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The Commiteee that acted for the National Conference of Commissioners on Uniform State Laws in preparing the Uniform Land Security Interest Act was as follows:

Conference Representatives:

HAROLD E. READ, JR., One State Street, Hartford, CT 06103, Co-Chairman

MARION W. BENFIELD, JR., University of Illinois, College of Law,

504 East Pennsylvania Avenue, Champaign, IL 61820

HENRY M. KITTLESON, P.O. Drawer BW, Lakeland, FL 33802

CARL H. LISMAN, P.O. Box 728, Burlington, VT 05402

CARLYLE C. RING, JR., Room 322-D, 5390 Cherokee Avenue, Alexandria,

VA 22312, President (Member Ex Officio)

WILLIAM J. PIERCE, University of Michigan, School of Law, Ann Arbor, MI 48109,

Executive Director

RICHARD E. FORD, 203 W. Randolph Street, Lewisburg, WV 24901,

Chairman, Division A (Member Ex Officio)

American Bar Association Representatives:

JOHN P. TREVASKIS, JR., 327 West Front Street, Media, PA 19063, Co-Chairman

JOHN A. GOSE, 5400 Columbia Seafirst Center, 701 Fifth Avenue, Seattle, WA 98104

JESSE B. HEATH, JR., 38th Floor, Texas Commerce Tower, Houston, TX 77002

JAMES M. PEDOWITZ, 15th Floor, 575 Madison Avenue, New York, NY 10022

American College of Real Estate Lawyers Representative:

NORMAN GEIS, Room 2700, 180 North LaSalle Street, Chicago, IL 60601

Educational Director and Reporter:

RICHARD B. AMANDES, Suite A, 3120 West Main Street, Visalia, CA 93291

Special Consultant:

WILLIAM R. BREETZ, JR., 241 Main Street, Hartford, CT 06106

Final, approved copies of this Act and copies of all Uniform and Model Acts and other printed matter issued by the Conference may be obtained from:

Section 101. Short Title

Section 102. Purposes; Rules of Construction; Scope

Section 103. Variation by Agreement

Section 104. Supplementary General Principles of Law Applicable

Section 105. Construction Against Implied Repeal

Section 106. Remedies to be Liberally Administered

Section 107. Severability Clause

Section 108. Obligation of Good Faith

Section 109. Waiver or Renunciation of Claim or Right After Breach

Section 110. Excluded Transactions

Section 111. General Definitions

Section 112. Notice; Knowledge; Giving Notice; Receipt of Notice

Section 113. Protected Party; Residential Real Estate

Section 114. Person Related To

Section 115. Presumption

Section 201. General Validity of Security Agreement

Section 202. Title to Collateral Immaterial

Section 203. Enforceability of Security Interest; Formal Requisites

Section 204. Use of Disposition of Collateral Without an Accounting

Section 205. After-Acquired Property

Section 206. Defense Against Assignee of Obligation

Section 207. Power of Debtor to Lease

Section 208. Alienability of Debtor's Interest; Right to Accelerate on Transfer

Section 209. Request for Statement of Account

Section 210. Security Interest in Certain Rights and Claims and in Crops

Section 211. Secured Party's Equity in Collateral

Section 301. Priority Between Conflicting Security Interests in Same Collateral

Section 302. Future Advances

Section 401. Definitions

Section 402. Additional Charges

Alternative A

Section 403. Maximum Finance Charge

Alternative B

Section 403. Maximum Finance Charge

Section 404. Penalty for Excess Charge and Effect on Security

Section 501. Rights and Remedies

Section 502. Acceleration

Section 503. Creditor's Right to Possession

Section 504. Right to Appointment of a Receiver

Section 505. Rents; Rights and Duties of Creditor in Possession

Section 506. Index of Notices and Times Relating to Foreclosure

Section 507. Methods of Foreclosure and Notice

Section 508. Notice of Intention to Foreclose

Section 509. Creditor's Power of Sale After Default

Section 510. Foreclosure by Judicial Proceeding

Section 511. Application of Proceeds of Sale, Surplus, and Deficiency

Section 512. Effect of Disposition

Section 513. Debtor's Right to Cure Default and Redeem

Section 514. Creditor's Liability for Failure to Comply with Part 5

Section 601. Effective Date

Section 602. Specific Repealer; Provisions for Transition

Section 603. Laws Not Repealed

The Uniform Land Security Interest Act - "ULSIA" or the "Act" - deals solely with mortgages and other forms of consensual security interests in real estate. Within that limited field, however, the Act contains comprehensive provisions on the formation of the security agreement, the extent of the security interests created, including provisions regarding future advances and after-acquired property, the rights of parties, and provisions for foreclosure of security interests.

The substantive provisions of the Act track closely with Article 3 of the Uniform Land Transactions Act ("ULTA"). This Act differs from ULTA, however, both in its scope and in its treatment of some significant questions which have developed in the decade since ULTA was first promulgated.

A description of developments which led to promulgation of this Act may be helpful.

During the 1960's, many lawyers and scholars came to recognize the substantial benefits which adoption of the UCC provided in the field of personal property law. That recognition encouraged the National Conference to consider how similar benefits might be realized in the field of real property law. After an extended review of the implications of this question, the National Conference determined in 1969 to promulgate a single, uniform statute embracing the entire subject of land law. This comprehensive effort became known as the Uniform Land Transactions Act.

Work on the original ULTA began with the appointment of a special drafting committee. Drafting commenced in early 1970, and numerous drafts were considered by the drafting committee and its advisors in meetings from 1970 to 1975. The Act was first considered by the full membership of the national Conference at its 1972 Annual Meeting and was considered by the Conference at each annual meeting thereafter until final approval in 1975.

In its work, the drafting committee sought advice from a wide variety of persons interested in the real estate selling and lending market, including both industry and public interest representatives. In accordance with the standards procedures of the National Conference and the American Bar Association, the committee consulted with appropriate sections and committees of the American Bar Association, including the Real Property, Probate, and Trust Law Section and the Special Committee on Housing and Urban Development. Also in conformity with usual Conference procedures, the committee appointed an Advisory Committee representative of all affected segments of the public, the real estate industry, and lenders.

At the 1975 Annual Meeting, it became evident that some portions of the original ULTA required further study. Additionally, because of the complexity of the field and because the states treated various aspects of real estate law in substantially different ways, it appeared unlikely that any state would enact a single comprehensive real estate code. At the same time, it appeared that the states would be well served if a series of separate statutes were available dealing with discrete aspects of land law in a comprehensive way.

For these reasons, when it promulgated an amended ULTA in 1975, the National Conference made two other policy decisions which have had a significant impact on the subsequent development of land law.

First, the national Conference deleted those provisions of the original ULTA dealing with condominiums and created a new special drafting committee to consider that subject. That decision ultimately led to promulgation of the Uniform Condominium Act (1977), the Uniform Planned Community Act (1980), the Model Real Estate Cooperative Act (1981), and a statute treating all such forms of common ownership, the Uniform Common Interest Ownership Act (1982).

The special drafting committee on condominiums, in turn, recommended that a separate drafting committee deal with time-sharing of condominiums and other forms of commonly owned real property. The National Conference accepted that recommendation, resulting in promulgation of the Model Real Estate Time-Share Act in 1980.

Those five Acts have found growing acceptance in the various states. It is unlikely, however, that any of those statutes would have been adopted had they been a part of a comprehensive code.

Second, at its 1975 Annual Meeting, the National Conference created a special drafting committee to continue consideration of the complex issues of conveyancing, recording, priorities, limitations, mechanics and other nonconsensual liens, and public land records. As a result, those subjects were deleted from the original ULTA and were later incorporated in a separate statute, the Uniform Simplification of Land Transfers Act ("USOLTA"), promulgated in 1976.

After ULTA was promulgated in 1975 and while USOLTA was being drafted, a study committee was appointed by the Real Property Division of the Section of Real Property, Probate and Trust Law of the American Bar Association. From 1975 to 1977, meetings were held between members of that committee and representatives of the National Conference. As a result of those meetings, a number of amendments to ULTA and USOLTA were proposed and approved by the National Conference in 1977.

Accordingly, between 1975 and 1982, the National Conference had promulgated ULTA and USOLTA, as well as the Time-Share Act and four separate acts dealing with various forms of common interest ownership. Taken together, these seven acts cover nearly the entire field of land law.

In an effort to provide a means of coordinated oversight of these acts, and to consider the desirability of amendments to the acts from time to time, the National Conference in 1978 created a Joint Editorial Board on Real Property Acts, similar to the Joint Editorial Boards on the UCC and the Uniform Probate Code. Representatives of the American Bar Association and the American College of Real Estate Lawyers sit on the Board with representatives of the National Conference.

For the reasons described below, promulgation of a separate act on security interests in land was recommended by the Joint Editorial Board after several years of review.

The reasons which led to the National Conference's original decision to draft comprehensive land legislation are more compelling today with respect to secured transactions than they were in 1969.

Growth of the Secondary Market. In the mid-1970's, a secondary market for real estate mortgages had begun to develop, with the goal of encouraging various financial entities to invest in mortgage-backed securities. Today the secondary market, whose principal members are the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation, is a major factor in the flow of interstate loan funds and in the development of uniform real estate loan practices. While FNMA and FHLMC have from time to time become involved in various states' legislation, their activities and impact have, of necessity, been limited. One of the major purposes of the original ULTA and this Act is to provide uniform modern state law which will facilitate development of a broader secondary mortgage market.

Increased Primary Lending Activity. In addition to encouraging the secondary market, uniformity of state law will further encourage widespread lending by financial entities which presently may restrict their lending to a few states because of the difficulties and additional expense involved in dealing in other states with widely varying laws. The uniform instruments now required by the secondary market have aided in this effort; uniformity of mandated content in those instruments, and in the outcome of their enforcement when necessary, would substantially aid in this effort.

Increased Benefit to Borrowers. The benefit of the Uniform Land Security Interest Act to individual borrowers and small businesses would also be substantial. An extremely mobile population and many businesses with multi-state real estate operations now regularly borrow from national lenders through the use of computer networks. There can be no doubt that a uniform statute on security interests will substantially enhance the attractiveness, and reduce the cost, of interstate transfer of funds for lending purposes. In addition, the development of uniform practices in the various states will, over time, help consumers understand the increasingly complex universe of mortgage lending.

The Importance of a Simple and Modern Statute. An important purpose of the Act is to modernize and simplify the law applicable to secured real estate transactions. Real estate law has ancient historical roots. To a greater extent than probably any other area of the law, real estate law remains bound by rules first applied many generations ago when economic and social conditions were far different than they are today. While our courts sometimes recognize that many existing rules are inappropriate to modern circumstances, those courts have been understandably hesitant to change by judicial decision rules on which parties will have relied in structuring the transaction before the court. Changing rules by statute, of course, will not have the drawback of defeating the expectations of parties to completed transactions, since the statute will operate prospectively only.

Codification of the rules relating to real estate transactions will not, of course, remove all difficulties in the application of legal rules. Many real estate transactions are extraordinarily complex; in such cases, complexity of analysis is a nearly inescapable result. Also it is not to be expected that the Act is so perfectly drafted that it does not, itself, raise new questions of interpretation and application. What can be expected is that, on balance, the rules applicable to a particular transaction will be much more accessible and clear than they were under prior law.

Reducing Costs Upon Foreclosure. Whatever the causes of that phenomenon, there is little doubt that delays in completing real estate foreclosures in many states have increased the risks of vandalism, fire loss, depreciation, damage, and waste. The resulting losses have plainly raised the cost of private mortgages, and have significantly eroded the economic value of many government subsidy programs involving real estate mortgages. Recent data indicates an unprecedented growth in the portfolio of foreclosed properties by the secondary mortgage market and government lenders.

Delays in foreclosure generally and delays in the transfer of title due to redemption periods observed in some states have encouraged the practice known as "equity skimming" with consequent financial loss to the government, homeowners, and mortgagees generally.

The National Conference believes that the availability of a uniform, less expensive, and more expeditious foreclosure procedure would ameliorate these conditions, and would facilitate the sale and resale of secured real estate loans.

Consistent with the National Conference's 1975 determination that statutes on discrete subjects are more likely to meet the state's needs, this Act collects those provisions of ULTA dealing with secured transactions, and separates them from the balance of ULTA. In so doing the National Conference believes the Act will find ready acceptance.

Basic Structure; Applicability. This Act has the same general structure as ULTA Article 3. It is divided into six parts, which were the separate "Parts" of ULTA Article 3. Those parts cover (1) general provisions and definitions; (2) validity of security agreements and rights of parties; (3) priorities and future advances; (4) maximum finance charge and usury; (5) default; and (6) effective date and repealers.

The key definitions are all functional. For example: (a) "Security Interest," § 111(aa), is an "interest in real estate which secures payment or performance of an obligation;" (b) "Security Agreement," § 111(z), is a "writing that creates or provides for a security interest in real estate;" (c) "Secured Creditor," § 111(y), is a "lender, seller or other person in whose favor there is a security interest;" (d) "Debtor," § 111(i), is "the person who owes payment or other performance of the obligation secured;" (e) "Collateral," § 111(c), is "real estate subject to a security interest."

The aim of this Act is to provide a simple and unified structure within which the immense variety of financing secured by real estate can go forward with greater certainty and less transaction cost. The definitions help create this structure. As a result, the traditional distinctions among security interests based largely on form or whether the creditor had "title" to the real estate collateral are not retained. Compare UCC § 9-202. The Act applies to all transactions intended to create a security interest in real estate, regardless of form, and upon default the same remedies apply. See § 202. This does not mean that old forms must be discarded; indeed, Section 102 makes clear that they may be used. The rights and duties of creditor and debtor prescribed by this Act, however, are made applicable to the transaction regardless of form.

Since rights, obligations, and remedies under this Act do not depend on location of title, this Act does not determine whether "title" to the collateral is in the secured creditor or in the debtor. If, under other law, the location of title is important, for example the incidence of taxation, the parties are left free to contract as they will.

The Act is inapplicable to "nonconsensual transactions" such as: (a) mechanic's liens; (b) vendor/vendee liens; and (c) tax and judgment liens. See § 110. In addition, ULSIA would not modify existing state law regarding priorities, except as to future advances. See § 302. Instead, those issues are left to other state law. A state wishing to consider alternatives in those areas should consider USOLTA.

The Act supersedes prior legislation dealing with mortgages and real estate installment sales contracts on a prospective basis. As such, it occupies a substantial part of the area developed by equity in centuries of litigation to police the relationship between borrower and lender concerning treatment of the real estate after a default in performance of the obligation secured.

Thus, for example, it includes within its coverage the "absolute deed" found by the court to be a deed intended as a security interest. See the Note to Section 102(b). Since under the law of fixtures, tangible personal property affixed to land becomes part of the land, this Act applies to security interests in fixtures except insofar as the Uniform Commercial Code has carved out a portion of this subject for treatment as a security interest in personal property. See UCC

§ 9-313. The drafters intend to prevent the creation of a gap between personal property and land law; if Article 9 of the U.C.C. is not applicable, the security interest provisions of this Act become applicable. See Section 102(d).

Consumer Protection. A number of modern consumer-related issues create a need for protective regulation. These include the marketing of common interest communities - condominiums, cooperatives, or planned communities - marketing of subdivided but unimproved lots, and the creation of security interests in the residence of a debtor. Provisions generally restricting all lender practices, however, are inappropriate in a codification of only the law of real estate security interests. Other laws appropriately supplement its provisions.

For example, Congress has enacted a Land Sales Practices Act, as have many states. Many states now regulate purchase money and other security interests in housing under other acts, including their condominium acts, small loan acts, installment land sales acts, and the like. While this Act applies generally to security interests in the debtor's residence, it is not designed to supersede that regulatory legislation. Thus, it is likely that an obligation secured by real estate may be subject to regulation under those acts and be also required to comply with provisions of this Act.

At the same time, the Act does contain consumer protection provisions establishing certain nonwaivable rights of a borrower. Most of such consumer protection, however, is limited to those borrowers who come within ULSIA's statutory definition in § 113 of a "protected party" (i.e., an individual who contracts to give a security interest in owner-occupied residential real estate).

The Act also deals with a number of important issues not considered in ULTA.

"Clogging the Equity of Redemption". At common law a mortgage borrower had the equitable right to "redeem" the mortgaged property, that is, pay the full mortgage debt after default, and thereby avoid forfeiture of the property which was security for the loan. The common law also developed a prohibition on "clogging" or "fettering" this equitable right to redeem. The prohibition developed originally to prevent forfeiture of property by a debtor or overreaching by a creditor under a contract which sought to override the redemption rights.

The 1904 English case of Samuel v. Jarrah Timber & Wood Paving Corp. Ltd., 1904 A.C. 323, provides a classic formulation of the prohibition against clogging a debtor's equity of redemption:

"No contract between a mortgagor and a mortgagee made at the time of the mortgage and as part of the mortgage transaction, or, in other words, as one of the terms of the loan can be valid if it prevents the mortgagor from getting back his property or paying off what is due on his security. Any bargain which has that effect is invalid, and is inconsistent with the transaction being a mortgage."

In the modern real estate world of "equity kickers" and convertible mortgages, the doctrine poses some potential difficulties for lenders. Section 211 of this Act resolves these issues by permitting essentially any transaction which meets the "good faith" test of § 108.

Residential mortgages involving equity kickers may be less vulnerable to the clogging defense than nonresidential mortgages because, in 45 states, federal law has already preempted state limitations on the priority and enforceability of "alternative mortgage transactions," including transactions that involve the sharing of equity or appreciation. See the Alternative Mortgage Transaction Parity Act of 1982, 12, USC § 3801 et seq.

As originally proposed in ULTA, the part of that Act dealing with usury and maximum permissible finance charges was one of the more comprehensive in ULTA, comparable in comprehensiveness to the provisions in ULTA and in this Act dealing with default, Part 5.

However, since the approval of ULTA in 1975 and its amendments in 1977, the Depository Institutions Deregulation and Monetary Control Act of 1980 (P.L. 96-221) has largely preempted state usury restrictions imposed by 37 states on first mortgage residential loans. Thus, Part 4 of this Act dealing with these matters is complementary to that Act, containing merely the provisions necessary to make ULSIA sufficiently complete within itself.

A more detailed description of the provisions of Part 4 appears in the Introductory Comment to that Part.

Durrett v. Washington National Insurance Company, 621 F.2d 201 (5th Cir. 1980), held that a nonjudicial foreclosure sale is a "transfer" within the meaning of

§ 67d of the Bankruptcy Act and could be set aside as a fraudulent transfer if it were made without "fair consideration" within one year prior to the filing of the bankruptcy petition.

This was the first time in over 400 years since the Statute of 13 Elizabeth originally codified the law of fraudulent conveyances that a court has applied such law to noncollusive foreclosure sales. Since the Court agreed that the sale did not involve any intent to commit fraud (the purchaser was an innocent third party who saw the sale advertised in the newspapers and bid an amount equal to the balance of the mortgage) the intentional fraud provision of the bankruptcy law was inapplicable. The Court could find fraud only by finding constructive fraud.

