MBE: Property

Part Performance {Specific Enforcement of contract for land in violation of SOF}

A land sale contract must be memorialized in writing and signed by the party to be charged to be enforceable under the Statute of Frauds. However, courts in most states will award specific performance of a contract absent a writing under the doctrine of part performance. The doctrine applies if the buyer has performed at least two of the following acts: 1. Taken possession of the land; 2. Made substantial improvements to the land; and/or 3. Paid all or part of the purchase price. Some courts will accept as part performance additional acts showing the buyer's detrimental reliance.

deficiency judgment - foreclosure

A lender is entitled to a deficiency judgment when the proceeds of a foreclosure sale do not satisfy the mortgage debt. Foreclosure is a process by which a mortgagor's interest in property is terminated, generally by selling the property to satisfy the debt. If the proceeds of the sale are insufficient to satisfy the debt, the mortgagee/lender can bring a personal action against the mortgagor/debtor for the deficiency. However, when the fair market value is higher than the foreclosure price, a number of states limit the deficiency that can be recovered to the difference between the debt and the property's fair market value.

Requirements for Burden of Real Covenant to Run to a Successor in Interest

A real covenant is a written promise to do or not to do something on the land. The burden of the covenant will run to successors in interest if: (i) the covenanting parties intended that successors in interest be bound by the covenant; (ii) the successor in interest has notice of the covenant; (iii) there is horizontal privity between the original covenanting parties; (iv) there is vertical privity between the covenantor and his successor in interest; and (v) the covenant touches and concerns the land. Vertical privity requires that the successor in interest to the covenanting party hold the entire durational interest held by the covenantor at the time he made the covenant.

Termination of Easement

Termination of Easements An easement, like any other property interest, may be created to last in perpetuity or for a limited period of time. To the extent the parties to its original creation provide for the natural termination of the interest, such limitations will control. a. Stated Conditions b. Unity of Ownership c. Release An easement may be terminated by a release given by the owner of the easement interest to the owner of the servient tenement. A release requires the concurrence of both owners and is, in effect, a conveyance. The release must be executed with all the formalities that are required for the valid creation of an easement. 3) Statute of Frauds The Statute of Frauds requires that every conveyance of an interest in land that has a duration long enough to bring into play a particular state's Statute of Frauds (typically one year) must be evidenced by a writing. This writing requirement is also applicable to a release of an easement interest. If the easement interest that is being conveyed has a duration of greater than one year, a writing is required in order to satisfy the Statute of Frauds. An oral release is ineffective, although it may become effective by estoppel. d. Abandonment It has become an established rule that an easement can be extinguished without conveyance where the owner of the privilege demonstrates by physical action an intention to permanently abandon the easement. To work as an abandonment, the owner must have manifested an intention never to make use of the easement again. 1) Physical Act Required An abandonment of an easement occurs when the easement holder physically manifests an intention to permanently abandon the easement. Such physical action brings about a termination of the easement by operation of law and therefore no writing is required; i.e., the Statute of Frauds need not be complied with. 2) Mere Words Insufficient The oral expressions of the owner of the easement that he does not intend to use the easement again (i.e., he wishes to abandon it), by themselves, are insufficient to constitute an abandonment of the easement. 3) Mere Nonuse Insufficient An easement is not terminated merely because it is not used for a long period by its owner. To terminate the easement, the nonuse must be combined with other evidence of intent to abandon it. Nonuse itself is not considered sufficient evidence of that intent. e. Estoppel For an easement to be extinguished by estoppel, three requirements must be satisfied. Namely, there must be (i) some conduct or assertion by the owner of the easement, (ii) a reasonable reliance by the owner of the servient tenement, (iii) coupled with a change of position. Even though there is an assertion by the easement holder, if the owner of the servient tenement does not change her position based upon the assertion, the easement will not be terminated. f. Prescription An easement may be extinguished, as well as created, by prescription. Long continued possession and enjoyment of the servient tenement in a way that would indicate to the public that no easement right existed will end the easement right. Such long continued use works as a statute of limitations precluding the whole world, including the easement holder, from asserting that his privilege exists. The termination of an easement by prescription is fixed by analogy to the creation of an easement by prescription. The owner of the servient tenement must so interfere with the easement as to create a cause of action in favor of the easement holder. The interference must be open, notorious, continuous, and nonpermissive for the statutory period (e.g., 20 years). g. Necessity Easements created by necessity expire as soon as the necessity ends. h. Condemnation Condemnation of the servient estate will extinguish the nonpossessory interest. Courts are split, however, on whether the holder of the benefit is entitled to compensation for the value lost. i. Destruction of Servient Estate If the easement is in a structure (e.g., a staircase), involuntary destruction of the structure (e.g., by fire or flood) will extinguish the easement. Voluntary destruction (e.g., tearing down a building to erect a new one) will not, however, terminate the easement.

