BASIC (02-08)

PS 01620.042 Pennsylvania

A. PR 08-053 Reply to Your Request for a Legal Opinion on "SSI: Rental liability where ownership of property is questionable."

DATE: January 24, 2008

1. SYLLABUS

At issue is determining with whom does a claimant, receiving Supplemental Security Income, have rental liability if the residence in which the claimant resides is under a sale of purchase agreement and the buyer has not gone to closing.

Under Pennsylvania law when a buyer signs an agreement of sale the buyer obtains equitable entitlement to the property and the seller maintains legal title. The buyer becomes the beneficial owner and is entitled to any benefit accruing to the real estate from the date of execution of the agreement of sale, including rents arising from the property. Therefore, a rental agreement established between the claimant and the buyer, who has equitable interest, is considered a valid agreement and the claimant has rental liability to the buyer.

2. OPINION

QUESTION PRESENTED

Your memorandum inquired as to whether Brian G~, a Supplemental Security Income (SSI) recipient, has rental liability to his brother, William G~ (the purchaser), who entered into an agreement of sale dated August 8, 2004. You referred to a memorandum prepared by the Office of the General Counsel in March 2005 (PS-05-120) discussing the doctrine of equitable title and you inquired whether William G~ could claim equitable title to the property. If not, you inquired whether Brian G~ is receiving rent-free shelter from Tibor D~ (the seller), who is the owner of record.

SUMMARY

According to the Pennsylvania common law doctrine of equitable conversion, when William G~ signed an agreement of sale to purchase the property, he obtained equitable title to the property, while Tibor D~, the seller, retained legal title. A purchaser, by virtue of becoming the equitable or beneficial owner, is entitled to any benefit accruing to the real estate between the date of execution of the agreement of sale and the actual conveyance including any rents arising from the property. As an equitable owner, William was entitled to any rental proceeds from the property. We believe that the obligation of Brian to pay rent arises out of a valid oral agreement with William, per the Pennsylvania statue permitting oral rental agreements. Therefore, because William G~ has equitable title to the property and any benefit accruing to the real estate, has been granted permission to possess the property prior to closing and delivery of the deed, and because Brian G~ may be deemed to have a valid obligation to pay rent per an informal agreement with William G~, we do not believe that Brian G~ is receiving rent-free shelter from Tibor D~.

BACKGROUND

You indicated in your memorandum that Brian G~ reported that he lives alone in the property that is under an agreement of sale to his brother, William, who told you that he sometimes stays on the property when he visits, but that he has a principal residence in Towanda, Pennsylvania. Both Brian and William reported that Brian pays William $500 per month for rent and utilities, including cable service. Apparently there is no written lease for this arrangement. You indicated that there is a dispute over whether William G~ has paid the full purchase price for the property.

Your investigation revealed that property records for the City of Philadelphia list Tibor D~ as the owner of the property, and that in a phone conversation, Mr. D~ acknowledged that he had an agreement of sale with William G~ for the property dated August 8, 2004. However, Mr. D~ claims that William G~ has not fulfilled the terms of that agreement because he has not paid Mr. D~ all funds due. The notarized agreement of sale that you provided contains an "as is" clause whereby the purchaser is to assume the outstanding water bill and taxes beginning on September 8, 2004, for a total of 30 monthly payments of $400 each, a total obligation of $12,000. According to your conversation with Mr. D~, William G~ has not satisfied this obligation. There may be other payment obligations due under the agreement of sale, as well, according to party statements in your file. Mr. D~ indicated that no legal action had been initiated by either party to the agreement. Mr. D~ also acknowledged that he had an informal agreement with William G~ that he could inhabit the property with the understanding that he would perform some work on the property.

DISCUSSION

The common law doctrine of equitable conversion has been in effect in Pennsylvania since at least 1863. See Reed v. Lukens, 44 Pa. 200 (Pa. 1863), 1863 WL 4782 (Pa.) (stating that after a contract for the sale of real estate is duly executed, until the conveyance of the deed, the purchaser is the equitable owner and entitled to all advantages that may thereafter arise, and responsible for all loss that may befall it). See also Payne v. Clark, 409 Pa. 557, 561, 187 A.2d 769, 770-71 (1963) (stating that from the moment an agreement of sale is executed it vests equitable title to the purchaser who may go into a court of equity seeking to enforce the contract and compel specific performance).

The doctrine of equitable conversion arose in England out of the power of the chancellor to compel the performance of what was intended by the parties. This power was grounded in the principle that equity treats as done those things that should be done. It is because of the equitable remedy of specific performance that fundamental real property rights are created in a purchaser of realty prior to delivery of the deed. See Pivirotto v. City of Pittsburgh, 515 Pa. 246, 250-525, 28 A.2d 125, 127-28 (Pa. 1987) (finding that the purchaser of property at a tax sale had equitable title and an interest in equity of redemption that entitled him to notice prior to demolition by the city and to damages).

