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Real estate principles 11th edition by floyd and allen pdf

14/10/2021 Client: muhammad11 Deadline: 2 Day

Eleventh EDITION

REAL ESTATE PRINCIPLES

CHARLES F. FLOYD and MARCUS T. ALLEN

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This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional advice. If legal advice or other expert assistance is required, the services of a competent professional should be sought.

President: Dr. Andrew Temte Chief Learning Officer: Dr. Tim Smaby Executive Director, Real Estate Education: Melissa Kleeman-Moy Development Editor: Julia Marti

Printed in the United States of America ISBN: 978-1-4754-2173-6 / 1-4754-2173-7 PPN: 1515-0111

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DEDICATION

This book is dedicated to R. W. Barber

a man of the land and

C. O. Floyd a man of business. —Charles F. Floyd

This book is dedicated to Rhonda, Melanie, and Issabella.

—Marcus T. Allen

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c o n t e n t s

p r e fa c e xi i i r e a l e s tat e t o d ay f e at u r e s xvi i

c h a p t e r 1

Why Study Real Estate? xx Chapter Preview 1

The Role of Real Estate Studies in Business Education 2

Personal and Business-Related Real Estate Decisions 2

Organization of This Book 3

Special Characteristics of Real Estate 4

The Economic Importance of Real Estate 9

The Real Estate Industry: Career Opportunities 10

Chapter Review 13

Key Terms 14

p a r t o n e

Real Estate Legal Analysis 15

c h a p t e r 2

Property Rights and Legal Descriptions 16 Chapter Preview 17

Real versus Personal Property 18

Fixtures 18

Mineral and Air Rights 20

Water Rights 20

Estates in Land 23

Concurrent Estates 29

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vi Contents

Condominium Ownership 31

Cooperative Ownership 32

Time-Shares 32

Legal Descriptions 32

Chapter Review 43

Key Terms 45

Study Exercises 46

Further Reading 412

g l o s s a ry 413 a p p e n d i x 431

i n d e x 437 c r e d i t s a n d a c k n o w l e d g m e n t s 447

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xiii

p r e f a c e

Welcome to the eleventh edition of Real Estate Principles! As one of the most popular and well-respected texts in college-level real estate education, this book has served as the framework for a practical and rigorous learning experience for intro- ductory real estate students at schools across the nation since its first edition was published in 1981. This edition continues that tradition by incorporating the latest industry advances and education technologies into a comprehensive, student-friendly presentation of the real estate “body of knowledge.” We are absolutely convinced that students who master the material presented in this text will become better-informed real estate market participants whether their primary real estate interests lie in con- sumption, investment, brokerage, appraisal, law, property and asset management, or any combination of these aspects of real estate.

| pedagogical devices ______________________________________

For students, the book contains the following pedagogical devices designed to enhance their learning experience:

■■ Each chapter begins with a Chapter Preview that clearly sets forth the learning objectives.

■■ The Key Terms discussed in each chapter appear in boldface for emphasis. These terms are succinctly defined in the end-of-book Glossary.

■■ Many tables, figures, and photographs are provided throughout the text to help readers visualize the topics and incorporate them in their knowledge base.

■■ Each chapter ends with a Chapter Review that concisely summarizes the key concepts.

■■ Thought-provoking review exercises are provided at the end of each chapter.

■■ Suggested reading lists for each chapter are included to direct students who wish to learn more about specific concepts to additional sources of information, including books, academic journals, practitioner journals, newspapers, magazines, and internet sites.

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xiv Preface

| instructor support _____________________________________

For instructors, we have developed an extensive collection of support materials that can be easily downloaded (with the proper password) from the publisher’s web- site at www.dearborn.com. The materials include

■■ detailed lecture notes in Microsoft PowerPoint and Microsoft Word format for each chapter (for use with a computer display projector or as transparency slides);

■■ assignment exercises for each chapter (with answers); and

■■ multiple-choice, true-false, and short-answer questions by chapter.

Readers familiar with previous editions of this text will be pleased to find that this edition continues to incorporate many of the special features from previous edi- tions that enhance the students’ learning experiences. Close-Ups, Legal Highlights, People Profiles, and Case Studies are liberally sprinkled throughout the book to dem- onstrate how real estate principles can be observed and applied in the “real world.”

| flexible pathways through the text ______________________

Because real estate is such a dynamic and diverse discipline, we have purpose- fully designed Real Estate Principles in such a way that instructors who wish to approach the material from their own preferred direction can do so with relative ease. Each chapter can be treated as a stand-alone learning module within the real estate body of knowledge. While we recommend presenting the material in the chapter order provided for general business students, an instructor who wishes to focus on finance and investment analysis issues can easily shift Chapters 16 through 20 to the beginning of the semester (after Chapter 1) to allow adequate time for in-depth cov- erage. Or an instructor who wishes to focus on real estate economics might consider following the first chapter with Chapters 11 through 15. We would be pleased to get feedback from instructors describing how they choose to sequence the chapters in their courses.

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Preface xv

| acknowledgments _______________________________________

No project of the magnitude of this book can be accomplished without a spirit of teamwork and mutual respect between all the parties involved. We wish to sincerely thank all of the people who provided comments, suggestions, and other invaluable forms of support in the research, writing, and production process, especially Jeffrey J. Rymaszewski, senior lecturer, University of Wisconsin at Milwaukee, Frank T. Cook, and Ron Williams.

In addition, special thanks are due to the students in our classrooms who served as guinea pigs for the new material.

Finally, we hope that everyone who reads this book will be able to use the lessons contained herein to improve their real estate decision-making skills and, ultimately, to enrich their lives with respect to real estate resources.

Charles F. Floyd, PhD University of Georgia

Marcus T. Allen, PhD Florida Gulf Coast University

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xvii

c h a p t e r 1

Case Study: The Importance of Location Case Study: The Gestation of Park Springs

c h a p t e r 2

Close-Up: Water Wars Legal Highlight: Who Can Use the Shore?

