©
1994 by Home Study, Inc. dba American Schools
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Table of Contents;
Chapter I: Real Property;
Chapter II: Legal Ownership;
Chapter III: Agency & Ethics;
Chapter IV: Contracts;
Chapter V: Real Estate Mathematics;
Chapter VI: Financing;
Chapter VII: Mortgage Insurance;
Chapter VIII: Appraisal;
Chapter IX: Transfers of Real Estate;
Chapter X: Property Management;
Chapter XI: Land Control;
Chapter XII: Taxation;
Chapter XIII: Fair Housing Laws;
Chapter XIV: Macroeconomics;
Chapter XV: Legal Professional Requirements;
Chapter XVI: Notarial Law;
Chapter XVII: Selling Real Estate;
Chapter XVIII: Trust Funds Handling;
Glossary;
Index.
Chapter
I: Real Estate
Educational
Objectives: Learn about Real Property, Personal
Property, Mobile Homes, Separate
or Concurrent Ownership (Types of Tenancies) R.
E. TERMS GLOSSARY, INDEX
What
is real estate?
Real
estate may well be the most important physical and economic element in
today's world. No everyday activity goes unaffected by it. Real estate
lies at the foundation of our civilization. Upon it we eat, sleep, walk,
and perform all other activities.
In
Old French, the word for "thing" was "real". An individual's interest or
rights to a property is referred to as real estate. Real
estate is, in modern terms, the interest individuals have in the land and
all that is attached thereto.
Economics
is the social science concerned with the study of the allocation of scarce
resources so as to maximize the satisfaction of material needs and wants.
In our economic system, real estate resources are allocated by the market
or price system. That is, real property goes to those who are ready, willing
and able to bid the highest price to obtain it.
In
any given market situation prices will be determined by the interaction
of supply and demand. Demand is a
schedule of the amounts of a good or service consumers will be willing
and able to purchase at various prices. In a similar vein, supply is a
schedule of the quantities of goods or services that producers or current
owners will be willing to make available at various prices. Thus, demand
and supply represent particular relationships between prices and quantities
of commodities. The Law of Demand (and common sense) tells us that as prices
increase the quantity demanded diminishes while the Law of Supply points
out that the quantity supplied tends to rise when prices increase.
Just
as the economy as a whole is subject to peaks and valleys of activity that
have recurred over the years with fairly reasonable regularity, the real
estate industry as part of this economy has also been subjected to recurring
periods of recession and prosperity.
Real
estate is often the first industry to feel the adverse effects of depressed
conditions in the national and local economies. It also takes the real
estate industry a longer period of time to climb out of a recession than
the economy as a whole because of inability to react quickly to changes
in supply and demand.
A
special characteristic of the real estate cycle is that the real estate
industry usually attains a much higher level of activity in prosperous
times than does the economy in general. Mortgage insurance programs, active
secondary mortgage markets, and other contra cyclical forces dampen the
tendency toward extreme fluctuations from peaks to troughs of activity
in construction and real estate investment.
Real
estate, as it is known in this country, is not a necessity of life, but
a luxury. The amount of real estate actually needed for the bare necessity
of shelter is very small. This is especially true measured in terms of
dollar value rather than in dwelling units. The demand for dollars' worth
of real estate, therefore, behaves very much like the dollar demand for
any other luxury good.
Demand
for real estate increases sharply with increased personal incomes. In this
connection, it must be remembered that the increase in demand is an increase
in the dollars offered for real estate. This is not necessarily an increase
in the number of houses demanded; in fact, it is more likely to be an increase
in the dollars that a prospective buyer will put in a single house. An
increase in total demand may be accompanied by a decrease in demand for
certain properties.
If
the subject of real estate economics in the aggregate had to be reduced
to a single theorem, it would probably be: the most important factors in
determining the price of real estate are the level of personal incomes
and the competition of other luxury goods for those incomes. For the individual,
factors such as types of mortgages available, interest rates, and closing
dates weigh heavily in determining the offering price.
The
immobility of real estate and the fact that each parcel is unique causes
the real estate market to be local and therefore a highly specialized one.
The
real estate market is influenced by many factors, but supply and demand
are responsible for its existence. This market is somewhat different from
the markets for other goods. Since real estate is immovable, its market
must be a local one. If houses are selling well on the coast, the demand
may exceed the supply. At the same time, a small Midwestern town may have
an oversupply of housing. Housing, however, cannot be moved across the
country to an area where a greater demand exists.
It
must also be noted that building new structures to meet demand takes time
and that supply cannot respond quickly to increased demand for real estate.
Furthermore, large sums of money are needed. Funds invested in real estate
are called capital. The availability or lack of such capital limits the
market for real estate by controlling the effective demand.
The
number of end users or consumers of real estate is of primary significance
in the real estate marketplace. As a general rule, the more end users there
are in a region, the higher demand (competition for supply) will be. Therefore,
the higher prices will be. The location of consumers of real estate is
the apparent reason the location of the real estate is so significant.
In the United States, about 70% of the entire population lives within a
hundred miles of a coast line. The remaining 30% inhabit the broad midlands.
With this geographic distribution of our national population, it is easy
to see why the price of real estate in coastal states is considerably higher
than in MidAmerican.
The
sophistication of the modern real estate market causes a number of specialists
to become involved in the market place. Perhaps one of the most difficult
choices for the newcomer to real estate is to decide which area of the
business is the most interesting. The following list is not all inclusive
but should give a general idea of the proliferation of opportunities available
to those interested in real estate careers.
