Module 34: Property

Overview

Property entails items capable of being owned (i.e., the rights related to the ownership of things that society will recognize and enforce). Property is classified as real or personal, and as tangible or intangible. Protection of property and settlement of disputes concerning property is a major function of the legal system.

A. Distinctions between Real and Personal Property

B. Personal Property Can Be Acquired By

C. Bailments

D. Intellectual Property and Computer Technology Rights

E. Interests in Real Property

F. Contracts for Sale of Land

G. Types of Deeds

H. Executing a Deed

I. Recording a Deed

J. Title Insurance

K. Adverse Possession

L. Easement by Prescription

M. Mortgages

N. Lessor-Lessee

Key Terms

Multiple-Choice Questions

Multiple-Choice Answers and Explanations

Simulation

Simulation Solution

The candidate should be able to distinguish between personal and real property and between tenancies in common, joint tenancies, and tenancies by the entirety. The candidate also should understand that an instrument given primarily as security for real property is a mortgage and be able to distinguish between the legal results arising from “assumption” of a mortgage and taking “subject to” a mortgage. Other questions concerning mortgages require basic knowledge of the concepts of novation, suretyship, subrogation, and redemption.

Questions on deeds may distinguish between the legal implication of warranty deeds, quitclaim deeds, and special warranty deeds. Both mortgages and deeds should be publicly recorded, and the questions may require the candidate to identify a priority and constructive notice. The most important topics under lessor-lessee law are the Statute of Frauds, the effect of a sale of leased property, assignment, and subleasing. Before beginning the reading you should review the key terms at the end of the module.

A. Distinctions between Real and Personal Property

1. Real property (realty)—includes land and things attached to land in a relatively permanent manner
EXAMPLE
A building is erected on a parcel of land. Both the land and the building are real property.
a. Crops harvested are not real property because they are separate from land
b. Growing crops are generally part of land and therefore realty
(1) Growing crops can be sold separately from land in which case they are considered personal property
(a) True whether buyer or seller will sever growing crops from land
2. Personal property (personalty)—property not classified as real property or a fixture
a. May be either
(1) Tangible—subject to physical possession
EXAMPLE
Automobiles and books are tangible personal property.
(2) Intangible—not subject to physical possession but subject to legal ownership
EXAMPLE
Contractual rights to receive payment for automobiles sold and intellectual property, such as copyrights, are intangible personal property.
3. Fixture—item that was originally personal property but which is affixed to real property in relatively permanent fashion such that it is considered to be part of real property
a. Several factors are applied in determining whether personal property that has been attached to real property is a fixture
(1) Affixer’s objective intent as to whether property is to be regarded as personalty or realty
(2) Method and permanence of physical attachment to real property
(a) If item cannot be removed without material injury to real property, it is generally held that item has become part of realty (i.e., a fixture)
(3) Adaptability of use of personal property for purpose for which real property is used
(a) If personal property is necessary or beneficial to use of real property, more likely that item is fixture
(b) But if use or purpose of item is unusual for type of realty involved, it normally would be personal property
b. Trade fixture is a fixture installed by tenant in connection with business on leased premises
EXAMPLE
A tenant who is leasing premises for use as grocery store installs refrigeration unit on property. Refrigeration unit is integral to conducting of business for which tenant occupies premises and therefore qualifies as trade fixture.
(1) Trade fixtures remain personal property, giving tenant right to remove these items upon expiration of lease
(a) If item is so affixed to real property that removing it would cause substantial damage, then it is considered part of realty

B. Personal Property Can Be Acquired By

1. Gift—a present, voluntary transfer of property without consideration
a. Necessary elements
(1) Donative intent by donor
(2) Delivery
(3) Acceptance by donee (usually presumed)
b. Promise to make a gift is unenforceable because it is not a contract due to lack of consideration given by donee
c. Inter vivos gift is made while donor is living and is irrevocable once completed
d. Gift causa mortis is a conditional gift in contemplation of death and is automatically revoked if the donor does not die of impending illness or crisis causing gift
2. Will or intestate succession
a. Property passes under terms of will that is valid at death (i.e., dies testate)
b. If deceased has no valid will (i.e., dies intestate) then property passes under laws of state
3. Finding personal property
a. Mislaid property
(1) Happens when owner voluntarily puts the property somewhere but forgets to take it
(2) Finder does not obtain title to mislaid property
(a) Owner of premises becomes caretaker in case true owner of mislaid property comes back
b. Lost property
(1) Happens when owner involuntarily leaves property somewhere
(2) Finder has title to lost property which is valid against all parties except the true owner
EXAMPLE
A loses his watch. B finds it but C attempts to take it from B even though both know it is not C’s watch. B has the right to keep it from C.
c. Abandoned property
(1) Generally, finder has title valid against all parties including owner that abandoned property
NOW REVIEW MULTIPLE-CHOICE QUESTIONS 1 THROUGH 5

C. Bailments

1. Bailment exists when owner of personal property gives possession without giving title to another (bailee)—for example, dry cleaners or valet at restaurant—bailee has duty to either return personal property to bailor or to dispose of it as directed by owner
2. Requirements for creation
a. Delivery of personal property to bailee
b. Possession by bailee
c. Bailee has duty to return property or dispose of property as directed by owner
3. Types of bailments
a. For benefit of bailor (i.e., bailee takes care of bailor’s property)
b. For mutual benefit (i.e., bailee takes care of bailor’s property for a fee)
c. For benefit of bailee (i.e., bailor gratuitously allows bailee use of his/her property)
4. Bailee’s duty of care
a. Older view depended on the type of bailment (i.e., slight care if for benefit of bailor, ordinary care if for mutual benefit, extreme care if for benefit of bailee)
b. Now general rule is bailee must take reasonable care in light of the facts and circumstances
(1) Type of bailment is determined by given facts and the facts are used to determine what is reasonable care
(a) Bailee is absolutely liable for delivery to improper person
[1] But a receipt or ticket that is for identification of bailor entitles bailee to deliver bailed goods to holder of ticket without liability
c. Bailee has absolute liability for unauthorized use of property
d. Bailee usually cannot limit liability with exculpatory clauses
EXAMPLE
A coat check ticket often limits liability on its back side. If the ticket is to be just a means of identification, then the bailee’s liability is not limited. If the bailor is aware of the liability limitations statement, liability may be limited if reasonable.
5. Bailee has duty to use property as directed to fulfill purpose of bailment only
a. Liable to bailor for misuse
b. In cases of theft, destruction of property, or failing to return property, this constitutes tort of conversion
c. Bailee may normally limit liability for his/her negligence but not for intentional conduct
6. Bailee is not an agent of bailor, so bailor is not responsible for bailee’s actions
7. Bailments normally terminated by
a. Fulfillment of purpose of bailment
b. Agreement to terminate by both bailor and bailee
c. Bailee using property inappropriately
8. Common carriers are licensed to provide transportation for public
a. Liability is based on strict liability, so common carriers are liable for damage to goods being transported even if loss caused by third parties or by accidents
(1) Exceptions—common carrier not liable for
(a) Acts of shipper, such as improperly packing goods to be shipped
(b) Acts of God, such as earthquakes
(c) Acts of public enemies
(d) Loss because of inherent nature of goods
(2) Common carriers allowed to limit liability to dollar amount specified in contract

