Selling Real Property: The Purchase Contract

Selling real property mostly occurs in residential sales, but real property also includes business property such as a mall, farm, or office building. There are three main steps to the sell of real property: the purchase contract, closing, and title protection. This article focuses solely on the purchase contract and the executory period that directly follows signing.

When a party determines to purchase a home, they complete a contract which fills out the price and other terms. After signing, the title is examined, the property condition is evaluated, financing is obtained, etc (executory period). During these steps, several problems may arise, which are outlined below.

Statute of Frauds

The statute of frauds was designed to prevent fraud by requiring large purchases (or purchases of land) to be done in writing. Thus, an oral agreement may not be enforceable. So, there are three main requirements to meet the statute of frauds. First, the writing must list out the essential terms such as the party identities, the price, and property description. Second, the contract must be in writing, either formal or informal. Third, the contract must be signed.

Hickey v. Green

442 N.E.2d 37 (Mass. Ct. App. 1982).

Hickey sued for specific performance which was granted by trail and which Green appeals.

Question

Should the contract be enforced?

Rule

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

Restatement Second of Contracts § 129

Holding

The appellate court agrees with the trial court but remands to require payment for the property and to examine if the Hickey’s situation has changed.

Facts

Mrs. Green orally agreed with the Hickeys to sell her land for $15,000. Relying on this, the Hickeys sent a check for $500, with the language that it was a deposit for the property in question. The check was never endorsed by Mrs. Green. Additionally, the Hickeys acted quickly to sell their home in preparation for the move. 10 days after the check was sent to Mrs. Green, the Hickeys received a check deposit from another person for their property.

However, Mrs. Green received an offer from another party for $16,000 and accepted. Although the Hickeys offered to match, their offer was refused. As such, the Hickey’s sued for specific performance to avoid injustice.

Analysis

There was a contract here which the Hickeys relied on. Mrs. Green, made a promise but did not back out of the promise quickly enough. As such, it would be unjust to rule against the Hickeys because they had bound themselves to another party through acceptance of the deposit. However, some time has passed and conditions may have changed. Thus, the trial court is ordered to rule in favor of the Hickeys for specific performance for the price of the contract, but could choose to reopen the case to see if the situation no longer requires specific performance. If the situation no longer requires the performance, then Mrs. Green may be liable to the reasonable costs accrued for the advertising, deposits, and litigation expenses.

Additional Notes

Statute of frauds has three parts:

1. Essential terms
   1. Parties and
   2. Price and
   3. Property Description
2. Writing
   1. Formal or
   2. Informal
3. Signature by party against whom enforcement is sought

The check from Hickey did not satisfy the statute of frauds because it was missing all the essential terms. Additionally, the check was missing a signature by Mrs. Green.

As such, the writing is not sufficient to meet the statute of frauds. However, enforcement can still happen if there is an exception.

1. Equitable estoppel (reasonable reliance)
2. Part performance

Here, the equitable estoppel applies. The Hickeys reasonably relied on Mrs. Green’s promise by selling their property.

Marketable Title

Of course, for a person to sell property, they have to be authorized to sell that property. Otherwise, their title is not marketable. There are three main ways a title is not marketable:

1. The seller is attempting to sell more interest than they have (e.g. selling a fee simple when there is only a life estate).
2. The title is subject to an encumbrance (impediment).
3. There is reasonable doubt about either the interest or the encumbrance.

Additional Notes

When you enter into a contract, you are not purchasing the land. Instead, you are purchasing the title.

The idea of this principle is that the title needs to be free from barriers which may subject the buyer to litigation.

Lohmeyer v. Bower

227 P.2d 102 (Kan. 1951).

Lohmeyer wanted rescission from a contract before closing but lost in trial court and appealed.

Question

Is the title marketable?

Rule

If a title is subject to encumbrances, then it is not marketable. If there is reasonable doubt that the title is subject, then it is not marketable.

Holding

The title was not marketable, reversed.

Facts

The Lohmeyers signed a contract for the purchase of a home owned by the Bowers. However, before closing, the land was inspected and it was discovered that the property was in violation of city ordinances where the home was built too close to the property line. Additionally, the home was in violation of private ordinances which required a home to be two stories high (but was only one story high). The Lohmeyers wanted out of the contract, but the Bowers refused.

Analysis

This is not a marketable title because there are reasonable doubt about encumbrances on the title. It is possible that the new owners would be liable because the home is built too close to the property line.