The Court thus applied what is now § 548(a)(2) of the Bankruptcy Code, which makes a transfer fraudulent without the necessity of proving fraudulent intent, if the transfer takes place while the transferor is insolvent and within a year of the transferor's bankruptcy and is made for less than a reasonably equivalent value. While the constructive fraud provisions do not require proof of fraud, their development over the years - from badges of fraud to presumptions of fraud to constructive fraud - clearly indicates that they were intended to help ferret out transfers designed to put property outside of the reach of creditors, not to attack noncollusive foreclosure sales conducted in accordance with applicable law. See Zinman, Houle and Weiss, Fraudulent Transfers According to Alden, Gross and Borowitz: A Tale of Two Circuits, 39 Bus. Law. 977, 986-95 (1984). For this reason, no court attempted to apply constructive fraud to noncollusive foreclosure sales until Durrett.

The Act cannot deal with the entire Durrett matter but may ease some of the problem of Durrett where the Bankruptcy Act looks to the state law of fraudulent transfers.

ULSIA § 512(c) provides:

"(c) A regularly conducted, noncollusive transfer under a power of sale (Section 509) or by a judicial sale (Section 510) to a transferee who takes for value and in good faith is not a fraudulent transfer even though the value given is less than the value of the debtor's interest in the real estate.

ULSIA § 512(c) should be compared with the comparable provisions of the Uniform Fraudulent Transfer Act. For further discussion, see the Comment to Section 502(b).

The Act permits nonjudicial foreclosure of all security interests, and eliminates all rights of redemption after sale. A "protected party," however, receives special procedural protections prior to sale. See Pedowitz, Mortgage Foreclosure under the Uniform Land Transactions Act (as Amended), 6 Real Estate Law Journal 179 (1978) for a detailed analysis of the default provisions contained in Article 3 of ULTA. These provisions are virtually unchanged in ULSIA.

The continuing trend toward "securitization" of mortgage instruments by the secondary mortgage market will increase the pressure for federal preemption of state restrictions on the validity of mortgage documents. In the fields of usury and alternative mortgage transactions such federal preemption so far has been limited to housing mortgages and has not generally been applicable to commercial mortgages. As a result, many states now impose more onerous consumer protection provisions on commercial mortgages than they are permitted by federal law to impose on housing mortgages. This discrimination will ultimately be eliminated either by expanding federal preemption or by uniform state legislation such as ULSIA.

SECTION 101. SHORT TITLE. This [Act] may be cited as the Uniform Land Security Interest Act.

SECTION 102. PURPOSES; RULES OF CONSTRUCTION; SCOPE.

(a) This [Act] shall be liberally construed and applied to promote its underlying purposes and policies, which are:

(1) to simplify, clarify, and modernize the law governing secured transactions in real estate;

(2) to promote the interstate flow of funds for secured real estate transactions;

(3) to provide residential borrowers with special protection against practices that may cause unreasonable risk and loss to them; and

(4) to make uniform the law with respect to the subject of this [Act] among states enacting it.

(b) Subject to the provisions on excluded transactions (Section 110), this [Act] applies to any transaction, regardless of its form, intended to create a security interest in real estate. This [Act] governs security interests created by contract or conveyance, including a mortgage, deed of trust, trust deed, security deed, contract for deed, land sales contract, lease intended as security, assignment of leases or rents intended as security, and any other consensual lien or contract for retention of title intended as security for an obligation.

(c) If a security agreement covers both real estate and personal property, this [Act] applies to the security interest in real estate and the secured party may also proceed against the personal property in accordance with the secured party's rights and remedies under this [Act].

(d) If a security interest covers only fixtures subject to Article 9 of the Uniform Commercial Code, the creation, obligation, and foreclosure of the security interest in the fixtures is governed by Article 9 of the Uniform Commercial Code.

1. This Act should be construed in accordance with its underlying purposes and policies. The text of each section should be read in the light of the purpose and policy of the rule or principle in question, and also of the Act as a whole, and the application of the language should be construed narrowly or broadly, as the case may be, in conformity with the purposes and policies involved.

Therefore, the rules and principles promulgated by the Uniform Commercial Code, which has now been adopted in 49 of the 50 states plus the District of Columbia and the Virgin Islands, have been generally followed unless the rule did not seem appropriate to real estate or there was strong disagreement with the policy being stated. Where the language of this Act is identical with that of the Uniform Commercial Code, the strong presumption should be that it is to be interpreted in the same way in both acts.

The fact that land does not move from state to state is not as important to the question whether uniformity is needed in hand transactions as is the fact that individuals and business entities do move from state to state and frequently conduct transactions involving land in many states. This is particularly true as to national lenders and as to dealers in the secondary mortgage market.

This Act, through a number of rules and principles, limits freedom of contract to protect consumers against contract provisions which may be harmful to their interests and of which they may not know or as to which they may not have bargaining power to avoid. In this Act, the term "protected party" is used instead of "consumer." A protected party is, basically, a person acquiring, or giving a security interest in, his own home. See Section 113. Some of the provisions applying special rules to protected party transactions are Section 206(d) subjecting certain assignees to defenses of a protected party and the provisions of Part 5 giving protected parties special protections in security interest foreclosures. Certain provisions restricting freedom of contract, such as the provisions on unconscionability, also apply to nonconsumer contracts.

2. Subsections (b), (c), and (d) carry out the purpose, referred to in the introductory comment, of bringing all consensual security interests in real estate under this Act except for certain types of transactions excluded by Section 110.

If a transaction is intended as security, it is governed by this Act no matter what form the transaction takes. If, however, the security interest is created by operation of law and not by manifested intent, it is excluded. For example, the security interest given to an unpaid materials supplier or subcontractor in the land on which the supplier or subcontractor made a real estate improvement is governed by statutes on construction liens or mechanics' liens. Those liens are statutory and do not arise by reason of the consent of the owner of the land.

Transactions in the form of absolute deeds of conveyance or of leases are subject to this Act if the understanding of the parties or the effect of the arrangement shows that a security interest was intended. See Kratovil, Modern Mortgage Law and Practice, Ch. 3; Osborne, Mortgages (2d ed.), Ch. 4. The list of traditional security devices in subsection (b) is illustrative only; other devices, old or new, are included so long as the requisite intent is found.

An assignment of rents as security for an obligation is also covered by this Act. The definition of real estate specifically includes rents arising from real estate (Section 111(20). An assignment of rents from a building, for example, may be: (1) made as additional security under a security interest covering the land and buildings, (2) as the only security for an obligation, or (3) may be made as a sale of the rents. All of these agreements are subject to this Act. Article 9 of the UCC applies both to sales of accounts and to transfers of accounts as security. In the Commercial Code that position was taken primarily because of the desirability of providing a mechanism for perfection of assignments through the public record system rather than having the common law rules of priority (either first in time or first to notify ordinarily having priority) continue.

However, Section 9-104(j) of the UCC exempts assignments of rents from lands from the coverage of that act. Therefore, in states in which rents are treated as personal property, the common law rules as to priority of assignees would apply. Under this Act, rents from real estate are treated as real estate so that the applicable priority rules are those relating to real estate and, therefore, the recording statute rules would apply.

The primary difference between a sale of rents and a transfer of rents as security is that in the sale the buyer is entitled to receive the full rents, whether they are more or less than the price paid for them, while in an assignment for security, the assignee is ordinarily entitled only to have his debt repaid with any surplus rents above the debt being returned to the assignor-debtor. This Act takes no position on whether a transaction in which the assignor guarantees the collectability of the assigned rents may appropriately be treated as a sale rather than as a transfer for security. That issue sometimes arises in determining whether state usury statutes apply to particular assignment transactions. It should be remembered in that regard that this Act proposes two alternatives regarding the repeal of usury statutes, one that the usury defense be eliminated in its totality, and the other that it continue only regarding protected parties.

Subsections (b), (c), and (d) do not affect subsection (3) of Section 9-102 of the UCC. An assignment by a mortgagee of his right to receive payment is governed by Article 9 of the UCC although the real estate priority rules based on recording are applicable. See paragraph 4 of the comment to UCC, Section 9-102.

Subsection (d) is intended to carve out of the coverage of this section the foreclosure and other problems concerning a security interest in fixtures only insofar as the UCC is applicable. Thus, a question arising between a first and second real estate mortgagee as to the right to include fixtures in the sale of the real estate would be subject to this article and not to the UCC.

Subsections (b), (c), and (d) are identical to ULTA Section 3-102, and subsection (a) is altered from ULTA Section 1-102 only because of the more limited subject matter dealt with in ULSIA.

SECTION 103. VARIATION BY AGREEMENT.

(a) The parties to a transaction may vary by agreement the effect of any provision of this [Act] except as provided in subsection (b) and Section 501(d), or unless a section of this [Act] contains the words "notwithstanding agreement to the contrary."

(b) The obligation of good faith prescribed by this [Act] may not be disclaimed by agreement, but the parties by agreement may determine standards by which the performance of that obligation is to be measured if those standards are not manifestly unreasonable.

Freedom of contract is a principle of this Act. Except as provided in this section and in the section referred to in subsection (c), the rules stated in the Act may be varied by agreement. Of course, the meaning of the statute itself must be found in its text, including its definitions, and in appropriate extrinsic aids. However, the parties by agreement can change the legal consequences which would otherwise flow from the provisions of the Act.

The effect of an agreement as to rights of third parties is left to specific provisions of this Act and to supplementary principles applicable under the next section.

Under subsection (b), freedom of contract does not extend so far as to permit parties to disclaim the obligation of good faith imposed by this Act, though they may fix standards for the performance of that obligation so long as the standards are not "manifestly unreasonable." See Section 108, which imposes an obligation of good faith in the performance or enforcement of every contract within the Act.

This section is based on ULTA Section 1-103.

SECTION 104. SUPPLEMENTARY GENERAL PRINCIPLES OF LAW APPLICABLE. The principles of law and equity, including the law relative to capacity to contract, principal and agent, marshalling of assets, subrogation, estoppel, fraud, misrepresentation, duress, coercion, mistake, bankruptcy or other validating or invalidating cause, supplement this [Act] unless displaced by particular provisions of it.

This Act displaces existing law relating to secured land transactions only as stated by specific sections and by reasonable implications therefrom. "Validating" and "invalidating" are not intended as narrow words confined to the inception of the transaction, but extend to cover any factor which at any time or in any manner renders or helps to render any transaction or right valid or invalid.

Reference is made specifically to marshalling of assets and rights of subrogation to make it clear that, in addition to the rights given them by Part 5 of this Act, other parties in a security interest foreclosure situation have their common-law rights of marshalling and subrogation.

The listing given in this section is merely illustrative; no listing could be exhaustive. Nor is the fact that in some sections particular circumstances have led to express reference to other fields of law intended at any time to suggest the negation of the general application of the principles of this section.

SECTION 105. CONSTRUCTION AGAINST IMPLIED REPEAL. This [Act] is intended as a unified coverage of its subject matter. No part of it may be construed to be impliedly repealed by subsequent legislation if that construction can reasonably be avoided.

This Act, carefully integrated and intended as a uniform codification of permanent character covering an entire field of law, is to be regarded as particularly resistant to implied repeal. See Pacific Wool Growers v. Draper & Co., 158 Or. 1, 73 P.2d 1391 (1937).

This section is identical to ULTA Section 1-105.

SECTION 106. REMEDIES TO BE LIBERALLY ADMINISTERED.

(a) The remedies provided by this [Act] must be liberally administered to the end that the aggrieved party is put in as good a position as though the other party had fully performed. However, consequential, special, or penal damages may not be awarded except as specifically provided in this [Act] or by other rule of law.

(b) Any right or obligation declared by this [Act] is enforceable by judicial proceeding unless the provision declaring it otherwise provides.

The basic principle for determining the appropriate remedy for breach of contract or of other duty under this Act is that the aggrieved party should be put in as good a position as he would have been had the other party performed. The liberal construction rule is also intended to reject any doctrine that damages must be calculable with mathematical accuracy. Compensatory damages are often at best approximate: they have to be proved with whatever definiteness and accuracy the facts permit, but no more. Under subsection (b) any right or obligation described in this Act is enforceable by court action, even though no remedy may be expressly provided, unless a particular provision specified a different and limited effect. Whether specific performance or other equitable relief is available is determined not by this section but by supplementary principles.

This section is identical to ULTA Section 1-106.

SECTION 107. SEVERABILITY CLAUSE. If any provision of this [Act] or of its application to any person or circumstance is held invalid, the invalidity does not affect other provisions or applications of this [Act] which can be given effect without the invalid provision or application, and to this end the provisions of this [Act] are severable.

This is the model severability section recommended by the National Conference of Commissioners on Uniform State Laws for inclusion in all acts of extensive scope.

SECTION 108. OBLIGATION OF GOOD FAITH. Every contract or duty governed by this [Act] imposes an obligation of good faith in its performance or enforcement.

This section sets forth a basic principle running throughout this Act: in secured real estate transactions good faith is required in the performance and enforcement of all agreements or duties. Particular applications of this general principle appear in specific provisions of this Act, such as the right of a lessee to pay to the secured creditor of his lessor (Section 505), and the right to accelerate as against an assignee of the debtor (Section 513(d)).

The concept, however, is broader than these illustrations and applies generally, as stated in this section, to the performance of every contract or duty within this Act.

This section is identical to ULTA Section 1-301.

SECTION 109. WAIVER OR RENUNCIATION OF CLAIM OR RIGHT AFTER BREACH.

(a) Subject to subsection (b), a claim or right arising out of an alleged breach of a security agreement may be discharged in whole or in part with or without consideration by a written waiver or renunciation signed and delivered by the aggrieved party.

(b) A waiver or renunciation, whether or not for consideration, of a claim or right arising out of an alleged breach, by which a party agrees to forego rights given the party by this [Act] or otherwise, is invalid if the court finds as a matter of law that the waiver or renunciation is unconscionable or that it was secured in an unconscionable manner. The competence of the aggrieved party, any material misrepresentation, failure to disclose, or overreaching by the other party, and the value of any consideration for the waiver or renunciation, are relevant to the issue of unconscionability.

1. This section makes consideration unnecessary to the effective renunciation or waiver of rights or claims arising out of an alleged breach of a contract where such renunciation is in writing and signed and delivered by the aggrieved party. There may also be an oral renunciation or waiver sustained by consideration but subject to statute of frauds provisions.

2. Subsection (b) applies an unconscionability test to determine the validity of a waiver or renunciation of rights after a breach and states some of the factors relevant to determining unconscionability. Subsection (b) is broader than subsection (a), since it also applies to waivers or renunciations for consideration.

3. This section is based on ULTA Section 1-305.

SECTION 110. EXCLUDED TRANSACTIONS. Except for Section 302 on priority of future advances, this [Act] does not apply to:

(a) a landlord's lien unless the parties agree in writing that this [Act] applies;

(b) a vendor's or vendee's lien unless the lien is specifically created by a writing;

(c) a nonconsensual lien, such as a mechanic's lien, judgment lien, or tax lien;

(d) an agreement not to convey or encumber;

(e) a lien to secure an obligation owed to an association in a common interest community, or under covenants or restrictions running with the land, but the remedies provided in Part 5 apply; or

(f) a security interest in an interest in a common interest community if under other law of this State that interest is personal property.

1. Since the Act applies only to consensual transactions, the express reference to landlord's liens (subsection (a)), vendors' and vendees' liens (subsection (b)) and construction liens (subsection (c)) merely reiterates the limitation on coverage already made explicit in Section 102. Although a judgment lien is normally nonconsensual, a stipulated judgment could, by agreement of the parties, create a consensual lien to which the Act would apply. Subsection (d) is intended to exclude the "negative pledge" or agreement not to convey real estate during the existence of an obligation. The case law is unclear whether these agreements create an "equitable mortgage." Cf. Coast Bank v. Minderhout, 61 Cal.2d 311, 392 P.2d 265 (1964) with Tahoe National Bank v. Phillips, 4 Cal.3d 11, 480 P.2d 320, 92 Cal. Rptr. 704 (1971)). This section resolves the problem for purpose of this Act by excluding the agreement from coverage of this Act.

2. Subsection (e) deals with a form of "lien" which is of growing importance. Many declarations of covenants, conditions, and restrictions recorded with respect to subdivisions and other common interest communities provide for a property owners' association and authorize it to establish "maintenance" and other charges for upkeep of common property. Typically, the declaration provides that the charge is a lien upon the burdened land. While such a charge might qualify as a consensual lien in the hands of the first purchaser from the developer it seems best to exclude it from this Act except as to remedies on default.

3. Subsection (f) is intended to exclude from the Act a security interest in a cooperative apartment if under state law that interest is personal property. Thus, this subsection is similar in purpose to Section 102(d), and is consistent with the definition of "real estate" in subsection 111(20).

4. This section is substantially identical to ULTA Section 3-104 except for the addition of subsection (f) and the introductory reference to Section 302.

SECTION 111. GENERAL DEFINITIONS. As used in this [Act], subject to additional definitions contained in this [Act] which apply to specific parts, or sections thereof, or unless the context otherwise requires:

(1) "Aggrieved party" means a party entitled to a remedy.

(2) "Agreement" means the bargain of the parties as found in their language and by implication from other circumstances. Whether an agreement has legal consequences is determined by the provisions of this [Act], if applicable; otherwise by the law of contracts.

(3) "Collateral" means the real estate subject to a security interest.

(4) "Common interest community" means real estate described in an instrument with respect to which a person by reason of ownership of a part thereof is obligated to pay for real estate taxes, insurance premiums, maintenance, or improvement of another part thereof. The term includes real estate held in a condominium or cooperative.

(5) "Contract" means the total of legal rights and obligations resulting from the parties' agreement as affected by this [Act] and other applicable rules of law.

(6) "Conveyance" means a transfer of real estate other than by will or operation of law.

(7) "Creditor" includes an unsecured creditor, a secured creditor, and a representative of creditors.

(8) "Debtor" means a person who owes payment or other performance of an obligation secured, but if the debtor and the owner of real estate are not the same person, the term means the owner of real estate in any provision of this [Act] dealing with collateral and the obligor in any provision dealing with an obligation. The term includes both where context requires.

(9) "Deed" means a writing, other than a lease or a security agreement, which by its terms conveys real estate.

(10) "Fault" means wrongful act, omission, or breach.

(11) "Future advances" means funds advanced to a debtor, or other obligations incurred on behalf of a debtor, by a secured party after the debtor executes a security agreement.

(12) "Future advances made to protect collateral" means future advances made or incurred (i) for the reasonable protection of the security interest in the collateral, such as payment of real property taxes, hazard insurance premiums, or maintenance charges imposed under a common interest community declaration or other restrictive covenant; or (ii) under a security agreement, created to enable completion of a contemplated improvement, that contains a legend on the first page clearly stating it is a "Construction Security Agreement" and secures an obligation which the debtor incurred for the purpose of making an improvement of the real estate in which the security interest is given.

(13) "Judicial proceeding" means an action at law, suit in equity, or any other proceeding in which rights are judicially determined.

(14) "Law" includes statutes, case law, administrative rules or regulations, and legislative enactments of local governments.

(15) "Organization" means a corporation, business trust, estate, trust,

partnership, association, joint venture, government, governmental subdivision or agency, or any other legal or commercial entity.

(16) "Party," as distinguished from "third party," means a person who engages in a transaction or makes an agreement under this [Act].

(17) "Person" includes an individual or an organization.

(18) A security agreement is a "purchase money security agreement" to the extent that it is:

(i) taken or retained by the seller of the collateral to secure all or part of its price or

(ii) taken by a person other than the seller of the collateral who, by making an advance or incurring an obligation, gives value to enable the debtor to acquire the collateral.