D. Intellectual Property and Computer Technology Rights

1. Two general but competing goals
a. Incentives to create products and services
(1) By granting property rights so creators have incentive to create and market
b. Provide public access to intellectual property and computer ideas and uses
(1) By limiting intellectual and computer technology rights so that public has access to this
2. Copyright law
a. Protects original works (e.g., literary, musical, or artistic works)
(1) Expressions of ideas are generally copyrightable—ideas may not by themselves be copyrighted
(2) Amendments to Copyright Act give added protection to computer hardware and computer software
b. Copyrights created after January 1, 1978, are valid for life of author plus seventy years
(1) Are valid for 95 years from publication date when owned by publishing house, or 120 years from creation date, whichever expires first
c. Registration of copyright not required because copyright begins when author puts expression in tangible form
(1) Registration, however, gives copyright owner, in case of infringement, rights to statutory damages and attorneys’ fees
d. Works published after March 1, 1989, no longer need copyright notice on them
e. Fair use doctrine allows use for limited purposes without violating copyright
(1) Examples include portions for comment, news reporting, research, or teaching
EXAMPLE
Professor hands out copies of a portion of copyrighted work to each member of the class. Note that the professor is allowed to share a portion of the copyrighted work, not the entire copyrighted work.
(2) Accessing a digital work is not protected by fair use doctrine
f. Consumer Software Copyright Act amends copyright law to include computer programs as creative works protected by federal copyright law
(1) Covers not only portions of computer program readable by humans but also binary language portions normally read by computer
(2) Covers general items in program such as its basic structure and organizations
g. Remedies include stated statutory damages or actual damages including profits attributed to infringement of copyright—injunctions also allowed
(1) Higher damages can be statutorily assessed for willful infringement
h. Criminal penalties of fines and imprisonment are allowed for willful infringement
i. No Electronic Theft Act (NET Act)
(1) Act criminalizes copyright infringement over Internet whether or not for financial gain where retail value of copyrighted works exceeds $1,000
(2) Provides for imprisonment and fines
3. Patent Law
a. Covers machines, processes, art, methods, composition of matter, new and useful improvements including genetically engineered plants or animals
b. Mere ideas are not covered
(1) But practical applications may be
(2) Cyber business plans can be patented when they use a practical application of formulas, calculations, or algorithms because they produce results that are useful, tangible, and concrete even though some have argued these cyber plans are intangible.
c. Invention must be novel, useful, and not obvious
d. Patents administered by US Patent and Trademark Office
(1) Inventor may not obtain patent if invention was on sale or in public use in US at least one year before attempt to obtain patent
e. Generally, patents are valid for twenty years from when patent application was filed
(1) By treaties, patents generally receive international protection for twenty years
(2) Design patents are valid for fourteen years from date of issuance of patent
f. Owner of patent must mark it using word patent to give notice to others
(1) May also use “Pat” abbreviation
g. US gives patent protection to first inventor to invent rather than first to file for that patent
(1) Most countries give protection to the first to file the patent
h. Earlier views of computer software often categorized it as based on ideas and thus not patentable—more recent authority and court decisions protect software and Internet business methods as patentable
(1) Financial and business models used over the Internet can also be patented
EXAMPLE
Pratt Company patented a computer program that used mathematical formulas to constantly improve a curing process for synthetic rubber upon receiving feedback in the process. This computer program was patentable because Pratt did not attempt to patent the mathematical formula to exclude others from using the formula but patented the process.
EXAMPLE
River.com Inc. receives a patent for the company storing customers’ shipping (and billing information) with a one-click ordering system to reduce customers’ need to reenter data on future orders.
EXAMPLE
Dual Softie, Inc. receives a patent that allows purchasers of automobiles over Internet to select options they want on the auto.
EXAMPLE
Silvernet, Inc. patents a system that pays individuals who respond to online surveys.
i. Even when patent issued by US Patent Trade Office (PTO), PTO may reexamine and reject patent
(1) Patent may be overturned or narrowed in case brought to court
(2) Unlike earlier, computer-related patents focus now on whether they are novel and nonobvious rather than on whether they can be patented at all
j. Patent law is exclusively federal law
(1) There is no state patent law
k. Remedies include injunctions, damages including lost profits traceable to infringement, or assessment of reasonable royalties
(1) If infringement is willful, inventor may be awarded treble damages and require infringer to also pay attorney’s fees
l. US Supreme Court recently affirmed important part of patent law providing that one cannot escape liability for patent infringement by making only insubstantial changes to a patent and attempting to claim it to be a new patent
m. Paris convention—allows patent protection in many foreign countries
(1) Most comprehensive agreement between nations involving intellectual property
(2) Signed by nearly all industrialized countries and by many developing countries
(3) Generally, allows a one-year grace period for inventors to file in other countries once inventor files for patent protection in first country
4. Trade Secrets Law
a. Economic Espionage Act makes it federal crime to use trade secrets
(1) Trade secrets include such information as financial, engineering, scientific, technical, software programs, or codes
(a) Also protects processes used by company
(2) Federal law helps protect against computer hackers who steal trade secrets such as data bases and computer lists.
b. Alternative to protection by copyright or patent
c. Protects formulas, patterns, devices, or compilations of information that give business an advantage over competitors
(1) Must be secret that others have difficulty in acquiring except by improper means
(2) Owner must take reasonable steps to guard trade secret
(3) Can cover computer hardware and software
d. Remedies for violations include breach of contract, breach of fiduciary duties, wrongful appropriation of trade secret, injunction, theft, and espionage
(1) Civil law as well as criminal law may be used
e. Trade secret protection by law may be lost if
(1) Owner of trade secret fails to take steps to keep it secret, or
(2) Other person independently discovers what was subject of trade secret
f. Methods to help protect trade secret include
(1) Licensing of software
(a) Prohibit copying except for backup copies
(2) Provide in license that it is terminated for any breach of confidentiality
(3) Sell software in object code instead of source code
(4) Have employees and buyers sign confidentiality agreements
5. Semiconductor Chip Protection Act
a. Amends copyright laws
b. Prohibits taking apart chips to copy them
(1) Allows such act if used to create new chip rather than copy
(2) Not prohibiting copying if design embodies the unoriginal or commonplace
c. Protection is for ten years from time of registration or first commercial application, whichever is first
d. Permits civil recovery and penalties up to $250,000 for chip piracy
e. Reverse engineering of chips allowed if it creates some new innovation
6. Federal Counterfeit Access Device and Computer Fraud and Abuse Act has criminalized many intentional, unauthorized uses of computer to
a. Obtain classified information to hurt US
b. Collect credit or financial information protected by privacy laws
EXAMPLE
Obtaining credit card limits and credit card numbers by accessing credit card accounts.
c. Modify material financial data in computers
d. Destroy or alter computer data to hurt rightful users
EXAMPLE
A person intentionally transfers a computer virus to a company computer.
7. Trademarks under Lanham Act
a. Purposes
(1) To provide identification symbol for company’s product
(2) To guarantee consistent quality of all goods from same source
(3) Advertising
b. Protection for trademark for distinctive graphics, words, shapes, packaging, or sounds
EXAMPLE
Coca-Cola has a trademark for its distinctive bottle.
(1) Colors may be trademarked now if they are associated with particular goods such that those colors are identified with that brand
c. Marks normally need to be distinctive to be protected
(1) Secondary meaning of things not inherently distinctive can develop to make them protectable
EXAMPLE
Microsoft registered “Windows” as a trademark when “Windows” acquired its secondary meaning.
EXAMPLE
Windows store cannot be used as a trademark because it sells windows to put on homes and is thus generic rather than distinctive.
d. Generic words like software cannot be protected
(1) Many words that were once trademarks have become generic so are no longer protectable
EXAMPLE
Escalator was originally a brand name but is no longer protectable due to its generic use. Other examples are Yo-Yo and Dry Ice.
EXAMPLE
Xerox takes out advertisements explaining that Xerox is not a verb, but instead say “copy” the document. Xerox is trying to protect its trademark by trying not to let the name grow into common usage.
e. Trademark rights in US are obtained initially by its use in commerce
(1) For distinctive marks, generally first seller to use trademark owns it
(2) Company can register trademark
(a) Although this is not required, provides constructive notice to others of claim of trademark
(3) Online company may register domain name as trademark with US Patent and Trademark Office
(a) Various companies may use same trademark for different types of goods or services but only one company may register the domain name
EXAMPLE
Both Star Fences Inc. and Star Insurance Company wish to use Star.com. Only one may do so.
(b) Cybersquatting is registering sites and domain names that are confusingly or deceptively similar to other existing trademarks
[1] Congress passed the Federal Anticybersquatting Consumer Protection Act to help stop cybersquatting and to provide clearer standards of proof and remedies for this activity such as injunctions to stop the activity as well as money damages
f. Loss of trademark rights
(1) Actual abandonment when not used in ordinary course of business
(a) Presumption of abandonment if not used for three years unless owner can prove intent to use trademark
(2) Constructive abandonment—Company allows trademark to lose its distinctiveness by frequent and common usage
g. Trademark infringement
(1) Can infringe on trademark whether registered or not
(2) Proof of infringement
(a) Establish trademark is valid—federally registered mark is prima facie valid
(b) Priority of usage
(c) Violation against trademark if similarities will likely cause confusion in minds of prospective or actual purchasers
(3) 1995 Trademark Dilution Act expands the Lanham Act to protect a weakening of a famous mark’s ability to distinguish goods. Prior law required the infringing trademark to cause confusion as to the source of the product.
h. Remedies for infringement
(1) Injunction against use
(2) Lost profits caused by confusion
(3) Attorneys’ fees in some situations
8. Other symbols under Lanham Act
a. Certification mark
(1) Used to certify characteristics such as origin by geographical location, origin by organization, mode of manufacture.
EXAMPLE
Product XYZ receives the Good Housekeeping Seal of Approval.
b. Collective mark
(1) Used to identify that product or service is provided by certain collective group, union, or fraternal society.
c. Service mark
(1) Used to identify that services come from certain company or person
EXAMPLE
All of the shops of a group of shops called The Green Roof Plaza have similar style of roofs painted in the same shade of green.
d. Similar to trademarks, these additional three types of trade symbols need to be distinctive and not deceptive so that prospective customers do not confuse these products or services with others
(1) Registration is not required but advisable because it provides federal protection for ten years
(a) Renewable for as many additional ten-year periods as desired
9. Invasion of Privacy—Increased computer use puts on more pressure
a. Computer Matching and Privacy Act
(1) Regulates computer systems used to determine eligibility for various government programs such as student financial aid
b. Right to Financial Privacy Act
(1) Restricts government access to financial institution records without customer approval
c. Family Educational Rights and Privacy Act
(1) Grants adult students and parents of minors access and right to correct records at institutions of higher learning
10. Palming off results when one company sells its product by confusing buyers and leading them to believe they are purchasing another company’s product
a. Proof of palming off requires that there is likely to be confusion due to the appearance or name of the competing product
11. Counterfeit Access Device and Computer Fraud and Abuse Act
a. Crime to obtain financial institution’s financial records
b. Crime to use cards, codes, counterfeit devices, etc. to obtain valuable items or to transfer funds without authorization
12. Information Infrastructure Protection Act
a. Helps protect individuals or companies from another’s unauthorized use of or access to computer’s data
(1) Law encompasses computer hackers, transmitting computer viruses or worms, etc.
13. Identity Theft and Assumption Deterrence Act is federal law that makes identity theft and identify fraud felonies
a. Act also helps victims of identity theft by having Federal Trade Commission aid them to erase effects of identity theft and to aid them to restore their credit
14. Digital Millennium Copyright Act
a. Federal law based on treaties with other countries to minimize pirating and distribution of copyrighted works
b. Provides civil and criminal penalties against those that circumvent antipiracy protections or manufacture or sell such equipment to allow circumvention
(1) Also provides civil and criminal penalties for unauthorized access to copyrighted digital works by circumventing technology that protects such intellectual property
(a) It is not required that accessed information be misused
(b) Mere access is sufficient under this Act
(2) This Act also modifies fair use doctrine of copyright law for digital protected works so that it is now illegal to merely access these works by circumventing the encryption technology that protects these
(a) Fair use doctrine is unchanged for nondigital works so that misuse, not mere access of copyrighted works is required
c. Internet Service Provider (ISP) is generally not liable for customers’ copyright infringement unless ISP became aware of infringement and failed to correct problem
15. Uniform Computer Information Transactions Act (UCITA) requires that the following be in writing:
a. Contracts for licensing of information rights for over $5,000
b. Contracts for licensing of information services that cannot be performed within one year
c. User agrees to contract by clicking, for example, on “I agree prompt button”
16. Federal Telecommunications Act passed
a. To increase competition in telecommunications market
b. Preempts any state or local government laws that have effect of minimizing or eliminating competition in telecommunications market
(1) Such as county laws that prohibit ability of company to provide telecommunications service
17. Online dispute resolution is becoming increasingly used to resolve disputes
a. Advantages include low cost, fast communication, and often no need to bring in third parties
b. Disadvantage includes hard to enforce settlement because no court or sheriff involved
18. Internet Treaties
a. Grants between many signing nations providing copyright protection for computer programs, producers’ rights, performers’ rights over the Internet
(1) Includes rental copies, transmissions over satellite, encrypted signals, and any type of media
NOW REVIEW MULTIPLE-CHOICE QUESTIONS 6 THROUGH 13

