Real Estate Transactions Outline

SPRING 2023: REAL ESTATE TRANSACTIONS OUTLINE
A. THE MARKET CONTEXT FOR REAL ESTATE TRANSACTIONS
LAWYER ADDS VALUE IN 3 IMPORTANT WAYS:
1. THE LAWYER STRATEGICALLY STRUCTURES AND DOCUMENTS THE

TRANSACTION: must know what documents are needs to accomplish the goal of a client or the
parties.
2. THE LAWYER MANAGES AND ORGANIZES TIME: Timeline of a transaction proceeds
from initial negotiation to executing the contract to closing on the exchange. Must organize the
order of events and time for performance by clearly defining the times and dates for parties to
undertake and complete various aspects of the transaction.
3. THE LAWYER MANAGES RISK: must use knowledge of the law to structure a managed
approach to the variety of risks that my arise and to protect the clients value expectations from the
transaction.
RISK MANAGEMENT: 3 elements
1. IDENTITY: potential risks

2. REDUCE: reduce the probability of loss from identifiable risks.
3. SHIFT: shift the cost of risks that are not otherwise eliminated.
TYPES OF REAL ESTATE TRANSACTIONAL PRACTICE: two major segments
1. RESIDENTIAL: involves home sales (including single-family homes, condominiums, and

cooperatives) and purchase financing.
2. COMMERCIAL: Builds the basic contract, property, and mortgage law foundations of a
residential transaction.
THE CONTRACT: the main blueprint
MARKET CHOICE: a person who seeks value by entering into a real estate transaction is making a
market choice. (Desirable market is one that will be profitable)
PROFITS FROM AN EXCHANGE IS TYPICALLY CONSIDERED IN TWO DIFFERENT WAYS:
1. ACCOUNTING PROFITS: based on covering the cost of a transaction.

2. ECONOMIC PROFITS: measure the amount of accounting profit against the comparative
return that could have been earned from undertaking an alternative transaction of comparable
risk.
RISK & RETURN: the riskier investment must provide a higher rate of return to attract investment.
VALUE, UTILITY & COMPARATIVE ADVANTAGE: value is related to a concept called UTILITY.
UTILITY: is a measure of how much an individual values a particular good, service or activity.
a. The value of the lawyer rests in their ability to facilitate the client’s investment expectations.
Lawyer is selling expertise, or comparative market advantage, in understanding the legal
rules & infrastructure necessary to produce.
FOUR TYPES OF COST:
1. TRANSACTION: costs associated with undertaking a particular exchange, Costs of

collecting information, negotiating, cooperating and regulatory compliance. GOAL:
reduce transaction costs.
2. OUT OF POCKET: Actual expenses incurred in doing a project.
3. OPPORTUNITY: associate with the market choices one gives up to pursue the selected
choice.
4. SUNK COSTS: a special type or category of out of pocket costs: Costs that cannot be
recovered when a party abandons a course of action.
TRANSACTIONAL MISBEHAVIOR: occurs when a party to a transaction tries to change the

dynamics of the deal, after the deal has been struck.
RENT-SEEKING BEHAVIOR: A person engages in rent seeking when she tries to manipulate
or change legal regulations and obligations in order to create additional value. To the extent that
law defines the possible legal investment opportunities in real estate it can serve as a source of
economic value. Working to change the legal framework to enhance one’s economic value in a
real estate investment is one type of rent seeking.
CATEGORIES OF MARKET RISK:
1. TEMPORAL RISK: variety of risks related to time: relate to past, present, or

future information about a property or a transaction.
2. TIME: affects both value and risk.

TIME-VALUE RISK: means that having one's money or performance now is better than merely
having an expectation that it will be available at some date in the future. Involves the risk of non-
performance.
PAST OR HISTORICAL RISK: refers to an inability to be certain about historical
information upon which particular business judgments rely in calculating the desirability of
a current transaction.
PRESENT RISK: centers on information relied on for purposes of establishing the
presence or absence of specific conditions that would affect the property or the transaction.
FUTURE RISK: the risk of not being able to predict the future.

TRANSACTIONAL RISK:
A. INVESTOR OR OWNERSHIP RISK: defines the position of a person who is an equity
stakeholder in property. Ownership risk involve liability for environmental problems that
affect the property and tort liability for injuries that occur to certain categories of visitors
to the property. Risk of depreciating value of property and the risk that a construction
project may be unsuccessful.
B. MARKETPLACE RISK: associated with general market forces that can affect the
profitability of any given transaction. DIFFERENT because it affects all market
participants and is not generally property-specific.
C. CREDIT RISK: involves financing transactions, but it arises in other transactions
whenever payment and performance are not simultaneous.
D. TRANSFER RISK: possibility that any particular promise, warranty, or representation
made by one party to another party may prove to be untrue or unenforceable, or at least
not live up to the expectation of the party meant to be benefited. It may also arise from
mistakes in document preparation, from errors in recording, or as a consequence of lost
documentation.
LAWYERS PROFESSIONAL RESPONSIBILITIES:
 Legal fees are a subject covered by the ABA’s of Professional Conduct.

 Expected to charge clients reasonable fees based on such factors as:
o Complexity of the work
o The amount of effort and expertise required
o The likelihood that other employment opportunities will be foregone by taking on
the matter
o The significance of or the amount involved in the matter
o The time limitation imposed
o Any special reputational skills or talents possessed by the attorney
Model Rule 1.5(c): contingency fee and bonus fee agreements must be written.
MARSH V. WALLACE (2009)

RULE OF LAW: A lawyer who represents the interests of multiple parties to real estate
transaction must ensure that each party understands the scope of his representation.
HOLDING: In real estate transactions, it is not unusual for a lawyer to undertake different
responsibilities to each of the parties’ interests. Thus, even if the lawyer reasonably and
objectively believes that he can faithfully represent each party’s interests, he must still fully
explain to each party the benefits and risks that are involved with multiple representation.
B. HOUSING PRODUCTS
M & T MORTGAGE CORP. V. WHITE (2010)

FACTS: White (P) filed suit against M & T (D), because after purchasing the properties sold by
D they found out that the properties were in such disrepair that they could not attract tenants. It
was unclear whether either the seller or the lender intentionally targeted and took unfair
advantage of minority group members, or whether they intentionally misrepresented the
properties’ condition or worth.
RULE OF LAW: Federal legislation prohibits unfair housing and lending practices targeted at
members of protected classes.
HOLDING: For example, the FHA and ECOA prohibit discrimination on the grounds of a person's
race, sex, national origin, or similar factors. The plaintiff must allege either that the defendant
subjected him to disparate treatment on account of his membership in such a protected class, or that
the defendant engaged in conduct that had a disparate and adverse impact on that class. In the present
case, White and the Councils allege disparate impact in the form of reverse redlining. Instead of
denying housing-related services such as financing or insurance to residents of redlined poor or racial-
minority neighborhoods, a reverse redliner provides those services, but only on deliberately predatory
or grossly unfair terms, to a specifically targeted protected class. Proof of reverse redlining involves
four elements. White and the Councils satisfy the first two elements because, as African Americans,
they belong to a protected class, and they were otherwise willing and able to buy property and qualify
for financing. The third element, the imposition of predatory or grossly unfair terms or conditions,
remains unproved. For instance, there is no clear proof that the properties' sale price or financing terms
unfairly overestimated the properties' worth. The fourth element, intentional targeting of African
Americans for discriminatory treatment, also remains unproved. Based on the evidence introduced so
far, a jury could conclude that any predatory behavior took advantage of White and the Councils, not
because they were African American, but because they were unsophisticated.
TEXAS DEPARTMENT OF HOUSING AND COMMUNITY AFFAIRS V. INCLUSIVE

COMMUNITIES PROJECT, INC. (2015)
RULE OF LAW: The Fair Housing Act prohibits entities from making housing decisions that
have a disparate impact on a protected class, even if this impact is not intended by the entities
making the decisions.
HOLDING: The Act prohibits entities from making housing decisions that have a disparate impact
on a protected class, even if this impact is not intended by the entities making the decisions.
Established precedent regarding similar antidiscrimination statutes makes clear that a disparate-impact
claim may be brought if: (1) the language of the statue refers to the consequences of an action and not
merely the intent of the actor, and (2) interpreting the statute to encompass a disparate-impact claim is
consistent with the statute’s purpose. Here, both of these criteria are met. First, § 3604(a) of the Act
provides that an entity may not otherwise make unavailable a dwelling to an individual because of
race, color, or national origin. This statutory structure and the phrase “otherwise make unavailable”
focus on the consequence of an action rather than on the intent of the actor, thereby satisfying the first
criterion. Additionally, a close examination of the amendments to the Act indicate that Congress
intended actions resulting in disparate impact to be prohibited under the Act. Specifically, three
exemptions from liability included in the amendments assume that disparate-impact claims may be
alleged under the Act. Moreover, interpreting the Act to encompass disparate-impact claims is
consistent with the Act’s primary purpose of eliminating discriminatory practices. Thus, the second
criterion is also satisfied.
FAIR HOUSING ACT: make it illegal to refuse to sell to potential buyers based on race, gender,
religion, and disability.
HOUSING TYPES
SINGLE FAMILY
REINER V. EHRLICH (2013)

RULE OF LAW: The business-judgment rule precludes judicial review of an organization’s
legitimate business decision.
HOLDING: The business-judgment rule precludes judicial review of an organization's legitimate
business decision. Maryland applies this rule to decisions made by a residential subdivision's
homeowners' association. In the absence of any showing of fraud or bad faith on the part of the
association's directors, if a Maryland court determines that a decision made by the association lay
within its legitimate range of discretion, the court will uphold the decision as a matter of law, without
assessing whether the decision was right or wrong. Here, subdivision covenants gave the homeowners'
association discretionary power to grant or deny permission for variances from the covenants. The
Reiners applied for such permission and were denied. The mere fact that the Reiners disagree with the
association's decision gave the trial court no basis for reversing that decision.
TURUDIC V. STEPHENS DBA SUSAN ESTATES RESIDENTS’ ASSOCIATION (2001)

RULE OF LAW: Enforcement of restrictive subdivision covenants must be reasonable and non-
capricious.
HOLDING: Enforcement of restrictive subdivision covenants must be reasonable and non-
capricious. If the action of a homeowners' association to enforce a provision of the covenants is in
question, the court should consider the covenant's text and context, evidence of the association board's
intent, and maxims of contract interpretation, such as the maxim that a covenant must be construed
most strictly against itself. Here, given the nuisance clause's text and context, it is clear that although
keeping pet cougars may not be normal, it is not necessarily unreasonable. In the Turudics' case,
owning cougars was reasonable, because they took pains to secure the cougars' pen. Evidence of the
board's intent also favors the Turudics. The board cited unreasonable danger as the reason for
asserting the nuisance clause, but there was no objective reason to fear any danger. If safety was the
board's concern, it made no sense for the board to turn down the Turudics' reasonable offer to address
that concern by upgrading the pen. The board gave no reasons for denying the Turudics' permit
application. The real reason for the denial may be the board members' simple objection to the purpose
for which the pen was put. This is analogous to a homeowner's association refusal to approve plans for
a house that includes a billiards room, just because board members disapprove of billiards. The
board's action seems unreasonable and capricious. Therefore, construing the nuisance clause most
strictly against itself, the board acted improperly in asserting that clause against the Turudics.
CONDOMINIUMS AND HOMEOWNERS ASSOCIATIONS (HOA)
ANDERSON V. COUNCIL OF UNIT OWNERS OF GABLES ON TUCKERMAN

CONDOMINIUM (2008)
RULE OF LAW: The condo. Form of property ownership is a hybrid consisting of individually
owned units and common elements owned by the residents as tenants in common.
HOLDING: Condominiums may consist of residential apartments or townhouses, offices, or retail
spaces. Each individual owner maintains his or her own unit, which is like the inside of a shell, and an
owners' council or association maintains the common elements, which are like the outside of the shell.
Common elements typically include land, foundations, walls, roofs, hallways, lobbies, and other
appurtenances, the ownership of which is held by the co-owners as tenants in common. Common
elements can be subdivided into limited common elements that are allocated for an individual owner's,
or a subgroup of individual owners', exclusive use. Limited common elements often include
designated parking spaces, balconies, terraces, or patios. Here, Anderson's damage stemmed from a
leaky water heater in her own townhouse, which was only one individual unit of the whole
condominium property. Both the council bylaws and state law made Anderson and her insurer, and
not the council, liable to repair the water heater at their own expense. Therefore, the trial court
correctly entered judgment for the council, and is affirmed.
ROLE OF REAL ESTATE BROKERS

BROKER: plays the role of transactional intermediary in the market for property sale and
exchange, but the broker does not simply disappear once the parties are found. Instead, the
broker continues to facilitate the transaction by assisting the parties with matter such as contract
negotiation, inspections of the property, and financing arrangements.
TYPES OF BROKERS:
1. RESIDENTIAL BROKERS
2. COMMERICAL BROKERS
3. LEASING BROKERS
4. MORTGAGE BROKERS
REGULATION OF BROKERS
LEVELS OF LICENSES:
“FULL” LICENSE: able to act in his full capacity

