Rights in real property - Transfer

Learning Outcomes

This article explains the rules governing rights in real property transfer for MBE purposes, including:

• The formal requirements for a valid deed, common drafting defects, and how those defects appear in exam questions.
• What counts as effective delivery and acceptance of a deed, with emphasis on escrow, conditional delivery, and revocation.
• The distinction between legal and equitable title in land sale transactions and the consequences of equitable conversion.
• How different recording statutes allocate priority among competing claimants and how to classify a statute from its wording.
• Who qualifies as a bona fide purchaser, the three types of notice, and how notice facts are tested.
• The main forms of title assurance—covenants for title, warranty deeds, and title insurance—and the remedies they provide.
• How mortgages interact with land transfers, including assumption versus “subject to” language, due-on-sale clauses, and priority rules.
• The meaning of marketable title, typical defects that render title unmarketable, and how the merger doctrine limits contract remedies.
• How to apply these doctrines systematically to resolve MBE-style priority, ownership, and mortgage-enforcement disputes under timed conditions.

MBE Syllabus

For the MBE, you are required to understand the rules governing the transfer of rights in real property, with a focus on the following syllabus points:

• Requirements for a valid deed (form, content, execution).
• Delivery and acceptance of deeds, including escrow and conditional delivery.
• Distinctions between legal and equitable title, including equitable conversion.
• Recording statutes (race, notice, race-notice) and types of notice.
• Rights of bona fide purchasers and the shelter rule.
• Title assurance through covenants for title and title insurance.
• Seller’s obligation to deliver marketable title at closing and the merger doctrine.
• Priority issues when properties are encumbered by mortgages or other interests.

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. Which of the following is NOT required for a valid transfer of legal title to real property?
   1. A written deed signed by the grantor
   2. Delivery of the deed with intent to transfer
   3. Consideration paid by the grantee
   4. Identification of the parties and property
2. In a notice jurisdiction, who prevails if O conveys Blackacre to A (who does not record), then to B (who pays value and has no notice of A), and then A records before B?
   1. A
   2. B
   3. O
   4. Title is void
3. What is the main purpose of a recording statute?
   1. To validate defective deeds
   2. To protect bona fide purchasers from prior unrecorded interests
   3. To guarantee marketable title
   4. To prevent all future disputes

Introduction

Transferring rights in real property is more than handing over a deed. The law distinguishes between:

• Legal title (the interest shown on the deed and in the public records), and
• Equitable title (the interest that equity recognizes, especially between contract and closing).

Between contract and closing, the buyer typically holds equitable title under the doctrine of equitable conversion, while the seller holds legal title as security for the price. At closing, a properly executed, delivered, and accepted deed passes legal title. Recording then determines whose legal title prevails against competing claimants.

Real property can be transferred in several ways:

• Sale (by land sale contract and deed),
• Gift (by deed, without consideration),
• Devise (by will, effective at the testator’s death), and
• Intestate succession (by operation of law when the owner dies without a will).

Key Term: Deed
A written instrument signed by the grantor that, when properly delivered and accepted, transfers legal title to real property to the grantee.

Key Term: Legal Title
The formal ownership interest evidenced by a valid deed and recognized at law, typically controlling in priority contests once properly recorded.

Key Term: Equitable Title
A beneficial ownership interest recognized in equity, such as a buyer’s interest under a specifically enforceable land sale contract before legal title passes.

Purchasers are also protected by title assurance mechanisms: covenants for title in deeds, title insurance, and the recording acts. On the MBE, questions often combine these concepts in short fact patterns—e.g., a flawed delivery, an unrecorded deed, a later bona fide purchaser, and a property encumbered by a mortgage.

Understanding how these pieces fit together is essential to analyzing who owns what, when, and with what level of protection.

Requirements for a Valid Deed

A deed is the legal instrument used to transfer title to real property. For a deed to be valid, it must satisfy the Statute of Frauds and basic deed formalities. In most jurisdictions, a valid deed must:

• Be in writing.
• Identify the grantor and grantee with reasonable certainty.
• Be signed by the grantor (the person conveying the interest).
• Contain words of present transfer (e.g., “grant,” “convey,” “give”).
• Adequately describe the property.
• Be delivered with the present intent to transfer title, and accepted by the grantee.

