GProperty II

Chapter 8 Selling Real Property

 Residential – homes/condos (individual)
 Commercial- everything else

A. The Purchase Contract

 Buyers due diligence and the contingency period

 Seller’s disclosures
 Property Inspection
 Appraisal
 Title Search
 Buyer secures financing
 Closing
 Purchase and sale becomes official between buyer and seller
 The loan between the buyer and lender becomes cemented

 Parties
 Brokers, Agents, Realtors (Agents work for brokers)
 Brokers enjoy a special exception to the unauthorized practice of law statutes by using the state
promulgated forms
 States use promulgated forms brokers are required to use
 Why use agents/brokers? They’re knowledgeable, more efficient and market your home well
 Atty’s are expensive and generally no longer used in the sales of residential real estate.

1. Statute of Frauds

 Written contract required for sale of RP, once the offer is signed by both parties it becomes a
binding K
 Requires Essential Terms: Identify the buyer/seller, purchase price, property, be signed
by the party against whom enforcement is sought
 Identifying the property can get sketchy if the land is vacant or possibly has not been given an
address—the court must be able to determine the precise boundaries of the property.
-enter surveyor and or google maps
 Government survey
 metes (meats) and bounds- description using distances and directions from identifiable
point which is common for undeveloped land outside of subdivisions
 subdivision/plot map

 Equitable Estoppel Doctrine: Oral K may be enforced if

 One party acts to their detriment in reasonable reliance on the promise
 Serious injury would result if the K was not enforced

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  Part Performance Doctrine you must have a combination of 3 elements:
 Payment of a portion of the purchase price,
 transfer of possession
 improvements made to the property
*Earnest Money is used to make a statement regarding how serious they are about the
purchase- generally that would go towards the purchase price
 Applies to conveyances of RP (deeds)

Hickey v. Green

2. Marketable Title (Merchantable Title)

 Executory period- Period between formation of agreement and closing

 Seller demonstrates proof of title in accordance with K terms

 Buyer gets firm commitment for financing

 Parties get inspection reports and certificates as required by state, terms of purchase K,
and local ordinances and custom

 Default standard, ‘at closing seller will deliver marketable titles to the real property’ This is
implied and included in every real estate contract
 Potential Titles Problems
 Gaps or errors in the public records
 Improper Conveyance
o Forgery, fraud
o Purported conveyance by only one spouse
 Boundary Disputes
 Reversionary Interests
 Adverse Possession
 Easements
 Encroachments
 Reservations of Rights
 Covenants & Use Restrictions
 Liens

 Big picture: the title is reasonably free from doubt regarding its validity aka law assumes the
buyer should get title that is good and no one will foreclose on it or claim ownership/ have any of
your sticks

 Title is unmarketable if:

 Seller owns less than they purport to own

 Seller is subject to an encumbrance (mortgage, liens, judgements, etc.)

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  Marketable Titles Rules to Remember:
 Majority rule: presence of most encumbrances makes title unmarketable
 The mere existence of zoning ordinances and similar laws does not render title
unmarketable
 An existing violation of a zoning ordinance will render title unmarketable

Lohmeyer v. Bower 545

 Other Title Standards

 Record title: Buyer is obligated to accept all matters that appear in the public records,
it’s on the buyer to determine what that means, this is basically the opposite of
marketable title (generally not in the residential world)
 Insurable title: Title which a title insurance company is willing to insure
 Title acceptable to buyer: Gives buyer absolute discretion to accept or reject any
matters that appear on title

Hierarchy: Perfect title, Title acceptable to buyer, marketable title, insurable title, record title

Encumbrances or conditions that do not Encumbrances or conditions that do render

render title unmarketable: title unmarketable:

 Zoning ordinances  Mortgages

 State statutes and municipal  BUT . . . Title must be
ordinances marketable at closing, and
 Defects in the condition of the mortgages typically
property (mold, etc.) discharged and released
 Conditions that reduce the value of  Liens
the property (such as hazardous  Most easements
substances)  Judgments
 Private restrictions and restrictive
covenants

 Easements: if the easement reduces the value of the property renders the title unmarketable
 Generally beneficial easements are not considered an encumbrance making title
unmarketable
 Encroachments: when things go over the line of property.
 Creates unmarketable title for both (or all) properties. Adverse possession possibility.

3. Equitable Conversion

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  At the moment of equitable conversion (i.e., the moment the contract goes into effect), the
BUYER assumes the risk of something happening during the executory period

 Seller’s Title
 Legal Title: Seller still owns the property
 Buyer’s Title
 Equitable Title: Gives buyer an interest in the property before the sale has closed

 Doctrine of Equitable Conversion: If the property is damaged (or even destroyed) during the executory
period, buyer is still required to complete the purchase and pay the entire purchase price.
 Massachusetts Rule: under which the seller continues to bear the risk until actual transfer of the title,
absent an express agreement to the contrary.
 Emerging Rule: The party entitled to possession bears the risk of loss during the executory period.

Brush Grocery Kart, Inc. v. Sure Fine Market, Inc. (The Hailstorm Case)

 Death before closing does not negate the cataract agreement

 Seller Dies: the sellers estate must proceed with the sale an distribute the proceeds to
the heirs
 Buyer Dies: buyers estate must proceed with the purchase and distribute the property
to the heirs who receive the buyers real property

4. Duty to Disclose

 There is no greater duty given to a buyer that has more experience. (Ex. Just because the buyer is an
electrician the seller must still disclose wiring issues.)
 Psychological things (murder in the home/ghosts) are generally not material defects. Though some states
vary on their approach- some have a ‘shield law’ to protect the seller.

 Caveat Emptor: ‘Buyer Beware’ common law doctrine, a seller of real property has no general duty to
disclose defects in the condition of the property.
 Seller is obligated to disclose defects in the condition if:
 Seller affirmatively misrepresented the condition of the property, or
 Seller actively concealed defects in the property, or
 Seller owed a fiduciary duty to the buyer
 Silence does not count as affirmative misrepresentation

Johnson v. Davis (The leaky roof case) On TWEN: Where the seller of a home knows of facts that materially affect
the value of the property which are not readily observable and are not known to the buyer, the seller is under a
duty to disclose them to the buyer

 Justifications for imposing duty to disclose:

 Duty to disclose imposes no cost or burden on sellers
 Sellers are in a better position than buyers to know about the condition of the property
 Defects may be so well concealed that even an expert could not find them
 Seller has a duty to disclose:
 Are known to the seller, and
 Materially affect the value of the property; and

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  Are not readily observable and not known to the buyer

Stambovsky v. Ackley (Haunted house case) Seller created the condition, and The condition is
known to the seller and is unlikely to be discovered by a prudent purchaser exercising due care,
and The condition materially impairs the value of the property

 Implied Warranty of Quality: the developer of newly-constructed residential property may be

liable for issues they are unaware of because they should be delivering a non-defective home
suited for its intended use.

 Majority Rule: (Johnson v. Davis Rule) A seller of residential property has a duty to disclose defects in the
property that:
1. Are known to the seller, and
2. Materially affect the value of the property; and
3. Are not readily observable and not known to the buyer

 Stambovsky Rule: Seller has a duty to disclose a condition to the buyer where:
1. Seller created the condition, and
2. The condition is known to the seller and is unlikely to be discovered by a prudent purchaser
exercising due care
3. And the condition materially alters the property.

Strawn v. Canuso- The Landfill case: A professional seller of residential real estate, or a broker
Landfill is seeping toxic waste into representing that seller, has a duty to disclose to a prospective buyer
the ground water off-site conditions that materially affect the value or desirability of
the real estate.

