Mortgages/security devices - Installment land contracts

Learning Outcomes

After reading this article, you will be able to explain the nature and operation of installment land contracts as a security device, distinguish them from traditional mortgages, identify the remedies available to sellers and buyers upon default, and evaluate the enforceability of forfeiture clauses and the modern trend toward equitable relief. You will be prepared to answer MBE questions on the rights and obligations of parties to installment land contracts.

MBE Syllabus

For MBE, you are required to understand the legal principles governing installment land contracts as a form of security device for real property transactions. This includes:

  • Recognizing the structure and function of installment land contracts and how they differ from mortgages and deeds of trust.
  • Identifying the remedies available to sellers and buyers upon buyer default, including forfeiture, damages, and equitable relief.
  • Understanding the enforceability of forfeiture clauses and the modern judicial approach to protecting buyers’ interests.
  • Applying the rules regarding waiver of strict performance and the election of remedies by the seller.
  • Knowing when courts may treat installment contracts as mortgages for purposes of buyer protection.

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

  1. In an installment land contract, if the buyer defaults after paying substantial amounts, which remedy is the seller least likely to obtain under the modern trend?
    1. Forfeiture of all payments and immediate repossession
    2. Foreclosure and judicial sale
    3. Damages for the seller’s actual loss
    4. Specific performance by the buyer
  2. Which of the following best describes an installment land contract?
    1. A deed is delivered to the buyer at closing, and the seller retains a mortgage.
    2. The buyer receives legal title immediately and pays the seller in installments.
    3. The seller retains legal title until the buyer pays the full purchase price.
    4. The buyer and seller jointly hold legal title until the contract is paid off.
  3. If a seller regularly accepts late payments from a buyer under an installment land contract, what is the likely legal effect?
    1. The seller may declare forfeiture at any time without notice.
    2. The seller has waived strict performance and must give notice before insisting on timely payment.
    3. The seller must always foreclose as if the contract were a mortgage.
    4. The buyer is automatically entitled to a deed.

Introduction

Installment land contracts are a common alternative to traditional mortgages for financing the sale of real property. In these contracts, the buyer agrees to pay the purchase price in regular installments over time, but the seller retains legal title until the full price is paid. This arrangement creates a security device that protects the seller’s interest while allowing the buyer to occupy and use the property.

Key Term: Installment Land Contract A contract for the sale of real property in which the buyer pays the purchase price in installments over time, and the seller retains legal title until the full price is paid.

Structure and Operation

In an installment land contract, the buyer typically takes possession and assumes most responsibilities of ownership, such as paying taxes and maintaining the property. However, the seller holds legal title as security for payment of the full contract price. Only after the buyer completes all payments does the seller deliver a deed transferring legal title.

This structure differs from a mortgage, where the buyer receives legal title at closing and the seller (or lender) receives a mortgage lien as security.

Key Term: Forfeiture Clause A provision in an installment land contract allowing the seller to terminate the contract, retain prior payments, and repossess the property if the buyer defaults.

Remedies Upon Buyer Default

If the buyer defaults on payments, the seller may have several remedies, depending on the contract terms and the jurisdiction:

  • Forfeiture: The seller may declare the contract terminated, keep all payments made, and retake possession. This is the traditional remedy, but modern courts often limit its use, especially if the buyer has paid a substantial portion of the price.
  • Damages: The seller may sue for the actual loss suffered, including the difference between the contract price and the property’s fair market value, plus costs.
  • Foreclosure: Many courts now treat installment contracts as equivalent to mortgages, requiring the seller to foreclose and sell the property to satisfy the debt, with any surplus returned to the buyer.
  • Specific Performance: The seller may seek a court order requiring the buyer to pay the balance due, but this is rare unless the buyer is able to cure the default.

Key Term: Equitable Conversion The doctrine that treats the buyer as the equitable owner of the property under a land contract, even though the seller retains legal title as security.

Modern Trend: Buyer Protection

Courts increasingly protect buyers from harsh forfeiture outcomes, especially when the buyer has made significant payments or improved the property. The modern approach often requires the seller to proceed by foreclosure and sale, rather than simple forfeiture, to prevent unjust enrichment and to give the buyer the benefit of any equity built up.

Key Term: Waiver of Strict Performance The principle that if a seller regularly accepts late or partial payments, the seller may be deemed to have waived the right to insist on timely payment unless proper notice is given.

Worked Example 1.1

A buyer enters into an installment land contract to purchase a home for 200,000,paying200,000, paying 20,000 down and $1,500 per month. After five years of timely payments, the buyer misses three payments. The seller declares forfeiture, keeps all payments, and retakes the property. The buyer sues for equitable relief.

Answer: Under the modern trend, a court is likely to deny strict forfeiture and instead require the seller to foreclose as if the contract were a mortgage. The buyer, having paid a substantial amount and built up equity, is entitled to protection from forfeiture and may recover any surplus from a foreclosure sale.

Waiver and Reinstatement of Strict Performance

If a seller has established a pattern of accepting late or partial payments, courts may find that the seller has waived the right to declare forfeiture for late payment. To reinstate strict performance, the seller must give the buyer clear notice and a reasonable opportunity to cure any default.

Worked Example 1.2

A seller under an installment land contract accepts late payments for several months. The next time the buyer is late, the seller immediately declares forfeiture and retakes the property.

Answer: The seller’s prior acceptance of late payments constitutes a waiver of strict performance. The seller must give the buyer notice of intent to require timely payments and allow a reasonable time to cure before declaring forfeiture.

Election of Remedies

A seller who elects to pursue forfeiture generally cannot also seek damages or specific performance for the same default. The seller must choose one remedy and forgo the others. However, if the seller accepts payments after declaring forfeiture, courts may find that the seller has waived the right to forfeit.

Exam Warning

Courts are increasingly reluctant to enforce forfeiture clauses strictly, especially where the buyer has paid a substantial portion of the price or made valuable improvements. Expect MBE questions to test the modern trend toward equitable relief.

Revision Tip

Always check whether the buyer has built up significant equity or made improvements. If so, courts may require foreclosure and sale, not simple forfeiture.

Key Point Checklist

This article has covered the following key knowledge points:

  • Installment land contracts are security devices where the seller retains legal title until full payment.
  • Traditional remedy for buyer default is forfeiture, but modern courts often require foreclosure and sale.
  • Forfeiture clauses may be unenforceable if the buyer has paid a substantial amount or improved the property.
  • Waiver of strict performance occurs if the seller accepts late payments without objection.
  • Seller must give notice and a reasonable opportunity to cure before insisting on timely payment after waiver.
  • Seller must elect a remedy—cannot both forfeit and sue for damages or specific performance.
  • Courts may treat installment contracts as mortgages to protect buyers’ equity.

Key Terms and Concepts

  • Installment Land Contract
  • Forfeiture Clause
  • Equitable Conversion
  • Waiver of Strict Performance
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