Consideration is not required. A deed can transfer property as a pure gift if there is donative intent, delivery, and acceptance. This is why option (c) in Question 1 is not required.

Writing, Parties, and Property Description

• Writing and signature: The deed must be in writing and signed by the grantor. The Statute of Frauds is satisfied by a writing that:

  • Identifies the parties,
  • Describes the property, and
  • Shows an intent to convey an interest in land. The grantee need not sign, even if the deed includes covenants on the grantee’s part; acceptance is enough to bind the grantee.

• Authority to sign: The grantor may authorize an agent (e.g., under a written power of attorney) to sign the deed. If the agent signs outside the principal’s presence, most Statutes of Frauds require the agent’s authority to be in writing.

• Identification of parties: Grantor and grantee must be identifiable. A deed to a nonexistent entity or a deceased person is generally void. A deed to a sufficiently described class (e.g., “to my children”) is permissible if the class can be ascertained when the deed takes effect.

• Description of the property: The description must be sufficient to identify the land with reasonable certainty.

  • The description need not be perfect or use technical “metes and bounds.”

  • It can reference:

    • Physical monuments (e.g., “to the old oak tree and along the river”),
    • A street address, lot number, or subdivision plat, or
    • Other objective indicators.

  • If different components of the description conflict, courts often prioritize in this order: natural monuments, artificial monuments, courses, distances, and finally area.

  • Ambiguities:

    • Latent ambiguity (uncertainty revealed only by extrinsic facts) may be clarified with extrinsic evidence.
    • Patent ambiguity (uncertainty apparent on the face of the deed) is harder to cure; extrinsic evidence cannot be used to create a description where none exists at all.

Key Term: Recording Statute
A statute that regulates the effect of recording instruments affecting real property and allocates priority among competing claimants, often protecting later bona fide purchasers against prior unrecorded interests.

Words of Present Transfer

The deed must show an intent to pass an interest now, not in the future. Language such as “I hereby grant and convey Blackacre to A” is sufficient. An attempted transfer “to take effect next year” is usually viewed as a promise to convey in the future, not a present conveyance.

Where the language is ambiguous, courts construe deeds to make a present transfer if reasonably possible, because deeds are typically not testamentary instruments.

Execution and Formalities

• A seal is not required in modern practice.
• Witnesses and acknowledgment (notarization) are generally not required for validity between grantor and grantee, but may be required for recording.
• Corporate grantors usually must act through authorized officers under corporate law; trustees must sign for trust-owned property.
• In some states, a spouse must join in a deed conveying the family homestead, even if the spouse is not in the chain of title, to release homestead or marital rights.

A deed that is validly executed between grantor and grantee is effective to transfer legal title once it is properly delivered and accepted, even if it is never recorded. Recording affects priority against third parties, not the validity as between the parties.

Delivery and Acceptance

Delivery and acceptance are what make a signed deed operative. A perfectly drafted, signed deed sitting in the grantor’s desk does not transfer title until there is effective delivery and acceptance.

Key Term: Delivery (of Deed)
The act or conduct by which a grantor demonstrates present intent for a deed to take immediate effect, transferring legal title to the grantee.

The core question is whether the grantor intended the deed to have immediate legal effect.

• Physical handover to the grantee is powerful evidence of delivery but is not required.
• Recording a deed by the grantor is also strong evidence of delivery.
• Conversely, even physical transfer can fail as delivery if the grantor clearly retains control—for example, saying “this will become yours if I die first and if I don’t change my mind.”

A grantor can deliver by words alone (e.g., a phone call stating that the deed has been executed in favor of the grantee) if the grantor clearly intends the conveyance to be presently effective.

Parol Evidence and Conditional Delivery

A distinction is important on the exam:

• Deed handed to the grantee + oral condition (“This is yours, but do not record until after I die”):

  • Most courts treat this as unconditional delivery; the oral condition is disregarded under the parol evidence rule.
  • Title passes immediately upon delivery.

• Deed handed to a third party with written or oral instructions (escrow, discussed below):

  • Parol evidence is generally admissible to show the conditions of the escrow.
  • Title does not pass until the conditions are satisfied.

Delivery Through Third Parties (Escrow)

A common mode of delivery is through an escrow agent (such as a lawyer or title company). The grantor hands the executed deed to the escrow agent with clear instructions to deliver the deed to the grantee once certain conditions are met (e.g., full payment of the purchase price).