Benefit vs. Burden to Run -- Real Covenants

or the benefit of a real covenant to run with the land, notice is NOT required. If the owner of the benefitted parcel discovers the covenant after acquisition, she still can sue to enforce it. A real covenant is a written promise to do or not do something on the land. The benefit of the covenant will run with the land if: 1. The covenanting parties intended that successors in interest be benefitted by the covenant; 2. There is vertical privity between the covenantee and her successor in interest; and 3. The covenant touches and concerns the land (i.e., it benefits the covenantee and her successor in their use and enjoyment of the benefited land). In contrast, for the burden of a real covenant to run to a subsequent purchaser, she must have actual or constructive notice of it at the time she acquires the burdened land and there must be horizontal privity between the original covenanting parties, in addition to the above requirements.

Installment Land Contracts

A security interest in real estate operates to secure some other obligation, usually a promise to repay a loan, which is represented by a promissory note. If the loan is not paid when due, the holder of the security interest can either take title to the real estate or have it sold and use the proceeds to pay the debt with accrued interest and any legal and court costs. 3. Installment Land Contract In an installment land contract, the debtor is the purchaser of the land who signs a contract with the vendor, agreeing to make regular installment payments until the full contract price (including accruing interest) has been paid. Only at that time will the vendor give a deed transferring legal title to the purchaser. In case of default, the contract usually contains a forfeiture clause providing that the vendor may cancel the contract, retain all money paid to date, and retake possession of the land.

Absolute Deed—Equitable Mortgage

Absolute Deed—Equitable Mortgage A landowner needing to raise money may "sell" the land to a person who will pay cash and may give the "buyer" an absolute deed rather than a mortgage. This may seem to be safer than a mortgage loan to the creditor and may seem to have tax advantages. However, if the court concludes, by clear and convincing evidence, that the deed was really given for security purposes, they will treat it as an "equitable" mortgage and require that the creditor foreclose it by judicial action, like any other mortgage. This result will be indicated by the following factors: (i) the existence of a debt or promise of payment by the deed's grantor; (ii) the grantee's promise to return the land if the debt is paid; (iii) the fact that the amount advanced to the grantor/debtor was much lower than the value of the property; (iv) the degree of the grantor's financial distress; and (v) the parties' prior negotiations.

Implied Easement

An easement by implication is created by operation of law rather than by written instrument. It is an exception to the Statute of Frauds. There are only three types of implied easements: (i) an intended easement based on a use that existed when the dominant and servient estates were severed, (ii) an easement implied from a recorded subdivision plat or profit a prendre, and (iii) an easement by necessity.

Requirements for Equitable Servitude to Run with the Land

An equitable servitude is a covenant (i.e., a promise to do or not do something on the land) that, regardless of whether it runs with the land at law, can be enforced in equity against assignees of the burdened land who have notice of it. The burden of an equitable servitude will run to successors in interest if: 1. The covenanting parties intended that successors in interest be bound by the covenant; 2. The successor in interest has notice of the covenant (if she paid value); and 3. The covenant touches and concerns the land (i.e., it benefits the covenantor and his successor in their use and enjoyment of the burdened land). The benefit of an equitable servitude will run to successors in interest if: 1. The covenanting parties intended that successors in interest be benefited by the covenant; and 2. The covenant touches and concerns the land. Horizontal privity between the original covenanting parties and vertical privity between the covenantor and his successor in interest are NOT required to enforce either the burden or the benefit of an equitable servitude. Horizontal privity means the original parties to a real covenant shared some interest in the land independent of the covenant at the time they entered it (e.g., as grantor and grantee). It is required to enforce only the burden of a real covenant at law. Vertical privity also relates to real covenants and means that (i) the burden will run at law if the successor holds the entire durational interest held by the covenantor at the time he made the covenant, and (ii) the benefit will run at law even if the successor holds a lesser estate.

