Real Estate Transactions

Front 1

Four Types of Brokerage Agreements

Back 1

(1) Open listing agreement- broker earns a commission if he gets a buyer for the property who actually buys
□ Maybe in commercial deals, not in residential deals
(2) Exclusive agency agreement- promise by seller not to engage another broker
(3) Exclusive Right to sell- seller is obligated to pay commission whomever and however the property is sold, through the efforts of the broker or otherwise
□ Most common for the residential market - between 4 months to a year
(4) Net listing agreement- commission is not specified as a percentage, seller agrees to pay the broker all amounts received in excess of a set price established by the broker and the seller- seller is guaranteed a net amount of sales proceeds
□ Less common than other three types

Front 2

Conscious price parallelism

Back 2

Conscious price parallelism is allowed-not the same as price fixing (but really the same) -brokers figure out what every one else is charging
no price fixing- via supreme court

Front 3

Why does it matter what commission rates are?

Back 3

has a relationship to the broker's incentives to fully market the property

Front 4

Clauses in K relating to commission

Back 4

□ Best efforts to market clause- REALLY hard to monitor and evaluate
Good faith and protective clause - protects broker from having seller not pay him commission that is due
Financing condition- no commission is payable unless buyer can obtain financing

Front 5

Multiple Listing Service

Back 5

to allow brokers to make listings more public-
MLS- multiple listing service- might tell you the commission rate and the type of agreement the broker has

Front 6

General Duties Brokers owe to clients

Back 6

Duty of Loyalty, duty of confidentiality, duty against fraud or misrepresentation

Front 7

Duties brokers owe to non-clients

Back 7

Generally, the same duties they owe to client- not to commit fraud, fair dealing, no misrepresentation- and sometimes also to disclose material latent defects they know of

Front 8

Traditional Types of brokers duties

Back 8

(1) Dual Agency- a broker represents a buyer and seller at the same time- permitted but there are many conflicts of interest and broker must disclose to seller and buyer
(2) Traditionally- Sub-agency relationship- Traditionally- even a cooperating/selling broker who appears to be representing the buyer, owes his duties to the seller
(3) Informal dual agency relationship -
(4) Formal K where selling broker is buyer's broker- duty is to the buyer
(5) Transactional Brokerage/nonagency brokerage- sells services but has no agency relationship to buyer or seller- arms length transaction- need an example

Front 9

Broker's Right to a Commission

Back 9

Traditional Rule- Broker earns his commission when he produces a customer who is ready willing and able to purchase upon terms acceptable to the owner
Minority Rule- Massachusetts- Hillis v. Lake-Broker only earns commission if the sale closes, except when the seller's intentional default because of a wrongful act or interference by the seller= Anti-broker rule
OR: Express conditions in contract of sale are not satisfied, so no commission- ex. financing condition is not fulfilled

Front 10

Commission is Payable (Time-wise) when

Back 10

-Agreement terminates prior to closing when R,W, and A buyer is procured
If no closing- and under minority rule- commission is payable at end of listing period

Front 11

When may a broker recover from a buyer?

Back 11

Implied Contract—if that broker performs some services for the buyer. In exchange, B has impliedly promised the broker that she will complete the transaction.
Third-Party Beneficiary-broker is a 3rd party beneficiary of the purchase agreement btwn B and S
Tortious Interference with Contract—buyer who defaults has tortiously interfered with the listing contract, pursuant to which the broker was to earn a commission.

Front 12

4 tests to determine what legal services brokers are allowed to provide?
(C,C, C,S, I,I )

Back 12

(1) Contracts versus Conveyances Test- Brokers can prepare contract, but can't do anything that conveys inerest in the land, like a deed
(2) Simple vs. Complex Test- if transaction is simple- can prepare standard form agreement and fill in the blank, buy cannot do other things, easements, etc.
(3) Incidental Test- broker can draft agreements if that is incidental to the broker's business and the party pays no separate charge for this service
(4) Interim Notice Test- notice must be given to buyer and seller that the broker and title co.s don't represent them, they have their own conflicting interests - Public interest is the determining factor, and here because no one is being harmed brokers are allowed to continue almost every practice they were doing before- very lienient
□ Although- Broker can't say anything about easements, covenants or other title matters

Front 13

Licensure of Brokers

Back 13

Brokers are licensed by state, real estate salespersons are licensed by state to work under brokers
Attns
Most states provide a total exemption for attorneys- could collect a commission for working just as a broker
Some states provide a limited exemption- as long as the attn perform only duties incidental to a broker and do not accept the brokerage commission (IF they are also acting as attorneys for the buyer)=ok

Front 14

Four Stages of K

Back 14

Precontract Stage
Executory Contract
Closing
Post Closing

Front 15

Letters of Intent- Purpose

Back 15

Purpose: Both parties seek a result that temporarily takes a property off the market while giving the buyer more time to consider the merits and demerits of a possible purchase.

Front 16

Letters of Intent- non-binding or not?

Back 16

--K needs to name the parties, identify the subject matter and recite the mode of consideration- but especially IF:
---If there is no non-binding clause
---If there was detrimental reliance upon promise to the transaction= promissory estoppel

Cases:
GMH Associates v. Prudential- letters of intent are not binding unless there is detrimental reliance
Texaco v. Penzoil- Letters of Intent/Informal memo of agreement can be binding

Front 17

Statute of Frauds Requires what?

Back 17

Need a written document, writing must include essential terms such as names of the parties, the legal description of the property and the intent to buy and sell must be signed by parties to be charged
¨ Signature-Electronic Signatures in Global and National Commerce Act- Electronic Sigs are ok

Front 18

Exceptions to SoF

Back 18

Part performance-
Equitable estoppel,- similar to part peformance

Front 19

What is required to prove part performance?

Back 19

two part test, prove the existence of an oral K, a (1) buyer has to take possession, (2) make partial full purchase, or improvements

Front 20

What purpose does the part performance exception fulfill?

Back 20

1. Evidentiary function—the acts substitute for a writing as an alternative sold proof that the contract exists and is not the buyer’s fabrication.
2. Hardship theory—to prevent hardship; the buyer will suffer irreparable injury unless the court intervenes to enforce the oral agreement.

Front 21

Equitable estoppel

Back 21

◊ 1.) the D has induced an expectation
◊ 2.) The P reasonably relied on the expectation
◊ 3.) the plaintiff would be harmed if that expectation were false

Front 22

Doctrine of Merger

Back 22

□ Doctrine of Merger-contract merges into the deed of conveyance- any guarantees that are made in K but aren't reflected in the deed are extinguished- Any reps and warranties are extinguished otherwise unless you have expressly provided for the continuance

Front 23

Fixtures v. Personal Property

Back 23

Look to
(1) degree of attachment,
(2) general custom (washer and dryer are not considered a fixture),
(3) harm to property upon removal (less harm= more likely to be fixtures)
(4) Look to intent of annexor

NOTE: Deeds do not pass title to goods, titles of goods pass under the UCC article 9 at time of sale of property- i.e. you can just get a receipt

Front 24

Parol Evidence Rule

Back 24

Rule-Parol evidence cannot be sued to contradict clear terms of a writing

1.) four corners-limits the interpretation to the document
2.) ambiguity- if there is ambiguity then parol evidence can be used

Front 25

What are some ways to allocate risk during the executory contract period?

