Competing Claimants

Question 1

Adverse Possession Generally

Answer 1

Title to real property may be acquired by adverse possession. Title by adverse possession results from the operation of the statute of limitations for trespass. If an owner does not, within the statutory period, take action to eject a possessor who claims adversely to the owner, the title vests in the possessor.

Question 2

Requirements for Adverse Possession

Answer 2

To establish title by adverse possession, the possessor must show

(i) an actual entry giving exclusive possession that is

(ii) open and notorious,

(iii) adverse (hostile), and

(iv) continuous throughout the statutory period.

Question 3

Running of Statute

Answer 3

The statute of limitations begins to run when the true owner can first bring suit. Filling a suit will not stop the period from running, however, the suit must be pursued to judgment.

Question 4

Actual and Exclusive Possession

Answer 4

An adverse possessor will gain title only to land she actually occupies.

If an adverse possessor actually occupies a reasonable portion of the parcel, and her occupation is under color of title (i.e., a document that purports to give title but does not actually do so) to the entire parcel, then she will be deemed to have constructively possessed the entire parcel.

Exclusive means that the possessor is not sharing with the true owner or the public. Two or more people may obtain title by adverse possession, they take title as tenants in common.

Question 5

Open and Notorious Possession

Answer 5

Possession is open and notorious when it is the kind of use the owner would make of the land. The adverse possessor’s occupation must be sufficiently apparent to put the true owner on notice that a trespass is occurring.

Question 6

Hostile

Answer 6

The hostility requirement is satisfied if the possessor enters without the owner’s permission. The adverse possessor’s state of mind is irrelevant. When possession starts permissively, possession does not become adverse until the possessor makes clear to the true owner the fact that she is claiming it “hostilely.”

Question 7

Co-Tenants

Answer 7

Possession by one co-tenant is usually not adverse to his co-tenants because each co-tenant has the right to possession of all the property. A co-tenant must oust others or make an explicit declaration that he is claiming exclusive dominion to create adverse possession.

Question 8

Grantor Stays in Possession

Answer 8

Where a grantor stays in possession of land after her conveyance, she is presumed to be there with permission of the grantee. (Likewise, if a tenant remains in possession after the expiration of the lease, he is presumed to have permission of the landlord.)

Question 9

Continuous Possession

Answer 9

An adverse claimant’s possession must be continuous throughout the statutory period.

Also, there need not be continuous possession by the same person; and adverse possessor can tack her own possession onto the periods of adverse possession of her predecessors, but privity is required.

Question 10

Payment of Property Taxes

Answer 10

Most do not require the adverse possessor to pay taxes on the property, but consider such payment good evidence of a claim of right.

Question 11

Disability

Answer 11

The statute of limiations does not begin to run if the true owner was under some disability to sue when the cause of action first accrued. Only the disability of the owner existing at the time of the cause of action arose is considered.

Question 12

Adverse Possession and Future Interests

Answer 12

The statute of limitations does not run against a holder of a future interest until the interest becomes possessory.

Question 13

Up until the time the adverse possession period has run, the true owner can:

Answer 13

Have the adverse possessor evicted off the land and sue for damages (reasonable rental value)

Adverse possessor is a trespasser until statute of limitation runs

Question 14

Writing Requirement for Land Sale Contract

Answer 14

Statute of Frauds must be satisfied

A contract must be in writing and contain the signature of the party to be charged and the essential terms. Part performance can take a contract out of the statute.

Question 15

Doctrine of Equitable Conversion

Answer 15

Under this doctrine, once a contract is signed, equity regards the buyer as the owner of the real property.

The seller’s interest (the right to the proceeds of sale) is considered personal property.

The bare legal title that remains in the seller is considered to be held in trust for the buyer.

The right to possession follows the bare legal title, however, thus the seller is entitled to possession until closing.

Question 16

Risk of Loss

Answer 16

If property is destroyed (without fault of either party) before closing, the majority rule places the risk on the buyer.

Some states, however, have enacted the Uniform Vendor and Purchaser Risk Act, which places the risk on the seller unless the buyer has title or possession at the time of loss.

[Even though the risk of loss is on the buyer, if the property is damaged or destroyed, the seller must credit any fire or casualty insurance proceeds he receives against the purchase price the buyer is required to pay].