Profit vs. Easement

As between profits and affirmative easements, only a profit is terminated when surcharged. The same termination rules that apply to easements apply to profits, except that misuse of the interest (i.e., surcharge) will terminate a profit but not an easement. If an easement is surcharged, the servient landowner's remedy is an injunction, or possibly damages if the servient land has been harmed. Neither easements nor profits entitle the holder to possess and enjoy land. Both are nonpossessory interests in land that is owned by someone else. An affirmative easement is the right to use another's land for a specific purpose, and a profit is the right to take the soil or a substance of the soil (e.g., minerals, timber) from another's land. Implied in every profit is an easement entitling the holder to enter the servient land to remove the resource. Both profits and easements may arise by prescription. Profits and easements may be created in the same way. Acquiring an interest by prescription is analogous to acquiring title to property by adverse possession.

Specific Performance Sale of Land Contract

Both the buyer and the seller generally are entitled to specific performance of a land sale contract. A court of equity will order a seller to convey title if the buyer tenders the purchase price. The remedy at law, damages, is deemed inadequate because land is unique. Courts also generally will award specific performance for the seller if the buyer is in breach, although a few courts will do so only if the property is especially unique (e.g., not if a developer is selling a house in a large subdivision of similar houses). The seller's ability to recover in equity is sometimes explained as necessary for mutuality of remedy.

Deed of Trust

Deed of Trust The debtor/notemaker is the trustor. The trustor gives the deed of trust to a third-party trustee, who is usually closely connected with the lender (e.g., the lender's lawyer, affiliated corporation, or officer). In the event of default, the lender (termed the beneficiary) instructs the trustee to proceed with foreclosing the deed of trust by sale. Many states allow the sale to be either judicial (as with a mortgage) or nonjudicial, under a "power of sale" clause that authorizes the trustee to advertise, give appropriate notices, and conduct the sale personally

Doctrine of Equitable Conversion

Doctrine of Equitable Conversion Under the doctrine of equitable conversion, once a contract is signed and each party is entitled to specific performance, equity regards the purchaser as the owner of the real property. The seller's interest, which consists of the right to the proceeds of sale, is considered to be personal property. The bare legal title that remains in the seller is considered to be held in trust for the purchaser as security for the debt owed the seller. But note that possession follows the legal title; so even though the buyer is regarded as owning the property, the seller is entitled to possession until the closing. a. Risk of Loss If the property is destroyed (without fault of either party) before the date set for closing, the majority rule is that, because the buyer is deemed the owner of the property, the risk of loss is on the BUYER. Thus, the buyer must pay the contract price despite a loss due to fire or other casualty, unless the contract provides otherwise. 1) Casualty Insurance Suppose the buyer has the risk of loss, as is true under the majority view, but the seller has fire or casualty insurance that covers the loss. In the event of loss, allowing the seller to recover the full purchase price on the contract and to collect the insurance proceeds would be unjust enrichment. Hence, the courts require the seller to give the buyer credit, against the purchase price, in the amount of the insurance proceeds. b. Passage of Title on Death The doctrine of equitable conversion also affects the passage of title when a party to a contract of sale dies before the contract has been completed. In general, it holds that a deceased seller's interest passes as personal property and a deceased buyer's interest as real property. 1) Death of Seller: If the seller dies, the "bare" legal title passes to the takers of his real property, but they must give up the title to the buyer when the contract closes. When the purchase price is paid, the money passes as personal property to those who take the seller's personal property. Note that if the property is specifically devised, the specific devisee may take the proceeds of the sale. 2) Death of Buyer: If the buyer dies, the takers of his real property can demand a conveyance of the land at the closing of the contract. Moreover, under the traditional common law rule, they are entitled to exoneration out of the personal property estate. Thus, the takers of his personal property will have to pay the purchase price out of their share of the buyer's estate. However, a majority of states have enacted statutes abolishing the doctrine of exoneration, {**PA**}and in those states the takers of the real property will take it subject to the vendor's lien for the purchase price. In these states, as a practical matter, the takers of the real property will have to pay the price unless the testator specifically provided to the contrary.

