The Battle of Hastings
The history of modern real estate transactions and closings must begin with the Norman conquest of Britain, a monumental battle and the last time the English were defeated on British soil. The battle of Hastings occurred on October 14, 1066 and was not simply another invasion by a foreign force, such as that intended by Hitler. The battle of Hastings was the culmination of a rivalry for the throne of England.
William the Duke of Normandy was the great, great nephew of Emma of Normandy, who was the mother of Edward the Confessor, King of England. That made Edward and William first cousins, twice removed. The other contender for Edwards throne was Harold, the Earl of Wessex. Harold was the brother of Edwards queen, Edith, although Harold was not of royal blood. In 1064, realizing the potential for war between England and Normandy over the throne, Edward the Confessor appointed William the Duke of Normandy as his successor. Harold was required to swear his oath of fealty to William, so his usurpation of the throne upon Edwards death in 1066 was seen as perjury, both a sin and a felony. Harold claimed that Edward had a death-bed change of heart, had renounced William and in his place appointed Edward.
William assembled his army of about 5,000 plus another 2,000 squires, all on horseback. Harolds army was about 7,000 fighting men but all on foot. The battle of Hastings was essentially one fought between infantry and cavalry, with predictable results. Harold was shot in the eye with an arrow and mortally wounded. His troops were routed and William the Bastard, Duke of Normandy became William the Conqueror. Given Williams setting in motion the forces which today make real property law so complex, law students upon learning his history will like prefer not to change his name.
Williams realm was not just the England of Edward and Harold but extended immediately into Scotland and Wales and ultimately into Ireland. And therein lies the beginning of the real property laws, some of which are with us today. William needed economic control of all the land in order to maintain military superiority in order to deter his enemies, both foreign and domestic. Rather than establishing an army of mercenaries, such as he had assembled to fight Harold, William established a system of ownership of land in exchange for knights in service to the king. William literally exchanged dirt for soldiers.
The Feudalism of William the Conqueror
The noblemen of Normandy who had helped William assemble his knights for the Battle of Hastings were rewarded by being given lands on which to live, raise cattle and grow crops. These men, called the barons, had something less than outright ownership which was more tenurial in nature. The providing of knights to the king was more akin to an annual rent. Not only were the barons more like tenants, they did not have the right to transfer what they owned to another without two important considerations: (1) consent of the king; and, (2) the payment of a fine.
Requiring payment for terminating ones tenancy and substituting another in ones place is not unlike the pre-payment penalty that lenders have asserted in the twentieth century for the early termination of a mortgage, undoubtedly replaced by a new and different mortgage, probably from a different lender. Thus the requirement of the kings consent and the payment of a fine during the period of two centuries following the Battle of Hastings is the first link to todays real estate laws.
While the barons were essentially prohibited from selling their positions to another, they could off-set some of their obligations to the king by a process called subinfeudation. This was for all practical purposes a re-letting of a portion of the barons lands to another, often one of the barons knights, who would provide a portion of the barons obligation to the king. For example, if a baron were to subinfeudate one-third of his land to a knight in exchange for one-half of the knight service required, the baron was literally money ahead.
The knight beneath the baron had the same rights as the baron. He could again Subinfeudate but could not substitute. The system can be depicted as a pyramid with the king at the apex, the barons in the first upper layer followed by numerous layers of middle lords, with the serfs who actually tilled the soil at the base. Compare this to a modern series of junior liens, available in Texas on all property but ones homestead. Placing a junior lien on ones homestead is permitted in the other forty-nine states and was the subject of a November, 1997 ballot measure designed to permit such. Consider the ramifications for default in a senior lien when a junior lien exists. If a senior lien is foreclosed today, the junior lien holder is at least sold out and becomes an unsecured creditor, often with little chance of collecting the obligation. In states which limit or prohibit deficiency suits after a non-judicial foreclosure, the sold out junior is literally wiped out.
And so it was in feudal times. A baron might Subinfeudate much of his land so that others paid most of the obligation to the king. The lesser lords beneath the baron, called mesne or middle lords, followed the same pattern so there might be many lesser lords, each level providing some of the knight service to the king as well as other tenurial obligations. If the baron failed to keep his obligations, including that of loyalty, the penalty was forfeiture of the lands the king had bestowed on the baron. That included all land which had been subinfeudated by the barons and their lesser lords. The lesser lords lost their holdings if the barons interest was forfeited. Note the similarity between a sold-out junior lien holder of today and a subinfeudated lesser lord whose barons rights are forfeited. They are identical. The junior loses everything in both instances and the common theme is that unfulfilled obligations result in the loss of ones lands.