Close-Up: The Empire State Building Legal Highlight: How Did an Acre Get to Be an Acre?

c h a p t e r 3

Close-Up: Meadow Brook Ranch Use Covenants Legal Highlight: Validity of Restrictive Covenants

Legal Highlight: Restrictive Covenant Disputes Legal Highlight: A Cautionary Tale on Mechanics’ Liens

Legal Highlight: Prescriptive Easement Legal Highlight: The Case of the Landlocked Parcel

Close-Up: Use of Conservation Easements Legal Highlight: Adverse Possession

c h a p t e r 4

Legal Highlight: What Constitutes “Public Use”? Legal Highlight: Inverse Condemnation

Close-Up: The Smart Growth Controversy Legal Highlight: The Strange Case of the Incredible Shrinking Building

Legal Highlight: The Case of the Costly Permit Legal Highlight: The Takings Issue

c h a p t e r 5

Close-Up: Sleuthing for Transaction Price Legal Highlight: Title Examination through the Grantor and Grantee Indexes

r e a l e s t a t e t o d a y f e a t u r e s

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xviii Real Estate Today Features

c h a p t e r 6

Legal Highlight: Validity of an Oral Contract Legal Highlight: Necessity to Meet “Concurrent Conditions” by Date of Closing

c h a p t e r 7

Legal Highlight: Landlord’s Liability for Failure to Provide Adequate Maintenance Legal Highlight: Liability of Landlords for Injuries to Guests of Tenants

c h a p t e r 8

Legal Highlight: The Seller’s Agent’s Obligations to the Buyer Legal Highlight: Fair Housing

c h a p t e r 10

Close-Up: Green Acres Shopping Center—A Property Management Success Story

c h a p t e r 11

Close-Up: Civita: An Urban Green Village Close-Up: If You Build It Green, Will They Come? Yes!

Close-Up: Five Historic New Towns: Savannah, Riverside, Radburn, Levittown, and Reston Close-Up: Highlands Falls Country Club

Case Study: Milford Hills Saga

c h a p t e r 12

Close-Up: Atlantic Station: A Successful Brownfields Redevelopment Project Close-Up: The First Suburban Shopping Center: Country Club Plaza

Case Study: Birkdale Village Case Study: The Trump Building: 40 Wall Street Case Study: The Interstate North Industrial Park

Case Study: The Boiler Room Office Building: A Unique Adaptive Use

c h a p t e r 14

Close-Up: The Rise of the “Location-Neutral” Urban Migrant Case Study: A Tale of Two Cities: Flint and West Point

Case Study: Neighborhood Revitalization

c h a p t e r 15

Close-Up: Prequalified vs. Preapproved Case Study: The House That Came Off the Mountain

c h a p t e r 16

Close-Up: What Is Credit Scoring?

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Why Study Real Estate?

1c h a p t e r

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case study The Importance

of Location

case study The Gestation of Park Springs

r e a l e s t a t e t o d a y

c h a p t e r p r e v i e w

Why study real estate? Why is it important? What are the characteristics that make real estate different from other types of assets? Fundamentally, people must have places to live and businesses must have locations for their activities. As a result, real estate is a vital resource that touches the economic lives of all people. A thorough understanding of the complexities of real estate resources and the markets in which they are traded enables us to make informed choices regarding real estate for either personal or business use. The objective of this book is to present the general principles necessary for effective real estate deci- sion making. The text also serves as a starting point for more advanced study of the concepts and issues facing real estate market participants.

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2 R E A L E STAT E P R I N C I P L E S

| the role of real estate studies in business education _____

When you first learned that your college or university offers a real estate prin- ciples course as part of its business school curriculum, you may have thought that the focus of the course would be to prepare for a career as a real estate broker. While real estate brokerage is an excellent career choice for many people, this book does not assume that a career in brokerage is your motivation for studying real estate issues. Instead, we present the principles of real estate from the perspective of the user of real estate resources. These principles provide a foundation for effective real estate decision making, whether you intend to make a career in the real estate industry or simply to become more knowledgeable about your personal real estate transactions.

In most universities and colleges, real estate is regarded as a specialty area under the general umbrella of business studies. As such, a real estate principles course cov- ers issues and topics unique to the real estate discipline that are much too specific for adequate coverage in other areas of academic study. Because of the special- ized knowledge required for effective real estate decision making, real estate issues deserve independent attention in a business school curriculum. The intricacies of real estate resources and markets can baffle the ill-prepared decision maker, but a solid foundation in real estate principles will help you make effective personal and business real estate decisions throughout your life and career. In addition, the topics covered in this text will serve as a springboard for those students who wish to pursue a more detailed study of real estate in subsequent courses.

| personal and business-related real estate decisions ______

A thorough understanding of real estate principles is extremely important for real estate decision making in both personal and business-related venues. As indi- viduals, all of us will probably face the following questions several times over the years:

■■ Should I buy a house or a condo or should I lease an apartment for my personal residence?

■■ In what neighborhood do I want to live?

■■ What type of financing should I use, and how do I arrange it?

■■ Should I use a broker to sell my property or try to sell it myself?

■■ How should I structure the sales contract to get the best deal?

■■ How do I decide which property I should invest in?

The same issues that face us as individuals also apply in the business environ- ment. Consider a company that requires additional office space to expand its opera- tions and compete effectively in its product market. Such a company faces many questions that can be addressed only with the knowledge of real estate principles. The following are examples:

■■ Should the company buy or lease additional space? If the company leases space, how should it structure the details of the lease agreement to best serve its objectives?

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C H A P T E R 1 Why Study Real Estate? 3

■■ If the company decides to buy more real estate, should it build a new property or purchase an existing one?

■■ How should the company finance the purchase or development?

■■ Should the company acquire a larger building than it currently requires and lease the additional spaced to tenants until the company needs it?

■■ Should the company consider relocating the corporate headquarters to a different location, either in its current city or in another city altogether?

Appropriate answers to these and other important questions require familiarity with the overall operation of real estate markets, as well as specific knowledge of legal issues, transaction details, and the financial framework of real estate resources. For this reason, real estate principles are a fundamental component of undergraduate business education, regardless of your chosen field of study.

| organization of this book ________________________________

Our goal is to present some of the basic principles of real estate in such a manner that you will be well prepared to anticipate and evaluate changing market conditions and make real estate decisions that best serve your personal and business objectives. We have divided the topics considered in the text into four categories:

1. Part One, Real Estate Legal Analysis (Chapters 2–7) consid- ers issues related to the legal concept of real estate ownership. We define various ownership interests one can obtain in real estate, deed and legal description methods, and private and public limitations on ownership.

2. Part Two, Real Estate Service Industries (Chapters 8–10) discusses the real estate services industry, including brokerage, property man- agement, and appraisal.

3. Part Three, Real Estate Market Analysis (Chapters 11–15) consid- ers the dynamics of real estate markets as a result of national, regional, and local influences on property values and uses. In addition, we review the classic models of urban growth and discuss various aspects of the land development process. We also examine the residential, commercial, and industrial development process.

