Real Property Outline

Roberts: Real Property Security
I. Basics of Mortgages
A.     Mortgage: Security for the repayment or fulfillment of an obligation (typically a promissory note).
B.      Borrow money and put up land as collateral. If you don’t pay back the money, you lose the land.
C.      Promissory Note v. Mortgage: Promissory note (I promise to pay you back). Mortgage (Security to repay the loan).
II. Introduction to the Law of Real Estate Finance
A.     English Common Law
1.       The Common Law Mortgage
                                  a.          Traditional Mortgage: Fee simple subject to condition subsequent. Interest for several years, principle due date.
i.        Debtor D à Lender L and his heirs, but if D repays on time, D can reenter and terminate L’s estate.
                                 b.          Law Day: Day borrower had to repay the mortgage debt: “Pay the Creditor if he then be in England.” Then the borrower could re-enter and terminate the lender’s estate. But if he didn’t pay on Law Day then he lost his land.
2.       The Equity of Redemption (EOR): MR’s Right to Pay Late: Tender of debt within a reasonable time after law day.
                                  a.          Equity of Redemption is a NON-WAIVABLE RIGHT – you CANNOT CLOG the equity of redemption.
i.        RULE: Options tied to default are invalid clogs on the equity of redemption.
ii.      Lenders will try to get around this rule by giving itself the option to buy the mortgaged land at default for what the MR then owed, or for amount owed plus $1000, or for FMV minus debt – but these are all VOID
iii.    Even options to purchase property at any time after mortgage is made (regardless of default) are often void.
                                 b.          Rule Against Clogging: Renders unenforceable and void any agreement by the MR that are part of the original mortgage transaction and that purport to cut off or modify the equity of redemption.
i.        Creditors who don’t allow debtors to pay late received fines or imprisonment.
                                  c.          But: Although EOR cannot be waived contemporaneously with the execution of a mortgage,
EOR can be released subsequent to the execution of a mortgage.
i.        This will be closely scrutinized to insure creditor is not taking advantage of oppressed and powerless debtor.
3.       Foreclosure – Ends the right of redemption. ME’s right to obtain or sell land after equity of redemption has run.
                                  a.          After time, the Equity of Redemption became universal. Equity always guaranteed the right to redeem. 
                                 b.          Foreclosure is an action in equity by the ME. MR’s redemption right was forever barred after foreclosure.
                                  c.          Strict Foreclosure: On Default, MR automatically loses land to the ME, even if land was worth more than debt.
i.        Originally, this was all there was in England. Minority View: Now used only in CT and VT.
ii.      Courts saw that this was not fair. All lender was entitled to was the amount lended.
                                 d.          Public Sale by Sheriff: Majority Rule: Sell the land. Debtor gets whatever is left over after loan debt is paid.
i.        If sale yields less than mortgage debt à Deficiency Judgment
                                  e.          Acceleration Clause: Empowers ME to declare entire amount of a mortgage debt due in the event of MR default
B.      The American Development
1.       U.S. Jurisdictions recognize equity of redemption and refuse attempts to clog the redemption right.
2.       Foreclosure by Public Sale: Majority Rule: Typically guaranteed in statutes.
                                  a.          Judicial Foreclosure: Court proceeding, all interested persons are made parties. Time-consuming and costly.
3.       Statutory Redemption: (1/2 states) MR’s statutory right to redeem for specific period of time after foreclosure sale.
                                  a.          MR is not paying the debt to prevent foreclosure, he is paying the purchase price to redeem the property.
4.       Different Theories of Mortgage Law: Who is entitled to possession of the mortgaged land?
                                  a.          Title theory: ME has legal title and right to possession of mortgaged real estate until debt is satisfied/foreclosed.
i.        Rationale: Based on Mortgage history – Originally – Fee simple subject to condition subsequent. 
ii.      MR in possession = licensee/guest.
iii.    In the U.S., this ME right to possession is rarely, if ever, exercised until default by the MR.
                                 b.          Lien theory: MR retains both legal and equitable title, and thus the right to possession to the foreclosed land, until a valid foreclosure has occurred. Majority Rule and Restatement view.
i.        ME only has a security interest, can be treated as trespasser if interfering with MR’s possession of property.
ii.      Rationale: Title does not pass, because the mortgage is intended only as a security.
