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Property II Review Outline

TRANSFER

OF

LAND PROCESS

Sales K Serves as the vehicle by which buyer/seller agree to transfer land. Sales K controls until closing. Needs to include: o o o o o o o o o o 1) Detailed account of purchase price (how much will be paid / put down on loan) 2) Adequately describe property in offer to purchase 3) Narrow requirement that Vendor must produce marketable title 4) Date of transfer of possession / closing 5) What type of deed is expected 6) Proration of utilities / taxes / etc 7) Identifies who bears risk of loss / casualty insurance 8) Proration of any extras in the K (appliances / shrubbery / etc) 9) Earnest money 10) Condition if the K fails

BROKERS

AND

AGENTS

Real Estate Brokers / Agents Agents possess a more limited license and work under the supervision of brokers. Both owe fiduciary duties to their contracting party under law of agency. Real Estate Broker Duties Traditionally, unless the agreement provides otherwise, the sellers or listing broker earns a commission or fee when he procures a ready, willing, and able purchaser, and the seller/purchaser execute a Sales K. Exam Tip: Sales K provisions override any common law rules, such as those below. o Majority Rule (Broker Fees) Traditionally fee earned when broker provides the RWA purchaser and broker will get paid even if the seller/RWA purchaser do not enter a Sales K. Minority Rule (Broker Fees) Brokers fee not payable unless sale is completed. No closing, no commission. Reasoning follows that seller is not responsible for investigating the purchasers personal and financial capacities before signing the Sales K. No-Fault Failures to Close If the parties do not close because of a no-fault occurrence, such as storm or fire, usually no commission is due to the broker.

Broker as Sellers Agent Listing broker is the sellers agent and owes a duty of loyalty, fair dealing, and good faith to the seller. Broker must diligently seek a purchaser (but does not guarantee success), and cannot perform an act showing disloyalty to the seller. o Dilemma Selling brokers (show properties to prospective purchasers) are loyal to the seller even though their main contact is with the prospective purchaser. As such, Buyers Brokers are becoming more common so the prospect purchaser has an agent loyal to them.

Duty to Disclose Latent Defects to Purchasers Broker may or may not have this duty. More duties in residential sales than commercial (commercial buyers more able to protect). Two types of jurisdictions: o Caveat Emptor Buyer beware. Traditionally, broker (and selling landowner) owed no duty to purchasers to disclose defects. Still default rule in many states, but largely being eroded. Seller Beware In non-CE states, broker must avoid misrepresentations of material facts, and must disclose latent and material defects that the broker either knew about or could have discovered upon a reasonable inspection.

STATUTE

OF

FRAUDS

Definition Statute that requires deed and real estate Ks to be in writing and signed by the person to be bound. Essential Components o o o o 1) Identification of the parties 2) Sufficient description of the property 3) Price (or at least a method to determine price) 4) Intention to convey the property (with sellers signature)

Oral Exceptions Oral K may be enforceable if moving party (1) proves an oral K exists and (2) persuades a court to excuse their failure to produce a writing that satisfies the SoF. o Part Performance Purchaser does some combination of the following: (1) Pays the K price, (2) Takes possession of the property, or (3) Improves the property. Paying Price Alone insufficient to warrant enforcement since money can be given back. Possession Entails more than delivery / acceptance of title. Purchaser must physically move onto the property. Improvements Substantial improvements (not to include clearing, digging wells, fencing, cultivating, or planting trees) may be excused from SoF.

MARKETABLE TITLE
Definition Marketable title is not perfect title. It is title that a reasonable person would accept because the indicated defect does not affect market value or subject the purchaser to an unreasonable risk of litigation. Rule of Thumb Title is unmarketable if acquiring the property would subject the purchaser to a real risk of litigation (to remove a condition, to challenge a creditors or nonparticipating co-owners rights, or to bring or defend an AP suit, as examples). A purchaser, in other words, is not required to buy a lawsuit. Closing Unless seller cures all defects before closing date, a purchaser can rescind the Sales K. If closing occurs, Sales K is merged with Deed, and purchaser is limited to the rights flowing from warranties of Deed. Examples of Unmarketable Title Undisclosed encumbrances that were not part of the Sales K o o Outstanding future interests of others in the property (reverter) Encumbrances (liens/mortgages, real estate taxes, income taxes, mechanics lien, judgments) Easements on the property Variations in the names of grantors and grantees Variants in the chain of title (40-60 years by statute) Outstanding dower interests Adverse possession claims Structural encroachments Existing violations of equitable servitudes or covenants Zoning restriction violations if lawsuit is likely!