Back 25

Equitable conversion, covenants, reps and warranties

Front 26

Equitable Conversion

Back 26

Gen Def: - title is split before closing happens- legal title remains with seller and equitable title with the buyer= risk allocation principle

--Old- At the moment of signing, buyer takes on risk of anything happening to the property (pro-seller rule) (but only if the K is specifically enforceable at the time)
--Uniform Vendor and Purchaser Risk Act- UVPRA-seller has risk of loss until he transfers poss OR legal title to buyer

Note: If the K puts the risk of loss of the seller until closing, then that is where it stays- equitable conversion applies only in the absence of a contractual term allocating risk

Front 27

Breach of a Warranty or Rep

Back 27

§ Breach of Warranty or Rep-provides a cause of action for a party but not a right of cancellation

Front 28

Financing Conditions- what do you want to include?

Back 28

Make sure to include: 1.) Interest rate, 2.) term of loan (time), 3.) amount or percentage of purchase price, Maybe also:a.) Type of loan- fixed or variable rate mortgage, B.) Number of points- pay interest in a lump sum up front to get a lower rate on a fixed mortgage- each point costs 1% interest c.) institutional lender, and not seller financing/ PMM

Note:
If no financing condition, transaction is assumed to be an "all-cash exchange"
ALSO:
¨ Want funding of loan to be express condition, not just approval of loan

Front 29

To sue an appraiser on a misappraisal:

Back 29

must show privity
OR maybe third party beneficiary theory

Front 30

Per Acre v. In Gross Sale

Back 30

□ RULE: In gross sale- quantity doesn't matter, there shouldn't be a price adjustment if the land is found to be larger than it is- but if the parties made size an issue (per acre sale), then the parties can rescind or change the deal if the acreage is wrong

Front 31

To determine whether something is a per acre or an in gross sale:

Back 31

----Ct will look to whether acreage was mentioned, whether it was an essential term much discussed-
----" More or less "-in gross
---Look to whether price is an exact multiple of the acres- ex. 1500 for 300 acres

Note:
Cts tend to assume something is an in gross sale rather than a price per acre sale
If there is an extreme mistake (by 50% or more), then they will use the doctrine of mutual mistake

Front 32

If the price is going to be reduced because of missing land in a per acre sale:

Back 32

Proportionally/ Pro rata OR
Maybe there should be a valuation per area that should have been included in the K in the first place because the land is different

Front 33

Two types of warranty deeds:

Back 33

Special Warranty Deed- typically limit sellers responsibility to claims and defects created during time seller owned property
General Warranty Deed- not really limiting to seller's responsibility

Front 34

Elements required for a proper deed:

Back 34

For SoF:

(1) Must be in writing
(2) Must name grantor and grantee
(3) Must adequately describe the real property

For proper deed:
(4) Must have grantor intent
(5) Actual or constructive delivery
(6) Acceptance by grantee

Front 35

Doctrine of Merger

Back 35

§ After closing, all promises, warranties, conditions, etc, are extinguished if not written in the deed- all causes of action after closing must be on closing documents- not on the prior K

Front 36

Three Exceptions to the Doctrine of Merger: MM, CM, F

Back 36

Mutual Mistake
Collateral Matters- not directly relating to title- If there is enough intent showing that parties intended the condition to survive, it might (like items that need to be removed from the property)

Fraud

Front 37

To show mutual mistake- what do you need to prove?

Back 37

---The instrument does not conform to the intent of both parties,
---¨ The claimant was mistaken as the content of the instrument and the other party knew of the mistake but kept silent, OR
---The claimant was mistaken as to actual content due to fraudulent affirmative behavior.

Front 38

Think about merger when:

Back 38

When you are writing the purchase and sale agreement- state intent of parties that this condition should survive the closing- "all warranties made by seller shall survive closing of this transaction"

Front 39

Three Types of Escrow Accounts:

Back 39

(1) Loan Escrow- used by lenders to hold real estate taxes and insurance premiums
(2) Escrow Closing- for costs of closing
(3) Contingency Escrow- used to resolve a problem at closing- money held in contingency escrow after closing until problem fixed

Front 40

What kinds of Damages Are available?

Back 40

Contract damages (Expectance= price of K- FMV at time of breach) and Reliance

Equitable damages- (need to show clean hands, that money damages are not enough, and then )Vendor/Vendee Liens, Specific Performance (R, W and A), Recission, Reformation

Liquidated Damages

Lis Pendens, Slander of Title

Tort Damages- mental anguish (ok if in connection with residence), punitive, etc

Front 41

What do you need to show for Specific Performance?

Back 41

P must show that they were ready, willing and able, that money damages are not enough, remedy at law= inadquate

Front 42

Mutuality of remedy

Back 42

What remedy one party can get, the other party can get

Front 43

Lis Pendens

Back 43

§ Lis pendens- when you record something at the public records office, a notice that there is pending litigation that will affect a potential claim or conflicting interest against title to real estate- shows up on a title report, makes it hard to sell, or get a mortgage against the property- gives notice of problem

Front 44

Valid Lis Pendens-

Back 44

Timing- Can only file a LP action with the court has to already been filed with the court

Property interest has to be the heart of the dispute (proper remedy might be an attachment lien)

If improper- it clouds owners title, Look for slander of title issues (cannot file an abuse of process b/c lis pendens is not a process)

Front 45

Time is of the Essence Clause

Back 45

Makes it easier to argue that any delay would make a breach of K a material breach

Strict performance required

If K doesn’t have time of the essence clause - some delay will be ok - will NOT be considered material breach

Front 46

Marketable title

Back 46

Marketable title/good and clear market title- title that is free from all encumbrances except those agreed to by the buyer/seller, no plausible claims of a third party's interest in the property

NOT marketable: free simple determinable with risk of reverter, and Title which will expose owner to litigation- is NOT marketable title (cannot be forced to buy a lawsuit- like setback problems)

BUT land with AP claim on it is marketable

Front 47

Title of Record

Back 47

¨ Record title- seller's title cannot depend on an unrecorded instrument- like AP owner- if K does not require record title- courts are split as to whether AP owned land is marketable title

Front 48

Satisfaction clause- good to include

Back 48

Satisfaction clauses- saying that title must be satisfactory to buyer's attorney

Objective interpretation- based on what state has determined to be marketable title

Subjective interpretation- what YOU think is marketable

Front 49

Four types of encumbrances that have no effect on market title-

Back 49

DOVS
(1) De minimus- so small they don't have a measureable effect on price or value- if someone wants to get out of this= transactional misbehavior
(2) Obsolete- Expired on its face- not enforceable because it expired, or is beyond statute of limitations, or racial encumbrances)
(3) Visible- buyer can see them- court will look to the difference between public encumbrances and private encumbrances (public ones won't have any effect on marketability)
(4) Superfluous- covenants that don't impose any obligations on the landowner beyond those required by law-

Front 50

Four Types of encumbrances that do have an effect on market title

Back 50

(1) Encroachment
(2) Easement
(3) Mortgages- Mortage Assumptions- mortgage continues as a lien on the property- seller will usually remain liable to the lender unless lender lets them off the hook
□ Get a binding letter of estoppel-if there is a mistake afterwards, you could recover the overpaid amounts
(4) Liens

Front 51

Encroachment

Back 51

Encroachments DO impair marketable title (encumbrances do not- they are a deed issue/contract issue)

Like when (when your prop overhangs onto someone else's, or someone else's onto yours)

Will it trigger a breach of covenant against encumbrances? Some courts say yes, and some courts say no (Magun v. Bombaci- used a narrow view of encumbrances

Front 52

Zoning and Marketable Title

Back 52

Different Approaches

Typically- zoning regs do not affect title (¨ New York- narrow view- private servitude, liens= encumbrances, but zoning= not an encumbrance)

Broad view- Some courts will say that it does affect market title

Front 53

Subdivision approval and Marketable Title

Back 53

○ Failure to get subdivision approval- does not mean title is unmarketable- that needs to be expressly contracted for - law allocates the burden to the buyer (Voorheeseville Rod and Gun Club v. Tompkins)

Front 54

Waiver of Title Defect and Price Abatement

Back 54

If buyer waives title defect- can seller refuse not to sell, or can buyer get specific performance?

