Real Property

Question 1

Types of Security Instruments

Answer 1

1. Mortgages
2. Deeds of Trust
3. Installment Land Contracts
4. Absolute Deeds as Security
5. Conditional Sale and Repurchase

**2-5 are “equitable mortgages” / alternatives to mortgages **

Question 2

Definition

Mortgage

Answer 2

an interest in real property that serves as security for an obligation

indicates the existence of a debt

Question 3

Mortgagor vs. Mortgagee

Answer 3

• Mortgagor = debtor/borrower
• Mortgagee = lender

Question 4

As mortgage alternative

Deed of Trust

Answer 4

borrower delivers note to third-party trustee as security for payment to lender

TLDR; operates like a mortgage but uses a trustee

NOTE: mortgagee-lender cannot purchase property at a non-judicial forclosure sale, but beneficiary-lender can

Question 5

As mortgage alternative

Installment Land Contract

Answer 5

Debtor agrees to buy land through installment payments & gets immediate possession, but seller retains title until the buyer makes the final payment

RULES RE BUYER’S FAILURE TO PAY:
* traditional rule: if buyer misses a single payment –> treated as default and the seller may keep all prior installment payments made AND take back the property
* modern approach: states try to assist defaulting buyers –> 3 approaches
1. allow seller to retain ownership of property but require some restitution for prior payments
2. buyer given equitable right of redemption (buyer may keep property by paying full balance of K any time prior to foreclosure sale)
3. treat installment K as a mortgage, so the seller must foreclose to gain title to the property; AND buyer has equitable right of redemption and other protections

consider: what theory on mortgages does the state follow?

Question 6

Absolute Deed

Answer 6

Borrower transfers the deed to creditor (instead of conveying a security interest) with intent to secure loan
* usually enforceable as an equitable mortgage unless competiting equities (e.g., good-faith purchase) take precedence

Question 7

Conditional Sale and Repurchase
(Sale-Leaseback)

Answer 7

Seller leases property from buyer immediately after sale, & seller’s rental payments function as repayments on the loan
if the lease is for a long time with option to repurchase, may be a disguised mortgage

Question 8

Types of Mortgages

Answer 8

1. Purchase Money Mortgages
2. Future Advance Mortgages

Question 9

Definition

Purchase Money Mortgage

Answer 9

loan taken out for the purpose of PURCHASING property

[granted to (i) seller of RP or (2) a third-party lender to the extent the loan is used to acquire title to RP]

Question 10

Future Advance Mortgage

Answer 10

a line of credit used for home equity, construction, business, and commercial loans

often referred to as a “second mortgage”

Question 11

Theories of Title

Lien Theory v. Title Theory

Answer 11

• Lien Theory [MAJORITY]
  ~ debtor/mortgage has TITLE and right to possession until foreclosure
  ~ creditor/mortgagee has lien (security interest) and cannot take possession prior to foreclosure
  ~ treats mortgage as a lien that does NOT sever a JT
• Title Theory
  ~ creditor/mortgagee has LEGAL TITLE until mortgage has been satisfied and is entitled to possession at any time (but mortgage terms typically don’t allow this until default)
  ~ mortgage DOES sever a JT and converts it into TIC

But see Intermediate Lien Theory [minority rule]
title is is in mortgagor until default; mortgagee may demand possession when default occrus

Question 12

Pre-foreclosure rights and duties

Answer 12

1. right to possession
2. mortgagor has duty not to commit waste
3. equity of redemption - at any time prior to the foreclosure sale, mortgagor has right to redeem the land/free it of mortgage by paying off the amount currently owed, plus interest (if mortgage has acceleration clause - must pay full amoun of unpaid loan to redeem)

equity of redemption CANNOT be waived in mortgage; can be waived later for consideration

Question 13

Rights of Mortgagor/Debtor

Equity of Redemption v. Statutory Redemption

Answer 13

Equity of Redemption = universally recognized; may only be exercised up to the date of the foreclosure sale

Statutory Redemption = only recognized by ~half of the states; applied only after foreclosure has occurred
* amount to be paid usually = foreclosure sale price rather than the amount of the original debt

Question 14

Common Mortgage Provision

Acceleration Clause

Answer 14

gives Lender the right to demand immediate payment of full amount of the outstanding loan obligation, including interest

Question 15

Due-on-Sale Clause

Answer 15

gives Lender the right to accelerate a mortgage obligation when the Borrower transfers the property

COMMON EXCEPTIONS TO ENFORCEABILITY OF CLAUSE:
1. Devise, descent, or transfer to joint tenant upon death
2. Transfer to spouse or child
3. Transfer to ex-spouse in divorce
4. Transfer to borrower’s living trust
5. Creation of subordinate lien without occupancy rights
6. Granting leasehold interest of less than 3 years without option to purchas

Question 16

Common Mortgage Provision

Due-on-Encumberance Clause

Answer 16

gives Lender the right to accelerate a mortgage obligation when the Borrower obtains a second mortgage or otherwise encumbers the property

Question 17

Can a mortgage be transferred?

