RET Class Notes

8/8/2019 RET Class Notes

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1.12.10Chapter 1 & Chapter 10

y The basic real estate transactiony Talking about a person who owns landy We have O, who has ownership of land, which is called title, but O would rather havemoney than the land. O can sell the land. All that O needs is a buyer who will pay the

price in exchange for the land.

y The first question is why does this have to be so complicated? An important thing is thatyou are dealing with a large amount of money. Most people need to borrow money inorder to make the purchase. Therefore a lender may become involved.

y Our financial system encourages borrowing by allowing for tax benefits.y Promissory notes are notes that reveal the promise made to the lender to repay the money

in exchange for a loan. If the note is non-negotiable, it is covered by the rule of commonlaw contracts. If the note is negotiable, it is covered by Article III of the UCC.

y Lenders use collateral to give themselves security. It makes them feel less nervous aboutentering into the transaction with the buyer. If the lender feels secure, it may feel asthough it is less of a risk, and may be willing to enter into the transaction for cheaper.

y The lender can use the land as collateral. But no one can give a greater interest than he orshe has. So both the lender and the buyer are concerned with Os title to the land. Therecould be liens, covenants, or equitable servitudes attached to the land which could burdenit.

y Easement=it is a right to use the land. It is a non-possessory interest in the land. This isan example of how the fee simple rights could be subtracted.

y Title can be divided based on time (present [fee simple] and future interests [remainders,reversions, shifting or springing ])

y A person cannot convey a greater interest than he or she has. This is why both buyer andlender are worried.

y The three acts of RETyou can organize this through using a timeline.o 1.) Marketing period;o 2.) Executory period (ends at the transfer of the deed) the parties do what they are

required to do under the contract due diligenceacting in a way that is non-negligentdoing what you are supposed to do in a particular situation. It is whata reasonably prudent person would do under the circumstances. ;

o 3.) Closing (the deed gets recorded, the buyer takes possession)y Fiduciary duty/relationship: the duty to put someone elses interests ahead of your own.

It is a relationship based on trust and confidence. Primary one is between agent and principal. Fiduciary is a very important concept. A lawyer may represent both parties

to a transaction only after a full and fair disclosure, but must withdraw if a conflict arises.y Can a lawyer do business with clients? Without it looking self-dealing, probably not.y Options: a contract to hold open an offer to enter into another contract for a stated period

of time. Options are used in many different types of transactions.

o A call option is an option to buy. Why do people use these as opposed to enterinto a contract right from the beginning? What happens if the option is exercised?The offer that is accepted that was held open and a contract is created. From theoption being exercised comes another real estate contract. Does the option to buy


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real estate have to be signed in writing by the party to be charged? No, because itis not a contract for the sale of land. Contracts for the sale or transfer of aninterest in land MUST be in writing!!

o A put is an option to sell.y A Commitment: this is not a technical contracts term. It can express a willingness but not

an obligation to do something in the future. Determining what exactly the word means ina particular situation will require a facts and circumstances analysis

y Pre-Approval:y Pre-Qualification:y The Three Cs ofLendingWhat a lender looks at when making reasonable decisions on

how to make loans:o Credito Capacityo Collateralo (Characterwhat about this person makes him reliable?)

y Lying on a Mortgage Applicationwhy could this be a problem?o If you overestimate your income you may not be able to pay back the loano It can be both a federal and a state crimeo There is no escape through bankruptcyo It is fraudulentyou are giving them false information that the lender is supposed

to be able to rely upon. Fraud is a basis for recission of the contract, and thelender can demand the money back!

o You expose yourself to civil liability01.19.09Chapters 13 & 19

What is a mortgage?-The use of real property to secure an obligation. It is the use of real property ascollateral to secure an obligation. But a more narrow definition depends on thejurisdiction

History of the mortgage:-O has acquired title to a piece of property. But O needed cash. A way to get this would

be to sell the land. But this would be bad because land was the source of all well and socialpower. If you had ownership of land, you were someone important. Selling the land used to bethe last possible resort.

-But how could O get money without selling the land? One way was to borrow money

from a lender. The lender would make O a loan. But a lender would feel nervous about gettingrepaid. This uncertainty would be the lender feel insecure. So the lender would want somethingto provide security, safety. What O could do was pledge the land to the lender to secure thepromise to repay the money borrowed. Thus the land was almost given as a hostage. The wordused to describe this was called a gage=a pledge of land. A right to possession as a means ofsecurity.

-Vif gage=a live pledge.


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-Mort gage=a dead pledge. Allows the lender to act dead-just hold the land hostage andwait to be repaid.

-But if you give up possession of the land, how are you going to live lender the moneyback, if land is the source of all power?

-Here, O does not have to give up title of the property to lender. He still owns the land,

but still cannot acquire the wealth he needs to repay the lender.-Is there a downside to this? All the lender is entitled to is to get his money back. Thusthere is no profit motive for the lender. There was a prohibition on charging money (interest) forthe use of money. This used to be a mortal sin. Usury=the absolute prohibition on charginginterest.-But there became a need for another way to borrow money with a profit motive. So thingsevolve. The concept of the lease was developed.-The lease is not a part of the English common law system. It was used to evade usury. To carryout a lease, there would be O. O had title to land, but he needed to raise money, but did not wantto sell his land. Rather than borrow the money, O would lease the property to a Tenant, inexchange for the amount of money that O needed. But by leasing property to T, T would get a

leasehold interest.-O will get the money he needs, gets to keep seisin, because a lease is a non-freehold interest(still holds title), with all the political/social power. As soon as the term of the lease ends, O getshis money back. O will then get the source of his wealth back. But the shortcoming with this isthat T has possession for a period of time, so the lease concept was not optimal to satisfy theneed for possession.-If charging interest were allowed, then O could deal with the lender openly. The lender couldbe given a promise to pay, and if this promise were made enforceable, it would be considered acontract. The contract was traditionally reduced to a bond, or a note (short for a promissorynote).-Lender wants to be secure, but lender cannot be totally secure. So in addition to the enforceablepromise, you would give the lender a fee simple subject to a condition subsequent, O wouldretain the right of re-entry, when the time was reached in the future. O could re-enter and cutshort the lenders fee simple by showing up with the money! If this happened, the condition wassatisfied, and Os right of re-entry would become a fee simple absolute again.-In addition to the right of re-entry, O got a license (permission to do something), but thispermission could be revoked, unless you create a contract not to revoke. SO lender has a feesimple subject to a condition subsequent, subject to a license (O has permission to occupy thepremises), subject to a K not to revoke (lender cannot take away this permission so long as Odoes not default!).-Eventually, the mort gage becomes a mortgage. It is a way to balance everybodys interests.Suppose O borrowed 100,000 from lender, but the property has a fair market value of 1 milliondollars. Suppose O now needs more cash? What does he do? He goes to lender #2. O couldgive Lender 2 a note as a promise to pay (the promise to pay is the notebut what is it securedwith?) O wants to be able to have the right of re-entry so he can get his property back when hepays off the loan. O conveyed this right of re-entry to Lender 2, so now he has a Right of Re-Entry in Right of Re-Entry.-Notethere is a hierarchy of mortgages, an order of priority.-Liens are merely a charge or claim against property. And if we are talking about a lien, it can beeither legal or equitable.


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-Mortgage theory based on lien, OR the Lien Theory of Mortgages: now, O has title, and whatgoes to lender is the lien (the note [controls the promise of repayment] and the mortgage).-Intermediate Theory: jurisdictions that have started to evolve from title theory but have notgotten all the way to lien theory.-The thing that is different is who holds the title (the present right to hold the land/the right to

exclude others from the land. In a title theory, the lender has the present right to hold the land,except what he has given up through the license and the K not to revoke.-Under lien theory, O still has all the present rights to the property, only subject to what wasgiven up through the lien.-The starting point is always to find out who has what rights under the present possessoryinterest.-Uniform Land Transactions Act (ULTA): there are three articles. Article III is the mortgagearticle. Under this theory, if O has title and wanted to get a loan from lender, O would givelender a note plus a statutory security interest. All the rights of each party would be laid out bystatute. If you had a second mortgage, Lender 2 would also get a note and a statutory securityinterest, and this lenders rights would also be set forth through the statute. But no state adopted

this!-ULTA evolved into ULSIA, but again, this was not adopted by any state.-So we are left with:1.) Lien Theory (Florida)=mortgage is a sort of equitable lien. Arises from the K that will be thesource of the lien through equitable conversion.2.) Title Theory=the lender has the power over the land (present possessory interest), until O re-enters with the money. Mee has title, but it is subject to what the Mor gave up.3.) Intermediate Theory

Deed ofTrust:-O conveys a deed to a trustee. A trust means that the trustee is holding the title in trust for abeneficiary. The lender is the primary beneficiary. The obligation is owed to the lender.-A deed of trust will be treated as if it is a mortgage. But keep in mind that the use of these varywidely.- Literal Equity Stripper=when someone takes fixtures away from the property and it decreasesthe value of the property.-Waste-Innocent PurchaserException-Illegal activity=could lead to repossession or foreclosure-Hazardous waste located on the propertyowner may be held liable for the cleanup. BUT,there are exceptions under CERCLA. Although under CERCLA, the lender may escape liability,he may still feel insecure, because he will feel less secure about his collateral.-Under the terms of the mortgage, the insurance policy is also a contract, both of which must beinterpreted. What are the rights as to the mee and mor, etc.-If you get a mortgage loan, the lender is concerned that you may not pay your insurance or yourtaxes, because this could then jeopardize the security interest.-So, then Lenders collect escrowsthey require that you pay into their pocket in advance theinsurance and tax money so that they will have that money when those things become due.-Escrow=third party who acts as a dual agent for both parties, who has an obligation to bothparties. He has fiduciary duties to both parties. Most lenders will refer to this as an impound


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account and limit their agency obligations to simply paying things when they come due. Withagency comes fiduciary duties.