REAL
PROPERTY
Real
estate professionals are constantly reminded of the physical aspects of
the commodity that is their stock in trade. The Preamble of the Code of
Ethics of the National Association of Realtors begins, "Under all is the
land..." But real property is much more than something one can touch, see,
walk on, dig holes in, or build upon. That is only part of what real property
is all about. Even more important are the legal aspects of ownership which,
when coupled with the physical rights inherent in the ownership of land,
constitute what is known as the bundle of property rights. It is this bundle
of rights that constitutes the real estate professional's stock in trade.
Knowledge of how the bundle of rights can be separated and sold is critical
to those working in the brokerage industry.
Often
the difference between a sale and no sale is knowing exactly what the buyer
needs and what is important to the seller. For instance, consider the following.
A broker has a prospective buyer interested in a parcel of land that will
be used with other parcels for the purpose of constructing a high-rise
office building. The broker realizes, however, that all the buyer really
needs of this particular parcel is enough land to sink the structural supports
for the building. This broker is in a much better position to work a deal
than the broker who believes the buyer needs all the physical rights of
the land. In this instance, the perceptive broker might convince a property
owner, who otherwise might not, to sell the subsurface rights to his/her
land. Perhaps the seller did not realize he/she could sell part of the
rights and retain the rest. The broker has created a "win-win" situation.
The buyer gets what he/she needs; and the seller keeps his/her most important
rights while still earning a return on the property through the sale of
what he/she does not need--the subsurface rights.
This
is only one example where knowledge of how the bundle of property rights
can be separated and sold resulting in a completed transaction and, hence,
a commission for the broker. Clearly, knowledge of the buyer's and seller's
particular needs, wants, and desires is very important to the successful
operation of a brokerage firm.
GENERAL
CONCEPTS OF REAL PROPERTY
Land
and anything permanently affixed to the land is real estate. The physical
aspects of real estate include the land and all natural and man-made elements
attached to it, the subsurface elements extending to the center of the
earth, and the airspace above the earth. Real property includes the land
and anything erected or growing upon the land as well as the rights issuing
out of and exercisable within or about the land. Improvements are classified
into two types: improvements on and improvements to the land. Improvements
on the land include homes, multi-family dwellings, barns, condominiums,
and other structures. Improvements to the land include streets, curbs,
gutters, sewer and water service, utilities, and other infrastructure.
A specific tract of land with or without man-made improvements is called
a parcel.
Technically
speaking, real estate and real property have two very different meanings.
Real estate refers just to the physical elements of land and man-made improvements,
if any. Real property consists of all the physical characteristics of land
and the legal rights of ownership-the bundle of rights. However, the terms
real estate and real property are often used interchangeably, and the student
is advised that in most situations when one speaks of real estate one really
means real property.
Real
property, or real estate as it is often called, consists of:
(1)
Land
(2)
Anything affixed to it as to be regarded as a permanent part of the land
(3)
That which is incidental or appurtenant to the land, and,
(4)
That which is immovable by law.
Real
property includes the surface of the earth, the soil beneath to the center
of the earth, the airspace above to infinity, and all things provided by
nature or attached by man.
A
thing, as defined by statute, is real property when it is attached to the
land by roots (trees and shrubs), imbedded in it (fences, sewers, and the
like), or permanently resting upon it (attached buildings).Ownership of
such things is vested in the owner of the land to which they are attached
and normally pass with the title to the land. When
removed from the land, they become personal property and no longer belong
to the estate.
A
thing is appurtenant to land when it is used with and for the benefit of
the land. This includes the rights, privileges and improvements which are
adapted to the use of the real property to which they are connected or
belong. When intended to be a permanent addition to the land, an appurtenance
passes with title to the real property. Examples of appurtenances are easements,
rights-of-way, and condominium parking stalls.
Air
space, will be treated the same as other real property. Landowners are
considered owners of all air space from the surface of their parcel upward.
They may enjoy, alienate, exchange, partition, devise, lease or mortgage
their interest in air rights. Air space is subject to taxation, zoning
laws and condemnation. It is capable of being divided or subdivided. The
landowner's enjoyment of air space is normally limited only by government
regulations regarding flights of aircraft.
Title
to subsurface minerals (oil, natural gas and coal) run with the land unless
otherwise reserved. Such reserved rights may be separated from the surface
rights. A landowner may own all, part or none of them. When a division
takes place, title to mineral rights will run separate from title to surface
rights. It is possible for one owner to have surface rights only, a second
to have oil mineral rights and a third to have coal or other mineral rights.
Water
in its natural state is real property. Title of a landowner to real property
includes water rights over both surface and subsurface water, including
rights to use streams, rivers, creeks, ponds, and lakes. Any landowner's
rights in these water sources must be weighed against the same rights of
others whose land includes the same water source.
The
owner of land which touches on a non-navigable lake or watercourse enjoys
riparian rights to use the water. While having no absolute ownership of
water, rights are shared in common with all landowners along the stream
or lake to use the waters in a reasonable manner. Examples of such rights
are the right of swimming, boating, fishing, and the right to the alluvia
deposited by the water. A riparian owner may use such water, but may not
prevent the natural flow of the stream or of the natural spring from which
it commences its definite course, nor pollute the water in such a way as
to adversely affect others. Riparian rights give the owner of land ownership
to the bed of the stream to is midpoint.
Littoral
rights are those held by owners of land abutting or bordering navigable
bodies of water such as rivers, large lakes, oceans and seas, and include
the rights to the water and ownership of the land up to the mean high-water
mark.
