Advanced Business Law BPP 433

Advanced Business Law (BPP433/85)

2007 Winter Quarter

Instructor: David Oliveiri

LANDLAND

Advanced Business Law BPP 433

Advanced Business Law BPP 433

Advanced Business Law BPP 433

Learning Objectives

Just What is Land?

What Legal Rules Apply to Land and Land Transfer?

Managerial Implications – Constraints, Risks, Opportunities

Advanced Business Law BPP 433

Is “The River Campus” Land?

What is “The River Campus”?

Think About This!

Advanced Business Law BPP 433

Land

Land = Real Property

Real Property = “Bundle of Rights”

Why Land/Real Property?

Example from Hardin, Tragedy of the Commons (1968): Open pasture, many herdsmen, herdsmen are REMPs. How do they maximize?

Advanced Business Law BPP 433

Advanced Business Law BPP 433

Tragedy of the Commons?

#Cattle Wt. Gain/Cow/Week Total Wt. Gain Societal Gain 1 7 7 7 2 9 18 11 3 8 24 6 4 7 28 4 5 6 30 2 6 5 30 0 7 4 28 -2 8 3 24 -4 9 1 9 -15 10 -1 -10 -19

HOW MANY COWS WILL GRAZE IN THIS PASTURE?

Advanced Business Law BPP 433

Tragedy of the Commons

Private Property = Rights Allocation [E.G. Single Owner of Pasture]

Result: Society and Individual Decisions Coordinated – [E.G. Single Owner Rents Grazing Rights ]

Managerial Implications

Advanced Business Law BPP 433

Clay, Uncertain Property Rights and Agricultural Production: Evidence from Post-Gold-Rush California (Carnegie Mellon University, Unpublished, 2/16/2006)

1860 California, Uncertain Agricultural Land Rights

Significant Negative Effect on Farm Values, Crop Production

– Squatters’ Farm Values 22-38% Lower

– Low Investment in Land; Lower Production; Use of Short Season Crops

– But Similar Amounts of Livestock

Tragedy of the Commons

Advanced Business Law BPP 433

Tragedy of the Commons

What Business Am I In?

What Rights Maximize Revenue? – Grazing Rights, Above, Below, Sides, Support, Light, Entry, Quiet, Views, Resource Removal, …?

How Do I Get These Rights?

KEY CONCEPT: REAL PROPERTY INTEREST

Managerial Implications

Advanced Business Law BPP 433

Interests in Land/Real Property

Possessory Interests (Estates)– Ownership Interests (Freehold Estates) -- Infinite/Indefinite/Lifetime Duration– Non-Ownership Interests (Nonfreehold Estates) – Includes Commercial

Leasing

Non-Possessory Interests (Non-Estates)– Easements– Profits– Covenants– Rents

ST2-Q5, Q7 (S&R 50-P1), Q1ST2-Q5, Q7 (S&R 50-P1), Q1

ST2-Q4ST2-Q4

Advanced Business Law BPP 433

Transfer – Only Of Interest/Rights One Owns!

Pre-Contract Stage

Contract Signed

Executory Contract Stage

Closing/Deed Delivered/Mortgage Executed

Post-Closing Stage

HOW? HOW?

ST-Q2ST-Q2

Advanced Business Law BPP 433

Financing Transfers of Real Property Interests

Assume a sale from Seller (S) to Buyer (B) of a commercial office building. Purchase price is $100k. S had previously mortgaged the property to Bank (L), and the current balance is $75k.

– All Cash Sale

L S BRELEASERELEASE DEEDDEED

$100$100$75$75

Advanced Business Law BPP 433

Assume a sale from Seller (S) to Buyer (B) of a commercial office building. Purchase price is $100k. S had previously mortgaged the property to Bank (L), and the current balance is $75k.

– New Mortgage Loan

L S B NLRELEASERELEASE DEEDDEED

$100$100$75$75 $100$100

MORT.MORT.

Financing Transfers of Real Property Interests

Advanced Business Law BPP 433

Assume a sale from Seller (S) to Buyer (B) of a commercial office building. Purchase price is $100k. S had previously mortgaged the property to Bank (L), and the current balance is $75k.

– Buyer Assumes Existing Mortgage

L S BDEEDDEED

$25$25

NOTENOTE

Financing Transfers of Real Property Interests

Advanced Business Law BPP 433

L S BRELEASERELEASE DEEDDEED

$15 + $85 Mort.$15 + $85 Mort.$75$75

Assume a sale from Seller (S) to Buyer (B) of a commercial office building. Purchase price is $100k. S had previously mortgaged the property to Bank (L), and the current balance is $75k.

– Seller Financing/Wraparound Mortgage

Financing Transfers of Real Property Interests

Advanced Business Law BPP 433

What Rights/Interests Traditionally Accompany Real Property Ownership

Right to Possess/Occupy– Possess Every Inch? Restrictive Covenants, Setbacks

– Occupy Every Inch? Tenants

Right to Use as Owner Sees Fit– All Uses? Zoning, Nuisance, Environmental Regulations

Right to Exclude Others– Officials? Police With Warrant, Health Inspector, RGE

– Public? Discrimination Laws

– Neighbor? Easement by Necessity

Right to Transfer Freely– Subdivide? Ordinances on Lot Size

– Eminent Domain

Advanced Business Law BPP 433

Real Property Rights As Bargaining Starting Point

Coase, The Problem of Social Cost

Hypothetical: Sports Bar (S) and Doctor’s Office (D) located on adjacent properties. Dispute –Noise, Disruption, Loss of Business. Lawsuit.

Potential Lawsuit Outcomes : (1) No Nuisance (S “Enjoins” D); (2) Nuisance (D Enjoins S); (3) Nuisance (S Compensates D); (4) Nuisance (D Compensates S). Who Decides Outcome? Correct Social Outcome? What Next?

Hard (Specific) Rights v. Soft (Ambiguous) Rights

Advanced Business Law BPP 433

Bryant v. Lefever

Coase, Problem of Social Cost

Traditional Approach = Allocate Blame = Who Causes?

BUT Incompatible Property Uses Resolved With Free Bargaining

…Regardless of Initial Assignment of Rights!!

So, Rights Allocations= Starting Point for Bargain

With No Transactions Costs, Judges Cannot Affect Allocative Efficiency!! BUT….

Advanced Business Law BPP 433

Negotiation

Farmers A and B

Adjacent Fields

Plowing Requires Turnaround – 10% of Plot at Each End!

Can A and B Improve Yield?

A

B

Advanced Business Law BPP 433

Obtain/Disclose Useful Info

Master Facts

Understand/Satisfy Other Party

Support Position With Reasoning

Effectiveness – Explore Alternatives, Firm/Flexible, Avoid Argument

Negotiation

A

B

Advanced Business Law BPP 433

Bottom Lines; Q&A

Effective Business Operation Requires Rights

Land/Real Property = “Bundle of Rights”

Uncertain Property Rights = Economic “Tragedy”

Allocated Property Rights = Starting Point for Bargaining

Incompatible Property Uses Will Be Resolved With Free Bargaining