(19) An advance is made "pursuant to commitment" if the obligor has bound itself to make it, whether or not a default or other event not within its control has relieved or may relieve it from its obligation.

(20) "Real estate" means any estate or interest in, over, or under land, including minerals, structures, fixtures, and other things that by custom, usage, or law pass with a conveyance of land though not described or mentioned in the contract of sale or instrument of conveyance; and, if appropriate to the context, the land in which the interest is claimed. "Real estate" includes rents, the interest of a landlord or tenant, and interests in a common interest community unless under other law of this State that interest is personal property.

(21) "To record" means to present to the recording officer for the place in which the land is situated a document the recording office accepts and either enters in a daily log or notes thereon an identifying number, regardless of whether under applicable law the recording officer is directed to file the document or otherwise maintain a record of it. "Recorded" and "recording" have corresponding meanings.

(22) "Representative" means a person empowered to act for another, and includes an agent, a government official, an officer of a corporation or association, a trustee, and a personal representative of a decedent.

(23) "Secured creditor" means a lender, seller, or other person in whose favor there is a security interest. If the holder of an obligation issued under an indenture of trust or the like is represented by a trustee or other person, the representative is the secured creditor.

(24) "Security agreement" means a writing that creates or provides for a security interest in real estate.

(25) "Security interest" means an interest in real estate which secures payment or performance of an obligation. If a lease is intended as security to the lessor, the lessor's interest is a security interest. If a seller's retention of legal title to real estate after the buyer enters into possession is intended as security, the seller's interest is a security interest. Whether a transaction is intended as security is to be determined by the facts of each case. However,

(1) the inclusion in a lease of an option to purchase at a price not unreasonable under the circumstances at the time of contracting does not of itself indicate the lease is intended for security, and

(2) retention of the title to real estate by a seller under a contract right to retain title for not more than one year after the buyer enters into possession of the real estate is not a retention for security.

(26) "Signed" means executed by signature. Signature includes any symbol executed or adopted by a party with present intention to authenticate a writing.

(27) A person gives "value" for rights if the person acquires the rights:

(i) pursuant to commitment to extend credit or for the extension of credit;

(ii) as security for, or in total or partial satisfaction of a preexisting claim;

(iii) pursuant to a preexisting contract; or

(iv) generally, in return for any consideration sufficient to support a simple contract.

(28) "Written" or "writing" includes printing, typewriting, or any other communication intentionally expressed in tangible form.

It is necessary to have a set of terms to describe the parties to a real estate security agreement, the agreement itself, and the property involved therein. Furthermore, since ownership of real estate may be fragmented into leaseholds, easements, common interest communities, and the like, it is necessary to have a general term referring to the property subject to the security interest without in each statutory provision providing that it is applicable to security interests in fee simple as well as to security interests in leaseholds or easements. The selection of the statutory terms must avoid, if possible, using a term which under existing law is applicable to one of the numerous forms. While existing law and market conventions applies the term "mortgagor" to the grantor-debtor in a title state and also to the settlor-debtor in a deed of trust state, existing law and convention often uses the term "purchaser" and "land contract" to describe the obligor and the agreement in the installment land contract. Since it is desired to avoid any implication that the existing law referable to "mortgagors" is to be used for the construction and interpretation of this article, a set of terms has been chosen which have no common law or statutory roots tying them to a particular form. In place of terms such as "mortgage," "contract for deed," "trust deed," etc., this Act substitutes the general term "security agreement" or "real estate security agreement" (see subsection (24)). In place of "mortgagor" or "installment purchaser" this Act substitutes "debtor" defined in subsection (8). In place of "mortgagee," or "vendor," this Act substitutes "secured creditor." In place of mortgage of a fee and mortgage of a leasehold, this Act substitutes "collateral" defined in subsection (3) and the interest in the collateral which is conveyed by the debtor to the creditor or which is retained by the creditor is defined as a "security interest" and not as a "lien" or as "title."

The statement in the definition of "security interest" that "retention of title to real estate by a seller under a contract right to retain title for not more than one year after buyer enters into possession of the real estate is not a retention for security" is intended to exclude from the coverage of this Act many typical situations in which buyer takes possession a short time before the closing.

On the other hand, where seller retains the title for longer than one year after buyer enters into possession, the other circumstances of the case must be looked to in order to determine whether a security interest was intended. In many such cases, it will be clear that a "land sales contract" or "installment sales" transaction was intended and, if so, the seller's remedies for buyer's default are those under this Act.

Parties. In all but a few cases the person who is personally obligated to pay the debt and the person whose real estate secures the debt will be the same person at the inception of the transaction. It is not uncommon to transfer property "subject to" a secured debt of the transferor. In that case the definition of "debtor" includes the transferee where the section refers to rights in the real estate and may sometimes mean either the person personally obligated or the person owning the real estate in which there is a security interest.

The term "secured creditor" includes any person in whose favor there is a real estate security interest. Thus, it refers to a seller of real estate who retains a lien or title to the real estate sold for the purpose of securing the price, and it also refers to a person, such as an institutional lender, whose claim arises initially from a cash loan.

1. "Aggrieved party" is a definition taken from ULTA Section 1-201.

2. "Agreement" is taken from ULTA Section 1-201. The usage is intended to include full recognition of usages in real estate business, course of dealing, course of performance and the surrounding circumstances, and of any agreement permitted under this Act to displace a state rule of law. "Agreement" is intended to refer to the agreement in fact. The word "contract," defined in paragraph (5) refers to the legal obligation resulting from an agreement. Whether an agreement has legal consequences is determined by this Act if applicable and otherwise by the general law of contracts.

3. "Collateral" is the general term used for all of the interests in land which may be subjected to a security interest. All of these interests in land are subsumed under the term defined in subsection (20) as "real estate."

4. "Common Interest Community." The term, drawn from the Uniform Common Interest Ownership Act, creates one comprehensive definition of those interests governed by the Act. This generic definition, derived from the definition of "planned community" in the Uniform Planned Community Act, is used through the Act to refer collectively to the three particular forms of common interest community: condominiums, cooperatives, and planned communities.

5. "Contract." See Comment to "agreement" above.

6. "Conveyance." This term is intended to include any method of lifetime transfer of an interest in real estate other than by operation of law. Since a real estate security interest creates an interest in land, a mortgage or other security interest is a "conveyance." Similarly, if the creditor assigns his claim secured by the security interest and his interest in the real estate of the debtor, the "assignment" is a conveyance. Acts sufficient to effect a transfer or conveyance are determined by the applicable law. Requirements for a deed are specified by recording or conveyancing law; for a will by the law of wills; for a transfer as a result of an eminent domain proceeding, by the law of eminent domain, and so on. The term is intended as a convenient shorthand term to cover all of the different methods of effecting a voluntary and involuntary lifetime transfer. See paragraph (9) for definition of a "deed." Where this Act states a rule applicable to lifetime transfers and to transfers by will, the term "transfer" is used.

7. "Creditor" includes both the person who is initially in a legal relationship with the debtor and also any transferee and any representative. If a person acts through an agent, the "creditor" is the principal.

8. "Debtor." See fourth paragraph of Comment, Parties, supra.

9. "Deed." The deed is the instrument by which the obligation to convey a freehold estate is purportedly carried out. The formal requirements for validity of a deed are not determined by this Act, but by the other law of the state. Under this Act, however, a deed that does not provide otherwise carries the warranties of title.

10. "Future advances" receive favorable priority treatment in certain circumstances. See Section 302.

11. "Future advances made to protect collateral" receive priority pursuant to § 302 of this Act. This term includes future advances secured by a security interest to enable completion of a contemplated improvement. To be a construction security interest entitled to that favorable treatment the first page of the security agreement must contain a legend indicating that it is a construction security interest. That requirement is imposed so that title examiners will not have to read every clause of a recorded mortgage to determine whether it claims to be a construction security interest.

12. "Judicial proceeding" is a term used in this Act instead of "action." It includes proceedings initiated by a complainant and also claims of a defendant, such as matters frequently called recoupment, counterclaim, or set-off. "Proceeding" is the term more frequently used in modern court rules to eliminate any connotation of actions at law or suits in equity.

13. "Law" is defined to make clear that it includes administrative actions and legislative acts of local governments.

14. "Organization" should be read in connection with the definition of a person. "Organization" is intended to include all legally recognized persons other than an individual. It specifically includes governmental entities, trusts, and associations.

15. "Party" is intended to be a general term covering a person engaging in transactions. It includes a person acting through an agent.

16. "Person." See Comment to "organization."

17. "Purchase money security agreement." A purchase money security agreement under existing law has priority over certain claimants. The definition used is the prevailing definition which accords the same status to a person who makes an advance or incurs an obligation to enable the debtor to acquire the collateral. Under this Act there are certain instances where a purchase money creditor is not entitled to claim a deficiency judgment against a protected party if the proceeds from sale of the collateral are insufficient to satisfy the unpaid obligation. This antideficiency judgment rule is applicable to either kind of purchase money creditor - seller or third party supplier of purchase price. See Section 511(b) and the second paragraph of Comment 2 to that section.

18. "Pursuant to commitment" is defined for use in the rules relating to priority of future advances (Section 302). The definition is the same as that in Section 1-201(14) of the ULTA. The definition allows a secured party priority as to a committed advance even though, at the time it is made, borrower's breach or other circumstance might justify refusal to make the advance. Therefore, the lender is not required for priority purposes to determine whether he has been discharged from the obligation to make the advance.

19. "Real estate." The basic definition provides that real estate is the legal relationship (interest) a person has against the world with respect to an object, the physical land. It includes both the common law estate and the interests called easements and other incorporeal hereditaments. The term is also used, if the context warrants, to refer to the physical object (the land) in which the interest exists. Leaseholds are defined as real estate for the purposes of this Act. However, the treatment of leaseholds as "real estate" is only for the purposes of this Act and is not intended to change other laws of the state, such as the law of decedent's estates, under which leaseholds are treated as personal property.

20. "To record" is defined to include the situation where a document not entitled to be recorded is nevertheless accepted by the recording officer. Taken from USLTA 1-201.

21. "Representative" is taken from ULTA and also from Uniform Probate Code which used the term "personal representative" to include an executor and an administrator.

22. "Secured creditor." See fourth paragraph of Comment, Parties, supra.

23. "Security agreement." See first paragraph of Comment, supra.

24. "Security interest." See first paragraph of Comment, supra.

25. "Signed" is taken from ULTA Section 1-201.

26. "Value" is taken from ULTA Section 1-201.

27. "Written" or "writing" is taken from ULTA Section 1-201.

SECTION 112. NOTICE; KNOWLEDGE; GIVING NOTICE; RECEIPT OF NOTICE.

(a) A person has "notice" of a fact if:

(1) the person has actual knowledge of it;

(2) the person has received a notice or notification of it; or

(3) from all the facts and circumstances known to the person at the time in question the person has reason to know it exists.

(b) Except as provided in subsection (e), a person has "knowledge" or "learns" of a fact or "knows" or "discovers" a fact only when the person has actual knowledge of it.

(c) A person "notifies" or "gives" or "sends" notice or notification to another, whether or not the other person actually comes to know of it, by taking steps reasonably required to inform the other in ordinary course, but where this [Act] specifies particular steps to be taken to notify, or give or send notice or notification, those steps must be taken.

(d) A person "receives" a notice or notification at the time it:

(1) comes to the person's attention; or

(2) is delivered at the place of business through which the person conducted the transaction with respect to which the notice or notification is given or at any other place held out by the person as the place for receipt of the communication.

(e) Notice, knowledge of a notice, or notification received by a person is effective for a particular transaction at the earlier of the time it comes to the attention of the individual conducting the transaction or the time it would have come to the individual's attention had the person maintained reasonable routines for communicating significant information to the individual conducting the transaction and there had been reasonable compliance with the routines. An individual acting for the person is not required to communicate information unless the communication is part of the individual's regular duties or the individual has reason to know of the transaction and that the transaction would be materially affected by the information.

(f) Notwithstanding agreement to the contrary, all notices required or permitted to be sent to protected parties under this [Act] must contain a warning statement in [ ] and in any other language found by the [Commissioner of Banks] to be the principal language spoken by a substantial number of persons engaged in transactions covered by this [Act] as follows: "This is an important notice regarding your rights in real estate. Get it translated immediately."

1. This section is identical to ULTA. Section 1-202. For convenience in understanding, it combines in one section the provisions specifying when a person "has" notice; when a person "gives" notice; when a person "receives" notice; and in the case of an organization when notice received by an individual is imputed to the organization. Thus, the idea in subsection (c) is that proper dispatch and not its receipt satisfies the obligation stated in a section as an obligation "to notify" or "to give notice."

2. Under the definition of notice a person has notice when he has received a notification of the fact in question, but by the last sentence the Act leaves open the time and circumstances under which notice or notification may cease to be effective. Therefore, such cases as Graham v. White-Phillips Co., 296 U.S. 27, 56 S.Ct. 21, 80 L.Ed. 20 (1935), are not overruled.

3. The terms "notifies," "gives," or "sends" are the words used when the essential fact is the proper dispatch of the notice, not its receipt. When the essential fact is the other party's receipt of the notice, that is stated. Subsection (d) states when a notice is received.

4. Subsection (e) makes clear that reason to know, knowledge, or a notification, although "received" for instance by a clerk in Department A of an organization, is effective for a transaction conducted in Department B only from the time when it was or should have been communicated to the individual conducting that transaction.

SECTION 113. PROTECTED PARTY; RESIDENTIAL REAL ESTATE.

(a) "Protected party" means:

(1) an individual who gives a security interest in residential real estate all or a part of which the individual occupies or intends to occupy as a residence;

(2) a person obligated primarily or secondarily on an obligation secured by residential real estate if, at the time the obligation is incurred, that person is related to an individual who occupies or intends to occupy all or a part of the real estate as a residence; or

(3) an individual who acquires residential real estate and assumes or takes subject to the obligation of a prior protected party under the real estate security agreement.

(b) "Residential real estate" means, in relation to a protected party, real estate, improved or to be improved, containing not more than [three] acres, not more than four dwelling units, and no nonresidential uses for which the protected party is a lessor. If a unit in a common interest community is otherwise "residential real estate," it remains so regardless of the size of, or the number of units in, the common interest community.

1. This section sets forth the basis of the distinction made throughout this Act as to the circumstances in which a person is protected against clauses in the contract which waive or relax one or more of the stated rules in this Act. For example, but not as an exhaustive list as to a protected party, there are restrictions on his freedom of contract as to (1) after-acquired property clauses in a security interest (Section 205(b)); (2) maximum or "usurious" finance charge (Section 403 Alternative B); (3) creditor's right to take possession after default (Section 503); (4) exercise of power of sale after default of performance of a secured obligation (Section 507); (5) notice of intention to foreclose (Section 508); and (6) anti-deficiency judgment provisions (Section 511).

2. The fact that a protected party owns the real estate concurrently with another person, either by tenancy by the entireties, joint tenancy, or tenancy in common, does not affect his protected-party status, whether or not the person with whom he owns the real estate is a protected party. This definition of a protected party, which continues the protection to residential real estate, should be compared with many of the consumer credit protection laws in which the protection is given to the individual regardless of the character of the real estate if the credit is extended for a consumer purpose. Thus, a doctor who borrows money on security of his medical clinic building for college education of his children may be protected by a consumer-credit law because the purpose of the loan is a consumer purpose but he would not receive protected-party status under this Act. Similarly a doctor who borrowed money to purchase new X-ray equipment and gave a security interest in his single-family house would be a protected party under this Act, but his loan would not be consumer credit under many consumer-protection acts. This Act does not exclude operation of consumer-protection acts so that in some cases both this Act and a consumer-protection act will be applicable.

3. Owner-occupied residential real estate also includes real estate in which there are rental units if the obligor occupies the real estate, the real estate contains no more than [three] acres of land, and it contains no more than four units available for housing purposes. An obligor is protected even though there is a commercial use which the obligor operates. If the commercial use is a rental unit, the protection is not available.

4. Occupies as "a" residence instead of "his principal" residence is used intentionally. An individual who has his voting residence in one state or county, a summer residence in another, and a winter residence in a third may be a "protected" party in each of the three jurisdictions. The justification for this inclusion is simplicity to the lender at the time of the loan application. If he satisfies himself that the obligor intends to occupy the real estate as "a" residence for at least part of the year, he is not subjected to additional uncertainty by being required to ascertain whether it is a principal or secondary residence. The "second home" phenomenon has made this determination difficult.

The Act does not prescribe a monetary standard as the dividing line between a protected party and a person who can bargain freely because monetary standards get out of date, particularly in housing, because of inflationary tendencies.

5. A person selling his residence is not a protected party.

SECTION 114. PERSON RELATED TO. In the phrases "individual related to" or "person related to" a person is related to:

(1) an individual if that person is:

(i) an organization directly or indirectly controlled by the individual, the individual's spouse, or a relative by blood or marriage who shares the same residence with the individual;

(ii) the spouse of the individual;

(iii) a brother, brother-in-law, sister, or sister-in-law of the individual;

(iv) an ancestor or descendant of the individual or of the individual's spouse or;

(v) any other relative by blood or by marriage of the individual or of the individual's spouse if the relative shares the same residence with the individual; and

(2) an organization if that person is:

(i) any other organization controlling, controlled by, or under common control with the organization; or

(ii) a person related to the person controlling the organization.

The definitions of this section are important in determining who is a protected party under Section 113. For example, a corporation is related to an individual if it is under the control of the individual (paragraph (1)(i)) of this section. Under Section 113(a)(2) a person obligated on an obligation secured by residential real estate occupied by an individual related to him is a protected party. Therefore, a corporation obligated on a security interest on real estate resided in by an individual controlling the corporation is a protected party.

SECTION 115. PRESUMPTION. "Presumption" or "presumed" means that a party against whom a presumption is directed has the burden of proving that the nonexistence of the presumed fact is more probable than its existence.

"Presumption" or "presumed" is paraphrased from the Uniform Rules of Evidence, Rule 301. Where a "conclusive presumption" is intended in this Act, the word "presumption" is not used at all. Phrases such as "red is green" or "red is to be regarded as green" are used when the statutory language is intended as a command to a court to follow a particular rule of law, regardless of the actual facts.

SECTION 201. GENERAL VALIDITY OF SECURITY AGREEMENT. Except as provided in this [Act] and in other statutes governing recording and priority of interests in real estate, a security agreement is effective according to its terms between the parties, against purchasers of the collateral, and against creditors.

Part 2 deals with rights between the parties to a security agreement, whereas Part 3 deals with rights among third parties

1. This section states the general validity of a real estate security agreement. In general, the agreement is not only effective between the parties, but it is also effective against third parties. Exceptions to this general rule arise where there is a specific provision in this Act; for example, this Act invalidates a disclaimer of the obligation of good faith (Section 108); and Section 403(b) Alternative B invalidates a finance charge exceeding the rate stated in that section.

2. Section 301 subjects security agreements under this Act to the other law of the state regarding recording and priority of interests in real estate. Therefore, effectiveness of the security interest against purchasers of the collateral and creditors is, by this Act, left to other law of the state, except (a) Section 302 does itself state certain rules as to the priority of "future advances," and (b) Section 211 contains a provision relating to the property of certain option rights held by secured parties.

This section is identical to ULTA Section 3-201.