"Tacking"

For purposes of determining title by adverse possession, tacking is permitted to combine the periods of occupancy of an adverse possessor and her transferee. A claimant may establish title through adverse possession by showing (i) an actual entry giving exclusive possession that is (ii) open and notorious, (iii) adverse (hostile), and (iv) continuous throughout the statutory period. However, continuous possession need not be accomplished by the same person. If there is privity between successive adverse holders, their periods of adverse possession may be tacked together to make up the full statutory period. Tacking is not permitted to combine the periods of occupancy of an adverse possessor and the possessor she ousted. Periods of adverse possession may be tacked together to make up the full statutory period if there is privity between the successive adverse holders. Privity is satisfied if the subsequent possessor takes by descent, by devise, or by deed purporting to convey title. Thus, tacking is not permitted where one adverse claimant ousts a preceding adverse claimant or where one claimant abandons and a new claimant goes into possession. Tacking is not permitted to combine a true landowner's period of disability and her transferee's period of disability. The statute of limitations does not begin to run for adverse possession if the true owner was under a disability (e.g., minority, imprisonment, insanity) when the cause of action first accrued. However, only the owner's disability that existed at the time the cause of action arose will count. Thus, disabilities of successors in interest have no effect on the statute, and tacking is not permitted to combine a true landowner's consecutive periods of disability.

Requirements for the Benefit of a Real Covenant to Run with the Land

For the benefit of a real covenant to run with the land, only vertical privity must exist. A real covenant is a written promise to do or not do something on the land. The benefit of the covenant will run with the land if: 1. The covenanting parties intended that successors in interest be benefitted by the covenant; 2. There is vertical privity between the covenantee and her successor in interest; and 3. The covenant touches and concerns the land (i.e., it benefits the covenantee and her successor in their use and enjoyment of the benefited land). For the benefit to run, vertical privity exists when the successor in interest holds even a lesser estate than the original covenantee had. In contrast, for the burden to run, vertical privity requires that the successor hold the covenantor's entire durational interest.

Equitable Servitude

If a plaintiff wants an injunction or specific performance, he may show that the covenant qualifies as an equitable servitude. An equitable servitude is a covenant that, regardless of whether it runs with the land at law, equity will enforce against the assignees of the burdened land who have notice of the covenant. The usual remedy is an injunction against violation of the covenant.

Remedies for Buyer's Breach in Sale of Land Contract

If the buyer breaches the land sale contract, the seller may recover the difference between the contract price and the market value of the land on the date of breach. This is the usual measure of damages. Incidental damages (e.g., the buyer's title examination and moving or storage costs) also can be recovered. Additionally, when the buyer breaches, courts usually will allow the seller to retain the buyer's "earnest money" deposit on the ground that restitution of the funds to the buyer would unjustly reward the party in breach.

Reasonable Time to Tender Performance -- Land Sale

In general, a party who fails to tender performance on the closing date has a reasonable time after the closing date to tender performance and avoid breach. Generally, the time of performance stated in a land sale contract is not absolutely binding. A party, even though late in tendering her own performance, can still enforce the contract if she tenders within a reasonable time after the stated date.

Party Walls and Common Driveways

Often, a single wall or driveway will be built partly on the property of each of two adjoining landowners. Absent an agreement between the owners to the contrary, courts will treat the wall as belonging to each owner to the extent that it rests upon her land. Courts will also imply mutual cross-easements of support, with the result that each party has the right to use the wall or driveway, and neither party can unilaterally destroy it. 1. Creation While a written agreement is required by the Statute of Frauds for the express creation of a party wall or common driveway agreement, an "irrevocable license" can arise if there has been detrimental reliance on a parol agreement. Party walls and common driveways can also result from implication or prescription. 2. Running of Covenants If party wall or common driveway owners agree to be mutually responsible for maintaining the wall or driveway, the burdens and benefits of these covenants will run to successive owners of each parcel. The cross-easements for support satisfy the requirement of horizontal privity because they are mutual interests in the same property. Each promise touches and concerns the adjoining parcels, and the grantee will be charged with notice of the covenant because of the common wall or driveway.