 Professional Sellers are in a better position to have more information regarding the property and the
surrounding areas
 Professional sellers of residential housing have a duty to disclose offsite physical conditions that are:
1. Known to the seller, and
2. Unknown to and not readily observable by the buyer, and
3. Where the condition is:
 Sufficiently material to affect the habitability, use, or enjoyment of the property, and
 Which renders the property substantially less desirable or valuable to an objectively reasonable
buyer.

Futura Realty v. Lone Star The commercial property vendor owes no duty for
Building: The Hazardous damage to the land to its vendee because the
Waste Case vendee can protect itself in a number of ways,
including careful inspection and price negotiation.

 Caveat Emptor still rules for commercial real estate. Businesses are in a better position to do their own
research/knowledge.

Bloor v. Fritz: The Meth A broker has a duty t disclose “all existing
Case material facts known by the broker and not
apparent or readily ascertainable to a party”

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  Meth is a material
fact.

B. The Closing

 The conclusion of the transaction

 When the buyer delivers the purchase price to seller

 When the seller delivers a document (called a deed) conveying title to the property to the buyer

 When the buyer closes on the loan with the lender

 Residential still often includes a sit down closing

 Most states use an independent escrow agent

1. The Deed

 Must comply with the SOF

o Identification of the grantee (buyer)
o Identification and signature of the grantor (seller)
o Words showing grantor’s intent to convey title
o Description of the property
o Be signed by the grantor

 Only effective when delivered and accepted, after delivery, it is recorded.

 Grantor must intend to convey the land at that exact point and time.
 Acceptance is presumed, unless there is an affirmative rejection

Rosengrant v. Rosengrant: Bank Vault A property transfer is only valid if

Case/ Deed delivery the transferor intends for the
 Grantors intent AT THE TIME transfer to take effect immediately
OF TRANSFER upon delivery of the deed.

 Delivery will likely be deemed invalid, and no conveyance will have occurred, if any of the following is
true:

 Grantor retains the right to retrieve the deed

 Grantor intends that the deed will become operative only after the grantor’s death

 Grantor continues to use the property and pay the costs associated with the property as if no
conveyance has occurred

 Once a deed is delivered, title vests in the grantee, the location of the deed does not matter, it does not
NEED to be recorded to be considered valid.

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  Transfer on death deed: Recognized in a majority of states- can be redone as life continues

 Owner of real property executes a deed that designates who will receive the real property upon
the owner’s death
 Deed is revocable by the owner until death
 Deed is recorded in the public records
 Upon the owner’s death, the deed becomes operative
 Real property is conveyed to the grantee, by operation of law, immediately upon the owner’s
death

2. Remedies for Breach 580

Giannini v. First Nat’l Bank of Des Plaines:
The ‘non-existent’ condo
Absent oppression or fraud, a buyer of
real property is entitled to a specific
performance of a valid contract for the
sale of real property as a matter of
right.

 Specific performance is an equitable remedy not generally available for breaches of contract, but real
property is generally considered to be unique.
 Damages are measured (general rule) as the difference between the contract price and the fair market
value on the date of the breach.

 Deed types- sellers title

 Encumbrances: Rights or interests held by 3rd parties that affect the value or use of the property.
 Mortgages, Liens, Foreclosures, Easements, Leases, HOA covenants, Etc

C. Title Assurance

 Doctrine of Merger:
 Under the common law
Doctrine of Merger, the
provisions in the Purchase
Agreement “merge” into the deed at closing
 Said differently, a party cannot sue for breach of the purchase agreement after the
closing
 Buyers began to insist that sellers provide assurances of title in the deed itself

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 (1) Title Covenants – placed in the
deeds
Grantor promises in the deed that
he has food title to convey
(2) Title Option based on Search of
public Records
An attorney or other professional
renders an opinion about the state
of the title after searching the
public land record
(3)Title Insurance
A title insurance company issues a
policy that insures the grantees
title

1. Title Covenants- least effective way for a buyer to protect themselves

 Common types of Deeds:

General Warranty Deed Special Warranty Deed Quitclaim Deed

Grantor warrants title against all Grantor warrants title against all Grantor makes no warranties
defects, whether they arose before defects that arose after he about title, so the grantee receives
or after he obtained title obtained title only what the grantor has, if
anything.

The general warranty deed ad special warranty deed contain specific covenants:

Present Covenants: if they are breached, it is
at the moment the deed is delivered.
Taken together, these three covenants
provide much the same assurance as implied
covenant of marketable title
Future Covenants: they are breached when
the grantee is constructively evicted by a
third party holding superior title
The third party must step in for these to be
breached/damages must be shown

Grantee can only sue their grantor Runs with the land, grantee can sur remote
grantors in the chain of title who convey a
general warranty deed

Covenant of seisin: a promise that the
grantor owns the estate he purports to
convey; for example, this covenant is
breached if the grantor purports to convey a
fee simple but only owns a life estate.
Covenant of warranty: a promise that the
grantor will defend the grantee against any
claim of superior title; for example, if a third
party holds better title than the grantee does,
the grantor must defend the grantee’s title.

Covenant of right to convey: a promise that
the grantor has the right to convey title; for
example, this covenant is breached if the
grantor is a trustee who lacks the authority to
transfer title to the trust property.
Covenant against encumbrances: a promise
that there are no encumbrances on the title,
other than those expressly listed in the deed;
Covenant of quiet enjoyment: a promise that
the grantee’s possession of the property will
not be disturbed by anyone holding superior
title; for example, this covenant is breached if
the grantee is evicted because of a defect in
her title.
Covenant of further assurances: a promise
that the grantor will take all future steps

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 for example, this covenant is breached if reasonably necessary to cure title defects
there is a prior mortgage on the property. that existed at closing.

 Marketable title is only prior to the closing, whereas the title covenants protect after the closing.
 You sue for breach of title covenants after the closing if an issue comes up, Doctrine of merger
prevents suing after closing.

 Damages for Breach: Usually determined by the purchase price paid by the grantee (plus interest) Just
undo it and give the money back
 Breach of Covenant against encumbrances: pay off the encumbrance

 Downsides to Covenants:
 Covenants expire,
 you must wait for actual ouster of constructive eviction,
 recovery is limited to the purchase price, litigation expenses, and
 recovery depends on locating a solvent grantor

Brown v. Lober: Mineral Rights case The mere existence, without more, of
a superior title does not constitute a
breach of quiet enjoyment.

2. Title Opinion Based on Search of Public Records

A second method of title assurance, generally this is no longer done. Atty’s would compile an opinion
regarding the status of a title.

a. The Recording System

 Common Law Rule: first in time, first in right

 All states have enacted statues layered on top of the Common Law Rule. They are supplements, but do
not over rule the Common Law Rule.
 Recording acts are designed to:
 Protect against fraud
 Promote certainty in the transfer
 Promote the use of RP as a security for loans
 Encourage buyers and lenders to make diligent inquiry into sellers’ titles
 Put burden on buyers and lenders – not the government or courts – to determine ownership of
RP
 Subsequent Bona Fide Purchaser (BFP): acquires title without notice of a prior conveyance
 Deeds do not have to be recorded to be valid, it is still effective between the parties, recording system is
about creating the chain of title for the world to know.

