Keeping Current Property

Volume 26 No. 3

Keeping Current—Property Editor: Prof. Shelby D. Green, Pace University School of Law, White Plains, NY 10603, sgreen@law.pace.edu. Contributors: Prof. William G. Baker, Prof. Ronald Benton Brown, Prof. Matthew J. Festa, and Prof. Bridget Fuselier.

Keeping Current—Property offers a look at selected recent cases, literature, and legislation. The editors of Probate & Property welcome suggestions and contributions from readers.

CASES

ADVERSE POSSESSION: Cotenant who buys at tax sale, unaware of other cotenants’ interests, may establish ouster by open possession alone. Pauline and David owned property as tenants in common. When David died, he devised his interest to his daughter and grandchild, subject to a life estate in Pauline. Later Pauline conveyed her undivided one-half interest to Frackelton by a deed that purported to convey a fee simple to the whole property. When Frackelton failed to pay income taxes, the IRS sold the property to the Linkhouses, who took possession, made renovations, and rented out the dwelling. More than 15 years later, the Linkhouses learned of the other cotenants from a prospective purchaser who searched the title. The Linkhouses brought suit, claiming that they had acquired the cotenants’ half of the property by adverse possession. Ordinarily, to gain title, a cotenant must prove an ouster because the sole possession of one cotenant is presumed to be nonhostile against the other cotenant. The court explained, however, that the presumption of nonhostile possession does not apply when the cotenants are strangers and not in privity, such as here where the Linkhouses were not the original cotenants but acquired their interest through a tax sale. When such a stranger takes possession under a conveyance purporting to convey the whole estate and claims ownership of the whole, there is an ouster of the other cotenants. Thus, it was not incumbent on the Linkhouses either to discover the existence of the cotenants or to give them actual notice of their possession. The court observed that the timing of Pauline’s death might have changed the result, but the ousted cotenants failed to raise the issue or present evidence of the date of her death. The ousted cotenants owned a remainder, and the statute of limitations should not have commenced to run against them until Pauline’s life estate ended. Harkleroad v. Linkous, 704 S.E.2d 381 (Va. 2011).

COTENANTS: Cotenant who buys promissory note secured by other cotenant’s one-half interest may properly foreclose on that undivided interest. Brothers Ricardo and Ronald owned equal shares in property as tenants in common. Ricardo converted his one-half interest into a tenancy by the entireties with his wife, Carole. Carole borrowed $85,000, secured by a deed of trust that purported to convey the entire property. Ricardo signed the promissory note and deed of trust as attorney-in-fact for Carole, and, on the deed of trust, notarized signatures appeared above the names of both Ricardo and Ronald. After a suit by Ronald alleging that his signature was forged, he acquired the promissory note. Carole defaulted on the loan and Ronald directed the trustee to commence a foreclosure sale. The trustee advertised the sale as involving a one-half interest in the property. At the sale, an agent for Ronald made the only bid, $83,800, which was accepted. The most recent tax assessment indicated a property value of $327,730. Carole and Ricardo challenged the sale on two grounds: the trustee lacked the power to sell less than 100% of the property, and the sale should receive heightened scrutiny for fairness because the mortgagee purchased. The court rejected both assertions. The sale of only one-half interest was proper because trustees are obligated to “sell no more of the property than is necessary to pay the mortgage debt” and, as a matter of law, can foreclose on an undivided one-half interest rather than the entire property. Moreover, if Ronald’s signature on the deed of trust was forged, only Carole and Ricardo’s one-half interest was subject to the deed of trust and could be sold. Carole and Ricardo also failed on the second claim. A heightened standard of review is appropriate when the lender purchases at the sale, but Carole and Ricardo offered no evidence that the lender acted improperly. Nothing prevented them or others from bidding. Mere inadequacy of price alone, when not coupled with other indicia of unfairness, is not sufficient to set aside a sale. Fagnani v. Fisher, 15 A.3d 282 (Md. 2011).