REAL ESTATE SALESPERSON: has a license that permits him to act as a broker only
under the supervision of a licensed broker.
EFFECT OF LACK OF LICENSE: if an unlicensed person renders brokers’ services, the licensing
laws generally prohibit that person from collecting a commission or other compensation.
ANTITRUST LAW AND PRICE FIXING: the Supreme Court prohibited the fixing of commission
rates because it violated the federal antitrust statute known as the Sherman Act.
1. RECOMMENDED COMMISSION RATE: antitrust cases make it clear that the issuance of
advisory or recommended prices by brokers’ groups also constitutes illegal price-fixing.
2. MODERN RESIDENTIAL COMMISSION RATE: In most communities brokers tend to
charge the same commission rate.
a. Firms aware of what their competitors charge and then match that price, is known as
conscious price parallelism. (not illegal unless it is combined with evidence of
conspiracy or other misconduct).
BROKERS DUTIES TO CLIENTS:
A. AGENCY LAW: the broker’s duties to her/his client stem from the law of agency.
a. Under agency principles, the broker owes fiduciary duties to their client. Breach of
such a duty subjects the broker to liability to the client and to the risk of
disciplinary action from the state agency that regulates brokers.
DUTIES:
1. DUTY OF LOYALTY: the broker should do their utmost to protect the client and advance
the client’s interest.
a. DISCLOSURE OF CLIENT’S BOTTOM LINE: without the client’s consent the
broker may not disclose to potential purchasers the owner’s lowest acceptable offer or
“bottom line.”
b. SELF-DEALING: occurs when a person engages in a transaction in which his self-
interest is opposed to a fiduciary duty owed to another person. A broker representing a
seller may not secretly purchase the property using a straw or a front person, hoping to
make a profit.
2. DUTY OF FULL DISCLOSURE: must keep the client informed. When the broker learns
facts or other info. That are material to the client’s position or interests, the broker should
promptly tell the client. Must promptly communicate all offers to the client.
a. DURATION OF DUTY: After the broker -client relationship terminates, the broker
and the client may transact on an arm’s length basis. This means that the broker may
use new info. To the broker’s advantage without disclosing that info. To the former
client.
3. DUTY OF CONFIDENTIALITY: In the course of representing a client, the broker naturally
gains info. About the client’s objectives and the property. Absent the client’s consent, the
broker should not disclose such info. To third parties.
Four types of listing agreements for selling property:
1. Open listing: the broker earns his commission if he procures a ready, willing, and able
buyer for the property. (if more than one broker, than who ever finds one first will receive
the commission)
2. Exclusive Agency Agreement: contains a promise by the seller not to engage another
broker during the term of the agreement. The broker is the exclusive agent with respect to
the listed property. If the owner sells using another agent, the exclusive agent is still
entitled to his commission.
3. Exclusive Right to sell Agreement: (exclusive Listing) is the most protective of the
broker's expectation of earning the commission. The seller is obligated to pay the
commission if any buyer purchases the property during the term agreement. (It does not
matter whether the broker procures the buyer, whether another broker finds the buyer, or
whether the buyer and seller meet without the assistance of any broker.
4. Net Listing: is less common than the other three: The commission is not specified as a
percentage, and the seller agrees to pay the broker all amounts received in excess of a set
price established by the broker and seller.
a. Net: means that the seller is guaranteed a net amount of sales proceeds.
COOPERATING OR SELLING BROKER: two brokers are involved – not only a listing broker,
but also a cooperating or selling broker. The buyer is found by the cooperating broker, who then
splits the commission with the listing broker. Normally, in the absence of an agreement the
selling broker also works for the seller.
1. MULTIPLE LISTING SERVICE: many brokers are apart of this, which facilitates the
sharing of listings among the MLS members.
2. RULE OF SUBAGENCY: The traditional rule is that the cooperating or selling broker is
an agent of the listing broker and thus a subagent of the seller. This means the
cooperating broker has fiduciary duties to the seller, not the buyer. No one is representing
the buyer. This legal doctrine is contrary to the expectations of most home buyers and the
general public.
o Subagency rule has been widely criticized on two grounds:
1. The buyers ae misled into thinking that the selling broker is their agent
2. That buyers deserve representation at the critical stage of selecting a property
and negotiating the terms of a purchase contract.
DUAL REPRESENTATION: a broker may lawfully represent both seller and buyer in the same
transaction, as a dual agent. The broker must disclose the dual agency to both parties, who must
then consent to the arrangement.
RANGEL V. DENNY (2012)

RULE OF LAW: A real estate broker's fiduciary relationship with the client binds the broker to
exercise reasonable care, skill, and diligence in the performance of the duties that the broker
undertakes on the client's behalf.
HOLDING: Yes. A real estate broker's fiduciary relationship with the client binds the broker to
exercise reasonable care, skill, and diligence in the performance of the duties that the broker
undertakes on the clients behalf. The broker holds himself or herself out as trained and
experienced to render a specialized service in real estate transactions. Although a statute may
describe the details, conditions, and limits of that service, ultimately the broker's precise duties
depend on the nature of the task the broker undertakes to perform and the agreements the broker
makes with parties involved in the transaction. Here, it was proper to dismiss the Rangels case
against Dowling only if there was no way that the Rangels could prove facts entitling them to
relief. However, if one reviews the record, accepts the truth of the Rangels pleadings, draws all
inferences in their favor, and overlooks ay contradictory evidence, one must conclude that the
Rangels have stated a sufficient cause of action against Dowling, and that therefore the trial court
erred in dismissing their case. On remand, either party may present evidence that points towards
breach or does not point towards it, Dismissal is overruled and the case is remanded.

BROKERS’ CLAIMS AGAINST SELLERS:
1. TRADITIONAL RULE: WHEN CUSTOMER IS FOUND: the broker earns his

commission when he procures a ready, willing, and able buyer at terms acceptable to the
seller.
2. DIFFERENT TERMS: the terms agreed to by the buyer and the seller need not be the
same as those set forth in the listing agreement.
3. SELLER’S ACCEPTANCE OF BUYER: by signing the contract of sale tendered by the
buyer, the seller signifies her acceptance of the buyer procured by the broker. Under the
traditional analysis, this means that if the buyer subsequently defaults, the seller cannot
defeat the broker’s claim to the commission by arguing the buyer was not ready, willing
and able.
4. NEW RULE: IMPLIED CONDITION THAT SALE MUST CLOSE: some states have
replaced the traditional rule with an implied condition that the sale must close in order for
the broker to earn the commission.
a. EXCEPTION UNDER NEW RULE WHEN SELLER DEFAULTS: a seller may
still be liable to the broker for the commission when the seller’s default causes the
failure of the transaction to close.
5. EXPRESS CONDITIONS IN THE CONTRACT OF SALE: if the transaction fails to
close because a condition in the contract of sale is not satisfied, no commission is
payable.
BROKERS’ CLAIMS AGAINST BUYERS:
1. LACK OF PRIVITY: the seller’s broker may seek damages against a buyer who defaults
after signing a contract on the theory that the buyer’s wrongful conduct has deprived the
broker of the commission. Usually fails due to lack of privity – there is no express
contract between the parties.
2. IMPLIED CONTRACT THEORY: sometimes, a broker succeeds in suing a defaulting
buyer for the commission based on the theory of implied contract. The buyer has
impliedly promised the broker that she will complete the transaction. The broker is a
third-party beneficiary of the purchase agreement between the buyer and seller.
3. TORT THEORY: the seller’s broker can use to recover from a defaulting buyer is
tortious interference with contract. The rationale is that the buyer who defaults has
tortiously interfered with the listing contract, pursuant to which the broker was to earn a
commission. This deprives the broker of her prospective economic advantage.
REQUIREMENT OF A WRITTEN LISTING AGREEMENT: at common law, an oral listing

agreement is valid. However many states have statutes that require a written listing agreement.
HILLIS V. LAKE (1995)

RULE OF LAW: The broker of an unsuccessful real estate transaction is nevertheless entitled to
a commission if the failure to close was due to the seller's bad faith or wrongful conduct.
BROKERS’ DUTIES TO NONCLIENTS:
TRADITIONAL TORT DUTIES: Buyers often sue the seller and seller’s broker when they find
the property is less desirable then they had expected due to a physical defect or some other
problem. Traditionally brokers owe nonclient buyers the same duties that sellers owe nonclient
buyers – not to commit fraud, not to make intentional or negligent misrepresentations of act, and
to disclose material latent defects.
HOLMES V. SUMMER (2010)

RULE OF LAW: If a seller's real estate agent knows of circumstances that make a successful
closing unlikely, the agent must disclose those circumstances to the buyer.
HOLDING: Such circumstances do no include the properties physical condition or other facts
that the buyer can ascertain through diligent attention and observation, but they do include any
facts that materially affect the property's value or desirability and that are known or accessible
only to the agent. The disclosure rule does not convert the seller's fiduciary into the buyer's
fiduciary, but it does recognize that the nondisclosure of certain material facts amounts to a
representation that the facts do not exist, and deprives the buyer of any opportunity to make an
informed purchase decision. Without such a rule, and especially in a time of general disruption in
the real estate marketplace, public confidence in the marketplace would be shaken, professional
time spent preparing for closing would be wasted, and smooth operation of the marketplace
would be further impeded. Here, D is liable for the P's losses because, after obtaining the seller's
consent to do so, she should have disclosed the property's over-encumbrance.
BROKERS AND LAWYERS:

SEVERAL TESTS ARE USED TO DETERMINE WHEN A BROKER’S ACTIVITIES

CONSTITUTE UNAUTHORIZED PRACTICE:
a. CONTRACTS VERSUS CONVEYANCES TEST: The broker may prepare the

contract of sale or earnest money contract between the parties, but may not
prepare deeds and other closing instruments that convey interests in land.
b. SIMPLE-COMPLEX TEST: if the transaction is simple and straightforward, a
broker is permitted to select standard-form instruments and assist the parties in
filling in blanks.
c. INCIDENTAL TEST: Broker drafting of instruments is authorized if it is
incidental to the broker’s business and no separate compensation is paid therefor.
d. PUBLIC INTEREST TEST: NJ Supreme Court has fashioned a “public interest”
test to decide what tasks nonlawyer professional may perform in connection with
residential sales.
LAWYERS ACTING AS BROKERS: statutes that provide for the regulation of brokers
typically have an exemption for attorneys. There is a split of authority as to the scope of the
attorney exemption.
a. INCIDENTAL TEST
b. TOTAL EXEMPTION: attorneys are totally exempt from the licensing
requirements based on the reasoning that due to their professional education they
are generally competent to provide real estate brokerage services and their
conduct is independently regulated by the bar association.
IN RE ROTH (1990)
RULE OF LAW: In general, a lawyer is prohibited from seeking dual compensation for acting
as both a lawyer and a broker in the same real estate transaction.
PREPARING TO CONTRACT: THE TIMELINE FOR THE

TRANSACTION
4 KEY TIME PERIODS:

1. PRECONTRACT: involves negotiation and initial investigation prior to executing an
enforceable contract
2. EXECUTORY CONTRACT: begins with the execution of an enforceable contract. It
continues whole the contract is performed, up until the closing of the contract.
3. CLOSING: when the deed is exchanged for the money and other consideration.
Closing involves the completion of the contract undertakings required to exchange the
property for the price.
4. POST-CLOSING PERIODS: involves taking care of matters that have to be addressed
after closing, such as recording documents in the public records, issuing the final title
insurance policy, and commencing payments on any mortgage loans entered into to
finance the exchange.
KEY ROLE IN A CONTRACT: is to convey an interest in real estate is that a conveyance of an

interest in real estate requires a grantor and a grantee. This means that the parties must have the
legal capacity to engage in the transaction.
 MUST HAVE: consideration, an offer, an acceptance, and a legal purpose.
STATUTE OF FRAUDS: prohibits the enforcement of an oral contract unless there is a writing
signed by the party to be charged. The parties’ entire contract need not be in writing; parts of it
may be oral. Does not need to be long, may only be a memorandum.
KEY ELEMENTS under the statute of frauds:
1. Identifies the parties
2. Describes the property
3. Indicates the intent to buy and sell
4. closing date
5. Is signed by the party to be charged. In most states, both parties do not have to
sign the contract or writing for an underlying oral contract to be enforceable. It
suffices if the party resisting enforcement (D) has signed the writing.
 Congress passed the Electronic Signatures Global and National
Commerce Act 15 USC Sections 7001-7031: permitting signature by
electronic means and may include e-mail and voice mail related signatures
as electronic communications.
 E-Sign Act (2000)
 Preemptive of state law to contrary
 Broad: any transaction affecting interstate or foreign commerce (leases,
contracts, sale and disposition of personal or real property)
 Means: Seller may send contract as attachment to email; buyer forms
legally binding contract by emailing back approval indicating intent to be
bound
 Telephone calls are electronic communications: voicemail or message on
answering machine may be enough
 Uniform Electronic Transactions Act (UETA) 1999
5. Names the price or other consideration. Many states insist on a written price
term, but others are willing to imply a reasonable price if the evidence shows that
the parties failed to agree on a price.
D’S ADMISSION OF CONTRACT: the traditional rule, still followed in most states, is that a
party may admit in judicial proceedings that she/he has entered into an oral contract and still
raise the statute of frauds as a defense. A minority of states hold that no writing is necessary
when a person admits she agreed to an oral contract. THUS, D’s admission bars the statute of
frauds defense.
PART PERFORMANCE DOCTRINE: an oral contract to purchase real estate is enforceable

when a party can demonstrate substantial reliance on that contract. Possession by the buyer under
the oral contract is generally required, and most states also require an additional act that shows a
change of position:
(1) the buyer has made repairs or improvements to the property, or
(2) the buyer has paid all or part of the purchase price.
EVIDENTIARY THEORY: Sometimes explained the doctrine by reasoning that the

performance itself gives evidence to the contract between the parties. Thus, the function
of the doctrine is to excuse a writing only when there is alternative solid proof that the
contract exists and is not the buyer’s fabrication.
HARDSHIP THEORY: excuses a writing when there is proof that a party who relied on
the oral contract will suffer irreparable injury unless the contract is enforced.
EQUITABLE ESTOPPEL DOCTRINE: part performance by the buyer under circumstances

where her reliance on a contract is reasonable estops the seller from denying the enforceability of
the contract for lack of a writing.
 Under this approach: the focus is on the affirmative actions of the seller that may have
misled the buyer or made the buyer’s part performance reasonable.
 Equitable estoppel – buyer relied on oral contract; buyer took possession with approval of
seller and repaired or improved property
 Focus on conduct of seller
PAROL EVIDENCE RULE: prohibits the admission of prior written or contemporaneous oral
evidence that adds to or is inconsistent with the parties’ final written agreement.
1. FOUR CORNERS OF THE DOCUMENT: GENERAL RULE: courts will not favor
the admission of parol evidence if there is a writing that appears to address the basic
elements of the transaction. Referred to as four corners: because the courts speak in
terms of limiting their inquiry to the meaning of the terms within the four corners of the
contract.
2. AMBIGUITY: courts allow parol evidence to clarify a contract term that in ambiguous
on its face.
3. CONTRADICTION: parol evidence is generally not permitted to contradict a written

term that is, on its face, ambiguous.
4. TIMING: parol evidence offered to prove a term or an understanding reached after a

writing was entered into may be admitted, since it would be a new term and not some
point of negotiation that could be assumed to have been resolved by the writing itself.
LETTERS OF INTENT: agreements to agree: writings before entering into a formal detailed
contract.
 PURPOSE: is to give one party (typically a purchaser or borrower) some degree of
assurance that a deal is likely before expending additional time and money of the
precontract stage of the transaction.
o The other party (typically the seller or lender) agrees to the letter of intent in order
to retain the other party’s interest in the transaction.
 LEGAL EFFECT: the preliminary writing is not legally binding. Most of the time the
writing includes a clause that will state it is not intended to bind or commit the parties
and they will be bound only when and if a formal contract is executed.
o HOWEVER: does bind the parties in the sense that they are obligated to go
forward in good faith and agree to each other’s proposals of reasonable terms for
the final agreement.
OPTIONS: the purchaser or optionee pays a negotiated amount t obtain the option, getting a
legal right to buy at specified terms, but with no obligation to buy.
GMH ASSOCIATES INC. V. PRUDENTIAL REALTY GROUP (2000)

