This article addresses the sale and release of individual parcels in a subdivision encumbered by a blanket trust deed.
An enforceable release provision
A developer makes an offer to purchase an unimproved parcel of real estate. An unrecorded final subdivision map exists which contains 25 lots. Each lot will have substantially the same value when grading and offsite improvements are completed.
The terms of the purchase price include a 20% down payment. The balance of the price is to be carried back by the seller in a note secured by a trust deed lien on the entire tract.
The trust deed will be subordinated to a loan for street improvements and grading of the lots. No portion of the down payment will be applied toward the release price for any lot created by the subdivision map.
The close of the purchase escrow will be contingent on the recording of the subdivision map and a subdivision improvement loan.
After improvements to the subdivision are completed, the developer intends to sell improved lots to individual builders of homes.
To sell the lots, the developer must be able to convey each lot free of the carryback trust deed encumbrance which blankets the subdivision.
To accomplish the resale objective, the broker representing the buyer prepared a partial release agreement which is attached to the purchase agreement as part of the developer’s offer. If accepted by the seller, the partial release agreement or its replacement will also be attached to the carryback trust deed. [See Form 280 accompanying this chapter]
The partial release agreement sets a release price for each lot. The release price paid applies to principal reduction only, not other amounts due on the carryback note such as interest. The release price per lot is 1 1/2 times each lot’s pro rata share of the original amount of the carryback note, based on each lot’s value as a percentage of the value of all lots originally encumbered by the trust deed.
Terms of release
For example, a subdivision blanketed by a trust deed lien contains 25 lots.
The release of one lot would require an additional principal payment of six percent of the original amount of the trust deed note. The six percent is 1 1/2 times four percent, the lot’s 1/25th pro rata share of the original amount of the carryback note.
Thus, when 2/3rds (17) of the lots have been released, the carryback note will have been paid in full. Then, the balance of the lots will be reconveyed from under the trust deed lien.
The partial release agreement provides for the sequential release of lots in numerical order, beginning with lot one on the recorded subdivision map.
The developer will pay, in addition to the release price, the costs of preparing and recording the partial reconveyance and any unpaid interest accrued through the date of release. Also, the blanket trust deed must be current before a lot will be released.
If the seller accepts this offer, will the developer’s partial release agreement calling for the reconveyance of individual lots be enforceable?
Yes! The partial release agreement is enforceable as it:
- specifies the price to be paid for the release of each lot;
- establishes the order for release of the lots; and
- ensures the seller’s loan-to-value (LTV) ratio will not increase after a reconveyance, since the release price exceeds each encumbered lot’s pro rata share of the original amount of the carryback note.
Use of release agreements
Partial release agreements are used by subdividers, developers and builders of projects containing numerous lots to be resold separately and reconveyed from a blanket trust deed lien.
A due-on-sale clause contained in a blanket trust deed is inapplicable to lots reconveyed under the partial release agreement.
However, if a developer sells a lot without first obtaining a reconveyance or without the prior consent of the carryback seller, the trust deed’s due-on-sale clause is triggered.
Further, a developer is prohibited from selling lots or parcels within a subdivision where the lots are subject to a blanket encumbrance unless a release clause unconditionally provides for the buyer to obtain title free of the blanket encumbrance. [Calif. Business & Professions Code §11013.1]
To accomplish a resale program for individual lots, the developer or builder must have a written agreement with the blanket trust deed holder calling for the release of individual lots from the trust deed lien on his subdivision. The developer thus avoids having to pay off the entire note balance simply to clear title to one of several encumbered lots.
A partial release agreement attached to a blanket trust deed encumbering a subdivision, as approved by the Department of Real Estate (DRE) in a final subdivision report, called a white sheet, must unconditionally provide for a buyer of a lot from a developer or builder to obtain legal title free from the blanket trust deed at the time of purchase. The release agreement must provide for a release even if the subdivider is in default on the blanket trust deed at the time of the request for release. [B & P C §11013.1]
Impairment on release
A carryback seller can refuse to release parcels under a partial release agreement if his LTV ratio would increase on the remaining lots due to a release. Thus, a release provision is unenforceable if it calls for an amount less than this lot’s pro rata share of the remaining loan balance, based on the lot’s value as a percentage of the value of all other lots remaining as security.
