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progressively fewer victims of the disease who need support. Must the trustee continue to use the trust funds for the support of diminishing numbers of polio victims, or can the trustee seek to have the trust modified to devote the funds to some other purpose? This question is governed by the cy pres doctrine (“cy pres” is Norman French for “so close” or “as close”), which permits courts in some circumstances to revise trusts in light of changed circumstances. American courts, reacting to abuses of cy pres doctrine by English courts, initially applied a very restrictive version of the doctrine. They required that the specific charitable purpose be impossible or illegal, and that the instrument of trust reflect a “general charitable intent” in addition to the specific purpose. More recently, courts have become more willing to invoke the doctrine, with the
Restatement of the Law Third, Trusts going so far as to say that cy pres should be available when carrying out the original trust would be “wasteful.”23
• Further Reading
Richard Craswell, Passing on the Costs of Legal Rules: Efficiency and Distribution in Buyer-Seller Relationships, 43 Stan. L. Rev. 361 (1991) (explaining the complexities in determining whether mandatory quality rules like the IWH benefit consumers).
Robert C. Ellickson, Cities and Homeowners Associations, 130 U. Pa. L. Rev. 1519 (1982) (advancing the model of common interest communities as private governments).
Henry Hansmann & Renier Kraakman, The Essential Role of Organizational Law, 110 Yale L.J. 387 (2000) (providing a general theory of organizational law based on partitioning assets).
23. 2 Restatement of the Law Third, Trusts § 67 (2003).
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Mary Ann Glendon, The Transformation of American LandlordTenant Law, 23 B.C. L. Rev. 503 (1982) (describing the evolution of the contractual model in lease law).
Th omas W. Merrill & Henry E. Smith, The Property/Contract Interface, 101 Colum. L. Rev. 773 (2001) (developing a model explaining the mixture of contract and property elements in leasing and trust law).
• seven
Land Transactions and Title Records
whenever an owner concludes that someone else would make better use of some or all of the owner’s property, a transfer is likely to occur. Alienation—by gift, sale, will, or intestacy—is one of the normal incidents of ownership, and is critical to the overall functioning of a system of property rights because it allows assets to be reallocated until they end up in the hands of the person who can obtain the highest value from their use. Even some of the lesser interests such as bailments and leases are created by some kind of transfer. In this chapter, we mainly focus on sales—transfers of property for valuable consideration—but will make sideways glances at gifts and inheritance. After considering some aspects of the contractual process as it relates to property, we will consider ownership records, which generally facilitate transfers but cause certain complications in particular settings. The focus throughout will be on land, in part because the transfer process for land involves high stakes and has the most elaborate systems of transfer and record-keeping. In part, this is because land is used to ground other related transactions, especially by serving as security for mortgages. We end the chapter with a look at security interests and mortgages in particular.
• Land Sale Contracts
Property and contract come together when property interests are transferred for consideration, usually for some combination of
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cash and debt. In the case of personal property, issues of the timing and quality of performance are handled under contract law, and the Uniform Commercial Code (UCC) in particular. Land sales differ from sales of personal property in many ways, not least in the length of time over which they stretch. Putting aside efforts related to searching for prospective buyers and sellers, which can entail entering into contracts with real estate brokers, a land sale has three phases. The process begins with the land sale contract and ends with the closing, when a deed passes from the seller to the buyer. The period in between, the executory period, can last for several months, and has a number of features unique to land transactions.
A land sale contract, to be enforceable under the Statute of Frauds, must be in writing and signed by the party against which enforcement is sought. The writing need not be terribly formal, but must identify the parties and the land, express an intent to convey it, and state the price. Because land is considered unique, land sale contracts are enforceable by the equitable remedy of specific performance. This is an order directing the party found to be in breach of the contract to carry out that party’s promises under the contract. Usually it is purchasers who seek specific performance, requiring sellers to go forward with the promised transfer of the property. Given its uniqueness, the buyer may not have any good substitute for the land subject to the contract. So an award of expectation damages will not provide the buyer complete relief. But even sellers, who are expecting only money out of the deal, can enforce a sale on a buyer with cold feet, as long as the requisites for enforcement are met. The availability of specific performance on both sides of the transaction provides more than symmetry (which may appeal to the sense of fairness at the heart of equity); it also may reflect the fact that land’s uniqueness means that being unable to rid oneself of unwanted land is difficult to measure in damages. Courts can avoid the thorny question of what damages would make a disappointed seller indifferent to retaining the land by simply enforcing the deal and having the sale go through.
