly paying off their interest. In other words, do not view your loan only in the principal amount because lenders plan to recover both interest and the principal amount.

Typically, FRMs take the form of 30-year or 15-year loans. There are pros and cons to both options. For instance, the 30-year loan has a lower monthly payment than the 15-year loan, but will result in over double the amount of interest to be paid before the loan is fully amortized.

Adjustable Rate Mortgage (ARM)

As the name assumes, mortgages based on ARM are adjustable throughout the life of the loan. This loan may be desirable when the current interest rates are high and the borrower anticipates the interest rates to drop throughout the life of the loan. Thus, the borrower is banking on receiving, on average, a lower interest rate than they would have if they obtained a FRM. Because of the fluctuation in interest rates, lenders tend to be more careful who they giver ARM loans to, for they want to make sure a borrower can make higher payments if the interest rate increases rather than decreases.

The ARM rate is determined by three factors: index, adjustment periods, and caps.

The index takes several factors into account who create a table of interest rates. When certain factors align, that determines what the interest rate is for that period. Rather than starting with the index amount, loans often provide a “teaser” interest rate, to encourage and market individuals to take the loan.

Adjustment periods refer to how often adjustments may be made. For example, the promissory note may say that adjustments occur every 12 months. At the end of the adjustment period, the lender and borrower will refer to the index to determine the interest rate for the next period.

Caps limit how drastic the adjustment may be made at the end of the adjustment period. For instance, the promissory note may limit the adjustment to a maximum of two percent, even if the index would indicate the adjustment should be four percent.

No-Point and Buy-Down Mortgage

Both these options are designed to rearrange the when the lender gets its profit.

A no-point mortgage agrees that there are no point fees in exchange for a higher interest rate. The purpose of this option is to appeal to borrowers who do not have the cash on hand to pay the points at the time of closing. This method, however, only benefits borrowers who anticipate selling the property within about 4–5 years. After that period, the higher interest rate would exceed the value of the cash saved at the time of closing.

A buy-down mortgage is where the borrower pays extra at closing to obtain a lower interest rate. Again this is a trade off of when cash is going to be paid. This method will obviously benefit a borrower who anticipates staying in a property long-term.

Balloon Mortgage

This is a short-term loan where the payments are for the interest only and then the balance of the loan is due in a large sum some time afterwards. Picture an expanding balloon as the date of payment in full is due approaches (called the balloon payment). Three main purposes for these loans exist: (1) The loan acts as a bridge loan, typically when a borrower is trying to sell their home and thus would not afford a double mortgage during the transfer; (2) To obtain low payments when the interest rate is high, hoping the market rates fall before the balloon payment is due; (3) Sellers use it when they are having a hard time selling their homes as an incentive to make a purchase, again hoping the market rates will fall.

Other

Above lists the most popular mortgage options; however, more options are available. Below lists the different types without going into detail of how they function:

• Level payment rate mortgage (LPRM) – Like ARM but length of loan shifts instead of payment amounts shifting.
• Shared appreciation mortgage (SAM) – Lender gets paid for increase of property value.
• Reverse annuity mortgage (RAM) – Lender pays elderly borrower (like a retirement) until the credit line is filled and the lender reclaims the property.
• Growing equity mortgage (GEM) – Lower monthly payments gradually increasing as time goes on.
• Graduated payment mortgage (GPM) – Same.
• Price level adjusted mortgage (PLAM) – Adjust the debt to account for inflation.
• Interest-only mortgage – Pay only the interest until the sell of the property.
• Piggyback mortgage

Mortgage Obligations

Paying the Debt: Usury

Usury laws restrict the lender’s ability to set interest rates. Quite simply, lenders cannot set the interest rates too high. Most states have a cap (varying depending on the transaction) that does not allow interest rates to exceed 12 percent. Additionally, usury laws limit how often interest is allowed to compound (yearly compounding seems to be the standard). Additionally, points and other fees are calculated into the interest considered by usury laws.

Penalties for violating usury laws can be quite intense. Depending on the state, a lender in violation of usury can lose all rights to collect interest, collect any more principal, or pay damages double the amount of interest.

Ron King Corp. v. R. & R. Mohring Enterprises, Inc.

The plaintiff Ron King Corp. issued a promissory note to R. & R. Mohring Enterprises at a rate of 18 percent which would increase to 24 percent if Mohring defaulted. The note was to be paid back on a monthly basis over the course of a year with two points. Presently, the usury law set the criminal penalty at 25 percent. Mohring defaulted on the note and Ron King sought to foreclose on the property.

