What is Meant by Equitable Conversion?
Equitable conversion is a legal theory that treats the equitable owner in possession of land as the real owner. The concept of equitable conversion is based on a set of rules developed by courts of equity, which we now know as "equity" or "equitable "in American law. Equity was developed at common law in England by the Courts of Chancery. It developed as a system of organized justice that was independent of the common law. Equity adapted certain common law principles to achieve what it conceived as justice. Thus for many centuries, equity and the common law were considered to be two separate systems.
Equitable conversion operates as a doctrine of courts of equity. Where equity acts, legal rights are merged into equitable rights . Equitable conversion comes into play where a conveyance of property will occur in the future. The doctrine of equitable conversion applies to scenarios where, before completion of a property sale, legal title will be held for the benefit of one party and an equitable interest will be held for the benefit of another. In other words, the "benefit" and "burden" of ownership is split. Equitable conversion results in the presumptive (not conclusive) change in the estate of property from real (land-based interests) to personal property (things of this world). When equitable conversion occurs, the equitable interest in the property is treated as the only remaining interest.
The History of Equitable Conversion
Historically, the doctrine of equitable conversion arose in equity to allow courts to enforce contracts signed by persons who died before performing their promises. The ancient common law could not be effective to resolve such cases because it required the strong evidentiary support of physical possession of property in order to convey interests in land. Moreover, at a time when records were nonexistent or not easily retrievable, the common law rule produced a practical and technical problem: if Charles and Matthew entered a contract for the sale of land, and only Charles came into possession of the property and died before Matthew, the vacant land would simply escheat to the King; all other persons would be powerless to lay claim to the property, and thus all potential estates would remain in limbo. For this reason, "equity" commenced its traditional offense against the common law at a very early date, allowing a remedy which made the land itself in its new form in the hands of the deceased vendor, and the estate of the descendants would pass to the original purchaser as if the supposed vendor had died in possession of the land, conveying to his heirs the various interests sought by the sale or deed.
This adaptive solution was not without its limits, however. As long ago as the mid-15th century, the King demanded the power to "devise" the land to others instead of allowing such property to escheat; such a stepping beyond the bounds of the common law required the implementation of an additional machinery: . . . . . . . . to give the King for the time being the power of disposing thereof to any subject, by letters patent, so as he should have the profits during the life of the King or Queen; and after the death of such King or Queen, or upon the surrender of the offices granted, the land should be new granted by letters patent of the new King or Queen to the use of the heirs of the grantor, so that the right and lawful title to the same land should never go in abeyance in any time or any way, but descend down to the issue of such King or Queen for ever…. And thus have the lands in the King’s disposition as they may be in their own case, held accordingly to the notion of a private person of his own free estate, except always the right of the King…. ‘The good of their people’ so people, and preserve their inheritance to the which they are born, as a natural love, growing with them.’ [2 Bl. Comm. 344, n. (1) (1762).]
Even more disturbing to the common law was that land conveyed via equitable conversion was beyond its purview; since the contract was merely a personal agreement, the actual granting of the land to the purchaser was made "equitable" by virtue of the Court’s decree. But the notion of merging title and possession in that way found no support in the common law, which as we have seen demanded physical possession of any property intended to pass. Huguenin v. Baseley (1807), 13 Ves. 90; post, ยง 18.
Fundamental Aspects of Equitable Conversion
Equitable conversion rests on two fundamental principles. They are: These principles find their support in equity and have been adopted in Georgia jurisprudence and statutory law. The principle regarding the separation of equitable and legal title stipulates that, when an owner of land conveys it to another by means of a contract for future conveyance, the equity or beneficial interest passes to the grantee, but the title vested in the grantor unless and until the grantor surrenders the legal title by performing every duty imposed by the contract. A deed executed following the termination of the contract operates as a mere declaration of pre-existing and continuing title in the grantee. The principle pertaining to the purchaser for value relies upon the proposition that the vendor is not entitled to recover upon a contract that has completely failed or that has merged upon an accepted deed. In such event, the law recognizes that it is just as much a fraud upon the rights of a bona fide purchaser from the purchaser as it would be upon the rights of the vendor to permit the vendor to accept the price, cancel the sale, and sue the purchaser for the land and its value. To permit such conduct, it is said, would enable the vendor, under the guise of a right of rescission to repudiate his contract, to practice a fraud on the less alert, vigilant, or less shrewd purchaser from the vendee.
Real Estate Transactions and Equitable Conversion
The practical implications of equitable conversion extend in multiple directions in the context of a real estate transaction. Often it only becomes relevant when something does not proceed as planned before closing. At its core, equitable conversion divides the rights and responsibilities of the parties between the personal obligation to sell the property and the real right of the buyer to receive the consideration owed.
In practice, issues arise mainly out of two scenarios. The first is where the sale contract does not close, often due to the buyer not being able to secure the necessary financing. Typically, any earnest money deposits are already lost by the time that the buyer defaults or rescinds the contract, and the seller keeps that money. However, the risks and responsibilities with respect to the subject property may be split differently in the sale contract.
A sale contract often allocates responsibility for property taxes, insurance, and other operating expenses to one of the parties. It is common for contracts to allocate some responsibility for these to the seller before closing. The decision whether to allocate risk to the seller can be particularly important if the transaction closes slightly late – usually through an extension or delayed closing date – which can result in unfair assessments of damages later on. In general, the party with financial responsibility for routine costs has the most incentive to monitor them through the closing date.