SECTION 202. TITLE TO COLLATERAL IMMATERIAL. Each provision of this [Act] with regard to rights, obligations, and remedies applies whether title to the collateral is in the debtor, the secured creditor, or a third party.

The rights and duties of the parties to a real estate security agreement are stated in this Act without reference to the location of "title" to the collateral. Thus, the characteristics of a security interest which secures the purchase price of a parcel of real estate are the same under this Act whether the secured creditor appears to have retained title, or the debtor appears to have obtained title and then conveyed a lien or title to the secured creditor, or the seller appears to have conveyed title to a third party to hold until the debtor has paid the purchase price. This Act in no way determines which line of interpretation is to be followed in cases involving the applicability of some other rule of law. Thus, if a corporation law makes a vote of the stockholders prerequisite to a corporation "conveying" a security interest but not if it acquires real estate "subject" to a security interest, this Act does not attempt to define whether the transaction "gives" a security interest for the purpose of the corporation law.

This section is identical to ULTA Section 3-202.

SECTION 203. ENFORCEABILITY OF SECURITY INTEREST; FORMAL REQUISITES.

(a) A security interest attaches to real estate when the following have occurred, unless an explicit agreement postpones attachment:

(1) the debtor has signed a security agreement containing a description of the collateral;

(2) value has been given; and

(3) the debtor has an interest in the collateral.

(b) A security interest is not enforceable against the debtor with respect to the real estate until it attaches.

(c) As to all future advances value is deemed to have been given at the time value was first given.

(d) A transaction, although subject to this [Act], is also subject to [(consumer credit law)] and, in case of conflict between this [Act] and that statute, that statute controls, except as provided in Part 4 of this [Act]. Failure to comply with any applicable statute has only the effect therein specified.

1. Subsection (a) states three basic requirements for creation of a security interest: a signed agreement containing a description of the real estate, value, and an interest in the collateral by the person giving the interest. Unless there is agreement that the time of attachment be postponed, when the three basic requirements are satisfied, the security interest exists. A security agreement might provide that attachment is postponed until some future date or future event. If so, the postponement is, in effect, an agreement to subordinate the security interest to all interests in the real estate which arise before the date of attachment. Such an agreement is obviously unlikely.

This section does not deal with the question of priority between the security interests and third persons who claim an interest in the collateral. That is a matter for the recording acts of the various states. See Sections 301 and 302 regarding priority as to unrecorded interests and as to future advances.

The amount of the obligation need not appear if the lender does not intend to provide future advances.

2. In Section 111(24) a security agreement is defined as an "agreement that creates or provides for a security interest." The requirement of this section is not intended to reject and does not reject the deeply rooted doctrine that a deed although absolute in form may be shown to have been in fact given as security. Under this Act, a debtor may show by parol evidence that a transfer purporting to be absolute was in fact for security. While the debtor may assert his right to return of the collateral on satisfaction of the obligation, subsection (a)(1) is in the nature of a statute of frauds so that the secured creditor may not enforce the security agreement without a writing.

3. Subsection (d) states that the provisions of regulatory statutes, such as a consumer credit law, prevail over the provisions of this Act but, as the second sentence indicates, failure to comply with the applicable regulatory law has only the effect therein specified. There is no doctrine of total voidness for illegality under this Act.

This section is the same as ULTA 3-203.

SECTION 204. USE OR DISPOSITION OF COLLATERAL WITHOUT AN ACCOUNTING. A security interest is not invalid, impaired, or fraudulent against creditors by reason of the right of the debtor to use, commingle, or dispose of all or part of the collateral or to use, commingle, or dispose of proceeds from disposition of the collateral or by reason of the failure of the secured creditor to require the debtor to account for proceeds or replace the collateral.

This section expressly validates a security interest in which the debtor is given the power to dispose of the collateral without being required to account for proceeds or substitute new collateral. Thus, a security interest in real estate which included an assignment of rents does not become void because the debtor has been given permission to collect the rents from the lessees and not thereafter account to the creditor for the rents collected. The UCC repealed the rule of Benedict v. Ratner, 268 U.S. 353, 45 S.Ct. 566, 69 L.Ed. 991 (1925) insofar as it applied to secured transactions in personal property in which the debtor was authorized to use the proceeds of disposition. This section in this Act makes a similar repeal where the collateral is rents or other real estate.

While this section repeals the rule of Benedict, rules of estoppel, consent, bona fide purchasers, and tracing may prevent the secured creditor from maintaining the security interest in rents collected and misapplied by the debtor.

This section is the same as ULTA Section 3-204.

SECTION 205. AFTER-ACQUIRED PROPERTY.

(a) Except as provided in subsection (b), a security agreement may provide that any obligation covered by the security agreement is to be secured by after-acquired real estate.

(b) Notwithstanding agreement to the contrary, a security interest given by a protected party does not attach to residential real estate under an after-acquired property clause, except with respect to contiguous real estate and real estate that is specifically described in the security agreement and which the parties intend to be security to the creditor.

1. Subsection (a) makes clear that a security interest arising by virtue of an after-acquired property clause has equal status with a security interest in collateral in which the debtor has rights at the time value is given. No further action by the secured creditor, such as taking a supplemental agreement, is required as far as claim against the debtor is concerned. This does not mean that the security interest is accorded the same priority as that in original collateral.

2. Subsection (b) limits the operation of the after-acquired property clause against a "protected party." No security interest attaches to after-acquired land in that case unless the land is contiguous to the original collateral or is described in the security agreement and is contemplated as additional collateral.

This section is identical to ULTA Section 3-205(a) and (b).

SECTION 206. DEFENSE AGAINST ASSIGNEE OF OBLIGATION.

(a) As used in this section, "obligor" means a debtor or tenant. Unless an obligor has made an enforceable agreement not to assert defenses arising out of a loan or rental agreement as provided in subsection (e), the rights of an assignee of a security agreement are subject to:

(1) all the terms of the contract between the obligor and the assignor and any defense arising therefrom; and

(2) any other defense or claim of the obligor against the assignor accruing before the obligor receives notice of the assignment.

(b) If the assignee empowers the assignor to act as servicing agent for a security agreement after it is assigned, any modification of or substitution for the contract assigned made in good faith and in the ordinary course of the assignor's business by the obligor and assignor is effective against the assignee, although the obligor has received notice of the assignment, unless the obligor has otherwise agreed or, before the modification or substitution, the obligor has received notice from the assignee that modification or substitution may not be made without the assignee's consent. However, the assignee acquires the rights of the assignor under the modified or substituted contract without further act of transfer. The assignment may provide that any modification or substitution is a breach by the assignor. If the obligor has received notice from the assignee that modification or substitution may not be made without the assignee's consent, the assignee may not unreasonably withhold consent to a modification or substitution approved by the assignor as servicing agent. A notice to pay to an assignee is not, of itself, a notice that the assignor has no power to make a modification or substitution of the agreement or that modification must have the consent of the assignee.

(c) The obligation of the obligor in the assigned agreement is discharged by performance to the assignor until the obligor receives notification of the assignment. If requested by the obligor, the assignee within ten days after the request is received shall furnish reasonable proof that an assignment has been made. The obligor need not perform to the assignee until requested proof is furnished. The obligor need not perform to the assignor until the time for furnishing proof of the assignment has expired.

(d) Notwithstanding agreement to the contrary, with respect to a security transaction entered into with a protected party by a lender whose security interest in the protected party's residential real estate is subordinate to another person's security interest in the real estate, an assignee or holder in due course of the rights of the lender is subject to all defenses of the protected party against the lender.

(e) Subject to subsection (d), if a debtor who has given a security interest in real estate agrees not to assert against an assignee defenses the debtor may have against the assignor, the agreement is enforceable by an assignee who takes the assignment for value, in good faith, and without notice of a defense, to the same extent as though the assignee were a holder in due course of a negotiable instrument under the Article on Commercial Paper (Article 3) of the Uniform Commercial Code. A debtor makes such an agreement if as a part of one transaction the debtor signs both a negotiable instrument and a security agreement.

1. Subsection (a) states the common-law rule as to an obligor's right to assert defenses against an assignee. Assignments of real estate security transactions are not uncommon. Under the operations of the Federal National Mortgage Association and other purchasers of the mortgage debt from the lender who originated the loan, assignments are increasing in importance. It is also true that many real estate security agreements involve also an assignment of the debtor's right to receive rents if the basic collateral is rental property. Two sets of problems arise on assignment of the obligation. There is the problem of disputes between the assignee and other claimants to the assignor's (lender's) assets. This section does not treat with this problem. Since a real estate security interest involves an interest in land, the priority among competing claimants to the lender's real estate interest is determined by the law on recording and priorities and, if a negotiable instrument is involved, it may also be subject to the rules concerning competing claims of Article 3 of the UCC on negotiable instruments.

2. One common practice in real estate finance is for the initial lender to assign the obligation but continue as "servicing agent" of the assignee for collection and other managerial functions. Subsection (b) treats with the right of the servicing agent who is also the assignor to continue to deal with the obligor after the assignment. For example, after an assignment of rents, may the original lessor who continues to manage the real estate make modifications of the lease without the consent of the person to whom the rents have been assigned? Subsection (b) modifies the ordinary contract rule that after an obligor learns of an assignment, he may not, without the consent of the assignee, agree with the assignor to modify the contract. Most agreements in connection with real estate are continuing and long term - e.g., an amortized mortgage and a lease. The principle that assignment of an obligation should not increase the burden of the obligor is applied to permit him and the assignor to make ordinary and minor modifications without the consent of the assignee unless the assignee has brought home to the obligor that these modifications are not longer possible. Under subsection (b), notification of the obligor that an assignment has occurred or that payment is to be made directly to the assignee is not sufficient in itself to inform the obligor that he may no longer deal with the assignor on day-to-day matters of performance.

3. There is also the question of whether payment by the debtor to assignor constitutes a discharge of his contractual duty to perform to the owner of his obligation. Subsection (c) states the normal rule even under statutes which call for recordation of assignments. Recordation of an assignment does not put the obligor on notice that he performs to the assignor at his peril. Existing law in many states expresses this rule by statute.

4. Subsection (d) permits a protected party to assert against an assignee of a seller or a second mortgagee any defense which he would have had against the seller or mortgagee even though a negotiable instrument has been taken and even though the protected party has purported to waive his right to assert defenses against an assignee. Some recent acts have subjected the assignee to "all claims and defenses" of a consumer-obligor. This Act, however, speaks only to defenses. In an assignment to a finance company or bank, the assignee does not ordinarily assume the duties of the assignor and, therefore, would not be liable for a breach of contract by the assignor, but the breach, of course, would be a ground for defense against a suit by the assignee for sums due from the protected party under the contract.

This Act is silent on the issue of whether a protected party can, upon discovery of facts which would have been a defense, recover back from an assignee payments already made. In present law, this issue is one of unjust enrichment and payment by mistake on which courts have taken varying positions. See Munson v. De Tamble Motors Co., 88 Conn. 415, 91 A. 531 (1914); Midtown Bank of Miami v. Travelers Indemnity Co., 366 F.2d 459 (5th Cir. 1966). A protected party can validly waive defenses as against assignees of first mortgagees. The vast majority of first mortgagees are institutional lenders such as savings and loan associations and banks which have financed the purchase or improvement of real estate. One of the major purposes of this Act is to develop and encourage a secondary market for home financing mortgages, and subjecting purchasers of first mortgages to possible unknown defenses might substantially dampen the salability of those mortgages.

5. Except as limited by subsection (d), subsection (e) expressly validates waiver of defenses clauses in mortgages, installment contracts, leases, or other contracts subject to this Act. The validation, however, is only as to defenses that would be cut off if a negotiable instrument were used. Therefore, a waiver of defenses clause, even though it purports to waive the obligor's right to assert "any defense" against an assignee, is not effective as to "real defenses" that would be available to a party on a negotiable instrument against a holder in due course. See UCC, Section 3-305. Similarly, a contract provision waiving the right to assert "real defenses" would be ineffective.

This section is taken from ULTA Sections 3-206, 1-313(b), and 1-314(a).

SECTION 207. POWER OF DEBTOR TO LEASE.

(a) Except as provided in this section or unless the secured creditor has agreed otherwise, a tenant under a lease executed by the debtor after a security interest in the real estate is perfected or under a lease that has been subordinated thereto by written agreement of the tenant has no greater right to remain in possession under the lease term than has the debtor.

(b) Notwithstanding agreement to the contrary in the security agreement and except as provided in subsections (c) and (d), a lease of residential real estate made in ordinary course by a debtor in possession of collateral is effective against the secured creditor for not more than two years after the date of the lease if the lease:

(1) reserves a reasonable rent in the circumstances existing at the time of leasing;

(2) contains a promise by the tenant for payment of rent in periodic installments payable not more than three months in advance;

(3) provides for reentry or termination of the lease within not more than two months after default by the tenant; and

(4) provides that the tenant is entitled to take possession not more than six months after the date of the lease or, in case of a building under construction, not later than completion of the unit subject to lease.

(c) Subsection (b) does not apply to leases made by or on behalf of a debtor as to whom a voluntary or involuntary petition pursuant to the Bankruptcy Code has been filed or a receivership proceeding instituted.

(d) A clause in a lease protected under subsection (b) granting the tenant a right of renewal for another term or an option to purchase is invalid against the holder of a security interest otherwise entitled to priority over the leasehold interest under subsection (a).

(e) The debtor and secured creditor, by agreement in writing, whether or not contained in the security agreement, may confer further leasing powers on the debtor, and on exercise of the power conferred, the lease takes priority in accordance with the authorization.

1. This section states the priority of a secured lender over leases executed by the debtor. The lender's right to take possession after default is stated in Section 503. The significance of that possession turns in part on the present section. If under priority rules the lease between a debtor as landlord and a tenant is superior to the security interest, the right to take possession is basically a right to manage the collateral and to collect rent of the lessee who cannot be ousted. See Sections 210 and 505 as to the right to collect rents. If the lease is junior to the security interest, then the present section is applicable. Under subsection (a) the creditor may exercise his possessory right by ousting the lessee.

2. Subsection (b) is new and changes existing law. The basic principle of the section is that a landlord of rental property is closely analogous to a person in the business of selling chattels so that leases executed in ordinary course by the residential landlord-debtor are, in the circumstances set forth in the section, superior to the claims of a prior secured creditor. (Compare the rule stated in Section 9-307(1) of the UCC). Thus, in an apartment building where the leases are executed after the security interest attaches to the property the debtor may execute leases which the lender, even after foreclosure, may not touch for two years. The lessor-debtor is prevented from using this power to "milk" the building, however, by the requirements stated in subsection (b). Also, under subsection (d), renewal provisions in leases falling within subsection (b) are not good as against the prior secured creditor.

Subsection (b) does not apply to situations in which the debtor is in a bankruptcy act proceeding or a receivership proceeding.

3. Subsection (e) states what should be a truism: the creditor may expand the power of the debtor and may authorize the debtor to execute longer term leases.

SECTION 208. ALIENABILITY OF DEBTOR'S INTEREST; RIGHT TO ACCELERATE ON TRANSFER.

(a) Notwithstanding any agreement to the contrary, a debtor's right in collateral may be voluntarily or involuntarily transferred. The security agreement may provide that a sale without consent of the secured creditor is a ground for acceleration of the debt. The security agreement may also provide that the granting of a security interest by a debtor other than a protected party is a ground for acceleration of that debt.

(b) Notwithstanding any agreement to the contrary, if a secured creditor demands a rate of interest higher than that specified in the security agreement or other consideration, exclusive of reimbursement for reasonable expenses and reasonable assumption charges, as a condition of approval of a transfer by a protected party of the protected party's interest in residential real estate subject to a security interest, and the higher rate of interest or other consideration is not agreed to, a prepayment penalty may not be charged if the debt is paid in full within three months after the failure to agree to a higher rate of interest.

1. The first sentence of subsection (a) is intended to provide that the debtor has a power to convey an interest in the collateral even though the security agreement attempts to restrict that power. This is the law today as to mortgages. If the security interest is in the form of a lease or installment land contract, some courts have upheld the restraint on alienation. This subsection rejects those cases.

The second sentence makes clear, however, that even though the debtor has the power to convey, the security agreement may contain a "due-on-sale" clause or other clause providing that the debt is accelerated if a transfer is made without the creditor's consent.

The five states (Arizona, Michigan, Minnesota, New Mexico, and Utah) which elected to override federal preemption of due-on-sale restrictions should consider whether or not to revise this sentence to conform to contrary state law.

One reason for the due-on-sale clause is that of empowering the security creditor to get rid of an old security agreement of long duration which has an interest rate substantially below market. The clause restricts the power of a debtor to sell his favorable interest rate.

In addition, the granting of an additional security interest by a nonprotected partymay be the basis of acceleration if the security agreement so provides.

2. Subsection (b) treats a conflict between the policy of two mortgage clauses. The due-on-sale clause is designed to discourage sales without clearing up the old mortgage. Also in the same instrument there may be a clause imposing a penalty for prepayment. The section provides that if the creditor conditions his approval of a transfer on payment of a higher interest rate than that applicable to the existing mortgage, the creditor cannot then, if the debtor does make the demanded prepayment rather than acceding to the higher interest rate, demand a prepayment penalty.

3. Regulations of the Federal Home Loan Bank Board contain limitations on the right to impose prepayment penalties under certain circumstances with respect to any loan secured by a home occupied or to be occupied by the debtor. See CFR 591.5(b).

4. This section is similar to ULTA Section 3-208.

SECTION 209. REQUEST FOR STATEMENT OF ACCOUNT.

(a) A debtor may request from the secured creditor a statement of account between them as of a specified date. The secured creditor shall comply with a written request within two weeks after receipt by sending a written statement of account that includes the principal amount due and accrued interest, other sums due, the interest rate in effect, including per diem for the current interest period, and indicates the status of any escrow account being held by the secured creditor in connection with the loan. A secured creditor who without reasonable excuse fails to comply with a written request is liable for any damage thereby caused to the debtor. A successor in interest is not subject to this section until the successor receives a written request.

(b) Subject to subsection (c), a debtor is entitled to request a statement once every six months without charge. The secured creditor may impose a reasonable charge for each additional statement furnished.

(c) If a secured creditor without request provides annually or more frequently a statement containing the information specified in subsection (a), the secured creditor may impose a reasonable charge for any statement requested as of a date within 21 days before or after the date of a periodic statement.

(d) A statement provided pursuant to this section and relied upon by a purchaser or any other interested party in good faith to the party's detriment is binding upon the secured creditor with respect to that party.

1. The purpose of this section is to assure the debtor a right to the information necessary in arranging a sale or other transfer of the collateral. If the debtor, for example, wishes to sell for "cash" there are calculations at closing which must be made, such as the amount of the unpaid obligation and interest accrued since the last payment by debtor to creditor. This section requires the creditor to make a statement to the debtor of the unpaid obligation. This burden is not heavy today because technological improvements in calculators and in electronic recordkeeping permit quick answers.

2. The section grants the debtor a right to a statement without charge notwithstanding agreement otherwise. It limits the harassment possibilities and onerousness of this right by controlling the number of times the debtor can get a statement without charge (see subsection (b)). If the creditor sends statements at least annually, subsection (c) further restricts the debtor's privilege of getting a statement without charge.

This section is the same as ULTA Section 3-209.

SECTION 210. SECURITY INTEREST IN CERTAIN RIGHTS AND CLAIMS AND IN CROPS.