DEEDS: Deed in lieu of foreclosure executed at time of loan origination is invalid clog on equity of redemption. To finance the purchase of land to be used as a church, a mortgagor signed a promissory note, secured by a standard deed of trust and also by a deed in lieu of foreclosure, which granted the lender title to the property on default “in order to avoid foreclosure of the . . . Deed of Trust.” When the mortgagor defaulted, the lender recorded the deed in lieu without commencing foreclosure. Thereafter, the mortgagor sued the lender, alleging that the deed in lieu was invalid. After a bench trial, the court ruled for the lender, but the appellate court reversed. It held that the centuries-old principle against clogging the equity of redemption meant that a deed in lieu of foreclosure given at the time of loan origination that had the effect of denying the mortgagor the right to redeem the property could not operate to transfer title. This principle, though originating in the 16th century, still has the support of most states, as well as the Restatement (Third) of Property: Mortgages § 3.1. The rule aims to prevent the loss of property by forfeiture by an impecunious mortgagor. The mortgagor’s equity of redemption is “inseparably connected with a mortgage” and cannot be waived or abandoned by any stipulation of the parties made at the time of the loan transaction, even if embodied in the mortgage. In other words, no provision in a mortgage or agreement by the parties can make a mortgage irredeemable. C. Phillip Johnson Full Gospel Ministries, Inc. v. Investors Fin. Servs., 12 A.3d 1207 (Md. 2011).

INVERSE CONDEMNATION: Landowner’s federal court action for inverse condemnation based on environmental harm is precluded by earlier state court judgment granting relief for same loss. A landowner’s attempt to sell his land failed on the discovery that it contained high levels of methane gas coming from the city’s neighboring landfill. The landowner filed suit in state court asserting state law inverse condemnation. The complaint included a reservation of all federal rights and remedies for a later suit in federal court. The state court awarded the landowner the value of the land at the time of the condemnation ($387,500) plus taxes paid from the time of the taking, but it denied prejudgment interest because of the difficulty in determining when the taking occurred, an odd inconsistency. The landowner was apparently unsatisfied with the award but failed to preserve his appeal rights by a timely filing of the record with the clerk of the Arkansas Supreme Court. The landowner then filed a federal action under 42 U.S.C. § 1983 alleging that the city had taken his property without paying just compensation. The federal action was dismissed based on the defense of claim preclusion. The Full Faith and Credit Act, 28 U.S.C. § 1738, requires federal courts to give state court judgments the same preclusive effect as those judgments would have in the courts of that state. Under Arkansas law, a claim is precluded from being raised in a second suit if “(1) the first suit resulted in a judgment on the merits; (2) the first suit was based upon proper jurisdiction; (3) the first suit was fully contested in good faith; (4) both suits involve the same claim or cause of action; (5) both suits involve the same parties or their privies.” Thus, claims that could have been brought, but were not, would be precluded. The state court had jurisdiction over the state court action, issued a final judgment on the merits of the state claims, and the action was fully contested by both parties. The parties in state and federal actions were the same. The only question was if both suits “involve the same claim or cause of action.” That was answered in the affirmative because the landowner’s federal claim was based on the same event as his state law claims, the methane gas pollution, so he could have brought his federal claims as part of the state court action. The attempt to reserve the federal claims was ineffective because there is no exception in the preclusion law for such reservations. Edwards v. City of Jonesboro, 645 F.3d 1014 (8th Cir. 2011).

LANDLORD-TENANT: Boarding house with long-term residents is not “lodging house,” exempt from forcible entry and detainer statute. A new resident in a 15-unit building signed a document entitled “Rules for Union Street Inn,” which described the property as a “licensed boarding house” and stated that he was “a short term guest.” He paid $550 per month for a unit with a bathroom, kitchen, dresser, and foldout couch. Following his arrest for disorderly conduct, he returned to the premises, but the owner called the police, who escorted him from the premises without allowing him to remove his belongings. The resident filed a complaint seeking damages for unlawful eviction and a restraining order to continue living there. The owner defended on the basis that the forcible entry and detainer statute expressly exempted lodging houses, but lost on the facts. The city’s licensing the property as a lodging house was relevant, but not determinative. Although some features resembled classic lodging houses, such as the availability of linen and cleaning services and the provision of some furnishings, more resembled normal rental properties. The furnishings were scant, most residents declined the cleaning and linen services, only certain units contained kitchen and bathroom facilities, most residents paid a monthly sum and stayed for long periods, there was no doorman or front desk, and the owner did not retain a key to the units nor maintain a guest register for all residents. Degenhardt v. Ewe Ltd. P’ship, 13 A.3d 790 (Me. 2011).

