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Course: Property - Land Transactions Spring 2001
School: University of Detroit
Year: 2001
Professor: unknown
Course Outline provided by Legalnut.com

Chapter 7

The land transaction

 

  1. Introduction

 

A typical home purchase transaction in the US

  • The first step in a house-buying venture is to consult a real estate agent. . . amoung of the purchase price. . . and the time when occupancy can be given.

  • Second, the american lay public is not yet convinced that a lawyer is needed at this juncture and prefers to thrust itself into the hands of the real estate agent.

  • Third, the loan will be liquidated by level monthly payments, covering principal and interest, over a period of approximately 30 years.

  • The buyer will require two things creida dn the assurance that the seller has a good title to convey.

  • It is entirely possible that the buyer will now himself solicit credit directly from some lender and that the may also employ his own attorney for the purpose of protecting his interests.

  • If this arrangement is to proceed he will now have to sign an application for a mortgage and make a deposit sufficient to cover all anticipated closing costs.

  • Fourth, prior to this time the real estate agent will have obtained some sort of informal commitment for the necessary loan.

  • There it will be processed to determine whether the borrower is a good risk and a credit report will be obtained. An appraisal will also be ordered. The lender will then begin the preparation of the necessary papers for an FHA application and, simultaneously, will notify its attorney that an investigation of title will be required.

  • Fifth, with the investigation of title comes the most involved and time consuming part of the transfer process.

  • Registration is voluntary, but a failure to register may result in an innocent purchaser for value obtaining priority.

  • The title is then “back tracked” through the indices to determine whether any adverse interests have been created.

THREE BASIC FORMS of establishing title, all three are not employed simultaneously.

  1. Direct search of the records by the examining attorney and culminates in the attorney giving his clients a written statement, called a “certificate of title”

  • This system of direct examination still prevails in some places but is excessively laborious because the books which must be examined are quite numerous and unwieldy and indices are so primitive that most of the examiner’s time must be spent in separating the relevant from the irrelevant.

  • Where abstracts are used a lay individual or corporation makes a “take-off” or copy of all of the public records, and then re-indexes them so as to make the contents readily available. This constitutes the “title plant.”

    1. when the abstract is ordered the abstractor assembles all of the pertinent records and abstracts or abbreviates their content

    2. certifies this abstract on its face as containing a reference to all instruments of record pertaining to the particular title and sells it to the purchaser of the abstract.

    3. It is then examined by an attorney who has made a direct examination

    4. Once the abstract has been prepared, it is passed down from seller to buyer, being merely brought up to date by addenda at the time of each transfer. . . .

    • additional security, that a certificate of title insurance be obtained from a national company. This kind of insurance is issued by a corporate insurer on the basis of a certificate furnished to it by the local attorney.

    • It simply supplements other modes of title assurance, at somewhat greater costs, and does not interfere with conventional relationship between attorney and client.

    1. the third major method of establishing title is by local title insurance, a company issuing this kind of a policy maintains a title plant substantially like that of the abstractor.

    • it is probably that the abstract system is sill the most prevalent in the US and I will for that reason, assume its use in the typical house-buying transaction.

    • When the mortgagee’s attorney has been instructed to prepare for closing, his first step will be to get in touch with the vendor and arrange to have the abstract brought up to date.

    • Sixth, the function of the closing is to bring all interested parties together and to permit them to execute and deliver the necessary documents simultaneously with the payment of the purchaser price and the settlement of the costs of the transactions.

    • Seventh, following the closing

    1. the mortgagee’s attorney will send the deed and mortgage to the courthouse for the attachment of revenue stamps and recording and will pay the necessary fees.

    2. When the instruments are returned from the courthouse he will send the deed to the vendee and the abstract, mortgage, note (or bond) and a certificate of title to the mortgagee.

    3. In the meantime he will have sent to the title insurace company a final certificate of title and an application for a mortgagee policy.

    4. His certificate will show that title is vested in the mortgagor and that the mortgage is a valid first lien against the property. When the policy is issued it will be sent by the company to the mortgagee. . . .

    • the transfer is completed, except for the repayment of the loan, and the work of the conveyancer is ended

     

    State v. Buyers Service Co.