Question 17

Effect of Death on Land Sale Contract

Answer 17

Under the doctrine of equitable conversion, if a party to a land sale contract dies before the contract is completed, the seller’s interest passes as personal property and the buyer’s interest passes as real property.

Thus, if the seller dies, bare legal title passes to his heir or devisees, but they must give up title to the buyer at closing. If the buyer dies, his heir or devisees can demand a conveyance of the land at closing. [If the property is specifically devised by will, check to see whether ademption or exoneration rules apply].

Question 18

What is Marketable Title

Answer 18

Every contract contains an implied covenant that the seller will provide marketable title (i.e. title reasonably free from doubt) at closing. It need not be perfect title, but it must be free of questions that present an unreasonable risk of litigation.

Question 19

Types of Defects (Marketability)

Answer 19

Types of Defects

(a) Record Chain Title (AP, Contingent Future Interests
(b) Encumbrances (Mortgages, Liens, Easements, Covenants, Encroachments)
(c) Zoning Restrictions (Existing violation)
(d) Waiver

Question 20

Time of Marketability

Answer 20

If the seller has agreed to furnish title at the date of closing, the buyer cannot rescind prior to that date on grounds that the seller’s title is not marketable.

Note that in an installment land contract, the seller need not provide marketable title until the buyer has made his last payment.

[Once the closing occurs and the deed changes hand, the seller is no longer liable on the implied covenant of marketability of title. The seller is then liable only for express promises made in the deed.]

Question 21

Remedy if Title Not Marketable

Answer 21

The buyer must notify the seller that his title is unmarketable and give him reasonable time to cure the defects. If the seller fails to cure the defects, the buyer’s remedies include rescission, damages, specific performance with abatement, and a quiet title suit.

[A quitclaim deed does not in any way affect the implied covenant to provide marketable title.]

Question 22

Time of Performance

Answer 22

Courts presume that time is not of the essence in real estate contracts. Thus, the closing date is not absolutely binding, and a party late in tendering her own performance can still enforce the contract if she tenders within a reasonable time after the closing date.

Question 23

Presumption of Time of the Essence

Answer 23

Time is of the essence if:

(i) the contract so states,
(ii) the circumstances indicate that was the parties’ intent, or
(iii) one party gives the other notice that time is of the essence.

If time is of the essence, a party who fails to tender performance on the closing date is in breach and may not enforce the contract.

Even if time is not of the essence, a party who is late in tendering performance is liable for incidental losses.

Question 24

Remedies for Breach of Sales Contract

Answer 24

The nonbreaching party is entitled to damages (difference between contract price and market value on date of breach, plus incidental costs) or, because land is unique, specific performance. Seller can keep earnest money (liquidated damages - provided in k).

Question 25

Warranty of Fitness or Quality

Answer 25

Contracts of sale a deeds of real property carry no implied warranty of quality or fitness for purpose. However, a majority of courts now recognize a warranty of fitness or quality in the sale of a new house by a builder.

Question 26

Sale of Existing Land and Buildings: Liability for Defects

Answer 26

The seller of existing buildings may be liable to the purchaser for defects such as a leaky roof, flooding basement, or termite infestation, on any of several theories:

(1) Misrepresentation (Fraud) - Similar to Tort Analysis
(2) Active Concealment.
(3) Failure to Disclose.

**Disclaimers do not erase the seller’s liability for these defects

Question 27

Active Concealment

Answer 27

The seller will be liable for defects, even without making any statements, if he took steps to conceal the defects.

Question 28

Failure to Disclose

Answer 28

Most states hold a seller liable for failure to disclose defects if:

(i) he knows or has reason to know of the defect;
(ii) the defect is not apparent, and the seller knows that the buyer is unlikely to discover it upon ordinary inspection; and
(iii) the defect is serious and would probably cause the buyer to reconsider the purchase if known.

Question 29

Title Insurance

Answer 29

A title insurance policy insures that a good record title of the property exists as of the policy’s date and promises to defend the record title if litigated. Title insurance protects only the person who owns the policy and does not run with the land to subsequent purchasers.

Question 30

Deed Formalities

Answer 30

A deed must be in writing, be signed by grantor, and reasonably identify the parties and land.

Thus, a deed may validly convey real property by inter vivos gift so long as the following requirements are met:

(i) donative intent,
(ii) delivery, and
(iii) acceptance.

