Unit 2 Study Guide: Property Ownership and Interests

I. The Concept of Property, Characteristics of Real Estate, and Fixtures

The Bundle of Legal Rights

The concept of property ownership is often described as a Bundle of Legal Rights. This bundle includes several distinct rights that an owner possesses regarding the property. An old English phrase/custom related to the promise of ownership was called Livery of Seisin. The mnemonic DEEP C can help remember these rights:

• D - Disposition: The right to determine how to dispose of the property. This includes the ability to sell, will, trade, or gift the property.

• E - Enjoyment: The right of uninterrupted use without harassment or interference from a third party with a superior title. This allows use in any legal manner.

• E - Exclusion: The right to keep others from entering or using the property. This is also described as the right to legally refuse to create interests for others.

• P - Possession: The right to use or occupy the premises.

• C - Control: The right to control the use of the property and its profits within the framework of the law.

Characteristics of Real Estate

Real estate includes the land and everything permanently attached to it. Several concepts describe different aspects of land ownership and rights associated with property:

• Appurtenances: Rights or privileges that “run with the land” and are passed with property ownership unless legally severed.

  • Land: Consists of surface rights, subsurface rights, and air rights.

    • Surface Rights: Rights to the surface of the land.

    • Subsurface Rights: The rights to use the space below the surface of the earth. These rights may be sold or leased separately from the property surface and include the right to remove natural resources like minerals, oil, and gas. A landowner may draw water from underground rivers and remove minerals. The rights to subsurface minerals can be conveyed without conveying full ownership of the land.

      • Example: Mineral rights can be deeded separately for particular minerals or be all inclusive. Oil and gas rights have frequently been severed from the land in states like Texas.

      • NC Specific: North Carolina law now requires a property owner to disclose if oil and/or gas rights have been severed by a previous or current owner.

    • Air Rights: The rights to use the space above the surface of the earth. Air rights may also be sold or leased independently of the land.

      • Examples: Solar or sun rights have become an ownership issue, particularly because of solar energy applications. View rights, especially scenic views, have become increasingly valuable. Cities and private owners can lease air space for pedestrian walkways or elevated transit systems.

  • Water Rights: Address the right to use adjacent water.

    • Riparian Rights: Pertain to the use of water when a property borders a nonnavigable or navigable waterway.

    • Littoral Rights: Generally pertain to navigable waters with a tide.

      • NC Specific: In North Carolina, adjacent landowners have unrestricted use of the navigable waters but only own up to the average high-water mark. The land between the high and low tide marks (the foreshore) is owned by the state of North Carolina.

  • Natural Actions of Water: Water action can affect the boundaries of land.

    • Accretion: A gradual increase in land resulting from the deposit of soil by water.

    • Reliction: A gradual increase in land as a result of permanently receding or disappearing water.

    • Erosion: A gradual decrease in land caused by flowing water or other natural forces.

    • Avulsion: A rapid decrease in land caused by an act of nature such as a flood. Property boundaries do not change in the case of avulsion.

  • Support Rights:

    • Lateral Support: The right to have adjacent property support the natural boundaries of the land.

    • Subjacent Support: The right to have support for the surface of the property from the owner of the subsurface rights. This is relevant in cases like underground mining.

• Plants (Fruits of the Soil): Plants on the property can be classified as real or personal property depending on their nature and cultivation.

  • Fructus naturales (Fruits of Nature): Plants that do not require annual cultivation, such as trees and shrubbery. These are considered real property.

  • Fructus industriales (Fruits of Industry): Annual crops that require cultivation, also known as emblements. These are considered personal property, especially if planted by a tenant farmer.

• Improved Land vs. Improved Lot:

  • Improved land: Usually refers to land that has a structure on it, like a house.

  • Improved lot: Means that basic services are available, such as electricity, phone, and street access.

Real Property vs. Personal Property

• Real Property: That which is immovable.

• Personal Property: That which is movable and meant to be moved. Also known as Chattels. Everything that is not real property is personal property.

• Severance: The process of changing an item of real estate to personal property by detaching it from the land.

  • Example: Cutting down a tree. A farmer selling a growing crop through a contract. A seller detaching a chandelier before selling property.

• Annexation (Attachment): The process of changing an item of personal property to real estate by permanently affixing it to the realty.

  • Examples: Construction materials routinely become real estate. Home improvement items like ceiling fans are frequently annexed by homeowners.

Fixtures

A fixture is an item that was once personal property but has been converted to real property by being permanently affixed to the realty. Identifying fixtures is important, for example, in the context of an Offer to Purchase.

