Sebastian v. Floyd

Brief Fact Summary. Two parties entered into an installment sale contract with a forfeiture clause

Synopsis of Rule of Law. Buyers in installment land contract, if they go into default, have the right to redeem their property by paying the debt, interest, and expenses incurred by the creditor due to default.

Facts. Jean Sebastian (Defendant) contracted to buy a house from Perl and Zona Floyd (Plaintiffs). The contract called for installment payments. A forfeiture clause provided that if Plaintiff failed to make any monthly payment and remained in default for sixty days, Plaintiffs could terminate the contract and retain all previously made payments as rent and liquidated damages. Defendant admitted to being in forfeiture but asked that the forfeiture clause not be enforced.

Issue. May a clause in an installment land sale contract providing for forfeiture of the buyer’s payments and return of the property upon the buyer’s default be enforced by the seller?

Held. No.
When an installment land contract is used to finance the purchase of property, legal title remains with the seller until the buyer has paid the entire contract price or some agreed-upon portion, at which time the seller tends a deed to the buyer. But, equitable title passes to the buyer when the contract is entered. The seller only holds bare legal title as security for the payment of the purchase price.
There is no real distinction between a land sale contract and a purchase money mortgage. In each, the seller finances the buyer’s purchase of the property, using the property as collateral for the loan. When a purchaser of property defaults on his payments, his entire interest in the property is not forfeited. The mortgagor can redeem the property by paying the full debt plus interest and expenses incurred by the mortgage during the default.
A rule treating the seller’s interest as a lien will best protect the interest of the parties. The sell will receive the contract price and expenses, thus fulfilling his expectations at the time he agreed to sell his land. Also, the buyer’s equity in the land will be protected.

Discussion. Installment land sale contracts are treated as mortgages, so they receive the full range of protection offered to mortgagors in default.