Court Decisions Mentioning "Equitable Interest" or "Lease Option"

This page starts with a link/list to text from court cases with decisions relating to "equitable interest" and/or "lease-options."

The Case Citation is listed next below, as a title and a link to the actual text below. Generally there is also a link to the web source fot each Case, usually as found through FindLaw.com.

Is real property 'acquired,' within the meaning of the revenue acts, when a lease is made containing an option to purchase, or when the option is exercised? The ques tion is presented under the relevant sections of the Revenue Acts of 1921, 1924, 1926, and 1928.1

October 13, 1906, the Irvine Company leased to the San Joaquin Fruit Company one thousand acres, part of a much larger tract, of bare unirrigated land in California. The lessor was wholly owned by one Irvine, and the lessee was organized by two experienced men who together with Irvine subscribed its capital, in the hope that planting, irrigation, and cultivation would make the land valuable.

The lease was for a term of ten years from December 1, 1906; required the lessee to plant the tract as an orchard within four years, to procure and conduct a specified supply of irrigation water to the tract, and to raise certain field crops in connection with the orchard; and embodied an irrevocable option to buy the whole acreage for $200,000, exercisable November 30, 1916.

Before October, 1908, the lessee procured the water, planted, and was successfully working the land; and the taking up of the option at the end of the term was then no longer a matter of doubt.

By February 28, 1913, the value of the property had greatly increased. On November 30, 1916, the option was closed and conveyance made to the lessee, which subsequently transferred the land to the respondent under circumstances which do not alter the basis for calculation of gain.

During the period 1920 to 1928, inclusive, [297 U.S. 496, 498] the respondent sold portions of the tract. In computing the tax liability for these years the petitioner determined the property was acquired November 30, 1916, when the option was exercised, and its cost was the $200,000 paid plus the amounts expended for improvements pursuant to the lease. The respondent appealed to the Board of Tax Appeals, contending the lessee acquired a property in the land-an interest real- prior to March 1, 1913, and the value of the land at that date was the proper basis for calculating gain on sales. The Board sustained the petitioner. 2 The Circuit Court of Appeals reversed the Board's decision. 3 To resolve an asserted conflict4 we granted certiorari. 296 U.S. 561 , 56 S. Ct. 141.

We hold that the respondent acquired the property on November 30, 1916. The option itself was property, and doubtless was valuable. If it had been assignable, and the lessee had sold it at a profit, taxable gain would have resulted from the sale. But the option is admittedly not the same property as the land.

So conceding, the respondent still insists that ownership of the option created an interest in the land.

This would not be true of a bare option unconnected with a lease;5 but we are told that because embodied in the lease the agreement became a covenant real and gave the lessee a species of interest or property in the land.

The weight of authority is to the contrary, 6 and no cited California decision supports the position.

7 But even if we should agree that a lessee-optionee acquires, by virtue of the instrument, an equitable interest in the land it would not follow that, within the contemplation of the revenue acts, he acquires the property at the date of the option rather than at the date of conveyance.

The word 'acquired' is not a term of art in the law of property but one in common use. The plain import of the word is 'obtained as one's own'. Language used in tax statutes should be read in the ordinary and natural sense. 8 In the common and usual meaning of the term the land was acquired when conveyed to the respondent's predecessor.

The Circuit Court of Appeals thought that to avoid serious doubts concerning the constitutional power to tax gains accruing before March 1, 1913, it was important, if possible, to treat the property as acquired when the option was given. The court therefore resorted to the doctrine that the title when acquired relates back to the date of the option. Cited in support of this application of the theory are cases in which the California courts have invoked it to subordinate the rights of assignees or mortgagees who became such with notice of an outstanding option.

9 The fiction of relation, indulged to defeat those dealing with the legal title with knowledge of the option, can give no aid in solving the question of the time of the optionee's acquirement of property under a statute taxing gain upon a subsequent sale. And there is no need of the fiction to avoid any constitutional question. The power to tax gains which accrued prior to the adoption of the Sixteenth Amendment is not here involved.

We suppose [297 U.S. 496, 500] the amount received by the respondent from a sale includes and is the result of increase in value of the property in the period prior to March 1, 1913.

But the gain accruing in that period did not accrue to property owned by the lessee.

Neither the land nor the gain so accruing before March 1, 1913, became the lessee's property until 1916 when it took up the option.

An alternative contention is that the exercise of the option and the conveyance on November 30, 1916, constituted merely an exchange of capital assets-a closed transaction-and the basis for calculation of gain was the value of the land and improvements at that date.

The capital asset, sale of which resulted in taxable gain, was the land. This was not an asset of the taxpayer prior to the exercise of the option. We think it clear that there was no combination of two capital assets (the option and $200,000 of cash), to form a new capital asset (the land), which was subsequently sold at a profit. The judgment of the Circuit Court of Appeals must be reversed.

Footnotes

[ Footnote 1 ] 42 Stat. 227, 229, 202(a, b); 43 Stat. 253, 258, 204 (a, b); 44 Stat. 9, 14, 204(a, b), 26 U.S.C.A. 113 note; 45 Stat. 791, 818, 113( a, b), 26 U.S.C.A. 113(a, b). The provisions of the Revenue Act of 1924 ( 43 Stat. 258), which are typical, follow:

Section 202 of the Revenue Act of 1921 speaks of 'property, real, personal, or mixed.'

[ Footnote 2 ] San Joaquin Fruit & Investment Co. v. Commissioner, 28 B.T.A. 395.

[ Footnote 3 ] San Joaquin Fruit & Investment Co. v. Commissioner, 77 F.(2d) 723.

[ Footnote 4 ] See Commissioner v. Cummings (C.C.A.) 77 F.(2d) 670; Chisholm v. Commissioner (C.C.A.) 79 F.(2d) 14.

[ Footnote 5 ] Richardson v. Hardwick, 106 U.S. 252, 254 , 1 S.Ct. 213; Todd v. Citizens' Gas Co. (C.C.A.) 46 F.(2d) 855, 866.

[ Footnote 6 ] Willard v. Tayloe, 8 Wall. 557, 564; Kadish v. Lyon, 229 Ill. 35, 40, 82 N.E. 194; Bras v. Sheffield, 49 Kan. 702, 710, 31 P. 306, 33 Am.St.Rep. 386; Caldwell v. Frazier, 65 Kan. 24, 68 P. 1076; Luigart v. Lexington Turf Club, 130 Ky. 473, 480, 113 S.W. 814; Trumbull v. Bombard, 171 App.Div. 700, 157 N.Y.S. 794; Gamble v. Garlock, 116 Minn. 59, 133 N.W. 175, Ann.Cas.1913A, 1294.

[ Footnote 7 ] Compare Ludy v. Zumwalt, 85 Cal.App. 119, 259 P. 52; Hicks v. Christeson, 174 Cal. 712, 164 P. 395.

[ Footnote 9 ] Smith v. Bangham, 156 Cal. 359, 104 P. 689, 28 L.R.A.(N.S.) 522; Chapman v. Great Western Gypsum Co., 216 Cal. 420, 14 P.(2d) 758, 85 A.L.R. 917.

Giraud v. Milovich , 29 Cal.App.2d 543

The appellant, Mrs. Adelaide F. Giraud, brought this action of unlawful detainer against her tenants, P. M. Pocock and Mijo Milovich, the respondent herein, for [29 Cal.App.2d 544] failure to pay rent. The action was apparently abandoned as to Pocock, but was defended by Milovich, the tenant then in possession. There is some evidence to the effect that Pocock sold his interest to Milovich or at least agreed to a sale, soon after they took possession.

Milovich defended the unlawful detainer action upon the theory that he had been previously evicted by the landlord from the substantial portion of the leased premises and was accordingly relieved from the obligation to pay rent.

The parties acquired their respective interests in the property as follows: Felician Giraud, the original lessor, executed to P. M. Pocock a lease of the premises in question. It was a rectangular piece of property located an eighth of a mile south of Bishop, California. It had a 100-foot frontage on U.S. highway No. 395 and a depth of about 50 feet.

The lease was for a term of five years from March 25, 1933, at a rental of $25 per month. Pocock, on April 25, 1933, assigned the lease to himself and Mijo Milovich. The lease and assignment were duly recorded May 5, 1933.

The respondent entered into actual possession of the premises on April 25, 1933, on which he erected and maintained a gasoline service station, and continued in actual possession of all of it except a strip fronting on the highway which had a length of 100 feet and a depth of 20 feet, from which the court found he had been evicted.