B/c marketable title benefits the buyer, he could probably get specific performance

But seller would want to make sure there is an exception, or that the waiver is somehow noted in the deed

Front 55

Habendum Clause

Back 55

□ Habendum clause- clause in deed that follows the granting clause that demonstrates the extent of the grant and declares the extent of the interest conveyed

Front 56

Defective Deeds

Back 56

Void Deeds- Forgery and/or Lack of delivery
---Fraud= voidable title- at the option of one party,

Voidable Deeds- like if no acknowledgement, can grant good title to BFP- voidable at the option of one party

Front 57

Special Warranty Deeds

Back 57

"by through and under" language
Special warranty is just from the present owners forward- they are only warranting what THEY did on the property- and owner is only liable for title defects they created

Front 58

Measure of damages for breach of covenant/warranty deed

Back 58

Generally- limited to purchase price

For donative transfers- limited either to FMV or purchase price- Booker T Washington

Front 59

Savings Clause if you breach a warranty deed

Back 59

If you transfer title that isn't yours to something and then you acquire title later, then that title automatically transfers to the grantee

Front 60

Deed Covenants of Title- Six

Back 60

Present- CES
Right to convey
Cov ag encumbrances
Cov of Seisin

Future- QEFAW- Runs with Land
Quiet Enjoyment
Future assurances
Warranty

Front 61

To breach cov of quiet enjoyment

Back 61

need actual or constructive eviction

Front 62

Cov of warranty

Back 62

□ Warranty- "warrant and forever defend"
¨ The covenant of warranty with its promise to defend obligates the grantor to pay the costs of defending title against third parties, including reasonable attorneys’ fees.

Front 63

Remedies for breach of deed covenants of title

Back 63

For the first five, remedy is damages, for FA- remedy is specific performance to correct title

Front 64

Quitclaim Deeds

Back 64

--No covenants of title- grantee bears the risk

---Used in Donative Transactions or when trying to clear up questionable title
If donative transaction- Damages are then limited to the purchase price OR some Courts- recovery of purchase price or the actual value of land at the time of transfer (Booker T Washington)

Front 65

Three types of measurements for survey

Back 65

(1) Metes and bounds
(2) Gov survey system- each township is made up of 6 miles square, each section is 640 acres
(3) Subdivision plats

Front 66

Five Reasons to have a Land Survey
ERRRPI

Back 66

Existence of the property
Relationship of property to other properties
Relationship of record lines to actual lines
unRecorded interests
Physical improvement locations

Front 67

Duty of Surveyors

Back 67

if in privity- no problem, can also use thrid party beneficiary theory and tort theory of negligent misrepresentation

Front 68

Standard of Surveyors

Back 68

Surveyor's certificate- options= none, minimum standards or professional standards/ best practice

Front 69

Legal Adequacy of Description

Back 69

Needs to be clear- if clear, and unambiguous, then extrinsic evidence is not allowed- if fraud or mistake- extrinsic evidence is allowable

Policy- we want to make the paper records reliable - Walter v. Tucker- Missouri (if deed refers to W 50ft- then it refers to frontage)

Front 70

Major Rules of Deed Interpretation

Back 70

Grantee is preferred in case of any ambiguity

Deeds may expressly incorporate other writings to show legal description

Specific language controls over general

Natural Monuments control over artificial monuments

Monuments control over calls
□ If there is a discrepancy between lines marked with monuments (occupied lines) and lines as recorded (record line) in the plats- then location of monuments controls (McGhee v. Young)
¨ B/c redrawing the lines on paper later is easy, but moving people around and changing their expectations is not

Front 71

Functions of the public record system

Back 71

(1) Title Assurance
(2) Priority o

Front 72

Two types of indexing systems

Back 72

Name/Grantor Index (doesn't matter if grantees name is correct)---can have wild deed problem

Tract Indexing system- but problems ensue when the tract is split

Front 73

Three Types of Recording Acts

Back 73

CL- first in time first in right (delivery)
Race
Notice (at time of deed transfer)
Race Notice

Front 74

BFP

Back 74

Must take for value, without notice

NOTE: therefore, some inherited properties or gifts do not = BFP b/c no value

□ Installment land contract- The trad’l doctrine suggests that the purchaser is not a BFP until enough payments are made for a court to deem them sufficient

Front 75

Notice and BFP

Back 75

An instrument that appears in the chain of title will place a BFP on notice only if it specifies the interest’s nature and scope.

§ If there is a judgment docket card, buyer is on inquiry notice to go investigate- A correct title search must go beyond the judgment docket card
- Pelfresne

Front 76

Least Cost Avoider

Back 76

Remember!

Front 77

Defects in Deed- do they give notice?

Back 77

Patent vs. Latent
----Patent- defect is visible on face of deed- like when there was no proper acknowledgement/if a trustee acknowledged the deed, then it does not give constructive notice- Metropolitan National Bank v. US
---Latent- might give constructive notice to second lien holder


Misindexing- split- but risk usually falls on the searcher

Front 78

Duty of Purchaser to Inquire of Possessors

Back 78

Except when the possession is consistent with record title (co-tenants, tenants)

NOTE: if man is living there with next wife but still owns property with first wife in T by E= constructive notice/inquiry notice

Prior Grantor Exception (some states) to inquiry notice when there is possession by a grantor who recently deeded the property to the seller

Front 79

BFP Shelter Rule

Back 79

Gen Rule: BFP passes good title to a person who wouldn't necessarily be a BFP

EXCEPT when a former owner acquires title after the BFP transaction, former owner cannot cure the defects in his own title-Chergosky v. Crosstown Bell

Front 80

Misindexed Deed

Back 80

Wild deed- instrument that has been recorded but can't be found using the name indexing system (where someone that doesn't record their deed)- but this does not happen in Tract indexing system

Late Recorded- if there is a substantial gap in time between delivery and recordation and in the meantime the record owner has transferred ownership to someone else.


Early Recorded Deed- a person transfers an interest in land he does not own and subsequently acquires an estate in that land. If the grantor eventually gets title, the doctrine of estoppel by deed operates to transfer that title to the prior grantee

Front 81

Three ways to insure your title

Back 81

(1) Title abstract
(2) Attn title opinion
(3) Title Insurance

Front 82

Title abstract

Back 82

A title abstract is a summary report of all of the instruments of record for a particular tract of land. It purports to collect and report on all known and recorded info related to the title of a particular piece of property.

