This chapter brings together property financing, competing claims, attached improvements, natural-resource rights, land-support doctrines, remedies, and a comprehensive examination method.
The unifying concept is priority among interests.
Property law rarely asks only, “Who owns the land?” A parcel may simultaneously be affected by a present possessory estate, future interests, a lease, a mortgage, junior liens, easements, covenants, fixture claims, resource rights, zoning restrictions, and neighboring land-use claims. A strong Property answer therefore identifies each interest before deciding which one prevails.
Mortgage doctrine makes this especially clear. A borrower may own or possess property while a lender holds a mortgage securing a debt. Another lender may later obtain a junior mortgage. A purchaser may acquire the property subject to one or more mortgages. A foreclosure may terminate some interests while leaving others untouched. Recording statutes, purchase-money rules, contractual subordination, tax liens, mechanic’s liens, modifications, and statutory foreclosure procedures may all affect priority.
The same classification discipline applies beyond mortgages. An industrial machine may begin as personal property and later become a fixture. A commercial tenant may nevertheless retain a right to remove a trade fixture. A landowner’s right to use water may depend on whether the jurisdiction follows riparian rights or prior appropriation.
I Mortgage Structure
A mortgage secures repayment of an obligation with an interest in real property.
Mortgagor
The Borrower.
Gives the mortgage.
Mortgagee
The Lender.
Receives the mortgage.
Suppose Owner borrows $300,000 from Bank to purchase Blackacre and grants Bank a mortgage on Blackacre. Owner is the mortgagor. Bank is the mortgagee. The mortgage gives Bank a property-based security interest connected to repayment of the debt.
The Note and the Mortgage
The debt and the security interest should be distinguished.
- The promissory note represents the borrower’s debt (personal obligation).
- The mortgage secures that obligation with an interest in real property.
Traditional doctrine states that the mortgage follows the note. A transfer of the underlying debt may therefore carry the associated mortgage interest. Students should not treat the note and mortgage as the same document merely because they arise from the same transaction.
Exam Tip
On every mortgage problem, write two separate lines:
Debt: Who owes whom?
Security: What property secures the debt?
This distinction becomes critical in assumption, deficiency, and foreclosure problems.
II Mortgage Theories
Jurisdictions traditionally use three general mortgage theories. These classifications may affect possession, joint-tenancy severance, and rent collection.
1. Lien Theory
The mortgagor retains title. The mortgagee holds a lien securing the debt. Granting a mortgage does not mean the borrower transferred legal ownership to the lender. (Majority rule).
2. Title Theory
The mortgage transfers legal title to the mortgagee subject to the borrower’s remaining rights (equity of redemption). This can sever a joint tenancy.
3. Intermediate Theory
Occupies a position between the two. The borrower generally retains title until default, after which the lender obtains stronger title-related rights.
III Equity of Redemption vs. Statutory Redemption
Timing is the Key Distinction
Equitable Right of Redemption
The borrower can redeem the property by paying the secured debt and permitted costs before the foreclosure sale is completed. It cannot be permanently waived at the time the mortgage is created (a disfavored "clog on the equity of redemption").
Statutory Redemption
A right created by statute in some states allowing the borrower to buy back the property for a certain period after the foreclosure sale.
Common Trap
Do not state that every borrower can redeem after the foreclosure sale. Post-sale redemption depends entirely on state statute. The ordinary equitable right operates only before foreclosure.
IV Foreclosure Methods and Parties
Foreclosure terminates the borrower’s equity of redemption and sells or transfers property to satisfy the secured debt.
Methods
- Judicial Foreclosure: Proceeds through court-supervised litigation.
- Power-of-Sale (Nonjudicial): Allowed by some mortgages/deeds of trust without full judicial action. Strict statutory notice and timing rules apply.
- Strict Foreclosure: Exists only in limited jurisdictions. Does not involve a sale; title simply vests in the lender.
Parties to Foreclosure
Proper foreclosure parties generally include those holding interests junior to the mortgage being foreclosed.
Why? Because foreclosure of a senior mortgage can terminate junior interests if those holders are properly joined. Failure to join a junior interest holder leaves that interest unaffected by the foreclosure.
Senior interests, conversely, generally need not be joined because foreclosure of a junior mortgage ordinarily lacks power to eliminate superior interests.
V Priority, Recording, and Subordination
The basic priority rule is: First in time, first in right.
But that is only the starting principle. Priority may be modified by recording statutes (notice, race, race-notice), subordination agreements, future advances, mortgage modifications, tax liens, and mechanic’s liens.