After making the above-described lease, Felician Giraud, the original lessor, on October 31, 1933, conveyed a right of way to the state of California for highway purposes consisting of a strip of the leased premises 100 feet long by 20 feet deep where the property adjoined the U.S. highway No. 395, for the sum of $151.50.

Felician Giraud, on the same day, executed a deed to the remaining portion of the leased property to Alfred and Adele Giraud. Alfred Giraud conveyed his interest in the premises to appellant about July, 1934, prior to the commencement of this action. December 18, 1933, Alfred and Adele Giraud signed a quitclaim deed to the described 20-foot strip of property, conveying it to the state of California for highway purposes.

The deed from Felician Giraud contained the following: "And I, the said grantor, do hereby waive all claim for any and all damages or compensation for and on account of the [29 Cal.App.2d 545] location, establishment and construction of said state highway and do grant to the grantee the right to remove any and all trees, growths and road-building material within said right of way, and the right to use the same in such manner as the said grantee may deem proper, needful or necessary in the construction, reconstruction or maintenance of said state highway," etc. The deed from Alfred and Adelaide F. Giraud contained the following: "and we__________ release __________ and discharge __________ for ourselves __________ grantees and __________ assigns __________, the state __________ from any __________ suits __________ damages __________ or claims __________ we now have __________ by reason of the location or construction __________ of the state highway __________ and to all damages to the remaining section of our said lands by reason of the severance therefrom of the parcel __________ conveyed and quit-claimed". The state went into possession of the 20-foot strip of land in question and forcibly ousted and evicted him therefrom, thus leaving him only the 30 feet in depth of the original 50 feet upon which to conduct and operate his business. The court found that Alfred and Adelaide F. Giraud were at all times the onwers of the real property leased, although Felician Giraud held the legal title in trust for them.

From the record, which is woefully lacking in clarity, it appears that respondent testified that he had no knowledge of the execution of the deeds to the state until the authorities were about to enter and widen the highway, which date was around November, 1934. About this time respondent stated to appellant that he would be satisfied to let her sell this strip to the state and allow it to enter into possession if she would replace the strip so taken from her adjoining property, and raise the gas station, pumps and tanks. He testified that he did not know that the parcel had theretofore been sold to the state. However, the evidence is conflicting and there is in evidence an encroachment permit dated April 8, 1933, issued to P. M. Pocock, authorizing certain work to be done in reference to an approach to the oil station.

The evidence discloses that it would be necessary to make some extensive fill to the rear portion of the remaining parcel of the leased premises before it would be usable as a filing station; that respondent was compelled to move three large one-thousand-gallon gasoline tanks from the strip taken by the state and that thereafter he had no available space on the [29 Cal.App.2d 546] property to place them, and was forced to store them on a portion of an unopened adjoining street.

There is considerable evidence indicating that the landlord and the representatives of the state were busily engaged in an endeavor to appease the tenant before moving upon the property. After the state took possession appellant made no attempt to secure for respondent, by lease, any additional ground and refused to raise the gas station, etc., whereupon respondent offered to do this work and withhold the cost from the monthly rental which was refused. He also offered to sell his equipment and interest to appellant at considerable discount but appellant declined, whereupon respondent refused to pay further rent for the premises.

The rent was ordinarily paid to appellant, but she claimed none had been paid by Milovich or Pocock since November, 1934. The trial court found that Felician Giraud, Alfred Giraud and appellant Adelaide F. Giraud ousted, evicted and dispossessed the respondent from a substantial portion of the premises leased, to wit, the 20-foot strip above described, and that such eviction still continued; that the rental value of that portion of the premises from which he had not been ousted, at the time of the signing of the findings, was 82+c per day; that appellant had not sustained any damage in any sum by reason of the detention of the premises and accordingly denied appellant the relief prayed for in her complaint.

The appellant advances the contention that the lease, being for more than one year and duly recorded, and the lessor-owner having made an outright deed to a portion of the premises, that this only constituted a severance of the reversionary interest in the property and did not amount to an eviction by the lessor, and constituted no wrong to the tenant, and that therefore the law will apportion the rent. (Citing 16 R. C. L. 916, note 8; 16 R. C. L. 945, note 8; Dreyfus v. Hirt, 82 Cal. 621, 627 [23 P. 193]; Linton v. Hart, 25 Pa. 193 [64 Am. Dec. 691].) She contends further that the state evicted the tenant, if there was an eviction, and that therefore the tenant is still required to pay the rent to the landlord for the proportionate value of that part of the land which the tenant still retained, and for failure to pay such rent the tenant should be dispossessed in an unlawful detainer action. (Citing sec. 1935, Civ. Code.) [29 Cal.App.2d 547]

Respondent answers this contention by claiming that the two deeds to the state gave the grantee full and every power and authority of immediate possession, which was its warrant for entering in and upon the premises, for taking possession thereof, and for ousting and evicting the respondent therefrom; that by virtue of this authority and the representations made it ousted the tenant.

It is often difficult to determine what acts will constitute an eviction. [1] It is settled, however, that there need not be actual dispossession of the tenant from the leased premises. An eviction may be actual, as where there is a physical expulsion, or it may be constructive as where, though amounting to an eviction at law, the tenant is not deprived of actual occupancy. Any disturbance of a tenant's possession by a landlord or by someone acting under his authority, whereby the premises are rendered unfit for occupancy for the purpose for which they are demised, or the tenant is deprived of the beneficial enjoyment of the premises, amounts to a constructive eviction. (Riechhold v. Sommarstrom Inv. Co., 83 Cal.App. 173 [256 P. 592]; Hopkins v. Murphy, 233 Mass. 476 [124 N.E. 252, 13 A.L.R. 816].) In 16 R. C. L. 955, sec. 463, we find the following:

"Minority Rule: It is the rule in a few jurisdictions that when a landlord enters and dispossesses the tenant of a part of the premises a discharge of the rent will not result unless the tenant surrenders or abandons the possession entirely and that if the tenant remains in possession the rent is discharged only pro tanto to the extent of the value of the use and occupation of the part of the premises of which the tenant is dispossessed."

From 16 R. C. L., p. 953, sec. 461, we quote the following, together with some of the supporting authorities from the footnotes:

"Partial Eviction by Lanlord: General Rule. When the eviction is of a part of the premises only, and is by the landlord himself, this, according to the generally accepted view, will relieve the tenant from liability for future rents, though he remains in possession and enjoyment of the balance of the premises and the law will not in such a case apportion the rent." (Citing Halligan v. Wade, 21 Ill. 470 [74 Am. Dec. 108]; Royce v. Guggenheim, 106 Mass. 201 [8 Am. Rep. 322]; Kuschinsky v. Flanigan, 170 Mich. 245 [136 N.W. 362, [29 Cal.App.2d 548] Ann. Cas. 1914A, 1228, 41 L.R.A. (N. S.) 430]; Briggs v. Hall, 4 Leigh (Va.), 484 [26 Am. Dec. 326].) "As has been said the landlord cannot so apportion his own wrong as to force the tenant to pay anything for the residue." (Colburn v. Morrill, 117 Mass. 262 [19 Am. Rep. 415].) "So an action for use and occupation cannot be maintained after such a partial eviction, as the lease is not terminated by the unlawful eviction. He still continues to occupy that part of the estate from which he has not been evicted, under and by virtue of the lease, and no implied promise to pay arises. Not only does a partial eviction by the landlord preclude the recovery of rent accruing subsequent to the eviction and while the eviction continues, but it also suspends the right of the landlord to maintain proceedings to remove the tenant for the non-payment of rent, as the tenant ceases by the act of his landlord to become liable legally for the rent." (Note, Ann. Cas. 1914A, 1233.) "... An actual partial eviction by the landlord suspends the rent only during the continuance of the eviction, and on its termination the rent revives. ... A partial eviction by the landlord does not, it seems, where the tenant remains in possession of the balance of the premises, release the tenant from other obligations on his part independent of the covenant to pay rent, such as his covenant to repair." (Smith v. McEnamy, 170 Mass. 26 [48 N.E. 781, 64 Am.St.Rep. 272].)