Front 83

Suing on a negligently done title abstract

Back 83

privity

OR

third party beneficiary theory

OR

tort theory of negligent misrepresentation

Front 84

Attn's Title Opinion Standards

Back 84

Opinions of attorney based on abstract of title to disclose possible clouds

Attn needs to disclose if there is a colorable claim that a third party could make-North Bay Council v. Bruckner

Front 85

Title Insurance

Back 85

Title Co is subject to strict liability- if there is a historical risk, and it is covered, then title insurance co must pay

Front 86

Standard Exceptions on Title Insurance Policy

Back 86

(1) Survey Exception- no coverage for matters an accurate survey would show, such as encroachments, boundary line disputes or shortages in area
(2) Zoning and Building Laws
(3) Rights of parties in possession not shown by the public record
(4) Rights of claims of which the insured has knowledge pripr to the issurance of the policy
(5) Taxes or assessments for the current year which are not yet due and payable and taxes or assessments that are not shown as existing liens by the public records
§ Ex. A notice of the tax assessment on record is not a lien, even if it is on record, while the assessment itself will be a lien- Vestin Mortgage v. First American Title Insurance
(6) Liens for work performed on the property and materials incorporated into the property- mechanics and materialman's liens

Front 87

Gap Period and Title Insurance

Back 87

Gap period- issuance of title commitment and beginning of policy - so who takes the risk at that time? If nothing is mentioned, the title insurance policy does a final search before the policy is issued

Insured can request gap period protection

Front 88

Who can rely on title insurance?

Back 88

○ Usually only that current owner, but each K will have a K covering who is covered- so look there- maybe will cover your heirs

Front 89

Improving Title System

Back 89

(1) Title standard
(2) Marketable title acts
(3) Title curative acts
(4) Torrens System

Front 90

Title Standards

Back 90

State bar associations come up with those- not binding on court, maybe is persuasive though-Most title standards NOT incorporated into codes
Related to mktability; help determine what defects are sig enough to impact mktability of the title
Cover things like:
Minor variations in names- idem sonems
how far back to take the title search

Front 91

Title Curative Acts

Back 91

Cover minor defects in deeds- and reforms them, like - Improper acknowledgement, improper delivery, failure to pay recording fee or transfer tax, etc.

Force of law

Front 92

Marketable Title Act

Back 92

Effect- Act extinguishes all defects and interests before root title date that are not referred to post-root, limits the period of time covered by the searches, Solves stale interest problem

Root= time period- then go back to the next title mentioned before the root period

Exceptions include- interests of the US gov, interests of state or local gov, utility and railroad easements, mineral rights, visible easements (so you still have to look for these things which are not covered)

Front 93

Can preserve old old interests under the Marketable Title Act by:

Back 93

Holder of an old interest can preserve that interest by rerecording the instrument or filing a notice to continue that interest. A specific reference to it in a post root doc also continues it -Sunshine Vistas v. Caruana

Front 94

Torrens System

Back 94

Govt issues registration certificates - "conclusive" as to ownership and all outstanding interests to the property
- proposed and used in 5 states as an alternative to the recording system.- certificate is title to land

Front 95

Benefits of the Torrens System:

Back 95

Reduce search costs and time since all work is done initially and then you have compact record in one title to the land

Front 96

Downsides to the Torrens System

Back 96

(1) Expensive initially—have to pay experienced gov. workers to do the initial search and to prepare the certificate.
(2) Indemnity Funds- States that use Torrens System are supposed to have funds everyone contributes to to cover a settlement when the gov. registry employees make a mistake, but often the funds are too small and can’t provide adequate restitution if gov. makes a mistake.
(3) Voluntary Nature
(4) Certificates not conclusive as to NON existence of other interests - they just list what interests ARE there - therefore there are too many exceptions to the conclusiveness of title

Front 97

Planned Unit Developments

Back 97

Planned Unit Developments- Single Family homes with joint open space, and also apartment buildings with joint open space
Need Overlay Zoning- to get a PUD, but you will also maintain your previous zoning

Front 98

Homeowners associations

Back 98

To figure out whether an assessment would be allowed, court said to look to the
¨ 1.) substantiality of the impact of new covenants on homeowners and 2.) whether the assessment or new covenant was foreseeable or not - Evergreen Highlands Association v.
West
Generally, if majority approves the covenants, you will be bound by them

Front 99

Characteristics of a Condo

Back 99

(1) Declaration of Condominium
(2) You have fee simple absolute over your unit and tenant in common for all common areas/elements
Don't need specific zoning as long as density zoning is ok
Can be single family homes, apartments, office buildings, etc.

Front 100

Parts of Condo

Back 100

(1) Unit- owned exclusively by owner - the interior space of the unit
(2) Common Elements- consist of all those portions of the condo unit that are not defined in declaration of part of a unit
(3) Limited Common Elements- Limited use for unit or group of units, while still not being a part of the described unit. - like private patios, designated parking spaces

Front 101

Condo Associations and their Judgments

Back 101

Cts usually should apply Business judgment rule- generally, actions by board of directors, or associations, is upheld unless it is apparent that there is a blatant violation of duty of care- cannot be arbitrary decision

Like for assessment of repairs:
Major repairs caused by the elements are assessed to all unit owners whether or not the element is a common element or a limited common element (like balconies)- Cedar Cove Efficiency Condo Association v. Cedar Cove Properties

Front 102

Possible Defenses against any claim by Homeowners Ass./Condo Assn.

Back 102

Grandfathering argument- courts look at reasonableness and hardship but typically you won't win with this argument

Front 103

Property Interest for Cooperatives

Back 103

Stock certificate (considered personal property)
Buyer becomes share holder in corporation
As unit owner - common ownership to common elements
¨ Corporation owns the title

Proprietary Lease (considered real property) .... Owners of coops pay rent to coop (as supposed to landlord)
So here, the owners are ALSO tenants - Corporation is the landlord (neighbors and myself - as one of the shareholders)

Upon sale- usually no warranty deed, instead a stock cert. and assign of lease

Front 104

Characteristics of Coops

Back 104

---They are difficult to sell -(condo has right of refusal) coops have absolute right of approval - requires agreement of the board (board decides who to let in)
---Seller has to find a buyer who is acceptable to the board
---Courts allow this - BUT no unreasonable restraint on alienation- no discriminatory reason for rejection of a potential buyer
---- All financial risk in condos is on the individual owner- but here all other owners pick up the slack for non-payers of rent- otherwise - corporation fails and foreclosure could result

Front 105

Financing of Condos

Back 105

Developer gets a blanket mortgage - owned by corporation

Individual unit mortgage-Unit owners can get separate individual financing and use their shares as guarantee
----If he defaults - foreclosure - bank becomes the owner of stock certificate - Article 9 and lease
----But if he also defaults on his share of the blanket mortgage- everyone else has to make up diff.

Front 106

Kickout rights of Coops

Back 106

Does reasonable evidence of tenant's objectionable behavior have to be presented in court OR should court defer to business judgment rule of the coop

Cts will ask did coop act 1.) within scope of its authority, 2.) to further its legitimate purpose (make sure people do not default on mtg & maintain the value of their building, and they have financial stability; fiduciary duty to further collective interest of the coop) 3.) in bad faith

Front 107

Time Share Housing- 3 types

Back 107

--Real property interest- fee interest that recurrs periodically every year
---License- a license right to occupy a unit according to terms specified in agreement
----Club membership- owner buys club points=¨ Royal Aloha


Also could be owned as a tenancy in common or an interval estate

Front 108

Three different theories on who owns the possession in mortgages

Back 108

1. Title Theory
2, Lien Theory
3, Intermediate/Hybrid Theory

Front 109

Title Theory of Mortgages

Back 109

□ 1.) Title theory- common law- the signing of the mortgage means the mortgagee/lender gets fee title and right to possession, once debt is paid off, mortgagee has a duty to reconvey the title to the buyer.