Neither
riparian nor littoral rights may be reserved by the grantor in a conveyance
of land to another.
In
states where water is scarce, water use is often decided upon the doctrine
of prior appropriation. Under this doctrine, water belongs to the state
and is allocated to users who have filed for or obtained permits.
Uniqueness
of Real Estate
Real
estate is unlike any other commodity in one very important respect--its
location. Every parcel of real estate is uniquely located. No two parcels
may physically occupy the same location. For this reason, real estate is
a heterogeneous, or one-of-a-kind product; every parcel is different from
every other parcel. Commodities such as wheat or oil, shares of stock,
and copper pennies are homogeneous products; they are all alike and, thus,
relatively simple to evaluate. The heterogeneous nature of real estate,
however, creates a problem of assessing and evaluating a complex set of
variables every time a parcel of real estate is considered for purchase,
sale, lease, exchange or otherwise disposed. Further, the small number
of sales, relatively speaking, implies buyers and sellers may lack adequate
information in a given market. This lack of information is one of the reasons
the real estate brokerage industry has developed: to help clients make
more informed decisions.
Immobility
of Real Estate
Real
estate also is characterized by its immobility: land is unmovable in a
geographic sense; it is fixed in space. True, dirt can be bulldozed and
carried away, but the land's geographic location remains the same. In part
because of this, the market for real estate tends to be local in nature.
Demand for a particular parcel must come to the site rather than the parcel
going to the buyer as with other commodities. The fixed nature of real
estate has other drawbacks from the perspective of the property owner.
An object fixed in location is a likely target for taxation, and real estate
can be taxed heavily in the form of local property taxes. Real estate is
also susceptible to both positive and negative external influences, such
as environmental or economic conditions. Owners must be aware of how vulnerable
property values are to influences that may be beyond their control.
Indestructibility
of Real Estate
Real
estate, especially land, is also characterized by its indestructibility;
land cannot be destroyed. This feature tends to stabilize investments in
land and improvements, although rather it is entwined with adjacent and
closely situated parcels and land uses. Other factors related to situs
that influence location decisions include the magnitude and direction of
population growth, the adequacy of existing and planned infrastructure,
recreational facilities, employment centers, environmental and cultural
factors, life styles, and so on. The move to the suburbs by millions of
American families in the last three decades is an example of how area preferences
influence location decisions and, hence, value. The effect of situs is
evident also in the preference by some prospective home buyers for homes
in new developments rather than similar dwellings in older neighborhoods.
The
basic economic characteristics of land are its scarcity, improvements,
area preference, and permanence of investment.
Land
in a given location or of a particular quality is becoming relatively scarce.
To have an economic value, a good must be scarce or of limited supply.
Usable land is a scarce commodity, though modification by man has increased
the relative supply. As the supply of usable land diminishes, man finds
ways to bring marginal land, once considered unusable, into production.
Excessively dry land is irrigated for agricultural purpose or marshy land
is drained. In urban areas, man may compensate for the scarcity of suitable
land by using land more intensively. For example, single family homes may
be converted into apartments, or a multistory building may be built where
a single-story building once stood. Since land is durable and immobile,
it is subject to a succession of uses over the passage of time.
A
betterment is an improvement upon the property which increases the property
value and is considered a capital asset as distinguished from repairs or
replacement.
The
improvements or modification of one parcel of land has an effect on the
value and utilization of neighboring tracts and often has a direct bearing
on an entire community. For example, the improvement of a certain parcel
by the placement of a manufacturing plant can greatly influence a large
area. Such land improvements not only affect the land use itself, but also
the value and price of the land.
Another
important factor involving improvements is longevity. It is not unusual
to find a building which has been standing for one hundred or more years.
The
economic characteristic of area preference, often referred to as situs,
does not refer to a geographical location as such, but rather to choices
and preferences of people for a given area within a geographic location.
This preference can be created by various factors including, weather, pollution,
employment, shopping and schools. Area preference, such as being on an
aesthetically pleasing cul de sac, is the reason some lots within
a development are sold for a premium.
When
land has been improved, capital and labor expenditures represent a fixed
investment. Once these investments, such as buildings, sewers, electric
service, drainage, and water systems, have been made, they cannot be shifted
economically to areas of greater demand. The fixity (permanence) of investment
in land requires that careful planning precede any capital expenditure.
The income return on such investments is long-term, relatively stable,
and usually extends over what is referred to as the economic life of the
improvement.
Real
Property and Personal Property
Personal
property is all property other than real property. It is sometimes referred
to as chattel or occasionally as personalty. Personal property is temporary
in nature and movable. Title transfers with a bill of sale. The usual evidence
of ownership is possession.
Personal
property may be changed to real property and, conversely, real property
may be converted to personal property. Standing trees, for example, are
real property. When these trees are cut down, they become personal property.
If the logs are made into lumber and used to construct a house, they return
to their original status as real property.
The
difference between real property and personal property is not always clear.
In many situations, a piece of property does not align itself perfectly
into either classification. Following are some types of property that need
further analysis and explanation.
Crops
fall into two general classifications, crops by nature or crops by man.
Crops by nature are those such as wild fruits, grass and perennial plants,
and are usually considered real property. Crops
by man, requiring annual planting or cultivation, are called emblements
and normally classified as personal property. Because there is no natural,
clear distinction between the classes, disputes often arise as to the classification
of a particular crop.
Crop
classification is generally determined by whether the crop is growing (real
property) or has been severed or harvested (personal property). Even that
does not always hold. For example, a contract to buy watermelons still
on the vine is considered a contract for personal property. If a property
is sold containing crops of any kind, the crops pass to the buyer unless
specifically reserved by the seller and so stated in the sales contract.
