Property - Knowledge Set

Question 1

May a buyer obtain specific performance of an oral land sale contract?

A Yes, provided the buyer has paid most of the purchase price

B No, because an oral contract does not satisfy the Statute of Frauds

C Yes, if the buyer has taken possession of and made substantial improvements to the land

D No, because the buyer’s remedy is damages

Answer 1

C

Yes, a buyer may obtain specific performance of an oral land sale contract if the buyer has taken possession of and made substantial improvements to the land. While land sale contracts must be memorialized in writing and signed by the party to be charged to be enforceable under the Statute of Frauds, courts in most states will enforce an oral contract in equity under the doctrine of part performance if the buyer has performed at least two of the following acts: 1. Taken possession of the land; 2. Made substantial improvements to the land; and/or 3. Paid all or part of the purchase price. Some courts will accept as part performance additional acts showing the buyer’s detrimental reliance. A buyer might not obtain specific performance of an oral land sale contract even if the buyer has paid most of the purchase price. As explained above, most jurisdictions require at least two acts of part performance. For an oral land sale contract, the buyer’s remedy is NOT damages. Only specific performance is available in equity under the doctrine of part performance. Although an oral contract does not satisfy the Statute of Frauds, a court may award specific performance if the buyer shows sufficient acts of part performance. Two theories support this remedy: (i) the buyer’s acts unequivocally evidence an oral contract; and (ii) the buyer’s detrimental reliance estops the seller from asserting the Statute of Frauds as a defense.

Question 2

Which of the following is true when a seller of land dies before the contract closes?

A The contract is voidable by the seller’s estate.

B The successors to the seller’s personal property must give up equitable title at closing.

C The contract is voided by the seller’s death.

D The successors to the seller’s real property must give up legal title at closing.

Answer 2

D

When a seller of land dies before the contract closes, the successors to the seller’s real property must give up legal title at closing. Under the doctrine of equitable conversion, the buyer of land is considered to own (i.e., hold equitable title to) the real property once the contract is signed. The seller is entitled to the proceeds of sale. Equity regards the seller as holding bare legal title in trust for the buyer as security for the debt owed. When a party to the contract dies before closing, her interest passes accordingly. The deceased seller’s personal property takers are thus entitled to the sale proceeds on closing but must surrender legal title at that time. The successors to the seller’s personal property do NOT give up equitable title at closing when a seller of land dies before the contract closes. As stated above, under the doctrine of equitable conversion, the buyer obtains equitable title to the land upon the signing of the contract. If the seller dies before closing, the bare legal title she held passes to the takers of her real property, who must surrender it to the buyer at closing (when both legal and equitable titles merge in the buyer). The takers of the seller’s personal property succeed only to the proceeds of the sale, not the title to the real property. When a seller of land dies before the contract closes, the contract is NOT voidable by the seller’s estate. It can be enforced against the takers of her real property when closing occurs. Furthermore, the contract is NOT voided by the seller’s death. As is explained above, the doctrine of equitable conversion affects the passage of title when a party to a land sale contract dies before the closing. On closing, the seller’s estate must surrender legal title to the buyer, and the estate is entitled to the proceeds of the sale.

Question 3

Which of the following statements regarding specific performance of a land sale contract is true?

A Both the buyer and the seller generally are entitled to specific performance

B If the seller cannot convey marketable title, the buyer may not obtain specific performance

C Specific performance is available only to the buyer

D Specific performance is available only to the seller

Answer 3

A

Both the buyer and the seller generally are entitled to specific performance of a land sale contract. A court of equity will order a seller to convey title if the buyer tenders the purchase price. The remedy at law, damages, is deemed inadequate because land is unique. Courts also generally will award specific performance for the seller if the buyer is in breach, although a few courts will do so only if the property is especially unique (e.g., not if a developer is selling a house in a large subdivision of similar houses). The seller’s ability to recover in equity is sometimes explained as necessary for mutuality of remedy. In either case, specific performance is NOT available only to the seller or only to the buyer. If the seller cannot convey marketable title, the buyer MAY obtain specific performance of the land sale contract with an abatement of the purchase price in an amount reflecting the title defect.

Question 4

Which of the following is not an essential term of a land sale contract under the Statute of Frauds?

A An identification of the parties to the contract.

B A closing date.

C A description of the property.

D A price and manner of payment, if agreed upon.

Answer 4

B

A closing date is not an essential term of a land sale contract under the Statute of Frauds. The closing is when the parties tender performance of the contract, i.e., exchange the purchase price and deed. Matters incidental to the contract (e.g., furnishing of deeds, prorating of taxes, title insurance) can be determined by custom, and a closing date will be construed to be within a reasonable time. They need not appear in the writing nor even have been agreed upon. The essential terms of a land sale contract under the Statute of Frauds are: 1. A description of the property; 2. An identification of the parties to the contract; and 3. A price and manner of payment, if agreed upon. The Statute also requires the contract to be in writing and signed by the party to be charged.a

Question 5

Which of the following would not make title to land unmarketable?

A Evidence that a prior grantor lacked capacity to convey the property

B A significant variation in the description of property from one deed to the next

C The existence of a mortgage on which the statute of limitations has run

D The defective execution of a prior deed in the chain of title

Answer 5

C

The existence of a mortgage on which the statute of limitations has run would not make title to land unmarketable. Every land sale contract contains an implied covenant that the seller will provide marketable title at closing. While it need not be perfect title, it must not present the buyer with an unreasonable risk of litigation. Generally, this means an unencumbered fee simple with good record title. Title may be unmarketable because of a defect in the chain of title. Examples include a significant variation in the description of the land from one deed to the next, the defective execution of a prior deed in the chain of title that thus fails to meet the requirements for recordation, and evidence that a prior grantor lacked capacity to convey the property. Many courts hold that an ancient lien or mortgage on the record will not render title unmarketable if the seller has proof of its satisfaction or the statute of limitations on the claim would have run under any possible circumstance, including tolling for disabilities.

Question 6

In general, a party who fails to tender performance on the closing date:

A Is excused from performance

B Has no liability for even incidental damages

C Is in total breach and loses her right to enforce the contract

D Has a reasonable time after the closing date to tender performance

Answer 6

D

In general, a party who fails to tender performance on the closing date has a reasonable time after the closing date to tender performance and avoid breach. Generally, the time of performance stated in a land sale contract is not absolutely binding. A party, even though late in tendering her own performance, can still enforce the contract if she tenders within a reasonable time after the stated date. Courts presume that time is not of the essence. However, this presumption may be overcome if: (i) The contract states that time is of the essence; (ii) The circumstances indicate that the parties intended that time is of the essence; or (iii) One party notifies the other within a reasonable time before the closing date 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 total breach and loses her right to enforce the contract . However, even if time is not of the essence, a party who is late in tendering performance is NOT excused from performance absent repudiation or impossibility, and will be liable for incidental damages (e.g., additional mortgage interest or taxes).

