Real Estate Finance 2

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					                  Real Estate Finance 2
                       Prof. Grant, Spring 1997


         Profs recommended hornbook.

               Nelson and Whitman, Real Estate Finance Law.

    The Role of the Broker/Agent.

         Broker generally works for seller as sellers agent. Agency law applies.

         In Idaho, by recent statute, real estate agency must be in writing.

               This eliminate implied-in-fact or implied-in-law agency.

               Protects brokers.

    Three Types of Listing Agreements.

         Open listing.

               Owner pays commission if the broker procures a buyer, but the
               owner retains the right to sell the property himself, and the owner
               can contract with other brokers for open listings.

               Legal effect of an open listing--offer for a unilateral K.

                      That is, the owners offer is only accepted by the
                      performance of the broker.

                      Thus, the seller can revoke the offer to the broker at any time
                      before the brokers performance without incurring any
                      obligation to the broker.

                            Because the broker is not obligated to do anything,
                            there is no mutuality of obligation.

         Exclusive agency listing.

               Seller pays the broker a commission if the broker procures a buyer,
               but the seller retains the right to sell the property himself without
               paying a commission; however, the seller promises to not K with
                                                 Real Estate Finance 2 – Spring 1997  1
           any other broker/agents.

           Legal effect--valid bilateral K.

                  Sellers promise is obvious. Broker promises to use his best
                  efforts during the K period to obtain a buyer.

     Exclusive right to sell listing.

           Seller pays the broker a commission no matter who procures a
           buyer during the K period.

           Legal effect--valid bilateral K.

                  Sellers promise is obvious. Broker promises to use his best
                  efforts during the K period to obtain a buyer.

     Note--brokers statute of frauds.

           Many states have statutes barring a brokers action for a
           commission in the absence of a writing signed by the seller.

                  Furthermore, some courts hold that the broker may not even
                  recover in quantum meruit if the listing K is not in writing.

           Idaho has this type of statute.

                  Idaho also disallows quantum meruit to brokers.

Broker Owes Seller Three Main Fiduciary Duties .

     Duty of good faith and loyalty.

           Generally, bad faith leads to forfeiture of commission, while
           negligence may not lead to forfeiture of commission but may lead to

           If the broker induces the prospective buyer to believe that the
           property can be bought for less than the listed price, he thereby
           fails to discharge this duty and forfeits the commission.

           Also, the broker must not reveal to prospective buyers how eager
           the seller is to sell, including facts putting pressure to the seller.

           The general rule is that the improper disclosure must be made in
           bad faith for the broker to forfeit the commission.

                                               Real Estate Finance 2 – Spring 1997  2
                Seller generally need not show actual harm in order to
                withhold the commission.

          Negligent disclosure on the part of the broker may not lead to a
          forfeit of the commission.

                However, the seller may still sue for damages if the property
                was sold for less than it should have been sold.

          Where a conflict of interest exists (e.g., where broker is part of the
          entity purchasing the property), the broker has duty of full and
          complete disclosure to the seller/principal.

                A breach by the agent of this duty of loyalty is a fraud for
                which the agent is answerable in damages, and any
                compensation paid to him may by forfeited. TPL Associates
                v. Helmsley-Spear, Inc., 146 A.D.2d 468, 536 N.Y.S.2d 754
                (App. Div. 1989).

          Broker can show all of his listed properties to a potential buyer. He
          is bound to show one sellers property exclusively only if the listing
          K explicitly so provides.

     Duty to exercise reasonable care and diligence (and skill).

          The broker has to reach some level of competence.

     Duty to disclose information to the principal.

          Includes not only information that the broker becomes aware of, but
          also to disclose information that the broker should have become
          aware of.

How a Broker Performs Under the Listing K--Two Views.

     Traditional rule: broker must only furnish ready, willing, and
     able buyer who will buy on sellers terms.

          If the buyer later backs out, the broker still gets the commission.

          States vary on rule when buyer is financially unable to close.

                Some states do not award commission because buyer was not
                truly able.

                Estoppel rule in some states.

                                            Real Estate Finance 2 – Spring 1997  3
                  Once the seller Ks with the buyer, the seller accepts
                  the buyer as ready, willing, and able and is estopped
                  from later arguing that the buyer was unable, even if
                  the buyer is in fact not able to perform under the K.

                  However, the owner has not accepted the buyer if
                  there is a financing conditional clause.

Newer rule: broker must furnish a buyer who closes. Three-part

     Broker must do all of the following:

           Furnish buyer ready, willing, and able to purchase on terms
           of listing or terms acceptable to seller.

           The buyer must K with the seller.

           The buyer must close according to the terms of the K.

     See Dworak v. Michals, 320 N.W.2d 485 (1982).

           According to prof, the case cited by Dworak, Ellsworth Dobbs,
           236 A.2d 843 (1967), held that a clause in the listing K to the
           contrary to this 3-part test is void because against public

     This rule still requires the seller to pay the commission if the
     failure to close is the fault of the seller.

     Profs restatement of the rule.

           No close, no commission (unless sellers fault).

     This is probably the rule in Idaho, but it is not entirely clear.

Drafting notes.

     To avoid conflict (such as whether the seller owes the commission if
     the house burns down before the close), include a clause in the
     listing K entitling the broker to a commission only if there is a
     close, unless failure to close is the fault of the seller.

     Watch out for clauses in the listing K which state, K binding on
     heirs and assigns, because the general rule is that the agency is
     destroyed by the death of the principal.

                                        Real Estate Finance 2 – Spring 1997  4
Brokers Duties to Buyer.

     Traditionally, the broker owed no fiduciary duties to buyer.

           Broker only controlled by tort law (e.g., negligence and fraudulent
           misrepresentation or failure to disclose).

     A broker owes a duty to prospective buyers to submit their bids to
     the seller.

           [This is from notes in text; check gouge or hornbook. What is the
           legal theory?]

           Despite the absence of privity of K, a real estate agent is clearly
           under a duty to exercise reasonable care to protect those persons
           whom the agent is attempting to induce into entering a real estate
           transaction for the purpose of earning a commission. Easton v.
           Strassburger, 152 Cal.App.3d 90, 199 Cal.Rptr. 383 (1984).

     Fraudulent concealment or misrepresentation by broker.

           A broker must disclose to the buyer material defects known to the
           broker but unknown and unobservable by the buyer.

           Of course, the broker cannot make fraudulent misrepresentations
           to the buyer.

           Re protecting the broker, see Hagglund and Weimer, Caveat
           Realtor: The Brokers Liability for Negligent and Innocent
           Misrepresentations, 20 Real Est.L.J. 149 (1991).

     Simple negligence by broker.

           According to Easton v. Strassburger, 152 Cal.App.3d 90, 199
           Cal.Rptr. 383 (1984), the broker has an affirmative duty to conduct
           a reasonably competent and diligent inspection of the residential
           property listed for sale and to disclose to prospective buyers all
           facts materially affecting the value or desirability of the property
           that such an investigation would reveal.

           Idaho legislature has rejected this requirement of independent
           investigation by broker. I.C.  54-2064. See also  55-2501.

                 Broker has no duty to conduct an independent investigation.

                 Also, the Idaho broker need not verify truth of what seller
                 tells him.
                                           Real Estate Finance 2 – Spring 1997  5
Buyers and Sellers Duties to Broker.

     Withdrawal-from-sale clauses.

           These types of clauses usually say that the broker gets the
           commission if the seller withdraws the property from sale during
           the K period.

           Courts differ as to whether the commission amount is a penalty in
           this situation.

                 A court may view the commission upon withdrawal from sale
                 as an alternative means of performance rather than as
                 liquidated damages or penalty. Blank v. Borden, 11 Cal.3d
                 963, 524 P.2d 127 (Sup.Ct. 1974).

                 Some courts label these provisions unenforceable penalties.
                 Wright v. Schutt Constr. Co., 500 P.2d 1045 (1972).

                        This puts the burden on the broker to prove that he
                        could have sold the property at the listed price.

                        Another problem is that with most Ks, the property is
                        listed with MLS, which requires the listing broker to
                        pay a portion of the commission to the cooperating

           Prof says that an atty representing the seller could argue that the
           K is just an offer for a unilateral K.

                 Note for exam--Prof likes this argument.

                 If the brokers promise to use diligence is insufficient to
                 support a bilateral K, then the sellers promise is an offer for
                 a unilateral K, which can be revoked at will.

           If the seller turns the property over to the bank to avoid foreclosure
           during the term of the listing K, the seller should not have to pay
           the commission because the withdrawal was not voluntary.

                 There is Idaho authority on this.

     Extension clauses.

           Common law rule.

                                            Real Estate Finance 2 – Spring 1997  6
            If the three elements of the test are met, the owner must pay
            the commission.

            Three elements.

                   Sale occurs within a reasonable time after the
                   termination of the agency K.

                   Broker was the procuring cause of the sale.

                   Owner acted in bad faith.

                          The majority of states do not require this third
                          element, but Idaho does.

             Procuring cause is a high standard for brokers to meet, so
            they prefer to insert a clause in the K that decreases the
            burden on the broker.

