Learning Conveyancing — The Hard Way
by Gary Casaly, Esquire
The practice of law is a learning experience. Sometimes, however, the lessons are learned the hard way. Little twists and turns in the application of a law or statute can result in more than just an enlightening experiencethey can cause all kinds of "gulps" experienced before (or after) a final exam in law school. The practice of law is a testand you're taking it!
Before I get into the questions of title issues themselves and how they can be scarier than a haunted house on Halloween night, let me explore some "traps" that await the unwary even in the seemly innocuous purchase and sale agreement. Modifying the "standard" purchase and sale agreement is a common practice, but it seems that some of the modifications are themselves "standard," and in some cases overlook important issues.
Almost inevitably the paragraph that defines the seller's damages in the event of a default by the buyer is modified. The applicable paragraph, in one form of the agreement, as unmodified, states this:"If the Buyer shall fail to fulfill the Buyer's agreements herein, all deposits made hereunder by the Buyer shall be retained by the Seller as liquidated damages unless within thirty days after the time for performance of this agreement or any extension thereof, the Seller otherwise notifies the Buyer in writing." Ordinarily, the stock language is redrafted to limit the Seller's damage to the deposit. The buyer generally won't sign the agreement without the change.
But what would be the result if the provision was not modified at all? A seller whose buyer did not raise the issue might be tempted to keep the paragraph intact and unmodified with the view of expanding possible damage claimsor at least having the option to do soin the event of the buyer's default. In this regard Schrenko v. Reganante, 27 Mass.App.Ct. 282, 537 N.E.2d 1261 (1989) is instructive. In Schrenko the clause appeared in the agreement in unmodified form. The buyer defaulted and the seller, even after selling the property for a higher price (but claiming to have incurred additional expenses), retained the deposit as "liquidated damages." The trial judge found for the seller, stating that with respect to the subsequent sale, "When a breach occurs, a snap shot of the situation should be taken. Simply put, the subsequent sale is not in the picture." It is interesting to note that the trial judge's position, with respect to liquidation was ultimately held to be the law in a different case, Kelly v. Marx, 428 Mass. 877, 705 N.E.2d 1114 (1999), wherein the Supreme Judicial Court held that the "second look"considering facts that occurred after the breachwas not a proper inquiry. However, in Schrenko the trial judge was overruled because it was determined that the paragraph was in fact not a liquidated damage clause. As unmodified, the paragraph permitted the seller to choose what remedy to exercisekeep the deposit or sue the buyer for actual damagesand this discretionary aspect of the paragraph resulted in the clause being deemed one concerning a penalty. This gave the result that the seller could not keep the deposit as liquidated damages and was left to a suit in which actual damages would have to be proved. With the price realized from the second sale being greater than that which would have been obtained from the first sale, there would be a serious question as to where the seller sustained any damages. In such case the seller would be left with no remedy.
Other provisions of a purchase and sale agreement, if left unmodified, can cause problems, too. Take the paragraph in at least one "standard" agreement that reads" "To enable the Seller to make conveyance as herein provided, the Seller may, at the time of the delivery of the deed, use the purchase money or any portion thereof to clear the title of any and all encumbrances or interests, provided that all instruments so procured are recorded simultaneously with the delivery of said deed." The clause in the sentence that appears after the last comma is a good subject for modification: most conveyancers see the "trap," and add "except instruments, such as discharges from institutional lenders, which are customarily recorded after closing" at the end of the clause. This modification may not be necessary (but it certainly is highly recommended) in view of the decision in Auclair v. Thomas, 39 Mass.App.Ct. 344, 656 N.E.2d 321 (1995), in which the court held that the "time is of the essence" provision included elsewhere in the agreement was applicable to the time for performance and not the time for recording title-curing instruments.
For those who are interested in knowing, the last clause discussed above was intended to resolve the issue that was raised in Greenberg v. Lannigan, 263 Mass. 594, 161 N.E. 882 (1928). In Greenberg there was no right reserved in the purchase and sale agreement permitting the seller to use the purchase money to clear the record title. However, the seller attended the closing with discharges in hand of mortgages that encumbered the title. The court said this was not enough, and held that the buyer would be permitted to reject the title because the discharges were not already recorded at the time set for performance, even though they were available to be recorded along with the deed. Auclair dilutes the holding in Greenberg to some degree.