Grantor/ Grantee Index Tract Index

-Each recorded document is - Each recorded document is indexed
indexed by the names of the by a “tract number” or a “parcel
grantor and the grantee identification number”

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 -Location of the recorded document - Location of the recorded document is
is given (book/page number, given
reel/image number, etc.)

b. How to Search Title

 Multi-step Process
 Search indices to find recording locations of the documents (Grantee index, then
grantor index)
 Pull documents
 Evaluate documents
 Traces back to the patent: aka when the fed. Govt gave the land out through grants

c. Operation of the Recording System 599

Luthi v. Evans: The Mother Hubbard Transfers made pursuant to “Mother

Case Hubbard” clauses are only effective as
to a subsequent BFP if the BFP had
actual knowledge of the transfer

A subsequent purchaser who has

actual knowledge of a prior interest
takes subject to the rights of the prior
interest holder

To impart constructive notice to a

subsequent BFP, the recorded
instrument must describe the
property with sufficient specificity so
that the specific property can be
identified

 Mother Hubbard Clause: very general one liner transfer to someone.

 Marketable title acts: increase the efficiency of the title search process, some states limit the
need to search beyond a specific number of years.
 Any rights that arise more than XX number of years ago have been extinguished if they
are not being used/nor recorded/renewed.
 Rids chain of title of old defects, liens and encumbrances (like a statute of limitations)

d. The Recording Acts

 The first person to acquire an interest prevails over all later claimants under the common law
rule UNLESS a subsequent purchaser is protected by the states recording act.
 BFP: Exception to the common law rule, first in time first in right
 The recording acts provide special protection for a subsequent purchaser who acquires
his interest for value (not gifted/inherited) and without knowledge/notice of a prior
interest

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  Types of Jurisdictions
 Race: A subsequent purchaser has priority over a prior interest if he records first – even
if he had actual knowledge of the prior interest.
 Notice: A subsequent purchaser has priority over a prior interest if he takes without
notice of the prior interest - the subsequent purchaser does not have to record in
order to have priority.
 Race-notice: A subsequent purchaser has priority over a prior interest if he takes
without notice of the prior interest and he records first.

Messersmith v. Smith : improperly Because the documents were not

recorded deed case properly recorded the subsequent
BFP could not prevail.
Later overturned by statute

 Zimmer Rule: (Minority/ later over turned by statute) a Subsequent purchaser is deemed to have
‘recorded’ his conveyance only if all prior conveyances in his chain of title are properly recorded.
 Falls under the race-notice jurisdiction
 Invalid Acknowledgements (other than latent defects): generally will not be recorded because it
isn’t correct. The subsequent purchaser would be responsible for recognizing a lack of
notarization.
 Shelter Rule: As long as one person is a subsequent BFP, everyone that comes afterwards is also
a BFP.
 Torrens System:
 Used in some counties in 4 states (Hawaii, Ohio, Minnesota and Massachusetts)
 Title is registered through a government agency
 Government agency issues a certificate of title to the owner each time title is
transferred

e. Chain of Title Problems

 Outside the Chain: Anything recorded out of order is technically a wild deed
 Wild Deed
 Deed Recorded too late
 Deed Recorded too Early
 Deed from a Common Grantor

Board of Education of Minneapolis v. Hughes 621

f. What Constitutes “Notice”?

 Actual: Someone actually being there

 Record: an interest that would be discovered by searching the real estate records
 Inquiry: an interest that would be discovered if the subsequent party investigated a suspicious
circumstance (visible observations,

Raub v. General Income Sponsors of Iowa, Inc.: Special exception to the grantor being on the property because of
timing

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  Fraudulent deeds- a deed induced by fraud is invalid and can be set aside by a court, BUT before the deed
is set aside, the fraudulent deed has the ability to convey title to a subsequent party.

3. Title Insurance: If the buyer suffers a loss from a title defect that existed on the effective date of the
policy he received compensation from the title company.

 How is Title Insurance Different from other Insurance?

 Premium paid once at the closing, generally by the seller,
 No expiration,- even after sale of home
 Some terms can be negotiated.
 Timing- upon purchase covers only the past

 Types of Policies
 Owner’s Policy
 Usually in the amount of the purchase price
 Insures the buyer/owner’s interest in the property
 Coverage continues as long as the owner holds title to the property
 Some coverage extends even after the owner sells the property
 Lenders Policy
 Usually in the amount of the loan
 Coverage expires when the loan is repaid in full
 If the lender forecloses, coverage continues after the lender acquires title to the
property

 Title Insurance Process

1. Title company performs a search of the public records to find the documents that affect the
property
2. Title company examines the documents to determine what rights or claims third parties may
have against the property
3. Title company issues a title insurance commitment (Buyer can accept or work with the company
to resolve matters or negotiate to have the company insure over the defects)
4. After the closing, the title company issues the title insurance policy

 Policy Forms
 ALTA (American Land Title Association)
 2006 policy forms are the current standard
 Owner’s policies and lender’s policies
 Cover page
 Exclusions
 Schedule A- gives you the information
o Effective date – date the search was completed
The “gap” is the period between the effective date of the title commitment and
the date on which the deed is recorded
o Proposed insured – the buyer or lender
o Policy amount - amount of insurance purchased
o Is the type of estate a fee simple absolute?
o Legal description of the property
 Schedule B
 Conditions

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 Covered Risks:
 Title is “vested” in anyone other than the owner
 There is a defect, lien, or encumbrance on title
(Other than those listed as Exceptions, and other than the pre-printed Exclusions)
 There is a lien for unpaid real estate taxes or special assessments
 There is an encroachment, encumbrance, violation, or other matter that would be disclosed by a
survey
 Title is unmarketable
 There is no right of access to the property
 There are recorded notices of zoning violations or violations of other laws, or a recorded notice
of eminent domain
 Title is voided under bankruptcy laws
 There is a defect, lien, or encumbrance recorded in the “gap” period
 How problems arise
 Errors in title exam process
 Defects that would have been discovered if the title company had made the examination- they
rely on the most recent title policy
 “Hidden” defects- some kind of fraud or forgery

 Coverage is limited by:

 Exclusions
 Potential risks that the title company is not willing to cover in any title policy
 Pre-printed language included in every title policy
 Non-negotiable
 Exceptions (Schedule B)
 Defects, liens or encumbrances affecting the particular property
 Matters discovered in the title search
 Matters discovered on the survey
 Specifically listed in the title commitment and in the final title policy
 Called the “Schedule B” items
 The preprinted language
 Risks the title company is not willing to cover in any policy (owner creation, known and not
disclosed, that result in no loss, or created after the date of the title policy)

 Schedule B
Schedule B lists the defects, liens, and encumbrances specific to the property which are being “excepted
out”
Two types:
 Standard exceptions
 Appear to be “permanent” but can be removed if the buyer and/or seller meet certain
requirements
 Example: claims for construction liens
 Property-specific exceptions
 Defects, liens, and encumbrances found in the title search and on the survey

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  Title Company’s Obligation
 Duty to defend
 The title company must pay the costs of litigation to protect the owner’s title
 Duty to indemnify
 The title company must compensate the owner if a loss occurs
 If a claim is made against the owner’s title, the title company must defend the case, pay
the litigation costs, and compensate the owner for losses
 Claims
 Title companies spend a significant amount of $$$ on loss avoidance by searching titles in order
to identify all liens, defects and encumbrances
 Liens, defects and encumbrances are excluded from the policy coverage
 Because of loss avoidance, title companies spend a small percentage of their revenue on loss
payments
 Tackling Potential Claims
 Do any of the insuring provisions apply?