The defendant is arguing this note violated usury law (24 + 2 = 26) and would thus be declared void and the collection be cancelled.

On the other hand, the plaintiff is arguing the note did not violate usury law (18 + 2 = 20) and would therefore be able to foreclose on the property in the case of a default.

Usury law is only violated if there was no intent to evade the usury law. Here, had the defendant made the payments, usury law would not have been violated. Because the violation came due to the defendant’s default, no violation actually occurred. Thus, summary judgment in favor of the plaintiffs is warranted.

Paying the Debt: Late Payment

Subject to state and federal regulations, lenders often have late fees for installments that are made late. Usually there is a 10–15 day grace period before the fee goes into effect. Of course, enough late payments and the lender will assume the borrower is in default and could then require all the payment due (acceleration). Most late fees are assessed as either (1) a fixed charge for all borrowers, (2) a higher interest rate for the missed payment, or (3) a higher interest rate on the entire principal balance.

The whole purpose is discourage people making late payments.

Paying the Debt: Prepayment

Most of the time, a borrower will want to pay back the loan earlier. This can occur in either full or partial prepayment and may be either voluntary or involuntary. Involuntary prepayment comes in the form of acceleration (the whole balance is due before anticipated). Voluntary prepayment typically is partial where the borrower pays additional as the funds come in. Because prepayment reduces the amount of interest to be paid off sooner, often lenders will put restrictions on the ability to make prepayments. These come in the form of a “prepayment premium or penalty”, a charge based on a percentage of the amount of principal being prepaid.

Lopresti v. Wells Fargo Bank, N.A.

In N.J. prepayment fees cannot be accessed against a residential mortgage, but can against a business mortgage. Excessive fees will consider the normal industry standard, purpose of the fee, whether the parties are represented and sophisticated, and whether there was any fraud or duress.

Lopresti owned a business called Body Max. This business took out a mortgage for over 500,000 and secured the mortgage on Lopresti’s mortgage. This agreement had a prepayment fee of 1%. Later, Body Max amended the agreement for a higher interest rate but a reduced principal. This new agreement also provided a calculation designed to protect the interest of the lender. If interest rates fell and the borrower attempted to refinance, then a prepayment fee could be assessed against them. If interest rates increased and the borrower refinanced, then no fee would be assessed. Eventually, Body Max refinanced with another bank and Wells Fargo assessed nearly 50,000 of prepayment fees, about 13% of the principal.

This transaction was completely fine statutorily because this was a commercial mortgage. Additionally, the parties were sophisticated, there was no fraud or duress, and the purpose of the fee was not arbitrary (designed to protect the lenders bargained for interest). Thus, the transaction was valid and the plaintiff’s claim ought to be dismissed.

Housing Products

Single-Family Home

A single-family detached home is probably the most desired housing product on the market today. This consists of a home that is detached from the street, property boundaries, and neighboring lots. Many of these homes are now part of a planned unit development (PUD) program that includes HOAs and restrictions that manage how homeowners are permitted to use the property.

A better way of thinking of this product is that the purchaser is not buying a home, they are buying a lifestyle.

Reiner v. Ehrlich

When the HOA is not acting in bad faith or fraud, the decision made by the HOA is going to be afforded the business judgment rule in which the court will not interfere.

The Reiners sought to replace the roof on their home. According to the HOA provisions, a home in their neighborhood only permitted “natural cedar shake or natural slate, synthetic cedar, synthetic slate” up to a certain fire hazard grade. However, the Reiners sought to replace their home with asphalt. When their application was denied by the HOA Modification Committee, they sought to build anyways. Upon learning of this intent, the HOA sent a cease and desist letter, then sued.

There was nothing wrong with the HOA bylaws or restrictions. Because the court is going to give deference to the HOA via the business judgment rule, the decision will stand unless there is a showing that it was made by fraud or bad faith. Here, there was no evidence of either fraud or bad faith so the decision will stand.

Condominiums

A condominium is a single unit within g a multiunit project. The owner of the condominium has ownership rights in the unit they possess and then collective rights within the common elements, such as a yard, exterior, etc.

To form a condominium, the development creates a Declaration of Condominium where they describe the rules and obligations of the condominium unit owners association (essentially an HOA) and enforces those restrictions.

When it comes to the sale of units, typically the association has the right of first refusal, meaning they have the first option to purchase the unit from the owner (thus putting restrictions on who can buy the unit).