Key Term: Escrow
A delivery of a deed to a neutral third party, with instructions to deliver it to the grantee upon performance of specified conditions, typically in connection with a land sale closing.

Key rules:

• If the grantor’s instructions are irrevocable (grantor has no right to get the deed back), delivery is complete when the deed is given to the escrow agent. Title will pass automatically to the grantee when the conditions are satisfied.
• If the grantor reserves the right to retrieve the deed or to change instructions (“give this to A in two months unless I change my mind”), most courts treat this as no present delivery.
• If the grantee wrongfully obtains the deed from escrow before conditions are satisfied, no title passes. A later purchaser from the grantee generally does not become a BFP because the grantee had no title to convey.

Some jurisdictions apply a relation-back doctrine: when a deed is deposited in escrow and the condition later occurs, the grantee’s title may be treated as relating back to the date of the deposit to protect the grantee against intervening events such as the grantor’s death or incompetency. This doctrine does not defeat the rights of later bona fide purchasers.

Delivery Conditioned on Grantor’s Death

Grantors sometimes try to use deeds as “will substitutes”:

• If O hands a deed to a third party with instructions “give this to A on my death,” and O intends to make a present transfer of a future interest (e.g., O retains a life estate, A gets a remainder), many courts uphold the delivery. O cannot revoke the deed, and A holds a vested future interest.
• If the instructions are “give this to A only if A survives me,” courts often find there was no present transfer—O intended a testamentary gift that must comply with the Statute of Wills. In that case, the deed is ineffective unless executed as a valid will.

Acceptance

Acceptance by the grantee is required, but:

• Acceptance is presumed if the transfer is beneficial to the grantee.
• Acceptance is also presumed for minors or incompetents.
• A grantee who does not want the property must affirmatively reject the deed—typically by returning it or executing a reconveyance.

Once a deed is effectively delivered and accepted, title passes and cannot be revoked by simply retrieving or destroying the physical deed.

Worked Example 1.1

O executes a deed to A but keeps it in his desk. Later, O dies and A finds the deed. Is title transferred to A?

Answer:
No. There was no delivery, as O did not intend for the deed to have immediate legal effect. Title remains with O’s estate.

Worked Example 1.2

O executes a deed conveying Blackacre “to A” and hands it to his attorney with instructions: “Give this deed to A when she pays the full price under our contract; do not return it to me.” A pays the full price six months later, and the attorney hands A the deed. O dies in the meantime. Did A receive title?

Answer:
Yes. O made an effective escrow delivery when he handed the deed to the attorney with irrevocable instructions. When A satisfied the condition, title passed to A. O’s death before the condition was satisfied does not prevent the transfer.

Legal vs Equitable Title and Equitable Conversion

In a standard land sale contract, there is often a gap between contract signing and closing. During this period, equity treats the buyer and seller differently from the legal title shown in the record.

Key Term: Equitable Conversion
The doctrine under which, once there is a specifically enforceable land sale contract, the buyer is treated as the equitable owner of the land and the seller as holding legal title as security for the price.

Under the doctrine of equitable conversion (majority rule):

• The buyer becomes the equitable owner of the property upon execution of a specifically enforceable contract.
• The seller retains legal title as security for payment and holds the purchase price in equity.

Requirements and Consequences

For equitable conversion to apply:

• There must be a valid, specifically enforceable land sale contract (satisfying the Statute of Frauds or an exception such as part performance).
• If the contract is not specifically enforceable (e.g., lack of capacity, fraud, or a fatal defect under the Statute of Frauds with no part performance), equitable conversion does not arise.

Consequences on the MBE:

• Risk of loss (majority rule): If the property is damaged or destroyed through no fault of the parties between contract and closing, the risk falls on the buyer, absent a contract provision or statute to the contrary. The buyer must still pay the full price and usually has no rescission right, but may be entitled to any insurance proceeds the seller receives if the contract so provides.

• Risk of loss (minority rule – Uniform Vendor and Purchaser Risk Act): The risk is on the party in possession until legal title or possession passes. Often that is the seller until closing. Many MBE questions explicitly state whether such a statute has been adopted; if not, apply the majority equitable conversion rule.