Question 31

Defective Deeds

Answer 31

A void deed will be set aside by the court even if the property has passed to a bona fide purchaser, but a voidable deed will be set aside only if the property has not passed to a bona fide purchaser.

Question 32

Fraudulent Conveyances

Answer 32

Even when a deed complies with the required formalities, it may be set aside by the grantor’s creditors if it was made:

(i) with actual intent to hinder, delay, or defraud any creditor of the grantor, or
(ii) without receiving reasonably equivalent value in exchange for the transfer, and the debtor was insolvent or became insolvent as a result of the transfer.

However, the deed will not be set aside as against any grantee who took in good faith and paid reasonably equivalent value.

Question 33

Reformation of Deeds

Answer 33

A deed will be reformed if it does not represent the parties’ agreement because of:

(i) mutual mistake,
(ii) a scrivener’s error, or
(iii) a unilateral mistake caused by misrepresentation or other inequitable conduct.

Question 34

Deed Delivery: In general

Answer 34

Delivery refers to the grantor’s intention to make a deed presently effective even if possession is postponed.

Delivery may be satisfied by manual delivery, notarized acknowledgment by the grantor and recordation, or anything else. Parol evidence is admissible on the issue of intent to deliver, but not to show that delivery was conditional.

[Title passes upon delivery. It cannot be canceled or taken back. Thus, if a fact pattern has the grantee returning a deed to the grantor, this has no effect; it is not a cancellation or a reconveyance. To return title to the grantor the grantee must draw up a new deed and deliver it to the grantor.]

Question 35

Retention of Interest by Grantor or Conditional Delivery

Answer 35

Retention of control or interest by the grantor indicates a lack of intent to pass title.

Failure to record a delivered deed does not affect the passage of title even if the parties believe that the deed is ineffective until recording.

A properly executed and delivered deed that provides that title will not pass until the grantor’s death is valid and creates a future interest in the grantee.

If a deed is absolute on its face but delivered with an oral condition, the condition is disregarded and delivery is absolute.

Question 36

Transfer to Third Party with No Conditions

Answer 36

If the grantor gives a deed to a third party with instructions to give it to the grantee, there is a valid delivery. If the grantor fails to give instructions, the validity of the delivery depends on whether the third party could be considered the grantor’s agent. If so, there is no delivery.

Question 37

Transfer to Third Party with Conditions (Commercial Transactions)

Answer 37

A valid conditional delivery occurs when a grantor gives a deed to a third party with instructions to give it to the grantee when certain conditions occur. Parol evidence is admissible to show that delivery is conditional. (Remember that the rule is contra where the grantor gives the deed directly to the grantee).

Question 38

Grantor’s Right to Recover Deed

Answer 38

A grantor can revoke only if:

(i) the condition has not yet occurred, and
(ii) there is no enforceable written contract to convey.

Question 39

Covenants for Title Generally

Answer 39

There are three types of deeds used to convey property interests other than leaseholds: the general warranty deed, the special warranty deed, and the quitclaim deed. The difference among these deeds is the **scope of title assurance. **

Question 40

Covenants in a General Warranty Deed

Answer 40

The following are the usual covenants for title contained in a general warranty deed:

(1) Covenant of Seisin
(2) Covenant of Right to Convey
(3) Covenant Against Encumbrances
(4) Covenant for Quiet Enjoyment
(5) Covenant of Warranty
(6) Covenant for Further Assurances

Question 41

Covenant of Seisin

Answer 41

The grantor covenants that she has the estate she purports to convey. She must have both title and possession at the time of grant. This present covenant may be breached at the time of conveyance and cannot be enforced by remote grantees.

Question 42

Covenant of Right to Convey

Answer 42

The grantor covenants that she has the authority to make the grant. Title alone will satisfy this covenant. This present covenant may be breached at the time of conveyance and cannot be enforced by remote grantees.

Question 43

Covenant Against Encumbrances

Answer 43

The grantor covenants against the existence of physical or title encumbrances. This present covenant may be breached at the time of conveyance and cannot be enforced by remote grantees.

Question 44

Covenant for Quiet Enjoyment

Answer 44

The grantor covenants that the grantee will not be disturbed in possession by a third party’s lawful claim of title. This future covenant may be breached only upon disturbance of the grantee’s possession and may be enforced by future grantees since they run with the grantee’s estate.

