Real Estate Law,
th
6
Edition
by George J. Siedel, III
and Robert J. Aalberts
Slides prepared by
Heidi Bulich
Real Estate Law, 6th ed., by Siedel and Aalberts
1
Real Estate Law
• What is Law? System of rules and principles devised
by organized society for the purpose of controlling
human conduct.
• Sources of Law
• US Constitution – Sets up 3 branches of government. Powers
are express and implied.
• Bill of Rights
• Remaining amendments
• State Constitutions
• Statutes
• Judicial
• Administrative
Real Estate Law, 6th ed., by Siedel and Aalberts
Chapter 1
2
Important Principles
• Common Law – court-made law
• Stare decisis – courts must rely on earlier
decisions involving similar facts and
higher court decisions trump
• Equity – to provide relief to parties who
had just claims but who can not be
adequately compensated with monetary
damages
Real Estate Law, 6th ed., by Siedel and Aalberts
Chapter 1
3
The Court System
US Supreme Court
Highest State Appellate Court
Hears Questions of Law
Federal Court of Appeals
Hears Questions of Law
Intermediate Appellate Court
Hears Questions of Law
District Court
Trier of Fact of federal issues and
disputes involving persons from different states
Dispute must be over $75,000.
Trial Court
Trier of Fact - Hears Criminal and Civil Cases
Real Estate Law, 6th ed., by Siedel and Aalberts
Chapter 1
4
Nature of Property
• Property refers to rights and interests of
ownership. Rights include:
•
•
•
•
•
Possession
Control within the law
Enjoyment within the law
Exclusion
Ability to convey
Real Estate Law, 6th ed., by Siedel and Aalberts
Chapter 2
5
Real Property vs. Personal Property
• Real Property – Immovable, fixed and permanent
• Governed by case law and state statutes
• Oftentimes conveyed with a deed
• Often taxed
• Personal property – everything that is not real –
main characteristic – it is moveable, may be
tangible or intangible
• Governed by UCC Article 2
• Sometimes a bill of sale is required
• Oftentimes NOT taxed
Real Estate Law, 6th ed., by Siedel and Aalberts
Chapter 2
6
Fixtures
Fixture – a tangible object – formerly treated as personal property
but now has become so connected with the real property that it
becomes real property
• Annexation = Attachment. Two types of annexation
• Permanent – Removal would cause serious
damage i.e. furnace, pipes.
• Constructive – Property may not be physically
attached, but look at its relationship with the real
property i.e. screens for storm windows, garage
door opener
Real Estate Law, 6th ed., by Siedel and Aalberts
Chapter 2
7
Cont. Fixtures
• Adaptation – Adaptation of article to use in
property i.e. plumbing apparatus designed for use
in a plumbing system, air conditioning unit
installed into a specific site. Some courts look to
see if articles are necessary or beneficial to
enjoyment of real estate.
• Intent – Most important. Did he/she intend to
make article a permanent part of the real estate?
Best if expressed in a contract.
Real Estate Law, 6th ed., by Siedel and Aalberts
Chapter 2
8
Cont. Fixtures
• Important to distinguish personal property from fixtures:
•
•
•
•
•
Different laws apply
Means of conveying differ
Fixtures are taxed
Eminent Domain
Mortgage instrument often describes a security interest in all mortgagor’s
originally owned and “after acquired” real property – NOT personal
property.
• Foreclosure sales – fixtures, not personal property are subject to sale
• Tenant fixtures
Real Estate Law, 6th ed., by Siedel and Aalberts
Chapter 2
9
Growing Crops
• Fructus naturales – Any plant with perennial roots
(trees, shrubs, grasses) which is produced by the power
of nature alone.
• Fructus industriales – Sometimes known as
emblements. Plants which are sown annually and
grown primarily by human labor (wheat, corn,
soybeans).
• If real estate is sold – all unsevered growing things pass
with the land.
• If growing crops are sold separately from land –
UCC 2-107 applies (sale of forestry rights, sale of
potatoes)
Real Estate Law, 6th ed., by Siedel and Aalberts
Chapter 2
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UCC 2-107
• If articles can be
severed without
material harm to real
estate, then they are:
Personal Property
Real Estate Law, 6th ed., by Siedel and Aalberts
• If material harm
caused to real
property if severed. . .
Look to see WHO
severed
• If severed by S – then
personal property law
govern
• If severed by B – then
real property law
governs
Chapter 2
11
Doctrine of Emblements
•
•
•
Emblements are annual crops produced by labor and
industry.
Doctrine applies in L – T situation.
T in interest of fairness, keeps fruit of labor if:
1. Period of Tenancy of uncertain duration
2. Tenancy terminated by L or Act of God; and
3. T can prove he or she planted crop during tenancy
Real Estate Law, 6th ed., by Siedel and Aalberts
Chapter 2
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Competing Interests
-- Fixtures
• Transfer of Real Estate – Unless specified in the
purchase agreement to be personal property, will be
considered real property and pass to the Buyer
• Tenant’s Fixtures – Some will be considered fixtures
and remain on the property at the termination of the
tenancy. If the tenant’s fixture is a trade fixture,
agricultural fixture or a domestic fixture AND
1. Tenant can remove fixture without subjecting harm
to premises; and
2. Articles are removed before surrendering premises
to landlord, THEN : Article may be removed by tenant at
termination of tenancy.
Real Estate Law, 6th ed., by Siedel and Aalberts
Chapter 2
13
Fixture Financing
When property is transferred, the following rules apply:
• Real Property – Deed is
used between B & S.
Mortgage is used
between ME & B.
Real Estate Law, 6th ed., by Siedel and Aalberts
• Personal Property – Bill
of Sale is used between B
& S.
Security agreement is
used between B & (Seller
or Lender)
Chapter 2
14
Important Definitions
• UCC – Compilation of commercial laws which
were drafted by legal scholars. Adopted by every
state except LA, therefore uniform laws in US
regarding sale of personal property.
• Article 9 – Applies to “any transaction which is
intended to create a security interest in personal
property or fixtures.” To create a security
interest, must obtain and perfect security interest.
Real Estate Law, 6th ed., by Siedel and Aalberts
Chapter 2
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Creating Security Interests
• In Personal Property
• In Real Property
TO OBTAIN: execute security
agreement between B & (Seller
or Lender) or take possession of
article
TO PERFECT: file financing
statement (UCC-1) with
Secretary of State. This gives
secured party rights against
third parties.
PRIORITY – Determined by who
files first
Real Estate Law, 6th ed., by Siedel and Aalberts
TO OBTAIN: Execute security
agreement between B & (Seller or
Lender) or take possession of article.
TO PERFECT: file financing
statement (UCC-1A) with Register of
Deeds). This gives secured party rights
against third parties.
PRIORITY – Determined by:
Against Concurrent or later creditors
– WHO FILES FIRST
Against all prior security interests,
except construction mortgages – must
be perfected at time fixture affixed or
within 20 days to take priority over
prior security interests (except
construction mortgages)
Chapter 2
16
3 Common Fixtures Scenarios
• ME vs. MR – Many mortgages cover fixtures, therefore,
all articles annexed to real property become subject to
lien of mortgage and cannot be removed by owner.
• Owner vs. Secured Party – If security agreement
executed and no other creditors, no need to perfect and
secured party may repossess articles.
• Secured Party vs. Other Creditors – See page 38.
Real Estate Law, 6th ed., by Siedel and Aalberts
Chapter 2
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Scope of Real Property
• Airspace – Ownership of land generally includes ownership of
airspace above its surface. Owner of air rights may sell rights
separately from surface of real estate, i.e. high rise real estate projects.
• Subsurface Rights - Ownership of land generally includes ownership
of subsurface space below its surface. Owner of these rights may sell
rights separately from surface of real estate, i.e. sale of minerals, oil
and gas.
Special considerations for oil and gas leases -- Some states permit oil and
gas to be sold as real property (ownership principle). Other states do not
consider oil and gas owned until they are captured. Right to extract =
personal property right (exclusive right).
Real Estate Law, 6th ed., by Siedel and Aalberts
Chapter 3
18
Water Rights
• Limited Resource – Who owns land under water? Who
has right to use water? How should water be used?
• Navigable Water – If a stream or body of water may be
used for commerce between or among the states, it is
navigable water – it becomes a public river or highway.
Michigan has “floating log” test.
• Ownership of Land Under Water – If you are a riparian
owner, how far does your land extend?
Real Estate Law, 6th ed., by Siedel and Aalberts
Chapter 3
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Cont. Water Rights
• First Question: Is water navigable?
• If YES – STATE owns riverbed to “high
water” mark
• If NO – You own to center of river, all
submerged land and land on shore to “high
water” mark.
Real Estate Law, 6th ed., by Siedel and Aalberts
Chapter 3
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Use of Water
• Distinguish ownership, use and control
• Ownership – Just discussed
• Use – Public has right to use all navigable water as
long as federal and state laws not violated. BUT
NOTE – Right to use navigable water does not
include license to go on riparian owner’s land.
Private owners control use of non-navigable waters.
• Control - Congress – over navigable waters which
affect interstate commerce. States – all navigable
waters which do not affect interstate commerce.
Private owners – all non-navigable waters.
Real Estate Law, 6th ed., by Siedel and Aalberts
Chapter 3
21
Cont. Use of Water
• Riparian Rights Theories
1. Natural Flow - each riparian owner entitled to
have water maintained in “natural state”.
“Artificial” wants OK as long as they do not
materially change quantity or quality of water. (NOT
Common)
2. Reasonable Use – each riparian owner allowed
to use water benefits as long as owner does not
interfere unreasonably with beneficial uses of other
riparian owners.
• Prior Appropriation – FIRST come FIRST serve and
first person must have used water
Real Estate Law, 6th ed., by Siedel and Aalberts
Chapter 3
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Pollution Credits
• Transferable rights related to the use of air.
1. Clean Air Act standards – 1990 Clean Air Act
amendments established the Acid Rain Program –
permanent cap on total amount of sulfur dioxide
emitted by electric utilities nationwide (about ½ of
amount emitted in 1980)
2. Since 1995 US companies permitted to trade units
(called allowances) of certain air emissions.
3. Clear Skies Initiative.
Real Estate Law, 6th ed., by Siedel and Aalberts
Chapter 3
23
Priority Among Lien Holders
Look to state law to determine when liens attach:
Some states: when any construction began or
materials first furnished;
Others: when work completed;
Others: when contract signed or work ordered;
and
Others: when notice of lien recorded.
Real Estate Law, 6th ed., by Siedel and Aalberts
Chapter 3
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Cont. Priority
4/15/02 : Owner of vacant lot hires contractor to build home
5/15/02 : Work begins
8/15/02 : Work completed
9/15/02 : House sold and mortgage to Last Bank. LB
records mortgage.
11/2/02 : Notice of lien recorded because seller never pd.
contractor. Contractor had 90 days to record lien IN MOST
STATES contractor has to be paid by bank or purchasers to
avoid property from being sold.