Question 7

For which type of security interest in land does the debtor transfer title to a third party acting on behalf of the lender?

A Deed of trust

B Installment land contract

C Absolute deed

D Equitable mortgage

Answer 7

A

A deed of trust is a security interest in land by which the debtor (i.e., the trustor) transfers title to the land to a third party (i.e., the trustee), such as the lender’s lawyer or a title insurance company, acting on behalf of the lender (i.e., the beneficiary). In the event of default, the lender instructs the trustee to foreclose the deed of trust by selling the property. An equitable mortgage exists if a court concludes that a grantor transferred an absolute deed to serve as security for an obligation. If the court so determines, the grantee must foreclose by judicial action, as with any other mortgage. The court will consider: (i) The existence of a debt or promise of payment by the grantor; (ii) The grantee’s promise to return the land if the debt is paid; (iii) Whether the amount advanced to the grantor was much lower than the value of the property; (iv) The degree of the grantor’s financial distress; and (v) The parties’ prior negotiations. An installment land contract is a security interest in land in which the debtor (i.e., the buyer) contracts with the seller to pay for the land in regular installments until the full contract price has been paid, plus interest. Only then will the seller transfer legal title to the buyer. The contract may contain a forfeiture clause providing that the seller may cancel the contract upon default, retain all money paid, and retake possession of the land.

Question 8

What does it mean for a grantee to assume a mortgage?

A The grantee becomes a surety for the original mortgagor.

B The grantee becomes primarily liable to the lender.

C The grantee institutes foreclosure proceedings.

D The grantee takes out an additional mortgage on the property.

Answer 8

B

For a grantee to assume a mortgage means the grantee becomes primarily liable to the lender. When a mortgagor conveys mortgaged property, the grantee takes the land subject to the mortgage. A grantee who signs an assumption agreement promises to pay the mortgage loan, thus becoming personally and primarily liable to the lender. The original mortgagor becomes secondarily liable as a surety. Assumption of a mortgage does not mean the grantee becomes a surety for the original mortgagor. The assuming grantee becomes primarily liable to the lender, and the original mortgagor becomes secondarily liable as a surety. Assumption of a mortgage does not mean the grantee institutes foreclosure proceedings. Foreclosure is a process that terminates the mortgagor’s interest in the property. Generally, the property is sold in a foreclosure sale to satisfy the mortgage debt. The grantee who assumes a mortgage promises to pay the mortgage loan; thus, if the grantee defaults, foreclosure proceedings may be brought against him. Assumption of a mortgage does not mean the grantee takes out an additional mortgage on the property. As explained above, a grantee who signs an assumption agreement promises to pay the original mortgage loan, thus becoming primarily liable to the lender.

Question 9

Which of the following generally occurs when a mortgagee transfers a promissory note without a written assignment of the mortgage?

A The mortgagee retains the rights to the mortgage.

B The mortgage is separated from the obligation on the note.

C The mortgage follows the note.

D The mortgage is extinguished.

Answer 9

C

When a mortgagee transfers a promissory note without a written assignment of the mortgage, generally the mortgage follows the note. A mortgage is a security interest in real estate that secures an obligation, usually a promise to repay a loan, which is represented by a promissory note. The debtor (i.e., the mortgagor) gives the mortgage and the note to the lender (i.e., the mortgagee). The mortgagee who transfers her interest usually does so by indorsing the note and executing a separate assignment of the mortgage. While it is possible to transfer the note without the mortgage, the mortgage automatically will follow the properly transferred note. No separate written assignment of the mortgage is necessary. The mortgagee does NOT retain the rights to the mortgage when she transfers the note without a written assignment of the mortgage unless she expressly reserves the rights, which there would rarely be any reason for her to do. Generally, the mortgage follows the note; the mortgage is NOT separated from the obligation on the note, and the mortgage is NOT extinguished.

Question 10

Under which theory can the mortgagee take possession of the mortgaged property upon the mortgagor’s default?

A The title theory only

B Either the lien theory or the intermediate theory

C The lien theory only

D Either the title theory or the intermediate theory

Answer 10

D

Under either the title theory or the intermediate theory, the mortgagee may take possession of the mortgaged property upon the mortgagor’s default. Under the title theory, followed in a minority of states, legal title is in the mortgagee until the mortgage has been satisfied or foreclosed. Thus, the mortgagee is entitled to possession upon demand at any time, which means the mortgagee can take possession as soon as the mortgagor defaults. The same is true in the few states that follow the intermediate theory, under which legal title transfers from the mortgagor to the mortgagee on default. Under the lien theory, followed in a majority of the states, the mortgagee is deemed to hold a security interest in the land and the mortgagor is considered the owner until foreclosure. Thus, the mortgagee may not take possession of the land before foreclosure.

Question 11

When may a mortgagor redeem her land in equity?

A Before the foreclosure sale.

B Only during the foreclosure sale.

C After the foreclosure sale.

D At any time, unless waived in the mortgage itself.

Answer 11

A

A mortgagor may redeem her land in equity before the foreclosure sale. At any time prior to the foreclosure sale—i.e., this right does not exist only during the foreclosure sale—the mortgagor has the right to redeem the land or free it of the mortgage by paying off the amount due, plus interest. If the mortgage or note contained an acceleration clause, which permits the mortgagee to declare the full balance due in the event of default, the full balance must be paid in order to redeem. A mortgagor may not redeem her land in equity after the foreclosure sale. However, about half the states provide a statutory right to redeem—distinct from the equitable right discussed above—for some fixed period after the foreclosure sale has occurred (e.g., six months or one year). While a mortgagor may redeem her land in equity at any time before the foreclosure sale, this right cannot be waived in the mortgage itself. Doing so is known as “clogging the equity of redemption” and is prohibited. However, the right can be waived later, for consideration.

Question 12

As between two mortgages, what is the effect on the junior mortgage when the mortgagor accepts an advance of funds from the senior mortgagee?

A The junior mortgage is given priority over the entire senior mortgage if the advance was optional

B The junior mortgage is given priority over the advance if the advance was optional

C The junior mortgage is given priority over the advance if the senior mortgagee was contractually obligated to make it

D The junior mortgage is given priority over the entire senior mortgage if the senior mortgagee was contractually obligated to make it

Answer 12

B

When the mortgagor accepts an advance of funds from the senior mortgagee, the junior mortgage is given priority over the advance if the advance was optional. Priority among mortgages on the same real estate is normally determined by chronology: The earliest (i.e., senior) mortgage is first in priority, the next (i.e., junior) mortgage is second, and so on. Generally, if the mortgage obligates the mortgagee to make further advances of funds after the mortgage is executed, such advances will have the same priority as the original mortgage. However, if a junior mortgage is placed on the property and the senior mortgagee later makes an “optional” advance (i.e., one it was not contractually bound to make) while having notice of the junior mortgage, the advance will lose priority to the junior mortgage. Numerous states have reversed this rule by statute, but it remains the majority view. Thus, the junior mortgage is NOT given priority over the advance if the senior mortgagee was contractually obligated to make it. Furthermore, an advance would not jeopardize the priority of the entire senior mortgage itself; thus, the junior mortgage is NOT given priority over the entire senior mortgage, regardless of whether the advance was optional or the senior mortgagee was contractually obligated to make it.