Question 45

Covenant of Warranty

Answer 45

The grantor agrees to defend against reasonable claims of title by a third party and to compensate the grantee for any loss sustained by the claim of superior title. This future covenant may be breached only upon disturbance of the grantee’s possession and may be enforced by future grantees since they run with the grantee’s estate.

Question 46

Covenant for Further Assurances

Answer 46

The grantor promises to perform acts reasonably necessary to perfect title conveyed. This future covenant may be breached only upon disturbance of the grantee’s possession and may be enforced by future grantees since they run with the grantee’s estate.

Question 47

Statutory Special Warranty Deed

Answer 47

In many states, use of the word ‘grant’ in a deed creates by implication two limited assurances against acts of the grantor (not her predecessors):

(i) that the grantor has not conveyed the same estate or any interest therein to anyone other than the grantee; and
(ii) that the estate is free from encumbrances made by the grantor.

Question 48

Quitclaim Deeds

Answer 48

A quitclaim deed releases whatever interest the grantor has. No covenants of title are included or implied.

Question 49

Estoppel by Deed

Answer 49

If the grantor purports to convey an estate in property that she does not then own, her subsequent acquisition of the estate will automatically inure to the benefit of the grantee. This doctrine applies where the conveyance was by warranty deed, or where the deed purported to convey a particular estate. Is not usually applicable to quitclaim deeds.

Question 50

Rights of Subsequent Purchasers

Answer 50

Most courts hold that title inures to the benefit of the grantee only as against the grantor. Thus, if the grantor transfers her after-acquired title to a bona fide purchaser for value, the BFP will prevail over the original grantee.

Question 51

Recording Acts: In General

Answer 51

Recording acts generally protect all BFPs from secret interests previously created and provide a mechanism for earlier grantees to give notice through recordation. Proper recordation gives constructive notice of the first conveyance to everyone, so there can be no subsequent BFPs.

Question 52

Notice Statutes

Answer 52

Under a notice statute, a subsequent BFP prevails over a prior grantee who failed to record. The key is that the subsequent purchaser had no actual or constructive notice at the time of the conveyance.

Question 53

Race-Notice Statutes

Answer 53

Under a race-notice statute, a subsequent BFP is protected only if she takes without notice and records before the prior grantee.

Question 54

Race Statutes

Answer 54

Under a pure race statute, whoever records first wins. Notice is irrelevant.

Question 55

Bona Fide Purchasers

Answer 55

To be a BFP, a person must be a purchaser, without notice (actual, constructive, or inquiry), and pay valuable consideration.

Question 56

Purchaser from Donee, Heir, or Devisee

Answer 56

A purchaser from a donee, heir, or devisee of the record owner is protected against prior unrecorded conveyance of the record owner.

Question 57

Judgment Creditors

Answer 57

Most states permit a plaintiff who obtains a money judgment to place a judgment lien on the defendant’s real property by filing the judgment in the appropriate county office. The majority, however, hold that such a judgment creditor is not protected by the recording statute against a prior unrecorded conveyance by the defendant.

Question 58

Transferees from Bona Fide Purchaser: What is the Shelter Rule

Answer 58

A person who takes from a BFP will prevail against any interest the transferor-BFP would have prevailed against. This is true even if the transferee had actual notice of a prior unrecorded conveyance. This rule does not, however, help a transferee who previously held title; she cannot ‘ship through’ a BFP to get good title.

Question 59

Purchaser Under Installment Land Contract

Answer 59

In most states, a purchaser under an installment land contract is protected only to the extent of payment made. In a dispute with a prior claimant, the court may award the purchaser:

(i) a share of the property as a tenant in common equal to the proportion of payments made;
(ii) a lien on the property to the extent of the amount paid; or
(iii) the entire property, subject to a lien on the property to the extent of the balance still owed.

Question 60

Actual Notice

Answer 60

Actual notice includes knowledge obtained from any source (e.g. newspaper, word-of-mouth).

Question 61

Constructive/Record Notice

Answer 61

A subsequent purchaser will be held to have record notice only if the deed in question is recorded ‘in the chain of title,’ which means that it is recorded in such a manner that as searcher could reasonably find it. [Although no one has a legal duty to perform a title search, a subsequent purchaser will be charged with the notice that such a search would provide, whether or not she actually searches.

