REAL ESTATE TRANSACTIONSA. Introduction:

1. Terms:

a. Marking transactions/ernest money/depositing receipt:

1. Transaction where K formed looking to actual transfer of land2. Not done yet (other things need to be done still)3. Object of K is actual enjoyment of the land – land is the object

b. Secured transactions:

1. Land is a means rather than end2. Secured creditor (person owed $ or performance of some obligation3. Not comfortable w/ available remedies if not performed – want further assurance

a. Lend $ to build home, but get deed of trust → if $ not repaid, will take land ina foreclosure sale

4. Land not object of deal – end was payment of the debt.

2. What can be done w/ Real Property:

a. Sellb. Gift (donative deed)c. Lease (including ground lease)d. Optione. Encumbrance

1. Security interest in real propertya. 2 types:

1. Consensuala. deed of trustb. equitable mortgage

2. Involuntarya. judgment creditor’s lienb. tax lienc. homeowner’s assessment

f. Subdivisiong. Exchangeh. Equity vs. Loan position

1. CA: lenders must exhaust security before going after lender personally to satisfy debta. (if recourse loan)b. Exception: Where property is “environmentally impaired”

2. Shared appreciation:a. Co-tenant lender w/ no possession right, but only right to share portion of gain on

sale (and maybe interest)i. Restrictions on use

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B. Terminology:

1. Inspections: Higher duty – must find out

2. Disclosure: know something + law says must tell

3. Sales Agent: Lower level license than brokers; must work under supervision of broker

4. Law of Principal and Agent: When there is a relationshipa. Principal may be bound by some acts of agentb. Involves imputation of knowledgec. Fiduciary duties of selflessness, loyalty

5. Executory K: Pending K (from K formation to time K fully performed)

6. Lease: Characteristics of both K’s and conveyances

7. Options: Offer to buy/sell land which has been made irrevocable for an agreed upon period of time forseparate consideration

a. Free option: Executory K w/ no consideration – for all practical purposes, binds only (S) →ties up land w/out paying for option

8. Deed: Conveyance in land sale

9. Deed of trust:

a. Day deal closes - recipient of conveyance pays the $ but it’s typically a loanb. No use and enjoyment of land as in a deedc. Have power to foreclose on land – deed goes to lender (now full beneficiary of land)d. Bad for lender to have to foreclose on land – that was the hedge, not the point

1. REO (or OREO): Real estate owned: = failure b/c bad loan

10. Lien/security interest: There is a charge against property – some kind of debt or obligation is owed+ is latched onto a property which becomes a fund to pay that debt or obligation

a. Consensual lien/security interest: Someone gave security interest (e.g., mortgage, deed of trust…)

1. Conveyance /deed based model (mortgages and deeds of trust)

b. Forced/involuntary liens: Sovereign given right to impose a lien on property w/out owner’sconsent (e.g., judgment lien; mechanic’s lien; tax lien)

1. In CA, recording a judgment creates a lien on any property owned in that county

11. Mortgages:

a. Mortgages, deeds of trust, installment land K’s, equitable mortgages: all consensual interstin land

b. Power as creditor (but involuntary – so not as carefully crafted)c. Debtor – mortgagor

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d. Creditor: mortgagee

12. Deeds of Trust:

a. 2 Components: The obligation + the security interest

1. Creditor lends $ (usually through escrow) to → Trustor

b. Reconveyance: Undoing of deed of trust

c. If no repay:

1. In CA: primary and sometimes only source of recovery is through the property(antideficiency laws)

13. Equitable mortgages: Negative pledge

a. X loans $ to Y; Y promises (negative pledge) will not encumber property if not repaidb. Lease: X loans $ to Y; Y gives right to lease at very low interest rate until $ paid back

1. Some interest in real estate has been created to repay a debt/obligation

14. Installment Land Contract (ILK): (Form of marketing K to create a mortgage)

a. Normal land K – X will buy land from Y for x($) at x(time)→ X can’t get enough loan $ →ask Y to sell or finance rest of price → deed from Y to X + deed of trust to Y

b. Y remains owner of record → lets X move in for some amount – but no deed → on same schedule as note payments, X pays rest of $ → at end of schedule, Y gives deed → Xnot legal owner until all paid off

= prolonged executory K being used as a mortgage

c. Courts treat ILKs like mortgages in terms of rights (gives more protection to debtors)

15. Judgment proof: Person owes but can’t pay

16. Lis pendens: Litigation pending – records fact to give notice

17. Notice:

a. Actual: actually knowb. Constructive/imputed: Knowledge you are deemed to have had whether it impinged on your

awareness or not

1. Agency: You picked agent j—loss rests with you2. Recording acts: Give imputed knowledge to world if correct + indexed in public

record – deemed to know b/c have access3. Inquiry: W/in limits, certain knowledge presumed b/c it’s right there – you had

reason to inquire

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a. If enough discrepancy between public record and actual use of property – dutyto inquire further

18. Title: all of the ownership in land (usually means fee interest

a. Legal/record title: ownerships you can determine from the public recordb. Beneficial/equitable title: Intestants intended something not shown in public record or K –

imperfectly recorded interest

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BROKERS

A. Broker Roles:

1. Finder: Have info. that may not be generally available; put interested people together

2. Advisor: Form of offer/acceptance/K/addendum

3. Objectifier: Get people past emotional pre-conceptions and look objectively at deal

4. Appraiser: (not formal): Duty of reasonable care, skill, and diligence still applies (assumption thata great deal of knowledge going into appraisal)

5. Negotiator/arrange/structure deals

6. Advocate (PROB: Brokers often represent both side – w/ appropriate disclaimers, etc.)

7. Go-Between

8. Arrange financing

9. Trustee of funds

10. What they do:

a. Selling (just facilitating)b. Leasingc. Property managementd. Broker secured loans (deeds of trust)e. Sale of secured paper

B. COMMON PROBLEMS:

1. Contingency basis2. No obvious measure of benefit provided3. Blurred boundaries (between broker’s role and practice of law)4. Delayed benefit5. Heavy reliance on client ((B)/(S)) for info6. Public suspicion7. Law is vague8. Most clients are vulnerable (thus, high fiduciary duties)9. Statute of frauds10. Emotional ((S)’s remorse)

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C. Problems:

1. Brokers in general:

a. Typically one time – right to commission is driven by result

b. Contingent compensation – up front expenses w/ no guarantee

1. Creates loyalty not to client but to deal

c. Safety clause: To prevent (S)s to sell after K up to (B) found by broker

2. Consumers:

a. No negotiation over price (commission) – usually 6%

b. Monopolizing info.

c. Steering; red-lining (won’t show property in certain area)

d. Self-dealing – only out for selves

e. Broker magic knowledge - no explanation

f. Conflict of interest (e.g. represent both sides)

g. Didn’t do anything but still want commission

h. Very lightly capitalized – if they cheat you, maybe not much to recover from

i. Played on my heart strings

3. What has law done to solve problems?:

a. Required licensing

b. Strict regulations

c. Education requirements

d. Courts enforce strict fiduciary duties1. No fraud, lying2. Total disclosure3. Undivided loyalty (hard to square w/ dual agency)4. Good faith; fair dealing

e. Statute of frauds: More vigorously enforced in real estate than anywhere else (especiallyagainst brokers)

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f. Civil rights law (against steering; red-lining by banks)

g. Anti-trust: Now can use multiple listing service for a fee

h. Conflicts issues: poorly addressed

i. Civil liability: Very sporadic – not enough $ at stake

j. Errors and Omissions Insurance (malpractice insurance)

h. Real estate recovery fund (CA): mandated insurance program (brokers pay into fund to pay forbad conduct of brokers who have split)

D. CONTRACT/LISTING:

1. Agreements:

a. Types:

1. Exclusive “right to sell”:a. For a specified period of timeb. Client agrees that if property sold during period, broker receives commission –

regardless of whether broker actually sellsc. Broker agrees to use best efforts/reasonable efforts consistent w/ commercial custom

& practice

1. Purely outcome driven – only right to commission if it sells2. Must be finite ((S) has basically taken off market) (usually @ 90 days)3. No duty to prove broker is procuring cause of sale

2. Exclusive agency:a. For a specified period of timeb. If property is sold other than by broker, no commissionc. Presents issues of causation (procuring cause)

3. Open:a. If broker becomes procuring cause of trigger event (sale), broker is entitled to

commissionb. Can K w/ multiple brokers in this mannerc. Less incentive for individual brokers’ efforts

4. Neta. Client wants x amount of money; broker gets everything in excessb. Potential for self-dealing -- huge commission if broker lowballs value

5. Optiona. Broker has option to purchase at end of time period for certain priceb. Inherent conflict of interest

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b. The Listing:

1. “Employs and grants X the exclusive and irrevocable right to sell”

a. No right to sellb. Irrevocable (not really)

1. Listing period2. Safety period: events broker set in motion – subject to some sort of record

c. Finite period of time1. Listing w/ no time not enforceable (against public policy)

2. Commission earned (in CA): RWA (B) (can modify by K)

3. Terms of Sale:

a. Price, parties, time

b. Contingencies

c. Commission event:1. Offer meeting the terms of the listing (or terms agreed to by (B))2. Offer alone doesn’t create K between (B) and (S)

d. Timing of possession

e. Risk of loss

4. Title:

a. Good title:1. Title insurance policy is evidence of good title (“free from reasonable doubt”)2. Need “insurable title”

b. Exceptions (easements, liens, restrictions, etc.)

