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Property II
University of Toledo School of Law
Cavalieri, Shelley

University of Toledo Law

Prof. Shelley Cavalieri

Spring 2012



a. The transfer of land from one party to another, the purchase and sale of land – The alienability of property

A. Buying and Selling Real Estate

i. Sales of Property: how sales happen, who are the different actors, and how they behave.

a. Two categories Costs of Land Transfers:

1. Price of Land: K itself; this number is in K

2. Transaction costs: Tends to be hidden costs in purchase and sale of land, in amount of time spent looking for home, costs hidden into price (i.e. inspection, lawyer, realtor commission)

b. Process in Buying:

1. How much you can afford to spend?

a) How much is/should be required as a down payment?

· When you buy and don’t put any $ down, you don’t have as much to lose, no equity is lost, and have higher payments

· Trad. Rule of requiring down payments of 20%, are becoming the norm again to limit financial risk

b) People’s month indebtedness should not be more that 1/3 of their monthly income

2. Search for property

a) Ideally constrained by how much you can afford

b) Get broker/real estate agent to help

3. Negotiations of Purchase & Sale agreement

a) Usually real estate agents involved, some states require Atty.

4. Form K: Reduces transaction costs

a) Executory Ks: K not immediately enacted, but has certain series of steps that must be enacted before K is fully binding

· Multi stage process, negotiate sale, but the K itself doesn’t mark the moment title transfers; title is not immediately transferred b/c

· Buyer & seller must do several things in time between K and Closing (b takes legal possession):

1) Buyer will conduct title search (process designed to insure the seller actually has good title to sell)

2) Mortgage Contingency Clause (built in between K and closing; builds in an exit for buyer in case mortgage falls through; *an escape for buyer

3) Inspection clause (usually allowing an inspection that if the inspection comes out badly, the K may be rescinded by either party; *Another escape valve

5. Closing & Transfer of Title

6. Lender gives proceeds of loan to the Seller, and Buyer gives down payment (S gets 2 chunks of cash: one from B’s loan and other directly from Buyer (down payment); S does several things w/ this money:

a) Pay off mortgage

b) Pay off broker commission

c) Pay legal fees & title insurance

d) Pocket proceeds (if any)- optional, sometimes the $ may not cover all expenses, and S may owe out-of-pocket

7. Transfer of Title from Seller to Buyer

a) B then signs promissory note and executes what can either be called a mortgage or deed of trust to the lender, and lender then has an interest in title

b) B becomes legal owner, however then the buyer cease to be legal owner in most jx, b/c the bank actually holds title to land, and in some jx bank has a primary and 1st right to take it away from Buyer, if B cease to be able to pay off mortgage (different theories in mortgages)

8. Buyer pays fees, B has to pay

9. Title insurance Co. records deed & mortgage @ clerks office

10. Title co. issues a policy of title insurance, and is legally obligated to:

a) Defend title in court against adverse claims, and

b) Pay $ if title is flawed or unmarketable

ii. Real Estate Brokers:

a. Historically, has always been enlisted by Seller, but increasingly has been used by Buyers

b. Brokers owe a fiduciary duty to Sellers:

1. Brokers owe fiduciary duties to the sellers; are to act in best interest of Seller first; Brokers have to exercise fidelity and good faith, and broker cannot put self in position opposed to the principal’s best interest (principals hire agent to exercise their interest for them)

2. Agent is required by law to put his Seller’s interest ahead of Agent’s own interest

c. Types of Brokers:

1. Listing Broker: works directly with seller

2. Selling Broker: owes fiduciary duties to seller, but works with buyer (Duty owed to Seller) *confusing kind (like a double agent)

· Selling agent’s Job is to go out and look for buyers for the seller they represent

· Problem: B usually doesn’t know that agent isn’t working for them, and tend to disclose too much information

3. Buyer’s Agent: Owe duty to Buyer; problem is they may not get paid b/c commission is from listing & selling broker’s commission,

a) But this may be negotiated for by buyer putting in K that S will give commission to buyer broker, since no privity exists between S & B’s brokers

4. Dual Agency: Listing or Selling broker for seller and buyer’s broker for buyer

· Obligation to owe simultaneous fiduciary duties to both parties, but have to reveal dual agency to both B & S, and both B & S have to agree to this arrangement

· Must be able to fulfill dual agency of fiduciary duties to both B & S

d. Broker’s Disclosure Requirements:

1. Some states require sellers agents to disclose that they represent seller not buyer

2. Many states require the disclosure of material defects that are known to broker, but Buyer doesn’t know, even if seller refuses to do so.

· Broker could possibly be liable to inform of defect

e. Broker’s Commission

1. Typically 6% commission, divided up

a) 3% to broker who represents Seller

b) 3% to broker who identified buyer

2. Traditional Rule- broker gets commission when broker provides a buyer who is ready, willing, and able to buy at the specified price or a price the buyer finds acceptable

a) ready, willing, and able = party that has made an offer and has the means to proceed

b) Under trad. Rule, the broker is entitled to commission, even if the buyer fails to close deal on mortgage

· Usually, in practice, they don’t pursue this rule, in order to maintain friendly relationship & good reputation

3. Minority: No commission until closing, unless Seller backs out

4. Best approach = put it in K when broker gets paid

· I.e. commission paid w/in … days of closing

f. Brokers may be becoming less useful, due to changes in technology and market changes

g. Multiple listing services, price fixing and anti-trus

o a hazard of litigation and is a

2. Substantial defect (not trivial)

3. Violates Zoning ordinances or covenants = encumbrances that expose owners to hazard of litigation

a) Is a hazard of litigation if the land that is to be purchased already violates the local law)

d. Marketable Title Rules:

1. Existence of covenants = unmarketable title, BUT they can be waived in the K

a) *Restrictive covenant is ALWAYS an encumbrance

· If K did not waive violation the K is in breach

2. The existences of a zoning restriction is NOT an encumbrance, but violation is

a) Zoning Ordinance is NOT an encumbrance, but it can be if it violates local law

3. Utility/Sewage Easements:

a) Majority: utility easements are encumbrances b/c it interferes in part of the land, but we waive them, b/c it makes property more marketable

b) Minority: easements known before purchase, or that are open, obvious, and notorious are NOT encumbrances

o Considered on notice of them and are therefore already contracted for them and does not render title unmarketable

e. Note: a distinction between public and private restrictions on land b/c of efficiency:

1. Private promises are attached to title and are easy to discover in a title search. So they render title unmarketable, unless they’ve been waived

2. Public zoning, to understand how it works, requires going through all of the local law, and that is too expensive. So, it is NOT an encumbrance, b/c for it be so would make transactions between parties too difficult

a) Zoning restrictions:

1) Are not equal to encumbrances

2) Marketable

· Ex: zoning ordinance, wetland laws, state, local & fed. Laws

f. If the title is presently unmarketable, the B may choose either:

1. To rescind the K and recover any down payment;

2. Sue for damages for breach of K;

3. Sue for specific performance w/ and abatement of the purchase price to compensate for defect in title


a. When seller goes to sell land, Seller has both equitable and legal title

b. At the end of the deal, the Buyer holds both equitable and legal title to the land

c. Between the K and Closing process, title is separated in intermediate stage:

1. Buyer holds equitable title

2. Seller holds legal title

a) S holds legal title and is treated as a trustee for the buyer

b) During this time, while Executive K is being worked out; S has claim to $ that is secured by a vendor’s lien on the land