 Are there any exceptions that limit or take away the coverage?
 Remember: exceptions are defects, liens or encumbrances affecting the particular
property

 Are there any exclusions that limit or take away the coverage?
 Remember: exclusions are potential risks that the title company is not willing to cover
in any policy
 Exclusions are listed in the pre-printed language

Riordan v. Lawyers Title Insurance Corp.:  The language of the insuring

The no vehicle access title insurance provisions is not ambiguous
case  Under a plain reading, the policy
only guarantees a legal right of
access, not a right of vehicular
access
 Lack of a right of vehicular access
does not render title
unmarketable

Chapter 9 Financing Real Property

A. Creating the Obligation

 Usually, when an individual borrows money to purchase real property, the individual signs two
documents:
1. Promissory Note: Borrower’s promise to repay the loan
 Contains financial terms of loan, establishes events of default, determines fees and
terms for late payments. Not recorded.
2. Mortgage: Borrowers pledge of the Real Property as a security for repayment.

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  Enforcement mechanism for default on the promissory note, recorded, governed by
state real property law.
 Acceleration Clause
 Due-on-Sale Clause: Authorizes the lender to demand full repayment if the real property is sold or
otherwise transferred to a third party.
 Non-monetary Obligations
 Liability of Successor Owners

Subject to v. Assuming
 If a property is sold “subject to” the mortgage, the new buyer takes the real property subject to
the lien, but is NOT personally liable for the debt it secures
 Caution! The lender can still foreclose if the original borrower defaults in repaying the
debt!

 If the new buyer buys the property and “assumes” the mortgage, the new buyer IS personally
liable for the debt
 And the lender has the right to foreclose if the debt is not repaid

B. Providing the Security

1. Mortgage

o 2 party arrangement:
 Borrower (mortgagor)
 Lender (mortgagee)
o Borrower grants a mortgage to lender
o If borrower defaults, lender has the right to foreclose

 Mortgage Loan Characteristics:

 Amount
 Term
 Payment Frequency
 Rate
 Payment Schedule
 Flat amortization: Monthly payments which by the end complete payment
 Balloon- Borrow does not repay the full amount during the term; there is a lump sum
payment at the end of term.
 Default: Mortgage Theories
1. Lien Theory: the lender has a security interest only and the borrower is the owner of the real
property until the completion of the foreclosure action under state law. (Majority)
2. Title Theory: The lender has legal title until the mortgage has been satisfied or foreclosed, this
means the lender may be entitles to possession immediately upon the borrowers default.
(Minority)
3. Intermediate Theory: compromise. The lenders lien is converted into title to the real property
upon borrowers default.

2. Deed of Trust

o 3 party arrangement
 Borrower (trustor)

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  Lender (beneficiary)
 Third party (trustee)
o Borrower grants a deed of trust to a trustee
o Trustee holds the deed of trust for the benefit of lender
o Trustee has the right to foreclose and distribute proceeds to lender

 Default: Lender instructs trustee to foreclose the deed of trust and sell the property after notice has been
given to all parties. Lender has the right to bid.
 Non-judicial- power of sale clause allowing trustee to conduct the sale
 Judicial- as with mortgage

3. Installment Land Contract

a Definition -:An agreement by the buyer to purchase the real property and to pay for the real property with
regular installment payments until the full contract price, including accruing interest, has been paid. The buyer
takes possession, but the seller retains the title to the real property until the final payment is made. Only after the
contract is fully performed and the purchase price is fully paid will the seller deliver a deed transferring legal title
to the buyer. The seller’s security for the full payment of the purchase price is seller’s retention of the title.

b. Default

 Historically - If the buyer defaulted on the land contract, the seller was allowed to cancel the contract,
retain all the money paid, and retake possession of the real property (this process was called forfeiture).
 Equity of Redemption - Most states allow the buyer who is in default to pay off the full balance of the land
contract and retain the property. This is analogous to the equity of redemption in mortgage law.
 Treat as Mortgage – Some states treat land contracts like mortgages for the purposes of the seller’s
remedies. Other states have codified the procedures that seller must undertake in the event of a default
under a land contract.

Slone v. Calhoun: The land Contract Case
 Land contract is akin to a mortgage
 Buyer does NOT forfeit her entire interest
when she defaults
 Buyer has the right to redeem the property
by paying the full debt plus interest and
expenses
 Seller’s only remedy is to file a foreclosure
action
 If the property sells for more than the
amount owed to seller, BUYER receives the
excess

4. Equitable Mortgage

 Absolute Deed as Security (Equitable Mortgages)

 Definition of Equitable Mortgage - To avoid debtor protections under mortgage law, a lender
may attempt to disguise the true nature of its interest in the real property. Rather than use a
mortgage instrument, the parties may structure the transaction as a conveyance of the property
from the borrower to the lender with the borrower’s option to “repurchase” the property upon
repayment of the debt. If the court concludes by clear and convincing evidence that the deed

16
 was really given for security purposes, it will be treated as an “equitable mortgage” and the
court will require the lender to foreclose as required under mortgage law.

 Sale-Leaseback - An owner of real property needing to raise money may sell her real property to
another for cash, and then lease the real property back from the grantee for a long period of
time. A sale-leaseback transaction may (or may not, depending on the circumstances) be
deemed an equitable mortgage by a court.
 Key Documents:
 Real Estate K
 Lease
 Option to Repurchase

Zaman v. Felton: Equitable Mortgage Case  Not every sale/leaseback transaction is an

equitable mortgage
 It’s all about intent!
 If the sale/leaseback is entered into
to avoid mortgage foreclosure law,
then the transaction will be
characterized as an equitable
mortgage
 Substance over form!
 Buyer/lender’s only remedy is to
proceed with foreclosure

 8 Part Test (Not on Exam)

 Intent that seller remains the owner
 Substantial disparity in value
 Existence of an option to repurchase
 Seller’s continued possession
 Seller’s continuing ownership burden
 Disparity in bargaining power and sophistication
 Irregular process (home not listed for sale, no appraisal)
 Financial distress of seller

C. Foreclosing on the Security

 Extinguishes the borrower’s title to the property

 Transfers title to the winning bidder at the foreclosure sale
 In general, eliminates all liens and interests, including leases, that arose after the mortgage
 Provides certainty in the chain of title by eliminating all interests that arose after the mortgage

Types of Forclosure:

Judicial Non- Judicial

 Permitted in all states  Not permitted in all states

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  Statutory cause of action  Contractual right of sale
 Lender files lawsuit  Court is not involved
 Court issues judgment of foreclosure  If borrower does not redeem (repay) debt
 Public official holds court-supervised within set number of days, the lender holds a
foreclosure sale foreclosure sale

 What does it do?

 Extinguishes the borrower’s title to the property
 Transfers title to the winning bidder at the foreclosure sale
 In general, eliminates all liens and interests, including leases, that arose after the mortgage
 Provides certainty in the chain of title by eliminating all interests that arose after the mortgage

 The Foreclosure Sale

Theory:

 Auctioning the property to the highest bidder will allow the lender to obtain the fair market price for
the property

Reality:

 Lender is often the only bidder

 Generally, financing is not available to others (which precludes many bidders)

- Lender usually bids the amount of the loan plus it’s costs, this is a Credit Bid

- Deed is delivered to winning bidder after sale is confirmed by Court, called a Sheriff’s Deed

Results of the Foreclosure Sale

 Deficiency Judgements
 Lender may have the right to seek a deficiency judgment against borrower
 Borrower may be personally liable for the “shortfall”
 Whether lender may seek a deficiency judgment depends on state law
 Lender’s right to seek a deficiency judgment depends on state law (whether the state has any anti-
deficiency statutes)
 Anti-deficiency statutes:
 Some (but not all) states prohibit the lender from obtaining a judgment for the
“shortfall” between the foreclosure sale price and the amount owed by the borrower
 Common anti-deficiency statutes:
 Owner-occupied residences
 Non-judicial foreclosure

5. Special Mortgage Priority Rules

 Junior Interest:

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  Necessary parties to the action
 “Wiped out” by the foreclosure

 Senior Interest- first mortgage stays in place

 Not extinguished
 Buyer at the foreclosure sale takes subject to the senior interest
 Buyer at the foreclosure sale does NOT become personally liable
 Senior interest can still foreclose if original borrower defaults on the amount owed to the senior
interest holder

D. Exercising Rights After Foreclosure 669

1. Protecting the Borrower

 Before Foreclosure:
 “Equity of Redemption”?
 Borrower’s right to “redeem,” or repay the debt, stop the foreclosure, and prevent the loss of
the property

 “Clogging the Equity of Redemption?”

