Because learning changes everything.
Chapter 2:
Legal Foundations to Value
© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
The Real Property Bundle of Rights: A Few
Questions
• What do we mean by rights?
• What are property rights?
• What is real property?
• What is personal property?
• What do we do when the difference is unclear?
© McGraw Hill 2
What Are Rights?
Claims the government is obligated to enforce.
• Derived from the Constitution.
• Differs from raw power.
Non–revocable.
• But subject to public health, safety, and welfare.
Enduring.
• Not limited to the memory of owners or others.
• Cannot be “erased” by other citizens or by government.
© McGraw Hill 3
Personal Rights v s. Property Rights
ersu
Personal rights.
• Freedoms guaranteed by Constitution.
• Supreme Court interpretations of Constitution.
Property rights.
• Exclusive possession.
• Enjoyment of the use or benefit: Use, collect rents, harvest.
• Freedom to dispose as one pleases: sell, convert, rebuild.
• Within the limits of safety.
© McGraw Hill 4
Real Property v s. Personal Property
ersu
Real property: Rights in land and its permanent structures.
• Surface of the earth and improvements.
• Air, up to reserved air space or tallest structure.
• Beneath the earth: minerals, oil and gas, water.
Personal property: All other property.
• Personal and household goods.
• Intellectual property.
• Music.
© McGraw Hill 5
Rights in Our Society
Access the text alternative for slide images.
© McGraw Hill 6
Real Property: Rights in Three Dimensions
Access the text alternative for slide images.
© McGraw Hill 7
Built on Air Rights
MetLife Building, New York New East Side, Chicago
© McGraw Hill 8
Fixtures 1
Fixture: Real property that formerly was personal property.
Rules for identifying a fixture:
• Manner of attachment.
• Character of the article and manner of adaptation.
• custom screens or storm windows.
• church pews.
• custom designed furniture.
© McGraw Hill 9
Fixtures 2
Intention of the parties.
• Dominant rule.
• Customary assumptions of the realm.
• Ex: Kitchen appliances – owned home v s. apartments.
ersu
Relation of the parties.
• Variant of rule of intention.
• Trade fixtures of a commercial tenant (personal property).
• Fences installed by a tenant farmer (personal property).
• Items installed by a residential tenant (personal property).
© McGraw Hill 10
Importance of Fixtures
• In every real estate transfer, fixtures lurk.
• Fixtures automatically go with the real property.
• Be careful to identify possible fixtures.
• Explicitly state whether they stay with the property or not.
© McGraw Hill 11
Real Property Interests
Interest: Any “bundle” of rights in real property.
Estate: An interest with the right of exclusive possession.
Nonpossessory interests:
• Easements.
• Restrictive covenants.
• Liens.
© McGraw Hill 12
Estates
Access the text alternative for slide images.
© McGraw Hill 13
Ownership (Freehold) Estates 1
• Estates with indefinite length.
• Fee simple absolute – contains all possible rights.
• Fee simple conditional – all rights, but revocable if specific
condition is violated.
© McGraw Hill 14
Ownership (Freehold) Estates 2
Life estate with remainder interest.
• Ordinary – created by the owner.
• Legal – Imposed by law.
• Special problem in Florida with homestead:
• At death of spouse,
• Surviving spouse gets life estate.
• Any minor children get vested remainders.
© McGraw Hill 15
Leasehold Estates
Estates with definite ending.
Tenancy for years.
• For a specific interval of time (few days to decades).
• Must be written if for more than one year.
• Written lease contract governs entirely.
Periodic tenancy.
• Most commonly monthly (can be weekly, quarterly).
• Automatically renews until either party terminates.
• Often by oral agreement.
• State law governs notice of termination.
• Time required is usually half of the payment period.
© McGraw Hill 16
Modernizing Leasehold Law
Leasehold law derived from agrarian society.
• Landlord’s obligation: Simply grant possession.
• Tenant’s obligation: Pay the rent.
Concepts and precedents were inadequate for a modern
apartment setting.
• Landlord is providing shelter and related services.
• Tenants’ actions affect each other.
States adopted residential landlord and tenant laws to solve
this problem.
© McGraw Hill 17
Model Residential Landlord – Tenant Act
• Establishes a more equitable relationship between
landlords and tenants.
© McGraw Hill 18
Non–Possessory Interests in Land
• Easements.
• Liens.
• Restrictive Covenants.
© McGraw Hill 19
Easements
• Easement: The right to use land for a specific and limited
purpose.
© McGraw Hill 20
Easement Appurtenant
• Right of use a (dominant) parcel of land “enjoys” over an
adjacent (servient) parcel.
• Always a dominant and servient parcel involved.