Question 13

If an occupier initially has the true owner’s permission to enter the land, may she acquire title to the land by adverse possession?

A Yes, unless the occupier believes she is on her own land

B No, because the statute of limitations will not begin to run

C No, because an adverse possessor must lack the true owner’s permission to be on the land

D Yes, if the occupier communicates hostility

Answer 13

D

Yes, an occupier who initially has the true owner’s permission to enter the land may acquire title to the land by adverse possession if the occupier communicates hostility and satisfies the other elements of adverse possession. To establish title by adverse possession, the occupier 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. If the occupier enters with the owner’s permission, her possession may become adverse only once she makes it clear to the owner that she is claiming hostilely. This can be done by explicit notification, by refusing to permit the true owner to come onto the land, or by other acts inconsistent with the original permission. The occupier’s state of mind is irrelevant to adverse possession, which means that it does not matter whether the occupier believes she is on her own land, knows she is trespassing on someone else’s land, or has no idea who owns the land. While it is true that an adverse possessor must lack the true owner’s permission to be on the land, a subsequent communication of hostility may cause initially permissive possession to become adverse, as explained above. The statute of limitations WILL begin to run if an occupier who initially had the true owner’s permission to enter the land communicates hostility, as explained above.

Question 14

Which of the following is a future covenant for title?

A Covenant of warranty

B Covenant against encumbrances

C Covenant of seisin

D Covenant of right to convey

Answer 14

A

The covenant of warranty is a future covenant for title. A general warranty deed contains covenants for title through which the grantor warrants against title defects created by herself and prior titleholders. The usual covenants for title include present covenants, which can be breached only at the time of conveyance; and future covenants, which can be breached only upon eviction (i.e., interference with the possession of the grantee or her successors by someone with better title). Through the covenant of warranty, the grantor agrees to defend the grantee’s title from any third party’s lawful or reasonable claims of title and to compensate the grantee for any related loss. Because this covenant cannot be breached until a third party interferes with possession, it is a future covenant. The covenant of seisin is a present covenant for title. Through it, the grantor warrants that she has the estate or interest she purports to convey (i.e., both title and possession) at the time of the grant. The covenant against encumbrances is a present covenant for title. Through it, the grantor warrants that there are no encumbrances (e.g., easements, profits, or mortgages) against the title or interest conveyed. The covenant of right to convey is a present covenant for title. Through it, the grantor warrants that she has the power and authority to make the grant (i.e., she has title or is the titleholder’s authorized agent).

Question 15

A deed generally must contain which of the following in order to be valid?

A The grantor’s acknowledgment.

B The grantor’s words of intent.

C The grantee’s signature.

D The metes and bounds of the land.

Answer 15

B

A deed generally must contain the grantor’s words of intent in order to be valid. A deed must demonstrate that the grantor intends to transfer realty (e.g., by using the word “grant”). However, no particular technical phrasing is necessary. A deed generally need not contain the grantor’s acknowledgment in order to be valid. Before a deed can be recorded under most recording statutes, it must be acknowledged by the grantor before a notary public. However, the grantor’s signature, without an acknowledgement, is sufficient for the deed itself to be valid. A deed generally need not contain the metes and bounds of the land in order to be valid. While a deed must identify the land, a metes-and-bounds description is only one of many ways property may be described. A description is sufficient if it provides enough information to identify the property in question (e.g., a street address, or a reference to a lot in a recorded subdivision plat). A deed generally need not contain the grantee’s signature in order to be valid. Even if the deed contains covenants on the grantee’s part, her acceptance of the deed is sufficient to make those covenants enforceable.

Question 16

Which of the following parties would be entitled to prevail against a prior transferee under “notice” and “race-notice” statutes?

A A donee of the land

B A judgment creditor

C A mortgagee for value

D One who took the land by specific bequest

Answer 16

C

A mortgagee for value would be entitled to prevail against a prior transferee under “notice” and “race-notice” statutes. Notice and race-notice recording acts protect bona fide purchasers (“BFPs”) from prior unrecorded conveyances of the same property. A BFP is a purchaser who takes land without notice of a prior instrument and pays valuable consideration. Donees, heirs, and devisees are not BFPs because they do not give value for their interests; i.e., they are not purchasers. Thus, a donee of the land and one who took the land by specific bequest would not be entitled to protection under the recording acts. In contrast, mortgagees for value ( i.e., those who loan substantial money in return for a mortgage on the land) are treated as “purchasers,” either expressly by the recording act or by judicial classification. A judgment creditor would not be entitled to prevail against a prior transferee under “notice” and “race-notice” statutes. In nearly all states, a plaintiff who obtains a money judgment can obtain, by statute, a judgment lien on the defendant’s real estate. The majority of cases hold that the judgment lienor is not protected either because (i) he is not a BFP because he did not pay value for the judgment, or (ii) the judgment attaches only to property “owned” by the defendant, and not to property the defendant has previously conveyed away, even if that conveyance was not recorded.

Question 17

A recording act that provides: “Any conveyance of an interest in land, other than a lease for less than one year, shall not be valid against any subsequent purchaser for value, without notice thereof, unless the conveyance is recorded,” is a:

A race statute

B race-notice statute

C statute of frauds

D notice statute

Answer 17

D

A recording act that provides: “Any conveyance of an interest in land, other than a lease for less than one year, shall not be valid against any subsequent purchaser for value, without notice thereof, unless the conveyance is recorded,” is a notice statute. Under a notice statute, a later purchaser of land will prevail over an earlier grantee if she takes without actual or constructive (e.g., record) notice of the earlier grant. The above language is not a race-notice statute. An example of a race-notice statute is: “Any conveyance of an interest in land, other than a lease for less than one year, shall not be valid against any subsequent purchaser for value, without notice thereof, whose conveyance is first recorded.” Under a race-notice statute, a later purchaser will prevail over an earlier grantee only if she takes without actual or constructive (e.g., record) notice of the earlier grant and records before he does. The above language is not a pure race statute. An example of a pure race statute is: “Any conveyance of an interest in land, other than a lease for less than one year, shall not be valid against any subsequent purchaser whose conveyance is first recorded.” Under a race statute, notice is irrelevant. The first party to record, regardless of the date of her conveyance, wins. The Statute of Frauds is not a recording act. Every conveyance of an interest in land with a duration long enough to bring into play a particular state’s Statute of Frauds (typically one year) must be evidenced by a writing, signed by the party to be charged.

