Selling Property

Question 1

Process of Selling Real Property (Residential)

Answer 1

Phase 1: Negotiate sale and prepare purchase contract
- A real estate broker represents the seller and helps find buyers for the property
- The broker earns a commission, based on the listing agreement
- The listing agreement must satisfy the statute of frauds, or exception under part performance or Estoppel (Hickey v. Green)

Phase 2: Complete performance of the purchase contract at closing
- Once the purchase contract is negotiated and signed:
1. The seller’s title is examined
2. The condition of the property is evaluated
3. The buyer obtains financing from a bank or other lender
4. An escrow account is opened to consummate the transaction
5. The deed, mortgage, promissory note, and escrow instructions are prepared

Phase 3: Buyer protects the title they purchased though title protection (e.g. title insurance)

Question 2

Marketable Title

Answer 2

Marketable title is title to real property that is reasonably free from doubt, i.e., title that a reasonably prudent buyer would be willing to accept. It does not need to be “perfect” title, but the title must be free from questions that might present an unreasonable risk of litigation.

Marketable title is an implied covenant and implied condition in a purchase contract.

If title is unmarketable, then Buyer can rescind the purchase contract unmarketable title allows only Buyer to rescind, not Seller.

Question 3

What Renders Title Unmarketable?

Answer 3

Title Unmarketable

Problem with title to real property:
- Less property interest than identified in purchase contract
- Subject to an encumbrance (even if recorded, unless contract language)

Risk of litigation due to:
- Uncertainty regarding title
- Violation of law (e.g. violation of zoning code)
- Violation of a private covenant (even if wouldn’t otherwise make title unmarketable)

Must be Substantial Problem, not immaterial defect

Title Not Unmarketable

If parties agree to terms, for example:
- Purchase contract says “no promises re: marketable title”
- Purchase contract explicitly lists the encumbrance or potential litigation
- Zoning restrictions (unless violated)
- Some jurisdictions: Visible Encumbrance

Physical Defects:
- Marketable title concerns “title” to property, not the physical condition

Question 4

Marketable Title: Timing

Answer 4

● In general, if Buyer discovers a problem with title during the “executory period” (after the purchase contract is signed but before closing), then Seller has until closing to fix the problem with title.
● If the purchase contract does not have a “time is of the essence” clause, then the seller still has a reasonable time to cure after closing date (often 1-2 months is considered reasonable)
● If the purchase contract has a “time is of the essence” clause, then Seller must provide marketable title at closing – no reasonable time to cure.
● If it is obvious that the problem can’t be cured prior to closing, then the buyer can rescind based on unmarketable title prior to the closing (e.g., one-story house can’t become a two-story house in a week).

Question 5

What defects must the Seller disclose?

Answer 5

In general, a Seller has a duty to disclose defect if (1) the defect is known to the Seller, (2) not known or not readily discoverable by a Buyer exercising due care (latent defects), and (3) the defect materially impacts the value of the contract.

Every jurisdiction prohibits intentional misrepresentation
- No affirmative misrepresentation (i.e., no lying about the condition of the premises)
- No active concealment (e.g., no putting painting over significant hole in the wall)
- Must disclose if a fiduciary duty to the Buyer (e.g., California requires Sellers agent to report defects to buyer based on visual inspection of the property)

Question 6

“As-Is” Clauses

Answer 6

Sellers sometimes attempt to avoid liability for property defects by inserting exculpatory “as is” clauses (waivers) in purchase contracts.

An “as is” clause in purchase contract:
- If intentional misrepresentation, the “as is” clause is not enforceable
- Residential: Jurisdictional split on whether enforceable or not enforceable (and so require disclosure notwithstanding as-is clause.)
- Commercial: Usually enforceable

If the exculpatory “as is” clause identifies and disclaims liability for specific types of defects (e.g., “seller is not liable for leaks in the roof”) it is likely to be upheld.

