Mortgages/security devices - Installment land contracts

Learning Outcomes

This article explains installment land contracts as tested on the MBE, including:

• The nature, structure, and operation of installment land contracts as a seller-financed real property security device
• How installment land contracts differ from traditional mortgages and deeds of trust in title, remedies, and risk allocation
• The operation of equitable conversion, marketable title obligations, and risk of loss in the installment contract context
• Remedies available to sellers and buyers on buyer default, including forfeiture, damages, foreclosure, restitution, and specific performance
• The enforceability, limits, and modern judicial treatment of forfeiture clauses, especially where the buyer has built significant equity
• How waiver of strict performance arises through course of dealing and how sellers may reinstate strict compliance with proper notice
• The doctrine of election of remedies and how choosing forfeiture, damages, or foreclosure affects subsequent rights and recovery
• When courts are likely to recharacterize installment land contracts as equitable mortgages to trigger foreclosure and redemption protections
• Recording, priority, and exam-tipped issues involving installment buyers as purchasers for value under modern recording statutes

MBE Syllabus

For the MBE, you are required to understand installment land contracts as a type of real property security device, with a focus on the following syllabus points:

• 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, foreclosure, and restitution
• Understanding the enforceability of forfeiture clauses and the modern judicial approach to buyer protection
• Applying the rules regarding waiver of strict performance and the seller’s election of remedies
• Knowing when courts may treat installment land contracts as mortgages for purposes of foreclosure, redemption, and protections for buyers’ equity
• Understanding how equitable conversion, marketable title, recording, and risk of loss operate in the installment land contract context

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 (vendee) pays the purchase price in installments over time, and the seller (vendor) retains legal title as security until the full price (often with interest) is paid.

Key Term: Vendor (Seller)
The party who owns the property, retains legal title under an installment land contract, and holds that title as security for the buyer’s obligation to pay the purchase price.

Key Term: Vendee (Buyer)
The party who takes possession and equitable ownership under an installment land contract and pays the price in installments, receiving legal title only when the contract is fully performed.

Structure and Operation

In an installment land contract, the buyer typically:

• Takes possession of the property
• Assumes most responsibilities of ownership (property taxes, insurance, maintenance, sometimes repairs)
• Makes periodic payments (monthly, quarterly, or annually) of principal and interest

The seller:

• Holds legal title as security for payment of the full contract price
• Usually agrees to deliver a deed only after complete performance (full payment or earlier payoff under agreed terms)

This structure differs from a mortgage loan:

• Under a mortgage or deed of trust, the buyer receives legal title at closing, and the lender receives a security interest (mortgage or deed of trust) that must be foreclosed upon default.
• Under an installment land contract, the seller keeps legal title until the contract is paid in full, making the contract itself the security device.

Key Term: Forfeiture Clause
A provision in an installment land contract allowing the seller, upon buyer default, to terminate the contract, retain prior payments as liquidated damages, and repossess the property.

Installment contracts are attractive to sellers who wish to retain more control and avoid foreclosure procedures, and to buyers who cannot obtain conventional financing. For exam purposes, treat them as a form of seller financing that functions like a mortgage but with different default mechanics.

Statute of Frauds and Formal Requirements

Because an installment land contract is a contract for the sale of an interest in land, it is subject to the Statute of Frauds:

• It must be in writing
• It must be signed by the party to be charged (usually the seller in an enforcement action)
• It must contain the essential terms (parties, property description, and price/payment terms)

Oral “rent-to-own” or “contract for deed” arrangements are usually unenforceable unless an exception (such as part performance) applies.

Possession, Equitable Ownership, and Risk of Loss

Even though the seller holds legal title, the buyer is treated as the equitable owner once the contract is formed.

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

Key consequences of equitable conversion in this context:

• Risk of loss: In jurisdictions that follow the traditional equitable conversion rule and have not adopted the Uniform Vendor and Purchaser Risk Act, the buyer generally bears the risk of loss (e.g., fire, casualty) after the contract is formed, even under an installment contract.
• Property rights: The buyer’s equitable interest is a real property interest that can be assigned, devised, or encumbered (e.g., by junior mortgages), subject to the contract terms.