Question 62

Wild Deed

Answer 62

A wild deed is a recorded deed that is not connected to the chain of title. It does not impart constructive notice because a subsequent purchaser could not feasibly find it.

Question 63

Deeds Recorded Before Grantor Obtained Title

Answer 63

There is a split of authority on whether a recorded deed, received from a grantor who had no title when conveyed but who afterwards obtains title, imparts constructive notice to the subsequent purchasers. Most courts say it does not, and a BFP will win on the grounds that the deed is not in his chain of title. The minority view protect the prior grantee over the BFP on an estoppel by deed theory.

Question 64

Deed in Chain Referring to Instrument Outside Chain

Answer 64

Reference to another instrument in a recorded document that is in the chain of title may impart constructive notice of the instrument referred to even if it is unrecorded or not itself in the chain of title.

Question 65

Restrictive Covenants: Deeds from Common Grantor

Answer 65

Courts are split on whether deeds to adjacent lots or lots in a subdivision executed by the same grantor and containing restrictions and easements involving the subject lot, are within the chain of title of the subject lot. The better view is that they are not.

Question 66

Inquiry Notice

Answer 66

Under certain circumstances, a purchaser is required to make reasonable inquiries. He is charged with knowledge of whatever the inquiry would have revealed, even if in fact he made none. References in recorded instruments to unrecorded transactions, unrecorded instruments in the chain of title, and possession unexplained by the record put a purchaser on inquiry notice. The mere fact that a quitclaim deed was used does not charge the purchaser with inquiry notice.

Question 67

Title Search

Answer 67

In a tract index (minority) jurisdiction, the searcher looks at the page indexed by block and/or lot describing the property and any instruments affecting it.

In a grantor and grantee index (majority) jurisdiction, the searcher establishes a chain of title by searching back in time in the grantee-grantor index. From that point, he then searches forward in time in the grantor-grantee index to see if any grantor conveyed an interest to someone outside of the backward chain.

Question 68

Recorder’s Mistakes

Answer 68

An instrument is considered recorded when filed with the recorder_s office, regardless of whether it is thereafter properly indexed. A subsequent purchaser is charged with notice of a misindexed instrument but has a cause of action against the recorder_s office.

Question 69

Effect of Recording Unacknowledged Instrument

Answer 69

Because an unacknowledged instrument is not entitled to recordation, it does not give constructive notice. A subsequent grantee must have actual notice of a deed to be bound by it. Compare: Where acknowledgment is defective for reasons not apparent on the face of the instrument, the better view is that it imparts constructive notice.

Question 70

Exoneration

Answer 70

At common law and in some states, the devisee of specific property is entitled to have the land exonerated by payment of liens and mortgages from the testator’s residuary estate. However, a large number of states have statutorily abolished the exoneration doctrine, requiring the will to expreslly provide for payoff.

Question 71

Lapse and Anti-Lapse Statutes

Answer 71

A lapse occurs when the beneficiary of a gift in a will dies before the testator. Under the common law, if a lapse occurred, the gift was void. However, nearly all states now have statutes that prevent lapse by permitting the gift to pass to the predeceasing beneficiary’s living descendants under certain circumstances. These statutes vary as to the scope of beneficiaries covered by the statute.

Question 72

Degree of Relationship to the Testator

Answer 72

Many of the anti-lapse statutes apply only when the named beneficiary is a descendant of the testator. Others apply if the beneficiary is more remotely related, such as a descendant of the testator’s grandparent. Others apply to any relative, and still others apply to any beneficiary at all.

Question 73

Inapplicable if Beneficiary Dead When Will Executed

Answer 73

If the beneficiary is already dead when the will is executed, the anti-lapse statute usually does not apply, and the gift will lapse and fail.

Question 74

Application to Class Gifts

Answer 74

If a class member within the coverage of an anti-lapse statute predeceases the testator leaving surviving issue, the statute will apply and the issue will take the deceased class member’s share of the gift.

Question 75

Anti-Lapse Statute Does Not Apply if

Answer 75

The anti-lapse statute does not apply if there is a contrary will provision.

Question 76

Abatement

Answer 76

If the estate assets are not sufficient to pay all claims against the estate and satisfy all devises and bequests, the gifts are abated (reduced). Absent a contrary will provision, estates in most states abate in the following order:

(i) property passing by intestacy,
(ii) the residuary estate,
(iii) general legacies, and
(iv) specific devises and bequests.