Note though that the physical conditions or value of the property do not make a title unmarketable. Instead, it is the condition of the title in question. Additionally, if a person knows of the potential encumbrance, then it is inferred that the buyer accepts the encumbrance and negotiated the selling price based on it.

Additional Notes

There are typically only two types of encumbrances. Private and public.

Here, the buyers are trying to rescind because the contract said that the title was free and clear of any encumbrances. However, the buyer agreed to be subject to any easements (right to access the land. e.g. pathways) and all restriction of record. The record refers to the county records concerning the property.

Here there are two encumbrances:

1. Private
   • The house was required to be two stories high by the home owners association.
2. Public
   • The city ordinance set a zoning regulation required the building to be set back by 3 feet but was within 18 inches.

As a result, the issue comes down to whether this is a marketable title because of the encumbrances. If the title is marketable, then specific performance may be valid. If the title is not marketable, then the contract may be rescinded.

A title is unmarketable if the title exposes the buyer to the fear of litigation if they obtain possession.

Can someone sue the buyers for the violation? Yes

The existence of a public encumbrance does not make a title unmarketable. Instead, a violation of a public encumbrance makes a title unmarketable.

Note, that the existence of a private encumbrance makes a title unmarketable. Other examples of private encumbrances include mechanic’s lien, easement, or mortgage. However, if the buyer is warned of those encumbrances at the time of the contract, then they accept those encumbrances. In this case, the private encumbrance would be a restriction in the record that the buyer agreed to. However, even though the encumbrance was in the record, the title is still unmarketable because it was a violation.

Steps for Analysis

1. Private Encumbrance
   1. Presence of a private encumbrances makes title unmarketable, unless encumbrance is mentioned in the murchage agreement, “subject to all restrictions and easements of record that do not significantly affect the use or value of the property.”
   2. However, a violation of a private encumbrance renders title unmarketable.
2. Public Encumbrance
   1. Public encumbrances like zoning ordinances do not make title unmarketable. All land is subject to public regulation.
   2. However, a violation f a public encumbrance renders title unmarketable.
   3. Note that there is a difference between housing codes (condition/value of the property) and zoning ordinances.

Equitable Conversion

Between the contract signing and closing is a period called the executory period. During this time, the land may be damaged or destroyed and still be enforced against the buyer (unless there was a provision in the contract who bears the risk if destruction occurs). This is because after the contract is signed, the buyer has the interest in the property while the seller has the interest in the purchase price.

Brush Grocery Kart, Inc. v. Sure Fine Market, Inc.

47 P.3d 680 (Col. 2002).

Brush sued Sure Fine for the damage but the trial and appellate court found that Brush was the equitable owner. As such, Brush appealed.

Question

Which party bears the risk of the damage? In other words, who is the equitable owner.

Rule

The party entitled to possession bears the risk.

Holding

Sure Fine Market was entitled to possession so they bear the risk. Reversed.

Facts

Brush leased from Sure Fine premisses to be used as a grocery store. This lease also included the option to purchase. Near the end of the lease, Brush informed Sure Fine of their intention to execute the option and the parties began to negotiate a price. However, the parties did not come to a conclusion, damage insurance expired, and so did the lease. However, the parties entered into price discussions again. Coming to no agreement, the parties sued one another for negotiating in bad faith. During the litigation, a hailstorm occurred causing 60,000 worth of damage to the property. Both Brush and Sure Fine said that the other had responsibility for the damage and the issue came before the court.

Analysis

There are three approaches taken by the several jurisdictions to determine who the equitable owner is:

1. The buyer
2. The seller
3. Whichever party is entitled to possession.

Here, the court adopts the third approach. In this instance, Sure Fine is entitled to possession because there was no purchase contract. Additionally, the option to purchase does not make the discussions a purchase. Instead, Sure Fine said that if Brush continued to remain in the premises, they would assume that Brush was a holdover tenant. In other words, neither party considered the contract for sell to entitle Brush for possession.

Additional Notes

During the executory period, there is a split about who owns what. Traditionally, the buyer is the equitable owner (owns the real property and bears the risk of loss). The seller is the legal owner who owns the purchase price. This is the default rule unless the contract says otherwise (so write your way out of it!).

This remains true even when one or both of the parties die in this period.