 Borrower’s right to redeem cannot be waived in the mortgage document itself
 This is known as “clogging the equity of redemption”
 Mortgagee-In-Possession
 Lender may take possession of the property before foreclosure when:
 Borrower consents or abandons the property
 (Note: missed payments are not enough!)
 Benefits to the lender:
 Lender can collect the rents, prevent waste, make repairs, and lease out vacant space
 Risks to the lender:
 Duty to manage the property in a careful and prudent manner, potential tort liability,
etc.
 Instead of becoming a “mortgagee in possession,” most lenders prefer to have a receiver
appointed by the court to manage the property

Pros Cons

 Allows lender to get control of the  They are not free!

property during the lengthy
foreclosure process
 Protects against waste
 Collects rent and applies to debts
 Avoids liability of a “mortgagee-in-
possession”
 State law procedures vary
 Requires judicial action
 They are not magic!
 Receiver is not the lender’s agent

 Homeowner Options
1. Reinstatement
 Reinstating the loan by paying the past due amount (plus costs) prior to the foreclosure
judgment

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 2. Equity of Redemption
 Repaying the loan in full prior to the foreclosure judgment
3. Statutory redemption
 Repaying the loan in full within the statutory redemption period
 Applicable in most, but not all, states

 No Money for Redemption

 Loan modification
 Amendment to the original terms of the loan
 Ex: reduction in interest rate, reduction in the principal amount, increase in the duration
of the loan

 Refinance
 Refinance the loan to a lower rate or a fixed rate loan
 Challenges:
o Negative equity (home is “under water”)
o Home value does not support the new loan needed to pay off the debt (the
house does not “appraise out”)
 Potential defenses to foreclosure
 Lender documentation problems (“show me the Note”)
 Robo-signing
 Fraud, other missteps by lender
 Bankruptcy
 Chapter 13 bankruptcy temporarily “stays” the foreclosure
 Borrower commits to a repayment plan to repay all debt on more favorable terms
 Short sale
 Borrower sells the property for less than the amount of the debt (with lender’s consent)
 Lender agrees to forgive the remaining debt
 Deed-in-lieu of foreclosure
 Borrower conveys the property to the lender (without going through the foreclosure
process)
 In exchange, lender may agree to forgive the remaining debt

2. Protecting the Lender 670

Wansley v. First Nat’l Bank of Vicksburg: The farmer A low price at the foreclosure sale is NOT enough to
brothers case- claim the foreclosure sale price was just set aside the sale unless the price is “so grossly
too low inadequate as to shock the conscience of the Court”

Housing Crisis:

Teaser Rate: Fixed rate for 2-3 years then adjustable

Stated Income/ No doc: Lender relied on credit score, borrower doesn’t provide documentation, fixed rate and the
adjustable, 2014 new guidelines

Interest Only (house flippers and investors) Monthly payments only cover the interest, homeowner only gains
equity if the price increases

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Negative amortization: Payments don’t even cover the interest, unpaid interest is added to principal, amount of
debt increases every month

No money down loans: buyers borrows 100% or more of the purchase price, if house declines in value the
homeowner will be underwater

Chapter 10 Private Land Use Planning 683

A. Easements

 A non-possessory right to use the land of another party

 Estate, tenement, land, parcel, and property all mean the same thing
 Dominant tenement: the land benefited by the easement
 Dominant owner: easement holder / owner of the land benefited by the easement
 Servient tenement: the land burdened by the easement
 Servient owner: owner of the land burdened by the easement

1. Creating Easements

 Express (express grant or express reservation), or

 Created by an express grant - a written agreement between the servient owner and the
dominant owner, or
 By an express reservation – an easement reserved by the grantor when he conveys a portion of
his property a third party but retains an easement over that property
 Must satisfy the Statute of Frauds

 By implication (4 types) Imposed as a matter of law without the need for agreement of the owner of the
servient (burdened) property
1. By prior existing use
2. By necessity
3. By prescription
4. By estoppel (a/k/a irrevocable license)

 Types of Easements
 Easements in gross
 Not connected to the easement holder’s use of his land
 Personal to the easement holder
 Involves only one parcel of land
 Typically an easement granted to a utility company

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  Easements appurtenant
 Benefits the easement holder in his use of a specific property (the dominant estate)
 Involves two parcels of land, usually adjacent
 The most common type of easement
 Easements and Conveyances
 Unless the parties otherwise agree, an appurtenant easement is automatically transferred with
the ownership of the dominant (benefited) estate and servient (burdened) estate
 In other words, the easement “runs with the land” and is binding upon future owners of
both parcels
 Easement or License
Easement:
o An interest in real property
o Permanent in nature
o No right of possession
o Limited right to use the land for a specific purpose
o “Runs with the land” and binding upon subsequent owners
License:
o Not an interest in real property
o A privilege to use the land of another for a specific purpose
o Personal to the grantee
o Cannot be transferred or assigned by the grantee
o Can be revoked by the grantor at any time
 Right of Profit
 Right of a third party to enter the land to remove minerals, oil & gas, timber, other natural
resources
 How does it differ from an easement?
o Under the Restatement, a profit is a sub-category of easements
o In most jurisdictions, courts apply the same legal principles to easements and profits

 Millbrook Hunt, Inc. v. Smith
The Hunt club had a valid express easement
The easement is binding upon subsequent
owners (even though the owner retained the
“absolute right” to develop the land)
 Points to remember:
Courts look at the substance of the document
If the owner has the right to revoke, it is most
likely a license
If it includes a provision stating it is binding
upon future owners, it is most likely an
easement

Emanuel v. Hernandez 690

Berge v. State of Vermont 697

O’Dell v. Stegall 704

Kienzle v. Myers 712

22
2. Interpreting Easements 718

Marcus Cable Associates, L.P. v. Krohn 719

3. Terminating Easements 726

Preseault v. United States 727

4. Negative Easements 734

B. Land Use Restrictions

• Owners of real property may create agreements that restrict the use of real property where . . .

• The agreement binds not only the original owners who made the agreement . . .

