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Charles J. Jacobus TEXAS REAL ESTATE LAW 11E

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2 Chapter 5 How Ownership is Held ownership in severalty, tenancy in common, joint tenancy, partnerships, limited partnerships, corporations, limited liability companies, and trusts. Each type of ownership will be discussed in its purest, most basic form to simplify its unique characteristics. The types of ownership include:

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3 Ownership in Severalty One person is the owner. He has sole control over the use and possession of the property. Also has unlimited liability for all causes of action.

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4 Tenancy in Common Multiple ownership in Texas is presumed to be a tenancy in common. Dened as an ownership by more than one, in undivided interests. There is no requirement that the interests be equal. All co-owners have the right of possession (unity of possession ). All of the co-tenants do not have to occupy the real estate at one time. A possession of one co-owner is deemed a possession by all owners. Upon death a co-owners interest passes to their heirs.

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5 Tenancy in Common Rights of Parties When only one of the co-owners is in possession, the relationship with the other co-owners is construed to be one of landlord and tenant. If a co-owner receives more than his proportionate share of rights, he owes a duty to pay the other co-owners their share. If one of the co-tenants incurs necessary expenses, he is entitled to reimbursement from the other co-owners.

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6 Tenancy in Common Liabilities A co-owner may encumber, sell, or lease his respective interest as long as it does not adversely affect the rights of the other co-owners. His obligation to third-party creditors extends only to his interest. If a co-owner loses his share, the creditor becomes a co-owner. If the property is encumbered by a single mortgage the creditors can seek collection from one or all of the co-owners, jointly or severally. The co-owner who pays the debt has the right to reimbursement. If the expenses are voluntarily paid without the consent of the other co- tenants, the expenses are not reimbursable. Conicts among co-owners may be resolved through suit for partition.

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7 Joint Tenancy Dened as ownership of real estate by two or more, with the parties having a right of survivorship. Right of survivorship means that upon the death of one of the joint tenants, his interest automatically passes to the other joint tenants. Joint tenancy requires four unities: time, title, interest, and possession.

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8 Joint Tenancy - Creation Texas does not look favorably on joint tenancies. Texas does not allow joint tenancies except where created by an agreement in writing of the joint owners. In no event is such an agreement assumed from the mere fact that the property is held in joint ownership. Ownership passes to the surviving joint tenant immediately upon the death of the other joint tenant. Providing an avenue to avoid will contests and lengthy probate proceedings.

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9 Joint Tenancy - Liabilities Each of the joint tenants owes the duty of care to the other(s) not to commit waste or arbitrarily withhold economic benets of the other(s). Each joint tenant has a liability of his fractional interest for debts. When a joint tenant conveys or loses his interest, the new owner becomes a tenant in common rather than a joint tenant. One owner may also partition his interest in the event of a conict.

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10 Community Property Right of Survivorship Spouses may create community property with a right of survivorship. The agreement shall include a phrase such as: 1. With right of survivorship. 2. Will become the property of the survivor. 3. Will vest in and belong to the surviving spouse. 4. Shall pass to the surviving spouse. Except for the right of survivorship, the ownership, management, and operation of the community property remains the same. The agreement may be revoked. This statute consistently uses the term may, and not will or shall. This form of ownership creates so many problems it is seldom used.

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11 Business Organizations In 2003, the Texas Legislature established a whole new series of statutes for business organizations called the Business Organizations Code. www.capitol.state.tx.us

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12 Business Organizations Power, Authority, and Formation The code gives all domestic entities the power to: (1) sue, (2) be sued, (3) make contracts, (4) lend money, (5) incur indebtedness, and (6) other powers not specically excluded by the Code. Not-for prot entities can acquire, own, hold mortgage and dispose of and invest its funds in property for the use and benet of its members. All business entities must le a certication of formation. A domestic entity exists perpetually unless otherwise provided in the governing documents to the entity.

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13 Partnerships An association of two or more persons to carry on as co-owners a business for prot. There are four basic partnership entities that will be discussed: (1) general partnerships, (2) joint ventures, (3) limited liability partnerships, and (4) limited partnerships.

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14 General Partnerships Creation No specic statutory guidelines for the creation of a partnership; a written or oral agreement is not necessarily essential. Normally inferred when the partners in fact have a co-ownership with the intention of sharing prots or losses in a business venture. Any property may be acquired in the partnership name or the names of individual partners and all is considered partnership property. Once acquired, property can be conveyed only in the partnership name The purchase or conveyance of property generally includes the name of the partnership and then lists each of the partners individually. Each partner actually gets three distinct rights: 1. The partners rights in specic partnership property. 2. The partners interest in the partnership. 3. The partners right to participate in management.

