Advanced Business Law
(BPP433/85)
LAND
2007 Winter Quarter
Instructor: David Oliveiri
Advanced Business Law BPP 433
Advanced Business Law BPP 433
Advanced Business Law BPP 433
Learning Objectives
Just What is Land?
What Legal Rules Apply to Land and Land
Transfer?
Managerial Implications – Constraints, Risks,
Opportunities
Advanced Business Law BPP 433
Think About This!
Is “The River Campus” Land?
What is “The River Campus”?
Advanced Business Law BPP 433
Land
Land = Real Property
Real Property = “Bundle of Rights”
Why Land/Real Property?
Example from Hardin, Tragedy of the Commons (1968):
Open pasture, many herdsmen, herdsmen are REMPs.
How do they maximize?
Advanced Business Law BPP 433
Advanced Business Law BPP 433
Tragedy of the
Commons?
#Cattle
1
2
3
4
5
6
7
8
9
10
Wt. Gain/Cow/Week Total Wt. Gain Societal Gain
7
7
7
9
18
11
8
24
6
7
28
4
6
30
2
5
30
0
4
28
-2
3
24
-4
1
9
-15
-1
-10
-19
HOW MANY COWS WILL GRAZE IN THIS PASTURE?
Advanced Business Law BPP 433
Tragedy of the
Commons
Private Property = Rights Allocation [E.G.
Single Owner of Pasture]
Result: Society and Individual Decisions
Coordinated – [E.G. Single Owner Rents
Grazing Rights ]
Managerial Implications
Advanced Business Law BPP 433
Tragedy of the
Commons
Clay, Uncertain Property Rights and Agricultural
Production: Evidence from Post-Gold-Rush California
(Carnegie Mellon University, Unpublished, 2/16/2006)
1860 California, Uncertain Agricultural Land Rights
Significant Negative Effect on Farm Values, Crop
Production
– Squatters’ Farm Values 22-38% Lower
– Low Investment in Land; Lower Production; Use of
Short Season Crops
– But Similar Amounts of Livestock
Advanced Business Law BPP 433
Tragedy of the Commons
Managerial Implications
What Business Am I In?
What Rights Maximize Revenue?
– Grazing Rights, Above, Below,
Sides, Support, Light, Entry, Quiet,
Views, Resource Removal, …?
How Do I Get These Rights?
KEY CONCEPT: REAL
PROPERTY INTEREST
Advanced Business Law BPP 433
Interests in
Land/Real Property
Possessory Interests (Estates)
– Ownership Interests (Freehold Estates) -- Infinite/Indefinite/Lifetime
Duration
– Non-Ownership Interests (Nonfreehold Estates) – Includes
Commercial Leasing
ST2-Q5, Q7 (S&R 50-P1), Q1
Non-Possessory Interests (Non-Estates)
– Easements
– Profits
– Covenants
– Rents
ST2-Q4
Advanced Business Law BPP 433
Transfer – Only Of
Interest/Rights One Owns!
HOW?
Pre-Contract Stage
Contract Signed
Executory Contract Stage
Closing/Deed Delivered/Mortgage Executed
Post-Closing Stage
ST-Q2
Advanced Business Law BPP 433
Financing Transfers of
Real Property Interests
Assume a sale from Seller (S) to Buyer (B) of a
commercial office building. Purchase price is
$100k. S had previously mortgaged the property to
Bank (L), and the current balance is $75k.
– All Cash Sale
DEED
RELEASE
L
S
$75
Advanced Business Law BPP 433
B
$100
Financing Transfers of
Real Property Interests
Assume a sale from Seller (S) to Buyer (B) of a
commercial office building. Purchase price is
$100k. S had previously mortgaged the property to
Bank (L), and the current balance is $75k.
– New Mortgage Loan
DEED
RELEASE
L
S
$75
Advanced Business Law BPP 433
MORT.
B
$100
NL
$100
Financing Transfers of
Real Property Interests
Assume a sale from Seller (S) to Buyer (B) of a
commercial office building. Purchase price is
$100k. S had previously mortgaged the property to
Bank (L), and the current balance is $75k.
– Buyer Assumes Existing Mortgage
DEED
NOTE
L
S
B
$25
Advanced Business Law BPP 433
Financing Transfers of
Real Property Interests
Assume a sale from Seller (S) to Buyer (B) of a
commercial office building. Purchase price is
$100k. S had previously mortgaged the property
to Bank (L), and the current balance is $75k.
– Seller Financing/Wraparound Mortgage
DEED
RELEASE
L
S
$75
Advanced Business Law BPP 433
B
$15 + $85 Mort.
What Rights/Interests
Traditionally Accompany
Real Property Ownership
Right to Possess/Occupy
– Possess Every Inch? Restrictive Covenants, Setbacks
– Occupy Every Inch? Tenants
Right to Use as Owner Sees Fit
– All Uses? Zoning, Nuisance, Environmental Regulations
Right to Exclude Others
– Officials? Police With Warrant, Health Inspector, RGE
– Public? Discrimination Laws
– Neighbor? Easement by Necessity
Right to Transfer Freely
– Subdivide? Ordinances on Lot Size
– Eminent Domain
Advanced Business Law BPP 433
Real Property Rights As
Bargaining Starting Point
Coase, The Problem of Social Cost
Hypothetical: Sports Bar (S) and Doctor’s Office (D)
located on adjacent properties. Dispute –Noise,
Disruption, Loss of Business. Lawsuit.
Potential Lawsuit Outcomes : (1) No Nuisance (S
“Enjoins” D); (2) Nuisance (D Enjoins S); (3) Nuisance
(S Compensates D); (4) Nuisance (D Compensates S).
Who Decides Outcome? Correct Social Outcome?
What Next?
Hard (Specific) Rights v. Soft (Ambiguous) Rights
Advanced Business Law BPP 433
Bryant v. Lefever
Coase, Problem of Social Cost
Traditional Approach = Allocate Blame = Who
Causes?
BUT Incompatible Property Uses Resolved With
Free Bargaining
…Regardless of Initial Assignment of Rights!!
So, Rights Allocations= Starting Point for Bargain
With No Transactions Costs, Judges Cannot Affect
Allocative Efficiency!! BUT….
Advanced Business Law BPP 433
Negotiation
A
B
Farmers A and B
Adjacent Fields
Plowing Requires Turnaround – 10% of Plot at
Each End!
Can A and B Improve Yield?
Advanced Business Law BPP 433
Negotiation
A
B
Obtain/Disclose Useful Info
Master Facts
Understand/Satisfy Other Party
Support Position With Reasoning
Effectiveness – Explore Alternatives, Firm/Flexible,
Avoid Argument
Advanced Business Law BPP 433
Bottom Lines; Q&A
Effective Business Operation Requires Rights
Land/Real Property = “Bundle of Rights”
Uncertain Property Rights = Economic “Tragedy”
Allocated Property Rights = Starting Point for
Bargaining
Incompatible Property Uses Will Be Resolved With
Free Bargaining
Advanced Business Law BPP 433