Chapter 2Legal Foundations to Value

Real EstateFIN 331

Fall 2013

Chart illustrates the inflation-adjusted median price of a single-family home in the United States over the past 44 years. More recently, the inflation-adjusted price of the median single-family home has declined and is now testing support of its two-year upward sloping trend channel.

The Nature of Property

A.Real Estate as a bundle of rightsB.What do we mean by Rights?C.How do property rights differ from

personal rights?D.How does personal property differ

from real property

REAL PROPERTY AS A BUNDLE OF RIGHTS

A. What do we mean by rights?1. Claims that the government is obligated to

enforce2. Derived from the Constitution & Bill of Rights3. Different from raw power4. Nonrevocable and Enduring5. Can be reduced in the interest of health,

safety, and welfare6. Not limited to the memory of owners or others7. Cannot be nullified by other persons or by

government

REAL PROPERTY AS A BUNDLE OF RIGHTS

B. How do personal rights differ from property rights?1. Personal rights

a. Freedoms guaranteed by Constitutionb. Supreme Court interpretations of Constitution

2. Property rightsa. Exclusive possession b. Enjoyment of the use or benefit: Use, collect

rents, harvest.c. Freedom to dispose as one pleases (within

limits of safety): sell, convert, rebuild, etc.

REAL PROPERTY AS A BUNDLE OF RIGHTS

C. How does real property differ from personal property?1 Real property: Rights in land and its

permanent structures (see Exhibit 2-2)a Surface of the earth and improvementsa Air, up to reserved air space or tallest structureb Beneath the earth as far as technology allows:

Minerals, oil and gas, water

2 Personal property: All other propertya Personal and household goodsb Intellectual propertyc Music

REAL PROPERTY AS A BUNDLE OF RIGHTS

A.How do we distinguish real from personal property?1. Fixtures (Real): typically something not

readily movable.Examples: custom screens & draperies, kitchen appliances such as radar ranges, garbage disposals (attached to property)

2. Personal: typically something moveableExamples: furniture, pictures, “customary assumptions of the realm”

REAL PROPERTY AS A BUNDLE OF RIGHTS

3. Special rule for “Fixtures”a. The manner of attachmentb.The character of the article and manner of

adaptationc. The intention of the partiesd.Relation of the parties: landlord and tenant

relationships1) Trade fixtures considered personal property

2) Agricultural fixtures at taxes are considered property of the tenant

3) Same rules apply for residential tenants

Real Property Bundle of Rights

A. Interest: Any set of rights in real property

B.Estates: A real property interest that includes the right of exclusive possession

C.Non possessory interests:1. Easements2. Restrictive covenants3. Liens

Possessory Interests [Estates]

A.Fee Simple Absolute - all possible rights

B.Fee Simple Conditional - all rights, but revocable if specific condition is violated

C.Ordinary Life Estate and Remainder1. Rights are unbundled2. Owner retains full rights until death

D.Legal Life Estate; created by act of law

Leasehold (Non-ownership or Non-freehold) Estates

A. Leasehold interest are possessory interests and are therefore Estates1. They are limited time2. The right of disposition is diminished3. They are not titled interests

B. Tenancy for years1. Leasehold interests are for a specific period of time (few days to

decades)2. Must be written if for more than one year3. Written lease contract governs landlord-tenant relationship

C. Periodic Tenancy1. No definite length of time2. Often by oral agreement3. State law governs notice of termination

Minimum time required for notice is usually half of the payment period

Leasehold (Non-ownership or Non-freehold) Estates

D.Tenancy at Will1. continue tenancy after the leases

expired2. Generally an oral agreement between

the tenant and the landlord

E. Tenancy at Sufferance1. When tenant is supposed to vacate but

does not2. This does not constitute trespassing

because of the previous leasehold interest

Nonpossessory Interests in Land

A. Easements: The right to use land for a specific and limited purpose1. Affirmative easements:

a. Driveway or access right-of-wayb. Sewer linec. Drainaged. Common wall

2. Easements Appurtenanta. Involves the relationship between 2 adjacent parcels of landb. The dominant parcel benefits from the easementc. The servient parcel is constrained or diminished by the

easementd. May be positive (some intrusion) or negative (no intrusions)

Nonpossessory Interests in Land

3. Easements in Gross (Commercial Easements): right to use land unrelated to other parcelsa. Extract natural resources, harvest

timber/cropsb.Add roadways, ditches, pipeline, etc.c. May be transferred separately from land

title or ownership

Nonpossessory Interests

Examples:On parcels A and C is a common driveway easement.On parcel C is an implied easement of access in favor of parcel B.Parcel E as an involuntary driveway easement known as an easement by prescription.Parcel F has an implied easement for access to extract oil.The power lines and the roadside electric lines are easements to permit installation and maintenance.The wildlife preserve on parcel G may be protected by a conservation easement.

