Land Sale Contracts

Question 1

What are the two steps for every conveyance of real estate, and what is the legal effect of each step?

Answer 1

(1) The land contract: conveys equitable title that endures until step 2
(2) The closing: deed passes legal title and becomes the operative document

Question 2

After the land contract (step 1), but before closing (step 2), which law applies?

Answer 2

Contract law

Question 3

After closing (step 2), what law applies?

Answer 3

Real property

Question 4

The time between the signing of the land contract (step 1) and closing (step 2) is commonly called the _______.

Answer 4

escrow period

Question 5

To satisfy the Statute of Frauds, a contract involving an interest in land must:

Answer 5

(1) Identify the parties
(2) Describe the property
(3) Include the price (the consideration) or a means of determining the price (e.g., the fair market value as determined by an appraisal, AND
(4) Signatures of the party against whom enforcement is sought (i.e., if signature is missing from one party, then the contract will be held unenforceable against that party). There is no requirement that BOTH parties sign the contract.

The 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.

Question 6

If the land description in a real estate contract overstates or understates the amount of land being transferred, what result? Why?

Answer 6

The buyer can pursue specific performance with a pro rata reduction in price.

Land is considered unique, so the preferred remedy for breach of a land contract is specific performance.

Question 7

What is the one exception to the Statute of Frauds regarding land sale contracts?

Answer 7

The doctrine of part performance

Part performance is an equitable doctrine allowing a buyer to enforce an oral real estate contract by specific performance if:
(1) The oral contract is certain and clear, and

(2) The acts of partial performance clearly prove the existence of a contract

Question 8

Under the doctrine of part performance, what acts will prove the existence of a contract?

Answer 8

Two of the following three actions:
(1) Buyer has taken possession of the property

(2) Buyer has paid the purchase price or a significant portion of the purchase price
(3) Buyer has made substantial improvements to the premises

NOTE: One of the above standing alone is NOT SUFFICIENT. Two are required because any one on its own could plausibly be explained as indicative of some other kind of agreement. For example, maintaining possession could be plausibly explained as a landlord-tenant relationship, paying the purchase price could be plausibly explained as payment of a debt, and making substantial improvements could be plausibly explained as performance under a different kind of contract.

Question 9

What is the doctrine of equitable conversion?

Answer 9

Once a contract for a land sale is signed, equity regards the buyer as the owner of the real property. By contrast, at closing, the deed conveys legal title to the buyer.

The right to possession rests with the party who holds legal title, so the SELLER is entitled to possession until closing.

Question 10

If between contract and closing, the property is destroyed through no fault of either party, who bears the risk of loss?

Answer 10

The buyer, unless the contract says otherwise.

However, the seller MUST credit any fire or casualty insurance proceeds they receive against the purchase price the buyer is required to pay.

Question 11

What happens if one of the parties dies after the contract but before closing? Why?

Answer 11

The interests of the deceased party pass to their estate.

The buyer has equitable title and is deemed to own the property from the moment the contract is signed. The seller has legal title and has an interest in the purchase price. Thus, the contract remains enforceable, with the deceased party’s estate taking the decedent’s place in the transaction.

NOTE: If the property is specifically devised by will, check to see whether ademption or exoneration rules apply.

Question 12

What are the two promises implied in every land sale contract?

Answer 12

(1) Seller will provide marketable title

(2) Seller will not make false statements of material fact

Question 13

What is “marketable title”?

Answer 13

Title reasonably free from doubt and the threat of litigation due to some defect that would render the title unmarketable

Question 14

What are the 3 common defects that render title unmarketable?

Answer 14

(1) Defects in record chain of title (most often, adverse possession)
(2) Encumbrances (mortgages, liens, easements, restrictive covenants)
(3) Zoning violations

Question 15

If even a portion of the title rests on adverse possession, it is unmarketable because adverse possession constitutes a defect in the record chain of title. Why?

Answer 15

Because the seller must convey good record title at closing. Title resting on adverse possession that has not been enforced via a quiet title action will not appear in the record, so the seller cannot lawfully convey it.

Question 16

Generally, mortgages, liens, restrictive covenants, easements, options to purchase, and significant encroachments render title unmarketable unless _______. (+ 2 exceptions)

Answer 16

the buyer has waived them

EXCEPTIONS:
(1) If an encroachment 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.

(2) An easement that is BENEFICIAL, visible, or known to the buyer does NOT impair the marketability of title.

Question 17

How do zoning restrictions and zoning violations affect marketability?

Answer 17

Zoning restrictions DO NOT affect marketability.

An existing violation of a zoning ordinance DOES render title unmarketable.

Question 18

How do future interests held by unborn or unascertained parties affect marketability of title?

Answer 18

When a holder of a future interest is unborn or unascertained, it is IMPOSSIBLE to convey marketable title.

