Property Outline PART 2 (Final) Flashcards
Required formalities for a Promissory Note
Subject to Statute of Frauds
Four Key Components:
1. The amount: Usually limited by the applicable loan-to-value ratio
2. The Interest rate: Can be fixed, adjustable, “teaser rate,” etc.
In theory, usury laws limited amount of interest that can be charged but not actually
3. The Term: Usually 25-30 years; may include due on sale clause, acceleration clause and/or prepayment penalty
4. The amortization schedule: Can be fully amortized or only partially amortized with a “balloon payment” at the end;
Each mortgage payment is applied to pay some principal of loan and some interest on the loan; mostly interest in early part of schedule
Fraud and other mischief (mortgages)
General rule: When there is fraud in the creation of loan or security instrument or subsequent transactions, the fraudulent document is invalid, and even bona fide purchasers for value (BFP) are not protected under the Recording Acts
Required formalities for a Mortgage?
- Subject to Statute of Frauds
• MAJ: Same requirements as for a Valid Deed
• Identifies borrower and lender
• Identifies property to be security
• Contains borrower’s intent to use property as security
• If combined with mortgage/deed of trust, recites that repayment is secured by
mortgage/deed of trust, thus linking the two transactions
• Signed by borrower - Executed mortgage must be delivered to lender
- Not required to be recorded to be enforceable
Two primary forms of security interests
Promissory Note and Mortgage (typical mortgage)
Mortgagor = borrower = debtor = buyer of property (“giving the mortgage”)
Mortgagee = lender = creditor
Promissory Note and Deed of Trust or “power of sale mortgage” (allows nonjudicial foreclosure)
Trustor = borrower = debtor = buyer of property
Trustee = 3rd party (usually bank or title company)
Beneficiary of the trust = Lender = Creditor
Lien theory vs Title theory vs Intermediate theory (mortgage forclosure)
Lien theory (MAJ): Mortgage is a lien on property If default, lender can foreclose and can only get title and right to possess through foreclosure process
Title theory:
Transfer of title
If default lender can take possession without foreclosure or can foreclose
Intermediate theory
If default, lender is entitled can take possession (and collect rents/profits) upon default before foreclosure is completed
“acceleration clause” (mortgage)
Allows the lender to demand full payment of the loan if the borrower fails to make even one installment payment.
Due on Sale Clause
Mortgage can be paid off at property sale (to protect lender from rising interest rates)
“Assumes the mortgage”
Buyer who assumes the mortgage debt becomes primarily liable to pay the loan
The original borrower becomes secondarily liable (meaning they can be sought after later)
Novation: lender agrees to substitute the liability of the buyer for that of the original borrower who is released from liability. (only lender can release)
“Subject to the mortgage”
Buyer can lose interest in the property but not assets from original borrower’s mortgage
Buyer can pay the loan but no duty to do so
In default, the buyer will lose their property interest via a foreclosure
Lenders Options when borrowers default
Work with borrower to get back on track
- Modification of loan or mortgage
- Use contract remedies/sue to enforce the promissory note against whomever is liable (See rules re if buyer assumed mortgage or took subject to mortgage)
- Take possession without foreclosing (if mortgage theory allows)
- Accept “Deed in Lieu of Foreclosure”
- Initiate Foreclosure
Special rule if default on mortgage where property is Life Estate
Life estate holder owes interest on the mortgage
Remainder holder owes the principal
Lender takes possession without foreclosure (mortgage foreclosure alternative)
Can only do this if they have a right to do so under the mortgage (ie title theory of mortgage states)
Usually they don’t want to possess it because they would be taking on the risks of possession including tort liability
But might do so if good revenue-producing property or to protect from waste
Deed in lieu of foreclosure (mortgage foreclosure alternative)
Get the deed instead of foreclosure
Effect is it releases the borrower from all obligations related to the mortgage and lender full ownership rights of the property
Required for transaction: consent of both mortgager and mortgagee
Borrowers options if default
- Request loan modification
- Reinstate the loan (pay what was due)
- Exercise right of equitable redemption = “redeem the property” by paying off the whole debt, e.g. by taking out another loan to pay off this one, or get someone else to assume it before the foreclosure sale.