Subordination Agreements
Parties may contractually change ordinary priority. If Mortgage 1 is chronologically senior to Mortgage 2, Mortgage 1’s lender may agree that Mortgage 2 will take priority. This voluntarily rearranges the first-in-time ordering.
Purchase-Money Mortgages (PMM)
A PMM finances the acquisition of the property. It commonly receives superpriority over claims arising through the purchaser at or around acquisition (such as prior judgment liens against the buyer).
- Seller PMM: The seller finances part of the purchase price and takes a mortgage. (Usually beats third-party PMMs).
- Third-Party PMM: A bank lends the buyer money to acquire the property and takes a mortgage.
Exam Tip
When a mortgage is created as part of the transaction through which the borrower acquires the property, write PMM beside it immediately. Purchase-money status is rarely an irrelevant fact.
VI Foreclosure Effects and Proceeds
The effect of foreclosure depends on the foreclosing mortgage’s priority. The essential rule is:
Senior forecloses → Juniors are wiped out.
Junior forecloses → Seniors remain on the property.
If a junior mortgage forecloses, the purchaser at the sale takes the property subject to the senior mortgages. A buyer who pays at a junior foreclosure sale acquires property still burdened by the senior debt.
Distribution of Foreclosure Proceeds
Proceeds from a foreclosure sale are distributed in a strict order:
- Expenses of the sale, attorneys' fees, and court costs.
- The principal and accrued interest on the foreclosing mortgage.
- Any junior liens in the order of their priority.
- The remaining surplus, if any, to the mortgagor (borrower).
Senior liens are not paid from a junior foreclosure sale. They remain attached to the property.
Deficiency Judgments
If the foreclosure proceeds are insufficient to satisfy the foreclosing debt, the lender may seek a deficiency judgment against the borrower personally for the remaining balance. However, many states have anti-deficiency statutes that restrict or prohibit these judgments, especially for residential or purchase-money mortgages.
VII Assumption Versus Subject To
When mortgaged land is transferred, the new owner may either assume the mortgage or take subject to the mortgage. The difference concerns personal liability.
Buyer Assumes the Mortgage
- Buyer becomes personally liable for the debt.
- Original Borrower remains secondarily liable (as a surety) unless released via a novation.
- The property remains subject to foreclosure.
Buyer Takes Subject To
- Buyer does not become personally liable.
- Original Borrower remains solely personally liable.
- The property remains subject to foreclosure (Buyer risks losing the land if debt isn't paid, but cannot be sued personally for a deficiency).
Due-on-Sale Clauses: These clauses permit the lender to demand full payment of the loan if the borrower transfers the property. They are generally enforceable, subject to specific federal statutory exceptions (e.g., transfers to relatives upon death or divorce).
VIII Fixtures
Fixtures begin as personal property (chattel) but become sufficiently attached to land that property law treats them as part of the real property. Courts consider:
- Annexation: Physical attachment to the land/building.
- Adaptation: How specially suited the item is to the property (custom design).
- Intent: Objective intent inferred from circumstances (method of attachment, intended use, permanence), not just a later subjective statement.
- Relationship of Parties: Landlord/tenant disputes are treated differently than seller/buyer disputes.
Trade Fixtures
A commercial tenant may generally remove trade fixtures installed for business purposes if removal occurs timely (before lease expiration) and does not cause unreasonable structural damage. Despite the word "fixture," trade fixtures remain removable personal property to encourage commercial enterprise.
IX. Water Rights
Surface-water systems generally follow one of two doctrines:
Riparian Rights (Eastern States)
Tied to land bordering the watercourse. Owners have rights of reasonable use. Competing uses by riparian owners are balanced for reasonableness.
Prior Appropriation (Western States)
Priority is based on first appropriation and beneficial use. "First in time, first in right." Rights are not tied simply to owning land adjoining the water.
Groundwater doctrine varies substantially by jurisdiction (absolute ownership, reasonable use, correlative rights). Do not assume surface-water rules automatically govern groundwater. Apply the rule specified in the fact pattern.
X. Lateral and Subjacent Support
A landowner possesses a right to support from adjoining land.
- Lateral Support (from the side): If a neighbor excavates and causes the plaintiff's land to collapse, strict liability applies if the land would have collapsed in its natural condition. If buildings on the land contributed to the collapse (increased the weight), the plaintiff must usually show negligence by the excavator, unless the land would have collapsed even without the buildings.
- Subjacent Support (from underneath): Arises when mineral rights are separated from surface ownership. The mineral owner excavating underground is strictly liable for supporting the existing surface land and buildings.