1. PROB: Prelims. can’t be relied on (not an information source – just astatement of intention)

c. “Subject to”:

1. New (B) not personal obligor of existing debt2. But property remains subject to security interest (TD or lien)

d. “Assumption”

1. New owner assumes preexisting debt2. Original obligor not off the hook unless express release obtained from lender

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5. Compensation to Broker

a. Can be fixed by K

1. Conditional commission provision: Agreement which provides commissionearned only upon close of escrow

b. Majority rule (Kopf) commission earned when broker brings prospective (B)ready, willing, and able (RWA) to terms OR if (B) and (S) enter intoK at varying terms ((S) estopped to deny conditions not acceptable)

1. Doesn’t matter if deal closes or not

c. Minority rule (Drake): No close, no commission

1. Suggests majority rule is against public policy – can’t even K to it

d. Scenarios (when deal doesn’t close):

1. Close of escrow prevented: Can’t prevent satisfaction of condition –no closing/performance of K if (S) frustrates

2. (Drake) If didn’t close – maybe not really RWA – a fake (B) fromthe beginning → no commission

3. Does make a difference:

a. Deal no close b/c (B) breached but was RWAb. “Acts of God”: Something prevents close (fire; condemnation; etc.)

1. Who has the risk (in CA, if e.g. a flood, may get comm..)

e. Arguments:

1. Majority state: If no close, argue evidentiary of (B) not being RWA

2. Minority state: Argue (S) prevented, → discharged → should get commission even though no close (Drake)

5. Safety clause: Allows broker to preserve right to get commission w/in limited periodof time

6. Attorneys fees: standard in form K

7. Arbitration/mediation clauses: standard in form K

2. Statute of Frauds:

a. Certain K’s must be in writing or else not enforceable

1. Real estate2. Broker’s K’s – strictly applied

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3. If can’t be performed in 1 year

a. Phillippe v. Shapell (FACTS: S. hired P.; oral agreement; works for years; allsophisticated parties; P. sends letter affirming 6% commission; did not good;2nd letter refers to 1st – no good) HELD: S.

1. Party charged must sign2. P. still an agent – may be sued for breach of duties

4. Virtually no exceptions to S of F apply to broker (estoppel, laches, waiver, unjustenrichment)

3. Withdrawal From Sale Clause

a. If de-listed during term of listing, broker still gets full commission

1. Legal in CA (Blank v. Borden)2. Can’t have a WFS w/ greater charge than commission (b/c that would = penalty)

b. Assumes sale would have occurred had property not been de-listed

E. DUTIES OF INVESTIGATION AND DISCLOSURE

1. Duties in General:

a. Contract:

1. Source of duty: those to which you’ve agreed

b. Entity formation:

1. Duty of Good Faith and Fair Dealing (DGFFD): Duty not to torpedo other party’sexpectation; not to seize details maybe in letter of K but that are unfair andinsincere

2. Relationships that form over time – entail more than K

c. Public obligatons:

1. Simple negligence: breach of duty of due care

2. Negligent misrepresentation

a. Affirmative statement of fact that turns out to be false – no knowledge but careless –didn’t check facts

3. Promissory fraud: Fraudulent statement about your state of mind (promise w/ no intentto perform)

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a. Can get punitive

4. Concealment: Involves no affirmative representations

a. Must first find a duty to speak

b. Misleading partial disclosure: Leaving impression that giving full disclosure (whenno duty to speak) but holds back some info.

5. Deceit: Representation of fact w/ knowledge of falsity; intended to induce reliance

*********Argue P. had no right to reasonably rely (except w/ promissory fraud)********

d. Statutory duties

e. Strict liability: fault doesn’t matter (e.g. mass produced housing)

2. Easton: DUTY OF INSPECTION:

a. Affirmative duty of inspection (visual) by broker to seek out material problems/defects

b. Residential only

c. Must be reasonably ascertainable by broker

3. Legislative Response:

a. §1102 (TDS – transfer disclosure statement)

1. Non-waivable (can’t waive by using “as is” clause)2. Detailed interrogation of (S)3. Broker only needs visual inspection4. Broker’s rely heavily on seller’s representations5. Sets up indemnity claim in event of broker’s liability6. No constructive delivery, etc. – must give to (B) – need actual knowledge

b. §2079 (inspection requirement)

1. Reasonably competent & diligent inspection2. Visual only3. Limited to residential deals4. Standard of care = reasonably prudent broker (professional standard of care)5. (B) has duty of self protection6. Can’t be waived

4. Commercial property:

a. Standard is much looser

b. Scope of disclosure/liability:

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1. No fraud2. Must disclose all material facts that aren’t obvious or equally accessible to (B)3. Agency disclosure duties may apply4. Level of sophistication matters5. No duty of brokers to inspect

5. “As Is” Clauses

a. Broad class of clauses called disclaimer clauses – relieving of an obligation

1. Relieves (S) of doing anything to inform self about things to disclose

2. Does not/cannot relieve (S) from obligation to disclose things known to (S) + notobvious (no concealment – even if K says relieves (S) from disclosing all knownmaterial facts) ---- against public policy

3. §1102(c): Still have obligation to give transfer disclosure statement

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AGENCY

*****Look for agents based on what they do – not what their label is or what they claim to do*******

A. Indicators:

1. Compensation (not dispositive- §2079.19)

2. Principal controls details of work (not always the case – e.g., broker, attorney)

3. Principal decides objective/goal

4. Agent carries out the objective w/ some discretion

B. CLAIMS:

1. (S) : claim undisclosed dual agency (UDA) so no commission2. (B) : claim UDA to get out of purchase3. To impute knowledge to purchaser (by S) (b/c an agent must disclose fully – so knowledge is imputed/

constructive knowledge)

C. Result of finding agency:

1. Agent may bind principala. Depending on scope of agency

2. Fiduciary duty of agent to principala. Undivided loyaltyb. Presents a problem in dual agency situations

3. Vicarious liability of principal for agent’s actionsa. To a certain degreeb. Exception: punitives

4. Imputed knowledge:a. Principal deemed to know if agent has actual knowledge and law would require agent to give info.

to principalb. E.g., material facts re: transaction

D. Dual Agency:

1. Arises when single broker handles transaction between (B) & (S)

2. RULES:

a. If not disclosed, transaction voidable by either party

1. Without showing causation2. Exceptions:

a. Waiverb. Estoppelc. Laches

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b. §2079.21: Dual agent shall not disclose to (B) that (S) will take less than listing price w/outwritten consent + vice versa (exception to fiduciary duty)

1. if broker knew (S) must be out in 30 days – not addressed by statute

c. Must disclose dual agency + ramifications of the dual agency relationship to the principals

1. If not disclosed → no commission

a. Huijers (FACTS: Mixed residential/commercial property; dual agency; brokersigned up (S) prior to issuing disclosure statement; (B) offered full asking $, but (S) got (S) remorse; (B) informed (S) if repudiated, (S) would owebroker’s commissions out of pocket) HELD: Listing agreement voidable

1. Failure to disclose implications of dual agency to (S) (facts and materialimplications of dual agency must be disclosed by agent in writing)

2. Listing agreement between (S)s and agent was voidable – so owe nocommission

3. BUT – since disclosure statement given to (S) prior to execution of purchaseK, that K was not voidable

b. Illustrates flaw in majority rule for commission earning

3. Fact question:

a. Not all single-broker transactions are dual agenciesb. E.g., language in K or disclosure can be overridden by actions of broker vis-à-vis (B)

E. Sub-agency:

1. MLS – multiple listing servicea. Factility of brokers; allowing for location of buyers, etc.b. Broker enlists assistance of second broker (subagent)c. Agent may engage a subagent, unless forbidden by principal

2. Vicarious Liability:a. Runs from subagent to prime agentb. Unlike general agency law

3. Dual agency:a. Can also exist in multiple-broker transactionsb. Facts specific

F. Roles and Duties:

1. Selling agent:a. Finds & obtains (B)b. Presents offer

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2. Listing agent:a. Obtains listingb. Agent for a partyc. Can also act as selling agent, w/out necessarily creating dual agencyd. Can’t act only for (B) when only as a listing agent (CC §20079.18)