Anderson v. Council of Unit Owners of Gables on Tuckerman Condominium

According to the governing document, a master insurance policy covers the condominium (common areas), while the unit owner needs to obtain an additional insurance policy for their unit.

Anderson owned a two story unit within the Grables condominium project. A water heater on the second story broke and flooded the kitchen of the lower story, causing over 6,000 in damages. The apartment complex refused to apply their insurance policy to repair the damage and instead Anderson had to pay a 250 copay while her insurance company covered the damages. Together Anderson and her insurance company initiated this lawsuit to recover the costs associated with the repair.

There is a distinction between what is the responsibility of the condominium association and the unit owner. According to the policy, the association is responsible for maintaining insurance for the common areas and general maintenance of those areas, while the unit owner is responsible for all repairs within the home.

Cooperative Housing

Cooperative housing is essentially the same as a condominium in appearance, but vastly different in application. For instance, rather than purchasing a unit, a buyer is actually buying stock of the governing corporation and then provided a lease for the unit. Essentially, the purchase is in the organization rather than the unit. For this reason, cooperative housing is very picky in who they choose to be a part of the unit. They can deny occupancy to anyone for any reason that isn’t illegal (can’t discriminate based on race, religion, etc.).

Time-Share Housing

A time-share is essentially a condominium where the owners share the right to the same unit space, but at different times. Typically, a time-share is used for vacations where the owner goes to the unit for the space of one or two weeks, depending on their purchased interest. As with the other products, there are typically fees assessed against the owners for the upkeep of the property. Additionally, time-shares usually have exchange programs where owners can exchange their rights to another property (so they can vacation at more than one place rather than returning to the same location yearly).

Housing Accessibility

With the continued development of ownership, regulations have developed that prevent sellers from discriminating based on disability.

United States v. Edward Rose and Sons

When two apartments share the stair landing, that landing qualifies as a common area that must be accessible. Inaccessibility may be determined by the presence of stairs to access the area.

Edward Rose and Sons were developing apartments that had two entrances. The front entrance was by the parking lot, but it lead to a stair landing that descended to the lower two units. The back entrance lead directly to a landing by those two units with no stairs, but it was further away from the parking lot.

The government argues that this landing is inaccessible because it is far away from the parking lot and is not the primary entrance. Using the rule outlined above, the court agreed.

Assuming or Taking Subject to a Mortgage

When parties sell a property, the question is how the original mortgage is to be resolved. The primary method of resolution is that the seller takes the cash from the buyer and uses it to pay of his debt to the mortgagee. This process would remove the seller’s obligation.

There are other ways of making the transfer.

First, the buyer could assume the mortgage. This means they would take the property, assume the mortgage terms and make payments on that mortgage. Additionally, the buyer is personally liable and has primary liability for the debt after assumption. Additionally, the seller remains personally liable unless the lender releases the seller. One reason for assuming a mortgage is because the interest rates are higher and the original mortgage had a lower interest rate.

Second, the buyer could take the property subject to the mortgage. In this situation, the seller remains responsible for the debt, but the buyer agrees to pay the mortgage. The buyer is incentivized to keep paying the mortgage because failure to do so will likely result in foreclosure of the property. However, the buyer has the added benefit of lack of personal liability for any outstanding balance after a foreclosure occurs. In these situations, the seller is likely to issue a promissory note to the buyer, basically being a second mortgage on the property. This is called a work-around mortgage.

Swanson v. Krenik

Absent some express agreement to the contrary, a second grantee’s purchase of property and assumption of a mortgage obligation does not modify the surety-principal obligor relationship created between the mortgagor and the first grantee in their previous transaction.

In 1977, the Kreniks took out a mortgage to Alaska Federal (AF) Bank to purchase a property.

Four years later, the Kreniks sold to the Swansons who assumed the promissory note. AF consented to the assumption but did not release the Kreniks. Additionally, the Swansons gave another promissory note to the Kreniks.

Two years later, Swanson conveyed the property to another party who assumed the AF and Krenick promissory notes. Later, the other party defaulted and went into bankruptcy.

Thus, the Kreniks had third liability, Swansons had second liability, and the other party has the first liability. Here, the Swansons are arguing that instead of this hierarchy, Kreniks were cosurities (jointly liable) for any default caused by the third party.

Here, there was no express agreement modifying the Kreniks liability. Thus, the Kreniks are not cosurities but instead are subsurities (third in line of liability).