      Extension clauses are usually upheld.

            The extension clause typically requires that the brokers
            contact with the buyer had some minimal causal connection
            with the eventual sale.

            This is usually interpreted to mean that the broker
            negotiated with the buyer, or introduced or interested the
            buyer in the property.

            If no time is specified, a reasonable time is presumed.

      See Mellos v. Silverman, 367 So.2d 1369 (Ala. 1979).

Majority rule for open listing Ks is that the seller has a duty to the
broker to disclose buyers found by seller.

      Atty should advise seller in this situation to include a warranty
      clause in the K with the buyer. See text p.68-9.

Tort theory of recovery when buyer schemes to cut out broker.

      Theory is tortious interference by the buyer with the brokers
      business relationship with the seller, resulting in a deprivation of
      prospective economic advantage to the broker.

            See McCue v. Deppert, 91 A.2d 503 (N.J.App.Div. 1952).

                                       Real Estate Finance 2 – Spring 1997  7
                     This court held that the Statute of Fraud was no defense for
                     the buyer, even though the listing was oral, because the
                     Statute of Frauds is personal and not available to strangers
                     to the K.

                     Broker must prove that but for the buyers
                     misrepresentation to the seller that no broker was involved,
                     the broker would have sold the property for either the listing
                     price or for a lower price that the seller would have accepted.

               Idaho Supreme Court has held that the  must act with an
               improper purpose.


    The Mortgage Market.

    The Credit Quartet.

         Four important parts of a real estate loan.

               Down payment.

               Length of mortgage.

               Rate of interest.

               Method of amortization.

         Down payment.

               Also called loan-to-value ratio.

               Affected by government regulation and lenders own standards.


                     Level-payment, self-amortizing loan.

                            The type of loan where the borrower makes the same
                            payment over the life of the loan, and at the end of the
                            term, all of the principal and interest is paid off.

                             Debt-service constant multiplied by the total loan
                            amount tells you how big the annual payment must be
                                                   Real Estate Finance 2 – Spring 1997  8
                to achieve this.
Length of mortgage.

      Due-on-sale clauses are valid per federal law.

            Get typical clause from text p. 182.

            A few states had common law restrictions on due-on-sale
            and due-on-encumbrance clauses.

                   Some borrowers challenged due-on-sale clauses as
                   invalid restraints on alienation.

                   Enforceable in most states.

                   In a handful of states, courts held that these clauses
                   are only valid if reasonable.

                         Reasonable includes being worried about

                         Unreasonable includes just wanting to get rid of
                         a below-market-interest-rate loan.

            Federal regulations allowed federally chartered savings and
            loans to enforce due-on-sale clauses in any state.

                   But some S&Ls were state chartered.

                   Also, banks were not covered.

            Congress stepped in with Garn-St. Germain Act.

                   All due-on-sale clauses are valid.

                         But this Act says K will be enforced as written.

                          Drafting note.

                                Do not limit the purpose of the
                                due-on-sale clause.

                                If the clause includes language such as
                                if security is impaired, a court will not
                                allow the bank to call the loan just
                                because the interest rate is low.

                                      Real Estate Finance 2 – Spring 1997  9
            See class supp. p. 1 for excerpts from Act.

      Under the Garn-St. Germain Act, there are restrictions on a
      lenders right to exercise due-on-sale clauses in certain

            Home equity loans, devises, leases less than 3 years,
            transfers to spouse children, divorce, transfer to inter
            vivos trust, etc. See text p. 183.

            These are limited to residential real property (1-4

            Watch out for divorce. The due-on-sale clause cannot
            be exercised on the home, but if one spouse gets the
            business, there is no protection because the
            exemptions do not cover commercial loan.

The borrowers right to pre-pay is not automatic.

      Drafting note. If the borrower wants the right to pre-pay, a
      provision must be included in the loan K.

            This is common, but bank often requires a premium to
            be paid for the privilege of prepayment.

             Drafting note. If you represent the bank, phrase this
            as an agreed upon payment (i.e., an alternative means
            of performance), not a penalty or liquidated damages.

            See sample clause on text p.189.

      If the lender chooses to accelerate the loan upon sale or
      encumbrance per a due-on-sale or due-on-encumbrance
      clause, the lender may not demand any prepayment penalty.

            This is because acceleration is not prepayment.

            Generally, the prepayment premium is only earned
            when the borrower voluntarily prepays.

                   Condemnation or fire does not create voluntary

                   An involuntary prepayment may give rise to
                   right to premium if specifically included in K.

                               Real Estate Finance 2 – Spring 1997  10
           FHA, VA, Fannie Mae, and Freddie Mac loans must include
           the right to prepay with no penalty per federal regulations.

                  This is only on 1-4 family residences.

           Because of federal regs and some state regulation, many
           residential loans contain a provision providing for

                  But it is often the case that prepayment of principal
                  does not excuse the borrower from continuing the
                  monthly payments.

     Commercial mortgages often contain due on encumbrance

           Reasons a holder of first mortgage would object to second

                  Increased risk of default.

                  Increased risk of impairment of security.

                         Commercial loans are often non-recourse, and a
                         borrower who has little cash stake in, e.g., the
                         shopping center, may neglect it.

                         Borrower/owner can pull money out of the
                         property by mortgaging out. This is tax wise.

                  To call in below-market rate loan.

Rate of interest--usury.

     Today, there is little regulation of usury in real estate loans.

           Idaho has no usury statute re real estate loans.

           Even in states with usury laws, there are usually many
           exceptions, e.g., for corporate borrowers, or seller-financed

     Three elements to successful usury defense.

           Transaction was a loan or forbearance.

                  A court may re-characterize a transaction, such as a
                                      Real Estate Finance 2 – Spring 1997  11
                           sale and lease-back, which was constructed to evade
                           the usury law but which was really just a loan.

                      was required to pay excessive interest.

                           Points are generally held to be disguised interest.

                     Lender had wrongful intent, which most courts view as
                     anything more than innocent mistake.

                     Note. If borrower proves usury as a defense, the lender
                     forfeits all interest.

               Drafting note.

                     Can include a cap provision in the loan document stating
                     that interest charged shall not exceed the maximum
                     permitted by applicable usury laws.

                     Also, parties can K that the law of some other jurisdiction

               Federal pre-emption.

                     In most states, state usury restriction no longer apply to first
                     mortgage loans on residential real estate, including
                     apartment buildings. 12 U.S.C.  1735(f)-7(a) (1989).

                           There are also Treasury regs on point. 12 C.F.R. Part
                           590 (1992).

                     This federal law had an opt-out provision [I think], and Idaho
                     was one of the thirteen states to opt out and retain usury
                     restrictions for residential first mortgage loans.

                           ???But prof said Idaho has no usury laws re real

         Method of amortization.

    Alternative Mortgage Instruments.


    Forms of Security Devices.

                                              Real Estate Finance 2 – Spring 1997  12
The mortgage.

     A mortgage is not the loan itself.

     A mortgage is a security interest in property given to an obligee
     (usually a lender) to secure the loan.

           A mortgage can also secure other obligations, such as the
           promise of the mortgagor to act as surety for the debts of a
           third party (this type of mortgage is called a collateral
           security mortgage).

     Improvements to the house add to the mortgage security.

           If there is no exemption in the original K, improvements are
           added to the security of the mortgage IF the improvements
           are considered fixtures and are thereby treated as additions
           to the real property.

           However, if a chattel was covered by a security interest
           before the chattel was affixed to the real property, usually
           the chattel security interest will have priority over the
           mortgage on the real property.

     Where a mortgage is given to secure a loan, the loan itself is
     usually evidenced by a note or bond from the borrower.

           A note is an unsealed instrument.

           A bond is a sealed instrument.

     Mortgagee/lender gets a lien when it receives a mortgage.

           Today, the general rule is that a mortgagee gets a lien.

                  This lien theory is followed in most states, including
                  the vast majority of Western states.

           Long ago, the mortgagee received title subject to divestment.
           (The title theory.)

                  The application of this old principle led to harsh
                  results and led to the equitable right of redemption.

     The equitable right of redemption is an implied term of every
     mortgage bargain, and is enforceable by a bill in equity.

                                     Real Estate Finance 2 – Spring 1997  13
      This is a different right from a statutory right to redeem.

      The decree of foreclosure terminates (forecloses) the
      mortgagors equitable right to redeem.

      There is very strong public policy supporting this equitable
      right to redeem, and the parties may not contract out of or
      waive this right.


      Foreclosure procedure.

               The decree of foreclosure terminates (forecloses) the
               mortgagors equitable right to redeem.

               The foreclosure decree is issued after notice to the
               defaulting mortgagor and after a waiting period

      Foreclosure by judicial sale. Widely used.

               This is the general method, and the only method
               allowed in Idaho.

               Property is sold by sheriff, and mortgagor gets excess
               over loan liability.

               This method of foreclosure creates a judicial record of
               the default by the mortgagor and is often preferred
               because it offers this protection to a purchaser at the
               foreclosure sale.

      Strict foreclosure--mortgagee gets title. Rare.

               The foreclosure decree vests title in the mortgagee.