(a) A security interest attaches without explicit agreement to:

(1) any right the debtor has against a seller for breach of the contract to convey or of the warranties in the conveyance;

(2) any claim of the debtor for payment for any portion of the collateral taken in an eminent domain proceeding;

(3) any insurance payable to the debtor because of loss of or damage to the collateral; and

(4) any claim of the debtor against third parties for loss of or damage to the collateral.

(b) An obligation described in subsection (a) is discharged by performance to the debtor until the obligor receives notification that the secured creditor has a security interest entitling the secured creditor to receive the performance and that performance is to be made to the secured creditor. If requested by the obligor, the secured creditor, within ten days after the request is received, shall furnish reasonable proof of the secured creditor's right to the performance. The obligor need not perform to the secured creditor until the requested proof is furnished. The obligor need not perform to the debtor until the ten-day period has expired or the proof has been received, whichever occurs first.

(c) A security interest in real estate attaches to crops and profits from the real estate only if the security agreement so provides.

1. In many land financing transactions today the secured creditor in reality looks to the revenue coming from the land to furnish the cash flow for debt service. While it is true that in case of default the essence of his security is his ability to realize on the capital asset, the land, it is also true that income and cash flow is an important consideration in his estimate of his security. It is also true, however, that the cash flow from the land is an important independent asset of the debtor. The farmer plants his crop in the land subject to the security interest and after harvest sells or uses it, perhaps for purposes independent of the mortgage debt. In any event, the arrangements which the debtor makes while he is in possession are themselves assets of the debtor and in the world of modern financing may be used as collateral for other obligations. Thus, a farmer who is a mortgagor may seek to subject his crop to a security interest independent of the land. Similarly, the landlord of an apartment or office building may have a real estate mortgage, he may thereafter make leases for short or long periods obligating the lessee to pay rent, and he may thereafter assign his right to future rent from existing leases.

Thus, real estate security has a problem of "proceeds," basically cash flow resulting from the use of real estate. As between secured creditor and debtor, this section states the rights to rents and profits accruing between the making of the mortgage and foreclosure. Prior law gave no clear answer to this problem, in part because the mortgaging of rents and crops apart from the land is a late development. Basically, prior law attempted to resolve the right of lender and debtor to rents and crops by asking who is entitled to possession. Since possession normally is an attribute of having "legal title," "title theory" states tended to get different answers to some of the questions dealt with in this section than "lien theory" states.

2. Subsection (a)(1) concerns claims for breach of warranty of both title and quality. If, for example, the security interest is a purchase money security interest and the seller has breached his warranty of quality to the buyer so that the value of the real estate as it is is substantially less than the market price it would have had if it had been as warranted, the buyer has a claim for damages against the seller. As between the buyer and his own lender, the purchase money creditor, that right to damages is a "proceed" which the secured creditor may claim.

3. Subsection (c) states a basic rule to serve as the benchmark of drafting clauses in security agreements: the real estate secured creditor, whether he appears to have title or not is not entitled to crops or other profits unless his security agreement provides that they are additional collateral for the debt; on the other hand, the secured creditor is entitled to rents unless his security agreement specifically provides that rents are not part of the security. This distinction in the treatment of rents and of crops and profits is based upon the belief that such a distinction fits a developing belief of lenders and borrowers as to the rights of the lender.

As a matter of statutory construction, the rule that rents are part of the security unless excluded by the security agreement arises from the fact that, under Section 111(20), rents are part of the real estate and from the fact that they are not statutorily excluded from the reach of the security agreement by subsection (c) of this section nor by any other section. That is, the usual security agreement will convey all the debtor's interest in particular real estate and, under this Act, one of the interests conveyed will be the right to rents. Once rents are collected they are, of course, not real estate but the proceeds from real estate. See Section 505 as to priority between the secured party and third parties as to rents actually collected by the third party.

As this Comment makes clear, the word "profits" in subsection (c) is not intended to include rents.

Even if a security agreement has excluded rents from the security, a secured creditor who has taken possession of the collateral upon debtor's default is given the power to collect the rents (see Section 505).

SECTION 211. SECURED PARTY'S EQUITY IN COLLATERAL. Notwithstanding a rule denominated "fettering," "clogging the equity of redemption," or "claiming a collateral advantage" or a rule of similar import:

(1) a secured party, without adversely affecting its security interest, may acquire from a debtor [other than a protected party] any direct or indirect present or future ownership interest in the collateral, including rights to any income, proceeds or increase in value derived from the collateral; and

(2) an option granted by a debtor [other than a protected party] to a secured party to acquire an interest in the collateral takes priority as of the date of its recording and is effective according to its terms if the right to exercise the option is not dependent upon the occurrence of a default under the security agreement.

1. This section is based upon the Congressional finding set forth in Section 801 of the Alternative Mortgage Transaction Parity Act of 1982 (Title VIII of the Garn-St. Germain Depository Institutions Act of 1982, P.L. 97-320) that "alternative mortgage transactions are essential to the provision of an adequate supply of credit secured by residential property necessary to meet the demand expected during the 1980's." The common-law doctrine prohibiting a mortgage from "clogging" the equity of redemption is a major impediment to alternative mortgage transactions. See, for example, Humble Oil & Refining Company v. Doerr, 123 N.J. Super. 530, 303 A.2d 898 (1973). The purpose of this section is to protect shared-appreciation mortgages, contingent interest mortgages, and other equity participation arrangements from impairment by the clogging doctrine in all cases in which that doctrine has not already been abrogated by federal law.

2. This section applies to all security agreements, whether or not executed by a protected party. However, the words "other than a protected party" have been bracketed in subsections (a) and (b) to enable those states (Maine, Massachusetts, New York, South Carolina, and Wisconsin) which have elected to override the federal preemption of alternative mortgage transactions applicable to residential mortgages to include the bracketed language if they wish to discourage protected parties from engaging in alternative mortgage transactions.

3. Subsection (b) resolves special problems applicable to so-called "convertible mortgages," under which a mortgagee is given an option to purchase the mortgaged property. In this type of transaction, if the option rights are dependent upon the mortgagor's default, it might be possible to circumvent the default procedures mandated by Part 5 of this Act. Accordingly, subsection (b) provides that the option is effective according to its terms only if the option is exercisable without regard to the existence of a default. Subsection (b) also assures the secured party that the option takes priority as of the date of its recording, thereby protecting the optionee against intervening liens of record in states where an optionee under an unexercised option is not considered a bona fide purchaser under the applicable recording statute beyond the consideration paid for the option.

4. This section does not displace the state law of "equitable subordination," under which a lender who retains excessive management control over the collateral may be subordinated to general creditors.

SECTION 301. PRIORITY BETWEEN CONFLICTING SECURITY INTERESTS IN SAME COLLATERAL.

(a) So long as conflicting security interests remain unrecorded, the first to attach has priority.

(b) Except as provided in Section 302, the priority of a recorded security interest is determined according to the law governing recording and priority.

This section refers to other law of the state for determination of priority issues except for two matters: (1) priority between unrecorded security interests and (2) priority as to future advances. The rule stated as to unrecorded security interests is simple: so long as neither is recorded, the first in time prevails. With the exception of priorities regarding future advances, dealt with in Section 302, and certain option rights in the collateral described in Section 211, recorded security interests are governed by a state's general law governing recording and priority.

SECTION 302. FUTURE ADVANCES.

(a) An obligation secured by a security agreement may include future advances, whether or not future advances are made pursuant to commitment. However, except for future advances made to protect collateral, the maximum amount of future advances secured at any time may not exceed the maximum amount stated in the agreement, together with interest accrued but unpaid on those advances.

(b) A future advance made to protect collateral is secured by a security agreement even though the agreement does not provide for future advances, or the advances cause the total obligation to exceed the maximum amount stated in the security agreement.

(c) [Except as expressly set forth in (cite reference to state mechanics' lien laws, if any)] a future advance made under a recorded security agreement takes priority as of the date of the recording:

(1) if made pursuant to a commitment entered into before the secured creditor had knowledge of an intervening interest, to the extent of the outstanding future advances that do not exceed the maximum amount stated in the record;

(2) if not made pursuant to a commitment entered into before the secured creditor had knowledge of an intervening interest, to the extent of future advances that are outstanding when the secured creditor obtained knowledge of the intervening interest and do not exceed the maximum amount stated in the record.

(d) A future advance made to protect collateral takes priority as of the date a security agreement is recorded, even though the secured creditor has knowledge of an intervening interest at the time the future advance is made.

1. A security agreement may provide that it secures not only the advance made at the time it first attaches but also future advances. There is a limitation, however, in the last sentence of subsection (a): the future advance secured must be within the maximum amount stated in the agreement. Thus, in an amortized mortgage the security agreement may provide that the debtor may borrow again up to the initial amount of the debt. It may also provide that the debtor may borrow any sum unrelated to the initial obligation up to an amount stated in the security agreement. If the debtor becomes obligated to the secured creditor for a sum in excess of these stated limits, the obligation is not secured by the real estate. The rule stated in subsection (b) is a rule of attachment rather than a rule of priority.

2. Two exceptions to the requirement that the maximum amount be stated in the security agreement are provided in subsection (b) although they may be described as representing a single principle: sums advanced by the lender to pay current charges necessary to the protection of the security and sums advanced to complete a structure that is part of the security are secured by the real estate even though the amount of these advances, when added to other advances, exceeds the stated maximum. If the secured creditor pays, for example, a real estate tax claim which would be prior to his security interest, the creditor may make that advance and have it secured by the real estate. Under subsection (b), the security agreement covers advances made for the reasonable protection of the security interest or for the completion of agreed improvements under a construction security agreement whether or not the agreement specifically provides that it covers future advances for those or any other purposes. Under this subsection, therefore, a secured creditor has, in all cases, an absolute priority as to advances made for the reasonable protection of the security or for completion of agreed improvements under a construction security agreement.

3. Subsection (c) addresses the need to provide an orderly method to determine priorities between (1) the lien securing future advances made by secured lenders and (2) conflicting intervening liens, including mechanic's liens. This subsection must be considered in the light of changes incorporated in this Act not included in ULTA. First, Section 110 of this Act expressly recognizes that the priority of future advances is covered by the rules set forth in this section, even with respect to nonconsensual liens. Second, subsection (c), while providing a choice to legislatures, elects to follow the rule that future advances of the types described will take priority over mechanics' liens. Adoption of the bracketed language will permit a state to delegate resolution of the relative priorities to the state's mechanic's lien laws, without reference to this Act. That approach is not recommended for those states which desire to facilitate loans not fully disbursed initially such as revolving credit loans secured by real estate collateral (including "equity" loans commonly available to home owners), because inclusion of the bracketed language would require revolving credit lenders to search record title to the collateral at the time of each advancement.

4. Subsection (c) is based upon the familiar rule that "obligatory" advances take priority as of the date of commitment, while "nonobligatory" advances generally take priority as of the date of disbursement. The phrase "pursuant to commitment" is defined in Section 111(19), and that definition is intended to eliminate many of the problems created by the "obligatory" test.

Under subsection (c)(1), if a future advance is made under a recorded security agreement pursuant to a commitment entered into before the creditor had knowledge of a conflicting intervening interest, it takes priority over that interest so long as the total amount outstanding as to which priority is claimed does not exceed the maximum amount stated in the record.

This is true even when the lender has actual knowledge of the intervening interest. Furthermore, if a security agreement states that it secures future advances so long as the total secured debt does not exceed $200,000 at any one time, and the lender then advances $200,000 of which $150,000 is thereafter repaid and readvanced, the full $200,000 not yet repaid has priority over an intervening interest. However, under subsection (c)(2), if such future advances are not made "pursuant to commitment," then the advances take priority over intervening interests only to the extent of amounts outstanding when actual knowledge was first obtained; the constructive notice provided by the land records is not actual knowledge. See § 112.

5. Under subsection (d), "future advances made to protect the collateral" take priority as of the date the security agreement is recorded, even though the secured creditor has knowledge of an intervening interest at the time of the advance. For example, payment of a prior security interest, as in a wrap-around mortgage, or payments for repairs necessary to prevent deterioration of the real estate, would qualify. In construction lending, advances made to assure completion of the improvement fall within that category if the requirements of subsection 111(12)(ii) are fulfilled. Subsection (d) applies whether or not the bracketed language in subsection (c) is adopted.

6. See § 505 for priority rules as to rents.

State usury regulation of certain loans was preempted by the Depository Institutions Deregulation and Monetary Control Act of 1980, Public Law 96-161, as extended by Public Law 96-221 ("DIDMCA"). Section 501 of DIDMCA preempted entirely state regulation of loans secured by "federally related" first lien mortgages on residential real estate, stock allocated to a dwelling unit, and residential manufactured homes made after March 31, 1980. Sections 511 and 512 of DIDMCA allowed any person to charge interest at a rate of not more than 5% in excess of the Federal Reserve discount rate on 90-day commercial paper, including any surcharge, on any business or agricultural loan, secured or unsecured, if the loan is $25,000.00 or more ($1,000.00 if made after October 8, 1980) and if the loan was made or committed to be made on or after April 1, 1980, and prior to April 1, 1983, the date on which the preemption for business and agricultural loans expired. The three-year period for states to override this preemption ended on March 31, 1983, and 15 states elected to override some portion of the federal preemption. They are: Colorado, Georgia, Hawaii, Iowa, Kansas, Maine, Massachusetts, Minnesota, Nebraska, Nevada, North Carolina, Puerto Rico, South Carolina, South Dakota, and Wisconsin.

Part 4 of this Act contains two alternative treatments of usury. Alternative A (Section 403) allows the parties to a loan secured by real estate to agree upon any finance and additional charges for the loan. It is designed for adoption by the states which did not elect to override the federal preemption, if they are also willing to extend the Alternative A policy to business and agricultural loans and junior mortgages on residential real estate, as is recommended in Section 403. By choosing Alternative A, usury restrictions on mortgages can be abrogated in their entirety. Alternative A does not distinguish between protected and nonprotected parties.

Alternative B (Sections 403 and 404) is the same as Alternative A, except for protected parties. As to protected parties a maximum finance charge can be stated, but no maximum finance charge is suggested in Alternative B. Alternative B is designed for use by the states which elected to override the federal preemption and those which wish to impose usury regulations only with respect to protected parties. Those states which choose Alternative B can confine usury restrictions to mortgages by protected parties and avail themselves of the definitions of "finance charge" and "additional charges" contained in Sections 401 and 402 as well as eliminate certain of the harsher remedies for usury violations which are inconsistent with a modernized treatment of this difficult issue.

SECTION 401. DEFINITIONS. In this Part, unless the context otherwise requires, "finance charge" means the sum of all charges except those excluded as "additional charges" under Section 402, payable directly or indirectly by the debtor and imposed directly or indirectly by the creditor as an incident to the extension of credit, including any of the following types of charges that apply:

(1) interest or any amount payable under a point, discount, or other system of charges, however denominated;

(2) time price differential, credit service, service, carrying, or other charge, however denominated;

(3) premium or other charge for any guarantee of insurance protecting the creditor against the debtor's default or other credit loss; and

(4) charges incurred for investigating the collateral or creditworthiness of the debtor or for commissions or brokerage for obtaining the credit irrespective of the person to whom the charges are paid or payable, unless the creditor had no notice of the charges when the credit was granted.

The definition of "finance charge" derives from the Uniform Consumer Credit Code (UCCC) Section 1.301(20) and is substantially similar to the concept of finance charge embodied in Regulation Z. In general, charges "incident to or as a condition of the extension of credit" are finance charges, whatever the parties call them, if imposed by the creditor on the consumer.

SECTION 402. ADDITIONAL CHARGES.

(a) In addition to the finance charge permitted by Section 403, a creditor subject to that section may contract for and receive the following additional charges:

(1) official fees and taxes;

(2) charges for insurance as described in subsection (b);

(3) the following charges, if they are bona fide, reasonable in amount, and not for the purpose of circumvention or evasion of this [Act]:

(i) fees or premiums for title examination, abstract of title, title insurance, or similar purposes including surveys,

(ii) fees for preparation of a deed, settlement statement, or other document, if not paid to the creditor or a person related to the creditor,

(iii) escrows for future payments of taxes including assessments for improvements, insurance, and water, sewer, and land rents, and

(iv) fees for notarizing deeds and other documents, if not paid to the creditor or a person related to the creditor;

(4) charges for other benefits, including insurance, conferred on the debtor, if the benefits are of value to the debtor and the charges are reasonable in relation to the benefits and are of a type which is not for credit; and

(5) charges, not exceeding $5 or five percent of the unpaid amount, whichever is less, as a result of delinquency, if made for actual unanticipated late payment, delinquency, default, or other like occurrence, unless the parties agree that they are finance charges.

(b) In addition to the finance charge permitted by Section 403, a creditor may contract for and receive an additional charge for insurance written in connection with the transaction:

(1) as to insurance against loss of or damage to property or against liability arising out of the ownership or use of property, if the creditor furnishes a clear, conspicuous, and specific statement in writing to the debtor setting forth the cost of the insurance if obtained from or through the creditor and stating that the debtor may choose the person through whom the insurance is to be obtained;

(2) as to credit insurance providing life, accident, or health coverage, if (i) the insurance coverage is not required by the creditor, (ii) this fact is clearly and conspicuously disclosed in writing to the protected party, and (iii) in order to obtain the insurance in connection with the extension of credit the protected party gives specific, dated, and separately affirmative written indication of the protected party's desire to do so after having received written disclosure of the cost thereof; and

(3) as to creditor's single interest insurance, but only:

(i) to the extent that the insurer has no right of subrogation against the protected party,

(ii) to the extent that the insurance does not duplicate the coverage of other insurance under which loss is payable to the creditor as the creditor's interest may appear, against loss of or damage to property for which a separate charge is made to the protected party pursuant to subsection (b)(1), and

(iii) if the creditor furnishes to the protected party a clear, conspicuous, and specific statement in writing setting forth the cost of any insurance obtained from or through the creditor and stating that the protected party may choose the person through whom the insurance is to be obtained.

1. In general, charges designated as additional charges fall roughly into three classes: (1) those that would likely have been incurred had there been no credit extension (e.g., closing costs); (2) those closely related to the extension of credit but providing valuable subsidiary benefits to the consumer (e.g., life, accident, health, and property insurance); and (3) those ultimately payable to third parties with no portion of the charge returnable to the creditor by commission or otherwise (e.g., taxes, official fees for perfecting security interests). These classes are nonexclusive; for instance, property insurance would sometimes fall within class (1) and closing costs fit into class (3) as well as (1).

2. Though this section coincides with Regulation Z in excluding premiums for insurance from the finance charge under certain stated conditions, it varies from Regulation Z in that it does not include appraisal fees and credit report charges as additional charges. Section 401(4) expressly designates these charges as part of the finance charge. Another variation from Truth in Lending is the treatment of vendor's single interest insurance (V.S.I.). A Federal Reserve Interpretation allows exclusion of the premium for V.S.I. insurance from the finance charge. Paragraph (3) of subsection (b) adopts a more sophisticated test and allows the premium to be treated as an additional charge in limited situations in which the vendor's single interest coverage does not duplicate the coverage of other insurance under which loss is payable to the creditor as his interest may appear, against loss of or damage to property for which a separate charge is made to the consumer. In this case, the charge is sufficiently beneficial to the consumer to justify classifying the premium as an additional charge.

