REAL ESTATE TRANSACTIONS
I. CONTRACTS FOR THE SALE OF LAND
A. Real Estate Sale Process
1. 3 step process
a. Pre contract stage
· Decision to sell
· Listing w/ broker
· Broker markets and negotiates
· Contract signed between buyer and seller
b. Executory period
· Title search and examination (if title is not marketable deal ends)
· Mortgage loan application
· Survey
· Physical inspection
· Document preparation
v Mortgage
v Deed
v Title insurance commitment
v Waivers
v Indemnification agreements
· Closing and delivery of the deed
c. Post-Closing Period
· file and record mortgage and deed in County Clerk’s office
· Title insurance issued
· Mortgage sold to investor
2. Ancillary Service providers during process:
a. real estate broker
b. title insurance company
c. mortgage lender
d. surveyor
e. credit reporting agent
f. appraiser
g. physical inspectors
h. escrow/ closing agent- usually title company- holds money documents, owes fiduciary duty to buyer and seller
3. Methods of Financing Real Estate
a. Simple cash sale
b. Paying off old mortgage
c. New mortgage loan from lender
Other Variations
d. New mortgage loan may be made by the seller instead of the new lender
e. There may be 2 new loans, one by the lender and one by the seller
f. Instead of paying off the old mortgage loan the buyer may assume it (Note: the old lender must consent to the sale; lender might not consent b/c interest rate on old loan is bad and they want to get rid of it or new buyers are a risk/ bad credit)
g. This may be combined with a new 2nd mortgage to the seller or a new lender
B. The Role of the Broker
1. Salespersons have to work under brokers and then pass an exam in order to become a broker
2. Listing Agreement-
a. sets out
· employment services of the broker
· property identification
· broker’s duties
· listing dates
· commission- usually due when a buyer who is ready, willing and able to sell or when the closing occurs depending upon contract terms
· signatures
Note- usually a broker doesn’t have the power to actually sell the property, he may only secure offers. In order to actually sell the property the listing agreement must state this clearly.
b. 3 types of Listing agreements
· Exclusive right to sell- only broker can sell, seller cannot sell without incurring liability for broker’s commission
· Exclusive Agency- Broker earns commission if any broker makes a sell, but not if the seller sells directly
· Open Listing- Broker earns a commission only if he personally makes the sale. Several brokers may be given listings at the same time.
3. Agency Relationship
a. Traditional agency model- broker is agent of seller b/c seller pays broker out of proceeds; fiduciary duties owed to seller:
· duty to disclose all pertinent information
· loyalty to client
· no self dealing
· confidentiality
b. Problems arise when broker also brings in the buyer- to whom is the duty now owed? (conflict of interest)
c. Can have a Buyer’s broker who would owe a duty to buyer only
d. Agent for the transaction- doesn’t represent either party, puts together the transaction, contracts and closes it.
e. Seller’s Broker’s duty to the purchaser:
· Originally, duty was in tort and broker had to conduct a reasonable investigation and disclose all facts materially affecting the value of the property
· Now there is a duty in the broker’s code of ethics
· Modern trend: recognize liability not only for misfeasance (lying) but for nonfeasance (negligence in not uncovering)
C. Statute of Frauds and Part Performance
1. Theoretical basis- best evidence of transaction; ensures seriousness of transaction to parties
2. Oral agreement for land can be enforced, although it is difficult
3. Requirement of the SOF:
a. does not require that the contract of sale be in writing
b. requires that the party against whom enforcement is sought must have signed the writing
4. Combination of writings
a. several writings may be used to enforce an oral contract (letters, memos, receipts, deed, check)
5. Elements which must be in the writing
a. identify the land
b. words indicating a sale
c. signature of the party to be charged
d. in most states, price and terms of payment
e. in some states, including OK, all essential terms must be in writing
· 16 O.S. 4- No interest in land can be created or transferred except by an instrument in writing signed by the parties. There must be no part of the agreement left to parol.
· 15 O.S. 139- No action can be brought upon any contract for sale of lands unless in writing and signed by both parties. No part of the agreement may be left to parol.
