Property Themis Questions

The owner of a restaurant conveyed the restaurant to an up-and-coming chef.  The owner executed a valid, written deed to the chef, who did not record the deed.  Although the chef was talented, his restaurant failed within a few months.  A culinary school seeking a location for cooking classes purchased the restaurant from the chef.  The chef executed a valid, written deed to the culinary school, and the culinary school promptly recorded the deed.

After the sale but before the culinary school could occupy the restaurant space, the original owner noticed that the restaurant was vacant.  The owner then sold the space to a fast-food chain, and the fast-food chain promptly recorded the deed.  The owner did not tell the fast-food chain of his earlier conveyance of the restaurant to the chef, and the fast-food chain otherwise lacked actual knowledge of this conveyance.  When the fast-food chain attempted to take possession of the restaurant, it discovered that the culinary school had moved into the restaurant.

The fast-food chain has filed an appropriate action to quiet title against the culinary school.  The restaurant's jurisdiction has a race-notice recording statute and maintains a grantor-grantee indexing system for its real property records.

Who will likely prevail?

Under a race-notice recording statute (as seen here), a subsequent property interest has priority over an earlier interest if the subsequent interest holder was a bona fide purchaser (BFP; i.e., someone who paid value and lacked notice of the prior interest) and the first to record.  There are three types of notice:

actual – when the purchaser has personal knowledge of a prior interest

inquiry – when a reasonable investigation would have disclosed the existence of prior claims (e.g., someone other than the seller is obviously using the property)

constructive (i.e., record) – when a prior interest was properly recorded in the land records and appears in the property's chain of title

Here, the fast-food chain purchased the restaurant without actual or inquiry notice of the prior interest because the restaurant was unoccupied.  Therefore, the fast-food chain is a BFP if it also lacked constructive notice of the culinary school's earlier interest in the restaurant.

Most jurisdictions, including the jurisdiction here, use the grantor-grantee indexing system for real property records.  Recorded documents are located using two indexes:

A purchaser first searches the seller's name in the grantee index to see if and when the seller acquired the property.

The purchaser then searches the seller's name in the grantor index to see if and when the seller conveyed the property to anyone else.

A recorded deed that falls outside this chain of title is a "wild deed" that is considered not properly recorded and consequently fails to give constructive notice to subsequent purchasers.

Here, although the culinary school's deed from the chef was recorded before the fast-food chain's deed from the owner, the chef's deed from the owner was never recorded.  Consequently, the culinary school's deed from the chef is a "wild deed" (see image above) that is considered not properly recorded and thus did not give the fast-food chain constructive notice of the earlier conveyance.  Therefore, the fast-food chain will likely prevail (Choices A, C, and D).

A man decided to sell his house after receiving a new job in a neighboring state.  Before putting the house on the market, the man told his friend that he was selling the house and that she could buy it at a lower price than he would seek from other potential buyers.  Excited at the prospect of home ownership and the lower price, the friend immediately agreed to purchase and entered into a contract with the man for the sale of the house without inquiring as to any issues with the house.  The man did not mention anything to the friend as he was unaware of any issues.

Pursuant to the contract, the man delivered a general warranty deed to the friend at closing.  The friend then moved into the house and decided that she would hire a contractor to perform some slight renovations to the upstairs guest bathroom.  As soon as the contractor broke through the wall, he discovered black mold throughout the interior of the bathroom and along the pipes.  The friend brought suit against the man for damages.

Pursuant to a statute, a seller has a duty of disclosure in all home-sale transactions in the jurisdiction.

For whom is the court likely to rule?

Answer: The man, because he was not aware of the black mold.

In a majority of jurisdictions (including this one), the seller of a residence has a duty to disclose all material physical defects that are known to the seller and cannot be reasonably discovered by the buyer.  A defect is material if it:

• substantially affects the value of the residence

• impacts the health or safety of a resident or

• affects the desirability of the residence to the buyer. 

If the seller fails to make such disclosures, then the buyer may rescind the sale or seek damages.

Here, the friend's contractor discovered black mold throughout the interior of the upstairs guest bathroom.  This physical defect was material because the presence of black mold substantially affects the value of the residence and impacts the friend's health (Choice A).  But since the man was unaware of any issues with the house, he did not breach the duty to disclose such defects.  Therefore, the court will likely rule for the man.

A man bought a warehouse as part of his new manufacturing business.  The warehouse required several upgrades in order to serve as an office and storage area.  To finance these upgrades, the man took out a loan from a bank secured by a mortgage on the warehouse.  The mortgage provided that the bank could declare the entire loan due and payable if the warehouse was ever sold, transferred, or encumbered without the bank's permission.  The bank promptly recorded the mortgage, and the man made timely payments for six years.

The man later decided to expand his business and required a loan for new equipment.  He took out a loan from a second bank secured by a mortgage on the warehouse.  The second bank recorded its mortgage.  Upon learning of the mortgage to the second bank, the first bank demanded the balance of the man's mortgage obligation, plus interest.

Can the first bank foreclose on the warehouse if the man refuses to pay the balance?

Answer: Yes, because the mortgage contains a valid due-on-encumbrance clause.

A due-on-encumbrance clause gives the lender (i.e., mortgagee) the right to accelerate a mortgage obligation when the mortgagor obtains a second mortgage or otherwise encumbers the mortgaged property without the lender's consent.  Acceleration allows the lender to demand immediate payment of the full amount of the outstanding loan obligation, including interest.  If the mortgagor cannot pay the balance, then the mortgagor is in default and the lender can foreclose on the property.

Here, the first bank's mortgage contained a valid due-on-encumbrance clause.  The man triggered this clause by obtaining a second mortgage without the first bank's permission.  As a result, the first bank had the right to demand the remaining balance of the mortgage obligation—regardless of whether the man's mortgage payments were current (Choice A).  If the man fails to immediately pay the balance in full, then he is in default and the first bank can foreclose on the warehouse.

A landowner died and left a piece of land to his three sons as joint tenants with the right of survivorship.  The youngest son sold his interest in the property to the oldest son.  The oldest son then died and left all of his real property interests to his daughter.  The youngest son later died.  Following the youngest son's death, the middle son gave his interest in the property to a nephew.

The applicable jurisdiction continues to follow the common law with regard to joint tenancy.

Who owns the property?

A joint tenancy exists when two or more persons own property with the right of survivorship (as seen with the three sons).  The right of survivorship means that a joint tenant's interest disappears upon death and the remaining joint tenants' interests automatically expand proportionately to absorb it.  In jurisdictions that follow the common law with regard to joint tenancies (as seen here),* the creation and continuation of a joint tenancy depends on the coexistence of four unities (PITT):

• Possession – tenants share an equal right to possess or use the property

• Interest – tenants each have an equal interest in the property

• Time – property interests simultaneously vest in all tenants

• Title – property interests received in the same instrument of conveyance

If any of these four unities is destroyed, then the joint tenancy is severed and converts into a tenancy in common.

Here, the youngest son's lifetime conveyance destroyed unity of title and severed the joint tenancy with respect to his interest only.  The conveyance did not affect the joint-tenancy interests held by the other sons.  Therefore, the oldest and middle sons owned 2/3 of the property as joint tenants.  And since the youngest son conveyed his interest to the oldest son, the oldest son also held a 1/3 interest the property as a tenant in common.

A joint tenancy is not devisable because it passes automatically to the remaining joint tenants, but a tenancy in common is devisable.  So when the oldest son died, the daughter received his 1/3 tenancy-in-common interest and the middle son received his 1/3 joint-tenancy interest (thereby owning a 2/3 interest).  The middle son later gave his property to the nephew, so the daughter owns a 1/3 interest and the nephew owns a 2/3 interest in the property as tenants in common (Choices A, C & D).