Transferring

Property rights are freely alienable (transferrable) regardless of what title theory the state adopts. That is, the parties are free to transfer the property to another. However, a mortgage may limit the ability to transfer property. For instance, mortgages may have a due-on-sale clause or due-on-sale clause, which says the balance of the loan is due when the property is transferred to another without the permission of the lender.

Secondary Mortgage Markets

The typical mortgage is between a borrower and a lender, where the lender would make its money from the interest. This is often known as the primary mortgage market. Over time, lenders saw mortgages as an investment opportunity. Now, lenders will create collateralized debt obligations (CDO). A CDO is a conglomerate of several mortgages categorized by the risk associated those notes. These CDOs are then sold to investors who can select the CDO based on the level of risk. So, lenders now make its money from mortgage fees and the cash received from selling CDOs. The purposes of creating CDOs are (1) it minimized the risk from lenders and increased liquidity, and (2) investors can quickly and easily diversify their investment portfolio.

Mortgage-Backed Securities

As mentioned these CDOs, also known as mortgage-backed securities, have ratings to determine how risky the CDO is. A CDO with low risk have ratings of AAA, while higher risk CDOs have ratings of A or BBB. The most risky investments may not have a rating at all. Also note that the 2007 crash partially occurred because the ratings had poor investigative ratings, and the ratings were adjusted because CDO issuers were paying the rating agencies for better ratings.

MERS

MERS stands for Mortgage Electronic Registration Systems. This is a system formed by residential lenders designed to track ownership of mortgages as they are traded through the MERS system. The primary function and benefit of the system is that it eliminates the need to record the mortgage every time the mortgagee changes (when transfers occur through MERS members).

Culhane v. Aurora Loan Services of Neb.

Culhane issued a promissory note on a home to a lender (Preferred) and then gave the mortgage to MERS as a nominee for Preferred and its successors and assigns. Preferred then assigned the note to Deutsch and Aurora serviced the loan. MERS then transferred the mortgage to Aurora.

When Culhane defaulted, Aurora sought to foreclose. Culhane argued the assignment to Aurora was invalid because the individual who signed the assignment agreement was signed by an employee. Additionally, Culhane argued that Aurora did not have the right to foreclose when Aurora only owned the mortgage (legal interest), but not the note or the right to receive the debt (beneficial half).

By nature of MERS, an employee can sign no problem, so authority was granted. As such, there was ownership of the mortgage even though there was no ownership of the note. Even so, ownership of the mortgage, but not the promissory note, is still sufficient to have the right of foreclosure. This is true even if different parties hold the mortgage and the note.

Easements

Types of Easements

Easements give a non possessor of a piece of land to use the land for a variety of reasons. The most common reason is for a non possessor to pass through the land to their land. For instance, imagine that A has a 5 acre piece of land that is landlocked by other property owners and no private drive. In this instance, A would request an easement, which will give him the right to pass through others lands to access his land.

There are 5 difference kinds of easements:

1. Prescriptive easement
2. Implied easement by prior existing use
3. Easement by necessity
4. Express/Grant easement
5. Easement by estoppel

Of these 5, an express easement is the only type that is is agreed between the parties involved. All the other easements are imposed by a matter of law without the permission of the owner.

There are a few more definitions to be aware of before continuing any further discussion:

• Dominant tenement – the land benefited by the easement
• Servient tenement – the land burdened by the easement
• Dominant owner – the easement owner (owner of dominant tenement)
• Servient owner the owner of the servient tenement
• Appurtenant easement – easement owner uses the land (most applied)
• Easement in gross – not connected to holder’s use, but is personal
• Affirmative easement – allows holder of easement to use the land (most applied, e.g. “passing though”)
• Negative easement – prevents servient from using land

Creating Easements

For are two ways an express easement may be allowed: by grant or by reservation. A grant easement is when the servient owner grants an easement to the dominant owner. A reservation easement is when the dominant owner conveys some land to another but reserves an easement for continued use.

An easement must be in writing that:

1. Identifies the parties
2. Describes the land parcels involved
3. Describes the location of the easement on the servient land
4. States the purposes of the easement

Express Easement

“An easement implies an interest in land ordinarily created by a grant, and is permanent in nature. A license does not imply an interest in land, but is a mere personal privilege to commit some act or series of acts on the land of another without possessing any estate therein.”

Implied Easement by Preexisting Prior Use

The elements of an implied easement from preexisting use includes:

1. Common ownership of both parcels, then a conveyance that separates that ownership (splitting property into two)
2. Before the severance, the owner used part of the united parcel for the benefit of another part. The use was apparent and obvious, continuous, and permanent.
3. The easement is necessary and beneficial to the person who received the split property.

