§20.4 - Requisites of a Mortgage

JurisdictionWashington

§20.4 REQUISITES OF A MORTGAGE

This section discusses the legal requisites of a mortgage, including the form and contents of the instrument as well as terms, covenants, and conditions in a mortgage.

(1) Interests in property

A mortgagor first must have an interest in the real estate to create a valid mortgage. The interest may be a present interest or future interest, and may be contingent or whole. Under the general rule, a mortgagor has the power to mortgage any interest it possesses in real estate. It has been stated that anything that is in existence, that the mortgagor owns, and that could be sold or conveyed, may be mortgaged. 59 C.J.S. Mortgages §68 (1998). The following sections examine the application of the general rule to circumstances in which the existence and scope of an interest present special problems in Washington.

(a) Vendee's interest in conditional real estate sales contract

The Washington Supreme Court very early recognized that a vendee in possession of property under contract of sale has an interest that can be conveyed or mortgaged. Scott v. Farnam, 55 Wash. 336, 104 P. 639 (1909). Prior to 1986, the mere recordation of a mortgage on a vendee's interest did not impart knowledge to the vendor so as to require the vendor to name the mortgagee of the vendee's interest in a forfeiture action. Kendrick v. Davis, 75 Wn.2d 456, 452 P.2d 222 (1969). The subsequently enacted Real Estate Contract Forfeiture Act specifically provides, however, that the holder of "any interests in or liens upon all or any portion of the property derived through the Purchaser" shall receive the required notices. RCW 61.30.040(2)(a). Thus, in contract forfeiture actions the mortgagee of a vendee's interest must be notified of the forfeiture action.

In the event the vendee fails to make payments under the contract, the mortgagee has the right to make or tender such payments as would be necessary to protect its security (i.e., to keep the contract in effect), but may acquire only the right to complete the purchase by a conveyance from the mortgagor/vendee or by foreclosure of the mortgage and purchase at a sheriff's sale. Kendrick v. Davis, 75 Wn.2d 456.

In Cascade Security Bank v. Butler, 88 Wn.2d 777, 567 P.2d 631 (1977), the Washington Supreme Court held that a vendee's interest in a real estate contract is real estate for purposes of the judgment lien statute.

The court has held that a vendee under a real estate contract may contest a suit to quiet title. Turpen v. Johnson, 26 Wn.2d 716, 175 P.2d 495 (1946). If the contract so provides, the vendee has a right to possession and control of the land, and the right to grow and harvest crops, State ex rel. Oatey Orchard v. Superior Court, 154 Wash. 10, 280 P. 350 (1929); the right to sue for trespass, Lawson v. Helmich, 20 Wn.2d 167, 146 P.2d 537 (1944); and the right to sue to enjoin construction of a fence, Kateiva v. Snyder, 143 Wash. 172, 254 P. 857 (1927).

Because the court characterizes the vendee's interest in the real estate contract as "substantial rights" and a "valid and subsisting interest in property," Cascade Sec. Bank v. Butler, 88 Wn.2d 777, if the vendee has title and the vendor has only a lien the court might well hold in a subsequent case that execution of a conditional sales contract for security purposes constitutes a mortgage and that there must be judicial foreclosure and sale to divest a vendee of its interest in the property.

The 1988 Washington legislature provided that a real estate contract may be foreclosed as a mortgage. RCW 61.30.020. This change certainly seems to be a move toward recognizing a real estate contract for what it isa real property security device.

Practice Tip: Because the interest of the vendee under a real estate contract has been determined to be a real property interest, a creditor seeking to take a security interest in the vendee's interest should do so with a mortgage or deed of trust.

(b) Vendor's interest in real estate sales contract

In the case of an executory contract for the sale of real property, the general rule is that the rights of the vendor may be the subject of a mortgage by the vendor prior to the conveyance of title, as long as the terms of the mortgage given by the vendor do not restrict the rights of the purchaser under the executory contract of sale. 59 C.J.S. Mortgages §71(c)(1998); see, e.g., Union Guardian Trust Co. v. Rood, 261 Mich. 188, 246 N.W. 74, aff'd, 265 Mich. 354 (1933).

Although Washington courts have not ruled expressly on a mortgage by a vendor in these circumstances, the courts have recognized the vendor's interest as personal property for the purposes of administration of an estate, In re Fields' Estate, 141 Wash. 526, 252 P. 534 (1927); for inheritance tax purposes, In re Eilermann's Estate, 179 Wash. 15, 35 P.2d 763 (1934); and for purposes of RCW 26.16.030 (restrictions on conveyances of community property), Meltzer v. Wendell-West, 7 Wn.App. 90, 497 P.2d 1348 (1972).

In view of this uncertainty as to where "title" resides in property subject to a real estate contract, one should view the vendor's interest in a real estate contract as comprising two elements. The first is an interest in real property. After Cascade Security Bank v. Butler, 88 Wn.2d 777, 567 P.2d 631 (1977), In re Freeborn, 94 Wn.2d 336, 617 P.2d 424 (1980), and Crichton v. Himlie Properties, 105 Wn.2d 191, 713 P.2d 108 (1986), it would appear that this interest could only be classified as a lien, i.e., security for performance of the contract obligation. The second element of a vendor's interest is a contract right to receive payments, a personal property right that the court has labeled a "general intangible." Id. at 193-95.

Like the Washington Supreme Court, Washington legislators cannot quite seem to make up their minds on how to denominate the interest of a vendor in real property subject to a real estate contract. RCW 6.21.070 was amended, adding the following language:

A vendor's interest under a real estate contract, including vendor's legal title to the real...

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