E. Interests in Real Property

1. Present interests
a. Fee simple absolute
(1) Highest estate in law (has the most ownership rights)
(2) May be transferred inter vivos (while living), by intestate succession (without will), or by will (testate at death)
(3) May be subject to mortgages, state laws, etc.
EXAMPLE
Most private residences are fee simple absolute estates although they are commonly subject to mortgage.
b. Fee simple defeasible
(1) Fee simple determinable—upon the happening of the stated event the estate automatically reverts to the grantor
EXAMPLE
Conveyance to the holder of an interest was, “to A as long as A uses it for church purposes.” The interest will revert back to the grantor or his heirs if the property is not used for church purposes.
(2) Fee simple subject to condition subsequent—upon the happening of the stated event the grantor must take affirmative action to divest the grantee of the estate
EXAMPLE
Conveyance to the holder of the interest was “to A, but if liquor is ever served on the premises, the grantor has right to enter the premises.” The grantor has power of termination so as to repossess the premises.
c. Life interest (life estate)—an interest whose duration is usually measured by the life of the holder but may be measured by lives of others
EXAMPLE
Conveyance of land, “to A so long as she shall live.”
(1) Upon termination (death), property reverts to grantor or grantor’s heirs, or to a named remainderman
(2) Usual life interest can be transferred by deed only (i.e., not by a will because it ends on death)
(3) Holder of a life interest (life tenant) is entitled to ordinary use and profits of land but may not commit waste (injure interests of remainderman)
(a) Must maintain property (in reasonable state of repair)
(b) May not misuse property
d. Leaseholds—see Lessor-Lessee at end of this module, section N.
2. Future interest (holder of this interest has right to or possibility of possession in the future)
a. Reversion—future interest reverts back to transferor (or his/her heirs) at end of transferee’s estate
(1) Usually kept when conveying a life interest or an interest for a definite period of time
EXAMPLE
X conveys, “to Y for life” or “to Y for ten years.” X has a reversion.
b. Remainder—future interest is in a third party at the end of transferee’s estate
EXAMPLE
X conveys, “to Y for life, upon Y’s death to Z and her heirs.” Z has a remainder.
3. Concurrent interest—two or more persons (cotenants) have undivided interests and concurrent possessory rights in real or personal property—each has a nonexclusive right to possess whole property
a. Tenancy in common
(1) A concurrent interest with no right of survivorship (interest passes to heirs, donee, or purchaser)
EXAMPLE
A and B each own 1/2 of Greenacre as tenants in common. If B dies, then A still owns 1/2 and B’s heirs own the other half.
(2) Unless stated otherwise, multiple grantees are presumed to be tenants in common
(3) Tenant in common may convey individual interest in the whole but cannot convey a specific portion of property
(a) Unless there is a judicial partition to split up ownership
[1] Creditors may sue to compel a partition to satisfy individual’s debts
b. Joint tenancy
(1) A concurrent interest with all rights of ownership going to the surviving joint tenants (i.e., have rights of survivorship)
(a) To create a joint tenancy, all of following unities are required: time, title, interest, and possession
(b) Cannot be transferred by will because upon death, other cotenants own it
(c) Corporation may not be joint tenant
EXAMPLE
A and B each own 1/2 of Redacre as joint tenants. If B dies, A owns all of Redacre because of her right of survivorship. B’s heirs do not receive any interest.
(2) If rights in property conveyed without consent of others, new owner becomes a tenant in common rather than joint tenant; remaining cotenants are still joint tenants
EXAMPLE
A, B, and C are joint tenants of Greenacre. A sells his interest to D without the consent of B and C. D is a tenant in common with a one-third interest in the whole. B and C are still joint tenants (with the right of survivorship) each having a one-third undivided interest.
c. Tenancy by the entirety
(1) Joint interest held by husband and wife; must be legally married to qualify for tenancy by the entirety.
(2) To transfer, both must convey
(3) Each spouse has a right of survivorship
(4) Divorce creates a tenancy in common
(5) Creditors of one spouse cannot place a lien or satisfy a judgment against property held in this manner. The creditor must be a creditor of both spouses.
4. Nonpossessory interests in land
a. Easement is right to enter another’s land and use it in limited way. Very common for utility companies, for example, to have easements on private property for the benefit of all; usually provided for when the property is divided.
EXAMPLE
A is granted an easement to drive over a certain segment of B’s land.
(1) Methods of creation
(a) Express grant in deed
(b) Express reservation in deed
EXAMPLE
S sells B some land whereby in the deed S reserves an easement to walk across the land.
(c) By necessity
EXAMPLE
A owns a piece of land that blocks B’s access to any public road. B has the right to use A’s land for access to the public road.
b. Profit is right to enter another’s land and remove items such as trees, grass, or gravel
(1) Profits may be created by grant or by reservation
NOW REVIEW MULTIPLE-CHOICE QUESTIONS 14 THROUGH 21

F. Contracts for Sale of Land

1. Generally precede transfers of land. Often includes escrows.
EXAMPLE
An earnest money agreement. The purchaser puts the money down to show his seriousness while he investigates the title and arranges for a mortgage.
a. Generally, agreement must
(1) Be in writing and signed by party to be bound
(a) To satisfy Statute of Frauds under contract law
(2) Identify land and parties
(3) Identify purpose
(4) Contain terms or promises
(5) Contain purchase price
b. Assignable unless prohibited in contract
2. If not expressed, there is an implied promise that seller will provide a marketable title (implied warranty of marketability)
a. A marketable title is one reasonably free from doubt. Does not contain such defects as breaks in chain of title, outstanding liens, or defective instruments in past (chain of title).
(1) Zoning restrictions do not make a title unmarketable
b. Agreement may provide for marketable or “insurable” title
(1) Insurable title is one that a title insurance company will insure against defects, liens, and invalidity
c. If title is not marketable, purchaser may
(1) Rescind and recover any down payment
(2) Sue for damages
(3) Sue for specific performance with a reduction in price
3. Risk of loss before deed is conveyed (e.g., if house burns down, who bears the burden?)
a. General rule is purchaser bears the risk of loss, subject to terms of the contract
b. Courts may look to who has the most ownership rights and benefits (normally buyer)
c. Either party can insure against risk of loss

G. Types of Deeds

1. Warranty deeds contain the following covenants (unconditional promises) by grantor
a. Grantor has title and right to convey it
b. Free from encumbrances except as disclosed in the deed
EXAMPLE
O conveys by warranty deed Blackacre to P. There is a mortgage still unpaid on Blackacre. Unless O discloses this mortgage to P, O has violated the covenant that the deed be free from encumbrances.
c. Quiet enjoyment—neither grantor nor third party with rightful claim will disturb grantee’s possession
2. Bargain and sale deed (grant deeds)
a. Generally, only covenants that grantor has done nothing to impair title (e.g., s/he has not created any encumbrances)
b. Does not warrant against prior (before grantor’s ownership) impairments
3. Quitclaim deed conveys only whatever interest in land the grantor has. No warranty of title is made by grantor.
a. It is insurable, recordable, and mortgagable as with any other deed

H. Executing a Deed

1. Deed must have description of the real estate
a. Purchase price generally not necessary in deed
2. There must be delivery for deed to be effective; there must be an intent on part of grantor to pass title (convey) to grantee
a. Possession of the deed by grantee raises a presumption (rebuttable) of delivery
b. A recorded deed raises a presumption (rebuttable) of delivery
c. A deed given to a third party to give to grantee upon performance of a condition is a delivery in escrow
(1) Escrow agent—intermediary between the two parties who holds deed until grantee pays, then gives deed to grantee and money to grantor
d. Destruction of deed does not destroy title
3. Deed must identify the buyer and seller
4. Must have the seller’s signature; buyers signature is not required

I. Recording a Deed

1. Gives constructive notice to the world of grantee’s ownership (this is important)
a. Protects grantee (new owner) against subsequent purchasers
EXAMPLE
X sells land to Y. Y records his deed. Later X sells land to Z. Z loses against Y because Y recorded the deed giving constructive notice of the prior sale.
(1) However, deed is valid between immediate parties without recording
b. Most recording statutes provide that subsequent purchaser (bona fide) who takes without notice of the first sale has priority
(1) Under a notice-type statute, a subsequent bona fide (good-faith) purchaser, whether s/he records or not, wins over previous purchaser who did not record before that subsequent purchase
EXAMPLE
A sells the same piece of property in a state having a notice-type statute to B and C in that order. B did not record the purchase. C is unaware of the sale to B and is thus a bona fide purchaser. C defeats B. Note that C should record the purchase or run the risk of another bona fide purchaser (i.e., D defeating C’s claim).
(2) Under a race-notice type (notice-race) statute, the subsequent bona fide purchaser wins over a previous purchaser only if s/he also records first (i.e., a “race” to file first) (Historically the Examiners have tested the notice-race statute most frequently)
EXAMPLE
X sells some property to Y and then to Z, a good-faith purchaser. After the sale to Z, Y records the purchase and then Z records the purchase. Although Y wins in a state having a race-notice statute, Z wins in a state having a notice-type statute.
EXAMPLE
Same as above except that Z does not record, both results above are not affected.
(3) Under a race statute, the first to record deed wins
c. Notice refers to actual knowledge of prior sale or constructive knowledge (i.e., one is deemed to be aware of what is filed in records)
d. To be a purchaser, one must give value that does not include antecedent debts

J. Title Insurance

1. Generally used to insure that title is good and to cover the warranties by seller
a. Not required if contract does not require it
2. Without title insurance, purchaser’s only recourse is against grantor and s/he may not be able to satisfy the damages
a. Standard insurance policies generally insure against all defects of record and defects grantee may be aware of, but not defects disclosed by survey and physical inspection of premises
b. Title insurance company is liable for any damages or expenses if there is a title defect or encumbrance that is insured against
(1) Certain defects are not insured by the title policy
(a) These exceptions must be shown on face of policy
c. Title insurance does not pass to subsequent purchasers

K. Adverse Possession

1. Possessor of land who was not owner may acquire title if s/he holds it for the statutory period
a. The statutory period is the running of the statute of limitations. Varies by state from five to twenty years.
b. The statute begins to run upon the taking of possession
c. True owner must commence legal action before statute runs or adverse possessor obtains title
d. Successive possessors may tack (cumulate required time together)
(1) Each possessor must transfer to the other. One cannot abandon or statute begins over again for the next possessor.
e. True owner of a future interest (e.g., a remainder, is not affected by adverse possession)
EXAMPLE
X dies and leaves his property to A for life, remainder to B. A pays little attention to the property and a third party acquires it by adverse possession. When A dies, B is entitled to the property regardless of the adverse possession but the statute starts running against B.
2. Necessary elements
a. Open and notorious possession
(1) Means type of possession that would give reasonable notice to owner
b. Hostile possession
(1) Must indicate intentions of ownership
(a) Does not occur when possession started permissively or as cotenants
(b) Not satisfied if possessor acknowledges other’s ownership
(2) Color of title satisfies this requirement. When possession is taken under good-faith belief in a defective instrument or deed purporting to convey the land.
c. Actual possession
(1) Possession of land consistent with its normal use (e.g., farm land is being farmed)
d. Continuous possession
(1) Need not be constant, but possession as normally used
e. Exclusive possession
(1) Possession to exclusion of all others

L. Easement by Prescription

1. Person obtains right to use another’s land (i.e., easement) in way similar to adverse possession
2. Same elements are used as for adverse possession except for exclusive possession—state laws require several years to obtain this
EXAMPLE
X cuts across Y’s land for several years in such a way that she meets all of the same requirements as those needed for adverse possession except for exclusive possession. X obtains an easement to use the path even if Y later tries to stop X.
NOW REVIEW MULTIPLE-CHOICE QUESTIONS 22 THROUGH 31