Key Term: Risk of Loss (Installment Contracts)
The allocation of responsibility for accidental damage or destruction of the property between contracting and delivery of legal title; under equitable conversion, the buyer typically bears this risk unless modified by contract or statute.

Marketable Title in Installment Land Contracts

Marketable title is the standard of title the seller must be able to convey.

Key Term: Marketable Title (in Installment Contracts)
Title reasonably free from doubt and litigation, which the seller under an installment land contract is generally obligated to deliver only when legal title is to be conveyed (usually at the final payment).

Under the majority rule (tested on the MBE):

• In an installment land contract, the seller’s obligation is to furnish marketable title when the deed is to be delivered, typically after the buyer completes all payments.
• The buyer ordinarily cannot stop making payments or rescind before the end of the contract merely because the seller’s title is presently unmarketable, as long as the seller can cure by the time performance is due.
• An exception arises if the buyer can show that the seller cannot possibly cure the defects in time; then rescission or other relief may be available earlier.

Exam tip: If a fact pattern shows the buyer discovering a title defect midway through the installment period, ask whether the seller can reasonably cure by the time final payment and deed delivery are due.

Structure and Operation (Recap)

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.

Remedies Upon Buyer Default

If the buyer defaults on payments, the seller may have several remedies, depending on the contract terms and the jurisdiction. The key is to distinguish the traditional approach from the modern trend.

1. Forfeiture

Under the traditional approach:

• The seller could invoke a forfeiture clause:
  • Declare the contract terminated
  • Retain all payments already made as liquidated damages
  • Retake possession of the property
• No foreclosure or sale was required; the buyer simply lost both possession and all equity built up.

Modern courts view strict forfeiture as harsh, especially after substantial performance by the buyer.

Limitations under the modern trend:

• If the buyer has paid a substantial portion of the price or made valuable improvements, courts are likely to:
  • Refuse to enforce strict forfeiture
  • Treat the contract more like a mortgage, requiring foreclosure and sale
• Even where forfeiture is allowed, courts may:
  • Permit the buyer to redeem by curing the default within a reasonable time
  • Allow restitution to the buyer to the extent payments exceed the seller’s actual damages

Key Term: Restitution for Defaulting Buyer
Equitable relief allowing a defaulting buyer to recover the amount by which their payments and improvements exceed the seller’s actual damages, even when a forfeiture clause exists.

2. Damages

The seller can elect to:

• Affirm the contract and sue the buyer for damages, typically:
  • The difference between the contract price and the property’s fair market value at the time of breach, plus
  • Incidental damages (e.g., costs of repossession, repair, resale)
• This remedy is more common where the buyer has not yet made substantial payments or where the seller does not wish to retake the property.

3. Foreclosure and Judicial Sale

Many courts now treat installment land contracts like mortgages when the buyer has significant equity:

• The seller must pursue foreclosure rather than simple forfeiture.
• The property is sold, and the proceeds are used to satisfy the unpaid contract balance and costs.
• Any surplus must be returned to the buyer.

Key Term: Equitable Mortgage (Recharacterization)
A judicial recharacterization of a transaction (including an installment land contract) as a mortgage when, in substance, it is intended as security for a debt. This triggers mortgage-like protections, including foreclosure procedures and redemption rights.

In some jurisdictions, statutes or case law routinely treat long-term installment contracts as mortgages, particularly in residential settings, to prevent unjust enrichment of the seller.

4. Specific Performance

The seller might seek:

• Specific performance compelling the buyer to pay the balance and complete the contract, sometimes in conjunction with acceleration clauses that make the entire balance due upon default.

Courts are cautious with this remedy:

• Specific performance is more likely if the buyer can realistically cure the default and the property is unique (land always is).
• It is less likely where enforcing the full price would be oppressive relative to the buyer’s equity and circumstances.