Foreclosure Sale Proceeds

The order of priority for allocating mortgage foreclosure sale proceeds is as follows, from first to last: 1. Expenses of the sale, including attorneys' fees, and court costs; 2. The principal and accrued interest on the foreclosing party's loan; 3. Any junior lienors in the order of their priority; and then 4. The mortgagor. In many cases, no surplus remains after the principal debt is paid off. Senior lienors receive none of the proceeds. Because a senior lien remains ON the property (i.e., may itself be foreclosed in the future), a senior lienor is not entitled to any of the money from the sale, even if there is a surplus.

Marketable Title

There is an implied covenant in every land sale contract that at closing the seller will provide the buyer with a title that is "marketable." a. "Marketability" Defined—Title Reasonably Free from Doubt Marketable title is title reasonably free from doubt, i.e., title that a reasonably prudent buyer would be willing to accept. It need not be a "perfect" title, but the title must be free from questions that might present an unreasonable risk of litigation. Generally, this means an unencumbered fee simple with good record title. 1) Defects in Record Chain of Title Title may be unmarketable because of a defect in the chain of title. Examples include: a significant variation in the description of the land from one deed to the next, a deed in the chain that was defectively executed and thus fails to meet the requirements for recordation, and evidence that a prior grantor lacked capacity to convey the property. Many courts hold that an ancient lien or mortgage on the record will not render title unmarketable if the seller has proof of its satisfaction or the statute of limitations on the claim would have run under any possible circumstance, including tolling for disabilities. a) Adverse Possession Historically, a title acquired by adverse possession was not considered marketable because the purchaser might be later forced to defend in court the facts that gave rise to the adverse possession against the record owner. On the bar exam, title acquired by adverse possession is unmarketable, despite the fact that most modern cases are contra. Most of the modern cases hold adverse possession titles to be marketable if: (i) the possession has been for a very lengthy period; (ii) the risk that the record owner will sue appears to be very remote; and (iii) the probability of the record owner's success in such a suit appears to be minimal. b) Future Interest Held by Unborn or Unascertained Parties Even though most states consider all types of future interests to be transferable, it is often impossible for the owners of the present and future interests, acting together, to transfer a marketable fee simple absolute title. This is because the future interests are often held by persons who are unborn or unascertainable. 2) Encumbrances Generally, mortgages, liens, easements, and covenants render title unmarketable unless the buyer waives them. a) Mortgages and Liens A seller has the right to satisfy a mortgage or lien at the closing with the proceeds from the sale. Therefore, as long as the purchase price is sufficient and this is accomplished simultaneously with the transfer of title (usually through the use of escrows), the buyer cannot claim that the title is unmarketable; the closing will result in a marketable title. b) Easements An easement that reduces the value of the property (e.g., an easement of way for the benefit of a neighbor) renders title unmarketable. The majority of courts, however, have held that a beneficial easement (e.g., utility easement to service property) or one that was visible or known to the buyer does not constitute an encumbrance. Some courts go so far as to hold that the buyer is deemed to have agreed to take subject to any easement that was notorious or known to the buyer when she entered into the contract. c) Covenants Restrictive covenants render title unmarketable. d) Encroachments A significant encroachment constitutes a title defect, regardless of whether an adjacent landowner is encroaching on the seller's land or vice versa. However, the encroachment will not render title unmarketable if: (i) it is very slight (only a few inches) and does not inconvenience the owner on whose land it encroaches; (ii) the owner encroached upon has indicated that he will not sue on it; or (iii) it has existed for so long (many decades) that it has become legal by adverse possession, provided that the state recognizes adverse possession titles as being marketable (see 1)a), supra). 3) Zoning Restrictions Generally, zoning restrictions do NOT affect the marketability of title; they are not considered encumbrances. An existing violation of a zoning ordinance, however, DOES render title unmarketable. 4) Waiver: Any of the above-mentioned title defects can be waived in the contract of sale

Adverse Possession

Title to real property may be acquired by adverse possession. (Easements may also be acquired by prescription.) Gaining title by adverse possession results from the operation of the statute of limitations for ejectment, or recovery of real property. If an owner does not, within the statutory period, take legal action to eject a possessor who claims adversely to the owner, the owner is thereafter barred from bringing suit for ejectment. Moreover, title to the property vests in the possessor. B. REQUIREMENTS To establish title by adverse possession, the possessor must show (i) an actual entry giving exclusive possession that is (ii) open and notorious, (iii) adverse (hostile), and (iv) continuous throughout the statutory period. 1. Running of Statute The statute of limitations begins to run when the claimant goes adversely into possession of the true owner's land (i.e., the point at which the true owner could first bring suit). The filing of suit by the true owner is not sufficient to stop the period from running; the suit must be pursued to judgment. However, if the true owner files suit before the statutory period (e.g., 20 years) runs out and the judgment is rendered after the statutory period, the judgment will relate back to the time that the complaint was filed.

