land sale contracts

Question 1

steps of a real estate conveyance

Answer 1

step 1: land contract - conveys equitable title

[escrow period] - buyer has a chance to inspect, get a mortgage, check equity of title etc.

step 2: the closing, where the deed passes legal title and becomes operative document

Question 2

before the closing, what rules apply? what about after?

Answer 2

before – the rules of the land contract - contract rules!

after – real property law rules

Question 3

common issues before closing / during escrow period

Answer 3

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 4

common issues after closing

Answer 4

less common

These issues are most likely to arise when title problems or encum- brances are discovered after closing. What if it turns out the seller sold the property to multiple buyers? What if, after the closing, the buyer discovers that a neighbor has an easement over the property or a judgment creditor has a lien on the property? Does the buyer have any recourse against the seller?

Question 5

requirements for the land sale contract

Answer 5

offer

acceptance

consideration

compliance with SoF
– writing signed by the D
– identifies parties
– describes property
– includes price (consideration) or a means of deterring price [such as FMV as determined by appraisal]
— ^ definite enough that court can enforce

no defenses to enforcement

Question 6

what happens when the land description in the land sale K overstates or understates the amount of land being transferred?

Answer 6

Remedy: specific performance with a pro rata reduction in price

Question 7

exception to statute of frauds for land sale K

Answer 7

PART PERFORMANCE

buyer can enforce oral real estate contract by specific performance IF:

(1) the oral K is certain and clear

AND

(2) the acts of partial performance clearly prove the existence of a K —– buyer must prove 2/3 of the following
(a) buyer has taken possession of the property
(b) buyer has paid purchase price or significant portion of the price
(c) buyer has made substantial improvements to the premises

Question 8

what is the doctrine of equitable conversion

Answer 8

once land-sale contract is signed, equity regards the buyer as the owner of the real property —- i.e., the land sale contract conveys equitable title to the buyer.

By contrast, at the closing the deed conveys legal title to the buyer. The right to possession rests with the party who holds legal title. Thus, seller is entitled to possession until closing.

Question 9

what is the process of land-sale to escrow ?

Answer 9

first you need an enforceable land-sale contract in place

then, doctrine of equitable conversion regards buyer as owner of the real property - equitable title

and, you can go to escrow

then, at the closing, deed conveys legal title title to the buyer

Question 10

who bears risk of loss after land sale contract is signed?

Answer 10

risk of loss of property through destruction is on the buyer between the contract signing and the closing, unless the K says otherwise

if property is damaged or destroyed, seller must credit any fire or casualty insurance proceeds they receive against purchase price the buyer is required to pay

Question 11

what happens if buyer signs the land sale K, and then dies before closing?

what happens if seller dies before closing?

what happens to the K?

Answer 11

dead buyer
buyer has equitable title = his interest passes as real property to his estate

dead seller
deceased seller has a right to purchase price = that right passes to their estate as personal property

K remains enforceable – deceased party’s estate takes the decedent’s place in the transaction

Question 12

What promises are implied in the 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 and what are common defects that render title unmarketable?

Answer 13

MARKETABLE TITLE

title reasonably free from doubt and the threat of litigation

• COMMON DEFECTS

(1) DEFECTS IN RECORD CHAIN OF TITLE … seller must provide GOOD RECORD TITLE

adverse possession
— any part of land being encumbered by AP makes title unmarketable because it does not appear in the record unless it has been brought to quiet Tiel
.
.
.
(2) ENCUMBRANCES

General rule:
mortgage, liens, restrictive covenants, easements, options to purchase, significant encroachments = unmarketable UNLESS buyer waives them

Exceptions:
– slight encroachment [inches] that do not inconvenience of owner of encroached upon parcel will not render title unmarketable [but a foot or more WILL]

– easement that is beneficial [utility easement to service a property], visible or known to the buyer does not impair marketability

– if a mortgage exists, seller has right to satisfy mortgage or lien at the closing with the proceeds of the sale, so buyer cannot claim title is unmarketable if price is sufficient and mortgage is paid off at the same time title is transferred

NOTE: Purchasers are generally presumed to have contracted to accept the land subject to visible (obvious) easements.
.
.
.
(3) ZONING VIOLATIONS

zoning restrictions – do not affect marketability

zoning violations – renders title unmarketable
.
.
.
(4) FUTURE INTERESTS HELD BY UNBORN OR UNASCERTAINED PARTIES

you cannot convey marketable title when a holder of a future interest is unborn or unascertained

no guardian ad litem to represent that future interest for this purpose

Question 14

when must title be marketable?

what about installment Ks?

Answer 14

GENERALLY - day of closing - seller has up to that time to clear title / defects [so, buyer cannot rescind before closing]

NOTE that even if the seller exceeds the date originally set for closing because seller is still working on clearing clouds on title, etc., seller has a reasonable time [since land sale contracts not typically time is of the essence contracts] to delay the closing date while seller clears those clouds to obtain marketable title. must be a REASONABLE time period.