• Death of a party:

  • If the seller dies before closing, the sales proceeds are treated as personal property in the seller’s estate. The devisees or heirs who take the seller’s real property generally do not receive the sales proceeds.
  • If the buyer dies before closing, her equitable interest in the land passes as real property to her real property beneficiaries or heirs, while the obligation to pay the purchase price is borne by her personal property estate.

Interaction with Marketable Title

The buyer’s equitable title does not require that the seller’s title be marketable at contract signing. The seller is obliged to deliver marketable legal title at closing. If the seller can cure defects by that date (for example, by using the sale proceeds to pay off an existing mortgage), the buyer usually must proceed.

Recording Statutes and Priority

Recording statutes are designed to protect purchasers from undisclosed prior interests. Recording does not make a defective deed valid, but it determines who prevails when multiple parties claim the same property.

Recording a deed in the appropriate county land records provides constructive notice to the world of the recorded interest.

Key Term: Race Statute
A recording statute under which, as between competing claimants, the party who records first prevails, regardless of notice.

Key Term: Notice Statute
A recording statute under which a subsequent bona fide purchaser without notice of prior unrecorded interests prevails, whether or not the subsequent purchaser records.

Key Term: Race-Notice Statute
A recording statute under which a subsequent bona fide purchaser without notice prevails only if that purchaser also records first.

Key Term: Bona Fide Purchaser (BFP)
A person who acquires an interest in property for value and without notice (actual, record, or inquiry) of prior unrecorded interests, and who may receive protection under a recording statute.

Key Term: Chain of Title
The sequence of recorded instruments (deeds, mortgages, etc.) that, when properly indexed, connect the current record title holder back through prior owners.

Key Term: Wild Deed
A recorded deed that is outside the chain of title (e.g., because it was recorded before the grantor’s deed was recorded) and therefore does not give constructive notice to subsequent purchasers.

Basic Types of Recording Statutes

There are three main types:

• Race: The first to record wins, regardless of notice.
• Notice: A subsequent BFP without notice of a prior unrecorded interest prevails, even if the prior grantee later records.
• Race-Notice: A subsequent BFP without notice who also records first prevails.

In all systems, the burden is on the later taker to show that they qualify for protection under the statute.

Who Is Protected

Only certain persons are protected by recording acts:

• Purchasers for value (including mortgagees) are protected.
• Donees, heirs, and devisees are not protected, because they do not give value, and take subject to prior unrecorded interests.
• A purchaser from a donee/heir/devisee can be protected if that purchaser is a BFP.

“Value” generally means substantial pecuniary value; nominal consideration typically is insufficient. Taking land in satisfaction of an antecedent debt is treated as giving value in many jurisdictions, and this is the default assumption on the MBE unless the facts suggest otherwise.

Types of Notice

A purchaser is not a BFP if they have:

Key Term: Actual Notice
Direct, subjective knowledge of a prior interest, obtained from any source.

Key Term: Record (Constructive) Notice
Notice imputed by law from properly recorded instruments within the chain of title, whether or not the purchaser actually searches the records.

Key Term: Inquiry Notice
Notice arising from facts that would prompt a reasonable purchaser to investigate, where a reasonable investigation would reveal the prior interest.

• Actual notice: The purchaser actually knows of the prior interest (e.g., the seller tells the buyer, or the buyer reads the prior unrecorded deed).

• Record (constructive) notice: Notice from properly recorded instruments in the chain of title. Recording in the wrong county, or recording a deed that is not properly acknowledged, often fails to give constructive notice.

• Inquiry notice: Facts that would lead a reasonable buyer to investigate, which investigation would reveal the prior interest. Common sources:

  • Someone other than the seller visibly in possession of the property.
  • A visible easement or path.
  • A recorded document that refers to an unrecorded instrument (e.g., “subject to the unrecorded lease to T”).

A purchaser who fails to investigate after being put on inquiry notice cannot claim BFP status.

Chain-of-Title Problems: Wild Deeds and Late Recording

Because most jurisdictions use grantor-grantee indexes, instruments recorded outside the chain of title do not give constructive notice.

• A wild deed arises when, for example, O conveys to A, A immediately records, and then O’s deed from a prior owner is never recorded. A’s deed is recorded but cannot be found in a reasonable title search (because the grantor O does not appear as record owner). A’s deed is “wild” and does not impart constructive notice.