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Land sale contracts usually contain a number of express and implied promises. One of the most important is the seller’s promise to provide marketable title. (This is a default rule; sellers can contract around this by promising only insurable title.) “Marketable title” is a term of art around which a great deal of precedent has built up. The concept refers to certain risks that the buyer (most likely, the buyer’s attorney) discovers during the executory period before the closing. Basically a title is unmarketable if the buyer finds an undisclosed defect or cloud on the title during this period that presents a likelihood of litigation. A buyer is not required to “purchase a lawsuit.” So, for example, a disclosed easement would not be a defect. The disclosed easement is presumably already reflected in the agreed upon price. But an undisclosed easement, which would not be reflected in the price, would be a defect that presents a likelihood of litigation. Any substantial risk that the seller does not have title (which risk has not been removed during the executory period by the seller) makes title unmarketable. But a potential claim that would be barred by the statute of limitations would not render title unmarketable. Slight defects of title can be remedied (again, equitably) through a reduction in the purchase price, thus avoiding the more drastic result of undoing the entire deal. At closing, all the promises, such as the warranty of marketable title, must be fulfilled, and the land will be transferred with a deed and consideration changing hands.
The land sale contract governs the relationship between the seller and the buyer during the executory period, which runs from the signing of the contract to the closing. During this period, the state of the title is in a curious intermediate state: The seller is treated as having a personal property interest in the land and the buyer as having a real property interest. This is called equitable conversion because the seller is still the legal owner (as reflected in the land records) but is treated as the equitable owner of a personal property interest—the right to receive the proceeds of the sale. Conversely, the buyer is the equitable owner of a real property interest in the land and is the legal owner of the cash or the anticipated proceeds of the
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loan that will be used to purchase the land. In the executory period, both parties have an insurable interest in the property, but the default rules as to who gets insurance proceeds in the event the property is destroyed or damaged vary greatly by jurisdiction. In many jurisdictions risk of loss tracks the equitable real interest, and thus the buyer would be the recipient of any insurance proceeds. Wise parties will allocate these risks explicitly in the land sale contract, especially if they prefer a different allocation of insurance payments and proceeds than the law provides.
Another important consequence of equitable conversion is what happens if either the buyer or seller dies between the contract and the closing. If the seller dies in the executory period with a will leaving personal property to relative A and real property to relative B, relative A will receive the equitable interest in the sale and eventually the proceeds at the closing. (In our example, B may receive the legal title but be obligated to turn the proceeds over to A.) For purposes such as insurance and inheritance, equitable conversion matters greatly to certain classes of third parties. Although parties are free to override some of the effects of equitable conversion by allocating insurance payments and proceeds or by writing a specific will, they are not free to alter the basic ground rules for what counts as equitable personal and real property in the executory period. The number of options are limited, and their effects are kept simple in a fashion reminiscent of the numerus clausus (see Chapter 5), with enough flexibility so as to avoid frustrating many of the ends that informed parties would want to pursue.
After the closing, the land sale contract becomes largely irrelevant; it is said to “merge” with the deed so that only those undertakings expressed in the deed bind the seller. Although there are exceptions to this doctrine of merger, sellers are mostly off the hook at this point unless the deed contains future warranties. Deeds are of three main types. A deed that does not warrant title, but passes only whatever interest the seller had, is called a quitclaim deed. If the seller warrants title, the seller can either warrant title against all defects, making it a general warranty deed. Or the seller can take
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responsibility only for defects arising during the seller’s period of ownership, which is called a special warranty deed.
Warranties of title typically vary in terms of when they give rise to liability and who can invoke them. Sellers giving warranty deeds may include any of six covenants in their deeds, which fall into two classes, present covenants and future covenants. Present covenants include the covenant of seisin, which provides a warranty of title in the grantor; the covenant of right to convey, which warrants the authority of the grantor to alienate; and the warranty against encumbrances, which, like the implied promise of marketable title in the executory period, warrants against undisclosed easements, clouds on the title, and so forth. If there is a violation of any of these present covenants, it occurs at the moment of the closing. By contrast, future covenants can be violated at the closing or any time thereafter. They are the covenant of warranty, which commits the seller to defend the title against lawful claims against it; the covenant of quiet enjoyment, which warrants that no one with superior title will challenge the buyer; and the covenant of further assurances, which obligates the seller to defend the buyer’s title in litigation and execute needed documents to remedy any defects in title documents. There is no violation of these covenants until a problem arises and the seller fails to perform on the covenant.