To avoid controversy over trees, growing crops, and the like, the rights
of the parties involved should be clearly set forth in the purchase agreement,
and in some cases, in the deed.
Another
group of items difficult to distinguish as real property or personal property
are fixtures and trade fixtures. Fixtures are considered real property
while trade fixtures are personal property.
A
fixture is an article of personal property which has been affixed to real
property in such a manner that the law considers it to be a part of the
real property. If an article is determined to be a fixture, it passes with
the property. Since some "fixtures" can provoke disagreement, the treatment
of these should be carefully stated in the purchase contract. The issue
of whether or not an item is a fixture can be avoided by including the
item in question in the contract. The law of fixtures addresses the basic
distinction between real property and personal property. Courts apply the
following tests to determine whether an article is a part of the real property.
If
the item was attached with the intent of making it a permanent part of
the building, it is a fixture.
When
personal property is firmly attached to real property, such as fence posts
set in concrete, the result is a fixture. Another example is a furnace
that is removable, but was attached in such a way that its removal would
do serious damage to the property.
When
an article is essential to the purpose of which the building is intended,
such as the furnace mentioned above, it is presumed to be a fixture. If
a landlord installs air conditioners into wall slots specifically designed
for that purpose, the air conditioners are fixtures even though they could
be readily removed.
If
the parties to a contract agree, by expression or implication, that an
item is or is not a fixture, the agreement will control the status of the
item.
The
relationship of the parties (such as landlord and tenant or buyer and seller)
may aid in the ultimate decision. For example, as between a buyer and a
seller in a real property contract, the issue of whether specific property
is a fixture is generally resolved in favor of the buyer, particularly
if the previously mentioned factors leave the issue unresolved.
A
trade fixture or chattel fixture is an article owned and attached by a
tenant for the purpose of trade or business and is normally considered
personal property.
If
the tenant moves out leaving a trade fixture, or the lease expires prior
to removal of the trade fixture, such fixture becomes the property of the
landowner. Leases generally require that, at the expiration of the lease,
the tenant must return the premises to the condition existing at the time
of the creation of the lease except for reasonable wear and tear.
Real
estate licensees have the right to act as agents in the sale of mobile
homes, provided the requirements of the Health and Safety Code Section
18551 have been met when transforming the mobile home into real property.
Except mobile homes that have been transformed into real property, licensees
are allowed to sell only mobile homes that are used (at least one year
old) and which are properly registered for at least one year with the Motor
Vehicle Department or the Department of Housing and Community Development.
Licensee may not rely solely on the age of the mobile home but on the actual
registration. Real estate brokers may not have a sales office where more
than two mobile homes are being sold, unless they are also a licensed mobile
home dealer.
RIGHTS
AND INTERESTS IN REAL PROPERTY
The
system of property ownership in most of the United States had its beginning
in the pre-colonial days in England. Through the centuries, the forms of
land ownership have evolved through common law from ownership of land vested
in the sovereign (Feudal System) to the allodial system, free and full
ownership by individuals of right in land. Technically, no one owns real
estate, only the rights relative to its use. The concept of private property
ownership as the basis for personal liberty is diminishing as greater emphasis
is placed on the needs of society as a whole.
One
of the most significant governmental actions affecting property was the
decision of the Continental Congress to sell to private owners the rights
of parts of the vast territories acquired as a result of the Revolutionary
War. A committee worked out a plan, largely attributed to Thomas Jefferson,
for locating and selling land. The Land Ordinance of 1785 established the
Rectangular Survey System and guaranteed ownership in fee simple.
The
government described all public lands by the rectangular method before
disposing of those lands through allotment, sale or homestead. The ordinance
also provided that Section 16 and in some instances, Section 36, of each
township be designated by law to be used for schools.
The
establishment of the individual rights to own real property resulted in
the creation of estates in land by which ownership interest could be divided
among several individuals. Real property interests can be characterized
in terms of the rights, privileges, powers and duties which may accompany
them. Although persons involved in the real estate industry may not encounter
all of these estates in land, it is necessary to understand the various
interests which are possible and the limitations associated with them.
Interests
in real property under the allodial system can be possessory or nonpossessory.
Possessory interests are those by which the owner has the physical control
of land that can be enjoyed by a person. Nonpossessory interests include
liens, encumbrances, easements, etc., rights which are valuable but which
do not include any present right to possess or occupy the real property.
Possessory
estates (corporeal rights) are classified either as freehold which means
the interest lasts for an indeterminable time, or as less than freehold,
which is an interest that lasts for a definite and determinable period
and includes leasehold estates.
A
person holding a freehold estate has title to the real property for an
indeterminable duration. Included in freehold estates are the fee simple,
the fee simple defeasible, and the life estate. The fee owner may do anything
with the property that does not interfere with the rights of others. Ownership
of and title to real estate are expressed in terms of the degree, quantity,
nature, and extent of rights embodied in a fee simple estate.
The
fee simple absolute is the largest and most complete estate known in our
legal system. It denotes the maximum legal ownership of real property and
includes the greatest possible combination of rights, ownership privileges
and immunities a person may have in real property. It is possible to own
all rights in a parcel of real estate or only a portion of them.
Fee
simple estate is limited only by governmental controls. Government has
given up almost all right to absolute ownership, but it has retained certain
ownership powers such as power of escheat, police power, power to tax,
and the right of eminent domain. Owners have all rights except those reserved
by government.