• Total Circumstances Test (IRMA): The legal test used to determine whether an item is a fixture. The factors considered are:

  • I - Intention of the Annexor: This is the most important factor. The court attempts to determine if the person who installed the item intended for it to be permanent.

  • R - Relationship of the Annexor: The relationship of the person who attached the item (e.g., owner, tenant) is considered, as well as the existence of an agreement.

  • M - Method of Annexation: How the item is attached to the property is examined (e.g., permanently attached by bolts, cement, or just sitting there).

  • A - Adaptation to Real Estate: How the item is used in relation to the real estate. Has it been specially adapted for the property?

• Types of Fixtures:

  • Trade Fixtures: Personal property owned by a tenant that is attached to rented real property for the tenant’s use during the lease. If not removed by the end of the lease, trade fixtures become the landlord’s property through a process called accession.

  • Agricultural Fixtures: A special class of fixtures in North Carolina. Items attached by a tenant farmer are considered the real property of the landlord.

    • NC Specific: Agricultural fixtures are a special class in North Carolina, considered the landlord's real property.

  • Improvements: A valuable addition to the land or a change in its condition intended to enhance value.

    • Examples: Grading, drainage, ditches, sidewalks, gutters, etc..

    • National Specific: For "National" questions on the State exam, consider an improvement as an appurtenance.

• Clarifying Fixtures: To avoid confusion, particularly in sales, items intended to be included should be clarified when a property is listed and the sales agreement is negotiated, using the Fixtures Provision in the Listing Agreement and the Offer to Purchase and Contract.

• Effect of the North Carolina Uniform Commercial Code (UCC):

  • NC Specific: In North Carolina, filing a security agreement legally makes a financed fixture personal property until paid in full. The creditor may remove the item upon default. A security agreement may be filed by the creditor, and a title search should reveal any such agreements.

• Manufactured Homes vs. Modular Homes: These factory-built homes are treated differently regarding real vs. personal property status.

  • Manufactured Housing: Factory-built by HUD standards. They have a permanent chassis. They are considered personal property but may convert to real property. Also called trailers or mobile homes and have a Vehicle Identification Number (VIN) registered with the North Carolina Department of Motor Vehicles. They have a HUD label on the rear exterior wall or under the kitchen sink.

    • NC Specific (Conversion to Real Property): To convert a manufactured home to real property in North Carolina, the wheels, axles, and trailer hitch must be removed after the home is attached to a permanent foundation, and then the DMV title must be cancelled. Paperwork must be recorded and DMV notified.

  • Modular Housing: Factory-built by state building codes. They contain a label certifying compliance. Once assembled on-site, they are immediately considered real property. They are not covered by the North Carolina Condominium Act.

II. Freehold Estates

Freehold Estates are ownership estates in real property that last for a potentially unlimited period of time. They provide title to the property.

• Inheritable Estates: These estates can be passed on to heirs.

  • Fee Simple Estates: These are estates of inheritance that are always legally transferable, though not always free of encumbrances. They may be lost or defeated, also known as Qualified Fee Estates.

    • Fee Simple Absolute: The highest type of interest in real estate recognized by law. There are no limitations on fee simple ownership as long as it does not violate public land use regulations, deed restrictions, or the rights of others. This is considered the highest form of ownership.

    • Fee Simple Defeasible (Qualified Fee Estate): Ownership may be lost or defeated by the occurrence or nonoccurrence of a specified event.

      • Fee Simple Determinable: Exists "so long as" a limitation is met. It requires a certain activity or use to continue. If the condition is violated, the property automatically reverts to the original owner or the grantor’s heirs (the grantor retains the possibility of an automatic reverter).

        • Example: Pullen Park.

      • Fee Simple Subject to a Condition Subsequent: Dictates some action that the new owner must not perform. If the condition is violated, it does not automatically revert. The former owner retains a future right of reentry, but this requires court proceedings to regain ownership.

        • Example: A condition that the property cannot be used for the sale of alcohol.

  • Life Estate Pur Autre Vie: An estate owned for the lifetime of another person, called the measuring life. The measuring life has no ownership rights. This type of life estate is inheritable during the measuring lifetime. Upon the death of the measuring life, the estate will either revert back to the original owner or transfer to a remainderman (if named).

• Non-Inheritable Estates: These estates terminate upon the death of the designated person and are not passed to heirs.

  • Conventional Life Estate: Created by the owner by deed or will for the lifetime of the new owner (the life tenant). Ownership by the life tenant terminates upon the death of the life tenant. It cannot be willed by the life tenant. Successive life estates are possible.

  • Marital Life Estate: A type of non-inheritable life estate. (Specific details beyond this classification are not provided in the sources).