               This is harsh because mortgagor loses equity.

               Followed in only a few Eastern states, and in a
               specialized situation we will cover later in course.

      Power-of-sale mortgage.

               Lender may conduct sale. Sort of a hybrid of the other
               two methods, and is somewhat similar to a deed of
               trust arrangement.
                                  Real Estate Finance 2 – Spring 1997  14
                  Not allowed in Idaho (but see deed of trust).

                  Some states which allow this type of mortgage allow
                  the mortgagee to bid at the foreclosure sale, others do

     Statutory right to redeem.

           This applies after the foreclosure sale. Thus, it runs
           consecutive to the equitable right to redeem.

           Exists mainly in agricultural states, including Idaho.

           Will cover in more detail later in course. Applies only to
           mortgages [I think].

The deed of trust.

     See Idaho Code  45-1502 for important requirements.

           Power-of-sale option. I.C.  45-1503.

     Even thought title passes for the purpose of the trust, a deed of
     trust is for practical purposes only a mortgage with a power of sale.

           Long v. Williams, 105 Idaho 585, 671 P.2d 1048 (1983).

     Characteristics of a deed of trust.

           Applies only to real property.

           Also called a trust deed mortgage, but is not really a

            There is no post-sale redemption period. [Check this.]

           Is similar to a mortgage with a power of sale, but the trustee
           arranges the sale in the event of a default.

     Class notes on Bear Lake case.

           Prof says Idaho courts may not follow this bruptcy case.

           Prof says the rule of Bear Lake seems to be saying that you
           cannot use a deed of trust for more than 20 acres unless you
           lie, and that this does not make sense.
                                      Real Estate Finance 2 – Spring 1997  15
           Prof says there is an implied good faith requirement to I.C. 

The deed absolute.

     Three common methods.

           Sale and lease back.

           Sale and buy back.

           Sale and option to repurchase.

           An example is a deed from the buyer to the lender with a
           lease from the lender back to the buyer, plus the buyer/leasor
           has a right to get the property back when the last lease
           payment is made.

                  Advantageous to the lender as long as a court does not
                  re-characterize the K as a mortgage.

     There is strong common law precedent against clogging the equity
     of redemption.

           This method of financing is an attempt by a lender to get
           around this policy.

           The deed absolute will be re-characterized as a mortgage if
           the parties intended the deed to function as security for a

     Test of validity. Class notes.

           Test is whether the parties intended the deed in fee to be
           security on a debt.

                  IF the deed was intended to be security, it will be
                  treated as a mortgage instead of as a deed in fee.

                         This gives the borrower the benefit of the equity
                         of redemption.

           Parol evidence almost always gets in because deeds are
           virtually never a full embodiment of the agreement.

           Statute of frauds is also not an impediment because of the
                                      Real Estate Finance 2 – Spring 1997  16
           very strong policy of not clogging the equity of redemption.

The installment land contract.

     Characteristics of an installment land K.

           Buyer takes possession and occupies the property throughout
           the K period.

           Payments are amortized similar to mortgage.

           Legal title remains in the seller, and title is acquired by the
           buyer only after the last payment is made.

           Typically, the buyer agrees to pay taxes, insure
           improvements, and maintain the property in good repair.

           Unless the K says otherwise (see below), either the buyers
           or sellers interests may be assigned without consent.

                 Likewise, either the buyers or sellers interests may
                 be mortgaged, unless the K says otherwise.

           Transaction costs are low, and the down payment is often
           lower than in other financing devices.

           Courts typically hold that buyers build equity, and the old,
           harsh rule of outright forfeiture of all payments upon default
           is often circumvented by courts acting in equity.

     Sellers problem of unmarketable title if buyer defaults and
     departs. Class notes.

           Sellers retained title can be clouded if the installment land
           K is recorded because of buyers equitable rights.

                 Sellers technique of not recording can be frustrated if
                 buyer assigns his rights to a third party, and the third
                 party records.

                        This would technically be a wild deed under the
                        recording acts, but title companies maintain
                        their own Torrens-type systems.

                 For this reason, sellers often include a
                 no-assignment-without-consent clause in the land

                                     Real Estate Finance 2 – Spring 1997  17
            installment K.

      Also, a seller may include in the K a clause indicating that
      the relationship will revert to landlord-tenant relationship if
      the buyer defaults.

            There is Idaho case law that this method cannot cut off
            the buyers equitable rights.

Class notes on Cheney v. Jemmett, 107 Idaho 829 (1984).

      As a matter of law, when a land installment K grants the
      buyer the right to assign his rights in the K subject to the
      consent of the seller, the seller must act reasonably and in
      good faith in withholding consent.

            [The buyer probably has the right to assign his rights
            in the K if the K is silent on this issue.]

      As a drafting point, perhaps the answer to protect the seller
      is to use a clause that says, No assignments, period.

            Seller can still waive the clause if he chooses.

            Court does not address this issue.

Garn-St. Germain Act federal pre-emption of the enforceability of
due-on-sale clauses should help sellers.

      Is an installment land K a credit sale secured by a lien on
      real property?

            Probably yes, per Federal Home Loan Bank Board
            regulations. 12 C.F.R.  591.2(h).

            Unlike some other states, Idaho law says that a land
            installment K is not a mortgage. But the federal law

      The drafting lesson is to include a due-on-sale clause that is
      explicitly called a due-on-sale clause.

            And parties should agree that the due-on-sale clause is
            a due-on-sale clause within the definition of the
            Garn-St. Germain Act.

                               Real Estate Finance 2 – Spring 1997  18
                       This protects the seller if the buyer should sell his
                       interest in the land installment K.

          Thus, it is better for sellers to use deeds of trust rather than
          installment land Ks, despite the folk wisdom.

          Note that many states have legislation providing greater protection
          to installment land K buyers.

     Miscellaneous security devices.

Junior (or Secondary) Mortgage Financing.

     Conventional second mortgages.

          Second mortgages should include certain important clauses,
          including the following:

                The mortgagor (borrower) will not consent to revising any
                terms in the first mortgage without the the consent of the
                second mortgagee (second lender).

                The second mortgagee may make any first mortgage
                payments in default and add these payment sums to the
                second mortgage debt.

                A default on the first mortgage shall constitute a default on
                the second mortgage.

                Mortgagor will insure the property in an amount to cover
                both first and second mortgages.

          In the case of a default, a second mortgage may be separately
          foreclosed, but the person taking title at the foreclosure sale takes
          subject to the outstanding first mortgage.

     The wraparound mortgage.

Construction Financing.

     Construction lender has no duty to the landowner to make sure
     that the borrower/builder applies the loan proceeds to the

          Since the landowner will often agree to subordinate his fee interest
          to a mortgage lien for the purpose of obtaining a construction loan,
          the landowner assumes the risk that the mortgagor/builder will
                                           Real Estate Finance 2 – Spring 1997  19
     divert the funds.

     Thus, landowner, not the bank, must watch over the builder to
     make sure that loan funds are actually spent on the property.

     See Rockhill v. United States, 418 A.2d 197 (Md. 1980).

Mechanics liens.

     See Idaho Code  45-501, 505, 506, 507, 510, 512.

     There is a 90-day grace period.  45-507.

     Standard duration is 6 months.  45-510.

Future advances: whether advances made after the giving of a
mortgage have priority over intervening mechanics liens.

     Some courts hold that if the mortgagee is under an obligation to
     advance the money, then the mortgagee has priority.

           If the mortgagee is obliged to make the advances by the
           instrument, then the lien of the mortgage or trust deed has
           priority over a mechanics lien when the mortgage or deed
           has been recorded before the mechanics lien attached,
           despite the fact that the advances may have been made after
           the attachment of the mechanics lien.

     California and other states protect even optional advances unless
     the mortgagee gets actual notice of the intervening claim.

     See I.C.  45-108.

           Future advances have absolute priority in the following

                  if the mortgagee was legally bound to make the

                  OR if the advance was necessarily and actually
                  applied to the maintenance and/or preservation of the

           The intervening liens can have priority if all of the following
           conditions are met:

                                    Real Estate Finance 2 – Spring 1997  20
                             neither of the above cases apply, and

                             the mortgagee had actual notice of the intervening

                       [Note. This is my own interpretation of the statute. Missed
                       profs lecture on this point.]

         Stop notices.

               Not available in Idaho, but is available in Washington.

               This is a remedy for unpaid laborers. Tells the bank to stop giving
               out money until laborers paid. Bond might be required.

         Methods of helping to ensure performance.

               Performance bonds.

               Voucher system.

                       This may involve having the bank make the disbursement
                       checks out to both the general contractor and each of the


    Pay Off Mortgage With Sale Proceeds.

         Must have a prepayment provision in the mortgage.

         The buyer gets a new first mortgage on the property, unless buyer has all

         The seller is not liable for any deficiency judgment obtained against the
         buyer by the new first mortgagee.

    Mortgage Takeover. (Two kinds.)

         Subject to.

               Buyer takes the property subject to the mortgage (and agrees to pay
               it) but does not assume mortgage.