[2] The rule in an California seems to be in accord with the general rule. The leading case is Skaggs v. Emerson, 50 Cal. 3, wherein the court held, in an action for unlawful detainer to recover possession from the tenant by reason of failure to pay rent, that if a tenant is forcibly evicted from a substantial part of the demised premises, by the landlord, and the lease is not terminated, but the tenant still continues to occupy, under the lease, the part of which he retains possession, the tenant cannot be compelled to pay the rent reserved, for, in such case, there can be no apportionment of rent, and that if a tenant is forcibly evicted by the landlord from a substantial part of the demised premises, but still continues to occupy the remainer under the lease, the landlord cannot, under the unlawful detainer act, recover possession from the tenant by reason of nonpayment of rent while the eviction continues. (Veysey v. Moriyama, 184 Cal. 802, 805 [195 P. 662, 20 A.L.R. 1363]; Kelley v. Long, 18 Cal.App. 156 [122 [29 Cal.App.2d 549] P. 832]; Camarillo v. Fenlon, 49 Cal. 202; Automobile Truck etc. Co. v. Salladay, 55 Cal.App. 219 [203 P. 163]; North Pac. S. S. Co. v. Terminal Inv. Co., 43 Cal.App. 182 [185 P. 205]; 15 Cal.Jur. 682, sec. 92.) A different rule seems to apply where the tenant remains in possession of the whole of the premises leased and claims a constructive eviction. (Veysey v. Moriyama, supra, and cases cited; Riechhold v. Sommarstrom Inv. Co., supra; Agar v. Winslow, 123 Cal. 587 [56 P. 422, 69 Am.St.Rep. 84]; 15 Cal.Jur. 680, sec. 90; Barrow v. Simon, 2 Cal.App.2d 500 [38 PaCal.2d 197].)

The evidence sufficiently supports the finding that there was a substantial partial eviction and accordingly, under the above-cited authorities, the tenant may remain in possession of the remainder and not be liable for the rent while the partial eviction continues. Therefore, an action of unlawful detainer to recover possession of the premises for nonpayment of rent will not lie if such eviction, under the evidence, was an eviction by the landlord or by his procurement. The evidence seems to justify a conclusion on the part of the trial court that the lessor and his successors authorized the state of California to take immediate possession of the leased premises by virtue of the two deeds in evidence and the subsequent acts of the appellant in making the claimed false promises without any intention of performing them, whereby the eviction was accomplished to the detriment of the tenant, and therefore can be said to be wrongful. (Civ. Code, sec. 1573, subd. 1.)

The original lessor granted this right of way to the state and retained the entire proceeds from the sale. Had the state instituted condemnation proceedings (and there was some evidence it intended to do so) and had an award been given, the tenant would have been entitled to share in the proceeds thereof according to his interest in the property. This would not have terminated the lease nor have absolved the lessee from his covenant to pay the full rent. (City of Pasadena v. Porter, 201 Cal. 381 [257 P. 526, 53 A.L.R. 679].)

The case of McWilliams v. Harper, 177 La. 728 [149 So. 437], decided by the Supreme Court of Louisiana, July 7, 1933, seems to be entirely in accord with the facts and this holding. In the cited case the plaintiff (the tenant) took [29 Cal.App.2d 550] possession of the property leased by him, made improvements on it, used one of the buildings on it for a small grocery store and also as a filling station. In 1929, preparations were being made to hard-surface and improve the highway. The police jury of Bossier parish concluded to run the old road, which ran immediately in front of the store and filling station, a little farther to the north, and caused a survey to be made with that end in view. The survey thus made ran through the store building and filling station. The defendant landlord objected to the new route, since it would destroy his property. An expropriation suit was threatened if defendant would not sell a right of way. Defendant promised a right of way north of the store on condition that the police jury would place the store and all outhouses on the property in the same position with reference to the new road as they were then occupying with reference to the old road. The police jury, on the completion of the highway, turned the buildings around as promised. The new route reduced the area of the property appreciably and cut off a part of plaintiff's truck patch and, as above said, necessitated the moving of the buildings around, so as to face the new road. Plaintiff was not consulted about the making of the dedication, nor was his consent obtained for the new route, so far as that route might affect his rights in the leased premises, nor were any legal proceedings had by the police jury to obtain such rights. On January 11, 1930, plaintiff brought a suit, alleging that defendant, by making the dedication in disregard of his rights, breached and abrogated the contract of lease and caused his eviction. Defendant presented the argument that the lease, being of record, when the dedication was made, the police jury, by operation of law, accepted the dedication subject to it, and that whatever wrong may have been done to plaintiff in ignoring his lease, was done, not by defendant, since it had a right to dedicate its property, whether leased or not, but by the police jury. In disposing of this contention the court said:

"Under the facts of the case, as we find them, defendant does not occupy the position of a third person in whatever wrong was done plaintiff. He made the dedication, without reference to plaintiff's right to use of the property, and without consulting him. He had every reason to know at the time that the construction of the road would not be delayed until the expiration of the lease which still had several years [29 Cal.App.2d 551] to run. He acquiesced in the construction of the road, without regard to the plaintiff's rights, and did the little he could do in furtherance of its prompt construction, as, for instance, the permission granted by him as to the removal of dirt."

This holding is so applicable to the facts in the case before us that we adopt it as a proper disposition of the question raised here. Our conclusion is that appellant at least stood as a participator in the wrong done.

JUSTICE BURNETT:� The Court granted a writ of certiorari to review the Court of Appeals� decision in Lewis v. Premium Investment Corp., 341 S.C. 539, 535 S.E.2d 139 (Ct. App. 2000).� We affirm as modified.�

On October 29, 1976, Respondent William Lewis (Purchaser) entered into an installment sales contract to purchase real estate in North Myrtle Beach from Petitioner Premium Investment Corporation (Seller).� The contract contains the following default provision:

Four months after executing the contract, Purchaser placed a mobile home on the lot and his family moved in.� Purchaser made all payments through July 1988. [1] � After July 1988, no further payments were made.

In October 1989, one year after Purchaser�s default, Seller mailed Purchaser a notice canceling the contract.� The notice was returned �unclaimed� to Seller.� Although sent by certified mail to the correct address, Purchaser asserts he did not receive the notice.

In 1992, Purchaser�s wife contacted Seller�s representative to determine if he would allow her to assume the payments.� The representative passed away without making a commitment.

On August 27, 1996, Purchaser�s attorney forwarded Seller a check for $2,451.34.� Seller refused to accept the check.

At the time of default (August 1988), Purchaser had made 141 of the approximately 182 monthly payments and owed $2,440.14.� The balance as of August 31, 1998, was $7,726.33.

Purchaser brought this action for breach of contract and specific performance.� In its amended answer and counterclaim, Seller alleged Purchaser was in default and sought an order terminating the contract.� Alternatively, Seller sought judgment in the amount of $7,443, reasonable attorney�s fees, and foreclosure of any equitable interest Purchaser may have obtained as a result of the transaction. [2]

The master-in-equity determined Purchaser was in default of the agreement and Seller had the right to terminate the agreement pursuant to its terms.� The Court of Appeals reversed, holding Purchaser had an equitable interest in the property and, therefore, Seller�s right to seek forfeiture or to foreclose was subject to Purchaser�s right of redemption which could not have been waived by the agreement.� Id.�

Did the Court of Appeals err by declining to apply the forfeiture provision of the installment land contract, instead determining Purchaser has an equitable interest in the property which includes a right of redemption upon default?

Whether an equitable right of redemption exists in spite of a strict forfeiture provision in an installment land contract has not been specifically decided by this Court.� In deciding the answer to this question, we must determine whether equitable principles may alter the clear and unambiguous terms of the parties� contract.��

15 Richard R. Powell, Real Property ' 84D.01 at 3 (2000); Ellis v. Butterfield, 570 P.2d 1334, 1336 (Idaho 1977) (installment land contract is �frequently called a �poor man�s mortgage� because the vendor, as with a mortgage, finances the purchaser�s acquisition of the property by accepting installment payments on the purchase price over a period of years, but the purchaser does not receive the benefit of those remedial statutes protecting the rights of mortgagors.�). [3] � Contrary to existing mortgage protections, a seller may typically avoid foreclosure procedures by including a forfeiture remedy in the installment land contract.� See Matthew Cole Bormuth, note, Real Estate B The Wyoming Installment Land Contract: A Mortgage in Sheep�s Clothing?� Or What You See Isn�t What You Get, 28 Land and Water Law Review 309 (1993); Juliet M. Moringiello, A Mortgage by Any Other Name: A Plea for the Uniform Treatment of Installment Land Contracts and Mortgages under the Bankruptcy Code, 100 Dick. L. R. 733 (1996) (forfeiture remedy makes installment land contract more favorable to vendor than seller-financed mortgage).��

Basic contract law provides that when a contract is clear and unambiguous, the language alone determines the contract�s force and effect.� C.A.N. Enterprises, Inc. v. South Carolina Health & Human Servs. Fin. Comm�n, 296 S.C. 373, 373 S.E.2d 584 (1988).� It is not the function of the court to rewrite contracts for parties.� See Gambrell v. Travelers Ins. Cos., 280 S.C. 69, 310 S.E.2d 814 (1983).