6. Exceptions to the SOF:
a. If the statute isn’t satisfied the sale could still be enforced.
· The purchaser may still get rescission and restitution or
· the part performance doctrine may permit enforcement of the contract or
· judicial admission- when defendant admits there was a contract but claims a defense based on the lack of writing
b. Part performance- requires any two of the following
· Partial payment of the price
· Taking possession
· Making substantial improvements
c. Theoretical basis of part performance
· Prevent unjust enrichment (estoppel)
· Acts of parties are a substitute for the evidence that a writing would provide (evidentiary)
D. Remedies for Breach of Real Estate Sale Contract
1. 3 kinds
a. Damages- loss of bargain plus out of pocket costs
b. Specific performance- available to either party
c. Rescission and restitution
2. Damages
a. English Rule- when breach occurs b/c of seller’s inablilty to convey good title, which is not his own fault, then buyer can recover deposit and costs, but not more than nominal damages
b. American Rule- permits a buyer to obtain the benefit of the bargain damages irrespective of the nature of the reasons for the seller’s default.
c. ½ states follow English, ½ follow American
d. Measuring loss of bargain damages
· Difference between contract price and market value at time of breach
· Example- Seller and Buyer agree to a purchase price of $100,000; FMV is $120,000
v If seller breaches Buyer gets the difference between contract price and FMV so Buyer will get $20,000, because that is their loss
v If buyer breaches seller gets nothing b/c their damages are the difference between the FMV and the contract price, they get nothing b/c they’re actually getting out of a bad deal
· Exception to above measurement is when you’re in a declining market: contract price over actual resale price
v Problem- seller fraud: seller could sell to a friend really cheap and then sue buyer to make up the difference
3. Specific Performance
a. Remedy at law may be inadequate for buyers, so specific performance may be n
tract merges into deed so you can only sue on the 6 specific warranties in the deed
c. Note- if a QC deed no recourse b/c there are no warranties
G. Equitable Conversion
1. During the executory period, equitable title passes to the buyer and legal title remains with the seller until closing.
2. Situations in which this arises:
a. Does a judgment lien against seller attach?
· In equitable conversion jurisdictions the judgment lien does not attach because seller no longer has an interest in the real property, only a personal property interest.
· In Oklahoma, judgment lien would attach.
b. Are taxes owed?
· Under equitable conversion the buyer owes the taxes unless otherwise stated in the contract.
c. Who inherits?
· Under equitable conversion if seller dies leaving a will devising real property to A and personal property to B, then the purchaser will receive the land and B receives the money. A gets nothing b/c there was no interest in real property left.
· If Buyer dies and leaves a will devising real property to C and personal property to D, then C can enforce the contract and receive the land, but the money for the purchase will come out of D’s personal property.
3. Risk of Casualty Loss
a. If purchaser has risk then:
· He has no right to rescind the contract
· He is obligated to complete the purchase at the agreed price
b. If seller has risk then:
· Purchaser may rescind the contract
· Purchaser may have specific performance with abatement (discount) if damage is not substantial
c. English Rule- Common law in most states follows equitable conversion and risk of loss is on the buyer. (majority of states follow this)
d. American Rules
· Risk of loss on seller until closing (minority)
· Risk of loss on buyer, but seller holds insurance proceeds in trust for buyer (minority) (Gilles v Sprout)
· Massachusetts rule- threshold test must be met before it is determined who the risk of loss will be on
v Seller has risk of loss if improvements were material part of contract and damage was of a material value
v If change in value is not great or if the improvements didn’t constitute a material part of the contract, specific performance may be decreed- seller can force buyer to go through but they must give a reduction
· Uniform Vender/Purchaser Risk Act- the seller can’t enforce the contract if no legal title has passed or buyer does not have possession (adopted in 12 states, including Oklahoma)
4. Exceptions to Equitable Conversion (buyer’s risk)
a. Seller causes the damage
b. Equitable title has not passed to the buyer (ex. Title is not yet marketable)
c. Other exceptions are manipulated to reach a fair result.