• Future Interests: When a life estate ends, the future interest takes effect.

  • Remainder Interest: The grantor names a third party to receive title at the end of the life estate.

  • Reversionary Interest: The grantor does not name another party to receive title when the life estate terminates. Therefore, title reverts back to the grantor or the grantor's heirs or devisees.

• Rights and Duties of Life Tenants:

  • Rights: Include all income/profit from the property during their tenancy, the use of property resources to maintain the property (estovers), and the ability to mortgage or sell their life interest (though this only lasts for the duration of the life estate).

  • Duties: The life tenant must pay real estate ad valorem taxes and special assessments arising during the tenancy, and interest on any pre-existing financing secured by the property. A life tenant cannot permanently injure or waste the property.

• Legal Life Estate: A legal life estate is one created by statute rather than common law.

  • Dower and Curtsey: Common law legal life estates that allowed a non-owning spouse a lifetime right to a partial ownership.

    • NC Specific: Dower and curtsey have been replaced by Intestate Succession Laws in North Carolina.

  • Homestead: A legal life estate involving the family home in some states that protects at least some part of the home from most creditors.

    • NC Specific: North Carolina has a very limited homestead exemption.

III. Concurrent and Common Interest Community Ownership

Ownership in Severalty

• Ownership in Severalty: Title is vested in one natural or legal person or entity. This is also called sole ownership. Typically, the owner was not married when the property was acquired. For example, a surviving joint tenant or spouse in a tenancy by the entirety becomes the sole owner in severalty.

Concurrent Ownership (Co-ownership)

• Concurrent Ownership: Real property is held by two or more persons or entities at the same time. This is also known as Co-ownership or Co-tenants.

  • Tenancy in Common: A form of co-ownership by which each owner holds an undivided interest in real property. There must be unity of possession, meaning each owner has the right to possess the whole property. Ownership interest does not have to be equal. Each owner may encumber or convey their individual interest. Survivorship is not possible; each interest is inheritable and passes to the owner’s heirs. The deceased owner's portion is probated through their estate. It is impossible to distinguish physically which percentage of the property a tenant in common owns.

    • Application: When two or more unmarried people acquire title and the deed does not stipulate the type of tenancy created, by operation of law they acquire title as tenants in common.

  • Joint Tenancy: Ownership of real estate between two or more parties named in one conveyance as joint tenants . Joint tenants must purchase at the same time, and all must appear on the deed. Joint tenants usually have the right of survivorship between them, meaning the deceased owner's interest passes directly to the remaining owner(s). The last surviving joint tenant will own the property in severalty. The right of survivorship is the distinguishing feature. Ownership interest is usually equal, although N.C. law change now allows unequal interest. An Affidavit of Survivorship is filed upon death, and the deceased owner's interest passes directly to the remaining owners.

    • NC Specific: North Carolina does not favor the right of survivorship among owners. Upon the death of a joint tenant, their estate does not automatically pass to the surviving joint tenant(s) but goes to their heirs in the same manner as estates held by tenancy in common unless a right of survivorship is specifically written in the deed. The wording must comply with NC court decisions. A person newly acquiring an interest in the property (e.g., buying from a joint tenant) will be a tenant in common with the original remaining joint tenants because title is conveyed at a separate time.

  • Tenancy by the Entirety: A special form of ownership for married couples only. Owners must be husband and wife when they obtain the property. Property owned prior to marriage does not automatically convert to tenancy by the entirety upon marriage. There is undivided unity of possession. Ownership interest must be equal. Both must purchase at the same time and both must appear on the deed. Both spouses must sign the deed to convey the property. Termination occurs by death, divorce, or mutual agreement of the spouses. Survivorship is automatic. If one spouse dies, the other becomes the sole owner in severalty.

    • NC Specific: In North Carolina, a purchase by a married couple will convey as tenancy by the entirety by default unless otherwise requested. Even if they are not named as such, if the grantees in a deed are husband and wife at the time, a tenancy by the entirety is created.

• Termination of Co-ownership:

  • Suit for Partition: Available to tenants in common and joint tenants. The court may physically divide the property among the disputing owners or order it sold and divide the proceeds.

Common Interest Community Ownership (Hybrid Ownership)

These are types of ownership where there is individual ownership combined with shared ownership of common areas.

• Condominium Ownership: Created under horizontal property acts. The owner of each unit has title to the airspace within their unit and an undivided interest in the common elements of the building or area. No land is owned by individual owners. Condominiums can be for any type of real estate. Limited common elements are common elements restricted for the use of some units exclusively. There is no right to partition condominium ownership. Owners are required to pay periodic fees for common area expenses. The individual ownership unit is assessed for real property tax. Title to individual units can be likened to any other real estate ownership. Common elements/areas are shared between all owners. Condominium ownership is a freehold estate.