o o o o o o o o

Defects which are NOT Unmarketable o o o o o Zoning restrictions (so long as there are no current violations of the restrictions) Other land use regulations Building Codes Restrictive covenants Federal government restrictions

DUTY

TO

DISCLOSE DEFECTS

Definitions o Material Defect A defect that affects the propertys value or that could significantly impair the occupants health and safety, or that the seller knows affects the desirability of the property to the buyer. Objective Material Test Whether a reasonable person would attach importance to the defect in deciding to buy the property. Subjective Material Test Whether the defect affects the value or desirability of the property to the buyer in question.

Latent Defect A defect known to the seller and not discoverable by the purchaser or their representative on reasonable inspection.

Caveat Emptor Jurisdiction Unless a seller is in a fiduciary relationship, seller is under no obligation to disclose defects. A seller who remains silent escapes liability. Sellers cannot actively mislead by affirmatively misrepresenting or actively concealing facts. Duty to Disclose Jurisdiction Sellers must disclose material latent defects to purchasers. Seller does not have to disclose patent or non-material defects. o Stigma Statute A statute that shields sellers from a failure to disclose psychological or prejudicial factors that might affect market value, such as a murder within the house or that a former occupant died of AIDS. As-Is Clauses Generally, an as is clause in a sales K will be upheld if the defects are reasonably discoverable and there is no fraud. But if there is a fraudulent representation or concealment of information by the seller, the buyer is not bound by the as is clause.

EQUITABLE CONVERSION

AND

RISK

OF

LOSS

Legal Title Right to administer and deal (sell) property Equitable Title Right to possess / use / enjoy property Equitable Conversion The shift of Equitable Title to the purchaser once the Sales K is executed. o Procedure Buyers interest is deemed an interest in real property while sellers is personal property via the Deed. This matters if one of the two dies before Closing (and how the property is moved). Remedies Allows buyer to force specific performance of K once K is signed (regardless of marriage/death of seller), and vice versa.

Risk of Loss Which party bears the RoL if the property is destroyed (fire, flood, etc) if not in Sales K? Exam Note Best practice is to include a provision regarding RoL in the Sales K.

Majority Rule (RoL Bearer) As soon as the buyer signs the K (gains equitable title), they also gain the risk of loss if the property is destroyed before they gain legal title/actual possession. Minority Rule (RoL Bearer) Risk of loss only follows person with legal title.

Risk of Loss and Property Insurance Most states agree that both seller and buyer have insurable interests during the Executory Period. If one party has the risk of loss, and the other party has insurance: o Majority Rule (Insur) Insured party holds the insurance proceeds in constructive trust for the RoL party. Minority Rule (Insur) Insured party is allowed to collect both insurance proceeds and Sales K price.

CLOSING PROCESS
Deed Requirements o o o o o o 1) Must be written (SoF) 2) Language in deed must indicate intent to convey property 3) Identification of grantor(s)/grantee(s) 4) Accurate description of the property 5) Size and quality of estate being transferred 6) Properly executed deed ((a)signed by grantor(s), (b) attestation for witnesses, (c) some states require it to be notarized, (d) delivery, (e) some states require a seal)

Not Required in Deed o Consideration for the Deed Deed is symbolic conveyance of the land. Deed is not a K. Deed is the delivery at closing, K is over. Dont need consideration without a K! Underlying purpose of putting in consideration is to remove all possibility that the deed was a gift.