LANDLORD-TENANT: Lease with no express duration or that contains statement that term is “indefinite” creates tenancy at will. Leases of lakefront lots entered into during the 1970s fell into three categories: (1) leases expressly stating that their terms were “for the period from this date until ‘Indefinite,’” (2) leases with no express end date, and (3) leases with fixed termination dates. In 2007, the original landlord’s successor sent new leases to the tenants, proposing changes in the terms and higher lease payments. The tenants brought an action against the new landlord seeking to establish that their original leases were long-term leases based on written and verbal agreements with the original landlord. The new landlord maintained that leases in the first two categories created tenancies at will. The trial court found the term “indefinite” ambiguous as a matter of law and held that leases in this category ran for 99 years based on the tenants’ extrinsic evidence. The trial court held that the leases with no stated end date created tenancies at will. The appellate court affirmed the latter holding, pointing out that when a lease is silent about duration, the court may not supply a term. The court reversed the first holding, discerning no ambiguity. It rejected the tenants’ position that “indefinite” had two meanings: one “legal,” meaning “uncertain or vague,” and one common, meaning “not limited” or “unlimited.” This was not a reasonable interpretation. The term “indefinite” simply means “uncertain” in all contexts. A lease for an indefinite and uncertain duration, as a matter of law, is a tenancy at will. Providence Land Servs., LLC v. Jones, 353 S.W.3d 538 (Tex. App. 2011).

MORTGAGES: Bank did not have equitable mortgage on condominium unit purchased with proceeds from unsecured loan. A person borrowed $400,000 from the Bank of Salem and one day later borrowed the same amount from the Bank of America. Five days later he bought a condominium unit. Both loans were unsecured, but both lenders claimed the borrower had promised to later secure his loan with a mortgage on the unit. The borrower died one month later, without having been granted a mortgage. In Florida litigation, both lenders sought to foreclose an equitable mortgage or, in the alternative, to impose a constructive trust on the unit. Both filed notices of lis pendens, but both notices expired a year later with neither bank obtaining an extension. Meanwhile, Bank of America obtained a judgment against the decedent’s estate in Arkansas based on other, unrelated debts. Bank of America domesticated the judgment in Florida and then executed on it, culminating with a sheriff’s sale of the condominium unit to a bona fide purchaser. Two years after the sheriff’s sale, Bank of Salem filed a motion for relief in the Florida action. The trial court imposed a constructive trust on $400,000 of the foreclosure sale proceeds for the benefit of the Bank of Salem, but the appellate court reversed. Even if the borrower promised to provide a mortgage on the unit after his purchase, that would be a mere promise of future conduct, not the fraud necessary to impose a constructive trust. The court also denied relief because Bank of Salem had allowed its notice of lis pendens to expire, thereby relinquishing any claim on the foreclosure proceeds. Bank of America v. Bank of Salem, 48 So. 3d 155 (Fla. Dist. Ct. App. 2010).

PROPERTY OWNERS ASSOCIATIONS: Association can enforce covenants as successor to subdivision developer even absent express grant of enforcement power. A landowner sought to subdivide his two lots into six. Restrictive covenants allowed the subdivision of lots only with the written consent of the developer. To administer the restrictive covenants, the developer formed a company, which became the property owners association, and the developer went out of existence. Over time, the association received and approved various requests to subdivide lots within the plat. After the association rejected the landowner’s request, he challenged the denial on the ground that the association lacked the authority to enforce the covenants. The court held in favor of the association, concluding that the association was the direct and de facto successor to the developer. In so doing, the court rejected the traditional position that restrictive covenants are disfavored as restraints on free use of land, instead recognizing that they often serve to enhance, rather than inhibit, the value of land. Under this new approach, covenants are interpreted so as to protect the homeowners’ collective interests and give effect to the drafter’s intent to create and maintain a planned community. This means that the association created by the developer assumes the power to enforce covenants when the developer ceases to exist, even absent an express transfer of that power. Otherwise, the covenants’ purposes would be frustrated and rendered meaningless. Jensen v. Lake Jane Estates, 267 P.3d 435 (Wash. Ct. App. 2011).

