Land Contracts Are Unique in the Eyes of the Law

Land contracts are different from other contracts as well as other areas of law. The way they are treated varies from state to state. To understand why, it’s helpful to dive into a bit of legal background, including the basics of common law and principles of equity. This section is not for the faint of heart! But for those of you who are intrigued, keep reading.

Basics of common law

Common law—also known as case law or precedent—is developed by the courts, as opposed to statutes enacted by the legislature or regulations created by government agencies. If a statute or regulation applies to an issue in a case, the court must apply the statute or regulation as it overrides common law. However, if there are no statutes or regulations that apply to a distinct issue, courts turn to past decisions of cases with similar facts and circumstances. They then apply the prior case law or precedent to determine the outcome of the present case, making certain tweaks as needed to adapt to the distinct facts and circumstances of the present case. Indeed, no two cases before a court are exactly the same. This explains how common law morphs and evolves over time—as more and more cases are decided by the courts, more and more common law is created, refined, and even changed as social and cultural norms change. The court system in each state has its own common law that has developed over time, making common law—and the courts’ treatment of land contracts—vary quite a bit from state to state.

Issues of law and issues of equity related to land contracts

Common law is made up of two systems—law and equity. Issues of law are handled by applying the law as it’s written to the facts of the case—the law is precisely what the relevant statute, the regulation, or even the terms of the disputing parties’ contract says. So if a land contract has a forfeiture clause and the buyer defaults on the last installment of a 20-year contract, when deciding the issue of law, the court will say too bad, she loses everything because that’s what is written in the contract. In other words, when deciding issues of law, the court strictly enforces the law or the terms of a contract as written, with absolutely no exceptions.

Issues of equity typically refer to a set of remedies or procedures to ensure a fair outcome in the case. When faced with issues of equity, courts basically weigh the injustices of applying the law and the associated legal remedy, so to speak. Given a rare set of circumstances, the court will override the remedy that the law demands and create what’s called equitable relief to be applied in all similar circumstances. In this way, the courts have devised equitable doctrines to alleviate high-level social or economic inequities that arise when the law is strictly applied in certain situations. In the case of the land contract, some courts have stepped in and crafted a form of relief for the buyer that is more fair or equitable than completely forfeiting the land upon default even if that’s what the land contract expressly says.

Basically, some courts have said, well, in all fairness, if a buyer has built equity in the land for nearly 20 years, she should at least have an opportunity to make the final payment or at least get back the equity she’s invested just as a mortgagor does if she defaults on her home loan payment. Here, allowing the buyer to have another chance to avoid the harshness of a forfeiture clause is what’s considered equitable relief.

Originally, courts of law and courts of equity were actually separate. However, in the federal courts and in most states they have merged and a single court can decide both issues of law and issues of equity.

Why land contracts are treated differently in different states

The common law process of the court system and the distinction between issues of law and issues of equity explain why land contracts are treated differently state by state. Basically, state courts have struck a different balance in applying the strict law of forfeiture clauses and applying principles of equity or fairness when devising a remedy for when one party doesn’t hold up their end of the deal. Moreover, many state legislatures have also stepped into the mix because they have been unhappy with how their state courts have struck this balance. These state legislatures have enacted statutes to override the common law in their state on the issue of forfeiture clauses in land contracts. Again, common law of the court applies only when there’s no statute or regulation on point. Once a state legislature passes a statute governing the issue of forfeiture clauses in land contracts, the courts in that state have to disregard the common law precedent and strictly apply what the statute says to do from then on. Needless to say, it can get confusing!

Why land contracts are different from other contracts and areas of law

Land contracts are unique and different from other contracts and other areas of law precisely because of how the courts have applied the equitable conversion doctrine, as well as how the state legislatures have enacted specific statutes to deal with forfeiture clauses. Keep in mind, it’s only on a very rare occasion that courts will step in and override the terms of a contract based on an equitable doctrine. Courts are typically not as paternalistic and will completely defer to the free will of the parties to come up with their own terms under freedom to contract principles, and will apply those terms as written when deciding the outcome of a contract dispute. Moreover, farmers may get confused and think that perhaps they could get away with not abiding by employment laws or food safety laws on some kind of equitable grounds. Farmers might be thinking, why not just go to court and pull at the judge’s heart strings by arguing it’s too harsh and simply not fair to have to comply with these laws? But this won’t work. Employment laws and regulations at both the state and federal level override common law as these consist of statutes and regulations enacted by the state and federal legislatures or government agencies. Common law only applies when no statute or regulation is on point. So there’s no easy out when it comes to abiding by such laws and regulations.