Question 7

Breach of the Purchase Contract Generally

Answer 7

Seller or Buyer breach
- Refuse to go through with the transaction (justifies remedies)

Seller’s breach (justifies Buyers rescission and other remedies):
- Failed to deliver marketable title
- Failed to disclose when obligated to disclose
- Failed to comply with any conditions included in the purchase contract (e.g., Seller promises to paint the building)

Buyer’s breach (justifies Seller’s rescission and other remedies):
- Failed to comply with any conditions included in the purchase contract (e.g., Buyer must maintain the site during the executory period)

Question 8

Remedies for Breach of Contract if Refusal to Perform Purchase Contract

Answer 8

Buyer’s Remedy
● In general, courts will order specific performance if money damages are inadequate.
● When Seller refuses to perform the purchase contract (i.e., refuses to sell the property), courts presume money damages are inadequate because real property is unique.
● Therefore, courts usually grant buyer requests for specific performance.

Seller’s Remedy
● In general, courts will order specific performance if money damages are inadequate.
● When a Buyer refuses to perform the purchase contract (i.e., refuses to buy the property), courts presume money damages are inadequate because real property is unique. [Note: Use this rule.]
● However, there is a modern trend towards awarding money damages to Seller, so remains somewhat uncertain.

Question 9

Damages for Breach of Sales Contract

Answer 9

● Restitution damages: Back to original position (e.g., If S breaches, S must return B’s deposit)
● Reliance damages (incidental damages): Expenses from reliance on the contract (e.g., S must reimburse B’s inspection costs)
● Consequential damages: Foreseeable damages to non-breaching property if reasonably certain (e.g., B’s lost profits from the inability to run business on the subject property)
● Liquidated damages: Contract provision specifying damages for breach in advance Enforceable only if: Difficult to determine damages in advance, and when signed purchase contract, reasonable estimate (courts usually ignore the first element and focus on the second)
● Expectation damages (“loss of bargain” damages): Difference between contract price and fair market value on date of breach. Exception in some jurisdictions: If good faith (unintentional) breach of warranty of marketable title, expectation damages not available.

Question 10

Equitable Conversion

Answer 10

Under the equitable conversion doctrine, the purchase contract “converts” the legal right to property from Seller to Buyer. The Buyer is the equitable owner of the land until closing unless the contract provides otherwise.
- Buyer: equitable right to property (Seller’s real property)
- Seller: legal right to payment (Seller’s personal property)

Risk of loss: In general, if the property is destroyed before closing, Buyer bears the risk of loss and must pay the contract price.

Some states, including California, have adopted the Uniform Vendor and Purchaser Risk Act, which places the risk on the Seller unless the Buyer has either legal title or possession of the property at the time of the loss.

If the Buyer or Seller dies during the executory period before closing, the contract is still valid and is still enforceable by the beneficiaries of either party.

Question 11

Real Estate Closings Customs

Answer 11

Residential Property

East Coast and Midwest: Face-to-face meeting with grantor, grantee, and lender
West: “Escrow” process:
- Documents to escrow agent
- Escrow agent disburses deed and money when conditions met

Commercial Property

“Escrow” process: Documents are given to an escrow agent who disburses deed and money once all conditions are met

Question 12

Requirements for a Valid Deed

Answer 12

1. Statute of Frauds: Writing and signed by the grantor (the party to be bound)
   a. Exceptions:
   i. Part performance
   ii. Equitable estoppel
2. Must state:
   a. Grantor and grantee names
   b. Words indicating intent to convey e.g., “grant”
   c. Description/identification of the property
   i. Subdivisions: lot number and reference subdivision map in public records

Question 13

Delivery: Basic Principles

Answer 13

Key Element: Grantor’s manifest intent to transfer an immediate property interest to the grantee

Grantee’s acceptance of the deed (usually presumed!)

