Real estate Chapter 2

Forms of Ownership

Ownership of real estate takes many forms and can be a complex subject. Choosing the

correct form of ownership affects inheritance of property, trust and estate planning, income

and inheritance tax strategy, and much more. Selecting a form of ownership, or vesting for

real estate buyers is the purview of escrow officers, attorneys, financial planners, CPAs, and

professionals other than real estate brokers and agents. The real estate agent’s role is to

ensure that the subject area receives thoughtful consideration by the buyer.

Natural person

a human being; Non-natural person – a corporation, a limited liability

company (LLC), a partnership, or a limited partnership.

Unity of title

a condition of ownership which is common to all who hold title to the property.

The more unities there are, the more the owners have in common (in their ownership) with

each other.

Undivided interest

When there is more than one owner to a property, they are said to hold

undivided interests meaning that no owner can claim a specific physical portion of the

property as belonging to that owner only. Multi-party ownership deals with interests in rather

than physical portions of the property.

Partition

to divide out an interest where there are multiple owners. This may be done by

agreement of the owners where a legal description for the agreed upon portion of the property is created and deeded out to the partitioning party by the remainder of the owners

(Physical Partition). Or, it may be ordered by a court that may either declare a portion of the

property to be owned separately by the partitioning party, or by a court-ordered sale where

the property is ordered sold and the proceeds distributed based on the various percentages

of ownership (Judicial Partition).

Tenant in severalty

There is only one owner. The title to the property has been “severed”

from all others. This form of ownership is available to humans and non-humans. If a

corporation bought a property, it could take title in “severalty” as the sole owner of the

property. Likewise, one human could acquire property in severalty. This is the concept of

sole and separate property. There are no unities of title in tenant in severalty as there are

no other owners.

Tenants in common

There are two or more owners. The

owners of property as tenants in common have only “one

unity of title.” This is the right of equal access and

possession. Tenants in common own undivided interests in

the property and therefore may have access to any part of

the property.

Joint Tenancy

two or more natural owners. The

owners of property as Joint Tenants have four (4) unities of

title:

Equal right of access and Possession

Equal Interests

Acquired their title all at the same Time

Acquired their Title all in the same document.

Right of survivorship

The primary significance of joint tenancy is that upon the death of

one of the joint tenants, the share of the deceased joint tenant is divided equally among all

of the surviving joint tenants. Joint tenancy is sometimes referred to as the poor man’s

probate for this reason.

Tenancy by the entiretie

In other states, it might be prudent for this same couple to

take title using tenancy by the entireties. This form of ownership has the four unities of title

found in joint tenancy, with the additional requirement that the parties must be married.

Thus, there would be only two parties in a tenancy by the entireties situation but are treated

as one legal person.

Community property statutes

The community property form of ownership requires the

existence of a state statute which permits it, as not all states do. The existence of a

community property statute in a state creates the possibility that a married couple may have

property which belongs solely to the wife, or solely to the husband, or property which is held

by them as community property

Separate property

is property owned by an individual prior to a marriage or acquired

after the marriage by gift or by inheritance. Property which is owned prior to the

marriage, or after acquired by gift or inheritance, remains the sole and separate property

of the party owning it.

Community property

is all other property acquired by either the husband or the wife

during the marriage and each spouse is presumed to own a 100% interest in the

community property. Conveyance of community property requires the signatures of both

spouses. In the event of a divorce, the community property will be split 50/50, and any

“sole and separate” property will be set over to its owner without marital claims from the

other spouse

Corporations

A corporation is a legal

person meaning it can sue and be sued

in court. A corporation consists of one or

more shareholders who own stock in the

corporation. As a stockholder, they do

not own the property of the corporation,

but have what is called a derivative

interest in the equity of the corporation,

some of which might be real property.

Example: If a corporation owned a property with a value of 1,000,000 and owed

$250,000 against it, the property would have an equity of $750,000 (real estate

equity is the current market value of the property minus all debt associated with the

property). Assuming the corporation had no other debts or obligations, its

stockholders, as a group, would have a derivative interest in the $750,000 equity of

the corporation. Their percentage of ownership of the stock would determine the

portion of the equity they would receive if the corporation were liquidated.