               The grantee/buyer does not have personal liability for a deficiency
               judgment obtained by mortgagee/bank.
                                               Real Estate Finance 2 – Spring 1997  21
           Even though buyer has no personal liability on the mortgage
           debt, the buyer has property liability because the property
           can be sold out from under the buyer if the mortgage goes
           into default.

           If the buyer fails to make the payments, and the seller
           (facing personal liability) pays off the mortgage, the seller
           should get an assignment of the mortgage from the lender to
           a nominee of the seller so that there is no question that the
           buyer can be ousted.

                  This is because of the technical rule that payment of
                  the mortgage debt discharges it and releases the

     Seller has a risk of personal liability on a deficiency judgment.

           Idahos one-action rule provides some protection to seller.

                  But only 5 states have the one-action rule.

           In the vast majority of states, the mortgagor can go after the
           seller on the promissory note without first foreclosing on the

     Drafting note. Make sure that sale K and deed make it clear that
     buyer is not assuming because in most states there can be an
     implied assumption.

           Use language like takes subject to but does not assume.

           This is especially important in the states where an
           assumption can be oral.


     Buyer takes the property subject to the existing mortgage and
     assumes the mortgage.

           An express assumption clause should be in both the sale K
           and in the deed. See form on p. 1330 of text.

           If seller is not assuming, this too should be made clear in the
           K [and in the deed?].

     The grantee/buyer has personal liability for a deficiency judgment
                                     Real Estate Finance 2 – Spring 1997  22
           obtained by mortgagee/bank.

           Seller has a risk of personal liability on a deficiency judgment.

                 However, the assuming buyer/grantee has the primary
                 liability, and the seller/mortgagor has secondary liability.

                 Thus, if the seller must pay off the deficiency judgment, the
                 seller has a cause of action against the grantee.

           Watch out. In most states there can be an implied assumption.
           Usually arises in the following fact pattern. FMV is $100K;
           mortgage is $80K; buyer is paying $20K for the sellers equity.

                 If the sale price is stated as $20K, then no problem, does not
                 look like assumption.

                 If the sale price is stated as $100K with a $80K credit for the
                 debt (which might make tax basis easier to argue), this looks
                 like the buyer is assuming the mortgage, and a court might
                 find an implied assumption.

                        So if you use this method and do not want to assume,
                        be sure to expressly state that there is no assumption.

                 On implied assumptions, see Adams v. George, 119 Idaho
                 973 (1991).

           When there are successive buyers of the mortgaged property, and
           each one assumes the mortgage, the mortgagee may enforce the
           debt against any one (or all) of them.

                 This is true even if the chain of assumption is broken and
                 then resumes, in most jurisdictions.

           If the mortgagee and the assuming buyer modify the original
           agreement without the consent of the original mortgagor/seller, the
           mortgagor/seller is released from personal liability.

                 Buyer becomes sole debtor on the mortgage.

           Bank cannot put in a covenant that subsequent grantees assume.
           But bank can put in a due on sale clause, and not waive it unless
           the grantee assumes.

Rights of the Grantor as Against the Grantee.

                                           Real Estate Finance 2 – Spring 1997  23
     If grantee only takes subject to the mortgage.

           Grantor has no claim against the non-assuming grantee that he
           personally pay the debt.

           But the land remains liable not only to the claim of the mortgagee,
           but also, via subrogation, to the claim of the grantor who, facing
           personal liability, pays off the mortgage debt after default by

                 Procedurally, the grantor in this situation should ask the
                 mortgagee to assign both the mortgage and the mortgage
                 debt to a nominee of the grantor.

                 This assignment might be necessary in order to retain
                 priority which the mortgagee held in the property against the
                 technical rule that payment of the mortgage debt discharges
                 it and releases the mortgage.

     If grantee assumes.

           Unclear whether single-action rule in Idaho would require grantor
           to pursue land first if assuming grantee defaults on assumption

                 Prof says that under EIPCA, an Idaho court might hold that
                 the spirit of the single action rule would force the grantor to
                 go against the property first, but that the words of the
                 statute do not really require it.

Rights of the Mortgagee As Against the Assuming Grantee.

     The best rationale for giving the mortgagee a cause of action
     against the assuming grantee is the third-party beneficiary

           Under the Restatement of Contracts (Second)  302,

                 an intended beneficiary may enforce the promise,

                 while an incidental beneficiary may not enforce the promise.

           The mortgagee is an intended beneficiary of the grantees promise
           to the grantor to assume the mortgage debt.

           Other, less compelling, theories are the quasi-suretyship theory and
           the equitable assets theory. Some states just provide for liability by
                                           Real Estate Finance 2 – Spring 1997  24

     Where there are successive purchasers of the mortgaged
     property, and each purchaser assumes the mortgage, the
     mortgagee may enforce the debt against any one (or all) of the

           In some states the mortgagee may do so even if the chain of
           assumption is broken.

Discharge of the Grantor by Loan Modification.

     Modification of the original mortgage agreement by the mortgagee and
     grantee/assumor (without consent of mortgagor) may release the
     mortgagor/grantor from personal liability on the promissory note.

           It is possible for the mortgagor to consent in advance, and this type
           of clause is common re extensions only.

                 These clauses are strictly construed against mortgagee.

                 Modification beyond the scope of the clause can result in
                 discharge of mortgagor.

     Four common types of modification.

           Extension of time to pay.

                 Mortgagee might agree to do this because the grantee is
                 having temporary financial difficulties or is unable to handle
                 to monthly payments.

                        Note that the

           Increase in the interest rate.

                 This is almost certainly beyond the scope of any reasonable
                 reservation of rights clause in the original mortgage, and
                 would thus

           Release of personal liability against the grantee.

           Release of some or all of the land secured by the mortgage.

     If the grantee has assumed the mortgage, any of these four modifications
     will discharge the mortgagor/grantor.

                                            Real Estate Finance 2 – Spring 1997  25
         If the grantee has taken subject to the mortgage, any of these four
         modifications will discharge the mortgagor/grantor up to the value of the
         land at the time of the modification.

         Note. FHA and VA must give the mortgagor a novation if the grantee is

               This is very helpful to mortgagor trying to sell home.


    Pre-Foreclosure Rights.

               There is a significant period of time that will elapse between
               default and foreclosure. How can mortgagee prevent waste, etc.,
               during this time?

                      Three basic pre-foreclosure alternatives for mortgagee when
                      the property is at risk.

                            Take possession prior to foreclosure.

                            Assignment of rents.


                      Deed in lieu of foreclosure is another alternative. This ends
                      the borrower/lender relationship.

         Mortgagee in possession.

               Not really available in lien theory states, like Idaho.

                      In lien theory states (which is almost all states, including
                      Idaho), the mortgagee has no right to possession prior to

                      Parties cannot K around this in the mortgage. I.C.  6-104.

                            However, the parties can agree to give the mortgagee
                            possession later. It just cannot be agreed to in the

                            This is the Idaho rule. Some states allow the
                            mortgage contract to provide that the mortgagee has
                            the right to possession in the case of default.
                                               Real Estate Finance 2 – Spring 1997  26
     Problems with taking possession.

           When a mortgagee goes into possession, he does not become
           the owner of the real estate.

                  Rather, he becomes a quasi trustee, managing the
                  property for the benefit of the mortgagor, but still
                  watching out for his own interest.

                  The mortgagee in possession has a duty to collect the
                  rents and profits when accrue during his occupancy
                  and apply them to the mortgage debt.

           Mortgagee will not get reimbursed for costs of operating
           property, except for necessary repairs.

           Also, there is a high duty to account to the mortgagor.

                  However, this duty does not extend to anyone else,
                  such as the second mortgagee or unsecured creditors.

                  Thus, the mortgagee cannot be required to account to
                  a second mortgagee for income received while the
                  mortgagee was in possession.

                  See Myers-Macomber Engineers v. M.L.W.
                  Construction, 414 A.2d 357 (Penn. 1979).

Assignment of rents.

     This means the tenants must pay the rent directly to the

           However, some argue that this should be unavailable in lien
           theory states because the right to receive rents is the
           primary incident of possession.

     In a deed of trust, an absolute assignment of rents can be made
     even though the trustee does not have a right to take possession of
     the rents until the happening of a condition such as default.

           See In Re Gould, 78 B.R. 590 (D.Idaho 1987).

           An important aspect of the case was that the deed
           specifically contained an absolute assignment of rents, not an
           assignment for additional security only.
                                    Real Estate Finance 2 – Spring 1997  27
           An assignment for additional security only should not be
           allowed because of I.C.  6-104.

                  Prof says that for this reason, the Gould case is
                  wrongly decided.

           Prof says I.C. 45-905 is saying that you cannot admit
           extrinsic evidence to show that a deed of trust is a mortgage,
           but you can admit extrinsic evidence to show that a deed
           absolute is a mortgage.

Appointment of a receiver.

     Court appoints receiver to manage property.

     This is a matter of statute. See I.C.  8-601 and 8-601A.

     Class notes on I.C.  8-601.

           There must be an action pending or an action that has
           passed to judgment.

           There is an broad equitable power in clause 6.

           This Code section does not give any help to lenders holding a
           deed of trust. Applies only to mortgages.

