Daily Development for
Friday, February 25, 1996
By: Patrick A. Randolph,
Jr.
Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
randolphp@umkc.edu
MORTGAGES; EQUITABLE
MORTGAGES; INSTALLMENT LAND CONTRACTS:. Upon default in an installment land
contract, trial court has discretion as to whether to uphold forfeiture and
grant summary possession or to require installment contract seller to foreclose
contract as an equitable mortgage.
Paraguay Place-View Trust
v. Gray, 981 P.2d 681 (Colo. App. 1999).
In 1994 the defendants
entered into an installment land contract as purchasers. In 1997 defendants
failed to make payments under the installment land contract and the plaintiff
commenced a forcible entry and detainer action ("FED") action to
obtain possession of the property. Defendants argued that the correct remedy for
a default under the installment land contract was a foreclosure action and not
a FED action. The District Court held that plaintiff was required to bring a
foreclosure action to obtain possession of the land and therefore dismissed the
FED action.
Plaintiff contended that
the trial court erred by requiring that a foreclosure action be brought in
order to obtain possession of the property in light of a Colorado statute
stating that an FED action is available " "when a vendee having obtained
possession under an agreement to purchase lands or tenements, and having failed
to comply with his agreement, withholds possession thereof from his vendor, or
assigns, after demand therefor is duly made."
Defendant pointed to a
more recent Colorado statute that provides for foreclosure of installment land
contracts.
3838305, C.R.S.1998, provides, in relevant part that:
" (2) For the
purposes of this article, an installment land contract vendor of property shall
be considered as a lienor for the unpaid portion of the purchase price,
interest, and other amounts provided under the installment land contract and
shall be subject to all requirements in this article with respect to lienors; but
such installment land contract vendor shall not be considered as an owner as to
any portion of such property.
(3) For the purposes of
this article, an installment land contract vendee of property shall be considered
as an owner except as to any portion of such property that such vendee may
thereafter have transferred, as evidenced by a recorded instrument, and such
vendee shall be subject to all requirements in this article with respect to
owners."
The appeals court held
concluded that this statute really just restates existing Colorado law, and
that Colorado precedent had established that when a default occurs in an
installment land contract and the vendor desires to obtain possession of the
property, the vendor may commence an FED, but the court, upon appropriate
request, may determine whether the vendor may proceed with the FED or if the
vendor must foreclose on the property giving the vendee/owner the right to cure
the default and the right of redemption.
Various factors are
considered by the courts when determining whether or not an installment land
contract should be treated as a mortgage such as the amount of the vendee's
equity in the property, the length of the default period, whether the vendee
made any improvements to the property and whether the property has been
adequately maintained.
The court stated that
requiring that vendors always go through the foreclosure process would effect a
sweeping change in the way land installment contracts have been historically
treated. Id., at 684. But, after reviewing the impact of such a change, the
court held that a trial court nevertheless has the authority to order a
foreclosure in the appropriate case.
Comment 1: Of course, a
number of states, and the Restatement of Mortgages, have taken the position
that an installment land contract should be treated as a mortgage all of (or
most of) the time. Other states, like Colorado, and also Kansas, leave the
discretion to the courts.
The idea is that many
installment land contracts are "no down" or "low down" seller
financing deals, and it seems unfair to require a lengthy and expensive process
for the vendor to get the property back if the vendee defaults when it has paid
the vendor very little and has made little investment of its own in the property.
Thus, where the vendee defaults when it has no real interest to protect, the
vendor in these states is not required to proceed to a judicial foreclosure. But
if there is a significant vendee's interest, the courts recognize an equity of
redemption which must be foreclosed. Kansas courts generally look primarily at
the percentage of the contract price that has been paid, but Colorado's broader
group of factors would appear to insure more equitable protection of
substantial interests of borrowers.
A few states, like Iowa,
use the installment contract device regularly and define the rights of the
parties by statute, permitting forfeiture only after notice and opportunity to
cure. Michigan law is similar.
Comment 2: From a practice
standpoint, the editor is seeing more drafting of installment land contracts
with private power of sale rights written in, so that if the courts refuse to
grant forfeiture, the vendor at least has a fighting chance to argue that he is
entitled to avoid the judicial process and foreclose privately. (Not all states
permit private foreclosure, of course.)
Comment 3: If all
installment land contracts were "low down" deals and no purchase
money mortgages fit the same description, the editor might buy in to the
special treatment of installment land contracts. But the fact is that installment
land contracts can and are used in all manner of financial abuses, and to the
editor there is no reason other than inertia to treat this instrument as a
class any differently than states treat mortgages.
Readers are urged to respond, comment, and argue with the daily
development or the editor's comments about it.
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