In summary, the elements require:

1. Severance of title by a common owner
2. Apparent, existing, and continuous use of easement prior to severance
3. Necessity at the time of severance

Easement by Necessity

Easement by necessity requires:

1. Severance of title to land in common ownership.
2. Necessity for the easement at the time of severance. For instance, a landlocked parcel.

Prescriptive Easement

Prescriptive easements follow the same elements of adverse possession:

1. Open and notorious
2. Adverse and hostile
3. Continuous
4. For a statutory period.

Irrevocable License

An estoppel easement or an irrevocable license occurs when:

1. A landowner allows another to use the land
2. The new user uses the land in good faith in that license by making improvements to the land at their cost
3. the landowner reasonably knows that such reliance would occur.

Note that the easement lasts only as long as the anticipated reliance lasts. When that time expires, the easement also expires.

Interpreting Easements

How do we know what the language used in the creation of an easement means?

Follow contracts law. When the language is unclear, use the general meaning and then apply that to the intention of the parties at the time the agreement was made.

The rule for how easements can be used as time passes:

• Here, according to the Restatement Third of Property, the manner, frequency, and intensity can change over time as long as the original purpose of the easement does not change.

Terminating Easements

Mere non-use does not abandon an easement. The servient user must do something more to indicate that they abandoned the use.

There are several other ways an easement may be terminated:

• Prescription – adversely reclaiming the land
• Term – easement expires
• Condemnation of the servient land
• Estoppel – Reliance that the easement was terminated
• Merger – New owner has possession of both easement and servient land
• Misuse
• Release – agreement to end the easement in writing.

Closing

Closing is a straightforward concept. A deed of conveyance is exchanged, typically for a sum of money. For a deed of conveyance to be valid, it must be (1) in writing, (2) state the names of grantor and grantee, (3) provide an adequate legal description, (4) intent to deliver the deed (words of grant such as convey), (5) actual or constructive delivery, and (6) acceptance of delivery. Typically after a deed is conveyed, it is recorded, although this is not necessary to create an interest in the property.

Most attorneys use checklists to keep track of all the documents necessary to complete closing. Typically, the checklist will include:

Merger

Once the deed has been made, all the preexisting agreements between the parties within the executory period are merged into one final document, the deed. This doctrine is true unless there has been (1) a mutual mistake between the parties, (2) fraud, (3) ambiguity as to the meaning of the terms, (4) existing rights collateral to the contract of sale, or (5) there is a provision in an earlier agreement stating that it survives closing. If there is a showing of any of these factors, then parol evidence may be utilized to show the true intent of the parties. The following case addresses two of these principles, mutual mistake and ambiguity.

Panos v. Olsen

The deed merges all preexisting agreements unless there is ambiguity, fraud, a mutual mistake, or preexisting rights subject to the contract of sale. Here, there is only a claim of ambiguity or mutual mistake.

Ambiguity is defined as a term that may have more than one meaning. This will not add a term that was already lacking.

A mutual mistake must be mutual between all the parties as to the meaning of the term. The standard of showing whether there is a mutual mistake is clear and convincing evidence shown by the party claiming a mutual mistake.

If either is shown, parol evidence may be used to add additional information regarding the intent of the parties.

Panos sold an adjacent lot to Olsen. In the contract for sale, it restricted any home built on the lot to not exceed 32 feet as measured from the road. When the deed was conveyed, it contained the same language. Olson built a home. From the Panos survey (which is unclear whether Olsen was provided with the survey), the home was measured to be 34.91 feet high from a monument. However, from the Olsen survey, the home was measured to be 31.96 feet high from a gutter along the road.

According to Panos, the two had discussed orally that the measurement was to be taken from the monument. Olsen has no recollection of the discussion.

The term is not ambiguous because it may reference any spot along that road. There is nothing there saying that multiple measurements are used twice. Again, there is no mutual mistake because Panos failed to show with clear and convincing evidence that the term was unknown. For these reasons, the doctrine of merger is not excused and the judgment of the trial court is affirmed.

Estate of Myers v. Estate of Myers

Robert Myers was caring for his mother and living with her. While all parties were still alive, Robert’s siblings conveyed their interest in the home to him in the event of their mother’s death. The mother died and the home was owned by Robert. Eventually, Robert died. Now the question is whether the home goes to Robert’s brother or daughter. At trial, parol evidence was admitted to show that Robert intended the home to be returned to the possession of his brother upon Robert’s death. However, there was no written indication to this matter.