  • NC Specific (North Carolina Condominium Act of 1986): A condominium is created when the developer records a declaration of its creation in the county where the property is located. The declaration must include covenants, restrictions, or conditions. The developer must file a plat map or plan of the property. The developer must prepare a set of bylaws, which typically provide for a unit owners’ association, election of a board of managers, their duties and compensation, election/removal methods, and method for collecting monthly dues for common area management and maintenance. Consumer Protection: The developer must provide a public offering statement to the purchaser before the purchase contract is signed. There is a seven-day rescission period on the sale of new units where the purchaser can cancel and receive a full refund of the earnest money deposit (which must be held in escrow for seven days). For resale units, a resale certificate detailing dues and fees must be given to the purchaser prior to conveyance. There is no right of rescission on resales.

• Cooperative Ownership: Title to the building is held by a corporation or land trust. The purchaser is a shareholder who receives a stock certificate in the corporation and a proprietary lease to an individual unit for the life of the corporation. Shareholders pay fees/assessments to support the corporation’s expenses. The cooperative building’s real estate taxes are assessed against the corporation as owner. There is no deed for the individual owners; their rights are based on the stock certificate and proprietary lease.

• Townhouse Ownership: Each town house unit is individually owned. Each unit owner belongs to a homeowners’ association that owns the common areas. Unlike a condominium unit, the owner of each town house unit also independently owns the land under which the unit is built. Units are usually attached horizontally by party walls. Townhouses are sometimes called “row houses”. They are not covered by the North Carolina Condominium Act. Party walls are shared between two units. Townhouse ownership is typically low-rise.

• Time-Share Ownership: Any right to occupy a unit for at least five separate time periods over at least five years. It can be either a fee simple interest (time-share estate) or a right to use (time-share use). The purchaser usually receives the right to occupy a certain unit for a specified time frame each year, with one week being most common. Monies must stay in an escrow account for 10 days or until the contract is rescinded.

  • NC Specific (North Carolina Time Share Act): Regulates the development and sale of time-shares. Time-share salespeople must be active real estate brokers under the supervision of the project broker. Time-share developers can be fined $500 per violation of the act, and/or have the project’s registration certificate revoked. There is no maximum penalty amount. The time-share developer is the only entity that the North Carolina Real Estate Commission (NCREC) can fine. Time-share purchasers must be allowed five days to cancel the purchase without penalty. The down payment or earnest money deposit must be held in a trust account for 10 days or until the contract is canceled and the money is refunded.

IV. Trusts

• Purpose of Trusts: A trust is a means by which one party transfers ownership of property to another party (the trustee) to hold or manage for the benefit of a third party (the beneficiary). Trusts are used in estate planning to limit the time and cost of probate. Assets held in trusts can pass to heirs outside of probate, which may reduce time and taxes. A trust is a fiduciary agreement.

• Trust Terminology:

  • Trustor: The individual who creates the trust. Also called the grantor or settler. The trustor can also be the trustee.

  • Beneficiary: The person or entity that benefits from the trust.

  • Trustee: The fiduciary who exercises control over the subject property according to the instructions of the trustor in the trust agreement. The trustee's power and authority are limited by the terms of the trust agreement and law. Typical trustee duties include the care and investment of trust assets. After paying trust expenses and the trustee’s fee, income may be paid to or used on behalf of the beneficiary. The trustee may be able to transfer assets into and out of the trust per the agreement.

• Real Estate and Trusts: Real property may be owned by trusts in most states. The legal and tax implications for trusts are complex and vary widely. Real estate professionals should be careful when dealing with real estate assets held by a trust and should seek out legal counsel. Trust dissolution may occur when the beneficiary reaches a certain age, at the death of the beneficiary or the trustor, or when other conditions are met. Assets transfer to the beneficiary upon specified terms of the trust agreement.

• Types of Trusts that can Own/Hold Real Estate:

  • Living Trust: Created during the trustor’s lifetime.

  • Testamentary Trust: Created by the property owner’s will.

  • Land Trust: A type of trust where real estate is the only asset. The beneficiary is usually the trustor. Land trusts can be used for secrecy since public records do not usually name the beneficiary. The beneficial interest in a land trust is considered personal property that may be transferred by assignment rather than a deed. Land trusts are usually for a definite term (e.g., 20 years) which can be extended.

  • Real Estate Investment Trust (REIT): Mentioned as a type of trust that can own/hold real estate. (No further details provided in the sources).