RULES OF LAW: The enforceability of a letter of intent for the sale and purchase of real
property depends on the intent of the parties.
HOLDING: Problems can easily arise if one party misunderstands what another party is seeking to
do by entering into an LOI. Here, neither the original LOI nor its draft revision amounted to an
enforceable contract. The draft revision did not constitute GMH's acceptance of Prudential's contract
offer. It was only GMH's offer, based on the Prudential employee's suggestion, of terms that GMH
hoped would lead to a settlement. Prudential never accepted this offer. Both the original LOI and the
draft revision stipulated that issues remained for negotiation and that any agreement required the
approval of Prudential's directors. Neither of those conditions was ever met. There being no contract,
Prudential could not have committed fraud in procuring one. Prudential did not breach a duty to
negotiate in good faith, because both the original LOI and the draft revision expressly stated that either
party could break off negotiations at any time and for any reason. The doctrine of promissory estoppel
is inapplicable because Prudential never promised to keep the property off the market indefinitely.
Because GMH's claims are without merit, the trial judgment is reversed, and the case is remanded.
– Contract law structures the deal; know basic contract law:
– adequate consideration (may be mutual promises)
– offer
– acceptance
– unconscionability – terms are harsh, unfair or unduly favorable to one party
– anticipatory repudiation
– breach
– warranty
– damages
Problem 4 (A)
a) (a)Gary & Jean married couple own property in Charleston. August 1, Contract:
$600,000 for good & marketable fee simple title by warranty deed at closing November
1.August 10, Gary & Jean take out a 60 day loan for $100,000 and give mortgage. Can
they? Yes they can because the title will be the title is goung ti be clean by Novemer 1.
b) (b) Only Gary signed contract. October 12, likely increase in value of the house.
October 30 Gary notifies buyers he will not perform because wife did not sign UNLESS
> price. What are rights of Buyers?
c) (c) would Buyers have been able to avoid the Contract if they wished because Jean did
not sign? They can becayse they did not have a binind agreement with both of them
THE EXECUTORY CONTRACT
EXECUTORY CONTRACT PERIOD: generally, begins at the moment the parties reach an
agreement, usually memorialized in the execution of formal writing. Ends at the end of closing
of the contract with the satisfactory completion of all the various contractual undertakings of
each party.
APPROACHES TO ALLOCATE EXECUTORY PERIOD RISK:

1. CONDITIONS: conditions serve to allocate risk by excusing one or both parties from
completing the exchange when a described event fails to occur.
2. WARRANTIES: A party who warrants the quality of a particular element of the
transaction takes on the risk of that quality not being true. Simultaneously the other party
has a reduced risk.
3. REPRESENTATIONS: These are express disclosures or statements about important
elements of the transaction. They are stated in the contract to show the materiality and
relevance of the information.
 The party making the representations takes on the risk of its falsehood.
4. COVENANTS AND NEGATIVE COVENANTS: these are promises allocating the
responsibilities between the parties.
 Covenants (generally understood as affirmative covenants) express the actions
and risks that a party agrees to take on.
 Negative covenants are promises with respect to actions that a party agrees not to
take during the executory contract period.
5. REMEDIES: the parties should state the consequences of particular events in advance,
including the failure of conditions, warranties, representations, and covenants. Courts
often defer to the parties’ clarification of the nature and scope of remedies.
LAWYER’S ROLE IN EXPLAINING CONTRACT: the lawyer must assure the client that the
contract is enforceable and that all of the essential terms are included in the writing. The lawyer
must be sure the contract reflects the client’s expectations and interests. He should fully explain
to the client all documents prepared in connection with the contract.
1. DUTY TO NONCLIENTS: generally involves notifying the nonclient that the lawyer
does not represent him/her and is not protecting their interests in the transaction. If the
lawyer offers any explanation to the nonclient of the documents he has prepared, he must
take extreme care to explain the basic terms accurately so the nonclient understands each
document’s nature and scope.
CONTRACT MODIFICATIONS: changes that come after the execution of the original contract.
 SUBSEQUENT AGREEMENT: Some courts require it to be in writing, but others allow
proof of a later parol modification on the basis that the original writing establishes the
foundation of a real agreement between the parties.
 ESTOPPEL: A party can be estopped from enforcing a contract erm or requirement if the
other side has reasonably and detrimentally relied on the party’s action or inaction.
o The party subject to estoppel may usually reinstate the term or requirement by
giving the other side ample notice of the intention to do so.
 WAIVER: a contract may be modified by a party’s waiver of a term or condition.
o A party can waive a term or requirement by word, writing, or action. A term or
requirement, once waived, is said to be gone forever. Meaning it cannot be
reinstated.
STERLING V. TAYLOR (2007)

RULE OF LAW: A memorandum containing an unclear essential term does not satisfy the
statute of frauds if extrinsic evidence contradicts the terms of the memorandum.
HOLDING: The statute of frauds states that certain contracts are unenforceable, unless there is a
memorandum of the agreement, signed by the party to be charged. The memorandum must contain
the essential terms of the contract. If an essential term in the memorandum is unclear, extrinsic
evidence is admissible to explain the essential term. A memorandum containing an unclear essential
term satisfies the statute of frauds if the extrinsic evidence clarifies the term with reasonable certainty.
Extrinsic evidence will not provide reasonable certainty where it contradicts the terms of the
memorandum. In a contract for the sale of land, the price term is an essential term. The memorandum
at issue provides that the price would be approximately 10.468 multiplied by gross income, which was
estimated at $1,600,000.00. Sterling argues that “gross income” was intended to refer to actual rental
income, which would result in a price term of $14,404,841.00. However, Sterling’s extrinsic evidence
contradicts the terms of the memorandum, which expressly states the price was $16,750,000.00.
Moreover, the memorandum gives no indication that the price term was to fluctuate according to
actual rental income. Consequently, the extrinsic evidence does not show with reasonable certainty
that the price alleged by Sterling was intended by the parties. Since the price term is too uncertain to
be enforced, the judgment of the Court of Appeal is reversed.
MORAN V. ERK (2008)

RULE OF LAW: An attorney-approval contingency in a real-estate contract is not subject to a
bad-faith exception.
HOLDING: When a real-estate contract is subject to attorney approval, this approval should not
depend on a determination of whether a party acted in good faith. The existence of a bad-faith
exception would prevent clarity and predictability in contracts, and any factual investigation could
conflict with the attorney-client privilege. In this case, the Erks disapproved the contract within the
three-day period, entitling the Erks to walk away from the deal. As a result, the Erks were no longer
obligated to purchase the Morans’ home.
EQUITABLE CONVERSION DOCTRINE: splits title to the property between the seller and the
buyer at the moment the contract is signed. The seller is still the owner of the property and is said
to retain legal title to the realty, while the buyer is said to acquire equitable title. Both parties
own property rights and have the ability to deal with and transfer their respective interests.
a. LEGAL TITLE: the seller has legal title only as a trustee, as security for the
forthcoming payment of the purchase price. Legal title is considered personal property.
b. EQUITABLE TITLE: the buyer is the equitable owner of the property prior to closing
just as if an express trust were created. Does not mean the buyer has the right of
possession prior to closing.
TRADITIONAL RISK OF LOSS RULES: under equitable conversion, the traditional rule is that
the buyer has the risk of loss from fire and other casualty from the time the contract becomes
enforceable. This rule can apply to a broad range of risks, including earthquake, hurricane,
sinkholes, drought, and even unexpected zoning problems.
OTHER RISK OF LOSS RULES:

1. CONTROL: some courts look to see which party controlled the property at the time of
loss and whether or not the ability to control would have in ay way made it possible to
prevent or reduce the risk of loss.
2. UNIFORM VENDOR AND PURCHASER RISK ACT: adopted by a dozen states, the
act places the risk of loss on the seller until the buyer receives possession or legal title to
the property.
3. IMPLIED CONDITION: Mass. And other states have rejected the traditional equitable
conversion rule, instead placing the risk of loss on the seller. The explanation is that there
is an implied condition that the improvements will continue to exist without material
damage up to the time of closing. This is based on the parties probable expectations.
CONTRACT ALLOCATION OF RISK OF LOSS: the parties can alter the doctrine of equitable
conversion by express contract and allocate some or all of the risk of loss to either party. The real
importance of clarifying the risk of loss is that it identifies who should account for this risk by
retaining insurance to cover the risk of loss.
MAJOR CONTRACT CONDITIONS:
A. CATEGORIES OF CONDITIONS:
1. CONDITION PRECEDENT: a party avoids certain risks or duties under the contract if
a certain condition is not met.
2. CONDITION SUBSEQUENT: a party is relieved under the contract of a risk or duty
that was undertaken when an expected even does not happen.
3. SIMULTANEOUS CONDITIONS: require both parties to perform at the same time.
4. INSPECTION CONDITION: buyers often bargain for a condition to inspect the
building, fixtures, and other improvements. Should clearly specify what is to be
inspected, by whom, and at whose expense, and what the consequences of the info.
Revealed by the inspection are to be.
5. MORTGAGE FINANCING: protects the buyer from the risk that he may not be able
to obtain the financing he needs in order to buy the property.
1. SELLER FINANCING: when the buyer is denied a mortgage loan from an
institutional lender, occasionally the seller offers to finance the sale at the terms
specified in the condition. There is a split of authority as to whether the buyer
must accept this offer.
6. ATTORNEY APPROVAL: some sale and purchase contracts have a condition stating
that they are subject to or contingent upon attorney approval.
BRUSH GROCERY KART, INC. V. SURE FINE MARKET, INC. (2002)

RULE OF LAW: After executing a contract for the sale of real property, the vendee does not
bear the risk of loss to the property prior to the transfer of title unless the vendee is in possession
of the property.
HOLDING: After executing a contract for the sale of real property, the vendee does not bear the risk
of loss to the property prior to the transfer of title unless the vendee is in possession of the property.
There are three approaches to determining which party bears the risk of loss during the executory
period of a contract for the sale of real property. A majority of states put the risk of loss on the vendee
from the time of contracting, relying on the theory of equitable conversion. Equitable conversion
treats the vendee of real property as the equitable owner of the property and the vendor of the property
as a secured creditor. Accordingly, once the equitable conversion occurs at the time of contracting, the
vendee is the owner of the property and is responsible for its condition. A minority of states keep the
risk of loss on the vendor until the transfer of title is complete, unless the parties expressly agree
otherwise. Several states apply a third approach, set forth in the Uniform Vendor and Purchaser Risk
Act. Under this approach, the risk of a no-fault casualty loss is borne by the party in possession of the
property at the time of the loss. This approach finds the most support in logic, equity, and policy
considerations. It would be unfair to remove the vendor’s liability in a real-property sale prior to
transfer if the vendee is not in possession to somehow prevent against a loss. Accordingly, if the
vendee is not in possession of the property, and a material casualty loss occurs without the vendee's
fault during the executory period, the vendee is entitled to rescind the contract and recover any
payments made on the property, or, in the alternative, to have partial specific performance of the
contract with an abatement in the purchase price to compensate for the loss. Here, Brush was not in
possession of the property at the time of the hailstorm, as it had left the property. Thus, Sure Fine is
considered to have regained possession of the land and is liable for the loss of $60,000. The purchase
price determined by the special master should be reduced by the loss incurred in the hailstorm.
LOUISIANA REAL ESTATE COMMISSION V. BUTLER (2005)

RULE OF LAW: Ambiguous text in a contract is interpreted against the party that furnished the
text.
HOLDING: Ambiguous text in a contract is interpreted against the party that furnished the text. The
contract in this case made the Butlers' purchase of the Crockers' house contingent on their ability to
obtaining a loan, in an undetermined amount, at 8.5 percent interest. The Butlers prepared the
contract, so if there is any ambiguity in these terms, it must be resolved against the Butlers. If the
Butlers had already determined that they needed a loan covering 90 percent of the property's value,
they could and should have said so in the contract, instead of saying that the amount they needed was
undetermined. Moreover, the Butlers should not have represented that they had sufficient funds to
complete their purchase. As to the 8.5-percent financing contingency, nothing in the trial record
suggests that the Butlers could not have obtained a loan at that rate, particularly if the Butlers had
chosen to borrow less than 90 percent of the property's value. The trial court correctly ruled that the
Crockers may keep the Butlers' down payment.
CONDITION OF THE PROPERTY

The contract must address matters that relate to both the quantity and the quality of the property
being exchanged.
 Parties want to have a degree of certainty regarding the amount of land or improvements
being transferred as well as the physical characteristics of the property.
 This will affect the value of the property.
QUANTITY:
SALE BY THE ACRE: the parties may bargain for a price to be determined on the basis of a
certain amount per acre or per square foot. When exact area is material to the transaction, the
contract should provide for a survey to determine the exact quantity and to confirm the legal
description.
SALE IN GROSS: if the parties specify a total purchase price for the property with no
breakdown into a per acre unit price, the presumption is a sale in gross. Buyer will usually not be
entitled to a price adjustment when a shortage is discovered.
 If the property description states the quantity, but adds the phrase “more or less,” this
strengthens the presumption of a sale in gross.
 If the shortage is extreme, approaching 50% or more, the court may grant relief to the
buyer under the doctrine of mutual mistake, even though the sale is in gross.
 If it was more than expected the seller would not be entitled to more compensation.
SURVEY: used to confirm the quantity of the land. Should obtain prior to closing.
 If buyer discovers the shortage in quantity only after closing, the doctrine of merger may
be an additional bar to relief.
PERFECT V. MCANDREW (2003)

RULE OF LAW: Circumstances determine whether a contract for the sale and purchase of real
property can be terminated for an error in describing the property.
HOLDING: Circumstances determine whether a contract for the sale and purchase of real
property can be terminated for an error in describing the property. These circumstances include
factors such as fraud or ambiguity in the terms of the sale contract. If the error sufficiently
related to one of the contracting parties essential interests, the contract can be invalidated under
the doctrine of mutual mistake. Here we need to determine whether the parcel's size mattered, the
contract could have stated that it did not involve a transfer in gross but the transfer of 81.1 acres
at a specific per acre price. If size did not matter, the contract could have said in many ways, for
example by stating hat it related to a transfer in gross, or to the transfer of gross, or to the transfer
of 81.1 acres "more or less." The parties failed to specify any terms therefore the trial judge used
extrinsic evidence to resolve the contracts ambiguity, which demonstrated that the parties neither
discussed nor showed any interest in the parcel's size. This evidence was sufficient to support the
judge's findings that the parties contemplated a transfer in gross, and that their interest in the
parcel's size was too insignificant to warrant invalidating the contract on the basis of their mutual
mistake.