* In most states, mechanic’s liens have priority over
mortgages.
Real Estate Law, 6th ed., by Siedel and Aalberts
Chapter 3
25
Environmental Liens
Comprehensive Environmental Response,
Compensation & Liability Act of 1980 (CERCLA or
Superfund)
Federal statute for:
1. Cleanup of contaminated property, and
2. Allocation of liability for costs
Retroactive, strict and where harm is indivisible, joint
and several liability for costs of responding to a
release. No showing of fault is required.
Real Estate Law, 6th ed., by Siedel and Aalberts
Chapter 3
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Liability Under Superfund
• Release has occurred or is threatened
• Response costs were incurred
• Person involved is 1 of the following:
• Current owner or operator of facility
• Former owner or operator of facility
• Person who arranges for transport, treatment or disposal
of hazardous substances
• Transporter of hazardous substances
• Note: exceptions apply
Real Estate Law, 6th ed., by Siedel and Aalberts
Chapter 3
27
Limited Defenses to Liability
•
Purchasers of Property/Innocent Landowners
• Innocent owner did not know nor had reason to know it was there
• Importance of conducting Phase I and Phase II Assessments
• Property acquired after hazardous substance placed on property
•
Secured Parties
• Court decisions finding secured lenders who acquired property
through foreclosure or who have restrictive covenants in loan
agreements to be “owners or operators” and liable under CERCLA.
• EPA issued Lender Liability Rule in 1992. Struck down by DC
Circuit.
• 1996 Lender Liability Amendments passed by Congress - - codified
the Lender Liability Rule
Real Estate Law, 6th ed., by Siedel and Aalberts
Chapter 3
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Cont. Limited Defenses to Liability
Small Business Liability Relief and Brownsfield
Revitalization Act
1. Signed by President Bush on January 11, 2002
2. Significant revision of Superfund law
3. 2 parts of Act.
A. Part 1 – Establishes superfund liability exemptions for small
businesses and nonprofit organization which ship only extremely
small or de micromis quantities of hazardous substances to a site or
whose contribution consists of “ordinary municipal solid waste”.
B. Part 2 – Establishes first federal statutory brownsfield program
which includes federal money for remediation of brownsfield sites,
liability protection for new purchasers of contaminated site and more
support for state brownsfield programs.
Real Estate Law, 6th ed., by Siedel and Aalberts
Chapter 3
29
Easements
Easement = interest in land which gives the owner the right to
use real estate owned by another for a specified purpose
• Holder does not have an ownership interest in property, only
a right to use
• These rights include:
1. Use and enjoy land on limited basis.
2. Entitled to protection from third parties.
3. Easement owner NOT subject to will of owner
of land as with license holder
4. Easement can be conveyed.
5. Easement can be created in ways other than
by written agreement.
Real Estate Law, 6th ed., by Siedel and Aalberts
Chapter 4
30
Cont. Easements
• 3 Different Ways Property Can Be Used:
• EASEMENT - Steve (Servient Estate) owns
property in fee simple, grants right-of-way
easement to Diane (Dominant Estate). Gives her
an easement, NOT a possessory interest in Steve's
property.
- She may use road, but may NOT stop others from
using it except to extent their use prevents her full
enjoyment.
- Steve, as possessor, may exclude all others, except
Diane, even though crossings pose no harm to Steve.
- Steve may use road as long as it does not interfere
with Diane.
Real Estate Law, 6th ed., by Siedel and Aalberts
Chapter 4
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Cont. Easements
• LEASE - Steve leases road to Diane -transfers full possession. Diane can exclude
Steve and all others from road. Steve
transferred full possession to Diane, therefore
she could have excluded Steve and all others
from road during term of lease.
• LICENSE - Steve grants Diane a right-of-way
for 10 years -- NOT written down. Statute of
Frauds requires grants of interests in land over
one year MUST BE IN WRITING. Steve may
rescind at any time.
Real Estate Law, 6th ed., by Siedel and Aalberts
Chapter 4
32
Types of Easements
• Affirmative and Negative Easements
Affirmative - owner of easement has right to use
land that is subject to easement. (i.e., construct
sewer tunnel, walk on it.)
Negative - owner of easement can prevent owner
of land from performing certain acts on land. (i.e,
negative easement to prevent sun.)
Real Estate Law, 6th ed., by Siedel and Aalberts
Chapter 4
33
Cont. Types of Easements
•
Easements Appurtenant and in Gross
1. Appurtenant - an easement which benefits easement
owner in that easement owner uses land appurtenant to his
land. Must have two tracts of land owned by different parties.
Two tracts need NOT adjoin, though they generally do.
Servient estate -- tract over which easement runs.
Dominant estate -- tract which benefits from easement.
Is ALIENABLE and can be SUBDIVIDED
Easement appurtenant is considered PART of the dominant
estate. If dominant estate is conveyed, easement passes
with title; HOWEVER, title to actual land over which easement
runs is retained by owner of servient estate -- such as
easement, "runs with the land.“
Real Estate Law, 6th ed., by Siedel and Aalberts
Chapter 4
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Cont. Types of Easements
2. Easement in Gross -- personal interest in or
right to use land of another that is NOT
appurtenant to ownership or possession of
real estate.
- ONLY have servient estate no dominant.
1.
(Alienability) Right to Convey Easement in Gross -this right connected to the easement is dependent on
whether the easement is commercial or
noncommercial.
2.
Subdivision or Apportionment of Easement in Gross -If easement in gross is transferable, can it be sold to
more than one buyer? Look at intent of parties of
original easement agreement.
Real Estate Law, 6th ed., by Siedel and Aalberts
Chapter 4
35
Creation of Easements
•
•
EXPRESS – must satisfy formal requirements – in writing, signed,
witnessed and recorded
IMPLIED
1. By Reference to Easement or to Plot--where legal
description identifies road or path as boundary and GR owns
fee in such path, easement is path passes to GE.
2. By Prior Use -- Parties situated in such a way that
easement could have been granted or reserved by express
language, BUT NO STATEMENT made. Commonly occurs
when owner of two tracts of land sells or mortgages one tract
and does not mention an easement, BUT as a result of
transaction, an easement is created.
3. By Necessity
Real Estate Law, 6th ed., by Siedel and Aalberts
Chapter 4
36
Easement by Estoppel
• If owner of servient estate allows user to make
improvements re: use, servient owner is estopped from
denying existence of easement.
ILLUSTRATION
R owns sewer and water pipes in street running past his
house and vacant land he owns. - sells lot to E, but says
nothing of pipes. E builds house and R without objection
watches E tie into sewer and water pipes. Thus, easement
to use sewer and water created by estoppel.)
Real Estate Law, 6th ed., by Siedel and Aalberts
Chapter 4
37
Extent of Easements
• General Rule: Scope of use is determined by how
and for what reason the easement was created.
• Owner of easement cannot materially increase
burden on servient estate or impose a new and
additional burden.
a. If conditions for use specifically provided in
easement, use is limited to that use and those
which are necessary to its proper enjoyment.
b. General grant however, may be used any way
as long as it is reasonable
Real Estate Law, 6th ed., by Siedel and Aalberts
Chapter 4
38
Cont. Extent of Easements
•
Easement Appurtenant - used only for benefit of dominant estate. May
not be used for benefit of any other tract of land. Thus, land acquired
by owner of dominant estate AFTER creation of easement, has no
right to use easement.
Note situations regarding development and subdivision of dominant
estate.
•
Easement by Prescription - use of easement after prescriptive period
must remain almost the same as use at the beginning of prescriptive
period. (i.e., private right-of-way acquired by prescription is limited to
uses made during prescriptive period. Prescriptive easement to carry
water in open ditch over another's property, does not include the right
to carry same quantity in covered pipes in a closed ditch). No different
or materially greater use may be made of easement except by further
adverse use for a prescriptive period (i.e., in first example--if G
continued to ride motorcycle for another 10 years--would have
prescriptive easemt. to ride motorcycle.)
Real Estate Law, 6th ed., by Siedel and Aalberts
Chapter 4
39
Cont. Extent of Easements
• Easement by Prior Use - Look to prior use, may use
easement for uses which existed at time original estate
was severed AND all uses reasonably contemplated by
parties.
•
Easement by Necessity - Lasts as long as there is a
necessity
•
Express easements - Usually provided by terms.
Real Estate Law, 6th ed., by Siedel and Aalberts
Chapter 4
40
Use by Easement Owner
• Since easement is a RIGHT to use another's land for a
specific purpose, easement owner must use easement
premises only for that purpose. (i.e., If I grant Bob an
easement for ingress and egress over part of my land, Bob
has no right to lay gas pipes in the easement.)
•
Also use by easement owner must not interfere with
landowner's use. (i.e., If I give Mary a driveway easement
over my land, I do not expect her to park in my driveway all
night and prevent me from entering my garage.)
Real Estate Law, 6th ed., by Siedel and Aalberts
Chapter 4
41
Duty to Repair
If I give Mary an easement over my property, who has duty to keep it in repair?
1. The fact that I gave an easement does not impose duty on me, the servient tenant, to
repair easement.
2. Parties could agree in express easement who would be responsible.
3. If no express agreement, easement owner (Mary) does have duty to make easement
usable. To repair existing road, trim encroaching trees, remove impediments.
4. In order for easement owner to perform duty to repair, has right to enter servient
estate at all reasonable times to make repairs and maintenance.
a) This right called a "secondary easement" -- may be used only when necessary
and in a reasonable manner so as to NOT burden owner of servient estate.
5. If both easement owner and landowner use road -- they share costs in proportion to
use of road.
6. If easement owner allows right-of-way to fall into disrepair, no right to travel along
another route.
BUT, IF:
7. If Landowner impedes easement owner from using easement, easement owner may
travel around obstruction and over other land belonging to landowner.
Real Estate Law, 6th ed., by Siedel and Aalberts
Chapter 4
42
Termination of Easements
•
•
•
•
•
•
•
•
•
•
Cessation of Purpose – terminates when purpose no longer exists
Expiration of Period – Express easements freq. Have term -- when term
expires, easement expires
Merger – When 1 owner acquires both servient and dominant estates
Abandonment – Requirement of intent
Destruction of Servient Estate
Estoppel
Prescription
Cessation of Necessity – Applies to easements implied by necessity
Condemnation
Release
Real Estate Law, 6th ed., by Siedel and Aalberts
Chapter 4
43
Prescriptive Easements
• By Prescription --acquiring right to use land NOT
by express agreement or agreement between
parties, BUT by lapse of time and certain use of
property during that time.
• REQUIREMENTS:
•
1. Use must be ADVERSE (hostile, open, notorious
and visible)-- no permission by O -- NOT a neighborly
accommodation. (i.e., A's driveway used by B to get
car into B's backyard. Never got A's permission.
Prescriptive
easement,
not
a
neighborly
accommodation.)