Chapter 13: When the Borrower Sells orPledges Mortgaged Property-Suppose lender received a note and a mortgage.

-If O conveys the land to buyer, does buyer take title, which is free of this mortgage?-Buyer must not be both innocent and injured, mee must show that he is innocent and injured inorder to get into a court of equity.-When could a buyer be both innocent and injured?-Bona fide purchaser for value=an equitable concept-In an equitable lien, unless he is a bona fide purchaser for value, buyer will take title subject tothe mortgage.-Under title theory, lender would have the fsscs, and O would have right of re-entry and licenseand contract not to revoke. If buyer is a bona fide purchaser for value, and no adequate remedyat law, then buyer can take title subject to the mortgage (right of re-entry, etc) and the only wayhe can take free of the mortgage is if he can invoke estoppel.

-Buyers title is still subject to the mortgage under lien and title theories. If the note is properlyexecuted, and expresses an intent to bind future parties, then it may run with the land, althoughthey ordinarily dont, because notes dont normally touch and concern the land. So buyer takestitle subject to a mortgage-Two possibilities: Buyer only takes title subject to the mortgage OR subject to the mortgageAND the note-If buyer assumes the note, is the mor still obligated on the mortgage? Buyer does not have thepower to release the mor. He would only be released if he was released by mee, or if therelease is provided for by law.-Suppose that, instead of property being sold, mee sell the note and the mortgage to X (thesecondary mortgage market). X is now the buyer of the note and the mortgage. Can mor nowassert defenses against X? It depends on first of all, whether the note is a negotiable instrument.If so, then the governing law is Article III of the UCCif a note is transferred to a holder in duecourse, which is a bona fide purchaser of value, then the holder in due course, takes free of anydefect or claim which would have made the note or obligation voidable. On the other hand, ifnot a negotiable instrument, then it is simply a common law contract, and it is governed bycommon law contract rules. An assignment does not become binding on ogor until buyer getsnotice of the assignment.

y In general, a mortgage is the use of land as collateral in order to secure an oblilgation.y We do not talk about personal property here because personal property is now governed

by Article IX of the UCC.

y Lien theory=mortgage is viewed as a lien. Title theory seemed to be too rigid to some.y T

itle theory=mortgage is viewed as a conveyance. Mee gets a title. Mor gets license,gets a contract not to revoke the license unless mor defaults, and gets right of re-entry.

y Intermediate theory= a compromise bw these two theories.1.26.10Chapters 21 & 22Mortgage Foreclosure

y The mee originates the mortgage. The loan is not the only source of the obligation.


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y We start with O. O is the mor. The mee is the lender. The mor have given the mee amortgage + a promise to pay

y Sometimes mee turns around and sells note and mortgage to a buyer. Typically they aresold, but they could also be assigned as security. The note and the mortgage could beused as collateral for another obligation.

y Suppose note and mortgage are sold to buyer. Suppose it having been sold to buyer, towhom should mor make the payments to? If mee transfers the entire mortgage to thebuyer, then an assignment occurs.

y The transfer is only binding on mor when he gets notice of the transfer under commonlaw contracts. Any defense which the moor would have against mee could also beasserted against the buyer.

y A negotiable instrument is defined by statute. Fl Ch. 673, Article III of UCC. If theinstrument is not negotiable, then common law contracts applies.

y Negotiable instrument: an inst which is uncond promise to pay a fixed amount of moneywith or without interest or payable charges; does not state any undertaking by personpromising or ordering payment to do any addtl act other than the payment of money.

There cannot be any other promises other than the promise to pay. It must just be apromise to pay at a particular time and include no other promises or obligations otherthan the promise to pay.

y The mortgage is separate from the note. Why have two documents here? If youcombined it into one document which contains promises regarding the land, then therewould be promises other than promises to pay. Then it would not be negotiable and itwould not fall within Art. III. Negotiation=a transfer of possession, whether vol or invol.Possession is transferred through delivery. This is what makes an instrument negotiable.If this is a negotiable instrument (an unconditional promise to pay) and it is negotiated,then the negotiation, if it is to a holder in due course, could change the rules. A holder indue course=the possessor/holder who took instrument for value in good faith without

notice. A holder in due course is a statutory version of a bona fide purchaser for value.y A holder in due course takes free of a whole list of defenses.y Congress added addition to Real Estate Settlement Procedures Act. Prior person and new

person has to give notice to mor of the transfer.

y Assume mee assigns the note, and then mor make payment to mee. Mee takes money.Assignment only binding on oor when he has notice of the assignment.

y People who buy notes and mortgages is called the secondary market. Then buyers wouldbegin to buy large groups of mortgages and then sell shares to investors.

y Suppose mee transfers the mortgage to X. What does X get? Its only purpose is tosecure an obligation. Mortgage was created merely with the intent to secure theobligation, so X cannot enforce the mortgage.

y Suppose the note was transferred to X, now there is a default on the mortgage (i.e., on thepayment of the note)can X foreclose on the property? What can X do? What does heget? The note is the obligation and the mortgage is merely security for the obligation.The note is a contract, and contract rights may be assigned. The mortgage follows thedebt!!!

y The mortgage follows the debt!! Because it will be equitably assigned unless there is acontrary intention expressed. Because otherwise the mortgage would be uselesswouldnot benefit X or mor.


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Foreclosurewhat is the point of foreclosure?

y Assume we have mor and the note + mortgage to meey Title theory mortgage=mor transfers title in fsscs to mee. Mor retains right of re-entry

+license+contract not to revoke license.

y Suppose mee fails to live up to the obligation and defaults. What happens? He loses hisright of re-entry, because condition subsequent was not satisfied by defaulting and failingto pay. Then in the instance of default the property becomes FSA, the right of re-entryexpires, and mee revoke the license. They can do this because the promise not to revokewas only so long as mor performed on his promise to pay.

y What legal rights do mor have? The propery was only used to secure an obligation, andnow mor has lost title.

y Mee now has legal title in FSA, and mor has no legal rights at law. O may seek anequitable remedy=the equitable right of redemption. Mor must pay the balance due onthe note, however. He who seeks equity, must do equity. Mor would have to pay up andmake the mee whole again. This is what is meant by redemption.

y Foreclosure=cutting off redemption rights of mor The right of redemption wouldencumber the property if mee wanted to turn around and sell the property. Based onsubstitution, the buyer would be subject to the equitable redemption, sot then buyerwould be hesitant to buy or not pay very much for the property.

y Foreclosure is like a preemptive strike to cut off the right of redemption. Put up or shutup. It cuts off the equitable right to redeem, because now mor no longer retains anylegal remedies.

y Strict foreclosure=y Strict foreclosure is unusual. Traditionally, mortgages were one payment at the end (on

law day). Then mortgages evolved into the installment system, the debt was beingamortized by payments. Debt was being reduced, giving mee title would give him morethan what he was entitled to, which would result in unjust enrichment, which would be

inconsistent with equity. What resulted was foreclosure by SALE. This converts theproperty into a fund, out of which the mee can be paid what mee is owed.

y Suppose there is money left over? It will go back to the mor. If mee is paid off, mee ismade whole, and not entitled anymore, bc mortgage is only intended to secure theobligation. Any surplus goes back to mor.

y Suppose now that you have a second mortgage (note 2 + mortgage 2). If the first mort isforclosed, then the first mort should get paid in full. If there is a surplus, then should goto mee 2, if then a surplus, then it should go back to mor.

y Traditionally foreclosure operated to elimitate the equity of redemptiony What is a mortgage in a lien theory state=an equitable lien on title. Results via equitable

conversion. Mee 1 has nothing but an equitable lien. If this is so, then mee has to get

the court to execute on the lien. Mee must go to a court of equity and must show noadequate remedy at law. Must come in with clean hands, and innocence and injury mustbalance in mees favor.

y Mee must be injured by lack of paymenty Lien execution is essentially the same as extinguishing the equity of redemptiony Suppose we have M1 and M2 and M3. You represent mee 2. M2 is in default. Can

mee foreclose? Yes. In a title theory, mee is foreclosing on the right of re-entry.