Merger Doctrine At closing the Sales K merges into the deed and the purchasers rights are limited to those warranties and covenants contained in the deed or other document. Exceptions include: Using Sales K to combat Fraud or if the Sales K stipulates that it survives closing. Fraud and Deeds A forged deed or fraud in the execution deed conveys nothing (no rights based on property/deed). A deed which is the product of fraud in the inducement is said to convey the property. It may be voidable, but its valid. Fraud in the inducement is my child convinced me I should sell this property because of global warming fears. The deed is intended, but misled into conveyance by false statements. Grantor intends to deed, but fraudulent facts induced the intent.

After Acquired Title Doctrine aka Estoppel by Deed. The legal title to property passes to the Grantee as soon as the Grantor gets their title. Doctrine applies only where the Grantor warranted they had title. If Grantor quitclaimed the property to the Grantee, the Grantee acquires no interest if the Grantor later acquires property.

DEED CONVEYANCE ELEMENTS


Elements (1) Grantor INTENDS to presently convey an interest in property, (2) Grantor DELIVERS a deed to the grantee, (3) Grantee ACCEPTS the deed. Notes Grantor INTENT is most important element. Grantors DELIVERY of the deed is a physical demonstration of their INTENT to convey title. Deed must grant either present or future interest that passes immediately. Delivery Exceptions Deed can be delivered without title passing if grantor did not intend to transfer title. Conversely, if grantor records deed in deed records but hasnt delivered to grantee, title still passes. Rebuttable Presumptions Methods courts use to resolve delivery issues. Facts can rebut. o Presumption A deed in the grantees possession has been delivered to the grantee. Presumption Recorded deeds have been delivered.

WARRANTY DEED
What Type of Warranty Deed? Classification Part 1: o General Warranty Deed Warrants title against all defects in title (minus those specifically excepted in the deed itself), whether they arose before or after the grantor took title. Special Warranty Deed Contains warranties only against the grantors own acts but not the acts of others. Thus if the defect in a mortgage on the land executed by the grantors predecessors in ownership, the grantor is not liable.

What type of Warranty Deed? Classification Part 2: o Future Warranty Protects actions in the future. S/L does not run until the breach occurs. Present Warranty Protects actions from the past up until closing. S/L runs at closing.

Chapman Definition Best type of deed to give/get. Deed which includes in language of deed 5 or 6 standard warranties. Warranty in traditional sense means promise. Fulfills all 6 requirements of a Deed. Gives a remedy for the warranties. Supplanted by Title Insurance. Warranties = covenants = promises. Warranties

Warranty of Seisin Possession of the sticks, clod, dirt land as true owner. Special present warranty. Breached at closing if seller is not true owner. Warranty of Good Right to Convey Property Often stated in same breath as Warranty of Seisin. Different though because sometimes we grant someone else the right to convey property (if owner cant get to Atlanta to sell property, can grant power of attorney to his lawyer, which gives the lawyer this Warranty). Special present warranty. Warranty of No Extra Encumbrances Seller promises there are no unknown encumbrances when conveying deed. Some courts say if something is open and obvious then buyer beware; other courts require disclosure if the practice is not the norm, even if open and obvious. Liens, lawsuits, judgments, tax liens, code violations, zoning violations, EPA violations are all encumbrances that seller warrants against. General present warranty (only those encumbrances present at closing). Warranty of Quiet Enjoyment Seller promises that buyer will enjoy their property with no interference with possession, use, enjoyment, or ownership of property. Special future warranty. Breach of this warranty requires ouster (eviction or a successful AP claim) or interference so substantial to call it constructive ouster. QE Rule If QE is interrupted, you can sue grantor (covenant attached to land). Issue in every case is whether the QE warranty exists.

Warranty to Defend Interest Seller promises to defend buyers title / compensate for lawful claims against title. Special future warranty. Warranty of Further Assurances Seller promises to produce documents to fix any defect in the conveyance. Special future warranty.

GRANT DEED
Grant Deed aka Bargain-sale deed, aka Special Warranty deed. Does everything a Warranty Deed does except include warranties.

QUITCLAIM DEED
Quitclaim Deed Says that If I own anything, I convey it to you. Does not describe property or anything of that sort. Only thing it cares about is the grantor/grantee. Mostly used in divorces, concurrent interests (breaking TIC/JT), or solving AP claims.