A business owner borrowed money from a financial institution in order to expand his business.  The business owner executed a nonnegotiable promissory note to evidence his personal liability to repay the financial institution.  In addition, the business owner granted the financial institution a mortgage on his condominium that was evidenced by a written document as security for the loan.  By a separate written document, the financial institution assigned its interest in the note to a third party.  This document made no mention of the mortgage.

What is the effect of this transaction on ownership of the mortgage?

Answer:The third party owns the mortgage, because the mortgage follows the note

To finance the purchase of real property, a borrower typically executes two documents that serve as evidence of the debt:

• Promissory note – a formal "IOU" that sets forth the terms of the loan.  It is the primary evidence of the debt and is not recorded in the deed records.

• Mortgage – a lien that secures the loan by attaching the debt to a real property interest and providing a means of enforcement (e.g., foreclosure).  It is recorded in the deed records to provide notice of an outstanding debt attached to the real property.

A promissory note can be assigned to another (an assignee) independent of the mortgage.  The mortgage automatically transfers with the note once the note has been properly assigned (unless the parties agree otherwise) (Choice C).  A negotiable promissory note can be assigned by simply endorsing and delivering the note to the assignee.  However, a nonnegotiable promissory note requires a separate assignment document to transfer ownership.

Here, the financial institution properly assigned its nonnegotiable promissory note by executing a separate assignment document of transfer.  The mortgage will be deemed to have automatically transferred to the third party because the mortgage follows the note.  Therefore, the third party now owns the mortgage.

A couple entered into a contract to purchase a house from the owner.  The couple did not record the contract of sale.  Prior to the execution of the contract, the owner had incurred a debt to a creditor.  Subsequent to the execution of the contract, the creditor obtained a judgment against the owner.  Unaware of the contract of sale, the creditor recorded her judgment in the land records for the county in which the house was located, thereby giving the creditor a lien against property owned by the owner in the county.  After the owner deeded the house to the couple and they recorded the deed, the creditor sought to execute the lien and levy on the house.  The couple filed an action to enjoin the creditor from executing the lien.

The applicable recording act reads: "No conveyance or mortgage of real property shall be good against subsequent purchasers for value and without notice unless the same be recorded according to law."

Who will likely prevail?

Answer: The couple, because the doctrine of equitable conversion protected their interest in the house from the judgment creditor.

Under the doctrine of equitable conversion, a buyer receives equitable title to real property upon entering a land-sale contract.  In contrast, the seller retains legal title and acquires the equitable right to receive the purchase price upon closing.  As a result, a judgment obtained against the seller after the execution of the land-sale contract is not enforceable against the real property—even if the claim arose before the contract was executed.

Here, the owner incurred a debt to a creditor prior to entering into a land-sale contract with the couple for the owner's house.  But since the creditor obtained a judgment against the owner after the land-sale contract was executed, that judgment cannot be enforced against the house.  That is because the couple's equitable interest in the house is protected under the doctrine of equitable conversion.  Therefore, the couple will likely prevail.

An individual received a contingent remainder interest in land by will.  Subsequently, the individual sought to transfer this interest to his niece via a document.  The unsigned document identified the individual as the grantor, named the niece as the grantee of the interest, contained an adequate description of the property interest to be conveyed, and expressed an intent to transfer the interest.

Does this document operate to transfer the contingent remainder interest to the niece?

Answer: No, because the individual did not sign the document.

To be a valid deed—i.e., a legal instrument used to convey an interest in real property from the owner (grantor) to another (grantee)—a document must:

• be in writing and signed by the grantor 

• identify the grantor and the grantee

• describe the property being transferred and

• contain words of transfer (eg, "deed over," "transfer," "give").

A purse maker sought to market her line of "smart" purses that were compatible with a new handheld device.  As part of her plans, the purse maker sought to purchase a brick-and-mortar store from which to sell her purses.  The purse maker found a suitable store and entered into a contract with the owner of the store.  The contract was in writing, signed by both parties, and stated the essential terms, including a closing date in 30 days.  Due to the purse maker's plan to sell her purses in advance of the release of the new handheld device, the contract stated that the closing date could not be delayed.

One week before the closing date, the purse maker discovered that the store was in violation of a zoning ordinance that mandated an updated version of the current fire sprinkler system.  The owner promised that he would promptly update the fire sprinkler system and that, although it would not be finished by the closing date, it would be done in time for the grand opening of the store.  In addition, the owner promised to provide a warranty deed upon closing to shield the purse maker from any potential liability stemming from the outdated fire sprinkler system.  On the day of closing, the purse maker refused to close the land-sale deal.

In an action by the owner for specific performance against the purse maker, who will likely prevail?

Answer: The purse maker, because the owner did not provide marketable title to her on the closing date as stated in the land-sale contract

Absent contrary language, real estate contracts contain an implied covenant of marketable title, which obligates the seller to deliver marketable title (i.e., title free from defects) on the date of closing.  However, strict adherence to the closing date is not required in equity unless time is of the essence.  Time is of the essence when:

• the contract specifically states that "time is of the essence" 

• circumstances indicate that it was the parties' intention to strictly adhere to the closing date or

• one party gives the other party notice that time is of the essence within a reasonable time prior to closing. 

If time is of the essence and the seller cannot deliver marketable title on the date of closing, then the seller is in breach and the buyer can rescind the contract.*  This is true even if the seller can correct the issue within a reasonable time after closing.

Here, the parties' contract stated that the closing date could not be delayed, so time was of the essence.  This obligated the owner to deliver marketable title to the purse maker on the closing date specified in their contract.  The owner was unable to do so because the fire sprinkler system violated a zoning ordinance, so the purse maker was not required to close the land-sale deal—even if the sprinkler system would be updated before the grand opening (Choice A).  Therefore, the purse maker will likely prevail.

A farmer informed his best friend, who had fallen on hard times, that he wanted to give the friend a small farm that the farmer had recently acquired.  The friend told the farmer that he would be honored to own it.  The farmer had his attorney prepare a proper deed transferring the farm to the friend.  The farmer signed the deed, and his signature was notarized.

On his way to deliver the deed to the friend, the farmer stopped by his home for lunch.  The farmer placed the deed on a small table in the entryway, along with his car keys and wallet.  The farmer had lunch and then took a nap.  While napping, the farmer died.  The farmer's adult son, from whom the farmer had been estranged for several years, claims that the deed is not valid.  The friend contends that the farmer's deed was effective to convey the farm to him.

The farm is located in a race-notice jurisdiction.

Did the farmer likely transfer his farm to the friend?

Answer: Yes, because the farmer intended to deliver the deed to the friend.

A deed is a legal instrument that transfers ownership of real property from the owner (grantor) to another (grantee).  The transfer is effective once the deed is:

• delivered by the grantor – demonstrated by the grantor's intent to make a present transfer of the property and

• accepted by the grantee – presumed when the transfer is beneficial to the grantee.

The grantor typically manifests the intent to presently transfer the property by physically handing over or mailing the deed to the grantee or the grantee's agent.  However, the intent to transfer can also be implied from the grantor's words or other conduct.

Here, the farmer died before he was able to physically deliver the deed to the friend.  However, the farmer's intent to presently transfer the farm to the friend can be implied from his conduct.  The farmer signed and notarized the deed and then started to deliver it to the friend before stopping for lunch.  Therefore, the deed was validly delivered (Choice A).  The friend indicated his acceptance of this gift, and in any event, his acceptance is presumed because the farm is beneficial to him.  Therefore, the farmer likely transferred his farm to the friend.

A landowner gave her property's mineral rights to her son.  After the transfer but before the son began to mine the minerals, the landowner sold the property to a corporation that built a commercial warehouse on the property.  As a consequence of the son's subsequent mining activities, which were conducted with reasonable care and in compliance with all laws and regulations, the land subsided and the warehouse was damaged.

Can the corporation likely recover from the son for the damage to its warehouse?

Answer: No, because the son exercised reasonable care in conducting the mining activities.