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15 Rights to specic property cannot be conveyed without consent of all. A person cannot become a partner without the consent of all. The relationship of the partners is termed a duciary relationship. Each partner can bind the partnership to any obligations. Any single partner may convey title to property in the partnership. Any partner can incur a debt or other obligation for the partnership. Each of the partners is liable jointly and severally for all obligations. All are bound by the partners acts, even if they are wrongful. General Partnerships Creation

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16 General Partnerships Advantages Pooling of resources and liabilities so that no one partner bears the brunt of all the losses. All losses as well as all prots, are passed through directly to each of the partners individually. Income taxes are paid on the personal level only. Depreciation allowances, capital gains tax treatment, tax-free exchange, and installment sale benets pass to the individual partners.

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17 General Partnerships Disadvantages Joint and several liability. One radical partner can create liability or even bankrupt the whole. The risk is often too high for the benets obtained. A partner must always monitor what all of the other partners are doing.

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18 Joint Ventures Is a partnership, more appropriately called a joint adventure. Two or more partners jointly pursue a specied project. Legally, a joint venture is governed by the same rules as partnerships. Establishment of a joint venture requires four basic elements: (1) community of interest in the venture; (2) agreement to share prots; (3) agreement to share losses; and (4) mutual right of control or management. Often involve two partners, a nancial partner and a managing partner. Joint ventures are usually very sophisticated transactions. There is a high duciary duty to the other joint venturers.

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19 Limited Liability Partnerships A partner in a registered limited liability partnership is not individually liable for debts and obligations of the partnership arising from errors, omissions, negligence, incompetence, or malfeasance committed in the course of partnership business by another partner, or a representative of the partnership, not working under the supervision or direction of the rst partner at the time the errors, omissions, negligence, incompetence, or malfeasance occurred.

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20 Limited Partnerships A very effective tool for real estate ownership and investment. Often considered the standard form of investment for private investors. One of the more stable means of ownership. Law is reasonably well settled and is generally understood. Has one or more general partners and one or more limited partners. Limited partners are not bound by the obligations of the partnership to third parties.

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21 Limited Partnerships Creation Need a certicate of limited partnership and the partnership agreement. The limited partnership agreement can be written or oral. The certicate must be in writing and led with the Secretary of State. The certicate must be signed by all general partners. www.sos.texas.gov

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22 Limited Partnerships Liabilities General partner has all the liabilities as if in a general partnership. Limited partners are not bound by any of the obligations of the partnership. Only risk the limited partner takes is the loss of his contribution. Limited partners cannot get a return on their investment until all obligations of the partnership have been met.

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23 Limited Partnerships Advantages The main advantage is the limited liability of the limited partners. Tax benets are an additional advantage to limited partnerships. Limited partner gets all the tax benets with virtually no liability. Liability Shield

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24 Limited Partnerships Disadvantages First is the total reliance by the limited partners on the general partners. Second is that limited partnerships can be considered securities and so regulated. Third is that in ling a certicate of limited partnership, there is a certain amount of personal disclosure that some partners wish to avoid. Fourth is that limited partners may not take part in management (with a few limited exceptions).

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25 Corporations Organization Three basic classes of individuals are involved shareholders, directors, and ofcers. Shareholders are the owners and ultimately control through the bylaws, and by voting their shares. They also elect the board of directors. The corporation is managed by the board of directors. The ofcers of the corporation are elected by the board of directors. The ofcers perform day-to-day functions as determined by the board of directors.

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26 Corporations Creation Created by ling a charter with the Secretary of State. Must pay a corporate franchise tax each year. If a corporation is formed in another state, it is a foreign corporation. A foreign corporation must register with the Secretary of State Vast majority of major corporations are organized in Delaware. An attorney well versed in corporate and real estate law is needed!

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27 Corporations Corporate Real Estate Granted the specic power to purchase and sell real property. There is a difference between selling property of a corporation and the sale of all of the corporations assets. Sale of property may be accomplished by the signature of the president, vice president, or attorney-in-fact. A deed conveying a corporations real property must be authorized by a resolution of the board of directors. If the sale of the real estate consists of all of the assets of the corporation a resolution by the shareholders is required.

