USE OF INSTALLMENT SALE CONTRACTS KNOWN AS CONTRACTS FOR DEED IN THE SALE OF REAL PROPERTY AND MINERAL INTERESTS

Real property is frequently transferred via contracts which allow for the payment of the purchase price to be executed in a series of installments. These types of contracts are called installment contracts or contracts for deed. Often, the vendor maintains legal title until the entirety of the purchase price has been satisfied, although it need not be created in this manner. Installment contracts usually contain forfeiture clauses that enable the vendor to terminate the contract, recover the property, and retain all installments paid when the purchaser defaults.  This process may be used for real property and mineral interests.

Anatomy of an Installment Land Contract

a.       Prepayment clause – permits vendee to make payments on the principal in advance of their due date (although SD 43-26-9 now appears to permit pre-payment unless there express language stating otherwise)

b.      Shift to mortgage and deed – requires vendor to convey legal title and vendee to execute mortgage after a certain percentage of the price is paid

c.       Furnishing of Abstract – requires vendor to furnish an abstract showing marketable title at some definite date early in the life of the contract

d.      Payments tied to farm income – recognizes the fluctuation of farm income, out of which the vendee might meet his contract payments; installments may be a percentage of crops and livestock sales

e.       Grace Period – grace period to pay installments after the due date without a breach of contract

f.       Boiler plate provisions of an installment contract

a.       “Time is of the essence of this contract”’ – prevents relief against a default by making time of the essence

b.      “Prompt payment of all installments on due dates is a condition precedent of the duty of the vendor to convey title”

c.       Acceleration clause – the basis of the installment vendor’s action for specific performance and strict foreclosure when the vendor is demanding the entire unpaid purchase price be paid or else vendee’s rights be foreclosed

d.      Forfeiture or liquidated damages clause

e.       In the event of default, “vendor shall have right to re-enter and take possession of the premises without hindrance or delay”

South Dakota Law and Installment Land Contracts

1.      Assignment of Installment Contract

Unless there is specific language in the land installment contract restricting or not permitting the assignment of the contract interest, either party may assign his or her interest to a third party.

2.      Forfeiture and Liquidated Damages Provisions

Whether a forfeiture provision in a contract is an enforceable liquidated damage provision or an unenforceable penalty – pursuant to SDCL 53-9-5 – is a question of law to be determined “based on consideration of the document as a whole, the situation of the parties, the subject matter of the contract, the circumstances surrounding the execution, and other factors.” Prentice v. Classen, 355 N.W.2d 352-55 (S.D. 1984).

Forfeiture provisions will be upheld if: (1) at the time the contract was made, the damages in the event of breach were incapable or very difficult of accurate estimation, (2) there was a reasonable endeavor by the parties to fix compensation, and (3) the amount stipulated bears a reasonable relation to probable damages and is not disproportionate to any damages reasonably to be anticipated. Id.

A court may decline to enforce a forfeiture clause if the defaulting vendee established by clear and convincing evidence that a substantial disparity exists between the payments made on the contract, together with the improvements made to the property, and the loss of rents and other detriment suffered by the vendors due to the loss of use and possession of the property. Id.

3.      Prepayment Privilege is Implied in Real Estate Contracts

Pursuant to SDCL 43-26-9, any contract made in this state for the purchase and sale of realty shall be interpreted as including an agreement that the vendee shall have the right to tender, and the vendor shall have the duty to accept, prepayment of the balance of the contract price with accrued interest at any time without penalty to the vendee, unless the contract expressly provides otherwise.

General Practice Tips [Powell on Real Property]

1.      Recording the contract

Because installment contract purchasers are typically poorly advised, they often fail to record their purchase contracts. They act unwisely in failing to do so, for the lack of recordation can expose a purchaser to unnecessary risks. Under state recording acts, an installment purchaser is unprotected against a subsequent taker of the property who acquires an interest without notice of the installment land contract.

Counsel for the installment purchaser should have the contract recorded in order to provide notice to third parties and so protect the purchaser’s interest in the contract and the land. In addition to protecting the purchaser’s interest against third parties, recording the installment contract may also give the purchaser protections in the event of vendor’s or purchaser’s bankruptcy.