SALES CONTRACTS: Buyer recovers for seller’s negligent misrepresentation of boundary line even though buyer purchased survey that incorrectly displayed boundary line. A seller did not disclose an ongoing boundary line dispute with a neighbor to a prospective buyer. The buyer learned about the dispute from an acquaintance and inquired of the seller. The seller said that the neighbor was “crazy,” that the dispute was “not a big deal,” and that the disputed land was a six-to-eight-foot strip of land located where the buyer had no particular concern. The seller also said that a survey supported his position but failed to disclose that another prior survey supported the neighbor’s claim to a strategically located strip that was 176 feet long and 18 feet wide. After entering into a contract, the buyer obtained its own survey, which incorrectly agreed with the seller’s claim. After closing, the buyer learned that the correct boundary line was six inches from the building, making the property unsuitable for its business. Buyer sued the surveyor and the seller. The jury verdict found the seller’s misrepresentation was the legal cause of 90% of the buyer’s injury, but the trial judge granted the seller’s motion for judgment notwithstanding the verdict on that basis that the buyer’s incorrect survey was the sole legal cause. A claim for negligent misrepresentation requires a showing of a misrepresentation of a material fact, made negligently, with the intent to induce reliance, justifiable reliance in fact, and injury. The appellate court reversed, explaining that there was no requirement that the buyer rely solely, or even predominantly, on the misrepresentation. Nor did justifiable reliance require that the buyer exercise due diligence or investigate every piece of information. Instead, reliance is justified if the person acts as a reasonable person. Specialty Marine & Indus. Supplies, Inc. v. Venus, 66 So. 3d 306 (Fla. Dist. Ct. App. 2011).

SALES CONTRACTS: Buyer who fails to contact seller for more than two months after final contract extension is not entitled to specific performance. A contract for the purchase of a vacant lot contained a clause allowing the buyer 90 days to inspect and to terminate if the results were unsatisfactory. The sale was otherwise “as is.” Toward the end of the inspection period, the buyer requested an extension on account of difficulties surveying the land and testing the soil. At the end of this extended period, the buyer requested another 120 days to obtain government permits and approvals to develop the land. After receiving the permits and approvals, the buyer requested another 90 days. The seller agreed to each extension, although the third agreement set a date for closing. Closing did not occur. Two months later, the seller wrote to the buyer stating that the extension period had expired and offering to sell the property at a renegotiated price, $35,000 higher, to reflect the current market value. The buyer responded, stating its intention to close as “expeditiously” as possible. The buyer then filed a complaint seeking specific performance. The court affirmed summary judgment for the seller. When a contract does not contain a “time of the essence” clause, a party’s failure to perform on the date agreed does not preclude specific performance if the nonperforming party acted in good faith and with reasonable diligence. This is where the buyer fell down. Its failure to close or otherwise communicate with the seller for two months after the extension period had ended was unexplained and unexcused. The buyer’s failure to present any explanation to the court for its lack of communication meant its conduct was unreasonable as a matter of law. Given the history of their dealings, it seemed that all the buyer needed to do was to ask seller for more time. Empire Acquisition Group, LLC v. Atlantic Mortg. Co., 35 A.3d 878 (R.I. 2012).

LITERATURE

Local Government. Prof. Christopher Serkin takes on the topic of “entrenchment” of policy decisions through the political process. Although most of the literature on this topic deals with the federal government, Serkin explains how the issue is much more salient in the area of local governments and their effect on property rights and land use, in Public Entrenchment through Private Law: Binding Local Governments, 78 U. Chi. L. Rev. 879 (2011). Proceeding from the long-standing democratic theory that present decisions should not bind future legislatures, Serkin observes that much of what local governments do—in contracts, property transactions, and municipal debt obligations—have the effect of entrenching policy. The article provides a helpful taxonomy of the ways in which local government decisions have entrenchment effects in property law. Perhaps the most compelling and original insight is about the effect of eminent domain reform. Although many states’ eminent domain reform laws enacted in the wake of Kelo v. City of New London, 545 U.S. 469 (2005), have sought to restrict eminent domain to protect property rights, Serkin conceives of eminent domain as a flexible mechanism that allows governments to adjust for changed circumstances—that is, to act against entrenchment of previous decisions. This article is a major contribution to the theory of local government land use law and also offers a key new insight about the effects of eminent domain.

Mortgage Crisis. The mortgage crisis has triggered an alarming rise in the incidence of properties that have become vacant through foreclosure or abandonment. The sharp rise in vacant properties has severely affected communities through general blight, external lowering of property values, and declining tax receipts. Prof. Frank S. Alexander and Leslie A. Powell address this critical problem and offer some practical solutions in their article, Neighborhood Stabilization Strategies for Vacant and Abandoned Properties, 34 Zon. & Plan. L. Rep. No. 8, at 1 (2011). This practically focused article offers ideas that will be of great interest to both practitioners and policymakers. The first area of suggested reform is tax foreclosure, and the authors suggest several procedural innovations to streamline the disposition of vacant properties in tax delinquency, including shifting toward in rem foreclosures, doing away with minimum bid requirements, and expedited procedures. They also advocate for the imposition of a super-priority enforcement lien for code violations, the adoption of statutory receivership programs, a vacant property registration system, and an increase in the use of land banks. This piece provides a very concise and practical road map toward reforms that could help address the current crisis.

