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Ownership and Transfer of Various Types of Real Estate Interest

How do individuals establish and document an ownership interest in real property?

Interests in real property are subject to an instrument of title. A deed is the primary manner of establishing ownership and transferring an interest in land. The deed contains a precise legal description of the land and specifies the exact location and boundaries according to a mapping or surveying system. Some types of property interest, such as an easement, can be created through a legal document other than a deed; however, a deed is still required to subsequently transfer an established ownership interest in the property. There are several types of property deeds:

Warranty Deed – This is a deed that purports to transfer any ownership that an individual has in the real property. The seller warrants that she holds title to the property free and clear of any liens or encumbrances and that she is legally entitled to transfer the property. A warranty deed may be divided into “general warranty” and “special warranty” deeds.

Note: Individuals providing warranty deeds often purchase title insurance to protect themselves against warranty liability in the event of a defect in title.

General Warranty – The general warranty deed warrants the title against any defects that have ever existed in the title.

Special Warranty – A special warranty deed warrants the title against any defects caused by or relating to actions or omissions of the seller.

Grant Deed – A grant deed is a deed in which the seller guarantees to the purchaser that the property has not be previously sold and that there are no liens, encumbrances, or restrictions that are not disclosed. She also guarantees that there are no current ownership claims by third parties. Unlike the warranty deed, the grant deed does not warrant title against all claims by third parties. That is, the seller will not defend the title if anyone else claims an interest in the property. The recipient is left to rely upon her own search of title to the property to identify potential claims.

Quitclaim Deed – A deed that purports to transfer the ownership that an individual has in the real property without warranty. That is, the seller or transferor does not warrant that she has any particular ownership interest in the subject property. These types of deeds are commonly used in disputes over real property and in situations where title history is very uncertain.

Note: This type of deed is commonly used in complicated divorce or inheritance situations.

Discussion: Why do you think that the law requires a special legal document to transfer an ownership interest in land? Why do you think a simple contract to transfer land insufficient to transfer ownership?

Practice Question: Hannah, along with her five sisters, inherits land from her grandfather. There is a bit of uncertainty as to each daughter’s inheritance rights, so Hannah is not certain of her ownership percentage in the land. Ted is a developer who wants to build condos on the land. He works out a deal with Hannah and her five sisters to purchase all of their interests in the land. As part of this transaction, what type of deed would you recommend that Hannah use in transferring her interest to Ted? Why?

What is a “fee simple” interest in real property?

Fee simple is the term used to represent the maximum ownership interest in real property that is allowed under law. It can be referred to as complete ownership. A fee simple owner has full legal rights and powers to possess, use, and transfer the land. There are, however, certain limitations that can be placed on fee simple ownership, including:

Fee Simple Absolute – Fee simple absolute ownership means that all interests in the property are transferred. There is no limitation or conditions attached to the transfer.

Fee Simple Defeasible – Fee simple defeasible ownership means that a condition (or multiple conditions) are attached to a transfer of the property. This means that if a certain event occurs, the transfer is undone and the property either reverts back to the original owner or to a third party.

Example: Tom transfers property to Ann under the condition that it always be used for residential purposes. If the land is ever used for anything other than residential purposes, it reverts back to Tom (or his heirs).

Note: The rights retained by the transferor of a fee simple defeasible or a designated third party is discussed below in the context of a life estate.

These characteristics of a fee simple interest are important tools for individuals when determining the extent of property interest to transfer.

Discussion: How do you feel about the ability of an owner of land to transfer and interest in that land subject to conditions? Can you see any advantages or disadvantages to limiting the owner of land’s use of her property? Does this ability in any way run afoul of the goals or objectives of government in recognizing ownership interest in land?

Practice Question: Veronica wishes to transfer land she inherited from her grandfather to her alma mater, Great College. She drafts a deed that states that all interest in the property is transferred to Great College, so long as it is used for academic purposes. If it is ever not used for academic purposes, it reverts back to her estate. Years later, Great College decides to rent the land to a group of fast-food restaurants seeking to serve the student body. If Veronica has passed away, what are the rights of Veronica’s estate to demand return of the property?

What is a “life estate” interest in real property?

A life estate is a temporary transfer of an ownership interest in real property. The transfer is good for the life of the transferee or some other third-party identified in the deed of transfer.

Reversion – At the end of the life estate, the land reverts back to the original owner who has a reversion interest.

Remainder – At the end of the life estate, the person to whom the property returns has a remainder interest.

The holder of a life estate has the ability to fully use and enjoy the property. The holder cannot, however, cause extraordinary changes to the property or knowingly deplete the property of non-renewable resources (such as digging up minerals). The holder may, however, build new structures or cut timber from the land. Any improvements to the land revert or transfer along with the property at the end of the life estate.