�� Parties to a contract may stipulate as to the amount of liquidated damages owed in the event of nonperformance.� Tate v. Le Master, 231 S.C. 429, 99 S.E.2d 39 (1957).�� Where, however, the sum stipulated is plainly disproportionate to any probable damage resulting from breach of contract, the stipulation is an unenforceable penalty.� Id.; Kirkland Distributing Co. of Columbia, S.C. v. United States, 276 F.2d 138 (4th Cir. 1960).� Equity will not enforce a penalty for breach of contract.� South Carolina Dep�t of Health and Envtl. Control v. Kennedy, 289 S.C. 73, 344 S.E.2d 859 (Ct. App. 1986). �Equity does not favor forfeitures or penalties and will relieve against them when practicable in the interest of justice.�� Lane v. New York Life Ins. Co., 147 S.C. 333, 374, 145 S.E. 196, 209 (1928) citing Bangert v. John L. Roper Lumber Co., 86 S. E. 516, 517 (N.C. 1915).�

Our conclusion is supported by authority from other jurisdictions. In numerous other states, courts claim an equitable power to �deny or delay forfeiture when fairness demands.�� Freyfogle, supra 620; see Hatfield v. Mixon Realty Co., 601 S.W.2d 894 (Ark. Ct. App. 1980); Cedar Lane Investments v. American Roofing Supply of Colorado Springs, Inc., 919 P.2d 879 (Col. Ct. App. 1996); Ellis v. Butterfield, supra; Nelson v. Robinson, 336 P.2d 415 (Kan. 1959); Perkins v. Penney, 387 A.2d 205 (Me. 1978); Rothenberg v. Follman, 172 N.W.2d 845 (Mich. Ct. App. 1969); O�Meara v. Olson, 414 N.W.2d 563 (Minn. Ct. App. 1987); Beck v. Strong, 572 S.W.2d 484 (Mo. Ct. App. 1978); Sharp v. Holthusen, 616 P.2d 374 (Mont. 1980); Martinez v. Martinez, 678 P.2d 1163 (N.M. 1984); Lamberth v. McDaniel, 506 S.E.2d 295 (N.C. App. 1998); Straub v. Lessman, 403 N.W.2d 5 (N.D. 1987); T-Anchor Corp. v. Travarillo Assocs., 529 S.W.2d 622 (Tex. Civ. App. 1975); Call v. Timber Lakes Corp., 567 P.2d 1108 (Utah 1977); Bailey v. Savage, 236 S.E.2d 203 (W.Va. 1977); see also 4 Richard R. Powell, Real Property � 37.21[1][c] at 132 (2001) (�[t]he main problem with the forfeiture remedy is that it often puts the seller in too favorable a position and, therefore, is subject to attacks based on equitable considerations of unfairness and unconscionablilty.� ).� In fact, the authoritative treatise on real property law provides, �no state today is likely to condone a purchaser forfeiture that greatly exceeds the vendor�s loss.�� 15 Powell, Real Property � 84D.01[4] at 12.

As discussed at length in Bartles v. Livingston, 282 S.C. 448, 319 S.E.2d 707 (Ct. App. 1984), the common law recognized an equitable right of redemption in the context of mortgages well before any statutory right was granted.� The mortgagor was given an equitable right to redeem the property irrespective of the terms of the mortgage and this right to redeem was considered an equitable interest in the land.� For years, in an executory contract for the sale of land our Court has equated the vendor with the mortgagee and the vendee with the mortgagor.� Dempsey v. Huskey, 224 S.C. 536, 80 S.E.2d 119 (1954). [4] � There is no equitable reason why the right of redemption should not likewise be afforded to vendees in an installment land contract in appropriate circumstances.

For the above reasons, we hold courts of equity can relieve a defaulting purchaser from the strict forfeiture provision in an installment land contract and provide the opportunity for redemption when equity so demands. [5] � Accordingly, this matter is remanded to the master-in-equity to determine whether Purchaser has an equitable right of redemption.�

TOAL, C.J., MOORE, PLEICONES, JJ., and Acting Justice George T. Gregory, Jr., concurs.

[1] The contract price was $7,500 plus interest.� Purchaser paid $75.00 as a down payment.� Monthly payments were $75.00.

[2] The parties agree this is an action in equity.� Collier v. Green, 244 S.C. 367, 137 S.E.2d 277 (1964) (specific performance lies in equity); Wilder Corp. v. Wilke, 324 S.C. 570, 479 S.E.2d 510 (Ct. App. 1996) (actions for foreclosure or cancellation of instruments are in equity).�

[3] An installment land contract does have advantages for buyers.� In addition to immediate possession, installment land contracts offer the benefits of a low down payment and easy credit requirements.� Buyers do not have to procure expensive and, sometimes unavailable, traditional mortgage financing.� Closing costs are often minimal and, since there is no outside lender, there are no loan origination fees.� Eric T. Freyfogle, Vagueness and the Rule of Law: Reconsidering Installment Land Contract Forfeitures, 1988 Duke L.J. 609.�

[4] The Court of Appeals has specifically held that in an installment land contract, the vendee in possession of the land is considered the owner of an equitable interest in the property.� Southern Pole Bldgs., Inc., v. Williams, 289 S.C. 521, 347 S.E.2d 121 (Ct. App. 1986).�

We note the right of redemption is distinguishable from an equitable estate which may pass to the purchaser under the theory of equitable conversion. �Unlike the equitable right of redemption, the theory of equitable conversion does not apply if the parties provide to the contrary by contract.� Brook v. Council of Co-Owners of Stones Throw Horiz. Prop. Regime I, 315 S.C. 474, 445 S.E.2d 630 (1994).� In this case, the contract provides that, upon default, all amounts previously paid will be retained by Seller as rent.� Although this provision may prevent Purchaser from claiming an equitable estate in the property for the amount of the payments made, it cannot defeat his equitable right of redemption.��

[5] A variety of case-specific factors should be considered to determine if redemption is equitable under the circumstances.� See Cedar Lane Investments v. American Roofing Supply of Colorado Springs, Inc., supra (the amount of the purchaser�s equity, the length of the default period and the number of defaults, the amount of monthly payments in relation to rental value, the value of improvements to the property, the adequacy of the property�s maintenance); Rothenberg v. Follman, 172 N.W.2d 845 (Mich. Ct. App. 1996) (whether forfeiture is unreasonable depends upon amount and length of default, amount of forfeiture, reason for delay in payment, and speed in which equity is sought); 4 Powell, Real Property � 37.21[1] at 135 (�In determining whether the attempted forfeiture should be set aside, courts consider the amount of default, the reason for the purchaser�s default, the amount of money the purchaser would forfeit compared to the purchase price, and the relationship of the monthly payments to the fair rental value of the property.�).��

Document Links:
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    SUBSEQUENT HISTORY:
    PRIOR HISTORY:
    DISPOSITION:
    CASE SUMMARY
    PROCEDURAL POSTURE:
    OVERVIEW:
    OUTCOME:
    CORE TERMS:
    LexisNexis® Headnotes
    HEADNOTES
    SYLLABUS
    COUNSEL:
    JUDGES:
    OPINION BY:
    OPINION

85 Cal. App. 119, *; 259 P. 52, **;
1927 Cal. App. LEXIS 357, ***

SARAH ELIZABETH LUDY, Respondent, v. I. G. ZUMWALT et al., Defendants; WESTERN CANAL COMPANY (a Corporation), Appellant
Civ. No. 3298
COURT OF APPEAL OF CALIFORNIA, THIRD APPELLATE DISTRICT
85 Cal. App. 119; 259 P. 52; 1927 Cal. App. LEXIS 357

August 15, 1927, Decided
SUBSEQUENT HISTORY: [***1] [**1117] A Petition for a Rehearing of this Cause was Denied by the District Court of Appeal on September 1, 1927, and the Following Opinion then Rendered thereon.