     Class notes on I.C.  8-601A.

           This Code section applies to deeds of trust.

                  Subsection 1 applies to deeds of trust.

                  Subsection 2 applies to deeds of trust and mortgages.

           Note the effect of  8-601A(2) on mortgages.

                  This is a lower standard than is in  8-601.

                  It seems that the legislature intended to liberalize the
                  rules of  8-601 when it enacted  8-601A.

     Usually the lender cannot put a clause in the K providing for a
     receiver under less stringent terms than are provided in the

                                     Real Estate Finance 2 – Spring 1997  28
            Courts do this by saying that it is contrary to public policy or
            by saying that the court lacks subject matter jurisdiction
            until the terms of the statute are met.

      Drafting note.

            Mortgage should always include language that the mortgage
            covers both the real estate and the rents, issues, and

            This can be important in getting a receiver appointed.

Deed in lieu of foreclosure.

      Almost all states allow a voluntary conveyance by the mortgagor of
      his equity of redemption when made to the mortgagee in accord and
      satisfaction of the mortgage debt.

      Problems with deed in lieu of foreclosure.

            Does not extinguish junior liens.

                   Must foreclose (and join junior lienors) to extinguish
                   junior liens.

            Litigation risks.

                   Risk of recharacterization litigation (i.e., for additional

                   Risk of unconscionability litigation.

                   See drafting notes below.

            Generally lose right to deficiency judgment.

      Drafting notes.

            Be sure to include a recital that the parties unequivocally
            state that the deed is not intended to be a mortgage or any
            other security arrangement.

                   Might even simultaneously execute an affidavit.

                   See Kerr Land & Livestock, Inc. v. Glaus, 107 Idaho
                   767 (1984).
                                      Real Estate Finance 2 – Spring 1997  29
                 Also, you might want to state that the parties agree that the
                 property is worth less than the outstanding mortgage, and
                 that the lenders consideration is giving up the right to a
                 deficiency action.

                        Might even get an appraisal.

           See Boneparth, Taking a Deed in Lieu of Foreclosure: Pitfalls for
           the Lender, 19 Rl. Est. L.J. 338 (1991).


           Mainly applies to commercial property loans when the rental
           market takes a downturn. Is a type of informal alternative dispute

           The purpose of the loan workout is to restructure the loan as an
           alternative to foreclosure, bankruptcy, or litigation.


     Overview of types of foreclosure.

           Strict foreclosure was the initial form of foreclosure in England.

                 Exists today in only a few states.

           Foreclosure by judicial sale.

                 The standard lawsuit method.

                 Only method available for mortgages in Idaho.

           Power of sale foreclosure.

                 No lawsuit required. Must follow statutory guidelines.

                 In Idaho, a deed of trust can and should have a power of sale

                        Thus, in Idaho, the deed of trust beneficiary can
                        choose between judicial foreclosure and power of sale
                        foreclosure (where the trustee holds the sale). Will
                        cover in more detail later.

     Judicial foreclosure.
                                           Real Estate Finance 2 – Spring 1997  30
Necessary parties (must be joined).

      Plaintiff should join as s all person whose interest in the
      mortgaged property are subordinate to the s interest.


            Junior lienors (whose liens may be extinguished).

            Successors to mortgagors interest.

            Others, such as lessees or easement holders whose
            interests were created subsequent to the mortgage.

      Failure to join any necessary party means that the
      foreclosure will not terminate his interest in the land.

            Thus, that persons interest survives the foreclosure

            Foreclosure is effective as to all necessary parties who
            were joined.

      Note that I.C.  6-101 says that the foreclosing party need
      not join unrecorded lienholders or unrecorded grantees.

            Furthermore, the unrecorded parties are bound by the

            This is an important statute because Idaho common
            law said that a foreclosing mortgagor who bid only the
            mortgage amount at the foreclosure sale did not pay
            value that would protect him under the recording acts.
             Some states go the other way on this issue.

      Senior lienors cannot be cut off and usually are not joined.

Proper parties. (These are not necessary but may be desirable.)

      The original mortgagor if he has sold out his interest and he
      is personally liable on the note.

            If the note was non-recourse, then the mortgagor who
            has sold out is neither a necessary nor a proper party.

                               Real Estate Finance 2 – Spring 1997  31
           Also, anyone else who may be personally liable on the note, if
           there might be a deficiency and if a deficiency judgment is
           allowed in the particular case.

                  E.g., guarantors, sureties, mesne transferees who
                  assumed personal liability.

     Idaho Code  6-101. The one action rule.

           The effect of this statute is that the mortgagee must sue to
           foreclose then seek the deficiency.

                  In other states, you can go after the  on the note and
                  pursue other assets to satisfy the entire note rather
                  than go through the rigmarole of foreclosure.

           Very important code section. See notes in class supplement.

           Most states do not have this type of rule.

           This rule favors debtors.

           The substantially valueless exception in the deed of trust one
           action statute should also apply here (i.e., to mortgages).

                  A second mortgage can easily be substantially
                  valueless under I.C.  45-1503(2).

     Generally, the mortgagee is allowed to bid at the foreclosure sale.

     Statutory right of post-sale redemption. I.C.  11-310.

Power-of-sale foreclosure of a deed of trust.

     Note that foreclosure of a deed of trust in Idaho can be by power of
     sale or by judicial foreclosure.

           There must be a power-of-sale provision in the deed.

     See I.C.  45-1505 for procedure. (This list is not comprehensive.)

           Deed of trust must have been recorded.

           Must file a notice of default.

           Must give notice of both default and of sale to prescribed

                                       Real Estate Finance 2 – Spring 1997  32
           parties (see Code).

     Some states require that the lender/beneficiary include
     authorization to bid at the sale in the trust deed.

           (This is more likely for power-of-sale foreclosure of mortgages
           in states that allow it, because the mortgagee is the one
           conducting the sale.)

     Redemption rights are in I.C.  45-1506(12).

           These are very advantageous to the borrower/trustor.

            may catch up all payments and cure default within 115
           days of default notice or any time prior to decree of

            need not pay off principal.

                  This section works to de-accelerate the note.

                  This is radically different from foreclosure of a

           ***This cheap right to redeem applies to a deed of trust
           whether it is foreclosed by power of sale or if it is foreclosed
           by judicial foreclosure.

     No right to redeem after sale. I.C.  45-1508.

     If you foreclose a deed of trust by judicial foreclosure, the right to
     post-sale redemption exists. I.C.  45-1508.

     One action rule for deeds of trust. I.C.  45-1503.

           This rule favors debtors.

           Substantially valueless exception.

                  A second mortgage can easily be substantially
                  valueless under I.C.  45-1503(2).

     For all these deed of trust code sections, 45-1503, 05, 06, 08, see
     good notes in class supplement.

Conducting the foreclosure sale.

                                       Real Estate Finance 2 – Spring 1997  33
     Duty owed to borrower/mortgagor by the foreclosing mortgagee is
     that of a quasi-trustee, not a true trustee.

           Mortgagee must act in good faith and use reasonable
           diligence to protect the interests of the mortgagor.

           Mortgagee is free to bid as low as possible to take the
           property at the sale. But watch out for an unconscionably
           low bid.

     By itself, a very low price is usually inadequate to set aside a
     foreclosure sale.

           This assumes there was no rigged bidding and that all
           statutory procedures were followed.

           However, in extreme cases of price inadequacy courts have
           set aside foreclosure sales.

                  This might be called gross inadequacy that shocks the
                  conscious of the court.

     Chilled bidding may invalidate a foreclosure sale.

           E.g., conspiracy among buyers to keep bidding low and share
           the profits, or the mortgagee falsely representing the
           property to discourage bidders.

     Limit on deficiency judgments. (See below.)

           Limit is debt minus fair market value of the property.

           This makes it no good to mortgagee to try to take the
           property for a very low bid at the foreclosure sale.

                  Also, a very low bid would make your title uncertain
                  because the sale might be set aside because grossly

Notice in a power of sale foreclosure.

     See I.C.  45-1506. Is probably broader than is required by
     constitutional due process.

     There is insufficient state action in a power-of-sale foreclosure by a
     private property to trigger the 14th Am.
                                     Real Estate Finance 2 – Spring 1997  34
     Some federal foreclosures by power of sale may trigger the Fifth
     Am. Unsettled area of the law.

           See Warren v. Government National Mortgage Assn., 611
           F.2d 1229 (8th Cir. 1980), cert. denied, 449 U.S. 847 (1980)
           and Ricker v. United States, 417 F.Supp. 133 (D.Me. 1976).

Omitted parties.


     The rights of one who is not a party to a mortgage foreclosure
     action are not affected by that judgment or foreclosure sale.

           Thus, a junior mortgagee who is not made a party to the
           foreclosure sale still has a property right in the property.

     But what right does the junior mortgagee have in this type of case?

           The junior mortgagee has a right to redeem from the
           foreclosing senior mortgagee.

                   This right to redeem is neither diminished nor
                   enlarged by the foreclosure proceedings brought by the
                   senior mortgagee.

           The junior mortgagee may not redeem only a portion of the

                   A mortgage is an entire thing, and must be redeemed
                   in its entirety.