- Offer lender a Deed in lieu of foreclosure: lender doesn’t have to accept
- Allow property to be foreclosed
- Abandon the property
Judicial Foreclosure process:
- Lender formally notifies borrower of default
- If borrower doesn’t act to resolve the problem, the lender files and serves complaint against borrower, junior lienholders and any other persons holding an interest in the property that are subordinate to the mortgage being foreclosed
- Defendants can answer the complaint and object
- Court considers any objections and rules in hearing; usually gives a judgment for lender providing for foreclosure sale as remedy
- Notice of foreclosure sale given
- Foreclosure sale occurs and highest bidder at foreclosure purchases property
- Judicial confirmation of the sale
- Official execute and delivers deed to purchaser
- Proceeds of foreclosure sale are distributed according to priorities
- Lender may seek deficiency judgment (if allowed)
Nonjudicial Foreclosure Process
By contract and with some state regulation (notice requirements)
State of Title after foreclosure
Lender must give proper notice to all junior lienholders and any other persons holding an interest in the property that are subordinate to the mortgage being foreclosed on
If state law provides a statutory right of redemption, the borrower can use it to reclaim the property for a certain time after the foreclosure sale. (equitable is before)
Title now fully on buyer unencumbered
Priority of Obligations (mortgage foreclosure)
Upon default of its loan, any mortgagee/beneficiarry of Deed of Trust can initiate foreclosure
Order of Distribution:
- Pay expenses of sale, attorney fees, and court costs
- Pay the principal and accrued interest of loan that was foreclosed
- If anything left (“surplus”), pay off any junior liens or interests in order of priority
- If anything still left, give to mortgager for her equity
General Rule to Establish Priority and Exceptions:
First in time is the general rule
Exceptions:
1. Operation of a recording act
(Will depend upon type of RA in the jdx and usually if lender had any kind of notice of prior mortgages/liens)
2. Subordination agreement in which creditor agrees to give priority to a junior mortgage or lien
3. Purchase Money Mortgage
4. Modifications of a Senior Mortgage
5. Future Advance Mortgage
6. Subrogation
7. Other state laws providing particular types of liens priority (e.g. property tax liens, child support liens, HOA liens…)
Purchase-Money Mortgage
A purchase money mortgage is a mortgage in which the loan proceeds are used to acquire title
Doesn’t have to be a residential property
A PMM has priority over other mortgages created by or that arose against the purchaser-mortgager prior to the purchaser mortgagor’s acquisition of the property, whether the PMM is recorded or not.
But PMM’s priority can be defeated by subsequent mortgages or liens by operation of the Recording Acts (if PMM not recorded) or by agreements between relevant parties. (e.g. a Subordination Agreement)
How a purchase money mortgage works:
A PMM has priority over other mortgages created by or that arose against the purchaser-mortgager prior to the purchaser mortgagor’s acquisition of the property, whether the PMM is recorded or not.
But PMM’s priority can be defeated by subsequent mortgages or liens by operation of the Recording Acts (if PMM not recorded) or by agreements between relevant parties. (e.g. a Subordination Agreement)
Modification of a Senior Mortgage effect on priority
If there are two mortgages and the senior mortgage is modified in a way that makes it more burdensome to borrower the junior mortgage is given priority over the modification (e.g. the increase in the debt), but only the modification.
- -payment schedules probably not enough
- -alterations in principal or amount are though
Future Advance Mortgage
If the original mortgage requires the lender to make further loans to the borrower after the original mortgage is executed, then such advantages will have the same priority as the original mortgage.
However, if further loans optional while having notice of junior lien, then those advances will have priority below the junior lien unless a statute provides otherwise.
Fact to be in hypo is that there is a requirement on further loans
Subrogation
[=substitution]
A mortgage taken out for refinancing a preexisting senior mortgage. Takes the priority position of the senior mortgage even though there may have been other mortgages/liens on the property between the time of the original mortgage and the refinancing.
But subrogation will not be enforced if there are countervailing equities (ie. circumstances that would make it unfair to enforce subrogation)
“Two funds” rule of marshalling
Applies when there are two lenders/mortgagees who have mortgages on one tract of land but one of them also has a mortgage on another tract of land
“Two funds” rule of marshalling is equitable doctrine that requires a senior creditor, having two or more funds to satisfy its debt, to first dispose of the fund not available to a junior creditor so as to preserve, if possible, the equity of the one whose lien extends to only one fund.