• But also the subsequent owners of the real property

 The Basic Principles of

 Real Covenants and Equitable Servitudes
 Real covenants and equitable servitudes are both:
 Private promissory obligations…
 Regarding land use…
 That are enforceable not only between the original parties but also by and against the original
parties’ successors in interest simply because they are the successor owners of the original
parties’ properties

1. Traditional Approach 736

a. Real Covenants

 An enforceable promise concerning the use of land that benefits and burdens BOTH the original parties to
the promise AND the successor owners of their properties
 Real covenant is a 2-sided promise:
 Benefit – the right to enforce the promise (in other words, the plaintiff has the right to sue)
 Burden – the duty to perform the promise (in other words, the defendant can be sued for
breach of the promise)
1. Elements:
1. Statute of Frauds:
 The covenant must be contained in a document that satisfies the Statute of Frauds
2. Intent to bind successors
 Original parties must have had the intent for the covenant to “run with the land” and
bind successor owners
3. Touch and concern the land
 The covenant must relate to the use, enjoyment, or occupation of real property (height,
restrictions on building size, type of building, types of materials used)
Affirmative Covenants Negative Covenants
Requires the holder of the Restricts the owner of the
burdened property to do burdened estate in his use of the
something land

Increases the burdened

owner’s obligations in
connection with the land

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 4. Notice
 Successor owner must have notice of the covenant
 Actual, record, or inquiry notice is sufficient
 If a subsequent BFP qualifies for protection under the recording act, the subsequent BFP
may take free of the covenant

5. Horizontal privity
 There must be some relationship between the original parties to the covenant
 Generally requires that, at the time the parties entered into the covenant, the two
shared some interest in the land independent of the covenant

 Three Approaches to Horizontal Privity (depending on jurisdiction)

i. Mutual interests
-Original parties must have had a mutual interest in the property
-Landlord/tenant, or co-tenants, or grantor/grantee of an easement
ii. Successive interests
-Original parties must have been in a grantor/grantee relationship (successive
owners of the same property) *Part of why I’m willing to sell you the property.
iii. No requirement
-Modern trend: no requirement of horizontal privity

6. Vertical privity
 Relationship between an original party to the covenant and the successor owner of the
land
 Vertical privity exists only if the successor owner acquires the entire estate that the
original party had
 No longer required in most states

Deep Water Brewing, LLC v. Fairway Resources Ltd. 739

b. Equitable Servitudes 745

 an enforceable promise concerning the use of land that benefits and burdens both the original parties to
the promise and their successors
 Enforced in the court of equity

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  Elements of Equitable Servitudes:
1. Statute of Frauds
2. Intent to bind successors
3. Touch and concern the land
4. Notice

Gambrell v. Nivens 745

2. Restatement Approach 751

 The Restatement combines real covenants and equitable servitudes into a single doctrine called
covenants that run at law
 A servitude arises when:
 The owner of a property intends to create a servitude that burdens his/her property
 The owner enters into a contract or conveyance that satisfies the Statute of Frauds
which creates the servitude
 The servitude is not arbitrary, unconscionable, does not unreasonably restrain
alienation, does not violate public policy, etc.

3. Common Interest Communities

 A common interest community (“CIC”) is a planned residential development:

 In which all parcels are subject to land use restrictions, and
 Which is governed by a homeowner association (“HOA”)
 Includes condominium associations and homeowner associations for single-family homes

 Why have them?

 Use and building restrictions to uphold property values
 Gated communities with privately owned roads and other infrastructure
 Amenity centers (golf course, tennis courts, clubhouse, pool, etc.)
 Lakes/ponds, stormwater management systems, and other utility systems

 Decalaration:
 Runs with the land, binding on future property owners, and enforceable as real covenants or
equitable servitudes
 Must be recorded in the real estate records before the developer begins selling lots or condo
units

 Binding Nature
o Every potential buyer has opportunity to read the Declaration (which includes covenants,
conditions & restrictions governing land use) prior to purchase
o Therefore, each buyer agrees to be bound by the covenants, conditions & restrictions when
purchasing a property in the community

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  Components of the Declaration
1. Creates the Association
 Establishes organizational structure
 Enumerates powers
 Establishes voting procedures
2. Creates the use restrictions
 Use restrictions may be enforced as real covenants or as equitable servitudes
3. Creates assessment obligation
 Collection procedures and lien rights
4. Establishes ownership rights
 Common areas
 Limited common areas (for condos)

 Enforcement of CC&Rs
 Any benefitted party has the right to enforce a violation by a burdened property owner – right
is generally reserved for the board in practice.

 CC&Rs are binding upon all homeowners because the CC&Rs appear in the chain of title to all
properties in the community
 Some defenses to enforcement of CC&Rs:
 Abandonment
A covenant has been abandoned when:
o The average person, upon inspection of a subdivision and knowing of the
restrictions,
o Observes sufficient violations,
o So that he/she will logically infer that the property owners do not comply with,
and do not enforce, the covenant

 Changed conditions
The party arguing that a restrictive covenant should be terminated due to changed
conditions must prove:
o The original purpose of the restrictive covenant has been materially altered or
destroyed by changed conditions, and
o That a substantial benefit can no longer can be achieved by the enforcement
of the restriction

 Unreasonableness

a. Enforcing Restrictions

Real Covenants Equitable Servitudes

Enforceable by: Enforceable by:
Damages (legal remedy) Injunction only (equitable remedy)
Injunction (equitable remedy)

Cannot be terminated by equitable Can be terminated by equitable

doctrines such as unclean hands, laches doctrines such as unclean hands,
laches

26
 Nahrstedt v. Lakeside Village Condominium Unreasonableness
Association, Inc.: The “no kitty” case

Fink v. Miller
 Abandonment of a real covenant or equitable
servitude requires proof that existing
violations are so great as to lead the average
person to reasonably conclude that the
restriction has been abandoned
 Considerations include:
 The number, nature and severity of
existing violations
 Prior acts of enforcement
 Whether a substantial degree of the
benefit of the servitude can still be
realized

Vernon Township Volunteer Fire Department, Inc. v.  In general, courts focus on whether the
Connor conditions have changed within the
subdivision or CIC
 Changes in the surrounding
properties that are outside of the
community are less persuasive

b. Governing the Development

 How much power/authority does the Board of Directors of the HOA have in exercising its authority?
 Two Step Process:
 Was the action of the Board of Directors within the scope of the authority granted to
the HOA/the Board under the Declaration?
 Did the Board of Directors act reasonably in the exercise of its powers?

27
 Schaefer v. Eastman Community Association:  In determining whether the Board acted within
The ski hill case its authority, the Shaefer court followed the
1. Within scope of authority Restatement approach:
2. Reasonable  The powers of the Board of an HOA should
be interpreted broadly
 A decision of the Board is valid and within
the scope of the Board’s authority so long
as the decision does not contravene an
express provision of the Declaration or a
right reasonably inferable therefrom (and
so long as the decision is not reserved as a
matter that must be voted on by all
members)

Fountain Valley Chateau Blanc Homeowner’s: The Reasonableness standard

Hoarder Case

Association v. Department of Veterans Affairs 782

C. Nuisance 787

Chapter 11 Land Use Regulation 805

A. Basics of Zoning 806

 Government (state, regional or local) regulation of privately owned land

1. Constitutionality of Zoning

 Modern zoning ordinances typically contain similar features to the pattern used in Euclid (now known as
“Euclidian zoning”)
 Euclidian zoning is the basis for modern zoning ordinances
 The key features of Euclidian zoning are the regulation of the location of buildings and the separation of
uses

 Modern zoning ordinances have two components:

1. The text of the ordinance
 Sets forth the zoning classifications
 Sets forth the restrictions on use and the restrictions on building in each zoning
classification
2. Maps that depict the zoning classification
of each parcel

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  Zoning Ordinances
 All lands were categorized under a specific zoning district
 Ordinance set forth the uses that were permitted in each district and established other
restrictions (height, density, building size, etc.)
 Less-intensive uses (like single-family homes) were permitted in more intensive use districts
 Ordinance applied to undeveloped lands and modifications to existing uses
 Existing uses that did not comply with the zoning ordinance were allowed to continue as
nonconforming uses

Euclid v. Ambler A newly enacted zoning ordinance is constitutional

Assumption the Single Family Home is the most
important,
Different districts are better/ desirable
Low density development
and does not violate the due process or equal
protection clauses of the U.S. Constitution even
though the application of the zoning ordinance results
in a significant reduction in the value of some
properties

Why is it constitutional?
Because, under the Rational Basis Test, the zoning
ordinance is not clearly arbitrary and unreasonable,
and it bears a substantial relationship to the
protection of the public health, safety, morals, or
general welfare of society