A
fee simple estate is an estate of inheritance and may be willed or deeded
as it is freely transferable and devisable. All other estates are derived
from the fee simple. When a deed does not specify the state being conveyed,
it is presumed to transfer a fee simple estate.
Qualified
Estates
Since
the fee simple absolute is the only unlimited ownership interest, all the
other inheritable present freehold estates are limited in some way. Technically
these restricted interests are called defeasible estates, which means that
these interests can be defeased or defeated in the future by the happening
of an event or a stated condition. In many respects, the fee simple defeasible
is treated the same as the fee simple. It is an estate of inheritance and
will descend to the heirs of the title holder.
A
fee simple determinable estate expires automatically upon the occurrence
of an event stated in the deed or will and reverts back to the grantor,
his heirs or assigns. When creating the estate, words such as "so long
as" or "until," followed by the event, are used. For example, property
owner "A" conveying property to a church with wording "so long as the property
is used for church purpose" creates a fee simple determinable estate in
the church. The estate conveyed to the church will end automatically if
and when the property is used for non-church purposes.
Life
estate is any estate in real or personal property which is limited in duration
to the life of its owner or the life of some other designated person. If
the estate is measured by the lifetime of a person other than its owner,
it is called a life estate pour autre vie. Life estate is classified
as a freehold estate because it is a possessory estate of indefinite duration,
but it is not an estate of inheritance.
Since
the interest of the grantee in life estate ends at the death of the grantee
or another person, the grantor might retain a reversionary interest, which
is transferable (alienable, devisable, and descendible) at all times. In
the alternative, a grantor may appoint a third party to receive ownership
interest at the death of the life tenant. This third person is called a
remainderman, one who has a future interest, also freely alienable, devisable,
and descendible.
A
life tenant may sell, rent, or mortgage the life estate, but can give no
greater right than is owned. The right of the buyer or renter ceases immediately
upon the termination of the life estate.
Life
tenants owe certain duties to the owners of the vested future interest,
either the reversioner or remainderman. They are obligated to maintain
the property and not allow it to waste, i.e., cause exploitation of mineral
deposits, destruction of buildings, or other acts resulting in permanent
injury or loss of value to the property.
A
homestead is a tract of land which is owned and occupied as the family
home. A homestead exemption law exempts a portion of the value of the homestead
property exempt from claims of most outside creditors.
Homestead
is included under the section on possessory estates because of the right
of family survivors to the homestead property upon the death of the husband
or wife. Upon the death of the surviving spouse, the surviving children
may continue to possess and occupy the whole homestead until the youngest
child reaches majority. To protect spouses individually, both husband and
wife must join in executing any document conveying homestead property.
Leasehold
estates are possessory interests created by the establishment of landlord-tenant
relationships. They may last for a definite time period or for as long
as the parties are willing to continue their relationships. For the duration
of the lease, the lessee possesses or occupies the land with the understanding
that the landlord retains full ownership of the real property. The lessor
retains the reversionary rights plus the right to collect compensation.
Because title does not accompany such estates, leases are considered to
be personal property.
In
addition to the fact that most leases contain a clause against the assignment
or subletting without prior consent of the lessor, sometimes statutes prohibit
assignment or subletting without permission from the landlord. In the absence
of such restraint, tenants could indiscriminately transfer leases, introducing
"strangers" to the landlord.
In
an assignment, the entire interest in the property of the assignor is transferred
to the assigns or assignees. The transferee comes into privity of estate
with the lessor, meaning that each remains liable to the other on the covenants
of the original lease. In subleasing, a lease is given by a lessee for
a portion of the leasehold interest with the lessee retaining sole reversionary
interest. The main difference between subletting and assigning, so far
as the landlords are concerned, is that they cannot directly sue the sublessee
where it is possible to bring suit against the assignee.
An
estate for years is a leasehold estate expressed in terms of a specific
starting time and a specific ending time. The duration can be any length
of time. An estate for years does not automatically renew itself.
A
tenancy from period to period is an estate which continues for a fixed
period (year, month, week) and for successive similar periods unless terminated
by either party by proper notice. The most common example of a periodic
estate is the month to month apartment rental. It is also called tenancy
from year to year.
A
tenancy at will may be terminated at the will of either the landlord or
the tenant and has no other specified length of duration. By statute the
common law has been changed in that estates at will are treated much the
same as tenancy from period to period. If, for example, a tenant at will
is applying monthly rent, then a thirty day notice requirement must precede
termination of the lease, just as in a tenancy from month to month.
Tenancy
at sufferance exists when a tenant, without the consent of the landlord,
fails to surrender possession after termination of the lease. This is the
lowest estate in real estate and no notice of termination may be required
for the landlord to evict the tenant. Designed to protect the tenants from
being classified as trespassers on one hand, it also prevents their acquisition
of title by adverse possession on the other.
FORMS
OF OWNERSHIP IN REAL PROPERTY
All
real property is owned by the government, by one person alone, or with
others in some form of concurrent ownership. Rights, privileges, and duties
are defined in terms of the type estate held and the encumbrances and controls
affecting the real property.
Sole
ownership of real property by a legal person is known as ownership in severalty.
The term implies that the person's ownership is severed from all others.
A natural person may own in severalty any freehold estate previously discussed.
Real
property owned by public corporations, such as cities, counties and school
districts, is generally owned in severalty.
Concurrent
Ownership
Concurrent
ownership of real property exists when more than one person has legal title
to the same parcel of land. Each co-owner owns an undivided interest in
the real property. Whether each co-owner's share is equal or not may determine
the type of co-ownership.