• Late or early recording can create similar problems:

  • Deeds recorded before the grantor acquires record title are outside the chain.
  • Deeds recorded after the grantor has conveyed to another and that later deed is recorded first may also fall outside a reasonable chain-of-title search, depending on indexing practices.

Void vs. Voidable Instruments

Recording acts only protect those who take through a valid instrument:

• A forged deed or a deed executed by someone without authority is void and conveys no title, even to a BFP.
• A deed obtained by fraud, duress, or from a person lacking capacity is usually voidable—it is effective unless and until rescinded. A BFP who takes from the fraudulent grantee before rescission is typically protected.

The Shelter Rule and Estoppel by Deed

Key Term: Shelter Rule
A rule that allows a person who takes from a BFP to “shelter” under the BFP’s protection and acquire the same priority, even if the transferee personally has notice of prior interests.

Key Term: Estoppel by Deed (After-Acquired Title)
A doctrine under which a grantor who purports to convey property he does not own, and later acquires title, is estopped to deny the earlier conveyance; the after-acquired title automatically passes to the earlier grantee in many jurisdictions.

• Shelter rule: Anyone (even a donee) who takes from a BFP takes whatever rights the BFP had. This allows the BFP to freely transfer the property without losing priority and means that a grantee with notice can sometimes prevail because they take from a protected BFP.

• Estoppel by deed / after-acquired title: If O conveys Blackacre by warranty deed “to A” at a time when O has no title, but later acquires title, many jurisdictions treat the title as automatically passing to A. O is estopped from denying his earlier grant. Recording and the type of recording statute may affect priority as against other parties.

Worked Example 1.3

O conveys Blackacre to A, who does not record. O then conveys Blackacre to B, who pays value and has no notice of A’s deed. B records. In a notice jurisdiction, who owns Blackacre?

Answer:
B owns Blackacre. In a notice jurisdiction, a subsequent BFP without notice of a prior unrecorded deed prevails, even if the prior grantee records later.

Worked Example 1.4

O conveys Blackacre to A, who does not record. Later, O conveys Blackacre to B for value. B has actual notice of A’s deed but records immediately. The jurisdiction has a race statute. Who prevails?

Answer:
B prevails. Under a pure race statute, the first party to record wins, regardless of notice. B recorded before A, so B takes priority even though B had actual notice of A’s prior deed.

Worked Example 1.5

O conveys Blackacre to A, who does not record. O then conveys to B, who pays value and has no notice of A. B delays recording. A then records. The jurisdiction has a race-notice statute. Who prevails?

Answer:
A prevails. Although B was a BFP without notice, B did not record first. In a race-notice jurisdiction, the subsequent BFP must both (1) lack notice at the time of conveyance and (2) record first. Because A recorded before B, B does not qualify for protection.

Exam Warning

In a race-notice jurisdiction, a subsequent BFP must both lack notice of the prior interest and record first to prevail. Failing to record promptly can result in loss of priority, even if the purchaser paid value and had no notice.

Revision Tip

Always identify the type of recording statute in the jurisdiction before answering priority questions. Look for facts indicating notice, value, and the order of recording.

Title Assurance

Buyers seek assurance that they are acquiring good title. The main forms are:

• Covenants for title in deeds.
• Title insurance.
• Protection under recording acts.

Key Term: Covenant for Title
A promise in a deed about the grantor’s authority to convey and the quality of the title transferred, enforceable by the grantee and sometimes by later grantees.

Types of Deeds

• General Warranty Deed: Contains all six standard covenants for title, protecting against all title defects, whether arising before or during the grantor’s ownership.
• Special Warranty Deed: Usually contains the same six covenants but only warrants against defects arising during the grantor’s ownership.
• Quitclaim Deed: Contains no covenants for title; it conveys whatever interest, if any, the grantor presently has.

Key Term: General Warranty Deed
A deed in which the grantor warrants against all defects in title, whether arising before or during the grantor’s ownership, typically including six covenants for title.

Key Term: Special Warranty Deed
A deed in which the grantor warrants only that the grantor has not created title defects during the grantor’s period of ownership.

Key Term: Quitclaim Deed
A deed that contains no covenants for title and transfers only whatever interest, if any, the grantor has at the time of conveyance.

