§22.3 - The Vendor-Vendee Relationship

• Jurisdiction: Washington

§22.3 THE VENDOR-VENDEE RELATIONSHIP

Under a real estate contract, the seller retains legal title to the property as security for performance of the contract. Bank of N.Y. v. Hooper, 164 Wn.App. 295, 263 P.3d 1263 (2011), review denied, 173 Wn.2d 1021 (2012); Tomlinson v. Clarke, 118 Wn.2d 498, 825 P.2d 706 (1992). The right to receive contract payments is treated as personal property totally separate and distinct from the retained "naked legal title." Monegan v. P. Nat'l Bank, 16 Wn.App. 280, 556 P.2d 226 (1976).

(1) Benefits and burdens between the parties to the contract

This section describes how the parties' rights to possession and risk of loss are allocated under a real estate contract.

(a) Right to possession, crops, and timber

Generally, the buyer does not receive the right to possession of the property prior to delivery of the deed unless that right is specifically granted to the buyer by the terms of the contract. 3 AMERICAN LAW OF PROPERTY §11.25 (A. James Casner ed., 1952).

Washington appears to follow the general rule on possession, as well as the rights attendant on possession, without major deviation. Welch v. Hover-Schiffner Co., 75 Wash. 130, 134 P. 526 (1913). The Welch court, however, held that the right to possession may be granted to the buyer by implication, even if it is not expressly granted by the contract. The possibility of an implied right to possession apparently arises when the contract places some duty on the buyer (in Welch, the duty to cut the weeds and maintain the property) that requires the buyer to be in possession of the property. Care should be taken, therefore, not to include such duties in a real estate contract unless the seller intends the buyer to have possession. On the other hand, when possession by the buyer is intended, that provision should be included in the contract.

The right to possession is important because other entitlements, such as the right to harvest crops and the right to collect rents and profits, hinge on the right to possession. As a general rule, a buyer in possession is the owner of crops harvested during the term of occupancy. Lynch v. Sprague Roller Mills, 51 Wash. 535, 99 P. 578 (1909).

However, if the buyer's interest in the contract has been forfeited prior to harvest of a crop, he or she has no right to the crop. Short v. Short, 180 Wash. 514, 40 P.2d 752 (1935). On the other hand, the buyer may be able to assert a lien against the crops for materials or labor expended as a supplier under RCW 60.11.020(2). Absent a violation of the equity-skimming rules under Chapter 61.34 RCW or any related federal statutes, a buyer in possession also has the right to collect the rents and need not return them if the contract is later forfeited. Erckenbrack v. Jenkins, 33 Wn.2d 126, 204 P.2d 831 (1949).

As a general rule, the obligation to pay taxes rests with the party in possession. 3 AMERICAN LAW OF PROPERTY §11.25 (A. James Casner ed., 1952).

In Kruger v. Horton, 106 Wn.2d 738, 725 P.2d 417 (1986), the court held that the buyer in possession had the right to log standing timber absent a contract provision to the contrary. Consequently, the buyer was not liable to the seller for waste or conversion of the timber after forfeiture. The court relied on previous cases holding that the buyer in possession had the right to harvest crops. Timber rights present special problems. Bremerton Cent. Lions Club v. Manke Lumber Co., 25 Wn.App. 1, 604 P.2d 1325 (1979), review denied, 93 Wash.2d 1016 (1980).

Practice Tip: The Kruger decision makes it critical to include a provision in a real estate contract that prevents the buyer from logging timber on or removing minerals from the property until some portion of the purchase price that approximates the value of the timber has been paid. See Bremerton Cent. Lions Club, 25 Wn.App. 1; RCW 61.30.100(4) (an amendment to the Real Estate Contract Forfeiture Act permitting seller to recover damages for waste in conjunction with a forfeiture action).

Most of the Washington cases involving rents, the right to receive profits from crops, or the obligations for taxes and assessments are concerned with interpreting contractual provisions. When such a contractual provision exists, it of course is controlling.

Caveat: Certain contracts for the sale of minerals, oil and gas structures or materials to be removed by the seller, or growing crops (a) are contracts for the sale of goods, not a present transfer of an interest in land, and (b) may nevertheless be recorded with the County Auditor and thereby give notice of such sale to third parties. Ch. 62A.2-107 RCW.