Real Estate Law, 6th ed., by Siedel and Aalberts
Chapter 4
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Cont. Prescriptive Easements
• Cont. Requirements
a. Hostile -- User does not recognize owner of
land has authority to prevent his use--use is
hostile in that he does not recognize authority of
owner. i.e., Preshlock never thought Brenner
could prevent his use of driveway. See case p. 99
b. Open, Notorious, Visible -- Use must be open,
notorious and visible so that owner would learn
about it if he kept informed about his property
through ordinary inspections. p. 101 Downie
Real Estate Law, 6th ed., by Siedel and Aalberts
Chapter 4
45
Cont. Prescriptive Easements
Cont. Requirements
2. Use must be continuous and uninterrupted for the required
period. (i.e., occasional entries on neighbor's land DO
NOT ripen into a prescriptive easement.)
ILLUSTRATIONS
•
•
A owns house -- constructs garage. Builds driveway over part of B's
lot without B's permission. After 20 years has prescriptive easement.
A builds driveway over B's land -- uses it for five years without B's
permission. A sells land to C -- uses for 5 years. C sells to D -- uses
for 10 years. D now has prescriptive easement. Prescriptive uses of
A, B, C and D can be tacked
- since easement benefits TRACT A --
becomes easement
appurtenant
Real Estate Law, 6th ed., by Siedel and Aalberts
Chapter 4
46
Estates in Land
4 Types of Freehold Estates
1. Fee Simple
2. Fee Simple Determinable
3. Fee Tail
4. Life Estate
Real Estate Law, 6th ed., by Siedel and Aalberts
Chapter 5
47
Fee Simple
• Absolute ownership – greatest extent of ownership interest
recognized by law
1. Holder is entitled to all rights of property ownership.
2. No time limit on existence -- upon death, passes to
heirs.
3. Owner can dispose of property as she wishes
4. Only subject to government regulations and duties
which arise out of tort law (i.e., nuisance)
• TO CREATE INTEREST IN FEE SIMPLE "TO BOB"--This
is enough even if NOT expressed as estate in fee simple,
most statues assume conveyance of fee simple estates
Real Estate Law, 6th ed., by Siedel and Aalberts
Chapter 5
48
Fee Simple Defeasible
Occurs when fee simple is qualified by language which
causes fee simple to end when a certain event occurs.
Three types.
1. Fee Simple Determinable - fee simple estate continues
as long as certain event continues or building remains, etc.
(See pp. 130-131) Thus, when grantor conveys estate,
there is a possibility estate would revert back to him or his
heirs.
POSSIBILITY OF REVERTER: (i.e., Bob holds land in fee
simple. Conveys land to Ellen and her heirs as long as
land is used to farm. Ellen has fee simple determinable
and Bob has a Possibility of Reverter. Bob or his heirs will
get land back automatically if Ellen or her heirs stop
farming.
Thus estate--fee simple determinable with
Possibility of Reverter
Real Estate Law, 6th ed., by Siedel and Aalberts
Chapter 5
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Cont. Fee Simple Defeasible
b. Fee Simple Subject to Executory Limitation - Fee simple estate ENDS
when certain event automatically occurs and passes to 3rd person.
(See pp. 130-131)
c. Fee Simple Subject to a Condition Subsequent - Fee simple estate
ends if a certain event occurs, but unlike above, where grantor
automatically gets land, here, grantor MUST TAKE SOME ACTION TO
RETAKE PROPERTY. (i.e., Go to court) (See p. 131). Grantor's
interest is right of entry or power of termination.
Thus, when grantor conveys estate, he has retained a POWER OF
TERMINATION or a RIGHT OF RE-ENTRY.
(i.e., Bob holds land in fee simple. Conveys to Ellen, but if liquor is
ever sold on the land then Grantor may re-enter and repossess. Bob
has a power of termination. Ellen has fee simple subject to condition
subsequent.)
Real Estate Law, 6th ed., by Siedel and Aalberts
Chapter 5
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Cont. Fee Simple Determinable
Limitations on creating fee simple defeasible which LIMIT
use of property:
* May not unreasonably restrict ability of grantee to
transfer real estate.
* In Michigan a reversion or right of entry is unenforceable
if specified contingency does not occur in 30 years. May
extend contingency for another 30 years if record affidavit
that construction began within 5 year period prior to
expiration.
Real Estate Law, 6th ed., by Siedel and Aalberts
Chapter 5
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Fee Tail
Estate conveyed to grantee until grantee dies
without children surviving then back to grantor.
Can not be inherited by others outside family.
* If grantee dies without heirs, property reverts to
grantor.
* Abolished by statute in most states because it is
a severe restraint on alienation.
Real Estate Law, 6th ed., by Siedel and Aalberts
Chapter 5
52
Life Estates
Generally is an estate whose duration is measured
by life of a person. Two types:
1. Conventional life estate - created by act of
parties
2. Legal life estate - created by operation of law
Real Estate Law, 6th ed., by Siedel and Aalberts
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Conventional Life Estate
1. Ordinary - limited to lifetime of owner of life estate, the life
tenant.
*Upon death of life estate owner, FULL ownership
reverts to original owner or his heirs. THUS, grantor
conveys life estate and retains a reversionary interest or
may pass to third party
2. Pur Autre Vie - estate limited to life of a third party.
*Upon death of third party, FULL ownership reverts to
grantor, THUS, grantor conveys life estate pur autre vie
and retains a reversionary interest or FULL ownership can
pass to another party, thus party gets remainder interest.
Real Estate Law, 6th ed., by Siedel and Aalberts
Chapter 5
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Legal Life Estates
Legal life estate - marital estates of dower, curtsey, homestead and
community property.
1. Curtsey - Husband's life estate in real estate of deceased wife.
At wife's death, widower entitled to life estate in all wife's real
property inheritable by issue of M & W IF a child of marriage
was born alive.
2. Dower - Wife's (life) estate in real estate of deceased husband.
Unlike curtsey, dower did not require birth of child, only that
child be capable of inheritance. Dower attaches at marriage, or
when property is acquired. After dower attaches, H is powerless
to defeat it. Not terminated by divorce. Can only be released by
wife's consent. See also Chapter 10.
Real Estate Law, 6th ed., by Siedel and Aalberts
Chapter 5
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Cont. Legal Life Estates
• In Michigan, the W is entitled to 1/3 of all lands H held
in fee simple estate during the marriage. Thus, dower
does not apply to:
1.
2.
3.
4.
5.
6.
Leases
Life Estates
Joint Tenancies
Partnerships
Land Contracts
Oil and gas leases
• W must be party to conveyance of property acquired
during marriage – if not, 3rd party owns subject to W’s
dower rights
Real Estate Law, 6th ed., by Siedel and Aalberts
Chapter 5
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Cont. Legal Life Estates
• Homestead - A tract of land that is owned and occupied as
the family home. As a homestead, protected from claims
of owner's general creditors and can only be subjected to
certain liens – need to look at particular state law.
• Community Property - Adopted by eight western and
southwestern states. Consists of all property real and
personal acquired by either spouse during marriage. Each
spouse owns 1/2 of community property
Separate Property - is not subject to community property.
This is property acquired and owned by either spouse prior
to marriage or acquired by gift, devise or descent.
Real Estate Law, 6th ed., by Siedel and Aalberts
Chapter 5
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Life Tenant’s Use of Property
• Rule: Life Tenant's interest in real property is a true
ownership interest and generally Life Tenant can do what
he or she pleases with property without consultation from
grantor of life estate or remainderman if life estate passes
to third party.
• Taxes and Interest
1. Life Tenant pays all taxes and interest on debts on
land IF Life Tenant has received profits, rents or income
from property. In some states, once Life Tenant has
earned profits derived from land, must pay taxes. In others,
mere possession is enough to trigger tax obligation.
Real Estate Law, 6th ed., by Siedel and Aalberts
Chapter 5
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Cont. Life Tenant’s Use of Property
• Special Taxes and Assessments - Life Tenant NOT
responsible for special taxes or assessments. (i.e., city
installs new sidewalks and assesses each property owner
an assessment.) Considered permanent public
improvement that raises the value of property -- so
property will be worth more when it reverts to grantor.
• Insurance - Who insures improvements on real property?
Who is entitled to proceeds of insurance if buildings are
destroyed?
Neither Life Tenant nor remainderman has duty to
insure; but if either insures, he or she is entitled to
proceeds, depending on facts
Real Estate Law, 6th ed., by Siedel and Aalberts
Chapter 5
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Cont. Life Tenant’s Use of Property
• Duty to Repair and Rules Regarding Life T’s Use of Property
• General Rule: Life T is NOT to commit waste on life estate. Life T
has role of trustee of life estate in the sense that he or she cannot
injure or dispose of the property to the injury of the rights of
remaindermen BUT he or she can use the property for his or her
exclusive benefit and take all the income and profits.
• Extent of Duty to Repair
1. Life T has obligation to return premises to remaindermen
unimpaired by neglect.
2. Life Tenant not responsible for extraordinary repairs.
3. If Life Tenant makes improvements, these are considered fixtures
and may be removed at termination of life estate, provided
improvement is not an integral part of real estate.
Real Estate Law, 6th ed., by Siedel and Aalberts
Chapter 5
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Cont. Life Tenant’s Use of Property
•
•
Life T’s Use of Property - Life Tenant may act as fee simple owner
would if owner were on property, BUT he may not use property in such
a way to limit or diminish market value for remainderman.
1. Life Tenant may keep rents and profits he produces.
2. Life Tenant may sell his interest in property BUT he may not
sell more than he owns.
3. Life Tenant may continue profitable operations on the land if
land used for such operations BEFORE creation of life estate.
4. Life Tenant not permitted to commence waste -- to destroy
property in such a way to cause harm to reversion or remainder.
5. Right of Estovers – Life T may take whatever he/she needs
from land to make necessary repairs. May NOT take timber for purely
commercial purposes.
Real Estate Law, 6th ed., by Siedel and Aalberts
Chapter 5
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Concurrent Ownership
Joint Tenancy
Tenancy By the Entirety
Tenancy in Common
Community Property
Joint Tenancy
T by the Entirety
T in Common
Planned Unit Development
Condominium
Timesharing
Time
UNITIES
Title
Interest Possession
Person
X
X
X
X
X
Real Estate Law, 6th ed., by Siedel and Aalberts
X
X
Chapter 5
X
X
X
62
Tenants in Common
• Characteristics:
When a parcel owned by two or more person as Tenants in
Common, EACH of owners has undivided interest in
fractional part of parcel.
1. Deed creating Tenancy in Common can state fractional interest
held by each co-tenant. If no fractional interest is specified and
two people hold title to property - EACH has undivided 1/2
interest.
2. Tenants in Common do not need to hold equal shares.
(i.e., one can hold 1/10th interest and other, the remaining 9/10ths
interest.)
3. Tenants in Common NEED not acquire their interests in property
at same time or by same instrument.
Real Estate Law, 6th ed., by Siedel and Aalberts
Chapter 5
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Tenants in Common
Rights in Property
1. Entitled to share the possession and rents of property according to
their shares in property.