Example: Beth transfers property to Carl for the rest of his life. At the end of his life, the property reverts back to Beth or her heirs. If Beth has no heirs, it goes to Fran or her heirs. Beth has a reversion interest and Fran has a remainder interest.

Discussion: How do you feel about the ability to transfer a temporary ownership in land for an individual’s life? Should that right be limited by requiring that the life estate be measured by the life of the holder of the interest? Are there any economic utility arguments for or against the government recognizing life estates?

Practice Question: Linda works as a tenant on the farm of Eric, a local aristocrat. Upon Eric’s death, he grants Linda the right to live and farm the land for the rest of her life. At the end of her life, however, the land will transfer back to Eric or his children. If Eric is not alive and he does not have any children, the land will transfer to Gladys, Eric’s cousin. What interests do Linda, Eric, and Gladys have in the land?

What is a “leasehold estate” in real property?

A leasehold estate, commonly called a lease, is the property right granted to a tenant by a landlord. The lessor has limited rights similar to that of an owner, but for a limited term. The renter cannot materially change the property without the landlord’s consent. Any material changes to the property (such as installation of fixtures) become the property of the landlord upon termination of the lease.

Note: The provisions of the Uniform Commercial Code, Article 2A govern leases of personal property.

Discussion: Should a lease be considered a form of ownership interest in property? At what point do you think the right of use turns into rights of ownership?

Practice Question: Gayle has a house that she generally rents to tenants. Juliet comes into town and asks Gayle if she can stay with her for a few days. Gayle agrees to allow Juliet to stay in her rental house. After a couple of days, Juliet offers to clean up the house as a thank you for letting her stay in the house. Gayle agrees without any talk of compensation or rent. Juliet proceeds to paint the walls, install curtains, and replace some of the faucets. What is the relationship between Gayle and Juliet? Did Juliet have the right to undertake the aforementioned changes to Gayle’s house?

What types of co-ownership interests exist in property?

It is very common for individuals (particularly family members) and businesses to own property collectively. The most common forms of co-ownership of property are as follows:

Joint Tenancy – All owners of the real property are indicated on the title and each owns an equal an undivided interest in the property. There is a “right of survivorship” among owners. The interests of all owners are unified, so that when one owner passes away the other owners acquire the deceased owner’s interest. If any owner seeks to sell or transfer her interest in the property, the joint tenancy is broken and the ownership becomes a tenancy in common.

Tenancy in Common – Each owner owns a specific percentage of the property. This percentage of ownership is separate from other owners’ interest. The ownership interest is not unified; rather, it is “divisible”. Any owner can sell her ownership interest and there is no right of survivorship. If the owner passes away, her ownership interest passes to her heirs and assigns. The remaining owners do not acquire the deceased owner’s interest.

Tenants by the Entirety – This is a method of joint ownership in property by married spouses. Each spouse owns and equal and undivided interest in the real property. There is a right of survivorship, so either spouse will inherit complete ownership of the property when the other spouse passes. The land passes automatically without having to go through probate. Neither spouse may transfer the property without the other spouse’s consent. There is a presumption of tenancy by the entirety in most states, unless the deed or title indicates that only one spouse is the owner of the property.

Practice Question: Elaine and Jerry are co-owners of property that they use in their business venture. They own the property as joint tenants. What happens to the property if either Jerry or Elaine pass away?

Community Property vs. Separate Property

This property designation further concerns the ownership of real property by legally married couples. It applies to real and personal property. As explained above, ownership of property as tenants by the entirety would control with regard to real property. Generally, property held by a married couple is either classified as “marital property” or “separate property”.

Marital Property – Is owned equally by both spouses and each spouse’s consent must be present to legally sell the property.

Separate Property – Belongs to one spouse or the other. It does not require the consent of both spouses to sell or transfer.

There are two systems in the United States for determining whether property is marital or separate. One system follows the “common law” rule and the other follows the “community property” rule.

Common Law Rules – Common law states that martial or separate property is determined by whose name is on the title, who purchases the property, or who receives it as a gift.

Community Property Rules – In states observing community property rules, all property acquired during the marriage is considered marital property, with the exception of property acquired before marriage, property inherited, or received as a gift. This rule is analogous to the concept of property owned as tenants by the entirety. This rule becomes important in the event of divorce between the parties. The court will be forced to determine who owns property.

