Conveyancing Part 1 (Land Sale Contracts)

Question 1

Real Property Definition

Answer 1

Land and any structures built on it. Real property law is about the rights (bundle of sticks), right to use, sell, exclude, etc.

Question 2

Conveyancing Overview

Answer 2

This is about everything involved in the transfer of real estate. Mostly involves sales but sometimes gifts or bequests.

Main topics are:
1. Contract
2. Deed
3. Recording
4. Financing

Question 3

Conveyancing is a 2-Step Process (Module 14)

Answer 3

Every transaction for sale of land involves 2 step process:
1) The Land Contract. Its job is to pass equitable title from seller to buyer. The land K endures for a short time until step 2 which is closing.
2) Closing. The Land K dies and the deed becomes the operative instrument. The job of deed is to pass legal title from seller to buyer.

Question 4

Keeping the 2 Steps Separate

Answer 4

The closing date is generally set in the contract. The buyer and seller typically meet on that date at a title insurer’s office or similar place to exchange the purchase price for the deed. It sounds quite simple but usually involves signing stacks and stacks of documents. It is important to keep the two steps in the real estate sale separate in your mind. Before the closing, Contracts rules apply; after closing, we’re strictly in the realm of Real Property law.

Question 5

Common Issues BEFORE Closing

Answer 5

problems in the sale of land, they generally arise during the period between the signing of the contract and the closing date. This is sometimes called the escrow period. During this time, any number of things could cause one of the parties to have a change of heart and try to back out of the contract. The buyer might learn of title defects or termites, or bad plumbing and wish to rescind the contract. The seller may discover that they can get a better price and want to rescind the contract.

Question 6

Common Issues AFTER Closing

Answer 6

Problems between a buyer and seller are less common after closing. These issues are most likely to arise when problems with title or encumbrances are discovered after closing.

Question 7

Land Sale Contract

Answer 7

The sale of real property begins with a contract. This contract is the same as any other in terms of what is required to make it enforceable. Everything you learned in your Contracts module will come in handy here. As always, we need an offer, an acceptance, and consideration. The contract must comply with the Statute of Frauds and there must not be any other defenses to enforcement.

Question 8

The Statute of Frauds (SOF)

Answer 8

Because the contract involves an interest in land, the statute of frauds requires a writing signed by the party to be bound—in other words, signed by the party currently being sued. In addition to that signature, to satisfy the statute, the writing must:
1) Identify the parties
2) Describe the property, and
3) Include the price or a means of determining the price (such as FMV from an appraisal)

What do these requirements mean? As with all contracts, there aren’t any hard and fast rules about the language that must be used. These terms must be definite enough for a court to enforce the contract. So, if a court can tell from the documents who the parties are, which parcel is being conveyed, and what consideration is being supplied, the statute is satisfied.

BOTH PARTIES DO NOT HAVE TO SIGN THE CONTRACT YET. In the exam, the parties are already at the breach of contract stage, not the drafting stage. Only the signature of the party being sued is required.

Question 9

Hypo: Land size in K is bigger than in reality

Answer 9

Q: B enters into a contract to purchase a farm. The contract recites that the farm is 100 acres. When B has a survey done, B learns that the farm is actually 98 acres. What is B’s remedy?

A: Specific performance with a pro rata reduction in price commensurate with the acreage deficiency. Specific performance is the preferred remedy for breach of K for sale of land because land is unique and therefore subject to specific performance as a buyer’s remedy.

Question 10

Price in Land K Must be Specific

Answer 10

Must either be a set price or there must be sufficiently clear means of determining the price. A “mutually agreeable price” is too vague.

Question 11

Exception to Statute of Frauds: Part Performance

Answer 11

What happens if there is no writing or the writing falls short of the requirements? Suppose for example that while chatting at the local diner Kenny agrees to sell his farm to Eric for $500,000. As so often happens on the bar exam, before closing, the seller, Kenny, meets a tragic and premature end. Kenny’s estate decides that he made a bad bargain and refuses to close, citing the statute of frauds. Anytime you see an oral contract for a sale of land on your exam, bells should go off. Right away you know you’re going to have a problem with the statute of frauds.