M. Mortgages

1. Lien on real property to secure payment of loan
a. Mortgage is an interest in real property and thus must satisfy Statute of Frauds
(1) Must be in writing and signed by party to be charged
(a) Party to be charged in this case is mortgagor (i.e., party taking out mortgage, the borrower)
(2) Must include description of property and debt to be incurred
b. Debt is usually evidenced by a promissory note
c. Mortgage must be delivered to mortgagee (i.e., lender)
d. Mortgage may be given to secure future advances
e. Purchase-money mortgage is created when seller takes a mortgage from buyer at time of sale
(1) Or lender furnishes money with which property is purchased
2. Mortgage may be recorded and receives the same benefits as recording a deed or recording an assignment of contract
a. Gives constructive notice of the mortgage
(1) But mortgage is effective between mortgagor and mortgagee and third parties, who have actual notice, even without recording
b. Protects mortgagee against subsequent mortgagees, purchasers, or other takers
c. Recording statutes for mortgages are like those used for recording deeds
(1) Under a notice-type statute, a subsequent good-faith mortgagee has priority over previous mortgagee who did not file
(a) This is true whether subsequent mortgagee files or not; but of course if s/he does not file, a subsequent good-faith mortgagee will have priority.
EXAMPLE
Banks A, B, and C, in that order, grant a mortgage to a property owner. None of these record the mortgage and none knows of the others. Between A and B, B has priority. However, C has priority over B.
EXAMPLE
Same facts as before, however, B does record before C grants the mortgage. B has priority over A again. B also has priority over C because now C has constructive notice of B and thus has lower priority.
(b) Notice is either actual notice or constructive notice based on recording
(2) Under a race-notice type (notice-race) statute, the subsequent good-faith mortgagee wins over a previous mortgagee only if s/he also records first
(3) Under a race statute, the first mortgagee to record mortgage wins
(4) First mortgage to have priority is satisfied in full (upon default) before next mortgage to have priority is satisfied
(a) Second mortgagee can require first mortgagee to resort to other property for payment if first mortgagee has other property available as security
3. When mortgaged property is sold the buyer may
a. Assume the mortgage (if the mortgagee allows)
(1) If “assumed,” the buyer becomes personally liable (mortgage holder is third-party beneficiary)
(2) Seller remains liable (unless released by mortgagee by a novation)
(a) Mortgagee may hold either seller or buyer liable on mortgage
(3) Normally the mortgagee’s consent is needed due to “due on sale clauses”
(a) Terms of mortgage may permit acceleration of principal or renegotiation of interest rate upon transfer of the property
b. Take subject to the mortgage
(1) If buyer takes “subject to” then buyer accepts no liability for mortgage and seller is still primarily liable
(2) Mortgagee may still foreclose on the property even in the hands of buyer
(a) Buyer may pay mortgage if s/he chooses to avoid foreclosure
(3) Mortgagee’s consent to allow buyer to take subject to the mortgage is not needed unless stipulated in mortgage
c. Novation—occurs when purchaser assumes mortgage and mortgagee (lender) releases in writing the seller from the mortgage
EXAMPLE
O has mortgaged Redacre. He sells Redacre to T. T agrees to assume mortgage and mortgagee bank agrees in writing to substitute T as the only liable party in place of O. Because of this novation, O is no longer liable on the mortgage.
4. Rights of parties
a. Mortgagor (owner, debtor) retains possession and right to use land
(1) May transfer land encumbered by mortgage
b. Mortgagee (creditor) has a lien on the land
(1) Even if mortgagor transfers land, it is still subject to the mortgage if it has been properly recorded
c. Mortgagee has right to assign mortgage to third party without mortgagors’ consent
d. Upon mortgagor’s default, mortgagee may assign mortgage to third parties or mortgagee may foreclose on the land
(1) Foreclosure requires judicial action that directs foreclosure sale
(a) Court will refuse to confirm sale if price is so low as to raise a presumption of unfairness
(b) However, court will not refuse to confirm sale merely because higher price might have been received at a later time
(2) Mortgagor usually can save real estate (redeem the property) by use of equity of redemption
(a) Pays interest, debt, and expenses
(b) Exists until foreclosure sale
(c) Cannot be curtailed by prior agreement
(3) After foreclosure sale debtor has right of redemption if state law grants statutory right of redemption (Examiners will tell you if it is a “right of redemption” jurisdiction)
(a) Affords mortgagor one last chance to redeem property
(b) Pays off loan within statutory period
(4) If mortgagee forecloses and sells property and mortgagor does not use equity of redemption or right of redemption
(a) Mortgagee must return any excess proceeds from sale to mortgagor
1] Equity above balance due does not give right to mortgagor to retain possession of property
(b) If proceeds from sale are insufficient to pay note, mortgagor is still indebted to the mortgagee for deficiency
1] Grantee of the mortgagor who assumed mortgage would also be liable for deficiency, but one who took subject to the mortgage would not be personally liable
5. Mortgage lenders are regulated by Real Estate Settlement Procedures Act (RESPA)
a. Provides home buyers with extensive information about settlement process and helps protect them from high settlement fees
6. Deed of trust—also a nonpossessory lien on real property to secure a debt
a. Like a mortgage, debtor retains possession of land and creditor has a lien on it
b. Legal title is given to a trustee to hold
(1) Upon default, trustee may sell the land for the benefit of creditor
7. Sale on contract
a. Unlike a mortgage or a deed of trust, the seller retains title to property
b. Purchaser takes possession and makes payments on the contract
c. Purchaser gets title when debt fully paid
8. When mortgaged property is sold or destroyed, the proceeds from sale or insurance go to mortgagee with highest priority until it is completely paid, then the proceeds, if any, go to any mortgagees or other interest holders, with the next highest priority, etc.
NOW REVIEW MULTIPLE-CHOICE QUESTIONS 32 THROUGH 39

N. Lessor-Lessee

1. A lease is a contract and a conveyance
a. Contract is the primary source of rights and duties
b. Contract must contain essential terms including description of leased premises
c. May be oral if less than one year; the Statute of Frauds applies under the one year rule not the real estate provision.
2. Types of leaseholds
a. Periodic tenancy
(1) Lease is for a fixed time such as a month or year but it continues from period to period until proper notice of termination
(2) Notice of termination normally must be given in the same amount of time as rent or tenancy period (i.e., if tenancy is from month to month then the landlord or tenant usually must give at least one month’s notice)
b. Tenancy for a term (also called tenancy for years)
(1) Lease is for a fixed amount of time (e.g., lease of two years or six months)
(2) Ends automatically at date of termination
c. Tenancy at sufferance
(1) Created when tenant remains in property after lease expires
(2) Landlord has option of treating tenant as trespasser and ejecting him/her or treating him/her as tenant and collecting rent
d. Tenancy at will
(1) Property is leased for indefinite period of time
(2) Either party may terminate lease at will
3. Lessor covenants (promises) and tenant’s rights
a. Generally, lessor’s covenants are independent of lessee’s rights; therefore, lessor’s breach does not give lessee right to breach
b. Right to possession—lessor makes premises available to lessee
(1) Residential lease for real estate entitles tenant to exclusive possession of property during period of lease unless otherwise agreed in lease
c. Quiet enjoyment—neither lessor nor a third party with a valid claim will evict lessee unless tenant has breached lease contract
d. Fitness for use—premises are fit for human occupation (i.e., warranty of habitability)
e. In general, if premises are destroyed through no fault of either party, then contract is terminated
EXAMPLE
Landlord’s building is destroyed by a sudden flood. Tenant cannot hold landlord liable for loss of use of building.
f. Lessee may assign or sublease unless prohibited or restricted in lease
(1) Assignment is transfer by lessee of his/her entire interest reserving no rights
(a) Assignee is in privity of contract with lessor and lessor may proceed against him/her for rent and breaches under lease agreement
(b) Assignor (lessee) is still liable to lessor unless there is a novation or release
(c) Lease may have clause that requires consent of lessor for subleases
[1] In which case, consent to each individual sublease is required
[2] Lack of consent makes sublease voidable
(d) Clause prohibiting sublease does not prohibit assignment
(2) A sublease is the transfer by lessee of less than his/her entire interest (e.g., for three months during summer, then lessee returns to it in the fall)
(a) Lessee (sublessor) is still liable on lease
(b) Lessor has no privity with sublessee and can take no action against him/her for rent, but certain restrictions of original lease run with the land and are enforceable against sublessee
(c) Sublessee can assume obligations in sublease and be liable to pay landlord
(d) Clause prohibiting assignment does not prohibit sublease
g. Subject to lease terms, trade fixtures attached by lessee may be removed if can be removed without substantial damage to premises
h. Tenant can use premises for any legal purpose unless lease restricts
4. Lessee’s duties and lessor’s rights
a. Rent—due at end of term or period of tenancy unless otherwise agreed in lease
(1) No right to withhold rent even if lessor is in breach (unless so provided by lease or by statute)
(2) Nonpayment gives lessor right to sue for it or to bring an eviction suit or both
b. Lessee has obligation to make ordinary repairs. Lease or statute may make lessor liable.
(1) Structural repairs are lessor’s duty
c. If tenant wrongfully retains possession after termination, lessor may
(1) Evict lessee, or
(2) Treat as holdover tenant and charge with fair rental value, or
(3) Tenancy becomes one of period-to-period, and lessee is liable for rent the same as in expired lease
5. Termination
a. Expiration of lease
b. Proper notice in a tenancy from period-to-period
c. Surrender by lessee and acceptance by lessor
d. Death of lessee terminates lease except for a lease for a period of years
(1) Death of lessor generally does not terminate lease
e. Eviction
(1) Actual eviction—ousting directly
(2) Constructive eviction—allowing conditions which make property unusable if lessor is liable for condition of premises
f. Transfer of property does not affect tenancy
(1) New owner cannot rightfully terminate lease unless old owner could have (e.g., breach by tenant)
(a) However, if tenant purchases property then lease terminates
NOW REVIEW MULTIPLE-CHOICE QUESTIONS 40 THROUGH 43

KEY TERMS

Bailee. A party who is entrusted to hold the goods of another person.

Bailment. When a party entrusts goods to another party.

Bailor. The party who gives his/her own goods to another to hold.

Common carrier. A party who transports goods for hire and is strictly liable for any damage to those goods. Damages are generally limited by statute though.

Copyright. Intellectual property right that provides protection for the original expression of an idea.

Deed. A written instrument that transfers ownership of real property.

Easement. A legal right to use another’s property in a specific manner.

Fair use doctrine. Allows copyrighted material to be used without paying royalties. Use is generally limited to educational, news and other not-for-profit purposes.

Joint tenancy. A type of co-ownership of real property with the right of survivorship.