Real Estate Brokers. The housing and mortgage crisis has led to calls for the tightening of standards and liability measures for real estate transactions. One of the proposed solutions is to treat brokers as fiduciaries under the law. Prof. Gerald Korngold provides a lively and thoughtful counterargument in his article, Real Estate Brokers Are Not “Fiduciaries”: A Call for Developing a New Legal Framework, 40 Real Est. L.J. 376 (2011). Korngold is sympathetic to the reformist motive but expresses his legal concern with applying a remedy that does not fit. His most important insight is that the role of the real estate broker simply does not fit the mold of traditional fiduciary relationships and the substance of law that has evolved to govern broker-party relationships. Although there is a great deal of pressure in the wake of the mortgage crisis to hold brokers to a higher standard, Korngold demonstrates that shoehorning a system designed for other practices onto the broker-buyer relationship would misalign certain incentives and would be counterproductive. Korngold suggests instead that legislatures and courts consider adopting rules that contemplate a greater understanding of specific facts that might be at issue in broker relationships.

LEGISLATION

Delaware enacts the Delaware Mortgage Loan Modification Services Act. The law is intended to protect homeowners from unfair or deceptive practices by providers of mortgage loan modification services. Mortgage loan service providers are required to register with the Attorney General. Lawyers and persons licensed as mortgage loan originators, brokers, and lenders are exempt. A contract for mortgage loan modification services must be in writing and meet the other technical requirements of the act. 78 Del. Laws 196.

New York permits electronic recording of instruments affecting real property. The law defines electronic record, digitized paper document, and electronic signature. A digitized paper document or an electronic record is considered recorded at the date and time of the receipt, electronic or otherwise, provided by the recording officer. 2011 N.Y. Laws 549.

New York prohibits private transfer fee obligations. A private transfer fee obligation is a fee or charge payable on the transfer, or payable for the right to make a transfer, of real property. Private transfer fee obligations entered into after the effective date of the law are void. Existing private transfer fee obligations are subject to numerous requirements on transfer or risk being treated as void. The law excludes from its scope most one-time fees and fees paid to homeowners, condominium, and cooperative associations. 2011 N.Y. Laws 522.

Oregon limits lender’s right to recover residual debts following short sales of residential property. If the lender reports to the Internal Revenue Service that the lender has canceled all or a portion of a borrower’s debt under a short sale of housing, the lender may not bring an action or seek payment for the residual debt following the short sale. 2011 Or. Laws 480.

Texas adopts the Texas Appraisal Management Company Registration and Regulation Act. Under this act, an appraisal management company, defined as a third party that directly or indirectly performs appraisal management services, must register with the appraiser licensing and certification board, file a bond, and otherwise comply with the rules of the board. The act imposes stringent requirements on appraisal management companies to reduce fraud and ensure competence in the appraisal process. 2011 Tex. Gen. Laws 256.

Texas enacts the Residential Mortgage Loan Servicer Registration Act. Under the act, servicers of residential mortgages must register with the savings and mortgage lending commissioner. The aim of the act is to ensure compliance with federal and state laws and regulations. The act provides a procedure for lodging complaints against servicers. 2011 Tex. Gen. Laws 588.

Texas prohibits lenders from requiring borrowers to execute a deed in favor of the lender as a condition of extending credit secured by residential real estate. Deeds conveying the property to the lender in violation of the act are voidable except against subsequent purchasers for value without notice. 2011 Tex. Gen. Laws 1242.

Texas regulates residential foreclosure consulting services. Like many other jurisdictions, Texas enacts legislation to prevent fraud and overreaching against homeowners who have defaulted on mortgage debt. The act imposes stringent requirements on those who attempt to profit from the growing number of mortgage defaults. The term “foreclosure consultant” is defined broadly to include anyone who solicits or contacts a homeowner and represents or offers to provide services for compensation for a pending foreclosure or loan default. Lawyers and others who are normally involved in the process are generally exempt. 2011 Tex. Gen. Laws 902.

Utah allows condominium associations to require tenants in residential condominium units to pay rent to the association if the landlord-owner fails to pay assessments. The association may require that a tenant make all future lease payments due to the unit owner to the association only if authorized in the declaration, bylaws, or rules and the unit owner is more than 60 days delinquent in paying condominium assessments. The association must notice the delinquent unit owner before requiring a tenant to pay lease payments to the association. 2011 Utah Laws 355.

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