October, 2010 browsing by month


Nine Points of the Law

Monday, October 25th, 2010

The mysterious rights of a party in possession.

KOKOMO, IN–When Park P, LLC, bought this 254-unit apartment complex they expected to inherit about 250 tenants. But there was an unexpected problem.

The Park Place apartments at Kokomo

Within the complex are two laundry rooms, housing 45 commercial, coin-operated laundry machines. In each laundry room there was a sign saying the machines were owned and operated by Commercial Coin Laundry Systems “pursuant to a written lease.” Each machine also bore a 3×5-inch label with the same information. The signs and labels included Commercial Coin’s logo, office telephone number, and a 24-hour toll-free service number.

Park P had purchased the complex in April 2005. Several weeks later, the owner of Park P wrote a letter to Commercial Coin complaining about maintenance of the machines and hazardous conditions in one of the laundry rooms. The owner said he was willing to honor “the agreement” that Commercial Coin had with a prior owner, but wanted Commercial Coin to agree in writing to “accept full liability for any eventual accident.”

Inside, some of the 254 units

Commercial Coin did not respond to the letter, but continued to operate the machines and pay rent to Park P. So it happened that, in February 2008, Park P filed suit for trespass, based on Commercial Coin’s refusal to remove its machines and vacate the premises.

Commercial Coin answered, saying it has a written lease giving it rights to operate without interference by Park P.

Problem is, the lease was not recorded, and Park P claims it is not legally bound by the past agreement.

On a motion for summary judgment, the trial court ruled in favor of Park P, saying the new owner was not subject to terms of the off-record lease. The court cited an Indiana statute, providing that a lease of real estate for a period longer than three years must be recorded in order to bind a subsequent good faith purchaser.  Commercial Coin appealed.

The Court of Appeals reversed, and remanded the case for further proceedings.

The Court reasoned that a good faith purchaser, of the type protected by the statute, must be one without notice of rights asserted by a party in possession. The court explained that notice sufficient to bind a purchaser could be actual, constructive (imparted by county land records), or implied (imparted by occupancy or possession of the land). In this case, the question for trial would be whether Commercial Coin’s occupancy was so apparent that Park P should have inquired to discover its alleged rights under the off-record lease.

Moral:  Possession, they say, is nine points of the law.

The old saying, rooted in English common law, has little meaning today except as shown by this case.

American courts uniformly hold that a purchaser of land, or a mortgage lender, may be subject to rights of parties in possession. It may be a lease, an option to purchase, right of first refusal, easement–whatever.

To know the condition of title to land, one should look not only to land records but to the land itself.

The case is Crown Coin Meter v. Park P, LLC, 934 N.E.2d 142 (Ind. App. 2010).

The Spider and the Fly

Saturday, October 2nd, 2010

How not to pay for that new home.

LEE’S SUMMIT, MO–Sanctum, LLC was developer of the “Siena at Longview” subdivision in this suburb of Kansas City.

In June 2002, Ivan and Marie Johnson entered into a construction contract with Sanctum for a new home to be built on Lot 7B in the Siena subdivision. The price would be $317,600, with the understanding the Johnsons would upgrade cabinetry, lighting and fixtures at their own expense, and receive credit for upgrades against the sale price at closing. Move-in was scheduled for November 2002. This would be their “retirement home.”

Lot 7B: A trap for the unwary

At the time the contract was made, Sanctum had construction loans from Gold Bank–secured by deeds of trust against the subdivision–for infrastructure and other improvements.

As provided by the contract, at signing the Johnsons paid Sanctum an earnest money deposit of $1,000, plus an additional $62,720 sixty days later.

Planning to move, the Johnsons sold their old home and moved into an apartment. They put most of their possessions in storage.

As work on the home proceeded the Johnsons advanced $57,517 for upgraded materials and labor.

November came, but the home was not ready. Each month thereafter Sanctum gave the Johnsons a new move-in date. Finally, in February 2004, the interior was ready and Sanctum scheduled a closing for March. The Johnsons were told they could move in on the first of April.

But as the closing date approached, Sanctum announced a new problem. It was, perhaps, “the problem” all along. Sanctum, it seemed, could not get its lender, Gold Bank, to release the property from construction deeds of trust without payment of an amount Sanctum didn’t have at hand. Sanctum hoped to have new investors, but wouldn’t be able to close until the investors were lined up and provided funding.

The Johnsons were allowed to move in, but there was no closing and they didn’t have a deed to the property. That, they hoped, would come.

Instead, by July 2004 Gold Bank put the subdivision into foreclosure. The foreclosure sale was held August 17. The Johnsons attended the sale, but couldn’t bid on Lot 7B because the subdivision was offered as a whole for $3 to 4 million.

By now the Johnsons had hired a lawyer, and they began heroic efforts to save their investment.

The Jackson County Courthouse at Kansas City, Missouri

First, they recorded a “Notice of Equitable Lien” against Lot 7B. Later, they filed a lawsuit and recorded a “Notice of Mechanic’s Lien.”

There were other mechanics’ lien claims against the subdivision, and other lawsuits, and the cases were consolidated for trial.

The trial court ruled against the Johnsons, and they appealed.

The Court of Appeals ruled the Johnsons were simply out of luck. Even though they had paid for substantial improvements, the court held they were not “eligible” to enforce a mechanic’s lien claim because the contract with Sanctum, coupled with their payments, made them “equitable owners” of the property. The court explained Missouri law provides mechanics’ lien rights for contractors and material suppliers, but not an “owner.”

As for their equitable lien claim, the court said the claim had merit and “the Johnsons did, in fact, have a legally recognizable vendee’s lien against the property in the total amount of $121,237.86.” But their lien was created after the Gold Bank deeds of trust were recorded and, the court said, it was wiped out by the foreclosure.

In closing, the court said: “This is not a result that sits well with the Court, but it is a result that is required by the law….”

Moral: The Johnsons should not have paid Sanctum or the upgraders before they had clear title to the property. That means a deed, of record, not subject to prior deeds of trust.

The earnest money should have been put in escrow, and not paid out until the buyers could get clear title.

“Unto an evil counsellor, close heart and ear and eye; And take a lesson from this tale, of the Spider and the Fly.” (Mary Howitt, The Spider and the Fly, 1829.)

The case is reported as First Banc Real Estate, Inc. v. Johnson, 321 S.W.3d 322 (Mo. App. W.D. 2010).