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The previous web pages focus on defining property rights; there has been little attention paid to how property rights are acquired.  This web page overviews how property rights transfer between a seller and buyer.

An initial thought about the transfer of property rights -- as a general statement, property rights, when thought about in the abstract, already exist; they are not being created (even though in some situations they are still being defined).  Thus when we consider "acquiring a property right," someone else must be giving up that property right.

Transferring Real Property

The most common ways of transferring property rights include

• purchase
• inheritance
• gift
• adverse possession
• escheat
• eminent domain

Each of these is discussed in the following material. The examples will focus on real property but some of the concepts also apply to the transfer of personal property.  This discussion begins will the transfer of real property by sale between a seller and a buyer.

A purchase of real property begins with a contract

• "Pursuant to Section 9-06-04, N.D.C.C., our codification of the statute of frauds, an agreement for the sale of real property or an interest therein is invalid unless the contract or some memorandum thereof is in writing." Sabot v. Rykowsky, 363 N.W.2d 550 (N.D. 1985)

• N.D.C.C. §47-10-01 . Method of transfer. An estate in real property ... can be transferred only by ... an instrument in writing, subscribed by the party disposing of the same or by the party's agent ...

Contract: individuals agreeing to impose rules on their transactions

• The purchase of real property involves a written contract between the seller and buyer (sometimes referred to as the purchase agreement), but reaching the point of having a contract begins with a written offer.
  • What is an "option to buy," how does it differ from an offer to buy, when might the buyer and seller want to consider using an option to buy before extending an offer to buy, and how is an option to buy created?
• The buyer makes a written offer specifying the terms by which the buyer is willing to acquire the property -- a seller could also make an offer to sell, but it is probably more common that the buyer makes the initial offer.
• The offer must be signed by the buyer.
• The buyer attaches earnest money to the offer to demonstrate the buyer is serious about wanting to purchase the land
  • "Earnest money is generally defined as a comparatively small down payment made as an assurance that the purchaser is in earnest and good faith and that if he fails to purchase the property the deposit will be forfeited ... Unless the contract specifically provides otherwise, the seller ordinarily may retain earnest money only if the buyer breaches the agreement." Lamb v. Riemers, 2003 ND 148

• If and when the document (the written offer) is signed by the seller (i.e., the offer is accepted ), it is a legal contact; therefore, the offer must address all terms and conditions that parties need or want addressed in the contract.
• If the seller does not accept the offer (that is, the seller rejects the offer); the seller may counteroffer. Written offers and counteroffers can be considered a formal negotiating process.
• Once both parties have signed an offer, it is their contract to transfer ownership of the land.
• Entering into an agreement to buy land does not mean the transaction is completed; several more steps need to occur before the ownership transfers (as explained below) and these steps take time. Accordingly, there often is a period of 30, 60, 90 days or more (as agreed upon by the buyer and seller) between the time the agreement is signed and when the transaction is "closed," that is, when the ownership and possession of the land transfers to the buyer.

What if something goes wrong after a contract for the sale of real property has been created?

• If the buyer backs out of the transaction after both parties have signed, the seller may keep the earnest money.
• Another remedy if one party does not complete the transfer is for the second party to force the first party to perform -- specific performance. Specific performance is available only if the property is unique; but the law presumes each tract of land is naturally unique.
  • " ... specific performance is neither a matter of grace nor of absolute right but is an equitable remedy, and as such rests in the sound discretion of the court. Courts generally demand that the party seeking specific performance ... has the burden of proving or establishing the right and need for such relief. This proof must include a showing of good faith on the part of the plaintiff and a showing that the legal remedy of damages is inadequate, or that an award of damages will fail to put the injured party in as good a position as if the other party had fully performed. Historically, courts have frequently awarded the remedy of specific performance to an aggrieved purchaser of real estate because of its unique character and because the remedy at law for monetary damages would be inadequate compensation for the sellers' breach of contract." Jonmil, Inc. v. McMerty, 265 N.W.2d 257 (N.D. 1978)

Terms in a contract for sale (what needs to be addressed in offer)