Question 18

In order to prevail over a prior grantee under a race-notice statute, when must a subsequent bona fide purchaser record?

A Before the prior grantee records.

B A bona fide purchaser will prevail over a prior grantee under a race-notice statute without recording.

C Before she learns of the prior grant.

D Before she takes possession of the property.

Answer 18

A

In order to prevail over a prior grantee under a race-notice statute, a subsequent bona fide purchaser (“BFP”) must record before the prior grantee records. A race-notice statute is a recording act that alters the common law rule of “first in time, first in right” to protect a subsequent BFP ( i.e., one who gives valuable consideration and lacks notice of the prior conveyance). However, to obviate questions about the time of delivery and to induce parties to record promptly, race-notice statutes only protect BFPs who are first to record. A subsequent BFP need not record before she learns of the prior grant. The notice requirement of BFP status is measured from the time of the subsequent grantee’s receiving her conveyance. Thus, a BFP who lacked notice at the time of the conveyance, then learned of the prior interest, and then recorded, can still prevail over a prior interest—provided the BFP records before the prior grantee records. A subsequent BFP under a race-notice statute need not record before she takes possession of the property. Rather, she must record before a prior grantee records. The date that the subsequent BFP takes possession is immaterial for purposes of prevailing over a prior grantee. A bona fide purchaser will NOT prevail over a prior grantee under a race-notice statute without recording. A race-notice statute contains the recording requirement discussed above. By contrast, under a notice statute, a subsequent BFP need not record in order to prevail over a prior grantee who failed to record. A notice statute requires only that the subsequent purchaser have no actual or constructive (i.e., record or inquiry) notice at the time of the conveyance. This is not the case under a race-notice statute.

Question 19

Regarding the delivery and acceptance of a deed, which of the following will courts generally NOT presume?

A A grantee accepts a deed if the conveyance would benefit her.

B A grantee’s return of a deed is a reconveyance to the grantor.

C A grantee accepts a deed if she is a minor.

D A grantee’s possession of a deed means it has been delivered.

Answer 19

B

Regarding the delivery and acceptance of a deed, courts will not presume that a grantee’s return of a deed is a reconveyance to the grantor. A deed will not transfer an interest in land unless it has been delivered by the grantor and accepted by the grantee. Title passes to the grantee upon effective delivery, and returning the deed to the grantor has no effect. To effect a reconveyance, the grantee must execute and deliver a new deed. Courts generally will presume that a grantee’s possession of a deed means it has been delivered. Unless the grantor clearly expressed his intent that title pass to the grantee without physical delivery, the grantor’s continued possession of the deed raises a presumption of nondelivery. Conversely, the grantee’s possession of a properly executed deed raises a presumption of delivery. Regarding acceptance of a deed, courts generally will presume that a grantee accepts a deed if the conveyance would benefit her. In most states, acceptance is presumed if the conveyance is beneficial to the grantee, regardless of whether the grantee knows of it. In other states, acceptance is presumed only where the grantee knows of the grant and fails to reject it. Courts also will presume that a grantee accepts a deed if she is a minor. In all states, acceptance is presumed if the grantee is an infant or an incompetent.

Question 20

A homeowner lived next door to a vacant lot owned by another neighbor. From the time the homeowner purchased his own property, he told other people that he owned the vacant lot. The homeowner had an underground dog fence installed under the vacant lot without the neighbor’s knowledge. The homeowner also mowed the vacant lot regularly in the summer. When he had landscaping services performed on his own property, the landscapers dug up vegetation beds, which extended three feet into the neighbor’s lot. After the statutory period for bringing a trespass action had passed, the homeowner brought an action to quiet title, claiming ownership of the vacant lot.

Which of the following additional facts, if true, would be most helpful to the homeowner’s case?

A One of the people that the homeowner often told about owning the vacant lot was the neighbor herself.

B The neighbor occasionally saw the homeowner’s dog on the vacant lot, but never demanded that the homeowner keep the dog in the homeowner’s yard.

C The vegetation beds continued to exist with the same dimensions, and were regularly maintained by the homeowner, for the entire statutory period.

D When he told people that he owned the vacant lot, the homeowner believed that it was true.

Answer 20

A

Telling the neighbor about owning the lot would be most helpful to the homeowner. Establishing title by adverse possession requires the possessor to show (i) actual and exclusive possession that is (ii) open and notorious, (iii) adverse, and (iv) continuous for the statutory period. Mowing the vacant lot regularly would be an act consistent with open and notorious possession. That along with the homeowner’s communication of hostility–which means simply that the homeowner is possessing without the neighbor’s permission–ought to establish open and notorious adverse possession. (B) is incorrect. The placement of the underground dog fence without the neighbor’s knowledge means that the possession of the property is not open and notorious. That the homeowner’s dog occasionally went over into the vacant lot does not result in open and notorious possession by the homeowner. (C) is incorrect, because constructive possession of part of a tract of land is sufficient to obtain title to the whole only if there is reasonable proportion between the part actually possessed and the whole of the tract. Landscaping that crosses over a few feet into the vacant lot is not likely to rise to the level of possession of the whole. (D) is incorrect, because the state of mind of the homeowner is irrelevant in determining whether the possession is hostile. The only consideration is whether he was actually in possession without the true owner’s permission.

Question 21

An uncle executed a warranty deed granting a parcel of land to his nephew. The uncle placed the deed in his bedroom closet and told his friend to get the deed and give it to the nephew if the nephew survived the uncle. Several years later, the uncle conveyed the land by quitclaim deed to a purchaser for $20,000. The uncle told the purchaser about the earlier deed to the nephew, and he told the purchaser that he planned to tear it up, but the uncle never did so. The purchaser properly recorded her deed. The uncle died the following year, leaving the nephew as his sole surviving heir. The friend thereupon delivered the uncle’s deed to the nephew, which was the first time the nephew knew of the deed. A statute of the jurisdiction in which the land is located provides: “No conveyance or mortgage of real property shall be good against subsequent purchasers for value and without notice whose conveyance is first recorded according to law.”

Was the deed from the uncle to the purchaser effective?

A Yes, as a conveyance of title when delivered.

B Yes, on recordation, to cut off the nephew’s interest in the property.

C No, as against the nephew, because the purchaser knew of the deed from the uncle to the nephew when she became a grantee.

D No, as against the nephew, because the purchaser took by quitclaim deed and thus stands in the shoes of the uncle.