General partnerships

This form of business ownership can be an arrangement between

humans or a combination of humans and other business entities such as corporations or

other partnerships, where the parties agree to jointly undertake some activity. Normally the

activity is a business activity for profit.

Limited partnerships

Two classes of partners are created in a limited partnership. There

must be at least one general partner, and there may be any number of limited partners.

The general partners have the right to full participation in the activities of the partnership

and are individually liable for the obligations and debts of the partnership. The limited

partners do not have any right to participate in the activities of the partnership, and are not liable beyond their initial investment in their limited partnership share for the obligations or

debts of the partnership.

If a limited partner dies, his limited partnership share passes to his estate, much like a

share of stock in a corporation. If a general partner dies, the partnership must usually be

reformed.

Limited Liability Company (LLC)

a business structure that is a hybrid of a corporation

and a limited partnership

Cooperative apartments

In major cities on the eastern seaboard, developers and

investors realized that apartment and other buildings with residential potential would be far

more profitable if the units could be sold rather than rented. These buildings, however, were

not built in such a way as to divide the units and sell them as individual dwellings. The

concept was created to form a corporation, which would own the building and sell shares of

stock in the building, entitling the owner to a proprietary lease. This arrangement was

approved by the Internal Revenue Service and owners of proprietary leases in a

cooperative building were treated much the same as a homeowner for tax purposes.

Condominiums

Condominium ownership

differs from that of a co-op apartment. In a

condominium, the owner owns real estate rather

than a share of stock. The condo unit is, in

reality, a space in the building, and the condo

owner has ownership of only the internal walls,

cabinets, fixtures, appliances, carpets, floors, etc.

The land on which the condominium building sits,

the parking spaces, the club house, the

swimming pool, and other features or amenities

of the condominium (common elements) are

owned by all (undivided interest) of the condominium owners as tenants in common. Condominium owners are able to obtain separate financing for their unit and are allowed

the interest deduction for interest paid, the same as a homeowner. Likewise, their unit is

separately taxed (deductible) and is separately insured. There will be a monthly

assessment against each of the condominium units for the expenses of the common area

including property taxes, insurance, maintenance, and management of the condominium.

These assessments are usually called condominium fees.

townhomes

A townhome may appear to be a single family dwelling which is physically

attached to adjacent structures. Each townhome is usually two-or three stories and typically

sits on its own parcel of land. The owner of the townhome owns the land upon which the

structure sits and also owns other common property (pools, tennis courts, parks, etc.) in the

townhome project as a tenant in common with the other owners in the development.

Mixed use projects

a mixed use development will be designed around different but

compatible uses in it, such as residential, retail, restaurant, office and medical/dental

facilities. Ownership arrangements differ from project to project, but are usually similar to

condominiums.

Timeshares

A timeshare may be envisioned as the right to use and occupy a residential

unit on a periodic recurring basis, according to an arrangement among the other owners,

regardless if there is an additional charge for same.

In most timeshare projects, the timeshare buyer purchases a right to use a unit (the actual

room or suite where the persons will stay) for a week. Normally this week occurs annually,

but depending on the timeshare plan, it could occur more or less frequently.

Freehold estates

Freehold” translates to “ownership” and provides the bundle of rights of

ownership for an indeterminable period of time, either based upon someone’s lifetime or

forever. Freehold estates may either be Fee Simple Estates or Life Estates.

Legal life estates

as the name implies, are created by state law. Dower, curtesy, and

homestead are legal life estates used in some states. Homestead laws protect a

homeowner’s personal residence from certain creditors. The exemption offers virtually

absolute protection, with no limit, from forced sale to meet the demands of creditors, except

under special circumstances. The residence is not protected, however, from liens for

nonpayment of property taxes, mortgage liens, construction liens, or mechanic’s liens. By

filing the homestead exemption in some states, property owners receive a reduction from

the assessed value in the calculation of property taxes.

Elective share

protects a surviving spouse in the event the deceased spouse left the

surviving spouse out of the will. The law provides the surviving spouse with a percentage of

the decedent’s net estate consisting of both real and personal property, a homesteaded

property if any, and property owned as tenants by the entireties.

