Best if printed in landscape.
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.
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.
most common ways of transferring property rights include
- adverse possession
- eminent domain
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.
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 ...
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."
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
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)
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.
- 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
- Indicate the date when deed will
- 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.
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..."
- 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
- 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.
the time of signing the contract and closing, the following events occur:
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.
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."
Buyer may have an environmental audit completed; three levels of environmental
- 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.
Buyer arranges financing
pay full price from their savings or other cash sources.
borrows to complete the purchase; the lender usually is a financial institution
(such as a bank or credit union); the documents include
- Note -- the loan agreement
between the lender and borrower; it is the borrower's promise to repay the loan.
- 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.
- 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.
- 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.
- 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.
Seller finances buyer;
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
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.
prepares a 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.
- 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
- Ownership and possession
transfers to the buyer at this time.
closing, certain documents will be made public.
: Deed and Mortgage ( N.D.C.C. §§47-19-01 and -41)
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).
North Dakota (N.D.C.C. §11-18-02.2), a grantee or agent who presents a deed for recording
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.
File report of full consideration with state board of equalization,
File report of full consideration with register of deeds;
full consideration, or
Designate an exemption for revealing full consideration.
E-mail question: Could
you please tell me how N.D.C.C. §11-18-02.2 differs from N.D.C.C.
§11-18-02.2(1) requires that as one records the deed after buying
land, the buyer must reveal the purchase price so that information
can be used in administering property tax.
N.D.C.C. §11-18-02.2(6)(i) states that revealing the purchase price
is not required if the transfer of land was by a quit claim deed.
The difference between the two statements is that most land transfers
by warranty deed; and that quit claim deeds are used primarily when
the sale does not (for whatever reason) involve a negotiated market
Bottom line -- since the legislation was enacted as a way to observe
market price for land, and since it is assumed that transactions
involving quit claim deeds do not reflect market price, there is
no reason to require that the purchase price be revealed if a quit
claim deed is being used.
Minnesota uses a Torrens Registration system to track land ownership; that is, government issues a certificate of ownership, not unlike the system used to document ownership of an automobile. See Chapter 508 of Minnesota Statutes. This is quite different that the public recording system used in North Dakota. Each state may use a different approach; check the laws for the state in which the land is located.
for Sale -- Disposition Upon Death
happens if the buyer or seller dies between the time a contract for sale
is signed and closing?
contracts continue unchanged even though a party to the contract dies.
However, the contract can be changed if the heirs and the other party
agree. If there is no agreement to change the contract, it must be honored
(fulfilled) by the decedent's estate, whether it is the buyer or seller.
With a note and mortgage, or a contract for deed, heirs of the seller
will receive the payments while heirs of the buyer will receive the
land but be required to make the payments.
Summary of Key points
This web page introduces several concepts relative to the sale (purchase) of real property. Some of the concepts are
- The statute of frauds mandates that the agreement to transfer an interest in real property and the actual transfer of real property be documented with a written agreement.
- Negotiations for an agreement to transfer ownership of real property are quite formal; that is, a written offer is prepared and signed by the buyer or seller, and if the other party accepts that offer by signing the document, this document is now a contract.
- An offer to buy or sell real property often specifies conditions that may terminate the contract, such as inability of the buyer to arrange reasonable financing, inability of the seller to demonstrate"marketable title," and lack of an acceptable environment audit.
- Again, if the offer is accepted by the second party, the offer becomes a contract and thus these conditions are part of the contract.
- The buyer's desire to have an acceptable environmental audit is a relatively new situation; it has arisen since 1980 after Congress enacted CERCLA.
- If the seller is married, have both spouses sign the contract regardless of who is listed as owner.
- The two most common types of deed are a warranty deed and a quit-claim deed.
- The buyer will want to determine what property interest the seller has in the land that is being sold; this will include an abstract for the land, and a title opinion or title insurance. The buyer generally expects that the seller has a "marketable title."
- A quiet title action is a court proceeding wherein the judge determines who owns which property rights (that is, which "sticks in the bundle of rights").
- A note is an agreement between a lender and borrower wherein the borrower agrees to repay the loan; a mortgage transfers a "stick in the bundle" from the borrower to the lender whereby the lender can seize the borrower's land if the borrower does not repay the note.
- Lenders recognize they may end up owning the borrower's land (if the borrower does not repay the note) and therefore are interested in knowing 1) what rights the borrower is buying (that is, what rights the seller is transferring to the buyer) and for this reason, the lender also requires a title opinion or title insurance, and 2) whether there is an acceptable environmental audit (because the lender does not want to risk becoming the owner of land with an environmental problem).
- A land transaction culminates in a closing.
- Land transfers are made a matter of public record by recording the deed (and mortgage, if there is one) in the office of the county register of deeds.
November 19, 2010