Answer 21

A

The purchaser’s deed was effective to convey title from the uncle to the purchaser immediately on delivery. A quitclaim deed transfers whatever right, title, or interest in the property the grantor has. Thus, when the purchaser took by quitclaim deed, she acquired the uncle’s interest in the land. Because the deed from the uncle to the nephew was never validly delivered, the conveyance is ineffective and the uncle was the sole owner of the property. If a grantor executes a deed but fails to deliver it during his lifetime, no conveyance of title has occurred. “Delivery” refers to the grantor’s intent; it is satisfied by words or conduct showing that the grantor intended that the deed have a present operative effect–i.e., that title pass immediately and irrevocably, even though the right of possessing the land may be postponed until some future time. To make an effective delivery, the grantor must relinquish control. Here, the uncle clearly did not intend to relinquish the land because he executed the deed but retained it, and merely told his friend to deliver it at his death to his nephew, provided that the nephew was still alive. Thus, because the uncle did not intend to relinquish control of the land until his death, there was no valid delivery of the deed. Note that the deed did not convey a future interest to the nephew. To convey a future interest (i.e., a present interest in the property, but where possession is postponed until some future time), there must also be a present intent to convey an interest. Here, the uncle showed no intent to presently convey an interest because he retained the deed. Generally, in cases where the grantor has retained the deed, the condition that title will not pass until the grantor’s death must be contained in the language of the deed itself for a future interest to be conveyed. Therefore, the purchaser took full title to the land. (B) is wrong because recordation of the purchaser’s deed is irrelevant. The nephew never had an interest that could be cut off (see above). Thus, the purchaser prevails because she acquired valid title from the uncle, rather than because of any priority in recording. Had the purchaser not recorded her deed, she would still have prevailed. (C) is wrong because it is irrelevant that the purchaser knew of the earlier deed to the nephew. The earlier deed to the nephew was not a valid conveyance of the property because there was no delivery. Because no interest passed to the nephew, the purchaser’s notice of the deed is meaningless. (D) is wrong because the fact that the conveyance was by quitclaim deed is not important; the purchaser is the full owner of the land. This choice implies that the purchaser’s quitclaim deed is somehow ineffective against the nephew’s warranty deed, but the fact that the purchaser took by quitclaim does not in any way lessen her interest in the land. A quitclaim deed effectively conveys all interest in the property the grantor has. In this case, the uncle had a fee simple absolute, and so that is what passed to the purchaser under the deed. The nephew’s warranty deed was never delivered, and thus it was worthless.

Question 22

A landowner embarked on an expedition into a remote jungle, leaving no means to communicate with him. Because property values suddenly began plummeting in the landowner’s neighborhood, his son believed that it was imperative to sell his father’s property before it became worthless. Having no way to speak to his father ahead of time, the son prepared a deed conveying the property to a buyer, but left the line for the buyer’s name blank. He then signed his father’s name on it as the grantor, and handed the deed to the buyer. The deed, however, did not include any language regarding the amount the father was to receive in exchange for the property. The buyer believed that the son was the owner of the property. When the father returned, he was happy that the property had been sold.

If the buyer changed his mind and now wishes to have the conveyance set aside, which of the following would be his best argument?

A The deed was not valid because the rapidly declining property values amounted to extreme duress.

B The deed was not valid because the buyer was not identified in the writing.

C The deed was not valid because the consideration for the deed was not contained in the writing.

D The deed was not valid because the son signed it.

Answer 22

D

The buyer’s best argument would be that the deed is void because the son signed it. A valid deed requires a writing containing a description of the land and parties, words of intent, and the grantor’s signature. Here, the signature on the deed was forged. A defective deed may be voidable, which means that it would be set aside only if the property had not been conveyed to a bona fide purchaser, or it could be void, meaning that the deed would be set aside regardless of the property having passed to a bona fide purchaser. Deeds obtained by means of, among other things, duress, undue influence, or mistake are considered voidable. Deeds that were forged, never delivered, or obtained by fraud in the factum are void. Here, although the father seems to have ratified the conveyance and the buyer was a bona fide purchaser, the deed is void because the signature was forged. (A) is incorrect. A deed obtained by duress would be merely voidable, and in any case, the pressure caused by rapidly dropping values is not the duress that is contemplated by the common law rule. Duress for voidability purposes means pressure that is brought by an individual or entity in order to procure the deed. (B) is incorrect. Although a deed must identify the parties, courts will presume that the person taking delivery is authorized to fill in the name of the grantee. In the absence of the son’s forgery–i.e., if the landowner had executed and handed the deed to the buyer–all the buyer would have had to do was fill in his name and the deed would be valid. (C) is incorrect because a recitation of the consideration for the conveyance is not required to make a deed valid.

Question 23

A testator executed a will, devising his land “to my son and my daughter, share and share alike.” Shortly thereafter, the daughter died intestate, leaving a child as her only heir. The next year, the testator and his son were involved in a car accident. The testator died immediately. The son died six days later, leaving a will that bequeathed his entire estate to his wife. The jurisdiction has the following statute: “If a devisee, including a devisee of a class gift, who is a grandparent or a lineal descendant of a grandparent of the testator is dead at the time of execution of the will or fails to survive the testator, the issue of such deceased devisee shall take the deceased’s share under the will.”

Who owns the land?

A The daughter’s child owns all of the land in fee simple.

B The son’s wife owns all of the land in fee simple.

C The daughter’s child and the son’s wife each own an undivided one-half interest in the land.

D The daughter’s child and the son’s wife each own one-half of the land.

Answer 23

C

The daughter’s child and the son’s wife each own an undivided one-half interest in the land. At common law, if a will beneficiary died before the testator, the gift to the beneficiary was void. However, this jurisdiction has an anti-lapse statute, which saves the gift for the predeceasing beneficiary’s descendants if the beneficiary herself is a descendant of the testator. Here, when the daughter died, her one-half interest in the land passed to her child under the anti-lapse statute. When the son died, his one-half interest in the land, to which he was entitled on the father’s death when the father’s will took effect, passed through the son’s estate (not the anti-lapse statute) to his wife. Moreover, a conveyance to two or more persons is presumed to create a tenancy in common rather than a joint tenancy unless an intention to create a right of survivorship is clearly expressed. Each co-tenant has the right to possess all portions of the property; no co-tenant has the right to exclusive possession of any part. Therefore, the daughter’s child and the son’s wife each own an undivided one-half interest in the land as tenants in common. (A) and (B) are wrong because neither the child nor the wife owns all of the land in fee simple. (D) is wrong because the child and the wife each own an undivided one-half interest, which is a one-half interest as to the entire tract, as opposed to one-half of the land, which would be all interest in a one-half part of the tract.

Question 24

A landowner owned a large tract of land containing numerous coal mines. To finance the renovation of some of the buildings on the land, the landowner obtained a $50,000 mortgage from a bank. Shortly thereafter, the landowner conveyed the surface of the land to his sister and the mineral rights to a utility company. The bank recorded its mortgage the next day; the day after that, the utility company recorded its deed; the following day, the sister recorded her deed. None of the parties dealing with the landowner had any knowledge of the others at the time of their transactions.

The jurisdiction in which the land is located has the following statute: “No conveyance or mortgage of an interest in land is valid against any subsequent purchaser for value without notice thereof whose conveyance is first recorded.”