This section is similar to UCCC, Section 3.404.

[SECTION 403. MAXIMUM FINANCE CHARGE. In an obligation secured by real estate, the parties may contract for and receive any finance charge and additional charge agreed upon.]

See Introductory Comment to Part 4.

[SECTION 403. MAXIMUM FINANCE CHARGE.

(a) Except as provided in subsection (b) as to protected parties, in all obligations secured by real estate, the parties may contract for and receive any finance charge and additional charge agreed upon.

(b) As to credit extended to a protected party (Section 113(a)), a creditor may not contract for or receive a finance charge, calculated according to the actuarial method, exceeding [ ] percent per year on the unpaid balances of the amount financed.

(c) If a creditor making a construction loan to a protected party has given a commitment to make a second loan to pay the construction loan or, as a condition of making the construction loan, has required a commitment from another creditor to make a loan to pay the construction loan, the rate of finance charge on the construction loan must be determined by treating the two loans as a single obligation, combining the interest and other charges applicable to the two loans, and spreading them over their combined term.

(d) For the purpose of calculating the rate according to the actuarial method, the court shall assume that the obligation will be paid according to the agreed terms and will not be paid before the end of the agreed term. For that purpose, the finance charge includes any prepaid items required to be included in the finance charge in accordance with the method used for disclosure under the Federal Truth in Lending Act. The calculation may be made entirely on the basis of a 360-day or a 365-day year but not on a mixed basis.

Unlike the Uniform Consumer Credit Code first promulgated in 1968, this Act does not contain a statement of a maximum interest rate. UCCC recommended, as does Alternative B for this Act, that there should be no limitation on agreed interest rates other than for mortgages by protected parties.

SECTION 404. PENALTY FOR EXCESS CHARGE AND EFFECT ON SECURITY.

(a) If a secured creditor contracts for or receives a charge in excess of that permitted under this Part, the court, in addition to requiring restitution of any excess charges paid, shall award damages of three times the excess amount received by the creditor, but not more than $5,000.

(b) Except to the extent that recalculation of the finance charge and reallocation of payments made between the obligation and the finance charge allowed results in the obligation being discharged by performance, the real estate security interest continues to exist unimpaired even though the charges and payments have been found to be excessive and a penalty has been imposed under this section.

(c) In a judicial proceeding in which it is found that a creditor has contracted for or received a charge in excess of that permitted under Section 403, the court shall award to the protected party the cost of the proceeding and reasonable attorney's fees.]

The penalty applies only to excess amounts actually received, not to amounts contracted for but not yet paid. In determining the excess amounts received, payments are allocated between interest and principal according to the contract provisions. A creditor does not lose his security interest as a result of an excess interest charge.

SECTION 501. RIGHTS AND REMEDIES.

(a) If a debtor is in default under a security agreement, the secured creditor has the rights and remedies provided in this Part and, except as limited by subsection (d), those provided in the security agreement, including the right to reduce the personal obligation of the secured creditor's claim to judgment.

(b) If a secured creditor reduces its claim to judgment before foreclosing under this Part, the judgment lien takes its normal priority as a judgment lien on the real estate, unless the judgment specifies that the obligation was secured by real estate under a recorded security agreement identified in the judgment. If the judgment states that the obligation was secured by real estate under a recorded security agreement identified therein and an appropriate notation to that effect is made on each docket entry of the judgment, the lien of the judgment relates back to and takes the priority of the security interest in the real estate.

(c) A secured creditor who has foreclosed under this Part may not bring a judicial proceeding to recover the debt except as provided in this Part.

(d) Rights granted to the debtor and obligations imposed on the secured creditor under this Part may not be waived or modified as between creditor and debtor, except as specifically permitted. However, the parties by agreement may determine the standards by which the fulfillment of those rights and obligations is to be measured if the standards are not manifestly unreasonable.

(e) If the security agreement covers both real estate and personal property, the secured creditor may proceed under this Part as to both the real estate and personal property.

(f) In this Part, "foreclosure" and "right to foreclosure" mean foreclosure by a sale conducted by the secured creditor or third party under Section 509 or foreclosure by judicial sale under Section 510.

(g) In this Part, "default" cannot occur until after the expiration of any applicable grace period or notice to comply, or both, to which the debtor is entitled.

1. The rights of a secured creditor in the real estate after the debtor's default are the essence of a real estate security transaction. These rights distinguish the secured creditor from the unsecured claimant. This section and the following sections specify those rights as well as the limitations on their free exercise which legislative and judicial policy has required, almost from time immemorial, for the protection not only of the defaulting debtor but also of other creditors.

2. The rights and remedies in this Part are dependent on a "default." This term is not defined in this Act: a "default" is the failure of the debtor to perform an obligation which the security agreement provides is to be regarded as a "default." If this event has occurred, the remedies of this Part become available. While "default" makes available the rights and processes set forth in this Part, there are in various sections certain minimum times which must expire before the creditor can proceed. The minimum time is not stated as a minimum period after default but as a minimum period after an event specified in the statute. Thus, for a protected party a "notice of intention to foreclose" must be given, but under Section 507(d) it cannot be given until five weeks after a money obligation is not performed when "due." Thus, in an amortized secured loan calling for payments on the first of each month and providing that nonpayment is a "default," the notice of intention to foreclose cannot be sent until five weeks after an uncured nonpayment. If the security agreement builds into the contract as it typically does a contractual "grace period" by providing that default does not occur until an installment remains unpaid for 30 days, the earliest time a notice of intention to foreclose can be sent remains the same as in the form described earlier - five weeks after an uncured nonpayment rather than five weeks after default. In a typical situation, there are informal efforts by the lender to induce the debtor to cure the nonpayment before the creditor decides foreclosure is the only alternative. By using nonpayment as the point of beginning of time which must elapse rather than default, the Act does not penalize the lender who expresses a grace period in his security agreement or who takes informal action to have the nonpayment cured before he determines to proceed to foreclose.

However, under subsection (g) "default" cannot occur until the expiration of any grace period or period of notice to which the debtor is entitled. If, therefore, a security agreement with a protected party provided a six weeks grace period for making payments, the notice of intention to foreclose specified by Section 507(d) would have to be delayed until the expiration of six weeks after nonpayment, rather than five weeks. The notice could, however, be given immediately upon "default" since the default occurs more than five weeks after the nonpayment.

3. Subsection (a) makes clear that the statutory statement of rights and remedies after default is not an exclusive list of rights and remedies. Freedom of contract is maintained as the basic principle of the Act. There are limitations on freedom of contract as to creditor's rights, but they are listed in subsection (d). The rights of the debtor listed in that subsection may not be waived or varied except as therein provided.

4. Under subsection (a), the secured creditor is entitled to reduce his claim to judgment, if there is personal obligation, or to foreclose the debtor's interest in the collateral and thereafter claim a "deficiency judgment." This choice to the creditor presents a potential conflict between the rights given a judgment creditor by applicable law and the priority system for judgments and the rights given a debtor under real estate security law. Under existing law in most states, a lender may proceed concurrently or successively to foreclose the security interest and to proceed to judgment upon the note or other evidence of personal obligation. This section continues that option, and it therefore rejects the so-called "one-action" rule which exists in a few states.

Under the one-action rule, the creditor may not disregard his security even if he wishes to do so. However, in the absence of some ground of liability such as waste or fraud, a protected party has no "personal obligation" on a purchase money security interest. Therefore, the purchase money secured party is not entitled to a personal judgment against the protected party debtor but is limited to foreclosure of his security interest.

If the creditor forecloses first, his subsequent action on the debt is controlled by this Part, primarily to protect the policy of restricting deficiency judgments (see Section 511(b)) and to prevent double recovery. If the creditor has proceeded to judgment first, the judgment establishes a new priority, perhaps less effective than the original priority unless the judgment identifies its obligation with the security agreement.

5. Subsection (e) is necessary to coordinate foreclosure under this Part with foreclosure under Article 9 of the UCC. Section 9-501(4) of the UCC permits the secured creditor to foreclose a security interest covering, in the same agreement, both personal property and real estate under real estate law or to separate the two types of property and pursue separate types of foreclosure. This subsection authorizes this Act to be used to foreclose the security interest in personal property, if the creditor chooses, but it does not permit foreclosure of the real estate security under Article 9 of the UCC.

6. Subsection (f) is a definitional section. This Part requires the security agreement to provide specially for some of the remedies of the creditor. Threemethods of liquidating the transaction are provided in Section 507 - exercise of a statutory power of sale, judicial foreclosure, and a form of strict foreclosure where the secured creditor takes indefeasible title to the land. The term "foreclosure" is made applicable to all three processes.

This section is the same as ULTA Section 3-501.

SECTION 502. ACCELERATION.

[(a)] To exercise a right to accelerate against a debtor, a creditor must give written notice after the debtor's failure to perform that if the failure is not cured before a date stated, which may not be earlier than 15 days after the date the notice is given, or in any event earlier than the expiration of the grace period in the security agreement, the entire debt will be due. This provision may be waived or modified by a debtor other than a protected party.

[(b) If the debt is accelerated, no prepayment penalty may be imposed by the creditor.]

1. Subsection (a) sets forth basic notice protection for a debtor, which may not be waived or modified by a debtor who is a protected party.

2. Optional subsection (b) is intended to prevent a creditor from imposing a prepayment penalty solely by reason of the debtor's default and is not intended to sanction avoidance of a prepayment penalty through deliberate default by a debtor as part of a plan to sell or refinance the collateral following acceleration of the debt. Because of the inherent difficulty of distinguishing between these two situations, this subsection is optional and should be adopted only after careful consideration of the opportunities for its abuse in avoiding valid prepayment charges. In keeping with the policy underlying § 208(b), a state desiring to include this subsection might want to consider limiting its applicability to protected parties.

Subsection (a) is the same as ULTA § 3-512(b). Subsection (b) is a new optional addition.

SECTION 503. CREDITOR'S RIGHT TO POSSESSION.

(a) Except as provided in subsection (c), if the security agreement provides that the secured creditor may take possession without judicial proceeding, the secured creditor, on debtor's default, may take possession if the secured creditor can do so without breaching the peace.

(b) Except as provided in subsection (c), a secured creditor, on the debtor's default, may take possession of the real estate by judicial proceeding.

(c) A provision in a security agreement giving a secured creditor the right to take possession without judicial proceeding is not effective against a protected party as to any dwelling unit occupied as a residence by the protected party or an individual related to the protected party. As against a protected party, the court shall stay execution of any order for possession made under subsection (b) as to any dwelling unit occupied as a residence by the protected party or an individual related to the protected party until after the debtor's interest in the real estate has been terminated, unless the court finds that termination of the debtor's possession at an earlier time is necessary to protect the value of the real estate against deterioration or destruction.

(d) In a judicial proceeding to remove the debtor from possession before termination of the debtor's interest, the debtor may assert claims and defenses against the secured creditor, including a claim that there has been no default.

(e) Except as against a protected party, if more than one secured creditor is entitled to take possession, the secured creditor whose security interest has priority also has priority of right to take possession. As against a protected party, the right to take possession before termination of the debtor's interest may be exercised only by a secured creditor whose claim is prior to all other secured creditors.

(f) Any possession of the secured creditor under this section is subject to the terms of any lease executed by the debtor before the creditor takes possession, even though the lessee's right under the lease terminates on termination of the debtor's interest in the property, unless the court finds that termination of possession of a lessee whose interest is subordinate to that of the creditor is necessary to protect the real estate against deterioration or destruction.

(g) The right to possession under a default ceases upon cure or redemption of that default under Section 513.

1. Except as to a protected party debtor in possession (subsection (c)), this section permits a secured creditor to take possession on default and before foreclosure. It is a substantial change in the law of "lien theory" states and adopts the result which follows at least theoretically in "title and intermediate theory" states that at least after default the creditor can take possession. Under existing law, either because the lender has no right to possession before sale to him or because there is an onerous burden on a creditor in possession, resort frequently is had to a court-appointed receiver to oust the debtor from possession. This Act is based on a major policy decision - to reduce the "cost" of foreclosure. A provision giving the creditor a right to take possession after default without the intervention of the expensive receivership process is one step in carrying out this policy.

The present section states the right of the secured creditor to take possession after default. Section 504 states the restrictions on the right to appointment of a receiver, and Section 505 states the rights and duties of a secured creditor in possession. In each case, the rights and duties are those that exist in the interim between default and termination of the debtor's interest in the real estate.

Even as to a protected party in possession, the secured creditor may take possession of that portion of the real estate not used by the debtor or an individual related to him as a residence. For example, if the security is a four-flat residential building with one of the flats being occupied by the debtor, the secured creditor could, under subsections (a), (b), and (c), take possession of the three flats not occupied by the debtor as a residence.

As against a protected party, however, only a first secured party (first mortgage) is entitled to take possession prior to foreclosure. That restriction on rights of junior secured parties applies to all protected party cases, whether or not the protected party is in possession.

2. The right to take possession by judicial proceeding (subsection (b)) arises from the existence of the security interest. Neither a clause in the security agreement granting the right nor title in the creditor is a prerequisite. However, the right to take possession by self-help arises only if there is a provision for taking possession by self-help in the security agreement. Further, even though there is a provision in the security agreement for self-help taking of possession, possession cannot be rightfully taken if the taking involves a breach of the peace.

The self-help remedy will be particularly important to a secured creditor in the case of abandoned property. Observe that the restriction on the use of the self-help remedy as to protected parties applies only as to protected parties or an individual related to them who reside on the property. Therefore, if the security agreement contains a clause permitting self-help, self-help is available as to abandoned protected party real estate.

3. The rule of subsection (c) that any order of possession be stayed as against a protected party who is occupying the premises as a residence means, effectively, that a creditor cannot oust a debtor from possession of his residence until at least 10 weeks after the debtor failed to make a required payment because that is the minimum time to foreclosure sale as against the protected party (see Section 506).

4. While the creditor may take possession and control after default, subsection (f) provides that in the interim existing leases cannot be disturbed even though they are subordinate to the security interest. This is existing law in lien theory states but may change the rule in many title or intermediate theory states. Protection of the debtor's right to redeem requires that the creditor cannot disturb his leases until the right to redeem is extinguished. If the debtor has executed improvident leases, the creditor's power to reject or terminate arises, if at all, by reason of Section 207.

5. If there is more than one security interest in the real estate and more than one is in default so that two or more secured creditors are entitled to take possession, subsection (e) gives the exclusive right to possession to the one whose security interest has priority.

SECTION 504. RIGHT TO APPOINTMENT OF A RECEIVER. Nothing in this [Act] expands the power of a court to appoint a receiver before or after default. A court may appoint a receiver after default only upon a showing that a secured creditor cannot take possession or that possession by a secured creditor will not adequately take into account the interests of persons having a claim to the real estate involved, unless the court in its discretion otherwise finds the appointment of a receiver appropriate.

1. The purpose of this section is to confine the appointment of a receiver to unusual cases where possession and control by the secured creditor will not adequately protect the various interests in the land. The historic position in the United States has been that in title states a receiver should not be appointed as of ordinary course. It was often stated that since the mortgagee has title, the remedy at law was adequate. In lien jurisdictions, a receiver is appointed only where the security is deemed to be inadequate or there is a threat of waste. In many jurisdictions, these rules were relaxed so that a receiver could be appointed almost as a matter of course if the security agreement either authorized appointment or there was a pledge of rents and profits. Among the reasons mortgagees preferred a receivership over taking possession themselves was the onerous duty to account placed on a mortgagee in possession.

2. This section is intended to restore the unusual nature of a receivership. It states that ULSIA does not expand the right to obtain a receiver. Thus, the section providing for rents and profits (Section 210) and the section granting the creditor a right to take possession (Section 503) do not expand the power of the court to appoint a receiver.

3. Although it is intended that a receiver not be appointed as a matter of course, the Act recognizes that there may be special circumstances where a receiver is proper even though the lender could have taken possession and control himself. The section states that a receiver cannot be appointed unless it is necessary to "adequately take into account the interests of those having a claim to the real estate or ... the court in its discretion finds the appointment of a receiver appropriate." Danger to the security without efficient management or dispute among several creditors may present cases in which a receiver should be appointed. What is intended is that there be a strong reason for a receiver before the court is entitled to make an appointment.

SECTION 505. RENTS; RIGHTS AND DUTIES OF CREDITOR IN POSSESSION.

(a) After a debtor's default, a secured creditor in possession of the real estate and any creditor who has an assignment of rents, even though not in possession, may notify a lessee to make payment of the rents to that creditor and, subject to the priority among creditors specified in this subsection, is entitled to the rents accruing after the receipt of the notice, except to the extent that the rents have been paid in good faith either to the debtor or to a secured creditor entitled thereto under a previous notice. If more than one secured creditor entitled to rents has notified the lessee to make payment, the secured creditor in possession has priority or, if no creditor is in possession, the secured creditor having priority of security interest has priority as to rents. If requested in writing by the lessee, the secured creditor, within ten days after the request is received, shall furnish reasonable proof as to the secured creditor's right to rents. The lessee need not perform to the secured creditor until the proof is furnished. The lessee need not perform to the debtor or any secured creditor who had previously given notice until the time for furnishing the proof has expired. In any case provided for in this subsection the lessee is discharged by performance in good faith to the secured creditor.

(b) A creditor in possession may execute leases (other than oil, gas, or other mineral leases) extending beyond the time of the creditor's possession which have the same priority as if made by the owner of the real estate. The terms of the lease including its duration must be reasonable and customary for the type of use involved.

(c) A creditor in possession shall manage the property as would a prudent person, taking into account the effect of that person's management on the interest of the debtor. If the creditor by contract delegates the managerial functions to a person in the business of managing real estate of the kind involved who is financially responsible, not related to the creditor, and prudently selected, the creditor satisfies the creditor's obligation to act prudently, and is not responsible to the debtor or other persons for the omissions and commissions of the management agent.

(d) In managing the real estate the creditor or the creditor's delegate:

(1) shall carry casualty and liability insurance reasonably available and reasonable as to amount and risks covered;

(2) shall maintain the property in at least as good condition as existed at the time the creditor took possession, excepting reasonable wear and tear and damage by any casualty not required to be insured against under paragraph (1);

(3) may make other repairs and improvements necessary to comply with building, housing, and other similar codes or with existing contractual obligations of the debtor; and

(4) shall apply receipts to payment of ordinary operating expenses including royalties, rents, and other expenses of management.

(e) A creditor in possession may abandon or vacate the property after first giving notice to the persons specified in Section 507(f) and in the manner specified in Section 508, stating the date on which abandonment is intended, which shall not be less than four weeks after the notice is given.

(f) A creditor in possession may deduct from any money received in managing the real estate all costs and expenses incurred by the creditor or the creditor's delegate, including the costs of hazard and liability insurance premiums against the creditor's or the agent's acts or omissions. The creditor also may deduct from the receipts any commission or management fee reasonably paid for managing property of the type involved.

(g) As between the creditor in possession and the debtor the risk of accidental loss or damage and the risk of liability to third parties arising during the course of management is on the debtor if the creditor:

(1) has procured insurance as required by subsection (d)(1), to the extent of any deficiency in the insurance coverage, or

(2) has not procured insurance as required by subsection (d)(1), to the extent that insurance coverage as required thereby would not have covered the risk.