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y Mee 2 is foreclosingnecessary parties are Mee 3if he is properly joined in service ofprocess, then his interest in the property will be extinguished.

y You must also find out everyone else that could potentially have an unrecorded, juniorinterest in the party

y To extinguish the interest of junior interest, you must join them as a party to thelitigation.

y The claims are paid in the interest in which they attach. Mee 2 will thus get paid first. Ifsurplus, mee 3 will get it. IF still surplus, then mor get it

y What about mee 1? What makes a party indispensible? If you cant figure out the otherpartys rights without figuring out theirs, too, then they are indispensible.

y Mee 1y How can mee foreclose without going to court? How can he have the power to do this?

Agency. Under the terms of the mortgage, the mor agrees to appoint mee as the agentof mor in the event of default. Then the mee will sell the property thereby convertingthe property on behalf of mor. Mee must perform in accordance with the terms of theagency. As mor agent, mee has a fiduciary obligation to get a high price, though.

y Deeds of trust=you have a trustee that holds the title in trust as an agent for mor, andthen mee is not in a conflict of interest with mor.

y If mee 2 sells property to buyer at foreclosure sale, will buyers title be free of the othermortgages? The power of sale foreclosure cannot have an effect of the senior mortgage.It is simply an agency power to sell title as it existed at this power of sale foreclosure.But does the foreclosure sale extinguish the junior mortgage? Why does Mee 3 takesubject to a contract in the second mortgage? What is the legal concept? Privity. Mee 3is getting some interest in land, and therefore if this contract creating the agency runswith the land (it does), because the mee would be substituted.

y Mee 2 has an agency which binds Mee 3 bc the covenant runs with the land. Whatmust mee 2 do to make it binding on mee 3? Mee 2 must give mee 3 notice in order

to make the power of sale effective.y To protect itself, mee will have to come to the foreclosure sale and bid on the property

with cash, but any other mee can bid its debt. But mee 3 will have to bid with cash,until it gets over the debt owed to mee 2. If mee does not come with cash he will loseout.

y Mee 3 took land subject to this covenant. State statutes governing the power of sale arewhat make mee 2 have to give mee 3 notice before extinguishing their interest in theproperty. This is a way of protecting junior claimants by ensuring that they get notice.

y Can you use the power of sale in every state? No. If intended to secure an obligation topay money, it is a mortgage, and mortgages must be foreclosed on in equity (Fl). Thereare some statutory exceptions to this, however.

y Can the federal government trump state foreclosure law regarding itself? Yes, throughthe Supremacy clause.

y Power of sale / judicial foreclosure (necessary and proper parties).y The modern note is paid in installmentsthis is a modern amortized mortgage.y We start with the mortgage loan (the note + the mortgage). Then we have a default. The

mor has defaulted. The mee wants to begin foreclosure. Mor wants foreclosure to be


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completed. Once foreclosure (ends the equity of redemption) is completed, the equity ofredemption ends.

y The mor defaults and the mee sends a noticey Acceleration=mee calls the loan due in one lump sum. All of the payments are due

this would extinguish the debt. How do you accelerate? There will be an acceleration

clause in the obligation. Acceleration could become automatic on default. It woulddepend on what the terms of the contract were. It is possible that this would occur, butthis would be unlikely.

y If you are involved in a foreclosure, look at the terms of the mortgagey If you accelerate, you must first give notice of accelerationthe loan document or a

statute may require it, orFRCPs may require it. Jurisdictions will have their own rules asconditions precedent to commencing foreclosure proceedings.

y Acceleration makes the payments all due at once. This prevents mee from having to sueon each late payment.

y Redemption=once there is redemption, borrower has redeemed the property from themortgage. He has paid everything that is due on the note (attys fees, costs of litigation,

etc)y Cure=you cure the default. If you cure the default in time, then they cannot accelerate

and cannot give notice of default.

y Reinstatement=usually what occurs after you default. Lender has given app notice toaccelerate the debtcan you deaccelerate? Merely curing wont do it. This is unusual,but one way to possibly deaccelerate is to declare bankruptcy. IT is under federal law,and a party is entitled to enter into this is if a party cannot pay debts as they become due.

02.02.10

y Suppose O goes to lender, and gets a note and mortgagey But the closing agent forgot to get mor to sign the mortgage!!y Does lender have a mortgage??y Why does a mortgage have to be signed?y A mortgage is the use of land as collateral to secure an obligation.y Def depends on juris. There are three theoriesy Lien theory: mort is viewed as equitable lien on title. It arises through equitable

conversion. Equity considers the obligation performed. Where is the obligation to givethe land as collateral? From the contractual obligation that is one aspect of the mortgage.A lien is given in exchange for the loan. When equity considers that promise done, this iswhat we call equitable conversion. Why do we have a problem with lien arising througha lack of signature? There is a contract. The promise is for mor to give mee a lien.Equity considers the promise performed.

o But how could someone with just an equitable lien on the property have theproperty foreclosed upon? How can the lender have the power to sell somethingthat isnt really his? If there is a judicial power of sale allowed.

o But what if there is no statutory power of sale? In an agency relationship, thelender has the right to sell it, because the lender has a fiduciary duty with themor. If the lender by the terms of the agreement is made the agent of O, then thelender could sell the property on behalf of O, because this is what an agency is.

Lender has an equitable lien on the property and could have a judicialforeclosure or a power of sale by statute state.


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Somejurisdictions do not allow a power of sale by statute (likeFlorida)

y Partial performanceequitable estoppel/evidentiary standard (there must have been a K sothere is no chance for fraud). The questions is does mee have a mortgage even though itis not signed? Yes he does in equity. It is called an equitable mortgage. But down the

line this could create title problems.y Title theory:Under title theory, a mortgage is a conveyance of title in fsscs. Mor gets

right of re-entry, mee gives mor a license to possess and occupy the premises, as well asa promise not to revoke the license as long as mor does not default on the payment. Totransfer a mortgage to lender in title theory, you need intent delivery acceptance, and awriting that satisfies the SOF. There is a dist between an equitable mortgage and a legaltitle. Where a person ought to get a mortgage and there is some technicality or they dosomething that makes the situation look different (EX: O enters relationship with lender,lender says he does not want to deal with a mortgage, and instead demands a deed to theproperty in FSA and enters into K with mor and says he can buy it back for statedamount of loan plus interestthus the K is treated as a conveyance. On its face it looks

like a deed toF

SA and a separate K to re-convey

but O misses the chance to buy backproperty and lender says hes keeping itdoes O have right to redeem? Why? Whyshould O have an equity of redemption? They intended an essence a loan to be repaid.This ought to have been a mortgage, so equity considers done what ought to have beendoneequity would re-characterize it as a mortgage.)

y Equitable mortgage=if parties intended to create a mortgage and benefits have beenreceived, then equity would consider it to be a mortgage.

o Equity of redemption could subsequently be waived after the mortgage isexecuted

y New Hypothetical: There is a property subject to two mortgages. We have Mee 1 andMee 2. O defaults. Mee 1 forecloses, and has a foreclosure sale. The property is

bought by buyer. Buyer then sells it to O again. But then Mee 2 shows up and saysyour property is subject to my mortgage. Is that possible? Did buyer take title free ofM2? How would he do this? M1 has first priority. Is M2 extinguished? If this is ajudicial foreclosure, in order for the judgment to be binding (res judicata), M1 will haveto join M2 in the foreclosure suit. If this is done, buyer at the sale bought the propertyand M2 was extinguished.

y If sold by power of salewhere might a notice requirement come from? From statestatute. Or in the terms of the mortgage itself. If requirement in not one of these twoplaces, then no notice is required. Assume that M2 is extinguished so that buyer tookfree of M2. Mee2 argues that when O repurchased the property, M2 was resurrected.Why is this so?

y Three future covenants: 1) future covenant of quiet enjoyment; 2.) covenant of furtherassurancespromises to do whatever is necessary to do in the future to perfect the title.y What would perfect the title here? If O lost the property to foreclosure, what would he do

to perfect title to mee? Give the property back. O ought to have perfected themortgagesince he ought to have done thisequity considers done what ought to bedonewhen this maxim is applied, we call this the doctrine of equitable conversion. Themortgage is thus resurrected.