QUALITY
Primary areas of concern include the structural soundness of improvements, the condition of
building operating systems and appliances, the environmental safety of improvements and land,
the availability of amenities such as utilities and vehicular access, and previous uses of the
property that may affect the value or desirability.
CAVEAT EMPTOR: buyer beware; the buyer has no implied rights with respect to quality.
 The buyer has the duty to inspect the property to determine whether its quality is
satisfactory and suitable for the buyer’s purposes prior to entering into the contract.
 The seller has no duty to reveal information to the buyer
o If the buyer fails to inspect or inspects carelessly, the loss is the buyer’s, not the
seller’s.
PRO-BUYER DOCTRINES: these doctrines or rules are either exceptions to caveat emptor, or
not within the scope of the doctrine because the defect cannot be detected by a reasonable
inspection by the buyer. Can relate to physical, environmental, or psychological conditions of the
property.
1. INTENTIONAL OR NEGLIGENT MISREPRESENTATION: if the seller or her agent

intentionally or negligently misrepresents the quality of the property, the buyer may be
entitled to rescind the contract or recover damages.
 Buyer must show that the represented fact was material and that she detrimentally and
reasonably relied on the representation.
 Must be latent (not observable) for the buyer’s reliance on the representation to be
reasonable.
o HOWEVER: a buyer who bargains for a representation is permitted to rely on
the representation and thus may be excused from making an inspection of the
item in question.
2. CONCEALMENT: the buyer may recover if the seller takes affirmative action to hide a
material defect or prevent the purchaser or her inspector from discovering the defect.
3. LATENT DANGEROUS DEFECTS: if the seller knows of a latent defect that makes the
property dangerous to possessors or users, the seller has an affirmative duty to disclose the
defect.
 POLICY: is to reduce the risk of personal injury to the buyer and third parties.
4. ATTORNEY LIABILITY: an attorney who provides false information or misleading

partial information (even if done without intent to mislead or cause harm) may be liable to a
nonclient for negligence if the nonclient proves reliance and damages. (Petrillo Case).

1. Express Allocation of Risk of Quality
CLAIR V. HILLENMEYER (2007)

RULE OF LAW: A contract for the sale and purchase of real property may allocate the parties'
responsibilities for remediating the property's defects.
HOLDING: A contract for the sale and purchase of real property may allocate the parties'
responsibilities for remediating the property's defects. Risk allocation is a common feature of
such contracts. This contract involves D's and P's rights and duties under a contract that
contained two relevant and unambiguous clauses. D's handwritten provision does not replace the
boilerplate clause, but supplements it. Summary Judgment was not appropriate in this case only
if, in light of those two clauses, any risk pertaining to the septic system indisputably fell on D
rather than on P. In fact, the risks allocation was disputable. The judge should have let the jury
decide if the septic system complied with applicable building codes; if surface percolation was
normal or indicated a septic system malfunction; whether the combined impact of the contract's
clauses imposed a duty on P to modify the system to P's satisfaction; whether the modifications P
was willing to make were reasonable; and whether it was unreasonable for P to withhold his
acceptance of those modifications. The trial judgment is reversed and the case is remanded.
DISCLOSING INACCURATE INFORMATION
PETRILLO V. BACHENBURG (1995)

RULE OF LAW: An attorney owes a duty of care to avoid making negligent misrepresentations
to a non-client third party if it is reasonably foreseeable that the third party will rely on the
attorney's representations.
HOLDING: An attorney can be liable to a non-client for making negligent misrepresentations if
the attorney knew or should've anticipated that the non-client would rely on the information.
Common-law Privity Doctrine is that attorneys only owe a duty to their clients. Privity: a direct
contractual relationship, like an attorney-client relationship. Modern caselaw and ethics riles
create exceptions to the privity doctrine. Liability if: a foreseeable non-client relies on attorney's
work and attorney intends, invites, or knows about reliance. The court noted that the objective
purpose of the attorney's work also impacts the determination. Here, Herrigal had the two
complete percolation reports, compiled a partial report with incomplete and misleading
information. Herrigal gave this report to D and should've anticipated that D, a realtor would give
this to potential buyers. Thus, the court inferred that the objective purpose of the partial report
was to convince potential buyers to buy the property. Herrigal should've also known that Petrillo
would depend on the partial report, when deciding to sign the contract. Thus the court concluded
Herrigal owes a duty to Petrillo. Affirmed.
MATERIAL DEFECTS AND DUTY TO DISCLOSE
IMPLIED DUTY TO DISCLOSE MATERIAL DEFECTS: some states go beyond the duty of
the seller to disclose known dangerous defects and hold that the seller has an implied affirmative
duty to disclose all material defects known to the seller.
1. MATERIALITY: a defect is material if it has a significant effect on the market value.

OR whether the defect would be a concern to most buyers in terms of their willingness to
buy the property or the price they would pay.
 A matter can also be made material if a party has extracted a contract representation
covering the issue.
EX: “Seller represents that the roof is sound and does not leak.” If it did leak then this
would be considered material since it was specified in the contract.
2. KNOWLEDGE: some courts impose an affirmative duty to disclose only when the
seller actually knows of the defect.
3. RESIDENTIAL VS. COMMERCIAL TRANSACTIONS: many courts protect home

buyers and maintain the caveat emptor for commercial use.
STIGMA AND NONDISCLOSURE STATUTES: property’s reputation in the community or its

negative history. Stigma may have either a material impact on value or an emotional impact on
the buyer.
 Nothing to do with the structural soundness or physical attributes.
 It is a psychological defect.
STATUTORY DUTY TO DISCLOSE:
1. INTERSTATE LAND SALES FULL DISCLOSURE ACT: the Act requires the
developer to file a registration known as a “Statement of Record” for approval by the
government before offering any lots for sale. Must be 25 lots or more.
IMPLIED WARRANTIES FOR SALE OF NEW HOUSING: a buyer of a new home receives an
implied warranty of habitability from her merchant seller.
EXPRESS ALLOCATIONS OF RISK OF QUALITY: the parties may specify by contract their
agreement as to property quality. Promises, representations, warranties, and conditions may all
be used, singly or in combination, to allocate risk.
1. RIGHT OF INSPECTION: buyer should have the contract provide for ample rights to
inspect by qualified people selected by the buyer.
2. “AS IS” CLAUSE: the buyer agrees that the property quality in its present condition,
when the contract is signed, is acceptable. This places all the risk on the buyer and should
be coupled with providing the buyer an opportunity to inspect.
3. EXPRESS WARRANTIES: made part of the agreement between the parties. The
doctrine of merger usually extinguishes an express warranty as to the physical condition
of the property at the closing unless the warranty protection plan that provides repair
services in the event of problems with the home.
LENDER LIABILITY: mortgage lenders are generally not liable to buyers for defects in new or
sued housing. A buyer has no legal right to rely on the lender’s appraisals and/or inspections.
 If the lender functions as a partner or joint venturer with the housing developer, the
lender may become liable to buyers for defects created by the developer. Such a lender
exercises managerial control over a project or shares in a proprietary interest. E
LENDER’S KNOWLEDGE OF SELLER’S FRAUD: if the lender knows or should know that
the seller is committing fraud on the buyer, the buyer who gets a mortgage loan from the lender
may assert fraud to the lender’s action to enforce the debt.
BLOOR V. FRITZ (2008)

RULE OF LAW: A real estate agent may have a duty to disclose material facts relating to a
property transaction.
HOLDING: A material fact is one that substantially and adversely affects the value of the
property or a party's ability to perform its obligations, or that operates to materially impair or
defeat the purpose of the transaction. The fact must be known to the agent but not apparent or
readily ascertainable by parties to the transaction. However, the agent's duty does not require him
to investigate matters that are currently unknown, unless he agrees to do so. In this case Miller
knew from the start that the D's were selling a property recently used as a meth lab's, but he
never disclosed this information to the P's. The trouble and expense that the P's incurred to clean
up the meth lab's contaminants proves the material nature of the undisclosed information. If D
had disclosed the information, the P's probably would have contacted the police and health
departments for more details, just as they did after it was too late for them to walk away from the
closing table. THUS Miller also shares the liability and violated his duty to disclose a material
fact about the property
VAN CAMP V. BRADFORD (1993)

RULE OF LAW: In general, a seller need not disclose a stigmatizing factor associated with his
or her residential property.
HOLDING: No, in general a seller does not need to disclose a stigmatizing factor associated
with his or her residential property. Over 20 jurisdictions have adopted nondisclosure statutes
that incorporate this rule, which is related to the principle of caveat emptor that traditionally
governs real estate transactions. The sellers duty of disclosure is limited to material facts
concerning a physical defect, which a potential buyer would be unlikely to observe or could not
readily ascertain. The risk of extending the duty to stigmatizing factors is that it will give rise to
lawsuits grounded in insubstantial harms and irrational fears. A seller should not make a
fraudulent or material misrepresentation that the buyer justifiably relies on to his detriment.
Depending on the circumstances and relative positions of the parties, such a misrepresentation
can make the seller liable for the buyer's losses. Taken in the most favorable to the P, is sufficient
for the case to proceed, reasonable jurors could conclude that both D's, as single women with
teenage daughters, would consider the fact of recent rapes at or near the property to be material
information relating to the property safety. Jurors could conclude that P's question about the
basement windows was a direct request for the truth, which D's response was designed to
conceal. Whether P justifiably relied on that answer, or suffered as a result, are questions for the
jury therefore summary judgment is denied.
IMPLIED WARRANTIES
LOFTS AT FILLMORE CONDOMINIUM ASSOCIATION V. RELIANCE COMMERCIAL

CONSTRUCTION, INC. (2008)
RULE OF LAW: An implied warranty arises from the construction of real property, whether or
not the builder is also the structure's vendor.
HOLDING: The structure itself is the subject of the implied warranty, and no such warranty
arises simply from selling the structure. TODAY….the construction market is evolving from a
model which a structures builder sells it directly to an individual consumer, and there is no direct
contractual relationship between the builder and the consumer. HOWEVER the law protects an
innocent consumer from the possibly catastrophic results of a construction defect, whatever the
commercial utility or nature of the arrangements between the builder and vendor. To deny the
consumer to redress, only because he lacks a direct contractual relationship with the builder,
would be to encourage for the sole purpose of shielding itself from liability to the consumer.
Therefore, in the present case, the association may sue the builder. BUILDERS AND
VENDORS should note that nothing in this opinion prevents or should discourage them from
allocating responsibility for a structures defects between themselves.
LAND DESCRIPTIONS/SURVEYS
TYPES OF DESCRIPTIONS:
TYPES OF SURVEYS
LEGAL ADEQUACY OF DESCRIPTION
DESCRIPTIONS IN CONTRACTS OF SALE
TR-ONE, INC. V. LAZZ DEVELOPMENT, CO. (2012)

RULE OF LAW: A contract for the conveyance of real property must describe the property
sufficient specificity to satisfy a jurisdiction's statute of frauds.
HOLDING: Established case law holds that a contract for the conveyance of real property must
describe the property with sufficient specificity to satisfy a jurisdiction's statute of frauds. HERE:
the contract is sufficiently detailed to identify the purchase price the buyers must pay but because
on its face the contracts fails to specify the property's exact size and location, its property
description it too vague to pass muster under NY statute of frauds.
WALTERS V. TUCKER (1955)

RULE OF LAW: Under Missouri law, the court may not rely on extrinsic evidence to reform a
deed that is unambiguous on its face.
HOLDING: A court may not rely on extrinsic evidence to reform a deed that is unambiguous on
its face. An AMBIGUITY is required to admit extrinsic evidence. If there's no facial ambiguity
in the language of the deed nor an ambiguity when the language is applied then Extrinsic
evidence is not admissible. Extrinsic evidence is not meant to show that the parties meant to
convey more, less, or different land than the boundaries described in the deed. The DEED stated
"the West Fifty feet" which meant fifty feet measured perpendicularly form the west boundary.
The trial court erred by admitting extrinsic evidence and reforming the deed according to D's
measurements.
MCGHEE V. YOUNG (1992)

RULE OF LAW: An original surveyor's boundary monuments prevail against any written
description of where the boundary lies.
HOLDING: An original surveyor's boundary monuments prevail against any written description
of where the boundary lies. Lawyers and other professionals are trained to describe the metes and
bounds of those monuments in writing, and in most cases subsequent surveyors and professionals
should rely on and follow those descriptions. HOWEVER the original surveyor had the training
and responsibility for establishing the true boundaries of previously unplatted land or a new tract.
If a written description of a boundary differs from where that surveyor placed boundary
monuments, it is better to correct the description than to move the monuments and uproot
persons who have occupied and improved land in good faith reliance on the monuments location.
PUBLIC RECORDS
PELFRESNE V. VILLAGE OF WILLIAMS BAY (1990)

RULE OF LAW:
HOLDING:
IN RE SIMPSON (2016)
RULE OF LAW: A bankruptcy trustee can avoid a deed to real property that would be voidable
by a bona fide purchaser of the property.
HOLDING: Under 11 U.S.C. Section 544(a)(3), a bankruptcy trustee can avoid a deed to real
property that would be voidable by a bona fide purchaser of the property. Georgia law provides
that a deed is voidable if it contains a patent defect, meaning a defect that is obvious and easily
detectable, in contrast to a latent defect that is not apparent on the face of the deed. A patent
defect makes the deed voidable, even if the deed has been recorded, because it fails to give a
bona fide purchaser constructive notice that there is a lien on the property. HERE, Weldon's
statement was not an attestation that the deed was signed in his presence, but an acknowledgment
that Simpson and her witness came before him and verified their signatures. This failure made
the deed patently defective, because the date of an acknowledgment can be important for
numerous reasons affecting the validity and authenticity of a deed. The court grants judgment for
the trustee. The banks security interest is avoided pursuant to 11 U.S.C. Section 544 (a)(3), and
the security deed is preserved for the benefit of Simpsons bankruptcy estate.
IN RE WEISMAN (1993)
RULE OF LAW: In race-notice jurisdictions, a person is deemed to have constructive notice of
an unrecorded real property transfer if, under the circumstances, a prudent purchaser would
inquire into the relevant facts.
HOLDING: In race-notice jurisdictions, a person is deemed to have constructive notice of an
unrecorded real property transfer if, under the circumstances, a prudent purchaser would inquire
into the relevant facts. A prudent purchaser is expected to look deeper if, on the surface, there is
an apparent inconsistency between the property's recorded ownership and the property's current
use or occupancy. If no such inconsistency is apparent, the general race-notice principle applies,
and the unrecorded conveyance is invalid against the claim of any subsequent bona fide
purchaser of the same property. Under federal bankruptcy law, a bankruptcy trustee stands in the
same position as a bona fide purchaser, and therefore the trustee can avoid an unrecorded
conveyance on behalf of the debtor. California applies to the present proceedings. HERE, if it
had been obvious in 1988 that D lived alone in the house, there would have been no apparent
consistency with tenancy in common, and a prudent purchaser might assume that D's sole
possession was in Weisman's interest. HOWEVER it was obvious that D and his wife now
occupied the house together. That arrangement was so inconsistent with Weisman's co-tenancy
that a prudent purchaser would have investigated and learned that Weisman no longer had any
property interest in the house.
MIDCOUNTRY BANK V. KRUEGER (2010)

RULE OF LAW: Proper indexing of a mortgage in the official recording system is not required
for the mortgage to be considered properly recorded.
HOLDING: Proper indexing of a mortgage in the official recording system is not required for the
mortgage to be considered properly recorded. An index is intended to be a starting point to help a
searcher find the actual document that is on file with the county recorder’s office. In this case, a title
searcher could have put in the Kruegers’ names into the grantor/grantee index to get the mortgage
document number. The searcher then could have put the mortgage document number into the index to
pull up the actual image of the mortgage document. That image correctly provided the correct legal
description of each property, showing that the Hinshaw property was encumbered by the MidCountry
mortgage at the time of the sale. The document was not indexed under the wrong name, nor was it
was not indexed at all. The document was merely imperfectly indexed. Because a searcher could still
find the mortgage in the index and view a copy of document with the correct mortgage information in
the official recording system, the mortgage was properly recorded.
ALLOCATING THE RISK
MARKETABLE TITLE: is best understood as title that is good in fact, subject to no

encumbrances except those agreed to by the parties, and free from reasonable doubts.