Question 14

Delivery: Rebuttable Presumptions

Answer 14

Physical delivery:
- If physical delivery to the grantee, rebuttable presumption that delivered
- If no physical delivery to the grantee, rebuttable presumption that NOT delivered
If recorded: Rebuttable presumption that delivered
- Recording creates STRONG presumption; hard to rebut

Question 15

Delivery and Future Interests

Answer 15

Test: Grantor’s present intent to convey present possessory interest or future interest
- Delivery of future interest is valid if present intent to transfer the future interest
- Future interest can be contingent (e.g., ”to G when G reaches age 25” may be present transfer of executory interest (future interest) to G).
Grantee’s acceptance of the deed (but usually presumed)

Question 16

Deed Given to a Third Party

Answer 16

Rule: Delivery to 3rd party is valid if intent to part “with all dominion and control” intending for the deed to take effect at the time of delivery to the 3rd party
- Key: irrevocable, so demonstrates present intent to convey

Common context: Grantor gives deed to escrow agent and says ‘”irrevocable”

Question 17

Delivery of Deeds and the Will Substitute Issue

Answer 17

Deeds

Deeds: require present and irrevocable conveyance so that deeds don’t function as “will substitutes”
Witnesses: Don’t need witnesses

Wills

Wills are revocable and don’t take effect until testator’s death
There are additional requirements for valid wills (e.g., witness requirement)

Question 18

Transfer on Death Deeds

Answer 18

EXCEPTION: Some states have statutes permitting transfer-on-death deeds:
- Don’t take effect until the grantor dies
- Revocable! – This IS a will substitute (where permitted)
- Safeguard: must be recorded

Question 19

Estoppel by Deed

Answer 19

Estoppel by deed provides that if a seller conveys property with a warranty deed before they have title to it, then, when they later obtain the property, they are estopped from claiming title. Therefore, the grantee gets title.

Question 20

Title Assurance

Answer 20

What protections do buyers have against potential title defects (not physical defects/conditions) that don’t emerge until after closing?
- Title covenants: Grantor promises in deed that title is good in deed warranties
- Recording system: State of title based on searching public land recording
- Title insurance: Pay for title insurance company policy that insures grantee’s title

Question 21

Warranty of Marketable Title and the Merger Doctrine

Answer 21

“Merger” doctrine:
- Warranty of marketable title expires at closing; title promises in the purchase contract “merge” (or perhaps disappear?) into the deed
- Post-closing, deed warranties (containing title covenants) apply to actual issues that arise (not based on doubt as to risk of litigation as in marketable title)

Side Note:
- Buyer and seller can agree to have specific purchase contract provisions continue after closing
- Purchase contract provisions that don’t relate to title - “collateral agreements” - remain in effect (e.g., seller will paint the house)

Question 22

Common Types of Deeds

Answer 22

● General warranty deed: the grantor warrants title against all the facts, whether they arose before or after they obtained title
● Special warranty deed: the grantor warrants title against all defects that arose after they obtained title
● Quitclaim deed: the grantor makes no warranties about title, so the grantee receives, only what the grantor has, if anything
○ Often used when title acquired by adverse possession, intestate succession, or other uncertainty about ownership)

Question 23

Inclusion of Warranties in Deeds

Answer 23

Long form deeds include the warranties in the deed itself

Short form deeds have warranties pursuant to state statutes
- CA short form deeds
- “Grant deed”
- State Statute: essentially a special warranty deed

Question 24

Standard Deed Covenants

Answer 24

Present Covenants
- Covenant of seisin
- Covenant of right to convey
- Covenant against encumbrances

Future Covenants
- Covenant of warranty
- Covenant of quiet enjoyment
- Covenant of further assurances

Question 25

Types of Transactions that Should be Recorded

Answer 25

1. Sales
2. Transfer by will or intestate succession
3. Mortgages
4. Leases
5. Servitudes
6. Judgment liens
7. Creditor liens

Question 26

Types of Recording Statutes

Answer 26

In property law, recording statutes govern how property transfers are recorded in public records and how those records affect the priority of competing interests in the property. There are three primary types of recording statutes: race, notice, and race-notice. Each of these statutes serves to protect subsequent purchasers of property, but they do so in different ways.

Race Statutes
Under a race statute, the first party to record their interest in the property, regardless of notice or knowledge of prior interests, takes priority. In other words, the party who records their interest first “wins the race” and has superior rights to the property. This type of statute prioritizes speed in recording and does not require a subsequent purchaser to be a bona fide purchaser (i.e., one who buys the property in good faith, without notice of prior interests, and for valuable consideration) for their interest to be protected.