Landlord. The owner of the leased premises.

Lease. A contract used to rent real property for a period of time.

Mortgage. A security interest in real property.

Mortgagee. The party with the security interest in the real property (the lender).

Mortgagor. The party who uses his/her real property as collateral to secure a loan (the borrower).

Notice statute. A law that applies to the recording of interests in real property. Notice states allow parties who take an interest in real property without notice to have a superior interest than a party who had an earlier interest.

Notice-race statute. A law that applies to the recording of interests in real property. Notice-race states allow parties who take an interest in real property without notice to have a superior interest than a party who had an earlier interest if the subsequent party records before the party with the earlier interest.

Patent. An intellectual property right that gives an inventor the exclusive right to use the invention.

Race statute. A law that applies to the recording of interests in real property. Race statutes give the superior interest to whichever party records its interest first.

Real estate contract. A written instrument that contains the terms of the bargain to transfer real property.

Real property. Land, the interests in land, and the permanent structures attached to the land.

Recording. The filing of property interests with the appropriate local government that allows the party who records to protect its interest against subsequent parties.

Tenancy by the entirety. A type of co-ownership of real property that is only available to married couples. Helps to protect the property from claims of individual creditors.

Tenant. The party who rents the rental property and acquires a right to use the premises.

Tenants in common. A type of co-ownership of real property that does not include the right of survivorship.

Title insurance. Insures against defects of title of the real property.

Trademark. A distinctive mark, word, symbol, design, etc. that a manufacturer/seller uses to identify its goods.

Trade secrets. Information that a business does not want disclosed to the public. Business must take extraordinary measures to keep the information private.

Multiple-Choice Questions (1–43)

A. Distinctions between Real and Personal Property

1. Which of the following items is tangible personal property?

a. Share of stock.

b. Trademark.

c. Promissory note.

d. Oil painting.

2. What is an example of property that can be considered either personal property or real property?

a. Air rights.

b. Mineral rights.

c. Harvested crops.

d. Growing crops.

B. Personal Property

3. Which of the following factors help determine whether an item of personal property is a fixture?

I. Degree of the item’s attachment to the property.

II. Intent of the person who had the item installed.

a. I only.

b. II only.

c. Both I and II.

d. Neither I nor II.

4. Getty owned some personal property which was later found by Morris. Both Getty and Morris are claiming title to this personal property. In which of the following cases will Getty win over Morris?

I. Getty had mislaid the property and had forgotten to take it with him.

II. Getty had lost the property out of his van while driving down a road.

III. Getty had abandoned the property but later changed his mind after Morris found it.

a. I only.

b. II only.

c. I and II only.

d. I, II, and III.

5. Rand discarded an old rocking chair. Stone found the rocking chair and, realizing that it was valuable, took it home. Later, Rand learned that Stone had the rocking chair and wanted it back. Rand subsequently put a provision in his will that his married daughter Walters will get the rocking chair. Who has the actual title to the rocking chair?

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C. Bailments

6. Which of the following standards of liability best characterizes the obligation of a common carrier in a bailment relationship?

a. Reasonable care.

b. Gross negligence.

c. Shared liability.

d. Strict liability.

D. Intellectual Property and Computer Technology Rights

7. Multicomp Company wishes to protect software it has developed. It is concerned about others copying this software and taking away some of its profits. Which of the following is true concerning the current state of the law?

a. Computer software is generally copyrightable.

b. To receive protection, the software must have a conspicuous copyright notice.

c. Software in human readable source code is copyrightable but in machine language object code is not.

d. Software can be copyrighted for a period not to exceed twenty years.

8. Which of the following is not correct concerning computer software purchased by Gultch Company from Softtouch Company? Softtouch originally created this software.

a. Gultch can make backup copies in case of machine failure.

b. Softtouch can typically copyright its software for at least seventy-five years.

c. If the software consists of compiled computer databases it cannot be copyrighted.

d. Computer programs are generally copyrightable.

9. Which of the following statements is correct?

a. Patent law is largely based on state law.

b. Accessing a digital work is protected by the fair use doctrine.

c. Financial and business models used over the Internet can be patented.

d. All of the above statements are incorrect.

10. Professor Bell runs off fifteen copies to distribute to his accounting class using his computer from a database in some software he had purchased for his personal research. The creator of this software is claiming a copyright. Which of the following is correct?

a. This is an infringement of a copyright since he bought the software for personal use.

b. This is not an infringement of a copyright since databases cannot be copyrighted.

c. This is not an infringement of a copyright because the copies were made using a computer.

d. This is not an infringement of a copyright because of the fair use doctrine.

11. Intellectual property rights included in software may be protected under which of the following?

a. Patent law.

b. Copyright law.

c. Both of the above.

d. None of the above.

12. Which of the following statements is not true of the law of trademarks in the United States?

a. Trademark law may protect distinctive shapes as well as distinctive packaging.

b. Trademark protection can be lost if the trademark becomes so popular that its use becomes commonplace.

c. Trademarks to receive protection need not be registered.

d. Trademarks are valid for twenty years after their formation.

13. Diane Trucco recently wrote a novel which is an excellent work of art. She wishes to copyright and publish this novel. Which of the following is correct?

a. Her copyright is valid for her life plus seventy years.

b. She must register her copyright to receive protection under the law.

c. She is required to put on a copyright notice to obtain a copyright.

d. All of the above are correct.

E. Interests in Real Property

14. Long, Fall, and Pear own a building as joint tenants with the right of survivorship. Long gave Long’s interest in the building to Green by executing and delivering a deed to Green. Neither Fall nor Pear consented to this transfer. Fall and Pear subsequently died. After their deaths, Green’s interest in the building would consist of

a. A 1/3 interest as a joint tenant.

b. A 1/3 interest as a tenant in common.

c. No interest because Fall and Pear did not consent to the transfer.

d. Total ownership due to the deaths of Fall and Pear.

15. What interest in real property generally gives the holder of that interest the right to sell the property?

a. Easement.

b. Leasehold.

c. License.

d. Fee simple.

16. Which of the following unities (elements) are required to establish a joint tenancy?

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17. Which of the following is not an interest that a person can have in real property?

a. Fee simple absolute.

b. Tenancy by default.

c. Life interest.

d. Remainder.

18. On July 1, Quick, Onyx, and Nash were deeded a piece of land as tenants in common. The deed provided that Quick owned 1/2 the property and Onyx and Nash owned 1/4 each. If Nash dies, the property will be owned as follows:

a. Quick 1/2, Onyx 1/2.

b. Quick 5/8, Onyx 3/8.

c. Quick 1/3, Onyx 1/3, Nash’s heirs 1/3.

d. Quick 1/2, Onyx 1/4, Nash’s heirs 1/4.

19. Brett conveys his real property by deed to his sister, Jan, for life with the remainder to go to his friend, Randy, for his life. Brett is still living. Randy died first and Jan died second. Who has title to this real property?

a. Brett.

b. Brett’s heirs.

c. Jan’s heirs.

d. Randy’s heirs.

20. Court, Fell, and Miles own a parcel of land as joint tenants with right of survivorship. Court’s interest was sold to Plank. As a result of the sale from Court to Plank

a. Fell, Miles, and Plank each own one-third of the land as joint tenants.

b. Fell and Miles each own one-third of the land as tenants in common.

c. Plank owns one third of the land as a tenant in common.

d. Plank owns one-third of the land as a joint tenant.

21. The following contains three fact patterns involving land. In which of the following is an easement involved?

I. O sells land to B in which O retains in the deed the right to use a roadway on B’s newly purchased property.

II. O sells land to B in which O in the deed has the right to cut and keep ten specified trees on the land sold.

III. O sells land to B. O continues that year to use a roadway on B’s newly purchased property when B is not looking.

a. I only.

b. I and II only.

c. II and III only.

d. I, II, and III.

G. Types of Deeds

22. A method of transferring ownership of real property that most likely would be considered an arm’s-length transaction is transfer by

a. Inheritance.

b. Eminent domain.

c. Adverse possession.

d. Sale.

23. Which of the following elements must be contained in a valid deed?

Purchase price Description of the land
a. Yes Yes
b. Yes No
c. No Yes
d. No No

24. Which of the following warranties is (are) contained in a general warranty deed?

I. The grantor has the right to convey the property.

II. The grantee will not be disturbed in possession of the property by the grantor or some third party’s lawful claim of ownership.

a. I only.

b. II only.

c. Both I and II.

d. Neither I nor II.

I. Recording a Deed

25. For a deed to be effective between the purchaser and seller of real estate, one of the conditions is that the deed must

a. Contain the signatures of the seller and purchaser.

b. Contain the actual sales price.

c. Be delivered by the seller with an intent to transfer title.

d. Be recorded within the permissible statutory time limits.

Items 26 and 27 are based on the following:

On February 1, Frost bought a building from Elgin, Inc. for $250,000. To complete the purchase, Frost borrowed $200,000 from Independent Bank and gave Independent a mortgage for that amount; gave Elgin a second mortgage for $25,000; and paid $25,000 in cash. Independent recorded its mortgage on February 2 and Elgin recorded its mortgage on March 12.

The following transactions also took place:

  • On March 1, Frost gave Scott a $20,000 mortgage on the building to secure a personal loan Scott had previously made to Frost.
  • On March 10, Scott recorded this mortgage.
  • On March 15, Scott learned about both prior mortgages.
  • On June 1, Frost stopped making payments on all the mortgages.
  • On August 1, the mortgages were foreclosed. Frost, on that date, owed Independent, $195,000; Elgin, $24,000; and Scott, $19,000.

A judicial sale of the building resulted in proceeds of $220,000 after expenses were deducted. The above transactions took place in a notice-race jurisdiction.

26. What amount of the proceeds will Scott receive?

a. $0

b. $ 1,000

c. $12,500

d. $19,000

27. Why would Scott receive this amount?

a. Scott knew of the Elgin mortgage.

b. Scott’s mortgage was recorded before Elgin’s and before Scott knew of Elgin’s mortgage.

c. Elgin’s mortgage was first in time.

d. After Independent is fully paid, Elgin and Scott share the remaining proceeds equally.

J. Title Insurance

28. A purchaser who obtains real estate title insurance will

a. Have coverage for the title exceptions listed in the policy.

b. Be insured against all defects of record other than those excepted in the policy.

c. Have coverage for title defects that result from events that happen after the effective date of the policy.

d. Be entitled to transfer the policy to subsequent owners.

29. Which of the following is a defect in marketable title to real property?

a. Recorded zoning restrictions.

b. Recorded easements referred to in the contract of sale.

c. Unrecorded lawsuit for negligence against the seller.

d. Unrecorded easement.