Eric, the buyer, has only one hope: the one exception to the statute of frauds in a land sale contract—the doctrine of part performance. Part performance is an equitable doctrine that allows a buyer to enforce a contract by specific performance if certain requirements are met. There are two requirements for the part performance exception:

1) The oral contract must be certain and clear, and
2) The acts of partial performance must clearly prove the existence of a contract

This second requirement is usually met if the [buyer/party] can prove at least two of the following three actions:
1. Possession of the property
2. Payment of the purchase price or a significant portion of the price
3. Valuable improvements to the property

Question 12

Partial Performance Second Requirement: Things that Prove the Existence of K

Answer 12

1) Possession = Suppose Buyer moves into the farmhouse but hasn’t yet paid the purchase price. The buyer will say, “Clearly I bought this. I am in the house! My stuff is here. I sleep here every night.” Does this prove a contract? No, not on its own. Think about a tenant. A tenant occupies land. That doesn’t mean they own it.

The evidence that the parties entered into a contract must be unequivocal. There must not be any other plausible explanation for their actions. So, possession is good evidence, but on its own, it’s not enough.

2) Purchase Price = What if the buyer says, “I gave the ‘seller’ $200,000! That’s a lot of money. And it happens to be about how much the house is worth.” That’s great evidence, but by itself, it doesn’t unequivocally prove the parties had a contract to sell the property. The money may be unrelated to the property. Maybe the buyer is paying off a gambling debt or loaning the money to the seller.

3) Improvements = Most people don’t go around fixing up houses they don’t own. What do people do right after buying houses? A lot of times, they improve them. They build a new porch on the house, or install a swimming pool in the back yard, they pave the driveway, something like that. Usually, tenants do not invest that type of money into a rental, but it’s possible, particularly with a long-term rental. So, improvements alone are not enough.

Exam Tip: If you see an oral contract for the sale of land on an essay question and you think the doctrine of part performance may apply, don’t forget to state the general rule first. Start your answer by stating that the statute of frauds requires contracts for the sale of land be evidenced by a writing and signed by the party being sued. Then state that, here, the contract is oral and won’t be enforceable unless if falls within an exception to the statute. And finally, state your part performance rule and analysis.

Common Pattern: Possession + partial payments by themselves aren’t good enough to show partial performance because that could be a lease rather than a sale.

Question 13

Equitable Conversion

Answer 13

Once we have the enforceable contract in place, we move into the time between the signing of the contract and the closing (the escrow period). This is a time with lots of uncertainty because oftentimes all that has occurred to this point is the signing of the contract. What happens if one of the parties changes their mind? What happens if the property is damaged or destroyed? What if one of the parties dies?

The moment the contract is signed, the law, through the doctrine of equitable conversion, recognizes the buyer as the owner of the real property. The seller’s interest (the right to the proceeds of the sale) is considered personal property. The seller retains bare legal title, and with it, the right to possess the property until the closing.

The two issues related to equitable conversion that you are most likely to see on the bar exam are risk of loss and passage of title on the death of a party.

Question 14

Risk of Loss

Answer 14

Because buyer is considered the owner of the real property, the buyer bears the risk of any loss during the escrow period. So, if the property is damaged or destroyed during that period through no fault of either party, the burden of that loss falls on the buyer.

We only use this rule if the seller is NOT at fault. If seller was responsible, then he would bear the loss.

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

Question 15

Passage of Title at Death

Answer 15

As we’ve mentioned, the life expectancy for parties on the bar exam can be surprisingly short. Very often one of the parties meets a tragic, premature, and unexpected end. What is the result if that happens after the contract but before the closing? The interests of the departed party pass to their estate.

So, because under the doctrine of equitable conversion, the buyer owns the property from the moment the contract is signed, a deceased buyer’s interest passes as real property to their estate, A deceased seller’s interest, the right to the purchase price, passes to their estate as personal property. The contract remains enforceable, with the deceased party’s estate taking their place in the transaction.