     

    In re opinion no. 26 of the committee of unauthorized practice of law

     

    1. The contract of Sale

    1. The Statute of Frauds

    • sought to make people more secure in their property and their contracts by making deceitful claims unenforceable.

    • §1-3 provided that, except for leases for less than three years, no interest in land could be created or transferred except by an instrument in writing signed by the party to be bound thereby.

    • §4 provided that no action shall be brought “upon any contract or sale of lands . . . or any interest in or concerning them. . . unless the agreement upon which such action shall be brought or some memorandum or note thereof shall be in writing, and signed by the party to be charged therewith.

      • to satisfy the statute of frauds a memorandum of sale must, at a minimum, be signed by the party to be bound, describe the real estate, and state the price.

      • Where a price has been agreed upon, most courts regard it as an essential term that must be set fourth. But if no price was agreed upon, a court may imply an agreement to pay a reasonable price.

      • Exceptions to the statute of frauds court have created two principal exceptions to the Statute of Frauds: part performance and estopel.

      Part Performance – allows the specific enforcement of oral agreements when particular acts have been performed by one of the parties to the agreement

      • one theory is that the acts of the parties substantially satisfy the evidentiary requirements of Statute

      • Such acts include the buyer’s taking possession and paying all or part of the purchase price or making valuable improvements.

      • The doctrine of part performance originated in equity in suits for specific performance and in most jurisdictions does not apply to actions at law for damages.

      Estoppel – applies where unconscionable injury would result from denying enforcement of the oral contract after one party has been induced by the other seriously to change his position in reliance on the contract.

      • estoppel, though originating in equity, has long been recognized as a defense in law

       

      Hickey v. Green

       

       

       

       

       

       

       

       

       

       

      1. Marketable title

      • an implied condition of a contract of sale of land is that the seller must convey to the buyer a “marketable title”

      • if the seller cannot convey a marketable title, the buyer is entitled to rescind the contract.

      • Is a title not subject to such reasonable doubt as would create a just apprehension of its validity in the mind of a reasonable, prudent and intelligent person, one which such persons, guided by competent legal advice, would be willing to take and for which they would be willing to pay fair value.

       

      Lohmeyer v. Bower

       

       

       

       

       

       

       

       

       

      Conklin v. Davi

       

       

       

       

       

       

       

       

       

      • measure of damages – the difference between the contract price and the market value of the property on the date of breach.

      • Specific performance – is a remedy that a court of equity, in its sound discretion, may grant to a buyer or seller whose damages remedy is inadequate.

      • When the buyer asks for specific performance, courts usually grant it, saying that each parcel of land is “unique” and therefore money damages cannot be an accurate substitute.

      • When the seller asks for specific performance, courts ordinarily grant it on the theory that the seller may find it difficult “to prove with reasonable certainty the difference between the contract price and the market price of the land”

       

      Note: Equitable Conversion

      • is that if there is a specifically enforceable contract for the sale of land, equity regards as done that which ought to be done.

      • The buyer is viewed in equity as the owner from the date of the contract (thus having “equitable title”); the seller has a claim for money secured by a vendor’s lien on the land. The seller is also said to hold the legal title as trustee for the buyer.

      • risk of loss – has been used by some courts to determine whether the seller or the purchaser takes the loss when the premises are destroyed between signing the contract of sale and the closings and the contract has no provision allocating the risk of lass.

      • Inheritance – equitable conversion has been applied in situations where one of the parties to a contract for the sale of land dies and the issue arises whether the decedent’s interest is real property or personal property.

      • If equitable conversion has occurred, the seller’s interest is personal property (right to the purchase price), and the buyer is treated as owner of the land.

       

      1. The Duty to Disclose Defects

      Stambovsky v. Ackley

       

       

       

       

       

       

       

       

       

       

       

      Johnson v. Davis

       

       

       

       

       

       

       

       

       

       

      • an increasing majority of state has put on the seller the duty to disclose all known defects, equating nondisclosure with fraud or misrepresentation.

      • Caveat Emptor is steadily being eroded.

      • In many state statutes have been enacted requiring the seller to deliver to prospective buyers a written statement disclosing facts about the property.

      • In some states requireing disclosure, there is no duty to disclose violations of building codes, zoning regulations, or private restrictive covenants.