K. Adverse Possession

30. Which of the following is not a necessary element for an individual to obtain title of a piece of real estate by adverse possession?

a. Continuous possession.

b. Possession that is to the exclusion of others.

c. Possession permitted by the actual owner.

d. Open and notorious possession.

31. Rake, twenty-five years ago, put a fence around a piece of land. At the time, Rake knew that fence not only surrounded his land but also a sizable piece of Howe’s land. Every summer Rake planted a garden on this land surrounded by the fence. Howe recently sold all of his land to Cross. Cross has found out about the fence line and has asked Rake to either move the fence or pay Cross for the land in question. What is the result?

a. Rake does not have to move the fence but must pay Cross for the land in question.

b. Rake does not have to move the fence but must pay Howe for the land in question.

c. Rake must move the fence.

d. Rake must neither move the fence nor pay either party for the land in question.

M. Mortgages

32. Generally, which of the following federal acts regulate mortgage lenders?

Real Estate Settlement Procedures Act (RESPA) Federal Trade Commission Act
a. Yes Yes
b. Yes No
c. No Yes
d. No No

33. Gilmore borrowed $60,000 from Dix Bank. The loan was used to remodel a building owned by Gilmore as investment property and was secured by a second mortgage that Dix did not record. FCA Loan Company has a recorded first mortgage on the building. If Gilmore defaults on both mortgages, Dix

a. Will not be entitled to any mortgage foreclosure sale proceeds, even if such proceeds are in excess of the amount owed to FCA.

b. Will be unable to successfully claim any security interest in the building.

c. Will be entitled to share in any foreclosure sale proceeds pro rata with FCA.

d. Will be able to successfully claim a security interest that is subordinate to FCA’s security interest.

34. Wilk bought an apartment building from Dix Corp. There was a mortgage on the building securing Dix’s promissory note to Xeon Finance Co. Wilk took title subject to Xeon’s mortgage. Wilk did not make the payments on the note due Xeon and the building was sold at a foreclosure sale. If the proceeds of the foreclosure sale are less than the balance due on the note, which of the following statements is correct regarding the deficiency?

a. Xeon must attempt to collect the deficiency from Wilk before suing Dix.

b. Dix will not be liable for any of the deficiency because Wilk assumed the note and mortgage.

c. Xeon may collect the deficiency from either Dix or Wilk.

d. Dix alone would be liable for the entire deficiency.

35. On April 6, Ford purchased a warehouse from Atwood for $150,000. Atwood had executed two mortgages on the property: a purchase money mortgage given to Lang on March 2, which was not recorded; and a mortgage given to Young on March 9, which was recorded the same day. Ford was unaware of the mortgage to Lang. Under the circumstances

a. Ford will take title to the warehouse subject only to Lang’s mortgage.

b. Ford will take title to the warehouse free of Lang’s mortgage.

c. Lang’s mortgage is superior to Young’s mortgage because Lang’s mortgage is a purchase money mortgage.

d. Lang’s mortgage is superior to Young’s mortgage because Lang’s mortgage was given first in time.

36. Which of the following conditions must be met to have an enforceable mortgage?

a. An accurate description of the property must be included in the mortgage.

b. A negotiable promissory note must accompany the mortgage.

c. Present consideration must be given in exchange for the mortgage.

d. The amount of the debt and the interest rate must be stated in the mortgage.

37. On February 1, Frost bought a building from Elgin, Inc. for $250,000. To complete the purchase, Frost borrowed $200,000 from Independent Bank and gave Independent a mortgage for that amount; gave Elgin a second mortgage for $25,000; and paid $25,000 in cash. Independent recorded its mortgage on February 2 and Elgin recorded its mortgage on March 12.

The following transactions also took place:

  • On March 1, Frost gave Scott a $20,000 mortgage on the building to secure a personal loan Scott had previously made to Frost.
  • On March 10, Scott recorded this mortgage.
  • On March 15, Scott learned about both prior mortgages.
  • On June 1, Frost stopped making payments on all the mortgages.
  • On August 1, the mortgages were foreclosed. Frost, on that date, owed Independent, $195,000; Elgin, $24,000; and Scott, $19,000.

A judicial sale of the building resulted in proceeds of $220,000 after expenses were deducted. The above transactions took place in a notice-race jurisdiction.

Frost may redeem the property before the judicial sale only if

a. There is a statutory right of redemption.

b. It is probable that the sale price will result in a deficiency.

c. All mortgages are paid in full.

d. All mortgagees are paid a penalty fee.

38. A mortgagor’s opportunity to redeem will be terminated by a judicial foreclosure sale unless

a. The proceeds from the sale are not sufficient to fully satisfy the mortgage debt.

b. The mortgage instrument does not provide for a default sale.

c. The mortgagee purchases the property for market value.

d. The jurisdiction has enacted a statutory right of redemption.

39. Rich purchased property from Sklar for $200,000. Rich obtained a $150,000 loan from Marsh Bank to finance the purchase, executing a promissory note and a mortgage. By recording the mortgage, Marsh protects its

a. Rights against Rich under the promissory note.

b. Rights against the claims of subsequent bona fide purchasers for value.

c. Priority against a previously filed real estate tax lien on the property.

d. Priority against all parties having earlier claims to the property.

N. Lessor-Lessee

40. Which of the following provisions must be included to have an enforceable written residential lease?

A description of the leased premises A due date for the payment of rent
a. Yes Yes
b. Yes No
c. No Yes
d. No No

41. Which of the following rights is (are) generally given to a lessee of residual property?

I. A covenant of quiet enjoyment.

II. An implied warranty of habitability.

a. I only.

b. II only.

c. Both I and II.

d. Neither I nor II.

42. Which of the following methods of obtaining personal property will give the recipient ownership of the property?

Lease Finding abandoned property
a. Yes Yes
b. Yes No
c. No Yes
d. No No

43. Which of the following forms of tenancy will be created if a tenant stays in possession of the leased premises without the landlord’s consent, after the tenant’s one-year written lease expires?

a. Tenancy at will.

b. Tenancy for years.

c. Tenancy from period to period.

d. Tenancy at sufferance.

Multiple-Choice Answers and Explanations

Answers

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Explanations

1. (d) Real property is land and objects attached to land in a relatively permanent manner; personal property is property not classified as real. Tangible property is subject to physical possession; intangible property cannot be physically possessed, but can be legally owned. Ownership of intangible property is often represented by a piece of paper, but the property itself is intangible; thus answers (a), (b), and (c) are incorrect. A share of stock is part ownership of a company; a trademark is ownership of the use of a particular mark, design, word, or picture, and a promissory note is ownership of the right to receive payment of a debt at a future date. These are all usually represented by a piece of paper, but are intangible. An oil painting is personal property subject to physical possession.

2. (d) Growing crops generally are part of the land and therefore considered real property. However, the crops can be sold separately from the land, in which case they are considered personal property under the UCC, whether the buyer or the seller will sever the growing crops later from the land. Answer (a) is incorrect because air rights are not discussed in the UCC as one of those that can be either. Answer (b) is incorrect because mineral rights are associated with land or realty. Answer (c) is incorrect because unlike growing crops that may be realty until sold in a contract, harvested crops are personal property separate from the realty.

3. (c) The factors used to determine whether an item of personal property is considered a fixture are (1) the affixer’s intent, (2) the method and permanence of attachment, and (3) whether the personal property is customarily necessary to use the real property.

4. (c) When the owner mislays personal property and forgets to take it with him or her, the finder does not obtain title but the owner of the premise acts as caretaker in case the true owner comes back. In the case of lost property (involuntarily left), the finder obtains title; however, the true owner, Getty, wins over this title. In the case of abandoned property, the finder gets valid title that is even valid against Getty.

5. (d) When property is discarded with no intention of keeping ownership over it, it is considered abandoned property. In such cases, the one who finds and keeps the abandoned property becomes the owner with title that is good against all other parties, even the owner who abandoned it. Note that Walters cannot obtain title from Rand because Rand no longer owns the rocking chair.

6. (d) The general rule for a bailee is to exercise reasonable care in light of the particular facts and circumstances. However, a common carrier holds itself out as a public delivery service, and is held to a very high standard for property placed in its care; therefore answer (a) is incorrect, and answer (d) is correct. Answer (b) is incorrect because gross negligence is reckless conduct and any bailee owes a duty of at least reasonable care. Answer (c) is incorrect because the common carrier does not share liability for losses.

7. (a) Computer software is covered under the general copyright laws and is therefore usually copyrightable as an expression of ideas. Answer (b) is incorrect because copyrights in general do not need a copyright notice for works published after March 1, 1989. Answer (c) is incorrect because a recent court ruled that programs in both source codes, which are human readable, and in machine readable object code can be copyrighted. Answer (d) is incorrect because copyrights taken out by corporations or businesses are valid for 100 years from creation of the copyrighted item or seventy-five years from its publication, whichever is shorter.

8. (c) Computer databases are generally copyrightable as compilations. Answer (a) is not chosen because copies for archival purposes are allowed. Answer (b) is not chosen because in the case of corporations or businesses, the copyright is valid for the shorter of 100 years after the creation of the work or seventy-five years from its date of publication. Answer (d) is not chosen because computer programs are now generally recognized as copyrightable.

9. (c) Even though earlier views of financial and business models that were used over the internet often categorized them as based on ideas and thus not patentable, more recent authority says they can be patented. Answer (a) is incorrect because patent law is exclusively federal law. Answer (b) is incorrect because accessing a digital work is not protected by the fair use doctrine. Answer (d) is incorrect because answer (c) is correct.

10. (d) Under the fair use doctrine, copyrighted items can be used for teaching, including distributing multiple copies for class use. Answer (a) is incorrect because although he originally purchased this software for personal use, he may still use it for his class, in which case, the fair use doctrine applies. Answer (b) is incorrect because databases can be copyrighted as derivative works. Answer (c) is incorrect because the use of the computer is not the issue but the fair use doctrine is.

11. (c) Both patent and copyright law are used under modern law to protect computer technology rights. Answer (a) is incorrect because copyright law now also protects software. Answer (b) is incorrect because modern law also protects software as patentable. Answer (d) is incorrect because modern law generally protects intellectual property rights in software under both patent law and copyright law.

12. (d) Trademarks are valid indefinitely until they are actually abandoned or the company allows the trademark to lose its distinctiveness. Answer (a) is not chosen because trademarks can protect many distinctive things such as shapes, packaging, or graphic designs. Answer (b) is not chosen because a company must take steps to keep the trademark distinctive or it can lose it through others’ common usage. For example, elevator was once a trademark which has since been lost. Answer (c) is not chosen because although a company may register a trademark to better protect its legal rights, it may still receive protection without registering it by proving the facts.

13. (a) Since January 1, 1978, this is the life of a copyright. Answer (b) is incorrect because the copyright is valid when the author puts the work of art in tangible form. Answer (c) is incorrect because works published after March 1, 1989 no longer require a copyright notice placed on them. Answer (d) is incorrect because under current copyright law, (b) and (c) are no longer required.