IMPLIED TERM OF MARKETABLE TITLE: Most conditions in real estate contracts must be
express. Marketable title is an exception. It is both an implied condition and an implied promise.
Buyer's obligation to close is conditioned on seller's title being marketable, and seller impliedly
promises that his title will be marketable at closing. Breach of the IMPLIED promise may give
rise to an action in damages.
a. GOOD IN-FACT: Title is good when seller actually has the quality of title promised in
the contract.
b. SUBJECT TO NO ENCUMBRANCES EXCEPT THOSE AGREED TO BY THE

PARTIES: these are encumbrances permitted by the contract.
c. FREE FROM REASONABLE DOUBT: there are no plausible claims of third parties
concerning interests in the property. Meaning the buyer does not need to prove that a
possible outstanding claim to the property is in fact valid in order to object that tiel is not
marketable.
CONTRACT TITLE: contracts defines the quality of title that the seller must furnish and the
buyer must accept. The parties specify what the seller's obligations are and what is acceptable to
the buyer. May be more lenient or more strict.
TWO TYPES OF CONTRACT TITLES:

1. INSURABLE TITLE: When the buyer plans to obtain a title insurance policy, the
contract often describes the type of policy that will be satisfactory to the buyer. The
contract may provide that a title insurance company's willingness to issue that policy
fully satisfies the seller's title obligations.
2. RECORD TITLE: requires proof of the status of title, gathered solely from deeds and
other instruments that are recorded in the public records for recording interest in real
property.
ENCUMBRANCES: is a nonpossessory right or interest in the property held by a third party that
reduces the property's market value, restricts its use, or imposes an obligation on the property
owner.
INCLUDE: easements, real covenants, equitable servitudes, marital property rights,
mortgage liens, tax liens, and other liens and charges.
FOUR TYPES OF ENCUMBRANCES THAT ARE CONSIDERED NOT TO IMPAIR

MARKETABLE TITLE:

1. DE MINIMIS ENCUMBRANCES: one that does not have an appreciable effect on the
value of the property or its use.
 SMALL LIEN: a lien would not be considered de minimis even if it secures a
very small sum of money relative to the purchase price. Seller is expected to pay
the debt to discharge the lien.
2. VISIBLE ENCUMBRANCES: some courts excuse visible encumbrances, such as
overhead utility lines, on the theory that buyer saw them, or should have seen them, when
he inspected the property and thus the parties implicitly agreed that they were permitted.
3. SUPERFLUOUS ENCUMBRANCES: A superfluous “covenant” or “encumbrance” is
written and recorded, but it does not impose any obligations on the landowner in addition
to those otherwise required by law.
4. OBSOLETE ENCUMBRANCES: covenants and other encumbrances in the chain of title

are obsolete when it is clear they are no longer enforceable. Either they have an express
time limit, such as 20 years, which has expired, or they are no longer enforceable for
other legal reasons.
ENCROACHMENT: is an unauthorized extension of an improvement across a boundary line.

 This constitutes a trespass by the improver.
1. SELLER’S IMPROVEMENTS ENCROACH: the owner may be forced to relocate the

improvements or pay damages.
2. SELLER’S NEIGHBOR’S IMPROVEMENTS ENCROACH: the owner may have lost

title to the area covered by the encroachment either under the law of adverse possession or
due to the application of principles of equity.
STALEY V. STEPHENS (1980)

RULE OF LAW: A marketable title to real property is one that contains no serious defect and no
defect that affects possessory title.
HOLDING: A marketable title to real property is one that contains no serious defect and no
defect that affects possessory title. Any reasonably prudent buyer expects that seller's title to be
marketable, but a slight defect should not be allowed to cloud the title. In this case, the property's
setback infringements are minor. By buying the property, the Stephens would expose themselves
to only minimal liability for damages. Nevertheless, until the statute of limitations runs out, there
is some risk that the Stephens could be sued, and would at least incur the expense and trouble of
litigation. Under these circumstances, the court cannot say as a matter of law that the Stanley's
title to the property is marketable and cannot compel the Stephens to accept the title. Therefore,
the trial court properly entered summary judgment, and is affirmed.
ZONING AND LAND USE REGULATIONS
1. NARROW VIEW OF TITLE: some courts define title narrowly, looking only at fee simple
interests and encumbrances like liens and private servitudes. This means zoning laws and
other types of public regulations of use do not render title unmarketable, even if they are
incompatible with buyer’s intended use of the property.
2. BROAD VIEW OF TITLE: Other courts have a broader view of marketable title, using
this concept to protect buyers whose expectations concerning property use and value are
frustrated when certain zoning problems are encountered.
A. EXISTING ZONING VIOLATION: The broad view of marketable title is especially

likely to apply when a zoning exists when the parties enter into the contract. The
rationale is that buyer should not bear the risk of the government bringing a zoning
enforcement action to seek an injunction or damages. In SCOTT V. TURNER (2009):

a township granted variance reducing the width of the right-of-way from 32 to 16
feet, subject to conditions that seller had violated before contracting to sell the
property. This breached seller's promise of "good and marketable" title because the
township had the right to compel the owner to upgrade the right-of-way at any time.
BUYER’S REMEDIES FOR TITLE DEFECTS:
1. ENGLISH RULE: buyer generally cannot recover damages when seller breaches the
promise of marketable title. Buyer is limited to restitution – the recovery of out-of-pocket
costs, such as return of deposit plus interests and expenses like the cost of title
examination.
a. BAD FAITH EXCEPTION: English rule exception when the seller has acted in
bad faith in connection with the title problem. The most common situation
involving bad faith is the seller’s failing to disclose a title defect known to the
seller when the contract is signed. Buyer is allowed expectancy damages.
2. AMERICAN RULE: buyer can select among the full range of damage awards,
including expectancy damages whenever the property value exceeds the contract price at
the time of the breach. The rationale is that the injury to the buyer is the same, regardless
of whether seller acted in good faith or bad faith.
3. CONTRACTUAL LIMITS: the parties contract sets forth specific procedures that
buyer must follow in making title objections and limits buyer’s relief if title is not
acceptable. (Jones Case)
JONES V. WARMACK (2007)

RULE OF LAW: Depending on contractual wording and circumstances, one party's
nonperformance of a contractual obligation may excuse another party's nonperformance.
HOLDING: HERE, taking the language of the contract as a whole, it is clear that D's notice of
inability to cure some title defects was not an anticipatory breach of contract. The contract
provided for just a situation by giving P a 10-day option to terminate or proceed with the
transaction. HOWEVER, option provision was separate and distinct from P's contractual
obligation to make timely down payments. By not making the final down payment, P breached
the contract, and D is entitled to keep the first two down payments.
EGLI V. TROY (1999)

FACTS:
RULE OF LAW:
HOLDING:
BOOKER T. WASHINGTON CONSTRUCTION & DESIGN COMPANY V. HUNTINGTON

URBAN RENEWAL AUTHORITY (1989)
FACTS:
RULE OF LAW:
HOLDING:
MAGUN V. BOMBACI (1985)

FACTS:
RULE OF LAW:
HOLDING:
TITLE PRODUCTS
ATTORNEYS TITLE OPINIONS AND CERTIFICATES
NORTHBAY COUNCIL, INC. V. BOY SCOUTS V. BRUCKNER (1989)

RULE OF LAW: A lawyer's opinion on title to real property must apprise the client of any
cloud on the title.
HOLDING: YES. A lawyer's opinion on title to real property must apprise the client of any
cloud on the title. It does not matter whether the apparent defect or encumbrance clouding the
title could actually be legally enforced against the buyer. All that matters is that the cloud would
make a reasonable and prudent prospective buyer think twice before purchasing the property, at
least for its full value. The lawyer cannot and is not expected to guarantee the title's quality, but
he has the duty to exercise care, skill, and knowledge in forming his opinion. HERE the council
clearly relied on D's title opinion when it bought the property in 1962. D clearly failed to inform
the council of the textual basis for doubting that the first-refusal clause had explored. It was
foreseeable that D's failure to alert the council to an obvious cloud on the property's title would
expose the council to future economic losses. There was no evidence on which a jury could
reasonably decide the case in D's favor, and the trial court should have directed the jury's verdict
for the council. REVERSED
TITLE INSURANCE
VESTIN MORTGAGE INC. V. FIRST AMERICAN TITLE INSURANCE COMPANY (2006)

RULE OF LAW: Title insurance policies insure only against defects, liens, or encumbrances on
title that exist of the date of issuance.
HOLDING: HERE, the town created the SID and issued its notice of intent before D issued its
title insurance policies, but neither action placed a defect, lien, or encumbrance on anyone's title.
Nothing in the title insurance stated that D would protect P from future taxation. D was not even
obligated to tell P about it. P's title insurance covered only its rights under the mortgage deed,
and nothing here affected the priority of P's mortgage or prevented P's foreclosure on the
mortgaged property. The only way in which the SID tax affected P was to make it harder for P to
sell the property. AFFIRMED.
KEYINGHAM INVESTMENTS, LLC. V. FIDELITY NATIONAL TITLE INSURANCE

COMPANY (2009)
RULE OF LAW: A primary purpose of title insurance is to protect a property lawyer buyer
against off-record risks in the chain of title.
HOLDING: An off-record risk is one that is not usually discernible from an inspection of the
public record. Forgery is an off-record risk that necessarily invalidates the good title commitment
or binder have been unambiguous conditions spelled out in the title commitment or binder have
been met. HERE: D's binder did not specify who had to execute the security deed. The binder
merely required the deed to pass muster with D's lawyers, which it did. THEREFORE D was
obligated to insure the P's.
FINAL PERIOD ON THE TIMELINE: THE CLOSING

(A) CLOSING THE CONTRACT
ST. LOUIS V. WILKINSON LAW OFFICES, P.C. (2012)

RULE OF LAW:
HOLDING:
IN RE OPINION 710 OF THE ADVISORY COMMITTEE ON PROFESSIONAL ETHICS (2008)

RULES OF LAW: A vendor of real property may give the buyer a seller's concession for a
portion of a real estate transaction's legitimate and actual costs.
HOLDING: A vendor of real property may give the buyer a seller's concession for a portion of
real estate transaction's legitimate and actual costs. In itself, it is neither fraudulent nor unethical
for the seller will sometimes do so to induce the buyer's purchase. Opinion 710 is not concerned
with such legitimate concessions, but with a concession that forms part of an overall scheme to
defraud the lender as to the transaction's actual costs. Opinion 710 states a conclusion that should
be obvious to all lawyers: it is unethical for a lawyer to knowingly perpetrate misrepresentations
that are false, fraudulent, or deceitful.
DOCTRINE OF MERGER: promises, representations, and conditions from the executory

contract are merged into the deed and other instruments signed at closing. "MERGER" means
they are extinguished and are no longer enforceable. The merger doctrine applies to both title
covenants in the executory contract and covenants related to physical condition or quality. Along
with Caveat emptor, merger puts the entire risk of quality on the buyer after closing, unless the
documents obtained at closing provide otherwise.
PANOS V. OLSEN (2005) (MUTUAL MISTAKE)

RULES OF LAW: The merger doctrine holds that the final documents in a real estate
transaction abrogate any prior written or oral agreement between the parties.
HOLDING: The Merger Doctrine holds that the final documents in a real estate transaction
abrogate any prior written or oral agreement between the parties. In a property conveyance, the
final documents are usually a sale contract and a warranty deed. The rule, though harsh,
preserves the integrity of the final exceptions: (1) mutual mistake in drafting the final documents,
(2) ambiguity in those documents, (3) collateral rights derived from other documents, and (4)
fraud in the transaction. HERE: there is no question of collateral rights or fraud. As to ambiguity,
the deed is not ambiguous just because it is broad worded. If P had intended to be more precise,
he could have specified in the deed that the height limit would be measured from the brass
marker. In the absence of such a specification, any other point on the adjacent street, including
the gutter, could serve as the base for measuring the height of D's house. As to mutual mistake,
there is no clear and convincing evidence that P and D misunderstood each other's intentions. In
the absence of mutual mistake, or P's mistake combined with D's it is inappropriate for the court
to reform the deed.
MERGER DOCTRINE EXCEPTIONS: THREE PRIMARY EXCEPTIONS TO THE

DOCTRINE OF MERGER:
1. COLLATERAL MATTERS: if there is sufficient evidence that the parties intended a
particular undertaking to survive closing, merger does not apply. (Only applies to nontitle
matters, such as the need to repair part of the property) when merger does not apply, the
matter is said to be collateral to the closing
a. Title matter will not survive this under the merger doctrine = reasoning is that title
matters are not collateral and are more likely to have a third-party impact, and
third parties need to have the ability to rely on the documents of record without
having to reference prior contractual undertakings, which may not even be
ascertainable.
2. FRAUD: If a party has committed fraud in closing the transaction, he cannot use the
doctrine of merger to relieve him of an earlier obligation.
3. MUTUAL MISTAKE: If the parties operated under a mutual mistake as to the content of
the closing documents, reformation is available despite the doctrine of merger,
a. UNILATERAL MISTAKE: does not suffice

AMBIGUITY

MUTUAL MISTAKE

REFORMATION

ESCROWS: three popular meanings:
A. LOAN ESCROW: lenders use the loan escrow to collect and hold money from the debtor
for paying annual real property taxes, and fire and hazard insurance premiums.
B. CLOSING ESCROW:
C. CONTINGENCY ESCROW:
MILLER V. CRAIG (1976)

RULE OF LAW:
HOLDING:
(B) CONTRACT REMEDIES
UZAN V. 845 UN LIMITED PARTNERSHIP (2004)

RULES OF LAW: Real Estate deposits are not subject to a liquated-damages analysis.
HOLDING: Liquidated - damages clauses have traditionally been subject to judicial oversight to
confirm that the stipulated damages are reasonably proportionate to the probable loss caused by
the breach. Real-Estate deposits, by contrast, receive limited supervision, partly because they are
usually part of an arms length transaction. These deposits will only be refunded on a showing of
one of the following factors: (1) disparate bargaining power between the parties, (2) duress, (3)
fraud, (4) illegality, or (5) mutual mistake. The remaining deposits should not be refunded unless
one of the above factors has been shown. The contract was negotiated as part of an arm's length
transaction between sophisticated parties, as the P's were billionaires represented by counsel.
There is no claim of duress, fraud, illegality, or mutual mistake. Therefore, the real-estate deposit
should not be refunded.
EQUITABLE REMEDIES
DIGUIUSEPPE V. LAWLER (2008)

RULES OF LAW: A buyer is not entitled to specific performance if he cannot prove he was
ready, willing, and able to complete the purchase at the time the transaction would have closed.
HOLDING: A buyer is not entitled to specific performance if he cannot prove he was ready,
willing, and able to complete the purchase at the time the transaction would have closed. A party
is entitled to specific performance if he can establish that he substantially performed his part of
the agreement and that he was ready, willing, and able to continue to perform his obligations. If
the opposing party breaches or repudiates party. Instead, the party seeking specific performance
must only pleas that he would have tendered performance were it not for the other party's breach.
Such tender is excused under circumstances if it would essentially be useless. If, however, a
party were granted specific performance without first establishing his readiness and ability to
perform, he would be given more than he is entitled to under the contract. He must therefore
establish these facts. In this case, the only available evidence regarding D's readiness and ability
to make the payment was equivocal. D bore the burden of establishing that he was ready, able,
and willing to perform when the transaction would have closed. Because he failed to do so, he
was not entitled to specific performance. AFFIRMED.
DEVENNEY V. HILL (2013)

RULE OF LAW:
HOLDING:
EXECUTIVE EXCELLENCE, LLC. V. MARTIN BROTHERS (2011)

RULE OF LAW:
HOLDING:
RESIDENTIAL MORTGAGE PRODUCTS

ACCESS TO MORTGAGE MARKETS

Lending institutions control access to mortgage money. The lender views a potential mortgage
loan as an INVESTMENT OPPORTUNITY. For each loan application, the lender assesses the
applicant, the property that will be security, and the relevant market context of the transaction.
Some mortgage terms are crucial to the lender's expectations as to profit and risk. They are
unlikely to be changed, but other terms are more likely to be negotiable.

