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Property II
South Texas College of Law Houston
Festa, Matthew J.

Property II Outline

Festa

Fall 2013

Intro

· The government decides what can or cannot be owed.

o Put another way, society and people.

o When other people recognize that you better title to something than everything else, then you own it.

· What is property?

o It’s a societal institution describing the legal relationships between people with respect to things.

o It’s a set of rules we recognize as to who has the right to do these things.

o It’s a bundle of sticks; a societal relationship. 4 fundamental things you can do with property: 1) Posses, 2) Transfer, 3) Use, 4) Exclude

o Deals with externalities.

o Tell the story of property.

· What do we want in a land transaction?

o Freedom and efficiency.

§ We want to put the land to its best use via the free market exchange.

§ Real estate transactions rearrange the 4 fundamental rights of property for either freedom or efficiency. They should protect property rights and promote efficiency.

Chapter 7—The Land Transaction

Section A: Introduction to Buying and Selling Real Estate

· Real Estate contracts

o Real estate transactions are 1) a conveyance of property rights; and 2) a contract.

o There’s a closing process, which ensures that property rights are protected. We find out problems with the property.

o They are executory contracts. When the K is signed, the buyer has equitable title.

§ They are not ready to become possessory until the process is over.

§ In other words, there’s a due diligence period.

§ The title is transferred at closing.

· Multiboard residential real estate contract (pg. 520)

o Essential terms:

§ Purchase price, legal description of property, good title by seller via title search, warranties of title, date of transfer of possession.

· Escrow agreementsà gives a bunch of $$ to a 3rd party until the deal is done.

· Terms detailing what happens if the deal falls through

· Signature.

§ Other terms: proration of expenses, assignment of risk (Waco example), Itemization of ownership, fixtures & personal property included in K (sheds, etc.).

· Problem (pg. 529)

o Why would a buyer want to know about the seller’s marital status?

§ Because the seller could be in a community property situation.

· If the land was purchased after marriage and you can paid off the mortgage using community funds, then ½ of the rights are the wife’s. Or it could be a TBE.

§ If one of the buyers dies and the seller tries to back out the K, does it matter whether the buyers intended to take title as TIC, JT, or TBE? Yes.

· For example, if W dies and gives her share to another person via a willà then it’s a TIC to that person.

o If it’s a JT, then ROS.

o Developer offers B a standard for that gives developer discretion to substitute materials in building the house, make changes, apply delays? Should B accept?

§ You should probably seek some express warranties if there’s something specifically that you want. Even if you might not get such warranties in a lot of cases.

§ Remember that a principle of modern K law is that each party has an implied duty of good faith and fair dealing.

§ Overall trend is provide the buyer with more protection.

Section B: Brokers

· Real estate (RE) brokers are often hired by sellers of property to attract prospective buyers and facilitate RE transactions. They can do this by:

o Marketing a seller’s property

o Listing residential properties on a multiple listing service (MLS)

o Negotiating purchase agreements

o Serving as an intermediary between buyers and sellers

o Participating in physical inspections of the property

o Assistant in arranging financing

· People tend to use brokers instead of lawyers.

· Need a license and they receive a commission for their services.

· RULE: Broker/agent—is the fiduciary of the seller/person who hires them.

o There is a duty of fidelity and good faith w/ respect to the principal.

§ No self-dealing.

o Must make full, fair, and prompt disclosure to client of all facts within his knowledge which are, or may be, material.

§ Applies to the sub-agents as well.

· Sub-agents—those who act with the express permission of another broker who has the listing of the property to be sold.

o Breach of dutyà liable for any consequential loss. Precludes recovery for commission.

o Licari v. Blackwelder

§ Facts:

· Brothers asked Schwartz to be a broker for them.

· They gained the property via inheritance, TIC.

· Schwartz enters into a co-brokerage with D.

· Ds bought house for $115k, sold for $160k. D breached duty by withholding info about higher offer.

· Listing broker—duty to the seller. Seller empowers the broker to serve as the seller’s agent in selling the property.

o The people who place a photo on the lawn.

o Lists the property on the real estate listing.

o Both listing and selling brokers get more in commission the higher price.