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y The foreclosure by M1 converted the mortgage into cashthe mortgage (M1) wasextinguished.

y Foreclosure is an ordered sale by the courttake the highest bid you get. Likely that thesale will not produce enough moneycan mee recover against O for the shortfall?Defeciency judgment. Foreclosure is an action in equity. Defeciency is an action at

lawbecause it is a suit on the obligation. You would first have a suit in equitiy toforeclose. If there is a shortage, then you sue at law for the deficiency. By the time meeforecloses (O also resp for foreclosure costs), there are costs accumulated, it is likelythere will be a deficiency. The possibility is that the foreclosure did not really help themat all. There are a number of juris that have enacted statutes for borrowers that restrictdefeciencies.

y No juris has eliminated deficiency judgments.y 1.) Protections against deficiency judgments: borrowers are protected if the borrower got

a purchase money loan, CA restricts the ability to get a deficiency judgment.

y Purchase money mortgage: a mort given by the seller for part of the purchase price.y Revised definition ofPMM: includes loans by third parties.y In juris that limit deficiencydoes it include ALL purchase money mortgage or just ones

given by the seller for part of the purchase price?

y 2.) If lender wants power of sale, it can do this, but cannot bring an action for deficiencyjudgment.

y 3.) Fair value statutes: if sells for less than fair value (def is not amount owed-amt recdat foreclosure is is fair value-amt owed on the property) FMV determined by how it issold (appraised value, etc.) It is intended to cut down on the amount of the defeciency

y 4.) One action statutes: require lender to consolidate all claims into one proceeding.y Deficiency action is an action on the note. Must ask for deficiency judgment in the court

of equity during the foreclosure proceedings

y A court acting in equity has discretion to withhold reliefmore so than a court acting inlaw.

y Co-signors:o Suppose we have the note and the mortgage. If the note is co-signed, what is the

effect? Co-signors are jointly and severally liable for the debt. A guarantor issecondarially liable. To go after a guarantor you must go after the primary partyfirst. The primary party must default and you must make an effort to go afterthem first.

o A guarantor is better off than a co-signor but not much better off.o The benefit of co-signing the mortgage: a mortgage is the use of land to secure an

obligation. So what is the point of co-signing the mortgage? If there is anotherperson who has an interest in the property

y Suppose we have O. Os land is subject to a mortgage, and note that secures themortgage, to mee. And the land has also been leased to tenant. If the mortgage goesinto default, what will happen to tenants lease?

o If mee forecloses, the foreclosure will sell title at the moment the mortgageattached, and if this is a judicial foreclosure, what makes it have that effect?What makes the lease become extinguished? The parties with the lease is anindisp party and it would be a violation of due process if they were not joined inthe foreclosure proceeding initiated by mee.


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o Can you sell the prop in foreclosure without extinguishing the lease? Theforeclosure will extinguish mees interest in the property. What is it thatextinguishes the lease? If you dont join the lessee, then you dont have ajudgment that extinguishes the lease! The lessee is the junior party here.

o Suppose we have a tenant who is not a good tenantmee wanted to get rid ofhim, but through some oversight, tenant did not get served. At the foreclosuresale, there is buyer. When buyer filed eviction against tenant, he finds that thelease was not extinguished by the foreclosure. What can buyer do? Buyer can goback to equity and re-foreclose, because it was not done the first time.

Chapter 20:

y Suppose you have Mor, Mee, and a tenant. What gives mor the right to lease theproperty?

o Under title theory, does mor own the property? He retains a right of re-entry tothe property. He re-enters by paying. This is a future interest. He also has aLICENSE to use the property. It is mere permission to use the property. He has alicense to occupy. Whether or not mor can lease the property will depend uponT

HE

TE

RMS OF

T

HE

L

ICENS

E!!

o Mor has no right to lease property if it is not provided for by the terms of thelicense. Can mee insist that tenant pay the rent directly to mee? To the extentthat mor gives him the ability to lease the property, he can lease it. But the meeis really the lord of the property.

o If under the terms of the license, mor can rent out the property, when license isterminated, the tenants rights are terminated too. At this time, the mee has theright to the rents.

o But in a lien theory jurisdiction: Mee has an equitable lien. Mor has title. Mor can lease out the

property, except to the terms in the mortgage that right has been given up.

In title theory juris., for mee to have power to take away right of mor tolease out property and to collect the rents, there must be an assignment ofrents.

You must determine the terms of the assignment. Page 411: The right to rents follows the rights to possession. The mor has the present possessory interest subject only to what he has

given up in the terms of the mortgage.o The important inquiry is who has the right to possession.o When does the mee have right to take possession/have the right to collect

rents, absent any agreement to the contrary (which is the license and thecontract)?

o In a title theory: when the mortgage is executed. The mee has rightto possession, subject only to mors right to occupy the property.

o In lien theory: when foreclosure is complete, buyer has right topossession.

o Intermediate theory: mee has right to possession when mor defaults.This is when mee can get at the rents and possession. This means thatmee is treated as having rights as in a title theory, but not until a laterperiod of time.


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o If you are collecting the rents, and you are not the owner of the property, whatcould be the danger here? You have a fiduciary duty to as a mortgagee youare acting as the landlords agent under the leaseyou owe the landlord afiduciary dutyyou must put his interests before your own.

o When you do foreclose, if there is a defenciency, mor can claim that it isbecause of how you managed the property.

The mee in possession is thus arisky position to be in.

o As a mee in possession, you could also foreclose the property, and let thelessee go after the mor. But right now the mee has the potential to getrentwhat else could you do besides actually taking possession of theproperty? Have a receiver appointed. What is this? The court of equityappoints someone else to take care of the property. It is an equitable remedy.You must show irreparable harm (impairment of the security), then the burdenshifts to mor to show that this isnt so.

o What is the problem with an equitable receiver?o It costs moneyo T

he court will appoint whoever it wants.T

his could be a problempotentiallythe receiver may not be a good quality manager.o The starting point is:

Appt of receiver is an equitable remedybut localizedquestion in terms of what is required to have one appointed.

o Prepaid Rents: Suppose we have a mortgage, note, and lease. If mortgage isterminated, then the lessee will have lost his advanced payment. If lease isterminated by foreclosure, then you can essentially kiss this money goodbye!

o The mor could go into bankruptcyone of the effects ofbankruptcy is any executory contract could be rejected. Eventhough the T has paid, the lease could be terminated!!

o Non-disturbance clause: mee promises T to not disturb the lease. There issomething in it for the mee. Mee may stipulate that the rent is paiddirectly to mee or to a third party, lock box, or escrow.

o Suppose Mor entered into lease first with T, and THEN mor entered intoa mortgage with mee (the order is just reversed). A lease is presentpossessory non-freehold interest. Landlord has FSA, subject to a lease. Ifthe property is foreclosed, what happens to the lease? At the foreclosure,the buyer gets the title as it was when the mortgage attached. It was FSAminus the lease. The lease cannot be terminated by the foreclosure. Thebuyer gets title subject to the lease. The lease here is senior to themortgage.

o Most lenders wont lend unless they get to have a senior interest.o Subordination=lowering your priority by agreement belowo Equitable subordination=a partys behavior has lowered their order

of priority.o If you pre-pay rents, then you lose some degree of leverage.o Suppose you are approached by a friend who says Im renting a condo

and I just got a notice that its in foreclosure, will I have to move out?o They will lose their property.


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o You could also say stop paying rent and stay there until theforeclosure sale

o The rational thing to do is to contact the lender who is foreclosingo Rent skimming: a person finding owners who are in trouble with their

mortgage you deed the prop to me, and I will lease it back to you and I

will take care of the mortgage.T

he crime is when the person just collectsthe rent and does not pay the mortgage. It is now a state and federalcrime. It is a crime when there is the intent to skim rent

Assignment of rents:o Mee does not ordinarily want to collect the rents, because he will

becomes a fiduciary bc he will act as an agent of the mor and this is riskyo To have priority in those rents, you must actually take possession of them

and if you dont, a creditor could get priority or a trustee in bankruptcy.o Fl Statutes try to create a new approachan assignment of rents is

absoluteit only becomes effective when the mee executes on it andstarts collecting the rent.

o Will this hold up in bankruptcy? See 697.07Chapter 12:

o Absent agreement to the contrary, under CL, if mee has been contracted to bepaid on a certain day, then that is what the mee is entitled to get. Mor cannotpay earlybut this can be changed by agreement.