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 focuses on:

• Preventing unjust enrichment of the seller (e.g., keeping a nearly paid-off property plus all payments)
• Giving buyers the benefit of any equity built up through payments and improvements
• Requiring remedies that resemble mortgage foreclosure when the buyer has substantial equity

Common tools:

• Recharacterizing the installment contract as an equitable mortgage
• Requiring foreclosure and sale rather than automatic forfeiture
• Allowing restitution for overpaid amounts
• Recognizing a right to redeem by curing the default within a reasonable time

Key Term: Waiver of Strict Performance
The principle that if a seller regularly accepts late or partial payments without objection, the seller may be deemed to have waived the right to insist on strict, timely performance, unless proper notice and a reasonable opportunity to cure are given.

Worked Example 1.1

A buyer enters into an installment land contract to purchase a home for $200,000, 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. After five years of payments, the buyer has built significant equity. A court may treat the contract as an equitable mortgage and require the seller to proceed by foreclosure and sale. The buyer would then be entitled to any surplus after the debt and costs are paid, or at least to restitution for amounts paid in excess of the seller’s actual loss.

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. Key points:

• Course of dealing: Repeated acceptance of late payments without protest implies waiver of strict timing requirements.
• Effect of waiver:
  • The seller cannot suddenly insist on strict punctuality and declare forfeiture for a similar delay without prior notice.
• Reinstating strict performance:
  • The seller must give clear written or oral notice that strict compliance will be required going forward, and
  • Provide a reasonable opportunity to cure existing arrears.

Once proper notice is given and a reasonable cure period expires without payment, the seller may again insist on strict performance, including available remedies on further 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 first notify the buyer that timely payments will be required going forward and give a reasonable opportunity to cure any existing default. Without such notice and cure period, an immediate declaration of forfeiture is likely unenforceable.

Restitutionary Relief for Defaulting Buyers

Even when forfeiture is permitted, modern courts often grant partial relief to defaulting buyers.

Rules to know:

• A buyer who has paid more than the seller’s actual damages may recover the excess under restitution or unjust enrichment principles.
• Actual damages are typically:
  • Lost contract profit
  • Costs of repossession, repair, and resale
  • Any decline in market value attributable to the buyer’s breach

If the buyer’s payments and improvements exceed that amount, many courts require the seller to refund the difference, rather than keep all payments as a windfall.

Worked Example 1.3

A buyer agrees to purchase land under an installment contract for $100,000. She pays $40,000 before defaulting. The fair market value of the land at breach is $95,000. The seller retakes the property and resells it for $95,000, incurring $5,000 in resale and repair costs.

Answer:
The seller’s actual loss is $10,000 (the difference between the $100,000 contract price and the $95,000 resale price) plus $5,000 in expenses, for a total of $15,000. Because the buyer has paid $40,000, many courts will permit the seller to retain $15,000 and require restitution of $25,000 to the buyer. A strict forfeiture of the entire $40,000 would likely be limited as an unenforceable penalty.

Election of Remedies

A seller who elects to pursue one remedy generally cannot pursue inconsistent remedies for the same default.

Key Term: Election of Remedies
A doctrine requiring the seller to choose among inconsistent remedies (forfeiture, damages, specific performance, foreclosure) after buyer default and not recover twice for the same breach.

Key rules:

• A seller who elects forfeiture (terminating the contract and retaking the property) usually cannot also:
  • Sue for the full contract price (specific performance), or
  • Recover additional damages based on the same default
• If the seller accepts payments after declaring forfeiture, courts often treat that as:
  • A waiver of the forfeiture, and
  • A reinstatement of the contract or a new contract

Worked Example 1.4

A seller declares forfeiture under an installment land contract and retakes possession. Two months later, the buyer sends a partial payment, which the seller cashes while still claiming that the contract was terminated and also sues for additional damages.

Answer:
By cashing the buyer’s payment after declaring forfeiture, the seller has likely waived the forfeiture and treated the contract as continuing. The seller cannot both terminate the contract and treat it as ongoing for purposes of collecting more money. The court may find the forfeiture ineffective and limit the seller to a damages or foreclosure remedy, subject to proper notice and cure opportunities.