       

      • The defect must be “material” to be actionable. 1 of 2 tests of materiality is used:

      • an objective test of whether a reasonable person would attach importance to it in deciding to buy or

      • a subjective test of whether the defect “affects the value or desirability of the property to the buyer.

        • In CA the seller must disclose, among other things, any “neighborhood noise problems or other nuisances.

        • Several state have enacted statutes shielding sellers from a failure to disclose psychological or prejudicial factors which might affect market value, such as a murder within the house or that a former occupant dies of AIDS. These statutes known as stigma statutes.

        • Under MEGAN’S LAW, enacted in several states, certain convicted sex offenders are required to register with a local police station. The local chief of police must notify the community of the registrant’s presence in the community.

        • Brokers duty to disclose – the court held that a real estate broker representing the seller has an affirmative duty to conduct a reasonably competent and diligent inspection of the residential property for sale and to disclose to prospective purchasers all facts materially affecting the value of desirability of the property that such an investigation would reveal.

        • Where statutes require the seller to disclose, the broker may be able to avoid liability by passing on to the buyer a written disclosure statement from the seller.

        • As a result, cautious buyers have spawned a fast-growing environmental assessment industry to discover as much as they can about possible contamination before they close a deal. They want to know about all previous owners and occupants of the property for a great many years back, as well as all uses to which the property has been put

         

        Note: Merger

        • the merger doctrine principally applies to questions of title of quantity of land. If a contract, for instance, calls for marketable title, and the buyer accepts a deed with no warranties, the buyer cannot thereafter upon discovery of a title defect sue on the contract provision requiring the seller to furnish marketable title.

         

        1. The Duty to Disclose Defects

        • sales of real estate may also give rise to a similar warranty. Suits on the warranty can arise only after the closing has taken place and the P has accepted the deed. Nonetheless, because such suits are closely connected with suits against the seller for nondisclosure, we take up the implied warranty of quality at this point.

         

        Lempke v. Dagenais

         

         

         

         

         

         

         

         

         

         


        1. The deed

        1. Warranties of Title

        • to wean lawyers away from verbosity, many states have statutes provided a short form of deed that may be used. The short form deed contains all the essential elements required in order for an instrument to be a conveyance: grantor, grantee, words of grant, description of the land involved, signature of the grantor, and, sometimes, attestation or acknowledgment.

        • In the US there are three types of deeds:

        1. general warranty deed – warrants title against all defects in title, whether they arose before or after the grantor took title

        2. special warranty deed – contains warranties only against the grantor’s own acts but not the acts of others. Thus if the defect is a mortgage on the land executed by the grantor’s predecessors in ownership, the grantor is not liable.

        3. quitclaim deed – contains no warranties of any kind. It merely conveys whatever title the grantor has, if any, and if the grantee of a quitclaim deed takes nothing by the deed, the grantee cannot sue the grantor.

        • consideration – is is customary to state in a deed that some consideration was paid by the grantee, in order to raise a presumption that the grantee is a bona fide purchaser entitled to the protection of the recording acts against prior unrecorded instruments.

        • Description of tract – a deed must contain a description of the parcel of land conveyed that locates the parcel by describing its boundaries. Customary methods of description include

        1. references to natural or artificial monuments and, from the starting point, reference to directions and distances (“meets and bounds”)

        2. references to a government survey, recorded plat, or some other record; and

        3. reference to the street and number or the name of the property.

        • ultimately courts laid down a hierarchy of rules to decide cases of conflicting descriptions:

        Natural monuments (trees) prevail over

        artificial monuments (surveyor’s states) which prevail over

        references to adjacent boundaries (to hunter’s property line) which prevail over directions (northwest) which prevail over

        distances (30 feet) which prevail over

        area (5 acres) which prevail over

        place names (quinn farm)

        these rules were designed to discover the intent of the parties, who probably relied more on specific, visible landmarks than on measurements of the eye.

        • seal - are no longer required.

        • Forgery – a forged deed is void. The grantor whose signature is forged to a deed prevails over all persons, including subsequent bona fide purchasers from the grantee who do not know the deed is forged.