Notice Statutes
Notice statutes, on the other hand, protect a subsequent bona fide purchaser, even if their interest is recorded after the interest of a prior purchaser. Under a notice statute, a subsequent purchaser takes priority over a prior purchaser if they had no actual, constructive, or inquiry notice of the prior interest at the time of the purchase. This means that if a subsequent purchaser buys the property in good faith, without knowledge of any prior interests, their interest will be protected, even if the prior interest was recorded first.

Race-Notice Statutes
Race-notice statutes combine elements of both race and notice statutes. Under a race-notice statute, a subsequent bona fide purchaser takes priority over a prior interest only if they both (a) lacked notice of the prior interest at the time of the purchase, and (b) recorded their interest before the prior purchaser recorded theirs. In essence, a subsequent purchaser must be a bona fide purchaser and must record their interest first to gain priority under a race-notice statute.

In summary, the key differences among the three types of recording statutes are:

Race statutes prioritize the first party to record their interest, regardless of notice.
Notice statutes protect subsequent bona fide purchasers, even if their interest is recorded after the prior interest.
Race-notice statutes protect subsequent bona fide purchasers only if they both lack notice of prior interests and record their interest before the prior purchaser.

Question 27

Shelter Rule

Answer 27

● Under the shelter rule, a grantee from a bona fide purchaser (BFP) is protected as a bona fide purchaser against any interest that the transferor-BFP would have prevailed against, even if the grantee would not otherwise qualify.
● This is true even where the transferee had actual knowledge of the prior unrecorded interest.
● EXAMPLE
○ O conveys to A, who fails to record. O then conveys to B, a BFP, who records. B then conveys to C, who has actual knowledge of the O to A deed. C prevails over A.

Question 28

Title Insurance

Answer 28

● A title insurance policy is a contract of indemnity between the issuing company (the insurer) and the property owner or mortgagee (the insured).
● In general, title insurance policies include (a) exceptions for specific actual or potential title defects and (b) standard exclusions, such as (i) problems created by the insured party; (ii) defects not shown by public records, but now to the insured party; and (iii) the impact of any, lol, organs, regulation relating to the occupancy of the land.

Question 29

Wild Deed

Answer 29

A wild deed, which is a prior conveyance from a grantor who is outside the recorded chain of title, does not give record notice to subsequent purchasers

Question 30

Types of Notice

Answer 30

In property law, the concept of notice is critical to determining the rights of various parties, particularly in the context of recording statutes. Notice can be categorized into three primary types: actual notice, constructive notice, and inquiry notice. Each type of notice serves to inform a party of an existing interest or claim on a property.

Actual Notice:
Actual notice refers to a party’s direct and personal knowledge of an existing interest or claim on a property. This can be gained through personal observation, direct communication, or other firsthand experience. For example, if the owner of a property explicitly tells a potential buyer about an existing easement on the property, the buyer is considered to have actual notice of that easement.

Constructive Notice:
Constructive notice, also known as legal or record notice, arises when a party is deemed to have notice of an interest or claim on a property based on its proper recording in the public records. Under the recording statutes, parties are generally expected to examine public records related to a property before entering into a transaction. If a prior interest or claim is properly recorded, a subsequent purchaser is considered to have constructive notice of that interest, even if they have not personally reviewed the records or are unaware of the interest. This imposes a duty on potential buyers to investigate the property’s title and history.

Inquiry Notice:
Inquiry notice occurs when a party is made aware of facts or circumstances that would prompt a reasonable person to make further inquiries about a property’s title or existing interests. Essentially, if there are visible or obvious signs that there might be an interest or claim on the property, a potential buyer is expected to investigate further. If they fail to do so, they are considered to have inquiry notice of the interest or claim. Examples of circumstances that could trigger inquiry notice include visible easements, such as a shared driveway or utility lines, or a third party occupying the property.

In the context of property transactions, understanding these different types of notice is crucial to determining the rights and obligations of the parties involved. Notice can impact the priority of competing interests in a property, particularly when it comes to recording statutes and the protection of bona fide purchasers.