So, the parol evidence rule is only admissible if the language in the contract is ambiguous. Here, the language was not ambiguous and clearly the home passes intestate to the daughter. Reversed and dismissed.

Kinzler v. Pope

Pope sold land to Kinzler on an installment contract basis. The land was split by a country road and Pope retained a life estate in the southern portion of the land where the Kinzlers did not reside. Once the Kinzlers finished paying the installment contract, Pope executed a deed of satisfaction conveying interest in the land. This deed did not contain the clause of a life estate that was in the original installment contract. So, the Kinzlers are arguing the life estate was extinguished and Pope had no right to any portion of the property.

On trial, the court held that the life estate portion of the contract was collateral to the agreement (necessary) and therefore was brought into the merger. However, attorney fees were not permitted. So, Pope won but was not awarded attorney fees.

On appeal, the court says that the attorney fees provision also should have been included because both parties argued in their pleadings that attorney fees ought to have been required. This shows that the provision was collateral for both parties and should have been included with the new contract. Reversed and remanded to determine the attorney fees in favor of Pope.

Escrows

There are three different types of escrows: (1) Loan escrow, used to collect and hold money for taxes and insurance; (2) escrow closing, where a hired escrow agent holds documents and money to close the transaction; (3) contingency closing, where the escrow agent is used to resolve problems that occur before closing but were not fixed until after (e.g., funds for repairs agreed to be made before closing but did not get to them until after closing).

The challenge escrow agents have is their fiduciary duty to care for the funds of the parties.

Miller v. Craig

Miller entered into an agreement with Crouse to sell their interest in some property. Craig was retained to draft documents and be an escrow agent associated with the transaction. To facilitate the transaction, Crouse deposited $5,000 in Escrow to Craig. Backing out of the transaction, a dispute arose between Crouse and Miller. Crouse won a judgment and Craig delivered the $5,000 to Crouse without asking Miller for permission. Miller appealed the lawsuit and won. He then attempted to recover the $5,000 from Craig but was unsuccessful, the basis for this lawsuit.

Craig had a duty to preserve the finances until everything had been finalized. Once there was a judgment, Craig should have asked the Millers if they planned on an appeal, and if so, whether he had the authority to transfer the finances. Here, Craig took no actions to preserve Miller’s interest and therefore was liable.

Foreclosure

Default Clauses

There is no legal description of a default other than saying a default is the inability to meet the demands of the promissory note a borrower has with a lender. The reason why there is no legal definition is because default is defined by the parties within their agreement. Together the parties decide what events will trigger default and the rights associated once default occurs.

Acceleration

In the event of a default acceleration clauses require the payment of the debt in full at one time. There are two kinds of acceleration clauses, automatic and optional. Automatic acceleration occurs automatically once the borrower is in default. Optional gives the lender the freedom to choose whether the accelerate the debt, depending on the willingness of the borrower to remedy their default. If the borrower is unable to satisfy the loan in full at the time of acceleration, this clause gives the lender freedom to foreclose on the property to recover their losses.

Types of Foreclosure

After foreclosure occurs, the lender sells the property following specified procedures. If the sale of the property is less than the amount required to satisfy the debt, the borrower is in deficiency and the lender can seek a deficiency judgment against the borrower. If the sale produces more than the value of the remaining debt, this is surplus that goes first to any junior interests, then the remainder to the borrower.

Strict

Not commonly used but this just means that there is a court date set where the payment of the property is required by the borrower or else the property is foreclosed and possessed by the lender. There is no right to a surplus in a strict foreclosure and the lender can retain the property

Judicial

Essentially the same as a strict foreclosure except the lender is required to sell the property at a public sale conducted by the sheriff. If there are any junior interests, these are necessary parties who could assert a right to some payment on the proceeds of the sale.

Power of Sale

Also known as nonjudicial foreclosure. This is the most common method of foreclosure, but can only be done if stated within the parties agreement. Again, the purpose is to sell the property and recover the profits to satisfy the debt. The advantage here is that power of sale is typically cheaper and faster than judicial foreclosure.

Foreclosure Abuses and Reforms

Due to the large increase of foreclosures during the 2007–2009 housing crisis a large number of abuses were discovered. Promissory notes had been lost, there was difficulty in knowing who the mortgagee of record was, short sales (sales of homes where the value is less than the remaining balance on the home) were conducted, homeowners would engage in strategic default (walk away if the value was less than the remaining balance) because they had the means of purchasing cheaper housing elsewhere, and robo-signing (signing affidavits with no review of the content). Many of these issues led to judicial reform.