4. Part Four, Real Estate Finance and Investment Analysis (Chapters 16–19) examines the financing of real estate investment and owner- ship, and real estate investment analysis.

The remainder of this introductory chapter sets the stage for the topics to be addressed throughout this text by describing the special economic characteristics of real estate, the economic importance of real estate, and various career opportunities in the real estate industry.

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4 R E A L E STAT E P R I N C I P L E S

| special characteristics of real estate ___________________

What is real estate? Simply defined, real estate is land and things attached to it such as buildings and other improvements to the land. Real property consists of the legal interests associated with ownership of the physical real estate. In practice, how- ever, the two terms are often used synonymously. All other movable property such as automobiles, furniture, boats, and clothing is known as personal property. As an economic resource, real estate has some distinct characteristics that distinguish it from other types of resources. These characteristics are

■■ fixed location;

■■ uniqueness;

■■ interdependence of land uses;

■■ long life;

■■ long-term commitments;

■■ large transactions; and

■■ long gestation period.

Fixed Location

The characteristic of real estate that distinguishes it from all other types of eco- nomic resources is its fixed location. If there is an oversupply of wheat in Kansas, or of automobiles in Michigan, they can be moved to areas of relative scarcity. This is not true of real estate resources. If there is an oversupply of condominiums in Miami, office space in Manhattan, or shopping centers in Minneapolis, they cannot be trans- ported to other communities where the demand is stronger. A tract of land, of course, cannot be moved a few feet up the street to help meet demand for space at that site. Thus, the success of real estate acquisition, development, and investment decisions is directly affected by the forces of supply and demand in a local area.

Uniqueness

Because real estate is fixed in location, every parcel is unique or, to use a fancy term, heterogeneous. Even subdivision lots located side by side are not perfect sub- stitutes for each other because of differences in such factors as topography, tree cover, and view. These factors often create large differences in property values. For example, lots fronting on a lake will probably sell for much more than lots just across the street; lots with a spectacular mountain view may sell for many times more than nearby ones without the view.

Interdependence of Land Uses

Real estate’s fixed location leads to another economic characteristic: interde- pendence of land uses. The use of real property depends greatly on the provision of

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C H A P T E R 1 Why Study Real Estate? 5

public services, the uses made of nearby land, and the general economic vitality of the neighborhood and community.

It is extremely difficult to use land to its full economic potential, particularly in an urban setting, unless adequate public services are provided and neighboring land is used in complementary ways. Even agricultural lands need to be served by roads, and such basic utilities as electricity and telephone service are necessary for prac- tical homestead use. As we move to denser residential development, public water and sewerage systems are essential as are such governmental services as education, police and fire protection, and various social services. Land must be converted to public use for parks, schools, and other governmental services, particularly trans- portation facilities. If adequate governmental services and public land uses are not available, it will be difficult or even impossible to develop land for residential, com- mercial, or industrial use.

The use of land is also affected greatly by nearby land use. If a large tract of vacant land is located near areas of expanding residential and commercial develop- ment, this location should increase both the land’s potential use and its value in the marketplace. Conversely, the value of land may be affected adversely by its proxim- ity to “undesirable” uses. It would probably be difficult, for example, to develop a single-family housing development next to a chemical plant or slaughterhouse. Such uses, however, particularly if served by transportation facilities and other public ser- vices, may make nearby land valuable for industrial purposes.

The economic vitality of a neighborhood, community, or region greatly affects the demand for real property and its value. If the economy of the area is expanding,

r e a l e s t a t e t o d a y

c a s e s t u d y

The Importance of Location

How important is location to the value of real estate? Very important in the case of a 77-square-foot “studio apart- ment” in the exclusive Knights-

bridge neighborhood of London. The former storage closet, originally conceived as a maid’s room, is only slightly larger than a prison cell, but is priced at $335,000, or about $4,500 per square foot. Moreover, the room has no electricity or heat, which would cost an additional $59,000 to make it habitable. Rather pricey, but the tiny apartment is

located in one of the wealthiest neighborhoods in the world and is within walking distance to exclu- sive stores such as Harrod’s and the city’s iconic Hyde Park.

Almost unbelievably, other ultra high-end Lon- don properties have been selling for even higher prices, sometimes as much as $6,000 per square foot. By comparison, the closet-sized apartment is a bargain. The old real estate axiom that the three most important factors in real estate are location, location, and location certainly applies in this case.

00RePrinciples_BOOK.indb 5 11/25/2014 8:03:24 AM

6 R E A L E STAT E P R I N C I P L E S

the population also will increase, bringing about a corresponding increase in the demand for residential, commercial, and industrial land. Conversely, if the economy of the area is in temporary or long-term decline, the demand for real estate and real estate value also will tend to decline.

It is the interdependence of land uses that leads to the existence of both private and public land-use controls, topics we will study in Chapters 3 and 4. The use of land affects the owners of other land more than the use of almost any other type of private property and may create costs to the public at large. For example, the fill- ing of floodplain lands (the low-lying land near streams) to make them suitable for high-density residential use may cause other owners of land on the floodplain to be affected adversely in periods of heavy rainfall. If other landowners also fill in their portion of the floodplain, a flood hazard may be created that will require large public expenditures to alleviate.

Long Life

Although its ability to generate income may change over time, land is virtu- ally indestructible. Additionally, real estate improvements—that is, buildings on the land—generally have very long lives. For example, a family would expect a new home to last as long as they wanted to live there and beyond, and many houses last for a century or more when maintained properly. Apartment houses, shopping cen- ters, and other types of income-producing property also have very long lives.

Long-Term Commitments

The long lives of real estate improvements mean that investment decisions are, by their very nature, long-term commitments. Although the immediate prospects for the production of income are very important in real estate investment analysis, the factors that influence income generation over the long term are equally critical. For example, the proximity of a hotel to a heavily traveled highway is a predominant fac- tor in the financial success of the hotel. If the hotel is built in a location that soon will be bypassed by a new freeway, it probably will not be a successful investment during much of its life. Conversely, shopping centers are often built somewhat ahead of the market to gain advantageous location in advance of expected population growth.