Nonpossessory Interests in Land

A. License1. An easement is the right to use another’s land for a specific and limited

purpose2. A license is permission to do so and is revocable by the grantor

B. Restrictive Covenants1. In a deed for a single parcel of land OR an entire subdivision2. Enforceable in court of law or by “parties at interest” ~ HOA3. Type of building and materials, minimum square footage, fences, etc.4. Can only be enforced by those who hold a legal interest in the property

C. Liens: An interest in property as security for an obligation1. General Liens: Arise from events unrelated to the property

a. Court awarded damagesb. Federal tax liens

2. Specific liens: Arise from ownership and use of the propertya. Mortgageb. Mechanics’ lienc. Property tax, assessment or Community Development District (CDD) lien

Liens

A. An interest in property that serves as security for an obligation1. General Liens: Arise from events unrelated to the

propertya. Court awarded damagesb. The lien is security for the payment of the judgment

2. Property Tax and Assessment Liensa. Enjoy top priority among liensb. Assessment liens can last for several years

3. Community Development District (CDD) lien4. Specific liens: Arise from ownership and use of the

propertya. Mortgageb. Mechanics’ lien

Liens

FORMS OF CO-OWNERSHIP

A. Indirect: Through business organizations or trusts1. General Partnerships2. Limited Partnerships3. Limited Liability Companies4. Corporation (Co-op)5. TrustEntity holds title. Ownership passes through the entity. Interest may not be divided.

FORMS OF CO-OWNERSHIP

B. Direct: 1. Tenancy in Common; each owner retains full rights

a. All have fee simple interest – can be divided (sell, mortgage)

2. Joint Tenancy with right of survivorship; most common in USa. Restricts inheritance to heirs of last owner, unlawful in some states

3. Tenancy by the Entirety: similar to 2 abovea. Typ. Husband and wife. Protection against liens & judgments if

against one spouse

4. Condominium; single ownership (fee simple) with tenancy in common (of communal elements)a. Bylaws define owner rights

5. Cooperative; a proprietary corporation – each owner has a proprietary lease (in effect ownership of a specific portion) and can be sold, transferred, or bequeathed.

FORMS OF CO-OWNERSHIP

6. Ownership interests from marriagea. Dower/Curtesy: common law granting of one third life estate to

survivor in the real property of the decedentb. Dower covers the widow’s claim, curtesy the widowerc. Life estate is not marketable

7. Elective Sharea. In law, grants the surviving spouse a share of most of the wealth

of the decedentb. Elective share applies to both real and personal propertyc. Elective share law may not encompass all of the decedent’s

wealth

8. Community Propertya. Gives a spouse a one-half claim at all property acquired “from

the fruits of the marriage”b. Excluded from claims are any property acquired before the

marriage (a motive for prenuptial agreements?)

Two Main Forms of Marital Property Rights

TIMESHARE

A. Multiple individuals having use of property but not simultaneous interests

B. the estate is divided into separate time intervals

C. Timeshare rights1. any contract that may convey any level of real

property interest2. Buyer often acquires a leasehold interest rate

fixed number of years3. A buyer may also acquire a license for partial

use

SPECIAL ISSUES REGARDING LAND

A.Rights to Water1. Who owns the land under a body of

water?2. Who controls use of land under a body

of water?3. Who has the right to use the surface?4. Who has the right to use the water

itself?5. Who has the right to use groundwater?

SPECIAL ISSUES REGARDING LAND

B. Rights to Oil, Gas, and Minerals1. Rights to the subsurface include rights to

minerals2. Mineral rights can be separated from land

ownership3. In some states, mineral rights imply ownership

of the space minerals occupy4. Oil rights

a. Ownership states: Oil is simply another mineralb. Traditional “rule of capture” (If you can remove it,

it’s yours) is being limited due to extensive secondary recovery methods.

HOMEWORK ASSIGNMENT

A.Key terms: Dominant vs. Servient parcel, Types of Liens, Property rights, Restrictive Covenants, Forms of Tenancy, Fee Simple types, Easements, Mineral Rights – Rule of Capture

B.Study Questions: 1, 3, 5, 7