585 S.W.2d 381
On November 8, 1974, Jean Sebastian contracted to purchase a house and lot in Covington, Kentucky from Perl and Zona Floyd for $10,900. She paid $3,800 down and agreed to pay the remaining balance plus taxes, insurance, and 8.5 percent annual interest in $120 monthly installments.1 The contract contained a forfeiture clause allowing the Floyds to terminate the agreement and retain all prior payments as rent and liquidated damages if Sebastian defaulted on any installment for sixty days.2
During the next twenty-one months Sebastian missed seven installments.3 Including her down payment she paid the Floyds a total of $5,480 rather than the $6,320 called for by the contract.4 Of this amount $4,300 or nearly forty percent of the contract price had been applied against the principal.5
The Floyds brought suit in the Kenton Circuit Court against Sebastian in August 1976 seeking a judgment of $700 plus compensation for payments for taxes and insurance and seeking enforcement of the forfeiture clause.6 Sebastian admitted by her answer that she was in default but asked the court not to enforce the forfeiture clause and counterclaimed for all payments made pursuant to the contract.7 On advice of counsel Sebastian ceased to make payments after the institution of this lawsuit.8
The case was referred to a master commissioner for hearing who recommended termination of the land sale contract and enforcement of the forfeiture clause.9 The Kenton Circuit Court entered a judgment adopting the commissioner’s recommendations.10 On appeal the Court of Appeals affirmed and the Supreme Court granted discretionary review.11
Whether a clause in an installment land sale contract providing for forfeiture of the buyer’s payments upon the buyer’s default may be enforced by the seller?12
There is no practical distinction between the land sale contract and a purchase money mortgage, in which the seller conveys legal title to the buyer but retains a lien on the property to secure payment.13 The significant feature of each device is the seller’s financing the buyer’s purchase of the property, using the property as collateral for the loan.14
The modern trend is for courts to treat land sale contracts as analogous to conventional mortgages, thus requiring a seller to seek a judicial sale of the property upon the buyer’s default.15 A conditional land contract in effect creates a vendor’s lien in the property to secure the unpaid balance owed under the contract. This lien is closely analogous to a mortgage. In view of this characterization of the vendor as a lienholder, it is only logical that such a lien be enforced through foreclosure proceedings.16 The seller’s remedy for breach of the contract is to obtain a judicial sale of the property.17
No. The facts show that the buyer had built up substantial equity in the property by paying nearly forty percent of the contract price toward the principal. The seller sought to enforce the forfeiture clause after the buyer defaulted on several monthly installments. Treating the seller's interest as a lien, the proper procedure is to hold a judicial sale of the property rather than allowing the seller to retain all payments as liquidated damages. This approach protects the buyer's equity while allowing the seller to recover the balance due on the contract plus expenses.18
The forfeiture clause may not be enforced by the seller. The judgment of the trial court and the opinion of the Court of Appeals are reversed and the case remanded for further proceedings consistent with this opinion.19