Question 16

Hypo about Passage of Title

Answer 16

Question: Seller contracted to sell Blackacre to Buyer. Seller then died before closing. In his will, Seller provided that all of his real property would pass to A and all of his personal property would pass to B. If Buyer goes to closing with Seller’s estate, who would ultimately get the money from the sale, A or B?

Answer: B, because after equitable conversion takes place at the signing of the contract, seller’s interest is a personal property interest.

Question 17

Marketable Title and Seller’s Liability for Defects

Answer 17

There is an implied covenant in every land sale contract that at closing the seller will provide the buyer with a title that is “marketable.”

2 implied promises in every land sale K:
1) Seller promises to provide marketable title at closing. This promise endures only up to the closing. Any problems post-closing in the implied warranty of marketable title will not work.

Question 18

Marketable Title

Answer 18

This is title free from reasonable doubt, meaning it’s free from lawsuits or the threat of litigation. Seller must be able to provide good record title.

3 Circumstances make Title Unmarketable:

1) ADVERSE POSSESSION = If even a portion of the title is subject to adverse possession, it’s unenforceable. If Blackacre is subject to adverse possession, it’s subject to threat of lawsuit. This makes title unmarketable.

2) ENCUMBRANCES = Marketable title means an unencumbered fee simple. What does that mean? Servitudes and mortgages render title unmarketable. The presence of a servitude (like easement or restrictive covenant or outstanding mortgage or lien) render it unmarketable unless buyer has WAIVED them. That’s because an easement or something would subject title to a lawsuit. But these are so common that buyers often have to waive lots of them. Title can therefore be marketable after the waiver of an otherwise unmarketable encumbrance. Seller always has right to satisfy outstanding mortgage or lien at closing from this transaction. On the eve of closing, we won’t allow buyer to start complaining about an outstanding mortgage when it’s obvious that the parties intend to discharge that at this exact closing.

3) ZONING VIOLATIONS = title unmarketable when Blackacre VIOLATES a zoning ordinance. The mere presence of a scheme of zoning restrictions where Blackacre resides doesn’t matter, but it’s Blackacre’s ACTUAL VIOLATION of an existing ordinance that renders title unmarketable. Why? Because if Blackacre is subject to a zoning ordinance, then it’s susceptible to the threat of a future lawsuit.

Question 19

Defects in Chain of Title to Watch For

Answer 19

Adverse possession is a defect in the seller’s record chain of title. There are other defects in the chain of title that will also render title unmarketable. We’ll cover chain of title in the Recording unit, but for now, just be aware that a title search may reveal the defects like those below that render title unmarketable. On the exam, watch for the following facts concerning the chain of title that will render title unmarketable:

1) A significant VARIATION IN THE DESCRIPTION OF the LAND from one deed to the next

2) A DEED in the chain of title that was NOT EXECUTED properly

3) A prior grantor who LACKED CAPACITY to convey the property

Question 20

Encroachments

Answer 20

An encroachment of a neighbor’s building onto the property is an encumbrance, a defect in title. Whether or not it renders the title unmarketable depends on how significant the encroachment is. If it is very slight (a matter of inches) and doesn’t inconvenience the owner of the encroached-on parcel, the encroachment won’t render title unmarketable. But, an encroachment of a foot or more, likely will.

Question 21

When Title Must be Marketable

Answer 21

Title must be marketable on the day of closing. The seller has up until that time to clear up whatever defect is making the title unmarketable. In fact, the seller may clear the title at the closing by using the proceeds of the sale to clear mortgages and liens.

Question 22

Notice and Right to Cure if Title Unmarketable

Answer 22

If a buyer discovers that the seller’s title is unmarketable, the buyer must give the seller notice detailing the defects. The buyer must give the seller reasonable time to cure the defects, even if it requires postponing the closing date.

Question 23

Remedies

Answer 23

If title is not marketable, the buyer is entitled to the usual remedies for breach of contract: rescission, damages, or specific performance with an adjustment in the purchase price.