Security for the loan: Credit makes it easier for consumers to purchase things based on future
income. Credit may be secured or unsecured.

UNSECURED CREDIT: (general credit) the lender relies primarily on the promise of the
borrower to repay the money. If the borrower defaults. The lender hopes to seize nonexempt
assets of the borrower.

 If there are no assets, the debt will go unsatisfied.
 The lender must monitor the loan plus keep an eye on the borrower's other assets just in
case it needs to take them to satisfy the debt.

SECURED CREDIT: borrower signs a promissory note and puts up specific collateral.
 The lender takes a mortgage on the borrower's residence being purchased.
 If the borrower fails to pay, the lender has a direct claim against the property under the
terms of the mortgage.
 Recording the mortgage establishes a priority for the lender, guaranteeing the availability
of a specific asset.
 W/ this protection, the lender has lower monitoring costs and lower risk compared to an
unsecured loan. Allows the offer of a cheaper interest rate, thus making borrowing for
home ownership accessible to more potential consumers.

EVALUATING THE LOAN APPLICANT:
1. ABILITY: involves an assessment of the assets, income, and employment situation and
prospects of the borrower.
a. Debt ratios: Should not qualify for a loan in excess of 28% of gross monthly
income. Should not have total debt payments (mortgage payments plus all other
debts) exceeding 36% of gross income. Sometimes lenders vary these formulas.
Especially to accommodate high-cost regions of the country.

2. WILLINGNESS: more subjective determination than ability to pay.
a. Today lenders use credit histories to evaluate the willingness to pay.
i. Helps to make it less subjective

b. FICO provides the credit score for each borrower with scores being in a range
from 300-900.
c. The higher the score the better, in general 660 or higher is acceptable for normal
credit pricing.
d. Scores over 700 get a better credit pricing (lower risk therefore lower pricing).
e. Scores below 620 usually require higher pricing (higher risk, higher pricing).
3. RACE: White applicants are substantially more likely to be approved for a mortgage
loan than are black or Hispanic applicants.
a. Use of credit scores is to reduce this problem.

MARKET DEFINITION: Lenders tend to argue that they have a right to define the lending
markets where they choose to operate. Housing advocates counter that lenders have an obligation
to make loans available for all types of communities, not just those identified as most profitable.
The market definition can raise serious issues of fairness and equality with respect to factors of
race, gender, income and education.
1. REDLINING: occurs when a lender refuses to make loans in a particular neighborhood
because of its racial, social, or economic characteristics.
a. Lenders defend nonracial redlining as being poor investments. (Bad crime,
abandoned homes, and falling housing values).
b. Problem is that such areas often correlate to lower income populations and
therefore have a disproportionate impact on minority populations than on white
population. Loans denials ensure that these areas will continue to suffer from
under capitalization.
2. FAIR HOUSING ACT: Prohibits redlining that is based on the racial characteristics of
the neighborhood where an applicant proposes to buy a home.
a. Advertising that conveys the implicit message that housing opportunities are not
open to minorities violates the FHA
i. Must introduce extrinsic evidence that bears on discriminatory intent, but
the content of ads is reviewable.
3. GREENLINING: occurs when a lender identifies wealthy neighborhoods where it will
pursue a customer base with financial products including mortgage loans.
a. Lender might define its customer base in terms of income, education, car
ownership, and other factors that have nothing to do with race, but have a lot to do
with expected profits.
b. Like redlining, is illegal because it may exclude a disproportionate number of
underrepresented people in certain geographic locations.
4. EXPLOITATION AND PREDATORY PRICING: Lenders must offer similar rates and
opportunities similarly situated borrowers without regard to race, gender, ethnicity,
religion, geographic location, and other prohibited factors.
a. In Honorable v. Easy Life Real Estate System (2000), the court found that it was
improper exploitation of consumers in a minority community to offer mortgage
financing on less favorable terms than those offered to similarly situated white
borrowers.

TYPES OF MORTGAGES AND PRICING: the concepts of points, annual percentage rate, and
mortgage insurance apply to all mortgage loan products.

1. POINTS: lenders usually require that the borrower pay up-front fees called "points."
a. Points are called loan processing fees, discounting fees,, or origination fees.
b. 1 Point is equal to 1% of the loan amount. 1 point also equals 100 BASIS points.
c. These points are used to cover processing costs for the loan, commissions for loan
officers, and fees for transacting in the secondary mortgage market.
d. Borrower often has the choice of paying additional points and reducing the stated
interest rate on the loan. Referred to as a "buy down" when a borrower agrees to
pay points to buy down the interest rate to a rate below the current market rate.

2. ANNUAL PERCENTAGE RATE: a statement of the cost of a loan using a formula set
forth in the RESPA (Real Estate Settlement Procedures Act).
a. To calculate the APR: lenders add to the stated interest rate a standard list of
expenses and fees associated with the loan origination.
i. Designed to treat all of the additional expenses and fees as if they were
also part of the interest expense for the loan.
ii. Produces a hypothetical rate of interest that represents what the rate would
be if all of the identified expenses were treated as if they were interest.
iii. Lender must disclose
iv. The borrower then will have the basis to do comparison shopping because
all lenders subject to the regulations have to apply the same formula.
v. The APR is for comparison and disclosure purposes; the actual interest
rate on a promissory note for a loan will be quoted mortgage rate and not
the APR rate.
1. This actual rate will determine monthly mortgage payments and
will be relevant for tax purposes.
3. MORTGAGE INSURANCE: protects the lender against risk of loss if a borrower
defaults and the property is sold through foreclosure for a price less than the outstanding
debt.
a. Underwriting guidelines generally require insurance when the loan-to-value ratio
exceeds 80%
b. The borrower pay for the Private mortgage insurance or PMI, by pay a monthly
premium, along with the principal and interest of the loan.
c. FHA insurance and VA guarantee programs often require full premium payment
at the outset of the loan.
d. PMI provides 20-30% risk coverage; this mean the insurer covers a 20 or 30
percent drop in property value, and the lender bears the remaining risk.
e. Mortgage insurance helps those will a small savings to obtain a home mortgage.
4. FIXED-RATE MORTGAGES: has a set rate of interest, which applies throughout the
life of the loan.
a. Mortgage payments never change
b. The loan is self-amortizing; with the very last payment, the loan is fully paid.
c. During the early years, the payments will go toward the interest.
d. Most are 15-30 years, but any term can be used.
e. Puts risk entirely on the lender if the future rate increases.
5. ADJUSTABLE-RATE MORTGAGES (ARM): has an interest that changes periodically
a. Monthly payments are adjusted to reflect the interest rate change.
b. Puts on the borrower some or all of the risk of future increase in market interest
rates.
i. FOR this reason, lender offer ARM's at significantly lower initial rates
than comparable fixed-rate mortgages.
c. THREE KEY FEATURES:
i. THE INDEX
ii. ADJUSTMENT PERIOD
iii. THE CAP

A. THE INDEX
a. EXTERNAL INDEX: Is outside the control of either party (EX: treasury bill
rates, government or trade indexes of average mortgage costs for a region of the
nation, and international rates
b. INTERNAL INDEX: subject to the lender's control (EX bank's prime rate
B. ADJUSTMENT PERIOD
a. Loan documents specify the timing and frequency of each interest rate adjustment
b. Typically every 6 months, one year, or two years.
c. This means that the index is checked during the agreed-to time frame and the
interest rate is then adjusted up or down.
C. THE CAP
a. Limits the upward movement of interest changes
b. Protect borrowers from the uncertainty of an unlimited rise in their mortgage
payments.
c. Symmetry: caps usually work in both directions, also limiting downward
adjustments
d. Caps may be in place for the life of the mortgage and for each adjustment period.
D. CONVERTIBLES: permits the borrower to convert from an ARM to a fixed rate
mortgage at some predetermined time
a. Borrower mist take an ARM during a period of time of high-interest rates,

expecting that rates will fall in 3 years when the economy adjusts to some new
trend.
b. Borrower will bargain for the convertible mortgage, which allows her to exercise
an option to convert to a fixed-rate mortgage on the third anniversary of the loan.
c. The conversion will then be prevailing market rate of interest for fixed-rate
mortgages, but the borrower would save on financing costs.
E. HYBRIDS: Hybrid ARM with a fixed interest rate and switches to an adjustable rate at a
specified time.
a. RESET DATE: date the interest changes
b. The date of the reset is fixed by the terms of the original mortgage, and is not
elected at the option f the borrower.
BERGHAUS V. US BANK (2012)

RULE OF LAW: The federal Truth-In-Lending Act’s safe-harbor provision generally relieves an
assignee of liability for damages resulting from a predatory loan.
HOLDING: Despite the general rule, an assignee is liable if he took a loan note in bad faith rather
than as a bona fide purchaser, or if a TILA violation was apparent on the face of the note. Here, there
is no evidence of bad faith on U.S. Bank's part, and both the disclosure statement and the loan note
made it clear that Berghaus's interest rate could climb to 12.625 percent or even higher. Because any
deception or misrepresentation on Decision One's part would not have been apparent from the face of
the note, U.S. Bank was under no obligation to investigate whether Decision One actually engaged in
any predatory misconduct. Perhaps it is contrary to principles of equity and good public policy, and a
contradiction of TILA's goal of protecting consumers against the uninformed use of credit, that in this
case, TILA's safe-harbor provision leaves Berghaus without any effective remedy. Nevertheless, the
trial court correctly ruled that U.S. Bank was entitled to avail itself of the safe-harbor provision's
protection, and the court's grant of summary judgment is affirmed.
MORTGAGE FINANCING AND THE CONTRACT TO PURCHASE

ALTERNATIVE MORTGAGE INSTRUMENTS:
1. NO-POINT MORTGAGE AND BUY-DOWN MORTGAGE: means the borrower gets
the loan at the stated interest rate without paying any points.
a. Advantage: the buyer pays less cash to close the loan
b. Trade-off: the interest rate is higher than for a oan that comes with points
c. BUY-DOWN mortgage: provides a below-market interest rate: the borrower pays
points to "buy down" the rate.
i. Reduces the monthly payments, which may be necessary for a borrower to
qualify for the loan when the borrower's income is not sufficient to
support higher monthly payments
ii. May be beneficial for a buyer who expects to retain ownership for many
years.
2. BALLOON MORTGAGE: provides for low periodic payments, with a much larger
payment due when the term ends
a. EXAMPLE: a balloon mortgage could provide for monthly payments based on a
30-year amortization schedule, but require the borrower to pay the loan balance in
full 3 years after the date the loan is made
b. To avoid default, the borrower must come up with cash or refinance at the end of
three years.
c. Often used for seller refinancing and in situations when the parties desire a
BRIDGE LOAN, with the expectation that in the short term the buyer will be able
to get a better deal from another source of financing.
3. LEVEL PAYMENT ADJUSTABLE-RATE MORTGAGE: (level payment ARM)
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.
a. When the effective interest rate changes, the monthly payment remains the same,
unlike the standard ARM, which modifies the amount of payment.
b. INSTEAD the term of the level payment ARM adjusts, becoming shorter or
longer, or a final balloon payment is required.
i. Becomes shorter or longer or a final balloon payment is required
ii. If the level payments are not enough to cover the interest that accrues,
negative amortization results, meaning the dollar amount of debt
increases.
4. SHARED APPRECIATION MORTGAGE: (SAM) the lender receives in addition to
interest on the loan a % of the appreciation in value of the property over a specified time
period.
a. The borrower trades some of her equity appreciation in her property for a lower
interest rate
b. If the home is sold earlier, the parties settle up based on the value at the time of
sale.
c. Typically referred to as a participation loan
5. REVERSE ANNUITY MORTGAGE: (RAM) is designed for senior citizens who have
home equity and desire extra income.
a. Homeowner receives a monthly annuity, secured by a mortgage on the equity
value.
b. Each month the mount of debt rises
c. The total annuity debt is capped, and the homeowner should ensure that if she
outlives her expected time in the home, she will not be forced to leave.

PURCHASE-MONEY MORTGAGE (PMM): is any type of mortgage provided by the seller of
the property to the buyer.
 Seller therefore acts as the lender in the transaction and should take normal precautions,
including getting a credit check and obtaining and recording standard loan documents.
 IN some contexts: people refer to a PMM as any mortgage given to secure debt incurred
to buy the property that is put up as collateral for the loan.
o Under this it is a Purchase money security interest (PMSI) under Article 9 of the
UCC.
o Special status or priority, particularly when several mortgages are given
simultaneously against a property.