Front 110

Lien Theory of Mortgages

Back 110

2.) Lien theory (majority of states)- Lender has a future interest to sell the property, contingent on default- If borrower defaults on mortgage, mortgagee can foreclose- all mortgagee has is a lien

If in a lien theory state, and contract purports to give fee title to lender- language used in K is irrelevant and you have NOT contracted around the common law rule

Front 111

Intermediate Hybrid Theory

Back 111

□ 3.) Intermediate/Hybrid theory states- Mortgagor retains title until/upon default, the lender automatically gets title- so Prior to foreclosure, buyer has right to possession after default

Front 112

Doctrine of Waste

Back 112

□ Def- when real property is owned by more than one person, the owner who is in possession of property owes the other owners the duty not to destroy or damage the property

Waste= a substantial diminishment in value of cost- Ex. Bell v. First Columbus National Bank- when homeowner is in financial difficulty, risk to property is high

Front 113

Types of Waste

Back 113

Affirmative
Voluntary

Front 114

Equity of Redemption

Back 114

lets mortgagor cure later, after default

Waivers or other terms that would eliminate the mortgagor's equity of redemption are struck down as contrary to pp

Anti-clogging principle

Types of Redemption
Statutory and Equity

Front 115

Types of Redemption

Back 115

Equitable- after default, before foreclosure

Statutory- after redemption

Front 116

Three remedies for the mortgagee when a buyer defaults

Back 116

Taking possession directly (the mortgagee in possession)

Invoking an assignment of rents

Court-appointed receiver

Front 117

Mortgagee in Possession

Back 117

§ Mortgagee in Possession- mortgagee can take physical possession of the property to secure their interest, with the consent of the mortgagor, prior to foreclosure to protect assets

Front 118

MIP;s duty to mortgagors- 4 types of duties
CC, M, A

Back 118

1.) Duty to collect rents and apply them to mortgage (can take an administrative fee off the top)
2.) Duty to act like a prudent and professional building owner- therefore there is a duty to rent unoccupied space
¨ 3.) Duty to mitigate-Duty to pay old electric bill even though there is no duty to third parties b/c MIP has to mitigate damages after default
4.) Duty to give an accounting of profits to the mortgagor

Upon default, MIP does not owe the mortgagor a duty to give undistributed mortgage funds to satisfy the mortgagors unpaid unsecured debts
NO- MIP didn't have to pay subcontractor of mortgagor- Myers-Macomber Engineers v. MLW

Front 119

MIPs duty to third persons

Back 119

No duty to third persons

Front 120

Assignment of Rents

Back 120

If property is cash producing- mortgagee wants the ability to collect rent directly from tenants upon default, and apply the payments to the mortgage debt

Types- 1.) collateral assignment 2.)absolute assignment 3.)presumption of collateral assignment

Front 121

Types of Recievers

Back 121

Types- Judicial and automatic- if there is an MIP clause

Front 122

Why have a reciever?

Back 122

Why? If there is a potential for misbehavior on part of mortgagor, and as MIP, you get risks, of possible mismanagement, waste, inappropriate accounting, or other tort claims (environmental, trip and fall cases), foreclosure takes a long time

Problems- receivers are not free, and it needs a court action to appoint one vs. automatic MIP if there is a clause

Front 123

What factors does a court look at when deciding whether to appoint a receiver?

Back 123

Chase Manhattan Bank v. Turabo-
Need to show material default and TEST 1.)the security was inadequate and 2.) debtor is insolvent AND 3.) "something more"/ Other factors include

P's solvency, the value of property is worth less than amount remaining on mortgage, fraud, imminent danger that property would be lost, diminished in valued, etc., inadequacy of the available legal remedies, probability that harm to P by denial of appoint is greater than injury to defendants, P's probable success in the action possibility of irreparable injury to P's interests, etc.

Front 124

What effect does a recievership clause have on appointment?

Back 124

¨ Split- Some courts say it doesn't matter because receivership is an equitable remedy and cannot be contracted in, and courts will still look to the factors

Front 125

What are points in the mortgage market

Back 125

Upfront costs based on cost of loan (Basis point is 1/100 th of a point) one point =one percent of the amount

Note: Loans in secondary MM are sold at less than par- so the cost is passed on to buyers, in forms of basis? points

Front 126

Evaluating the Loan Applicant

Back 126

1. Willingness to pay- hard to analyze- credit, employment history, past credit problems, etc.
2. Debt ratio/ Ability of the debtor to repay the loan- determined by things like 28 percent rule- debtor should only qualify for a loan which encompasses 28 percent or less of monthly income

Front 127

Subprime Loans

Back 127

Loans designed for persons with bad credit, bad history, greater risk of default. Rates are higher b/c risk of non-payment is higher

Front 128

Federal Laws regarding housing

Back 128

1.Unfair and Deceptive Trade Practices
2. Exploitation Theory
3, Fair Housing Act Claim
4. Truth in Lending Act
5. Home Ownership Equity Protection Act

Front 129

Unfair and Deceptive Trade Practices

Back 129

Unfair and Deceptive Trade Practices -If there was a substantial deviation between points charged here and points generally charged= not OK
Us v. Sargent- you obstruct the self-correcting elements of the market

Front 130

Fair Housing Act Claim

Back 130

Redlining- when you deny credit for specific geographic areas based on specific races or ethnicity (need specific intent to discriminate)
Greenlining- some lenders will only loan in high income neighborhoods
Reverse redlining- extending credit on unfair terms to those same specific communities (race and ethnicity)

Front 131

Exploitation Theory- Civil Rights Act Claim

Back 131

1.) as a result of racial segregation, dual housing markets exist and 2.) Defendant sellers took advantage of this situation by demanding price and terms unreasonably in excess of terms offered to whites/ Exploitation of unsophisticated buyers 3.) usually, the defendants have to have a set market share as determined by the FTC's guidelines (here more than 35% percent is necessary)- BUT Honorable rejects the need to show market power

Front 132

Truth in Lending Act- TILA

Back 132

When a loan is given, lender must give truthful disclosures on APR,

---Remedy- recission of loan
---Loan splitting= not ok, a situation where the debtor wants to get a single loan consummated in a single transaction (allows the lender to get more points/more money to confuse the borrower)

---Assignee Liability- Damages only if violation is apparent on face of the disclosure statement is there assignee liability
- can still get recission

Front 133

HOEPA

Back 133

Home Ownership and Equity Protection Act- HOEPA- high rate, high fee cost loans means you have to have more disclosures

Front 134

Mortgage Insurance

Back 134

To protect a lender in event upon default, and then foreclosure sale brings in less than the full amount of the debt- to protect against that shortfall if value of house is less than value of mortgages
Expands pool of potential homebuyer, reduces risk, risk spreading, reduces need for large down payment

Front 135

Types of Mortgage Insurance

Back 135

Public insurance- FHA, VA insures loans on reasonably priced homes - 100 % of home

Private- PMI- for more expensive homes- required when conventional loans exceed 80 percent of the property value- when you have less than 20 percent equity, or less than 20 percent down on the house

Front 136

Types of Amortization

Back 136

Self-amortizing—with the very last payment, the loan is fully paid. During the early years, payments are allocated primarily toward interest. The FRM puts on the lender the entire risk of future increase in market interest rates.