The release agreement must assure the amount of the release payment is an equal or greater percentage of the unpaid balance on the note than the lot’s share of the note balance. [People v. Redwood Baseline, LTD. (1978) 84 CA3d 662]
Protection on release of security
The carryback seller, through the partial release agreement, can protect against an increase in risk of loss due to a partial reconveyance by:
- setting the release price based on each lot’s relative value or requiring less valuable lots be released first;
- requiring all accrued interest to be paid on each release;
- requiring the release price to be in addition to any principal in regular loan payments; and
- applying the owner’s resale proceeds from a released lot to the remaining note balance.
A seller’s LTV ratio will not increase on release of a lot if the release price for each lot is based on its pro rata value of all lots encumbered, or if the less valuable lots are released first.
The carryback seller can further minimize his risk of loss by requiring all accrued but unpaid interest on the remaining balance to be paid concurrent with any reconveyance under the partial release agreement.
Occasionally, the carryback seller refuses to agree to apply any principal reduction due to monthly installments as a credit toward the release price to be later paid for a parcel. Then, release payments would be in addition to any regularly scheduled payments.
The carryback seller can strengthen the position of his carryback trust deed by negotiating to release a parcel only on receipt of all the net proceeds from a resale of the lot.
Additional security, such as the promise of a guarantor, a letter of credit or property other than the property sold, can be sought by the seller through a counteroffer. Thus, the carryback seller would not be relying on the property sold as his sole source of recovery on default.
Finally, a carryback seller might be asked to agree to subordinate to a construction loan. A note secured by the carryback trust deed becomes recourse paper when the trust deed actually becomes subordinated to a construction loan.
Thus, the carryback seller can pursue the buyer to recover solely on the note, not the trust deed, should foreclosure on the construction loan wipe out the carryback trust deed. [Spangler v. Memel (1972) 7 C3d 603]
Terms of the partial release agreement
A partial release agreement is certain and complete and thus enforceable if it contains:
- an identification of the dimensions and location of each lot;
- the release price of each lot; and
- the order for release of the lots. [See Form 280]
Identification of parcel
A partial release agreement cannot be enforced until a subdivision map has been recorded.
A developer cannot close escrow on the sale of any portion of an unsubdivided parcel until a final map in full compliance with the Subdivision Map Act and any local ordinances is recorded by the recorder in the county where the parcel is located. [Calif. Government Code §66499.30]
The partial release agreement prepared by the broker should disclose the carryback seller is under no obligation to release or reconvey portions of the property until a final or parcel map has been recorded.
A partial release agreement using acreage as the only description of the lots to be released does not contain the dimension or location information necessary to enforce the partial release agreement.
An acre is only a term of quantity. An acre, which constitutes 43,560 square feet of land, can be applied to property of any shape or location.
To have an enforceable partial release agreement, the broker should recommend a tentative map be prepared describing the exact dimensions and location of each parcel for later release.
A test for determining the sufficiency of a property description for release is whether a competent surveyor would be able to locate the land and establish its boundaries from the description contained in the release agreement. [Leider v. Evans (1962) 209 CA2d 696]
When a final map has not been recorded, a tentative or other unrecorded map should be attached or referred to in the partial release agreement.
In anticipation of changed dimensions or lot numbers in later maps, the release agreement, to be enforceable, should give the carryback seller the sole authority to adjust the release price and select which parcels may next be released. The selection for release and the price of each parcel cannot be left to later mutual agreement between buyer and seller and be enforceable. [City of Los Angeles v. Superior Court County of Los Angeles (1959) 51 C2d 423]
Release price payment
The partial release agreement accompanying this chapter applies the price paid to release a parcel to reduction of the principal amount of the trust deed note. Also, a reduction of the principal due to payment of periodic installments is applied toward the release price of the next parcels.
The release price is expressed in terms of acreage, square footage, front footage or lots. The release price for each parcel should be an amount greater than the parcel’s pro rata share of the outstanding debt.
The carryback seller should negotiate a release price per lot of 15% more than each lot’s pro rata share of the original amount on the note based on the relative value of all lots. Thus, when 85% of the lots are released, the seller’s note will have been paid in full.
A prudent carryback seller would not agree to a release price equal to the outstanding balance divided by the number of parcels remaining as security, since subdivided land often contains lots of more value or marketability than others.
The value of each lot is related to each parcel’s elevation, topography, easements, size and location in the subdivision.