Question 77

Crops (Emblements)

Answer 77

Generally, the conveyance of land includes all crops growing on it. However, exceptions exist for

(i) crops that have already been harvested or severed from the land, and
(ii) crops planted by a tenant during the term of the tenancy.

For title to crops to remain in a tenant, the tenancy must have been of uncertain duration and have terminated without fault on the part of the tenant.

Question 78

General Rule of Mortgages

Answer 78

The debtor/notemaker is the mortgagor. The lender is the mortgagee. On default, the lender can realize on the mortgaged real estate only by having a judicial foreclosure sale conducted by the sheriff.

Question 79

Deed of Trust

Answer 79

The debtor/notemaker is the trustor. He gives a deed of trust to a third-party trustee, who is usually closely connected to the lender (beneficiary). On default, the lender instructs the trustee to foreclose the deed of trust by sale.

Question 80

Installment Land Contract - Validity of Forfeiture Clauses

Answer 80

An installment purchaser obtains legal title only when the full contract price has been paid off. Forfeiture clauses, allowing the vendor upon default to cancel the contract, retake possession, and retain all money paid, are common.

Question 81

Absolute Deed

Answer 81

An absolute deed, if given for security purposes, can be treated by the court as an equitable mortgage to be treated as any other mortgage.

Question 82

Transfer of Mortgage Without Note

Answer 82

Some states hold that the transfer of the mortgage automatically transfer the note as well, unless the mortgagee-transferor expressly reserves the rights to the note. In these states, the transferee of the mortgage can then file an equitable action and compel a transfer of the note as well. Other states hold that, because the not is the principal evidence of the debt, a transfer of the mortgage without the note is void.

Question 83

Transfer of Note Without Mortgage

Answer 83

The note can be transferred without the mortgage, but the mortgage will automatically follow the properly transferred note, unless the mortgagee-transferor expressly reserves the rights to the mortgage. No separate written assignment of the mortgage is necessary.

Question 84

Methods of Transferring the Note

Answer 84

The note may be transferred either by endorsing it and delivering it to the transferee or by a separate document of assignment. Only if the endorsement and delivery method is used can the transferee become a holder in due course. To be a HDC, the following requirmeents must be met:

(i) The note must be negotiable in form;
(ii) The original note must be endorsed and signed by the named payee;
(iii) The original note must be delivered to the transferee;
(iv) The transferee must take the note in good faith and must pay value for it.

Question 85

Benefits of Holder in Due Course Status

Answer 85

A holder in due course takes the note free of any personal defenses of the maker but is still subject to real defenses.

Question 86

Payment to Original Mortgagee after Transfer of Note

Answer 86

If the original mortgagee transfers possession of a negotiable instrument, any payment by the mortgagor to that mortgagee will not count. The holder can still demand payment even if the mortgagor lacked notice of the transfer. However, if the original mortgagee transfers possession of a nonnegotiable note, the mortgagor_s payment to him is effective against the transferee until the mortgagor receives notice of the transfer.

Question 87

Assumption

Answer 87

If the grantee signs an assumption agreement, he becomes primarily liable to the lender, while the original mortgagor is secondarily liable as a surety. If no assumption agreement is signed, the grantee is not personally liable on the loan, and the original mortgagor remains primarily and personally liable.

However, if the grantee does not pay, the loan may be foreclosed, wiping out the grantee’s investment.

[Remember that once a grantee has assumed a mortgage, any modification of the obligation by the grantee and mortgagee discharges the original mortgagor of all liability].

Question 88

Due-on-Sale Clauses

Answer 88

Due-on-sale clauses, which appear in most modern mortgages, allow the lender to demand full payment of the loan if the mortgagor transfers any interest in the property without the lender’s consent.

Question 89

Defenses and Discharge of the Mortgage

Answer 89

Because a mortgage is granted to secure an obligation, defenses in an action on the underlying obligation are defenses against an action on the mortgage. A mortgagee’s right to foreclose is precluded by a discharge of the mortgage.

Question 90

Possession Before Foreclosure

Answer 90

When a mortgagor defaults on his debt, the mortgagee can foreclose on the mortgage. A mortgagee may wish to take possession of the property, or begin receiving the rents from the property, before foreclosure.

Question 91

Theories of Title

Answer 91

The mortgagee may have a right to take possession before foreclosure, depending on the theory the state follows. Most states follow lien theory.