If the sister brings an action to quiet title to the land, what would be the most likely result?

A The sister would have only a reversionary interest.

B The bank’s mortgage would be valid and superior simply because it was first in time.

C The sister would be deemed the owner in fee simple absolute and subject only to the payment of the mortgage held by the bank.

D The sister would have a fee simple interest subject to the mineral rights of the utility company and the mortgage held by the bank.

Answer 24

D

The sister’s fee simple ownership of the land would be subject to the bank’s mortgage interest and the utility company’s mineral interest. Under a race-notice statute, which the jurisdiction in this question has, a subsequent bona fide purchaser (i.e., one who takes for value and without notice) is protected only if she records before the prior grantee. Notice is measured at the time of the conveyance, not at the time of recording. The rationale of this type of statute is that the best evidence of which interest was created first is to determine who recorded first. As an inducement to record promptly, race-notice statutes impose on the bona fide purchaser the additional requirement that she record first. Because the bank was the first to receive a conveyance, the bank could not be held to have knowledge of any other conveyance, and when the bank recorded its conveyance first, the bank won out over the sister and the utility company under the statute. The utility company owns the mineral interest in coal on the land because it recorded before the sister. (A) is incorrect because the sister has a present ownership interest in the land, but it is subject to the bank’s mortgage and the utility company’s mineral interest. (B) is incorrect because the jurisdiction has a race-notice statute. Thus, the bank’s interest is superior only if it is first in time and without notice of all other interests. (C) is incorrect because, as discussed above, the sister does not have a fee simple absolute; the utility company owns the mineral interest.

Question 25

A rancher entered into a written contract to buy a farm from a farmer for $100,000. The contract stipulated for closing on September 30. In addition, the contract contained the following provision: “The taxes shall be prorated as agreed to by the parties at a later date.” Upon the signing of the contract, the rancher gave the farmer a check for $10,000 as a down payment. On September 28, the rancher notified the farmer that he would not be able to close on the farm until October 2, because the closing on his current home, the proceeds from which were to be applied to his purchase of the farm, was unavoidably delayed due to his buyer’s illness. Meanwhile, the farmer had difficulty finding a home she liked as well as the farm. She decided that she would rather not sell the farm and wished to avoid the contract with the rancher. On October 2, the rancher showed up at the closing with the $90,000 to tender to the farmer. The farmer did not show up. The rancher sues for specific performance.

In whose favor will the court most likely rule?

A The farmer, because the tax provision is an essential term of the contract, and it is not specific enough to satisfy the Statute of Frauds.

B The farmer, because the rancher materially breached by not tendering performance on September 30.

C The rancher, because of the operation of the doctrine of equitable conversion.

D The rancher, because time was not of the essence.

Answer 25

D

The rancher will prevail because there is no evidence that time was of the essence. In general, courts presume that time is not of the essence in real estate contracts. Thus, the closing date stated in the contract is not absolutely binding in equity, and a party, even though late in tendering his own performance, can still enforce the contract if he tenders within a reasonable time. (One to two months is usually considered reasonable.) Time will be considered of the essence only if: (i) the contract so states, (ii) the circumstances indicate it was the parties’ intention, or (iii) one party gives the other notice that he desires to make time of the essence. The contract in this case made no mention that time was of the essence. The facts do not indicate any circumstances, such as rapidly fluctuating prices or the need for the money to close another critical transaction, that would indicate that the rancher and the farmer intended time to be of the essence. The farmer did not give the rancher reasonable notice before September 30 that she wanted to make time of the essence. Thus, the court will not find that time is of the essence here. Because time is not of the essence, the rancher is not in material breach and is entitled to specific performance. (A) is wrong because the Statute of Frauds is not violated here. Contracts for the sale of land must be in writing to be enforceable. The essential terms for purposes of the Statute of Frauds are: the description of the property, the identification of the parties, and the price. The tax provision is not an essential term. It is an incidental matter, which need not appear in writing or even be agreed upon. (B) is wrong because, as discussed above, the rancher is not in material breach. Time was not of the essence, so the fact that the rancher did not tender his performance on September 30 did not constitute a breach of the land sale contract. (C) is wrong because the doctrine of equitable conversion will not affect the rights of the parties in this situation. The doctrine of equitable conversion holds that once an enforceable contract of sale is signed, the purchaser’s interest is real property, and the seller’s interest (the right to proceeds) is personal property. This is important with respect to which party bears the risk of loss if the property is damaged before the date set for closing or if one of the parties dies prior to closing. It has no effect in situations like this one where the question in issue is the enforceability of the contract itself.

Question 26

A landowner owned a large piece of property containing an inn and a bakery. She entered into a contract to sell the property to a purchaser for $1 million. The contract was recorded. The purchaser gave the landowner $200,000 as earnest money. The closing date was set for September 10, two months after the signing of the contract. On August 10, an arsonist set fire to the inn, which burned to the ground. On September 10, the landowner appeared at the closing and tendered the deed to the property. The buyer refused to tender the remaining $800,000 of the purchase price and demanded the return of his earnest money. The landowner sued the buyer for specific performance of the contract. The buyer countersued for the return of his earnest money. Both parties stipulate that the value of the property without the inn is $600,000, that insurance on the property had lapsed, and that the common law, unmodified by statute, applies.

What is the most likely result at trial?

A The landowner will not prevail on the issue of specific performance, but will be allowed to keep the earnest money.

B The landowner will not prevail on the issue of specific performance and will be ordered to return the earnest money.

C The landowner will prevail on the issue of specific performance, but the price will be abated to $600,000.

D The landowner will prevail on the issue of specific performance for the full contract price.

Answer 26

D

The landowner will succeed in her suit for specific performance at the full contract price. Where property subject to a contract for sale is destroyed without the fault of either party before the date set for closing, the rule in the absence of a statute is that the risk of loss is on the buyer. Thus, the buyer must pay the contract price despite a loss due to fire, unless the contract provides otherwise. Here, the inn was destroyed by fire after the landowner and the buyer entered into their contract for the sale of the property, but before the closing date. The contract apparently was silent regarding the risk of loss and there is no applicable statute. Thus, under the common law rule, the risk of loss is on the buyer. As a result, the landowner is entitled to receive specific performance of the contract, meaning that the buyer must pay the full contract price. (A) and (B) are incorrect because they conclude that the landowner is not entitled to specific performance. As explained above, the landowner is entitled to specific performance because the risk of loss is on the buyer. (B) is also incorrect because it states that the landowner must refund the earnest money. The landowner is entitled to the full contract price; thus, there is no reason for her to return the earnest money. (C) is incorrect because it allows the buyer to tender less than the full contract price. With the buyer bearing the risk of loss, he must pay the $1 million contract price despite the decrease in the property’s value due to the fire.