Affirmative easements: Negative easements:
• Driveway or access right- • Light and air easement.
of-way. • Scenic easement.
• Sewer line.
• Drainage.
• Common wall.
• “Runs with the land”: Rights and obligations are
inseparable from the parcels involved
© McGraw Hill 21
An Easement Appurtenant Involves a Dominant
Parcel and a Servient Parcel
Access the text alternative for slide images.
© McGraw Hill 22
Easements in Gross (“Commercial Easements”)
Right to use land, unrelated to any other parcel.
• Extract minerals or oil and gas.
• Build a roadway or railway.
• Lay a pipeline, power line, or cable.
• Run an irrigation ditch.
• Place and maintain a billboard or communications tower.
• Harvest timber or crops.
• Conservation easement for wetlands preservation.
• Hunt, fish, snowmobile.
Transferable separately from land title or ownership (Does not “run with
the land.”)
No dominant parcel – only servient parcels.
© McGraw Hill 23
More Easement Concepts
Exclusive & nonexclusive easement in gross.
• Exclusive: Conveys all rights of the easement.
• recipient can extend access to others.
• Nonexclusive: Rights limited to one user only.
• Recipient cannot extend access to others.
• Owner can convey access to others.
License: Like an easement in gross, but conveys permission
rather than right.
• Revocable.
• Terminates at the death of the grantor or sale of the land.
© McGraw Hill 24
How Many Easements in This Scene?
Access the text alternative for slide images.
© McGraw Hill 25
Rights Included in Various Real Property
Interests
Access the text alternative for slide images.
© McGraw Hill 26
Restrictive Covenants (Deed Restrictions) 1
Private restrictions on land use.
Created at conveyance of land to a new owner.
Examples:
• Setback lines, height restrictions, minimum floor area.
• No freestanding structures.
• No chain–link fences.
• No RV’s or boats parked in view of the street.
• No cars regularly parked in the driveway.
• No garage door facing the street.
• Required architectural review.
• No external antenna, satellite dish or clothesline.
• Required use of professional lawn service.
© McGraw Hill 27
Restrictive Covenants (Deed Restrictions) 2
Two methods of creation:
Restriction in a deed conveying a single parcel of land.
Restrictions placed on all parcels of a subdivision.
• A list of restrictions recorded as a separate document.
• Mutually binding on all purchasers in the subdivision.
© McGraw Hill 28
Restrictive Covenants: Enforcement
Enforced by court injunction.
Enforcement only by “parties at interest”.
• Isolated deed restriction:
• Grantor or grantor’s heirs.
• Subdivision restrictions:
• Owners, mortgage holders, renters.
Courts reluctant to enforce in case of:
• Delayed enforcement (abandonment).
• Changed neighborhood.
• Changed public policy.
Mandatory retirement in some states.
© McGraw Hill 29
Liens
Lien: A security interest for an obligation.
• Usually a debt.
General Liens: Arise from events unrelated to the property.
• Court awarded damages.
• Federal tax liens.
Specific liens: Arise from ownership and use of the
property.
• Mortgage.
• Mechanics’ lien.
• Property tax, assessment, or CDD lien.
© McGraw Hill 30
Three Levels of Liens on a Personal
Residence
Access the text alternative for slide images.
© McGraw Hill 31
Forms of Co–Ownership
Access the text alternative for slide images.
© McGraw Hill 32
Indirect Co–ownership
• Entity holds title.
• Ownership passes
through the entity.
• Undivided interest.
Access the text alternative for slide images.
© McGraw Hill 33
Forms of Direct Co–ownership 1
Example: A house with multiple owners.
• All share the right of exclusive possession.
• Cannot obstruct each other’s use.
• May hold different sizes of shares.
Tenancy in common.
Joint Tenancy.
Tenancy by the entirety.
Condominium.
© McGraw Hill 34
Direct Co–ownership
Access the text alternative for slide images.
© McGraw Hill 35
Forms of Direct Co–ownership 2
Tenancy in common:
• Default form except in special cases.
• Multiple owners of same fee simple interest.
• Each owner can sell or mortgage their interest
independently.
• Can be different size shares.
• Can be created in multiple transactions.
• Bad form for owning an operating business.
• Poor form for multiple investors.
© McGraw Hill 36
Forms of Direct Co–ownership 3
Joint tenancy.
• Defining feature: “right of survivorship” restricts inheritance
to heirs of the last surviving owner.
• Difficult to create and easily disrupted.
• Prevented or restricted by law in some states.
Tenancy by the entirety.
• Joint tenancy for husband and wife.
• Solves Florida problem of homestead life estate.
• Problem arises when household includes minor children.
• Protected against liens arising from either spouse alone,
including judgments.