Zervas v. Wells Fargo Bank, N.A.

Wells Fargo sought to foreclose on Zervas’s property and was successful at trial despite Zervas’s request for time to make up the issue. On appeal, Zervas argues that Wells Fargo did not give notice of acceleration or a reasonable opportunity to cure. The note had also been lost by Wells Fargo who could not produce where the assignment was located. For these reasons, there was a genuine issue as to a material fact and the district court’s ruling granting summary judgment in favor of Wells Fargo is reversed.

Pasillas v. HSBC Bank USA

HSBC sought foreclosure on a home and Pasillas sought to utilize a mediation program to forego foreclosure. The parties met but were unable to come to a resolution. At the mediation, it was unclear whether HSBC was represented by counsel and they failed to bring proper documentation (the mortgage was missing two pages, the assignment of rights was incomplete, etc.). Additionally, HSBC failed to bring somebody who had the power to adjust the terms of the loan (why have mediation if nothing is going to change?). For these reasons, HSBC did not properly follow the statutory requirements of the mediation program. As remedy for this abuse, the case is remanded to consider the total amount of sanctions that ought to be imposed on HSBC by evaluating whether there was bad faith, the prejudice caused, and whether there is a willingness to continue negotiations.

Junior Mortgages and Priority

Junior Mortgages

A junior mortgage may also be refrenced as “secondary financing.” In other words, this is a second mortgage an owner takes on the property. There could be several reasons to leverage the value of the property such as paying for debt or school, purchase an investment, or expanding a business. There are two main factors to consider when taking out a second mortgage.

First, note that the second mortgage is secondary to the primary mortgage. This means that in the event of a foreclosure by the first mortgage, the first mortgage will have their debts paid first. This also means that if the secondary mortgage forecloses, the first mortgage will remain as a creditor.

Second, junior mortgages come with more risk to the lender (because foreclosure priority is secondary). For this reason, interest rates on junior mortgages tend to be higher. Consequently, secondary mortgages tend to be paid off sooner.

Protecting the Junior Mortgage

Besides increasing the interest rate to mitigate against risk, junior mortgages also take steps to verify the outstanding loan amount of senior loans and looks for provisions that require automatic notification to junior mortgages (because junior mortgages need to notify senior mortgages of their rights to the security to recover anything at all). Additionally, time has passed before the second mortgage has been taken so there are improvements to the land or other assets the mortgage can attach to, which sometimes overlaps with priority assets. In this instance, the priority mortgage may need to marshall assets and collect against those where the secondary mortgage has no rights first.

To marshall, the court will rank the assets in order of priority and require senior creditors to proceed against those assets that are not subject to secondary liens.

In re Martin

If a marshaling order is granted:

1. First collect against those assets where you have sole priority.

Martin had three properties:

1. A homestead valued at 53,250
2. The farm valued at 45,600
3. and mineral rights valued at 50,000.

Martin also has three debt obligations:

1. Small Business Administration (SBA) has a first lien on the homestead and a second lien on the farm for 44,057.
2. State of Oklahoma/Commissioner of the Land Office (CLO) had the first lien on the farm for 40,500.
3. The Oklahoma Bank & Trust Co. had first priority in the mineral rights and second priority on farm for 151,000.

The Bank requested a marshaling order.

Although marshaling is permitted in most situations, the Oklahoma statute prevents marshaling against a homestead. Thus, the request of the bank to marshal is denied.

Mortgage Subordination

The general principle for the order of mortgage priority is “first in time, first in right.” This principle may be altered somewhat by the state’s recording statures. Additionally, mortgage subordination can be modified contractually, usually through a Subordination Agreement.

Ranier v. Mount Sterling National Bank

The Nolans had entered into a mortgage with Ranier for 200,000 on a home. Later, the Nolans applied for a loan and mortgage with the Mount Sterling National Bank for home improvements. The only way the bank would approve the loan is if Ranier agreed to subordinate her mortgage to the bank. Ranier agreed that the sum of 125,000 would be subordinated. Later still, the Nolans were approved for an additional loan from the bank for 75,000 that was not secured (Ranier was not informed of the additional loan). As the Nolans were making payments, the bank was first putting the money towards the 75,000 and did so without informing Ranier.

Once the Nolans were in default, the bank took all the foreclosure proceedings to cover the balance of the 75,000 and 125,000 and Ranier received the remainder, about 36,000.

