Equitable conversion is a legal doctrine that treats a contract for the sale of property as if the property has already been transferred, even though the actual transfer has not yet occurred. This shifts risk between the buyer and seller. However, there are situations where equitable conversion does not apply to a contract.
However, when is a contract not subject to equitable conversion? The case of Parson v. Wolfe, 676 S.W.2d 689 (Tex. App. — Amarillo, 1984) examines this doctrine and the exceptions to its application.
Facts & Procedural History
Two sisters entered into contract to sell land to their uncle. Unfortunately, one of them died before closing. At the time of her death, she lacked a will and had no children. The money from the land’s sale was placed with the court. The husband and the surviving sister were the decedent’s only heirs at law.
Her husband then claimed her share of proceeds under equitable conversion, but the surviving sister argued the contract was invalid and that she had inherited one-half of the decedent’s interest in the land and was entitled to the proceeds from that interest.
What is Equitable Conversion?
Equitable conversion treats a contract for the sale of property as immediately transferring equitable title to the buyer at the time the contract is formed. The seller retains legal title only as security for the purchase price. If the property is damaged or destroyed before closing, the buyer bears the loss.
The doctrine allocates risk between the parties and provides certainty regarding their duties and obligations during the sale process. It applies to real estate contracts and contracts for the sale of personal property unless the contract states otherwise.
Exceptions to Equitable Conversion
There are several exceptions where equitable conversion does not apply:
- The contract contains a provision expressly stating it is not subject to equitable conversion.
- The contract is for the sale of real property. Equitable conversion does not apply to realty sales contracts in many states including Texas.
- The contract involves the sale of certain intangible property like patents or copyrights. These are not subject to equitable conversion.
- The contract provides the sale is “as-is.” This exempts it from equitable conversion in Texas.
Subjecting Contracts to Equitable Conversion
Texas courts have addressed when equitable conversion does not apply. For example, in the case, a Texas Court of Appeals held that a real estate sale contract was subject to equitable conversion because it gave the sellers the option to demand specific performance or accept liquidated damages if the buyer defaulted.
The court found this language allowed either party to enforce the contract specifically. When a property sale contract allows specific performance, equitable conversion applies under Texas law.
The court noted the only situation where the contract would have avoided equitable conversion was if the liquidated damages clause served solely as a condition barring specific performance. But the contract was not written that way. Therefore, the contract was capable of enforcement by specific performance by either party, making it subject to the doctrine of equitable conversion. This meant that decedent’s interest in the land was to be treated as personal property which passed to her husband upon her death under the laws of descent and distribution.
While equitable conversion often applies, Texas law recognizes several exceptions. Exempting a contract from the doctrine affects risk allocation between the parties. Understanding when equitable conversion does not apply allows Texas attorneys to better represent clients in property sales transactions.
Careful contract drafting can produce the desired equitable conversion outcome in a given situation. In order to avoid equitable conversion, an “as-is” clause can be added into the real estate contract, or, there can be express language that the contract is not subject to equitable conversion.
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