Leasehold Estates and Types of Leases

The owner of real property is considered to own a legal bundle of rights that include

possession, control, enjoyment (use), exclusion, and disposition (sell). A lease is the temporary

transfer of some of the owner’s rights to another, specifically the rights of possession and

enjoyment. Under the Statute of Frauds, a lease for one year or more must be in writing to be enforceable.

Once a lease is agreed to, the landlord is said to have a leased fee meaning the landlord still

owns the property, but has surrendered the rights of possession and use to the tenant. The tenant is said to have a leasehold interest in the property, providing the right to possess and

use the property, but does not own it.

While a lease temporarily transfers the rights of possession and use, it also serves as a

contract for rent and other obligations.

Estate for years

This type of lease has a definite starting and ending date. The term can

be of any duration. It does not require notice by either side to terminate as the expiration

date of the lease is already spelled out in the lease. In the event of the death of either party,

any unexpired time on the lease is inheritable and binding upon the heirs.

Estate from period to period

This lease has a stated period of time which will

automatically renew for the same period over and over again until one party gives notice

they no longer wish to continue.

Estate at will

This lease is an open-ended lease with no specific termination date and

therefore, notice is required to terminate this lease. Should the parties have failed to specify

the length of the notice period, the courts will require a “reasonable” notice be given.

Estate at sufferance

This is the status of the parties where the term of the lease has

expired and the tenant remains in possession without the landlord’s consent. The tenant

has no right to be there and is technically a trespasser. As the name implies, the landlord is

“suffering” due to the tenant's continued presence in the property.

Gross lease

In this type of lease, the tenant pays a fixed monthly rent and from those

funds, the landlord pays the operating expenses of the property. This is most common in

residential and small office leases.

Net lease

The tenant pays a base rent (fixed monthly rent) and in addition to the base

rent, pays some, or all of the operating expenses of the property. On a Triple Net Lease or

NNN lease, the lessee pays the rent, plus all of the operating expenses including the taxes,

insurance, and common area maintenance or CAM. This is most common with larger

commercial and industrial leases.

Percentage lease

The tenant pays a base rent plus a percentage of the gross business

income, normally less any payment for returned goods. The philosophy is the landlord’s

location, anchor tenants, and marketing contributes to the overall business income of the

tenant. This lease may be gross or net.

Graduated lease

The tenant and the landlord have agreed that with the passage of time,

the leased space will become more valuable and that the tenant’s lease payment should

increase. The lease provides the dates on which the tenant’s lease payment will increase

and the amount of the increase.

Indexed lease

The landlord ties the lease payment to an index for inflation, such as the

Consumer Price Index (CPI), and as the index increases annually, so will the tenant’s lease

payment. The rent is $1,000 per month. At the end of the year, it is determined the

CPI has increased 5%. The tenant’s new lease payment for the next year will be $1,000

+ $50 (5% of $1,000) or $1,050. If it goes up another 5% the next year, then the new

lease payment in the 3rd year would be $1,050 + $52.50 (5% of $1,050) or $1,102.50.

Escalation lease

This lease is similar to an indexed lease, except that the tenant’s lease

payment is increased by the actual increases in the operating expenses of the property and

not directly tied to an inflation index.

Ground lease

is a lease of only the land where the tenant pays for and owns any

improvements including buildings. This type of lease is commonly 99 years or a very long

term.

Leasehold improvements

These are improvements or alterations to the leased space.

Normally they are done at the landlord’s expense and remain a part of the leased space as

the landlord’s property when the tenant vacates.

Trade fixtures

These are generally items of personal property that are installed in such a

fashion as to make them a fairly permanent part of the leased space. An example would be

fixtures for a dentist’s office.

Normally these types of “fixtures” are installed at the tenant’s expense with the landlord’s

consent. Also, normally these fixtures, although installed in such a way as to become a part

of the real estate, can be removed by the tenant at the end of the lease. The tenant would be

obligated to restore the landlord’s property after the fixtures were removed.

Options to extend or expand

If the tenant wants the ability to extend the lease beyond

the original term, or to expand into other space the landlord owns, this should be carefully

spelled out in the lease.

Actual Eviction

Actual Eviction is the lawful process of dispossessing a tenant who has

either overstayed the lease term, or who is in breach of the lease, and eviction has been

elected as a remedy by the landlord. The process will vary from state to state, but generally

requires a written notice to the tenant giving the tenant a short period to vacate, and if the

tenant does not vacate, the eviction process will allow for intervention by sheriff or police to

forcibly remove the tenant.