                   A mortgagee cannot be required to divide either his
                   debt or his security.

     However, if a party is omitted from a foreclosure proceeding, the
     foreclosure sale is effective against all the parties who were joined.

           Thus, the foreclosing party has only one person left to worry
           about--the party not joined.

Effect of foreclosure on tenants rights.

     When a mortgagee initiates foreclosure proceedings, this, by itself,
     is not a constructive eviction of a tenant.

                                     Real Estate Finance 2 – Spring 1997  35
     A lease senior in time to a mortgage generally remains in effect
     following foreclosure.

           The person acquiring the property following the foreclosure
           becomes the lessor under the terms of the senior lease.

     A lease junior in time to a mortgage can be extinguished by
     foreclosure of the mortgage if the lessee is joined as a defendant in
     the foreclosure proceedings.

           Foreclosing mortgagees sometimes intentionally do not join
           such junior lessees as foreclosure defendants [presumably so
           that the leases remain in effect after the foreclosure].

Risks of a junior encumbrancer.

     Senior mortgagee need not be joined if only the second mortgage is
     in default.

           The senior lienor is neither a proper nor a necessary party
           because his rights are not being cut off.

     Of course, the property will be sold subject to the senior lien.

           A due on sale clause in the senior lien on a property not
           covered by federal pre-emption against due on sale clauses
           can cause difficulties for the second mortgagee.

Foreclosure of a wraparound mortgage.

     A mortgagor on default on a wraparound mortgage must pay the
     full amount of wraparound, not just the difference between the first
     mortgage and the second mortgage.

     The mortgagor can be protected if there is only a limited
     acceleration clause in the second (wraparound) mortgage so that
     only the difference between the first and second mortgage is

           Note that in Idaho if the wraparound is a deed of trust, the
           trustor need only pay the late payments to redeem.

Effect of redemption.

     Example. There are two mortgages, and the first mortgage is in
     default. Second mortgagee is joined.

                                     Real Estate Finance 2 – Spring 1997  36
                If the second mortgagee pays off the first mortgage, second
                mortgagee is subrogated to the rights of the first mortgagee,
                but this does not include the whole foreclosure process and
                the time that has run against the . Thus, the second
                mortgagee must start the foreclosure proceedings over again.

                Instead, the second mortgagee should pay the first mortgagee
                and get an assignment from the first mortgagee. The
                assignment would include the whole foreclosure time for
                redemption that has run against .

                Note that as a practical matter this would not arise in a state
                with a post-sale redemption, like Idaho.

                        The second mortgagee should either bid at the
                        foreclosure sale or redeem after the foreclosure sale.

Post-Foreclosure Redemption.

     Parties entitled to redeem after foreclosure:


          successors to mortgagors,

          junior lienors.

     Post-sale redemption applies to:

           judicial foreclosures of mortgages, which is the only way to
          foreclose a mortgage, and

          judicial foreclosures of deeds of trust, which is one of two
          methods of foreclosing a deed of trust.

                See I.C.  .

     There is no post-sale redemption for a deed of trust foreclosed by
     trustees power of sale.

          See I.C.  45-1508 and 45-1506(11).

     The mortgagor retains possession during the post-sale
     redemption period.

          Doctrine of waste applies. I.C.  11-406.

                                          Real Estate Finance 2 – Spring 1997  37
     Purchaser has the right to collect rents from the tenant in
     possession, which includes the mortgagor. I.C.  11-407.

           Mortgagor can be evicted for non-payment of rent.

           Court will likely set the rent during the foreclosure

Idaho follows the scramble system of redemption, not the priority

     See I.C.  6-101, 11-401, 11-402, 11-403.

     Note that if the mortgagor redeems, the effect of the sale is
     terminated and he is restored to his estate.

Revival of junior liens upon redemption by mortgagor.

     If the mortgagor redeems, the effect of the sale is terminated and he
     is restored to his estate.

           But the majority rule is that the junior liens are revived.

           [Surprisingly,] states go both ways on whether the senior lien
           is revived by the mortgagors redemption.

                  [The only logical result is that the senior lien is not

                  Idaho has held that there is no revival if an assignee of
                  the debtor redeems. Old case. Evans v. American
                  Falls [I think].

     If a junior lienor redeems, the other liens are cut off, but there is a
     chance that another party may redeem from the junior lienor

Idahos muddled law on when a junior must redeem to protect

     This is a series of three cases.

           First, the Idaho Supreme Court made a good ruling, but for a
           bad reason, which was pointed out by the dissent. [Check
           this with Professor Grant.]

                                        Real Estate Finance 2 – Spring 1997  38
      Second, the Idaho Court of Appeals took the faulty reasoning
      from the first case and extended it to reach a truly wacky

      Third, the Idaho Supreme Court made reached a good result,
      but without following or overruling the prior case law.

First case: Eastern Idaho Production Credit Association v.
Placerton, Inc., 100 Idaho 863, 606 P.2d 967 (1980).

      Rule of the case: Redemption by a junior mortgagee
      constitutes a satisfaction of the junior mortgagees debt to
      the extent of the amount by which the value of the
      mortgaged property exceeds the sums paid for that

             Thus, the redeeming second mortgagee has to credit to
             the second mortgage debt the difference between the
             FMV and the amount paid to redeem, as long as the
             redemption price was less than the FMV.

      The courts [faulty] reasoning: I.C.  6-101 and 108.

      The specially concurring judge gave the proper rationale:
      unjust enrichment.

Second case: First Security Bank of Idaho v. Stauffer, 112 Idaho
133, 730 P.2d 1053 (Ct.App. 1986).

      Rule of the case: A junior lienor is required to redeem to
      protect its security, or give the credit to the debtor for the
      difference between the amount realized by the senior
      mortgagee on the foreclosure sale and the FMV.

      This result is extremely harsh on the junior lienor, and a bad

             Many junior lienors cannot raise the cash necessary to
             redeem, and there is no principle of law that justifies
             putting this enormous burden on the junior lienor to
             protect his security.

      If you represent the junior lienor:

             Urge the court to overrule this case and adopt the
             reasoning of the special concurrence in EIPCA.

                                Real Estate Finance 2 – Spring 1997  39
                  Try to distinguish this case, perhaps based on the fact
                  that the junior in this case was a bank.

     Third case: Idaho Power Company v. Benj. Houseman Co., 123
     Idaho 674, 851 P.2d 970 (1993).

           Rule of the case: A mortgagee is not precluded from suing to
           collect the entire debt secured by a mortgage where the debt
           was not due and where there was no basis to foreclose the
           mortgage at the time the property was sold to a third party
           by the trustee of prior deeds of trust for less than the FMV of
           the property.

           Courts rationale: Junior lienors debt was not in default
           and, thus, junior lienor had no right to foreclose it mortgages
           before the trustee sold the property.

           Prof says the courts rationale makes no sense in light of
           prior cases.

                  In light or prior cases, what difference does it make
                  whether the Idaho Power had no right to foreclose its
                  mortgages before the trustee sold the property? None,
                  says prof.

           What does this case mean, asks prof? No one knows.

           The result is correct, but the court should have held that
           Stauffer was not good law and adopted the rationale of the
           special concurrence in EIPCA.

Federal pre-emption: Redemption N/A to FHA.

     State post-foreclosure redemption statutes do not apply when the
     Federal Housing Authority (FHA) forecloses a mortgage which it
     has guaranteed.

           United States v. Stadium Apartments, Inc., 425 F.2d 358
           (CA9 1970).

     U.S. Supreme Court gave an ambiguous test for determining the
     applicability of federal law in lien foreclosures in United States v.
     Kimbell Foods, Inc., 440 U.S. 715 (1979).

           Book editors say that because of the vagueness of the test,
           the effect of Kimbell has been spotty.

                                     Real Estate Finance 2 – Spring 1997  40
Deficiency Judgments.

     See above notes on Idaho foreclosure and redemption.

     Deficiency applies only when the mortgagor assumes personal

          Does not apply to non-recourse loans.

     Limits on deficiency judgments.

          The one-action rule. Not really a limitation, but forces creditor to
          look to the land first. [Covered already.]

                In other states, the creditor can go after the  under personal
                liability first without foreclosing on the property.

          Fair Value Legislation. [Important.]

                The deficiency can never exceed debt amount minus the fair
                market value of the property.

                [What is the Idaho Code cite?]

          Limitations on conduct of the foreclosure sale. [Covered already.]

                Specific requirements.

                Grossly inadequate price.

          Some states put a flat-out ban on deficiency judgments in certain

                E.g., Washington does not allow if a deed of trust is
                foreclosed by power of sale.

          If you are going to be seeking a deficiency judgment, you should
          carefully scrutinize both applicable statutes (which may be hard to
          locate) and applicable case law so that you preserve your right to
          seek deficiency.

     Deficiency judgments on second deeds of trust.