· Selling brokers—duty to the seller. Introduce the buyer to the seller’s property. Relationship is that of a sub-agent with the listing broker being the main agent, typically. Therefore, they have an indirect relationship with the seller. They receive their compensation by splitting the listing broker’s compensation.

o Often work with prospective buyers over long periods of time, so they develop personal relationships with them.

§ Buyers think they have a fiduciary relationship with the broker. Therefore, there could be a misunderstanding as to who’s working for whom.

· The broker knows how low the buyer is willing to go, among other confidential information. Brokers then have to disclose this to the seller.

· Fiduciary to the seller, even if the buyer believes broker works for them.

· Hypo—Century 21 shows you around a lot of places. They still owe a duty to the seller.

o Trendà state legislatures & courts impose a more duties on the broker.

§ Duty to disclose to the buyer in writing who the broker has a fiduciary duty to.

§ Disclose any material defects in the property.

· Buyer brokers- owe a fiduciary duty to prospective purchasers.

· Multiple listing services (MLS)- before the listings were proprietary. Now it’s criticized as a monopoly and of engaging in price fixing.

· Dual agencyà when both the buyer and seller hire the same broker. In most states, broker must disclose this fact to both parties and they both must approve of the arrangement.

· Why do people hire brokers in real estate transactions?

o Uniqueness of real estate.

o There is a scarcity of information in the market for RE.

o Sellers are sporadic actors in the market who want to sell for as much as they can as fast as they can.

§ Infrequency of transactions.

o Importance of transactions

§ High value of real property to the parties and high emotional content

affect the value of the K)

o Reasonable person standard

· OR have a subjective impact on the value of the property.

o Undiscoverable by a reasonable buyer.

o THENà it must be disclosed.

§ Or else, the buyer may rescind the K.

· Equitable, not legal remedy.

o AKA, seller has duty to disclose material fact regarding condition of property not readily observable and not know to buyer.

§ Therefore, non-disclosure (silence) is held be the same as fraud.

§ Traditional rule of caveat emptor has been superseded by state statues.

§ State statues place this duty on seller.

· Merger- When B accepts the deed, the K merges into the deed. The promises made in the K are no longer applicable. Only those in the deed are.

o Ways around it? Say the two things are independent or collateral promises. OR you can have a K term that states that warranties will survive the deed.

· Stambovsky v. Ackley

o Facts:

§ Seller told everybody that there was a ghost. Didn’t tell buyer.

§ P alleges this impaired the value of the K. Seeks rescission. Claims this was a defect that should have been disclosed.

o Defect—affects the marketability.

§ Means that less people would buy the property if they knew about it.

§ Property value vs. encumbrance are not the same thing.

· There’s also a line between a defect and just general info about who lived there (gay couple, murder took place, etc.).

§ Defect caused by the seller, here the seller has peculiarity of knowledge.

o Caveat emptor—requires affirmative misrepresentation. Otherwise, buyer beware.

§ Rationaleà it’s an incentive for the buyer to make some effort. Buyers before were on a level playing field when it came to inspect the land on their own (farmers vs. farmers). Was based on Buyer’s ability to inspect.

§ Nowadays, people aren’t expect to know much about how to inspect land.

· Similar to Landlord-tenant law.

o How far does the modern duty to disclose go? Murder in the house, gay couple, structural problems, environmental harm on the property or in the area, sex offenders, criminals, etc.

§ The inquiry is whether it affects the market value. Depends on the facts (how recent was the murder).

§ Always remember that it must be material and undiscoverable by the buyer.

§ For both this and non-disclosure, you might want to put it in the K. Just depends on the argument you can make otherwise.

· Johnson v. Davis

o Facts: S knew about the roof leak, but they lied about it.

· Ramifications for all these protections: buyer has to pay for. If seller breaches the conditions, the buyer can get rescission + DAS. But either way, the buyer has to put more money into purchasing RE. If the seller were to bear the burden, the cost would still go up.