Uniform Real Estate Contracts On The Rise - Feb 2014

Terry Jessop & Bitner Newsletter

Issue 6, February 2014

In the early 1980's, with interest rates soaring over 20%, it was hard for home buyers to get favorable loans from banks. To avoid high interest rates, buyers resorted to purchasing homes "on contract," where a willing seller could offer a better rate than the bank. Rather than receive title to the home up front, the buyer would sign a Uniform Real Estate Contract (also known as an installment contract, or a contract for deed), pursuant to which the buyer would move into the home and make payments to the seller over time. Upon receiving the buyer's final payment, the seller conveyed title to the buyer. Banks balked at this, as it deprived them of the ability to issue new loans at higher rates. After a flurry of litigation over whether signing an installment contract constituted the sale of a home under a trust deed "due on sale" clause, the US Supreme Court ruled in favor of the banks and Congress enacted legislation allowing nationwide enforcement of due on sale clauses.

Down but Not Out

As interest rates came down, and in part because courts began enforcing due on sale clauses over the top of installment contracts, the UREC fell out of favor but it never died. One can still download the state-approved form from Utah.gov. However, even in the best of times, the UREC was problematic. Sellers rarely recorded the UREC for fear of alerting the seller's lender to the sale of the home. In addition, the UREC purports to be a contract to purchase a home, like a standard REPC, but it acts like a mortgage, as the borrower is immediately obligated to make monthly payments to the seller. So how does a seller proceed if the buyer stops paying? Can he just retake the property, or does the seller have to foreclose like he would a mortgage?

Problematic Remedies

The standard UREC default provision gives the seller both of these options, plus a third option to sue the borrower for damages. While courts have held that the option to just retake the property is enforceable, courts will not enforce this forfeiture remedy if it results in an unfair windfall to the seller (e.g., buyer makes 90% of the payments and then loses the home through forfeiture 30 days after failing to make a payment). The safer, but more expensive option, is to treat the UREC as a mortgage and foreclose it judicially, through a lawsuit.

The Return of the UREC

Now, with interest rates back on the rise, URECs are making a comeback. Here are some guidelines for how to deal with them. (1) The signing of a UREC triggers the due on sale clause in senior trust deeds, including due on sale clauses that appear in FHA and VA trust deeds. (2) A lender has the right to accelerate its loan in response to a signed UREC, but must take affirmative steps to do so. The acceleration of the loan is not automatic. (3) If parties insist on using a UREC, then, as a general rule, a notice of interest should be recorded in the county records to protect the buyer. (4) Some believe that a UREC can be foreclosed non-judicially if the contract provides for it. It is unlikely that a court would uphold such a foreclosure. Under Utah law, non-judicial foreclosures have to be done through a trustee. The standard UREC does not name a trustee, hence the UREC operates like a mortgage and must be foreclosed judicially. (5) Even if a UREC names a trustee, it is unlikely that an underwriter would insure a property that has been the subject of a non-judicially foreclosed UREC. Indeed, we recommend that they don't.

While UREC's have their place, they are disfavored and should be treated with caution, as they often invite litigation. If you have any questions about this or any other legal issue, please contact us.

©Terry Jessop & Bitner February 2014