PRIOR HISTORY: APPEAL from a judgment of the Superior Court of Glenn County. Claude F. Purkitt, Judge.

DISPOSITION: Affirmed.

CASE SUMMARY

PROCEDURAL POSTURE: Defendant lien holder appealed the judgment of the Superior Court of Glenn County (California) in favor of plaintiff mortgagee in the mortgagee's actions to foreclose a mortgage against defendants, mortgagors and other interest holders.

OVERVIEW: The mortgagee filed a complaint against defendants to foreclose a purchase money mortgage given by the mortgagors to secure a promissory note. The lienholder filed a cross-claim against the mortgagee alleging that a lien it possessed on the land to supply water was superior.

At trial, the court entered judgment for the mortgagee on all claims and the cross-claim.

The lienholder appealed. On appeal, the court affirmed the judgment.

The court held that because the mortgagors had no title of record and were not connected to the title of the mortgaged premises in any way at the time the water contract with the lienholder was made or when the mortgagee's mortgage was recorded, the lien attached to the title of the mortgaged premises gave no notice to anyone of its existence. Therefore, the lien was subordinate to the mortgage.

There was no constructive notice under Cal. Civ. Code § 1213. The mortgagee would not have been able to find the lien as to the water contract through a search of the land records. The doctrine of relation was also inapplicable to the case. The only equity the mortgagors had in the property was the right to have the contract to purchase the land enforced.

OUTCOME: The court affirmed the judgments in favor of the mortgagee in her action to foreclose the mortgage against the mortgagors and other interest holders and as to the lienholder's cross-claim.

CORE TERMS: mortgage, conveyance, deed, recorded, recordation, optionee, notice, lease, right to purchase, connected, doctrine of relation, purchase price, real property, constructive notice, conveyed, acre, trust deed, grantor, option to purchase, after-acquired, subordinate, mortgaged, recorder, acquire, tract, rent, water service, lands described, foreclose, subsequent purchasers
LexisNexis® Headnotes
Real Property Law > Financing > Mortgages & Other Security Instruments > Mortgagee's Interests
Real Property Law > Nonmortgage Liens > Lien Priorities
Real Property Law > Priorities & Recording > General Overview

HN1

Cal. Civ. Code § 1213, relating to the recordation of conveyances of real property, provides that every conveyance of real property acknowledged or proved and certified and recorded as prescribed by law from the time it is filed with the recorder for record is constructive notice of the contents thereof to subsequent purchasers and mortgagees.

Real Property Law > Deeds > General Overview
Real Property Law > Financing > Mortgages & Other Security Instruments > Mortgagee's Interests
Real Property Law > Priorities & Recording > General Overview

HN2

One who is not connected by any conveyance whatever with the record title to a piece of property and makes a conveyance thereof, does not thereby create any defect in the record title of another when such title is deducible by intermediate effective conveyances from the original owners to that other. Such a deed would not even be constructive notice. The California Civil Code provides that every conveyance of real property, acknowledged and recorded, is from the date of recordation constructive notice of its contents to subsequent purchasers and mortgagees. Cal. Civ. Code § 1213. This language is very general, applying in terms to every conveyance, but it is held that this only contemplates conveyances by one having legal title to the property conveyed and is applied where there are conflicting conveyances made by persons claiming under the same common grantor. It does not apply to a deed by a stranger; one who is not connected in any manner with the title of record. No notice whatever is conveyed by such a deed.

Real Property Law > Deeds > General Overview
Real Property Law > Financing > Secondary Financing > Lien Priorities
Real Property Law > Nonmortgage Liens > Lien Priorities

HN3

Where the vendor of real estate records his mortgage to secure the purchase price at the same instant that the deed from him is recorded, he surely can have no occasion to examine the records for encumbrances created by his vendee on the property, prior to the recording of his conveyance. The doctrine of relation, which is a fiction of the law adopted solely for the purposes of justice, will not be given effect when it would work manifest injustice.

Contracts Law > Types of Contracts > Option Contracts
Real Property Law > Purchase & Sale > Contracts of Sale > General Overview
Real Property Law > Purchase & Sale > Remedies > Specific Performance

HN4

While the optionee of an option agreement, valid in all essentials and fair, may be entitled to have such agreement specifically enforced, it is to that extent only that he can claim, if, strictly speaking, he can do so at all, an equity in the property involved in the agreement.

Manifestly, it cannot logically be held that, by virtue of his mere right to purchase the property which is the subject of the option, the optionee acquires any actual interest in the property itself which is the subject thereof, or that he can acquire any such interest until he has seasonably accepted or exercised his option to purchase according to the terms of the agreement.

An option is by no means a sale of property, but the sale of the right to purchase. The distinction between a contract to purchase or sell real estate and an option to purchase is, that the contract to purchase or sell creates a mutual obligation on the party to sell and on the other to purchase, while an option merely gives the right to purchase within a limited time without imposing any obligation to purchase.

HEADNOTES

CALIFORNIA OFFICIAL REPORTS HEADNOTES

CA(1)(1) Title -- Water Service Contract -- Absence of Title -- Subsequent Purchase-money Mortgage -- Notice -- Priority. -- Where the optionee under a contract for the purchase of real property, at the time of entering into and recordation of a water service contract providing for a lien upon said property for water to be furnished, has no title of record and is not in any manner connected with the title to the property, the recordation of such water service contract gives no notice to anyone of the existence thereof on the property; and the lien under said water service contract is subordinate and subservient to the lien of the purchase-money mortgage thereafter executed and recorded by said optionee simultaneously with the execution and recordation of the deed conveying the property to said optionee.

CA(2)(2) Id.--Option Contract--Subsequent Conveyance. --The rule that the conveyance to the optionee of the land the subject of the option contract establishes the title in the grantee as of the date of said contract is a fiction of law adopted solely for the purpose of justice and will not be given effect when it would work manifest injustice.

CA(3)(3) Id.--Title of Optionee--Interest Acquired. --While the optionee of an option agreement, valid in all respects and fair, may be entitled to have such agreement specifically enforced, it is to that extent only that he can claim, if, strictly speaking, he can do so at all, an equity in the property involved in the agreement; and it cannot be held that, by virtue of his mere right to purchase the property which is the subject of the option, the optionee acquires any actual interest in the property itself which is the subject thereof, or that he can acquire any such interest until he has seasonably accepted or exercised his option to purchase according to the terms of the agreement.

CA(4)(4) Id.--Consideration for Option--Legal Effect. --The mere fact that the optionee pays to the optioner a substantial sum of money, which is to be applied on the purchase price, in the event the optionee exercises his privilege to buy, does not impart to the agreement any greater dignity in legal effect than that of an ordinary option conferring upon a party the right to purchase the property.

CA(5)(5) Id.--After-acquired Title--Doctrine of Relation. --The doctrine of "after-acquired" title is, in effect, the same as the doctrine of relation. (On denial of rehearing.)

CA(6)(6) Id.--Recordation of Conveyance--Absence of Title--Notice. --The recordation of a conveyance by a party having no interest in or connection with the title to the property therein described does not have the effect of imparting notice to the real owner of said property or the public of such conveyance. (On denial of rehearing.)

SYLLABUS

The facts are stated in the opinion of the court.

COUNSEL: Guy C. Earl and W. H. Spaulding for Appellant.

Ware & Ware, U. W. Brown and I. G. Zumwalt for Respondent.

JUDGES: HART, J. Plummer, J., and Finch, P. J., concurred.

OPINION BY: HART

OPINION

[*120] HART, J. The plaintiff brought this suit to foreclose a a mortgage upon certain lands situated in Glenn County given by the defendants I. G. and Mattie B. Zumwalt to plaintiff to secure the payment to the latter of a promissory note, dated January 13, 1920, for the sum of $ 42,601.30.

The complaint is in the usual form in foreclosure proceedings. It alleges, however, that the appellant Western Canal Company and certain other parties "have, or claim to have, or assert, some interest in or claim upon said mortgaged lands and premises, or some part thereof, the exact nature of which is unknown to plaintiff, and for said reason she [*121] cannot allege or state the nature thereof, [***2] but she alleges that all of said liens, claims or interests of any of said defendants are subsequent to and subject to the lien of plaintiff."