It is not difficult to anticipate that a pyramid scheme cannot last forever, for one simply runs out of people to whom one can Subinfeudate. That is the ultimate reason for the failure of money-making plans known today as pyramid schemes. For feudal England, the system worked for two and a quarter centuries, by which time there was no land left to Subinfeudate and real estate sales were virtually non-existent. Thus one of the earliest significant steps the parliament of England undertook was land reform, a cry still heard today round the world.
The Statute Quia Emptores
The first assembly of the English Parliament is considered the great council convened by Baron Simon de Montfort in 1265, since it included representatives of all the towns. By 1290, the Parliament was official and was enacting statutes, all of which were written in Latin, the language of the clergy and the lawyers, who accounted for nearly all the literate people in England. In 1290, the Parliament enacted the statute Quia Emptores, so called for the first two words of the statute which translate Since purchasers.... The statute Quia Emptores abolished the system established by William the Conqueror. No longer was subinfeudation permitted. No longer was the consent of the king necessary and the payment of a fine as consideration for the substitution of another in the chain was abolished. Transferability of land became free. This meant that any restraint on the transferability of land was repugnant to the concept of fee simple absolute.
Due-on-Sale Litigation
This pronouncement became the basis for the 18 years of due-on-sale lawsuits which were litigated to appellate courts in 33 states between 1964 and 1982. A due-on-sale clause required that if you sold your land, you had to pay off your mortgage, that is, the entire mortgage balance became due and the maturity date of the loan accelerated. Popular before adjustable rate mortgages came into being, due-on-sale clauses were designed to permit the adjustment of interest rates at the time a property sold. Lenders using short term liabilities, savings accounts, as the basis for long term assets, real estate secured loan, found themselves in a bind with an old loan which had an interest rate below the market rate for savings accounts. The only mitigating factor was that rates did not fluctuate with any volatility after the Civil War. However, the lenders wanted the ability to adjust their portfolios over time and knowing that the average home would changes owners at least once every decade, the notion of refinancing upon the sale of a home came into being mid-century in this country.
The main issue in the litigation was if you or your buyer could not pay off the mortgage or obtain new financing, a potential sale might be lost and that loss attributable to the due-on-sale clause. Did due-on-sale clauses impose a restraint on the transferability of land? The courts were divided almost evenly during the two decades of litigation. The first such case, Coast Bank vs. Minderhout, 61 Cal.2d 311, 392 P.2d 265 (1964) turned on the issue of restrain on the transferability of real property. While Coast Bank does not cite the Statute quia emptores by name, it does refer to the common law absolute restraint on alienability, which it criticizes. The Court did state: In the present case it was not unreasonable for the plaintiff to condition its continued extension of credit to the Enrights (the borrowers) on their retaining their interest in the property that stood as security for the debt. Id. At 312.
The quoted language tied the Statute Quia Emptores to modern real estate lending and carved out an exception. Litigation ensued in the following two decades which reached appellate decisions in thirty-three states, almost evenly divided between those which saw due-on-sale clauses as an unreasonable restraint unless equitably enforced based on some potential damage to the lender and those which permitted automatic and strict enforcement of due-on-sale clauses without regard to harm.
The California Supreme Court addressed the issue again in Wellenkamp vs. Bank of America, 21 Cal.3d 943, 582 P.2d 970 (1978). The Court tempered its not unreasonable language of Coast Bank by adopting the equitable enforcement rule as follows:
...we hold that a due-on-sale clause contained in a note or deed of trust cannot be enforced upon the occurrence of an outright sale unless the lender can demonstrate that enforcement is reasonably necessary to protect against impairment to its security or risk of default. We therefore disapprove...(citations omitted) and overrule to the extent inconsistent the case of Coast Bank vs. Minderhout, supra.
The first step in an national standard came when the issue reached the U.S. Supreme Court in Fidelity Federal Savings & Loan Assn v. de laQuesta, 458 U.S. 141 (1982). The Court said that a federally charted institution could automatically enforce due-on-sale clauses. Federal S & Ls and national banks could in all states but only state charted banks and s & ls in the states which had adopted the California equitable rule could. A national policy was needed, so the Depository Institutions Act of 1982, commonly the Garn-St. Germaine Act, was passed by the Congress. That act allowed all lenders, state federal and private to enforce due-on-sale clauses.