The characteristics of long life and long-term commitments force the real estate investor and developer to establish realistic, long-term outlooks if they want to make successful investment decisions. The real estate investor who merely assumes that favorable economic trends will continue will probably be unsuccessful. For exam- ple, most of the problems that arose during the recent decline in real estate prices occurred because investors and financial institutions regarded the future with unbri- dled optimism. Investors should analyze carefully the factors that have caused eco- nomic trends to be favorable in the past and try to ascertain what will happen to these factors for some years into the future.

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C H A P T E R 1 Why Study Real Estate? 7

Large Transactions

Another important economic characteristic is the relatively large size of real estate transactions. Because they involve large expenditures, real estate transactions are not entered into either lightly or frequently. A home is by far the average family’s largest single purchase. Investment in income-producing real estate requires even larger outlays.

The large size of real estate transactions means that buyers usually have to rely at least partially on some type of outside financing. This economic characteristic has led to the rise of the real estate finance industry. Both buyers and sellers generally need assistance to analyze the marketplace, evaluate long-term investment decisions, arrange financing and, in general, deal with the complexities of these transactions.

Long Gestation Period

A final economic characteristic of real estate is the long gestation period of real estate development projects. The time between the conception of a development project and its actual completion and subsequent entry into the available supply may be several years. Suppose a group of investors decides to develop an apartment com- plex. To complete this project, they first must acquire the land, then have engineer- ing and architectural plans drawn for the site and buildings, secure zoning and other regulatory approvals, arrange financing, and construct the improvements.

Long delays may occur at any of these steps. For example, it may be difficult to secure approval from the zoning board, or it may be necessary to wait several months for the completion of a new sewer line, or bad weather may delay construction.

The long gestation period makes the supply of real estate slow to respond to increases or decreases in demand. Because the supply cannot be increased quickly, increases in demand often result in rapid upward price movements unless an excess supply exists. Conversely, demand may decline during a project’s gestation period, making it less valuable upon completion than originally anticipated. This is yet another reason the real estate developer must analyze factors affecting future demand and supply. There may be a strong market for, say, office space in a certain area at present. This does not necessarily mean that the strong demand will continue. Many investors have discovered, to their immense sorrow, that by the time the project was completed, demand for the products had declined. Or they may not have fully considered the impact of other projects that were being built at the same time. Suc- cessful real estate investment requires a thorough, long-term economic perspective.

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8 R E A L E STAT E P R I N C I P L E S

r e a l e s t a t e t o d a y

c a s e s t u d y

The Gestation of Park Springs

The development history of the Park Springs continuing care retirement community provides an excellent example of the long gestation period for real estate

development: 10 years from conception to generat- ing income.

In 1994, developers Andy and Kevin Isakson bought a 110-acre former private airport site that straddled two county lines in suburban Atlanta in order to obtain the two acres needed to complete the assemblage for a Super Target shopping center site. They then sold part of the remainder for a parking lot for the 1996 Atlanta Olympics but were left with 54 acres that had limited access and no utilities. In order to make the tract suitable for development they worked with the two counties involved and the state department of transportation to relocate an adjoining road to make the site more accessible. This also meant that the site would be surrounded on three sides by 3,500-acre Stone Mountain State Park. In order to gain utilities they had obtain water from one county and sewerage from the other. Finally, after four years of effort the site was ready for development. Now came the need to obtain zoning.

The plan was for a mixed-use development including apartments and retail space. This pro- posal was met with considerable community oppo- sition based on a fear of an influx of school children and an increase of traffic in the already congested area. Thus, the initial zoning proposal failed. Then one of the community leaders suggested an age- restricted senior retirement community. This was attractive to the community because there wouldn’t be additional local school children and the retired

residents would generate little traffic, particularly at busy hours. The developers responded with a proposal that included 398 residences restricted to persons 65 years of age and older. This proposal gained overwhelming community support and was approved after two more years of effort. This brings us to the year 2000, six years after purchase, with nothing but expense and no income from the property.

The developers saw the potential for success for a continuing care retirement community, one where seniors could purchase the right to occupy an independent living residence with the option of moving to assisted living or skilled care nursing facilities on the same site as their health needs changed. They offered a variety of units, ranging from an 800-square-foot one-bedroom apartment for $135,000 to a 2,400-square-foot detached two- to three-bedroom home for $600,000. For this entry fee the purchaser obtained the right to occupy the unit for his or her lifetime and the use of the development’s facilities, including a fitness center, library, woodworking shop, pottery shop, and three restaurants. A monthly fee covered all utilities, biweekly cleaning, all maintenance, and taxes. At owners’ death, 90% of the entry fee would be refunded to their estate.

The concept met with great market accep- tance, and finally in 2004, 10 years after the property was purchased, the first units were sold and the project began generating a cash flow—not yet a profit, but at least a cash flow. By 2007, all but 16 of the units had been sold, and entry fees had risen by 45%, generating a healthy profit for the developers upon resale of these units. Even

(continued)

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C H A P T E R 1 Why Study Real Estate? 9

| the economic importance of real estate ___________________

Real estate is a vital component of the national economy and constitutes a large portion of national wealth. As of the first quarter of 2014, land and structures com- prise about 21% of the total assets of households and about 33% of the total assets of businesses in the United States (the remainder consists of equipment and inven- tories). Real estate accounts for about 5% of the nation’s gross domestic product and about 36% of gross private domestic investment. In addition to tangible assets, individuals and businesses frequently borrow against real estate assets, which creates financial assets in the form of mortgages and mortgage-backed securities. In early 2014, the total outstanding mortgage debt in the United States was more than $13.3 trillion.

The economy of the United States is especially sensitive to changes in owner- occu pied residential real estate (housing) values. The most recent example was the overall negative economic impact the decrease in housing values in the 2000s had on the economy of the United States as well as impacts throughout the world. The shocking declines in overvalued housing stemmed from aggressive investment in mortgage-backed securities, which led to relaxed loan qualification standards and a variety of alternative mortgage loan products. These relaxed standards and so-called subprime loans enabled many people to obtain loans for which they would not have otherwise qualified. In some cases, borrowers did not have to provide any proof of their income or other assets (so-called liar loans). Some loan products allowed

r e a l e s t a t e t o d a y

c a s e s t u d y

The Gestation of Park Springs

so, the development didn’t begin to really show an overall profit until 2009. Park Springs has been a resounding success, but only with developers who were able to surmount the many obstacles inherent in the site and absorb the large development costs during the more than 10-year gestation period.