Ie bank must foreclose one without junior mortgages first
VERY SPECIFIC FACT SITUATION
Creditor asks a court to force a superior creditor to satisfy their debt out of the security interest which the invoking creditor does not have a lien against.
Borrower’s rights after foreclosure
Legal challenges to set aside the sale are available, but they are rarely successful because difficult standard. E.g. “shock the conscience of the court”
Statutory right of redemption vs equitable right of redemption
Allows borrower to reclaim the property for some specified time period after the foreclosure sale for a specified price (usually amount paid)
Equitable right of redemption:
Allows borrower to buy property after default but before foreclosure
Lender’s Rights after foreclosure
Deficiency judgments
If foreclosure sale proceeds are insufficient to pay a debt, lender can bring a personal action against debtor for the “deficiency” if state allows
Person(s) responsible to pay the loan are generally responsible for any deficiencies if state allows.
Deficiency rules and anti-deficiency statutes (no majority rule)
Some states prohibit deficiency judgments entirely on PMMs and on deeds of trust that are foreclosed by power of sale
Some states limit the amount that the lender can recover as a deficiency
Equitable Mortgage
Security interest transaction disguised as only a sale of land.
If courts find deed is security for debt, then foreclosure required and considered a mortgage.
Installment Land Contract
Similar to mortgage
Property transfers right after final installment
In typical contract remedy for any default is forfeiture
Harsh remedy even for minor default
No maj rule for alternatives to forfeiture, but for our purposes most jurisdictions provide some other remedy for vendee/buyer especially if vendee/buyer has paid a substantial amount of installments
Court probably won’t let lender kick off borrower after 80% paid with no process
Equitable Mortgage/Absolute Deed as Mortgage/Equitable Vendor’s Lien
It is a security interest transaction disguised as only a sale of land
• Debtor already owns the property
• Debtor arranges for loan from a lender
• Debtor give absolute deed to lender with no reference to debt to be paid or the property being a security interest for a debt
• Usually debtor remains on property and makes some other arrangement for the return of the property ownership to Debtor after the loan is repaid
- If default, because the lender has absolute deed, the lender wants to just evict the debtor and keep the property without any other process.
- But this can be harsh to debtor
- So, upon the debtor’s request, the court in equity may find that the parties actually intended a deed or other instrument to be security for a debt, and so the court will treat it as a mortgage, regardless of the form, and require lender to use foreclosure process to get title to the property
Recording Acts in General
- General Rule: First in Time is First in Right
- Recording Acts Create Exceptions:
A. If subsequent “purchaser/claimant” is eligible
and qualifies for protection under the relevant
Recording Act, or
B. If “Shelter Rule” applies
Types of Notice (recording act)
Actual notice
• Read, saw, or heard a fact
- Constructive Notice [= the law treats it as if it’s true]
- Record Notice
- Inquiry Notice
- Imputed Notice
Record Notice
All people presumed to know facts in public records
• Property records, probate records, court records, birth and death records, etc. (416)
Inquiry Notice
• Courts assume purchasers perform due diligence
• Person presumed to know certain information that Rable person would have found if:
1. Person read, saw, heard some fact that would put a Rable person on notice
–Often a stranger on the property or a reference in a recorded document
2. And if the person performed a Rable search
3. The search would have produced certain information
• Modern rule: Quitclaim deed does not create inquiry notice
Imputed Notice
Notice presumed by virtue of special relationship
ie A purchaser of land has imputed notice of all matters relating to the purchase of which his agent (e.g. a solicitor) has (or ought reasonably to have) knowledge.
Pure Race jxn
Eligible for protection against prior unrecorded interests under the Recording Acts:
only if subsequent purchaser recorded first
Thus, the knowledge of the winning transferee is irrelevant.
Pure Notice or Race-Notice Recording Act jxns
Subsequent BFP is eligible for protection against prior unrecorded interests under the Recording Acts
a. Again, a BFP is one who takes his interest without either actual or constructive notice of the prior transfer and pays value for the interest.
b. In a notice state, a subsequent BFP prevails over a prior unrecorded transferee, regardless of whether he/she records first.