(i) Lien Theory. The mortgagee is considered the holder of a security interest only and the mortgagor is deemed the owner of the land until foreclosure. The mortgagee may not have possession before foreclosure.

(ii) Title Theory. Legal title is in the mortgagee until the mortgage has been satisfied or foreclosed, and the mortgagee is entitled to possession upon demand.

(iii) The Intermediate Theory. Legal title is in the mortgagor until default, and upon default, legal title is in the mortgagee.

Question 92

Mortgagor Consent and Abandonment

Answer 92

The mortgagee may take possession if the mortgagor gives consent to do so, or if the mortgagor abandons the property.

Question 93

Risks of Mortgagee in Possession

Answer 93

Most mortgagees do not wish to take possession because of the risks of liability. These risks involve the duty to account for rents, the duty to manage the property in a prudent manner, a potential tort liability for those injured on the property.

Question 94

Receivership

Answer 94

Most mortgagees attempt to intercept the rents before foreclosure by getting a receiver appointed by the court to manage the property. Courts will generally appoint receivers for rental property upon showing that:

(i) waste is occurring,
(ii) the value of the property is inadequate to secure the debt, and
(iii) the mortgagor is insolvent.

Question 95

Foreclosure

Answer 95

Almost all states require foreclosure by sale, under which the property is sold to satisfy the debt in whole or part. While all states allow judicial sale, some stats allow nonjudicial sale under a power of sale. Foreclosure sales are usually conducted by auction, and the lender is permitted to bid at the sale.

Question 96

Redemption in Equity

Answer 96

At any time prior to the foreclosure sale, the mortgagor may redeem the property by paying the amount due. If the note or mortgage contains an acceleration clause, the full balance of the note or mortgage must be paid to redeem. This right cannot be waived in the mortgage itself.

Question 97

Statutory Redemption

Answer 97

About half the states allow the mortgagor to redeem the property for some fixed period after the foreclosure sale has occurred.

Question 98

Priorities

Answer 98

A mortgage’s priority is usually determined by the time it was placed on the property. Foreclosure does not destroy any interest senior to the interest being foreclosed. It generally destroys all junior interests, but failure to include a junior interest holder in a foreclosure action results in preservation of that party’s interest.

Question 99

Modification of Priority

Answer 99

Although priority among mortgages is generally determined by chronology, this priority may be changed by: (i) the operation of the recording statute if a prior mortgagee fails to record, (ii) a subordination agreement between a senior and junior mortgagee; (iii) a purchase money mortgage; (iv) the modification of a senior mortgage; or (v) the granting of optional future advances by a mortgagee with notice of a junior lien.

Question 100

Purchase Money Mortgages

Answer 100

A purchase money mortgage is a mortgage given in exchange for funds used to purchase the property. PMMs are given either to the seller as part of the purchase price or to a third-party lender. PMMs have priority over prior non-PMMs, even if such mortgages or liens are recorded first. However, subsequent mortgages or liens may defeat PMM priority by operation of the recording acts. As between two PMMs, a seller_s mortgage has priority over a third party_s. If there are two third-party PMMs, priority is determined by chronological order.

Question 101

Proceeds of Sale

Answer 101

Proceeds are applied first to the expenses of the sale, attorneys’ fees, and court costs; then to the principal and accrued interest on the foreclosed loan; next to any other junior interests in the order of their priority; and finally to the mortgagor.

Question 102

Deficiency Judgments

Answer 102

If the proceeds are insufficient to satisfy the mortgage debt, the mortgagee retains a personal cause of action against the mortgagor for the deficiency.

Question 103

Equity of Redemption

Answer 103

Several states give the contract purchaser a grace period to pay the accelerated full balance of the contract and keep the land after default.

Question 104

Restitution

Answer 104

A number of decisions, while granting forfeiture, have required the vendor to refund to the purchaser any amount by which his payments exceed the vendor’s damages.

Question 105

Treat as a Mortgage

Answer 105

A few states treat installment contracts as mortgages, thus requiring a judicial foreclosure sale.

Question 106

Waiver

Answer 106

Many cases hold that a vendor’s pattern of accepting late payments constitutes a waiver of the right of strict performance. To reinstate strict performance, the vendor must send the purchaser a notice of his intention to do so and must allow a reasonable time for the purchaser to make up any late payments.