Because quitclaim deeds contain no covenants, they are often used to clear up title disputes or release minor interests, and they play an important role in exam questions involving adverse possession or boundary issues.

The Six Covenants for Title

These covenants are typically divided into present and future covenants:

• Present covenants (breach, if any, occurs at delivery):

  • Covenant of seisin – the grantor owns the estate purported to be conveyed.
  • Covenant of right to convey – the grantor has the power to transfer.
  • Covenant against encumbrances – there are no undisclosed liens, easements, or other encumbrances.

• Future covenants (breach occurs later, when disturbed):

  • Covenant of quiet enjoyment – the grantee will not be disturbed in possession by someone with superior title.
  • Covenant of warranty – the grantor will defend the grantee’s title against lawful claims.
  • Covenant of further assurances – the grantor will execute any additional instruments necessary to perfect title.

Key exam points:

• Present covenants are usually enforceable only by the immediate grantee (and in some jurisdictions by limited successors), because the breach is complete at delivery.
• Future covenants run with the land and can be enforced by remote grantees who suffer an eviction or disturbance of possession.
• The measure of damages is often limited to the purchase price received by the covenanter, sometimes plus incidental damages.

Title Insurance

Key Term: Title Insurance
An insurance policy that, as of its effective date, protects the insured (owner or lender) against loss caused by defects in record title not excluded or excepted in the policy.

A title insurance policy:

• Insures that a good record title exists as of the policy date.
• Promises to defend the insured’s title if it is challenged.
• Typically covers defects such as:
  • Forged deeds,
  • Undisclosed heirs,
  • Errors in indexing or recording, and
  • Some off-record risks, depending on the policy.

Limitations:

• The policy is not a guarantee of beyond-record matters unless specifically covered.
• Standard exclusions often include:
  • Zoning and land use regulations (and violations of them),
  • Environmental hazards,
  • Claims arising after the policy date, and
  • Defects known to the insured but not disclosed to the insurer.

An owner’s policy protects only the named insured owner and does not automatically benefit subsequent purchasers, while a lender’s policy (for mortgagees) typically follows the mortgage upon assignment.

Transfer of Encumbered Property: “Subject To” and “Assumption”

Real property is often transferred with existing mortgages. Whether the buyer is personally liable for the mortgage debt depends on how the transfer is structured.

Key Term: Assumption of Mortgage
An agreement by which a buyer of encumbered property promises the seller to pay the existing mortgage debt, making the buyer primarily liable to the lender and the seller secondarily liable as surety.

Key Term: Taking Subject To a Mortgage
A transfer in which the buyer takes title encumbered by an existing mortgage but does not promise to pay the debt, leaving the original mortgagor solely liable in personam while the lender retains the right to foreclose.

• If the buyer assumes the mortgage:

  • The buyer becomes personally liable on the debt.
  • The original borrower becomes secondarily liable as a surety.
  • The lender can sue both the assuming grantee and the original mortgagor on the note, and can also foreclose on the property.
  • If the surety (original mortgagor) pays the debt, he has a right of reimbursement from the assuming grantee.

• If the buyer takes subject to the mortgage:

  • The buyer is not personally liable on the debt.
  • The lender can foreclose on the property if payments are not made, but cannot sue the buyer personally on the note.
  • The original mortgagor remains personally liable.

If the deed is silent about the buyer’s liability, most courts treat the buyer as taking subject to the mortgage.

Many mortgages include a due-on-sale clause, which allows the lender to accelerate the loan (demand full payoff) if the mortgagor transfers the property without the lender’s consent.

Key Term: Due-on-Sale Clause
A clause in a mortgage or note allowing the lender, at its option, to declare the full loan balance immediately due if the borrower transfers the property without the lender’s consent.

Mortgage Priorities and Recording

Mortgages are also subject to recording acts:

• A purchase-money mortgage (mortgage taken out to buy the property) generally has priority over earlier non–purchase-money liens, even if recorded later, if properly recorded as such.

Key Term: Purchase-Money Mortgage
A mortgage given to a lender (or seller) to secure a loan that enables the mortgagor to acquire title to the property.

• A future-advance mortgage (line of credit secured by the property) has priority for obligatory advances and, depending on state law, may or may not have priority for optional future advances made after notice of intervening liens.

