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10. In this action, for whom should the court render judgment?
An investor purchased a tract of commercial land, financing a large part of the purchase price with a loan from a business partner that was secured by a mortgage. The investor made the installment payments on the mortgage regularly for several years. Then the investor persuaded a neighbor to buy the land, subject to the mortgage to his partner. They expressly agreed that the neighbor would not assume and agree to pay the investor's debt to the partner. The investor's mortgage to the partner contained a due-on-sale clause stating, «If Mortgagor transfers his or her interest without the written consent of Mortgagee first obtained, then at Mortgagee's option the entire principal balance of the debt secured by this Mortgage shall become immediately due and payable.» However, without seeking his partner's consent, the investor conveyed the land to the neighbor, the deed stating that it was «subject to a mortgage to [the partner]» and giving details and recording data related to the mortgage. The neighbor took possession of the land and made several mortgage payments, which the partner accepted. Now, however, neither the neighbor nor the investor has made the last three mortgage payments. The partner has sued the neighbor for the amount of the delinquent payments.
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The mortgagor of a property is generally free to transfer title to that property BUT: (i) the mortgagor remains personally liable on the mortgage; and (ii) all subsequent grantees take the property «subject to» the mortgage. Subsequent grantees do not become personally liable on the mortgage unless they explicitly assume the mortgage. In sum, the mortgagor will always be personally liable on the mortgage, only subsequent grantees who assume the mortgage will be personally liable on it, and all subsequent grantees (whether they assume the mortgage or not) can lose the property through foreclosure if the mortgage is not paid.
Privity of estate arises when the parties share a relationship with the land (e.g., a landlord and a tenant).
A is correct. The facts state that the investor and the neighbor «expressly agreed that the neighbor would not assume and agree to pay the investor's debt to the partner.» The neighbor, therefore, did not assume the mortgage, which means she has no personal liability with regard to mortgage payments. Even though the neighbor voluntarily made payments for a few months, she was under no contractual obligation to do so. And when the investor conveyed the tract of land to the neighbor without first obtaining written consent from the partner as required by the due-on-sale clause, this gave the partner the right to demand immediate payment of the entire outstanding mortgage balance from the investor (not the neighbor). However, the neighbor may still lose the property if the partner exercises the right to foreclose in the event that payments are not made by anyone.
B is incorrect. This answer reaches the correct answer with the wrong reasoning. Judgment should be for the neighbor, but not because she is not in privity of estate with the partner. The neighbor expressly did NOT assume the mortgage, which means privity is irrelevant between the neighbor and the partner. When a buyer purchases a property «subject to» a mortgage but does not «assume» the mortgage, she will not be personally liable for payments. Here, the neighbor took the property «subject to» the mortgage and did not assume, which means there was no shared relationship between the neighbor and the partner as to the land. The investor's failure to ensure that payments were made gives the partner the right to sue the investor and possibly foreclose, but not to hold the neighbor liable.
C is incorrect. The call of this question asks who judgment should be for in the suit by the partner against the neighbor, not the investor. The partner may have an immediate actionable demand against the investor for the full balance of the mortgage for violating the due-on-sale clause, but the issue here is whether the partner can recover from the neighbor. As explained above, the partner may not hold the neighbor liable because she did not assume the mortgage, and her rights are unaffected by the due-on-sale clause.
D is incorrect. This is a misapplication of the rules governing privity. As previously explained, the neighbor did not assume the mortgage that the investor had secured through his partner. Consequently, the neighbor was not in privity with the partner, so that issue is irrelevant. Note: The only privity that might exist would be between the neighbor and the investor, but that is not at issue.