3. FIDUCIARY DUTY:

****Duty to disclose all material facts: Anything that would affect principal’s decision to enterinto transaction

a. Property b. Terms of transactionc. Collateral facts which may affect willingness to enter into transaction

a. Breach of fiduciary duty = constructive fraud

1. Subsumes negligence, negligent misrepresentation, breach of K, etc.)

2. Any act, omission or concealment involving a breach of legal or equitable duty, trust, orconfidence which results in damage to another even though the conduct is nototherwise fraudulent

b. Usually no punitive damages

c. Duty to investigate the material facts of the transaction

1. Salahutdin v. Valley of CA (FACTS: D. represented to P’s that land more than 1 acre; knewthey wanted to subdivide for their kids – need more than 1 acre to do so; didn’t makeany actual inspection – just relied on representation of sellers + eyeballed it; less than1 acre; P’s not very well educated; made clear land must be subdivisible) HELD: P.

d. Materiality required

1. If no dialogue about size of land (B) wants + no zoning statute – just got less land than thought – probably no liability

e. Facts regarding property itself + terms of real estate transaction + collateral facts which might affectprincipal’s willingness to enter into a transaction ***************

4. Statutes:

a. Limited to residential b. §2079.12: attempt to codify disclosure rules; mandates statutory disclosure of agency relationships

+ implicationsc. §2079.16: Disclosure Form:

1. (S)’s agent:

a. Utmost care, integrity, honesty, and loyalty (to (S))b. Diligent exercise of reasonable skill and care in performance of (A)’s duties (to both)

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c. Duty of honest and fair dealing and good faith (to both)d. Duty to disclose all facts known to the agent materially affecting the value or

desirability of the property that are not known to, or w/in the diligent attentionand observation of, the parties (to both)

2. Buyer’s agent:

a. Same as above

3. Agent representing both:

a. Same as above

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LEASING AND SALES CONTRACTS

A. Statute of Frauds:

1. Suretyship K must be in writing (guarantee):

a. Someone has agreed to stand for or hypothicate (put up property at risk) for another (a fall backobligor)

c. Called: “guarantees”

1. Obligor has an asset in connection w/ which he owes an obligation (e.g., a lease in which heowes rent) → someone wants to take over the asset (e.g., a sublease) – can:

a. Take over asset + obligationOR

b. Buy asset but not come into privity w/ obligee (so not personally liable)

1. In absence of release, B is still liable to A as a surety for C (now the primary obligor)

2. If non-assuming grantee (not personally liable) → property becomes liable

2. Real estate K’s and leases ↑ 1 year must be in writing3. Brokers’ provision4. Assumption: If assumptor buys property + assumes debt, must be in writing5. Loans: Loan commitments for loans ↑$100,0006. Equal Dignities Rule: If a K must be in writing under S of F, any agency authorizing one to form that

K must also be in writing

B. DEPOSIT RECEIPT (purchase K)

1. Generally:

a. Promise to buy, contingent upon financing (explicit covenant of diligence and good faith)

2. Assumption of preexisting debt:

a. Assumption:

1. Original borrower ((S)) becomes surety2. Secondarily liable to lender

b. Assumption & Release:

1. Original borrower is released from liability by lender

c. Subject to:

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1. Nonassuming grantee doesn’t have formal legal liability2. However, property is still subject to deed of trust3. Thus, practical liability

3. “Due-on” clause:

a. Accelerates payment of loan when property is subsequently transferred or encumbered

1. CA: Lender can’t call on loan unless can show legitimate risk (Wellencamp)

C. FORMATION; GOOD FAITH; RESTRAINTS ON ALIENATION

1. Consent to sell/assign:

a. Unless otherwise specified in K, denial of consent must be objective fair dealing:

1. In good faithAND

2. Reasonable

b. Quantum of restraint test: Rule against restraints not absolute -- it’s a balancing of degreeof restraint against justification

1. Kendall (FACTS: Lease required lessor’s approval for sublease; no explicit standardfor granting/denying consent; lessor refused to approve in a rising market)HELD: For Lessee (P.)

2. Codified by statutes: (p. 175)

a. Limited to commercial dealsb. Allows absolute prohibition of assignment c. Lessor can condition consent upon participation in increased rental income

c. Where commercial lease provides for assignment only w/ prior consent – may be withheldonly where lessor has commercially reasonable objection to the assignee or proposed use

2. Duty of Good Faith and Fair Dealing: (Implied in every K in CA)

a. Reasonable good faith w/ respect to lessor’s rights under lease rather than lessor’s interestin getting out of the lease (e.g., to profit from rising market) (Kendall)

1. Might be limited by Carma

b. DGFFD exists to protect express covenants of K – not to subvert or undermine those express promises

1. Courts still need to enforce according to bargain – not public policy

a. Carma (FACTS: provision if T. wants to sublet, have to ask L.; L. has right to

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kick T. out and lease to new T.) HELD: for D.

1. Can’t use DGFFD to say express provision is unfair

3. Unconscionability:

a. Doctrine of unconscionability can invalidate an express condition on transfer in a commercial lease

1. Absence of meaningful choice for one party+

2. K terms unreasonably favorable to other party

b. Procedural elements:

1. Oppression arising from inequality of bargaining power (results in absence of meaningful choice)

2. Surprise (terms hidden in printed form drafted by party seeking to enforce terms)

c. Substantive:

1. Terms one-sided2. Lack in justification3. Reallocate risks of bargain in objectively unreasonable or unexpected manner

d. Ilkhchooyi (FACTS: T. under sublease; L. said lease invalid; forced to sign a new one w/ differentterms; T. didin’t understand all of it; wanted same provisions as old lease; when wanted to sell, L.pointed out - lease provided for 75-25% split w/ lessor of any profits derived fromcovenants not to compete, sale of goodwill, etc. before L. will consent to assignement)HELD: Unconscionable

e. ISSUE: Does unconscionability belong in commercial transactions?

D. Estoppel Certificates:

1. Factual assurances from someone not a party to the K

a. Not a basis for liability – but can’t contradict what you say in EC

2. How do you get them?

a. Contingencies:

1. How contingent? -- May give (B) a way out

a. 100% EC’s from tenants may not be easy

2. Make condition realistic3. Relatively short4. With objective standards

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a. “substantially completed by not less than 2/3 T’s including big T’s and for those w/no EC’s, (S) will issue them (or warranty, rep, or indemnity)

3. Creates irrebutable conclusion or presumption -- even if contains erroneous recitation of terms

4. POLICY:

a. Has a positive impact on the reliability of commercial real estate transactions

E. OPTIONS:

1. Formal:

a. Wholly separate – (S) gives offer to sell → (B) gives separate consideration in return for which →option irrevocable for stated period of time → if option exercised → BLEK formed

1. Call option: Option to buy/acquire (make you sell)2. Put option: Right to sell (make you buy)

2. BLEK:

a. Typical buy/sell: exchange of promises, contingent on certain things (e.g., financing, etc.)

1. Exchange both covenants + conditions = conditions concurrent

3. Continuum from True Option →→ BLEK w/ no extra contingencies

a. # of contingencies: if 500 open contingencies all in favor of (B) – (S) doesn’t have much to rely on

b. Nature of contingencies: Right to inspect + reasonably disapprove vs. right to inspect + disapprovein my sole discretion (only question is good faith)

c. Time:

1. If right to inspect 10 days (= free option for 10 days; off market)2. If 60 days – may be free option unless reasonability requirement

d. Triggers: Contingency gone if not invoked w/in x(time) vs. if not invoked K gone

e. Who benefits from contingency: party benefited is one who can invoke/waive it

1. Property drafted: conditions separated as (a) for (B), (b) for (S), (c) for both

a. Caras (FACTS: D. agreed to sell land to P; escrow contingent upon P securingapproval to subdivide; another D(2) asked to buy; D. refused; wrote andcancelled escrow; sold to D(2)) -- Court viewed as an option – reallyjust a really contingent K

1. HELD: Not illusory – implied covenant of good faith to obtain approval

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of subdivision

4. Mutualities:

a. DGFFD saves most K’s (even w/ tons of contingencies)

b. Mutuality of remedy: Used to be unique to SP

F. REMEDIES:

1. Specific Performance:

a. Presumptively okay in residential deals

b. Real property presumed to be unique (law says $ probably not adequate)

1. Conclusive presumption in residential2. Rebuttable presumption in commercial (b/c if it’s about cash flow, $ damages okay)

c. (S)s can get SP – but harder ($ usually adequate)

d. K must be:1. Reasonably definite2. Just and equitable

e. Doctrine of equitable title:

1. When BLEK entered into, equitable title passes to (B)

a. When court grants specific performance – gives legal title (you own + in publicrecord) to equitable title holder

G. CONDITIONS/CONTINGENCIES:

****Fundamental purpose of a K: Denying the other side maneuverability*****

1. Questions to ask:

a. What: What is the condition?