Key Term: Future-Advance Mortgage
A mortgage that secures not only an initial loan but also future advances of funds, often up to a stated maximum.

Recording a mortgage serves the same function as recording a deed: it provides constructive notice and establishes priority among competing security interests.

Equity of Redemption and Statutory Redemption

Key Term: Equity of Redemption
The mortgagor’s common law right to redeem the property and prevent foreclosure by paying the entire mortgage debt (plus interest and costs) before the foreclosure sale.

Key Term: Statutory Right of Redemption
A statutory right in some states allowing the mortgagor (and sometimes certain lienholders) to redeem the property for a period after the foreclosure sale by paying the sale price or the mortgage debt.

The equity of redemption exists in all states and cannot be “clogged” by contract (courts are hostile to any provision that effectively prevents redemption). Statutory rights of redemption exist only by statute and often apply after the foreclosure sale; their details vary by jurisdiction.

Worked Example 1.6

Owner borrows from Bank, giving Bank a properly recorded mortgage containing a due-on-sale clause. Owner then sells the property to Buyer “subject to” the mortgage, without Bank’s consent. Buyer makes no payments. Bank sues Buyer personally for the full loan balance, relying on the due-on-sale clause. Is Buyer liable?

Answer:
No. A grantee who takes title “subject to” the mortgage is not personally liable on the debt. The due-on-sale clause allows Bank to accelerate the debt and foreclose, but it does not create personal liability for a buyer who never assumed the debt.

Marketable Title and the Merger Doctrine

A seller under a land sale contract must provide marketable title—title reasonably free from doubt and the risk of litigation—at closing, not before. Marketable title does not mean perfect title, but it must be such that a reasonably prudent buyer would accept it.

Key Term: Marketable Title
Title reasonably free from doubt in both fact and law, such that a prudent buyer would accept it, and not subject to a reasonable risk of litigation.

Common defects that render title unmarketable include:

• Title acquired by adverse possession not yet established by judgment (because record title still appears in someone else).
• Significant undisclosed encumbrances (easements, covenants, mortgages, liens) not agreed to in the contract.
• A chain of title with serious defects (forgeries, missing links, outstanding interests in unknown heirs).
• Existing violations of zoning or building codes (mere existence of zoning restrictions does not make title unmarketable; violations do).
• Outstanding future interests or options that cloud the seller’s ability to transfer a fee simple.
• Substantial encroachments of structures onto neighboring land (e.g., a house that significantly crosses the lot line).

Encumbrances and Contract Terms

Not every encumbrance makes title unmarketable:

• If the buyer agrees in the contract to take subject to a specific encumbrance (e.g., “subject to the recorded easement in favor of Utility Co.”), that encumbrance does not render the title unmarketable.
• A mortgage does not make title unmarketable if the seller can satisfy it out of the sale proceeds at closing. The seller is expected to use sale proceeds to pay off such liens so that the buyer receives unencumbered title.
• Minor, beneficial, or customary easements (e.g., public utility easements in a platted subdivision) often do not render title unmarketable, especially if observable and typical.

Timing and Remedies

The seller’s obligation is to deliver marketable title at closing:

• The buyer generally cannot refuse to perform before the closing date solely because the title is presently unmarketable, as long as the seller can cure by closing.
• If the seller cannot or will not cure by closing, the buyer may:
  • Rescind the contract and recover the deposit,
  • Sue for damages (benefit-of-the-bargain measure), or
  • Seek specific performance with an abatement in price if the buyer wishes to accept the defective title.

The Merger Doctrine

After closing, the merger doctrine applies: the land sale contract’s provisions regarding title are generally merged into the deed. The buyer’s rights then depend on the deed’s covenants, not on the contract, unless the contract expressly provides that certain obligations survive closing.

Key Term: Merger Doctrine
The principle that, at closing, the land sale contract’s provisions merge into the deed, so that post-closing rights are governed by the deed’s covenants rather than the contract, unless specified otherwise.

Exceptions:

• Contract provisions collateral to title (e.g., a seller’s promise to repair certain items, or to construct an additional structure) are often treated as surviving closing.
• Fraud, misrepresentation, or active concealment can support a post-closing action despite merger.
• Express “survival” clauses in the contract can preserve particular promises beyond closing.

