Chapter 2

Legal Foundations
to Value

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The Real Property Bundle of Rights:
A Few Questions

 What do we mean by rights?

 What are property rights?
 What is real property?
 What is personal property?
 What do we do when the difference is
unclear?
What Are Rights?

 Claims the government is obligated to

enforce
 Derived from the Constitution
 Different from raw power
 Non-revocable
 But can be reduced in the interest of health,
safety, and welfare of the citizenry
 Enduring
 Not limited to the memory of owners or others
 Cannot be nullified by other citizens or by
government
Personal Rights vs. Property
Rights
 Personal rights
 Freedoms guaranteed by Constitution
 Supreme Court interpretations of Constitution
 Property rights
 Exclusive possession
 Enjoyment of the use or benefit: Use, collect rents,
harvest
 Freedom to dispose as one pleases (within the
limits of safety): sell, convert, rebuild, etc.
Real vs. Personal Property

 Real property: Rights in land and its

permanent structures
 Surface of the earth and improvements
 Air, up to reserved air space or tallest structure
 Beneath the earth as far as technology allows:
Minerals, oil and gas, water
 Personal property: All other property
 Personal and household goods
 Intellectual property
 Music
Rights in Our Society
Real Property: Rights in Three
Dimensions
Built on Air Rights

MetLife Building, New York

New East Side, Chicago

Fixtures

 Fixture: Real property that formerly was

personal property
 Rules for identifying a fixture:
 Manner of attachment
 Character of the article and manner of
adaptation
 custom screens or storm windows
 church pews
 custom designed furniture
Fixtures - continued

 Intention of the parties

 Dominant rule
 Customary assumptions of the realm
 Example: Kitchen appliances in a single-family
residence vs. appliances in an apartment
 Relation of the parties
 Variant of rule of intention
 Trade fixtures of a commercial tenant (personal
property)
 Fences and other agricultural improvements of a
tenant farmer (personal property)
 Items installed by tenant in a residence (personal
property)
Which are Fixtures?

?
?
? ?
? ?
Importance of Fixtures
 In every real estate transfer, fixtures lurk
 Fixtures automatically go with the real
property
 You must be careful to identify possible
fixtures
 You should explicitly state whether they
stay with the property or not

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Real Property Interests

 Interest: Any “bundle” of rights in real

property
 Estate: A real property interest that
includes the right of exclusive possession
 Nonpossessory interests:
 Easements
 Restrictive covenants
 Liens
Estates
Ownership (Freehold)
Estates
 Estates of indefinite length
 Fee simple absolute - all possible rights
 Fee simple conditional - all rights, but
revocable if specific condition is violated
 Life estate with remainder interest
 Ordinary – created by the owner
 Legal – Imposed by law
 Special problem in Florida with homestead:
At death of spouse, surviving spouse gets life
estate and any minor children get vested
remainders
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Modern Leasehold Interests

 Tenancy for years

 For a specific period of time (few days to
decades)
 Must be written if for more than one year
 Written lease contract governs entirely
 Periodic tenancy
 No definite length of time
 Often by oral agreement
 State law governs notice of termination
 Time required is usually half of the payment
period
Modern Leasehold Interests
 Traditional leasehold law derived from
rural society
 Concepts and precedents were inadequate
for a modern apartment setting
 Florida and other states adopted
residential landlord and tenant laws to
solve the problem
Model Residential Landlord - Tenant Act

Establishes a
more equitable relationship
between landlords and tenants
Non-Possessory Interests in
Land
 Easements
 Liens
 Restrictive Covenants
Easements

 Easement: The right to use land for a

specific and limited purpose
Easement Appurtenant

 Right of use a (dominant) parcel of land

“enjoys” over an adjacent (servient)
 parcel
Affirmative  Negative
easements: easements:
 Driveway or access  Light and air
right-of-way easement
 Sewer line  Scenic easement
 Drainage
 Common wall
 “Runs with the land”: Rights and
obligations
are inseparable from the parcels involved
An Easement Appurtenant Involves a
Dominant Parcel and a Servient Parcel
Easements in Gross (“Commercial
Easements”)