        • On the other hand, most courts hold that a deed procured by fraud is voidable by the grantor in an action against the grantee, but a subsequent bona fide purchaser from the grantee who is unaware of the fraud prevails over the grantor. . . the law generally places the loss on th eperson who could have prevented the loss to the other.

         

        THERE ARE 6 EXPRESS WARRANTIES

        1. a covenant of seisin – the grantor warrants the he owns the estate that he purports to convey

        2. a covenant of right to convey – the grantor warrants that he has the right to convey the property.

        • in most instances this covenant serves the same purpose as the covenant of seisin, but it is possible for a person who has seisin not to have the right to convey 9a trustee may have legal title but be forbidden by the trust instrument to convey it

        • a covenant against encumbances – the grantor warrants that there are no encumbrances on the property.

        • - encumbrances include, among other items, mortgages, liens, easements, and covenants.

          1. A covenant of general warranty – the grantor warrants that he will defend against lawful claims and will compensate the grantee for any loss that the grantee may sustain by assertion of superior title

          2. A covenant of quiet enjoyment – the grantor warrants that the grantee will not be distributed in possession and enjoyment of the property be assertion of superior title.

          • this covenant is, for all practical purposes, identical with the covenant of general warranty and is often omitted from general warranty deeds.

          • a covenant of further assumptions – the grantor promises that he will execute any other documents required to perfect the title conveyed.

          •  

            The first three covenants are phrased in the present tense and are called present covenants.

            The last three covenants are phased in the future tense and are called future covenants.

            DISTINCTION:

            • a present covenant is broken, if ever, at the time the deed is delivered.

            • Either the grantor owns the property at that time, or he does not; either there are existing encumbrances at that time, or there are none.

            • A future covenant promises that the grantor will do some future act, such as defending against claims or third parties or compensating the grantee for loss by virtue of failure of title

            • A future covenant is not breached until the grantee or his successor is evicted from the property, buys up the paramount claim, or is otherwise damaged.

            • The State of Limitations begins to run on a breach of a present covenant at the date of delivery of the deed. It begins to run on a future covenant at the time of eviction, or when the covenant is broken in the future.


            Brown v. Lober

             

             

             

             

             

             

             

             

             

            Frimberger v. Anzellotti

             

             

             

             

             

             

             

             

            • the measures of damages for breach of a covenant of seisin is the return of all or a portion of the purchase price.

            • The measure of damages for a breach of a covenant against encumbrances is different. If the encumbrances is easily removable (for example, a mortgage) the measure of damages is the cost of removal.

            • If the encumbrances is not easily removable (for example, a restrictive covenant or easement), the measure of damages is the difference in value between the land with the encumbrance and without the encumbrance.

            • The measure of damages for breach of covenant against encumbrances generally follows the rules of contract law by putting the grantee in as good a position as if the covenant of warranty had not been breached , thus giving the grantee the benefit of her bargain.

             

            • future covenants run with the land to all successors in interest of the grantee. Hence if A gives a general warranty deed to B, and B sells to C, A is liable to C on any of the future covenants on A’s deed.

            • a present covenant, if not breached when the deed is delivered, can never be broken, and it is senseless to say it either runs or does not run with the land.

            • If a present covenant is breached when the deed is delivered, the grantee no longer has a covenant but, instead, has a cause of action for breach of the covenant.

             

            Rockafellor v. Gray

             

             

             

             

             

             

             

             

             

             

            • first a covenant to “run with the land” to a successor claimant, the convenantee must convey to the successor either titile or possession, some “thing” to which the covenant can “attach” and with which it can “run”

            • second, future covenants of warranty and quiet enjoyment are intended to secure compensation to the purchaser when his quiet possession is disturbed.

            • Judgements against the convenator may be uncollectible because the convenantor is insolvent or owns no property, or the covenantor’s property is fully within statutory exemptions to creditors’ claims of is fully cowered by a mortgage.

             

            Note: Estoppel by deed

            • Suppose that a grantor conveys land to a grantee that the grantor does not own, and the grantor warrants the title to the land.

            • If the grantor subsequently acquires title to the land, the grantor is estopped to deny that he had title at the time of the deed and that title passed to the grantee.

