DILETTANTE BUILDER FORCED TO BUY BACK HOUSE

We went to trial against a first-time homebuilder and got a judgment that required him to refund the full purchase price to our client ($280,000.00) and take back a deed to the house. The defendant asserted that he was a "casual seller" on the grounds that he had lived in the house after he built, and therefore he was liable, if at all, only for damages (e.g., costs of repair).

Cross examination of him at the end of trial showed that he was a "builder-vendor" and as such liable to take back the house and refund the purchase price. A snapshot of the house and its front lawn clearly showed a "for sale" sign from one of the national real estate agencies. Under it was a little white sign that could not be read with the naked eye. But a magnifying glass showed that the sign said the house had been built by the defendant's home-building company.

The snapshot was shown to the defendant, who said the white sign was too small to read. The magnifying glass was pulled out and handed to him. "Try this." The defendant pushed aside the glass and the photo, looked the judge in the eye, and told him the sign said the house had been built by his company.

Result: Instead of a judgment for damages, which would have meant that our client had to keep the house, there was a judgment for rescission: The defendant took back the house and refunded the purchase price.

WHAT IS TITLE INSURANCE?

If you were offered a deed to the Brooklyn Bridge for a million dollars, would you take the deed and pay the million dollars? That would be a great deal only if the deed gave you ownership of the bridge and a disaster if the deed were just a fancy piece of paper.

That risk is controlled by title insurance which sellers promise to provide to buyers. An insurer of land titles will protect a buyer against certain risks posed by rights and interest third parties may have in the land.

The insurer will investigate the existence and extent of the seller's interest in the relevant property by examining public records and otherwise. If and when it is satisfied that the seller is the true owner of the property, it will commit itself to insure the seller's title against the claims of others, subject to certain exceptions.

SELLERS OF REALTY CAN'T HAVE IT BOTH WAYS

By David McCarthy

A clause in a real estate contract that gives seller an option to recover liquidated damages or actual damages is unenforceable for violating public policy.

An "option" of that kind distorts the purpose of liquidated damages, i.e., to pre-arrange settlement for a sum certain when actual damages would be hard to determine, and subjects buyers to a penalty when liquidated damages exceed actual damages. (Catholic Charities etc. v. Thorpe No. 1-99-1717).

WHAT HAPPENS AT A REAL ESTATE CLOSING?

By David McCarthy

Seller and buyer perform the promises they made to each other in their contract for the purchase and sale of the property. Buyer pays seller the purchase price. Seller conveys the property to buyer by delivering a deed for the real estate and a bill of sale for the personal property.

Those activities are basic to any real estate closing. Other action may be required at the closing, and some promises are typically performed prior to the closing. The contract, which must be written to be binding, serves as a "to do" list.

Buyers often obtain a mortgage loan to help pay the purchase price. In such cases there is not only a "closing" on the sale between buyer and seller, but also a "closing" on the loan between buyer and lender. The lender pays money to the seller on behalf of the buyer.

The buyer gives the lender a promissory note and mortgage. The note is buyer's promise to repay the loan. The mortgage grants the lender a lien interest in the real estate that can be foreclosed on in case buyer does not repay the loan. Real estate sales so often close at the office of a title insurance company because they so often involve a mortgage loan. The title insurance company serves as an agent of the lender in such cases.

TENANCY BY THE ENTIRETIES: NOT NEW AND NOT BULLET PROOF

By David McCarthy

Who said real estate owned in tenancy by the entireties is beyond the reach of creditors of one of the tenants? The United States Supreme Court has just held otherwise, at least insofar as the creditor is the United States itself. United States v. Craft (No. 001831, April 17, 2002) held that a husband's interest in Michigan real estate, which was owned in tenancy by the entireties, was subject to a federal tax lien.

Tenancy by the entireties only seemed to be the hot new thing in residential real estate in the 1990s. In fact it originated in the ancient common law under the theory that a wife had no legal existence apart from her husband, and it basically disappeared in the 19th Century with the passage of the Married Women's Acts. Illinois abolished this form of ownership in 1861 and resurrected it in 1990 by amendment to the Joint Tenancy Act.

In Illinois it is available only to married couples and only for their homestead. It was said to possess two virtues which plain old joint tenancy did not: (1) tenancy by the entireties cannot be severed except by the consent of both tenants and (2) the property so held is beyond reach of creditiors of only one of the tenants. The second point is proving to be an overstatement.

The first Illinois decision on the subject held that the protections of tenancy by the entirety were absolute -- a creditior of only one tenant could not reach entireties property under any circumstance. A later decision held that a creditor of only one tenant could reach entireties property by invoking the Fraudeulent Transfer Act and demonstrating that the tenancy had been created with intent to defraud creditors. Still later the Illinois General Assembly and the Illinois Supreme Court entered the conversation.

First, the Joint Tenancy Act was so amended as to subject entireties property to the claims of the creditors of only one tenant if the tenancy was created with the "sole intent" of defauding creditors.

Next, the Illinois Supreme Court held that the "sole intent" standard was more exacting than the "actual intent" standard of the Fraudulent Transfer Act. Now the U. S. Supreme Court has effectively eliminated any obligation to prove fraud at all to the extent that the creditor is the U.S. itself.