Several
generalities apply to all forms of co-ownership. For example, each co-owner
is entitled to possess the entirety of the co-owned real property, subject
to the identical rights of the others. Generally, all profits derived from
the co-owned land must be divided between or among the co-owners according
to the interest of each in the real property. Co-tenants cannot exclude
the other co-tenant(s) or claim specific portions of the property for themselves.
Concurrent
ownership in common exists when two or more persons own undivided interests
in one parcel of land. The interest held need not be equal. For a tenancy
in common to exist, only the unity of possession must be present. That
is, each party must have a right to possession of the whole parcel, subject
to the same rights as the other tenants. Tenants in common may deed, will,
or encumber their interest in the real property as they choose.
Additionally,
a tenant in common may bring a partition action to force a sale of the
real property, the proceeds of such sale to be divided between or among
the tenants according to their share in the real property. An action of
partition may also be used to force a physical division of the co-owned
property between or among the tenants where an unresolved dispute exists.
In
absence of inferences otherwise, co-ownership is in tenancy in common by
presumption of law.
The
major difference between the joint tenancy and the tenancy in common is
that joint tenants have the right of survivorship, the grand incident of
joint tenancy. Survivorship means that upon the death of a joint tenant,
title is vested in the surviving joint tenant(s). In other words, the interest
of the decedent in the joint tenancy is vested to the surviving tenants
and is not included in the decedent's estate. Joint tenancy, sometimes
referred to as a "poor man's will," defeats a will in determining the distribution
of co-owned property.
A
joint tenancy exists when two or more persons own equal undivided shares
in real property, and when such tenants have conformed with the four unities
of time, title, interest and possession. The unity of time means that each
joint tenant must have acquired interest in the real property at the same
time as all other joint tenants. The unity of title requires the same instrument.
The unity of interest means that each joint tenant must possess the same
interest in real property as to scope (the share of the interest) and duration
(the estate possession) means that each joint tenant must have the same
right as the other joint tenant(s). A joint tenancy will be recognized
if and only if it was the intent of the transferor to create a joint tenancy.
Creation
of Joint Tenancy
To
create a joint tenancy, specific words in a deed or will are required.
Such words as "to A and B as co-owners," "to A, B, and C to share and share
alike," or "to A, B, C and D," are insufficient to create a joint tenancy,
unless it can be otherwise specially proven. The most acceptable means
of creating a joint tenancy is by stating "to A and R, as joint tenants
with the sole right of survivorship, and not as tenants in common." By
using such language, the intent to create a joint tenancy may be clearly
proven.
An
interest in a joint tenant terminates with death. A joint tenancy is also
terminated (severed) if any joint tenant deeds an interest in the joint
tenancy. The grantee of the joint tenant's interest will succeed to the
tenant's share, but the grantee will be considered a tenant in common.
If more than one joint tenant remains, such tenants will continue to hold
the remaining interest in the real property as joint tenants. For example,
if "A," "B" and "C" are joint tenants and "C" conveys his interest to "X,"
"X" now holds an undivided one-third interest as a tenant in common with
"A" and "B" who continue to be joint tenants, each with an undivided one-half
interest in the remaining two-thirds interest in the real property. Termination
of a joint tenancy also occurs when a joint tenant's interest is sold in
foreclosure sale or in a sale to satisfy judgment creditors.
If
the four unities are present in a conveyance or devise to husband and wife,
and the conveyance indicates an intent to create the right of survivorship
in favor of the spouses, a tenancy by the entireties is recognized. A tenancy
by the entireties is treated the same as a joint tenancy. For this tenancy
to exist, however, it must be between husband and wife and cannot be terminated
without the consent of both parties.
(The
following is reprinted by permission from the CalBRE Reference Book, p. 90-94)
The
community property system of co-ownership has its origin in Spanish law.
There are currently eight community property states: Texas, California,
New Mexico, Washington, Arizona, Louisiana, Nevada and Idaho. All property
acquired during a marriage, except property acquired by a spouse through
inheritance, will or gift, may be considered property of the marital community.
The property separately owned prior to marriage is not community property.
Community property is equally owned and controlled by husband and wife
and such property, as a general rule, will be equally divided upon divorce.
This division disregards the financial contribution each spouse actually
made to the property's acquisition.
Joint
Tenancy and Community Property. A husband and wife may acquire their home
with community funds, but proceed to take record title "as joint tenants."
California courts are aware of this problem and have established the rule
that the true intention of husband and wife as to the status of their property
shall prevail over the record title.
Among
themselves the rights and duties of joint tenants are generally the same
as among tenants in common, with the vital exception of the rule of survivorship.
A joint tenant may borrow money and as security execute a mortgage or deed
of trust upon such interest just as a tenant in common may. This does not
destroy the joint tenancy, but if the borrower should default, and the
mortgage or deed of trust should be foreclosed while the borrower is still
alive, the joint tenancy would be ended and a tenancy in common created.
Most lenders would hesitate to make such a loan. If the borrower dies before
the mortgage is paid off or foreclosed, the surviving joint tenant gets
title free and clear of such encumbrance.
Severance.
A joint tenant may sever the joint tenancy as to his or her own interest
by a conveyance to a third party, or to a cotenant. If there are three
or more joint tenants, the joint tenancy is severed as to the interest
conveyed but continues as between the other joint tenants as to the remaining
interests. Upon death of a joint tenant, the joint tenancy is automatically
terminated. Nevertheless, for record title purposes, the following must
be recorded in the county where the property is located:
(1)
A certified copy of a court decree determining the fact of death and describing
the property, OR
(2)A
certified copy of the death certificate or equivalent, or court decree
simply determining the fact of death, or letters testamentary or of administration
or a court decree of distribution in probate proceedings.