In determining whether an equitable interest arose in a real estate agreement of sale in Pennsylvania between a Pennsylvania corporation and a resident of another state, a federal district court noted that the Supreme Court of Pennsylvania has found that equitable conversion will come about only where the contract for the sale of land is unconditional "such as equity will specifically enforce." Filsam Corp. v. Dyer, 422 F. Supp. 1126, 1132 (E.D. Pa. 1976). In deciding whether Dyer's contract to purchase land was conditional upon seller Filsam Corporation making certain repairs and alterations, the Court clarified that "the existence of such conditions as are within the control of the parties to a contract cannot in itself render the doctrine of equitable conversion inapplicable." Filsam Corp., 422 F. Supp. at 1133. The Court further clarified that the requirement that the land sale contract be unconditional should only bar equitable conversion where the condition must be accomplished before the contract can become operative, citing In Re Governor Mifflin Joint School Authority, 401 Pa. 387, 394,164 A.2d 221, 224 (1960) (finding that a land agreement conditioned upon the passage of hoped-for zoning change was not within the control of the parties and that equitable conversion had not taken place). Finding no condition that was beyond the control of the parties, the Court in Filsam Corp. held that the purchaser's equitable interest arose upon execution of the agreement of sale and that the purchaser could assert his right to avoid the contract because of the seller's non-performance of the repairs specified in the contract. 422 F. Supp. at 1133. Equitable title carries with it a number of rights, including the right to collect rents. See Sullivan v. U.S., 461 F. Supp. 1040, 1044 (W.D. Pa. 1978), judgment aff'd, 618 F.2d 1001 (3d Cir. 1980).

Applying these principles of Pennsylvania common law to the agreement of sale between William G~ and Tibor D~, we note that the special clause regarding the monthly payments of $400 appears to be a condition that is within the control of the parties and is not described as one that is required to be accomplished before the contract can become operative. We also note that although there is a dispute regarding the full payment of the purchase price, this dispute is within the control of the parties and may be remedied by legal action. The purchaser, if not in default, may seek specific performance of the contract. The purchaser may also seek to rescind the transaction if the seller has repudiated the contract. The seller may sue for breach of the contract when the purchaser has refused to pay. Therefore, because the dispute regarding the payment of the terms of the contract is within the control of the parties, and remediable, we believe that the agreement of sale is an enforceable contract, that the doctrine of equitable conversion applies to the agreement, and that William G~'s equitable interest in the property arose on August 4, 2004, the date that the contract was signed by both parties.

You indicated that while there is no written rental agreement between William and Brian G~, Brian resides on the property and pays William $500 per month for rent and utilities. Your Report of Contacts with Brian and William dated August 28, 2007, indicate that they consider this arrangement to be a rental agreement. In Pennsylvania, a lease of real estate for a period of less than three years may be oral; the relevant Pennsylvania statute does not require a written contract. 68 Pa. Stat. Ann. § 250.201. A lease for more than three years must be in writing and signed by the parties, "otherwise it shall have the force and effect of a lease at will" . . . "unless the tenancy has continued for more than one year and the landlord and tenant have recognized its rightful existence by claiming and admitting liability for the rent, in which case the tenancy shall become one from year to year." 20 Pa. Stat. Ann. § 250.202. In your Report of Contact with Tibor D~ on September 28, and November 7, 2007, you indicated that he thought that Brian has lived in the property over a year, but he did not know exactly how long. If Brian has been a tenant in the property for over a year, and he and William G~ continue to recognize the rental agreement, we believe that Brian G~'s rental liability to William G~ continues on a year to year basis.

We note that the right to possess a property under an agreement of sale does not usually arise until the purchaser pays the price in full at closing, and the deed is conveyed to the purchaser, who then records it. There has been no closing, and, therefore, we assume, no conveyance of the deed. Although not addressed in the agreement of sale, the seller admitted to you that he gave William G~ permission to possess the property in exchange for doing "work around the place."

We believe that, according to the doctrine of equitable conversion, William G~ would be entitled to any rents that arise from the property whether or not he has actual possession. See Nikole, Inc. v. Klinger, 412 Pa. Super. 289, 603 A.2d 587 (1992), app. den'd, 535 Pa. 660, 634 A.2d 223 (1993); Reed v. Lukens, 44 Pa. 200, 1863 WL 4782 (1883). Until such time as the seller initiates a successful action for breach or rescission of the agreement of sale, or an action to eject William G~ and his brother from the premises, we believe that Brian G~ has rental liability to William.

CONCLUSION

We believe that William G~ has equitable title to the property and that William and Brian G~ have entered into a valid oral rental agreement. Accordingly, Brian G~ has rental liability to William G~ and is not receiving rent-free shelter from Tibor D~.

Michael M~

Regional Chief Counsel

By:__________________________

Patricia M. S~

Assistant Regional Counsel


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PS 01620.042 - Pennsylvania - 04/14/2008
Batch run: 01/27/2009
Rev:04/14/2008