Vendor and Purchaser
The legal relationship between the buyer and the seller of land during the interim period between the execution of the contract and the date of its consummation.
The sale of real property is treated differently by the law than the sale of PERSONAL PROPERTY. The relationship between the seller and the buyer has traditionally been labeled that of vendor and purchaser. A contract to sell real property (for example, a house, a building, farmland, or a vacant lot) does not automatically mean the sale will be consummated. The vendor will be required to prove that she can convey a marketable title to the land.
A contract for the sale of real property is executed when the vendor and the purchaser sign an agreement in which the vendor promises to convey ownership of the property to the purchaser, who promises to pay an agreed sum. The contract is consummated when the vendor delivers a deed to the purchaser and the purchaser pays the vendor's price. Consummation of the contract is variously referred to as the closing of escrow, the date of closing, or simply the closing.
The vendor-purchaser relationship is based on the unique nature of land. Title to any particular parcel has always involved more complications than arise with the ownership of personal property. The status of the vendor's title is a matter of great concern to any prospective purchaser, but that title is often subject to deficiencies.
Most purchasers offer to buy land before they have made an investigation of the seller's title to it. To protect the purchaser in this situation, the law permits him to demand a marketable title from the vendor and to withdraw from a sales contract if the title turns out to be unmarketable. Therefore, every contract for the sale of land includes the implied requirement that the vendor's title be marketable, unless the contract specifically provides otherwise.
A marketable title is a title that the vendor does in fact have and that is not subject to encumbrances, which are interests in the property held by someone other than the vendor or purchaser. Unless an agreement indicates otherwise, the purchaser is entitled to receive an absolutely undivided interest in all the property he has contracted to buy. For example, if the vendor promises to convey forty acres in the sales agreement and the next day the purchaser discovers that the vendor has title to only twenty-five acres, the purchaser is not obligated to honor the contract because the vendor lacks marketable title to the land the vendor agreed to convey.
If the vendor's title is subject to an outstanding mortgage, the title may be unmarketable. The mere existence of an encumbrance does not necessarily cause the title to be unmarketable, however, if the parties have provided for it in their contract. For example, in the sale of a vendor's house that has an outstanding mortgage, the purchaser's money will first be applied to paying off the vendor's mortgage before the vendor receives any proceeds.
To avoid confusion and frustration of the parties' intentions, contracts of sale usually require an insurable title to the property as evidenced by a title insurance policy. The purchaser must accept the vendor's title, provided an insurance company indicates its willingness to insure the title without making exceptions to the coverage.
Because land has always been regarded as a unique asset, a prospective purchaser can usually enforce a sales agreement whether the vendor wants to proceed or not. This power has the effect of giving the purchaser an interest in the land itself, as well as personal contract rights against the vendor. By executing the sales contract, the purchaser becomes the equitable owner of the land. The vendor retains legal title, but holds the title only as security for payment. This legal fiction is known as the doctrine of equitable conversion.
In some states the doctrine of equitable conversion shifts any loss or damage to the property to the purchaser before the closing. As the true owner of the property, the purchaser is required to bear the risk of loss during the contract period and cannot withdraw from the agreement. Thus, if a fire caused by neither party destroys the premises two weeks before the closing, the purchaser will still be obligated to complete the contract and pay the vendor's price.
Some courts reject this application of equitable conversion, holding that the contract fails if the vendor cannot deliver the premises in the original condition on the day of closing. This view treats the continued existence of undamaged property as an implied condition of the sales agreement. The purchaser is entitled to withdraw from the contract if the property is damaged prior to closing.
Several states have adopted the Uniform Vendor and Purchaser Risk Act, under which innocent losses occurring during the contract period are allocated to the vendor, unless the purchaser has taken possession prior to closing. The risk of loss is on the person in possession because that person is in the best position to take care of the property.