Community
property basically consists of all property acquired by a husband and wife,
or either, during a valid marriage, other than separate property. Separate
property of either the husband or the wife is not community property of
the community.
Separate
property includes:
(1)All
property owned by either husband, or wife, before marriage.
(2)All
property acquired by either spouse during marriage by gift or inheritance
(bequest, devise, or descent).
(3)All
rents, issues and profits of such separate property, as well as other property
acquired with the proceeds from the sale of separate property.
(4)Earnings
and accumulations of a spouse while living separate and apart from the
other spouse.
(5)Earnings
and accumulations of each party after rendition of a court decree of separate
maintenance.
(6)Property
conveyed by either spouse to the other with the intent of making it the
grantee's separate property.
Management
and Control. On and after January 1, 1975 each spouse was given coequal
management and control of the community property. An exception to coequal
management and control exists if one of the spouses manages a community
personal property business. This spouse has sole management and control
of the business. Community property is liable for the debts of either spouse
contracted after marriage. For debts contracted prior to marriage, community
property is liable for those debts except that portion of the community
property comprised of the earnings of either spouse. Neither spouse may
make a gift of community property without the consent of the other. Neither
spouse may encumber the furniture, furnishings or fittings of the home,
or the clothing of the other spouse or minor children without the written
consent of the other spouse. As in prior law, both must join in the conveyance,
encumbrance or leasing (one year or more) of community real property. Civil
Code Section 5127 provides that both spouses either personally or by duly
authorized agent must joint in executing any instrument by which community
real property or any interest therein is sold, leased or encumbered.
If
real property is owned by more than one person, licensees should obtain
all necessary signatures to the contract at the time the owners sign the
listing and acceptance. Each spouse has the right to dispose of his or
her one-half of the community property by will. Failing to do so, the title
to the decedent's one-half of the community property passes by in testate
succession to the surviving spouse.
(d)
Tenancy in partnership exists if two or more persons, as partners own property
for partnership purposes. Under the Uniform Partnership Act, the incidents
of tenancy in partnership are such that:
(1)A
partner has an equal right with all other partners to possession of specific
partnership property for partnership purposes. Unless the other partners
agree, however, no partner has a right to possession for any other purpose.
(2)A
partner's right in specific partnership property is not assignable except
in connection with the assignment of rights of all the partners in the
same property.
(3)A
partner's right in specific partnership property is not subject to attachment
or execution, except on a claim against the partnership.
(4)Upon
death, a partner's right in specific partnership property vests in the
surviving partner (or partners).The rights in the property of the last
surviving partner would vest in the decedent's legal representative. In
either case, the vesting creates a right to possess the partnership property
only for partnership purposes.
(5)A
partner's right in specific partnership property is not subject to dower
or curtsey (both have been abolished in California by statute), nor allowance
to widows, heirs, or next of kin. Even when married, a partner's right
is not community property. On the other hand, a partner's interest in the
partnership as such (that is, a partner's share of profits and of surplus)
is governed by community property rules for some purposes.
These
incidents make sense because two or more persons are attempting to carry
on a business for profit together. Without these incidents, continuity,
and unified, efficient operation would be difficult. They do not, however,
prevent the partners from owning different fractional parts of the business.
Thus, although each partner has unlimited liability to third parties for
firm debts, as among the partners, each partner's interest in profits and
losses may be any percentage agreed upon. Partners may also structure the
business relationship as a partnership in many different ways. Such as,
by agreement among the partners, one partner may be given greater authority
than the other partners. Partnerships are usually so individualized to
suit the goals and objective of the partnership that generalizations that
could be made about the rights and duties of partners would not begin to
cover the range of possibilities.
(End
of CalBRE Reference Book excerpt)
Cooperative
ownership is created when a nonprofit corporation is formed for the purpose
of buying, converting or constructing a building in order to create individual
apartment units. Shares in the corporation are sold to cooperators and,
in exchange for their investment, the shareholders each receive from the
corporation a property lease granting them exclusive right to occupy a
specific living unit in the cooperative apartment building. Cooperators
do not own their living units, but are tenants in a building owned by a
corporation of which they are shareholders.
While
often thought of as a type of building or housing complex, condominium
ownership or a condominium regime is a specialized form of property ownership.
It is a form in which owners own their units in fee and share an undivided,
fractional ownership of common areas with the others in the complex. Owners
receive unit deeds to their own apartments entitling them to a proportionate
share in the common areas.
Each
owner, by purchasing a unit, is committed to absorbing a prorated share
of the cost of maintaining the common area. Each pays a monthly maintenance
charge to the owners' association which determines the amount for the assessment.
Special assessments may also be made upon the owners from time to time
to cover extraordinary expense not covered by the normal association dues.
Condominiums may be used in commercial, professional and industrial complexes,
as well for residential property ownership.
Time-sharing
is a specialized form of condominium ownership. As the cost of building
a condominium unit outright, especially in resort areas, might be prohibitive,
the developer instead sells a designated share of time in the unit to buyers
who each receive a proportionate interest in the property and the right
to use it for specified periods of time during the year. Each owner pays
a pro rata share of maintenance and management costs based on time.