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10 R E A L E STAT E P R I N C I P L E S

borrowers to pay only the interest due on the loan (instead of interest and princi- pal amortization, as in traditional loans) for the first few years of the loan. Some loans had reduced initial interest rates (so-called teaser rates) that lowered the initial monthly payments but required higher interest rates (and higher payments) after the first few years. Some loans allowed borrowers to borrow more than the value of the house being pledged as collateral for the loans.

Easy access to mortgages increased demand for housing and resulted in rapidly increasing housing values. According to the S&P/Case-Shiller Home Price Index, housing values increased by more than 47% between 2000 and 2006. By mid-2006, however, many subprime borrowers realized they could not afford their loan pay- ments (especially those with required interest rate adjustments), and the number of delinquent subprime loans started to rise dramatically. By the first quarter of 2007, more than 17% of subprime loans were delinquent, and foreclosures were rapidly increasing. Investor demand for mortgage-backed securities that relied on payments from subprime borrowers for their cash flows dried up very quickly. Lenders quickly instituted more prudent borrower qualification standards and returned to more tradi- tional types of mortgages.

With less mortgage capital available, the demand for housing quickly began to erode. Nationally, home values fell by 32% between mid-2006 and the end of 2009. Some areas experienced even more dramatic declines over this time period: Las Vegas, 55%; Phoenix, 51%; and Miami, 47%. Likewise, the value of mortgage- backed securities plummeted, severely affecting many major financial concerns that held these securities as investment assets. The general economic decline that fol- lowed has proven to be the worst economic crisis since the Great Depression of the 1930s. As of late 2014, housing prices in many markets around the nation are recov- ering but have still not reached the record highs of the mid-2000s.

| the real estate industry: career opportunities ___________

The real estate industry is diverse, offering many career opportunities. To some students a career in real estate means selling homes, and, indeed, this is a significant part of the real estate brokerage industry. But many other fascinating careers in real estate exist, and one of the purposes of this book is to introduce these career oppor- tunities, as well as to provide the basic knowledge needed to become a part of the real estate industry.

Real Estate Brokerage

In 2014, the largest real estate brokerage trade association, the National Associa- tion of REALTORS®, had over 1 million members, including brokers, salespersons, and other real estate professionals. The compensation earned by participants in the brokerage industry fluctuates with the ups and downs of the real estate market, but the U.S. Bureau of Labor Statistics estimated that in 2012 real estate brokers earned an annual average of $82,380, and salespersons $53,200.

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C H A P T E R 1 Why Study Real Estate? 11

Five principal classifications of real estate exist in the private marketplace: owner-occupied residential, renter-occupied residential, commercial, industrial, and farm and other open land. Because it is difficult to be an expert in all aspects of the real estate market, most brokers specialize in certain types of property. The extent of specialization depends on a number of factors, particularly the size of the local market. The real estate broker in a small city may deal in several or all types of prop- erties. In larger cities, brokers may sell one type of real estate or properties located in only one part of a city. Quite commonly, some brokers and salespersons sell only owner-occupied houses, while others deal only in the sale or leasing of income- producing properties.

Property Management

Many people who invest in income-producing real estate, such as apartments and shopping centers, have neither the inclination nor the expertise to personally handle the properties’ day-to-day operating activities, such as leasing, rent collection, build- ing repairs, and building services. These tasks—and, indeed, the general objective of maximizing the value of a property—are delegated to the property manager. Some brokerage firms manage real estate as a supplementary activity, while many larger firms have a separate property management department. Still other property man- agers may be hired directly by the firm that owns the properties. If the property manager does a good job, this function can add considerable value to a property. It can also earn a good income for the property manager. The average annual wage for property managers in 2009 was $52,610.

Real Estate Finance

Several characteristics of real property, principally the long-term nature of real estate investment and the consequent need for large amounts of money over a long period of time, make mortgage credit both necessary for most purchasers and attrac- tive to many lenders. In turn, this has given rise to the real estate finance industry.

Real estate loans are made by many types of institutions and even by individu- als, and major employment opportunities are found in savings associations, savings banks, commercial banks, mortgage banking firms, and life insurance companies. Savings associations and savings banks specialize in residential loans and do most of their lending locally. Commercial banks also lend money on real estate, particularly for relatively short-term construction loans, and they also purchase many mortgages for mortgage bankers.

The mortgage banking and mortgage brokerage industries also play large roles in the financing of real estate. Mortgage bankers do not collect deposits from savers and have only a small amount of their own capital to lend. After originating loans to borrowers, mortgage bankers sell the loans in the secondary mortgage market, but they often continue to service (collect payments, mail late notices, etc.) the loans for a fee. Mortgage brokers do not originate loans with their own funds but instead bring lenders and borrowers together in exchange for one-time fees. Both mortgage

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12 R E A L E STAT E P R I N C I P L E S

bankers and brokers are essential parts of the financial mechanism that makes debt capital available to real estate owners.

Appraisal

Estimates of value are needed in almost every aspect of real estate and develop- ment. Sellers need to know what their potential purchases are worth in comparison with other properties in the market. Mortgage lenders need estimates of value, an appraisal, before they make lending decisions. Appraisals also are essential for tax assessors, insurance adjusters, and right-of-way agents. Accordingly, some apprais- ers are employed by financial institutions, other private firms, and government orga- nizations, while many others work as independent fee appraisers—that is, they offer their services to the public for a fee. The average annual wage of appraisers was $57,040 in 2012.

Consulting

Closely related to real estate appraisal is real estate consulting. The real estate appraiser makes estimates of value, while the real estate consultant advises indi- viduals and firms regarding their real estate investments. Though the two specialties require similar kinds of knowledge, the consultant must have even more extensive knowledge than the appraiser of all phases of real estate, tax laws, and other aspects of investment.

Development and Construction

Real estate development certainly is one of the most fascinating aspects of real estate and one that offers greater potential return—and greater potential risk—than perhaps any other field within the industry. Real estate development involves the acquisition and subdivision of land, designing and planning the project, and the construction of improvements, such as roads, utilities, and buildings ranging from single-family homes to multi-million-dollar office building and shopping centers. Development is often described as the process of creating value by improving real estate for more productive use.

Corporate Asset Management

Although real estate makes up a large portion of corporate assets, most cor- porations have not placed adequate emphasis on managing these assets efficiently. Increasingly, however, firms are establishing corporate real estate departments, and this has led to many new opportunities in the real estate field. As might be expected, utilities and other firms with very large percentages of their assets in real estate have been leaders in the field, and other companies as well are realizing that efficient man- agement of their real estate can add significantly to corporate profits.

