Professor Wilson Real Property Finance Outline Spring 2011:
Perfected – refers to when a lien becomes effective against others who acquire interests in the real estate or rents
inchoate interest – is an interest in real estate which is not a present interest, but which may ripen into a vested estate if it is not barred, extinguished, or divested. Ex. Adverse Possession
Mortgage Substitutes:
§ If the court decides it wasn’t a mtg, but D sold the land to a BFP before courts decision the BFP keeps the land, P cannot then go and take it from the BFP
§ 5 main benefits lenders get by circumventing the mtg rules and creating mtg substitutes
a. gets around right of redemption
b. no need for foreclosure expense & delays
c. right of possession of land prior to default (in absolute deed)
d. right to possession of chattels severed from the land by the debtor or third parties (absolute deed)
e. preventing the debtor from encumbering the land with further mortgages
Analysis: Mortgage or Sale – courts will consider the following factors in determining if the grantors intent at the time of the transaction (only at time of transaction is relevant) was to create a security device or absolute conveyance:
f. prior negotiations of the parties
g. relationship between the parties(where they typical for a mortgagor & mortgagee relationship)
h. distress of the make
i. whether the amount advanced was about equal to the amount grantor needed to pay existing debt
j. whether the parties had access to counsel
k. sophistication and circumstances of the parties
l. amount of consideration vs. actual value
m. is there a contemporaneous agreement to repurchase
n. whether the grantor retained possession of the property
parole evidence rule & statute of frauds typically will not prevent extrinsic evidence in these types of cases
Jurisdictions differ, some would hold language in the agreement that is expressly is not a mortgage as conclusive, others do not.
§ In Florida the language of what qualifies as a mortgage is broad, and even a installment land contract would qualify as a mtg in FL
Intent of the parties is the dominant factor in determining if they intended to create a mtg, or sale.
P must show by clear and convincing evidence a security was intended when on its face it appears to be a conveyance
§ TIL – A consumer credit transaction qualifies as a mtg under TILA (truth in lending act) if two contingencies are met:
a. the transaction is secured by the consumers principle dwelling and
b. the APR and fees exceeds either 8% of the loan amount or $400
Installment land contract (long term contract or Agreement for Deed):
· most common type of mtg substitute – some states treat it as a mortgage and thus apply mortgage law
· vendor holds deed until vendee pays off the debt to the seller
· this type of contract benefits seller – in the event of default he can quickly repossess the property and keep all the installment payments he received
· if you are buying land with a long term contract be careful the seller is not in foreclosure, if the property is foreclosed the buyer will have no recourse other than to sue the vendor for damages
· right of redemption for installment land contracts is different from traditional sales/ mortgages:
· passing of ownership does not transfer until full payment, unlike traditional mortgages were title passes at sale closing
· A vendor is not liable for unsafe conditions on the land unless he is in possession of it
Vendor has not duty to perfect title until vendee makes the final payment
the vendees interest in the land is mortgagable (Equitable Conversion) – he can borrow against it
the lien will be treated like a jr mortgage to the vendor
vendor cannot initiate foreclose on vendees land who he knows has a mortgage without sending notification to the mortgagee of his intent to foreclose on the property and provide an opportunity for the mortgagee to protect himself
the mortgagee has a duty to provide notice to the vendor of the mortgage
if mortgage is recorded is considered notice unless the mortgagee knows of it
the long term contract could provide language effectively preventing the vendee from mortgaging or assigning his interest in the land
a purchaser of a long term contract is treated as owner of the property, thus the debtors interest in the property to which the lien is attached is the full value of his estate in the property, not just the amount of payments and value of improvements
Most jurisdictions allow vendors interest in a long term contract is subject to judgment liens and is applied to the part the vendee has not yet paid
Vendor Remedies –
doctrine of election of remedies prevents double recovery for a single wrong – the vendor cannot seek both specific performance and contract cancellation
if the vendor who was awarded specific performance later buys the land at auction for less then the judgment he was awarded, the vendee’s amount owed will be reduced by the amount paid for but still owe the remaining portion.
· when vendee defaults the seller may:
o This options are only available if the jurisdiction does not treat the contract as a mortgage, otherwise mortgage law applies
o sue for the balance
o sue for specific performance
o The vendor tenders the
d regardless if breach was willful or not.
· However, a few states will not allow buyer to get specific performance it their breach was wilfull or grossly negligent
· some courts do not require a substantial portion of the purchase price to be paid).
· the contract may also specific in it what constitutes a substantial payment
o If the buyer does not pay the balance he may sue under restitution for the payments made to seller that exceed the damage of his breach
§ when suing for restitution the increased market value from the time of purchase up to the time of termination, not the date of the breach may be considered as damages
Buyers Concerns/ common problems with Long Term Contracts –
a frequent problems is vendees do not do a title search or get title insurance and may not be getting clean title from the vendor in a long term contract.
Since there is no mortgage company there is no one requiring a title policy
also if the vendor has mortgage on the land before he sells to vendee that mortgage will be a superior lien to the vendee’s rights
this is also a problem because many long term contracts are not recorded, thus the vendor may get liens on the land after selling it to the vendee without his knowledge
is best to record the contract or notice of conveyance to give constructive notice to subsequent lien holders
possession of the land will serve as notice; however, in certain jurisdictions it serves only actual, not constructive notice, thus if they don’t know its possessed by the vendee they have no notice
equitable mortgages –
§ it has the intent but not the proper form of a mortgage
o ex. parties intend to make a mortgage but it is not a proper form mortgage and would not be given effect without it being an equitable mortgage
§ Requirements:
o the parties intentions are the dispositve fact in determining if it is a equitable mortgage
o a specific intent to create a lien must be manifested
o extrinsic evidence will be admitted if there is ambiguity
§ However, if the plain meaning of the document is unambiguous no extrinsic evidence will be admitted to determine the meaning of the document