Example: Tom and Jane are married. Their primary possessions are a home and a car. Determining who owns the property will depend on whether it is marital property or separate property. If the state is a common law state, whoever’s name is on the title to the home and car own it. If it is a community property state, ownership depends on whether the home or vehicle was acquired by an individual prior to marriage or pursuant to a gift or inheritance. If it was purchased during the marriage, it will be considered community property.

Discussion: Which do you believe is most fair to spouses, community property laws or equitable distribution laws? Why? What is an argument for or against following equitable distribution principles? Community property principles?

Practice Question: Ervin and Betty are husband and wife. Over the years they have acquired several parcels of real estate. The real estate is always registered in Betty’s name. Terry, a general contractor, approaches Betty about purchasing one of the properties. Who has the right to sell the property? What do we need to know about the law of the jurisdiction to answer this question? Why?

What is an “easement interest” in real property?

An easement is a limited interest in real property. It involves a particular right to use the subject property in a particular manner, but does not necessarily create a right to possess the property. Generally, the easement rights exist at the same time as the rights of other property interest holders.

Example: An easement commonly grants the right to cross or use someone else’s land for ingress and egress. This is known as a “right of way”.

An easement may arise by a number of methods, as follows:

Express Easement – An express easement is an easement intentionally granted to another person in writing. It generally arises pursuant to a deed, contract, or testamentary document.

Example: Emma sells property to Dianne. Emma reserves an easement across Dianne’s property. As part of the transaction, Dianne signs a deed granting an easement to Emma.

Affirmative & Negative Easements – An affirmative easement grants an individual the right to do something on the subject property. A negative easement, on the other hand, restricts an individual from using her land in a certain way. Generally, it arises pursuant to a transfer of land whereby the original owner does not want the land used in a specific manner.

Example: Brad owns two pieces of land that are side by side. He sells one of the pieces of land to Teri. He establishes a negative easement in the land at the time of transfer that states that the land cannot be used in a certain manner.

Appurtenant & In-Gross Easement – The easement may attach to the land or it may belong specifically to the person. An “easement in gross” is an easement that allows an individual to use the subject land. The easement does not attach to the land, rather it is a right held by the individual. In this way the easement in gross is similar to a license. An “easement appurtenant” is an easement that attaches to or is a part of the land, rather than owned by an individual. The easement will remain with the property, no matter who owns the property.

Example: Sally may grant an easement to Victor that allows him to cross her land at a specific location. The easement states the right belongs to Victor and does not attach to the property. Sally can determine whether Victor can transfer the easement to another person, but it is personally owned. This is an easement in gross.

Natural Easement (Easement by Necessity) – A natural easement arises when it is necessary for an individual or the public to make use of land located near the property subject to the easement.

Example: Will owns land located behind Gloria’s land. The only way that Will can access his land from the public highway is to cross Gloria’s land. Will may be able to bring a court action establishing a natural easement allowing him to cross Gloria’s land at a specific point. The justification for the grant of easement is that without it, Will cannot use or enjoy his property.

Easement by Prescription (Adverse Possession) – An easement by prescription is obtained by adverse possession (see the discussion of adverse possession). An individual who wrongfully uses someone else’s land under the conditions required for adverse possession may pursue a court action to establish ownership rights in the property.

Example: Winston drives cattle across Mary’s property every year for 20 years (the applicable state’s statutory period). He did so openly; claiming the right to do so; it was known to others; it was done every year; and it was done without the permission and against the Mary’s wishes. When Mary finally tries to put up a fence to stop Winston from driving cattle, he brings a court action to establish an easement by prescription.

Discussion: How do you feel about an individual acquiring easement rights that are not express? Why should an easement ever belong to an individual rather than attaching to the land or burdened property? How strong should the need be for an individual to acquire an easement by necessity? How frequent must the use of someone else’s property be to give rise to an easement by prescription?

Practice Question: Steven owns a tract of land that adjoins the river. He decides to divide his land into two parcels. He maintains ownership of the parcel that adjoins the river. The other piece of property sits directly in front of his property and borders the road. Steven agrees to sell the property adjoining the road to Amy, but he puts in the deed a specific limitation stating that Amy cannot build a building on the far right side of the property. Steven and Amy later get into an argument and Amy seeks to stop Steven from crossing her land to access his property. What legal issues are at play in this situation?

What is a “license” of real or personal property?

A license is a grant of the right to use real or personal property. It is not a true property interest. A license of real property will be limited to a particular holder and it will have a definite (limited) term. Because it allows for use (without possession) of the real property, it is similar to an easement in gross. An easement, however, must be in writing. An oral grant of permission to use real of personal property would be considered a license.

Discussion: Do you think a license to use property should be considered a property interest? Why or why not? If so, what type of uses should be considered a property interest?

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