Recording, Priority, and Installment Buyers as Purchasers

Installment land contracts implicate recording and priority issues similar to mortgages.

• The buyer’s equitable interest is a real property interest that can, and usually should, be recorded.
• Under most recording statutes, a purchaser under an installment land contract is protected as a purchaser for value, but:
  • If the buyer has paid only part of the purchase price, some courts protect the buyer only to the extent of payments made.

When a prior unrecorded claimant competes with an installment buyer, courts may:

• Award the buyer:
  • A fractional interest proportional to the percentage paid, or
  • A lien on the property for the amount paid, or
• Award the property to the buyer and give the prior claimant a lien for the unpaid balance.

Worked Example 1.5

O conveys Blackacre to A, who does not record. O then conveys Blackacre to B as a gift, and B records. B later sells Blackacre to C via an installment land contract for $100,000. C pays $25,000 and records his contract. A later sues C to quiet title.

Answer:
C is a purchaser for value but has paid only one-quarter of the price. Under many modern approaches, the court may protect C only to the extent of his payments. Possible outcomes include: (1) C receives a one-quarter undivided interest in Blackacre as a tenant in common; or (2) A receives title, subject to a lien in favor of C for $25,000. Exam questions may test that an installment buyer’s protection under the recording acts can be limited to the extent of payment made.

Buyer’s Remedies When the Seller Defaults

While most exam questions focus on buyer default, you should also recognize the buyer’s remedies if the seller fails to perform (for example, refuses to deliver the deed at the end of the contract or lacks marketable title at that time):

• Specific performance: Because land is unique, buyers can almost always seek specific performance compelling the seller to convey marketable title upon full payment.
• Rescission and restitution: If the seller cannot convey marketable title and cannot cure, the buyer may rescind and recover all payments plus the value of improvements.
• Damages: The buyer may sue for expectation damages (difference between contract price and market value at breach) and consequential damages, where appropriate.

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, including foreclosure-like remedies and restitution for defaulting buyers.

Revision Tip

Always check whether the buyer has built up significant equity or made improvements. If so, courts may:

• Treat the contract as a mortgage
• Require foreclosure and sale
• Limit forfeiture
• Allow restitution for amounts exceeding the seller’s actual loss

Key Point Checklist

This article has covered the following key knowledge points:

• Installment land contracts are security devices where the seller (vendor) retains legal title as security until full payment, while the buyer (vendee) holds equitable title.
• The seller’s obligation to deliver marketable title in an installment contract generally arises only when legal title is to be conveyed, usually after final payment.
• Traditional remedy for buyer default is forfeiture, but modern courts often limit forfeiture, especially when the buyer has paid a substantial amount or improved the property.
• Modern approaches frequently require foreclosure and sale, or at least restitution, to prevent unjust enrichment of the seller and protect the buyer’s equity.
• Restitution may be available to defaulting buyers to the extent their payments and improvements exceed the seller’s actual damages.
• Waiver of strict performance occurs if the seller accepts late or partial payments without objection; strict performance can be reinstated only with clear notice and a reasonable opportunity to cure.
• A seller must elect a remedy and generally cannot both forfeit and simultaneously seek damages or specific performance for the same default.
• Courts may recharacterize installment contracts as equitable mortgages to trigger mortgage-like protections, including foreclosure procedures and redemption rights.
• Installment buyers have real property interests that should be recorded; their protection under recording acts may be limited to the extent of payments made.
• Equitable conversion in this context makes the buyer the equitable owner and generally places the risk of loss on the buyer absent contrary agreement or statute.

Key Terms and Concepts

• Installment Land Contract
• Vendor (Seller)
• Vendee (Buyer)
• Forfeiture Clause
• Equitable Conversion
• Risk of Loss (Installment Contracts)
• Marketable Title (in Installment Contracts)
• Restitution for Defaulting Buyer
• Equitable Mortgage (Recharacterization)
• Waiver of Strict Performance
• Election of Remedies