 Right to use land, unrelated to any other parcel

 Extract minerals or oil and gas
 Build a roadway or railway
 Lay a pipeline, power line, or cable
 Run an irrigation ditch
 Place and maintain a billboard or communications tower
 Harvest timber or crops
 Conservation easement for wetlands preservation
 Hunt, fish, snowmobile
 Transferable separately from land title or ownership
(Does not “run with the land.”)
 No dominant parcel – only servient parcels
More Easement Concepts

 Exclusive & nonexclusive easement in gross

 Exclusive: Conveys all rights of the easement
 recipient can extend access to others
 Nonexclusive: Rights limited to one user only
 Recipient cannot extend access to others
 Owner can convey access to others
 License: Similar to an easement in gross,
but conveys permission rather than right
 Revocable
 Terminates at the death of the grantor or sale of
the land
How Many Easements in This Scene?
Rights Included in Various Real
Property Interests
Restrictive Covenants (Deed
Restrictions)

 Covenants that impose restrictions on

land use
 Created at conveyance of land to a new
owner
 Examples:
 Setback lines, height restrictions for structures
 Minimum floor area
 No freestanding structures
 No chain-link fences
 No RVs or boats parked in view of the street
 No cars regularly parked in the driveway
 No garage door facing the street
 Required architectural review
 No external antenna, satellite dish or
clothesline
Restrictive Covenants -
continued
Two methods of creation:
 Restriction in a deed conveying a single
parcel of land
 Restrictions placed on a subdivision at
creation
 A list of restrictions recorded as a separate
document
 Mutually binding on all purchasers in the
subdivision
Restrictive Covenants:
Enforcement
 Enforcement by court injunction
 Enforcement only by “parties at interest”
 Isolated deed restriction: Grantor or grantor’s heirs
 Subdivision restrictions:
 Owners
 Mortgage loan holders
 Renters
 Courts reluctant to enforce in case of:
 Delayed enforcement (abandonment)
 Changed neighborhood
 Changed public policy
 Mandatory retirement in some states
Liens

 Lien: An interest in property as security

for an obligation
 Usually a debt
 General Liens: Arise from events
unrelated to the property
 Court awarded damages
 Federal tax liens
 Specific liens: Arise from ownership and
use of the property
 Mortgage
 Mechanics’ lien
 Property tax, assessment, or CDD lien
Three Levels of Liens on a
Personal Residence
Forms of Co-Ownership
Indirect Co-ownership

General  Entity holds title

Partnership  Ownership passes
Limited
through the entity
Partnership  Undivided interest

Limited
Liability Co.

Corporation
(Co-op)

Trust
Forms of Direct Co-ownership

 Example: A house with multiple owners

 All share the right of exclusive possession
 Cannot obstruct each other’s use
 May hold different sizes of shares
 Tenancy in common
 Joint Tenancy
 Tenancy by the entirety
 Condominium
Direct Co-ownership

Joint Tenancy
(Survivorship)

Tenancy in
Tenancy by the Common
Entireties
Forms of Direct Co-ownership

 Tenancy in common:
 Default form except in special cases
 Multiple owners of same fee simple interest
 Each owner can sell or mortgage their interest
independently
 Can be different size shares
 Can be created in multiple transactions
 Bad form for owning an operating business
 Poor form for multiple investors
Forms of Direct Co-ownership

 Joint tenancy
 Defining feature: “right of survivorship” restricts
inheritance to heirs of the last surviving owner
 Difficult to create and easily disrupted
 Prevented or restricted by law in some states

 Tenancy by the entirety

 Joint tenancy for husband and wife
 Solves Florida problem of homestead life estate
 Problem arises when household includes minor children
 Protected against liens arising from either
spouse alone, including judgments
Direct Co-ownership -
continued
 Condominium
 Combines single ownership and tenancy in
common
 Created by condominium declaration
 Bylaws define owner rights:
 Share of all obligations
 Restrictions on sale or rental
 Methods of altering bylaws
 Creates additional level of (private) government
 History of owners not understanding the
restrictions
Direct Co-ownership: Condominiums