The Zumwalts answered, denying that the note "is now due" and also the allegation of the complaint, which accords with a provision of the mortgage in that respect, that two per cent of the amount found due as principal and interest on said note "is a reasonable amount for attorney's fee in the foreclosure of said mortgage," and setting up "a separate defense" to the effect that, prior to the commencement of this action, and since the thirteenth day of January, 1924, the plaintiff in writing extended the time for the payment of said note to January 13, 1925. At the trial, however, the Zumwalts withdrew their denial that the note was due and their affirmative defense that plaintiff had extended the time for the payment thereof, leaving as the only issue as between the plaintiff and the Zumwalts the question, raised by their answer, whether the attorney's fees claimed by the complaint and as provided for in the mortgage would constitute a reasonable sum to be awarded plaintiff for that purpose.

The appellant Canal Company, a corporation organized [***3] for the purpose, among others, of supplying water to owners of land conveniently adjacent to its water system for the purpose of irrigation, answered the complaint, and in its answer embodied, in effect, a cross-complaint, in which it set up a lien upon the lands in question, growing out of a contract with the Zumwalts, whereby it agreed to furnish the latter, at specified rates, for a number of successive years, sufficient water with which to irrigate the lands in controversy, alleged that said lien was prior and superior to the lien of plaintiff's mortgage to foreclose which is the object of this action, and prayed that a decree be entered so adjudging.

The plaintiff answered the affirmative allegations of the so-called answer, and, after certain denials, and with more or less detail, recited the facts leading to the several transactions out of which the present controversy has developed and of which such consideration will hereinafter be given as will conduce to a proper understanding of the issues [*122] tried and determined below and now submitted here for review.

The findings by the trial court are favorable to the plaintiff, and, consequently, negative the claim by the [***4] appellant of a lien upon said lands prior in point of time to that of the plaintiff. As a matter of law the court concluded (conclusions of law) that the plaintiff was entitled to judgment against the Zumwalts for the sum of $ 41,601, as principal and $ 1,554.62 and $ 1,383.24, accruing, respectively, as interest to the date of the verification of her complaint, and subsequent to such verification, to January 13, 1925; that plaintiff is entitled to judgment decreeing that her mortgage is a first lien and "prior to any lien or claim of any character or kind whatever of any defendants, including the Western Canal Company, upon the lands described in the complaint"; that the plaintiff is entitled to have her mortgage and lien foreclosed, and is entitled to a judgment of foreclosure of the same and of the sale of said lands described in the complaint; that she is entitled to a provision in said judgment that she has a first lien upon all of said land for the payment of the sums found by the court that she is entitled to; that Western Canal Company is entitled to a judgment against the Zumwalts for the sums of $ 2,159.81 and $ 6,723, and interest on said sums from, respectively, December [***5] 1, 1921, and from December 1, 1922; that appellant is entitled to have a provision inserted in said judgment that "it has a lien upon the said 866 acres of land (the land upon which plaintiff's mortgage and the appellant's lien subsist) in the foregoing findings mentioned for the payment of said sums for which it is entitled to judgment, which lien is second to and subordinate to the lien in plaintiff's favor, as aforesaid.

Judgment was entered in harmony with the findings and conclusions of law.

The appeal is by Western Canal Company, upon the judgment-roll alone, from so much of said judgment as adjudges or decrees that its lien upon said lands is secondary and subordinate to the plaintiff's mortgage lien thereon.

The facts, as disclosed by the findings, may be herein stated as they are set out in appellant's opening brief, and which are among the facts specifically found by the court:

[*123] "Plaintiff owned an undivided one-half interest in a nine hundred twenty-three acre tract of land in Glenn County. The other half interest was owned in equal shares by eight other persons, her children. On September 22, 1919, in consideration of the payment of $ 5000.00 by defendant [***6] I. G. Zumwalt to said children, plaintiff and her children granted said Zumwalt an option for the purchase of said 923 acres. While said option was still alive, and on December 11, 1919, a contract was made between said Zumwalt and said appellant for the sale of water to irrigate all irrigable land in said tract, which proved to be 866 acres thereof, particularly described in the findings of fact and being all of said 923 acre tract 'save the sloughs and small waste parts and portions thereof.' On December 15, 1919, this water contract was recorded in book 6 of Contracts and Agreements, at page 435, in the office of the county recorder of said County of Glenn, and later recorded, on January 5, 1920, in book 44 of Mortgages, at page 188 thereof, in said office of said county recorder.

"At the time this contract was made, and at all times until after the commencement of this action, appellant was informed and believed that said I. G. Zumwalt owned all the property described in said contract, free and clear of any and all liens and encumbrances, except, of course, the lien of said contract for the payment of water bills, and had no actual information or actual knowledge to the contrary, [***7] and would not otherwise have furnished any water upon any of the lands described in said agreement. By the terms of said contract appellant was granted a permanent lien upon said lands as security for the payment of all moneys due or to fall due thereunder, such lien to be a first and prior lien.

"On January 13, 1920, plaintiff and her said eight children conveyed by deed the said 923 acres to said Zumwalt, plaintiff being at that time the owner of an undivided one-half interest in the said lands, and the eight children then owning each an undivided one-sixteenth interest therein. Simultaneously with the execution of said deed said Zumwalt paid said eight children in full for their aggregate one-half interest in said land the sum of $ 42,601.30, including said $ 5000. Said Zumwalt paid plaintiff nothing in cash, but in consideration of her half interest in said [*124] property, said Zumwalt executed and delivered at that time to plaintiff his note for $ 42,601.32, secured by a mortgage from said Zumwalt and his wife to said plaintiff covering said 923 acres; said note and mortgage being given to secure to said plaintiff her one-half share of the purchase price of said land as [***8] owner of the half interest therein. Plaintiff, at the time she took said note and mortgage, had no knowledge or information of said contract between said Zumwalt and Western Canal Company or that said Western Canal Company claimed any lien upon any of said land, and would not have accepted said note and mortgage had she known of said lien in favor of appellant. Said mortgage was thereafter, on January 16, 1920, recorded in the office of the said county recorder.

"Under the terms of said contract appellant did, during the year 1921, furnish on said lands water of the value of the principal amount of $ 2159.81, and likewise during the year 1922 water of the value, under said contract, of $ 6723.00.

"Said Zumwalt paid neither of said water bills nor any interest thereon. Having also defaulted in payment of his note to plaintiff, plaintiff brought suit to foreclose her said mortgage."

It may be added to the above statement that the court, both as a matter of fact and of law, found that I. G. Zumwalt and Mattie B. Zumwalt, prior to the execution of the deed by plaintiff and her children, conveying the land in question to I. G. Zumwalt, "had no right, title or interest in the lands and [***9] premises described in plaintiff's complaint and they had no right, title or interest therein at the time of the execution of said agreement in the form of exhibit A (the agreement between appellant and I. G. Zumwalt for the furnishing by the former of water for irrigation purposes to said Zumwalt), or at the time of the recordation of said agreement in the form of Exhibit A on the 5th day of January, 1920, as alleged in the answer of said defendant Western Canal Company, except that said defendant I. G. Zumwalt obtained from the parties executing the deed as aforesaid, on September 22, 1919, in consideration of the payment of $ 5,000.00 by said I. G. Zumwalt, to the parties other than plaintiff executing the deed as aforesaid, an option for the purchase of the lands described in said deed, [*125] which said option was in full force and effect at the time of the execution and also at the time of recordation of said agreement in form of Exhibit A aforesaid," etc.

The court, among its findings, also made the following, which, it is to be noted, partakes as well of the nature of a conclusion of law as of a finding of fact: "That the said mortgage so made, executed and delivered by [***10] defendants I. G. Zumwalt and Mattie B. Zumwalt to plaintiff was and is wholly a purchase money mortgage and was given, made and executed in order to secure the payment to plaintiff by said I. G. Zumwalt and Mattie B. Zumwalt of the purchase price agreed upon at the time of the sale of said property to the said I. G. Zumwalt, as aforesaid."

The plaintiff urges several different points in support of the judgment. The most important of these are the following: 1. That, as the court found, the mortgage to foreclose which is the object of this action is "a purchase money mortgage," it having been given by the nonappealing defendants to secure the payment of the purchase price of the lands, and that it takes precedence over and is superior to the previously recorded lien growing out of appellant's water contract of December 11, 1919; 2. That, at the time of the recordation of the appellant's lien, the Zumwalts were in no way connected with the title of record to the mortgaged premises, hence the recordation of appellant's lien imparted no notice of the existence of such lien upon the mortgaged premises and, therefore, cannot hold the position of priority over the lien of plaintiff's mortgage.