2. EXCEPT for sharing of possession and rent, almost as if EACH T in
Common owned separate parcel of real estate.
3. EACH T in Common can sell, convey, mortgage or transfer his or her
share without consent of other co-tenants. Also, share of each cotenant subject to judgment lien against him.
4. Death of co-tenant -- his or her divided interest passes to heirs or
devisees according to will.
5. Partition - If Ts in Common or Joint Tenants wish to terminate their
joint possession, any of co-tenants may file a suit to partition real
estate OR agree among themselves to terminate.
Real Estate Law, 6th ed., by Siedel and Aalberts
Chapter 5
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Joint Tenancy
•
•
Viewed as a special type of Tenancy in Common, with one important
difference – right of survivorship
Creation -- Cannot be implied or created by operation of law. Created only
by grant or purchase or by devise. Need 4 Unities to create:
1. Unity of Time - All Joint Tenants acquire interest at same time.
2. Unity of Title - All Joint Tenants acquire this interest by same instrument of
conveyance.
3. Unity of Interest - All Joint Tenants have equal ownership interests.
4. Unity of Possession - all Joint Tenants have undivided interest in property.
•
Some states have eliminated technical requirements of 4 Unities. Modern
view is that conveyance from owner to herself and Joint Tenants is sufficient
despite failing to meet unities of time and title. Michigan follows modern
view.
Real Estate Law, 6th ed., by Siedel and Aalberts
Chapter 5
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Joint Tenancy
•
•
Right of Survivorship -- The death of one Joint Tenant does not destroy the
unit. It only reduces by one the number of persons who own the unit. The
remaining Joint Tenants receive interest of deceased Tenant by right to
survivorship. This then avoids need for probate.
Termination of Joint Tenancy -- Either Joint Tenant can break Joint Tenancy if
he desires and convert it into Tenancy in Common. To sever Joint Tenancy:
1. Conveyance by Joint Tenant to a third party
2. Involuntary Transfer of Title
3. A Joint Tenant files partition suit and partition
decree entered.
4. Contract by one Joint Tenant to sell or convey
interest in land to third party
5. Any agreement between Joint Tenants that shows
intention to treat land as Tenancy in Common.
Real Estate Law, 6th ed., by Siedel and Aalberts
Chapter 5
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Joint Tenancy
The following will not sever a Joint Tenancy:
1.
2.
3.
4.
A will by deceased Joint Tenant
Lien created against one of the Joint Tenants
Creation of easement by one of the Joint Tenants
Dower and curtsey interests of spouse of deceased Joint
Tenant
5. Divorce – depends on state
Real Estate Law, 6th ed., by Siedel and Aalberts
Chapter 5
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Tenants by the Entireties
•
Like a Joint Tenancy:
1.
2.
•
Owners have rights of survivorship
Cannot be created by operation of law
Important Differences:
1.
2.
3.
Owners must be husband and wife
Title can only be conveyed by deed signed by both parties
No independent right to partition.
Real Estate Law, 6th ed., by Siedel and Aalberts
Chapter 5
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Forms of Ownership for
Investment Purposes
Factors to Consider in Choice of Entity
1. Limited Liability
Corporations, Limited Partnerships, Limited Liability
Partnerships, Limited Liability Limited Partnerships and
Limited Liability Companies have one important trait in common: their owners,
i.e.:
for Corp. -- SH
for Limited Partnership -- LP
Limited Liability Company -- Members
Limited Liability Partnerships – Partners
Limited Liability Limited Partnerships -- LP
ARE shielded from liabilities of entity
Real Estate Law, 6th ed., by Siedel and Aalberts
Chapter 5
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Cont. Factors to Consider in Choice of
Entity
2.
3.
4.
Transferability – Can the owners freely sell or transfer their
interests to a third party?
Taxation – Is the business entity a flow-through entity for
federal income taxation purposes – or does the entity pay
taxes on the income?
Control – Are the entity’s business and affairs controlled by its
owners – or by a central management that can act without the
owner’s approval?
Real Estate Law, 6th ed., by Siedel and Aalberts
Chapter 5
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Partnerships
Partnership - very informal form of business entity. Because of its
informality, it is quite common today.

1. Partnerships are governed largely by state law. Every
state BUT LA has adopted the Uniform Partnership Act.

2. UPA defines partnership as "an association of two or
more persons to carry on as co-owners of a business for profit."
Real Estate Law, 6th ed., by Siedel and Aalberts
Chapter 5
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Cont. Partnerships
Receipt of profits - prima facie evidence that partnership exists.
•
Partners share profits AND losses. If losses, creditors attach to partners'
individual property. (i.e., owners ARE personally liable.)
•
Partnership MUST be a business for profit, therefore, partnership law does
NOT apply to nonprofit organizations.
•
Partnership is an association of persons -- including corporations, other
partnerships, etc.
•
Partnership created by a voluntary agreement among person who contract to
act as co-owners in a business for profit. DOES NOT have to be express, may
be IMPLIED. (i.e., sharing profits)
ALSO, partners jointly and severally liable for obligations of partnership.
•
Real Estate Law, 6th ed., by Siedel and Aalberts
Chapter 5
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Corporations
Very important form of business entity. It provides a 1) continuous existence and a
vehicle for investment which is 2) safe from personal liability.
• Corporations governed by state law. Most states have adopted the MODEL
BUSINESS CORPORATION ACT.
•




Four corporate characteristics -- NEED all four or else "corporate veil will
be pierced"
*
LIMITED LIABILITY--Creditors of entity can not sue personally any
owners of corp. for debts of corp.
*
CENTRALIZATION OF MANAGEMENT--Corp. is governed on a
continuing and exclusive basis by officers and directors.
*
CONTINUITY OF LIFE--Corp. continues to exist regardless of death,
incapacity or bankruptcy of individual shareholders.
*
FREE TRANSFERABILITY OF INTERESTS--Shareholders can sell
shares of corporate stock without consent of corporation. All rights of
transferor-shareholder conferred on transferee.
Real Estate Law, 6th ed., by Siedel and Aalberts
Chapter 5
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Cont. Corporations
 DOUBLE TAXATION
 * Corporation taxed as a separate entity. It does not offer flowthrough tax benefits.
AND
 * Income distributed to shareholders as dividends is taxed at
shareholder tax rate.
Real Estate Law, 6th ed., by Siedel and Aalberts
Chapter 5
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Subchapter “S” Corporations
Characteristics:
1. No double tax -- tax attributes passed through to shareholder.
2. Like a corporation, the shareholders are shielded from liability.
3. Profits and losses MUST be shared by shareholders
proportionately in relation to stock ownership.
4. Eligible Shareholder MUST be U.S. citizens, estates, certain
tax-exempt org. or qualified trusts.
5. No more than 75 shareholders.
6. Corporation may only have one class of stock issued and
outstanding.
Real Estate Law, 6th ed., by Siedel and Aalberts
Chapter 5
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Limited Partnership
Characteristics:
1.
Governed by state statute – Most states have adopted ULPA
2.
Must contain at least 1 general partner who is personally
liable for limited partnerships’ debts, liabilities and
obligations.
3.
Also contains 1 or more limited partners who are not
personally liable for limited partnerships’ obligations.
4.
GP and LP may freely transfer shares of profits and losses and
rights to distributions. Remaining rights may not be
transferred without unanimous consent unless partnership
agreement provides otherwise.
Real Estate Law, 6th ed., by Siedel and Aalberts
Chapter 5
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Cont. Limited Partnerships
Cont. Characteristics:
5.
Flow-through taxation.
6.
Managed by GP. LPs are passive investors who do not
participate in management. “Safe harbor” under ULPA.
7.
Limited Partnership can lose limited liability status if it has
more than 2 attributes of a corporation.
Real Estate Law, 6th ed., by Siedel and Aalberts
Chapter 5
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Limited Liability Company
A “hybrid” entity that (1) has the flow-through federal tax
advantages of a partnership; (2) offers its owners the same
limited liability as a corporation’s shareholders, and (3) has a
flexible management structure
Characteristics:
1.
Governed by ULLCA.
2.
Owners are called “members”
3.
Members may be individuals or business entities
4.
Members may participate in management or be passive
5.
Members are not personally liable for for LLC’s debts,
liabilities and other obligations
Real Estate Law, 6th ed., by Siedel and Aalberts
Chapter 5
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Cont. Limited Liability Company
Cont. Characteristics:
5.
6.
7.
8.
9.
Members can lose no more than their investment
Ownership interest consists of financial rights and
management rights. Financial rights are personal property
and can be transferred without restriction. Restrictions on
remaining interests.
Flow-through taxation of federal income taxes – no double
taxation
LLC may elect to be taxed as a corporation
Control determined by operating agreement
Real Estate Law, 6th ed., by Siedel and Aalberts
Chapter 5
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Limited Liability Partnership
Characteristics:
1.
2.
3.
4.
Partners have limited liability
Partners may freely transfer their financial interests,
Management and other non-financial interests cannot be sold
or transferred without consent of all remaining partners
Taxed same as General Partner.
Controlled by partners – each partner has equal voice, unless
partnership agreement provided otherwise
Real Estate Law, 6th ed., by Siedel and Aalberts
Chapter 5
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The Search for Real Estate
Listing Agreement
1.
The Real Estate Agent
A. Broker - One employed to negotiate the sale, purchase or exchange of
land. Compensation generally in the form of a commission.
B. Salesman - Employee of broker. Receives compensation from broker.
Responsible only to the broker. Salesman's activities performed in the
name of the broker.
C. License Requirements - All states and Canadian provinces require real
estate brokers to be licensed. Purpose of licensing laws:
- protect public from dishonest or incompetent brokers.
- prescribe standards and qualifications for licensing brokers.
- maintain high standards in real estate profession.
- protect licensed brokers from unfair competition.
Real Estate Law, 6th ed., by Siedel and Aalberts
Chapter 6
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Cont. Listing Agreement
- Real estate broker NOT entitled to commission unless he had license
at time he was hired to perform services for which he received the
commission.
- Criminal penalties often imposed on person who violates broker's
licensing statutes.
2. The Agency Relationship - the Listing Agreement serves as an employment
contract and establishes an agency relationship.
A. Parties in Agency Relationship:
Principal (S or B)
Agent (Broker)
B. Powers and Duties of Agent – Authority limited to agreement
between principal and agent. Some duties set forth in agreement, others are
implied by law.
Real Estate Law, 6th ed., by Siedel and Aalberts
Chapter 6
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Cont. Listing Agreement
Broker is generally not given broad authority to act for principal.
For example, broker may not represent condition of property,
receive all or part of the purchase price, or make representations
to a Buyer that the deposit will be returned if there is no sale
unless these powers are specifically provided for in listing
agreement.
Note situations where brokers given express authority to perform
certain acts and other apparent authorities are assumed granted
Real Estate Law, 6th ed., by Siedel and Aalberts
Chapter 6
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Cont. Listing Agreement
Implied Duties of Broker - (Derived from general agency principles). Broker
always must put interest of principal first. Guidelines:
Care - Broker must exercise a reasonable amount of care while transacting
business.
