Property – RULES & DEF Flashcards
RULE –security interest
the owner of an interest in RP may convey or retain that interest as a security for the payment of an obligation, usually a loan.
the obligation typically takes the form of a promissory note , which sets out the terms of the transaction (only reflects obligation; need not be filed for security to be enforceable)
if obligation is not paid when due, then the holder of the security may sell the property and use the proceeds to satisfy the outstanding obligation
two main forms of security interest are
(1) mortgage
(2) deed of trust
RULE – discharge
a mortgage obligation may be discharged by payment of the debt secured by the mortgage or by acceptance by the mortgagee of a deed in lieu of foreclosure
the doctrine of merger may also be applied to eliminate a mortgage (but this is not MAJ)
DOCTRINE –merger (re: mortgages)
when interest in property mortgagee and the interest in the same property retained by mortgagor are acquired by the same person, mortgage is treated as having MERGED into a FEE OWNERSHIP of the property.
doctrinal rule is that, by accepting a deed in lieu of foreclosure, mortgagee has lost the ability to eliminate junior mortgages
NOT MAJORITY RULE
RULES
impact on junior mortgages when there is a deed in lieu of foreclosure
MAJORITY rule
MINORITY (Restatement) rule
DOCTRINAL rule (merger)
MAJ: if mortgagee receives deed in lieu of foreclosures, RESERVES right to foreclose on mortgage and thereby eliminate junior mortgages (by finding either express or implied intent by mortgagee not to merge its mortgage interest with its title)
MIN / R3d: says merger doctrine should not be applied to mortgages but nevertheless have similar result when mortgagee who takes a deed in lieu of foreclosure has ACTUAL knowledge of a junior mortgage. In that case, even if intent is to merge, mortgagee loses right to foreclose and thereby eliminate junior mortgages
DOCTRINAL: by accepting deed in lieu of foreclosure (ie when mortgagee acquires title to the mortgagor’s property by deed), mortgagee’s mortgage interest and newly acquired title MERGE. the mortgagee thereby loses ability to foreclose and eliminate junior mortgages
DEF: Mortgage
a mortgage is an interest in RP that serves as security for an obligation
obligation may be owed by person who grants mortgage (mortgagor) or by a 3d party
must satisfy SOF (conveyance of interest in RP)
DEF: deed of trust
alternative to mortgage in some states (NOT ALL STATES RECOGNIZE)
borrower (B) delivers TITLE to 3d party trustee (TPT), usually lender’s lawyer as security for payment of note to beneficiary (lender (L)).
TPT holds it on the condition that it must reconvey title to B upon satisfaction of the obligation
if B defaults, L will instruct TPT to sell the land to repay.
- contains a power-of-sale clause that generally allows privately supervised sale upon foreclosure. faster and less expensive than judicially supervised sale
DEF: installment land contract
K whereby S retains title until B makes the final payment under an installment payment plan
traditional rule: if B failed to make even one installment payment, S was entitled to keep installment payments and retake possession
modern rules
(1) treated as. mortgage –S must foreclose in order to gain clear title
(2) B has equitable right of redemption
(3) S may retain ownership but require some form of restitution to B
DEF: absolute deed
aka “deed of absolute sale”
free of all liens and encumbrances and used to transfer unrestricted title to property
to prove that it’s actually a disguised mortgage (ie accompanied by a prior or contemporaneous obligation):
* grantor must prove by C&C evidence.
* parol evidence OK bc deed was not intended as complete integration.
* SOF does not ban introduction of oral evidence to explain orinterpret the written deed (ie to show that it was subject to an agreement that the property serve as security for an obligation)
DEF: conditional sale & repurchase
RP sold and leased back to S
(1) for long period of time AND
(2) w option to repurchase property
may be treated as a security interest (disguised mortgage) rather than sale-leaseback arrangement
court will take into account equivalency of lease payments to FMV and likelihood that S will exercise option at end of lease period
RULE: transfer of property subject to mortgage (by the mortgagor)
mortgagor remains liable for loan after the transfer unless mortgagee agrees to release mortgagor
if transferee ASSUMES loan obligation, both T’ee and M’or are personally liable to M’ee (but M’or can seek reimbursement from T’ee if M’or makes payments)
RULE: lender’s modification or release of transferee’s obligation
TRADITIONAL RULE: original mortgagor-borrower is completely relieved of personal liability by a modification in the terms of the loan
MIN / R3d: M’or’s relief in the event of modification is limited to the amt that M’or’s right of recourse (against T’ee) is impaired
RULE: lender releases or impairs the property subject to the mortgage
If M’ee releases the mortgage upon transfer, M’or is let off the hook (ie released from personal liability to M’ee).
various approaches:
(1) release completely discharges M’or’s personal liability
(2) release only discharges M’or’s liability to the extend of the value of the property released (R3d)
DEF: Due-on-Sale clause
most mortgages have this and most of these clauses are FEDERALLY enforceable – also tends to cover other types of transfers than sales (like transfer by gift)
A clause that provides, upon the transfer of the property, the lender with the OPTION to demand immediate payment of the full amount of the outstanding loan obligation (incl interest
UNLESS the lender / M’ee has given its WRITTEN permission for the transfer
RESIDENTIAL PROPERTY EXCEPTION from FED enf.
applies to property containing fewer than five dwelling units
(i) automatic transfer of JT interest upon death of M’or
(ii) will/intestacy transfer to relative upon M’or’s death
(iii) to spouse or child of M’or
(iv) to ex-spouse of M’or due to divorce
(v) to M’or’s living trust
DEF: Due-on-encumbrance clause
gives L right to accelerate a mortgage obligation upon M’or’s obtaining a second mortgage or otherwise encumbering the property
similar enforcement rules to due-on-sale
RULE: Liability if transferee ASSUMES mortgage
both T’ee (B) and M’or (S) are personally liable to M’ee (L) to pay mortgage obligation
L may sue either and if there is still a deficiency, can sue the other
RULE: liability if transferee takes title SUBJECT TO mortgage
upon default T’ee is not personally liable but property may be sold at a foreclosure sale to satisfy outstanding mortgage loan obligation
MAJ: if a deed is SILENT or AMBIGUOUS as to T’ee’s liability, it is the default that they are taking title SUBJECT to the mortgage
MIN: if T’ee paid S difference between house value and outstanding mortgage obligation, then these jxdns imply an ASSUMPTION of the mortgage
DEF: negotiable instrument
signed doc that promises an amount to be paid to a specific person (e.g. check, certain promissory notes)
words of negotiability include “pay to the order of” or “pay to bearer”
RULE: transfer of note from M’ee to 3d party
if NEGOTIABLE INSTRUMENT: M’or obligated to pay holder of the note – even when M’or doesn’t have notice of the transfer and mistakenly pays original M’ee
if NOT NEGOTIABLE INSTRUMENT: M’or may pay original M’ee until M’or receives NOTICE of the transfer (R3d)