Prescriptive Easement

To acquire a prescriptive easement on property, the claimant's use must be open and notorious, adverse, and continuous for the statutory period. Acquiring an easement by prescription is analogous to acquiring title to property by adverse possession, except that the use need NOT be exclusive (i.e., the user may share the use with the owner or other easement claimants). There is no requirement that the use be in good faith, and adverse use means the user does NOT have the owner's permission.

Transfer by Mortgagor

Transfer by Mortgagor—Grantee Takes Subject to Mortgage If the mortgagor sells the property and conveys a deed, the grantee takes subject to the mortgage, which remains on the land. Unless there is a specific clause in the mortgage, the mortgagee has no power to object to the transfer. a. Assumption Often the grantee signs an assumption agreement, promising to pay the mortgage loan. If she does so, she becomes primarily liable to the lender (usually considered a third-party beneficiary), while the original mortgagor becomes secondarily liable as a surety. Note, however, that the mortgagee may opt to sue either the grantee or the original mortgagor on the debt. If the mortgagee and grantee modify the obligation, the original mortgagor is completely discharged of liability. b. Nonassuming Grantee A grantee who does not sign an assumption agreement does not become personally liable on the loan. Instead, the original mortgagor remains primarily and personally liable. However, if the grantee does not pay, the mortgage may be foreclosed, thus wiping out the grantee's investment in the land. c. Due-on-Sale Clauses Most modern mortgages contain "due-on-sale" clauses, which purport to allow the lender to demand full payment of the loan if the mortgagor transfers any interest in the property without the lender's consent. Such clauses are designed to both: (i) protect the lender from sale by the mortgagor to a poor credit risk or to a person likely to commit waste; and (ii) allow the lender to raise the interest rate or charge an "assumption fee" when the property is sold. Federal law preempts state law and makes due-on-sale clauses enforceable for all types of institutional mortgage lenders on all types of real estate. The preemption does not apply to mortgage loans made by private parties.

Lien vs. Title Theory of Mortgages

Under the lien theory, a mortgagee may not take possession of the mortgaged property without consent upon the debtor's default. A majority of the states follow the lien theory, under which the mortgagee is deemed to hold a security interest in the land and the mortgagor is considered the owner until foreclosure. Thus, the mortgagee may not take possession of the land before foreclosure unless the mortgagor consents or has abandoned the land. Under the title theory, followed in a minority of the states, legal title is in the mortgagee until the mortgage has been satisfied or foreclosed. Thus, the mortgagee is entitled to possession upon demand at any time, which means the mortgagee can take possession as soon as the mortgagor defaults. The same is true in the few states that follow the intermediate theory; however, under this theory, legal title transfers from the mortgagor to the mortgagee on default.

Transfer by Mortgagee

When a mortgagee transfers a promissory note, for the transferee to become a holder in due course: 1.The note must be negotiable in form—i.e., the note must be payable to bearer or to the order of the named payee and must contain a promise to pay a fixed amount of money and no other promises, except that it may contain an acceleration clause and an attorneys' fee clause; 2.If there is a named payee, she must have indorsed (i.e., signed) the note; 3.The note must be delivered to the transferee; and 4.The transferee must pay value for the note and take the note in good faith, without notice that the note is overdue or has been dishonored, or that the maker has any defense to the duty to pay it.

Transfer by Mortgagor - Assumption Agreement

When a mortgagor conveys mortgaged property, the grantee becomes primarily liable to the lender if the grantee assumes the mortgage. A grantee who signs an assumption agreement promises to pay the mortgage loan, thus becoming personally and primarily liable to the lender. The original mortgagor becomes secondarily liable as a surety. In the absence of an assumption agreement, the grantee takes subject to the mortgage and does not become personally liable on the loan. The original mortgagor remains personally and primarily liable. However, if the mortgagor defaults on the mortgage and the grantee does not pay, the mortgage may be foreclosed, thus wiping out the grantee's investment in the land.