You may be familiar with the situation that when there is no due-on-sale, an assumption of an existing loan can occur without the lenders consent. When one asks, is the loan assumable one really means is there a due on sale requiring the lenders consent? Assumability is still an issue today. The resolution of the issue raised by due-on-sale clauses which required two decades of litigation, reached back to the Statute Quia Emptores for its historical antecedents and has now been resolved by the Congress, returning lenders and the public to a position comparable to that which existed pre-1290.
Livery of Seizen
After Statute Quia Emptores, real estate transactions became more common and there became an open market for real estate sales, albeit there was no middle class. Starting in 1290 and for the following 200 years or so, transactions occurred in a ritual ceremony, called livery of seizen, which took place on the land the subject of a sale. England was still virtually illiterate, except the clergy and the lawyers. In order to transfer title to land, in order to have a real estate closing, the buyer and the seller stood on the land in question. That meant if a man in Devon wanted to buy property in York, he had to travel to York and go through a ritual ceremony with the seller. Know as livery of seizen the ceremony consisted of the seller handing the buyer some indicia of the land, a lump of dirt, a twig off a branch from a tree. In one case we know of the symbol was a cows horn and the buyer received title to all the land within earshot of a note blown on the horn.
A system of maintaining a record was needed since there was no county clerk to record this transaction nor microfilm on which to memorialize a sale. But the men of the middle ages were ingenious and they came up with a method of creating record, albeit mental. They used a small boy. Old enough to have later recollection but as young as possible to get the most years memory out of him, usually about age six or seven. At the moment of delivery of the lands symbol a third person would strike the lad on his backside, leaving a lasting impression of the event. Not as efficient as microfilm but better than trusting the parties to the transaction alone. This system lasted for another two centuries until the reign of Henry VIII.
Henry VIII and the Statute of Uses
Henry Tudor had little success in two areas of his life: battle and matrimony. To put things into historical perspective, Henrys first wife was Catherine of Aragon, the daughter of Ferdinand and Isabella of Spain who financed Columbus voyage to the new world. That marriage was annulled and Henry then married Anne Bolyn who ultimately lost her head for him.
In 1535, Henry VIII married his favorite of his six wives, Jane Seymour, mother of his only legitimate male heir. Henry had been unsuccessful in combat and returned home to find the royal coffers empty. The conveyancing bar had found a perfect tax loophole.
Beginning with the feudalism of William the Conqueror and continuing after the Statute Quia Emptores, the owners of land still had to pay something like taxes in the form of a portion of the profits from their land. The sovereign, then as now, is always there and always comes ahead of anyone else. Today the sovereign might be called the county or the school district but then it was the king. However, if a land owner had no crops or cattle from which to pay the king a portion, then nothing was paid.
Since one obtained title to land through the ceremony with the small boy, no written documents were used. The lawyers came up with a process to separate the right to occupy and use the land from the ownership of it. By signing over, in a written document, the right to occupy and use the land to another, the owner of the land eliminated any crops or cattle of his own and thus owed the king nothing. On the other hand the person actually occupying the land had the cattle and crops but did not own the land and also owed the king nothing. In a short time the king was penniless. By 1535 approximately eighty percent (80%) of the land in England was held pursuant to a use and the king was collecting his taxes on about twenty (20%) percent of the land, with predictable dire results.
So in 1535 Henry VIII went to parliament and asked that the tax loophole be plugged. Parliament enacted the Statute of Uses to be effective in 1536. This law provided that if the owner of land attempted to separate legal title to land from the right to occupy and use the land through a written document, that the law would automatically also transfer legal title. The ramification of that law was that now when an owner signed a written document called a use, transferring the right to use land, that written document also conveyed fee simple absolute, everything one could own in real property. That meant that the ritual ceremony with the small boy was no longer needed and that a written document could now be used to transfer title. Today we call that piece of paper a deed.
