Chapter 2
Basic Principles of Real Estate Law
Chapter Outline
I.
Introductory Definitions
A. Property: everything subject to ownership
B. Tangible property: property the intrinsic value of which is embodied in
the physical subject matter itself
C. Intangible property: property that has no intrinsic value in and of itself
but that represents something of value
D. Real property: property consisting of land and all things affixed to it, as
well as natural objects on or growing on the land
E. Personal property: all property that is not considered real property
II.
Classifications of Property
A. Real property (also known as real estate or realty) is composed of
physical components with attendant rights.
1. Surface rights: divided into land rights and water rights.
a. Land rights: property rights in all land contained within
specified boundaries, plus everything permanently attached
to the land.
b. Water rights: rights pertaining to property covered by
water on or adjacent to a landowner’s boundaries, as well
as rights in the use of the water itself. Water rights are
divided into littoral rights and riparian rights.
i.
Littoral rights: water rights pertaining to a
landowner whose property abuts a lake, ocean,
or sea. Landowner owns property up to the
high-water line.
ii.
Riparian rights: water rights pertaining to a
landowner whose property abuts a river, stream,
or similar watercourse. If the water is
navigable, the owner’s rights extend only to the
water’s edge. If the water is non-navigable, the
owner owns the submerged land up to the center
of the water.
c. Other terms important in understanding surface rights:
i.
Accretion: the addition of land by the gradual
deposit of waterborne materials on shore.
ii.
Reliction: the gradual drying up of water,
resulting in the addition of uncovered land.
1
iii.
Erosion: the gradual washing away of land
from the shore by tides or currents.
iv.
Avulsion: the loss of land bordering water as a
result of a sudden or violent natural disturbance.
2. Air rights: owning the air space above the parcel extending up
to heights established by law. Up to these limits the landowner
has private air rights. Beyond these limits, the air space is
subject to public air rights. Private air rights may be sold as
“air lots” upon which buildings can be built. They also are of
value to ensure an uninterrupted view.
3. Subsurface rights: also referred to as mineral rights, which
extend from the surface boundaries of a parcel of land
downward. These include oil, gas, ore, and other minerals.
B. Personal property (also known as chattel or personalty) pertains to
property characterized by movability.
1. Property is transferred by a document called a bill of sale. This
document is signed by the seller(s) and provides a detailed
description of the personal property conveyed. State law dictates
whether this document must be witnessed and notarized.
2. If personal property is used as part of the collateral for a loan, a
UCC-1 financing statement is filed in the public records to
perfect a security interest in personal property. In filing this
statement, a lender is giving notice to third parties of its security
interest in the personal property described in the statement.
C. Fixtures are objects that at one time were personal property but, through
the process of attachment to real property, have become part of the real
property.
1. Whether these objects are to be treated as personal or as real
property depends first and foremost on the intentions of the
parties.
2. Unless a contract indicates otherwise, an item determined to be a
fixture stays with the real property.
3. When drafting a fixtures provision in a contract for purchase and
sale, it is important to be as specific as possible.
4. If a contract does not contain a fixtures provision and a dispute
arises, four judicial tests can be used to determine whether an
item must remain with the real property:
a. intention of the parties,
b. method of annexation,
c. adaptation of the item, and
d. relationship of the parties involved
2
III.
Basic Ownership Rights
A. Legal rights (also known as a “bundle of rights”) are conferred when real
property is conveyed.
B. These rights consist of
1. right of disposition: the right to dispose of one’s property by
transferring rights to the property during one’s lifetime or at time
of death.
2. right of use: the right to use one’s property in any lawful manner
or to give a general or limited right of use of the property to
another.
3. right of possession: the right to occupy one’s property in
privacy.
4. right of exclusion: the right to exercise control over one’s
property.
IV.
Methods of Acquiring Real Property
A. Purchase: the most common way in which property changes hands.
B. Inheritance:
1. Devise: a gift of real property made in a will. The recipient is
referred to as the devisee. Generally, the devisee will take the
real property subject to all encumbrances and liens unless the
will makes provision for the pay-off of mortgages and other
liens.
2. Descent: the passing of real property when an owner dies
intestate (without a will). The property will pass according to
state intestacy laws.