I could discuss other types of modifications to the purchase and sale agreementsuch as requiring the seller to sign title insurance affidavits and other papers required by the lenderbut they do not relate to the title. One issue that does (at least in a way) has to do with utilities that serve the property. We all know that if we're going to pass upon the validity of an appurtenant easement that services the property, whether the easement is for access or utilities, it is necessary to first examine the title for the "servient" estate. But what happened if before the closing it is found that the utilities that service the property come in over other land? There's no appurtenant easement to examine and (of course) the neighbor won't grant one. Can the title be rejected? Probably not. Utility service is a convenience, for sure, and makes the property more merchantable, but is not a factor in determining the "marketability" of the title. I've seen hundreds of purchase and sale agreements that provide all improvements be located on the property and that the property have a right or access upon or to a public way, but rare is the agreement that addresses the question of utilities. In rural areas it's not uncommon for a well to be located on adjoining property, with or without the benefit of an appurtenant easement. If the property does not have the benefit of an easement or if the easement is deficient the title may be forced upon the buyer unless the agreement addresses this issue.
So much for the purchase and sale agreements and "getting ready" to pass (or reject) a title. A real question to be reckoned with when it comes to "fish or cut bait" is whether the title is good or not. Like a chameleon, sometimes a title issue is not clearly evident, and a title that appears to be good in fact is bad (and vice versa). Let me explore here some of these occasional "invisible"and more frequently lethaltitle issues that can pop up at any time and make Halloween look like a picnic.
Let's say you're examining the title to a lot that enjoys an easement. Of course, you examine the title to both the dominant and servient estates and are satisfied that the easement has been effectively "forged" with and is an appurtenance to the lot. Once the easement has been effectively spun out and attached to the lot there's no necessity to run the title to the servient estate. Real estate taxes thereafter assessed against the servient estate cannot affect the easement (G.L.c. 60 §45 provides that the premises conveyed by a tax title deed "shall also be subject to all easement lawfully existing ") and there's nothing that the owner of the servient estate can do after creating the easement that will adversely affect it. Right? Maybe not! What would happen if (i) the servient estate was conveyed to the owner of the dominant estate, (ii) the owner of the two estates thereafter jettisoned what was previously the servient estate with no mention of the reservation of an easement for what was formerly the dominant estate, and (iii) the lot being examined was then conveyed to your client with language in the deed that it has benefit of the easement? Event (i) would have caused the easement to merge, event (ii) would prevent the easement from being reestablished over what was previously the servient estate, and event (iii), although it would appear to carry the easement with the conveyance, would not accomplish this result because there would be no easement to grant! Obviously, the deed of the servient estate to the owner of the dominant estate which caused the merger would not be picked up in the title search unless one decided to run the title to the servient estate or run the owner of the dominant estate in the grantee index. The deed out by the common owner of what was previously the servient estate might be picked upand maybe save the dayprovided that is was evident in the grantor index that this property was indeed the servient estate, and the examiner had enough information and foresight to actually look at and report the deeds into and out of the common owner. The cryptic notation "N/L" here would be lethal!
There are other traps lurking to snag the unwary. For example, the case of Houghton v. Rizzo, 361 Mass 635, 281 N.E.2d 577 (1972), is "good news - bad news" kind of decision that can scare an examiner half to deathespecially an examiner who is examining a large subdivisionand cause a conveyancing attorney to wonder why he or she did not go to medical school instead. Houghton turned out to validate and support the integrity of the recording system, and to that end gave the conveyancer a sigh of relief. But the result could have turned out quite differently based on the very same principles applied by the court if just one fact had changed.
