The Installment Land Contract (Contract for Deed)
The vendee normally goes into possession and agrees to make monthly installment payments of principal and interest until the principal balance is paid off. The vendor retains legal title until the final payment is made, at which time he has a duty to execute a deed to the land.
1. An earnest money contract simply establishes the rights of the parties during the time between the date the bargain was entered into and the date of the closing, at which time title passes and security agreements, if any, are executed. ILCs govern parties throughout the life of the debt.
2. Remedies for default of an ILC:
– Sue for the remaining installments due with interest
– Specific performance of the contract – Some courts require a showing that the remedy at law was inadequate. For specific performance of the entire balance of the contract, include an acceleration clause. SP is a good remedy when the vendee has assets to satisfy the contract price and the land is worth less than the contract price.
– Damages – Difference between the contract price and the FMV of the land at the time of the vendee’s breach. Available when the vendee has abandoned the land.
– Sue to foreclose his vendee’s rights – Vendor treats the ILC as a mortgage and the land is sold by judicial sale. Strict foreclosure which deprives the vendee of equity is also available.
– Sue to quiet title or rescind the contract
– Most have a forfeiture clause that gives the vendor the option to declare the contract terminated, retake possession, and retain all payments under the contract as liquidated damages. If the forfeiture remedy is necessary to regain the land, other remedies may be barred by the election of remedies doctrine.
3. Russell v. Richards (New Mexico 1985): A forfeiture provision is enforceable absent unfairness that shocks the conscience of the court. There was no wrong done by the seller for the buyer to collect damages and buyer was profiting off of the property through leases.
4. TX STATUTE: Executory Contract for Conveyance: Avoidance of Forfeiture and Acceleration or of Recission: Seller can enforce these remedies so long as notice is given to the defaulting buyers. The greater the percentage of the purchase price paid, the greater the number of days of notice required.
5. Judicial Recognition of a Right of Redemption: Vendee may have a final opportunity to tender the contract balance before losing the land. This right of redemption may be unconditional or only if the vendee has paid a “substantial amount” of the contract price. Some courts also require good faith on the part of the vendee (forfeiture enforceable where a vendee makes no efforts to fulfill his contract obligations).
6. Sebastian v. Floyd (Ky. 1979): Where almost 40% of the debt had been paid and the contract provided that upon default, all past payments would be forfeited as rent, the clause is unenforceable. There is no reasonable relationship between the damages suffered and the penalty. This is close to a liquidated damages clause which is strongly disfavored by courts.
7. Does vendor’s acceptance of late payments constitute waiver of the forfeiture provision? Does it then give the vendee a right analogous to the equitable right of redemption? Some courts say yes unless the vendor gave vendee notice that he was giving him time to get back on schedule with the payments.
8. Issues of Title Insurance with low income ILCs. [Pages 326-333].
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