Real Estate Transactions

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Real Estate Transactions

• Installment Land Contracts
• 283-334

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Russell v. RichardsFacts

• John/Beth Richards sold to unnamed Purchaser on
  installment land K
• P later sold to Mary Russell
• Mary paid 11k cash and assumed rest of balance
  of contract
• Over next 6 years Russell reduced the k balance
  by 10.8k (to 26.5k)
• Russell then defaulted FMV of Land 82,735
• Richards declared forfeiture, retained prior
  payments as liquidated damages
• Whats the Issue? The Holding?

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Russell v. RichardsIssue

• Russell contended that forfeiture of her interest
  should shock the conscience and therefore she
  should recover damages for her equity in the real
  property

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Russell v. RichardsHolding

• Rule Forfeiture provisions are not enforceable
  if they are so unfair as to shock the conscience.
• Holding No such unfairness existed here because
  Russells loss of interest was not as a result of
  wrongdoing by the Richardses, but from her own
  default.

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Example

• Kate signs an installment sale contract to buy a
  blue diamond heart necklace from Leo for 10
  payments at 230k apiece

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Example Contd

• K provides Leo retains title until last payment
  made
• Kate makes 9 payments but fails to make the 10th
• Leo declares forfeiture, repossess the necklace
  and retains all of Kates payments as liquidated
  damages

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Example Contd

• Kate seeks to redeem by making the final tardy
  payment.
• Can Kate redeem? What if this case were decided
  in New Mexico?

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UCC 1-201 (37)

• 1-201 (37) defines security interest as an
  interest in PERSONAL property which secures
  payment or performance of an obligation
• The retention or reservation of title by a
  seller of goods notwithstanding shipment or
  delivery to the buyer is limited in effect to
  retention of a security interest
• So can Kate redeem by making the tardy
  payments???

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Answer

• Yes, although the K reserved title to Leo, this
  title is limited to a security interest so by
  keeping the title, Leo only retained a SI,
  which must be foreclosed by sale.
• Thus, before the sale, Kate can redeem by making
  the 230 tardy payment PLUS paying Leo his costs
  of enforcement.
• If sale occurs and price gtgtgt balance of debt who
  gets the surplus? Why?

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Sebastian v. Floyd Approach

• Vendor under installment land contract is merely
  retaining title to secure a debt
• Any attempt to use title for security should have
  some economic effect K should be treated as
  mortgage
• Apply this rule to Russell case.

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Hypo Sebastian plus Russell

• Assume the land would be sold
• If the sale brings 82,735- how much would the
  Richardses collect and what would become of the
  surplus (if any)?

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Peterson v. Hartell

• Majority Holding
• If buyer has not made substantial payments or
  if the default is nonmonetary, seller can
  immediately terminate the K
• But if buyer has made substantial payments or
  substantial improvements, and default is fully
  financial, buyer has right to specific perf of K,
  even after default, characterized as a right of
  redemption
• Justice Bird (concurring and dissenting)
• ILK should be treated as mortgage, requiring
  enforcement after default by foreclosure

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Question

• If majority says Peterson has a right of
  redemption why not just treat ILK as a mortgage?
  
• Hint Are there more characteristics of a
  mortgage that the majority did not want a ILK to
  have?

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Answer

• The majority holding precludes ILK buyer from
  enjoying statutory right to reinstate mortgage
• CA (and some other states) give not only
  equitable right of redemption but also statutory
  right to reinstate mortgage by paying simply the
  arrearage (instead of full balance) plus the
  costs of enforcement.
• The majority holding gives courts equitable
  discretion as to when allow redemption by using
  subjective words like substantial payment and
  substantial improvement

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Mortgage Law, Redemption and Reinstatement

• Mortgage law has always recognized equitable
  right to redeem
• Cannot reinstate unless
• Applicable statute (like Cal. Civ. Code sec.
  2924(c))
• Agreement so provides (see pgph 19 in FNMA/FHMLC
  mortgage in Appendix beginning pg. 1216)

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Sum Up of Treating ILKs as Mortgages

• Factors courts consider include
• Amount of vendees equity in the property
• Length of default period
• Willfulness of default
• Whether the vendee has made improvements
• Whether property was adequately maintained
• Restatement Third of Mortgages Section 3.4(b)
• ILK creates a mortgage

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Peterson v. HartellQuestion

• If buyer has right to redeem under K, but does
  not (or cannot) do so timely, what can the seller
  do under the ILK?