Worked Example 1.7

Seller delivers a deed to Buyer, but the deed is not recorded. Buyer discovers a prior unrecorded mortgage on the property after closing. Is Buyer protected?

Answer:
No. Unless Buyer was a BFP protected by the recording statute vis-à-vis that prior mortgage, Buyer takes subject to prior unrecorded interests. Recording is essential for protection against later purchasers, but it does not erase earlier interests that are not subject to a recording act contest. As between Buyer and the prior mortgagee, the mortgage remains valid.

Worked Example 1.8

Seller contracts to sell Blackacre to Buyer, promising “marketable title.” Unknown to both, a third party has a valid recorded easement for a driveway across Blackacre. Buyer objects and refuses to close. Must Buyer perform?

Answer:
No. The easement is an encumbrance that renders title unmarketable unless the contract contemplated it. Buyer can refuse to close and may sue for return of any deposit or for damages, depending on the jurisdiction and facts.

Key Point Checklist

This article has covered the following key knowledge points:

• A valid deed requires writing, identification of parties and property, grantor’s signature, words of present transfer, delivery, and acceptance.
• Consideration is not required for a valid deed; deeds can transfer property by gift.
• Delivery turns on the grantor’s present intent to make the deed operative; physical transfer is evidence but not conclusive.
• Oral conditions attached to a deed handed directly to the grantee are generally disregarded; the delivery is effective.
• Delivery through escrow is effective when the grantor relinquishes control and makes instructions irrevocable; title usually passes when the condition is satisfied.
• Acceptance by the grantee is presumed if the transfer is beneficial; rejection requires affirmative action.
• Under equitable conversion, once there is a specifically enforceable land sale contract, the buyer holds equitable title and usually bears the risk of loss absent an applicable statute or agreement.
• Recording statutes protect bona fide purchasers from prior unrecorded interests; they do not validate void instruments such as forged deeds.
• Three main types of recording statutes exist: race, notice, and race-notice, each with different requirements for later purchasers.
• Only purchasers for value (including mortgagees) may claim BFP status; donees, heirs, and devisees are not protected by recording acts.
• Notice can be actual, record (constructive), or inquiry; facts putting a reasonable buyer on inquiry defeat BFP status if not investigated.
• Chain-of-title problems (wild deeds, early or late recording) can prevent recorded instruments from giving constructive notice.
• The shelter rule allows successors of a BFP to inherit the BFP’s priority, even if they personally have notice.
• Covenants for title in general and special warranty deeds provide contractual title assurance; present covenants are breached at delivery, future covenants upon later disturbance.
• Quitclaim deeds carry no covenants and convey only whatever interest the grantor presently holds.
• Title insurance provides additional protection against many title defects as of the policy date but is subject to exclusions and does not run with the land to later owners.
• Buyers may take property “subject to” a mortgage (no personal liability) or “assuming” a mortgage (personal liability), and due-on-sale clauses allow acceleration on transfer.
• The equity of redemption allows the mortgagor to prevent foreclosure by paying the full debt before the sale; some states also provide a statutory right of redemption after the sale.
• Sellers must deliver marketable title at closing; serious encumbrances or title defects render title unmarketable unless agreed to.
• Mortgages and other liens typically do not make title unmarketable if the seller can satisfy them at closing out of the sale proceeds.
• After closing, the merger doctrine generally limits the buyer’s remedies to the deed’s covenants, absent surviving contract provisions or fraud.

Key Terms and Concepts

• Deed
• Delivery (of Deed)
• Legal Title
• Equitable Title
• Equitable Conversion
• Recording Statute
• Race Statute
• Notice Statute
• Race-Notice Statute
• Bona Fide Purchaser (BFP)
• Escrow
• Covenant for Title
• General Warranty Deed
• Special Warranty Deed
• Quitclaim Deed
• Title Insurance
• Assumption of Mortgage
• Taking Subject To a Mortgage
• Due-on-Sale Clause
• Marketable Title
• Chain of Title
• Wild Deed
• Actual Notice
• Record (Constructive) Notice
• Inquiry Notice
• Shelter Rule
• Estoppel by Deed (After-Acquired Title)
• Purchase-Money Mortgage
• Future-Advance Mortgage
• Equity of Redemption
• Statutory Right of Redemption
• Merger Doctrine