Obedience - Brokers must act in good faith and in conformity with principal's
instructions and authority.
Loyalty - Brokers owe principal 100% loyalty. Place principal's interest
above those of any other person she is dealing with.
Accounting - Broker must be able to report status of all funds entrusted to
them by their principals.
Notice - Broker must keep principal fully informed at all times of all facts
which might affect principal's business decisions.
Real Estate Law, 6th ed., by Siedel and Aalberts
Chapter 6
84
Cont. Listing Agreement
Specific Issues Related to Agency Relationship
A. Dual Agent – Licensee who is acting as agent of both the B
and the S. General rule prohibits dual agent situation except
when parties provide written consent.
B. Buyer’s Broker – Buyer and agent enter into agreement
whereby agent assists B in locating, financing and negotiating
the purchase of property.
Real Estate Law, 6th ed., by Siedel and Aalberts
Chapter 6
85
Cont. Listing Agreement
2.
Types of Listing Agreements
A. Exclusive Right to Sell - Most common form for residential
sales. One broker is appointed as the sole agent of Seller and
given the exclusive right to represent the Seller in marketing
the property and finding a purchaser.
B. Exclusive Agency - One Broker is authorized to act as the
exclusive agent of the principal, BUT Seller retains right to
sell the property himself or herself without obligation to the
Broker.
C. Open Listing - Most favorable to the Seller. Seller retains
right to retain any number of Brokers to act as his or her
agents. Brokers act simultaneously, all looking for buyers.
Seller only pays commission to Broker who successfully
produces a ready, willing and able buyer.
Real Estate Law, 6th ed., by Siedel and Aalberts
Chapter 6
86
Cont. Listing Agreement
3.
Antitrust Concerns
A. Sherman Antitrust Act – 2 considerations:
1. Per se violation of Sherman Act if real estate board's
activities are found to cause a "restraint of trade" (i.e., price
fixing). See US v. National Association of Real Estate Boards.
2. Do the real estate activities affect Interstate Commerce?
See McLain v. Real Estate Board of New Orleans.
B. Note, many states have their own Sherman Acts.
Real Estate Law, 6th ed., by Siedel and Aalberts
Chapter 6
87
Cont. Listing Agreement
4.
The Broker’s Commission
A. Broker is paid usually in form of commission ONLY entitled to
commission IF:
1. Licensed
2. Employed by Seller
3. Procuring cause of sale (i.e., from a ready, willing and able
buyer). To be considered the procuring cause of sale, Broker must
have taken action to start or cause a chain of events that resulted in
the sale.
B. "Ready, Willing and Able Buyer“ - Generally, once a Seller
accepts an offer from a ready, willing and able buyer, Seller is liable
for Broker's commission regardless of whether or not the buyer
completes the purchase.
Real Estate Law, 6th ed., by Siedel and Aalberts
Chapter 6
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Cont. Listing Agreement
"Ready, Willing and Able Buyer" is one who is prepared to buy on the
Seller's terms as specified in the listing contract and ready to take
necessary steps to close the deal.
Broker gets commission in the following situations:
1) If Seller refuses to sign purchase agreement, generally no liability to
buyer, but must pay Broker commission;
2) OR owner's title has uncorrected defects;
3) OR if purchase agreement signed and sale never consummated,
Seller MUST pay commission;
4) OR owner's spouse refuses to sign deed, MUST pay.
C. Cancellation of Listing Agreement – Principal may terminate listing
agreement but must be acting in good faith and agreement is not for a set
term.
Real Estate Law, 6th ed., by Siedel and Aalberts
Chapter 6
89
Discrimination in Selling
or Leasing Real Estate
A.
Civil Rights Act of 1866 - prohibits any type of discrimination based on
race. Notable limitations:
a. ONLY applied to discrimination on basis of race.
b. Applied only to U.S. citizens.
c. Limited to rights enjoyed by white citizens -- note, women had no
property rights in 1866
Executive Order No. 11063 – Issued in 1962 by JFK. Guaranteed nondiscrimination in all housing financed by government -- insured or
guaranteed loans.
Jones v. Mayer -- 1968 Supreme Court decision. Court held that statue
intended to bar all racial discrimination, private as well as public, in sale
or rental of property.
Real Estate Law, 6th ed., by Siedel and Aalberts
Chapter 6
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Cont. Discrimination in Selling
or Leasing Real Estate
B.
C.
Civil Rights Act of 1964 - Prohibits discrimination in any housing program
that receives whole or partial federal funding.
Fair Housing Law of 1968 - (Title VIII) Unlawful to discriminate on basis
of race, color, religion, sex or national origin, disability or family status
when selling or leasing residential property by means of the actions listed
on p. 179.
NOTE: FHA DOES NOT APPLY TO:
1. Sale or rental of single-family home when home is owned by person who
does not own more than three such homes at one time (therefore, sale by
owner of single-family homes not covered.) AND
Broker or agent not used; AND
Discriminatory advertising not used; AND, in addition
IF owner is not living in dwelling at time of
transaction or was not most recent occupant -ONLY one such sale is exempt from law in any two
year period
Real Estate Law, 6th ed., by Siedel and Aalberts
Chapter 6
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Cont. Discrimination in Selling
or Leasing Real Estate
2. Rentals in Owner occupied one-family to four-family dwellings as long as
NO discriminatory advertising.
3. Religious organizations may limit sale or rental of noncommercial
buildings to persons of same religion ONLY IF membership in religion is not
restricted on basis of race, color or national origin.
4. Private clubs may limit rental or occupancy of lodgings that it owns to
members.
Compare: 1866 law prohibits ALL racial discrimination without exception
whereas FHA exempts individual homeowners and certain groups, therefore
any aggrieved person may seek a remedy for racial discrimination under
1866 law against ANY homeowner. BUT, if discrimination based on grounds
other than color, remedy may not be allowed.
Real Estate Law, 6th ed., by Siedel and Aalberts
Chapter 6
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Cont. Discrimination in Selling
or Leasing Real Estate
D.
E.
1972 Amendment to FHA
1. Brokers must display equal opportunity poster which
can be obtained from HUD
2. Failure to display poster constitutes prima facie
evidence of discrimination if broker is investigated for
discriminatory practices by HUD
1988 Amendment to FHA – provided for more effective
enforcement mechanisms; and provided protections for the
disabled and for families.
Real Estate Law, 6th ed., by Siedel and Aalberts
Chapter 6
93
Cont. Discrimination in Selling
or Leasing Real Estate
F.
G.
Americans with Disabilities Act - Prohibits discrimination.
based on disabilities in employment, provision of government.
services, transportation provided by public or private entities,
places of public accommodation and commercial facilities
avail. to public.
State and Local Laws - If a state or
municipality has a fair housing law that
has been ruled "substantially" equivalent
to federal law, all complaints in that
state or locality, including those filed
with HUD, are handled by state
enforcement agencies.
Real Estate Law, 6th ed., by Siedel and Aalberts
Chapter 7
94
The Real Estate Contract
Introduction to Contracts
DEFINITION -- A contract is a promise or set of promises which
constitute a legally enforceable agreement between two or more
people.
TYPES OF CONTRACTS: Unilateral or Bilateral; Expressed or
Implied.
Unilateral Contract
"I offer to give you $100 if you cross
the Brooklyn Bridge."
Offer calls for acceptance to occur
by performance of an act. The unilateral
contract is accepted by actually
performing duties requested by the offer.
Real Estate Law, 6th ed., by Siedel and Aalberts
Bilateral Contract
"I promise to give you $100 if you promise
to cross the Brooklyn Bridge“
Form of contract when an offer requires
acceptance in form of a promise to perform.
Chapter 7
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The Real Estate Contract
Express - parties state the terms and show intentions in
words, either orally or in writing. (i.e., most listing
agreements)
Implied - Prior conduct - agreement formed by acts and
conduct of parties in past. ALSO--partial performance
Elements of a Valid Contract.
1. Competent Parties - all parties entering into contract must
have legal capacity to contract
2. Mutual Assent - All parties must be
mutually willing to enter into contract
and contract must be signed as the "free
and voluntary" act of each party. (i.e.,
"meeting of minds")
Real Estate Law, 6th ed., by Siedel and Aalberts
Chapter 7
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The Real Estate Contract
Cont. Mutual Assent
Offer is accepted when offeree signs agreement and communicates acceptance
to buyer.
Counter Offer - If any terms of original offer are changed, changes constitute
total rejection, relieves original offeror of liability--Offeree has NOT accepted
offer BUT MAKES NEW offer.
Contract Modification - Original contract stays if agreement modified after
contract is signed by both parties. So if A and B enter into contract and
THEN B decides to MODIFY agreement, original contract stays.
NO MUTUAL ASSENT IF:
Misrepresentation. Fraud, Mistake, or Duress, Undue Influence or Menace.
Real Estate Law, 6th ed., by Siedel and Aalberts
Chapter 7
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The Real Estate Contract
Misrepresentation - Innocent misstatement of material fact upon
which someone relies and causes that person to suffer damages.
Fraud - Misrepresentation. of material fact knowing it to be false
upon which another relies and causes that person to suffer
damages.
Silent Fraud - Seller must disclose info. re: defects in property in
MI whether or not B inquires--MI Seller's Disclosure Act-Brokers probably. NOT liable for silent fraud in MI but liable in
other states. “AS IS’ clause is sometimes used in purchase
agreements. B acknowledges in writing that S has made NO
warranties re: condition of property. In MI, “as is” clause does
not shield S from fraud or silent fraud.
Real Estate Law, 6th ed., by Siedel and Aalberts
Chapter 7
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The Real Estate Contract
Mistake - Mutual misunderstanding in negotiations between parties
1. Consideration - Consideration is any promise or performance
that is made in exchange for a promise or performance by the
other party to a contract.
Real Estate Contracts -- promise by owner to convey title to B
and promise by B to pay purchase price for property
2. Satisfaction of Special State Laws - Satisfy specific state
regulations (i.e., Statute of Frauds)
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The Real Estate Contract
REQUIRED PROVISIONS IN ALL CONTRACTS FOR THE SALE OF LAND:
1. Writing - every state has a Statute of Frauds which requires contracts for
the sale of land to be in writing. Every statute derived from 1677 English law
-- Statutes of Frauds. Verbal contracts for sale of land are unenforceable.
Statute of Frauds satisfied if "Rule of 4 Ps" is satisfied--in MI:
1. names of parties
2. description of property
3. price
4. terms of payment
2. Description of Parties: Contract must contain names of both Buyer and
Seller
3. Description of Real Estate: Contract must contain a reasonably certain
description of land to be sold
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The Real Estate Contract
4. Sale Price (i.e., Consideration): Contract must contain sales
price and must state how purchase price will be paid. The
payment terms are broken down into:
1. Total purchase price;
2. Down payment; and
3. Form of financing (mortgage assumption, land contract,
mortgage)
5. Signature of Parties: Purchase Agreement enforced against
parties who sign. If you do NOT sign, you are NOT liable under
contract.
