Aspects of The Land Contract

In a traditional sale model, a bank will finance the transaction, or at least a large portion of the transaction. The buyer grants a mortgage to the bank, the proceeds of the loan are paid to the seller, and the seller deeds the property to the buyer. This creates a contractual relationship between the new homeowner and the bank; the purchase money mortgage model. Dr. Seuss would be proud!

The land contract is an alternative means of financing the sale of land. The purchaser makes installment payments directly to the seller. Upon completion of the contractual payments, the seller deeds the property to the purchaser. Nothing very complicated.

The land contract, like the mortgage, is a contract. As such, it offers contractual provisions designed to remedy breach. The seller has remedies available if the buyer cannot perform. These remedies consist of either foreclosure or forfeiture.

The seller in a land contract is known as the vendor. The purchaser in a land contract is known as the vendee. Here’s how a land contract plays out in a chain of title.

(Example)

State of Title: Steve Yzerman in fee simple absolute.

Steve Yzerman, owner of redacre, decides to sell redacre to Pavel Datsyuk, another great Red Wing, on land contract. Mr. Yzerman has accepted the job as GM of the Tampa Bay Lightning. Steve also enjoys the beaches, the bikinis, and many other aspects of Florida living. Being stuck in Michigan in the wintertime is not much fun.

Execution of this land contract creates new interests in redacre, which are:

Owner: Steve Yzerman.

Vendor: Steve Yzerman.

Vendee: Pavel Datsyuk.

We now have a contractual relationship between Mr. Yzerman and Mr. Datsyuk.

Assignment of Seller’s Interest in Land Contract:

After execution of the land contract, it is possible for Mr. Yzerman to sell his ownership interest. Let’s assume he wants to sell his interest to Mike Babcock. After all, Mr. Babcock, as coach of the Red Wings, wants to keep a closer eye on his star player, Pavel. There have been rumors of too many beers.

Remember, Mr. Yzerman is the owner of redacre, as well as the vendor in the land contract. How does Mr. Yzerman accomplish the transfer of his interests?

He will use two instruments: (1) the Assignment of Seller’s Interest in Land Contract, and (2) the warranty deed.

For Mr. Yzerman to effectively convey his interest in redacre, he must dispose of both interests. First, he will convey his ownership interest by way of the warranty deed. Second, he will convey his vendor interest by way of the assignment of seller’s interest in land contract.

An assignment consists of two parties: 1) the assignor, and 2) the assignee. In our example, Mr. Yzerman would be the assignor, while Mr. Babcock would be the assignee.

Execution of the warranty deed and the assignment of seller’s interest in land contract creates new and amended interests in redacre, which are:

Owner: Mike Babcock.

Vendor: Mike Babcock.

Vendee: Pavel Datsyuk.

Assignment of Purchaser’s Interest in Land Contract:

Now, let’s put the skate on the other foot. After execution of the land contract, it is possible for Mr. Datsyuk to convey his vendee interest. Let’s assume he wants to convey his interest to Nick Lidstrom. He knows that Nick is settled down and will probably get along better with Coach Babcock.

How does Mr. Datsyuk accomplish the transfer of his interest?

He will use two instruments: (1) the Assignment of Purchaser’s Interest in Land Contract, and (2) the quit claim deed.

Mr. Datsyuk has one responsibility concerning redacre; he is the vendee. He conveys his vendee interest by way of the assignment of purchaser’s interest in land contract. As a way of overkill, he will also execute a quit claim deed in favor of the new vendee. The use of a quit claim deed is proper in this situation. Mr. Datsyuk was not the owner of redacre, only a vendee under contract. As such, he was never seized of redacre and, therefore, could not have satisfied the covenant of seizen found in a warranty deed. Take a minute to digest this; it is important to understand the distinction.

In our example, Mr. Datsyuk would be the assignor, while Mr. Lidstrom would be the assignee.

Execution of the assignment of purchaser’s interest in land contract creates new interests in redacre, which are:

Owner: Mike Babcock.

Vendor: Mike Babcock.

Vendee: Nick Lidstrom.

Technical note: As a general rule, the vendor and vendee are free to convey their respective interests to a third party. However, if the terms of the land contract forbid assignment, an attempted assignment will not be effective. The terms of the land contract will control the relationship between the vendor and the vendee. If the contract is “silent” concerning assignment, an assignment will generally be permitted.

Nuance:

In your profession, you will run across the tiered land contract. It works like this:

A sells to B on land contract. (This is labeled the 1st land contract)

B then sells to C on land contract. (This is labeled the 2nd land contract)

C then sells to D on land contract. (This is labeled the 3rd land contract)

*It is possible for all three contracts to exist concurrently. In fact, it happens more often than you might think.

A, B, C, and D all have an interest in blackacre. A is the original owner in fee simple absolute and the vendor under the first contract. An examiner will look for the conveyance from A to B in fulfillment of contract 1. He will then look for subsequent conveyances from B to C and from C to D, all in fulfillment of their respective contracts. At the end of the day, an examiner will look for D to be the owner in fee simple absolute.

Obviously, a tiered land contract scenario can create numerous problems. In our example, we have four parties involved (A, B, C, and D). Judgments, liens, or other matters affecting either of the parties can create a logistical nightmare. Personally, I like these scenarios, as it gives me an opportunity to sort out and analyze all the interests.

When you encounter a tiered land contract, don’t panic! Make sure to properly search all the party names and ask for successive deed conveyances in fulfillment of the respective contracts.

So long,

dave