“race-notice” legislation.
To come within the protected class, a subsequent purchaser must not only be a BFP, but it must also be the first to record, as in a race act state
Who is NOT eligible for protection against prior unrecorded conveyances under the Recording Acts?
Donees
Devisees and Heirs
But if Donee, Devisee or Heir get interest and properly records, it prevents subsequent claimant from using RA against them
Judgment creditors and RA protection
Whether judgment creditors are eligible for RA protection against prior interests depends upon state law and type of debt.
Maj rule: not eligible unless statute allows
State law: About half the states explicitly include judgment creditors (below). But if not explicitly included by statute, then generally not eligible. Even then sometimes only voluntary (mortgages etc)
The Shelter Rule
Rule: Someone who is not a BFP, but who gets an interest from a BFP who would have qualified for protection of the relevant recording act, is “sheltered” by the BFP’s protected status.
So, once a person’s title is protected under the recording act, that person can transfer good title to anyone—even someone who has actual notice of a prior adverse right or a donee—and the subsequent owner is “sheltered” under the BFP.
The Shelter Rule does not apply in Pure Race Recording Act jurisdictions because in those jurisdictions notice is irrelevant, only need to determine who was first to record.
Suggested process for applying Recording Acts
- What is the applicable recording act?
- Is the interest covered by the applicable recording act?
- Who is seeking protection of the recording act? Remember: Title is relative [Hint: Will always be the subsequent purchaser who is seeking help from the recording act.]
- Is the claimant eligible for protection?
- Does the claimant qualify for protection under the relevant recording act, including applying the Shelter Rule (if applicable)?
- If yes, apply the recording act.
- If not, apply first-in-time rule.
Subtlety behind donees and heirs in Recording Acts
In most states, transfers by devise or inheritance do not have to be recorded in public land records to make them legally effective against subsequent purchasers. Usually recorded in other public records so doesn’t have to be.
Title Insurance
Owner’s insurance: This covers the named insured for title defects that
predate her acquisition of the property. Generally covers the insured’s
liability under any warranties of title made when she sold the property.
Most policies protect the owner even after she conveys to someone else.
Nuisance (2 types)
A private nuisance arises when one uses his land in a manner that injures a private owner or occupant in the use or enjoyment of that person’s land.
A public nuisance is an activity that interferes with the rights of the public in general, usually by threatening the public health, safety, or morals.
Trespass vs Nuisance
A physical entry onto land owned or occupied by another is a trespass, not a nuisance. A nuisance involves conduct other than physical entry that interferes with the use or enjoyment of land.
Private Nuisance (2 types)
Nuisance per se
An act or condition that is always considered to be a nuisance, regardless of the surrounding circumstances, i.e. prohibited by law
Nuisance per accidens
A nuisance only because of the surrounding circumstances, such as its location and manner of operation
Private Nuisance Elements Overall
- Actual Cause (“but for” test)
- Legal (“Proximate”) Cause
- Intentional (other factors)
- Unreasonable element = balancing test (Eight factors)
- Significant Harm Element (Must be a significant harm that would be suffered by a normal person in the community (ie not eggshell plaintiffs))
a. legal cause
b. intentional or
c. unreasonable vs gravity
d. significant harm
Unreasonable factor (private nuisance)
Gravity of the harm factors:
1. the extent of the harm (mainly in terms of degree and duration)
Lowered property value maybe not enough alone
2. the character of the harm (physical damage or personal discomfort)
3. the social value of the plaintiff’s use and enjoyment
4. the suitability of the particular use or enjoyment invaded to the character of the locality; and
5. the burden on the plaintiff of avoiding the harm.
Utility of conduct factors:
- the social value of the primary purpose of the defendant’s conduct
- the suitability of the conduct to the character of the locality; and
- the impracticability of preventing or avoiding the interference.
A court must compare
(a) the “utility” of the defendant’s conduct with
(b) the “gravity of the harm” that this conduct causes to the plaintiff
Severe harm test:
An intentional interference is deemed unreasonable under this test if “the harm caused by the conduct is serious and the financial burden of compensating for this and similar harm to others would not make the continuation of the activity not feasible.”
The utility of the defendant’s conduct is irrelevant under this alternative test.