C. Gift: a conveyance of real property without consideration paid by the
recipient.
1. The person making the gift is referred to as the donor, and the
recipient is referred to as the donee.
2. Typically, a gift of real property is revocable prior to the
execution and delivery of a deed by the donor to the donee.
3. In addition, an oral gift of real property generally is not
enforceable. Some states provide an exception if the donee has
taken physical possession of the property and has made valuable
improvements to the property in reliance on the gift.
D. Adverse possession: the acquisition of title to real property through taking
possession of land that belongs to another without the owner’s consent and
3
retaining possession for a statutorily prescribed period of time. Typically,
for adverse possession to occur, the possession must be
1. hostile (without the owner’s consent).
2. actual (there must be physical control exerted over the property).
3. open and notorious (anyone would be able to determine the
possession has occurred through inspection).
4. continuous (must continue for a statutorily prescribed time).
(Many states allow the tacking of time periods of previous
adverse possessors.)
5. exclusive (cannot share use of the land in question with its title
owner).
6. In addition, some states require the adverse possessor to take
possession under claim of right (with the intent to claim the
land as his/her right). Some states require that the adverse
possessor pay the real property taxes on the property for the
requisite statutorily prescribed of possession.
V.
Estates and Tenancies
A. The interest a person receives in real property is based on the type or
estate or tenancy conveyed. The following terms denote the nature,
extent, and duration of a person’s interest in real property.
B. Freehold estates: estates of indeterminable duration. Created through the
combination of words of purchase and words of limitation. The two most
common types of freehold estates are fee simple absolute and life estate.
1. Fee simple absolute (also known as a fee simple or fee): an
estate that grants the property owner each of the four basic
property rights. This is the greatest estate one may hold. The
majority of real property transactions convey a fee simple
absolute unless words to the contrary appear on the deed.
2. Life estate: an estate in which the grantor conveys title to real
property to another for a period of time measured by someone’s
life.
a. If grantor does not specify who takes the property once the
life estate terminates, the grantor retains a reversionary
interest and the property reverts to the grantor or his/her
estate.
b. If the grantor does specify to whom title to the property
passes upon termination of the life estate, the person so
indicated is referred to as a vested remainderman.
c. Life estate pur autre vie is a life estate granted for the
lifetime of someone other than the grantee.
4
d. The holder of the life estate has the right of possession, use
and exclusion, but rarely the right of disposition.
e. The holder of the life estate must not diminish the value of
the property by committing waste.
i.
Permissive waste: the diminishment of the
value of property when a life estate holder fails
in the upkeep of the property.
ii.
Voluntary waste: the active use of property by
a life estate holder in a manner that reduces its
market value.
iii.
Ameliorative waste: the alteration of property
through the addition of improvements by a life
estate holder that increase the value of the
property. This generally is permitted.
C. Leasehold estates: estates of determinable duration. They convey the
rights of use, possession, and exclusion, but not disposition. The four
basic leasehold estates are the following:
1. Estate for years (also known as a tenancy for years): a tenancy
that continues for a designated period.
2. Tenancy from period to period: a tenancy that continues for
successive intervals until one party to the agreement provides the
other party with notice of termination of the tenancy.
3. Tenancy at will: a tenancy that begins as an estate for years,
with the tenant remaining on the property by agreement with the
landlord after the estate for years expires.
4. Tenancy at sufferance: a tenancy occurring after the expiration
of a lease, in which a tenant remains in possession of the
property without the landlord’s consent.
VI.
Methods of Title Holding
A. Ownership in severalty: ownership of real property in one’s own name
as a single owner. A single or a married individual may take title in
severalty. The individual’s marital status should appear on the deed
nonetheless.
B. Types of concurrent (joint) ownership:
1. Tenancy in common: a form of concurrent ownership in which
two or more persons have undivided interests in property but
which does not confer the right of survivorship. The co-owners
may own equal or unequal shares.
2. Joint tenancy: a form of concurrent ownership in which two or
more persons have undivided interests in property, with the right
5
of survivorship. The co-owners must own equal shares and take
title at the same time under the same deed. In some states, to
create a joint tenancy, the words “with right of survivorship”
must appear on the deed; otherwise, a tenancy in common is
presumed.