1. Make sure worded in objective language – room for an out b/c calls for experts(“adequately suitable for a commercial enterprise”)

2. E.g., inspection; finance; environmental

3. Limited by DGFFD

a. Bushmiller (Financing contingency in sale K; (B) gave up after first loan applicationdidn’t result in right terms) HELD: For (S) – no efforts do not equal

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reasonable efforts

b. Who? Who benefits

1. Whose condition is it to invoke?

2. E.g., financing and inspection (B); (S) must find new home (S)

a. Wyda v. Merner (financing contingency; period of time it had to be arranged in)1. 2 components:

a. Fact of financing contingency (B)b. Time limit (S) (buy couldn’t claim it waived time)

c. When?

1. Letting contingencies go too long pushes K towards free option (e.g., 60 day inspection pd)

d. Where:

1. Where does the condition reside in K?

a. Can separate into subsections ((B), (S), both) – but doesn’t mean everything

2. Where does the condition kick in?

a. Precedent: don’t have to do unless X occursb. Subsequent: I give promise but can take back if X doesn’t occur (harder b/c trying

to change status quo)c. Concurrent

e. How?

1. How do you know when invoked?2. How do you know when it’s dropped away? (waived or discharged)

H. MARKETABLE TITLE:

1. Every K to alienate land (sell, lease, option) carries w/ it implied promise to marketable title:

a. Definition:

1. Readily subject to good resale (if you can’t sell it – you don’t really own it)+

2. Free from reasonable doubt

- King (parties said little about MT; later (B) wants title insurance; (S) saysit’s changing the deal; claims no K b/c no express agreement to furnishcertificate of title) HELD: for P – MT is implied in law -- wantingtitle insurance is just implementing covenant of MT

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2. Doesn’t have to be pure (rarely is): just reasonably reliable

a. Tension b/c (B) expects pure titleb. Just has to be practically marketablec. Court won’t tolerate hyper prissiness about MT (Laba)

3. How to invoke it:

a. Don’t close deal

1. Vulnerable to argument it’s a pretext

b. Raise after close as basis for claim on deed covenants:

1. PROB: If you knew about problem before close – laches, waiver, estoppel problems

c. Look to 3rd party to protect you:

1. Title insurance:a. Policy limits + term limits → BUT deep pockets + don’t have to prove fault

b. Major take aways + preprinted exclusions

c. Literal language: no coverage for things in public record but they couldn’tfind b/c something was screwed up

2. PROB: Sometimes marketable title and insurable title are different

a. Insurance company can choose not to search or do a write-over (choose not tomake it an exception from coverage)

d. Drafting tip: (for buyers):

1. Prelims not reliable – most mistakes are mistakes of omission

2. K + escrow instructions: “We’ll take subject to A + B but nothing else…” (vs. “won’t takeA + B, everything else okay”)

I. MERGER: - a matter of intent

1. Merger by deed: All prior negotiations are merged into final writing (usually grant deed):

a. Usually grant deed is a simple, one-page documentb. Doesn’t contain reps & warrantiesc. What is left of K once performed by payment of $ + delivery of deed

1. ISSUE: Have all promises, covenants, warranties, etc. merged into grant deed?

d. RULE:

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1. Merger will only occur as intended

2. Not as to matters collateral to the deal

e. Ways to deal w/ it:

1. Put covenants in grant deed (attach addendum)- rarely done b/c grant deed recorded

2. Include non-merger convenant in K (…are not intended to merge…)

2. Merger of estate: Lessor estate and larger estate owned by same party: Lessor merges into larger (the fee)

a. If you have a FSA in land + there’s an encumbrance and owner acquires it back – 2 estates mergeinto 1

1. Example: Lender has deed of trust → foreclosure → borrower gives up and says willyou take a deed (deed in lieu) → lender is now owner

a. Bad if other interests (encumbrances, deeds of trust) that were inferior/subordinate to lender’s deed of trust – not wiped out by deed in lieubut would be by foreclosure

b. Must bargain for “no merge” clause

3. Rights to stop a foreclosure:

a. “Redeeming”

1. Tender the amount due → both owner + any junior lien holder can redeem (stop foreclosure)if foreclosure based on acceleration of installment debt

b. “Cure”: Bring current (ending acceleration (reinstatement) – only available if someone trips onan installment plan

4. Wipeout:

a. When trustee delivers deed to successful bidder – relates back to day deed of trust in whichit was latent was executed (act as if (B) acquired ownership deed at time of TD) →→ now, bylegal magic old owner had nothing (no interests/property) to give

b. Holder of, e.g., easement, may still sue for breach of valid K

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J. PRIORITY:

Equity

Contract

Public Policy

Recording Acts: exception to rule of FIT – protectsrelative interest of 2nd person that noone seemed there

FIT: First in time: who took delivery of a valid conveyance first (recording not required)

1. Every priority issue is between 2 contestants

2. CA Statute: 1st in time has priority

3. Recording Acts: Protects reliance interest of 2nd who has no way to know of 1st

a. If person who is FIT records → he winsb. If 1st not recorded → law rewards latecomers (B.F.P.’s + B. F.E.’s) for value (paid $) in good

faith reliance

1. Lose BFP status if:

a. Don’t pay valueb. Have constructive knowledge of 1st (e.g., imputed from agent; 1st already recorded)

2. MUST have: ignorance + innocent + good faith + detrimental reliance

c. Public policy: certain classes get priority

- tax liens- favored classes (e.g., purchase money deed of trust)

d. Contract: Can subordinate by K

e. Equity:

1. Equitable subordination: courts can fiddle w/ priority

4. Determining Priority:

a. Who are the contestants?b. Who was 1st in time?c. Is some a BFP?

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d. Is there a special rule of priority?e. Is this changed by K?f. Is there some reason of equity to change this?

K. ATTORNEY’S FEES:

1. American Rule: winner, in absence of statute or K providing so, will not recover their fees

a. Courts, realizing rule is harsh, find ways to include fees

2. Reciprocity: If you get fees if you win, I get them if I win

a. Even if K says “in event of breach, L. gets fees…”

1. Real Property Services (FACTS: Pasadena agreement w/ developer to build multi-useproperty; says give permission to sublease movie complex to RPS; city decides notto have movie complex; RPS sues City though not in privity; lease between Cityand developer has attorney fees clause; RPS claims to be 3rd party beneficiary; RFSloses suit; claims no privity so won’t have to pay fees)HELD: RFS must pay

a. If pray for fees and lose – can’t claim no privity to get out of paying other side’s fees

3. Voluntary dismissal

a. Doesn’t entitle other party to fees as if it were “prevailing party” (CC §1717)

4. Related tort claims:

a. May be entitled to fees if K language addressed “actions arising out of K”

L. RISK OF LOSS:

1. Risk passes from (S) to (B) when:

a. Title exchanges handsOR

b. Possession exchanges hands ((B) then has control to protect property)

2. If “material” part of property destroyed, call of K or buy at full price (Dixon)

a. Material: reasonable (B) would care; involves appreciable amounts of $

1. If it’s enough so (B) wants price reduction, it’s material

- Dixon (partial destruction of property before title passed to (B); issue was whether(B) retained right to enforce K at abated price) HELD: K rescinded –probably wrong

a. CC §1662: Vendor has no right to enforce (but doesn’t provide converse

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for vendee – BUT – at a price abatement?)

M. WARRANTIES:

1. No implied warranties in sale of real estate in CA

2. Mass produced housing:

a. SL of products liability theory applies:

1. Kriegler (Defective heating system in mass-produced housing tract) HELD: liability

2. If spec. house (maybe a few at a time) – no SL b/c not considered manufacture

N. “AS IS” CLAUSES

1. Mean less than people think:

a. No warranty anyway – so eliminating nothing

b. Only says: “I, (S), am not going to inspect”

1. (S) has duty to disclose known latent defects with or w/out “as is” clause

a. Typical lawsuit: some latent defect → (B) claims fraud; concealment, etc.

- Shapiro (As-is sale of commercial property; foundation damage apparentin basement; (B) sued for fraud) HELD: no recovery

- (B) failed to inspect (would have been apparent by visual inspect.)