Answer 17

Yes, all parties to a mortgage/deed of trust may transfer their interests (unless the mortgage states otherwise)

Question 18

Transfers by Mortgagors
(Effect on Liability of Parties)

Answer 18

Effect on Liability of ORIGINAL MORTGAGOR / BORROWER:

• if Transferee takes SUBJECT TO mortgage, Original Mortgagor remains primarily and personally liable to debt
  —> upon default, Lender can collect unpaid from Original Mortgagor ONLY
• if Transferee ASSUMES loan, Original Mortgagor becomes secondarily liable as a surety (UNLESS Lender (a) expressly releases Original Mortgator; or (b) modifies Transferee’s loan obligaton)
  —> upon default, Lender can collect unpaid debt from both Original Mortgagor AND Transferee

Effect on Liability of TRANSFEREE / GRANTEE:

• if Transferee takes SUBJECT TO mortgage –> Transferee is NOT liable
  —> upon default, Lender can only collect from Original Mortgagor (note: property can still be foreclosed on, thus wiping out Transferee’s investment in the land)
• if Transferree ASSUMES mortgage –> Transferee is PRIMARILY LIABLE (Original-Mortgagor remains secondarily liable)
  —> upon default, Lender can collect unpaid debt from both Original Mortgagor AND Transferee

ALWAYS CONSIDER: “IS THERE A DUE-ON-SALES CLAUSE?”

IF IT’S A NO-RECOURSE LOAN, debtor is not personally liable, but Lender may still foreclose. Just can’t go after that person for a deficiency.

Question 19

Defintion

Foreclosure

Answer 19

forced sale of property after material default by mortgator; mortgagor must give notice before foreclosing

terminates mortagor’s interest in property!

Question 20

Methods of Foreclosure

Answer 20

1. judicially supervised sale (sale under supervision of the court)
2. private sale (sale held by the mortgagee/lender)

Question 21

Priority of Liens on Real Property

Answer 21

IF NO RECORDING ACT: [first-in time, first-in-right, with PMM exception]
1. Purchase-Money Mortgages (super priority)
2. First-Recorded Liens (senior priority)
3. All other recorded liens (junior priority)
4. Unrecorded liens (lowest priority)

other exceptions = subordination agmts, mortgage modifications and replacements, future-advances, after-acquired proerty

First in time rule = surviving debts are satisfied chronologically
Also consider, if future-advance mortgages present –> must identify whether obligatory or optional.

Question 22

Foreclosure Sale’s Effect on Security Interests

Answer 22

ELIMINATED BY SALE:
1. mortgagor’s interest in the property
2. the mortgage interest being foreclosed upon
3. any junior interests attached to the property

UNAFFECTED BY SALE:
1. senior interests (first in time)

CREATED BY SALE:
1. purchaser of RP takes property subject to senior interests (but free of junior interests)

TIP: CLASSIFY THE INTEREST AS EITHER SENIOR OR JUNIOR, THEN APPLY THE RULE TO DETERMINE WHETHER INTEREST SURVIVES FORECLOSURE.

Question 23

Who is protected by a Recording Act?

Answer 23

A bona fide purchaser (BFP).
i.e., a subsequent purchaser for value who takes without notice (actual, constructive or inquiry)

Question 24

What kinds of notice are sufficient to satisfy the notice requirement of a Recording Act?

“

Answer 24

1. Actual Notice: subsequent grantee has real, personal knowedge of a prior interest
2. Constructive Notice: a prior interest is recorded
   ~ exception: wild deeds (i.e., recorded outside grantor’s chain of title)
3. Inquiry Notice: a reasonable investigation would have disclosed the existence of prior claims
   ~ 2 common situaitons:
   (i) dude on the land & subsequent grantee would have discovered that person’s possesison if they investigated;
   (i) interest mentioned in deed to some other transaction & subsequent grantee would have discovered this if they had inquired)

Question 25

Types of Notice Statutes

Answer 25

1. notice (“in good faith” or “without notice”)
2. race (“first to record”)
3. race-notice (“first to record” and “without notice”)

if no statute, CL first-in-time rule will apply

Question 26

Notice Recording Act

Answer 26

a subsequent BFP WINS if she acquires the property interest without notice of a prior, unrecorded conveyance

statutory language: “without notice”, “in good faith”

Question 27

Race Recording Act

Answer 27

interest holder who records first WINS, even if subsequent purchaser had notice of a prior, unrecorded conveyance

statutory language: “first record”

Question 28

Race-Notice Recording Act

Answer 28

subsequent BFP WINS if they
1. acquired the property interest without notice of a prior unrecorded conveyance; and
2. record first

statutory language: “without notice, who shall record first”

Question 29

Special Rules re Recording Acts

Answer 29

1. SHELTER RULE: a person who takes from a BFP protected by the recording act will have the same rights as her grantor, even if they wouldn’t otherwise be protected by the recording act
2. ESTOPPEL BY DEED: if a grantor conveys land that the grantor does not own but sunsequently acquires title to tha land –> that grantor is estopped from trying to repossess

Question 30

Termination of a Tenancy at Will

Answer 30

A tenancy at will can be terminated
1. by the landlord or the tenant or
2. automatically when the LL conveys a present interest in the property to a third party
~When LL conveys a future interest, the tenancy continues, and the future interest holder has no right to terminate that tenancy.

Question 31

Landlord’s Duty to Repair for Commercial Leases

Answer 31

Absent some statutory or contractual obligation, a commercial LL has NO duty to make repairs UNLESS:
* the repair is so substantial that it would not ordinarily fall within T’s CL duty to repair or
* the repair would primarily benefit value of LL’s property