14. (b) In a joint tenancy, each joint tenant has an equal and undivided interest in the property. Each joint tenant can transfer his/her interest in the property without the prior consent of the other joint tenants. When this occurs, the conveyance destroys the joint tenancy and creates a tenancy in common between the remaining joint tenants and the third party. When Long gave his/her interest in the building to Green, Green became a tenant in common with a 1/3 interest in the property. Therefore, answer (a) is incorrect. Answer (d) is incorrect because Green would have total interest in the building after the deaths of Fall and Pear only if Green had been a joint tenant rather than a tenant in common. Answer (c) is incorrect because a joint tenant may convey rights in property without the consent of other joint tenants.

15. (d) A fee simple is generally the most comprehensive interest that a person may have in property under the law of the United States. It allows the owner to sell it or to pass it on to heirs. Answer (a) is incorrect because an easement is not ownership of the land but the right to use it in a way such as using a roadway along with the owner. Answer (b) is incorrect because a leasehold gives the lessee the right to possess the premises under the lease but not the ownership of the premises. Answer (c) is incorrect because a license is permission given by the owner to use or occupy the real estate but not to own it.

16. (a) In a joint tenancy, each joint tenant has an equal and undivided interest in the property. Joint tenancy ownership consists of the unities of time, title, interest, and possession and carries with it the right of survivorship. Thus, all the elements listed in the question are required to establish a joint tenancy and answers (b), (c), and (d) are incorrect.

17. (b) A tenancy by default is not one of the recognized interests in real estate. Answer (a) is incorrect because a fee simple absolute is the highest estate recognized in American law. Answer (c) is incorrect because a life interest is an interest measured by the life of the holder or some other person. Answer (d) is incorrect because a remainder is the future interest that a third party acquires after the interest of a transferee terminates.

18. (d) In a tenancy in common, each tenant essentially owns an undivided fractional share of the property. Each tenant has the right to convey his/her interest in the property and if one of the tenants dies, that tenant’s interest passes to his/her heirs. Therefore, if Nash dies, Nash’s interest would pass to Nash’s heirs and the ownership of the property would be as follows: Quick 1/2, Onyx 1/4, and Nash’s heirs 1/4.

19. (a) Jan had title to the property when Brett granted it to her for her life. Randy never got title to it because he died before Jan’s life estate terminated. When Jan died, her life estate terminated and the property reverted back to Brett, who was still living. Answer (b) is incorrect because Brett was still living. Answers (c) and (d) are incorrect because Jan and Randy had been granted life estates which automatically terminate upon their deaths.

20. (c) When rights in property held in joint tenancy are conveyed without the consent of the other joint tenants, the new owner becomes a tenant in common rather than a joint tenant; therefore answers (a) and (d) are incorrect. Answer (b) is incorrect because the remaining cotenants are still joint tenants. Thus, after the sale of land from Court to Plank without the consent of the others, Plank owns one third of the land as a tenant in common. Both Fell and Miles will continue to each own 1/3 of the land as joint tenants.

21. (a) Fact pattern I involves an easement in which O reserves the right to use B’s land in the deed to B. O does not any longer own the roadway but retains the right to use it. Fact pattern II is a profit rather than an easement in which O has the right to enter B’s land to cut and keep the ten trees. Fact pattern III is not an easement because O has not retained nor has s/he been given the right to use the roadway. Note that this is not an easement by prescription in that the use is not open and notorious nor has it occurred for several years.

22. (d) An arm’s-length transaction is a negotiation between unrelated parties acting in his/her interest. A way to test an arm’s-length transaction is to consider what a disinterested third party would pay for the property. Answer (d) is correct because a sale involves the transfer of property for consideration in which a third party would generally negotiate and act in his/her interest. Answer (a) is incorrect because the property passes to a party as the decedent directs, subject to certain state limitations. Answer (b) is incorrect because eminent domain is the power of the government to take, with just compensation, private property for public use. Answer (c) is incorrect because adverse possession allows a person to gain title to real property if the person has continuously and openly occupied the land of another for a statutory period of time.

23. (c) In order for a deed to be valid, a description of the land must be included. The purchase price of the land need not be present to form a valid deed. The purchase price is part of the terms of the bargain and needs to be included in the real estate contract, not the deed.

24. (c) A general warranty deed warrants that (1) the seller has title and the power to convey the property described in the deed, (2) the property is free from any encumbrances, except as disclosed in the deed, and (3) the grantee (purchaser) will not be disturbed in his/her possession of the property by the grantor (seller) or some third party’s lawful claim of ownership. Thus, a general warranty deed would contain both of the warranties listed and answers (a), (b), and (d) are incorrect.

25. (c) In order for a deed to be effective between the purchaser and seller of real estate, the deed must be delivered by the seller with an intent to transfer title. Even though a deed may be executed it does not become effective until delivery is made with the proper intent. Answer (d) is incorrect because a deed need not be recorded in order for it to be valid between the seller and purchaser. Recordation of a deed is important because it gives constructive notice to all third parties of the grantee’s ownership; however, it does not affect the resolution of any disputes between the grantor and the grantee. Answer (a) is incorrect since a deed need be signed by only the seller in order for it to be effective; it does not have to be signed by the purchaser. Answer (b) is incorrect since the form of a deed is very different from a contract for the sale of real property. There is no requirement that the deed must contain the actual sales price.

26. (d) Under a notice-race statute, if a mortgagee fails to record its mortgage, a subsequent mortgagee who records will have a superior security interest if s/he did not have notice of the prior mortgage. In this situation, Independent Bank was the first to record its mortgage and would receive the $195,000 owed it. Scott would then receive $19,000 because Scott recorded his/her mortgage before Elgin. Since Scott did not have knowledge of Elgin’s mortgage until after Scott had recorded his/her mortgage, Scott would have priority over Elgin.

27. (b) Under a notice-race statute, a subsequent mortgagee (lender) who loans money without notice of a previous mortgage and records the mortgage first has priority over that previous mortgage. Thus, since Scott recorded his/her mortgage before Elgin and without knowledge of Elgin’s mortgage, Scott would have priority in a notice-race jurisdiction. Answer (a) is incorrect because Scott did not know of Elgin’s mortgage at the time Scott recorded his/her mortgage. Although Scott later learned about both prior mortgages, this would not affect Scott’s priority over Elgin’s mortgage. Answer (c) is incorrect because Elgin’s mortgage would have priority only if it had been recorded before Scott’s. Answer (d) is incorrect because Scott’s mortgage had priority over Elgin’s. Therefore, Scott would be entitled to receive the full $19,000 before Elgin received any of the proceeds from the judicial sale.

28. (b) Title insurance insures against all defects of record and defects the grantee may be aware of. Any exceptions not insured by the title policy must be shown on the face of the policy. Answer (a) is incorrect because title exceptions are not insured by the title policy. Answer (c) is incorrect because title insurance covers only defects of record. Answer (d) is incorrect because title insurance does not pass to subsequent purchasers.

29. (d) Marketable title means that the title to real property is free from encumbrances, such as mortgages, easements, and liens and defects in the chain of title. However, there is an exception. Most courts hold that the seller’s obligation to convey marketable title does not require the seller to convey the title free from recorded zoning restrictions, visible public rights-of-way or recorded easements; therefore answers (a) and (b) are incorrect. An unrecorded easement, however, would be a defect in marketable title. Therefore, answer (d) is correct. Answer (c) is incorrect because a lawsuit concerning negligence would generally not affect marketable title.

30. (c) One of the elements to obtain title to property by adverse possession is that the possession be hostile to the ownership interests of the actual owner. This does not occur when possession is permitted by the actual owner. Answers (a), (b), and (d) are all necessary elements to obtain ownership by adverse possession and are therefore incorrect.

31. (d) Rake has fulfilled the elements necessary to gain title to this land in question by adverse possession. These are: (1) open and notorious possession, (2) hostile possession shown by the fence, (3) actual possession, (4) continuous possession, and (5) exclusive possession for twenty-five years. Note that it is considered continuous possession even though the gardening is only during the summer, because the fence is constantly there. Answers (a), (b), and (c) are incorrect because since Rake obtained title to the land in question, he does not have to move the fence or pay for the land.

32. (b) Congress enacted the Real Estate Settlement Procedures Act (RESPA) in 1974 to provide home buyers with more extensive information about the settlement process and to protect them from unnecessarily high settlement fees. The act applies to all federally related mortgage loans, and nearly all first mortgage loans. Therefore, the general purpose of this act is to regulate mortgage lenders.

The purpose of the Federal Trade Commission Act is to prevent unfair methods of competition and unfair or deceptive practices in commerce. It is a general consumer protection act, and regulates compliance with antitrust laws. Although it may apply to mortgage lenders, its general purpose is not to regulate mortgage lenders.

33. (d) Dix’s second mortgage on Gilmore’s property will allow Dix to claim a security interest subordinate to FCA’s first mortgage security interest. Dix’s failure to record the second mortgage will not affect their right to successfully enforce the mortgage against Gilmore. Therefore, answer (b) is incorrect. Answer (a) is incorrect because Dix would be entitled to receive mortgage foreclosure sale proceeds if such proceeds were in excess of the amount owed to FCA. Answer (c) is incorrect because FCA’s first mortgage must be fully satisfied before any payments can be made to Dix.

34. (d) If a buyer takes a mortgage “subject to,” then the buyer accepts no liability for the mortgage and the seller is still primarily liable. The mortgagor does not have to attempt to collect from the buyer first; he can go directly against the seller. Therefore, answer (d) is correct, and answers (a) and (c) are incorrect. Answer (b) is incorrect because Wilk did not assume the mortgage but bought the building subject to the mortgage.

35. (b) A purchaser of real estate takes title subject to any mortgage he was aware of or any mortgage that was recorded before the purchase. Ford, therefore, takes title to the warehouse subject to Young’s mortgage, but free of Lang’s mortgage. Therefore, answer (b) is correct and answer (a) is incorrect. Answer (c) is incorrect because there is no such provision. Answer (d) is incorrect because the recording statutes change the first in time concept to encourage the recording of mortgages.

36. (a) To have an enforceable mortgage it must be in writing and must include a description of the property and debt to be incurred. Therefore, answer (a) is correct. Answer (b) is incorrect, because although debt is usually evidenced by a promissory note, this is not required to be. Answer (c) is incorrect because the promise to pay is adequate consideration. Answer (d) is incorrect because the amount of the debt and the interest rate are not required to be stated in the mortgage.