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Peterson v. HartellAnswer

• Seller can cancel the K and terminate buyers
  equity of redemption (analogous to strict
  foreclosure)
• BUT seller must make restitution to buyer of
  payments made under the K minus the sellers
  actual damages (includes consequential and lost
  bargain damages)

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Question

• Question---How can you calculate a Sellers lost
  bargain damages?
• Well, first you gotta understand what the seller
  bargained to receive under the K, and then
  subtract what the seller actually got under the K
• This is how to determine the difference between
  what he expected to get from the bargain and what
  he actually got.

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Restitution Example

• Michael Vick sells to Donovan McNabb Vicks
  personal practice field for 30k pursuant to an
  ILK
• McNabb pays 2k down, and finances the rest at 8
  over 30 years. How much is McNabb paying to Vick
  each month?
• Check out pg. 97 now check out
  http//ray.met.fsu.edu/bret/amortize.html

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Mortgage/ Amortization Calculator

• What is amortization?
• Amortization is a means of paying out a
  predetermined sum (the principal) plus interest
  over a fixed period of time, so that the
  principal is completely eliminated by the end of
  the term. This would be trivial if interest
  weren't involved, since one could simply divide
  the principal amount into a certain number of
  payments and be done with it. The trick is to
  find the right payment amount, which includes
  some principal and some interest. The math isn't
  celestial mechanics, but beyond the capabilities
  of the basic pocket calculator.

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Restitution Example

• Payment amount 205.45
• After 60 payments balance appx. 26,619.87, at
  which time buyer defaults
• At time of default, FMV of land has gone down to
  25k because McNabb has been throwing rowdy
  parties out on the field keg stands etc. --- And
  the field is now less valuable than it was.

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Restitution Example

• Suppose McNabb argues that Vick should make
  restitution as follows Is McNabb correct????
• Down payment 2k
• 60 Monthly Payments
• at 205.45/ month 12, 327
• Sub Total 14, 327
• Minus Diminishment in Lands Value
• (30k purchase value minus
• 25k present value) 5k
• TOTAL 9,327

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Restitution Example

• No!!!! McNabbs argument fails to take account
  of the time value of the land (or use value)
• Vick invested the land (think of it as
  investing 28k) and it was returned to him in
  depreciated form, if Vick has to return 100 of
  all the payments made, he gets no return for the
  use value (or time value) of his investment.
• Remember, some portion of each payment is
  attributable to interest so, returning 100 of
  all of the payments would be as though Vick had
  made McNabb an interest free loan!
• So, Vick should return the down payment, and the
  payments but not the portion of the payments
  attributable to the 8 interest rate.

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Restitution Amount Compared to Mortgage Remedy

• Note that the restitution remedy theoretically
  should match the outcome of a mortgage remedy
  (assuming the purchase price at foreclosure sale
  fmv of the land).

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ILK Sellers Remedies

• 7 Years Ago Buffy signed an ILK to purchase from
  Spike a townhouse for 100k.
• Buffy made the payments for 7 years reducing the
  contract balance to 75k.
• During those 7 years, Buffys series was
  canceled, and the value of the townhome went down
  to 50k.
• Buffy decided to stop throwing good money after
  bad (because the townhome was completely
  underwater) and decided to stop making payments
  on the townhome.
• How can Spike proceed?

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Spikes Potential Remedies Under the ILK

• Strict Foreclosure?
• Termination of K along with action for (a)
  ejectment or (b) damages in excess of K payments
  forfeited?
• Suit for specific performance (i.e. purchase
  price)?
• Foreclosure of K by judicial sale (analogous to
  mortgage foreclosure) coupled with right to
  deficiency judgment against Buffy?
• Under what circumstances can Spike pursue these
  remedies?

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Spikes Potential Remedies Under the ILK

• Strict Foreclosure?
• K is cancelled and vendors title in the land
  confirmed. Differs from forfeiture because
  usually a redemption period to redeem exists
  during which time purchaser can demand specific
  performance of k by tendering balance due
• Termination of K , action for (a) eviction or
  ejectment and (b) damages in excess of K payments
  forfeited?
• If Buffy has not abandoned the property, the suit
  to terminate the ILK and eject her will bar the
  right to recover excess damages under the
  election of remedies doctrine. See bottom of pg.
  314 , See also Note 1 on pg. 316

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Spikes Potential Remedies Under the ILK

• Suit for specific performance (i.e. purchase
  price)?
• K must have a clause providing for acceleration
  of full balance on default
• Foreclosure of K by judicial sale (analogous to
  mortgage foreclosure) coupled with right to
  deficiency judgment against Buffy?
• Problematic if jurisdiction does not have law
  allowing ILKs to be treated as mortgages
• This may not be a problem if there is a clause in
  the ILK allowing foreclosure
• Economically similar to specific performanceboth
  remedies give the vendor a money judgment for the
  full amount owing under the k. In both instances
  the money judgment may ne satisfied out of the K
  real estate