Duty to Disclose

Traditionally, a seller did not need to disclose any property defects to the buyer. However, the doctrine has long since expired, requiring sellers to disclose any known material defects that affect the value of the property or defects that are not readily discovered by the buyer.

The purpose of the following cases are to help define material and readily discoverable.

Stambovsky v. Ackley

572 N.Y.S.2d 672 (Sup. App. Div. 1991).

Stambovsky is the plaintiff wishing to rescind the purchase contract for Ackley’s home. The trial court reluctantly dismissed the case and Stambovsky appealed.

Question

When does the seller have a duty to disclose?

Rule

The seller has a duty to disclose any known material defect that adversely affects the property value that is not readily discovered by the buyer.

Holding

The case needs to be reversed and remanded for trial to determine if the presence of the ghost affects the value of the home.

Facts

The Ackley home was well known in the area in New York. Ackley had published several periodicals both nationally and locally describing the nature of the home. Specifically, it was haunted. There were several ghosts who would wander around the home and have friendly chats with Ackley.

However, Ackley decided to sell the home. Stambovsky was interested and signed a contract to purchase the home. At the time of the signing, Ackley did not disclose that the home was haunted. However, Stambovsky later discovered from others of the haunted nature and wished to rescind the contract. When Ackley refused, Stambovsky sued.

Analysis

As a matter of law, the home was haunted because of all the public publications Ackley had made. Thus, there was no need to determine the actual existence of a poltergeist. Thus the question turns to whether the nature of the property needs to be disclosed to a buyer.

Traditionally, the seller has no obligation to disclose any defects of a property unless those defects were actively concealed, misrepresented by the seller, or if there is a fiduciary relationship between the seller and buyer. However, the court chooses to abandon this completely strict approach by allowing exceptions to the rule. If the property value is altered by the material defect or is not readily discoverable by the buyer, then there is a duty to disclose.

Here, the existence of a poltergeist is a material defect that could adversely affect the property value. Additionally, the existence of the poltergeist could be difficult for the buyer to discover. As such, the case needs to be reversed and remanded.

Additional Notes

Simply, the rule states that the seller must disclose known material defects that affect the value of the property and defects that are not readily discoverable by the buyer.

The policy arguments that justify this disclosure include:

1. Ensure the quality of the property
2. Protect buyers from predatory business
3. The seller is in the best position to be aware of defects
4. Encourage marketability of the property.

Strawn v. Canuso

657 A.2d 420 (N.J. 1995)

Strawn and others are the plaintiffs while Canuso is the defendant.

Question

Whether the seller has a requirement to disclose “off-site” defects in addition to the onsite conditions.

Rule

Professional sellers (builders and developers of residential homes) are required to disclose material off-site defects that affect the value of the property.

Holding

The jury could determine that the waste site alters the value of surrounding homes. If so, the professional developers could be found liable. Reversed and remanded.

Facts

There was a landfill that was not supposed to take hazardous liquid waste but did anyways. The dumping escaped and seeped into the groundwater. As such, the residents directly surrounding the site complained and sued the developer. The complaint is that the developer knew of the landfill and of the conditions present but determined to build and sell anyways.

Analysis

The policy reason for the rule and holding is that professional builders are in a better position and have higher bargaining power to inform the buyer of any defects. Thus, professional builders have a duty to disclose off-site defects as well as onsite defects.

Additional Notes

Here, the question presented is whether a seller needs to disclose off-site conditions that may materially affect the value of the property. This question is significant because there are so many factors that could affect the value and enjoyment of the property including noise, shaking, etc. from nearby train stations or airports.

In this instance, there is a requirement to disclose off-site conditions that materially affect the health and safety of potential buyers of the property, but the rule is limited to only include professionals. Note the impact of this limitation. If a home needs to be disclosed by the conditions by a professional, the same home may later not need to be disclosed by a residential seller.

The reasons include:

1. There is unequal bargaining power between the professional seller and the residential buyer.
2. Trust in the market between residential sellers and buyers.

Additionally, a buyer is under no obligation to disclose to the seller something that may increase the value of the property.

Takeaways

Sellers must disclose if:

1. Disclose conditions created by the seller.
2. Professionals must disclose certain off-site conditions that affect the property.
3. Jurisdictions pass statutes stating what certain conditions need to be disclosed.
   1. About half have said that there is no need to disclose tragic situations within the home. “Stigma statutes”

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.