The
concepts for time-sharing and interval ownership of units are somewhat
different. The time-sharing creates a tenancy in common among the many
owners of the same unit and includes the exclusive right of each of them
to use the property for specific periods. Interval ownership, on the other
hand, creates a separate tenancy to the unit for a specified period each
year and thereby provides the exclusive right to use the property during
that time.
A
townhouse blends some of the characteristics of a single-family home with
those of a condominium. It is a form of residential housing in which the
owners own their dwellings, the land beneath and the air space above but
share joint ownership of common area contiguous to the units with the other
owners. "Cluster or multiple use" zoning, seeking to more fully utilize
available land and provide for higher density housing, is necessary for
townhouses which feature zero lot lines where one or more of the exterior
walls rest directly on the property line. A townhouse usually has a small
front and/or back yard and shares common (party) walls with adjacent buildings.
Under the townhouse concept, the owner's association owns and administers
the common areas, rather than having individual owners hold a pro rata
ownership interest in them.
FORMS
OF BUSINESS ORGANIZATION
Business
organizations can take several different forms, including sole proprietorship,
corporation, partnership, limited partnership, syndicate, joint venture,
and real estate investment trust. All of these business organizations can
receive, hold, and convey title in the various ways previously discussed.
These forms, while referred to by other names, normally take the form of
tenancy in common.
Sole
Proprietorship
A
sole proprietorship is a business owned by one individual. The owner of
a sole proprietorship is fully liable for the business debts. If business
debts exceed the assets of the business, the personal assets of the owner
may be attached by creditors for satisfaction of the business debts.
"A
corporation is an artificial being, invisible, intangible, and existing
only in contemplation of law." As a creature of law, it is capable of owning
real property in severalty in the corporate name. Its rights to alienate,
encumber and use real property are substantially the same as those of a
natural person. However, since a corporation may act only through its agents,
natural persons (board of directors, members or officers) must carry out
all negotiations and actions involving the transfer of corporate real property
or any interest therein.
Ownership
in a corporation is evidenced by shares of stock which are transferable
without having to dissolve the corporation. Stockholders do not have personal
liability for the debts of the corporation as only the corporate assets
are subject to the claims of creditors. Corporations are subject to double
taxation as they are taxed on corporate earnings and stockholders are further
taxed on dividends when received.
A
general partnership is a form of business organization in which the business
is owned by two or more persons called partners. In a general partnership,
the partners are personally liable for partnership debts exceeding partnership
assets. Partners are jointly and severally liable. That is, any individual
partner is personally liable for the partnership debts exceeding partnership
assets as well as all the partners being jointly liable.
Limited
Partnership
A
limited partnership exists when some of the partners are limited in their
financial liability to the amount of their contribution to the partnership.
Limited partners are "silent partners" and cannot take a role in management
of the partnership. The limited partnership is not taxed as such. The individual
owners are taxed on their portion of the partnership earnings. Each limited
partnership must have at least one general partner who conducts business
for the entity and may be held liable for all losses and obligations not
met by the other partners.
A
syndicate is a term to describe a combination of investors who pool funds
for investment. The usual form of syndicates are joint ventures, general
partnerships, and limited partnerships.
The
joint venture and general partnership are alike in that all partners are
liable for a partnership debts and all partners normally have a voice in
management of the group. The ownership group is not taxed (as a corporation
would be) but passes through all benefits and/or losses to each partner.
The difference between the joint venture and general partnership is that
the partnership is normally established to carry on business for an indefinite
period while a joint venture is a single or limited purpose partnership,
usually for a short time period.
Real estate investment
trusts are unincorporated trusts or associations of investors, managed
by one of or more trustees responsible for making various income producing
investments in real property so that such income may be distributed to
holders of the beneficial interest of the real property (trust beneficiaries).
To qualify as REIT under the Internal Revenue Code which exempts REITs
from taxation at corporate rates on income distributed to beneficiaries,
certain requirements must be met. This necessitates intricate legal advice.
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Any
number of persons (can be husband & wife)
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Any
number of persons (can be husband & wife)
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Only
husband and wife
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Division
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Ownership
can be divided into any number of interests equal or unequal
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Ownership
interests must be equal
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Ownership
interests are equal
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Title
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Each
co-owner has a separate legal title to his
or her undivided interest
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There
is only one title to the whole property
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Possession
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Equal
right of possession
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Equal
right of management and control except in the case of personal property
used in a business
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Conveyance
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A
conveyance by one of the joint tenants alone breaks
the joint tenancy between the conveying joint tenant's
interest and the others but does not affect the continuation
of the joint tenancy of the other two or more joint tenants
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Interests
can not be conveyed separately. Both co-owners must join in conveyance
of real property. Either co-owner may transfer personal property
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Purchaser's
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Joint
Tenancy Purchaser will become
a tenant in common with the other
co-owners in the property
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Community
Property Purchaser cannot acquire one co- owner's interest and hold as
community property with the other co- owner
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Death
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On
co-owner's death his or her interest
ends and cannot be disposed of by will. Survivor owns the property
by survivorship
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On
co-owner's death, 1/2 belongs to survivor in severalty, 1/2 goes to decedent's
devisees or by succession to survivor
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Successor’s
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Last
survivor owns property in severalty
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Creditor's
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Co-owner's
interest may be sold on execution sale to satisfy a creditor.
Joint tenancy is broken. Purchaser becomes tenant
in common.
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Community
property is liable for the debt of either co-owner contracted after marriage.
Debtor co-owner's interest cannot be sold separately on execution; whole
property must be sold to satisfy creditor
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Presumption
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Must
be expressly stated. Not favored
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Strong
presumption that property acquired by husband and wife is community property
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