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C H A P T E R 1 Why Study Real Estate? 13

Legal Experts

The legal complexity of real estate transactions and development projects often requires the expertise of attorneys and other legal professionals. Many attorneys spe- cialize in real estate law and provide important services for real estate market par- ticipants such as title examination, contract drafting, and litigation. These attorneys often hire paralegals to assist them.

Land Planners

Land-use planning has grown in importance with the increase in both urbaniza- tion and concern for the environment. Planners are employed by local government planning agencies, regional planning districts, and state development offices.

| chapter review __________________________________________

■■ The five broad categories that comprise the real estate “body of knowl- edge” considered in this text include real estate market analysis, the legal framework of real estate, real estate services, the real estate transaction process, and investment analysis.

■■ Simply defined, real estate is land and things attached to it.

■■ The special economic characteristics of real estate are (1) fixed location, (2) uniqueness, (3) interdependence of land uses, (4) long life, (5) long- term commitments, (6) large transactions, and (7) long gestation period.

■■ The characteristic of real estate that distinguishes it from all other types of economic resources is its fixed location. Fixity of location means that every parcel of real estate is unique, and this factor can create large differ- ence in property values.

■■ Land is indestructible, and real estate improvements generally have long lives. Thus, investment decisions are by their very nature long-term decisions.

■■ Because real estate purchases involve large expenditures committed for long periods of time, outside financing is essential for most transactions.

■■ The use of land depends greatly on (1) the provision of public services, (2) nearby land uses, and (3) the general economic vitality of the neighbor- hood and community.

■■ The gestation period for real estate improvements—that is, the time between conception of a real estate project and its actual completion and subsequent entry into the available supply—may be several years. This long gestation period makes the supply of real estate slow to respond to increases in demand.

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14 R E A L E STAT E P R I N C I P L E S

p a r t o n e

■■ Five principal classifications of real estate exist in the private marketplace: (1) owner-occupied residential, (2) renter-occupied residential, (3) com- mercial, (4) industrial, and (5) farm and other open land.

■■ The general objective of the real estate property manager is to maximize the income flowing to the owners from income-producing property.

■■ Mortgage loans now total about $14.1 trillion and have led to the devel- opment of a major sector of the real estate and finance industries. Major employment opportunities related to real estate are found in savings banks, commercial banks, mortgage banking and mortgage brokerage firms, and life insurance companies.

■■ Real estate appraisers estimate the value of real property. Their services are used by buyers and sellers, financial institutions, tax assessors, and many others.

■■ Real estate counselors advise individuals and firms about their real estate investments. They must have extensive knowledge of all aspects of real estate, tax law, and investment.

■■ Real estate development offers greater potential return and greater poten- tial risk than perhaps any other field within the real estate industry.

■■ Land-use planners are engaged in physical design, economic and invest- ment aspects of development, and land-use policies and regulations.

■■ Many real estate specialists are employed at various levels of government in property acquisition, tax administration, land-use planning, and other operations of government.

| key terms _______________________________________________

appraisal

gestation period

personal property

real estate

real property

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p a r t o n e

Real Estate Legal Analysis

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2c h a p t e r Property Rights and Legal

Descriptions

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c h a p t e r p r e v i e w

Perhaps you own or lease some real estate. What exactly are the rights that come with owning or leasing this property? These can be difficult questions because real property rights associated with real estate can be quite complex. Real property rights can be divided in many ways. For example, one party may own the right to use the surface of the land, another may own the right to sub- surface minerals, gas, or oil, and yet another party may own the right to use the water that flows across or under the land. Or two or more owners may jointly own unique and specific rights to the same parcel of real estate. This chapter examines these and other property rights issues that every market participant should understand to ensure effective real estate decisions.

After reading this chapter, you should be familiar with how property rights are divided among various claimholders. The objectives of this chapter are to

■■ define the concepts of real property and personal property;

■■ demonstrate how property rights are physically divided;

■■ consider how property rights are bundled into “estates in land”;

■■ describe how properties can be jointly owned by two or more owners; and

■■ examine the three methods for legally and uniquely identifying individ- ual parcels of real estate.

close-up Water Wars

close-up The Empire State

Building

legal highlight How Did an Acre

Get to Be an Acre?

r e a l e s t a t e t o d a y

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18 PA RT O N E Real Estate Legal Analysis

| real versus personal property ___________________________

In the previous chapter, we defined real estate as land and things attached to the land. Another important term real estate market participants need to understand is property. Although the term property can be used in several ways, we gener- ally think of property as any objects that can be owned or possessed—real estate, vehicles, books, clothing, furniture, stocks, or bonds, for example. Legally, the con- cept of property can be divided into two broad classes: real property and personal property. Real property consists of legal interests in land and things attached to the land. Personal property includes legal interests in all other types of property. Stated more simply, real property refers to rights to real estate—land and things attached to that land—while personal property refers to rights to movable property such as automobiles, furniture, clothing, and business equipment. Personal property is also called chattel.

Generally speaking, the requirements to transfer real property from one owner to another are much more complex than are those for personal property. To buy a book at a store, for example, the purchaser simply tenders the funds and receives the book and perhaps (but not always) a written receipt or “bill of sale.” But when real property is transferred, a written document must be prepared with language that uniquely identifies the property being transferred, the specific rights and interests being transferred, the parties to the transfer, and any other important details involved in the transfer. There are a few exceptions to the rule requiring a written document as evidence of real property transfers (such as a lease for less than one year in some states), but it is always a good idea to specify the details of transactions involving real property in written form to prevent misunderstandings and disputes even if such a document is not absolutely required.

When ownership rights to real property (often called title) are transferred, the document normally used to convey the rights from one party to another is called a deed. When a tenant acquires property rights to leased property, the document used to convey the rights from the property owner to the tenant is called a lease. Leases convey the rights of use and possession of real property under the agreed-on terms, but leases do not transfer ownership rights to the property. Both deeds and leases are considered in detail later in this book.

| fixtures _________________________________________________

Whether a particular item of property is considered real or personal property cannot always be readily determined. For example, a central air-conditioning unit clearly is movable personal property at the time it is purchased. However, when it becomes attached to land as part of a building, it is treated as part of the real estate and considered real property. Personal property that becomes part of the real property when it is attached to the land or a building is termed a fixture.

