Lytle v. Scottish American Mortgage Co. ( 1905 )

Lamar, J.

(After stating the foregoing facts.) The mortgage company insists that the purchase-price of the land was $1,260, of which $400 was paid in cash when the contract was made; that the balance of $860 was to be paid in ten annual installments of $85.10, without interest, and that until title passed the plaintiff'in error was a tenant .and bound to pay $275. rent annually for ten years; that time was made of the essence; and that by the express terms of the agreement the company was entitled to the improvements and also to retain whatever was paid on account of rent in the event there was a default and the company elected to rescind. The plaintiff in error insists that there was no contract of rental; that in effect the purchase-price was $4,000; that the $275 called rental was a part of the purchase-price, which she is entitled to recover on rescission; that she was not a tenant but a vendee in possession, and that her rights are to be determined accordingly.

1-. Even a lessee may in a proper case be relieved from a forfeiture. Laurence v. Savannah, 71 Ga. 398. But for the sake of' brevity, and to avoid dealing with the case in a double aspect, it will be well in the outset to determine whether the contract was a lease or a sale. Having regard only to the form of words, it was both. But mere names will be ignored. Contracts niust be construed according to their legal effect. It has therefore often been -held that stipulations for paying rent or hire during a term for the use of personal property, with a provision that on making the last payment title shall vest iu the so-called lessee, constitute a conditional sale. Hays v. Jordan, 85 Ga, 749. There is no reason why a similar rule should not apply to similar contracts in relation to land. Compare Hill v. Sidie, 116 Wis. 602, 96 Am. St. Rep. 1011. This was not a case where the defendant was a lessee having merely an option to buy, but she was in possession under a contract of sale, with a part of the purchase-money paid. This created the relation of vendor and vendee, not that of lessor and lessee. The “ land contract ” was a bond for title, in which time was made of the essence.

2. On the vendee’s default the vendor was entitled to exercise the reserved right to rescind. Ellis v. Bryant, 120 Ga. 890; Civil Code, § 3.675. The plaintiff in error does not resist the exercise of this right, but denies that the -vendor is entitled to charge or retain the $275 called rent in the rescinded agreement.

3. When a contract is rescinded, the parties are not to be left where the rescission finds them. The original status must be restored, or an equivalent therefor must be provided in the contract or furnished by the law. Civil Code, §§3710, 3711, 3712. Generally speaking, rescission is in toto. It abrogates the contract not partially but completely. It leaves the rights of the parties and the amount of the damages, if any, to be determined, not by the rescinded contract, but by the court of equity. Cf. Drew v. Peddlar, 87 Cal. 443, 22 Am. St. Rep. 258.

4. But equity will not force parties to litigate, nor will it prevent them from entering into agreements to avoid litigation. Civil Code, § 3935. There is no reason, therefore, why they may not agree in advance upon damages to be paid in the event of a breach, or upon an amount to be paid for rent on rescission of a contract of sale.

5. Whether such an agreement can be enforced will depend, however, among other things, on the question as to whether the rent was liquidated damages or so unreasonable as to come within the prohibition against penalties and forfeitures.

6. If the amount named as rent was in excess of a fair and reasonable value for the use of the property, or if what was really a part of the purchase-money was given the name - of rent for the purpose of enabling the vendor to retain it as rent when he could not retain it as purchase-money, then names will be ignored, the figures named in the contract will be disregarded, unreasonable liquidated damages will be declared to be a penalty, and the fair rent will be determined by proof of the real value of the land, rather than by reference to the excessive sum named in the rescinded contract. Nor does this mean that the vendee will be permitted-to evade the rule that one can not by parol contradict or vary'a valid written instrument. Civil Code, § 5201. Even parol testimony is admitted to enable one to show that a written instrument is not valid, but void. Civil Code, § 5203. It is always permissible to show that a paper is but a cover for usury, penalty, forfeiture, or other illegal advantage to one of the parties. For if the law did not sedulously -disregard form and seek for substance, nothing would be easier than its evasion by giving innocent names to prohibited acts.

7. What is called rent may be shown to be usury. Baggett v. Trulock, 77 Ga. 369 (2). What is called rent may be shown to be unreasonable liquidated damages. What is called rent may be shown to be purchase-money, if as purchase-money it could not be retained by the vendor on rescission.