IMPLIED WARRANTY

OF

QUALITY

Implied Warranty of Quality The inherent duty is to perform in a workmanlike manner and in accordance with accepted / customary standards of skill and care. Latent defects in construction of something new are incumbent on builder/seller of something new. Damages run from cost of repair to value of property. aka Implied Warranty of Habitability / Suitability. Limitations

Manifest Defects Only latent defects which become manifest after the subsequent owners purchase and which were not discoverable with a reasonable inspection of the structure prior to the purchase are covered by the extension of the implied warranty of workmanlike quality.

MORTGAGES
Title Theory Lender has legal title to the mortgaged property until the debt is repaid. Minority rule. Lien Theory Mortgage is a security device giving the lender rights to the property when the mortgagor breaches some term of the mortgage. Mortgagee = Legal title, Mortgagor = Equitable title. Majority rule. Deed of Trust Borrower delivers DoT to a 3rd party instead of directly to the lender. If borrower defaults, 3rd party (trustee) can foreclose on the mortgaged property. Benefit = faster foreclosure process. Due on Sale / Assumption / Subject to Most deeds require full mortgage to be paid before borrower can sell property to new buyer (due on sale). Some Ks allow new purchaser to assume the mortgage and continue its terms (assumption). Assumption gives lender full access to purchasers other assets for deficiency. Alternatively, purchaser can take mortgage subject to a note and mortgage. Lender is limited to proceeds from sale and cannot go after subsequent purchasers assets. Initial purchaser remains secondarily liable for unpaid amounts.

RECORDING SYSTEMS BASICS


Rule of Thumb Recording systems supplant common-law systems. Record title holders prevail over legal title holders. Practical Functions Recording systems assure title / determine a priority of rights to a parcel of land. Second, recording systems are informational access points for prospective purchasers. Constructive Notice Granted to all properly recorded documents regarding property. Chain of Title Series of documents affecting ownership of, rights to, and encumbrances on a parcel of land linked together in some manner.

RACE

OR

PURE RACE STATUTE

Method When two or more people have competing claims to real property, the first person to officially record prevails. Determining No mention of good faith of parties protected by statute lien creditors or purchasers.

RACE-NOTICE STATUTE

Method A subsequent bona fide purchaser or creditor who first records prevails against a person claiming a prior, unrecorded interest as long as the subsequent purchaser did not have notice of the preceding interest when she acquired her interest. The subsequent BFP can know about the interest when they record the document as long as they did not have notice when they purchased. Determining Mention of good faith, first duly recorded, etc o Actual Notice/Knowledge Subsequent purchaser or their agent had actual notice of a prior claim. Gained through personal observations, a document in the deed records, or hearing about it either during negotiations or from conversations outside the transaction itself. Constructive/Record Notice Refers to knowledge or notice a purchaser could gain by searching the deed records. Purchaser deemed to know all matters contained in documents legally recorded in the deed records, even if they didnt search them. Inquiry Notice Occurs when purchaser hears or observes something that would cause an ordinarily prudent person to inquire further. Most important source comes from visiting the property. Structures, railroad tracks, roads, and power lines may prompt an inquiry.

NOTICE

OR

PURE NOTICE STATUTE

Method Subsequent BFP/creditor for value prevails over prior claimants as long as they acquire the interest without notice of the prior claim. Prevail immediately upon closing subsequent purchaser does not need to be first to record. Determining Statutory language allowing without notice + absence of requirement to first record.

PURCHASERS FOR VALUE


Definition Notice and race-notice statutes protect subsequent bona fide purchasers without notice. Purchasers can include fee simple buyers, mortgagees, lessees, and anyone else who gives value for any interest in property. Persons who receive interests via gift/device/inheritance are not PFVs. These people can still prevail even if not protected by statute if they record (giving constructive notice). o What Constitutes Value? Money or other consideration less than the full value of a mortgage will suffice. Otherwise what constitutes value is a fact-and-circumstances test. Promise to pay consideration later is not value.