Negative Amortization- When periodic payment doesn't cover your interest for that loan period- interest is accruing faster than you are paying it

Front 137

Amortization

Back 137

Amortization- reduction of debt by regular payments of principal and interest reducing your loan value to 0 over time

Front 138

Types of Mortgage

Back 138

1. Fixed Rate Mortgage
2. ARM
3. No Point and Buy Down Mortgage
4. Balloon Mortgage
5. SAM
6. RAM
7. Level Payment Adjustable Rate Mortgage

Front 139

Elements of an ARM

Back 139

Interest rate changes during term of loan depending on market rates and contracted rates- the borrower takes the risk here, therefore ARMs are at lower rates than

FRMS -3 things
1.) Adjustment Period- period of time between each adjustment- annually, six months, whatever
2.) Index- Determines market rate-
a.) Internal index- market rate set by the bank, set by industry standards b.)¨ External index- interest rate set by the feds, private agencies and Treas. Bill rates
3.) Cap- limit the movement of the interest rate at adjustable periods- both up and down

Front 140

Convertible mortgage

Back 140

Convertible- permits the borrower to covert from an ARM to an FRM

Front 141

Fixed Rate Mortgage

Back 141

interest rate is fixed, monthly payment is fixed- both bank and borrower is at risk- good for risk averse people, is self- amortizing

Front 142

No point and Buy Down Mortgage

Back 142

No point- no point at closing, higher interest rate-
Better to have fewer points if you are going to be in home for a short time


Buy down mortgages- Pay a ton of points, then you get a below-market interest rate

Front 143

Balloon Mortgage

Back 143

Regular monthly payments, then a huge sum at the end
Good if you wanted a bridge loan- something for a short term financing before you get a longer term loan

Front 144

Level Payment ARM

Back 144

provides a borrower with a stable and predictable monthly payment over the term of the mortgage, but the lender gets interest rate adjustments. When the effective interest rate changes, the monthly payment remains the same- the term is increased or, a final balloon payment

Front 145

SAM- Shared Appreciation Mortgage

Back 145

SAM- for a lower rate, borrower shares a percentage of the equity appreciation with the bank

Front 146

Possible Problems with SAM

Back 146

Separation of improvements from appreciation- then look to terms of mortgage and see what counts as an capital improvement and what counts as appreciation- but if there is an ambiguity, the K will be construed against person who wrote the document

Conflicting appraisals- banks appraisers vs. tax assessment (look at when it was made)

Front 147

RAM

Back 147

RAM- an old person mortgage -provides a borrower with a stable and predictable monthly payment over the term of the mortgage, while giving the lender the benefit of interest rate adjustments. When the effective interest rate changes, the monthly payment remains the same. Instead, the term of the level payment ARM adjusts, becoming shorter or longer, or a final balloon payment is required.

Front 148

Purchase Money Mortgages

Back 148

Generally- it is any credit from seller of property which allows you to buy or acquire the property- Seller financed mortgages

Priority and PMM
-- Common Law: PMM would always have priority after foreclosure (ALH Holding Co. v. Bank of Telluride)
-- If there is a recording statute that gives priority to one party- then recording act superseded the common law and whoever had priority under the statute would have priority - otherwise go to common law???

Front 149

Usury

Back 149

Charging a really high rate of interest

Two theories on figuring out if something violated usury laws:
Spreading principle and
non-spreading principle

Front 150

Compounding of Interest

Back 150

Compounding of interest-refers to how often interest on the loan is calculated- interest is then added to the principal

Front 151

PMM and Usury

Back 151

Usury doesn't apply to PMM - under the time price/credit

Time Price/ Credit Sale Doctrine- immunizes the seller's purchase money financing from attack based on usury- basically the amount of price is increased if paid with credit, at a lower interest rate

Front 152

Defenses to usury (Siedel v. 18th East 17th St. Owners)

Back 152

1.) Corporations cannot usually assert the defense
2.) Not available to certain persons not privy to original transactions
3.) estoppel in pais/equitable estoppel- induce an expectation, reasonable reliance, detrimental reliance OR estoppel certificate
4.)waiver
5.) joint ventures/ investments

Front 153

Three Types of Remedies if there is usury

Back 153

Stautory damages
no interest
no further payments- loan is cancelled

Front 154

Two types of usury savings clauses

Back 154

generic clauses-in some state, not very effective
AND
Interest rate cap- cap on amount of interest

Front 155

Late Payment Penalties- Increased Interest- Two options

Back 155

Apply increase to installment that was missed- Westmark, or charge increased rate on whole principal remaining (often courts find this an invalid penalty- Garrett)

Front 156

Late Payment Penalty- fixed charge

Back 156

Like 5% of the installment
Analyzed under LD law- 1.)reasonable forecast 2.) damages were hard to calculate at time of K-ing

Front 157

Types of Prepayment

Back 157

Total v. Partial
Voluntary v. Involuntary

Front 158

Borrowers Right to Prepay

Back 158

No CL right
Lender has a right to perfect tender in time- Westmark
New trend- if there is no contractual term against it, prepayment without penalty is allowed

Front 159

Policy of allowing penalty for prepayment

Back 159

A lender suffers if a loan is paid earlier, because they don't get interest
Also a protection for secondary mortgage market-This encourages mortgage holders to hold it for longer

Front 160

Nondebt obligations

Back 160

to be enforceable- must be written obligation of underlying obligation, reasonably ascertainable in a monetary amount

because we want to understand after foreclosure what amounts need to be repaid

Front 161

Types of non-debt obligations

Back 161

Support mortgages
construction mortgages
mortgagors agreement to pay real property taxes, insure improvement, not to commit waste, not to sell or transfer building without mortgagees consent

Front 162

Assumption of a mortgage

Back 162

When second buyer assumes first buyers mortgage, that means the second buyer to pay the first buyer that the second buyer will pay all of the debt, but first buyer still remains on the hook
Joint and several liability between buyer and seller, mortgagee could come after either or

original mortgagor becomes a surety- Swanson v. Kreik

Front 163

In case of default by buyer who assumed mortgage

Back 163

surety can pay debt, or/and sue buyers on assumption contract, allow foreclosure (badbad)

Front 164

Subject to:

Back 164

Understanding between first buyer and second buyer that the second buyer doesn't have to pay and first buyer remains primarily liable. No express promise to pay by the 2nd buyer-but property can still be seized

Nonrecourse mortgage- Second mortgagor/buyer gets one- property can be taken but no extra liability

Front 165

Modification and Extension of Mortgage Debt- assumption

Back 165

Assumption- Common law rule- Anything that adds to surety's risk is going to result in discharge unless surety agrees to the modification

Front 166

Modification and Extension of Mortgage Debt- subject to

Back 166

Three approaches

1.) total discharge 2.) no discharge 3.) partial discharge- to the extent of the value of the real property at the time the mortgagee grants an extension of a nonassuming buyer

Front 167

Due on Sale clause

Back 167

Most common type of restraint on transfer by mortgagor

Automatically enforceable- Garn- St. Germain

Front 168

Garn St. Germain

Back 168

Due on sale clauses are automatically enforceable

Lender can have any reason they want to refuse to allow mortgagee to transfer (although Fair Housing Act law still prohibits certain discrimination)
Lender can impose any conditions on the transfer, don't have to be commercially reasonable

Front 169

Assigning Mortgage Debt

Back 169

Transfer of an ownership interest in a mortgage loan- called an assignment- 1.) assignment- written doc 2.) endorsement- lender endorses original note, 3.) delivery of original note to assignee 4.) recordation in records
To transfer successfully note must be given to assignee

Front 170

Three types of foreclosure

Back 170

strict foreclosure
judicial foreclosure
power of sale foreclosure

Front 171

Strict foreclosure

Back 171

--is an action brought in equity by the mortgagee after default by the mortgagor.
--NO SALE, therefore there is no overflow or surplus and mortgagor does not get any equity that might be in home

Front 172

Power of Sale foreclosure

Back 172

§ Cheaper and faster than judicial foreclosure- mortgagors and junior interest holders have less protection- seems like any surplus would go to junior interest, then mortgagor- titles are weaker than judicial foreclosure