The right to subjacent support—i.e., support from beneath the surface of land—arises when the owner of land grants the right to mine minerals to a third party.  The owner of the mineral rights may be:

• strictly liable to the surface owner for any failure to support the land and any buildings that existed on the land at the time the mineral rights were conveyed (provided that the damage would have occurred in the land's natural state) or

• liable for negligence for any damage to improvements built after the mineral rights were conveyed.

Here, the landowner conveyed her mineral rights to her son before she sold the property to the corporation and the corporation built the commercial warehouse.  As a result, the son is only liable for the damage caused to the warehouse if he negligently conducted mining activities.  Since the son's mining activities were conducted with reasonable care (i.e., not negligently), the corporation likely cannot recover from the son for the damage to its warehouse.

A buyer entered into a written contract to purchase real property from its owner.  The buyer asked that the owner convey the property to the buyer and her brother as tenants in common.  The owner noted that the buyer's brother would need to attend the closing to sign the necessary paperwork.  Because the brother lived in another state and could not attend the closing, the buyer brought her roommate to the closing instead.  The roommate pretended to be the buyer's brother and signed all the necessary paperwork with the brother's name.  The buyer paid the full purchase price, and the deed granting the buyer and her brother half interests as cotenants was recorded on the same day.

Unbeknownst to any of the parties, the evening before the closing, the buyer's brother had died in a car accident.  The brother's valid probated will devised all of his property to his wife.  The brother's wife has brought an action against the buyer, who has taken sole possession of the property, and the original owner to quiet legal title to an undivided one-half interest in the property.

Who should the court find has legal title to the real property, and in what proportions?

A deed is a legal instrument that transfers an ownership interest in real property.  To be valid, a deed must:

• be in writing and signed by the grantor (but not the grantee)*

• unambiguously identify the grantor and the grantee

• unambiguously describe the land and

• include words of transfer. 

A deed that names a nonexistent grantee is void as to that nonexistent grantee.  So if a nonexistent grantee was conveyed an interest in a tenancy in common, then the grantor would retain the nonexistent cotenant's interest and have a tenancy in common with the other cotenant(s) named in the deed.

Here, the owner (grantor) signed a deed conveying the buyer and her brother each a one-half interest in the property as tenants in common.  But since the brother was nonexistent at the time of the conveyance (he died the evening before), the owner retained the brother's one-half interest.  However, the deed is still valid as to the buyer, so the court should find that legal title is one-half in the buyer and one-half in the owner (Choices A & B)

The owner of a residence took a two-week trip out-of-state.  He left a document that was in the form of a valid deed, which he had executed, on the table by the front door of his residence.  The document purported to convey the vacant lot next to the residence to a cousin, who was watching the residence while the owner was away.  The cousin found the instrument the day after the owner left, together with a note addressed to the cousin that was attached to the instrument.  The note read, "This lot now belongs to you, but please do not record this deed until I return from my trip so I can explain to my son why I made this gift to you."

The owner died while returning home from his trip.  The cousin, immediately upon learning of the owner's death, recorded the deed.  The owner did not leave a will.  All of his property passed to his only son under the applicable intestacy laws.

The son has filed an action to quiet title to the lot against the cousin.

The applicable recording act states: "No conveyance or mortgage of real property shall be good against subsequent purchasers for value and without notice unless the same be recorded according to law."

In whose favor is the court likely to rule?

Answer: The cousin, because the owner had transferred ownership of the lot to the cousin before he died.

A deed is a document that transfers an interest in real property from the owner (grantor) to another (grantee).  To effectively transfer an interest in real property, the deed must be:

• delivered by the grantor – evidenced by the grantor's intent to presently convey ownership to the grantee and

• accepted by the grantee – presumed when the conveyance is beneficial to the grantee.

The grantor's intent to transfer is presumed in certain instances (see image above)—but not when the grantor keeps the deed.  In that situation, the outward and visible acts of the grantor must evidence an intent to make a present transfer of the property interest.

Here, the deed was not presumptively delivered because the owner left it on a table in his residence.  However, the owner also left a note with the deed that stated, "This lot now belongs to [the cousin]."  This demonstrated a clear intent to immediately transfer the lot to the cousin, so the deed was delivered (Choice D).  And since acceptance is presumed because the conveyance is beneficial to the cousin, the lot was effectively transferred to the cousin before the owner died.  Therefore, the court will likely rule in the cousin's favor.

A husband, who was having an extramarital affair, contemplated leaving his wife for his mistress.  The husband and the wife owned a beach house as joint tenants with the right of survivorship.  The husband's mistress loved the beach house and did not want the wife to have any rights to it.  As a result, the husband and the mistress came up with a plan to sell the beach house in an effort to eliminate the wife's interest in the house.  Without informing the wife, the husband sold his interest in the beach house to the mistress.  One week later, the mistress sold the house back to the husband.

One month later, the husband unexpectedly died of a heart attack.  In his will, he devised the entirety of his estate to his cousin.  The wife and the mistress have challenged the disposition in the will.

The jurisdiction does not recognize tenancies by the entirety.

What interest do the parties involved have in the beach house?

A joint tenancy is a type of concurrent estate in which each cotenant has an undivided and equal interest in the property with the right of survivorship.  The right of survivorship means that a joint tenant's interest disappears upon that tenant's death and the remaining joint tenants' interests automatically expand to absorb it.  As a result, joint tenants cannot devise their interests upon death.

However, joint tenants are free to convey their interest to another during life without the other tenants' consent.  The transfer will sever the joint tenancy and convert it into a tenancy in common, under which each cotenant has an equal right to possess the property without the right of survivorship.  As a result, each tenant in common is free to unilaterally transfer or devise his/her interest.

Here, the husband severed the joint tenancy between himself and the wife*—and converted it into a tenancy in common—when he transferred his interest in the beach house to the mistress.  So when the mistress transferred the interest back to the husband, he and the wife held the beach house as tenants in common.  And since the husband devised his one-half interest to the cousin, the cousin and the wife each own a one-half interest in the beach house as tenants in common (Choices A, C & D).

The owner of an undeveloped lot needed money.  The fair market value of the lot was $150,000.  The owner approached an investor about borrowing $75,000.  The investor agreed on the condition that the owner convey the lot to the investor outright by warranty deed.  In exchange, the investor would lend the owner the $75,000, allow the owner to remain in possession of the lot, and orally agree to reconvey the lot to the owner once the loan was paid in full.  The owner reluctantly agreed and conveyed the lot to the investor as agreed.  The investor then paid the owner $75,000 and promptly and properly recorded the deed.  A year later, the owner defaulted on the loan with a remaining balance of $50,000.

Which of the following best states the parties' rights in the lot?

Answer:The investor may foreclose on the lot because the transaction is treated as an equitable mortgage.

An equitable mortgage can be established when a debtor gives an absolute deed—i.e., a deed that is free of encumbrances and transfers unrestricted title to property—to a lender with the intent to secure a loan.  The debtor-grantor must prove by clear and convincing evidence that the deed was intended as security for a loan—not as an outright transfer.  The deed recipient, like any other lender, may then bring a foreclosure action if the debtor defaults.

Here, the owner conveyed his lot to the investor outright by warranty deed with the intent to secure a $75,000 loan from the investor.  The investor had agreed to reconvey the lot to the owner once the loan was paid in full.  Therefore, the deed likely constitutes an equitable mortgage.  And since the owner defaulted on the loan, the investor may foreclose on the lot.

A landowner owned a three-acre plot of land in a remote location.  His plot abutted a two-acre wooded property that contained an artesian spring owned by an out-of-state investor who had never developed or visited the land.  Hoping to make a substantial profit by making his property sound more appealing, the landowner altered the existing deed for his three-acre plot so that the deed indicated that his parcel was five acres in size and included the wooded property with the artesian spring.