8-11. If, then, the contract was one of sale, if what was called rent may be shown to be part of the purchase-money, the remaining question is, can the vendee on rescission caused by her default secure a return of purchase-money, or compensation for her improvements to the extent they enhanced the value of the land ? According to 2 Pom. Eq. Jur. 445, this ought to be a very plain and simple matter. “ But in the face of the authorities it is impossible to be answered in any general and certain manner.” Where one has contracted to buy but has paid nothing, his failure to perform allows the vendor to take advantage, of the provision for rescission, and to declare the contract, with all of its incidents, at an énd, and thereupon to recover the property. The vendee has paid nothing, and has no equity to be preserved. But where the vendee has entered and made improvements, or where he has paid a part of the purchase-money, he has acquired an interest in the land. This interest is property. He can not be deprived of such property except by virtue of some valid contract. It can not be done by way of penalty or forfeiture. In the sale of land on credit where the vendor retains title, he has nob the absolute estate, but is a trustee holding the title only as security. Eor many purposes the transaction may be treated in equity as though the vendor had made a deed to the vendee and the latter had thereupon given a common-law mortgage to secure the purchase-money. Thus treating it, the case is directly within the principle of the rule declared in one of the earliest and most signal victories won by equity over the hard literalness of the law. “ Once a mortgage always a mortgage.” If a mortgage when made, the instrument did nob become a deed on a subsequent default in payment of the secured debt. The mortgagor’s failure to pay was not allowed to work the confiscation called for by the terms of the conveyance. At first his equity of redemption could be barred only by strict foreclosure, and on his failure to redeem by a date named in the decree rather than by the time originally named in the mortgage. In modern times the principle has been so extended as to relieve the mortgagor from the necessity of making the payment himself, but preserving his equity until it is foreclosed by means of a sale. This in effect prevents a forfeiture until the equity is shown to be valueless by the results of a public sale under foreclosure.

As in a mortgage, so in its equitable equivalent, a conditional sale of land, a forfeiture will not be enforced even for the vendee’s default. There is no difficulty in making an exact computation of the damages. Any stipulation that more than these damages are to be paid or retained' can not be enforced in a court of equity, which “regards property as a mere pledge for a debt, and will not allow either a forfeiture of the property pledged, or an augmentation of the debt, as a penalty for non-performance.” 1 Pom. Eq. Jur. 446; Civil Code, § 3795.

Of course, where the vendee makes default, he can not take advantage of his own wrong so as to give himself a standing as plaintiff in an action to recover for improvements or purchase-money paid in part performance of the contract of sale. Such claim can only be asserted defensively, where the vendor by exercising the right of rescission has clothed the vendee with the correlative right to be restored to his status. Some cases qualify this rule, holding that, even as a defendant, the vendee has no right to a return of the purchase-money or compensation for improvements, as against a vendor who had been ready, willing, and able to convey upon compliance by the vendee with the terms of the sale. Those holding this view insist that not to enforce a stipulation for forfeiture is to interfere with the right of contract; that to permit the vendee as plaintiff or defendant to recover the value of improvements made or to regain money previously paid leaves .the vendor where he can not know whether the land is sold or not; forces him during the credit period to be ready at all times to refund the money paid; enables the vendee to take advantage of his own wrong, so that if the land increases in value he can insist on performance, while if the market price declines he will cease to make payments, and upon the exercise of the reserved right to rescind, the vendee will then demand the return of what has been previously lawfully paid, or seek reimbursement for improvements which have become a part of the real estate. But if it be admitted that this rule is hard, the contrary would be still harder. It would ignore the important fact that not only the vendee hut the vendor has an option. . It is uncertain which remedy he will pursue in case of default. If the land has decreased in value, he may still hold the vendee for the purchase-money. If the land has enhanced in value, the, vendor ought not to he allowed, for a breach of the same contract, to increase his rights by choosing his remedy. The court stands between the two to do complete equity to each. To the extent of the land sold, the improvements thereon, the money in the hands of the vendor received of the vendee, and also to the extent of the vendee’s general estate, the law guarantees the vendor against loss if he sues to recover the purchase-price. He ts not obliged to rescind. But when he does exercise that right, he discharges the vendee from liability under the contract, sets aside the sale, and is entitled to a return of the property subject only to the condition that as his status has been restored he must also restore the status of the vendee. Civil Code, §§ 3924, 3712. When the vendee sets up any right, he is also bound to recognize that of the opposite party, and is equally bound to do equity before he can secure relief. He is not entitled to a return of his purchase-money until he has allowed, as a deduction therefrom, all damages caused by his breach — one element of which will be the fair rental value of the property during the time he occupied it, even up to verdict. But when he does this he has done all that the law requires. Damages for the breach, payment of the rent, and a return of the land restore the vendor, to his status so far as the value of the land and the sum in hand will warrant. After being granted such complete equity, he should not be heard to complain if the vendee gets only the balance of the purchase-money previously paid on ac-’ count of a contract which the vendor has voluntarily elected to rescind and set aside.