37. (c) A mortgagor has the right to redeem the mortgaged property after default and before a judicial sale by payment of all principal and interest due on the mortgage note. Thus, Frost may redeem the property only if all mortgages are paid in full prior to the judicial sale. Answer (a) is incorrect because the right of redemption is a right that occurs after the judicial sale. Most states allow a mortgagor a period of time, usually one year after the foreclosure sale, to reinstate the debt and mortgage by paying to the purchaser at the judicial sale the amount of the purchase price plus the statutory interest rate. Answer (b) is incorrect because Frost may redeem the property prior to the judicial sale by paying all mortgages in full without regard to the probable sale price of the property. Answer (d) is incorrect because Frost would not have to pay penalty fees to the mortgagees.

38. (d) After foreclosure of the mortgage, the mortgagor may redeem the property by payment of all principal and interest due on the mortgage note. However, the right of redemption will terminate at the time of the judicial foreclosure sale unless the jurisdiction has enacted a statutory right of redemption. Answers (a), (b), and (c) are incorrect because they do not affect when the mortgagor’s right of redemption terminates.

39. (b) Recording a mortgage protects the mortgagee against subsequent mortgagees, purchasers, or other takers. Therefore, answers (a), (c), and (d) are incorrect because those answers involve parties with existing claims on the property.

40. (b) A residential lease agreement must contain the following essential elements: the parties involved, lease payment amount, lease term, and a description of the leased property. The omission of any of these terms will cause the agreement to fail for indefiniteness. The other terms of payment due date, liability insurance requirements, and responsibility for repairs are optional, but not required. They will not cause the contract to fail for indefiniteness.

41. (c) The lessee of residential property, although not the owner, generally has the right to possession of the property and the right to quiet enjoyment of the property. The right to quiet enjoyment means that neither the lessor nor a third party with a valid claim will evict the lessee unless the lessee has breached the lease contract. The lessee also has the implied warranty of habitability which means that s/he has the right to inhabit premises that are fit for human occupation.

42. (c) A lease is not a sale and does not involve a transfer of title. A lessee may have possession and control of the property but will not have ownership. When property is abandoned, the owner relinquishes possession and title of the property. Subsequent parties who acquire abandoned property with the intent to own it acquire title.

43. (d) A tenancy at sufferance is created when a tenant stays in possession of the leased property after the expiration of the lease without the landlord’s consent. A tenant at sufferance is a trespasser and the landlord may evict the tenant by instituting legal proceedings. Answer (a) is incorrect because a tenancy at will is an agreement that is not for a fixed period but is terminable at the will of the landlord or tenant. In this situation, the tenant does not have the consent of the landlord to stay in possession of the property and a tenancy at will is not created. Answer (b) is incorrect because a tenancy for years is a tenancy that has a fixed beginning and end at the time of creation of the tenancy. Answer (c) is incorrect because a tenancy from period to period would only be created if the landlord allowed the tenant to remain in possession of the property.

Simulation

Task-Based Simulation 1

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Situation

On June 10, 2010, Bond sold real property to Edwards for $100,000. Edwards assumed the $80,000 recorded mortgage Bond had previously given to Fair Bank and gave a $20,000 purchase money mortgage to Heath Finance. Heath did not record this mortgage. On December 15, 2011, Edwards sold the property to Ivor for $115,000. Ivor bought the property subject to the Fair mortgage but did not know about the Heath mortgage. Ivor borrowed $50,000 from Knox Bank and gave Knox a mortgage on the property. Knox knew of the unrecorded Heath mortgage when its mortgage was recorded. Ivor, Edwards, and Bond defaulted on the mortgages. Fair, Heath, and Knox foreclosed and the property was sold at a judicial foreclosure sale for $60,000. At the time of the sale, the outstanding balance of principal and accrued interest on the Fair mortgage was $75,000. The Heath mortgage balance was $18,000 and the Knox mortgage was $47,500.

Fair, Heath, and Knox all claim that their mortgages have priority and should be satisfied first from the sale proceeds. Bond, Edwards, and Ivor all claim that they are not liable for any deficiency resulting from the sale.

The above transactions took place in a jurisdiction that has a notice-race recording statute and allows foreclosure deficiency judgments.

Items 1 through 3. For each mortgage, select from List A the priority of that mortgage. A priority should be selected only once.

List A
A. First Priority
B. Second Priority
C. Third Priority
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Items 4 through 6. For each mortgage, select from List B the reason for its priority. A reason may be selected once, more than once, or not at all.

List B
A. An unrecorded mortgage has priority over any subsequently recorded mortgage.
B. A recorded mortgage has priority over any unrecorded mortgage.
C. The first recorded mortgage has priority over all subsequent mortgages.
D. An unrecorded mortgage has priority over a subsequently recorded mortgage if the subsequent mortgagee knew of the unrecorded mortgage.
E. A purchase money mortgage has priority over a previously recorded mortgage.
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Items 7 through 9. For each mortgage, select from List C the amount of the sale proceeds that each mortgagee would be entitled to receive. An amount may be selected once, more than once, or not at all.

List C
A. $0 E. $42,000
B. $12,500 F. $47,500
C. $18,000 G. $60,000
D. $20,000
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Items 10 through 12. Determine whether each party would be liable to pay a mortgage foreclosure deficiency judgment on the Fair Bank mortgage. If the party would be held liable, select from List D the reason for that party’s liability. A reason may be selected once, more than once, or not at all.

List D
A. Original mortgagor. C. Took subject to the mortgage.
B. Assumed the mortgage. D. Not liable.
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For items 13 through 15, determine whether each party would be liable to pay a mortgage foreclosure deficiency judgment on the Heath Finance mortgage. If the party would be held liable, select from List E the reason for that party’s liability. A reason may be selected once, more than once, or not at all.

List E
A. Original mortgagor. C. Took subject to the mortgage.
B. Assumed the mortgage. D. Not liable.
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For items 16 through 18, determine whether each party would be liable to pay a mortgage foreclosure deficiency judgment on the Knox Bank mortgage. If the party would be held liable, select from List F the reason for that party’s liability. A reason may be selected once, more than once, or not at all.

List F
A. Original mortgagor. C. Took subject to the mortgage.
B. Assumed the mortgage. D. Not liable.
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Simulation Solution

Task-Based Simulation 1

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Explanations

1. (C) 2. (B) 3. (A) Under a notice-race recording statute, a subsequent mortgagee (lender) who loans money without notice of the previous mortgagee and records the mortgage first has priority over that previous mortgagee. Once a mortgagee records, this gives constructive notice to any subsequent parties who then cannot obtain priority over the one who recorded. In this fact pattern, Fair Bank was the first mortgagee. Since Fair Bank also recorded this mortgage first, Fair Bank has the first priority over the subsequent mortgagees. Therefore, the answer to number 3 is (A). Of the two remaining mortgagees, Heath Finance was next in time but did not record the mortgage. Knox Bank was third in time and did record. However, Knox is unable to gain priority over Heath because Knox, when it recorded, knew of the Heath mortgage. Therefore, Knox does not meet all of the rules necessary to have priority over Heath. Thus Heath has the second priority after Fair Bank and Knox has the third priority. Therefore, the answer to number 2 is (B) and number 1 is (C).

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4. (D) 5. (D) 6. (C) This part covers the reason for the priority that applies to each of the mortgagees. Reason (A) states that “an unrecorded mortgage has priority over any subsequently recorded mortgage.” This is incorrect for all mortgagees and goes against the policy behind the recording statutes to encourage recording to warn subsequent parties of the previous mortgages. Reason (B) is not a correct statement. It states that “A recorded mortgage has priority over any unrecorded mortgage.” In this fact pattern, Knox recorded but Heath did not; however, Knox still has a lower priority because Knox knew of the Heath mortgage when its mortgage was recorded. Reason (C) is the correct answer for Fair Bank. It states that “The first recorded mortgage has priority over all subsequent mortgages.” This is true because once Fair Bank recorded, subsequent mortgagees had constructive notice of the Fair Bank mortgage and thus could not obtain priority. The correct answer to number 6 is therefore (C). Reason (D) states that “An unrecorded mortgage has priority over a subsequently recorded mortgage if the subsequent mortgagee knew of the unrecorded mortgage.” In this fact pattern, the Heath mortgage was the unrecorded mortgage that still had a higher priority than the recorded Knox mortgage because Knox Bank knew of the Heath mortgage when its mortgage was recorded. Thus Knox never fulfilled the rule which would allow it as the subsequent mortgagee, to gain a higher priority. Therefore, reason (D) is the correct answer for both Knox Bank, number 4, and Heath Finance, number 5, because the same rule determines the relative priority of these two parties. Note that reason (E) is not a correct statement for any of the mortgagees because there is no rule that gives purchase money mortgages priority over previously recorded mortgages.

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7. (A) 8. (A) 9. (G) Since Fair Bank has the highest priority, its mortgage will be satisfied first. Since the outstanding balance of the Fair Bank mortgage was greater than the $60,000 received at the judicial foreclosure, Fair Bank receives all of the $60,000 and Knox Bank and Heath Finance each receive nothing.

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10. (B) 11. (A) 12. (D) When a foreclosure sale does not provide enough money to pay off the mortgages, the mortgagee, in states that allow foreclosure deficiency judgments, will attempt to collect any deficiency from the parties involved. In this fact pattern, Bond is liable because s/he was the original mortgagor on the property and as such agreed to pay the mortgage. Thus, (A) is the correct answer for number 11. When Edwards later bought the property from Bond, s/he assumed the Fair Bank mortgage. Edwards, thus, became personally liable on the mortgage even though the seller, Bond, also remained liable. Therefore, (B) is the correct answer for number 10. When Ivor subsequently purchased the property from Edwards, Ivor purchased the property subject to the Fair Bank mortgage. In so doing, s/he did not accept any liability on the mortgage. Note that although reason (C) states “Took subject to the mortgage,” the correct answer for number 12 is (D) “Not liable.” This is true because the directions to part d. indicate that reasons (A), (B), or (C) are to be chosen as reasons for liability and (D) is to be chosen if the party is not liable.

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13. (A) 14. (D) 15. (D) When Edwards purchased the property, s/he gave a mortgage to Heath Finance. Therefore, (A) is the correct answer for number 13 because as the original mortgagor on the Heath mortgage, s/he agreed to be liable on it. Bond is not liable on the Heath mortgage because s/he having owned the property earlier, never agreed to be liable on this mortgage. Therefore, the correct answer to number 14 is (D). Ivor is not liable on the Heath mortgage because s/he never had actual notice or constructive notice of the unrecorded mortgage, and never agreed to be liable on it. Therefore, the correct answer to number 15 is (D).

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16. (D) 17. (D) 18. (A) Since Ivor borrowed from Knox Bank and gave Knox a mortgage on the property, Ivor is liable as the original mortgagor, making (A) the correct reason for number 18. Both Edwards and Bond owned the property prior to the Knox mortgage and never agreed to be liable on it. Therefore, the correct answer to numbers 16 and 17 is (D).

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