02.09.10Chs 23 & 30Class Notes

y A mortgage is the use of land as collateral to secure an obligation.y The modern note provides for amortizationy

Can you have a power of sale foreclosure (allows lender to sell the property for cash) in atitle theory state? Yesits just that the lender would be appointed the agent to sell theproperty and remember! The lender has the legal title, and must extinguish the equity ofredemption

y Suppose we have O, and he has title to lot 1, and offers a mort on lot 1 to secure the notethat lender will get in exchange for the loan. Lender is undersecured because the value ofthe prop is less than the value of the loan. Suppose now O has acquired lot 2, and offers amort on this to lender to secure the note. Can you have a mort on two diff properties tosecure one note?

y Yes. Why? Suppose lot 2 is worth fair market value, lot 1 is worth 900,000these twocombined provide an equity cushion because the property is worth more than the loan

being offered by lender. If lender forecloses on lot 2, then there would be a judgment offoreclosure, and title is sold as it was at the moment the mortgage attached.

y He who seeks equity must do equityy Two funds rule: if two funds avail, and going after one fund will not hurt third parties,

then the creditor must go after that one first.

y Suppose there is a developer who has a mortgage, and subdivided his prop into 4 lots.Lot 1 is sold to A, Lot 2 to B, Lot 3 to C, Lot 4 to D. ABCD did not make sure that they


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were released from developers mortgage before acquiring title, so they took subject tothis mortgage.

y Developer disappears, now ABCD hold land subject to a mortgage that is in default.There is a million dollar outstanding balance on the loan, and FMV of lot 1 is 400K, lot 2is 400K, lot 3 and 4 the same. Lender decides he wants to go after lot 1 first. Does lot 1

have any defense?y Why should A be first in equity? Lender must go by inverse order of alienation rule

must go after the last in time first. It is always most equitable to go after developer first(the original obligor), but in relation to the purchasers of the property, then follow theinverse order of alienation rule. This is an example of the maxim he who seeks equity,must do equity.

y The Plain Vanilla MortgageWhat is this?o Fixed paymento Fixed rate of interesto Fully amortized payments

Does this really describe a mortgage? No. It describes the note. It secures a plain vanilla note. The plain vanilla note has the above threeattributes. The alternatives to PVMs are essentially different types of notes. Alternatives to PVMs:

y Variable or Adjustable Rate MortgageWhat makes it adjust?y Something in the terms of the K.y The rate of interest varies.y Why would we have one of these? There are risks and benefits for

both parties

y For mor: it may have an initial lower cost, but there is the riskthat the interest rates may go up on you. Depending on terms of

the mortgage, the interest rates may only be able to adjust so much,but there could be a mortgage that has negative amortization:

y Neg amortization: compound interest. If you are the borrower, thebank gets compound interest, and you are getting negativelyamortized (aka screwed)

y Reverse annuity mortgage:y This is for people that have a lot of equity in their house, but very

little cash. Why do we encourage this? The bank would makemoney. Statistics show that people are happier in their homes, andmoving them out of the home sped up their imminent departure.These programs typically offer a loan that will not come due as

long as the person permanately occupies the premises. The point isthat is a way to get EQUITY out of the property. It is essentially areverse annuity mortgage, which is a home equity conversionmortgage. It allows the elderly person to convert the home equityinto cash.

y Interest Only Mortgageyou pay interest only. This significantlycuts down the cost of the loan. You will typically pay a lowerinterest rate. These tend to be for a very short termit is a way to


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speculate. If interest only, then this mean that the whole mortgageis due at the end.

y Balloon Mortgagea big payment that is due at the end. Principal+ whatever interest is due at that moment. There is a statutorydefinition of balloon mortgage. In Fla, you must warn to mor that

it is a balloon mortgage

that the final payment will besignificantly bigger.

y Graduated Payment Mortgageit secures a grad payment note. Itstarts out with a smaller payment and increases as the loanamortizes. If you have a good earning potential, then you may beallowed to start out with lower payments, and will slowly increasewith stepsassuming that you will eventually have enough moneyto pay the loan (you will eventually make enough money to pay themortgage). What could be the downside? You could not reach theanticipated earning potential and wont be able to make thegraduated payments. You could end up paying more interest over

time

the low initial payments arent covering all the interest andnegative amortization occurs and you incur negative debt. Youhave not been decreasing the principalyou have actually beenadding to it. So the graduated payments are much higher tocompensate for this.

y Price Level Adjusted Mortgagethe principal adjusts withinflation. This hasnt really caught on

y Participating Mortgage: Lender accepts below market interest ratein exchange for a cut of cash flow on the commercial property.This is a way to entice a lender. Why would you want to do this ifyou were a borrower? It could help you get started. The creditor

could get recharacterized from a creditor to a partner that is jointlyand severally liable for the debts that the owner incurs

y Shared Appreciation Mortgagegives the lender a chance toparticipate in the appreciation of the value. This belongs in theequity category. Appreciation is determined at sale. There needsto a provision of sale, or a buyout

y Convertible Mortgage: Three diff meaningso A mortgage where lender has the option to purchase. A

mortgage with a purchase option (Convertible mortgage +option).

Suppose Im the lender and youre the debtor andyou get into financial trouble. What prevents lenderfrom exercising his option to purchase if the ownerdefaults? This may clog the equity of redemption.

You need either a statute that eliminates thisproblem OR you have to structure the mortgage sothat the mortgage cant be used to defeat the equityof redemption.


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o A VAM that can convert to fixed rate, or sometimes viceversa (convertible interest rate mortgage)

o A mort that converts from a construction mort to apermanent long-term mort

y Wrap-Around MortgageSuppose there is mor and a first mort with agood interest rate. Now you have a second mortgage at a worseinterest ratethe second note has a higher rate of interest because it isriskier, and the mee wants to be compensated for taking on this risk.

y The wrap around mort wraps around your first mortgage. Ownermakes one payment to the wrap around lender. A wrap around mort isone that secures a wrap around note.

y Suppose first note is for x dollars, bc first mee has just made a loan ofx dollars. Nothing has been paid down yet. Second note is for a ydollars. In an ord second morg, the note would be for y dollars. But ifits a wrap around mortgage, it is for both amounts! X+Y. Whywould mor promise to pay the wrap around mee more than what he

had loaned him? The point is to make the wrap around mee resp forthe wrap around mort who would pay the other mee. Ask about howinterest payments work. This type of mortgage tries to make it allappear like the mortgage has a lower interest rate. It also gives a jrmee control over the payments on the first mortgagebecause hewould usually be in a position of risk. The wrap around mee isobligated to pay the first mee. Here, the 2nd mee is the wrap aroundmee, and the mor pays this mee, the wrap around mee. The wraparound mee will pay the first mee. Mor may write and endorse twosep checks and give them to wrap around mee. This way mor cantrackWA mee and make sure that WA mee pays the proper amount

to 1

st

mee.y Equitable Mortgagey Mezzanine Financing Whos on first? Everybody. Suppose you

have O, who owns title to property, and O gets a loan from lender andgives lender a note promising to repay plus interst, and secures thenote with a mortgage. BUT, O needs more money ,and O findsanother lender, but this other lender says I will only loan you themoney if I can get first priority. He goes back to first lender and askshim to support the second lender. First lender does not agree with this.O comes up with a scheme. O is actually O, Inc. The second lender isgiven an article 9 security interst to secure a note. This one has a first

priority in the owner. The first owner has a first priority in the land.What O would like to do is to transfer the land into a Special PurposeEntity, Inc., which can be a subsidiary of O or a wholly ownedcorporation by a person. But the only thing that has been transferred isthe land. Now the SPE is gives a note and mortgage on the land tolender 1, and a art 9 security interest to lender 2. If O defaults, andlender 2 defaults, he can sell the art 9 security interest (which could besomething like partial ownership of SPE). But ownership of SPE only


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gives you the rights of morthis could potentially mean that lender 2would, at the end of the story, have no assets. If O defaults and lender1 forecloses, he can sell the land!!

y Home Equity Loana second mortgage. Can you get a HEL if youdont have a first mortgage? Yes. It is a loan against the equity you

have in the property. It can be a first, second, or third mortgage.Usually for an amount of money that you can draw on.Alternatives to Foreclosureworkout

y If mor is in financial trouble, then this means that there will be more creditors.y Right now mee has first priority. If by agreeing to a workout, could mee lose

his priority?

y There are both dangers and benefits to a workoutAccepting a deed instead of foreclosure:

y Suppose you have O who has defaulted on mortgage. O offers lender a deed tothe property instead of foreclosureis this a good or bad idea?

y Suppose there is a second mortgage to a second mee, and a judgment lien to junior lienor. InTITLETHEORYWhen O gives mee a deed, what is O reallytransferring? Mee now has a FSAthe right of re-entry has been extinguished,and all O has is the equity of redemption. The deed transfer merely only releasesthe equitable right of redemption.

y UnderLIEN theory, what does mee get? An equitable lien. O has title inFSA,give mee an equitable lien. A second mee gets an equitable lien on the FSA.The lesser lien merges into the greater, the now the person who has the secondmortgage has now moved into first place and has acquired first priority.

y Merger: when does this occur and why? It occurs when one person holds morethan one interest in the property. Avoid this so that one person does not have two

interests and make sure that someone else can receive the deed in lieu offoreclosure. Have a clause in the deed in lieu that expressly states that the partiesdont intend merger to take place.

y But just dont have two interests in the same persony What could be the downside of O getting a release? He may be owed money.