3. Tenancy by the entirety: a form of concurrent ownership by
husband and wife, in which each spouse has an undivided
interest and right of survivorship. The law creates a legal fiction,
giving each spouse a 100% interest in the property. Neither
spouse may mortgage or convey the property without the consent
of the other spouse. This form of ownership is not recognized in
all states.
VII.
Ownership by a Business Entity
A. Sole proprietorship: any property acquired or sold is done in the owner’s
own legal name (not in the name of the owner’s business).
B. Partnership (including general partnerships, limited partnerships, and
limited liability partnerships): Real property may be bought or conveyed
either in the partnership name or in the names of the partners. The
partnership, not the individual partners, holds title to the property.
C. Corporation: Because a corporation is a separate legal entity, title to real
property of a corporation is held in the name of the corporation, not in the
name of the shareholders. The purchase and sale of real property must be
agreed to by the board of directors, with the board adopting a resolution
indicating ratification of the contract for purchase and sale. The corporate
bylaws typically indicate the officers permitted to carry out the transaction
on behalf of the corporation.
D. Limited liability company: Acquiring and conveying title to real
property are done in the name of the company.
VIII. Dower and Curtesy
A. Dower: the provision the law makes for a widow to lay claim to an
interest in her deceased husband’s real property.
B. Curtesy: the provision the law makes for a widower to make a legal claim
to an interest in his deceased wife’s real property.
C. elective share: a spouse’s statutory right to a fractional share of
real and personal property owned by the deceased spouse at the date of
death. In most states, dower and curtesy have been replaced by the concept
6
of the spousal elective share. a spouse’s statutory right to a fractional
share of real and personal property owned by the deceased spouse at the
date of death.
D. In states that still recognize dower and curtesy, it is important to include
the signature of both spouses must be recorded on all conveyances of real
property.
IX.
Community Property
A. A few states, generally founded under Spanish or French rule, recognize
the concept of community property: Louisiana, California, Texas, Nevada,
Arizona, Idaho, New Mexico, and Washington.
B. In community property states, all property falls within one of two
categories:
1. Separate property: (a) all property acquired by a spouse prior to
marriage, (b) income from property acquired by a spouse prior to
marriage unless commingled in a manner that makes it
community property, (c) acquired solely through separate funds,
or (d) acquired by gift, will, or descent, unless the gift or will
clearly indicates that the property is given to both husband and
wife.
2. Community property: all property, both real and personal,
acquired during marriage by either spouse.
C. Community property cannot be sold without the other spouse’s consent.
The intestacy laws of each state govern the manner in which community
property upon the death of a spouse who dies intestate. Most communityproperty states recognize prenuptial and postnuptial agreements. Absent
such an agreement, community property is divided equally in the case of
divorce.
X.
Homestead Property
A. Homestead property: the primary dwelling house or residence of the
head of household plus adjoining land.
B. Three contexts
1. Probate laws pertaining to homestead property: When a husband
or wife dies leaving a surviving spouse and minor children, the
homestead property passes automatically to the surviving spouse
and children. Whether the surviving spouse receives a fee simple
absolute or a life estate (with the children as vested
remaindermen) depends on state statutory law.
7
2. Homestead property tax exemptions: The majority of states
provide, by statute, a set dollar amount that is subtracted from the
assessed value of homestead property before real property taxes
are calculated.
3. Protection against the claims of creditors; sometimes referred to
as homestead rights: These rights may prevent a forced sale or
protect a certain dollar amount of equity in the homestead
property.
a. Historically, some states, such as Florida, had become
known as bankruptcy havens because of liberal state laws
protecting homestead property, regardless of the value of
the property, if mortgage payments were kept current.
b. The Bankruptcy Abuse Prevention and Consumer
Protection Act of 2005 placed a cap of $125,000 in equity
protection in homestead property unless the bankruptcy
filer has owned homestead property in the state for at least
1,215 days (40 months) prior to filing for bankruptcy. For
filers who have owned homestead property in the state for
40 months or more, election of state bankruptcy protections
for homestead property may be elected.
8