(h) The creditor shall apply moneys received by the creditor after deducting the ordinary expenses of management and operation, in the following order:

(1) to payment of claims having priority over the interests the creditor represents under the laws of the United States and of this State;

(2) to payment of interest and principal of the security interest under which the creditor is acting; and

(3) to payment of any residue to the persons who but for the creditor's taking possession would have been entitled to the moneys.

1. The purpose of this section is to spell out the rights and duties of a creditor in possession. As indicated in the Comment to Section 503 on the right to possession after default, the purpose of this Act in reducing costs of real estate transactions, particularly the cost of "mortgage foreclosure," is served by providing a substitute for the court-appointed receiver system now extensively used in foreclosures of rental property. Texts on mortgage law frequently assert that the rules as to accounting applicable to a mortgagee in possession are "so severe that mortgagees who are well advised will seldom take possession." It is a purpose of this section to spell out the duties of a mortgagee in possession so that they are less severe and more certain and do not discourage the mortgagee taking possession and do not encourage the use of a court-appointed and court-supervised receiver. Absent some defect in the rule of law, economic self-interest of the secured creditor under a defaulted mortgage ought to lead him to prefer to control matters himself or with "experts" selected by him rather than by a judge from a list which may or may not be based on competence in managing real estate.

If the real estate is income-producing property, proper allocation of the income to management preparatory for sale together with the sale of the capital asset is the essence of the creditor's security interest. Putting the debtor out of the management and control pending sale of the capital asset is justified in part by the danger of the debtor "milking" the property. The time lag between starting to foreclose and final realization of the capital value from sale should not be a weapon to prejudice the creditor.

On the other hand, since in this time period it is possible that the debtor will redeem (see Section 513), the creditor in possession should not be allowed to disaffirm leases, make new leases, and undertake or fail to undertake maintenance of the property without regard to the debtor's potential equity. Furthermore, the person in possession and control may make decisions or fail to make them so as to affect strangers. For example, failure to maintain rental property may result in personal injury to persons having no relation to the secured creditor. It is these problems with which the rights and duties of a creditor in possession must deal.

2. Subsection (a) authorizes a secured creditor who also has a claim to rents by an assignment to notify the tenants that thereafter payment of rents is to be made directly to the secured creditor. This does not result in the creditor taking possession, so the secured creditor as an assignee has no obligation to apply the rents to the expenses of property management. Of course, any rents collected as an assignee must be applied to reduction of debt. These rents are treated as "additional security" to the creditor which he may contract for and receive apart from being in possession of the real estate. If there has been no assignment of rents the creditor can reach rents only by taking possession. Under this Act, rents are automatically assigned to the secured creditor unless the security agreement specifically provides that they are not assigned. See Section 210 and the Comments thereto. The creditor who is collecting rents without taking possession can, of course, release all or part of the rents to the debtor or other property manager to be applied to operating expenses.

For various reasons, including the making of managerial decisions, the secured creditor may prefer to have the possession taken away from the debtor. This he may do under Section 503.

3. Subsection (a) also states priority rules as between various assignees of rents. These rules are as follows: (1) If one of the secured creditors is in possession, he has priority as to the rents. If, for example, a second secured party has taken possession, he is entitled to collect rents, even though the first secured creditor also has a security interest in the rents. The first secured party may, of course, take possession away from the second secured creditor. See Section 503. The second secured party in possession would be entitled to the rents while he is in possession, even though his secured agreement specifically provided that he did not claim a security interest in rents, since "any secured creditor in possession" may collect the rents. (2) If none of the secured creditors are in possession, the secured creditor who has an interest in the rents and priority of security interest has the right to the rents. (3) A junior secured party who has notified the lessee to make payments to him is entitled to keep payments made to him for rental due prior to the time that a senior secured creditor notifies the lessee to make payment to him. Additionally, the junior secured creditor is entitled to retain rental payments made in good faith to him prior to notice to the lessee by a senior interest even though the payments are the rent for periods subsequent to the receipt of the notice. If, for example, a lessee on June 1 makes to a junior secured creditor rental payments for June and July under a lease which provides for monthly rental payments and on June 30, a senior secured creditor notifies the lessee to make payments to him, the June 1 payment of the July rent, if made in good faith, was properly made and the senior secured creditor cannot recover that rent payment from either the lessee or the junior secured creditor. (Similarly, a secured creditor notifying on June 30 could not force the lessee to pay the July payment again if the lessee had previously in good faith paid to the debtor).

4. After default and before sale, leases may expire. If the debtor remains in possession, new leases are executed by him, not by the creditor, subject to termination by the purchaser at the foreclosure sale. Limitations on the debtor's power to lease are stated in Section 207.

If the secured creditor wishes to control the making of leases beyond that stated in Section 207, he must take possession and assume the managerial function. Since the possession obtained by the creditor after default and before sale is temporary pending foreclosure sale a question may arise whether the leasing power of the secured creditor in possession extends to making a lease for a term longer than that of his temporary possession. Subsection (b) grants the creditor in possession that power but only for a duration which is customary for the type of use involved. A creditor in possession of an apartment building, for example, may execute a lease for one or three years even though it is contemplated that sale or redemption will occur before expiration of the lease. Power to make leases for this term may be commercially necessary to obtain any reasonable rental of the premises. The purchaser at the foreclosure sale would take subject to the lease. So would the debtor be subject to the lease if the debtor redeemed. On the other hand, it would most likely be neither reasonable nor customary for a creditor in possession of an apartment building to lease dwelling units for 10 to 20 years.

5. Subsection (c) states the basic standard of accountability of a creditor in possession: he must manage the property as a prudent owner would manage it but further restricted in obligation by the short-term nature of his management. This is the better view under existing law. Under this standard, he is not accountable for the rental value of vacant units in a building held for rental if he used reasonable diligence to obtain new tenants.

Under existing law, it is probably true that a mortgagee in possession, like a trustee in possession and control, may employ agents to help carry out his responsibility. The second sentence of subsection (c) is stated to make clear that a financial institution not in the business of serving as a management or rental agency may delegate management functions and relieve itself of liability for management by making a provident delegation. The granted privilege is probably not more restrictive than existing law: the management agent must be selected in a prudent manner; he must be independent of the creditor, for example, a management agency not owned by the secured creditor. An agency servicing the mortgages held by the investor could perform this managerial role if it was also in the business of serving as property management agents. If the agency servicing a mortgage held by an investor was controlled by the mortgage holder or if its sole business was servicing mortgages, selection of that agency might not in the circumstances be a prudent selection. Use of an independent management agency would also immunize the secured creditor from claims for personal injury arising from commission or omission of the agent.

6. Subsection (d) states a few specific requirements for a creditor in possession which may be more stringent than the "prudent man" standard of subsection (c). It requires, for example, that casualty and liability insurance be carried even in circumstances where a prudent secured creditor might find it prudent to be a self-insurer. The expenses of this insurance are expenses of management chargeable against the debtor's interest in the income and capital.

7. Under subsection (e), a creditor in possession may relinquish possession after notification. Such a relinquishment does not require court approval.

8. The expenses of management are made a first charge on the receipts from management by subsection (f). If the creditor's possession extends over more than one accounting year, this section does not answer the question whether surplus receipts of one accounting year must be allocated to deficits of other accounting years. Since a creditor in possession must allocate all surplus receipt to reduction of debt, a deficit in management would become a charge against capital realized on sale in any event. See Section 511(a).

9. Subsection (g) makes clear that a creditor in possession is in effect an "agent" of the debtor. Even though third parties might be able to impose personal liability on a creditor in possession, he can charge that personal liability against the estate he is managing. Ordinary fiduciary law would adjust this rule if the injury caused to the third party was due to a willful breach of duty by a creditor in possession. For this reason, no express statement of this rule is made.

10. Surplus funds available after paying the expenses of the creditor in possession are to be applied to payment of claims having priority over the claim of the creditor in possession. Hence before any application of funds to debt, the creditor must satisfy himself as to the priority of debt secured by the real estate, and unpaid tax claims must be paid before the surplus funds are applied to reduction of the debt of the creditor in possession. This system of allocation is set forth in subsection (h).

SECTION 506. INDEX OF NOTICES AND TIMES RELATING TO FORECLOSURE.

(a) Before foreclosure, a notice of intention to foreclose (Section 508) must be given. The content of the notice is specified by Section 508(b), the method of sending by Section 508(a), and the persons to whom it must be sent by Section 507(f). If, at the time of default, the real estate is occupied by a protected party or an individual related to the protected party, the notice of intention to foreclose may not be given until the time specified in Section 507(d). Except as specified as to a protected party in Section 507(d), the notice of intention to foreclose may be sent at any time after default.

(b) Before foreclosure under a power of sale, notice of the intended sale must be given. The content of the notice of sale, the persons to whom it must be given, and the method of sending is specified in Section 509(a). Sale may not occur until after the time specified in Section 509(a). The notice of the intended sale may be included in the notice of intention to foreclose or may be by a separate writing and may be given simultaneously with the notice of intention to foreclose or at a later date.

(c) As against a protected party, a judicial proceeding to foreclose cannot be commenced until after the time specified by Section 507(b). As against any other debtor, the judicial proceeding may be commenced at any time after notice of intention to foreclose has been given (Section 507(b)).

(d) The effect of failure to comply with the notice and time provisions relating to foreclosure is specified by Sections 512(a) and 514.

This is a catalogue section containing the notice and time requirements for foreclosure.

SECTION 507. METHODS OF FORECLOSURE AND NOTICE.

(a) After a debtor's default, the secured creditor and debtor may agree on an acquisition of the debtor's interest in the real estate in lieu of foreclosure.

(b) Absent agreement, but after giving the debtor notice of an intention to foreclose (Section 508), the secured creditor may terminate the debtor's interest in the real estate by a judicial sale (Section 510), but as against a protected party the judicial proceeding may not be commenced until five weeks after notice of intention to commence the proceeding has been given.

(c) If the security agreement or other agreement between the debtor and secured creditor authorizes it, the creditor, after debtor's default and after giving the debtor notice of intention to foreclose (Section 508), may terminate the debtor's interest by exercising a power of sale (Section 509).

(d) If at the time of default a dwelling unit in the real estate is occupied as a residence by a protected party or an individual related to the protected party, the notice of intention to foreclose (Section 508) may not be given until a payment of money has not been made when due and remains unpaid for five or more weeks or until the protected party, having been notified by the secured creditor to cure any other default under the security agreement, has failed to commence and proceed diligently with performance within five weeks.

(e) If the secured creditor gives the notice required for exercising a power of sale (Section 509), or commencing a judicial proceeding (Section 510), as part of the creditor's notice of intention to foreclose under Section 508, the minimum time required by Section 508 (power of sale) or subsection (b) of this section (judicial sale) commences when the notice of intention to foreclose is given.

(f) A notice of intention to foreclose required by this section must be sent to the person specified by the debtor in the security agreement or, if none is specified, to the debtor or any one of two or more debtors, but notice must be given to all debtors having an interest in the property who are protected parties, to any person obligated on the debt whom the creditor may wish to hold liable for any deficiency, and to any person in possession of the real estate from whom the creditor has received a written demand to receive notice of intention to foreclose. Failure to comply fully with this subsection does not invalidate the notice as to persons to whom it is given.

1. Section 507 states the essential or basic rights of a secured creditor after a default: realization of funds to liquidate the secured debt by sale or other disposition. The preceding sections stated rights and duties during the interim between default and ultimate realization. But the basic interest of the secured creditor is to dispose of the collateral and to apply the proceeds to reduction of debt and thereafter proceed to collect any deficiency from other assets of the debtor.

This section also states the basic position of the debtor in default: to "protect" any equity he may have remaining in the collateral. Under existing law, this is the essence of the "equity of redemption."

The principle upon which Part 5 is constructed is that it is in the interest of the creditor to realize the maximum price on disposition of the collateral. It is also constructed on the principle that realization of the maximum value is in the debtor's self-interest and that if there is in fact an "equity" (surplus of value over debt) the debtor's own actions are usually the best method of assuring the realization of that surplus value. To enable the debtor to "protect" his own equity two matters seem essential: notice to him of the consequences of his default; and time to realize the capital value of his equity through his own initiative such as redemption, refinancing, or sale. The ability of the debtor to realize his equity through his own actions is stated in Section 513 on redemption and cure, particularly subsection (b).

Section 507 is an index section as to the methods of foreclosure available to the creditor. It is also a statement of the minimum time the creditor must allow the debtor in default before the debtor takes actions which irrevocably cut off the debtor's ability to protect his equity by his own conduct. Nothing in this section prevents the creditor, by his own practices, from giving more time than the statutory minimum, and the debtor and creditor after default may agree on a different method of termination.

2. This section states three remedies the secured creditor may have after default: an agreement with the debtor terminating the debtor's rights, such as a "deed in lieu of foreclosure"; a judicial sale; and, if the security agreement so provides, exercising a power of sale. With the exception of the first (termination of the debtor's interest by agreement), each method requires a notice to the debtor and a minimum time before it may be used. If the credit transaction involves a debtor presumed to be commercially sophisticated, the requirement in subsection (a) is a requirement that the creditor give the debtor "reasonable notice" of an "intention to foreclose." Under subsection 501(d), the security agreement itself may in the ordinary case define what is a reasonable time and the form of the notice. Absent a clause in the security agreement the reasonableness of the time and the question whether the notice which in fact occurs is "in law," a notice of intent to foreclose is a question of law which need be determined only if a dispute arises and which can be determined only in litigation. If the creditor fails in his statutory duty but the sale nevertheless occurs, the purchaser at the sale is protected by Section 512. Under that section, a failure of the creditor to give notice and conduct the sale properly does not affect the title of a purchaser at the sale.

3. For a "protected party" in default the requirement of notice of intention to foreclose is more rigidly imposed by statute, and in the security agreement the parties cannot agree to waive the notice requirement or reduce the time periods. Subsections (b) and (c) state a basic time requirement as to use of the remedies other than an agreed disposition: the remedy selected by the creditor cannot be carried out or commenced until five weeks after notice of intention to foreclose has been given.

4. Subsection (b) states two additional requirements for giving notice and conducting a sale if the defaulting party is a protected party occupying a dwelling unit in the collateral: the notice must be in substantial compliance with Section 508, and a minimum period of time must elapse before the notice can be given. This minimum is five weeks after a payment of money becomes due if at expiration of the five weeks the money remains unpaid. Basically, this means that if a protected debtor defaults on his amortization payment due on the first of a month, the earliest the creditor could exercise his power of sale would be 10 weeks after the first nonpayment.

5. Subsection (e) provides that if the notice of intention to foreclose clearly indicates which method of foreclosure is being used, the notice of intention to foreclose can cause a telescoping of the time periods. If, on the other hand, the notice of intention to foreclose is given without selecting any method of foreclosure, then when the creditor selects a method he must give the notice required by the method selected - e.g., five weeks in the case of exercise of power of sale.

6. Subsection (f) specifies to whom the notice of intention to foreclose must be given. This notice is primarily for the benefit of the debtor and not for the purpose of cutting off junior interests. Later sections concerning notice of sale and intention to take title in satisfaction of the debt require notice to junior lienors whose interest in the collateral would be cut off by foreclosure. The notice is to be sent to the person specified in the security agreement. The possessor of the real estate is given an opportunity to receive notice, but none is required for him unless he has given the creditor a demand for notice.

SECTION 508. NOTICE OF INTENTION TO FORECLOSE.

(a) Notice of intention to foreclose in a writing complying with subsection (b) must be sent to the person entitled thereto both by registered or certified mail and by ordinary first class mail. The notice must be sent to a debtor at the debtor's address specified in the security agreement as the place to which notices are to be sent. If the creditor knows of a different address of the debtor at which notices are more likely to come to the debtor's attention, the notice also must be sent to that address. The notice must be sent to a person other than a debtor at any address at which the secured party in good faith believes the notice is likely to come to the person's attention.

(b) The writing must state, in a manner calculated to make the debtor aware of the situation:

(1) the particular security interest to be foreclosed;

(2) the nature of the default claimed;

(3) that the secured creditor has accelerated maturity of the debt, if that is the case;

(4) any right the debtor has to cure the default, the amount to be paid or other action necessary to cure, and the time within which the cure must take place;

(5) the methods by which the debtor's ownership of the real estate may be terminated;

(6) any right the debtor has to transfer the real estate to another person subject to the security interest or to refinance the obligation and of the transferee's right, if any, to succeed to the rights of the debtor in curing the default;

(7) the circumstances under which the debtor's right to possession will be terminated and that on termination the debtor may be evicted by judicial process;

(8) the right of the debtor to any surplus from a sale and, if the debtor is or may be liable for any deficiency, a statement of the circumstances under which the deficiency will be asserted;

(9) that no deficiency may or will be claimed if that is the case;

(10) if the secured creditor intends to include in the notice of intention to foreclose a notice of sale under a power of sale (Section 509(a)), or of intention to institute judicial proceedings (Section 507(b)), the creditor shall so state and comply with the provisions of Section 509(a) or 509(b) as the case may be; and

(11) the right of the debtor under Section 514 to apply for a court order controlling the foreclosure.

This section requires the giving of a written notice of intention to foreclose meeting the requirements of subsection (b) to both protected-party and nonprotected-party debtors. In the case of protected-party debtors, the notice cannot be given until after the times specified in Section 507. In the case of nonprotected-party debtors, the notice can be given at any time after default. See, however, Section 502 as to a nonprotected-party debtor's right to cure.

SECTION 509. CREDITOR'S POWER OF SALE AFTER DEFAULT.

(a) If the secured creditor is authorized to foreclose by power of sale (Section 507(c)), the secured creditor, after the debtor's default and upon compliance with this section, may sell any or all of the real estate that is subject to the security interest in its then condition or after any reasonable rehabilitation or preparation for sale. Sale may be at a public sale or by private negotiation, by one or more contracts, as a unit or in parcels, at any time and place, and on any terms including sale on credit, but every aspect of the sale, including the method, advertising, time, place, and terms, must be reasonable. The creditor shall give to the persons entitled to notice under Section 507(f) reasonable written notice of the time and place of any public sale or if a private sale is intended, reasonable notice of intention to enter into a contract to sell and of the time after which a private disposition may be made. The same notice must also be sent to any other person who has a recorded interest in the real estate which would be cut off by the sale, but only if the interest was on record at least seven weeks before the date specified in the notice as the date of any public sale or seven weeks before the date specified in the notice as the date after which a private sale may be made. As to persons entitled to notice under Section 507(f), the notice must be sent to the address specified in Section 508(a). As to others entitled to notice, the notice may be sent to any address reasonable in the circumstances. Sale may not be held until five weeks after the sending of the notice. The creditor may buy at any public sale and, if the sale is conducted by a fiduciary or other person not related to the creditor, at a private sale.

(b) On acceptance of a bid at a public sale, the bidder, other than the foreclosing creditor, shall deposit at least ten percent of the bid price in cash or bank obligation. If the successful bidder fails to make the deposit on acceptance, or to complete the transaction within five weeks after acceptance, the secured creditor may specifically enforce the contract or resell the real estate under subsection (a). If the contract is not specifically enforced, the bidder's deposit may be retained or recovered as liquidated damages. Any sums retained or recovered by the creditor must be applied in the same manner as the proceeds of a completed sale.

1. This section prescribes the standards for conducting the foreclosure sale. It does not require that it be conducted by a disinterested third party, such as a trustee, nor does it prohibit the secured creditor from purchasing at the sale. The basic standard is that the sale must be conducted in a reasonable manner.

