I understand that commercial lending institutions typically do not get involved in land contracts. As such, today’s post addressing the Indiana Court of Appeals’ opinion in Hooker v. Norbu, 2008 Ind. App. LEXIS 2566 (Ind. Ct. App. 2008) (Hooker.pdf) is slightly off topic. Nevertheless, land contracts are a form of real estate financing, and enforcing such contracts could trigger the remedy of foreclosure. In Hooker, the default under the land contract resulted in a forfeiture.
Land contract, defined. My trusty Black’s Law Dictionary defines “land contract” as follows:
Contract for the purchase and sale of land upon execution of which title is transferred. Term commonly refers to an installment contract for the sale of land whereby purchaser (vendee) receives the deed from the owner (vendor) upon payment of final installment. The vendor retains legal title to the property as security for payment of contract price, while the vendee is said to have equitable title during the term of the agreement.
Unlike the promissory note/mortgage scenario, in which a mortgage creates a lien on property but not title to it, vendors (sellers) in the land contract transaction are the property owners. See, Indiana Follows The Lien Theory Of Mortgages.
Circumstances. In Hooker, plaintiff (property owner) and defendants entered into an installment real estate contract for the purchase of restaurant property. The sale price was $338,000 plus 11.5% interest, which translated to payments of about $3,600 per month. The defendants had difficulty making payments and, after two years, abandoned the property and returned the keys to the plaintiff. The plaintiff, in turn, filed a breach of contract claim. The issue on appeal surrounded how to calculate the plaintiff’s damages. The specific question was whether the plaintiff could keep the real estate and collect unpaid contract payments for the period that the defendants possessed the premises.
Forfeiture. The Court in Hooker noted that forfeiture is “the divesture of property without compensation.” In other words, “forfeiture terminates an existing contract without restitution, while rescission of such contract terminates it with restitution [compensation] and restores the parties to their original status.” Indiana disfavors forfeitures “because a significant injustice can result.” See, Land Contract Vendee Defeats Mortgagee’s Foreclosure Case.
The choice. The Court held that the plaintiff had two options in light of the defendants’ contractual default. First, he could have proceeded “as though he had a mortgage” by accelerating the land contract and foreclosing (if the defendants were unable to pay the full amount due). The second option was to pursue the remedy of forfeiture, thereby cancelling the land contract and retaining the payments made by the defendants and the real estate (in addition to recouping any actual damages sustained as a result of the transaction). Indeed it was undisputed in Hooker that the defendants themselves forfeited by abandoning the property and returning the keys to the plaintiff about two years after the execution of the contract. By then, the defendants had paid less than one percent of the purchase price. “Under these circumstances, the Contract and [Indiana Supreme Court] guidelines render forfeiture an appropriate remedy.”
Recovery limited. The plaintiff sought an additional award of outstanding interest for the time in which the defendants occupied the real estate but neglected to make sufficient payments. The problem was that the plaintiff “elected to have the Contract forfeited - - cancelled.” Once he made that decision, he was no longer permitted to enforce the contract. He was only entitled to receive the defendants’ payments made before their abandonment. As an aside, the Court suggested that the plaintiff essentially sat on his rights for several months by allowing the defendants to remain in possession of the real estate while in default. The Court did, however, approve of plaintiff’s recovery for actual losses associated with tax payments he was forced to make, personal property taken by the defendants and his attorney’s fees and costs.
Under the circumstances of Hooker, the Indiana Court of Appeals determined that the owner/vendor elected the remedy of forfeiture rather than foreclosure and therefore was prohibited from recovering the missed contract payments that he conceivably could have recovered had he elected the alternative remedy. One other lesson from Hooker: normally the contract language will control the outcome, so you or your lawyer must review the written agreement for additional insight into your remedies.