The carryback seller’s partial release price should be based on the economic risks he wants to exist both before and after the partial release. The LTV ratios before and after a release are used as the basis for setting the minimum dollar price for the release.
Order of release
In addition to price and description, the sequence for the release of the lots must be fair to the carryback seller.
Releasing the more valuable lots first, without payment of a debt reduction related to the value of each lot released, leaves the carryback seller with less valuable lots to secure a greater pro rata share of the carryback note.
A partial release clause may delegate to the buyer or a third party the selection of lots to be released next. However, this might not be prudent from the seller’s point of view as the delegation of valuation relies on the good faith of others to maintain a fair LTV ratio.
The broker’s role in structuring the partial release agreement includes negotiating the order in which the lots will be released so the release is enforceable.
The partial release clause could authorize the sequential release by lot number on the final map, or by any other agreed-to order of release.
Obtaining a release
To release a lot from a blanket trust deed lien, the owner of the lots makes a written demand on the carryback seller or lender holding the blanket trust deed for the partial reconveyance of the lot. The demand is usually from the escrow opened to sell or refinance the lot.
In response to the demand, the carryback seller signs instructions to the trustee on the blanket trust deed requesting a reconveyance of the lot.
The request for partial reconveyance is delivered to the escrow funding the payoff, with instructions authorizing escrow to use the request for a partial reconveyance when the escrow can deliver the release price to the carryback seller.
On close of the funding escrow the reconveyance request is sent to the trustee. The trustee in turn prepares and records a deed of reconveyance for the lot released. The carryback note and blanket trust deed are usually endorsed by the trustee to reflect the partial reconveyance.
It is good practice to handle the partial release and funding through an escrow or title company even if an insured sale or refinance is not involved. An escrow provides a record of events.
A partial release can be automatically implemented without a recurring demand each time a lot is to be reconveyed. The sequence for the release of lots and the release price for each lot are already set by the terms of the carryback note and trust deed.
An automatic release arrangement would require the carryback seller to initially place his request for the reconveyance of the lots with the trustee named in the trust deed or someone acting as a substitute, along with instructions to record reconveyances of lots on receipt of the corresponding payments.
A trustee must always be aware of the potential liability involved in the reconveyance – especially with an automatic release. If the trustee reconveys the wrong lot or receives insufficient payment for a release, he will be liable for the lender’s losses. [Doyle v. Surety Title & Guaranty Company (1968) 261 CA2d 525]
Enforcement of release agreements
A partial release agreement can only be enforced by the owner if the terms of the agreement contain a complete description of the location of each parcel with the order in which they are to be reconveyed. A partial release agreement fairly protects the security interest of the carryback seller from impairment. [Calif. Civil Code §§3390; 3391]
For example, a partial release agreement attached to a trust deed gives the developer the right to decide which lots will be reconveyed, providing the lots reconveyed are contiguous to the parcel initially released to the developer when the property was purchased.
Later, the developer seeks a partial release of the most valuable contiguous lots, leaving as security only inaccessible and undeveloped property. The release of the valuable lots would substantially increase the loan-to-value (LTV) ratio for the balance remaining unpaid on the note.
Is the partial release agreement enforceable when the LTV ratio will be increased on release?
No! When a partial release is granted and the LTV ratio substantially increases after the release, the lender’s secured position is weakened. The carryback seller, if forced to foreclose on the remaining lots, will be less likely to recover the remaining balance due on the note. Being unfair, the demand to release lots is not reasonable, and the release agreement becomes unenforceable. [Elderidge v. Burns (1978) 76 CA3d 396]
Consider a partial release agreement which sets the price per acre a developer must tender and the minimum number of acres he can release. Also, acreage to be released must be contiguous to acreage previously released.
Further, the first acreage released must be on the northern or southern border of the property. Parcel and subdivision maps will be recorded to allow the release.
The developer tenders payment for the partial release of a lot and demands reconveyance of the lot from the carryback seller.
The seller refuses, claiming the description in the partial release agreement for the parcels to be released is incomplete and unenforceable without a metes and bounds description. The exact location, dimensions and shape of the parcels to be released were not established in the release agreement.
The developer claims the words “contiguous acreage” are complete in their meaning and sufficient to describe the acres to be released.
Is the legal description of the acreage agreed to be released complete enough to enforce the reconveyance of a lot?