Don’t be fooled into thinking marketable title is waived if the contract calls for a quitclaim deed. As we’ll see, a quitclaim deed makes no promises with respect to title. However, the type of deed called for in the contract has no effect on the implied promise to deliver marketable title at closing.

Question 24

Seller’s Liability for Defects

Answer 24

There’s a 2nd implied promise seller makes: seller will make no false statement of material fact. Majority of states hold seller liable for failure to disclose latent material defects.

Seller is liable for material lies and omissions.

Seller is liable for fraud for what she affirmatively misrepresents of a material latent nature and she’s also liable for omissions of relevant latent material problems on site.

Can seller avoid liability for fraud or failure to disclose by including disclaimers in the land K? Like saying buyer takes as-is or with all faults? NO. The disclaimer won’t excuse seller for liability for fraud or failure to disclose.

Question 25

The Land K Contains No Implied Warranties of Fitness or Habitability

Answer 25

The common law norm is CAVEAT EMPTOR: buyer beware. Buyer must be diligent and hire inspectors, check structural integrity, get survey done. Seller makes no implied promise about fitness or habitability of the premises.

BUT, that said, there is a UNIVERSAL EXCEPTION: the implied warranty of fitness and workmanlike construction DOES APPLY to the SALE OF A NEW HOME BY A BUILDER-VENDOR.

When presented with sale of new home by builder-seller, that builder-seller should know best and is intimately familiar with the quality and workmanlike construction of the premises. So they do implicitly promise that the premises have been constructed in workmanlike manner.

Question 26

Failure to Disclose

Answer 26

Seller will be liable for fraud (knowingly making a false statement of material fact that the buyer relied on or actively concealing a defect) or failing to disclose known defects in the property. To be liable for failure to disclose:

1) The seller must know or have reason to know of the defect;

2) The seller must realize that the buyer is unlikely to discover the defect; AND

3) The defect is serious enough that the buyer would probably reconsider the purchase.

Question 27

Performance and Breach: Time of Performance

Answer 27

Unless the contract or the circumstances indicate otherwise, time is not of the essence in a land sale contract. Therefore, missing the closing date in the contract is not a material breach. So, even if, for example, a buyer is late in paying the purchase price, they can still enforce the contract if they tender the price within a reasonable time–usually within a month or two.

If the parties instead agree that time is of the essence, then missing the closing deadline even by a day and even for a reasonable excuse still does not excuse the fact that it is a material breach.

Question 28

Tender of Performance

Answer 28

A buyer’s obligation to pay the purchase price and the seller’s obligation to convey title are concurrent conditions; so, neither party is in breach until the other party tenders performance, even if the closing date has passed. If neither party tenders performance, the closing date is automatically extended until one of them does so. “Put up or shut up”.

Question 29

Remedies for Breach of K

Answer 29

3 types of remedies for breach of land sale K:

1) Damages = The nonbreaching party can seek damages—usually the difference between the contract price and the market value of the property on date performance was due. A nonbreaching seller usually has the option to seek those damages or to keep the buyer’s down payment as liquidated damages. Note about liquidated damages (earnest money): The sales contract often requires the buyer to give the seller earnest money (sometimes referred to as a down payment) and provides that the seller can keep the money if the buyer breaches the contract. If the amount bears a reasonable relationship to the seller’s actual damages, the court will allow the seller to keep the money as liquidated damages. Usually, if the amount is 10% or less of the purchase price, it will be found to be reasonable.

2) Specific Performance = Because land is unique, money damages are considered inadequate and a nonbreaching buyer is entitled to specific performance as a remedy for the seller’s breach. Note that if the seller cannot produce marketable title and a nonbreaching buyer wants to go through with the purchase, the buyer will usually be entitled to specific performance with a reduction in the purchase price to account for the defects. And, because the buyer is entitled to specific performance in the event of breach, a nonbreaching seller is also entitled to that remedy.

3) Rescission = If the buyer breaches, the seller may rescind the contract. If the seller breaches, the buyer may rescind the contract and recover any down payment or earnest money. Since the seller generally has until closing to clear any defects, buyer cannot rescind before then.