Question 27

On April 15, a seller entered into a valid written agreement to sell her home to a buyer for $175,000. The provisions of the agreement provided that closing would be at the buyer’s attorney’s office on May 15, and that the seller would deliver to the buyer marketable title, free and clear of all encumbrances. On the date of closing, the seller offered to the buyer the deed to the house, but the buyer refused to go ahead with the purchase because his attorney told him that a contractor who had done work on the house had recorded a lis pendens on May 1 against the property regarding a $10,000 contract dispute he had with the seller. The seller indicated that she was unaware of the lien, but that she was willing to go ahead with the sale and set aside funds from the purchase price to cover the contractor’s claim until the dispute was resolved. The buyer still refused to proceed, stating that the seller had breached the contract.

If the seller brings an action against the buyer for specific performance, what is the probable result?

A The buyer prevails, because the title to the property was not marketable as of the date of closing.

B The buyer prevails, because an encumbrance was on the title as of the date of closing that was subject to litigation.

C The seller prevails, because under the doctrine of equitable conversion, the buyer was the owner of the property when the lis pendens was recorded, and therefore it was invalid.

D The seller prevails, because an implied term of their contract was that she could use the proceeds to clear any encumbrance on the title.

Answer 27

D

The seller will likely prevail because she is entitled to clear the encumbrance with the proceeds of the sale. In a contract for the sale of real property, the seller of the land is entitled to use the proceeds of the sale to clear title if she can ensure that the purchaser will be protected. The seller’s offer to escrow the funds in this case should act as such guarantee. Thus, (A) is incorrect. (B) is incorrect because, although there will be litigation over the contract dispute, the litigation will not affect the title to the land because the contractor is claiming only money damages and not an interest in the property. (C) is incorrect because the doctrine of equitable conversion is only applicable as against the seller and the buyer, and does not affect the right of some third party with regard to attaching property held in the name of a debtor.

Question 28

A developer and an investor had been in the real estate business for many years. Because of their long-standing relationship, the developer and the investor, neither of whom was an attorney, often dispensed with certain legal formalities when dealing with each other, thus saving the costs of lawyers’ fees and other attendant expenses. The investor owned a parcel of land that the developer was interested in, and she offered to buy it from him for $50,000. The investor accepted the developer’s offer, and the parties agreed on June 15 as the closing date. The developer handed the investor a check for $2,500 with “earnest money” written in the memo, and they shook hands on their deal. A few weeks before closing, the developer called the investor and told him she had changed her mind about purchasing the land because of a a sudden economic downturn in the area. The investor appeared at the developer’s office on June 15 with the deed to the land in his hand. The developer refused to tender the balance due, and the investor sued the developer for specific performance.

Will the investor prevail?

A No, because the agreement does not comply with the Statute of Frauds and is, therefore, unenforceable.

B No, but the court will allow the investor to keep the $2,500 earnest money as damages.

C Yes, because the $2,500 payment constituted part performance of the contract.

D Yes, because the developer and the investor had established a course of dealing.

Answer 28

A

The investor will not succeed in a suit for specific performance because the agreement is unenforceable under the Statute of Frauds. Under the Statute of Frauds, a land sale contract is unenforceable unless it is in writing and signed by the party to be charged. The Statute of Frauds requires the writing to contain all essential terms of the contract, which are: (i) a description of the property, (ii) identification of the parties to the contract, (iii) the price and manner of payment, and (iv) the signature of the party to be charged. Here, the agreement between the investor and the developer concerns the sale of land; thus, the agreement must be in writing to comply with the Statute of Frauds. The only writing mentioned in the facts is the check given to the investor by the developer. This check contains neither a description of the property that is the subject of the agreement nor the price and manner of payment. Thus, the check is not a writing sufficient to satisfy the Statute of Frauds. Consequently, the agreement is unenforceable, and the investor will not prevail. (B) is incorrect because, if there is no enforceable agreement, there can be no “breach” of the agreement, for which breach the investor would be entitled to damages. Therefore, the investor may not keep the earnest money as damages. (C) is incorrect. Under the doctrine of part performance adopted by some states, a court may grant specific performance of a contract despite the absence of a writing if there has been payment of the purchase price. Even under this view, however, the developer’s payment of $2,500 out of a total price of $50,000 will not constitute sufficient performance to remove this agreement from the purview of the Statute of Frauds. (D) is incorrect because “course of dealing” (i.e., a sequence of previous conduct between the parties that may be regarded as establishing a common basis of their understanding) may be used to explain or supplement the terms of a written contract under the Uniform Commercial Code (“UCC”). This question does not involve the sale of goods, so the UCC is inapplicable. Furthermore, here there is no written agreement, the terms of which can be explained or supplemented by showing a course of dealing between the developer and the investor. Although the developer and the investor often dispensed with legal formalities as a cost-saving measure, this “course of dealing” will not confer validity on their oral agreement for the sale of land.

Question 29

A homeowner borrowed $50,000 from a bank, secured by a mortgage on his home. Shortly thereafter, the homeowner sold his home to a buyer for $70,000 by a deed containing a recital signed by both parties that title passed “subject to” the bank’s mortgage, “which obligation grantee expressly assumes.” The buyer paid the homeowner $20,000, took possession of the house, and began making monthly payments of principal and interest to the bank. A few years later, a chemical manufacturing firm built a huge sulfur processing plant just down the road from the home, which caused the house to immediately decline in value to $35,000. Subsequently, the buyer stopped making the monthly payments to the bank. The bank exercised its contractual right of nonjudicial foreclosure and sold the house at a public auction for $34,000. The bank then brought suit against the homeowner and the buyer for $14,000, the difference between the proceeds of the foreclosure sale and the $48,000 principal remaining due on the original loan to the homeowner. The jurisdiction does not bar deficiency judgments.

Against whom should the bank be granted a judgment for $14,000?

A Both the homeowner and the buyer.

B Only the homeowner.

C Only the buyer.

D No one.

Answer 29

A

Both the homeowner and the buyer are liable for the deficiency. If a sale of foreclosed property does not bring enough to satisfy the mortgage debt, the mortgagee/lender can bring a personal action against the mortgagor/debtor for the deficiency (as long as the jurisdiction does not bar deficiency judgments). When the mortgagor sells the mortgaged property and gives a deed, the grantee takes subject to the mortgage, which remains on the land. If the grantee does not sign an agreement to assume the mortgage, he does not become personally liable on the loan, and the original mortgagor remains personally liable. If the grantee does sign an assumption agreement, however, the lender is considered a third-party beneficiary of the agreement, and hence may recover from the assuming grantee, who is primarily liable, or the original mortgagor, who is secondarily liable. Here, the buyer signed the recital providing for the assumption, so she will be personally liable on the loan. Therefore, (A) is correct, and (B) is incorrect. (C) is incorrect because the homeowner, the original mortgagor, did not extinguish his own personal liability on the loan by obtaining the assumption agreement from the buyer. He remains secondarily liable as a surety. Thus, the bank may sue the homeowner on the original mortgage agreement. (Note that while the bank may obtain a judgment against both of them, its maximum recovery will be the $14,000 deficiency.) (D) is incorrect because the facts indicate that the jurisdiction does not bar deficiency judgments.