             

            • Since the grantee could sue the grantor on the warranty, when the grantor later acquires title, and compel the delivery of a new conveyance, the law eliminates the necessity of a lawsuit and automatically passes the subsequently acquired title to the grantee

            • Estoppel by deed originated in cases involving warranty deeds, but it has been extended by courts to quitclaim deeds if the deed represents that the grantor had title.

             

            1. Delivery

            • To be effective, a deed must be delivered with the intent that it be presentaly operative.

            • In the first case, the grantor intends to make the immediate transfer of title to the grantee.

            • In the second, the grantor intends to transfer title when all conditions are fulfilled. If there is an enforceable contract of sale, the escrow agent is the agent of both the grantor and grantee.

            • The grantor cannot recall the deed from the agent. When the agent deliers the deed to the grantee, if necessary to carry out the parties’ intent and do equity, the title of the grantee will “relate back” to the date the grantor handed the deed to the agent.

            • EXAMPLE: if the grantor dies before the escrow agent delivers the deed, the delivery of the deed by the agent is treated as if it occurred before the grantor’s death.

            • By this fiction the rule that a will is required to pass title at death is avoided. Title is regarded as having been transferred to the grantee during the grantor’s life.

            • Problems regarding delivery usually arise in donative transactions

             

            Sweeny, administratrix v. sweeny.

             

             

             

             

             

             

             

             

             

            • Where the deed is handed over to the grantee but the extrinsic evidence shows that the deed is to “take effect” at the death of the grantor, a few courts have held that there is no delivery, that the transfer is testamentary and void.

             

            Note: Delivery Without Handing over

            • to deliver a deed of land, it is not necessary that the deed be “handed over” to the grantee. “delivery” means no more than an act that evinces an intent to be immediately bound by the transfer

            • The most common case of delivery without manual tradition arises where the grantor executes a deed and places it in a safe deposit box,

            • If the grantor intends to pass title or a future interest to the grantee now, there has been a delivery even though possession may be postponed until the grantor’s death.

            • Layperson often do not know of the sharp distinction the law draws between an inter vivos transfer of land, requiring the delivery of a signed instrument, and a transfer at death, requiring an instrument complying with the statute of wills.

             

            Rosengrant v. Rosengrant

             

             

             

             

             

             

             

             

             

            • recoverable trust – the trust instrument may also provide that the survivor can revoke the trust. . . it avoid probate because you don’t need to go to probate court to get legal title.

            • Probate is necessary only when the beneficiary is not entitled to property under some valid inter vivos instrument and must get legal title changed to the beneficiary at the owner’s death.

            • Why is a recoverable trust valid whereas, in some jurisdictions, a recoverable deed is not? At law, courts focus on whether the deed has been delivered and whether the grantor has lost dominion and control.

            • Delivery of a declaration of trust is not required if the grantor is the trustee.

            • A revocable trust functions very much like a will, but avoids probate. Revocable trusts are popular with people who want to pass property at death without the cost, delay, and publicity of probate.

             

            1. The Mortgage

             

            • banks, savings and loan association and other financial institutions are in the busines of providing the money needed to finance the purchase of homes.

            • Once you make a loan application, after which the lender checks their credit rating, earnings, and job security to determine if the Byars are an acceptavle credit risk. If the loan is approved, the lender will issues its commitment to provide financing on specified terms within a specified period.

            • Generally the lender will set the terms and requirements of the mortgage with strict inflexibility; the buyers is asked to sight a “standard form” used in the jurisdiction.

            • PROCEDURE

            • To borrow the money from the lender, the borrower must give the lender a note and mortgage.

            • The note creates personal liability, but in case of default the lender will want to be able to reach, with priority over other creditors of the borrowers, some specific property.

            • Borrowers are mortgaGORS

            • Bank is the mortgaGEE

            • If the mortgagors fail to pay their note or do not otherwise perform their obligations, the lender, either at private sale or under judicial supervision, depending on the jurisdiction, can have the property sold FORECLOSE THE MORTGAGE and apply the proceeds of sale to the amount due on the note.

            • the interest is known as EQUITY short for Equity of Redemption.

             

            Murphy v. Financial Development Corp

             

             

             

             

             

             

             

             

             

            Bean v. Walker

             

             

             

             

             

             

             

             

             

             

             

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