Summary of a Recent
Judicial Development in
Commercial Transactions

Transfer of Real Estate Was a Contract, and Seller Had Not Complied
with Statutory Forfeiture Requirements

Walt McCarter
National AgLaw Center Research Associate

Summary of Decision

In Fritz v. Fritz, No. 08-1088, 2009 WL 779544 (Iowa Ct. App. Mar. 26, 2009), the Iowa Court of Appeals held that a seller's forfeiture rights under a real estate contract had not been validly exercised because the seller had not complied with the notice requirements of Iowa Code chapter 656.

Background

Parents conveyed real estate to their son pursuant to a real estate contract, which provided that the property would be transferred to the son within five years subject to certain conditions. Id. at *1. The contract authorized the sellers (the parents) to forfeit the buyer's (the son's) rights if the buyer failed to timely perform. Id. As part of the consideration, the son was to pay the remaining mortgage debt on the property (only $16,000, although the fair market value of the property was $70,000), pay all real estate taxes, maintain the property in good repair, and comply with an oral agreement between the parties that was not set forth in the contract. Id. Some of the oral conditions included were that the son refrain from drinking, help his elderly father with farm work, and pay each of his four siblings $10,000 once he received title to the property. Id. If the son complied with the contract terms, title was to be transferred to him in five years. Id. The contract also provided, "Because of the nature of the gift being made by Sellers to the son, the Buyer, Buyer shall not be allowed to assign this contract or to sell, convey, gift or otherwise dispose of all or any part of said property without the express written consent of Sellers." Id. at *2.

The parents' attorney had the son and his wife sign an advance consent-to-forfeiture agreement at the time the contract was executed. Id. A few years later, the mother paid off the balance of the note and recorded a consent-to-forfeiture. Id. at *3. Soon afterwards, the son's wife filed for divorce, the son died unexpectedly, and the mother resold the property. Id. The son's wife, as the representative of the son's estate, filed a petition seeking a declaratory judgment that she and/or the estate were the equitable owners of the real estate. Id. She argued that the attempted forfeiture of the contract was invalid for failure to comply with Iowa Code chapter 656, but the district court ruled that the transfer was a conditional gift rather than a contract and chapter 656 did not apply, and she appealed. Id.

Analysis and Holdings

The court first held that the transfer was a contract rather than a gift, because there was a bargained-for exchange and adequate legal consideration. Id. at *4. As a contract, the forfeiture had to comply with Iowa Code chapter 656, which requires a seller to serve written notice on the buyer thirty days prior to foreclosure. Id. at *6. The court noted that parties cannot "pre-waive" the chapter 656 requirements. Id. at *7. The court found no substantial evidence that the mother complied with chapter 656, and therefore reversed and held that the son's interest in the real estate was not validly forfeited. Id.

The case was decided on March 26, 2009.