• An offer to buy land, once accepted by the seller (that is, the written document is signed by the seller), is a binding contract; therefore, any terms the buyer wants included in the agreement needs to be part of the offer. Once the offer is made, there may be no more opportunity for the offeror (e.g., the buyer) to change the terms of the agreement. For this reason, it is important that the buyer carefully consider what needs to be in the contract, that is, what needs to be included in the offer.
• Typical terms, e.g., legal description of the land, purchase price, personal property items included in the sale (e.g., fixtures; see lines 12 and 20 on the sample document), rights reserved by the seller, etc (see reference text by Looney and Uchtmann, p. 77).
• Additional terms:
  • Condition the sale on buyer being able to arrange reasonable financing
    • Buyers do not want to legally bind themselves to purchase property until they have the financing arranged, but lenders are not willing to commit to loaning the money until the buyer/borrower has an agreement with the seller. Therefore, buyers often enter into agreements to buy land and then apply for the loan, but condition their obligation to complete the purchase of the land on being able to secure reasonable financing. If the buyer is not able to secure reasonable financing, this condition in the agreement allows the buyer to "step away" from having to buy the land.
    • "Lamb gave Riemers a check in the amount of $5,000 as earnest money for the purchase. Lamb asserts he was unable to secure appropriate financing and the sale was never completed. Riemers retained the $5,000 earnest money and refused to return it ... Closing never occurred in this case, and Lamb asserts he did not purchase the apartment complex because he was unable to secure appropriate financing, a condition of the purchase agreement." Lamb v. Riemers, 2003 ND 148
    • see line 55 on the sample document
  • Condition the sale on the buyer receiving reasonable assurance that the sellers possess the legal interest they are selling; that is, the seller has a marketable title to the land. This assurance comes as the result of a title search (discussed below). If the title search reveals the seller does not have marketable title, this condition in the agreement would allow the buyer to "step away" from the contract.
    • see line 33 on the sample document
  • Condition the sale on the buyer receiving an acceptable environmental audit
    • CERCLA (a federal law) imposes the cost of cleaning up hazardous waste on the current owner even if the owner had no role in causing the problem. Therefore, buyers want to be able to "step away" from an agreement to buy land if they discover a potential environmental issue, but buyers do not take the steps to inspect the property until they have an agreement to buy the land. Accordingly, buyers increasingly are including language in the purchase agreement that allows them to "step away" from the contract if an environmental problem or uncertainty is identified after the agreement is entered into but before the transaction is "closed."
    • See lines 47 and 74 on the sample document
  • Specify the property rights being transferred to the buyer or the rights being retained by the seller, but remember the Rule Against Perpetuities and the Rule Against Unreasonable Restraints on Alienation (for example, see N.D.C.C. §§47-02-26 and 27.1).
  • Specify whether the seller must provide additional information about past uses or events (e.g., pesticide application on agricultural land or water in the basement of a residence), including documentation (e.g., GPS data).
  • Indicate a date for closing; i.e., the date when the seller transfers ownership and possession of the property to the buyer .
  • Specify the type of deed -- Quit claim deed or Warranty deed (described below)
  • Indicate the date when deed will be delivered

• Statutory provisions that impact the terms of a land sale (examples)
  • N.D.C.C. § 47-10-11. Easements - Pass by transfer of property to which attached. A transfer of real property passes all easements attached thereto ...
  • N.D.C.C. § 47-10-13. Grant presumes fee simple title. A fee simple title is presumed to be intended to pass by a grant of real property unless it appears from the grant that a lesser estate was intended.
  • N .D.C.C. § 47-10-25. Meaning of minerals in deed, grant, or conveyance of title to real property. In all deeds, grants, or conveyances of the title to the surface of real property executed on or after July 1, 1983, in which all or any portion of the minerals are reserved or excepted and thereby effectively precluded from being transferred with the surface, all minerals, of any nature whatsoever, shall be construed to be reserved or excepted except those minerals specifically excluded by name in the deed, grant, or conveyance and their compounds and byproducts. Gravel, clay, and scoria shall be transferred with the surface estate unless specifically reserved by name in the deed, grant, or conveyance.

