In lieu of foreclosure, what do many installment contracts prefer and how do courts address this alternative?

Bar Exam Prep › Real Property › Security Interests in Real Estate › In lieu of foreclosure, what do many installment contracts prefer and how do courts address this alternative?

😀 Real Property • Security Interests in Real Estate PROP#229

Legal Definition

Though installment land contracts often call for forfeiture instead of foreclosure, courts have adopted several theories to avoid such a harsh result: "WaTER"

1. Waiver
2. Treat as a Mortgage
3. Equity of Redemption
4. Restitution

Plain English Explanation

Forfeiture is pretty harsh. Think about it: You have someone who buys property on an installment contract, makes years of payments towards owning the property, and then suddenly, right before they own it, they lose their job and are unable to pay a single month on time. Under a forfeiture clause, they lose everything. All the equity they built up and value they put into the house. They are simply evicted by the property owner. Many courts do not think this is fair, so they've come up with alternatives:

(1) Waiver, which means if the court can establish that the vendor (the person being paid) had a previous pattern of accepting late payments, then they have waived their right to require strict, on-time payment;
(2) Treat it as a mortgage, which means the vendor must go through a judicial foreclosure instead of just kicking out the purchaser;
(3) Equity of Redemption, which means the purchaser is given a grace period in order to come up with the money to pay off the balance on the contract; and (4) Restitution, which means the vendor can enforce the forfeiture clause but must refund the purchaser any money that is more than the damages suffered by vendor.

Related Concepts

How do states treat a mortgage without a note? How do states treat a note without a mortgage? How is a mortgage's priority determined? How may a party be a holder in due course of a note? Under which theories may a mortgagee take possession of a property and begin receiving rents before foreclosure? What are the 5 types of security interests in real estate? What are the benefits of the holder in due course status? What are the limitations of a junior interest? What are the methods of transferring a note? What interests does a foreclosure destroy? What is a deficiency judgment? What is a due on sales clause? What is a foreclosure? What is an installment land contracts? What is a receivership? What is a redemption in equity? What is a statutory redemption? What is the distribution order of proceeds from a foreclosure? What is the result of a grantee assuming the mortgage? What liabilities are associated with a mortgaged property that is transferred to another party? What occurs in intermediate theory states? What occurs in lien theory states? What occurs in title theory states? What results from a party purchasing a foreclosed property subject to a senior interest? What security interests exist under a absolute deed? What security interests exist under a deed of trust? What security interests exist under a installment land contract? What security interests exist under a mortgage? What security interests exist under a sale-leaseback? Who may transfer their interest in a mortgage?

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