-Loughrin: cannot waive TDS disclosures; use “as is” clauseto conceal known defects

c. Creates flavor that more of risk is on (B)

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DEEDS AND CONVEYANCES

A. Nature and Elements of Deeds:

1. Elements:

a. Writingb. Description of partiesc. Description of propertyd. Words indicating present intent to conveye. Signature of grantor

2. Only matters in the moment – not a promise to do something in the future

3. Nature of Elements:

a. Deed is evidentiary of delivery

b. No consideration necessary1. Can be a gift deed2. Form does recite consideration

c. Property Description:1. Required2. No specific method

a. Old methods bad: artificial, natural monuments (trees, boulders)b. Today: GPS technology; hire a surveyor

d. Notarization:1. Doesn’t need seal, notarization, recordation, or acknowledgment to be valid2. Notarization required for recordation

e. Testamentary deed1. Issue is conditions2. Generally OK to have limitations on estate, but not conditions on delivery3. Exceptions: conditions in escrow instructions

f. Fee simple conveyance:1. Presumption grantor intends to convey fee simple2. Unless otherwise indicated in deed (e.g., “life estate”)

g. Covenants for title:1. Speak at moment of conveyance, or ongoing2. Promises/restrictions that are part of the essence of the interest

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B. TYPES OF DEEDS:

1. Grant Deed :

a. Conveys everything grantor has or will later acquire in property designated

b. Warrants that title is good

c. Recording info. from local govt. goes at top:

a. Recording requested by:

1. Title Company: → you know 2 things:a. Possibly deal closed through escrow → tells you if litigation → go find

escrow fileb. Recorded by title co. b/c of accommodation recording (done as a favor –

Seymour): Title co. recorded instrument as a favor to a good client →sued b/c improper (no signature – slipped by recorder)

d. Date + time: For race notice (FIT)

e. No assessor parcel number: Govt. doesn’t trust private descriptions of land b/c afraid of losingtax revenues – assigns parcel nos. to land

f. Certain language implies promises:

1. “Grant” (magic word in CA): a. Fee Simpleb. covenant against encumbrances at moment of conveyance

1. If false, then actionable primitive form of title insurance

2. Quitclaim Deed:

a. Conveys any interest grantor may have in the property

b. Contains no covenants for title → no warranty of good title in grantor

c. Convey many types of interests (e.g., mineral rights; fee simple)

d. Can you get title insurance on quitclaim deed?

1. Maybe – but probably less coverage

3. Deed in lieu of foreclosure:

a. Foreclosure:

1. Creditor who forecloses first wipes out all other junior interests (interests that came behind

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that creditor (e.g., 2nd TD & owner)2. Relates back to 1st TD (if 1st is foreclosing) so that all who came after have no interest

in property – wipeout

b. Deed conveys title to lender w/out foreclosure procedures

c. Problems:

1. Deed speaks as of time of conveyance → doesn’t relate back to TD a. Doesn’t wipe out junior interests

2. Lender can foreclose on itself, accomplishing same result (unless merger)

3. Lenders rarely agree to take deed in lieu – b/c still have to foreclose on selves anyway

C. I NTERPRETATION OF DEEDS :

1. Key is intent: modern courts will look past form

a. Reserved interests: Deed can reserve interest in 3rd party

b. Duly recorded instrument imparts constructive notice of its contents

- Willard: (FACTS: intent to grant easement to use parking lot by church; not in deed)HELD: Willard not a BFP – church used lot while Willard was purchasing + after

D. CORRECTING ERRONEOUS DEEDS ( REFORMATION)

1. Void vs. Voidable:

a. Void: Deed will not be given effect

1. Nothing ever existed → no effect even if sell to BFP2. No intent to voluntarily convey

- minors (no capacity)-fraud (A signs B’s name)-duress-competence

b. Voidable: Fraud in the inducement

1. Erroneous motivation to convey2. Voidable at someone’s request3. A tells B – you’re conveying life estate when really conveying FSA; if A conveys to BFP,

B is stuck

2. Reformation : Not fraud or misrepresentation – just a mistake:

1. Only applies in voidable deeds

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2. To reflect true intent of parties:

a. Clerical errors: easy to reform

b. Bigger errors + others have relied: might not be able to reform

E. PRESUMPTIONS:

1. After-Acquired Title Doctrine:

a. Conveyance of fee simple presumptively includes all of grantor’s later-acquired interestin the property

1. Only applies to fee simple

2. Don’t have to be a BFP as a grantee

a. A says “I grant FS to B; only has a LE; B knows only has a LE → FS latervests in A → at that second it goes to B

b. Schwenn (Grantor’s oil & gas lessor interest transferred to her daughter; granter thenconveyed FS to grantee; later daughter reconveyed oil & gas interest back to grantor)

1. HELD: Since grantor conveyed FS – oil & gas interest automatically flowedto grantee

2. Estoppel by Deed:

a. Any estate reasonably described in the deed:

1. Includes other deeds (not just FS)

2. Requires some rep or warranty in the deed on which to base estoppel

a. A has no title; gives B a LE; A gets a FS; B automatically gets an LE

F. DELIVERY:

1. 2 Requirements:

a. Grantor must have present intent to convey the estate

b. Deed must be beyond grantor’s control

2. Non-escrow conditional delivery:

a. 2 Possibilities:

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1. No delivery

2. Delivery but no conditions

b. Generally hinges on grantor’s understanding

1. If he thinks stuff still must be done → no delivery (vice versa)

3. ESCROW:

a. Grantor has irrevocably placed deed out of his control subject to conditions

1. Deed not delivered until conditions met

2. At moment conditions satisfied → delivery is complete

a. Todd v. Vestermark: (FACTS: Burnett ((S)) + Vestermark ((B)) put escrowinstructions into Broadway escrow; no escrow until title issues; Broadwaynot the title co. so opens subescrow; Beneficial (PM lender) funds escrowfor purchase; Burnett already had loan on property – so Todd (lender) supposedto put in request for reconveyance; Title co. says go ahead and record and we’llwait for $ from Todd; Title Co. issues policy w/out loan (so if Todd loan notrepaid, Vestermark’s have action against Title Co.)

1. HELD: Premature delivery -- = no delivery

a. Vestermark couldn’t entitle Title Co. to issue policy

b. Title Co. failed to follow escrow instructions – Court goes toVestermarks (to absorb loss) – they have action against Title Co.

4. Constructive Delivery:

a. Deliver deed to someone else + no conditions

1. ISSUE: who is the person?

a. If A delivers to A’s agent → no delivery b/c not beyond A’s (grantor) control

b. If stranger = immediate delivery1. So long as someone toher than grantor’s agent

5. Delivery Presumptions:

a. Grantee has possession of deed (delivery presumed)

1. When give deed directly to grantee → conditions removed = immediate delivery

b. Grant has possession (NO delivery presumed)

c. Recordation: Prima facie evidence of delivery (more than a presumption)

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1. If not recorded – no presumption either way – just look at intent

a. Casey (FACTS: $ judgment against property owned by Berglund; purchase of property; Berglund quitclaims to Casey; abstract of judgment (get $ judgment to attach to property) recorded; reformation of quitclaim); deed recorded

1. HELD: Nothing for judgment to attach to b/c already quitclaimed – don’t need recordation for deed to be valid

a. Abstract doesn’t attach until recorded

d. Grant w/ reservation (delivery presumed)1. e.g., “I give you FS but reserve LE for me to stay

e. Acceptance presumed most of the time – especially where benefit to owning the land w/outunusual burdens

1. Before presuming acceptance, particularly where there are burdens, exceptions:

a. Intent of grantor

b. Subsequent conduct as evidence of intent of grantor

G. D EED COVENANTS AND CC&R’S :

1. In general:

a. Looked at in terms of K

1. Title insurance better to rely on b/c deep pockets

b. Remedies: K remedies (SP w/ abatement; damages; abatement + restitution): Can only get whatgrantor received (maybe interest + attorney’s fees) (SP for breach of convenant of furtherassurance)

c. Must have an actual defect (not like marketable title problem, w/ just a potential defect)

2. Ways to Include in a Deed:

a. Spell it outb. Use “grant”: Means I have “fee simple” + I have not encumbered it

1. Exceptions to this must be spelled out

3. 6 Title Covenants that can be Conveyed by Deed:

a. Present covenants:

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1. Breached, if at all, at moment title accepted (Statute of Limitations starts running)

a. Seisen (I, grantor, own the property (in FS if in CA))b. Right to conveyc. Against encumbrances

2. Implicit in deed

3. Use of magic word (in CA = “grant”)

b. Future Covenants:

1. Breached when grantee actually disturbed by someone w/ paramount title (must loseto 3rd party to go after grantor)

a. Warranty (no one has paramount title)1. Breached by eviction of grantee for lack of title2. By encumbrance3. Should be defended by grantor

b. Quiet enjoyment1. Right to be in property and not disturbed re: title

c. Further assurances:1. Continuing promise grantor will execute docs. necessary to ensure

grantee gets title (e.g., grantor must fix if there’s a problem)2. Can get SP

c. Title insurance: Usually subrogates to right of grantee and pays indemnity – then pursues actionvs. grantor

4. Equitable Servitudes:

a. Like a covenant that runs w/ the land but it burdens it

1. Must touch and concern the land to run w/ it

5. CC & R’s:

a. In essence, private zoning:

b. ISSUES:

1. When do they run with the land?

a. If restrictions recorded before sale, later purchaser deemed to agree to them(Citizens)1. Technically, recording of CC&R’s is not an instrument so no constructive

notice – court found intent by constructive notice2. Normally wouldn’t apply to past CC&R’s3. If they did apply, not really conveying FS – violates that grantor hasn’t

encumbered property

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H. PRIORITIES:

1. RULES:

a. First in Time, first in right (other things being equal) §2897

b. Recording Acts:

1. Voluntary: don’t have to record – but won’t be protected by §2897 against BFP

2. BFP for value is only beneficiary of Recording Acts:

3. 3 Types of Jurisdictions:

a. Pure Race: (minority rule – only NC, LA)1. Whoever gets to recording office first wins

b. Pure Notice: (@ 1/2 country):1. BFP always wins

c. Race Notice (CC §1214):1. Must be BFP for value + record first

4. Mechanics:

a. Records all indexed by party names (grantor/grantee)

b. Gives constructive notice only of deeds discoverable by reasonablydiligent search of records

c. Everything recorded gives constructive notice of all contents of instrument(CC §1213)

d. Unrecorded instrument is valid as between all parties who have notice(CC §1217)

2. Special Rules of Priority:

a. Purchase Money Deed of Trust:

1. Priority to one who holds security interest re: original purchase

a. Brock v. First South: PMDT gets priority over vendor’s lien b/cvendor’s lien is a secret lien; law trumps equity

b. Powell: (FACTS: (S) carried back PMTD (2nd); lender got 3rd; escrowholder same entity as (B); escrow agent/(B) recorded lender’sTD along w/ grant deed before seller’s TD; priority fight between

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(S) and lender)

1. HELD: Nobody 1st in time b/c all part of same transaction/ nobodya BFP

2. Since (S)’s interest was PMTD, (S) prevails - Rule: in a tiePM interest wins

b. Mechanic’s lien:

1. Relate back to commencement of work

c. Property tax:

1. Always takes priority (+ sometimes federal income tax; payroll taxes)

*****Usually all subject to operation of Recording Acts*****

3. Contract:

a. Subordination agreement:

1. Usually express – but doctrine of implied subordination may apply

4. Equity:

a. Equitable subordination

1. E.g., careless w/ funds in a way that harms known expectation of subordinatedparty; possibly breach of subordination agreement

b. Automatic Subordination:

1. Sometimes order of recordation happens for a reason – not just random-- shows intent (used as implied agreement to priority)

a. To show you’re first:-laches-waiver-estoppel-implied K

5. Real vs. Fictional:

a. Consensual vs. Implied-in-law

1. Vendor’s Liens: Implied-at-law where (S) finances sale partially w/ unsecuredobligation (e.g., when (S) doesn’t actually obtain a consensual security interest)

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I. LIS PENDENS:

1. “Litigation Pending”:

a. Recordable notice of:1. Pending action2. Affecting interest in real property

b. Creates cloud on title:1. Doesn’t prevent transfer2. Most sales don’t happen

2. Elements:

a. Real Property claim: Suit concerning ownership or possession of real property

1. BGJ: (FACTS: you had my $ and turned it into real estate – so I want my $ inthe form of real estate) HELD: Not a real property claim

b. Merit threshold:

1. Likelihood of success: more probably that recording party will prevail

3. Effect:

a. Everyone taking interest in property after recordation takes subject to the outcome ofthe pending action (includes outcome by judgment or settlement)

4. Expungement:

a. Upon expungement, LP no longer has any effect → disappears as if it never existed

b. Standards:1. Not a real estate case2. Probability of success (likely meritorious)

c. Possibilities:1. Get rid of LP but make D. post a bond2. Not get rid of it but make P. post a bond to hold D. harmless for delay3. If P. loses – D. can bring claim for malicious prosecution – but it’s really hard

to prove (no probable cause + malice)

5. Service requirements very strict/demanding on lis pendensa. Must service all known addresses, address in tax record, etc.

6. Attorney’s fees basically mandatory, even w/out clause

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J. IMPACT OF RECORDATION; BFP’S & BFE’S :

1. General Requirements:

a. Must give something of value for their interestb. No knowledge (actual or constructive) of prior interestc. General good faithd. Donees cannot be BFPs

2. Instrument only gives constructive notice if findable in a reasonably diligent search: (under nameof owner during period which owner held record title)

-Ludy ((S) carried back PMTD; (B) had previously granted lien to utility company before become owner of record (while had option); water companylien recorded before PMTD) HELD: PMTD had priority b/c (B) notowner of record at time lien recorded – (S) didn’t have to search then

a. May not be property recordedb. Names wrong (Romero – no notice)c. Clerical error (NE instead of NW)

3. Relevant Date – When they paid value:

a. Must have been ignorant when “BFP” relied (paid value)b. Can’t claim to be a BFP b/c in K (before close title)

Davis (Sale + small fraction of price paid in cash; got notice; rest of price in note)HELD: “pro tanto BFP” -- only BFP as to reliance interest (cash paid)

J. CHAIN OF TITLE:

1. What is the critical dimension: Time – Sequence of events – Parties

2. Inquiry Notice:

a. Possession (open, notorious, visible) + where that possession is inconsistent w/ recordtitle →→ you must investigate

3. Wipeouts:

a. Foreclosure wipes out any subordinate interests:

1. Don’t always want to wipe everyone out – e..g, tenants paying above market rent

a. Attornment agreements: (land prey; parasite; to adhere to)

4. Root of Title: Well defined event establishing origin of title (e.g. grant by fed. govt.)

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a. Most states have Marketable Title Acts: go back X years – anything before that disregard

b. Wild Chain: Cannot trace origin to root

1. Only win as latecomer if you’re BFP/BFE

2. If priority fight between #4 in child and #d in wild chain, #4 winsc. No notice of recorded simultaneously (Early-Late prob. – moments later would have notice)

5. Prelim. may be basis for actual knowledge (despite statute that says can’t rely)

******Put in title chart from 10/31

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ESCROW

A. Opening:

1. Technically, not truly opened until:a. Sales & purchase K formedb. Irrevocable depositc. Conditions (instructions): from both parties to the escrow

B. Escrow Instructions:

1. Don’t have to be in writing to be valid (Zang)

2. Escrow agents should not accept (or draft) instructions that are vague & ambiguous (Spaziani: unclear whetherfirst TD was to be for PM or construction loan)

3. If modify the K:

a. Must satisfy requirements for real estate K (i.e. signed by both parties, etc.)b. If oral instructions differ from the K – may not modify

C. Relationship of Escrow to the K:

1. Buy/sell deal all cash to (S) (no contingencies)a. Usually bilateral K between (B)/(S)b. Escrow = files/records of escrow co. + escrow instructions

1. Instructions can legally be the K → but docs doint 2 different things → escrow holdernot a party to buy/sell K

D. How Do Things Get Screwed Up?:

1. Failure to follow instructions:

a. Acting on conflicting orders

b. Acting on unclear orders

2. Allowing temporal fraud to occur:

a. Escrow holder closes before $ put in yet; (B) goes to get loan + DT → timing allowed appearancethat (B) has $ at risk in deal (belief of (S) that (B) put $ at risk is frustrated

1. Escrow holders must actually have the $ to prevent that extra time

b. Control over timing = ability to engage in temporal fraud

3. Scribner’s errors:

a. Lots of paperwork involved → things get screwed up (e.g., property description wrong; amt. wrong)

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1. Usually simple negligence

4. Premature Close:

5. Confusion as to who the Principals are:

a. Zang: (FACTS: foreclosure on property; Zang to lend $ on property to stop foreclosure; Zang payslender outside of escrow (b/c no time to go through escrow) – lender supposed to send recoveyance to Peggy at escrow co.; Peggy used that reconveyance to clear title + give TD tosomeone else (so Zang didn’t get 1st TD)1. If Zan not a principal, Peggy has a duty to ignore him

E. Fiduciary Duties:

1. Agency relationship: restricted authority (via instructions)

2. Quasi-Fiduciary duty b/c conflicted nature of escrow agent

a. KEY: instructions – Duty to strictly follow

1. No doctrine of substantial compliance: ambiguous instructions = no instructions(Spaziani) --- Escrow co. can be liable b/c acting on ambiguous instructions

a. TEST: would a reasonable person think instructions have more than one meaning

3. Scope:

a. Lee(1): Agent has no duty to police escrow (b/c inherently conflicted) 1. FACTS: Escrow agent could have reported/found fraudulent activity – no liability

b. Lee(2): Agent must verify signatures when in writing

c. Escrow co. must review any documents relative to the escrow …to discover potential risks to its principals

1. Kirby: (FACTS: Universal investment co. took $ from investors; loan for note fromborrower; assign note to investors (I); U. loans $, gets TD; title insurance policy showsassignment to I; borrower gets $; escrow co. pays $ to U. rather than I; U. takes $ and runs; I sue escrow holder – should have known paying $ to wrong person; only wayof knowing was title policy that came across escrow desk

a. Escrow co. not obligated to search for assignment – it had knowledge from title policy

b. Large burden on escrow companies to read everything in prelim (but w/ changes ininsurance code – maybe not good law anymore)

c. Escrow was still open (between U. and borrowers) → still under duty (I. new principals when U. assigned)

d. Knowledge not imputed across escrow boundaries (even if same officer)