Courts WILL NOT appoint a guardian ad litem to represent the unborn or unascertained parties for the purposes of conveyance.

Question 19

When must title be marketable? What about for an installment land contract?

Answer 19

Title must be marketable on the closing date. The seller has up until that time to cure any defects causing the title to be unmarketable.

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

Question 20

What is the seller’s liability under the implied covenant of marketability after closing has occurred?

Answer 20

None.

Once closing occurs and legal title has changed hands, the contract and deed merge, and the seller is NO LONGER LIABLE on the implied covenant of marketability. The seller is then liable only for express promises made in the deed.

Question 21

What is are a buyer’s duties and remedies if title is unmarketable?

Answer 21

The buyer must notify the seller that title is unmarketable and give the seller reasonable time to cure the defects.

If the seller fails to cure the defects, the buyer’s remedies include:
(1) Rescission

(2) Damages
(3) Specific performance with abatement
(4) A quiet title suit

Question 22

What is the seller’s covenant not to make false statements of material facts?

Answer 22

If a seller knowingly makes a false statement of material fact that the buyer relied on, actively conceals a defect (e.g., wallpapered over water damage), or fails to disclose known defects in the property, the seller may be liable to the purchaser AFTER closing for those defects.

Question 23

A seller will be liable for failure to disclose a defect if:

Answer 23

(1) The seller knew or had reason to know of the defect;
(2) The seller realized that the buyer was unlikely to discover the defect; AND
(3) The defect is serious enough that the buyer would have probably reconsidered the purchase had they known of its existence

Question 24

Factors increasing the likelihood that liability will be imposed on a seller who failed to disclose a defect include: (3 things)

Answer 24

(1) whether the property is a personal residence
(2) whether the defect is dangerous
(3) whether the seller created the defect or made a failed attempt to repair it

Question 25

Can the seller avoid liability for fraud or failure to disclose by including in the contract a general disclaimer of liability, such as “property sold as is” or “with all faults”?

Answer 25

General disclaimers are NOT sufficient.

If the disclaimer identifies specific types of defects (e.g., “seller is not liable for any defects in the roof”), it will likely be upheld.

Question 26

Do land contracts contain implied warranties of fitness or habitability? Exceptions?

Answer 26

No. Caveat emptor (“let the buyer beware”) is the common law norm.

EXCEPTIONS:
(1) Most courts recognize a warranty of fitness or quality in the sale of a new home by the builder.

(2) A person may sue a builder for negligence in performing a building contract. Some courts permit the ultimate buyer to sue the builder despite lack of privity.

Question 27

What is the judicial presumption regarding time of performance in land contracts?

Answer 27

Courts presume that time is not “of the essence” in real estate contracts. Thus, the closing date isn’t absolutely binding, and a party late in tendering their own performance can still enforce the contract if they tender within a reasonable time (e.g., two months) after the closing date.

Question 28

When is the judicial presumption regarding time of performance in a land contract overcome?

Answer 28

Time is of the essence if:
(1) The contract says so,

(2) The circumstances indicate that was the parties’ intent, OR
(3) One party gives the other notice that time is of the essence

Question 29

If time is of the essence and a party in a land contract fails to tender performance on the closing date, what liability results?

Answer 29

The party failing to tender performance 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 30

The buyer’s obligation to pay and the seller’s obligation to convey are _______. Explain.

Answer 30

concurrent conditions

Neither party is in breach until the other party performs (even if the closing date passes). If neither party tenders performance, the closing date is extended until one of them does so.

Question 31

When is a party’s tender of performance excused in a land sale contract?

Answer 31

A party is excused from performing if the other party has repudiated the contract or it is impossible for the other party to perform (e.g., when unmarketable title can’t be cured).

Question 32

What are the remedies for a nonbreaching party in a land sale contract?

Answer 32

The nonbreaching party is entitled to damages (difference between contract price and the market value on the date of breach, plus incidental costs or, because land is unique, specific performance.

If a buyer wishes to proceed despite unmarketable title, they can usually get specific performance with a commensurate reduction (abatement) of the purchase price.

Question 33

Are liquidated damages available in a breach of a land sale contract?

Answer 33

Yes. Sales contracts usually require the buyer to deposit “earnest money” with the seller and provide that if the buyer defaults in performance, the seller may retain this money as liquidated damages. Courts will uphold the seller’s retention of earnest money if the amount appears reasonable in light of the seller’s anticipated and actual damages.

Question 34

What is a title insurance policy? What are the kinds of title insurance policies?

Answer 34

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.

An owner’s policy protects only the person who owns the policy (usually the owner of the property or the mortgage lender) and does NOT run with the land to subsequent purchasers.

A lender’s policy follows any assignment of the mortgage loan.