But there is still another line of rulings, holding that the vendee must be free from fault before he is entitled to recover for improvements or to the return of purchase-money. Others hold that since in such a contract time is not of the essence, the vendee after default may, within, a reasonable time, tender the balance due, prevent the forfeiture, and secure his equity of redemption. In other words, by his tender he puts himself again in the right, and being in the right reheves against the penalty and forfeiture imposed only on one in default. But the prohibition against the exaction of penalty and the enforcement of forfeiture is not alone for the benefit of those who have kept their contracts. They do not need it. The effort to enforce a penalty and forfeiture is generally against the party who is delinquent. But if those who have met their obligations do not need the rule, and if those in default can not secure protection, it may as well be abrogated. While many courts have taken a different view of this subject, the decisions in this State are to the effect that before the vendor on rescission can recover the property sold, he must account for so much of the purchase-money as has been .paid.

12. In principle this involves the obligation to make compensation for improvements. The duty to return money is no greater than the duty to return money’s worth. Here the plea alleges that the vendee has paid $1,359 on account of the purchase-money. And if she is entitled to that, there is no reason why in equity she is not equally entitled to reimbursement for the $2,000 enhancement in value as the result of her money and labor in improving the land.

13. This does not lead to the conclusion that the vendor, can be compelled to pay for costly changes which he did not order and does not desire, and which, though valuable, are not of a character useful to him. Such a result is obviated by the terms of the decree. If the vendor elects to take back the land, he must return the purchase-money less damages and rent. If the land has been improved, he must allow the vendee for the enhancement in value occasioned thereby, before he can take the land thus improved. But the vendee can not force the vendor to pay for the building or other meliorations. When the vendee asks compensation therefor, another factor is injected into the case, whereby he loses the absolute right to the purchase-money and forces an accounting under which he can secure only what legally comes to him on a sale of the property. The rights of the parties must be adjusted; and upon the vendor’s paying the vendee what is equitably due for improvements and return of purchase-money, the vendor has the option to take the land under the terms of the rescinded contract. If he does not desire to exercise this option, the property should be sold, the proceeds should be first applied to the payment of what is due the vendor, and the balance should be paid over to the vendee. In this way the rights of both parties are fully preserved. The vendor is not obliged to buy. the improvements, though to protect his interest he may use his special judgment against the land as cash at the sheriff’s sale. At the sale the vendee also may get the benefit of the enhanced price due to the improvement. Compare Civil Code, §§ 5087, 5432; Acts 1897, p. 79 ; 16 A. & E. Enc. Law (2d ed.), 107 (c).

15. It is not necessary to consider at any great length the effect of the vendee’s sale of the fifteen acres for $500, with the consent of the vendor. That part of the land may have been the best or the worst, or an average, of the tract. What it was worth at the time of the contract the vendor is entitled to retain out of the $500 paid, to be applied as credit on the. purchase-money note. If because of improvement made thereon by the vendee or her efforts, she was able to sell at higher price, she is entitled to the benefit, and to that extent should be allowed credit as for any other money paid the vendor.

As to the right to purchase-money and compensation for improvements, see Blitch v. Edwards, 96 Ga. 606, 610; Glisson v. Heggie, 105 Ga. 33; Commercial Co. v. Campbell, 111 Ga. 390; McDaniel v. Gray, 69 Ga. 434; Dukes v. Baugh, 91 Ga. 33; Bryant v. Hambright, 9 Ga. 133 (4); Jones v. Snider, 99 Ga. 276; McCarty v. Moorer, 50 Tex. 287; Eberling v. Verein, 77 Tex. 339; Edgerton v. Peekham, 11 Paige, 352; Westhafer v. Patterson, 120 Ind. 459; Chobat v. Winter Park Co., 34 Fla. 258, 43 Am. St. Rep. 192; Griffeth v. Depew, 3 A. K. Mar. 177; 13 Am. D. 141; Gilbert v. Greewell 13 Ind. 484, 74 Am. D. 266; Phelps v. Brown (Cal.), 30 Pac. 774; Johnston v. Whittemore, 27 Mich. 463; Drew v. Peddler, 87 Cal. 443; 22 Am. St. R. 257; Johnson v. Evans, 50 Am. Dec. 674; In re Dagenham Dock Co., 8 L. R. Chan. App. 1022.

Judgment reversed.

All the Justices concur.