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The Real Estate Contract
Once four essential terms in the written agreement -P.A. will be enforceable, even if negotiations were
informal.
Four Essential Terms in P.A.
1. Parties described
2. Description of real estate
3. Consideration specified (i.e., payment terms)
4. Agreement signed
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The Real Estate Contract
OTHER COMMON PROVISIONS IN PURCHASE AGREEMENT
1. Description of personal property to be transferred with
premises. (i.e., contracts, franchises, permits, leases).
2. Survey
3. Condition and Inspection of Property
4. Prorations - Property taxes and assessments
5. Closing
6. Possession
7. Real Estate Brokers: Purchase agreement should define his or
her responsibility for holding earnest money, preparing closing
documents, etc.
8. Warranties
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The Real Estate Contract
Seller’s Warranties
1. Good and marketable title.
2. Premises and any personal property conveyed are sole
property of Seller.
3. Seller knows of no claims or encumbrances upon property.
4. No alleged claims or litigation regarding property.
5. All taxes and assessments paid.
6. Seller will indemnify Purchaser as to warranties.
Buyer’s Warranties
1. Authorized to enter into transactions.
2. Present proof of ability to complete transactions.
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Chapter 7
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The Real Estate Contract
Marketable Title - Seller must have good title, free from liens, encumbrances or
defects other than those specified in contract.
Title unmarketable if:
1. Seller lacks all or part of title alleged OR
2. Title subject to encumbrance OR
3. Reasonable possibility of #1 or #2.
Title Held By Seller: Unless purchase agreement indicates otherwise, purchaser is
entitled to undivided fee simple absolute to all property purchased.
Title Free From Encumbrances: Unless purchase agreement provides otherwise,
marketable title is free from all encumbrances. Types of encumbrances:
1. Easements
2. Zoning and Building Restrictions
3. Mortgages and Other Liens
4. Encroachments
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The Real Estate Contract
Equitable Conversion
Once Purchaser gets interest in real estate by executing a purchase agreement
-- Purchaser becomes equitable owner.
Seller retains legal title and this title is only held as security to receive money
from Purchaser.
Risk of Loss (After contract signed, before closing):
1. (Majority View) Buyer is regarded as equitable owner and
therefore, real owner of property. Therefore, he or she bears risk of BOTH
profit and loss during contract period. Buyer can not withdraw from contract
because property damaged.
2. (Minority View) Risk of loss remains with Seller unless legal title
conveyed to Purchaser or unless Purchaser causes loss--Uniform Vendor and
Purchaser Risk Act.
Real Estate Law, 6th ed., by Siedel and Aalberts
Chapter 8
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Title and Insurance
After purchase agreement is signed, three important things happen:
1. Seller proves he has title to real estate.
2. Buyer makes arrangements for property and liability
insurance; and
3. Buyer borrows money to finance purchase.
Proving Good Title
Seller must deliver abstract of title or title commitment to protect
real estate purchasers and creditors, public records are
maintained to help officially establish:
1. Who owns what real estate.
2. To give notice of encumbrances.
3. Establish lien priorities.
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Title and Insurance
How do we ensure these records are accurate?
1. Statute of Frauds requirements
2. Public recording rules
NOTICE - CONCEPTS
All Buyers and Lenders are charged with constructive notice
Contrast with actual notice -- everything the Buyer has direct knowledge of
ILLUSTRATION
Bill mortgages land to Jane. Jane does not record mortgage, but she does
take possession of land. Bill later mortgages same land to Ed, who knows of
earlier mortgage to Jane. Thus, Ed is charged with actual knowledge, so his
mortgage is second to Jane's mortgage.
ILLUSTRATION
Bill conveys land to Jane, who records deed. Then Bill persuades Ed to buy
the same land, telling Ed he owns land. Ed fails to examine title. Ed has
constructive notice of deed to Jane, Jane has priority.
Real Estate Law, 6th ed., by Siedel and Aalberts
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Title and Insurance
Three different types of Notice statutes:
Bona-Fide Purchasers -- one who has paid purchase price in
good faith and without knowledge of prior unrecorded deed or
mortgage.
1. Notice Statute - Unrecorded deed. Not valid against later
Bona-Fide purchasers. Bona-Fide purchasers win.
2. Notice-Rule Statute - Later Bona-Fide Purchaser only has
priority if he records first. Thus, subsequent Ps must be (1)
bona-fide purchasers, and (2) record 1st to have priority.
3. Race Statute - First to record wins, therefore, A has title. No
need for subsequent purchaser to be bona-fide.
Real Estate Law, 6th ed., by Siedel and Aalberts
Chapter 8
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Title and Insurance
Chain of Title
Tract Index - Index at recorder of deeds which allocates a
separate page to each piece of property in the county. All
recorded deeds and other documents relating to property are
listed on this page.
Grantor-Grantee Index - These records show ownership of land
passing from one person to another. Because most marketable
title legislature only requires us to look back 40 years, start with
current owner and go back 40 years.
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Title and Insurance
Proof of Title
Abstract - Brief history of instruments appearing in county
record that affect title to property
Title Insurance - Issued by a title insurance company after it
reviews recorded instruments. Contract by which a title
insurance company agrees, subject to terms of policy, to
indemnify the insured against loss sustained as a result of defects
in title other than specific title exceptions listed on policy.
OWNER'S POLICY: If a Seller wishes to obtain a title
insurance policy to prove his or her ownership in land, he
applies to title insurance company and agrees to pay a fee.
MORTGAGE POLICY: Only protects lender for amount of
mortgage loan and risks that affect security interest or lender.
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Title and Insurance
Standard Coverage - Generally insures against defects in public
records, plus things such as forged documents, documents of
incompetent grantors, incorrect marital statements.
Extended Coverage - Everything covered with standard policy, plus
additional risks which could be discovered by:
1. Walk-through of property;
2. Inquiries made of persons in possession; or
3. Examining the survey
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Title and Insurance
POLICY DOES NOT INSURE:
(EXCEPTIONS) -- some or all of these can be waived by title ins. companies
if presented with appropriate documentation or higher premium.
Specific
>
1. Defects or liens listed in policy which are
specific to property.
General
>
>
2. Unrecorded defects
3. Rights of parties in possession.
>
4. Questions regarding survey.
(EXCLUSIONS)
1. Losses resulting from government regulations of property.
2. Losses resulting from government right to take property.
3. Defects or liens: created by insured, known by insured, but NOT by
company, causes no loss to insured, created after policy issued.
Real Estate Law, 6th ed., by Siedel and Aalberts
Chapter 8
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Title and Insurance
HAZARD OR PROPERTY INSURANCE
MORTGAGE INSURANCE - Property insurance obtained by ME or by MR
for benefit of ME to insure security interest.
HOMEOWNER'S INSURANCE - Property insurance obtained by Purchaser
as homeowner.
When should it be purchased?
Types of Coverage: Basic, Broad and Comprehensive (note exclusions)
Liability provisions often protect insured from accidents caused by insured or
on insured’s premises
Real Estate Law, 6th ed., by Siedel and Aalberts
Chapter 8
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Financing the Real Estate Purchase
OTHER COMMON SECURITY DEVICES: security interests, guarantees and
suretyship
MORTGAGE - Conveyance of land given as transaction security for payment of
debt.
Definitions:
Mortgagor or Debtor - Gives interest in real estate as security for debt.
Mortgagee or Creditor - Person who takes interest in property as security for
debt.
Mortgage Loan - Loan obtained to pay portion of purchase price for real
property which is secured by real property.
Deed of Trust - Regular mortgage only involves two parties - borrower and
lender, with a Deed of Trust, Borrower conveys land to third party (Trustee) in
trust for benefit of lender or party who holds mortgage note.
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Financing the Real Estate Purchase
Purchase Money Mortgage - or - Seller Financed Mortgage - Seller takes a
mortgage from Borrower for any amount of purchase price not paid.
Equitable Mortgages - Any written instrument by which parties show
intention that real estate be held as security for payment of debt will be
considered an equitable mortgage. ALSO an instrument intended as a regular
mortgage, but which contains a defect will be treated as an equitable
mortgage.
Example where court finds equitable mortgage to protect creditor
Example where court finds equitable mortgage to protect Debtor
Title Theory States - Adheres to view that mortgage gives mortgagee some
form of legal title to land.
Lien Theory States - View that mortgage is not really a conveyance of land,
but only a lien. Mortgagee has lien to secure the debt.
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Financing the Real Estate Purchase
THE MORTGAGE TRANSACTION
Application and Commitment
1. Loan Application serves two purposes:
a. Provides information to lender so lender can determine whether to
make loan.
b. Defines term of loan contract.
2. Commitment – lender communicates acceptance to loan applicant
Mortgage Note
Note - The promise or agreement to repay debt in definite installments with
interest.
Chief function of Note is to make Mortgagor personally liable for payment of
mortgage debt.
Real Estate Law, 6th ed., by Siedel and Aalberts
Chapter 9
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Financing the Real Estate Purchase
Cont. Mortgage Note
Notes can be negotiable or non-negotiable - Is negotiable when its holder,
i.e., lender, may transfer his or her right to payment to third party by assigning
instrument over to third party. Meets requirements of Section 3-104 of UCC.
Three main provisions of a Note
1. Payment Plans - Most payable monthly and payments computed by
number of different payment plans.
2. Interest - Charge for the use of money. Generally, the interest portion
of each payment covers charge for using borrowed money during previous
month.
a. Usury
b. Prepayment
3. Acceleration - Mortgage and Note usually
provide that if B defaults, the entire principal sum
shall become immediately due and payable -acceleration clause.
Real Estate Law, 6th ed., by Siedel and Aalberts
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Financing the Real Estate Purchase
Requirements of a Mortgage Note
1. Promise to pay
2. Amount of debt (principal amount)
3. Interest Rate
4. Time and amount of principal and interest payments
5. Reference to the note’s security
6. Mortgagor’s signature
Due on Sale Clauses - Prevents a future purchaser of property from being able to
assume old loan at old low rate of interest. Clause provides that upon the sale
of property by Borrower, lender has choice of either declaring entire debt
immediately due and owing or permitting a qualified buyer to assume loan at
current market rates. Enforceable under Garn - St. Germain Depository
Institutions Act of 1982.
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Financing the Real Estate Purchase
The Mortgage - The conveyance of land given as security for payment of debt
Describing the Debt - Must be defined with reasonable certainty to prevent
subsequent purchasers or creditors from acquiring rights superior to those of
Mortgagee.
Parties must also be described with reasonable accuracy.
Accurate Description of Property
Mortgage Sets Forth Duties and Obligations of Mortgagee and Mortgagor
Duties of Mortgagor
1. Pay debt in accordance with terms of Note
2. Pay real estate taxes on property given as
security.