Suppose O owes 200k, and O gives a deed in lieu of foreclosure and gets a leasefrom the loan. If O owed $ and O no longer owes money, this is treated asincome under federal income tax law, and this is considered a taxable gain!! Heis now liable to the IRS. So whether this is good really does depend on thecircumstances.

CHAPTER 17 & 14RECORDING ACTS/DEEDS

y What does it take to transfer title from one person to another? The basic requirements:intent, delivery, and acceptance, and a writing signed by the grantor.

y Suppose we have a writing: it is called a deed. It is a document used to transfer title.y Deed=act. What is the act? Livery of seisen was a formal ceremony of delivery. There

was an intent to delivery and pass title.


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y The deed is now used for symbolic delivery. What has to be in the deed? It must besigned by the grantor. It does not have to be signed by both parties.

y A document signed and enforced by both parties is called an indenture. It is a documentbinding two parties. It is called this because it is indented.

y Frequently, modern deeds include obligations on the part of the grantee, such asrestrictive covenants, and they are always signed by the grantor

y If the deed is only signed by the grantor, it is called a deed poll. What if the deed is notsigned by the grantor? What result? If there has been good faith, detrimental reliance ona representation, the person who made the representation will be estopped from denyingit. The covenants would be binding on the grantee based on promissory estoppel.

y The point of SOF is to prevent fraud. But if there is evidence that there was a promise,then the danger of fraud is extinguished.

y What else does the deed need? A legal description of the propertythe boundaries of theproperty must be expressed, so you know exactly what land the grantor intended toconvey. Will less than a legal description of the property suffice in the deed? Some jurisrequire this, for some it is enough if prop described with reasonable certainty.

y The deed must also identify the names of the parties to the deedthe gee and the gor.y The deed must also contain words of present transfer(can be present transfer of a future

interest)

y Suppose the deed is not valid? Transfer on death deeds are not consistent with thecommon law. If you have one of these in a jurisdiction that does not recognize them,then look to adverse possession as a way of cleansing the title.

y Freeholds: FSA, life estate (fee tail: it can only be passed through someones linealdescendants to the heirs of my body.

y Use=equitable interest. If you transferred an equitable interest, they were said to have ause.

y If you convey legal title to someone and transferred equitable title to someone else, theperson with equitable title would have an interest in the land enforceable in the courts ofequity. Statute of uses then executed uses. If someone conveyed an equitable interest, hewould have an interest in the land.

y How were uses transferred? Bargain and Sale and Covenant to Seised. If you had a gorwho reached a bargain with gee, in which gor promised to convey in exchange forpayment of a price, and the gee paid the price, then the gor ought to do what gorpromised. This is what the gor ought to do. If someone ought to do something, thencourts of equity will consider it done. If someone is obligated to do something, equitywould consider the obligation as if it had been performed. If gee was supposed to gettitle, then equity courts will treat gee as if he has already recd the title. The exercise ofthis doctrine is called equitable conversion

y Statute of uses=the one will the use will be treated in law as what he should have had inequity. Where the person is supposed to get title, he will get title.

y Good consideration=family relationship Whenever you see this phrase, now you knowwhat they are talking about. In a juris that has stuck to common law rules, do you needconsideration in a deed? Yes. Either good or valuable consideration.


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y Does the deed need a seal? traditionally a deed is a sealed instrument, but now the sealhas been largely eliminated. Consideration has replaced the seal. So modern deedsgenerally do not require a seal.

y Does a deed need witnesses? It depends on the state. Most states do not, but some do.In Florida, two witnesses are required, unless it is a conveyance by a corporation and the

deed has the corporate seal.y Does a deed have to be acknowledged? It is required it as a condition precedent to

recording.

y Does the deed have to be recorded to be valid? It depends on the jurisdiction.y What about documentary stamps? Depends on the jurisdiction and the statute. But filing

the tax form to get the doc stamp is a condition precedent to recording.

y p.353Bargain and Sale Deedsgoes back to a conveyance bw a gor and gee who hadreached a bargain and the gee had paid the agreed the price. A use is raised by equitableconversion which could be raised by statue of uses to give rise to a legal title. Thisphrase has also mutated and may take on other meanings in some states.

y Traditionally deeds were broken into separate parts: a granting clause (the first partwould say who the grantee wasincluded words of purchase), habendum clause (used tofigure out what interest was passed). Modern deeds use more simplified language andthere is one clausea granting clausewhich says who gets what. The habendumclause controls the estate and the granting clause just states the purchaser.

New Topic:

y Suppose Tee conveys land. Is there any problem with land being conveyed through atrust?

y If the one with legal title has duties to perform that she will not be able to execute if theuse is executed, then the statute of uses does not apply.

y Suppose gor is the trustee. What is problem with this? He has seised for the use ofanother. If tee conveys to A, then A will be substituted. If you are the beneficiary, then

you have certain equitable interestsgee will not take free of the trust unless the teehas power to transfer free of beneficiarys interest. This power would be in the trustdocuments.

y Illinois land trust=if deed says to john d as tee and does not name a bene, then anybodycan rely on the deed & deal with tee as if tee was complete owner and there was notrust. 689.071 Fla Stat. Tee can convey the land without having to worry about theterms of the trust.

New Topic:

y p.347if deed is dated, it raises a presumption. A deed does not have to be dated, and itis not necessary, but it created a rebuttable presumption of delivery.

y Other presumptions:o Presumption of acceptance if there has been a delivery of something that is

beneficial to geeo Presumption of delivery if gee is in possession of a deed.o Presumption of delivery if gee has recorded the deed.

Types of Deeds:

y General Warranty: Has 6 Covenants. Covenants are promises that the gor makes to geeo Covenant of Seisin


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Gor promises that they are true owners and that they have the right toconvey title.

o Covenant of Right to Convey Gor promises that they have the right to convey the property as of the day

of the conveyanceo

Covenant AgainstE

ncumberances Gor promise that there are no encumberances against the gors titleThese three are promises about the property as it stands currentlythese are present covenants

o Convenant to Warrant and Defend Gor has authority to defend the title to the land and all fixtures against all

lawful claims and demandso Covenant of Quiet Enjoyment

Gor promises that no one with superior title will disrupt the gee title orpossession of the property

o Covenant ofFurther Assurances Gor will do whatever is necessary to perfect gees title in the property

T

hese are future covenantsy Special (limited) Warranty:

o Gor says that he has the right to convey and that nothing happened while he wasthe owner to disrupt this right to convey. Gor only promises that no title defectshave arisen due to the acts or omissions of the grantor committed prior to the timeof conveyance.

y Quitclaim:o Gor makes no warranties at all. Gor quits or gives up any claim that he has to

the property. Only used to give up rights. It is used to get someone who has aclaim or an interest in property to give it up. Whatever interest gor may have, hegives up to the gee.

yGrant Deed

Used in California.

y Lady Bird Deed: device in which gor conveys to gee subject to:o 1.) Gors life estateo 2.) Gors power of sale

Why would someone do this? How could gor sell the gees interest? Bycontract. The gee appoints the gor the agent for the sale of the geesinterest as well as the gors interest.

Someone may do this to avoid probate. To avoid creditors of gorbecause creditors can only attach the life

estate, but gee could also have creditors Downsides? Can create issues of clouding title

Still being used. Know that it is a type of deed and has potentialdownsides

y Suppose Gee took by warranty deed and then gee conveyed to X. Is it possible for X torecover on any of the covenants made by gor to gee? Present covenants would have tobe assigned (intent, delivery, acceptance required) to gee. There is generally apresumption against the claims to present covenants being assigned.


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y What about the future covenants? Only future covenants run with the land. They musttouch and concern the land. But why isnt this enough? Why do we then bother withrecording and title insurance?

o It is possible that gor could be unavailable or dead. Can you enforce thecovenants against gors estate? The statute of limitation begins to run when the

cause of action accrues

here, when there is a breach of the covenant/contract.Xs claim could already be barred by the statute of limitations. Other problemswith relying on title covenants: land values change, in the long run, they go up.So in normal inflationary cycle, odds are land will get more valuewhat is themeasure of damages for contracts? The benefit of the bargainwhat the hurtparty expected to receive had the breaching party performed. Suppose X is nowworth 100,000was once worth 10,000. All X could recover is 10,000.

o So covenants are not fool proof. Problems can arise.RECORDING DEEDS:

y If O sold to A, but O used fraud or misrepresentation to induce A, then the contract isvoidable. A could seek recission of the title.