© McGraw Hill 37
Forms of Direct Co–ownership 4
Condominium.
• Combines single ownership and tenancy in common.
• Created by condominium declaration.
• Bylaws define owner rights:
• Share of all obligations.
• Restrictions on sale or rental.
• Methods of altering bylaws.
• Creates additional level of (private) government.
• History of owners not understanding the restrictions.
© McGraw Hill 38
Direct Co–ownership: Condominiums
Access the text alternative for slide images.
© McGraw Hill 39
Why would you want a condo?
• Price.
• Amenities.
• Security, both when you are in residence, or away.
• Others do the maintenance and upkeep.
• Interesting social context and/or location.
© McGraw Hill 40
What special risks do you buy into?
Design and construction.
• Noise issues.
• Privacy.
• Parking and storage limits.
• Common area and structure maintenance costs.
Rules that may be frustrating.
• Exterior decoration and use of patio or balcony.
• Guest policies.
• Right to rent out.
Quality of management? (professional or not?).
Property reputation.
© McGraw Hill 41
Condo documents You Want to Examine
• Declaration.
• By–laws.
• Minutes from recent board meetings.
• Any pending legal actions.
• Association budget.
• Maintenance reserves.
© McGraw Hill 42
Cooperative 1
• Corporation owns property.
• Each owner holds shares and a proprietary lease (no term
and no rent).
• Cannot mortgage individual interests.
• Owner’s mutually liable for any specific liens.
© McGraw Hill 43
Cooperative 2
Access the text alternative for slide images.
© McGraw Hill 44
Automatic Ownership from Marriage: Early
Forms
Dower/curtesy.
• Automatic one–third life estate for a surviving spouse in
real property of a decedent spouse.
• Common law roots (traditional English).
• Dower is widow’s claim; curtesy is widower’s.
• Covers all real property ever owned during the marriage.
Problems with dower (widow’s interest):
• Life estate unmarketable.
• Much of modern wealth not in real property.
• Real property may be in multiple states.
© McGraw Hill 45
Automatic Ownership from Marriage:
Modern Forms 1
Elective share.
• Modern substitute for dower.
• Surviving spouse receives up to one–third of all decedent’s
personal property and in–state real property.
• Must chose by explicit “election” within specified time.
• Adopted in some form by 25 states.
© McGraw Hill 46
Automatic Ownership from Marriage:
Modern Forms 2
Community property.
• One–half interest in all property acquired “out of the fruits
of the marriage”.
• Not property owned before the marriage.
• Not gifts or inheritances to one spouse.
• May include income generated from “separate” property.
Found in states of Spanish tradition, plus Louisiana,
Wisconsin and Alaska.
Growing in acceptance as a superior arrangement to elective
share.
© McGraw Hill 47
Exhibit 2-10 Two Main Forms of Marital
Property Rights
Elective Share Community Property
Mainly Spanish/French heritage
Mainly used in: English heritage states states
Spousal share: One–third One–half
How triggered: Explicit declaration Automatic
Wealth coverage Varies up to all wealth All wealth created in the marriage
Number of States About 25 Ten states, with influence in more
© McGraw Hill 48
Timeshare
Common interval is a week.
Range in “quality” of ownership:
• Condominium share.
• Leasehold.
• License.
Choice of floating time intervals (example within three months) and
choice of resorts.
Industry with a questionable history.
Never a financial investment.
• Note that the developer has all the market information and the buyer
has none.
Key is ability of developer to sustain services promised.
© McGraw Hill 49
Issues in Rights to Water
• Who owns the land under a body of water?
• Who controls use of land under a body of water?
• Who has the right to use the surface?
• Who has the right to use the water itself?
• Who has the right to use groundwater?
• For answers, see on–line appendix to text.
© McGraw Hill 50
Rights to Oil, Gas, and Minerals
Rights carry implied easement for removal.
In some states, mineral rights imply ownership of the space
being mined.
Oil rights have two forms.
• Traditional “rule of capture” (If you could remove it, it was
yours).
• Unitization states: Regardless of the point of extraction, oil
is allocated to the properties from which it likely came.
© McGraw Hill 51
Summing Up
There is real property and personal property.
• ....and the problem of fixtures.
Real estate is a bundle of rights:
• Exclusive possession.
• Enjoyment.
• Disposition.
This bundle has many variations.
• Estates – freehold or leasehold.
• Non–possessory interests – easements, restrictive
covenants, liens.
© McGraw Hill 52
More Summing Up
There can be more than one direct owner.
• Tenancy in common, joint tenancy, tenancy by the entirety.
• Condominium, cooperative.
There can be automatic marital co–ownership.
• Community property.
• Dower, elective share.
© McGraw Hill 53