(b) Risk of loss

This section discusses the allocation of risk of loss to property subject to a real estate contract.

(i) Injury or destruction

Whether the seller or the buyer bears the risk of accidental damage to the property during the life of the contract is one of the most litigated and debated questions in the vendor-vendee relationship. The issue only arises when the contract is silent concerning risk, when the damage is fortuitous, and when damage is not due to the act of a third party. If the loss is allocated by the contract, the contract will control. If the loss is the result of intentional or negligent conduct by the seller or buyer, or a third party, it will presumably fall on the party engaging in such conduct under relevant tort principles.

The most common loss is from fire that destroys structures on the land under contract. Damage to the subject matter of the contract from any cause raises analogous questions. If property is taken by eminent domain, leaving only a claim to money, or if the value of the property is diminished by public land use controls, the loss also must be allocated between the parties.

Much of the debate in this area is caused by the majority rule that the loss falls on the buyer even if the seller is in possession. 3 American Law of Property §11.30 (A. James Casner ed., 1952). The loss falls on the buyer because the strict logic of the doctrine of equitable conversion treats the buyer as the owner of the property from the moment the contract is entered into. See George R. Nock, John A. Strait, & John W. Weaver, Equitable Conversion in Washington: The Doctrine That Dares Not Speak Its Name, 1 U. PUGET SOUND L. REV. 121 (1977). Such a rule, aside from its obvious rigidity, does not effectively protect the property from damage by imposing the risk on the party in possession, nor does it square with decisions that allocate rents, crops, and other entitlements, as well as certain liabilities, by reference to possession.

Dissatisfaction with strict application of the doctrine of equitable conversion applied in some early Washington decisions produced much variation in decisions in other states. Two strong minority positions developed that are reflected in some Washington decisions. The so-called "Massachusetts rule" places the risk of loss on the seller until legal title has been conveyed if the damage is substantial enough to constitute a "failure of consideration" or "destruction of the subject matter." Libman v. Levenson, 236 Mass. 221, 128 N.E. 13 (1920). These decisions permit the buyer to rescind the contract even if he or she is in possession of the property. However, unless the damage is great enough to amount to a failure of consideration, the seller may enforce the contract against the buyer with an abatement of the purchase price. A second minority position adopts the argument, first advanced by Williston, that the burden of loss should fall on the party in possession. This is the position taken by the Uniform Vendor and Purchaser Risk Act, 9A U.L.A. 358 (2005) and the Uniform Land Transactions Act §2-406(c)(1975).

The general question of which party bears the risk of loss when the contract is silent remains an open one in Washington. Many of the Washington cases use reasoning similar to the Massachusetts rule. This approach begins by placing the risk of loss on the seller but would permit the seller to enforce the contract with an abatement of purchase price in appropriate situations. The cases that deviate from this approach can be explained either by unique factual circumstances or now discredited reasoning concerning the existence of the buyer's right to specific performance. It seems safe to say that it is at least likely that the court would opt for the rule that places loss on the buyer simply because he or she is now regarded as the beneficial owner of the property from the moment of contract, in light of the statements in Cascade Security Bank v. Butler, 88 Wn.2d 777, 567 P.2d 631 (1977).

Any discussion of whether the seller or buyer bears the risk of loss when the property is injured or destroyed without the fault of either must necessarily begin with the famous, much maligned, and now overruled case of Ashford v. Reese, 132 Wash. 649, 233 P. 29 (1925), overruled by Cascade Security Bank v. Butler, 88 Wn.2d 777, 567 P.2d 631 (1977). In Ashford, the court stated that an executory contract of sale conveyed no interest, legal or equitable, to the contract buyer and that because the loss followed title, the seller must bear the loss. As an alternative ground of decision, the opinion offers the rationale that the buyer can recover because there has been a failure of consideration.

It was the court's first statement that caused such long-term difficulty in the Washington law on the vendor-vendee relationship. Although the broad statement that the contract buyer had no interest in property was eroded, criticized, and finally overruled, prior to Cascade Security Bank it was thought that the risk of loss situation was the one area in which the Ashford doctrine was still intact. Harry M. Cross, The Community Property Law In Washington, 49 WASH. L. REV. 729 (1974). However, a mere three years after Ashford, the court applied what...