XI. Property Remedies
Property doctrine becomes useful only when the student can identify what relief the claimant should seek.
XII. Complete Property Examination Framework
Do not begin a Property exam answer with "Who owns Blackacre?" Use this 10-step method to dismantle complex fact patterns:
1. Identify the Property: Real, personal, fixture, leasehold, resource?
2. Identify Every Claimant: List everyone claiming an interest.
3. Classify Each Interest: Present estate, future interest, lien, easement?
4. Identify the Source: Deed, will, lease, adverse possession?
5. Determine Validity: Statute of Frauds, delivery, RAP satisfied?
6. Determine Transferability: Can it be assigned or inherited?
7. Determine Priority: First in time, recording acts, PMMs, foreclosure rules?
8. Analyze Use Restrictions: Covenants, zoning, nuisance, easements?
9. Analyze Possession/Obligations: Rent, waste, taxes, repairs?
10. Determine Remedies: Ejectment, quiet title, injunction, foreclosure?
XIII. Common Property Examination Traps
- Calling every future interest a remainder. (Executory interests cut short other transferees).
- Confusing Determinable vs. Condition Subsequent. (Automatic return vs. Grantor must take action).
- Applying RAP to Grantor interests. (Reversions, Possibility of Reverter, Right of Entry are exempt from RAP).
- Treating Assignment and Sublease as synonymous. (Assignment = entire remaining term).
- Calling a Donee a Bona Fide Purchaser. (BFP status requires paying value).
- Assuming nonuse alone terminates an easement. (Abandonment requires intent to permanently relinquish).
- Reversing Mortgagor and Mortgagee. (Mortgagor = borrower. Mortgagee = lender).
- Assuming Junior Foreclosure eliminates Senior Mortgages. (It does not. The buyer takes subject to senior liens).
XIV. Sunday Capstone Hypothetical
"O conveys Blackacre 'To A for life, then to B if B becomes a licensed attorney, but if Blackacre is ever used for commercial purposes, then to C.' A enters possession and leases the rear half to Tenant for 10 years. Tenant installs a commercial kitchen for a catering business. A borrows $150,000 from Bank and mortgages A’s interest. O later signs a deed conveying Blackacre to Purchaser, who records immediately."
Classification Before Conclusion: Do not just ask "Who owns Blackacre?" Parse the interests.
- A: Has a Life Estate. A can only lease or mortgage what A has (an interest that ends when A dies). Bank's mortgage is only on A's life estate.
- B: Has a Contingent Remainder (must satisfy condition precedent of becoming a lawyer). Subject to RAP analysis.
- C: Has an Executory Interest (cuts short the prior estate if used commercially). The catering business triggers this condition.
- Tenant: Has a term of years leasehold. The commercial kitchen raises Fixture and Trade Fixture issues.
- Purchaser: O conveyed whatever interest O retained (a reversion if the future interests fail or before they vest). Recording immediately protects against subsequent BFPs, but doesn't erase A, B, or C's previously granted valid interests.
By classifying first, the complex web of foreclosure, fixtures, RAP, and recording acts becomes an organized checklist.
Chapter Summary
Sunday integrates property financing, priority, fixtures, support rights, and comprehensive examination strategy.
A mortgage secures a debt. The borrower (mortgagor) gives the mortgage to the lender (mortgagee). In a Lien Theory state, the borrower retains title. In a Title Theory state, the lender holds title, which can sever a joint tenancy.
Before foreclosure, borrowers have an Equitable Right of Redemption to pay off the debt and save the property. This cannot be waived at the mortgage's creation. Statutory Redemption occurs after the foreclosure sale, only if state law allows.
Foreclosure Priority: "First in time, first in right," modified by recording acts, subordination, and Purchase-Money Mortgages (PMMs, which have superpriority). Foreclosure by a Senior mortgagee wipes out junior liens. Foreclosure by a Junior mortgagee leaves senior liens intact on the property.
When selling mortgaged property: A buyer who assumes the mortgage is personally liable for the debt. A buyer who takes subject to the mortgage is not personally liable, though the land can still be foreclosed.
Fixtures are personal property attached to land. Commercial tenants can generally remove Trade Fixtures if timely and without unreasonable damage.
Water Rights: Riparian (East) is based on reasonable use by bordering landowners. Prior Appropriation (West) is "first in time, first in right."
Support: Strict liability applies to lateral excavation causing land to collapse in its natural state. Subjacent support protects the surface from underground mining.
Property Law is a system for identifying, classifying, ranking, and enforcing competing interests. Always classify interests before concluding ownership.
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