For example, the antique chandelier you inherited from Aunt Matilda and hung in your dining room is a fixture and part of your house. Unless it is specifically excluded when the house is sold, the new buyer becomes the proud owner of the

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C H A P T E R 2 Property Rights and Legal Descriptions 19

chandelier along with the rest of the real estate. Other items generally considered fixtures include landscaping, automatic garage door openers, water heating or filter- ing systems, window treatments (such as blinds and drapes), and appliances installed in the house (such as built-in dishwashers and central air conditioners). It is impor- tant to remember that if you are selling a home and want to retain ownership of Aunt Matilda’s chandelier or your prized rose bushes, you must specifically exclude them from the transaction. Likewise, if you are purchasing a property, you should be careful to specify what items are to be included when negotiating the terms of the transaction.

Tests for Fixture Status

Whether an item of personal property has become a fixture can be critically important in determining (l) the value of real property, (2) whether a real estate transaction includes the item, (3) whether the item is part of the security given to the mortgagee (lender), and (4) whether the item remains with the landlord or can be removed by the tenant when the lease terminates. These issues are often resolved by through litigation when there are disputes over the status of the item in question.

Intent of the Parties

The most crucial test used to determine whether something is a fixture or per- sonal property is the test of intent of the parties. The best way to indicate intent, of course, is by a written agreement that states clearly which items are to be con- sidered part of the real estate and which are to be considered personal property. For instance, a sales contract for a house might specify that the range and refrigerator may be removed by the seller. Or a lease agreement for a factory or warehouse build- ing might state that the tenant may attach trade fixtures (personal property used in a trade or business) such as machinery, office equipment, and office cubicles to the building without losing the right to remove these items at the termination of the lease. (Notice that trade fixtures are, by definition, personal property, not real prop- erty.) As long as the intent of the parties is made clear, there should be no confusion about whether the item in question is considered a fixture or personal property.

Other Tests of Fixture Status

Unfortunately, the intent of the parties often is unclear, so other tests of fixture status are applied by courts in the event of disputes. If an item of personal property becomes attached to the real estate, it usually is considered a fixture, and the damage caused to the land or building by the item’s removal is a crucial element in the test of attachment. For example, while a portable window air conditioner would likely be considered personal property, a central air-conditioning system would be consid- ered a fixture because the building would be damaged if the system was removed. Another method for determining whether an item is a fixture is the test of adapt- ability. Under this test, items that have been specifically adapted to the real estate are

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20 PA RT O N E Real Estate Legal Analysis

generally considered fixtures. The issue considered in this test is whether removal of the item would substantially alter the usefulness of the remaining real estate. For example, kitchen cabinets and a built-in entertainment center would probably be considered fixtures, while free-standing, noncustom cabinets would be classified as personal property.

Because these last two tests for fixtures do not necessarily provide clear-cut distinctions between real and personal property, the parties involved always should indicate their clear intent by a written agreement. This, of course, helps avoid dis- putes in all business matters.

| mineral and air rights ___________________________________

Real property rights are not limited to the surface of the earth; they also include the space above the earth’s surface (air rights) and minerals or other useful materials that exist below the surface (collectively called mineral rights). Historically, a land- owner’s real property interests have been conceptualized as pie-shaped, beginning at the earth’s center and extending through the surface indefinitely into outer space. In modern thought, the property rights associated with the surface of the land, miner- als, or other useful material that may exist under the surface of the land and airspace above the land are often separated among several different owners. Similarly, the rights to water that may flow over the land or be adjacent to the land are sometimes owned separately from the land itself.

Ownership of airspace is limited to a reasonable distance above the earth’s sur- face. Obviously, an airplane flying over a property at an altitude of several thousand feet rarely interferes with the owner’s use or enjoyment of the land. But when aircraft fly so low that a reasonable use of the land is prevented (for example, near a length- ened airport runway), the owner of the land may be entitled to compensation on the basis that the plane is interfering with the owner’s property rights.

Mineral rights and air rights may be owned by someone other than the owner of the surface of the land. It is common, for example, for a surface owner to sell to a third party the rights to any oil, gas, coal, and other materials that may be located below the surface. The air rights, likewise, may be transferred to persons other than the owner of the surface. For example, office buildings and parking decks have been constructed over the tracks of railroads, with the owner of the building owning only the air rights.

| water rights ____________________________________________

Water rights—who has the right to withdraw water from the land—is a question of considerable importance, particularly in the more arid western states, and increas- ingly in the eastern states. These rights vary from state to state and depend primarily on what type of water the land touches.

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C H A P T E R 2 Property Rights and Legal Descriptions 21

Rights Relating to Navigable Bodies of Water

The owner whose land joins a navigable body of water, such as an ocean, a sea, or certain rivers, generally owns the land to the high-water mark (the government usually owns the land underneath the water). The owners of such adjoining lands are

r e a l e s t a t e t o d a y

c l o s e - u p

Water Wars

Water scarcity has always been an issue for much of the West, but in recent years, several issues, particularly urban population growth, have also brought it to the fore in the

eastern United States. One example is the long- running legal dispute between the state of Georgia and its southern neighbors, Alabama and Florida, over the allocation of water from Lake Lanier on the Chattahoochee River.

When the dam was completed in 1957, its purpose was to generate electric power and to provide for potential future water needs of the City of Atlanta. Since that time, however, the population of the Atlanta region has grown from about 1 mil- lion to almost 6 million with the resultant increase in the need for water consumption. The increased withdrawal of the lake’s water for Atlanta has left less for the states downstream. When the Corps of Engineers made the decision in 1989 to stop generating power and use that water to serve the needs of the Atlanta region, Alabama and Florida sued in federal court to stop the increased flow to Atlanta. They contended that if adequate water flow in the river was not maintained, both the envi- ronment and their economies would be severely harmed.

Despite decades of legal wrangling and negotiations, the issue still has not been resolved.

However, there is a growing realization that the current prolific water usage is not sustainable if the Atlanta region continues its growth and that increased conservation is essential.

In the West, drought conditions in the Colo- rado River basin, which supplies water to 25 mil- lion people and 1 million acres of farmland, has reached crisis proportions. Not only is the water supply for rapidly expanding Las Vegas threat- ened, agricultural needs in the Lower Colorado basin are in danger.

When Lake Mead was filled following the completion of the massive Hoover Dam in the 1930s, its water level stood at 1,200 feet. By 2014 it had dropped to 1,075 feet and the allocation for agricultural use in Arizona had to be reduced. It was feared that the water level would fall below the intakes for the Las Vegas water supply, and the city was rushing the completion of an $85 million tun- nel to draw water from the bottom of the lake. Las Vegas was also attempting to reduce water usage, but the increasing population created an even greater need. Of course, the city still was supply- ing water to 60 golf courses and landscaping used 70% of the total water usage.