Constructive eviction

This means the landlord has done, or failed to do, something that

has had the effect of denying the tenant the use and enjoyment of the leasehold. Often this

involves matters of landlord maintenance which has not been done. As an example, the

outdoor temperature is 110 degrees, the landlord is responsible for maintaining the air

conditioning units, but has neglected maintenance and they do not work properly. The tenant

operates a candle shop and the candles are all melting and no one can stand to be in the

store under these temperatures. The landlord has constructively evicted the tenant.

Changing the locks is a common scenario of an unlawful constructive eviction.

The tenant, if successful in a claim of constructive eviction, may be entitled to either an

abatement of rent for the period the store could not be used, or the tenant may be entitled to

break the lease without further liability. The landlord may also be liable for the value of the

destroyed candles.

Lease options and purchases

These agreements start out as leases but include either

an option to purchase by the expiration of the leasehold (lease option), or include a purchase

agreement that will go into effect by the expiration of the leasehold (lease purchase). In

either scenario, the price and terms are negotiated up front.

Sale leaseback

an arrangement whereby the buyer and seller agree to a leasehold, the

seller remains in possession of the sold property under agreed upon lease terms, and

compensates the buyer for that possession. This is ideal for an investor who is purchasing

the property as an income producing property as the seller becomes the tenant.

deed

A deed is the only instrument used for the conveyance of title of

real property. Today, if a conveyance occurs, it is in the form of a written

instrument, the deed, which is acknowledged or witnessed by a

notary public, and normally recorded in the public records in the

county in which the land is located.

Recordation

Deeds are recorded in the county in which the

land is located.

Two partie

There are two parties to a deed – the grantor is

the person making the conveyance and the grantee is the

person to whom the conveyance is made.

Warranties and covenants

a warranty or covenant is a promise by the grantor to the

grantee concerning the title to the property, that some condition exists and will continue to

exist, or, that a condition does not exist and never will.

Warranty of seisin

The grantor owns the

property and has the right and power to convey the

property (seisin is an old French word dealing with

a ceremony, the livery of seisin, which was an

ancient ceremony used in England and France to

convey real property to a new owner).

Warranty against undisclosed encumbrances

The grantor has disclosed to the

grantee all encumbrances on the property, if any.

Warranty of quiet enjoyment

The grantee will be able to enjoy ownership of the

property without hearing anyone make a valid claim of superior title or right to the

property.

Warranty of further assurances

The grantor promises that should a claim of

superior title be made, the grantor will defend against the claim and defeat it.

Warranty of title forever

The grantor promises that should another party be able to

establish a superior claim to the title, the grantor will pay back to the grantee the

purchase price (the money back guarantee).

Special warranty deed

(used by executors, trustees and universal or general agents of the

grantor)

Warranty against undisclosed encumbrances

This is the only warranty created by

the special warranty deed. With a special warranty deed, if the grantor has created any

encumbrances they are disclosed. However, the grantor makes no further warranties

and makes no assurances for when the property was not owned by him. If the grantor

does not own the property, but is authorized to convey under a will, a trust, a power of

attorney, then no warranty of seisin is made.

Quit claim deed:

(the “clean-up” deed of real estate)

No warranties at all

The grantor is quitting any claim the grantor may have to the

property, but does not assert that there is any claim at all. This deed is often used to

remove liens and encumbrances from title, to surrender community property claims, or

to clear clouds on the title.

Implied warranty of seisin

The grantor warrants he owns the property and has the

legal right to convey it. There are no written warranties and is only an implication that

the grantor has title and the legal right to convey it.

Elements of a valid deed

1. In writing – A deed must be in writing and signed by all owners of the interest being sold.

2. Valid grantor – The grantor, if a natural person, must be alive, of lawful age, and have full

mental capacity. Note that a minor, or a person who lacks the mental capacity to enter a

contract, cannot make a valid conveyance. If the grantor is a business entity (corporation, partnership, or LLC) it must be lawfully in existence, and the human signing on its behalf

must be duly authorized to act for the entity.