          To insure being able to obtain a deficiency judgment where
          property securing both deeds of trust is not worth the total
          indebtedness, a second beneficiary can EITHER:

                                          Real Estate Finance 2 – Spring 1997  41
                 wait until the beneficiary of the first deed of trust forecloses
                 and sells the security, then proceed as an unsecured creditor,

                 first proceed with foreclosure sale on the second deed of trust,
                 but then bid only a nominal amount to insure there will be a
                 maximum difference upon which to later base a deficiency

           See Alpine Villa Development Co. v. Young, 99 Idaho 851 (1979).

     Soldiers and Sailors Civil Relief Act of 1940.

           50 U.S.C. app.  501-591 (1990).

           Can raise difficulties for foreclosing parties and other creditors if
           the  is in the military on active duty.

           Today, its really just a perk for military personnel.

           Prof says affects debts incurred before active duty, and the Act
           takes effect when the person goes on active duty.

                 The military service must materially affect the ability to

Bankruptcy Considerations.

     Bankruptcy Code  362(a) does not toll or suspend the running of
     a statutory period of redemption.

           See Johnson v. First National Bank of Montevideo, Minnesota, 719
           F.2d 270 (8th Cir. 1983), cert. denied, 465 U.S. 1012 (1984).

           The opposite result has been reached in states which require that
           some affirmative action be taken by a creditor or by a third party
           in order to transfer full title upon expiration of the redemption

           The  362 automatic stay should cause no problem in Idaho because
           no affirmative step is necessary to transfer full title.

                 The Idaho Bankruptcy Court is in accord with Johnson: the
                 issuing of the sheriffs deed at the end of the redemption
                 period is not the kind of act that the automatic stay stops.

                                            Real Estate Finance 2 – Spring 1997  42
     Bankruptcy Code  105(a) may not be invoked to toll or suspend
     the running of a statutory period of redemption absent fraud or
     faulty foreclosure proceedings.

           See Johnson, supra.

     The only extension of time available to debtors is that provided by
     the express terms of  108(b).

           See Johnson, supra.

           This adds 60 days from the date of the filing of the bankruptcy
           petition [check this to be sure].

     In order to set aside a foreclosure sale as as fraudulent
     conveyance under 11 U.S.C.  548(a)(2), you must show that the
     sale was defective under state law.

           The consideration received at a non-collusive, regularly conducted
           foreclosure sale constitutes reasonably equivalent value under 

                 See BFP v. Resolution Trust Corp., 114 S.Ct. 1757 (1994).

           Prior to this Supreme Court case, some bankruptcy courts had set
           aside regularly conducted, non-judicial foreclosure sales made
           pursuant to deeds of trust if the sales did not bring at least 70% of

                 These courts said [erroneously] that less than 70% of FMV
                 was not reasonably equivalent value under  548(a)(2).

Remedies for Breach of Installment Land Ks.

     An installment land K generally provides for forfeiture of land
     and all payments upon breach.

           In many jurisdictions [Idaho included?], landlords may not lock out
           holdover tenants, even if the tenant is in the wrong.

                 Rationale is that courts provide adequate relief without risk
                 of violence.

           These states will likely extend same protection to installment land
           K purchasers.

                                           Real Estate Finance 2 – Spring 1997  43
In order for a breaching installment land K purchaser to obtain
relief from forfeiture of the property, the purchaser must prove
(1) unenforceable penalty, and (2) restitution inadequate:

     that the liquidated damages amounted to an unconscionable
     penalty, AND

     that restitutionary relief would be inadequate.

           If forfeiture drastically overcompensates the seller, the seller
           should still get the property back, BUT the buyer would have
           a lien on the property for any unjust enrichment to the seller,
           e.g., for improvements, principal, etc.

     See Ellis v. Butterfield, 98 Idaho 644 (1977), rehearing denied 98
     Idaho 663 (1978).

           This is a good all-around case on ILKs.

     Thomas v. Kline, 99 Idaho 105 (1978), gives the same rule of law
     with a different result to the buyer.

           The difference between the two cases is the findings of the
           trial court.

           The Thomas court says that the standard of review is clearly
           erroneous because the trial courts conclusion that forfeiture
           is a penalty is a finding of fact. But prof says this is really a
           conclusion of law.

           Thomas just is all-around poorly reasoned.

Seller can choose between forfeiture and judicial sale upon
default by installment land K buyer.

     A seller under an installment land K can elect between the
     contractual remedy of forfeiture with repossession and the
     statutory remedy of judicial foreclosure and sale.

           BUT there is a big cost: the mortgage rules will apply to a
           judicial sale, including the statutory right to post-sale

           See Ellis v. Butterfield.

           Election of remedies doctrine applies, says prof. This means
           if seller chooses forfeiture, he cannot later seek judicial sale.
                                       Real Estate Finance 2 – Spring 1997  44
     Generally, the defaulting buyer does not have this right.

           But in certain circumstances the defaulting buyer can force
           judicial sale. Judicial sale may be appropriate relief where,
           e.g., the purchaser had made substantial improvements on
           the property prior to his default and could show:

                  that it would be an unconscionable penalty to allow
                  the vendor to recover the improved property and also
                  retain all payments made, AND

                  that the vendor would still be unjustly enriched by
                  recovering the improved property even if the purchaser
                  was allowed restitution of amounts paid on the K.

                  See Ellis v. Butterfield, footnote 3.

Unconscionability. Comparison of sellers actual damages to the
liquidated damages in the installment land contract.

     The liquidated damages amount cannot be unconscionably large or
     it will be unenforceable.

     Actual damages suffered by the seller upon breach by the buyer..

           Benefit of bargain of the original K, which equals K price
           minus FMV at time of K.

           Fair rental value lost during the period of the buyers

                  [T]he usual measure of actual damages for a
                  purchasers breach of contract for sale of realty is the
                  difference between the contract price and the market
                  value of the property at the time of breach, plus rental
                  value for any period of possession by the purchaser.
                  Margaret H. Wayne Trust v. Lipsky, 123 Idaho 253

           Forfeiture expenses.

                  This includes atty fees and costs. But if included in
                  the liquidated damages, cannot also be tacked on
                  again as part of the forfeiture proceedings. See
                  McEnroe, below.

                                     Real Estate Finance 2 – Spring 1997  45
           Brokerage commission on resale.

     Liquidated damages. (A liquidated damages provision must be
     included in the K--is generally retention of all payments made.)

           Forfeited down payment.

           Forfeited installment payments.

           Appreciation in value of the land.

                  Thus, if your trying to prove that forfeiture is an
                  unconscionable penalty, the FMV of the land at time of
                  breach is of crucial importance. Prove with expert.

           Improvements to property made by buyer.

     See McEnroe v. Morgan, 106 Idaho 326 (Ct.App. 1984).

           This case held that when actual damages were 78% of the
           liquidated damages, the liquidated damage amount was not
           an unenforceable penalty.

Because of all the uncertainties surrounding installment land K
remedies on default, many lawyers say youd be nuts to use an
installment land contract when you could use a deed of trust.

     But what if youre outside the city limits and over 20 acres? Is an
     installment land K better than a mortgage with its statutory right
     of post-sale redemption.

           Probably. Can always foreclose by judicial sale if it looks like
           the buyer will litigate. BUT this will carry with it the
           post-sale redemption right just like for a mortgage.

Restrictions on self-help repossession.

     In some states, landlords may not lock-out tenants who are
     wrongfully holding over.

           Rationale is that courts provide adequate relief without risk
           of violence or other encroachment on tenants rights.

     This group of states will likely impose the same limitations on a
     sellers right to use self help to evict an installment land contract
     buyer who is in default.
                                     Real Estate Finance 2 – Spring 1997  46

    CERCLA. 42 U.S.C.  9601-57.

         Watch out in Idaho--farmland can be contaminated by hazardous

         Any one of the potentially responsible parties can be sued for full
         cost of cleanup.

               There is joint and several liability.

         Scope. Potentially responsible parties include:

               present owner or operator of the facility,

               owner or operator at the time the waste was disposed,

               anyone who arranged for the disposal of the waste (usually the
               generator of the waste),

               person who transported the waste to the site.

         Exclusion for non-managing secured party.

               CERCLA excludes from the definition of owner or operator any
               person, who, without participating in the management of a . . .
               facility, holds indicia of ownership primarily to protect his security
               interest in the . . . facility.

                     Secured party has the burden of showing entitlement to this

               Under the Fleet Factors case, the secured party should avoid any
               involvement in management that would show that he could
               influence waste disposal decisions.

                     A secured creditor will be liable under CERCLA as an
                     owner/operator if his involvement with the management of
                     the facility is sufficiently broad to support the inference that
                     he could affect hazardous waste disposal decisions it he so

                     See United States v. Fleet Factors Corp., 901 F.2d 1550
                     (CA11 1990), cert. denied, 111 S.Ct. 752 (1991).
                                                Real Estate Finance 2 – Spring 1997  47
           Subsequent to Fleet Factors, the Environmental Protection Agency
           issued a rule contrary to the Fleet Factors broad liability. EPA
           says participation in management means actual participation, not
           the mere capacity to influence.

                 To be liable the secured party must either:

                         exercise decision-making control over the borrowers
                        environmental compliance, or

                        exercise control over the facility at a level comparable
                        to that of a manager.