                                  c.          Intermediate theory: MR has right to possession until default when the ME has right to possession & legal title.
i.        NC Rule: Qualified Right to Possession.
                                 d.          Implications of Title v. Lien Theory: Joint Tenancy with a Right of Survivorship
i.        Title: Mortgage will sever JT and make it a TIC – MR gives title to ME.
ii.      Lien: Mortgage doesn’t sever JT. When borrowing JT dies, his lien dies w/ him & other JT gets whole thing.
5.       Mortgage with Power of Sale: Alternative of Judicial Foreclosure that is Cheaper and Quicker.
                                  a.          Gives ME right to conduct the sale instead of sheriff or judge. Half of states allow MPS if they are fair & public.
                                 b.          Problem: Courts prohibit mortgagee who was conducting the sale from purchasing the property.
i.        Rationale: Conflict of Interest: Prevent ME from purchasing land at a cheap price.
ii.      But problems if there is no other buyer at sale. Sometimes a ME has to be able to buy the property.
6.       Deed of Trust: Mortgage Variant: In many jdxns, most commonly used mortgage instrument.
                                  a.          Trustor (MR) conveys BA to trustee to be held as security for payment of debt by MR to the beneficiary (ME).
                                 b.          Essentially a mortgage with a power of sale, But a third party trustee conducts the sale.
                                  c.          Solves the MPS problem – enables the lender who is the beneficiary of the trust to buy the land at foreclosure.
C.      Basic Mortgage Law Principles
1.       The Long Term Installment Mortgage and the Acceleration Clause
                                  a.          Installment Mortgage: Amortization Schedule: Repaid in equal installments over a substantial number of years.
i.        Over time, payment to principle rises and payment to interest falls.
                                 b.          Differs from Balloon Mortgages: Equal installments for short term, Entire principal is due at the end of period.
                                  c.          Acceleration Clause: Enables ME to declare entire principal balance immediately due & payable if MR defaults.
2.       Basic Mortgage Priority Principles:
                                  a.          Rule: Foreclosure sale purchaser of a senior mortgage will acquire a title that is free and clear of all mortgages or other liens or interests subordinate to the mortgage being foreclosed – Foreclosure wipes out junior liens.
i.        2nd & 3rd MEs are made Unsecured Creditors and they have to sue debtor personally – the debt still exists.
                                 b.          Rule: Foreclosure sale purchaser of junior lien takes title subject to liens or interests senior to the lien foreclosed.
i.        Thus, the purchaser at such a foreclosure sale should be willing to pay, at most, an amount that equals the FMV of the land minus the amount of any senior liens thereon.
III. MORTGAGE SUBSTITUTES – “A wholly different jural species, so to be immune from security law.”
A.     Rationale: Avoidance of Mortgage Law: Works against debtor. Unsuccessful attempt by MEs to avoid mortgage issues.
1.       Lender’s perspective: EOR can slow things down by requiring a sale. 
2.       Debtor’s perspective: EOR prevents lender from taking advantage of debtor’s distress in order to get the property.
B.      Absolute Deed: Typical mortgage documents purport to convey deed, but also contain defeasance language. Absolute Deeds contain no defeasance language. Usually accompanied by oral agreement or collateral writing about reconveyance.
1.       Parol Evidence is admissible to establish that absolute deed was intended to be security device, and hence that debtor has EOR, since an oral agreement simply supplements deed concerning a matter about which the deed does not deal.
2.       Mortgage intent generally must be established by clear and convincing evidence.
3.       Factors to Establish an Absolute Deed as a Security Only (Mortgage):
                                  a.          Presence of a debt: Is there a subsisting obligation?
                                 b.          Relationship between the parties: Is one a debtor in distress?
                                  c.          Legal Representation.
                                 d.          Sophistication and Circumstances of Parties.
                                  e.          Actual statements of the parties: Sale accompanied by defeasance, redemption or re-conveyance language.
                                  f.          Adequacy of Consideration: Disparity between amount received by grantor and the FMV of land conveyed.
                                 g.          Possession of property: By debtor after deed was delivered.