Therefore this is called voidable title,because A could go into equity to get recission. Voidable means subject to recission in

equity.

y A who has voidable title, then conveys to B. What does B get? Why is Bs title voidableagainst A? Because B is substituted. O could go into equity against A, so now O couldgo into equity against B. O must be both innocent and injured, and to prevail, B cannotbe innocent and injured. If B was, then the law would prevail. When the equities areequal, then the law would prevail. If B is both innocent and injured and acted in goodfaith, and paid value for the property, then what? Then O would not have right to pursueB in equity because he could not show that the equities balanced in his favor. If B is abona fide a purchaser for value (he has paid so he is injured because he has built up

equity in the property), and he is innocent, then he cannot be pursued by O in equity.y Now suppose there is X, who transfers possession to C. But X makes it look like C is the

owner, there may have been a deed, but it was never intended to pass title. X is still thetrue owner, because he has title. Now comes D. C delivers a deed with intent to passtitle to D, and D does pay value for the property, and D does take without any notice, soD is innocent. What title does D get? C had no title (void title), so D has a void title.The most C can convey to D is a void title. But D acted in good faith and paid valueheis a bona fide purchaser for value. This is Xs fault, because he allowed C to takeownership and cloaked C with the indicia of ownershipthis is something a RPP wouldknow that would mislead someone. D could go into equity because he has actedinnocently. He is innocent AND injured. There is not an adequate remedy at law here,

because land is unique (location location location), so getting money would not be anadequate remedy. D is looking for estoppel. He wants to estop/bar X from asserting histitle. This does not mean that D gets title. D has possession, has more rights in land thananyone but true owner, but X is estopped from asserting ownership, therefore D has themost perfect ownership interest.

o Now suppose D grants the property to E. What result? E would be substituted forD, and he could enforce any rights that go with the land.


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o Now suppose E conveys to X (the same initial owner!). Could X be protected? Ifland gets conveyed back to any party to the original fraud, they are still subject tolegal and equitable claims that may raise in relation to the land. Substitution doesnot protect X.

This is common law.

Recording Statutes:

y O has title. Wants to convey to A. There is I, D, A, and writing to satisfy SOF + deed isrecorded in the county courthouse. In order for deed to be good, must be recorded at thecounty courthouse. Suppose O at a later time passes title to B and all requirements aremet. What result? B has void title, A has title.

y Suppose O passes title to A, but A did not record. Who has title? O still. Now O passestitle to B. B did not record. O still has title. To determine if A or B gets title, its a raceto the courthouse. B records first, so he gets title. Now O has no title. Suppose Arecords. O has no title now, so A could not get greater than no title. Recording is thefinal step in transferring title. Race notice.

y Now suppose X has title. X passes to Q. Q does not record. X thus still has title. No Xpasses to R. R bought from X and knows about Q, and then records. So now who hastitle? R now has title. If R got title, X has no title, because of doctrine of subtraction.But this really bothered judges. They created statutory estoppelbut not a requirementto transfer title, and it only protects a subsequent BFP. If you record, you give notice. Ifyou dont record, you set up statutory estoppels. The person is protected if she is asubsequent BFP (must take without notice). Recording not required to transfer title, butrequired to give notice.

y In order to be protected, this person must be a subsequent BFP who records first!! this israce-notice statute. Recording not required to transfer title, but required to give notice.

3.9.10Chapters 16 & 18Real Estate Closings and Escrows & Surveys, Land Descriptions, and Boundary Disputes

y Range lines go up and downy Township lines go left and righty This creates boxes, and each box is a township, and each township has 36 sections, and

each section is a square section that is one square mile. To count to 36, start in the topnortheast corner and go left, then in the next row start from the left and go right.

y Metes and boundsy The earth is round, but the rectangular system is designed for a flat surface. The earth is

not perfectly round, either.

y How was the survey originally done?y One person used a 66 iron chain, and a crew would head south 66 at a time, and trying

to account for the changes in the lands surface. They would survey the state 66 at atime. This (human surveying) allowed for a lot of errors. Surveying was not a purescience.

y Hiatus sections/government lots=y Why does the deed description (the description of the property) need to be accurate?


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o If you are representing Buyer, you must make sure they are getting what they areexpecting to buy!

o Ask: do the metes and bounds boundaries close? To they match the area that ispurported to be transferred?

y Postal address does not describe the specific______, street names couldchange

descriptions using these do not do enough to relieve potential uncertainty

y If the buyer is not obligated to perform unless the buyer feels like it, an illusory contractis formed. Why does the buyer have to perform? If this is a bilateral contract, in whicheach parties promise is consideration for the other partys promise, if buyers promise tobuy is not binding, then buyer has not suffered a detriment! Buyers promise has notprovided a benefit to the seller. This does not fit the definition of consideration.

y Buyer could reserve a right to reject survey for good faith reasons, or for things that maketitle unmarketable or unsuitable, but if it is within the entire choice of the buyer, then thecontract is illusory.

y Ordering the right survey depends on what you want it to accomplish. You as the lawyerhas to know what the client wants to do with the land so that the survey can show

anything that would prevent the buyer from doing what he wants to do with the land.y When you order a survey, make sure that it meets the standards set forth by the

department of business and professional regulation and certified to the title insurer andmust be done by a registered florida surveyor. Make sure the surveyors registration hasnot lapsed for some reason.

o You must know what you want out of the survey. Do you want it to show youcertain things or do you want it to afford you certain protections?

o Be aware of applicable state statutes that may override provisions set forth in thetitle insurance policy.

y The survey must be done before closing, so that no rights are waived under the contract.But the survey should not be done so early as it does not provide any protection to the

buyer.y Boundary line disputes:y There are some ways the dispute can be settled:y Adverse possessiondoes not require that there be a dispute to begin withy Prescriptive easementdoes not require that there be a dispute to begin withy Boundary by agreementcan be established if there is disagreement. Each partys

agreement is consideration for the other partys agreement. And the conflict is settled.

y Boundary by acquiescenceacquiesce=you act as if you had no choice. Acquiesing isproof that a boundary is there. The point is the that the conduct of both parties isconsistent. One party acted like the boundary was one place and the other partyacquiesced

y Boundary by estoppel if a party makes a representation express or implied that knew orshould have known could induce detrimental reliance, and it does induce good faithdetrimental reliance, then this party is estopped from denying the truth of therepresentation.

o estopped from denying the existence of the boundary line. A fence could bethe representation in this context


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Chapter 16What is an escrow?

y Dual agentescrow agent has a fiduciary duty to both the buyer and the seller. If youhave two people with different interests, it will be hard to put both of the these interestsbefore your own.

y Sometimes there are even three parties: buyer, seller, and lendery You need escrow instructions executed by both partiesy There are two different types of closings:y New York Styleeveryone involved meets face to facey Escrow closing/California stylethe parties do not see each other and the closing is taken

care of through intermediaries

o Everything sent to escrow agent prior to the date of closingo Lender gives escrow agent moneyo Buyer gives escrow money and documentso Seller gives escrow the deedo Who is holding the title at this point? In order to transfer title of land, there must

be intent, delivery, and acceptance, and a writing that satisfies SOFo If we are talking about just a transfer of money, then all we need is intent,

delivery, acceptance.o Delivery is the agreed upon manifestation of a desire to pass titleo It depends upon what the parties agreedthe escrow is supposed to be the agent

for certain limited purposes. Delivery to your agent is essentially delivery toyourself. The parties must agree at what time title will pass

o Delivery could = agent recording the deed, or the escrow agents delivery of thedeed to buyer on behalf of seller

o Who owns the property? What if equitable conversion has already occurred? Ifall conditions have been satisfied so that delivery should occur, then delivery

should occuro Equity=when ought title pass?o If one of the parties is at fault, then that party could bear the risk of loss.o Closing protection letter against misfeasance or malfeasance

03.16.10Chapter 24&Chapter 3CH. 24: The Land Development Process

y Step 1: Land acquisitiony Developmentgo from raw land to land that can be built upon

o Plotting the land may be requiredto make a map and determine how it will besubdivided

o Consult with government to get plat approval, environmental approval, zoningpermits, other official approvals

o Then, prepare the land itselfremove trees,o If you want to do all of this, it will most likely cost moneyo Where will the developer get this money?