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1. Imputing knowledge by agency: Scope of imputation is limited to scope of duty2. If there’s leaking across escrows, can argue it’s functionally one big escrow or

an escrow + subsecrow

F. Remedies:

1. Sue escrow holder for:a. Negligence (breach of duty of care)b. Break of Kc. Breach of fiduciary dutyd. Constructive fraud

2. Claim escrow never closed → so no deal occurred

G. Conditions & Waiver:

1. Only party benefited can waive

a. Kish: (FACTS: U. owned hotel; S. wanted to buy; enters ILK; Kish arranged transaction + gotcommission from U.; Kish bought S.’s home; gets deed; Kish loans commissions to S. + Kish supposed to take a TD (never drawn up – two parties signed blank pieces of paper); S. ILKdidn’t go through escrow b/c no problem of simultaneousness; S. changes mind about everything (buying hotel + selling home); NV court set aside ILK (fraud in the inducement)

1. ISSUE: Implications of partial undoing of the transaction

2. HELD: Kish did nothing wrong so that deed can’t be set aside

3. THEORIES: (Sussman):a. No delivery occurred

1. TD + note to have gone to Kish → never did (note + TD to encumber S.’s interest in the motel) (S. only had equitable interest in hotelb/c ILK – escrow probably couldn’t figure out where the TD was toattach to)

a. Requirement was for Kish’s benefit as creditor + he waived it (BUT –benefit to S. b/c anti-deficiency laws)

4. ERRORS:a. Kish waived: Court finds retroactively that he waived

2. A collateral assignee does not have the power to subordinate:

a. Triple A Management (FACTS: W. sold 140 acres to Triple A(TA); W. got PMTD; TA wants to sell20 acres of that – needs release from W. to be free of TD on those 20 acres; TA collatorallyassigns PMTD(2)(from the 20 acres) to W. (in sale of 20 acres to Greenwood); G. sold 20acres to S. (gave 3rd PMTD to G.); Frisones wanted 1st TD as condition to lending $ to S.;F. says no close unless 1st TD; TA wouldn’t subordinate – didn’t want to have to go back+ negotiate w/ W.; Escrow then went to W.; W. subordinated

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1. Subordination invalid – didn’t have all powers of a full beneficial owner of the paper(e.g., if A owns house; gives B deed as security for a debt; B. can’t sell house)

a. F. claims to be BFE – but enough info in chain of title + in own escrow to haveinquiry notice W. just a collatoral assignee

2. Frisone can sue Stewart Title under 3rd party tort doctrine (for attorney’s fees)

H. SYNERGIES:

Escrow Title Insurance

1. Due care 1. No fault2. Fiduciary duty 2. Deep pocket3. Follow instructions literally 3. Limited liability (policy limits)4. Uncapped liability

(strong duties + uncapped liability but have to establish fault + maybe no $)

1. If escrow holder is title insurance company:

a. Opportunity to mix-and-match:1. If fault strong: negligence; breach of fiduciary duty; fraud2. If not: use TI policy (but have cap)

2. KEY: Use Title Co. as escrow holder

I. ANTI-DEFICIENCY LAWS:

1. Fundamental Thrust: you shouldn’t have to pay debt in full

2. STATUTES:

a. §2924 et. seq.: Debtor who has tripped up on installment plan has right of reinstatement to bring current w/in 5 days of foreclosure

1. Right of redemption: Right to pay off in full2. Procedural hurdles set off to slow process for borrower

b. §726: If you take a mortgage of TD, must go after property covered before debtors wallet

1. Limits personal liability2. “Security First” rule

c. §5806: When there are certain types of financing we call “purchase money”, there will be no personal liability period

1. All (S) carryback financing

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2. Bank loans to assist in purchasing 1-4 family owner-occupied residences

d. §580d: 2 Types of foreclosures in CA:

1. Judiciala. CA: If use judicial → subject to 1 year right of redemption for debtor to buy back

at sale price

2. Non-judicial: trustee does it privately w/ no court intervention → property sold at auction:a. Can’t get deficiency judgment

e. §580a (+§726(b)): Fair value rule:

1. If deficiency judgment can be recovered, the amount of that judgment is limited by lookingat difference between higher of bid price or fair market value at foreclosurea. $1 mi. debt → market value $800,000 → bid $500,000 → deficiency judgment

limited to $200,000 (borrower can buy back at $500,000)

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TITLE INSURANCE

A. Structure of the Industry:

1. 2 Distinct Capacities:

a. Insurance function (underwriter)1. assess + underwrite risk (put wallets on line)

b. Title Co. (sometimes same entity, but usually big insurer + small local title co.)1. Title search2. Escrow work3. Foreclosure desk4. Subdivision 5. Title abstractor: sell title info. (but no deep pockets) not in CA – (only on6. Attorney – to handle escrow; title abstract; report East Coast)

2. In General:

a. Title Insurance: indemnity K notion (insurance notion)1. Make claim when conditions of indemnity satisfied – no fault involved

b. Abstract (old model): Sell info. at risk of being sued1. Only lists what they found by way of limiting coverage

c. Title Insurance write-over/write-around: May know about problem on property – but doesn’tlist on exceptions from coverage1. People misled – but policy not a truth telling document

B. Title Products:

1. Prelim: (until 1982, courts treated as an abstract)

a. Merely offers to issue a policy (reporting intention to issue a policy)

b. Can you sue on a prelim?

1. If company holding out as an abstract: “Here’s the prelim, looks like not much on theproperty” → Use Estoppel Theory

2. Abstract:

a. Chain-of-title reports

b. Title Co. may know you’re buying info → issue a “report” or “guarantee” but limits liability →some characteristics of an abstract, some of an indemnity K

1. Contini: If Title Co. leads to believe prelim can be relied on, may be considered as anabstract for both the insurer + the purchaser’s benefit

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3. Title Insurance Policies:

a. Standard Coverage: Only protects against paper

1. Things in chain of title at recorder’s office2. No inquiry notice3. Can tack on endorsements to add coverage

b. Extended Coverage: Anchored in field work – what a reasonable person would have found

1. Inquiry notice

c. Both:

1. Insurance that title is vested where it says it is (vested in a specific way) (CLAIM arises if someone else owns all/part of that interest)

2. Protection against intrusionsa. Charges, liens, & encumbrancesb. CC&R’sc. Easements, etc.

3. Other interests: quasi-physicala. Landlockingb. Encroachments

d. Title Issues: not clear-cut

1. Lick Mill (P. bought land; some environmental testing; looked OK; but layer of verycontaminated soil @ 30 ft. down → huge clean-up costs (threatened to exceed valueof the property); under CERCLA, owner of land had legal responsibility to clean-upland w/out any fault)a. HELD: Title claim rejectedb. Plaintiff’s claims:

1. Congress linked land clean-up to title (SL notion)2. Clean-up responsibility is a negative stick in bundle (ownership attribute) –

should be a title issue like an encumbrance on property3. Things recorded by, e.g., EPA not required by recording acts (today,

reasonable to expect environmental search)c. Defendant’s claims:

1. No affirmatively covered2. Doesn’t deal w/ title – really about physical condition of property (but

could express self in title way)3. CERCLA an exercise of police power by state (so excluded in policy)4. Will break the bank – b/c never underwrote the risk

4. Litigation Guarantee:

a. Buy at threshold of lawsuit1. E.g., about to start a foreclosure or quiet title action → need to know who owners are → buy

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indemnity K to ensure right

a. Lis Pendens: Who to sue; property description; what county it’s in; etc.

b. Title Ins. Co. tells you what you need to know for lawsuit

5. Trustee’s Sale Guarantee:

a. Non-judicial foreclosure: Need same info. (property owners; who has other interests; propertydescriptions; who to serve)

6. Subdivision Work: Insure final result (identify boundaries; line adjustments)

C. Alternatives to TI:

1. In CA – none, as a practical matter

a. Quelimane (suit b/c Title Cos. won’t issue for property bought in tax sale)

2. When something is that essential → is it a public utility?

a. More regulation required b/c no alternativeb. Monopoly of a product → more willingness of govt. to intervene

D. LIFE CYCLE OF A POLICY:

1. Title Co. likes being escrow holder – don’t want any gap between escrow close and title policy issuance(b/c covers as of date of escrow)

2. Downdate:

a. If something pops up → conditions of K probably fail

b. Example: Downdate 2 days before close; day before a judgment lien attaches; Title Co. put in;as exception; escrow closes; (B) didn’t notice until 30 days later

1. Claims against seller:a. Break of Kb. Fraudc. Implied covenants of titled. Escrow never closed – so no deal

2. Against escrow holder:a. Breach of fid. duty -b. Negligence

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c. Constructive fraud – escrow instructions say don’t close unless in X condition