If the seller is married, have both spouses sign the contract regardless of who is listed as owner; this assures that both spouses agree to transfer their property rights, whatever those rights might be. Though some may argue this is no longer legally necessary, it is still a VERY common practice that both the husband and wife who sell real property sign the agreement, even if only one is listed as the owner.

• For example, see S.D.C.L. §43-31-17. "... A conveyance or encumbrance of a homestead by its owner, if married and both husband and wife are residents of this state, is valid if both husband and wife concur in and sign or execute such conveyance or encumbrance either by joint instrument or by separate instruments..."

Types of deed

• Deed: document that transfers property rights from the seller to the buyer (but it does not guarantee what rights the seller had, and therefore does not guarantee what rights the buyer is receiving).
• The contract should specify the type of deed that will be used at closing to transfer ownership from the seller to the buyer; the two most common types of deeds are the warranty deed and quit-claim deed.
• Warranty Deed: Grantor (seller) warrants
  • Fee Simple Absolute
  • The property is free of liens (claims against the property) except those noted
  • Quiet Possession (no one has a better right to possess the land) and a promise to defend the buyer's right to possess the land (N.D.C.C. §47-10-04)
    • Quiet possession is the "stick in the bundle" of rights that entitles the person to possess the property. By providing the buyer a warranty deed, the seller is guaranteeing that the seller has the right to possess the property and that the seller is transferring that right to the buyer. Guaranteeing or warranting quiet possession means there is no one else (such as a tenant of the seller) who has right to possess the property after the deed has been provided to the buyer.
      
• Quit claim deed: Grantors transfer whatever interest they own; the grantor makes no promise as to what rights are being transferred to the grantee (buyer).  As the name implies, the grantors will no longer claim any interest in the land, but instead transfers whatever rights they had in the land to the buyer but without making any promise as to which "sticks in the bundle" the buyer is receiving.
• As a general rule, a buyer will insist on a warranty deed if the buyer is paying the full market price for the land. A quit claim deed will be used when a grantor is dividing land, for example, as part of an estate distribution or divorce settlement.
  • A warranty deed can only be used if a fee simple absolute is being transferred; a warranty deed cannot be used to transfer a life estate, easement, future interest, or any other legal rights that are not a fee simple absolute.

Between the time of signing the contract and closing, the following events occur:

1. Seller has abstract updated

Abstract -- a document summarizing the recorded transactions that affect ownership of a tract of land. The entries in the abstract will include deeds, mortgages, judgment or tax liens, easements, transfer of mineral rights, release of mortgages, etc that have been previously recorded. The document is held by the property owner (or in some cases, by a lender who has a mortgage against the land). The abstract is generally updated when the owner is interested in selling the land. An abstract company is generally hired to add an entry for each transaction that has occurred to the land since the last time the abstract was updated.

• The abstract is not updated until someone (usually the current owner) pays to have the abstract updated.  Because of the cost, abstracts generally are updated when someone else wants to review it, such as a potential buyer.  Consequently, an abstract is usually updated as part of a sale.

• The updated abstract is then provided to the buyer or an attorney the buyer has designated. This allows the buyer to acquire assurance that the seller has a marketable title.

2. Buyer acquires assurance title is marketable

• Marketable title --a title without defects. More realistically, a marketable title is a title for which a prudent person would be willing to pay full market value (N.D.C.C. §47-19.1-01). 
  • The North Dakota Supreme Court "defined a "marketable title" as one that is free from reasonable doubt ... factors which are relevant to marketability include the extent to which the title has been accepted by other purchasers and incumbrancers, whether any adverse claims have been asserted against the persons in possession under the questioned title, and whether there is any reasonable likelihood of a successful attack upon the title."  See Mader v. Hintz, 186 N.W.2d 897 (N.D. 1971)
• Possible title defects include lack of needed signatures upon transfer, misdescription, heirs not properly identified, unreleased mortgages or liens, or unsatisfied judgment or tax liens.
  • Title Opinion -- statement prepared by an attorney, after reviewing the abstract and public record (conducts a title search), in which the attorney summarizes whether title to the land has any defects.
    • If a defect in the title is identified as part of this search, that will be noted in the opinion; if the buyer has conditioned the purchase on the seller being able to provide a marketable title (as discussed above), the buyer may be able to "step away" from the contract at this time.
    • If a defect in the title that the attorney should have been able to discover is identified at a later time (sometime after closing), the attorney shares the financial loss with the buyer.
  • Title insurance -- contract with a title insurance company that title to land has no defects; and that if defects are subsequently identified, the insurance company will cover the insured's financial loss.