Bona Fide Purchaser Pro Tanto Prior claimant must reimburse the subsequent purchaser for all consideration paid prior to the subsequent purchasers learning of the earlier claim. Mortgage vs Credit Parties using mortgage as part of purchasing price qualify as purchasers for value (the loan of money or deeding the property is the value). However,

creditors owed a pre-existing debt who seek a mortgage as collateral do not qualify. Some new value must be given for the mortgage before the mortgagee can qualify as a purchaser for value (no past consideration lolz?). Value need not be more money an additional year to pay in return for a mortgage = value.

EASEMENT TERMINOLOGY
Easement An irrevocable right to use another persons land for a specific purpose. Most frequent easements give the holder a right to travel over anothers land, or place power lines, sewer lines, etc o Easement in Gross Easement benefitting a person whether or not the person owns any specific property (or any property at all). Unless assignable, ends at holders (grantees) death. Easement Appurtenant Easement that benefits the owner or possessor of a particular parcel of land. EA passes with the property it benefits. Has potential to continue indefinitely. Affects at least two parcels of land. Property burdened by easement = servient estate/tenement. Property benefited by the easement = dominant estate/tenement. Easement with a Profit Right to enter anothers land, without liability for trespass, and remove minerals, timber, etc Affirmative Easement Gives the holder the right to go onto the servient estate for a specific purpose. Negative Easement Gives the holder the right to prevent the possessor of the servient estate from doing some act on the servient estate.

Determining Courts prefer EAs, so an EiG must be clear from the express grant. License Landowner permits another person to use property, but permission is revocable at the landowners will at law.

EXPRESS EASEMENTS
Creation Most easements result from an express grant or express reservation in a deed. Must satisfy the SoF. Must be recorded to bind BFPs. o Reserving / Excepting Grantor sells property but includes an easement clause for themselves. Reserving to a 3rd Party Grantor can reserve an easement for a 3rd party grantor intent controls. Some states follow old rule that a stranger to the deed 3 rd party reservation is invalid.

EASEMENTS IMPLIED

FROM

PRIOR USE

Definition Courts imply easements from prior use when the use was in place at a time a single parcel of land was divided into two parcels. This assumes the parties did not negotiate the matter or otherwise indicate some intent. Some indication that the right to

use the property was to be a revocable license or that one party failed to purchase the easement would preclude this implied easement, no matter how necessary it is. Implied easement = easement appurtenant. Elements: o o (1) The unity of ownership is severed (i.e. a common owner) (2) The use was in place before the parcel was severed (i.e. a pre-exiting or prior use) (3) The use must have been visible or apparent at the time of the severance (4) There must be continuous use of the easement (5) The easement is necessary for the enjoyment of the dominant estate (i.e. necessity)

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EASEMENTS IMPLIED

BY

NECESSITY

Definition Usually involve access to and from landlocked property. Sometimes known as right of way easement. Elements: o o (1) A common owner severed the property (unity of ownership) (2) The necessity for egress and ingress existed at the time of the severance (the severance caused the necessity) (3) The easement is strictly necessary for egress from and ingress to the landlocked parcel

ASSIGNABILITY

OF

EASEMENTS

Assign Transfer all of ones interest to another party. Easement Appurtenant Run with the land. Whoever possesses the dominant estate has the right to continue the easement over the servient estate. Easement in Gross o Commercial EiG = easements that further a money-making activity. Assignable unless deed says otherwise. Noncommercial/Personal EiG = personal enjoyment/pleasure. Many courts prohibit assignment unless deed says otherwise.

DIVISIBILITY

AND

APPORTIONMENT

Divisibility/Apportionment Easement holder attempts to share the easement with others or to assign, divide, or apportion the easement to multiple grantees. i.e. Can an owner transfer to more than one person?

Easement Appurtenant Each parcel of former dominant estate gains easement rights so long as they arent overburdening to the servient estate. Easement in Gross o Commercial EiG Exclusive Easement holder has sole right to easement. Can generally allow others to use. Nonexclusive Easement holder has right to easement, but servient estate owner can authorize others to use the easement and the holder cannot prevent this. Servient owner has power to decide who can use. One-Stock Rule When two or more persons inherit or otherwise share the exclusive right to an easement, they must act with one voice. One-stock owners have veto power to any action of the easement/profit.