-

INSTALLMENT K - seller has until buyer has made his last payment

Once the closing occurs and the deed changes hands, the seller is no longer liable to provide marketable title. The seller is then liable only for express promises made in the deed.

Question 15

what is the remedy if the title is not marketable?

Answer 15

FIRST, GIVE SELLER TIME TO CURE
The buyer must notify the seller that title is unmarketable and give the seller reasonable time to cure the defects.

closing date may be extended to allow seller time to cure

THEN, IF SELLER DOES NOT CURE:
buyer’s remedies include rescission, damages, specific performance with abatement, and a quiet title suit

BUT IF CLOSING OCCURS:
the contract and deed merge, and the seller’s liability on the implied contractual covenant ends

Question 16

relationship between a quitclaim deed and implied covenants in a land-sale contract

Answer 16

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

Question 17

what is the implied covenant that seller will not make false statements of material fact?

What increases likelihood of breach

what happens if seller breaches?

Answer 17

SELLER MAY NOT

(1) knowingly make false statement of material fact that buyer relies on

(2) actively conceal a defect [wallpaper over water damage]

or

(3) fail to disclose known defects in the property

To be liable for failure to disclose, seller must:
(a) know or have reason to know of the defect
(b) realize that buyer is unlikely to discover defect
and
(c) defect must be serious enough that buyer would probably reconsider purchase

FACTORS INCREASING LIKELIHOOD OF LIABILITY

whether the property is a personal residence, whether the defect is dangerous, and whether the seller created the defect or made a failed attempt to repair it.

IF BREACH

The seller may be liable to the purchaser AFTER the closing for defects, such as a leaky roof, flooding basement, or termite infestation, if they the above

Question 18

to what extent can seller disclaim liability on land sale K? [ex: “property sold as is,” or “with all faults”]

Answer 18

UPHELD – disclaimer that identifies specific defects [ex: seller not liable for defect in the roof]

NOT UPHELD – general disclaimers of liability

Question 19

is there an implied warranty of fitness or habitability in land sale contracts?

exceptions?

Answer 19

No - caveat emptor is the common law rule

exception: courts recognize warranty of fitness or quality in the sale of a new home by the builder

Question 20

time of performance for real estate contracts

when is time of the essence?

liability for being late

Answer 20

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 (for example, two months) after the closing date.

Time is of the essence if:
(1) the contract so states,
(2) the circumstances indicate that was the parties’ intent,
OR
(3) 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 perfor- mance is liable for incidental losses

Question 21

liability of a builder to a buyer of the building

Answer 21

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 22

explain buyer and seller’s obligations re: tender of performance

when is party’s tender excused?

Answer 22

the buyer’s obligation to pay and the seller’s obligation to convey are concurrent conditions, so neither party is in breach until the other tenders performance, even if the closing date passes

If neither party tenders performance, the closing date is extended until one of them does so

-
A party is excused from performing if:
(a) the other party has repudiated the contract
or
(b) it is impossible for the other party to perform, such as when unmarketable title can’t be cured

Question 23

remedies for breach of sales contract

remedies for breach when buyer proceeds despite unmarketable title

liquidated damages?

Answer 23

Damages (difference between contract price and market value on the date of breach, plus incidental costs)

or

because land is unique, specific performance.

If the buyer wishes to proceed despite unmarketable title, they can usually get specific performance with an abatement of the purchase price.

-

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 routinely uphold the seller’s retention of earnest money if the amount appears to be reasonable in light of the seller’s anticipated and actual damages.

Question 24

role of real estate brokers / duties / commission

Answer 24

DUTIES

Real estate brokers are the seller’s agents but should disclose material information about the property if they have actual knowl- edge of it.

COMMISSION
Traditionally, agents earned their commissions when they produced a buyer who was ready, willing, and able to purchase the property. Therefore, the commission was owed regardless of whether the deal actually closed. The growing trend, however, is to award the commission only if the sale actually closes or if it fails to close because of the fault of the seller.

Question 25

what is an exclusive listing agreement?

what does it require?

Answer 25

Under an exclusive listing agreement with a real estate broker, the broker’s best efforts to sell the property is consideration for the broker’s commission.

“Best efforts” includes expenditure of time, effort, or money.

If the property is sold by the seller or another agent during the listing period, the seller still may have to pay a commission.

Exclusive agency agreements prohibit listing the property with other brokers during the time of the listing.

Exclusive right-to-sell agreements additionally preclude the seller from selling the property themselves without paying the commission.

Question 26

title insurance policy and whom it protects

Answer 26

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 either the owner of the property and their successors to the property by operation of law, such as heirs or devisees,
or the mortgage lender) and does not run with the land to subse- quent purchasers.

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

Question 27

what does description of land in land sale contract or deed need to be adequate?

Answer 27

accurately ID the property, even if it contains error – must be clear what property is th subject of the K

a technical error will not cause the buyer to have to forfeit the property - court may grant specific performance