Question 30

A buyer bought a home from a real estate developer for $700,000. The buyer paid $100,000 of the purchase price herself. The buyer’s employer provided $100,000 of the purchase price by giving the buyer a loan and taking a mortgage. The developer loaned $500,000 to the buyer to finance the remainder of the purchase price, and in return took a mortgage on the property. One week later, a bank obtained a judgment against the buyer for a delinquent credit card balance. The bank properly recorded its judgment as a lien against the property.Another month after that, the buyer incurred some extraordinary medical expenses, and asked the employer for another $100,000, which the employer provided and added onto the principal balance the buyer owed on the loan. Finally, six months later, the buyer asked the developer to change the terms of the loan, so that the buyer would have more time to pay. The developer and the buyer agreed that the buyer could have an additional five years to pay the balance of the loan in exchange for an increase in the principal of the loan. Shortly thereafter, the buyer lost his job and defaulted on all of his payments. The employer brought an action to foreclose its mortgage. All mortgages and liens were promptly and properly recorded.

Regarding the distribution of the proceeds of an eventual sheriff’s sale of the property, which of the following statements is true?

A The bank is paid in full before the developer is paid in full.

B The employer is paid in full before the bank receives any proceeds.

C The developer is paid in full before the employer receives any proceeds.

D The developer is paid in full before the employer is paid in full.

Answer 30

A

The bank will be paid in full before the developer is paid in full. Generally, the priority of mortgages is chronological. A number of other factors, however, may affect priority. Where a seller of property receives a mortgage as part of the purchase price, a purchase money mortgage results. Purchase money mortgages may also arise when a third party lends money to the buyer for the purchase of property and takes a mortgage on the property in return. In general, the seller’s purchase money mortgage will take priority over the third-party purchase money mortgage. Purchase money mortgages, however, are subject to later liens by virtue of recording acts. In the case where a mortgage is modified by agreement between the parties, any increase in the debt resulting from the modification will be subject to a junior lien, even if the original mortgage itself had priority over the junior lien. In the same way, an optional (as opposed to an obligatory) advance that is made after the junior lien will have a lower priority than the junior lien. Again, this is the case even if the original mortgage is first in priority. Therefore, the distribution of sale proceeds in this case would be: (i) the original amount of the employer’s purchase money mortgage, (ii) the bank’s judgment, (iii) the $100,000 advance by the employer, and finally, (iv) the amount of the increase in the debt to the developer due to the agreed modification of the principal of the original loan. The original unmodified purchase money mortgage of the developer would remain on the land because it was senior to the mortgage being foreclosed (the employer’s). (B) is incorrect because the employer would not be paid in full before the bank received payment. (C) is incorrect because the developer would initially receive only the increased amount of the debt according to the modified loan terms. Also, the developer would have to wait until the bank judgment was satisfied and the employer was paid in full before the developer’s claim for the modification amount could be paid. (D) is incorrect because the developer would not be paid in full—its original purchase money mortgage would remain on the property after the foreclosure.

Question 31

A father purchased a tract of land, financing a large part of the purchase price by a loan from a bank that was secured by a mortgage on the land. A provision in the mortgage agreement, which had an acceleration clause, provided that a defaulting borrower waives his right to redeem once foreclosure proceedings have started. The bank properly recorded its mortgage. Several years later, the father needed money to send his twin daughters to college, so he obtained a loan from a credit union, also secured by a mortgage on the land. The credit union properly recorded its mortgage. The following year, the father became ill and was unable to make payments to either the bank or the credit union due to his high medical bills. The balance on the loan from the bank was $75,000, and the balance on the credit union loan was $25,000. The bank instituted foreclosure proceedings in a jurisdiction that provides a statutory right of redemption. The day before the judicial sale, the father inherited $100,000 from his aunt. He quickly contacted the bank and offered to pay off both loans in full. The bank refused because it was hoping to buy the now valuable property at the judicial sale.

If the father seeks to force the bank to accept his offer, will he likely prevail?

A Yes, because the jurisdiction has a statutory right of redemption.

B Yes, because equity requires a creditor to accept such an offer.

C No, because his agreement with the bank waived his right to redeem once foreclosure proceedings started.

D No, because he lost all of his rights in the property when he defaulted on the loan.

Answer 31

B

The father will win because he is exercising his equity of redemption rights. The equity of redemption gives the borrower the right to free the land of the mortgage by paying off the amount due, plus any accrued interest, at any time prior to the foreclosure sale. If the borrower has defaulted on a mortgage with an acceleration clause, he must pay the full balance in order to redeem. Here, the father’s offer to pay both the bank’s and the credit union’s loans is adequate to redeem the land. (A) is incorrect because a statutory right of redemption, recognized in about half the states, gives the borrower a right to redeem for the foreclosure price after the foreclosure sale. (C) is incorrect because this right to redeem cannot be waived in the agreement establishing the security interest. This would be “clogging the equity of redemption.” However, the right can be waived later for consideration. (D) is similarly incorrect because a defaulting debtor does not lose the equity of redemption.

Question 32

To buy a house, an investor secured a $10,000 mortgage from a bank. The bank promptly and properly recorded its mortgage. Subsequently, the investor financed certain improvements to the house with a $2,000 mortgage on the land from a finance company. The finance company promptly and properly recorded its mortgage. Before the investor made a payment on either mortgage, the federal government announced that it would begin storing nuclear waste products in the area. The value of property, including the investor’s house, plummeted. The investor did not pay either the bank or the finance company, and the bank brought a proper action to foreclose, notifying both the investor and the finance company. A buyer bought the house at the foreclosure sale for $6,000, which was its fair market value. There are no special statutes in the jurisdiction regarding deficiency judgments.

What does the investor owe?

A $5,000 to the bank and $1,000 to the finance company.

B $4,000 to the bank and $2,000 to the finance company.

C Nothing to the bank and $2,000 to the finance company.

D $4,000 to the bank and nothing to the finance company.

Answer 32

B

Absent any anti-deficiency statutes, the investor remains personally liable to pay for any shortfall arising from the foreclosure sale. Proceeds from the sale are used to satisfy the loan that was foreclosed first. Hence, all of the proceeds ($6,000) went to the bank. Thus, the investor must pay the balance still due the bank ($4,000) and the entire amount of the finance company’s mortgage ($2,000), which is terminated by the foreclosure of the senior mortgage. (A) is wrong because foreclosure sales are not allotted proportionally between senior and junior interests. (C) is wrong because foreclosure does not extinguish the underlying debt. (D) is wrong because the finance company’s mortgage does not remain on the land after foreclosure of the senior mortgage; hence, the investor is liable for that debt as well.