Administration of Land Trusts

A. Conveyance of Fee Title from or to Land Trusts.

1. General Legal Relationships. With respect to conveyances in land trust situations, it is important to understand the relationship between Grantor, Beneficiary and Grantee. Unlike the conveyance of a fee interest from an individual or corporate grantor, a transaction with a land trustee as grantor contains certain elements which must be considered in a sale involving a land trust. The party who controls the management of property (i.e. the Beneficiary) , and who would be considered the seller in a sale of real property not involving a land trust, is in fact the holder of personal property and is not a grantor of title to the land trust real property. That seller in the ordinary sense, but not necessarily in the legal sense, is the beneficiary of the land trust. The trustee merely holds and transfers title to the real property. One of the rights of the beneficiary is the right to direct the trustee to convey; the beneficiary cannot convey the title directly. The trustee holding the title will follow the directions of the beneficiary, except when any legal rights are asserted by the trustee or by third parties against the beneficiary.

The trustee and the beneficiary are bound by the terms of the recorded deed in trust which conveyed the realty to the trustee and by the unrecorded trust agreement between the trustee and the beneficiary. A grantee of title to real property from a trustee must consider the rights and obligations of both the trustee and the beneficiary. In general, the beneficiary has the right to (i) possession of the real estate; (ii) receipt of the rents, issues and profits of the real estate; and (iii) the right to direct conveyance of the real estate.

The trustee has the duty to convey upon direction of the beneficiary; and in certain cases, the right to convey without the direction of the beneficiary. The beneficiary, however, will be the party negotiating the terms of the sale, not the trustee. The grantee or buyer, therefore, will negotiate the conveyance of real estate with the party who might direct the conveyance but will not be the grantor of the deed. Therefore, undertakings and representations by the beneficiary are not those of the title holder and cannot be enforced against the title holder. The trustee-title holder, will not make substantial undertakings or representations to the prospective grantee, and yet, an agreement executed by a trustee may not bind the beneficiary. Finally, the fact that the trustee has executed a deed should not imply that the trustee holds title. The trustee is not under any duty to determine whether a deed in trust to the trustee conveyed any interest in the real estate so described.

a. Warranties. The grantee in a warranty deed receives certain covenants and warranties from the grantor, which are enforceable by the grantee. A trustee will execute only what amounts to a quit claim deed. The grantee of a land trustee's deed will not obtain any warranties of title.

b. The nature of the Trustee's Deed. A form of a Trustee's Deed is included as Exhibit C. The grantee of a Trustee's Deed receives only the rights of a land trust grantor in and to the property without warranty.

c. The proceeds of sale. The proceeds of sale should be paid to the grantor. The beneficiary should obtain a pay proceeds letter from the trustee, which directs that the proceeds should not be paid to the trustee but should be paid to the beneficiary or as the beneficiary directs. In the event that this is not possible or desirable, the proceeds should be payable to the trustee.

d. Liens against the beneficial interest. Because of the undisclosed nature of a beneficiary's interest, liens, encumbrances, and collateral interests in the beneficiary's personal property interest may exist.

(4) The 2006 revisions to the land trust act expressly provided that Chapter 679, Florida Statutes, applies to the perfection of any security interest in a beneficial interest in a land trust. Section 689.071.8(c), F.S.

e. Actions by the Trustee. In general, a trustee will not make any covenant, representation, warranty or agreement except to convey when directed by the parties necessary to direct conveyance.

f. Signature of Beneficiary. In view of the many personal obligations of the ordinary contract, it may be advisable to seek the beneficiary's execution of the agreement or a joinder by which a beneficiary joins in and adopts the undertakings and representations of the trustee seller. Provisions should be made that the contract will not be recorded.

2. General forms in conveyance of title by trustee.

a. Land Trust Contracts. Where a beneficiary is to execute a contract for sale, the beneficiary should represent and undertake that: the beneficiary is the sole beneficiary of the land trust; the beneficiary has full power to direct the trustee to enter into and execute the agreement and will do so to consummate the contemplated transaction; and there are no liens or claims to prohibit the trustee's execution of the closing documents upon delivery of the appropriate direction.

b. Beneficiary executes contract. The contract should recite that legal title is held in a land trust and that the trustee's deed will be delivered at closing. The trustee should be identified as the seller, and the beneficiary is executing the contract. The beneficiary could be made an additional seller.

A form of clause for the execution of a sale contract by a beneficiary is as follows:

c. Letter of Direction. The form of a letter of direction is included as Exhibit E.

d. A grantee of a land trustee may wish the beneficiaries to execute an undertaking which includes modified warranties of title. The sample form is as follows:

It is important that these provisions be negotiated with the real estate contract since the beneficiary is not likely to agree to them after the contract has been executed. It is also important to know who the beneficiaries are. The Affidavit of Beneficiaries is attached as Exhibit F and may be of more help in this regard.

B. Transfer of Title by Assignment of Beneficial Interest.

1. General. It is important to understand the relationship of the assignor, assignee, and the trustee. Because the beneficial interest in a land trust is personal property, the assignment of that beneficial interest is governed by rules affecting personal property, not real property.

a. The transfer of this personal property is the transfer of the right to control the real property.

b. The trustee who holds title to the real property interest is the same entity before and after the assignment. The legal title to the realty remains unchanged.

c. The trustee after the assignment takes its directions from a new party, the assignee.