No! The word “contiguous” does not define the exact shape and dimensions of each parcel to be released. Thus, the words “contiguous acreage” used in the partial release agreement describe a quantity of land, not a parcel of land, and render the entire partial release agreement unenforceable. [Lawrence<M> v. Shutt (1969) 269 CA2d 749]
An unenforceable partial release
A purchase agreement between a developer and a seller calls for partial release provisions to be agreed upon prior to the close of escrow.
On opening escrow, the seller and the developer are advised by the broker to resolve the unnegotiated terms of the partial release agreement before continuing with the transaction. The seller and the developer disregard the advice and escrow instructions are prepared and signed.
The escrow instructions call for the carryback trust deed to include as an addendum a partial release agreement to be delivered to escrow and approved by both the developer and the seller before closing.
The developer submits his attorney’s proposed partial release agreement for the seller’s approval. The seller refuses to approve or revise the agreement. The seller then cancels the purchase agreement and escrow.
The developer demands the seller close escrow and deliver title to the property claiming the sales transaction cannot be cancelled.
The seller claims the purchase agreement is unenforceable until a partial release agreement has been approved by both parties.
Can the seller refuse to convey title when a portion of the entire agreement has been left to future negotiations?
Yes! In purchase agreements containing an “agreement to agree” before closing, nothing is enforceable unless escrow has already closed. Where the purchase agreement leaves the terms of the release agreement up to mutual agreement at a later date, the entire purchase agreement is merely an “agreement to agree”. It is neither binding nor enforceable. [White Point Company v. Herrington (1968) 268 CA2d 458]
To avoid an unenforceable purchase agreement, the broker should complete negotiations on the terms of the release, prepare a partial release agreement and attach it to the purchase agreement as part of the initial offer.
Further, before escrow closes, the buyer cannot waive the yet-to-be-agreed-to partial release agreement and attempt to enforce the balance of the purchase agreement even though the release clauses were included solely for his benefit. No legal obligation to close a sales transaction arises until the entire agreement has been negotiated. [Magna Development Co. v. Reed (1964) 228 CA2d 230]
However, a fully negotiated but unenforceably defective partial release agreement for lack of completeness or fairness does not render the underlying purchase agreement unenforceable.
Neither a buyer nor a seller can refuse to perform and close the purchase agreement based on the unenforceability of a fully negotiated but defective partial release agreement. Enforceability of a fully negotiated partial release agreement is determined when the buyer makes demand for a partial release. [Yackey v. Pacifica Development Company (1979) 99 CA3d 776]
Even after escrow closes, an unenforceable partial release agreement in the recorded trust deed does not allow the transaction to be rescinded by the seller. [Lawrence, supra]
Whether the buyer can rescind the transaction after closing based on an unenforceable partial release agreement has yet to be decided by the courts.
However, the developer alone faces the loss of a bargained-for use of the property since only he benefits from the release of lots. Yet, the developer has received exactly what he bargained for – an unenforceable release agreement.
Like the seller, the buyer with a defective partial release agreement will not be able to rescind a closed transaction since he could not have cancelled the purchase agreement based on a defect in the release agreement drafted by the buyer and his broker. [Yackey, supra]
Buyer in default
When the terms of an enforceable partial release agreement have been complied with and the buyer requests the release of a lot, the carryback seller must cause the lot to be reconveyed. [CC §2941]
For example, a trust deed contains a partial release agreement permitting the release of lots as the principal balance of the note is reduced.
The owner makes his regular trust deed note installments. The installments include principal reductions which eventually total enough to entitle the owner to the release of lots.
However, the owner does not immediately request a reconveyance of the “paid for” lots from under the blanket trust deed.
Later, the owner defaults on the note and trust deed. He then requests a partial release of the lots he was entitled to have reconveyed due to the previous principal reduction.
The lender refuses to reconvey the lots claiming the partial release agreement does not entitle the owner to a release since the owner is in default.
Must the lender release the lots paid for before the owner was in default?
Yes! The buyer is entitled to a reconveyance of the lots which, essentially, were no longer encumbered before his default as the debt allocated to them had been paid. The failure of the owner to demand the partial release of lots before default on the note or trust deed did not extinguish his rights to the release of lots on which money was no longer owed at the time of the default. [Conley v. Poway Land and Investment Company (1965) 232 CA2d 22]