3. Maintain adequate insurance to protect lender
in event of casualty
4. Obtain lender's authorization in event of
major alterations to property
5. Maintain property in good repair
Real Estate Law, 6th ed., by Siedel and Aalberts
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Financing the Real Estate Purchase
Default Provisions
1. If Mortgagor fails to meet any of his duties, generally causes default
of mortgage. Generally, grace period provided before lender exercises right to
foreclose.
2. Note: Use of acceleration clause - which allows lender to accelerate
maturity of debt -- to declare entire debt due and owing.
3. Also, if Mortgagor fails to maintain property, pay taxes or pay
insurance premiums, generally Mortgagee has right to maintain or make
necessary payments.
4. Finally, some Mortgages provide that in addition to foreclosure
remedies of 1) power of sale or 2) judicial foreclosure, Mortgagee may
appoint receiver to take care of property.
Real Estate Law, 6th ed., by Siedel and Aalberts
Chapter 9
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Federal Laws Governing
Real Estate Lending
Fair Lending Laws
1. Fair Housing Act – See notes in section regarding Brokers
2. Equal Credit Opportunity Act - prohibits lenders from discriminating
against credit applicants on basis of race, color, religion, national origin, sex,
marital status, age or dependence on public assistance. State laws and local
ordinances may increase the number of protected classes.
a. Lender must notify loan applicant with 30 days of credit decision.
b. Lender must provide notice of right to receive copy of appraisal.
c. Special rules regarding collecting information about principal’s or
borrower’s spouse.
3. Community Reinvestment Act – Attempt to
eliminate redlining. Redlining is a practice of
refusing to make mortgage loans or issue insurance
policies in certain areas without regard to economic
qualifications of applicant.
Real Estate Law, 6th ed., by Siedel and Aalberts
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Federal Laws Governing
Real Estate Lending
4. Home Mortgage Disclosure Act (HMDA) – Requires lender
to report statistical information to the federal government
regarding applications and loans to purchase or refinance a
home. Information is collected for multi-family and singlefamily residences.
5. Home Ownership and Equity Protection Act (HOEPA) –
Created to protect borrowers from predatory lending practices.
Real Estate Law, 6th ed., by Siedel and Aalberts
Chapter 9
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Federal Laws Governing
Real Estate Lending
Disclosure of Loan Terms and Procedures
Truth in Lending Act - Enacted in 1969. Object of law was to
require credit institutions to inform borrowers of true cost of
obtaining credit.
1. Regulation Z issued by FRB to implement Truth in Lending.
2. All residential real estate transactions are protected by Act.
3. Additionally, credit transactions with individuals are covered
for personal, family, household and agricultural uses NOT
exceeding $25K.
4. Regulation Z does NOT apply to business or commercial
loans.
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Federal Laws Governing
Real Estate Lending
Real Estate Settlement Procedures Act
1. Enacted: (a) to ensure that both Buyer and Seller in residential
real estate transactions have knowledge of all settlement costs;
(b) eliminate kickbacks or referral fees that tend to increase
certain settlement services; and (c) reduce amount needed to
place in escrow account
2. RESPA applies to all purchases financed by a federally related
mortgage loan; loan secured by first or subordinate lien on
residential property; and residential property contains 1 to 4
family structure.
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Federal Laws Governing
Real Estate Lending
3. REQUIREMENTS OF RESPA
a. Lender must provide copy of HUD book, "Settlement Costs and You"
to every person making loan application within three days. (General
information regarding settlement costs.)
b. Lender must provide Borrower with good faith estimate of settlement
costs within three business days after submission of loan application.
Amounts stated as dollar amount or dollar range.
c. Loan closing information must be prepared on special HUD form
which details transaction -- Itemizes all charges imposed by lender.
d. Borrower permitted to review settlement statement one day prior to
closing.
e. Prohibits kickbacks (i.e., when insurance company pays lender for
referring one of lender's customers to agency.)
f. Limits amount Borrower required to pay into escrow account at
closing.
Real Estate Law, 6th ed., by Siedel and Aalberts
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Termination of Mortgage
Relationship
Payment of Entire Mortgage debt. Generally made when property is sold or
refinanced.
MORTGAGE DOES NOT HAVE TO BE TERMINATED IF PROPERTY
CONVEYED TO THIRD PARTY. IT CAN SURVIVE CONVEYANCE -Sale "Subject to" Mtg. and Mtg. Assumption
Sale Subject to Existing Mortgage. Describes conveyance where third party
accepts property "subject to" existing Mortgage. Third party takes
property subject to mortgage lien, but has no personal responsibility to pay
obligation.
Mortgage Assumption. Grantee takes land encumbered by Mortgage and becomes
personally liable for Mortgage debt.
NOTE -- When a third party has assumed a Mortgage, the Mortgagor is
still liable -- Mortgagor remains a surety -- a person equally liable with
third party.
Novation -- A release which Mortgagor can obtain from Mortgagee when
he conveys property to third party. It prevents Mortgagee from going after
Mortgagor for deficiency
Real Estate Law, 6th ed., by Siedel and Aalberts
Chapter 9
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Termination of Mortgage
Relationship
Foreclosure - Legal process by which property pledged as security in mortgage or
trust deed is sold to satisfy the debt.
TWO TYPES OF FORECLOSURE
Judicial Foreclosure - Property pledged as security,
sold by court order after Mortgagee gives sufficient
public notice.
Process:
1. Mortgagor defaults.
2. Mortgagee accelerates due date of all remaining monthly payments.
3. Mortgagee's atty. files suit to foreclose lien.
4. Court orders property to be sold.
5. Public sale is advertised and held. Real estate sold to highest bidder.
6. Third party who purchases property, purchases it free and clear of the
Mortgage and all junior liens filed subsequent to Mortgage.
7. Junior liens are extinguished by foreclosure.
Real Estate Law, 6th ed., by Siedel and Aalberts
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Termination of Mortgage
Relationship
Power of Sale - Foreclosure by Advertisement. Can only be utilized
when loan document contains a power of sale clause. Mortgagee
authorizes Mortgagor to sell property after default at a public
sale without court proceedings.
Notice Requirements. To foreclose, Mortgagee simply records
notice of default in county register of deeds to give public notice
of intended sale AND publishes advertisements in local
newspapers which state total amount due and date of public sale.
Sometimes, notices must also be posted on property in a
conspicuous location.
Real Estate Law, 6th ed., by Siedel and Aalberts
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Termination of Mortgage
Relationship
Principles of Equitable and Statutory Redemption
Equitable Redemption – Time between event of default and foreclosure.
Permits Borrower or any other person with interest in real estate to pay lender
the amount due, plus costs, and debt will be reinstated.
Statutory Redemption – Time period after the foreclosure sale whereby
Borrower can pay back debt plus costs to reinstate debt. Only permitted in
some states. Statutory redemption occurs by payment made to public officer
who held sale or another person designated by law of amount of foreclosure
sale plus interest. Mortgagor then holds land free and clear of mortgage and
foreclosure sale AND any junior liens. If NO redemption made, purchaser
owns property free and clear.
Real Estate Law, 6th ed., by Siedel and Aalberts
Chapter 9
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Termination of Mortgage
Relationship
POST SALE PROCEDURES
1. Deed executed by public official conducting sale, BUT deed is subject to
any rights of redemption.
2. If sale price exceeds debt, Mortgagor or junior Mortgagees, if any, receive
excess after expenses of sale are paid.
3. If sale price is less than debt, Mortgagee may recover deficiency from
Mortgagor. Remember, this is only recoverable if Mortgagor signed a
promissory note.
4. Sheriff's Deed - Delivered to Purchaser after foreclosure sale. All liens
recorded before Mortgage are not affected. All liens recorded after Mortgage
are extinguished, except special notice required for federal tax liens.
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Land Contracts or
Installment Contracts
Definition – Contract between Seller and Purchaser whereby Seller agrees to
convey title to P when P has paid the purchase price and has performed other
obligations specified in the contract. Similar to a Purchase Agreement in that
S agrees to convey title at a later point after satisfying certain conditions and
similar to a Mortgage since it includes specific financing terms and imposes
obligations on P which are similar to those imposed on a mortgagor. Usually
paid over a number of years.
Peculiarities
1. Title to real estate remains in Seller's name during term of Contract.
2. Purchaser does NOT receive deed until entire purchase price has been paid
AND terms of contract fully complied with. Seller retains fee ownership –
legal title.
3. Purchaser takes possession when contract is signed, generally pays property
taxes, insurance premiums and maintains property. Purchaser has possession,
therefore, equitable interest in property.
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Land Contracts or
Installment Contracts
WHY USE A LAND CONTRACT?
Seller
1. To offer attractive financing terms to
sell property.
2. More flexible.
Purchaser
1. Lower down payment.
2. More flexibility
3.Can purchase home even if
poor credit risk.
3.Not subject to as many regulations
and policies regarding mortgages.
4. More alternatives in event of
Purchaser's default.
5. Retains interest in land -- greater control
over use of land
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Land Contracts or
Installment Contracts
DEFAULT - Two remedies
Forfeiture - (Most popular) - Terminates contract. Seller
sometimes retains all payments made and evicts Purchaser.
Payments already made to S are kept by S as either liquidated
damages or as reasonable rental value of premises for time P in
possession.
Foreclosure – Similar to foreclosure of mortgage.
Real Estate Law, 6th ed., by Siedel and Aalberts
Chapter 9
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Encumbrances
Monetary Encumbrances
• Liens
• Real Estate Taxes
• Mortgages
• Mechanic’s Liens
• Judgments
• Environmental Super
Liens
Real Estate Law, 6th ed., by Siedel and Aalberts
Nonmonetary Encumbrances
• Encroachments
• Licenses
• Deed
Restrictions/Covenants
• Easements
1. Appurtenant
2. In Gross
3. By Necessity
4. By Prescription
Chapter 9
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Encumbrances
• Encumbrance = charge or burden on property that
may diminish its value or obstruct use of property,
BUT does not necessarily prevent transfer of title.
•
• Two Types of Encumbrances
• 1. Monetary encumbrances or liens -- affect title
• 2. Non-monetary encumbrances -- affect physical
condition and use of property
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Statutory Liens
• Lien = right of creditor to have Debtor's property sold
and be paid from proceeds. Allows creditor to force
sale of property. Example: ABC Stereo Comp. sells
Tom a $1,000 stereo. Tom only has $200, he finances
remaining $800 with ABC Stereo Comp. Tom fails to
make final payment. ABC Stereo Comp., which has a
lien on stereo can repossess and sell to recoup loss.
• Voluntary -- most common is mortgage where owner of
property agrees to use title to real estate as security for
a debt. Liens also arise by operation of contract. (i.e.,
Contract with electrician to perform work on home) OR
• Involuntary - by operation of law. (i.e., tax lien,
judgment liens, Super liens - environmental)
Real Estate Law, 6th ed., by Siedel and Aalberts
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Mechanic’s Liens
When does owner subject real property to lien?