In Houghton a developer created a thirty-seven lot subdivision. The developer then sold thirteen of the lots to purchasers and inserted in their deeds restrictions regarding the type and kind of structures that could be erected on the lots. The developer then began to erect buildings on the retained lots, which, if they had been erected on the lots sold, would have violated the restrictions imposed on those lots. The purchasers of the various lots (and in some cases their successors in title) brought an action to stop the developer from erecting the buildings on the retained lots. The purchasers insisted that the fact that the restrictions appeared in all of their deeds indicated that there was some sort of a "common scheme" demonstrating that the developer impliedly had agreed to bind the retained lots to the same restrictions that had been imposed on the lots sold. The court disposed of the argument in a more or less summary fashion: "[I]t [is] settled in this commonwealth that the statute of fraud prevents the enforcement against the vendor, or any purchaser from him of a lot not expressly restricted, of any implied or oral agreement that the vendor's remaining land shall be bound by restrictions similar to those imposed upon lots conveyed. Only where the vendor binds his remaining lots by writing, can reciprocity of restrictions between the vendor and the vendee be enforced." It is clear from Houghton that if the developer had stated in a deed out to any particular purchaser that he would impose similar restrictions on the retained lots, the result in the case would have been different. In such an instance the statute of frauds would have been complied with and the retained lots would be subject to the restrictions. This should frighten both the examiner and the conveyancing attorney. In order to protect against this potentiality and comply with the rule recited in Houghton the examiner must look at each and every deed from the developer, including all deeds of non-locus lots, up until the subject lot is conveyed out by the developer. For if the developer has in any of those deeds agreed to subject retained property (in this case property which would include the subject lot) to restrictions (or has imposed easements over the retained property) those servitudes will bind the subject property when it is conveyed. It is tempting to pass over entries in the grantor index that appear to relate to non-locus property, and even if the entries are noted in the abstract, it can become onerous to pull down and look at each of the instruments listed, but the failure to do this can be dangerous.
Another area of conveyancing that sometimes in learned the hard way is that which concerns the application of the rule regarding the attachment of encumbrances on after-acquired property. Most all conveyancers are aware of the rule, but following its requirements can on occasion be difficult. The rule is this simple: certain encumbrances or liens which are recorded before a person acquires title to property can attach to the property after it is acquired. The classic situation concerns federal tax liens. If a federal tax lien is on record against a particular individual and that individual thereafter acquires property, the federal tax lien will attach to the property when the individual acquires it. With federal tax liens having a life of ten years, this requires the examiner or conveyancing attorney to search the records under the individual's name for ten years prior to the purchase of the property. This is generally not a major problem when it comes to these types of liens since most registries have a separate consolidated index which requires merely opening a book (or now tapping on a computer) and looking under entries for that individual during the applicable ten-year period. But other liens that are not separately index can pose difficulties. If the examiner fails to run each grantee in the grantor index for the applicable period such liens as income tax liens or child support liens can be missed.
It's bad enough that conveyancing has to be learned the hard way. But even some "safe harbors" have their own submerged mines. On this vein, want to learn some scary stuff about registered land? Let's start the discussion with G.L.c. 185 §46. That's a "laundry list" of the things that are not covered by the land court's certification of title. This list includes such mundane things as federal tax liens, bankruptcies and leases, and such exotic things and Indian land claims.
Moreover, there have been some recent cases (Feldman v. Souza, 27 Mass.App.Ct. 1142, 538 N.E.2d 64 (1989), Wild v. Constantini, 415 Mass. 663, 615 N.E.2d 558 (1993) and others, to name a few) that have stated, in modern vernacular, "you don't get what you see." These cases have given great weight to certain provisions of the registration statute, and particularly those sections that provide that "if it's on record, even though it may not be on the certificate, you're bound by it." See G.L.c. 185, §58, which essentially incorporates the rules of unregistered land into the registration system. Remember that under Goldstein v. Beal, 317 Mass. 750, 59 N.E.2d 712 (1945) it was said that in many cases the same rules govern unregistered land apply to registered land.
The case of Paquin v. Anschutz, Land Court Registration Case No. 15857-S (1979), adds another twist to the question of reliance upon what's shown on the certificate of title. (The case was decided by the Land Court and does not appear to have been appealed.) In 1949 Certificate of Title No. 10549 was issued to Lambert covering lots A, B, and C. In 1950 Lambert conveyed Lot A to Anschutz by deed containing language granting appurtenant rights over Lot B for purposes of bathing and boating. The certificate of title issued to Anschutz for Lot A containing the language as to the appurtenant rights. However, the only notation made on the encumbrance sheet of Lambert's certificate of title was: "Lot [A] on plan filed with Certificate No. 11994 and this Certificate canceled as to such lot see ctf 11994, B 82 P 94." No specific notation was made on Lambert's certificate as to the easement encumbering the retained property.