 In deciding whether the government has the power to enact a particular law relating to the regulation of
real property, the court will apply one of two tests:

 Rational Basis Test (“RBT”):

 The law is constitutional unless it is clearly arbitrary and unreasonable,

 and has no substantial relationship to the public health, safety, morals, or general
welfare

This test is the default rule (applies unless Strict Scrutiny applies) when determining the
constitutionality of land use regulations

 Strict Scrutiny Test

 Law is constitutional only if it is narrowly tailored to accomplish a compelling state

interest
 Higher standard than RBT – the court is much more likely to strike down a law under
Strict Scrutiny than under RBT
 Strict scrutiny is applied when the law:
o Discriminates against a suspect class (race, ethnicity, etc.) or
o Impairs a fundamental constitutional right (freedom of speech)
o Rarely applied in zoning cases

2. Typical Zoning Ordinance 817

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3. Nonconforming Uses- allow buildings which do not meet the requirements of the current zoning code

 “Grandfathering” in a use or building that is no longer permitted

 A use or building that was legal at the time it began but, because of the enactment of or
amendments to the zoning ordinance, is no longer permitted in the district

 Owner has the right to continue the nonconforming use or to maintain the nonconforming building

 Having a Nonconforming Use

 If a subsequent owner acquires the property, the subsequent owner has the right to continue the
nonconforming use or building, subject to some restrictions

 Restrictions on nonconforming uses/buildings:

 The use cannot be expanded or changed

 The structure cannot be expanded for that use

 Only ordinary repairs are allowed; no rebuilding

 Terminating Nonconforming Use

 In most jurisdictions, nonconforming uses can only be terminated:
 If the use is discontinued or abandoned
 If the structure is destroyed
 If the use constitutes a nuisance
 If the property is taken by eminent domain
 Relatively new (and not often used) method of terminating a nonconforming use: amortization-
city forces the nonconformity to shut down over a number of years

Trip Associates, Inc. v. Mayor and City Council of
Baltimore
 Nonconforming use (“NCU”) is established if a
property owner can demonstrate that before,
and at the time of, the adoption of a new
zoning code (or amendment to a zoning code)
the property was being used in a then-lawful
manner for a use that, by later ordinance,
became non-permitted
The court held that Triplin “intensified” the NCU but
didn’t abandon (or partially abandon) the NCU
Intensification of a NCU is permissible as long as the
nature and character of the use is
unchanged/substantially the same
Increasing the number of nights of adult
entertainment from 2 to 5 is a more frequent use of
the property for the same permitted purpose

B. Rigid Zoning or Flexible Zoning?

 Three common methods to revise or change the zoning of a particular property:

1. Amendment of the zoning ordinance

2. Obtaining a variance

3. Obtaining a special exception (also called a conditional use permit)

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1. Zoning Amendments (also Rezoning)

 In reviewing the constitutionality and enforceability of rezoning / zoning amendments, courts apply one
of the following tests:

 Rational Basis Test (“RBT”)

o Same test as applied to determining the constitutionality of the original zoning

ordinance

- The amendment is clearly arbitrary and unreasonable and

- The amendment has no substantial relationship to the public health, safety,

morals, or general welfare

 Change or mistake approach (minority rule)

o Amendment to the zoning ordinance is valid only if:

- There was a mistake in the original zoning ordinance, or
- Conditions or circumstances have changed so significantly that the original
zoning ordinance should no longer apply

Smith v. City of Little Rock - the Wendy’s case
Whether the decision of a local government to rezone
a property from a residential classification to a
commercial classification – to allow a fast food
restaurant – should be upheld
Role of the court in reviewing the local government’s
decision is limited to determining whether the
decision was arbitrary or otherwise fails the RBT
- The court does not have the authority to
substitute its judgment for the judgment
of the local government
Presumption that the local government acted
reasonably
Opponents of the rezoning have the burden of proof
to demonstrate the rezoning is arbitrary and has no
substantial relationship to promoting the health,
safety and welfare of the community

 Spot Zoning (unconstitutional) exists when an amendment/rezoning:

 Singles out one parcel and treats it differently
 The parcel is treated differently primarily for the benefit of a particular person, not for the public
 The rezoning is inconsistent with the uses in the surrounding area
 Spot zoning is per se arbitrary
 If a court finds that a local government’s decision constituted spot zoning, the court will strike
down the rezoning
 Spot zoning constitutes an arbitrary, capricious and unreasonable treatment of one parcel of land

*Generally, the smaller the parcel the more likely spot zoning is afoot.*

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2. Variances

 General concept

 A variance is an exception to, or waiver of, the requirements of the zoning ordinance which is
made for a specific property when the strict enforcement of the zoning ordinance would result in
an unnecessary hardship on the owner

 The elements that must be proven depend on state law ( and can be statutory or common law
development)

1. The land has unique physical conditions that create an unnecessary hardship

2. Because of the unique physical conditions, the land cannot be developed in compliance with the
zoning requirements

3. The hardship was not created by the party seeking the variance

4. The variance will not:

 Alter the character of the area

 Substantially impair the use or development of adjacent property
 Be detrimental to the public welfare

5. The variance must be narrowly construed

 Area variances

 Exception which allows the owner to deviate from the height restrictions, setback
requirements, building size, density (number of units on the lot), lot size, street frontage, or
other physical requirements or restrictions

 Use variances

 Exception which allows the owner to use the land for a specific purpose that is not permitted
under the zoning ordinance

Detwiler v. Zoning Hearing Board of Lower Salford
Township: The weirdly shaped land case
 The court upheld the variance – why?
 Even though the land could be used for
agricultural purposes, the land would be
“practically valueless” without the
variance
 The surrounding properties were
residential (therefore the use of this
property as residential is not
detrimental)
 The hardship was not self-inflicted; mere
knowledge of zoning requirements is not
a bar to obtaining a variance
 No evidence of adverse effect on the
neighboring property values

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3. Conditional Uses (different from a variance,

 A use that is permitted by the zoning ordinance in a particular district but is regulated on a case-by-
case basis

 Allows the municipality to impose conditions on a particular use rather than it being automatically
permitted

 Every owner who wants to use his property for that use must obtain a conditional use permit

 Municipality typically has broad power to impose conditions that the owner must meet in order to
use the property as the owner desires

 When are Conditions used?

 The good:
 For complimentary uses to be placed in appropriate
locations
 Example: schools as a conditional use in a
residential district
 The bad:
 Where the municipality is concerned that the
type of use could adversely impact the area
unless safeguards are put in place
 Examples: auto salvage yards, landfills,
industrial plants
 The “Big Box”:
 Emerging trend of municipalities requiring conditional use permits for all retail buildings
exceeding a certain size
 Targets “big box” retailers like Wal-Mart, Target, Costco, Best Buy which want to build
large-scale stores

Walmart v. Planning Board
of North Elba:
General rule: the
municipality has a high
level of discretion in
determining whether to
grant a CUP and what
conditions should be
imposed to mitigate the
potential adverse impacts
 Under the zoning ordinance at issue in Wal-Mart v. North Elba, a CUP may
only be granted if the proposed project:
1. Would not have a materially adverse impact upon adjoining and
nearby properties, and
2. Would not have a clearly adverse aesthetic impact
 The planning board found that the proposed Wal-Mart did
not satisfy #1 and #2 therefore the CUP application was
rejected
 The planning board also found that the proposed Wal-Mart
would have an “undue adverse impact on the natural,
physical, social and economic resources” of the town

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  Limits to local Power
 An amendment to a zoning ordinance is valid unless the amendment:

 Is clearly arbitrary and unreasonable and

 Has no substantial relationship to the public health, safety, morals, or general welfare