[***11] CA(1)(1) The briefs of counsel are devoted mainly to the discussion of the point first above stated, but the consideration thereof herein is not required or necessary, since it seems to be clear that upon the authorities, as well as upon principle, the judgment must be sustained upon the ground that, as the Zumwalts, at the time of the making and the recordation of the water contract with appellant, or at the time plaintiff's mortgage was recorded, had no title of record or were in no manner connected with such title to the mortgaged premises, the lien attached to said premises by the water contract gave no notice to anyone of the existence thereof on said lands, and was consequently subordinate or subservient to plaintiff's lien. HN1

Section 1213 of the Civil Code relating to the recordation of conveyances of real [*126] property, or so much thereof as is pertinent to the present inquiry, reads as follows: "Every conveyance of real property acknowledged or proved and certified and recorded as prescribed by law from the time it is filed with the recorder for record is constructive notice of the contents thereof to subsequent purchasers and mortgagees."

Bothin v. California Title Ins. [***12] Co., 153 Cal. 718, 723, 724 [96 P. 500], was a case in which the title company issued to the plaintiff (Bothin) a policy insuring and guaranteeing the title to certain real property, numbered lot 71, situated in the city of San Francisco, and the plaintiff thereupon purchased said property. It was discovered after the transfer of the property had been made to plaintiff that one Partridge, prior to the date of the transfer of said lot to plaintiff, had conveyed to the trustees of a bank by a trust deed a lot in said city, which said trust deed included, though not by name or reference to the number thereof, fourteen feet of plaintiff's said lot and that the said bank had duly recorded said trust deed; that upon said lot so conveyed to the bank, at the time of said conveyance by Partridge, there was a building which extended on to and occupied said fourteen feet of plaintiff's lot. The trust deed not showing by the description of the property therein contained that lot 71 or any portion thereof was either by name or otherwise embraced within said description, the fact that it embraced any portion thereof could only be determined by a survey according to the calls of the trust deed. [***13] Action was by plaintiff to recover damages against the Title Insurance Company for a breach of the covenant of its insurance policy guaranteeing that there was no defect in the title of the lot or real property purchased by the plaintiff. The supreme court sustained the judgment of the trial court in holding that, inasmuch as the public records did not show that Partridge was in any way connected with the title of record to plaintiff's lot 71, or to any portion thereof, his trust deed to the bank did not and could not constitute notice that said fourteen feet had thereby been conveyed to the bank by Partridge, or, contrary to the contention of plaintiff in said action, did not "create any defect in the record title" of said lot No. 71, or in any portion thereof. On this subject, the court, discussing the rule in such cases in its abstract as well as in [*127] its concrete application, said: HN2

"One who is not connected by any conveyance whatever with the record title to a piece of property and makes a conveyance thereof, does not thereby create any defect in the record title of another when such title is deducible by intermediate effective conveyances from the original owners to [***14] that other. This we think so clear that it is idle to attempt to elaborate it. Such a deed would not even be constructive notice. Our code provides that every conveyance of real property, acknowledged and recorded, is from the date of recordation constructive notice of its contents to subsequent purchasers and mortgagees. (Civ. Code, sec. 1213.) This language is very general, applying in terms to every conveyance, but it is held that this only contemplates conveyances by one having legal title to the property conveyed and is applied where there are conflicting conveyances made by persons claiming under the same common grantor. It does not apply to a deed by a stranger; one who is not connected in any manner with the title of record. No notice whatever is conveyed by such a deed. ( Long v. Dollarhide, 24 Cal. 218; Garber v. Gianella, 98 Cal. 527 [33 P. 458]; Sharon v. Minnock, 6 Nev. 377; Rankin v. Miller, 43 Iowa 11; Edwards v. McKernan, 55 Mich. 520 [22 N.W. 20].)"

In Garber v. Gianella, 98 Cal. 527 [33 P. 458], cited in the above extract from Bothin v. California Title Ins. Co., in an action in conversion, the plaintiff [***15] sued to and did recover judgment against the defendant for the alleged conversion of certain wheat. By a deed of conveyance from one Lorenzo Gianella, the plaintiff acquired title to and ownership of a certain tract of land. Prior to that transaction, the grantor had given his son Vincenza Gianella (defendant), a lease of said land upon a money rent for the term of five years. The said lease was not acknowledged and never recorded. During the term of the lease, and before the transfer of said land to plaintiff, Vincenza Gianella subleased the land to one Boulware. By the terms of that sublease, Boulware was, as a consideration, to pay Vincenza a yearly rent or sum in the form of one-third of the crops "in the stack at the machine." Said sublease to Boulware was recorded at the request of Vincenza. The deed to plaintiff granted or conveyed to him the land, "together with the rents, issues and profits thereof," and warranted, [*128] for the grantor and his heirs, peaceful and quiet possession of said premises in the grantee and his heirs and assigns against the grantor and his heirs, and against all and every person and persons whomsoever lawfully claiming or to claim the same, [***16] shall and will warrant, and by these presents forever defend, subject, however, to a lease to Daniel Boulware, which said lease expires November 1, 1889." The deed contained nothing to indicate from whom Boulware obtained his lease. The wheat which the plaintiff (grantee of the land) claimed in his action was converted by Vincenza Gianella was that which Boulware delivered to the former under the terms of the sublease between Vincenza and Boulware. When negotiating for the purchase of the land, plaintiff was informed of the existence of the Boulware lease and of the fact that it would not expire until a year from the date (April 12, 1888) of the conveyance of the land to him. Affirming the judgment in favor of plaintiff, the supreme court, among other things, made the following observations which involve a statement of the reason of the rule now under consideration: "The conveyance from Lorenzo Gianella to the plaintiff had the effect to transfer to him the entire ownership of the land, including its rents, issues, and profits, subject to only such limitations as were contained in the instrument of transfer, or of which the plaintiff had either actual or constructive notice. As the [***17] lease to the defendant from his father was not recorded, there was no constructive notice thereby to the plaintiff of its existence. The lease was a 'conveyance' of the land within the definition of section 1215 of the Civil Code, and the interest in the land that was thereby created in the defendant, though limited to a right to receive the products of the land, was as void as against the plaintiff, by reason of the failure to have it recorded, as if it had been an unrecorded conveyance in fee. The record of the lease from the defendant to Boulware was not constructive notice of the lease to the defendant, or that he had any interest in the land. The provisions of recording acts are for the protection of subsequent purchasers and encumbrancers from the common grantor, and do not affect the rights of strangers to the claim of title. ( Chicago v. Witt, 75 Ill. 211; Losey v. Simpson, 11 N.J. Eq. 246; Traphagen v. Irwin, 18 Neb. 195 [24 N.W. 684]; Ely v. [*129] Wilcox, 20 Wis. 523 [91 Am. Dec. 436]; Long v. Dollarhide, 24 Cal. 218 at 227; 2 Pomeroy's Equity Jurisprudence, secs. 658, 701.) Records are only constructive notice of a title [***18] of which they enable a party to obtain actual notice or knowledge by means of a search."

The following California cases are to the same effect: Millett v. Lagomarsino, 4 Cal. Unrep. 883 [38 P. 308]; Dobbins v. Economic Gas Co., 182 Cal. 616 [189 P. 1073], the opinion being written by Mr. Justice Olney, and the doctrine under consideration therein stated with the clearness characterizing his judicial opinions. To the Califoriia cases named may be added the following from other jurisdictions in which the proposition in hand is discussed and in which the conclusions announced are in harmony with our own decisions: Heffron v. Flanigan, 37 Mich. 274; Donovan v. Twist, 105 A.D. 171, 93 N.Y.S. 990; Ryder v. Cobb, 68 Iowa 235 [26 N.W. 91]; Ransom v. Sargent, 22 Kan. 516; Bradley v. Byran, 43 N.J. Eq. 396 [13 A. 806]; Boyd v. Mundorf, 30 N.J. Eq. 545. In the last-named case it is well said: HN3

"Where, as in this case, the vendor of real estate records his mortgage (to secure the purchase price) at the same instant that the deed from him is recorded, he surely can have no occasion to examine the records [***19] for encumbrances created by his vendee on the property, prior to the recording of his conveyance."