                 See 57 Fed. Reg. 18344-18385 (April 29, 1992). Rule is at 
                 300.1100, Security interest exemption.

     Basis for liability is strict liability, not negligence.

           Thus, even if was legal to dump the waste at the time of disposal,
           you can still be liable for the cleanup costs under CERCLA.

Property Forfeiture for Drug Violations.

     Secured party can assert the innocent owner defense pursuant to
     21 U.S.C.  881(a)(6).

           Innocent owner is protected to the extent of his interest in the

           While Congress is not required to return any interest in the
           property, Congress has allowed for this act of executive clemency.

           Thus, the interest of an innocent owner means the the amount
           allowed by the government under its administrative practice for

           The administrative practice is to return:

                 the lenders principal,

                 pre-seizure interest at the note rate,

                 interest from the date of the seizure through the last full
                 month prior to the date of the notification granting the
                 petition for remission.

                                           Real Estate Finance 2 – Spring 1997  48

    Choosing a Shared Facilities Arrangement.

    The stock cooperative (co-op).


               Form a corp.

               Corp gives mortgage to bank.

                      There is this single mortgage on the entire property.

               Occupants buy shares in corp, and occupant/shareholder gets
               perpetual lease.

                      The more valuable your unit, the more shares you must buy.

               Lease payments go to debt service, maintenance, etc.


               City resident (e.g., New York City) gets tax advantages of
               home-ownership and advantages of property increase in value.

         Disadvantages--the single blanket mortgage.

               Default by some occupants can cause foreclosure of the blanket
               loan, resulting in loss of equity for all.

               Prevents pre-payment by a single occupant.

               Difficult for occupant to cash out.

                      Occupant cannot sell free and clear--must sell subject to the
                      blanket mortgage.

                      Buyer probably will not have the big chunk of cash to buy out
                      the occupant.

                              Occupant may have to carry back.

                              Most states do not have laws allowing bank to
                                               Real Estate Finance 2 – Spring 1997  49
                      recognize co-op shares as real estate collateral.

The condominium.

    A condominium is a creature created by statute, not common law.

         Each owner owns individual unit in fee simple, and the structure
         and common areas are owned as tenants in common.

               The condominium declaration will define the exact
               boundaries of what is owned in fee and what is owned as t/c.

               Cube in space.

         Differs from co-op in that the individual unit owner can go get a
         mortgage loan on the individual unit.

               No problem of blanket mortgage.

    Creation of a condominium project.

         A condo project is created once there has been substantial
         compliance in good faith with the provisions of I.C.  55-5504, which
         are the following:

               A declaration, together with a plat or plats, must be recorded
               in the county where the project is to be located.

               The recorded documents must express an intent to create a
               project subject to the provisions of the Act.

               Among the documents there must be:

                      A plat or map of the project.

                      Diagrammatic floor plans of the building or buildings.

                      A certificate executed and acknowledged by the record
                      owner of the project consenting to the recordation of
                      the documents.

         See Investors Limited of Sun Valley v. Sun Mountain
         Condominiums, 106 Idaho 855 (Ct. App. 1984).

    The condominium declaration.

         The declaration which must be filed to create a condo project is
                                         Real Estate Finance 2 – Spring 1997  50
essentially a master deed which defines the rights and duties of the
developer, the owners of the individual condo units, and the
management body of the project.

      Watch out for who has the authority to make decisions.
      Should make sure that a basketball court cannot be built
      close to your unit without your consent.

Requirements for condo declaration. I.C.  55-1505.

      Legal description of the land within the project.

      Legal description of each unit in the project.

      The percentage of ownership interest in the common area to
      be allocated to each unit for the purpose of tax assessment.

             Note. This means the condo developer must know the
             number of units in the project before the project is

                   This is problematic because of the nature of the
                   construction industry.

                   The first owners might object to a proposed
                   change in the number of condos, whether the
                   change be up or down.

                   See Investors Limited, supra, where an unbuilt
                   unit did not qualify as an owner who can vote.

Amending the declaration.

      Prior to first condo sale ---> owner + sec. lender may amend.

             Prior to the first sale of a condominium, the
             declaration and the plat may be amended or revoked
             by a subsequently recorded instrument executed and
             acknowledged by the record owner and the holder of
             any recorded security interest in all of the property
             comprising the condo project. I.C.  55-1504.

      After first sale ---> need consent of some owners.

             After the first sale of a condominium, the declaration
             and plats can be amended only if the proposed
             amendment is consented to by the requisite percentage
                               Real Estate Finance 2 – Spring 1997  51
                          of the voting power of the owners of the project,
                          always more than fifty percent, as specified in the
                          declaration. I.C. 55-1505(2)(k).

                 See Investors Limited of Sun Valley v. Sun Mountain
                 Condominiums, 106 Idaho 855 (Ct. App. 1984).

                          Owner as defined in that case was not construed to
                          include ownership of unbuilt units. This made it much
                          harder on builder to amend the declaration.

                 Note. Unlike many modern statutes governing development
                 and sales of condominiums, the Idaho law does not prohibit
                 or restrict the developer from retaining control over the
                 managing body of condominium owners by reason of the
                 developers ownership of built but unsold units.

The Homes Association.

     Differences from condos.

           Own land, not just cube in space.

           The common areas are not owned as tenants in common.

                 The homes association owns either a fee simple or long-term
                 lease in the common areas.

           Association has powers.

                 Can make assessments.

                 Can regulate color of house, etc.

     Advantages over condo.

           The common areas can easily be mortgaged to finance major
           improvements to the common areas.

                 Not so with condos because the common areas are owned as
                 tenancy in common.

Selected Problems in Shared Facilities.

     Liability in tort.

           The condominium association may be sued for negligence in its
                                            Real Estate Finance 2 – Spring 1997  52
     common name by a member of the association.

           The member may obtain a judgment against the
           condominium project and the association.

     Dont see too much of this type of litigation because of the
     prevalence of insurance.

     Some states have statutes limited liability of a unit owner to his
     proportionate share (thus, no joint and several liability).

The governing bodys rule-making power.

     Specific standards are not required provided that:

           the intention of the rule is clear, and

           that the rule enforcing committee exercised its discretion in a
           reasonable and good faith manner.

     A condominium rule must be reasonable to withstand judicial

           A condo rule is reasonable if it bears a fair and substantial
           relationship to legitimate condo purposes, such as improving
           aesthetics and marketability by eliminating junk cars.

Enforcement procedures: priority of condo assessments over
mortgages. Two rules.

     Some states have a statutory scheme governing condominium
     assessment priority.

           Idaho has a statute.

                  The lien arises only when the management body
                  records the notice of assessment, and has priority only
                  as of the date of the recording.

                  A condo assessment lien can be foreclosed in the same
                  manner as a deed of trust.

     Some states have held that a condo associations lien for
     assessments is a contractual lien which relates back to the time of
     the filing of the declaration.

           Thus, a lien for unpaid assessments will take priority over a
                                     Real Estate Finance 2 – Spring 1997  53
                    first mortgage on a particular condo unit.

                    If you're in one of these jurisdictions, you should carefully
                    draft your mortgage.

                           A default on the assessment lien is a default on the

                           The mortgagee has the right to pay past due
                           assessments and add the amount to the mortgage.

              Class notes. What else, short of foreclosure, can be done to enforce
              assessments? These mechanisms must be allowed by statute and
              provided by bylaws.

                    Late fees.

                    Civil fines.

                    Loss of voting.

                    Loss of right to use common facilities.

         Restraints on alienation.

              It is fairly common to have a restraint on your ability to sell your

                    More common in co-op than in condos because of blanket
                    mortgage in co-ops.

         Protecting the consumer.

    Time-Sharing Ownership.



    Shopping Center Development.

         Shopping center leases often use percentages of profits.

              Reduces risk for tenant; increases chance of good profit for landlord.

              Provides a good hedge against inflation.
                                              Real Estate Finance 2 – Spring 1997  54
          Usually there is a fixed minimum rental with a percentage of sales
          over a certain dollar amount.

                Is usually a percentage of gross.

     Drafting percentage leases can be very tricky.

          The issue is often what should be excluded from gross. Sales tax,
          credit card fees, subleases, etc.

     Missed a day.

     Shopping center bankruptcies.

          Provision allowing trustee to assume lease.

          Right of debtor or trustee to assign the lease.

                Trustee may assign if certain conditions met.

                       Assignee must have ability to pay.

                       Also, assignee must have a financial condition and
                       operating performance that is similar to original

                       Assignee must be able to generate sales so that
                       percentage lease is basically the same.

                       Cannot escape radius and non-compete clauses.

                       Must not disrupt tenant mix.

The Ground Lease.

     Usually for 50 or more years.

     Distinguishing feature: the lessee owns any buildings or other
     improvements put on the ground.

     Advantages of ground leases.

          Gives the lessee the depreciation deduction. Also, the rent is a
          business expense for the lessee. No capital tied up in land

          Also, can help lessor avoid capital gains tax and take advantage of
                                          Real Estate Finance 2 – Spring 1997  55
stepped-up basis when dies.

                              Real Estate Finance 2 – Spring 1997  56

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