 Zoning ordinance that is designed to exclude a particular business is not enforceable if the city
arbitrarily singled out a particular business for discriminatory treatment
 BUT if there is a rational basis for treating that business differently, the amendment is enforceable
 Bottom line:
 Courts uphold zoning ordinances that require CUPs for all retail buildings that exceed a
certain size (or that prohibit all retail buildings exceeding a certain size)

C. How Far Can Land Use Regulation Go? 842

1. Aesthetic Regulation 843

State ex rel. This case relates to the power of the local government to dictate aesthetics (as compared
Stoyanoff v. to the power of a homeowners association to enforce restrictions set forth in recorded
Berkeley: The CC&Rs- private citizens imposing rues on one another)
Pyramid House  It is not clear whether courts would allow a municipality to control the design
Case based solely on aesthetics BUT a municipality does have the power to regulate
design if:
 Aesthetics/design is not the sole factor, and
 The ordinance contains workable guidelines or standards to be used by the
decision makers
 Zoning ordinance that regulates aesthetic design satisfies a legitimate government
objective since it is aimed at preserving the character of neighborhoods and
property values
 Preserving the character of neighborhoods and property values are “directly
related to the general welfare of the community”

City of Ladue v. Gilleo:  Local governments have the right to regulate the physical characteristics
The sign in the of signs
yard/window case  Local governments may impose content-neutral restrictions on the time,
place and manner of speech (including signs)
 Restrictions on the size, number, and possibly the appearance of the signs
are permitted
 Restrictions on the content/message are NOT permitted

2. “Family” Zoning 856

 In Belle Terre, the court applied the Rational Basis Test and found that the family zoning ordinance was
constitutional because:
 It had a reasonable relationship to a legitimate government objective
 The legitimate government objective was the regulation of noise, parking and traffic, and limiting
density to reduce the strain on public resources

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 Belle Terre v. Borras- the anti college kids case In Village of Belle Terre v. Boraas, the Supreme Court
upheld a “family” zoning ordinance which provided
that only the following people may reside together:

“Families” – defined as any number of people related

by blood, adoption or marriage, or
Up to two unrelated people

In Belle Terre, the city (allegedly) enacted the “family”

zoning ordinance to prevent college students from
living together

Moore v. City of East Cleveland: the Grandma Case You cannot limit families living together, that is a
violation of the 5th amendment

Chapter 13 Eminent Domain 919

 Due Process Clause
 “No person shall… be deprived of life, liberty or property, without due process of law…”
 Takings Clause
 “…nor shall private property be taken for public use, without just compensation.”

 Eminent Domain:
 The power to take private property for public use is called eminent domain
 The process of using that power is called condemnation
 Eminent domain results in the actual acquisition of title to, and possession of, property by the
government
 Eminent domain is the inherent power of the federal, state and local government to take private property
for a public use

Breaking it Down:

1. Private property

 Applies to real property and personal property

2. Be taken

 In eminent domain cases, the government is obtaining title to and possession of the property

3. Public use

 What constitutes public use is the key issue in Kelo v. City of New London

4. Just compensation

 Fair market value of the property

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A. Defining Public Use

 Early cases:“Public use” meant that the condemned land must be physically used by the government or by
the public (schools, roads, military bases)
 Berman v. Parker: U.S. Supreme Court upheld the power of eminent domain in order to redevelop urban
“slum” areas by allowing the resale of condemned parcels to private owners

Hawaii Housing Authority v. Midkiff
As long as it is rationally related to a conceivable
public purpose.
Breaking up the feudal system of hawaii
 U.S. Supreme Court upheld the taking of 72
parties’ properties for the purpose of selling the
properties to the tenants to break up the “evils”
of a land oligopoly
 The Court held that the public use requirement is
satisfied if the local government
rationally could have believed the
condemnation would promote the
health, safety, morality, and general
welfare

B. Scope of Public Use 928

Kelo v. City of New London: The case that outraged
the nation
Taking properties and combing them to create
something more economically viable.
 The Takings Clause restricts the government’s
power to take private property: there must be a
public use
 Public use requirement is satisfied if the taking
serves a public purpose
 Public use is defined by the purpose of
the taking, not by the end-user or the
mechanics of the taking

 State statutes aimed at countering the Kelo decision typically do one or more of the following:

 Define “public use” to mean the possession or enjoyment of the condemned property by the
public

 Restrict eminent domain to properties that are determined to be “blighted” and harmful to the
public health or safety

 Require compensation greater than fair market value if the condemned property is a primary
residence

 Place a moratorium on the use of eminent domain for economic development

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 STATES RIGHTS
 The Kelo decision emphasized the rights of the states
 States are free to enact laws that are more protective of property rights (and more restrictive of the
government’s power of eminent domain)
 State courts, in interpreting the “public use” clauses in their own state constitutions, may:
o Give a more narrow definition of public use, and
o Give less deference to legislative determinations of what constitutes public use

Chapter 14 Takings 943

When is a taking a taking?

 At what point does a land use regulation become

a “taking” of private property?

 Said differently, at what point does a regulation restrict the owner’s rights so severely that the property is
effectively “taken” …

 . . . Even though the government does NOT take title to or possession of the property . . .

 . . . Such that the government is required to pay just compensation to the owner?

 Government has NOT formally exercised its power of eminent domain but the property owner sues,
claiming that, in effect, a taking has occurred because of the impact of some regulation

A. Foundation Era 943

B. A New Doctrine 944

C. The Penn Central Standard 956

Penn Central Transportation Co. v. City of New York
Part balancing Test dtermined
 the issue was whether
a regulatory act constituted a taking
at all or was merely a regulation
 U.S. Supreme Court held that NO TAKING had
occurred – and articulated a new standard for
analyzing takings cases

D. Three Categorical Test

0 Each regulatory takings case should be decided under a 3-part balancing test that considers the
following factors:

1. The economic impact of the regulation on the property owner, and

 If you lose everything (value of the property) it’s a taking

2. The extent to which the regulation interferes with the property owner’s investment-backed
expectations, and

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  What was the purpose at the time of purchase of the property: What did you think you
were buying at the time?

3. The character of the governmental action

 If the regulation results in the physical invasion of the property by the govt. common
good is less likely, nuisance prevention is less likely

1. Permanent Physical Occupation

2. Loss of All Economically Beneficial or Productive Use

Lucas v. South Carolina Coastal Council: The total
takings test
A regulation that results in the TOTAL deprivation of
ALL economically beneficial or productive USE of the
property is a taking – regardless of whether the
regulation serves an important public purpose --
(unless the regulation is justified by the background
principles of the state’s property law or nuisance law)

0 “Economically beneficial use” relates to whether the land can be used – not just whether the land has any
value

0 Zero value is NOT required – just zero (or practically zero) productive use

0 Land could have some value (e.g., the vacant lot has some value to Lucas’ neighbors) but have no
economically beneficial use (e.g., the vacant lot is zoned residential but the regulation prohibited
Lucas from constructing a residence)

0 Lucas applies in “relatively rare situations”

0 Lucas applies if a regulation requires the land to be left “substantially in its natural state”

Know: midkiff, Kello, Lucas, penn central

If you have a takings Question?

Was there a taking?

1. Determine whether the regulation is a per se taking under the Lucas rule

a. Does the regulation cause the loss of all economically beneficial or productive
use of the property? If yes, there probably is a taking.

2. If the Lucas rule does not apply, then determine whether the regulation is a taking under the
Penn Central 3-part balancing test:

a. The economic impact of the regulation on the property owner

b. The extent to which the regulation interferes with the property owner’s
investment expectations

c. The character of the government action

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