CA(2)(2) The position of appellant here, as is obvious, is that the conveyance by plaintiff to the Zumwalts of the land in controversy established the title of the latter to the lands in controversy as of the date of the option agreement whereby the plaintiff gave to the Zumwalts the right to purchase the property. But, as is said in the case of Hawkins v. Harlan, 68 Cal. 236, 237 [9 P. 108, 109], and equally applicable to the facts of the instant case: "This (referring to a position taken by counsel similar to the position of appellant here) is by operation of the doctrine of relation, which is a fiction of the law adopted solely for the purposes of justice, and will not be given effect when, as in the present case, it would work manifest injustice. ( Gibson v. Chouteau, 13 Wall. (U. S.) 92 [20 L. Ed. 534, see, also, Rose's U.S. Notes]; Shay v. McNamara, 54. Cal. 169.)"

[*130] The plaintiff in the present case would manifestly have no reason to investigate the public records to ascertain whether I. G. Zumwalt or any other stranger to the title had created, [***20] or any person had acquired, a lien upon the property prior to the execution of the deed by plaintiff to the Zumwalts conveying the lands to them and the simultaneous execution of the mortgage by the latter to secure the purchase price thereof, or at least so much of such purchase price as plaintiff was entitled to. And even if she had for any reason examined the records for that purpose, she would not, under our index system of recording written instruments required by law to be recorded, have obtained any knowledge of the lien of appellant, unless she had gone further in her investigation of the records than the law contemplates. (Pol. Code, sec. 4132, subds. 1, 2 and 26.) But the more important consideration in this connection, and one which more pointedly than any other exposes the utter futility of any attempt to apply the doctrine of relation here, is the fact that by the option agreement the Zumwalts acquired no interest in the lands in dispute other than that which is comprehended within the mere right to purchase said lands within a specified time for a specified consideration. CA(3)(3) HN4

While the optionee of an option agreement, valid in all essentials and fair, may be entitled to have [***21] such agreement specifically enforced, it is to that extent only that he can claim, if, strictly speaking, he can do so at all, an equity in the property involved in the agreement. Manifestly, it cannot logically be held that, by virtue of his mere right to purchase the property which is the subject of the option, the optionee acquires any actual interest in the property itself which is the subject thereof, or that he can acquire any such interest until he has seasonably accepted or exercised his option to purchase according to the terms of the agreement. "An option," says the supreme court, in Hicks v. Christeson, 174 Cal. 712, 716 [164 P. 395], "is by no means a sale of property, but the sale of the right to purchase." (Italics ours.) ( Dreyfus v. Richardson, 20 Cal. App. 800 at 800-805 [130 P. 161]; Pehl v. Fanton, 17 Cal. App. 247 [119 P. 400]; see, also, Menzel v. Primm, 6 Cal. App. 204, 209 [91 P. 754]; Howard v. D. W. Hobson Co., 38 Cal. App. 445, 455 [176 P. 715]; [*131] Ware v. Quigley, 176 Cal. 694, 698 [169 P. 377].) An excellent definition of an option is given in 29 Am. & Eng. Ency. of Law, second [***22] edition, page 606, as follows: "The distinction between a contract to purchase or sell real estate and an option to purchase is, that the contract to purchase or sell creates a mutual obligation on the party to sell and on the other to purchase, while an option merely gives the right to purchase within a limited time without imposing any obligation to purchase."

It, of course, follows from the foregoing considerations that, in making the agreement of option, the minds of the plaintiff and her children on the one hand and that of I. G. Zumwalt on the other could have come together on but one proposition, to wit: The giving by the former and the acceptance by the latter of the right to purchase the property for the stipulated sum within the time specified in said agreement -- a right which Zumwalt was at liberty to waive or refuse to exercise. Thus it is very clear, if, indeed, there could be any doubt as to the legal stability of the proposition after an examination of the cases above considered, that the Zumwalts, prior to the conveyance of the property to them, had absolutely no interest in said property upon which they could create a lien which would or could take precedence [***23] over the plaintiff's mortgage lien. CA(4)(4) Certainly, the fact, as found by the court, that the sum of $ 5,000 paid by I. G. Zumwalt as a consideration for the option, was agreeably to plaintiff, paid to her children, co-owners of the property, even if said sum was to be applied toward the payment of the latter's respective shares of the purchase price, if Zumwalt exercised the right with which he was invested by the option to purchase the property, did not have the effect of changing the nature of the transaction, in so far as the agreement of option was concerned. In other words, said payment did not impart to said agreement of option any greater dignity in legal effect than that of the ordinary option conferring upon a party the right to purchase real property. But it is unnecessary further to pursue the inquiry. We have carefully examined the cases cited by counsel for the appellant and we find nothing in them which conflicts with the conclusion herein arrived at.

[*132] The judgment is obviously legal and just, and it is accordingly affirmed.

Plummer, J., and Finch, P. J., concurred.

A petition for a rehearing of this cause was denied by the district court of appeal on September [***24] 1, 1927, and the following opinion then rendered thereon:

THE COURT. In their petition for a rehearing, counsel for the appellant declare that they did not and do not rely upon the doctrine of relation for the establishment of their position in this case; yet they assert in the petition that what they have always claimed and still contend is that the moment that the Zumwalts acquired title to the land through or by means of the deed to them from the plaintiff and her children, such "after-acquired" title in effect imparted validity to the appellant's lien, or, in other words, said conveyance inured to the benefit of the appellant as a lien claimant upon the land. CA(5)(5) The doctrine of "after-acquired" title is, in effect, the same as the doctrine of relation. The repudiation of the doctrine of relation by counsel for the appellant as the breastwork of their position warrants the assumption that it is by it granted that its lien was wholly without validity and legal force until the Zumwalts acquired title to the property. But, be that as it may, the proposition upon which appellant mainly relies in its petition is that its lien takes precedence over the mortgage lien of plaintiff because [***25] the former lien was recorded prior to the recordation of the latter lien. The difference, however, between appellant's position and the conclusion arrived at by this court is: That the appellant assumes, contrary to its declaration in the petition regarding the doctrine of relation, that the Zumwalts became identified or connected with the title to the property by virtue of the agreement of option, whereas our position is, as indicated in the former opinion, that the option agreement did not have any such effect; that said option merely involved a unilateral agreement which does not become a contract inter partes in the sense of an absolute contract to convey on the one side and to purchase on the other, until exercised by the optionee; that, in other words, an option is not a sale, but a right to exercise a privilege, and only when [*133] that privilege has been exercised in the manner provided in the agreement does it become a binding contract ( Barnes v. Rea, 219 Pa. 279 [68 A. 836]; Perry v. Paschal, 103 Ga. 134 [29 S.E. 703]; that, such being the case, the filing for record of appellant's lien did not impart constructive notice to the plaintiff or [***26] to anyone else of the existence of such lien, since such agreement could not vest in the Zumwalts title to the land or connect them in any way therewith.

The appellant in its petition cites a number of cases other than those mentioned in its original briefs as in support of the position they assume in this case. Those cases are from other jurisdictions and some of them construe the statute law of their respective states, which is in terms the same as section 1213 of our Civil Code, in harmony with the view of appellant. Other cases that are so cited or rather named in connection with the cases cited and which are referred to in volume 25 American Law Reports, page 89, construed the section of our code just named as it is interpreted by the supreme court in Bothin v. California Title Ins. Co., 153 Cal. 718, 723, 724 [Ann. Cas. 1914D, 634, 96 P. 500], which is cited in our original opinion. CA(6)(6) We still adhere to the view expressed in the original opinion that the California case just mentioned and other cases referred to in the original opinion clearly hold that the recordation of a deed by a party to whom such instrument purports to convey real property in which he has no [***27] interest or with the record title to which he has no connection will not and cannot have the effect of imparting notice to the real owner of the property or the public of such conveyance. If the Zumwalts, at the time of executing the contract with the appellant, were connected in any way with the record title to the property, then the position of appellant here would be impregnable; but, as stated, it is clear to our minds that at the time mentioned the Zumwalts had no more connection with the title to the property than any other person having no transaction with the owner of the land regarding said property.

The petition for a rehearing is denied.

A petition by appellant to have the cause heard in the supreme court, after judgment in the district court of appeal, was denied by the supreme court on October 13, 1927.

Court Decisions Mentioning "Equitable Interest" or "Lease Option"

U.S. Supreme Court

HELVERING v. SAN JOAQUIN FRUIT & INVESTMENT CO., 297 U.S. 496 (1936)

Footnotes

Giraud v. Milovich , 29 Cal.App.2d 543