Question: We recently settled on a beach property. Everything went fine except at settlement the Bank inserted -- to our surprise -- a "Second Home Rider" in the mortgage document which stated that at no time could we rent the house without written consent of the lender during the 15-year term of the mortgage. Prior to going to settlement, we received a preliminary loan commitment letter which only restricted renting for one year.

After numerous communications, the Bank advised us that Fannie Mae required that the Second Rider be removed. However, the Bank responded that while they will not remove the rider from land records, they will not enforce this clause.

The Bank has told us that "not enforce" means the same as removal of the rider. Land Records in the State where our property is located have not been altered. In your opinion, does "not enforce" have the same legal significance as actually removing or deleting the objectionable rider from the Land Records?

Answer: Absolutely no.

Land Records are very important in real estate. Oversimplified, if something is recorded on the land records in the jurisdiction where your property is located, it has the effect of "putting the world on notice" of legal title issues.

Let me give you an example: X owns property, and sells it to Y for $100,000. However, Y does not record the deed to the property among the land records. Shortly thereafter, X sells the same property to Z, for another $100,000.

This time, Z has the deed properly recorded. Y discovers this problem, and sues Z, asking the Court to "quiet title" in Y's name. Who will win?

The general rule of law is that since Z properly recorded the title, and if Z is what the law calls a "bona fide purchaser", Z will prevail. What is a "bona fide purchaser" (commonly called a "bfp")? The general rule is that a bfp is a purchaser who, in good faith, for valuable consideration, purchases something without notice or knowledge that someone else has a claim to that same property.

Y can still sue X for fraud or misrepresentation, but unless he can prove that Z was not a bfp, will not be able to claim ownership of the property in our example.

Now let's turn back to your case. The 15-year "no rent clause" has been recorded among land records. That puts the world on notice that you have agreed that you will be in default if you violate this recorded promise -- also called a covenant.

We know that banks often sell their papers to other financial institutions. If, for example, your Bank sells your documentation to a Bank in California, that new lender will have every right to enforce the 15-year "no rent clause". In effect, the new lender will be a bfp.

You will be in the same position as y in the example cited earlier. You will be in default if you have been renting your beach home, and the new lender will have the right to call you in default and foreclose on your property. Of course, like Y, you can sue the originating bank, but what guarantee do you have that they will still be in business?

I assume from your question that you do intend to rent your beach house periodically at the end of the first year. Thus, it is strongly recommended that you insist that the bank either remove the offensive covenant from the land records, or at least file a rider (addendum) correcting the situation. You will probably not be able to unilaterally record such a document on the land records, and will need the cooperation of your Bank.

If the Bank refuses to cooperate, you have the right to file formal complaints against that lender, both with your State Attorney General's office as well as all appropriate federal agencies -- such as the Federal Trade Commission, the Office of the Comptroller, and the Federal Reserve Board.

The first thing I would recommend is to have your attorney write a letter to the Bank, advising them of the situation, and demanding that they remove the offensive covenant. Your lawyer should even draft the appropriate document which is to be recorded, and send a copy to the bank for its review.

If the bank continues to be obstinate, you should then file your formal complaints with the appropriate federal and state regulatory agencies. I suspect the bank will capitulate in the long run. I agree with you that this should not have happened in the first place. However, when you went to settlement, you should have reviewed all of the legal documents carefully, and raised the issue at that time. Too many people go to a closing and do not bother to ask questions or carefully read everything they are being asked to sign.

A closing (settlement) is an important part of any real estate settlement, and consumers should not be rushed through the process. The time to raise issues is before the legal documents are signed -- since its harder to correct the problems after those documents have already been recorded on the land records.

For more articles by Benny Kass, please press here.

Published: December 28, 2001

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