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Summit House Co. v. GershmanFacts

• Gershamns were to sell to Summit via ILK.
• Market value of the property declined, and Summit
  defaulted on balloon payment.
• Summit sued to terminate K.
• Gershman counterclaimed for specific performance
  and won thereby obtaining a money judgment for
  K amount
• Summit never paid the Judgment, so Gershman
  enforced the Judgment by executing upon the
  vendees interest in the contract land. The
  execution led to a sheriffs sale.
• Summit did not attend the sheriffs sale
  Gershman was the winning bidder at the sale.
• Summit failed to redeem within the statutory
  period.
• Summit then moved for an order of the court
  holding that the Judgment was satisfied by the
  sheriffs sale.
• Holding???????

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Summit House Co. v. Gershman Rule

• By pursuing a remedy of specific performance, the
  vendor in an ILK does not cancel the contract.
  Accordingly, the vendor is entitled to the full K
  damages.

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Title Issues for Vendees

• When a vendee under an ILK, the chances of title
  problems with respect to the vendees interest
  are greater than if the transaction were
  structured as a purchase money mortgage.
• This is true, even in those jurisdictions that
  have reduced the impact of the forfeiture
  provision either through statute or judicial
  decision.
• In an ILK why would the vendee have concern
  about title problems?
• What are some examples of title problems?

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Title Issues for VendeesExample

• Mary Kate wants to buy a new condo in New York
  city close to NYU campus
• Mary Kate cant get conventional mortgage
  financing.

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Title Issues for VendeesExample

• A Developer (Mark Anthony) agrees to sell on ILK
  K price 70k interest 11 balloon payment
  after 5 years
• Mark Anthony has already granted a blanket
  mortgage over the entire complex for construction
  financing
• Contract Reads Seller Mark Anthony will deliver
  good and marketable title upon Buyer Mary Kates
  full performance.
• How do you advise Mary Kate?

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Title Risks for Buyers Like Mary Kate Include

• Unavailability of title insurance
• Foreclosure of existing blanket mortgage
• What would be the consequences of foreclosure of
  the blanket mortgage?
• Subsequent mortgage or judgment lien might arise
• Why/ How could that effect buyers mortgage?

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Example

• Lennie Briscoe agreed to buy land via K for deed
  from Seller
• Bank holds judgment lien vs. Lennie, who later
  assigns his interest under the K to Jack McCoy,
  who in turn spent 20k improving the land
• Bank later sought to have land sold in
  satisfaction of judgment against Lennie

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Examplecontd

• Jack argues that until the K payments are
  complete, Seller holds title so no judgment lien
  against Lennie can attach to the land is Jack
  correct?

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Answer

• NO in most states the buyers interest under an
  ILK is considered an interest in real property
  sufficient for a judgment lien to attach
• Thus, Jack took the property subject to Banks
  judgment lien
• How could jack have prevented this problem?

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Examplecontd

• Jack should have insisted that Lennie satisfy the
  judgment lien before entering into the K or
• Preferred approach three way agreement among
  Lennie, Jack and Bank with price for release of
  lien with all/part of Jacks payments directed to
  Bank

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Assignment of Buyers Interest Under an ILK

• Buyer can assign its interest either
• By sale (an outright or true assignment
  i.e,. the sale to Russell in Richards v. Russell)
• Assignee takes possession, and either assumes the
  Buyers contract obligations (including payments)
  or takes the land subject to those obligations
• For Security Purposes (to secure a debt of Buyer)
• Assignee does not take possession, but holds a
  lien against the Buyers rights under the
  Kanalogous to a second or junior mortgage

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Assignment of Vendors Interest Under an ILK

• Vendor may assign its interest under an ILK
  either
• By outright assignment
• Vendor simply sells its rights under the K to an
  assignee
• What are the sellers rights under the K?
• As security for a loan
• Vendor assigns its rights under the K to an
  assignee to secure Vendors obligation to repay
  loan extended by assignee

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Perfecting a Lien/ Security Interest

• A lien is effective as between the debtor and the
  creditor when the lien is created
• For a lien to have effect as against third
  parties dealing with the owner of the collateral
  (such as judgment creditors, purchasers, and/or
  secured parties) the lienholder must perfect
  that lien

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Perfection Occurs By

• Filing in the Real Estate Records (if the lien is
  against r/p)
• Filing in the UCC records (if the lien is against
  p/p)
• Possession of the collateral (if the lien is
  against p/p)

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End of Installment Land Contract Assignment

• Please prepare Assignment Four
• Negative Covenants pgs. 334-342