DEED OF TRUST: is a mortgage that includes a third-party trustee.
 Third party trustee: is named in the mortgage as an independent party to conduct a
nonjudicial foreclosure sale after a default.
WALSH V. CATALANO (2015)

RULE OF LAW: In general, a buyer who defaults on a real estate contract without lawful excuse
cannot recover his or her down payment.
HOLDING: The Uniform Vendor and Purchaser Risk Act provides one such excuse. The act, which
New York has adopted, provides that a contract for the sale and purchase of real property is
unenforceable, and the seller is obligated to return the buyer's down payment if, through no fault of the
buyer, all or a material part of the property is destroyed prior to closing. Here, the buyers were in no
way responsible for the hurricane that damaged and significantly reduced the value of Catalano's
property. According to the contract, the buyers' resulting inability to secure a loan commitment
obligated Catalano to refund their down payment. Thus, the trial court erred, and the buyers are
entitled to summary judgment.
MALUS V. HAGER (1998)

RULE OF LAW: A real estate mortgage contingency clause is effective only for the period of time
specified by the sale contract.
HOLDING: A real estate mortgage contingency clause is effective only for the period of time
specified by the sale contract. The court in the 1988 case took a different approach. In that case, the
lender withdrew its loan commitment after the buyer lost his job, and the seller lost money on its
subsequent sale of the property at a reduced price. The court construed the mortgage contingency
clause to apply not only to securing a timely mortgage commitment, but also to having the mortgage
proceeds available at closing. Confusion and uncertainty would result if such an interpretation applied,
as a matter of law, to all similar cases. Real estate contracts set specific dates for specific events so that
the parties can make their plans with confidence that, after a certain point, the contract will be
enforceable. Parties are free to insert additional contract clauses to cover contingencies such as a
lender's withdrawal of its loan commitment. However, in the absence of such a clause, it is unfair to
leave an innocent seller with no ability to recoup his losses when a seemingly firm contract unravels.
Here, the contract provided that if the Maluses could not close on their purchase, the Hagers could
keep their down payment. That provision should control the case's outcome. The trial court's judgment
is reversed, and the case is remanded for entry of judgment in favor of the Hagers.
PRIMARY MORTGAGE MARKETS


A. SAVINGS: becomes available as a source of funds for credit
a. Deposits, money market funds and commercial paper
b. Short-term commitments, meaning they can be withdrawn on relatively short
notice

B. INTERMEDIARIES: Financial institutions and other organizations that hold savings
make mortgage loans
a. They serve as transactional facilitators in the overall economy
b. From the POV of the intermediary, payments that must be made to attract
investment from savers are a cost of raising capital or a cost of funds
c. Cost that must be paid in order to assemble the large sums of money needed to
turn around and make loans available.

C. BORROWING: Individuals and families borrow funds from the intermediaries to acquire
or finance their homes.
a. Need to make enough money to cover their cost of funds and provide an adequate
profit, called the RETURN ON INVESTMENT.
b. Asymmetrical Relationship between the short-term nature of savings and the
long-term nature of the mortgage lending.
c. The key risk affects the intermediaries
d. ARM's are one mechanism for assisting lenders in adjusting to changing financial
interests

D. ALTERNATIVE MARKETS: alternative markets for investments
a. Intermediaries tend to specialize in particular types of financial markets

SECONDARY MORTGAGE MARKETS:

A. DIVERSITY OF MORTGAGE INVESTMENTS: to reduce risk, a lender in Ohio may
swap or sell its loans to a lender in Kansas, Florida, California, or Michigan. The
secondary market also allows local lenders to diversify among regions of the country
based on variations in savings rates and credit demands.
B. NEW INVESTMENT CAPITAL: The secondary mortgage market has broken down
barriers by encouraging uniform mortgage documentation and by pooling individual
mortgages and turning them into securities. This has attracted new investors from within
and outside of the US increasing the money available for domestic mortgage lending.
C. INTERMEDIARIES:
D. DIRECT SALES TO INVESTORS
E. CHANGING MARKET DYNAMICS
F. SECONDARY MORTGAGE MARKET FINANCIAL PRODUCTS
G. DERIVATIVES AND SWAPS
H. SECONDARY MARKET PROVIDES FUNDS FOR PRIMARY MARKET

GOVERNMENT REGULATION AND MARKET REFORM
UNITED COMPANIES LENDING CORPORATION V. SARGEANT (1998)

RULES OF LAW: The risks associated with subprime loans warrant a lender in charging higher
interest rates, points, and other loan-origination fees than conventional borrowers must pay.
HOLDING: Subprime lending makes loans available to individuals whose poor credit ratings and
limited resources make them ineligible for conventional housing loans. The subprime mortgage-loan
industry developed as a reasonable response to several economic developments since the 1970s,
including the redlining and abandonment of inner-city neighborhoods by conventional lenders.
However, many unscrupulous lenders take unfair advantage of the average subprime borrower's
limited financial sophistication and resources, and the rise of subprime mortgage-lending has been
accompanied by an increase in foreclosures. The consumer injury caused by predatory subprime
lending cannot be prevented by market forces alone, because those forces are often compromised by
unfair practices such as redlining and reverse redlining. As applied to this case, Massachusetts's
definition of unfair and deceptive lending practices is reasonable and consistent with Federal Trade
Commission regulations governing the lending industry. United's practice of charging 10 points to
cover the risks associated with subprime loans was an excessive deviation from the industry-wide
standard of charging no more than five points. Therefore, Sargeant is awarded her actual damages plus
interest, and reasonable attorney's fees. Because United's broker did not fully disclose Sargeant's total
costs, he is not entitled to a brokerage fee on Sargeant's loan.

CONSUMER FINANCIAL PROTECTION BUREAU V. GORDON (2016)
RULES OF LAW: The federal Consumer Financial Protection Act prohibits and provides
remedies for unfair, deceptive, or abusive practices in the consumer financial-services industry.
HOLDING: In this case, the CFPA and Regulation O apply to the loan-modification and
foreclosure-prevention services that Gordon offered prospective clients. Gordon intentionally
designed his marketing materials to deceive prospective clients into thinking that he was somehow
affiliated with the government, could guarantee results for his clients, and would work pro bono. Even
if Gordon's client-representation agreements correctly described his services, a later correction does
not eliminate a defendant's liability for making deceptive claims in the first place. Nothing in the
record suggests that the trial judge abused his discretion in applying remedies that the CFPA provides.
In fact, the judge rejected some proposed remedies as disproportionately harsh. Gordon offered no
evidence to show that the judge's award of damages was excessive, and there was no reason to
exclude some deceived clients from the scope of the award just because they were allegedly satisfied
with Gordon's services. The judge was justified in temporarily shutting down Gordon's practice as a
threat to consumers, and in finding that Gordon's evasive behavior belied his assurances that his
misconduct would not recur. The case is remanded for further findings as to whether the relevant
CFPA provisions were in effect for the entire period covered by the trial court's judgment, which is
affirmed in all other respects.
MORTGAGE OBLIGATIONS
PROMISSORY NOTE: an instrument separate and apart from the mortgage

 Mortgage debt is usually evidenced by a promissory note

USURY: usury laws limit the amount of interest a lender may charge a borrower.
A. TRADITIONAL USURY LAWS: not sensitive to market changes in the interest rate
a. Fixed maximum interest rate
b. Supposed to be high enough so that there is sufficient room under the limit for
reasonable and normal market fluctuations in the cost of money to occur
B. COMPOUNDING OF INTEREST: "compounding" refers to how often interest on the
loan is calculated
a. May be daily, monthly, annually or at the end of any other period agreed to by the
parties
b. Compounding effects how much the borrower owes
1. SIMPLE INTEREST: means that interest on the loan is compounded annually.
a. A usury law with a fixed annual maximum rate is usually calculated based on
simple interest.
b. A LENDER THAT CHARGES THE MAXIMUM RATE AND COMPOUNDS
MORE FREQUENTLY VIOLATES THE USURY LAW.
2. MARKET CUSTOMS: simple interest was once a very common method of
compounding decades ago before mortgage loans were not amortized - the borrower was
obligated to make only one payment, when the loan matured. NOW with installment
loans, almost always interest is compounded at the end of the period when installment is
due.
3. SPREADING INTEREST OVER THE LOAN TERM: the borrower's interest payments
are not distributed equally over the loan term.
a. PREPAID INTEREST: when a borrower pays points up front to get a mortgage
loan
i. HOWEVER courts allow the spreading of interest if there is room under
the usury limit when the points are added to the base interest rate.
b. ADJUSTABLE INTEREST RATE: A loan that calls for an adjustable or variable
interest rate is open to challenge if it is subject to a usury law with a fixed
maximum rate.
i. PROBLEM: is that an upward adjustment may exceed the usury
maximum, when this happens, some courts allow the spreading of interest,
but others do not.
c. USURY SAVINGS CLAUSE: any lender who makes an adjustable-rate loan that
is subject to a fixed usury limit should include savings clause in the promissory
note: there are 2 types:
i. GENERIC CLAUSE: says in essence that the parties do not intend to
violate the usury laws and regardless of the stated interest rate the
borrower will not pay and the lender will not collect more than any
applicable maximum rate.
i. Sometimes not effective Swindell v. Federal Mortgage (1991):
held that a usury savings clause is against public policy because it
puts the burden of determining the maximum lawful rate on the
borrower, not on the lender, who is in a better position to know the
law.
ii. INTEREST RATE CAP: the other type of savings clause is specific: the
lender looks up the specific usury limit and adds a life on the loan
maximum interest rate equal to this number.
d. DRAFTING CONSIDERATIONS: must become aware of the usury laws in your
state.
4. POST-DEFAULT INTEREST: loan documents sometimes call for the borrower to pay a
higher interest rate after default
5. TIME-PRICE RULE: (or credit-sale rule) this means the seller can quote both a cash
price and a higher credit price without the difference between the two prices being
construed as interest for usury purposes.
6. REMEDIES FOR USURY VIOLATIONS: At a minimum, the lender forfeits the interest
that exceeds the usury limits. Some states levy harsher penalties or triple the amount of
excess interest:
a. STATUTORY DAMAGES: some states require the lender to pay the borrower
damages that are double or triple the amount of excess interest
b. NO INTEREST: Some states do not allow the lender to collect any interest at all
on a usurious loan. The lender may only collect the loan principal
c. NO FURTHER PAYMENTS: In a few states, once the borrower proves usury,
she is relieved of all further payments, not only interest, but also outstanding
principal. The mortgage securing payment is then cancelled.
7. LENDER DEFENSES: when a borrower establishes that his loan is usurious, the lender
may have an affirmative defense. HOWEVER, courts are usually stingy with affirmative
defenses because usury laws are designed to protect borrowers who transact with unequal
bargaining power or are otherwise preyed on.
8. FEDERAL PREEMPTION: THE DEPOSITORY INSTITUTIONS DEREGULATION
AND MONETARY CONTROL ACT: 12 USC Section 1735f-7, to preempt state usury
laws on almost all loans secured by the first liens on residential property.
a. PROPERTY COVERED: the law covers all single-family homes, apartments,
other multifamily housing, manufactured homes, and cooperative housing.
b. FEDERALLY RELATED MORTGAGED LOAN: under the Act, state law usury
preemption applies to every federally related mortgage loan.
i. Borrower's identity makes no difference under the Act for preemption
purposes. Does not matter whether the borrower is an individual, joint
tenants, or a business entity.
c. JUNIOR MORTGAGE LOANS: All junior mortgage loans, including purchase-

money second mortgages, and home-equity loans are subject to state regulation of
interest rates.
d. LIMITS ON POINTS: the law preempts not only state interest rate limits, but also
state laws that limit discount points, origination fess, and similar up-front charges.

LATE PAYMENT: when a mortgage borrower pays. Late, the lender is entitled to monetary
compensation.
 May also be able to foreclose under the terms of the mortgage terms.
 The amount is based on general principles of damages and the express terms of the debt
(the promissory note)

INTEREST ON UNPAID SUM:
 The contract remedy for any person's failure to pay when due is interest for the period of
tardiness. (Only one unless there is a promissory note)
 The promissory notes specify a rate of interest using language that indicates what rate
applies between maturity and actual payment.

1. HIGHER DEFAULT INTEREST RATE SPECIFIED: Some promissory notes require
that the maker pay a higher interest rate upon the event of default
a. May impose the higher rate on the entire loan balance, or if the entire loan is not
yet matured only on unpaid past0due installments.
2. NO DEFAULT INTEREST RATE SPECIFIED: when it does not specify the rate of
interest, the rate should be the market rate at the time of default.
a. Will make the lender whole and cause the borrower to pay the loss she has
caused.
b. May be higher or lower than specified in the contract.

LATE PAYMENT CHARGE: the late charge is not an interest rate, but a specified fixed
amount.
 Usually it is equal to a percentage of the unpaid installment.

1. STATE STATUTORY LIMITS: Many states regulate late charges for residential
mortgages.
2. FEDERAL REGULATIONS: p. 174 (extra material book)
a. CONVENTIONAL LOANS:
b. FHA AND VA MORTGAGE LOANS:
c. OFFICE OF THRIFT SUPERVISION RULE:
3. LIQUIDATED DAMAGES: A late payment charge agreed on by the parties is a type of
liquidated damages clause.
o Must be a reasonable amount and actual damages must be difficult or impossible
to compute.
a. AMOUNT OF CHARGE: In Garrett v. Coast: the late charge for an unpaid

installment was equal to 2 percent per annum for the period of delinquency
assessed against the entire unpaid principal balance of the loan obligation.
i. Unenforceable penalty. To be a reasonable estimate of lender's actual
damages, the charge must be calculated based on the amount of the unpaid
installment.
b. DIFFICULTY OF MEASURING ACTUAL DAMAGES: It is easy to calculate
actual damages therefore late payments are unlawful. Courts although have
upheld late charges they consider to be reasonable in amount.
i. TWO POINTS STRESSED:
i. Actual damages from late payments are said to be hard to measure
because the lender incurs administrative expenses in connection
with the default, such as sending default notices to the borrower.
ii. Courts believe lenders should be able to encourage prompt
payment by making borrowers pay appreciably more than their
normal interest rate.
4. STATE USURY LAWS:
5. EFFECT OF STATUTES AND REGULATIONS ON COMMON LAW LIQUIDATED
DAMAGES RULES AND USURY RULES:

PREPAYMENT: early payment, when the borrower pays part of all of the principal before the
due date specified in the promissory note.

