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Posted: December 1, 2013

Real Property Law § 320 Limits Structuring Real Property Transactions as Sales

On November 27, 2013, the Second Department issued a decision in Bouffard v. Befese, LLC, 2013 NY Slip Op. 07925, interpreting Real Property Law § 320’s command that a “deed conveying real property, which, by any other written instrument, appears to be intended only as a security in the nature of a mortgage, although an absolute conveyance in terms, must be considered a mortgage.”

In Bouffard , a convoluted series of real estate transactions included one in August 2004 where defendant purchased a property for $200,000 and entered into an “option agreement permitting” plaintiff “to repurchase the property within 90 days at an option price of $220,000.” Defendant did not take possession of the property. In an action, “inter alia, to set aside the” deed, the trial court found that under Real Property Law § 320, the deed and option were only a mortgage and, moreover, that the mortgage loan “was usurious and void pursuant to Banking Law § 14—a and General Obligations Law § 5—501.” The Second Department Affirmed, writing:

In determining whether a deed was intended as security, examination may be made not only of the deed and a written agreement executed at the same time, but also of oral testimony bearing on the intent of the parties and to a consideration of the surrounding circumstances and acts of the parties. Thus, a court of equity will treat a deed, absolute in form, as a mortgage, when it is executed as a security for a loan of money. That court looks beyond the terms of the instrument to the real transaction; and when that is shown to be one of security, and not of sale, it will give effect to the actual contract of the parties.

(Internal quotations and citations omitted).

Bouffard serves as a reminder that the law places limits on creative structuring of transactions and if a party skirts too close to the edge, they can end up a big loser, like the defendant in Bouffard , who was left with a loan it could not collect.

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