The Statute of Frauds
While the Statute of Uses in 1536 permitted transfer of real estate by a signed writing, the ceremony could still be used also. It only took the English from 1536 to 1677 to figure out that one could falsely claim the ceremony without the writing, thus creating the potential for trouble and fraudulent assertions of ownership of land. Plagued with numerous cases of no proof of ownership for 140 years, many frauds were suspected. In 1564, the parliament changed the law from the possibility of transferring title by paper to the requirement that transfer of title could only be accomplished by written document. That statute was and still is called the Statute of Frauds. It might have been more aptly named the statute to prevent frauds. It exists in our law today and gives rise to the saying that an oral contract to sell your land is not worth the paper on which it is written.
Little has changed since that time, except our own congress seems to frequently get involved, imposing more and more requirements of documents: RESPA good faith estimates of closing costs; HUD-1 Settlement Statements; Regulation Z truth-in-lending figures. Real estate transactions today are impacted by several federal statutes beyond the Real Estate Settlement Procedures Act and the Consumer Credit Protection Act, commonly called the Truth-in-Lending Act. The Fair Credit Reporting Act and the Equal Credit Opportunity Act also have considerable influence in the area of home buying.
Electronic Signature of Documents
The Texas version of the Uniform Commercial Code was amended to permit UCC documents to be executed digitally in HB 984, which modified 2.108 of the Business and Commerce Code. While UCC documents generally deal only with personal property, if a coded, unalterable electronic signature, designed to have the same legal effect as a hand-written one, is now effective for UCC documents, can real estate documents be far behind?
Consider the function of the County Clerks in Texas who maintain a record of real estate transactions. No longer is a small boy required to remember who were the buyer and seller. But long before the county clerks began using microfilm, a scrivener sat and copied all real property documents by hand into a book which the county maintained for its real estate records. After quill pens went out of vogue and typewriters were invented, county clerks manually typed the wording of real estate documents onto the pages which were then inserted into the county records books. Later, came microfilm and microfiche.
Computer Recording of Documents
With scanning equipment as refined and inexpensive as it is today, will we not see the day very soon when the county clerk will stamp the appropriate records number on a document and then feed it into a scanner? The results will be stored electronically, with a duplicate record maintained in a separate location in the event of some natural disaster, nuclear holocaust or pilfering.
Notaries on the Internet
If electronic or digital signatures are now permitted on some documents, what about notary seals. The first seals consisted of melted wax into which an impression was made, usually with a ring which would identify the signor and validate the signature. That was followed by a notary publics impression seal, which perforated the paper upon which it was impressed. Impression seals were virtually incapable of alteration but they did not show up well on microfilm, so rubber stamps came into fashion and are permitted by law. Will not an electronic notary seal be used to create the acknowledgment required today to validate signatures?
Mortgage Portfolio Assignments
The market for trading in mortgage portfolios gives rise to still another electronic possibility. Today thousands of mortgages change hands, some bought at a discount and others sold at a premium, depending on the fluctuations in the interest market. Still in a single transaction with a single payment from one portfolio owner to another, there will be required a separate assignment of each mortgager, a separate paper capable of being filed for record in the county in which the real property securing the loan is located. All these numerous assignments must be individually signed and notarized. A cottage industry has sprung up in the preparation of these assignments which are often signed by employees of the preparing company, using a special resolution of the portfolio owners corporation to authorize limited signing ability.
Could not all the information gleaned from the mortgages and deeds of trust be obtained through use of a scanner and then merged into a template for electronic creation of the assignment document. This process could then be rounded out with electronic execution and notary sealing. All that remains at that point will be to file each in the appropriate county. So why not the use of a modem to file documents and eliminate the use of mail or overnight service. The document to be filed could be accompanied by a credit card number and authorization code for charging the cost of recording the document. This process should take but minutes instead of weeks or months to prepare and produce, sign and seal, thousands of assignments.
Even loan applications today can be sent via e-mail and there is already a nation-wide electronic registry of mortgages. It will not require another millennium for the modest changes suggested here to occur with less impact than the conversion from a ritual ceremony for passing title to the execution of a written document. The saga has not ended as yet and when you think of future changes, and resist them as your predecessors must have done, remember where it all started and that the problems and goals for the most part remain the same; only the process and solutions change with time.
James Cooper-Hill practices Real Estate law in Corpus Christi. A graduate of the University of Denver School of Law, he also holds a Degree in Finance from the University of St. Thomas. Cooper-Hill is Board certified by the Texas Board of Legal Specialization in Commercial Real Estate Law and Residential Real Estate Law. He has authored several books and published numerous articles in his speciality area.