From a bank From the existing landowner


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Any investment or loan vehicle If you are talking first acquisition and then development, you have two

stages that may need financing! If you acquire before you develop, there is a risk, because you may not be

able to get the necessary financing to develop

Until you start changing the land, there will not be major changes to ito But suppose you start to level the land, you start to put in streetsyou put money

into it, but you also limit the other uses for the land. The development costs thusmay actually decrease the property value because it could limit the people thatmay be interested in buying it

y Building Phaseo Digging a hole to make a foundation actually makes the land less valuable,

because it cuts down the amount of people who may want to buy ito The value of the land at acquisition may actually fluctuate and decrease over the

course of the land development process.o If you are the lender, this could be a concern.o

Digression: in an equitable mortgage, where is the obligation? Its in the mortage,but what is the mortgage? Where is the obligation to subject the mortgage to alien? Because it is a contract.

o In lien theory, equitable conversion applies to raise an equitable lien, becauseequity considers done what ought to be done.

o Intermediate theory: the jurisdiction has evolved based on the case by case basis.o A mortgage is supposed to provide security. What is supposed to provide security

is actually on something that is potentially decreasing in value here.o The other problem is that, if there are multiple claimants/lenders, they all are

going to be the closest to the front of the line in the event that something goesbad. If things go bad, and there is not enough money to pay all the creditors, then

the ones at the back of line may not get paid anythingo If we have creditors who are not going to get paid because there is not enough

assets, then one of the possibilities is bankruptcy. The borrower may go intobankruptcy, either voluntary or may be forced by an involuntary petition.

o Also, some of the creditors who do not get paid may have a shortage of moneymay then be forced to go into bankruptcy

First in time and first to record the mortgage will be first in line to receivemoney if the borrower defaults. But this can differ based on jurisdiction.

Race=transfer of the interest makes it complete Notice=transfer places subsequent purchasers and creditors on notice. A

subsequent creditor who takes without notice is protected against theeffect of the recorded document. Complete the transaction, get themortgage and then record it!!

o With a construction mortgage, why is simply not recording first enough to ensurethat you have priority? There could be mechanics liens (statutory creation, doesnot exist at common law).

o If there is a person who can file a mech lien, this person may be able to takepriority. Know the mech lien statute that governs your jurisdiction! If you were a


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construction lender one thing you would not want is for contruction to beginbefore you perfect your constr mortgage

o Fee schedules, Draw inspector=A system in which the lender does not trust thebuilderthey may steal it or spend it somewhere else, possibly on another project.To prevent this, the lender could try to control the money. Is there any downside

to this?Y

es, it takes more time, and it takes more money, so it is an addedexpense. You also run into the risk that if the lender meddles too much, the courtmay adjudge you to be a co-venturer. Why would this create a danger or liability?As a co-venturer you could be considered a partner and are thus jointly andseverally liable for the debts.

o The party seeking equity must have clean hands=the party seeking equity is notculpable for the injury from which he now seeks relief.

o Suppose you have O, and O enters into a construction mortgage to secure aconstruction note, but the $ will only be loaned in future advances/increments.Where the mort has been executed, the construction lender has not yet advancedany money. Now the construction lender records. At point three, we have a

second mortgage to secure a second note, and this second lender loans O themoney. Now second lender records immediately after. But lender does notactually make an advancement until point 5. Who had first priority? Lender orsecond lender? Why? If there is no money given, there is no obligation to repay,so there is no first mortgage yet at point one OR at point twothere is not yetanything to secure!! So when the second mort is recorded, the second lender hasan enforceable mortgage, because $ is advanced. The first lender simply set up asituation to create a mortgage once the payment is advanced.

o The traditional rule is that if there is a mortgage involves future interest/optionalpayments, the priority begins, or the lenders place in line begins when the firstpayment is executed.

o If the mortgage involves mandatory payments, then the priority of the lenderbegins when the mortgage is executed.

o Remember to check to see if this traditional rule is still in effect in yourjurisdiction.

oy Letter of credit: some entity (bank, insurance co) issues a letter, a binding contract that

they will pay if they get a draft that meets its terms.o But there are expenses to thiso And the letter may be drafted very narrowly in order to allow the entity to protect

itselfo Its governed by Article 5 of the UCC. Find someone who knows about this.

yNow we are in the development stage.

L

ender would like to get rid of constructionmortgage and get a lower rate long term, permanent mortgagethis will replace theshort term constr mortgage and will take it out, this is why it is called a take outmortgage.

o When it comes time to replace the constr loan, there will not be perm financingavailable. If the builder cant get out of the construction financing, there is a riskof default. What about a commitment from a lender?

o What is a commitment?


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o The word commitment by itself does not communicate much detaildesign it toaccomplish what you want. If you want to make it a K, then make it a K. If youare the constr lender, who wants the take out lender to perform, then constr lendermay claim that it is a K, which is enforceable.

o Suppose O entered into a constr loan (CL), who entered mort with constr lender.O borrowed a little extra money from second lender, and there is also a mechanicslien. Now suppose there is also someone who sued O, and now there is ajudgment lien against O. Now permanent lender shows up. O proposes to permlender that he uses money from perm mort to pay everyone else offeveryoneelse has done what is necessary to perfect their interest. So whos on first?Where in line of lenders does the perm lender fall? He can negotiate a Kreplacement mortgage. If a mort is intended to replace an existence mort anddoes not harm the subsequent mees, then it take the place of that mortgage. Butif the new mort harms the other mees, then the new mort may be equitablysubordinated.

The constr mort could also contain a contract with the perm lender so thatthen all subsequent mees are on notice of the take out. If perm lender buys the constr mort and by its terms converts to a permmortgage, then this should retain the priority, because all subsequentmees have notice.

Most constr lenders are going to want first priority. A seller land may agree to sell the land and take back a mortgage which is

subject to constr financing. This may or may not be a good idea.o Sanibel case, page24:

There was a construction mort to secure a constr note, which is designedto secure a promise to repay the future advances that are going to be madefor the construction.

As a condition, the Bank made Sanibel pre-sell some of their lots beforeconstruction started. They had to get some people under contract to buythe lots before construction started. So some buyers entered into acontract for sale.

There were two people who did pre-buy, and the development went belly-up. So who has priority to the collateral? Who will get paid first?

All the purchasers have is a contract for sale, and the Bank has a mortgageand recorded it. Why would a K give priority?

How did the K become an equitable lien? Through equitable conversion.Typically a buyer has a vendees lien on the property for the price that hasbeen paid.

In equity, buyers ought to have priority, because of this lien, and becausethe constr lender required the developer to find these buyers as a conditionprecedent to making the loan. So the CL not only knew about this but putthese ppl in harms way. So this is the basis for equitable subordination!

oy Partial Releases

o Suppose there is a developer, and he gets financing from a lender. The developernow has developed the property and is ready to sell first house to buyer


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o Now buyer will produce money with which he can use part of it to pay lender topay down the loan and part of it to finance the next house, and so on and so forth.

o Partial release clause: this would enable you to do what was explained in theabove bullet.

CHAPTE

R 3: BROKE

RSy If a broker is an agent depends.y Broker=an agent for the facilitation of a transaction.y Suppose you have O, and O is an owner, could O sell the property by him or herself?

Yes. For Sale by Owner.

y Brokers are sales professionals and what they should have is expertise is sales.y An owner enters into a bilateral contract with a broker. Broker makes a promise to

market, in exchange the owner makes a promise to pay. Usually the promise is to pay acommission, but it does not have to be.

y B has a list of properties for sale and he will market the properties on the list. B placesOs property on this list creates a listing agreement.

y B acts of sellers behalf to market the property and facilitate the transaction. This is alimited agency relationship.

y B bumps into someone on street, he says I want to buy something and B says let meshow you the properties on my list. B tries to match buyers up to properties.

y How does B know what properties to show the potential buyer?o Know their ability to payo Wants and needso Locationo Get to know the potential buyers!o Cultivate trust and confidenceo To be a successful broker, you must sell a lot and sell fast.

y B will become buyers agent. The traditional elements are: 1.) a principle who manifeststhe intent to have the agent act on his or her behalf; 2.) the agent accepts theresponsibility; 3.) the principle must have the right to control the venture.

y Out of an agency relationship arises a fiduciary duty. A fiduciary must put the interestsof the principle above of his own.

y This a dual agency relationship, however. This is a potential conflict of interest. B is theagent of both the buyer and the owner.

y An agent who breaches a fid duty forfeits any right to compensation AND can be liablefor the harm done.

y Possible relationship bw Broker and seller/buyer: based on proposal from natl assn ofrealtors

o Broker could be agent of sellero B could be a disclosed dual agento B could be a statutory non-agent or transaction brokernot a fiduciary, a

statutory creation. There is a lower duty of carewhatever is imposed by thestatute.

y Fla legis a B cannot be a dual agent without violating the broker statutory duty! See475.278


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y Buyers say: I could hire my own broker and pay him with my money, or I can go tosellers Broker, and get his help for free. This could be a problem because the B could bemore concerned about the well-being of the seller. Agency does not require that theprincipal pay the agent.

y B has a fiduciary relationship to the seller, but NOT to the buyer!y Bs may, by statute, have duties to third partiesy If brokers share lists with other brokers in the area with the agreement that if you sell a

property off someone elses list, youll split the commission, then this could be goodbecause more people are seeing the properties that you have on your lists. This is called abrokers exchange. They exchange their lists! Now there are multiple listingservices=purely contractual agr

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