Undivided
Ownership of
Common Elements Fee
Through Simple
Tenancy in
Common Fee Simple
Fee Simple
Why would you want a
condo?
 Price
 Amenities
 Security, both when you are in
residence, or away
 Others do the maintenance and
upkeep
 Interesting social context and/or
location

40
What special risks do you
buy into?
 Design and construction
 Noise issues
 Privacy
 Parking and storage limits
 Rules that may be frustrating
 Exterior decoration and use of patio or balcony
 Guest policies
 Right to rent out
 Quality of management? (professional or
not?)
 Property reputation
41
Condo documents You Want
to Examine
 Declaration
 By-laws
 Minutes from recent board meetings
 Any pending legal actions
 Association budget

42
Cooperative

 Corporation owns property

 Each owner holds shares and a proprietary
lease (no term and no rent)
 Cannot mortgage individual interests
 Owner’s mutually liable for any specific
liens
Cooperative
Corporation
holds title to all
land,
improvements

Shares

Corporation

Proprietary
Leases
Automatic Ownership from Marriage:
Early Forms

 Dower/curtesy
 Automatic one-third life estate for a surviving
spouse in real property of a decedent spouse
 Common law roots (traditional English)
 Dower is widow’s claim; curtesy is widower’s
 Covers all real property ever owned during the
marriage
 Problems with dower (widow’s interest):
 Life estate unmarketable
 Much of modern wealth not in real property
 Real property may be in multiple states
Automatic Ownership from Marriage:
Modern Forms

 Elective share
 Modern substitute for dower
 Surviving spouse receives up to one-third of all
decedent’s personal property and in-state real
property
 Must chose by explicit “election” within specified
time
 Adopted in some form by 25 states
Automatic Ownership from Marriage:
Modern Forms

 Community property
 One-half interest in all property acquired “out of
the fruits of the marriage”
 Not property owned before the marriage
 Not gifts or inheritances to one spouse
 May include income generated from “separate”
property
 Found in states of Spanish tradition, plus
Louisiana, Wisconsin and Alaska
 Growing in acceptance as a superior
arrangement to elective share
Exhibit 2-10 Two Main Forms of
Marital Property Rights
Elective Share Community Property
Mainly Spanish/French
Mainly used in: English heritage heritage states
states
Spousal share: One-third One-half
How triggered: Explicit declaration Automatic
All wealth created in
Wealth coverage Varies up to all wealth the marriage
Ten states, with
Number of States About 25 influence in more
Timeshare
 Range in “quality” of ownership:
 Condominium share
 Leasehold
 License
 Choice of floating time intervals (e.g.
within three months) and choice of resorts
 Industry with a questionable history
 Never a financial investment
 Note that the developer has all the market
information and the buyer has none
 Key is ability of developer to sustain
services promised
Issues in Rights to Water

 Who owns the land under a body of water?

 Who controls use of land under a body of
water?
 Who has the right to use the surface?
 Who has the right to use the water itself?
 Who has the right to use groundwater?
 For answers, see on-line appendix to text
Rights to Oil, Gas, and
Minerals
 Rights carry implied easement for removal
 In some states, mineral rights imply
ownership of the space minerals occupy
 Oil rights have two forms
 Ownership states: Oil is simply another mineral
 Law of capture states: Oil flows, and is not
owned until removed.
 Traditional “rule of capture” (If you could
remove it, it was yours) is being limited due to
extensive secondary recovery methods.
Summing Up
 There is real property and personal
property
 ….and the problem of fixtures
 Real estate is a bundle of rights:
 Exclusive possession
 Enjoyment
 Disposition
 This bundle has many variations
 Estates – freehold or leasehold
 Non-possessory interests – easements,
restrictive covenants, liens
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More Summing Up

 There can be more than one direct

owner
 Tenancy in common, joint tenancy,
tenancy by the entirety
 Condominium, cooperative
 There can be automatic marital co-
ownership
 Community property
 Dower, elective share
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End of Chapter 2