3. Probably no Title Ins. claim

3. No close problems:

a. Lost timeb. Market changesc. Costs

4. Lifespan: Infinite

a. Insures only against things that arise as a result of state of things at moment of issuance –not against things that arise in the future

5. Indemnity against Risk:

a. Tension: chances of a claim hinge on how careful they search → they provide indemnity against risk BUT they control the risk

1. May not be made whole by TI2. Should consider other ways for checking out title

a. Express warranties & reps. by (S)b. Have (S) leave $ in escrow for a period of time in case anything comes upc. Emphasize escrow liability

E. THE POLICY:

****2 fundamental obligations of TI: (1) Indemnity: make whole + (2): defend your good title *****

1. Insuring Clauses:

a. Insure against “loss or damage” (strict definition):

1. Title vested as stateda. Only insuring a particular estate

2. Defect in title/lien or encumbrance on:

a. Overlaps w/ vested titleb. Lien: narrow, statutorily defined categories (doesn’t include TD’s)c. Encumbrances: Charges/claims against your property

3. Unmarketability of title:

a. Clouds on title: Potential problem that puts buyers offb. Marketable = free from reasonable doubt

1. Lick Mill: No problem w/ marketability b/c it was a physical problem –not a title problem

4. Access: (landlocking problem)

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a. Problems between dominant and servient tenementsb. Doctrine of practical construction: way you live K is best evidence of what it meantc. Estoppel/lachesd. Implied dedication

5. Invalidity/unenforcability of lien of insured mortage (in a loan policy)

a. Title to (B)b. Enforceability of TD securing loanc. TD properly delivered in proper formd. Paying to ensure they didn’t screw up in role as escrow holder

6. Priority problems:

a. Insuring against someone else jumping your priority (doesn’t ensure you’re 1st though)

1. Optional Advance/Modification: If modification is voluntary (not compelledby existing docs) that modification will have priority

2. Obligatory Modification: if existing loan docs already provide for changes(always part of deal) or if protective, retain priority b/c really nota different deal – it was always implicit

b. Mechanic’s liens: Relate back to commencement of work

7. Assessments:

a. Liens applied against property by1. Public (e.g., street building)2. Non-profit orgs.

8. Assignments (lenders)

9. Attorney’s Fees:

a. Usually not included in policy limitsb. “Tender Policy Limits”:

1. At any point can tender you insurance amount → ends obligations2. Cuts off duty to defend

2. Exclusions From Coverage:

a. Laws, ordinances, and governmental regulations: (except to extent notice recorded in public record)

1. Use permit type issues2. Building codes3. Subdivision laws4. Environmental protection (post Lick Mill)

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b. Police power

c. Eminent domain

d. Defects, encumbrances, adverse claims, or other matters:

1. Created, suffered, assumed or agreed to by insured (whether or not recorded)a. Must be actual + voluntary (construed narrowly)

2. Not known (actual knowledge) to Ins. Co., not recorded, but known to insured + notdisclosed in writing

3. Not resulting in loss or damage to insured4. Attached or created after date of policy5. When insured not protect b/c didn’t pay value for its interest (not a BFP)

e. White dragon problem: Resulting from failure to qualify as a business

f. Usury:

1. Unenforcability of mortgage based on usury or consumer credit

g. Statutory lien (e.g., mechanic’s lien)

h. Bankruptcy (broad carve out for insolvency laws)

1. Bankruptcy has retroactive rules:a. Preference Laws: recognize bankrupt may favor certain creditors – for 3 mos.

pre-bankruptcy (+ 1 yr. for insiders) payments not made in ordinary courseof business can be yanked back in

2. Fraudulent conveyance laws: 3 or 4 yrs. – transactions by insolvent party or if intentto hinder creditors are set aside

3. Trustee has status of hypothetical BFP – can assert rights against unrecorded interests

3. Schedule A: Particulars of Policy

a. Premium amount + insurance amount

b. Date + time of policy

c. Name of insured

1. Normally you must have an “insurable interest” (obvious economic stake) to get insurance

d. Type of estate or interest (e.g., FS)

e. Vesting coverage (title is vested in (B))

f. Property description

1. No insurance as to size, location (standard) (in extended, there’s a survey)

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4. Schedule B: Exceptions

a. Part I – standard (recurring) exceptions:

1. Property taxes2. Matters not in public record, but discoverable by inspection of land; could be ascertained

by possessors of land (e.g., inquiry notice)3. Matters not shown by public record (e.g., wild deeds)4. Boundary line discrepancies not shown by public records & discoverable by survey (standard)5. Matters relating to:

a. Unpatented mining rightsb. Reservations or exceptions in patentsc. Water rights

b. Part II – specific items in title search:

1. Taxes2. Easements3. Public utilities/sanitation4. Deeds of Trust (doesn’t list priority)5. Assignments6. Unrecorded leases7. Rights of parties

c. PROB: Can’t rely on prelim – but people do:

1. ISSUE: Suppose something out there (TD); discovered before close b/c down date; is (S)in breach at moment problem discovered? → not necessarily

a. Fund. parts of K = title + price1. Concurrent conditions, at moment of deliver2. Nobody has to go first (b/c of escrow)

b. (S) may still have time to tender marketable title b/c concurrent conditionshaven’t occurred (performance not yet due)

c. Whose Problem is it? -- (S):

1. Presumption: (B) bargained for good, marketable title – subject to termsof K

2. If (S) doesn’t cure – maybe in breach of K3. Is (S) says too bad – you take w/ TD = “anticipatory repudiation”

a. (B) doesn’t have to wait until $ paid until breach (to sue)b. (B) doesn’t have to tender price b/c futile

5. Conditions & Stipulations:

a. Public record: Records established under state statutes

b. Insured =

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1. Heirs & devisees2. Transferees of lender’s paper

c. Known = actual knowledge

d. Marketability of title = alleged/apparent

e. Continuation of coverage:1. Lender acquiror after foreclosure is covered – but as a lender, not an owner2. Coverage as to owner who sells continues re: title covenants3. If (S) carryback, coverage will be as a secured lender

f. Notice of claim:

1. Failure to give notice may eliminate coverage if it’s prejudicial to carrier (to extend of prejudice)

g. Defense/Prosecution of Actions: Right to retain own counsel to monitor insurer’s counsel

1. Conflict problem for insurer’s counsel

h. Proof of Loss/Damages: Examination Under Oath (EUO)

1. Insurer has right to examine insured under oath2. Deposition conditions, -- but insured usually doesn’t retain counsel

i. Tender of policy limit

1. Insurer has option to simply tender policy limit to insured2. Can also purchase the debt from insured lender

j. Consequential damages:

1. No coverage

k. Coverage is cumulative:

1. Each occurrence reduces the overall coverage of the policy available for future matters

F. LIS PENDENS:

1. How long does lis pendens impart notice:

a. After judgment – but not recorded:

1. Maybe it is a spent shell2. Should you let litigants rely on LP when too lazy to record3. But – knowledge of document means knowledge of content – inquiry notice

to go look up judgment4. Does this require more than a reasonably diligent search

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b. If properly expunged:

1. Imparts no notice →→ as if never existed (even to people who knew of it)

G. PRELIMS:

1. If Can’t rely on – why not extint?

a. Very useful – quick + cheap

b. Usually correct – rely on them advisedly – most things are errors of omission

c. Ensure not complete reliance on prelim – can’t be sure nothing else out there

d. Deal w/ it contractually by very tight warranties & reps:

1. Implied covenant of marketable title covers most2. Provide $ left in escrow to cover probs.3. Warranty specific to known probs.

2. Courts still lean towards fairness (vs. certainty)

H. Interpretation of Policy:

1. Ambiguous terms interpreted reasonably in favor of insured

a. CA law: Any language can be ambiguous if a court thinks so (Pacific Gas & Elec. v. ThomasDrainage) (heavily criticized, but followed, by Kozinski in Trident Center)

b. As it would be read by an intelligent lay person – not an insurance expert

1. 1119 Delaware (FACTS: Conditional use permit that had been recorded; issue was whether it was a zoning restriction (not covered) or an encumbrance on title)

a. HELD: Duty to report CUP – saw CUP as a title issue (amounted to restrictionon owner’s ability to convey property

b. Broad interpretation of “encumbrance”

c. 2 bases for liability: (1) failure to disclose + (2) under policy

2. NOTION: How severely do you hold to terms of K vs. how broadly you construe in notion of justice

a. It’s an adhesion Kb. Insurance companies are huge lobbyistsc. Are they social welfare mechanisms or just (S)s of indemnity K’s?

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3. Can’t use DGFFD to contradict express covenants of K – not a license for court to rewrite the K

a. BUT – can use doctrine of unconscionability

1. White (p. 655)

I. MISCONDUCT BY INSURED:

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