• Contract states -- lien claimant must show he was
hired by landowner or his agent to furnish labor or
materials.
• Consent states -- sufficient for lien claimant to show
owner had knowledge of and consented to doing work,
even if work ordered by person other than Owner, i.e.,
Tenant.
(Courts recognize that Landlord is often powerless to prevent
Tenants from improving, therefore need affirmative consent of
Landlord. (i.e., provision in lease permitting additions.)
Real Estate Law, 6th ed., by Siedel and Aalberts
Chapter 9
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Cont. Mechanic’s Liens
Who is entitled to lien?
Driven by state statute -- Generally, both contractor and
subcontractor can recover, anyone who furnishes labor
or materials to improve real estate. In some states, the
landowner is responsible for making sure subcontractor
is paid even when landowner has paid general contractor
in full and general contractor has NOT paid subs.
Always best for landowners to get lien waivers from
general contractor before making any payment.
Real Estate Law, 6th ed., by Siedel and Aalberts
Chapter 9
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Cont. Mechanic’s Liens
What type of work is covered ?
Mechanics' liens only available for work which
results in permanent improvements. (i.e., if
contractor installs removable shelving in home
which could be removed without serious damage to
home, no lien could attach since shelving did not
constitute permanent improvement.)
Real Estate Law, 6th ed., by Siedel and Aalberts
Chapter 9
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Cont. Mechanic’s Liens
What's the procedure for claiming a lien?
• Every lien claimant MUST record lien statement with
register of deeds specifying amount due and nature of
improvement within certain time after work completed.
This appears on title work.
• Then claimant must commence an action to enforce lien
within a limited time period after work is completed.
• If court decides lien is valid -- property is sold to satisfy
debt.
Real Estate Law, 6th ed., by Siedel and Aalberts
Chapter 9
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Financing the Real Estate Purchase
THE REAL ESTATE CLOSING
Parties gather to execute promises made in Purchase Agreement.
In most instances, two closings occur at once:
1) Real estate contract is closed -- closing of sale of
property
AND
2) Mortgage transaction is closed -- disbursal of mortgage
funds by lender.
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Financing the Real Estate Purchase
Exchange of Documents at Closing - Order of Events
1. Buyer signs Note and Mortgage and receives check for amount of loan.
2. Buyer pays Seller the purchase price -- generally Buyer provides his own
certified check plus borrowed money.
3. Seller pays off mortgage and Seller pays real estate commission based on
gross sales price and to reimburse broker for any expenses made on behalf of
Seller.
4. Seller provides Buyer with a deed, title insurance policy, receipt for
payment, copy of Seller's Mortgage discharge, bill of sale for personal
property being sold, receipt for payment of last utility bills and taxes.
5. Mortgagee provides Buyer with a copy of Note and Mortgage and other
mortgage closing documents.
6. Seller receives Mortgage, Note and copy of discharge back from Seller's
Mortgagee
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Chapter 10
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Financing the Real Estate Purchase
Protecting the Lender's Interests - To protect its security interest in
property -- to make sure Borrower is getting good, marketable title and that
tax and insurance payments are maintained, Lender requires:
1. Title insurance policy
2. Fire and hazard insurance policy
3. May require additional documents such as a survey or inspection
report
4. Estimate of reserve for escrow, tax and insurance payments
5. Especially at commercial closings - Opinion of Attorney
Important Miscellaneous Items
1. Make sure title reports are brought up to
date of closing to ensure no last minute liens.
2. Immediately record documents to avoid potential priority
problems.
3. Borrower should always get keys of home.
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Deeds
Definition - Written instrument by which owner of real property intentionally
conveys to Purchaser his right, title or interest in parcel of real property. ALL
DEEDS MUST BE IN WRITING.
TYPES OF DEEDS
Quit Claim Deed -- Contains NO warranties. Conveys only Grantor's present
interest in land. (i.e., whatever title or interest Grantor has).
General Warranty Deed -- Seller provides P with 3 warranties. These
covenants transfer with the land to all successors in interest of Grantee. (i.e.,
A gives general warranty deed to B. B sells to C. A is liable to C on any future
covenants.).
1. Covenant of Title
2. Covenant Against Encumbrances
3. Covenant of Quiet Enjoyment
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Deeds
Special Warranty Deed - Grantor covenants only against lawful claims of all
persons that arise "under, by or through" Grantor. (i.e., claims arising through
acts of Grantor himself, not acts of others.)
Requirements for Valid Deed
1. Competent Grantor and Grantee. Note situation with Deeds in Blank.
2. Consideration - Except in Nebraska, actual price paid need not be stated.
Customary to recite consideration of "$1.00 and other good and valuable
consideration."
3. Words of Conveyance - Every deed must show a present intent on part of
Grantor to transfer his interest to Grantor.
4. Description of Land - Must be as precise and clear as possible. Purpose of
legal description is to fix the boundaries of land intended to be sold. Types of
legal descriptions: Government Survey, Metes and Bounds and Plats.
5. Exceptions and Reservations - Exception = Part of real estate which will
not be conveyed because it has already been excepted from property.
Reservations = Part of the real estate which Grantor carves out for himself or
others at time property is conveyed.
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Deeds
(Cont.) Requirements for Valid Deed
6. Date - Not essential for valid deed.
7. Execution
8. Delivery - A deed is delivered when Grantor does or says something to
show intention to pass ownership of land to Grantee. Must make delivery
during lifetime of Grantor.
BASIC PRINCIPLES
a. Delivery to Grantee. Delivery is presumed when Grantee takes
physical possession of deed, but presumption can be rebutted by evidence.
Also, no delivery if Grantor retains possession of deed, but again evidence
can be introduced to rebut presumption.
b. Delivery to Grantee on Oral Condition. Conditions are OK, but
must be written down.
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Deeds
c. Delivery to Third Party Agent. If delivery is made to agent of Grantee -have good delivery. If delivery is made to agent of Grantor -- no delivery
since there is no intention to transfer ownership.
d. Delivery to Third Party with Conditions. Escrow arrangement - Deed is
delivered in escrow when it is deposited with third party with directions to
deliver to Grantee upon performance of some condition set forth in escrow
instructions, not in deed. Requirements for valid escrow:
1. Must be a valid and enforceable contract for sale of land. The
escrow itself may serve as contract for land.
2. Escrow agreement must contain a condition -- something that must
be done before Buyer's money is paid to Seller.
3. Deed must otherwise be valid.
4. Escrow holder must be third party.
Once conditions in escrow agreement are performed,
ownership of land passes to Buyer and delivery of
deed is complete.
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Adverse Possession
• Method of acquiring ownership of property through possession
and use of property for certain number of years
• 5 Requirements
1. Hostile Possession – person occupying land must be doing so without
permission of owner and with intent of claiming ownership.
2. Actual Possession – Possessor must enter land and make actual use of
land appropriate to nature of land.
3. Open and Notorious Possession – Owner must be aware that claim is
being made
4. Continuous Possession – Must use land for certain number of years as set
forth by state statute
5. Exclusive Possession – Possessor can not share possession and use of
land with owner or third party.
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Rights of Landowners
and Occupants
TORT - Commission or omission of an act by one, without right, whereby
another receives some injury, directly or indirectly, in person, property or
reputation.
Types of Torts:
1. Negligence - To show person was negligent - injured person must prove:
Defendant did not act like a reasonable person would in similar circumstances
(failed to exercise due care) and Defendant's actions caused Plaintiff to suffer
an injury.
Contributory Negligence - If victim had somehow acted negligently and
contributed to his injury -- victim might not be able to recover damages.
Comparative Negligence - Victim has somehow acted negligently and
contributed to his injury -- court reduces damages in proportion to victim's
negligence.
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Rights of Landowners
and Occupants
2. Intentional Tort - Victim proves an intentional tort by proving: Wrongful
act was intentional and injuries resulted from the intentional act. Examples -assault and trespass. Trespass - Any intentional intrusion made on property
possessed by another. Elements:
a. Intent
b. Physical invasion onto land
c. Property possessed by another
d. Damages or equitable relief
3. Strict Liability - In certain instances, a victim can prove strict liability even
though the party has not been negligent and has NOT intentionally caused the
injury. Strict liability applies to only a few situations--when persons are
engaged in dangerous or ultra hazardous or abnormal operations.
4. Nuisance - arises when one person's use of his property materially and
negatively affects others. Private Nuisance - Interference with use and
enjoyment of one's land. Public Nuisance - Interference which damages
rights of public. These are criminal acts. Conduct which is harmful to health,
safety or morals of community.
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Eminent Domain
Eminent Domain describes right of government to acquire privately owned real
estate for use and benefit of general public. Federal government's right to
eminent domain is recognized by 5th Amendment. 14th Amendment requires
states to comply with 5th Amendment.
Government brings condemnation suit and serves notice on parties with interests
in affected property.
1. Court decides if proposed use is a public use - No concrete definition
of what public use is. Courts will generally NOT question decision of federal
government to condemn a certain parcel.
AND
2. Amount of just compensation which must be paid to each owner.
Courts determine FMV based on most profitable use of land, even if land not
currently being used for that purpose.
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Eminent Domain
Takings take two forms:
1. Government's physical taking of individual's land (i.e.,
property taken to construct General Motor's Poletown Plant).
2. Land use regulation which causes severe economic burden to
property owner. (i.e., some argue federal and state
environmental regulations). Government regulates property in a
manner that restricts owner’s use and enjoyment. Recent
Supreme Court decisions in Palazzola (obtaining permits to fill
in wetlands) and Lucas (beachfront management) have upheld
the rights of property owners against unreasonable government
regulations.
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Michigan Environmental Law
“Polluter Pay Law”
• Patterned after Superfund – Liability is
RETROACTIVE, JOINT AND SEVERAL.
• Following parties are potentially resp:
1. Current owners/operators – Causation based
Liability as opposed to Status-based liability as
under CERCLA
2. Past owner/occupier – Causation based
3. New owner/occupier – Importance of Baseline
Environmental Assessment
See http/michigan.gov/deq for more information
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Cont. “Polluter Pay”
• Exempt Persons
• Residential Owners
• Retail/Office/Commercial Lessee
• Person acquiring property without knowledge of or
reason to know it is contaminated (imp. Of due diligence)
• Persons who severed mineral rights
• Lender who conducts proper liquidation of property
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Priority of Environmental Liens
• Superfund and MOST states – environmental liens
have NO priority over existing liens
• NJ – environmental lien is a super lien – has priority
over ALL liens
• MI – If state response activity increased market vale
of real property the increase in value cause by state
funded activity constitutes a lien which automatically
has priority over all other liens.
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Drug Forfeiture Liens
• Federal law and some state laws permit forfeiture of
property acquired with proceeds of narcotics
trafficking, or used in any manner to facilitate
commission of drug offense (i.e., Using or dealing in
home).
• Real property may be seized by the federal
government and forfeited even if the owner is not a
drug trafficker (i.e., landlord).
• Only defense is Innocent owner.
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