Later in the same year Lambert conveyed Lot C to Anschutz by deed which contained the same language as to rights over Lot B. A certificate of title was issued to Anschutz which contained the language regarding appurtenant rights, and another notation was made on the encumbrance sheet of Lambert's certificate, but again only with respect to the partial cancellation of the certificate and not to the easement encumbering the retained Lot B to Strickland. The deed did not contain any language indicating the rights of Anschutz to use Lot B for bathing and boating purposes. Through various mesne conveyances, none of which referred to Anschutz's rights, title to Lot B became vested in Paquin. Neither Paquin's certificate of title, nor any previous certificates of title issued in connection with Lot B, contained references to Anschutz's rights.
In a controversy between Paquin and Anschutz the court noted that it had before it two innocent parties. Anschutz has purchased Lots A and C and had specifically granted easement rights, which were also noted on the certificates of title which had been issued from the land court, while Paquin had taken a deed for Lot B with no mention of any rights burdening the same, and had received from the land court a "clean" certificate of title.
The court acknowledged that "[o]rdinarily, it would seem that the court should respect the certificate that is first in time, which of course is that of Anschutz, unless some reason can be found not to do so . Thus all things being equal the Anschutzes should prevail." But the court found that all things weren't equal: "When the respondents Anschutz took the second deed to [Lot C] from Lambert they then had a duty to check Lambert's certificate of title. Had they done so then, they would have discovered that the certificate and the encumbrance sheet contained no notation of the conveyance of [Lot A] itself. This should have warned them that this easement was not properly protected. That was the time they should have acted and insisted that their adverse claim be noted under the provisions of Section 59 . Instead they waited twenty-six years to file their claim . The court rules that the Anschutzes are now estopped from asserting their claim to the easement."
The result apparently would have been otherwise if the Anschutzes had not purchased Lot C, even though all of the facts were the same. However, it is wondered whether the reasoning of the case could be extended so as to require even a one-time purchaser to return to the registry district where a particular easement instrument has been filed to see that a proper notation of the same had been made on the certificate of the grantor to that instrument. In any event, the decision seems to put an obligationwhether burdensome or otherwiseon a purchaser of an easement over registered land to bring to the attention of the assistant recorder errors or oversights in the filing and registering of documents, at least where that purchaser has previously dealt with other land covered by the grantors' certificate of title.
Okay, let's change gears. Sometimes conveyancing is learned the hard way because the statutes you're working with, though seemingly addressing the issue at hand, really don't apply. How can that be, you may ask. Well, here's one for you. G.L.c. 184, §7 states that "[i]n a conveyance or devise to three or more persons, words creating a joint tenancy shall be construed as applying to all of the grantees, or devisees ." Pretty simple statute. Right? You'd think, based on the statute, that if a deed was to "John, Mary and Phillip, as joint tenants" and John died that Mary and Phillip would take his interest as surviving joint owners. But this would be true only if the deed to John, Mary and Phillip was given after 1973. A deed given before then to "John, Mary and Phillip, as joint tenants" would have created a joint tenancy only as between Mary and Phillip, with John taking title as a tenant in common. In other words, the quoted part of the statute is an amendment to the general laws and a response by the legislature to the decision in Fulton v. Katsowney, 341 Mass. 503, 174 N.E.2d 366, where the court acknowledged that as a matter of syntax the words "as joint tenants" could apply to either all of the grantees or the last two, but said "we are compelled to rely on the statutory presumption [favoring a tenancy in common] to resolve the problem of construction." The legislature modified this presumption by the 1973 amendment to the statute, but deeds prior to then would be governed by the decision in Fulton.
The Fulton decision raises a very important point. There are many examples of statutes that appear to resolve issues that might occur in title but which in fact do not resolve the matter only because the statutes were not effective when the issue occurred. "Checking the pocket part" is one thing, but it's just as important to review the statute's history to see if it's applicable to prior transactions.
These are just a few examples why conveyancing is sometimes necessarily learned the "hard way." There are many more!