This section differs from many existing statutory power of sale procedures as to notice requirements. It separates the notice requirement into two functions: giving notice to potential purchasers that land is available for sale; and giving notice to persons already having an interest in the land, such as the debtor and junior lienors, that their interests are about to be cut off. It, thus, rejects the existing rule in many jurisdictions that advertisement of the sale in a legal publication as a legal notice satisfies both functions of notice of sale.

The requirement that the sale be conducted in a reasonable manner, including the advertising aspects, requires that the person conducting the sale use the ordinary methods of making buyers aware that are used when an owner is voluntarily selling his land. Thus, an advertisement in the portion of a daily newspaper where these ads are placed or, in appropriate cases such as the sale of an industrial plant, a display advertisement in the financial sections of the daily newspaper may be the most reasonable method. In other cases, employment of a professional real estate agent may be the more reasonable method. It is unlikely that an advertisement in a legal publication among other legal notices would qualify as a commercially reasonable method of sale advertising.

The other function of legal advertisement has been that of giving notice to persons entitled to notice of the pending destruction of their property interest. This section rejects the use of legal advertisement for this purpose except as a last resort where it is virtually impossible to give personal notice. Subsection (a) requires that notice of the pending sale be sent, but provides that it may be sent to an address shown in a recorded instrument. This differs from UCC Sec. 9-504(3) where notice is required for persons other than the debtor only if they have reasonably notified the creditor of a demand for notice. It was thought that requiring the creditor to keep an accurate list of claimants who have made demands on him was too onerous a burden. Similarly, it was concluded that notice only by legal advertisement was sufficiently unlikely to make junior claimants aware of their impending danger. The requirement that the creditor give notice to junior claimants is limited to those who are on record. This does, however, in effect require a creditor about to sell to undertake a title examination to determine to whom he must send notice.

The section provides that the creditor satisfies his obligation if he gives notice on the basis of the record as it was seven weeks before the day set for sale. This gives the creditor time to undertake a title examination and allows him to regard the examination as conclusively determining those to whom he must send notice.

2. Subsection (b) prescribes some of the mechanics of conducting the sale and makes clear that on acceptance of the bid there is an enforceable contract to sell.

The provisions of this section as to manner of sale are similar to those of ULTA Section 3-508.

SECTION 510. FORECLOSURE BY JUDICIAL PROCEEDING.

(a) A security interest may be foreclosed in a judicial proceeding directing a judicial sale of the real estate that is subject to the security interest.

(b) The secured creditor's initial pleading must state facts showing that:

(1) the notice of intention to foreclose (Sections 507(b) and 508) was properly given; and

(2) if the defendant is a protected party, the notice of intention to institute judicial proceedings (Section 507(b)) was properly given. In addition, if a deficiency judgment is claimed, the secured creditor shall state that the prohibition against a deficiency judgment (Section 511(b)) is not applicable.

(c) Process must be served upon all persons entitled to notice under Section 507(f) and any other person having a recorded interest in the real estate which would be cut off by the judicial sale. If the court finds that the debtor is in default and that the creditor has properly given notice of intention to foreclose, it shall enter judgment for the amount due with costs and order the sale of the real estate. The judgment also must specify the official, secured creditor, debtor, or other person authorized or directed to conduct the sale. Unless the judgment specifies that the sale is to be conducted in accordance with the law relating to the sale of real estate on execution, the sale is to be conducted under Section 509.

(d) A person conducting the sale must seek potential buyers and bidders through means of communication reasonable for the type of real estate involved, even though there has been or will be notice by publication for the purpose of service of process or informing persons having a claim to the property.

(e) The judgment must direct the person conducting the sale to make a report to the court. Upon confirmation by the court of the report of sale, the clerk shall enter satisfaction of the judgment to the extent of the sale price less expenses and costs. Unless the judgment states there is to be no deficiency judgment, the clerk shall enter the balance on the judgment docket to become a lien effective as of the date docketed and be enforced in the manner of any other judgment for the payment of money.

(f) If the sale is confirmed, the person conducting it shall execute an instrument of conveyance under Section 512.

(g) If possession of the property is wrongfully withheld after confirmation of the sale and delivery of the instrument of conveyance, the court may compel delivery of possession to the person entitled thereto by order directing the appropriate official to effect delivery of possession.

(h) This section does not affect any existing procedure for strict foreclosure.

1. This section prescribes the procedure for foreclosure by judicial sale. Unlike many existing judicial foreclosure laws, subsection (a) makes applicable the rules of civil procedure as the basic guide except as modified in this section. Thus, provisions found in many foreclosure statutes as to venue and how process is to be served, including notice by publication, would be repealed, and these matters would be governed by the rules of civil procedure.

2. Subsection (b) states certain rules of pleading necessary to make operative rights given elsewhere in Part 5 of this Act. There is, for example, a requirement notice of intention to foreclose be given as a condition precedent to utilization of any of the authorized methods of foreclosure, and subsection (b) requires that the secured creditor in judicial foreclosure allege facts establishing that he has complied with this requirement.

3. Subsection (c) calls for entering a judgment for the amount adjudged to be due and then prescribes how the court official is to conduct the sale. Unlike much existing law, it permits the court to select the person to conduct the sale and permits him to select the person he thinks will be best in the circumstances. Thus, he may appoint the secured creditor, the debtor, or any other person who is not an official as well as an official. The only limit would be "abuse of discretion." The subsection prescribes the sale process. It directs that the process for exercise of power of sale be used unless the judgment or decree specifies that it is to be conducted in accordance with the process regularly available for sales on execution.

4. Subsection (d) repeats for judicial sales the requirement for exercise of a power of sale under Section 509 that the official or other person conducting the sale use some means other than publication of a legal notice to find buyers.

5. If a judicial sale is held, subsection (e) requires that the sale details be presented to the court for confirmation and prescribes how a deficiency judgment, if any, is to be entered.

6. Subsection (f) states the formalities of the instrument of conveyance when the sale is conducted by the court.

7. Subsection (g) enables the court to put the purchaser in possession where possession is wrongfully withheld after confirmation of the sale.

8. Occasionally under existing law, equity courts have devised a strict foreclosure procedure primarily in aid of an earlier foreclosure that proved to be defective. While the need for such a process is substantially reduced by subsection (f) and Section 510, subsection (h) makes it available if there is some reason not otherwise covered by this Act making it desirable to use it.

SECTION 511. APPLICATION OF PROCEEDS OF SALE, SURPLUS, AND DEFICIENCY.

(a) The proceeds resulting from a sale of real estate under this Part must be applied in the following order:

(1) the reasonable expenses of sale;

(2) the reasonable expenses of securing possession before sale; holding, maintaining, and preparing the real estate for sale, including payment of taxes and other governmental charges, premiums on hazard and liability insurance, management fees, and, to the extent provided for in the agreement and not prohibited by law, reasonable attorney's fees and other legal expenses incurred by the creditor;

(3) satisfaction of the indebtedness secured;

(4) satisfaction in the order of priority of any subordinate security interest of record; and

(5) remittance of any excess to the debtor.

(b) Unless otherwise agreed and except as provided in this subsection as to protected parties, a person who owes payment of an obligation secured is liable for any deficiency. If that person is a protected party and the obligation secured is a purchase money security interest, there is no liability for a deficiency, notwithstanding any agreement of the protected party. For purposes of calculating the amount of any deficiency a transfer of the real estate to a person who is liable to the creditor under a guaranty, endorsement, repurchase agreement, or the like, is not a sale.

1. Subsection (a) is a standard listing of the application of the proceeds from a sale. Under subsection (4), the foreclosing secured creditor is required to pay any surplus to junior secured creditors of record. It will, therefore, be necessary to have a title check prior to distribution of any surplus.

2. Subsection (b) limits deficiency judgments. The borrower is liable for a deficiency judgment if the lender has held a judicial sale or exercised his power of sale, unless the borrower is a protected borrower. There is no deficiency judgment if the borrower is a protected borrower and the obligation secured is a purchase money security interest. A number of states have eliminated deficiency judgments for a purchase money security interest. In some of these states, a purchase money security interest includes both a mortgage running to the seller and a mortgage running to a cash lender whose loan proceeds were used to pay the purchase price of the real estate. In other states which have outlawed the deficiency judgment, the outlawing exists only if the purchase money mortgagee is the seller himself. Under this Act, the definition of "purchase money security interest" as set forth in Section 111(18) includes all security interests that enable the debtor to acquire the collateral, whether such security interest is taken by seller under Section 111(18)(i) or is taken by a third party cash lender under Section 111(18)(ii). As a result, the practical effect of subsection (b) will be to outlaw virtually all deficiency judgments against protected parties except in cases where the borrower's obligation is being refinanced.

By eliminating deficiency judgments against protected parties, this Act also eliminates one of the primary reasons for judicial supervision of the foreclosure process, because the borrower need not be concerned with the adequacy of the purchase price paid at the foreclosure sale. This Act, therefore, provides an important incentive for those states still requiring judicial foreclosure of security interests to adopt this Act intact, without modifying Section 509 authorizing power of sale foreclosures. By the same token, any state that modifies Section 509 by mandating judicial foreclosure of security interests granted by protected parties should also consider modifying subsection (b) by inserting the qualifying words "under Section 111(18)(i)" after the words "purchase money security interest" in the second sentence of subsection (b). This modification will then preserve the existing rights of third party cash lenders to obtain deficiency judgments against protected parties in cases where the amount received at the judicial sale is not sufficient to satisfy the debt.

3. The last sentence in subsection (b) dealing with a "sale" to a guarantor is taken from Section 3-510 of ULTA. Under earlier sections, the lender may sell the real property after default. If the lender intends to call on the guarantor for payment of the obligation, he may arrange to "sell" the collateral to the guarantor at a price agreed upon and then call upon the guarantor to pay on the guaranty. Since the price agreed upon between the guarantor and the lender is not an arm's length transaction, the purpose of the last sentence is to provide that a deficiency judgment cannot be calculated on the basis of that sale price.

SECTION 512. EFFECT OF DISPOSITION.

(a) If real estate is sold by a creditor under a power of sale (Section 509) or at a judicial sale (Section 510), a purchaser for value in good faith acquires the debtor's and creditor's rights in the real estate, free of the security interest under which the sale occurred and any subordinate interest, even though the creditor or person conducting the sale fails to comply with the requirements of this Part on default or of any judicial sale proceeding.

(b) The person conducting a sale under a power of sale (Section 509) or conducting a judicial sale (Section 510) shall execute a deed to the purchaser sufficient to convey title, which identifies the security interest and the parties to the security agreement, indicates where recorded and recites that the deed is executed by the person conducting the sale after a default and sale under this Part and that person's authority to make the sale. Signature and title or authority of the person signing the deed as grantor and a recital of the fact of default and the giving of notices required by this [Act] is sufficient proof of the facts recited and of the signer's authority to sign. Further proof of the signer's authority is not required even though the signer is also named as grantee in the deed.

(c) A regularly conducted, noncollusive transfer under a power of sale (Section 509) or by a judicial sale (Section 510) to a transferee who takes for value and in good faith is not a fraudulent transfer even though the value given is less than the value of the debtor's interest in the real estate.

1. This section is designed, like the similar section in ULTA (Section 3-511), so that the purchaser at the sale takes free of interests of the debtor and all subordinate parties. This is intended to eliminate the necessity of a rigorous examination to determine whether the foreclosure transaction complies with the statutory requirements in meticulous detail. The purpose of freeing the purchaser from the risk of the faulty foreclosure is to further assure that the sale price at the foreclosure sale will be more closely related to the real market value of the property thus liquidating the debt for the best interest of the lender and borrower.

2. Unlike the sale of goods, the purchaser at the foreclosure sale is likely to need a document that will indicate to a purchaser from him that he has title. Subsection (b) is designed to give him that kind of document, which may be recorded.

3. Subsection (c) rejects the reasoning of the decision in Durrett v. Washington National Insurance Co., 621 F.2d 201 (5th Cir. 1980), on the effect of laws pertaining to fraudulent conveyances on those transfers resulting from a default under a security agreement. Subsection (c) adopts the more traditional thinking that a transfer resulting from a foreclosure sale, whether by exercise of a valid power sale or by judicial sale, is not a fraudulent transfer, even if the sale price or consideration is less than the value of the debtor's interest in the property. The requirements that the sale be regularly conducted and noncollusive, and that the transferee pay value and act in good faith, are intended as further assurances to protect the interest of the debtor.

Although the Act strives to create conditions that should result in a market value price at a foreclosure sale, the drafters recognize that it is unrealistic to expect that it can always be achieved.

SECTION 513. DEBTOR'S RIGHT TO CURE DEFAULT AND REDEEM.

(a) At any time before the earlier of the sale or a contract of sale under a power of sale (Section 509), or before the time specified in a decree of judicial foreclosure, the debtor or the holder of any subordinate security interest may cure the debtor's default and prevent sale or other disposition by tendering the performance due under the security agreement, including any amounts due because of exercise of a right to accelerate, plus the reasonable expenses of proceeding to foreclosure incurred to the time of tender, including reasonable attorney's fees of the creditor.

(b) In determining what is necessary to cure a default, a protected party, except as provided in subsection (c), may cure the default and avoid operation of any acceleration clause (Section 502) in the security agreement by:

(1) paying or tendering all sums that would have been due at the time of tender in the absence of any acceleration clause;

(2) performing any other obligation the protected party would have been bound to perform in the absence of any acceleration clause; and

(3) paying or tendering the costs of proceeding to foreclose reasonably incurred after notice of intention to foreclose (Section 508) was given but not exceeding [ ], including reasonable attorney's fees of the creditor.

(c) A protected party may not exercise the right to cure under subsection (b) if, within the preceding 12 months, the protected party has exercised the right after having received a notice of acceleration.

(d) After default, a debtor entitled to cure or redeem under this section may release that right in writing or assign that right subject to Section 208. If a person other than a protected party who defaulted proposes to cure as permitted by subsection (b), the creditor may demand from that person the entire sum due on acceleration unless the creditor receives adequate assurance of due performance, if the creditor in good faith believes that the prospect of further payment or performance would be impaired.

(e) If a debtor is entitled to cure or redeem under this section, the debtor or the holder of any subordinate security interest, subject to the terms entitling the debtor or the holder of any subordinate security interest to cure or redeem, may require the secured creditor, upon full payment of the obligation, to assign the debt and the security interest without recourse or warranty to any person designated by the payer and the secured creditor is obligated to do so. The rights under this subsection may be enforced by the holder of any subordinate security interest even though it is an intermediate security interest. A tender of redemption by any holder of a security interest prevails over a tender of redemption by the debtor. As between or among holders of security interests the tender of redemption by the holder entitled to priority prevails over the tender of redemption by the holder of a subordinate interest. Nothing in this section requires giving an assignment where the secured creditor owns a subordinate security interest that is not to be assigned.

1. This section assures a debtor in default of a right to redeem or cure his default so as to protect the collateral from disposition by the creditor. The right given by this section does not depend on the location of title. Subsection (a) states the time before which the defaulting debtor must tender the performance due - before sale in the case of exercise of power of sale. Under this Act, there is no right of redemption after sale. A protected party is given through the required delay before notice and required time after notice a minimum of ten weeks within which to redeem. See Sections 506, 507, and 509. If the creditor for reasons of his own choosing delays sending notice or sets the date of sale more than five weeks after notice, the debtor's time to redeem is correspondingly increased.

2. Subsection (b) deals with the right of a protected debtor to avoid operation of an acceleration clause. The protected debtor may cure, notwithstanding an acceleration, by tendering the unpaid amortization payments including any late charges. But he is limited in exercising this privilege to once every 12 months.

3. Subsection (d) entitles the debtor, after default to make agreements concerning redemption which he is not permitted to make in the initial agreement before default. The right to assign the rights to redeem is one method given the debtor to protect his "equity" - he can sell it to another. If the assignee of a protected party tries to cure by payment of the past due installments, rather than the entire accelerated obligation, the creditor is entitled to refuse to accept the tender until he receives an adequate assurance of performance.

4. Subsection (e) is an additional provision facilitating the debtor's right of redemption. The subsection permits the debtor to demand as of right that the secured creditor assign the secured debt to the person curing the default instead of executing a satisfaction and then requiring the person furnishing the consideration to take a new security interest.

SECTION 514. CREDITOR'S LIABILITY FOR FAILURE TO COMPLY WITH PART 5.

(a) A sale or disposition of proceeds may be ordered or restrained on terms and conditions determined by the court if it is established by the debtor or any other person entitled to notice under Section 509(a) that:

(1) the obligation is invalid;

(2) the debtor is not in default;

(3) the creditor or other person exercising a power of sale under Section 509 is not complying or is not likely to comply with this Part; or

(4) the proceeds of any sale are not being applied or are not likely to be applied as required by Section 511.

(b) If disposition of the real estate has occurred, the debtor or any person entitled to notice under Section 509(a) hereof may recover from the creditor any loss caused by a failure to comply with this Part.

(c) If a creditor violates this Part, a protected party may recover, without reduction by reason of any unpaid portion of the debt or deficiency judgment owed the lender and without proof of actual damages, an amount equal to one percent of the initial unpaid obligation but not exceeding $500.

(d) In a judicial proceeding under this section, a protected party, in addition to any other remedy granted, may recover the reasonable expenses of litigation, including reasonable attorney's fees.

1. Exercise of a power of sale or taking title in satisfaction of the obligation are powers a secured creditor has after he determines without benefit of court sanction that a default has occurred. Under existing law, a debtor who believes he has a defense to the claimed default must initiate a judicial proceeding to stop the sale. Subsection (a) makes this power of the debtor explicit.

2. Subsection (b) prescribes the action against the creditor who fails to comply with the statutory procedures on foreclosure but who has sold the collateral. Section 512 provides in that case that the purchaser nevertheless acquires good title. Subsection (c) gives the injured debtor or junior lienor an action for monetary damages against the creditor who made the unlawful sale. For a protected debtor, a statutory penalty up to $500 is provided without proof of loss.

3. Subsection (d) also gives to a protected party whose land has been sold in violation of Part 5 a right to recover attorney's fees. This section is the same as ULTA Section 3-513.

SECTION 601. EFFECTIVE DATE. This [Act] takes effect on ____________________ following its enactment. It applies to transactions entered into and events occurring on or after that date.

The effective date of this Act should be delayed sufficiently that lawyers and others concerned with real estate transactions have time to acquaint themselves with its provisions prior thereto.

SECTION 602. SPECIFIC REPEALER; PROVISIONS FOR TRANSITION.

(a) The following acts and all other acts and parts of acts inconsistent herewith are hereby repealed: [here should follow the acts to be specifically repealed which should include any act:

(1) fixing interest rates for general real estate transactions,

(2) providing for foreclosure of mortgages,

(3) dealing with installment land contracts, and

(4) creating priority rules inconsistent with the future advances provisions of this [Act]].

(b) Transactions validly entered into before the effective date specified in Section 601 and the rights, duties, and interests flowing from them remain valid thereafter and may be terminated, completed, consummated, or permitted by any statute or other law amended or repealed by this [Act] as if the repeal or amendment had not occurred.

SECTION 603. A GENERAL REPEALER. Except as provided in the foregoing section, all acts and parts of acts inconsistent with this [Act] are hereby repealed.

SECTION 604. LAWS NOT REPEALED. This [Act] does not repeal ____________________.