Although the bank is free to make additional unsecured loans and to pay the interest to unsecured loans first, they are required to inform a third-party creditor (when they are subordinate due to a subordination agreement) of those actions. Here, the bank is getting the benefit of the priority and then acting in bad faith by not giving notice to Ranier, especially when her intent was to give the bank priority for only 125,000, not an additional 75,000.

Wrap-Around Mortgage

A wrap-around mortgage is a junior mortgage that wraps around the senior debt. This is typically used in seller-financed purchases through installment contracts. The way it works is borrower sends money to junior lender to pays money to the senior lender.

Commercial Real Estate

Commercial Leases

There are two primary commercial leasing methods: ground lease and sale and leaseback.

A ground lease is a lease of . . . the ground. That is, the developer of the land is generally the tenant and anticipates being there for a long time as different businesses appear upon the ground. This can be done wither because the owner refuses to sell the land outright to the developer or because the developer seeks to use the lease to finance other projects.

What happens if the developer defaults and there are other tenants within the realm (where the developer was their landlord)? Many leases account for this issue by saying the lender of the property would automatically become the new landlord in the event of a default. These are call attornment agreements.

Most of the time the original landlord (between the developer as tenant) will set up a triple net lease, where the developer covers the normal cost of the land (property taxes, insurance, etc.).

A leaseback is where an owner may sell the property but has the option to lease the building back from the new owner. In other words, the old owner no longer has ownership of the property but still has a lease to use the property. Additionally, the old owner may have the right to buy back the property for a nominal amount.

Commercial Financing

Construction Loans

A construction loan is a short-term loan to a developer for the purpose of acquisition, development, and construction of the property. These loans typically carry high risk because the value of a property might decrease if a project is not completed. Typically to account for these risks, borrowers have recourse loans where they have personal liability for a default.

Another way to mitigate risk is through a draw-down loan. A draw-down loan is where the lender releases finances periodically throughout the loan period when the developer has reached agreed upon checkpoints. For instance, release of a certain amount to acquire the property. Once property is acquired, release a certain amount to finance development. Then release more once zoning has been made, etc. Failure of the developer to meet one of these checkpoints will result in a default.

Permanent Loans

These are long-term loans usually between 10–30 years long. These loans are made after construction is completed and are designed to evaluate the potential level of success of a property. The developer gets paid by the development, who in turn uses that income to pay off the loan. A lender will then be required to evaluate the continued success of the management to ensure that the loan will not go into default.

Take-Out Arrangements and Three-Party Agreements

A take-out occurs when the developer has finished construction and rolls over the remaining balance on the construction loan into a permanent loan. That is, the permanent lender takes out the construction lender in the transaction by paying off the construction lender’s balance.

There are three types of take-out agreements:

• Locked in: Permanent lender has already committed to take over the construction loan.
• Stand-by: A developer hopes that there is no need for a permanent lender but has one ready to take over the construction loan if needed.
• Open-ended: There is no permanent lender ready to take over the construction loan and instead both the developer and the construction lender hope that a permanent lender will be available in the future.

The agreement that facilitates the relationship and obligations between the developer, construction lender, and permanent lender is a three-party agreement.

In other words, this whole process outlines how commercial financing occurs. Here is a step by step:

1. Developer has an idea
2. Developer acquires property through a loan or contract
3. A permanent lender is secured (hopefully with ai lock-in commitment
4. A construction lender is secured
5. The parties execute a three-party agreement
6. The developer closes on the construction loan and begins construction
7. Construction is complete
8. The permanent lender takes out the construction lender
9. Income is produced from the project (either by sale or use) and the main focus is property management.

Teachers Insurance & Annuity Association v. Ormesa Geothermal

Ormesa is a developer a a geothermal plant and sought financing for the development. Teachers Insurance & Annuity Association (TIAA) was among those interested in providing the financing. Together, the parties determined a fix rate and it was custom not to adjust the rate once agreed upon. A few months after the agreement, the market interest rate went down. If Ormesa could have an interest rate at the new market price, then it would save over $1,000,000 a year. Finding that it would be cheaper to breach the contract and walk away to a new lender, Ormesa failed to negotiate with good faith. Still trying to find a way out of the contract, Ormesa said the agreement was not binding. This argument was refused by the court. Damages related to this breach is over $4,000,000.

Disclaimer

The content contained in this article may contain inaccuracies and is not intended to reflect the opinions, views, beliefs, or practices of any academic professor or publication. Instead, this content is a reflection on the author’s understanding of the law and legal practices.