A buyer offered to pay $50,000 for the five-acre parcel and expressed that $10,000 per acre was quite reasonable.  The landowner accepted and signed the altered warranty deed, conveying the five acres to the buyer.  The landowner mailed the deed to the buyer, and the buyer subsequently took possession of the land.  However, the buyer did not record the deed.  A year later, the buyer learned that the out-of-state investor held title to the two acres of property that contained the artesian spring.

Is the buyer entitled to ownership of the five-acre parcel?

Answer: No, because the landowner altered the deed and that deed is therefore void.

A deed is a legal instrument that transfers an interest in real property.  For a transfer by deed to be effective, the deed must contain all essential components, be delivered by the grantor, and be accepted by the grantee.  However, a deed is void if:

• the grantor's signature on the deed is forged

• the deed itself is forged—i.e., falsely made or materially altered with the intent to defraud or

• the grantor is deceived about the nature of the executed document (e.g., when the grantor believes that he/she is signing something other than a deed).

A void deed is invalid at its inception and conveys no title to the grantee.  As a result, a void deed is unenforceable even if it is relied upon by a bona fide purchaser—i.e., one who purchases a property interest without notice of another's prior interest in the property.

Here, the landowner materially altered the deed to include the two-acre parcel owned by the investor.  This was done with the intent to defraud because the landowner wanted to make a substantial profit by making his property sound more appealing.  As a result, this forgery rendered the deed void and unenforceable—even though the buyer is a bona fide purchaser who relied upon the deed (Choice C).  Therefore, the buyer is not entitled to ownership of the five-acre parcel.

On January 1, a contractor entered into an agreement with a bank to obtain financing for a construction project.  The bank agreed to loan the contractor $6 million, with $1 million to be paid immediately and the remainder to be paid in $1 million increments at two-month intervals.  The contractor granted the bank a mortgage on land owned by the contractor in a different part of the state to serve as security for repayment of the amount loaned by the bank.  The bank promptly recorded this mortgage.

In May, after the bank had loaned the contractor a total of $3 million, the contractor obtained a $500,000 loan from a private equity firm.  This loan was secured by a mortgage on the land owned by the contractor that was also subject to the bank's mortgage.  The private equity firm promptly recorded its mortgage.  In August, after the contractor had received an additional $1 million from the bank, the bank acquired actual knowledge of the private equity firm's mortgage on the land.

In October, after the bank had loaned the contractor another $1 million, the contractor defaulted on both loans.  As a consequence of the default, the bank, pursuant to the terms of the loan, did not advance the final $1 million installment.

At a sale of the land initiated by the bank's foreclosure of its mortgage, to what portion of the sale proceeds does the bank have priority over the private equity firm?

Answer: Up to $5 million, the amount the bank actually loaned the contractor.

A future-advances mortgage (i.e., "line of credit") is a mortgage given by a debtor (mortgagor) in exchange for the right to receive money from the lender (mortgagee) in the future.  Under the traditional rule,* priority with regard to proceeds from a foreclosure sale depends on whether the advances are:

• optional – in which case, the future-advances mortgage has priority with respect to amounts loaned before the future-advances mortgagee received notice of a subsequent mortgage or

• obligatory – in which case, the future-advances mortgage has priority with respect to amounts loaned before and after the future-advances mortgagee received notice of a subsequent mortgage.

Here, the bank agreed to loan the contractor $6 million.  Only $1 million was paid immediately, and the bank was obligated to pay the remainder in $1 million increments.  As a result, the bank has priority with respect to the amounts loaned to the contractor before and after receiving notice (actual or constructive) of the private equity firm's subsequent mortgage (Choices C & D).  Since the bank has loaned the contractor $5 million, the bank has priority for up to $5 million of the proceeds from the foreclosure sale.

A limited partnership purchased a shopping mall.  The purchase was enabled by a loan obtained by the limited partnership from a bank.  As security for the loan, the bank took a mortgage on the shopping mall.  The mortgage contained a clause that provided: "In the event that the shopping mall is transferred to another owner, the full amount of the outstanding obligation is, at the election of the bank, due and payable unless prior permission of the bank was obtained."

Two years later, the partnership, having timely made its required loan payments, sold the shopping mall to a corporation.  The corporation did not assume liability for the partnership's loan obligation.  The bank, upon learning of the transfer, demanded that the partnership pay the full amount of the outstanding loan obligation.  When the partnership refused, the bank brought a foreclosure action to collect the full amount of the outstanding loan obligation.

Is the bank likely to succeed?

Answer: Yes, because the "due on sale" clause is enforceable.

Mortgage documents are used to convey a lender (mortgagee) an interest in real property to secure repayment of a debt.  These documents may contain a "due on sale" clause, which allows the lender to demand full payment of the remaining mortgage debt if the debtor (mortgagor) transfers the mortgaged property without the lender's consent.  If the debtor does not pay, then the lender can initiate foreclosure proceedings to recover any remaining debt.

Here, the limited partnership gave the bank a mortgage on the shopping mall as security for a loan.  The mortgage contained a "due on sale" clause, which was triggered when the partnership sold the shopping mall to a corporation without the bank's consent.  This allowed the bank to demand full payment of the remaining loan balance, which the partnership refused to pay.  As a result, the bank will likely succeed in its foreclosure action.

(Choice A)  Upon default on a loan obligation, a lender may elect to proceed against the debtor personally or foreclose on the mortgage.  Therefore, the bank need not proceed against the partnership personally before foreclosing.

To pay for a home in the mountains, a retiree executed a mortgage with the seller of the home.  Due to a clerical error, the seller's mortgage was never recorded.  Years later, the retiree executed a second mortgage on the home with a bank to make improvements, and that mortgage was immediately recorded.  As part of the mortgage-approval process, the retiree had to disclose his first mortgage on the property.  Shortly thereafter, the seller discovered that his mortgage had not been recorded and recorded it.

A year later, the retiree executed a third mortgage on the home after he realized the full effect his retirement was having on his finances.  The retiree then went nearly a year without making mortgage payments, so a foreclosure action was initiated.

In a race-notice jurisdiction, which of the following is a correct statement about the first mortgage?

Answer: It has priority over the second and third mortgages on the home. 

The "first in time, first in right" rule generally applies when determining the priority of interests in real property—i.e., whether an interest is junior or senior to another interest.  However, this rule is subject to various exceptions, including purchase-money mortgages (PMMs) and recording acts.

A PMM is a mortgage granted to the seller of real property if the mortgage is given as part of the same transaction in which title is acquired (as seen with the seller's mortgage here).*  A PMM has priority over liens that arose prior to the PMM regardless of whether the PMM was recorded.  But a PMM does not necessarily have priority over subsequent liens.  Instead, the recording act (or, if there is no recording act, the "first in time" rule) will control.

In this race-notice jurisdiction, a subsequent purchaser has priority over a prior conflicting interest if the purchaser (1) took the interest without notice of the prior interest and (2) recorded first.  The bank's mortgage (second) was recorded first.  But since the seller's mortgage (first) was disclosed during the bank's mortgage-approval process, the bank had actual notice of that mortgage.  Therefore, the first mortgage has priority over the second mortgage (Choices B & C).

The first mortgage also has priority over the third mortgage because the seller recorded the first mortgage before the third mortgage was executed.  This means that the third mortgagee took with record notice of the first mortgage and did not record first.  Therefore, the correct statement about the first mortgage is that it has priority over the second and third mortgages.

A tenant leased a set of 10 commercial storefronts spanning two city blocks.  The lease was for a term of five years and complied with all relevant statutes.  The lease was silent as to the effect of condemnation by the city.

Three years into the lease, the city properly took one of the city blocks for public use pursuant to eminent domain and compensated the landlord accordingly.  The city demolished five storefronts and began developing a public park.  Upon this condemnation, the tenant stopped paying rent for all 10 storefronts.  In an appropriate action, the landlord sued the tenant for the unpaid rent on all 10 storefronts.

Is the landlord likely to succeed?

Answer: Yes, but only for half the amount, because the tenant is entitled to compensation.