Noncommercial EiG Not assignable, also not divisible/apportionable.

SCOPE

OF

EASEMENTS

Location Easement must be located on an identifiable part of the servient estate. Easement owner must remain within the located easement. If not in the deed/grant, servient estate holder may situate the easement. If they do not, the dominant estate holder may situate it reasonably. Intensity General rule is that an easement holder can use the easement as long as the use does not overburden the servient estate. Focus is on the parties presumed intent for what qualifies as authorized use of the easement. EA + Benefits EA may benefit only the dominant estate. It cannot benefit adjoining property, even if the owner of the dominant estate owns the adjoining property, and even if the adjoining property is used in an integrated activity with the dominant estate. Improvements Easement holder has the right to make improvements to their easement as long as the improvements promote the use of the easement within the scope of the easement and does not unreasonably burden the easement or the servient estate owners use/enjoyment of their property.

TERMINATION
Methods o o o o

OF

EASEMENTS

By the terms of the grant If easement had a shelf life Purpose for easement ends Merger Person gains ownership of dominant + servient estates Forfeiture for misuse

Release Easement holder can transfer part or all of the easement to the servient estate owner Abandonment Needs (1) intent to abandon and (2) subsequent nonuse Recording Acts subsequent BFP can take easement if not recorded!

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REAL COVENANTS: TERMINOLOGY


Real Covenant An agreement, promise, or deed provision that relates to real property (land and improvements to land) and that binds or benefits subsequent owners of the respective properties solely because they own the property. Burden Something that diminishes the value or utility of the land. o Affirmative Require the owner of the burdened estate to perform some act or pay money. Negative Restrict or prohibit the uses that can be made of the burdened property.

Benefit Something that increases the utility (=more useable) or value of the land.

REAL COVENANTS: ELEMENTS


Interest in Land Real covenants are interest in land. Creation must satisfy SoF (expressly created in writing, usually a deed). Must comply with the states recording statute and are subject to it. Analysis Even if an element for a real covenant is not satisfied, the covenant remains enforceable and biding on the original parties in the agreement. Elemental analysis determines whether it runs with the land only. o Burdens and benefits are analyzed separately under each element to see if they run or not.

Intent to Bind Successors Original parties must intend the covenant benefit and/or burden subsequent purchasers rather than the covenant merely being a personal agreement between parties. o Magic Words heirs and assigns; This covenant shall run with the land; This covenant is appurtenant to the land. Benefit Inference If promisee owns neighboring property, benefit inferred to run with land. If promisee doesnt own neighboring property, benefit is personal. If promisee is subdividing land, a presumption arises that the benefit is to run with all properties in the subdivision still owned by promisee.

Touch and Concern Look and see what benefits/burdens are associated with the covenant and if they change the value or the utility of the land in question. Do the benefits/burdens have anything to do with the land?

Money Burden Generally a covenant for the payment of money does not touch and concern the burdened estate. Exception = homeowners association fees to be spent on improvements/upkeep. Benefit Covenant must touch and concern the benefited property for the benefit to run with the land, no matter whether the burden is personal to the promisor or runs with the land.

Privity of Estate Needs both (a) Horizontal and (b) Vertical privity. o Horizontal Privity Refers to the necessary relationship between the original parties to the agreement for the covenant to run with the land. Test Found only if the covenant is created when one original party transfers an interest (other than the covenant itself) in land to another original party. Generally horizontal privity can be created only in conjunction with grants of easements, leases, and freehold estates.

Vertical Privity Refers to that relationship between an original party to the K and those subsequent purchasers tracing their interests in the benefited or burdened property back to the original party. Typically found on sales, gifts, devises, and inheritances of real estate. Burden Test Party must have succeeded the original promisors entire estate / ownership interest. Lessees are not in vertical privity with their lessors with burdens. Benefit Test Party has a possessory interest in the property. Lessees are in vertical privity when enforcing benefits.