   

  • North Dakota statutes intending to clarify marketable title:
    • N.D.C.C. §47-19.1-03. Notice of claim of interest filed . ... marketable title shall be held by such person and shall be taken by that person's successors in interest free and clear of all interest, claims, any charges whatever, the existence of which depends in whole or in part upon any act, transaction, event, or omission that occurred twenty years or more prior...
    • N.D.C.C. §47-19.1-10. Purpose of chapter. This chapter shall be construed to effect the legislative purpose of simplifying and facilitating real estate title transactions by allowing persons to deal with the record title owner ... and to rely upon the record title covering a period of twenty years or more subsequent to the recording of a deed of conveyance...

• Quiet title action -- court proceeding to determine who owns the land if it is not clear as to who is the owner. A quiet title action involves all persons claiming interest in the land appearing in court to prove their claimed interest. The court will determine validity of all claims and remove invalid or undefined interests; N.D.C.C. Chapter 32-17. A quiet title action can be considered the "last resort" to resolving a land ownership dispute.

A quiet title action is a court proceeding wherein a person who has an interest in real property is willing to invest the time and cost to assure the ownership of the land is accurately understood and documented.  This person would initiate a lawsuit (a legal proceeding in court) that includes advertising that all persons claiming an interest in the tract of land are required to indicate to the court that they believe they have a legal interest (a stick in the bundle) in the real property. 

At an announced time, the court will hold a hearing to review all the ownership claims (including all evidence the interested parties provide for the court's (judge's) consideration).  After reviewing the evidence, the judge will announce (make a ruling) as to who owns which legal rights (sticks in the bundle).  This ruling will be recorded with the register of deeds and from that time forward, that decision will be the basis for determining the ownership of that land.

A quiet title action can be expensive so it is not used unless necessary, but it is the process by which our legal system documents who holds which rights to the real property. 

• A quiet title case -- Dennison v. N.D. Dep't of Human Services, 2002 ND 39 , Feb. 22, 2002. "this Court said a quiet title action is a direct action to determine what, if any, interest each party has in a tract of land, and a court's decision shall adjudicate the nature and extent of the parties' claims and shall determine the validity, superiority, and priority of the claims."

3. Buyer may have an environmental audit completed; three levels of environmental audit

• review history of ownership to identify whether there is a likelihood that previous owners used the property in such a way as to create an ongoing environmental problem,
• visually inspect the property to identify any potential problems, or
• conduct tests of the property/soil to identify potential problems not visible.

A buyer's interest in having an environmental audit conducted reflects the 1980 federal legislation (CERCLA) wherein a landowner is responsible for cleaning up an environmental problem on their land even though the current owner did not create the problem ( but instead the problem may have been created years earlier by a previous owner), and may not have been aware of the problem at the time the land was purchased.

An environmental audit should NOT be confused with a buyer or lender "inspecting" the property.  For example, when purchasing a home, the buyer and the buyer's lender will want to carefully inspect the home for structural defectives or other potential problems (e.g., does the furnace work and is the plumbing sound).  A professional may be hired to conduct the inspections and a failed inspection (if included as a contingency in the purchase agreement) may allow the buyer to "step away" from the contract.

Despite similarities with a property inspection (i.e., conducted by a hired professional and is a condition in the purchase agreement), an environmental audit is different.  The inspector is looking for a different type of potential problem (i.e., the presence of hazardous waste), the motivation for the audit is based on potential liability under federal law of having to clean up a potential hazardous waste problem, and the auditor most likely as had specific training to conduct an environmental audit.