Front 173

To overturn a power of sale foreclosure

Back 173

Borrower needs to argue: this sale is not fair / not equitable; detriment to the borrower;
-- if you can show IRREGULARITY IN THE SALE ITSELF that will be enough which caused the property to be sold for less than FMV

Front 174

Foreclosure sale and FMV

Back 174

Lender is under sort of under duty to reduce the underlying loan as much as possible by buying collateral at a fair price - however bank does not have any obligation to bid at FMV- above the amount of the debt -- Greater SW

Front 175

Judicial Foreclosure

Back 175

Mortgagee brings an action asking the court to issue an order calling for a sale of the mortgaged property. - ct sets a date for payment (past due monies, interest and costs), Sale happens on that day if borrower does not pay -

If there is an acceleration clause & borrower defaults - they would have to pay whole mortgage then and not only $ past due

NOTE: All necessary and indispensible parties need to be joined for a full and complete resolution
Indispensible- original property owners who gave to second owner who assumed mortgage
Necessary-junior interest

Front 176

If necessary parties are not joined in a judicial foreclosure

Back 176

Then their interest remain

Front 177

Equitable Subrogation

Back 177

The theory protects a lender that refinances an old mortgage and takes a new mortgage as security is treated as the beneficial owner of the first mortgage- priority-wise- Eastern Bank v. Pappas

Front 178

Equitable Subrogation and extention of mortgage

Back 178

Split Priority-
Equitable subrogation protects refinancer only to the extent of the original mortgage, not beyond

Front 179

Deeds in Leui of Foreclosure

Back 179

After default, borrower voluntarily conveys property to the lender, lender gets title right away and can keep or sell the property as it wishes w/o public foreclosure sale procedures

Benefits to borrower- mortgagee might cancel all or some of debt in exchange for transfer

Risks to Borrower- no duty to account to borrower for a surplus (like with strict foreclosure), bad for persons with substantial equity, and this does not cut off junior interests

Front 180

Risks for Lender in Deed in Leui of Foreclosure

Back 180

Borrower may claim deed in lieu clogs the equity of her redemption
Fairness of exchange may be questioned- inadequate consideration, etc.
Title risk= does not cut off junior interests
If bankruptcy happens w/I 90 days- transfer may be set aside as preferential

Front 181

Three types of statutory mortgage protection

Back 181

1.) anti-definciency judgment statutes
2.) Redemption
3.) one-action rule

Front 182

One action Rule

Back 182

One action rule- mortgagee cannot bring more than one mortgage action (for foreclosure and also for deficiency) against the mortgagor- (in CA)

Front 183

Who has the right to redeem?

Back 183

Mortgagor and sometimes also junior lienors

Front 184

Downsides of Statutory Redemption

Back 184

Downsides of Statutory Redemption

--Buyers is really buying a future interests, bids are therefore lower
--Increases uncertainty
-- Discourages prompt payment by mortgagor
--Incentive to commit waste by mortgagor

Front 185

Benefits of Statutory Redemption

Back 185

Benefits of Statutory Redemption

-Gives more time to mortgagor
- Benefits mortgagee because they get more money from mortgagee
- Good for farmer whose money comes at a certain time
- Also increases likelihood of a FMV bid, mortgagor is ok with letting buyer keep property

Front 186

Anti-Deficiency Judgment Staute

Back 186

-GA Act- lender who wants a deficiency judgment and who is conducting a power of sale foreclosure must go to the court who has to conclude property was purchased for FMV at the foreclosure sale
--Creates an incentive for lender to be more fair

Front 187

Determination of FMV in foreclosure sales

Back 187

Does not include quick sale value/foreclosure sale- Guthrie v. Form Equipment Leasing Co.

Under normal market conditions

Front 188

Mortgage Substitutes

Back 188

Disguised Mortgage
Negative Pledge
Absolute Deed intended as security
Installment Ks
Sale Leaseback
Ground Lease

Front 189

Whether a transaction is characterized as a sale or as a disquised mortgage depends on:IRuNPowerPlays

Back 189

Whether a transaction is a sale or a mortgages is a question of fact: IRuNPowerPlays
1.) intent of parties 2.) prior relationship (borrower/lender) 3.) unequal negotiations (positioning of parties, unequal bargaining position, does borrower need money now?) 4.) price adequacy (less than FMV) 5.) possession/use (by grantor)

Front 190

Negative Covenant/ Pledge

Back 190

Involves a promise by the borrower not to convey or encumber the asset until the loan is repaid- no liens, no other mortgage (Split over whether this is governed under K law or mortgage law)

Front 191

Installment Land K

Back 191

Executory contract where seller owns and maintains title, buyer retains possession and the borrower pays the purchase price in installments- K is not final until price is finally all paid and then merger occurs at closing

Front 192

In case of breach of Installment land K

Back 192

In case of breach
--Most Ks provide for forfeiture in case of breach-If vendor declares forefeiture- then equity in the land/object is lost
---------- Courts will probably look to buyers reason for default (Courts do tend to protect the purchasers for the value of improvements made)
---Expectancy damages
--Restitution
---Purchaser's Right of redemption- in some state
-- Foreclosure as mortgage

Front 193

Benefits of Installment Land K

Back 193

Provides financing for people who can't obtain traditional financing- bad credit, not enough money for down payment

Called a poor man's mortgage

Front 194

Transfer by Mortgager of Installment Land K

Back 194

Transfer is OK- Relationship between original vendor and subvendees- Yu v. Paperchase Partnership
BUT If vendor knows of subvendee's interest, Seller must notify subvendees about forefeiture/default and give them an opportunity to cure before declaring default

Front 195

Example of junior liens

Back 195

Home equity loans, mechanics liens, tax liens, judgment liens, builders liens, and other mortgages

Front 196

K terms to protect junior lienor

Back 196

1.) Confirm outstanding balance on senior lien
2.) Cross-default provision-¨ If you default in the first mortgage, you automatically default on the second mortgage
3.) Monitoring-
4.) Right to cure borrower's default-
5.) Marshalling of Assets

Front 197

Marshalling of Assets

Back 197

If senior creditor has more assets as collateral than the junior creditor-marshalling is a rule of equity that ranks or arranges the multiple assets in order, requiring that a senior creditor proceeds first against the asset that is not subject to a junior lien-
--So that junior lienholders don't get squeezed out
---Exception: Homestead Exemption

Note: Some courts only apply marshalling if there is a single debtor who created both debts

Front 198

Homestead Exemption

Back 198

Can't force the sale of a home except in particular situations - In re Martin
Ex. Can force sale of homestead if the 1.) Mortgage that was used to buy the homestead goes into default 2.) Materialman's liens 3.)Taxes due on that property

Front 199

Mortgage Subordination

Back 199

Subordination Agreement- one mortgage holder agrees to subordinate their mortgage lient to a second/new mortgage holder- K around first in time, first in right
---PMM- Special Priority under law, not under agreement

Front 200

Why agree to subordination?

Back 200

Why?
1. if new second loan is taken out to get money for improvements on collateral
2. sometimes first lienholder gets money to subordinate

Front 201

Subordination Agreement-debtor

Back 201

Gen Rule: creditor who gets payments from a debtor without direction as to what debt they are paying can apply the payments to secured or unsecured debt

BUT- the creditor is under and equitable duty if there is a subordination agreement, then bank has a duty to apply the payment it recieves from the debtor in a manner that does not prejudice the third party creditor's interest (subordinated interest) Ranier v, Mt. Sterling National Bank

Front 202

Form of subordination agreement

Back 202

Date doesn't matter, doesn't really matter if legal description is wrong
Does matter if there is no real consideration (but if there was reliance...), or if person trying to invalidate the agreement didn't sign

SCOPE of the subordination itself should be included- amount being subordinated, whether subordinated interest is subject to late fees, interest of the primary lienholder...