Condemnation is the taking of land for public use or because it is unfit for use.  The right of a tenant upon condemnation depends upon whether the condemnation is:

• partial – where only a portion of the leased property is taken, so the tenant must continue to pay rent but is entitled to compensation for the portion that was taken or

• complete – where the entire leased property is taken, so the tenant is discharged from his/her rent obligation and is entitled to compensation for the taking.

Here, the city took 5 of the 10 commercial storefronts leased by the tenant, so this was a partial condemnation.  As a result, the lease was not terminated, and the tenant was required to continue paying rent (Choice B).  However, the landlord cannot recover the full amount of unpaid rent because the tenant is entitled to compensation for the portion of the leased property that was taken (Choice D).  Therefore, the landlord is likely to succeed—but only for half the amount.

The owner of a building died.  By the terms of his will, the owner devised the building to a religious organization "for so long as it is used for religious purposes."  The owner then devised all of his remaining real property interests to his companion.  By law, the owner's son was his only heir.

Ten years later, the religious organization ceased to use the building for religious purposes.  The religious organization executed a quitclaim deed of the building to a developer in exchange for valuable consideration.  The developer plans to convert the building to commercial uses.  The developer has brought an action to quiet title to the building against the companion, the son, and the religious organization.

For whom should the court rule?

Answer: The companion.

A defeasible fee is an ownership interest in real property that has the potential to last forever but can be cut short if a specified event or condition occurs.  One type of defeasible fee is a fee simple determinable (FSD), which is created with durational language (e.g., "so long as," "during," "until").  The future interest that follows an FSD is either:

• a possibility of reverter – in which case, the estate automatically reverts back to the grantor when the specified event occurs (presumed if not expressly stated) or

• an executory interest – in which case, the estate automatically passes to a third party when the stated event occurs.

Here, the owner's will conveyed an FSD in the building to the religious organization (to the religious organization "for so long as it is used for religious purposes"), and he did not pass the accompanying future interest to a third party.  As a result, the owner retained a possibility of reverter, which was freely alienable by the owner during life and upon death.  The owner devised his possibility of reverter, along with his remaining real property interests, to the companion by will—leaving no real property interest for the son to inherit.

Ten years later, the religious organization executed a quitclaim deed of the building to the developer.  Although an FSD is freely alienable, devisable, and descendible, it is always subject to the stated condition.  As a result, ownership automatically reverted to the companion once the building was no longer used for religious purposes.  Accordingly, the court should rule for the companion (Choices B, C & D).

On April 1, a buyer and a seller executed a valid land-sales contract for a warehouse, with closing set for May 1.  The buyer paid a deposit equal to 20% of the sales price at the signing.  On April 15, the buyer discovered that the seller did not own the warehouse.  The seller assured the buyer that it had a contract to purchase the warehouse from a third party and would possess title to the warehouse by the May 1 closing date.  The seller had scheduled a closing with the third party to take title to the warehouse on April 30, but the third party did not appear at the closing.  The seller notified the buyer that it could not timely secure title to the warehouse and would need to reschedule the May 1 closing date, offering an alternative closing date of May 3.  The buyer refused to accept the rescheduled date.

On May 1, after the seller failed to appear for the closing, the buyer filed suit against the seller for rescission of the land-sales contract.  On May 2, the seller acquired title to the warehouse and filed a counterclaim against the buyer for specific performance of the land-sales contract.

How should the court rule?

Answer: The court should order specific performance, because time was not of the essence

A land-sales contract is executed when the seller promises to deliver marketable title—i.e., title free from unreasonable risk of litigation—and the buyer promises to pay the purchase price.  These promises must be performed on the closing date set forth in the contract if the parties set a strict closing deadline, which occurs when:

• express language in the contract makes time of the essence

• the circumstances strongly suggest that the parties intended it to be or

• one party gives the other party notice that time is of the essence.

But when time is not of the essence, strict adherence to the closing date is not required in equity.  Instead, performance is due upon closing or a reasonable time thereafter.  And so long as performance can be rendered within a reasonable time after the closing date, the delay does not provide grounds to rescind the contract and the other party must perform.*

Here, the seller did not have title to the warehouse when it entered the contract or by the May 1 closing date (Choices C & D).  However, there is no indication that time was of the essence.  And since the seller did acquire marketable title to the warehouse on May 2 and was ready to close on May 3—a reasonable time after closing—the buyer cannot rescind the contract.  The court should therefore order specific performance of the land-sales contract.

One month ago, a buyer signed a contract with a seller to purchase real property for $100,000.  Upon signing the contract, the buyer paid the seller $5,000 as a deposit toward the purchase price.  The contract contained a clause providing that the seller was permitted to retain the deposit as liquidated damages if the buyer defaulted on the agreement.  The contract specified the date for closing, but on that date, the buyer informed the seller that he had been unable to attain financing for the purchase and that he would not be able to purchase the property.  The buyer demanded the return of his deposit, but the seller refused.  Instead, the seller sold the property to another buyer for $96,000.

The buyer has brought an action against the seller to recover his deposit.

For whom should the court rule?

Answer: The seller, because the buyer breached the contract.

Real-estate contracts usually require the buyer to make a deposit of a portion of the purchase price (i.e., an "earnest money" deposit).  A liquidated damages clause is also often included, which allows the seller to retain the buyer's deposit if the buyer breaches the contract and refuses to purchase the property.  This clause is generally enforceable when the amount of liquidated damages is reasonable—e.g., no more than 10 percent of the purchase price.  But when evaluating reasonableness, courts may also consider:

• the sophistication of the buyer

• the nature of the transaction (commercial v. residential) and

• whether the seller suffered an actual loss (if not, courts may refuse to enforce the clause).

Here, the buyer's $5,000 deposit was less than 10 percent of the $100,000 purchase price.  There are no facts regarding the buyer's sophistication or the nature of this transaction.  But the facts do show that the seller suffered an actual loss of $4,000 when he sold the property to another for $96,000.  As a result, the buyer's deposit is likely a reasonable amount for liquidated damages.  And since the buyer breached the contract by failing to purchase the property upon closing, the court should allow the seller to retain the deposit.

Three sisters inherited, as joint tenants with the right of survivorship, a building in which their parents had operated a hair salon.  Only the oldest sister continued to operate the hair salon on the premises, but she did not restrict her sisters' access to the building.  The middle sister sold her interest in the building to the youngest sister.  The youngest sister died five years later.  By will, she left everything to her son.

Who owns the building?

Answer: The oldest sister and the youngest sister's son as tenants in common, with the oldest sister owning a two-thirds interest and the youngest sister's son owning a one-third interest.

A joint tenancy is a type of concurrent estate in which two or more persons each own an undivided and equal interest in property with the right of survivorship (as seen with the three sisters here).*  The right of survivorship means that a joint tenant's interest disappears upon death and the remaining joint tenants' interests automatically expand proportionally to absorb it.  As a result, a joint tenant cannot devise his/her interest at death.

In contrast, a joint tenant's interest can be transferred during life, but the conveyance will sever the joint tenancy and convert it into a tenancy in common—i.e., a concurrent estate where two or more persons hold separate but undivided property interests with no right of survivorship.  If two or more joint tenants remain after the transfer, then a tenancy in common will exist between the severing tenant and the remaining joint tenants, who will retain a joint tenancy with respect to each other.

Here, the middle sister's sale to the youngest sister severed the joint tenancy with respect to that interest.  The youngest sister therefore held a one-third interest as a tenant in common and a one-third interest as a joint tenant with the oldest sister.  Upon the youngest sister's death, her joint-tenancy interest passed automatically to the oldest sister, as the surviving joint tenant, and her tenancy-in-common interest was devised to her son.  Accordingly, the oldest sister has a two-thirds interest and the son has a one-third interest in the building.