A vendor is more likely to succeed in clearing his title if he records a quitclaim deed or release that the purchaser has signed after the contract has been executed. Under established mortgage law, a mortgagor can relinquish his redemption rights if he does so in a separate, subsequent transaction for adequate consideration. Courts will analyze these transactions closely to make sure that there has been no overreaching or other unfair conduct by the mortgagee, but the deeds are commonly employed and accepted as valid. By analogy, an installment purchaser should be able to relinquish his redemption rights or otherwise grant a valid release or quitclaim deed at a time when he is in default. The vendor might fairly and lawfully seek an executed quitclaim deed in exchange, for example, for a waiver of default or some favorable restructuring of the purchase terms. If a transaction of this type is substantively fair to the purchaser at the time it is made, the release or quitclaim deed should be valid and should serve to clear the vendor’s title. At the least, it seems likely that a court would uphold a release or quitclaim deed executed by a purchaser who had already lost his rights through abandonment or forfeiture. In such a case, the release or quitclaim deed would not cut off the purchaser’s redemption rights, since the purchaser would have lost them already.

2.      Right of Possession

The purchaser and vendor are free to agree on when the purchaser shall take possession of the property. In the typical earnest money contract, possession passes at the time of closing when the purchaser has paid the full purchase price and title has transferred. In the typical installment land contract, on the other hand, possession passes when the contract is signed, although the parties are free to agree otherwise.

Because of the uncertainty in the law on the issue of possession after the installment contract is signed, a well drafted agreement should specifically memorialize the parties’ understanding on this issue. Similarly, the agreement should indicate which party is obligated to pay real estate taxes and whether the purchaser must pay interest on the installment debt.

3.      Purchasers Use of the Property

As a general rule, a purchaser who has lawful possession of property can use it as he sees fit so long as he does not adversely affect the vendor’s security interest. Stated otherwise, the purchaser can use the property subject only to an obligation to avoid waste, both permissive and affirmative.

Vendor’s counsel might include in the installment contract specific provisions barring the purchaser from destroying and damaging the property or allowing it to deteriorate, much in the way that standard mortgages do. In the event a vendor desires restraints on the purchaser’s ability to alter the property greater than those provided by the case law, vendor should put these expressly in the contract. Vendor may also specify that destruction of the property breaches the contract, enabling the vendor to assert the contract remedies.

4.      Destruction of the Property

The installment contract can resolve many of ambiguities associated with the risk of loss by specifically allocating risk of loss to a particular party and by stating how insurance proceeds are to be applied in the event of a loss, much in the way that mortgages often provide for the use of such proceeds.

5.      Purchaser’s Ability to Assign

Generally, a purchaser is free to transfer his rights under an installment land contract without the prior consent of the vendor. The transfer can be in the form of an assignment of the original purchase contract or in the form of a resale under a new purchase agreement.

Therefore, careful drafting may eliminate ambiguity as to the parties’ intent on the right to assign. However, the parties’ agreement, no matter how clear, may be trumped by a judicial decision based on public policy grounds that finds that certain restrictions on transfer are unenforceable.

6.      Pre-payment

A vendor who wants to avoid prepayment or to delay it for some specified period should insert an express clause to that effect into the contract.

7.      Forfeiture and other remedies

When specifying a right to forfeiture in a contract, vendor’s counsel should make sure that there is no implication that other remedies are unavailable, perhaps by stating that forfeiture is available in addition to other remedies at law or in equity or by expressly specifying those other remedies. Many vendors may profit from suing for contract breach, specific performance or recission instead of forfeiture.

A vendor who wants to regain property has, depending upon the jurisdiction, four remedies from which to choose: (1) forfeiture; (2) rescission; (3) strict foreclosure; and (4) contract termination followed by a suit for contract damages. A vendor who does not want to regain the property can either seek a foreclosure by sale or bring an action for specific performance or full payment of the purchase price.

When the vendor does not want to recover the property, the best remedy for the vendor may be to sue for specific performance and to ask the court, if the price is not paid within a reasonable period of time, to order the sale of the property. If the purchaser performs, the vendor receives the full amount that he is due. If the purchaser does not perform, the property is sold, and the money goes first to the vendor. To date, courts have viewed this remedy as distinctly different from a request for foreclosure. Thus, they have allowed the vendor, after the property is sold, to recover a deficiency judgment, even if a state anti-deficiency law would bar a deficiency after a mortgage foreclosure. If anti-deficiency laws are not a problem in the jurisdiction, a vendor could as easily bring an action for foreclosure by sale, particularly if formal, relatively expedited procedures are available to process foreclosure requests.