Front 203

Wrap Around Mortgage- what is it, and why have it?

Back 203

Definition- it is a form of seller financing- borrower pays holder of junior debt who pays senior lien holder

Why?
-Keeps good financing from senior lien holder/bank, or when mortgage cannot be prepaid w/o substantial penalty
-If new buyer has bad credit, then middle man takes the risk

Front 204

Risks to wrap around mortgage

Back 204

Risk to new buyer- that middle man will take his money and run-

1.) get a right to cure default of senior lienholder-
2.) make sure that any notices are also forwarded to him
3.) Also needs right to stop payment to middle man if middle man defaults on payments to senior lien holder

Benefits to middleman- Middleman would know about default but can protect her own credit by curing default- if the new buyer had taken subject to the mortgage and then had defaulted, middleman wouldn't even know

Front 205

Why does a devleloper need a development entity?

Back 205

Developer wants 1.) limited personal liability 2.) to protect the corporate assets

Front 206

If doing business with a corporation- what do you want to know about the corporation?

Back 206

□ Can developer bind the corporation- who is the agent of the corporation
□ 1.) Articles of incorporation, bylaws and charter/other evidence that corp is properly formed 2.)certificate of good standing- from secretary of state to see that company has paid all it's fees and taxes, 3.) company's financial history, 4.) allowance to do transactions in state where property is owned 5.) Get Reps and warranties about their status and 6.) Legal opinion from the seller's council- they will review all the documents 7.)Dun and Bradstreet Report- has corporate history 8.) Is there an Ultra vires clause?- an attempted conveyance that is beyond the scope of the corporation's powers

Front 207

Commercial Lender and Article 9

Back 207

Article 9 applies to perfect a loan in personal property, such as:

Building/construction materials- are personal property UNTIL they are integrated into the building and become real property- you would want to have an Article 9 lien over this property
Fixture- Fixture filing, under UCC Article 9 but also governed by mortgage law too- Have to be filed after 20 days after attachment of the fixture-¨ Windows, doors, HVAC, etc.
Intellectual Property-design, name of building, permits, etc.-follow federal statutes which pre-empts Article 9

Front 208

Dragnet and Cross-collateral Clauses

Back 208

Dragnet- Makes security interest applicable to any past and present obligations between lender and borrower- very broad and very dangerous- clause stating that a mortgage secures all the debts that the mortgagor may at any time owe to the mortgagee
-NOTE: CAN GET CAUGHT VERY EASILY

Front 209

How do courts treat broadly worded dragnet clauses?

Back 209

(1)¨ Narrow- Not applied to other debts unless such debts are explictly described in the security agreement
(2) Middle- when objective evidence discloses the intention of the debtor and the creditor to enlarge the lien to include other obligations- Fisher v. First International Bank
(3) Broad- a generally worded clause is conclusive evidence of the intent of the parties to encompass other debts

Front 210

Ground Lease

Back 210

Form of developer financing-
¨ To developer, developer pays rent for 40-99 yrs (lon-term leasehold) -lowers developers cost of acquisition, rent is adjusted over the years (ex. Hong Kong- China was LL, Britain was tenant)

Front 211

Attornment Agreement- ground lease

Back 211

all subtenants but agree to attorn or be bound to the lender if the lender should take over the project (b/c of default by the developer)

Front 212

Nondisturbance agreement- ground lease

Back 212

the lender, upon taking over the property, to leave tenants in poss according to original lease

Front 213

Triple Net Lease- Ground lease

Back 213

all normal costs of ownership are placed on the tenant and developer

Front 214

Sale and Leaseback

Back 214

Original owner sells to someone and then leases it back to develop on it
---B/c original owner needs the influx of capital, although they do loose control

Front 215

Construction Loan Characteristics

Back 215

-Very high risk b/c collateral is uncertain, must be monitored
-Short term
- Funding is periodically released- draw down loan- phased dispersement of funds, performance standards/conditions precedent must be met via pre-arranged schedule
-Oftentimes a personal guarantee or recourse loan is necessary

Front 216

Permanent Loan Characteristics

Back 216

-Between 10-30 yr- often given by insurance companies
- Developer uses rent generated by property to pay off the loan
- Usually non-recourse loan- b/c there is collateral (prop is built)- b/c risk is less
Can get Convertible loan-

Front 217

Take out Arrangements- Three Types
(e.g. When permanent loan takes out the construction loan- like a refinancing)

Back 217

1.) lock-in- for sure
2.) stand-by- option
3.)open ended- agreement to not agree yet
4.) can always get a bridge loan

Front 218

Three Party Agreement- Commercial Real Estate

Back 218

□ Binds developer, construction lender and permanent lender together- good for everyone, no privity problems, gives right of specific performance to all parties- becomes a buy-sell agreement

Front 219

Loan Syndicate

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-Participation deal with bunch of lenders who can help the primary lender meet the main loan amount
- Benefit to loan syndicate- spreads out the risk of default over however many lenders, and diversification- then lenders can participate in many types of loans
-Lending Requirement- often a regulatory limit on how much can be lent to any one customer

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Match Fund

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Match fund- you have committed to get the money in from a lender, and you have at the same time, committed to spend out that money somewhere else-

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Call Protection on a Loan

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Call Protection- call= prepayment- a borrower cannot prepay a loan for a certain amount of time

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Categories of Cost

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-Out of pocket costs- actual expense incurred in doing a project
-Opportunity Costs- what were their forgone options, the market choices one gives up to pursue the selected choice
-Sunk costs- costs that cannot be recovered when a party abandons a course of action
-Transaction costs- costs associated with undertaking a particular exchange

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Types of Profit

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- Accounting profits- rate of return that they could expect (30%)
- Economic Profit- what they make here in relation to what could have been made elsewhere (30%- 15%= 15%)

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Three Key Phrases

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Risk and Return- risk allocation device

Least Cost Avoider

Transactional misbehavior

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If you sue for breach of title covenant, your damage are

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either FMV at time of transfer - if a donative transfer, or cost of transfer

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Marketable Title

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Title that a reasonably prudent purchaser would accept after being fully informed of all legal risks

Generally- title that exposes the purchaser to litigation IS NOT marketable title

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When does seller have a duty to disclose- 4 situations

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(1) concealment
(2) intentional or negligent misrepresentataion
(3) seller and buyer had a confidential relationship
(4)- More modern- if defects were latent and material

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What does a seller have to show for negligent or intentional misrepresentation?

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(1) Misrepresentation, Concealment or nondisclosure, of a material fact- (means measurable impact on the market value of property)
(2) Was there reasonable, justifiable reliance (look to nature of transaction, relationship of parties- mental, intellectual, age, knowledge) (and to some extent, the defect must be latent for buyer's reliance to have been reasonable)
(3) Was there detrimental reliance/damages

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Caveat Emptor

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Traditionally, seller had no duty to disclose- buyer beware

-As Is" is an express risk allocation device- parol evidence bars other rules unless there was fraud...unless one of the below- latent defects, concealment, intentional or negligent misrep

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Shield Laws

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State law (GA has) which doesn't require disclosure of stigmatizing facts, but also doesn't allow an owner to affirmatively misrepresent in response to a direct question
Broker is not required to step in and say anything to correct a lie by the seller?