TOTAL PREPAYMENT:

PARTIAL PREPAYMENT:

VOLUNTARY PREPAYMENT:

INVOLUNTARY PREPAYMENT:

BORROWER'S RIGHT TO REPAY:

1. PERFECT TENDER IN TIME:
a. EFFECT ON MORTGAGE:
2. IMPLIED RIGHT TO PREPAY:
3. EXPRESS PREPAYMENT PROVISIONS:
a. PREPAYMENT PENALTY:
b. ENFORCEABILITY:
i. PREPAYMENT RESULTING FROM LENDER'S DECISION TO
ACCELERATE DEBT:
LOPRESTI V. WELLS FARGO BANK, N.A. (2014)

RULE OF LAW:
HOLDING:
NONDEBT OBLIGATIONS
A. DEFINITION OF DEBT:
1. COLLATERAL PROMISES:
B. PRIMARY OBLIGATION IS NOT A DEBT:
1. WRITTEN DESCRIPTION OF OBLIGATION:
2. DEFINITELY ASCERTAINABLE AMOUNT:
A. SUPPLIER OF MATERIALS AND LABOR:
PAWTUCKET INSTITUTION FOR SAVINGS V. GAGNON (1984)

RULE OF LAW: A valid mortgage must secure the performance of some underlying obligation.
HOLDING: Usually, the obligation is fully described in a promissory note or similar instrument
rather than in the mortgage deed itself, which merely refers to or summarizes the note's description.
The summary need not describe the obligation precisely, but if the summary is at variance with the
note's description, the note is controlling. However, a mortgage can be valid even if there is no
promissory note, so long as the mortgage deed describes the obligation accurately enough so that it
can identified with reasonable certainty. Here, Gagnon's second mortgage is valid despite the fact that
the mortgage deed refers to a promissory note that is not mentioned in the construction contract. The
variance between the two documents is resolved in favor of the contract, which makes it sufficiently
clear that the mortgage is meant to secure R. & R.'s performance of its contractual obligations.
Therefore, Gagnon's second mortgage takes priority over McKendell's third mortgage, and because
Gagnon's $25,000 advance and documented construction expenses far exceed $10,153.95, he is
entitled to the entire balance of the foreclosure proceeds.
TRANSFERS OF MORTGAGED PROPERTY
SWANSON V. KRENIK (1994)

RULE OF LAW: In general, a real property grantee who assumes the grantor’s mortgage becomes
the principal obligor and the grantor becomes a surety.
HOLDING: If the property is later conveyed to third parties who also assume the mortgage, liability
for paying off the mortgage falls on the parties in the inverse order of assumption. This general rule is
subject to any exceptions to which the parties expressly agree. No such exception figures in the
present case. When Swanson bought the property and assumed the Kreniks' mortgage-secured loan,
she became the principal obligor and the Kreniks became sureties for the loan's performance. When
Rush and Luther bought the property and assumed the loan, they became the principal obligors,
Swanson became the surety, and the Kreniks became sub-sureties. The 1983 contract correctly stated
that all four individuals were responsible for repaying the bank. However, the contract also stated that
it did not change the then-existing surety relationship between the Kreniks and Swanson. Thus, the
Kreniks were not Swanson's co-sureties, but her sub-sureties. It might not be fair to Swanson to make
her pay the full amount that Rush and Luther should have paid, but it would be even less fair to
impose any part of that burden on the Kreniks, whose only role in the 1983 conveyance was to
facilitate its completion by acknowledging their underlying obligation to the bank.
RESTRICTIONS ON TRANSFER BY MORTGAGER
LEVINE V. FIRST NATIONAL BANK OF COMMERCE (2006)

RULE OF LAW: The federal government sets nationwide standards for enforcing mortgage
provisions.
HOLDING:
FRENCH V. BMO HARRIS BANK N.A. (2012)

RULE OF LAW:
HOLDING:
POSSESSION AND USE OF MORTGAGE PROPERTY

FAIT V. NEW FAZE DEVELOPMENT, INC. (2012)
RULES OF LAW: The grantee of a security interest in real property is liable to the grantee for
damages caused by the grantee's waste of the property.
HOLDING: D will be held liable for waste of the property. It does not matter if they did not
intend to decrease the property value. What matters is whether D undertook the demolition in
response to adverse market pressures if the jury can determine that he did then he will not be
held liable for waste of the property.
WOODVIEW CONDOMINIUM ASSOCIATIONS V. SHANAHAN (2007)

RULES OF LAW: A mortgagee in possession of property assumes both the rights and duties of
a prudent owner.
HOLDING: A mortgagee in possession of property assumes both the rights and duties of a
prudent owner. The mortgagee in possession may occupy the property, lease it to a third party,
sue third parties for damaging the property, and collect the property's rent and profits. However,
the mortgagor retains a right to redeem the property, and therefore the mortgagee in possession
must keep the property in good condition, pay property taxes and conform to local regulations,
and pay for services rendered in connection with the property. It does not matter whether the
mortgagee in possession directly contracted for those services. HERE as mortgagee in
possession, Shanahan had no direct contract relationship with the association, but he accepted the
management services that the association provided. Those services kept the property habitable
and made it possible for Shanahan to lease the property to others. It would be unjust to allow
Shanahan to reap the benefits of the association's services without bearing a fair share of their
costs. THEREFORE, the trial court is affirmed as it ruled that Shanahan is liable for
condominium fees charged during his tenure as mortgagee in possession. HOWEVER that tenure
did not begin until sometime after Pratt's default. So it is therefore remanded to determine when
Shanahan assumed control of the units as mortgagee in possession.
FORECLOSURE
ENGLISH V. BANKERS TRUST COMPANY OF CALIFORNIA N.A. (2005)
RULES OF LAW: The legal title owner is an indispensable party to a foreclosure action.
HOLDING: The legal title holder is an indispensable to a foreclosure action. If the P does not
join the title holder as a D, the foreclosure proceedings are no effect and any deficiency
judgment or foreclosure sale is void. HERE Lesa indisputably held title to the house, and
therefore the bank's failure to name Lesa as a party in the first foreclosure suit voided the initial
deficiency judgment and foreclosure sale, and necessitated a second foreclosure action to which
Lesa was a party. Because the first action was void and of no effect, res judicata did not preclude
naming both as co D's in the second action, though might be redundant to have done so.
However, the trial court erred in assessing a deficiency judgment against D as of the time of the
second action. D is liable for any deficiency only up to the time of the initial action. The trial
court's judgment is reversed, and the case is remanded to determine the correct deficiency
amount.
FORECLOSURE SALE PRICES

FIRST BANK V. FISCHER & FRITCHTEL, INC. (2012)
RULE OF LAW: If foreclosed property is sold but the sale price does not satisfy the outstanding
debt, the amount of the debtor's deficiency is measured by the difference between the amount of
outstanding debt and foreclosure sale price.
HOLDING: The amount of deficiency owed by a debtor after a foreclosure sale should be
measured by the difference between the amount of the unpaid debt and the amount obtained at
the sale. Some states use the foreclosure sale price to determine a debtor's deficiency only if the
debtor does not object to the sale price as insufficient. If the debtor successfully challenges the
sale price: It is the unpaid balance minus the fair market value = is the deficiency. Under the
Miss. Common law: unpaid balance minus the foreclosure price = debtor pays the difference.
The debtor cannot challenge the sale price in the deficiency action and must file an action to void
the foreclosure sale. A foreclosure sale is voided only if the sale price is so low it shocks the
conscience. Unfairly low sale prices give lender a windfall. D offered no reason to change Miss.
Aw: the arguments did not apply to itself as a sophisticated debtor, did not claim it could not
have bid at the foreclosure sale, and did not meet the standard for voiding the sale.
RESIDENTIAL FORECLOSURE ABUSES AND REFORMS:
ZERVAS V. WELLS FARGO BANK, N.A. (2012)

RULE OF LAW: The P in a judicial foreclosure proceeding is entitled to summary judgment
only if the D's answer cannot possibly present a genuine issue of fact.
HOLDING: The P is a judicial foreclosure proceeding is entitled to summary judgment only if

the D's answer cannot possibly present a genuine issue of fact. Before the court can order
foreclosure, the D's answer must put the case at issue, or the court must find the D to have
defaulted on his obligations. HERE the trial court entered summary judgment before the D's
answered the P's complaint, and without first entering a default judgment against the D's/ The D's
argued that the P never notified them or gave them an opportunity to cure their default, and they
challenged the P's standing to bring suit as the assignee of Fremont's mortgage note. Nothing in
the P's filings or in the trial record resolves the questions raised by the D's contentions, and thus
the bank has failed to establish that no answer the D's might file could present a genuine issue of
fact. Therefore, the trial court's entry of summary judgment is reversed and remanded for further
proceedings.
PASILLAS V. HSBC BANK USA (2011)

RULE OF LAW: A court can impose sanctions for a mortgagee's noncompliance with statutory
requirements for a negotiated restructuring of the mortgage.
HOLDING: A court can impose sanctions for a mortgagee's noncompliance with statutory
requirements for a negotiated restructuring of the mortgage. The court has discretion to
determine what form that sanctions should take. Among the factors the court should consider are
whether the mortgagee's violations were intentional, the prejudice the violations cause to other
parties, and the mortgage's willingness to mitigate any harm by continuing meaningful
negotiations. HERE the Program statute explicitly required the mortgagee to negotiate in good
faith, supply all required documents, and empower its representative to modify the loan in
question. D failed to produce the requisite documentation or send a duly empowered
representative to the negotiations. The mediator had ample cause to infer bad faith from D's
conduct, and therefore the trial court abused its discretion by refusing to impose sanctions and
ordering the foreclosure action to proceed. REVERSED and REMANDED to determine what
sanctions are appropriate.
EQUITABLE SUBROGATION
JOONDEPTH V. HICKS (2010)

RULE OF LAW: The doctrine of equitable subrogation is strictly construed and narrowly
applied.
HOLDING: The doctrine of equitable subrogation is strictly construed and narrowly applied.
The doctrine creates a limited exception to the general rule in race-notice states that, once a
senior lien on property is released, any junior lien moves up in priority. Equitable subrogation
allows that substitution of another person in place of former lienholder. In Co., equitable
subrogation is appropriate only if: (1) the applicant for subrogation paid a debt to protect his or
her own interest, (2) the applicant did not act as a volunteer, (3) the applicant was not primarily
liable for the debt paid, (4) the applicant paid off the entire encumbrance, and (5) subrogation
does not unjustly affect the rights of the junior lienholders. The court must apply the doctrine
within the overall context of equity and the specific facts of the case. If the applicant for
subrogation acted with actual knowledge of the junior lien, subrogation is appropriate only if
some mistake of act induced the applicant to pay off the senior encumbrance. Co. has never
recognized the related doctrine of derivative equitable subrogation. The doctrine allows a
successful applicant for subrogation to transfer his or her subrogated seniority to a third party
through a warranty deed. It makes no difference whether the junior lien remains in effect or the
junior lienholder agrees to remain in subordinate position, or whether the would-be derivative
subrogee could meet the requirements for equitable subrogation. HERE the D's had full
knowledge of Hick's lien and were not operating under any other misconception, and therefore
they could not qualify as equitable subrogees in their own right. MOREOVER, this court
declines to extend the doctrine of equitable subrogation to include derivative equitable
subrogation.
DEED IN LIEU OF FORECLOSURE
GMAAC MORTGAGE, LLC V. DYER (2012)

RULES OF LAW: A deed in lieu of foreclosure conveys title to the mortgagee, in return for a
release of the mortgagor from personal liability for the mortgage.
HOLDING: A deed in lieu of foreclosure conveys title to the mortgagee, in return for a release
of the mortgagor from personal liability for the mortgage. Once the deed has been executed and
handed to the mortgagee, the mortgagee is free from all obligations under the mortgage and
cannot be sued for a deficiency judgment. HUD statutes and regulations make this rule fully
applicable for FHA insured loans. HERE P's draft deed in lieu of foreclosure used HUD
approved language to express this protection. The 1999 case on which D relies is not applicable
here. That case was decided before HUD adopted the relevant regulations, and it involved HUD's
attempt to defray the deficiency left by the foreclosure sale that had already taken place. HERE
the effect of the deed would be to avoid a foreclosure sale altogether. The standard language
from P was sufficient to release P from all liability, and therefore reversed.

Real Estate Transactions Outline

Uploaded by

Copyright:

Available Formats

Real Estate Transactions Outline

Uploaded by

Document Information

Original Description:

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Real Estate Transactions Outline

Uploaded by

Copyright:

Available Formats

SPRING 2023: REAL ESTATE TRANSACTIONS OUTLINE

A. THE MARKET CONTEXT FOR REAL ESTATE TRANSACTIONS

LAWYER ADDS VALUE IN 3 IMPORTANT WAYS:

1. THE LAWYER STRATEGICALLY STRUCTURES AND DOCUMENTS THE

RISK MANAGEMENT: 3 elements

1. IDENTITY: potential risks

TYPES OF REAL ESTATE TRANSACTIONAL PRACTICE: two major segments

1. RESIDENTIAL: involves home sales (including single-family homes, condominiums, and

THE CONTRACT: the main blueprint

PROFITS FROM AN EXCHANGE IS TYPICALLY CONSIDERED IN TWO DIFFERENT WAYS:

1. ACCOUNTING PROFITS: based on covering the cost of a transaction.

FOUR TYPES OF COST:

1. TRANSACTION: costs associated with undertaking a particular exchange, Costs of

TRANSACTIONAL MISBEHAVIOR: occurs when a party to a transaction tries to change the

CATEGORIES OF MARKET RISK:

1. TEMPORAL RISK: variety of risks related to time: relate to past, present, or

LAWYERS PROFESSIONAL RESPONSIBILITIES:

 Legal fees are a subject covered by the ABA’s of Professional Conduct.

MARSH V. WALLACE (2009)

M & T MORTGAGE CORP. V. WHITE (2010)

TEXAS DEPARTMENT OF HOUSING AND COMMUNITY AFFAIRS V. INCLUSIVE

REINER V. EHRLICH (2013)

TURUDIC V. STEPHENS DBA SUSAN ESTATES RESIDENTS’ ASSOCIATION (2001)

CONDOMINIUMS AND HOMEOWNERS ASSOCIATIONS (HOA)

ANDERSON V. COUNCIL OF UNIT OWNERS OF GABLES ON TUCKERMAN

ROLE OF REAL ESTATE BROKERS

“FULL” LICENSE: able to act in his full capacity

Four types of listing agreements for selling property:

RANGEL V. DENNY (2012)

1. TRADITIONAL RULE: WHEN CUSTOMER IS FOUND: the broker earns his

BROKERS’ CLAIMS AGAINST BUYERS:

REQUIREMENT OF A WRITTEN LISTING AGREEMENT: at common law, an oral listing

HILLIS V. LAKE (1995)

BROKERS’ DUTIES TO NONCLIENTS:

HOLMES V. SUMMER (2010)

BROKERS AND LAWYERS:

SEVERAL TESTS ARE USED TO DETERMINE WHEN A BROKER’S ACTIVITIES

a. CONTRACTS VERSUS CONVEYANCES TEST: The broker may prepare the

PREPARING TO CONTRACT: THE TIMELINE FOR THE

4 KEY TIME PERIODS:

KEY ROLE IN A CONTRACT: is to convey an interest in real estate is that a conveyance of an

PART PERFORMANCE DOCTRINE: an oral contract to purchase real estate is enforceable

EVIDENTIARY THEORY: Sometimes explained the doctrine by reasoning that the

EQUITABLE ESTOPPEL DOCTRINE: part performance by the buyer under circumstances

3. CONTRADICTION: parol evidence is generally not permitted to contradict a written

4. TIMING: parol evidence offered to prove a term or an understanding reached after a

GMH ASSOCIATES INC. V. PRUDENTIAL REALTY GROUP (2000)

THE EXECUTORY CONTRACT

APPROACHES TO ALLOCATE EXECUTORY PERIOD RISK:

STERLING V. TAYLOR (2007)

MORAN V. ERK (2008)

OTHER RISK OF LOSS RULES:

MAJOR CONTRACT CONDITIONS:

BRUSH GROCERY KART, INC. V. SURE FINE MARKET, INC. (2002)

LOUISIANA REAL ESTATE COMMISSION V. BUTLER (2005)

CONDITION OF THE PROPERTY

PERFECT V. MCANDREW (2003)

1. INTENTIONAL OR NEGLIGENT MISREPRESENTATION: if the seller or her agent

4. ATTORNEY LIABILITY: an attorney who provides false information or misleading