A homeowner purchased a residence from its original owner, who agreed to finance the sale in exchange for a mortgage on the residence.  The homeowner later obtained a loan from a bank to add a family room to his residence.  In addition to the homeowner's note promising to repay the loan, the bank demanded and the homeowner granted a mortgage on the property.  Subsequently, the homeowner obtained a home equity loan from a credit union to remodel the kitchen.  The loan was secured by a mortgage on the residence.  All mortgages were promptly and properly recorded.

The homeowner, while continuing to make timely payments with respect to the loans from the bank and the credit union, failed to make the required payments to the original owner of the residence.  The original owner filed a foreclosure action with respect to her mortgage.  The credit union was made a defendant to this action, but due to an oversight, the bank was not made a defendant.  At the judicial foreclosure sale, the property was sold for its fair market value.  Proceeds from the judicial sale equaled the homeowner's obligation to the original owner.

The jurisdiction permits a mortgagee to obtain a deficiency judgment.

What is the bank's right with respect to its mortgage on the residence?

Answer: The bank's mortgage continues, because the bank was not made a party to the foreclosure action.

When a foreclosure is conducted by a judicially supervised sale, the foreclosing mortgagee (here, the original owner):

• must give notice to the holders of any junior interests in the property and make them parties to the foreclosure action so that they can participate or send a representative—otherwise, the junior-interest holder's interest will remain after the sale

• may, but need not, join others who have an interest in the property (e.g., a senior-mortgage holder) or are liable on the debt (e.g., a guarantor) as proper, but not necessary, parties

That is because a valid foreclosure only eliminates interests in the foreclosed property that are junior to the interest being foreclosed.  It has no effect on any other interests.

Lien priority is generally determined by the "first in time, first in right" rule.  Therefore, lien priority here is as follows: the original owner's, the bank's, then the credit union's.  As the foreclosing mortgagee, the original owner therefore had to give notice to the bank and the credit union (the junior-interest holders) and make them parties to her foreclosure action.  The credit union was notified and joined, but the bank was not.  Therefore, the bank's mortgage continues after the foreclosure sale.

A landowner needed money.  His land was fairly worth $100,000, so the landowner tried to borrow $60,000 from a lender on the security of the land.  The lender agreed, but only if the landowner would convey the land to the lender outright by warranty deed, with the lender agreeing orally to reconvey to the owner once the loan was paid according to its terms.  The landowner agreed, conveyed the land to the lender by warranty deed, and received $60,000 cash from the lender.  The lender promptly and properly recorded the landowner's deed.

Now, the landowner has defaulted on repayment with $55,000 still due on the loan.  The landowner is still in possession.

Which of the following best states the parties' rights in the land?

Answer: The lender may bring whatever foreclosure proceeding is appropriate under the laws of the jurisdiction.

A mortgage is a lien against real property that is given to secure a debt and is often memorialized in two documents:

• Mortgage deed – a writing that conveys an interest in the real property to secure the debt

• Promissory note – a formal "IOU" in which the borrower promises to repay the debt according to the listed terms (eg, interest rate, payment schedule, acceleration clause)

But an equitable mortgage can be established by an absolute deed (or other alternative means) that was intended to secure a debt.  As a result, the deed recipient (like any other lender) may bring a foreclosure action if the debtor defaults on repaying the loan.

Here, the landowner conveyed his land to the lender outright by warranty deed.  And since the lender agreed to reconvey the land once the loan was paid, the deed was intended to secure the landowner's debt.  As a result, the deed will be treated as an equitable mortgage (ie, an absolute deed) (Choice A).  This means that the lender can bring an appropriate foreclosure proceeding to recover the $55,000 still due on the loan.

Seven years ago, a man conveyed vacant land by warranty deed to a woman, a bona fide purchaser for value.  The woman did not record the warranty deed and did not enter into possession of the land.

Five years ago, the man conveyed the same land to a neighbor, also a bona fide purchaser for value, by a quitclaim deed.  The neighbor immediately recorded the quitclaim deed and went into possession of the land.

Two years ago, the neighbor conveyed the land to a friend, who had notice of the prior conveyance from the man to the woman.  The friend never recorded the deed, but he went into immediate possession of the land.

The jurisdiction has a notice recording statute and a grantor-grantee index system.

If the woman sues to eject the friend, will the woman be likely to succeed?

Answer: No, because the neighbor's title was superior to the woman's title. 

Recording acts are used to evaluate the priority of competing interests in the same property.  Most recording acts protect bona fide purchasers (BFPs)—ie, persons who:

• pay value for an interest in property and

• lack notice of a prior interest.

In a jurisdiction with a notice recording act (as seen here), a BFP's property interest is always superior to an earlier competing property interest.  And under the Shelter Rule, a person who receives a property interest from a BFP is protected from prior interests by the recording act to the same extent as the BFP.

Here, the man first conveyed the vacant land to the woman (BFP) and then conveyed it to the neighbor (BFP).  Since the neighbor was a BFP, the neighbor's title was superior to the woman's earlier title under the notice statute.  And though the friend knew about the earlier conveyance to the woman when the neighbor conveyed the land to him (not a BFP), he is sheltered by the neighbor's BFP status (Choice C).  As a result, the woman will likely lose her suit to eject (ie, remove) the friend from the land.

A condominium consists of 25 units located within a single building.  In order to protect aging electrical and plumbing systems located in the common areas within the building, the board of the condominium association has adopted a reasonable rule that prohibits an owner of a condominium unit from installing or replacing a washer or dryer in the unit.  The declaration that created the condominium is silent with regard to the matter.

An owner wants to replace an existing combination washer/dryer appliance in her condominium unit.

Can the association enforce this rule against the owner?

Answer: Yes, because the board adopted the rule to protect the building's electrical and plumbing systems.

A condominium is a common-interest community—ie, a real-estate development in which individually owned lots or units are burdened by a covenant that imposes an obligation to pay dues to an association.  These communities, typically acting through a board, have the power reasonably necessary to manage common property and carry out functions set forth in the declaration or granted by statute.  This includes the following powers:

• To levy assessments against individually owned property and charge reasonable fees for services or use of common property

• To manage and protect common property, including making substantial alterations, improvements, and additions to such property

• To adopt reasonable rules to govern the use of common and individually owned property to protect the common property (this is an implied power)

Here, the board of the association adopted a reasonable rule prohibiting the installation or replacement of a washer or dryer within a condominium unit.  The rule seeks to protect the electrical and plumbing systems located within the building's common areas.  Since the association has the implied power to adopt such rules, it can enforce this rule against the owner of the condominium unit.

repayment of the loan with a mortgage on a commercial tract that she owned.  The note and mortgage did not contain a due-on-sale clause.  Several months later, the woman conveyed the commercial tract to her business partner.  The conveyance provided that "the grantee assumes and agrees to pay the existing mortgage to the bank."  The business partner then conveyed the tract to a buyer "subject to the existing mortgage to the bank."  Each grantee received a copy of the note and the mortgage.

After the buyer made several timely payments, no further payments were made by any party.  The bank initiated a foreclosure action, naming the woman, the business partner, and the buyer as defendants.  The foreclosure sale resulted in a deficiency.

There are no applicable statutes.

Against whom is the bank entitled to collect a deficiency judgment?

Answer: The woman and the business partner.

A debtor is free to sell mortgaged property unless the mortgage agreement states otherwise.  After the sale, the mortgage remains attached to the property and the debtor remains personally liable for the debt secured by the mortgage.  But the buyer's obligations with respect to the mortgage depend on whether he/she:

• took the property subject to the mortgage – in which case the buyer does not agree to pay, and is not personally liable for, the debt (even if the buyer makes payments on the loan) or

• assumed the mortgage – in which case the buyer expressly agrees to pay and becomes primarily liable for the debt, while the debtor becomes secondarily liable as a surety.

Therefore, if a creditor forecloses on mortgaged property and the sale results in a deficiency—ie, the proceeds are insufficient to satisfy the debt—the creditor can obtain a deficiency judgment against the original debtor and/or any party who has assumed the mortgage.