Identifiable grantee

The grantee must be identifiable. For example, a deed to John Doe

and Wife would raise the question of was John Doe married on the date of the deed and, if

so, to whom

Consideration clause

There must be a consideration clause reflecting one of these four

types of consideration (anything of value):

• actual consideration – the purchase price

• nominal consideration – $1.00 and other consideration

• good consideration – for love and affection

• legal consideration – for value received

Granting clause

There must be a granting clause which states the nature and extent of

the interest conveyed – fee simple interest in . . . , or 25% interest in . . . , etc.

Vesting clause

There must be a vesting clause. Normally, vesting is a choice of the

grantee, but may be stated by the grantor. The grantee or grantees would be named,

followed by words that say: in severalty, as a tenant in common, as joint tenants with right

of survivorship, etc.

Habendum clause

There may be a habendum clause (not usually required) which says

“to have and to hold from this day forward.” The habendum clause is not required in some

states, but if there is one, its presence could be beneficial.

Valid legal description

There must be a valid legal description of the property being

conveyed; either:

• lot, block and subdivision

• metes and bounds

• reference to the USGS survey

Exceptions and reservations

Here is where the grantor will make the grant subject to

any exceptions, encumbrances, or liens on title which will not be removed by the grantor.

For example, words like these could appear: “subject to encumbrances, easements and

restrictions of record, if any.”

Here is also where the grantor may create restriction or easements. For example: “subject

to an easement in favor of the grantor across the south 20 feet of the property, and subject

to the right of the grantor to come upon the property at any time without notice to fish in the

pond.”

Grantor’s signature

The grantor must sign the deed. If it is a business entity, evidence

that the party signing for the business entity is authorized to sign the deed will be required.

This authorization needs to be in “recordable form,” meaning that the signatures on it must

be notarized.

Attestation

The attestation in a deed is the notary public’s attestation that the signing

parties appeared before the notary, swore they were who they said they were, were

authorized to sign the deed and did so as their free act, and actually signed the deed in the

presence of the notary public. Attestation is required in most states if the deed will be filed

in the public records, however, it is not necessary for the validity of the deed between the

grantor and grantee.

Acknowledgement

This is the witnessing by witnesses of the grantor signing the deed.

Like the attestation, acknowledgement is not required for the validity of the deed between

the grantor and grantee. Acknowledgement would be important if the deed were not

notarized and not placed in the public records. Any challenge to the deed would have to be

defended by producing one or more of the witnesses who would testify as to the

circumstances they observed concerning the grantor’s apparent capacity and whether it

was an act of free will.

Delivery and acceptanc

This is the actual point or act of conveyance. Delivery and

acceptance must be:

• intended by the grantor. A deed delivered by accident or under fraudulent or coercive

circumstances would not be a valid conveyance.

• commenced during the lifetime of the grantor. For example, the grantor is taking the

deed to the post office in an envelope with proper address and postage on it. As he

enters the post office, he has a massive stroke and dies on the spot. A bystander

thinking he’s helping takes the envelope out of the dead grantor’s hands and drops it in

the mail slot. This is not a valid delivery because it was not commenced during the

grantor’s lifetime.

Voluntary vs. Involuntary Alienation

“Alienation” refers to “alienating” or separating one’s

self from the property. One can have his property transferred to another in either a voluntary

or involuntary way. Examples of voluntary alienation usually involve a deed where the owner

voluntarily transfers his title to another person. Examples of involuntary transfers are a

transfer by will upon his death, foreclosure, adverse possession, condemnation, and erosion

or avulsion (wearing away of the land).

Actual vs. Constructive Notice

Actual notice is notification delivered in such a way as to

give legally sufficient assurance that the matter has been conveyed to the recipient.

Constructive notice is service delivery of information by posting, publication, and/or

recording.

Recording the Title

The purpose of recording the deed is to establish the priority of the grantee over others who

may claim or contend they have a claim to title to the property. Recording will establish the

grantee’s priority as of the date the deed is recorded. For notice to be effective, the deed

must be recorded in the county in which the property is located.

The primary purpose of a title insurance policy is to:

• assure the grantee that the status of the title is as the grantor warrants;

• provide the financial assurance that title will be defended, if necessary, by the title

insurance company;

• pay the grantee the purchase price should the grantee’s title be defeated by another

who is able to make a superior claim.