Fall 1998 Essay Question (60 minutes estimated time).
Fred Farmer had owned Greenacre for many years, but in 1995 he was growing tired of farming it and decided to sell out. He entered into a real estate installment contract with Bob Byers, who was interested in subdividing Greenacre and constructing houses on it. The contract contained the following clauses:
1. Acceleration and Forefeiture. In the event Byers fails to make any payment when due, or otherwise violates any covenant in this contract, Farmer may, by written notice to Byers, either (1) declare the principal amount of this contract immediately due and payable, and recover that sum by action against Byers, or (2) in lieu of such action, terminate this contract, repossess Greenacre, and retain all payments made by Byers.
2. Assignment. Byers covenants that he will not transfer or assign all or any part of his interest under this contract without prior written consent of Farmer.
3. Prepayment. Byers shall have no right to pay any sum due under this contract in advance of the date it is due. If Farmer voluntarily accepts any prepayment made by Byers, Farmer shall be entitled to a fee of five percent (5%) of the amount accepted.
The contract provided for a total purchase price of $500,000, and required Byers to pay ten annual payments of $50,000 principal on January 1, 1996 and every year thereafter until 2005, with interest on the unpaid balance to be paid annually at the rate of 6% per annum.
Byers took possession of the land in late 1995 and began making plans to subdivide it. He discovered that he needed more money for engineering, surveying, and planning expenses, so in June, 1997 he approached East Bank and obtained a loan of $100,000. This loan had a five year term and required no periodic payments. Byers gave East Bank a mortgage on the land to secure repayment of this loan, and East Bank recorded the mortgage in the county real estate records. Byers made no mention of the mortgage loan to Farmer, but made the full annual payments due under the installment contract, including interest, in January of 1996, 1997, and 1998.
In June, 1998 Farmer learned for the first time about the loan East Bank had made to Byers. Farmer was angry that Byers had not sought Farmer's approval before obtaining the loan, so on July 1, 1998 he sent Byers a written notice stating that he was terminating the contract and all rights of Byers and East Bank, and that Byers was required to relinquish possession of the land. Byers reluctantly vacated the land. No notice was sent directly by Farmer to East Bank, although Farmer was aware of the East Bank mortgage. However, Byers sent a copy of Farmer's letter to East Bank on the day Byers received it.
At the time Farmer sent the forfeiture notice to Byers, the installment contract had a principal balance owing of $350,000, plus accrued interest of $10,500, for a total balance of $360,500. The balance owing to East Bank on the mortgage was $100,000 principal, plus accrued interest of $5,000, for a total balance of $105,000. Land values in the area have moved sharply upward, and Greenacre now has a market value of $1 million. Byers' plans to subdivide the land were completely frustrated by Farmer's notice of forfeiture, and Byers never sold any lots to any other persons.
In June 1998 Farmer sent a letter to both Byers and East Bank, advising them that he now considered the contract terminated and neither of them had any remaining interest in Greenacre. He also demanded that Byers send him a check for $18,025, which he explained was 5% of the balance owing on the contract at the time of the forfeiture. Byers and East Bank have consulted you, asking your advice as to whether they have any interest in the land, whether there are any actions either of them can and should take to preserve their rights, and whether Byers is liable to Farmer for the claimed $18,0250 or any other amount. Please answer their questions, discussing all relevant legal issues.