Here, the woman mortgaged the commercial tract to a bank and then conveyed the tract to her business partner, who assumed the mortgage.  The business partner then conveyed the tract to the buyer, who took it subject to the mortgage.  Although the buyer made payments on the loan, this did not constitute an assumption of liability for the debt.  As a result, the bank is entitled to collect a deficiency judgment only against the woman and the business partner.

A landlord owned a house in fee simple.  He leased the house to a tenant for a term of 10 years by properly executed written instrument.  The lease was promptly and properly recorded.  It contained an option for the tenant to purchase the house by tendering $250,000 as purchase price any time "during the term of this lease."  One year later, the tenant, by a properly executed written instrument, purported to assign the option to her daughter, expressly retaining all of the remaining term of the lease.  The instrument of assignment was promptly and properly recorded.  Two years later, the landlord contracted to sell the house to a broker and to convey marketable title "subject to the rights of [the tenant] under her lease."  The broker refused to close because of the outstanding option assigned to the daughter.

The landlord brought an appropriate action against the broker for specific performance.  If judgment is rendered in favor of the landlord, it will be because the relevant jurisdiction has adopted a rule on a key issue as to which various state courts have split.

Which of the following identifies the determinative rule or doctrine upon which the split occurs, and states the position favorable to the landlord?

Answer: Options to purchase contained in a lease cannot be assigned separately from the lease

A contract for the sale of land impliedly warrants that the seller will convey marketable title to the buyer at the time of closing.  If the seller cannot do so, then the buyer can rescind (ie, cancel) the contract and refuse to close.  Here, the broker has refused to close because of the outstanding option to purchase assigned to the daughter.

The holder of an option to purchase has the exclusive right to purchase the property during a specified time (eg, "during the term of this lease").  Jurisdictions are split as to whether an option contained in a lease agreement can be assigned separately from the lease:

• Minority rule – an option is an independent provision that can be assigned separately from the lease

• Majority rule – an option is an integral part of the lease agreement that cannot be separately assigned

Since the majority rule would render the assignment of the option to the daughter invalid, this rule supports the landlord's action against the broker.

A man who owned property in fee simple mortgaged the property to a bank to secure a loan of $100,000.  The mortgage was promptly and properly recorded.  The man later mortgaged the property to his mother to secure a loan of $50,000.  This mortgage was also promptly and properly recorded.  Subsequently, the man conveyed the property to a purchaser.  About a year later, the purchaser borrowed $100,000 from an elderly widow and gave her a mortgage on the property to secure repayment of the loan.  The widow did not know about the mortgage held by the mother.  The understanding between the purchaser and the widow was that the purchaser would use the $100,000 to pay off the mortgage held by the bank and that the widow would therefore have a first mortgage on the property.  The widow's mortgage was promptly and properly recorded.  The purchaser paid the $100,000 received from the widow to the bank and obtained and recorded a release of the bank's mortgage.

The $50,000 debt secured by the mother's mortgage was not paid when it was due, and the mother brought an appropriate action to foreclose, joining the man, the purchaser, and the widow as defendants and alleging that the mother's mortgage was senior to the widow's mortgage on the property.

If the court rules that the widow's mortgage is entitled to priority over the mother's mortgage, which of the following determinations are necessary to support that ruling?

Answer: All of the above

Lien priority is generally determined by who records first (ie, first in time, first in right).  However, subrogation allows a third party who fully pays off a senior mortgage to take that senior mortgage's priority so long as the third party had no actual knowledge of junior interests.*  This does not harm junior interests because they retain the same lien priority.

Here, the bank's mortgage was recorded first, so it had priority over the mother's mortgage.  The widow's mortgage was recorded last.  However, the widow's loan was used to fully pay off the bank's senior mortgage, and the widow did not know about the mother's mortgage.  As a result, the widow acquired the bank's senior mortgage through subrogation.  Also, there are no equities in the mother's favor because she has retained her second-in-priority status.

A woman owned a tract of land in fee simple.  By warranty deed, she conveyed the land in fee simple to her brother for a recited consideration of "$10 and other valuable consideration."  The deed was promptly and properly recorded.

One week later, the woman and her brother executed a written document that stated that the conveyance of the land was for the purpose of establishing a trust for the benefit of the woman's grandson.  The brother expressly accepted the trust and signed the document with the woman.  This written agreement was not authenticated to be eligible for recordation and there never was an attempt to record it.  The brother entered into possession of the land and distributed the net income from the land to the grandson at appropriate intervals.

Five years later, the brother conveyed the land in fee simple to an investor by warranty deed.  The investor paid the fair market value of the land, had no knowledge of the written agreement between the woman and the brother, and entered into possession of the land.  The grandson made demand upon the investor for distribution of income at the next usual time the brother would have distributed.  The investor refused.

The grandson brought an appropriate action against the investor for a decree requiring her to perform the trust the brother had theretofore recognized.

Which party is likely to prevail?

Answer: The investor, because, as a bona fide purchaser, she took free of the trust encumbering the brother's title.

Many interests affecting property can be recorded, including trusts affecting land.  When different persons own such interests, recording acts are used to evaluate priority of competing interests.  Under most recording acts, a subsequent property interest has priority over an earlier interest if the subsequent interest-holder was a bona fide purchaser (BFP)—i.e., a person who (1) paid value and (2) lacked notice of the prior interest.  There are three types of notice:

• Actual – when a buyer has direct knowledge of a prior interest

• Record – when a document showing a prior interest was properly recorded in the land records and appears in the buyer's chain of title and

• Inquiry – when a buyer knows, or should know, of circumstances that would prompt a reasonable person to investigate (e.g., visible use of the property by someone other than the seller).

Here, the investor had no knowledge of the prior trust agreement when she purchased the land from the brother (no actual notice), and the brother's possession of the land gave her no reason to investigate further (no inquiry notice).  And since the trust agreement was never recorded, the investor did not have record notice of the trust.  Therefore, the investor was a BFP and took the land free of the trust.

For 22 years, the land records have shown a man as the owner of an 80-acre farm.  The man has never physically occupied the land.

Nineteen years ago, a woman entered the farm.  The character and duration of the woman's possession of the farm caused her to become the owner of the farm under the adverse possession law of the jurisdiction.

Three years ago, when the woman was not present, a neighbor took over possession of the farm.  The neighbor repaired fences, put up "no trespassing" signs, and did some plowing.  When the woman returned, she found the neighbor in possession of the farm.  The neighbor vigorously rejected the woman's claimed right to possession and threatened force.  The woman withdrew.

The woman then went to the man and told him of the history of activity on the farm.  The woman orally told the man that she had been wrong to try to take his farm.  She expressly waived any claim she had to the land.  The man thanked her.

Last month, unsure of the effect of her conversation with the man, the woman executed a deed purporting to convey the farm to her son.  The son promptly recorded the deed.

The period of time to acquire title by adverse possession in the jurisdiction is 10 years.

Who now owns the farm?

Answer: The son, because he succeeded to the woman's adverse possession title by privity of conveyance.

The statute of frauds requires that a conveyance of real property:

• be in writing

• identify the parties and property and

• be signed by the donor (the person conveying the property).

Here, the woman acquired title to the man's farm by adverse possession.  Although the woman later apologized to the man and orally waived her claim to the farm (Choice A), the man did not regain title because the woman's oral statement did not satisfy the statute of frauds since there was no signed writing.  Therefore, the woman still owned the farm when she conveyed it to her son.

A seller entered into a written contract to sell a tract of land to an investor.  The contract made no mention of the quality of title to be conveyed.  The seller and the investor later completed the sale, and the seller delivered a warranty deed to the investor.

Soon thereafter, the value of the land increased dramatically.  The investor entered into a written contract to sell the land to a buyer.  The contract between the investor and the buyer expressly provided that the investor would convey a marketable title.  The buyer's attorney discovered that the title to the land was not marketable and had not been marketable when the original seller had conveyed to the investor.  The buyer refused to complete the sale.