                                 h.          Payment of real estate taxes.
                                   i.          Improvements by grantor.
4.        “If it sounds too good to be true, it is”
C.      Conditional Sales: Absolute Deed in Fee Simple + Contract or Option to Resell to Grantor.
1.       Absolute Deed plus separate document professing to be contract or option to resell to the grantor the deeded property.
2.       Another tool for ME to avoid mortgagor’s EOR. Also used to avoid state usury law, or for tax reasons.
3.       Extrinsic evidence is admissible to establish that a conditional sale is a mortgage.
4.       Some courts impose clear and convincing evidence burden, while others employ preponderance of evidence standard.
5.       Same Factors to Establish Mortgage/Security Interest as with Absolute Deed.
6.       Typical Elements of Conditional Sale:
                                  a.          MR in distress conveys land to savior.
                                 b.          Savior brings current the MR’s debt with the first ME.
                                  c.          Savior grants MR an option allowing MR to repurchase the property for the amount of money savior paid to bring current the loan in default, plus interest, of course.
                                 d.          If option not exercised, savior owns land free and clear of MR. (The option is part of the property.)
7.       General Rule: When a landowner who is in debt and in default transfers fee simple title to another person who provides the debtor with funds to pay off the first debt or bring it current, the conveyance of the fee is going to be subjected to close scrutiny to see if it was intended merely as security for the funds advanced.
8.       Benefits and Detriments for Buyer and Seller:
                                  a.          Bad for Debtor: May lose property, all equity. If option is not recorded, buyer could sell to a BFP (some states).
                                 b.          Good for Creditor: Windfall Profit, No hassle of foreclosure, will earn interest, at a minimum. 
i.        But if held to be a security, then creditor is without a mortgage and at the mercy of the courts.
D.     General Rule: When other credible evidence supports a finding that the parties intended to create a mortgage or debt transaction, a court will not be bound by specific contract or deed language negating such an intent.
E.      Installment Land Contracts (Poor Man’s Mortgage):
1.       ILC: Purchaser pays seller a certain amount over time until he is owner and no longer has to pay (includes interest).
2.       This is equivalent to a vendor purchase money mortgage, contract for deed, long term land K.
3.       Forfeiture Clause Rule: Vendor retains legal title until the contract price is fully paid and usually relies on a forfeiture clause in the event of vendee default.
                                  a.          Vendee is the equitable owner (risk of loss and appreciation of value).
                                 b.          Almost all ILCs provide that time is of the essence and that when a vendee defaults, vendor has the option to declare K terminated, to retain possession of premises and to retain all previous payments as liquidated damages.
                                  c.          However, few, if any, jurisdictions will automatically enforce such provisions, particularly when forfeiture would be inequitable (time and money spent on the K at forfeiture) or shock the court’s conscience.
i.        BUT: Forfeiture may appropriate if it does not shock the court’s conscience. 
1.       If there is bad faith by buyer, or if it is an investment property with a sophisticated party charging rent.
ii.      Terms of the ILC are superceded by property law. Equitable title is considered vested in debtor.
iii.    Note: Different result if the vendee abandons and has paid only minimal sum on the ILC.
iv.     Conscience Shocking Factors: Amount Paid by Buyer, Period of Possession, FMV at Default v. Sale.
                                 d.          Legislative limitation on forfeiture: 12 or so states have imposed statutory grace periods.
                                  e.          Judicial limitation on forfeiture:
i.        Implied Waiver by vendor (pattern of vendor acceptance of late payments): balance can be paid late.
ii.      Recognition of an equity of redemption (functional equivalent of mortgage equity of redemption).
iii.    Restitution: Courts will grant forfeiture, but require that the vendor refund payments made by the vendee to the extent they exceed the vendor’s actual damages.
iv.     Foreclosure as Mortgage (Rest.): Treated like mortgage when vendee makes more than nominal K payments
4.       Potential Remedies for ILC Vendor (when vendee breaches)
                                  a.          Forfeiture upon default: Never a sure thing for the seller.
i.        Forfeiture will not work if it shocks court’s conscience, but will work if the vendee doesn’t challenge it.
ii.      Moreover, deficiency judgments often don’t work on forfeiture b/c of the “electio