Whether a mortgage of real property is a “conveyance” triggering a reverter clause in the deed; whether the Board of Selectmen’s authorization to enter a deed requiring reverter on misuse of the property also authorized it to require reverter on conveyance.

The Board of Selectmen of the town of Dennis deeded a property to the Dennis Housing Authority (DHA) for the sum of $1, to be used for affordable housing. The deed provided for a possibility of reverter to the Town if the DHA conveyed or transferred the property without written consent. The DHA immediately obtained a mortgage on the property from Citizens Bank. Four years later, the Board exercised its power of reverter and repossessed the property, on the basis that the mortgage constituted a conveyance of the property.

When the Board deeded the property to the DHA, it did not have explicit authorization from the town meeting to require reverter in the case of conveyance. However, it did have authorization to require reverter “in the event the property ceases to be used for [affordable housing].”

The current holder of the mortgage, Faneuil, sought a declaratory judgment that the town could not properly exercise the reverter clause, because a mortgage was not a conveyance. A Superior Court judge dismissed the claim, the Appeals Court agreed, see 75 Mass. App. Ct. 260, and the SJC granted the plaintiff’s request for further appellate review. 

1. Mortgage as a “conveyance.” Massachusetts follows the minority “title theory” of mortgage, in which legal title to a property passes to the mortgagee until the mortgage is satisfied. The trial judge therefore found that the property was “conveyed” when it was mortgaged, and the reverter clause was triggered. The plaintiff argues that this gives the legal fiction of title theory too much power; that the parties would have specifically referred to mortgage if they intended that form of conveyance to trigger a reverter; and that the more reasonable rule in a title theory state would be to trigger reverter on mortgage default, rather than creation. The Board of Selectmen responds that the title theory is well settled in Massachusetts, and does what it says it does; any reasonable title search would have disclosed the condition to Citizens, and Citizens should have known to request written permission from the Town, so there is no unreasonable hardship in applying the reverter clause.
2. Permission for the Board to create the deed. The plaintiff argues that the town meeting authorization for the Board to create a deed providing for reverter in case the property was no longer used for affordable housing did not authorize it to provide for reverter in case of transfer. The Appeals Court acknowledged that the Board could not create a deed “different in a substantial respect” from what was authorized, but held that the prohibition on transfer was implicitly necessary to accomplish the goals authorized by the town meeting, and therefore permissible.

Neither party offers the Court substantial guidance on the question of whether a mortgage should trigger a conveyance clause. Both agree that in Massachusetts, a mortgage is a conveyance; the plaintiff merely observes that the title theory doctrine is something of a fiction, and that other states follow more relaxed rules. The fact that the Court was willing to take appeal of a published Appeals Court decision — and is seeking amicus briefs solely on this aspect of the appeal — therefore suggests that at least some on the Court may be questioning a strict adherence to title theory. It will be interesting to see whether the Court indeed moves to some extent away from that theory. On a naive view, at least, a shift away from title theory would have the potential to benefit property owners at the expense of mortgage companies.