The investor sued the original seller for breach of contract, claiming damages from the seller's failure to convey marketable title, which resulted in the investor's loss of the sale to the subsequent buyer.

Who is likely to prevail on this count?

Answer: The original seller, because her contract obligations as to title merged into the deed.

All contracts for the sale of land, unless otherwise stated, impliedly warrant that the seller will convey marketable title to the buyer upon closing (Choices A & D).  However, once a deed is delivered to and accepted by the buyer, the doctrine of merger provides that all obligations contained within the land-sale contract merge into the deed.  Those obligations can be enforced thereafter only if they are incorporated into the deed.

Here, the investor has sued the original seller for breach of contract, claiming damages from the seller's failure to convey marketable title.  Although the investor's allegations appear to be true, he can only seek a remedy that arises from the deed—not the contract that merged with the deed.  As a result, the original seller is likely to prevail

An entrepreneur owned a ranch.  He entered into a written three-year lease of the ranch with a rancher.  Among other provisions, the lease prohibited the rancher from "assigning this lease, in whole or in part, and from subletting the ranch, in whole or in part."  In addition to a house, a barn, and a one-car garage, the ranch's 30 acres included several fields where first the entrepreneur, and now the rancher, grazed sheep.

During the following months, by a written agreement, the rancher allowed his neighbor, a car enthusiast, exclusive use of the garage for storage, under lock and key, of his antique automobile for two years, charging him $240.  The rancher told his other neighbor, a golfer, that she could use the fields to practice golf as long as she did not disturb his sheep.

Which, if any, of the rancher's actions constituted a violation of the lease?

Answer: Only allowing the car enthusiast exclusive use of the garage for storage

Unless the lease expressly provides otherwise, a tenant is free to transfer his/her interest under the lease to a third party through either:

• assignment – a transfer of all, or part of, the tenant's interest under the lease to a third party for the remainder of the tenant's lease term or

• subletting – a transfer of all, or part of, the tenant's interest under the lease to a third party for less than the remainder of the tenant's lease term.

Here, the entrepreneur leased his ranch to the rancher for three years.  The lease expressly prohibited the rancher from assigning or subletting the ranch, in whole or in part.  The rancher then entered into a written agreement that gave the car enthusiast exclusive possession of the ranch's garage (part of the rancher's lease interest) for two years (less than the remainder of the rancher's lease term) in exchange for $240.  Therefore, this written agreement was a sublease and violated the entrepreneur and rancher's lease (Choices B & D).

A tenant also is generally free to grant a license—a non-possessory (and usually non-exclusive) right to enter and use the property for a particular purpose—to a third party unless the lease states otherwise.  Here, the lease only prohibited assigning and subletting.  Therefore, the rancher's license to the golfer—granting her a non-exclusive right to enter and use the property to practice golf—did not violate the lease (Choices B & C).

A buyer and a seller entered into a written contract for the sale of land.  The contract satisfied the requirements of the statute of frauds.  Because the buyer needed time to obtain financing, the buyer and the seller did not agree upon a closing date, and the written contract did not contain a stated closing date.  Ten days after signing the contract, the buyer and the seller orally agreed to rescind the contract.  The next day, the seller sold the land to a third party.

Two days after that sale, the original buyer told the seller that she had changed her mind and wanted to complete their contract.  When the seller told her that he had sold the land to a third party, she sued him for breach of the written contract.

For whom will the court find?

Answer: For the seller, because the oral rescission was valid.

The statute of frauds requires a writing to create or modify an enforceable contract for the sale of land, but a writing is not required to rescind (ie, cancel) the contract.  Therefore, the buyer and the seller's oral agreement to rescind the contract was valid (Choice B).

The owner of land executed an instrument that purported to convey the land to a transferee.  The instrument, which contained all the necessary elements of a deed, contained the following statement: "This transfer is made for the sum of $1.00 and other good and valuable consideration."  The transferee promptly and properly recorded the instrument.  Subsequently, the owner challenged the validity of the deed based on lack of consideration.  The owner can prove that he did not receive any cash or other consideration from the transferee.

Should the deed be set aside?

Answer: No, because consideration is not required to effect a transfer of land

A deed is an instrument that passes an interest in real property to another.  A valid deed must include all of the following terms:

• the grantor's signature

• the identity of the grantor and the grantee

• a description of the property interest being transferred

• words of transfer

However, unlike with a contract, consideration is not required to effect a transfer of land by deed.  And since the instrument at issue here contained all the necessary elements of a valid deed, it effectively conveyed the land—regardless of whether the recited consideration was paid.  Therefore, the deed should not be set aside.*

Three siblings, two brothers and a sister, inherited land as equal tenants in common from their mother.  The property was subject to a mortgage that contained an acceleration clause, which provided that the entire outstanding balance of the mortgage loan was due upon default.  None of the siblings made the mortgage payments as they became due, and the mortgage fell into default.

The mortgagee foreclosed on the mortgage.  At the foreclosure sale, the sister purchased the land, paying 45% of the land's fair market value.

Can either of her two brothers reclaim his interest in the land?

Answer: Yes, if he pays his sister one-third of the amount she paid to acquire the land.

Cotenants owe a duty of fair dealing—but generally not a fiduciary duty—to each other.  However, a fiduciary duty may be imposed on cotenants who:

• jointly purchase property in reliance on each other or

• acquire their interests at the same time from a common source (e.g., by gift, will, or inheritance). 

This duty primarily arises when the co-owned property is sold at a tax or mortgage foreclosure sale and purchased by a cotenant.  The other cotenants then have the right to reacquire their original interests by paying their share of the cost paid to acquire the property (based on the cotenant's ownership interest) within a reasonable time.

Here, a fiduciary duty can be imposed on the three siblings because they are tenants in common who each inherited a one-third interest in the property at the same time and from a common source—their mother (Choice A).  And since the co-owned property was purchased by the sister at the foreclosure sale, the two brothers have the right to reacquire their original interests.  To do so, they must pay one-third of the amount the sister paid to acquire the land within a reasonable time.

A manufacturer entered into a 30-year lease with the owner of a building zoned for commercial use.  The lease contained a term that gave the manufacturer the right of first refusal if the owner ever decided to sell the building.  Ten years later, the owner entered into a contract to sell the building to a third party.  The owner has refused to honor the manufacturer's right of first refusal, contending that it violates the Rule Against Perpetuities.  The jurisdiction recognizes the common-law Rule Against Perpetuities and its application to rights of first refusal.

Which of the following is the manufacturer's best argument that the Rule Against Perpetuities does not apply to the manufacturer's right of first refusal?

Answer: The right of first refusal was granted in conjunction with a lease

Under the common-law Rule Against Perpetuities (RAP), specific future interests are valid only if they must vest or fail by the end of a life in being plus 21 years.  A right of first refusal is one type of future interest that is subject to common-law RAP unless the right was granted in a lease to a current leasehold tenant.  Therefore, the manufacturer's best argument that RAP does not apply to the manufacturer's right of first refusal is that it was granted in conjunction with a lease.

The owner of a building leased a portion of the ground floor for two years at a fixed monthly rent to a chef who opened a restaurant.  Eight months later the chef, due to a souring of the local economy, informed the owner that she was closing the restaurant.  She vacated the premises and stopped paying rent, which prior to that time she had timely paid.  The owner unsuccessfully sought to rent the unoccupied space on behalf of the chef for the following four months before bringing suit against the chef for breach of the lease.

What is the maximum amount of rent to which the owner is entitled in a majority of jurisdictions?

Answer: Four months' rent

A landlord can sue a tenant for damages when, as here, the tenant breaches the duty to pay rent.  In determining the landlord's damages, the majority rule is that the doctrine of anticipatory repudiation does not apply to leases.  This means that the landlord is not entitled to damages for future rents that would have been due under the lease.*  The landlord is only entitled to rental payments as they become due.