The immediate buyer may enforce any of these covenants at the time they are breached (within the statute of limitations). The present covenants may be enforced as of closing and the future covenants when and if the seller fails to act as required by the relevant covenant. In all states, the future covenants run to remote purchasers—as where A sells to B, and B sells to C, and C wishes to enforce against A. In this respect, these contractual promises take on a property-like aspect, analogous to the covenants running with the land we will consider in Chapter 8. Some states allow present covenants to run to remote grantees, but because they are violated, if at all, at the closing (here the A-to-B transfer), the statute of limitations starts running then. So if A sells to B at Time 1 with a warranty deed, and B sells to C at Time 2, C could sue A for a violation
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of a present covenant within the statute of limitations from Time 1 or on a future covenant if the suit is filed within the statutory period after the alleged violation.
There has been some trend toward leaving the seller on the hook after the closing. Under the common law, sellers were not permitted to make fraudulent representations, but otherwise the doctrine of caveat emptor (buyer beware) prevailed. In particular, sellers did not warrant that the land or buildings were free from defects or were fit for any particular purpose. Some states have changed the common law rule to require sellers of residential real estate to disclose material latent defects, that is, those that a reasonable inspection would not disclose. In a sense, this post-closing liability creates a more lasting in personam relationship between sellers and buyers. The tendency is to hold sellers of new homes to a higher standard than other sellers, with many courts consciously adopting a products liability theory that would allow even subsequent purchasers to sue the builder.1 Like the implied warranty of habitability we saw in landlord-tenant law (see Chapter 6), the warranty of quality in the sale of new homes is a consumer protection measure. Probably even more so than the implied warranty of habitability (IWH), it is aimed at asymmetric information in the contracting process, because in most (but not all) jurisdictions, it can be disclaimed by the seller or waived by the purchaser. Consistent with the noticegiving rationale, such disclaimer or waiver has to be specific and explicit.
Deeds in general have a notice-giving effect. Much of this effect is achieved by recording, to which we turn shortly, but the requirements for a valid deed and a conveyance have also been shaped by the problem of notice. As noted above, the Statute of Frauds requires a description of the land sufficient to identify it. Such descriptions are of two main types. In the eastern United States and in formerly independent Texas, land descriptions use
1. See, e.g., Schipper v. Levitt & Sons, Inc., 207 A.2d 314 (N.J. 1965).
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the “metes and bounds” system under which parcels are identified by geographical features or landmarks (for example, stones, and less reliably, trees), lengths and directions, in a description of a trip around the boundary of the parcel (as in “start at the big stone by Lake Lemon and then proceed North 25 Degrees East for 150 rods . . .”). In the rest of the country, a rectangular survey system, which originated with the Land Ordinance of 1785, provides the parameters for identification of interests in land.2 This system features six-mile square townships oriented with respect to principal base lines and principal meridians (for example, “the Northwest quarter of the Southwest quarter of Section 29, Township 3 South, Range 4 West, ____ Base and Meridian”). Each township is further divided into 36 one-mile square sections (640 acres) that can be further divided. (Corrections are needed at regular intervals to account for the roughly spherical shape of the Earth.) Two main advantages of the Public Land Survey System are the regular rectangular shape of plots and the ability to locate them from standard starting points. With GPS systems rapidly making their way into surveying, the advantage of the rectangular survey in terms of locating and describing boundaries is probably less than it used to be, but surveying still benefits from regularly shaped, especially rectangular, parcels that come neatly together across much of the country.
Surveys and land descriptions are but a part of the information of which purchasers and others need notice. The conveyancing process itself is also designed to furnish some notice. In feudal times the transfer of a freehold interest had to be accompanied by “livery of seisin,” which could take the form of a transfer of a clod of earth, a twig, or a set of keys. These days a conveyance by deed must include delivery of the deed. Delivery provides some assurance that the transfer has occurred, which is of great importance to anyone
2.Much of the country west of the Appalachians is covered by this public survey, with exceptions—including, interestingly, the Virginia Military District in southern and central Ohio, which was granted to Revolutionary War veterans from Virginia as compensation for their service.