Real Cases in Real Estate By Andrea Lee Negroni, Esq. – May 21st, 2012 Update

Real Cases in Real Estate By Andrea Lee Negroni, Esq. – May 21st, 2012 Update

Real Cases in Real Estate is a weekly update on real estate law, with legal principles illustrated and explained by lawsuits from around the country. The topics are wide-ranging for appeal to a broad spectrum of readers including lawyers, homeowners, investors and the general public. Andrea Lee Negroni, a Washington DC attorney and legal writer with 25 years of experience in financial services and mortgage law, contributes the case summaries.

Followers of Real Cases in Real Estate will learn and be entertained by lawsuits involving nuisance, trespass, zoning violations, deed restrictions, title insurance, public utilities, mechanics liens, construction defects, adverse possession, foreclosure and eviction, divorce and marital property rights, tenants' rights, and more. Real Cases in Real Estate uncovers the unpredictable, amusing, and sometimes outrageous disputes between next-door neighbors, contractors and homeowners, condo boards and residents, real estate brokers and homebuyers, and zoning administrators and developers.

Each fully cited case summary highlights the essential law of the case and explains the principal legal theories and concepts relevant to the outcome. Plain language treatment makes Real Cases in Real Estate accessible to lawyers and laymen alike.

Whether you follow real estate law professionally or as a hobby, you'll find something new and useful every week in Real Cases in Real Estate.

Updates for the Week of May 21st, 2012

A remorseful seller cannot characterize an option to repurchase property as a debt so as to recharacterize a sale as an equitable mortgage.

The Johnsons bought a home in Norfolk, Virginia in 1995; when its value rose, they refinanced it. By 2005, they were behind in their mortgage payments but could not refinance again because of their poor credit and prior bankruptcies. A mortgage broker introduced the Johnsons to a private investor, Washington, who bought their house with financing in the form of two new mortgages. Washington used the loan proceeds to pay off the Johnsons' existing mortgage and return some of their equity to them.  The agreement between Washington and the Johnsons allowed the Johnsons to rent the home with the option to repurchase it from Washington after 13 months. The documents in the transaction reflected an absolute sale of the Johnsons' property to Washington. There was a "Contract for Deed of Real Property" and a HUD-1 Settlement Statement.

The Johnsons did not read the documents they signed. They remained in the home after the sale, but after six or seven months, they defaulted on their rent. They sued to impress the property with an equitable mortgage. The Fourth Circuit rejected the Johnsons' claim, finding that because there was no pre-existing or contemporaneous debt between the parties, there was no equitable mortgage.

The decision highlights the distinction between an option to repurchase and an obligation to repurchase. An option creates no debt between the parties and no recourse by one party against the other. The lack of a right of recourse is inconsistent with debt. The Court noted that "because equitable mortgages are an exception to the rule that parole evidence is inadmissible to contradict the terms of a contract, the proof necessary ... must be so convincing as to leave no doubt on the mind that a mortgage, and not an absolute conveyance, was intended." The Court would not permit a seller who later regretted the sale to convert the transaction to an equitable mortgage.

Johnson v. Washington, et. al., 559 F.3d 238, 2009 US App. LEXIS 3596 (4th Cir. 2009) [enhanced version available to subscribers].

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