DOCTORINE OF EQUITABLE CONVERSION

Because of the peculiarities of real property at common law, the legal ownership of a given parcel
of land or a given house or any other piece of real estate does not pass from Seller to Buyer when
a real estate sales contract is signed. Assuming a viable contract was signed between Buyer and
Seller, and that the contract comports with the relevant states Statute of Frauds, legal ownership
does not even technically pass at the moment Buyer pays Seller! In order for ownership to
officially and legally pass to Buyer, Seller must convey the real property to Seller by way of a
viable deed. Both payment and conveyance typically take place some time after the contract is
signed, usually at the Closing, so this question often arises: Which party the Seller or Buyer takes
the hit (i.e., is liable for the loss) if property is damaged after the contract was signed
but before Closing

Damage or Destruction to the Property After the Contract is Signed

but Prior to Closing
As you can imagine, the answer to this question can have important consequences for the
signatories to a real estate contract. For example, what happens if a Buyer contracts to purchase
Sellers house, but the house burns down a week later, a full three weeks before the Closing?
Traditionally, according to what became known as the Doctrine of Equitable Conversion, the
answer was: The Buyer takes the hit. The theory behind the Doctrine of Equitable Conversion is
that although Buyer does not obtain legal title to the property upon executing the contract, he/she
does obtain title in equity. In other words, traditionally in U.S. real estate transactions, Buyer would
be liable for any losses resulting from damage to the subject property prior to Closing because
he/she is deemed to be the true orequitable owner of the property, whereas the Sellers interest is
limited to a contractual right to the sale proceeds. Under this rigid rule designed to protect the
Sellers interests, the Buyer would still be required to pay the full purchase price to the Seller, even
if the subject property was destroyed by fire before Buyer received the deed!
In order to trump or mitigate the harsh Doctrine of Equitable Conversion, parties to a real estate
contract are always free to add their own rules regarding liability for losses occurring during the
pre-Closing period. Thus, prior to signing, a Buyer may insist that a clause be added to the contract
making the Seller liable for any damage to the property (not caused by Buyer) that occurs prior to
Closing. Furthermore, regardless of what rule is in effect regarding pre-Closing liability, Buyer, like
Seller, typically has an insurable interest in the property after signing the contract, and thus can
purchase insurance that covers pre-Closing damage to the property.

Death of the Seller or Buyer After the Contract is Signed but Prior
to Closing
Note that the Doctrine of Equitable Conversion also affects the status of a given propertys
ownership when either party to the real estate contract dies or is otherwise incapacitated prior to the
Closing. Thus, for example, in the event of the Sellers pre-Closing death, and absent an agreement
to the contrary, legal title to the property will pass to the Sellers heirs, not the Buyer, but the Buyer
retainsequitable title, and thus Sellers heirs must still convey the property to Buyer at the Closing.
The heirs would thus take legal title to the real estate sale proceeds according to the Sellers will or
the applicable states intestacy laws.