2. Assignee. The assignee is bound by the same terms of the trust, as was the assignor. The assignee, by accepting the assignment, agrees to all of the provisions of the trust agreement. The assignee is entitled to all of the rights of the assignor to the trust, but is subject to all of the obligations and burdens that accompany the ownership of the beneficial interest. The rights of third parties with respect to the title remain unchanged and still burden the land. The assignment is subject to all of those rights but may be subject to contractual rights granted to parties in possession by the previous beneficiary.

3. Title Insurance. A bona fide purchaser of real estate without notice and for value is given certain rights against third parties. Title insurance underwriting acknowledges this and excepts from coverage any matters known to the purchaser. An assignee of the beneficial interest does not have these rights, and furthermore, has all of the knowledge of the trustee and the assignor imputed to it. A standard type title insurance policy affords limited protection to the assignee for this kind of problem. In some states, a non-imputation endorsement may be available. However, current regulations prohibit the issuance of the non-imputation endorsement in Florida.

4. Trustees acknowledgment or receipt. The trustee's acknowledgment is nothing more than a receipt of the assignment. It is not a statement as to the validity of or the priority of the assignment and certainly makes no representation of the status of the legal title to the land, or even that the trustee holds title to the land.

5. Lodging the assignment, refusal of the trustee to acknowledge. If the trustee's acknowledgment is only a receipt, the refusal of the trustee to lodge the assignment and to acknowledge the assignment does not make the assignment void. Between assignor and assignee the assignment is valid, but the trustee may then refuse to follow any directions of the assignee. The assignee in such a case has purchased a lawsuit.

6. Warranties of title by the assignor. The assignor may negotiate in the contract for purchase of the beneficial interest to receive certain warranties similar to the warranties of title, which are included in a warranty deed.

7. Lien on title. A transfer of the beneficial interest in a land trust does not affect the status of legal title to the underlying land. All liens and encumbrances remain the same. The assignee, in general, will not be personally liable for the satisfaction of those liens, although the real property may be sold to satisfy those liens. If the lien is a mortgage, the assignor may require that the assignee assume the debt and that the assignor be released from the debt. Additionally, the assignee may wish to assume the lien personally to prevent the calling of a mortgage which contains a due on sale clause. If the mortgage is assumed, it is advisable to receive, at the least, an estoppel letter from the lender which states that the mortgage is not in default and states the balance due, amount and date of payments. Additionally, an assumption agreement should be executed, in the same form as that for a transaction involving the transfer of real property.

8. Due on sale clauses. Most mortgages contain due on sale clauses which are triggered by an assignment of a beneficial interest. The use of an assignment of beneficial interest to avoid a due on sale clause can result in the triggering of a due on sale clause.

9. Drafting tips and assignments of beneficial interest.

a. Contractual language. To protect the assignee of the beneficial interest, appropriate provisions must be included in the contract between the assignee and assignor. These clauses include:

b. Assignment of Beneficial Interest. The actual form of assignment is usually provided by the trustee. Check for the signature of all beneficiaries and parties holding power to direct. Make sure that the assignment includes that the power to direct is transferred to the new beneficiaries. If homestead property is involved, include a waiver of homestead signed by the assignor and his or her spouse. Remember, the trustee may refuse to accept the assignment. A form of Assignment of Beneficial Interest is attached to these materials as Exhibit G.

c. Warranties of title on the Assignment of Beneficial Interest. The warranties of title on a deed do not apply to the assignment of beneficial interest. The form of warranty should be substantially the same as the undertaking mentioned earlier with the following changes:

d. Searches on title and beneficial interests. The assignment transaction itself does not involve real estate; however, since the rest of the trust is real property, it is very important to assure that the state of title is as agreed upon by the assignor and assignee of the beneficial interest. Title insurance, with the appropriate endorsement, should be a part of the transaction to assure that the assignee gets the agreed upon title.

e. Note that Section 201.02, Florida Statutes, pertaining to documentary stamp taxes on deeds and other interests relating to real property expressly provides that " [t]he tax shall also be payable upon documents which convey or transfer, pursuant to s. 689.071, any beneficial interest in lands, tenements or other real property or interest therein, even though such interest may be designated as personal property." Section 201.02(4), F.S.

C. Leases.

Generally, any lease of real property held in a land trust can be signed by the trustee as the lessor or as in Illinois, beneficiaries can execute the lease. The beneficiary enters into the lease in his or her own name reciting the appropriate capacity and not as an agent of the trust. A case approving this concept is Southeast Village Associates vs. Health Management Associates 92 Ill. App. 2d. 810, 416 NE 2d 325 (1980). The beneficiary under this concept is named as the lessor. Since the beneficiary is not the agent of the trust, and is not the trustee, the beneficiary should not attempt to sign for the trustee. The beneficiary may sue to recover rent and possession in his or her own name. Note that if the lease contains an option to purchase, then the trustee should sign, or the option should be executed by the beneficiary as the beneficiary of the trust with full power to direct the trustee.