4. Buyer arranges financing

Financing alternatives:

A. Buyers pay full price from their savings or other cash sources.

B. Buyer borrows to complete the purchase; the lender usually is a financial institution (such as a bank or credit union); the documents include

1. Note -- the loan agreement between the lender and borrower; it is the borrower's promise to repay the loan.
2. Mortgage -- a property right (a "stick in the bundle") that the borrower transfers to the lender which allows the lender to seize the property if the note is not repaid; a mortgage is a type of lien.
3. Title opinion or title insurance -- the mortgagee/lender also wants to know what rights the seller has and what rights the borrower is buying, because if the borrower is not able to repay the note, the lender may end up owning the property, and the lender wants to know interests that will include; this title opinion or title insurance is in addition to the title opinion or title insurance that the buyer has already acquired.
4. The mortgagee/lender also is interested in receiving an acceptable environmental audit for the land because the lender may end up owning the property if the borrower is unable to repay the note, and the lender does not want the obligation of "cleaning up" an environmental problem.
5. Finally, the seller provides a deed at the agreed upon time (e.g., at closing) which transfers the seller's interest in the land to the buyer.

C. Seller finances buyer;

i. Documents include a deed (from seller to buyer), a note (between the lending seller and borrowing buyer), and a mortgage (from the buyer to the lending seller so the seller can seize the land if the note is not paid), or

ii. Contract for deed (installment sale; buyer pays seller over an extended period of time); it can be thought of as a contract for sale (as described above) plus additional terms such as a payment schedule and interest rate, restrictions on repayment, restrictions on assignments, a statement as to who bears risk of loss and and who is responsible for insurance, who is responsible for maintenance and repairs, what farming practices will be allowed, whether the parties will use an escrow account (N.D.C.C. §47-09-08 and chapter 47-10.2), and whether the contract for deed will be converted to a mortgage at a later time. In this situation, the seller generally does NOT provide the buyer a deed until the payments specified in the contract have been made.

5. Seller prepares a deed

Deed -- document by which the grantor transfers property rights (sticks in the bundle) to the grantee. A deed includes

• Name of grantor and grantee.
• States that consideration (value) has been paid; statement of consideration (N.D.C.C. §11-18-02.2).
• Signed by the grantor.
  • Like the contact, have both the husband and wife sign the deed if the grantor is married; this assures that whatever rights each spouse has, they are being transferred to the buyer/grantee.

Closing

• Before the specified date for closing, financing has been arranged, title opinion or title insurance has been received and reviewed by buyer and buyer is satisfied that seller has a marketable title; buyer has received and reviewed environment audit and is satisfied there is no unacceptable risk of hazardous waste on the land, documents have been prepared.

• At closing, (assuming the buyer borrowed from a lender to finance the purchase), the buyer and lender will make sure the loan agreement is complete, lender provides loan (usually a check) to buyer/borrower, buyer provides payment (usually a check) to seller, seller provides a deed to buyer, and buyer provides a mortgage to lender.

• Ownership and possession transfers to the buyer at this time.

After closing, certain documents will be made public.

Recording : Deed and Mortgage ( N.D.C.C. §§47-19-01 and -41)

• Purpose of recording a deed and mortgage is "inform the world" that a property right has been transferred. 
• There is no single document that establishes or confirms ownership of real property; instead, the proof of ownership is in the public record. But even within the public record there is no single statement as to ownership of real property; instead, ownership is determined only by searching and compiling a record of all transfers pertaining to the land, and then determining who has which rights. That is the purpose of the title opinion (described above).

 

• In North Dakota (N.D.C.C. §11-18-02.2), a grantee or agent who presents a deed for recording must:
  • File report of full consideration with state board of equalization,
  • File report of full consideration with register of deeds;
  • State full consideration, or
  • Designate an exemption for revealing full consideration.
  The purpose for having to reveal the full consideration/purchase price is so officials responsible for administering property tax have reliable information about the market price of ag land in ND.

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