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28 Corporations Corporate Liability The primary purpose incorporation is for the insulation from liability of the shareholders and individuals organizing the corporation. The liability of the assets of the corporation is the only exposure. There is absolutely no personal liability to third parties dealing with the corporation. Stockholders Officer Board of Directors

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29 Advantages of Corporate Ownership Primary is the insulation from liabilities of all individuals concerned. As long as there is no fraud or material misrepresentation, there is no personal liability on the part of the shareholders, ofcers, or directors. There are times when courts will impose personal liability. When this is done, it is referred to as piercing the corporate veil. In Texas, this is relatively difcult to achieve. Liability Shield

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30 Disadvantages of Corporate Ownership One of the biggest drawbacks is the problem of double taxation. Income of the corporation is taxed as are dividends to shareholders. Also, the tax benefits of real estate do not pass to the shareholders. Not considered the best form of ownership for real estate purposes. It is not always clear to outsiders as to who has the authority to negotiate contracts, attend closings, and sign papers. Corporations can never operate as fast as individuals or partnerships.

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31 S Corporations For income tax purposes it is treated like a partnership. The income and losses for the S corporation pass directly through to the shareholders. No double taxation disadvantage as with regular corporations. The number of allowable shareholders has been increased to 75 (it used to be 35). Married couples are treated as one shareholder. It is imperative to seek competent legal and tax advice to help the S corporation.

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32 Limited Liability Companies If a person is harmed, there should be an ability to recover from the wrongdoer. Yet many juries are awarding signicant sums of money. Plaintiffs are pursuing personal liability for ofcers and directors. LLC creates limited liability, informal management procedures, and pass-through taxation. Seems to combine the best of corporation and partnership ownership.

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33 Limited Liability Companies Creation Articles of organization are signed and filed with the Secretary of State. Member or manager of an LLC is not liable for debts, obligations, or liabilities. A membership interest is considered to be personal property. Member has no interest in specic LLC property.

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34 Operations of a Limited Liability Company Name must include the word limited or abbreviation Ltd. or L.L.C. It must maintain the registered ofce and registered agent. All property owned by the LLC shall be held in the name of the LLC. Some investors form a separate LLC for each property but that could be very expensive in the long run. Texas creating a new form of LLC called a Texas Series LLC. It allows an investor to hold assets and liabilities within separate investments as a separate series under the umbrella of one LLC.

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35 Ownership by Trusts Organization In Texas, there are three major types of trust ownership. (1) testamentary or inter vivos trusts, (2) land trusts, and (3) real estate investment trusts. Trusts have a trustor, who establishes the trust. Ownership and control of the trust are held by the trustee. Assets are held for the true owners, the beneciaries of the trust. Once a trust has been established, it is usually irrevocable. The income is taxed as it is distributed to the beneciaries. The trustee individually is not liable for debts or obligations of the trust. The trustee has a duciary obligation to administer the trust properly.

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36 Testamentary and Inter Vivos Trusts Normally set up for the beneciaries of an estate. The Rule against Perpetuities dictates that the period that the trust may exist is limited to approximately 21 years after the death of the trustor. Can be set up so that it will not be taxed, and the income and benets of that trust will be managed professionally. The corpus of the estate may then vest in the beneciaries and may also provide for their well-being, expenses, and standard of living. If a trustee has mismanaged the assets or acted in bad faith, the beneciaries have a cause of action against the trustee.

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37 Land Trusts An individual buys land as a trustee for a group of investors. Management and ownership will vest in only one person, the trustee. Same duciary capacity exists between the trustee and beneciaries. Just calling a person trustee does not create a trust. Property Code gives trustee absolute power to deal with real property. Very functional and expedient way of owning and controlling real estate May be subject to a wide variety of interpretations by the Texas courts. This type of ownership does maintain the secrecy of all beneciaries.

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38 Real Estate Investment Trusts Enables the ownership and development of large real estate interests For the benet of large numbers of small investors. Promoter or developer is the trustor. Assets of the trust are the investors cash. Beneciaries are the investors. Generally administered by a board of trustees who are professional real estate consultants.

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39 Unincorporated Associations A non-prot association is an unincorporated organization, other than one created by a trust, consisting of three or more persons joined by mutual consent for a common, non-prot purpose. May hold title in its own name, and can transfer and encumber real estate, or be beneciary of a trust, contract, or will. A separate legal entity from its members for purposes of determining and enforcing rights, duties, and liabilities in contract and in tort. A person is not liable for a breach of a nonprot associations contract, tortious act, or omission merely because that person is a member.

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40 Questions for Discussion 1. What is ownership in severalty? 2. What are ten basic elements of a tenancy in common? 3. What are ten basic elements of a joint tenancy? 4. Name the four basic partnership entities in Texas and list three important aspects of each. 5. Three basic classes of individuals are involved in the organization of all corporations: shareholders, directors, and ofcers. Explain the role of each.