The second scenario occurs after the sale contract has closed, but before the closing of a new loan by the buyer. If a buyer finances the purchase price, the lender will typically require the property to be free of most liens at the time the loan closes, and will often require that third parties be notified of the closing and its terms. In particular, it will frequently require that the seller receive notice of, and consent to, the loan closing on the same date that the sale contract closes. This often serves to protect the buyer’s position as a subsequent creditor in the event that the seller tries to once again sell the same property to someone else.
Issues and Case Examples of Equitable Conversion
Despite the legal certainty that equitable conversion can provide, there are a number of challenges that may arise when real property is being purchased with a devise. The most common challenge is that the devises and the purchaser may not agree on the sale price, the time and method of closing, or even whether the purchaser needs to bring the closing funds due to the existence, or non-existence, of a deficiency, tax or other lien, or a mortgage.
In determining the rights, interests and obligations with respect to equitable conversion, Florida courts often look at the "same terms and conditions" language of the devise. This is the point where the greatest legal challenge exists as between the devisee and the purchaser.
Deed, to Dick and Jane: "I devise and bequeath the net proceeds from the sale of my house, the same terms and conditions as though I were selling it myself, to my children, Dick, Jane, Rachael and Sarah."
In this example, the devisee has all right and title to collect and hold the sale proceeds and has no obligation to make a mortgage deficiency payment, unless the devisee would be liable for such payments if the sale was pursuant to the deceased grantor’s direction, without a sale price and on the terms and conditions set forth therein.
What is an equitable conversion challenge? Consider the following: Ann’s Will Bequeaths Property to Son, Will Device Property to Son "BLACK’S LAW DICTIONARY, (7th ed. 2000) defines a devise as synonymous with a gift by will of real estate. . . . A device of real property passes title at the death of the testator. The title does not start with the devise , nor does it pass by the act of the devisee accepting the devise. The title vests in the devisee automatically upon the operation of law." Burch v. Equitable Life Assurance Society of the U.S. (Fla. 1st DCA 2000). Notice here that the devisee has accepted the devise and has all right and title to the net proceeds when the devisee sells the house. Here it is likely that Dick, Jane, Rachael and Sarah are equitable owners and the devisee holds legal title in trust hereunder for their benefit.
Relationships and Obligations: If Ann’s devise above, required her son to handle her estate, and specifically to close the sale of the property and distribute the proceeds according to the devise, then he would have an obligation to account for any expenses paid out of the sale proceeds and for the sale price.
Overall, recent cases have held the words "same terms" in the devise language constitutes a sufficiently specific direction that the devisee would, in fact, be liable on the deficiency, if any. However, Florida courts have found that the purpose of the doctrine of equitable conversion is to prevent unjust enrichment. Therefore, if the devisee intentionally delays the sale for his or her own and sole benefit, the devisee should not have any recourse against the estate for any loss the estate suffers as a result thereof. If the devisee should become personally liable on any deficiency due to the terms of the devise, such liability would likely be due to the bad faith of the devisee.
Equitable Conversion and Sales of Real Property
The doctrine of equitable conversion often finds its way into property law through the language contained in contracts. While some relief may be available through reliance on the doctrine, sometimes bad bargains cannot be unbartered.
The contract itself can create or clarify whether the equitable conversion doctrine will apply. It may explicitly state that the sale of property will be finalized when a certain event occurs, such as the purchaser obtaining financing or the seller furnishing title insurance. Of course, it’s still up to a court to decide whether the contract clearly manifests that the parties intended property ownership to pass in a conditional fashion, so the contract language must still be crafted with caution.
Leasehold agreements are also used to bind parties under the doctrine of equitable conversion. Such a deal must be carefully drafted, however. Generally, if a party does not have a possessory interest under a leasehold agreement, a court will not recognize the party as a bona fide purchaser, and that party may not be eligible for equitable conversion protection.
Whether the parties are transferring full title to a property or only transferring a leasehold interest in a property, their contract language will be important in determining whether a court will agree with their intentions and protect them under the doctrine of equitable conversion.
Future Directions in Equitable Conversion
Future trends in equitable conversion should encompass technology-driven changes in how property transactions are conducted. The rise of blockchain and cryptocurrencies may reduce the need for extensive equitable conversion. Title transfers on the blockchain can circumvent the requirements for a written contract or deed, making it easier for people to conduct real estate transactions, increasing the risk that equitable conversion might apply. However, on the flip side, this decentralized method of title transfer might lead to a more uniform application of the doctrine.
Another possible future trend is legislative action to address the evolving nature of commerce. For example, the potential use of a blockchain-like system by banks to ensure that no bank is holding concurrently pending transfers of the same property is being examined by The Uniform Law Commission and could be adopted in some states . Development of such a system might strengthen the efficacy of equitable conversion. A statutory conversion-based system could obviate the need for the court-supervised sales previously authorized based on equitable conversion. Both developments would be a potential boon to Courts and their busy calendars.
It also seems likely, though not certain, that the various states will continue to struggle with how to adopt technological innovations and enable new types of property transactions while at the same time preserving traditional concepts of real property law. The challenge will remain for judges, practitioners and scholars to struggle to find ways to balance the sometimes inequitable results of equitable conversion against the fairness it provides when it leads to a justier transfer of good title.