These examples clearly illustrate that the availability of water, which in the past has been taken for granted in much of the country, will be of increasing importance to regional economic devel- opment in the future.

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22 PA RT O N E Real Estate Legal Analysis

called littoral proprietors. Disputes regarding the use of water from these waterways seldom occur because there usually is sufficient water to be shared. The principal issue involving navigable waters has been pollution. Laws exist at both the federal and state levels to hold polluters of such waters responsible for their actions.

Rights to Nonnavigable Bodies of Water

The rights of a landowner to use water from a nonnavigable lake or stream that flows across the land are more complex. If an upstream owner uses too much water, for example, there may be too little water left for landowners downstream to use as they wish. How should the water be allocated among the competing owners? The laws that answer this question have developed in a way that reflects the abundance or scarcity of water within the geographic area. The two dominant doctrines with regard to an owner’s rights to nonnavigable bodies of water are the riparian rights doc- trine and the prior appropriation doctrine. The dominant doctrine in the eastern United States is the riparian rights doctrine. Under this doctrine, all owners whose land underlies or borders the water have equal rights to the water. This concept allows all riparian landowners to use all the water desired as long as the use does not deprive other landowners who are also entitled to some of the water.

r e a l e s t a t e t o d a y

l e g a l h i g h l i g h t

Who Can Use the Shore?

Littoral rights affect the use of water, but they also relate to the use of land. For example, does a landowner’s right to control his land extend to the waterline of an

adjoining lake, or does the public have the right to walk along the shoreline?

This was the issue involved in a dispute between across-the-street neighbors on Lake Huron in Michigan. Richard and Kathleen Goeckel own property on the lake. Joan Glass owned the house across the street and had a fifteen-foot ease- ment on the Goeckel property that allowed her to go to the beach. The Goeckels objected to her use of the trail and walking the shoreline in front of their home. Glass’s right to use the trail on the easement

was easily established, but the issue of whether the public has a right to walk the shoreline went all the way to the Michigan Supreme Court. The appeals court had ruled that citizens have the right to walk along the beach as long as they remain in the water. Property owners, the court said, have exclusive right down to where dry land begins and may bar access to the beach.

The Michigan Supreme Court disagreed, ruling that although landowners may own to the water’s edge, under the public trust doctrine inherent in the common law, the public has a right to walk along the shore to the ordinary high water mark. Joan Glass can continue her strolls along the shore. [Glass v. Goeckel, 703 NW2d 1 (2005)]

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C H A P T E R 2 Property Rights and Legal Descriptions 23

In contrast, many states west of the Mississippi are extremely arid and, conse- quently, have rejected the riparian rights doctrine and adopted the prior appropriation doctrine. Under this concept, the first person to use a body of water for some ben- eficial economic purpose has a right to use all the water desired, even if landowners who later find a use for the water may be precluded from using it. This “first-come, first-served” concept is based on the premise that there is an insufficient supply of water to satisfy everyone’s desires; therefore, the first landowner(s) using the water for some worthwhile purpose should be allowed to use all of the water. Prior appro- priation states usually establish a permit system whereby a governing authority can control the water’s use.

Underground Water

There are two types of underground water. Water that flows in a defined channel is called an underground or subterranean stream, while water in pockets not clearly located is known as percolating water. Issues involving underground streams gener- ally are resolved by applying the same principles that would be used if the body of water existed on the earth’s surface. In the case of percolating waters, states gener- ally apply a reasonable use test: A landowner may use the water beneath the land for industrial, agricultural, or other purposes necessary to the beneficial use of the land. However, if withdrawing the water depletes the underground water supply of adjoin- ing landowners, the courts may restrict such action.

| estates in land ________________________________________

Collections or bundles of ownership interests in real property often are described as estates in land. These are divided into two basic types: freehold estates, or ownership, and leasehold estates, or the right to use and possess (but not own) property owned by someone else. Owners normally purchase a freehold estate; renters have a leasehold estate. Figure 2.1 summarizes the different types of estates. When discussing estates in land, the terms grantor, grantee, lessor, and lessee often are used. The grantor is the party who transfers (by sale or gift) a real property interest; the grantee is the party who receives the interest. In the case of leasehold estates, the landlord is known as the lessor, and the tenant is known as the lessee.

Freehold Estates

Freehold estates are separated into present interests and future interests. Pres- ently possessed interests are classified as fee simple absolute estates, qualified fee estates, or life estates. Future interests that accompany qualified fee estates and life estates include reversion and remainder interests. We discuss each of these owner- ship interests in the following.

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24 PA RT O N E Real Estate Legal Analysis

Fee Simple Absolute Estates The fee simple absolute estate is the fullest and most complete set of ownership

rights one can possess in real property. Also known as a fee estate or a fee simple estate, this estate is the one most commonly associated with “owning real estate” and is the type of estate acquired in a typical transaction.

The property owner receiving a fee simple absolute title has an unlimited right to transfer the property to another during his or her lifetime or at death. Legally stated, the fee simple absolute estate is alienable, devisable, and descend- ible. Alienable means the owner can transfer any interest in the property while living. Devisable means interests can be transferred by a will on the death of the owner.

f i g u r e 2.1 Types of Estates in Land

Estates in Land

Freehold Estates Leasehold Estates

Future Interests Present Interests

Tenancy for a stated period Tenancy from period to period Tenancy at will Tenancy at sufferance

Reversion Remainder (vested and contingent)

Noninheritable Estate Life estate

Inheritable Estates Fee simple absolute estate Qualified fee

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C H A P T E R 2 Property Rights and Legal Descriptions 25

Descendible means the interest passes to the owner’s legal heirs if he or she dies without a valid will.

In addition to the ability to transfer a fee simple absolute estate without restric- tion, the owner has the right of unlimited use and even abuse of the land, constrained only by liens and other encumbrances, public land-use controls, and restrictive cov- enants. These restrictions are discussed in Chapters 3 and 4.

Qualified Fee Estates In a qualified fee estate, the owner’s rights can be “defeased” or lost in the

future should a stated event or condition come to pass. For example, the University of Georgia holds a qualified estate in a historic rock house located on the campus in the midst of its modern buildings. Many years ago, the Lumpkin family donated a large tract of land to the university with the qualification in the deed that the family house had to be “forever maintained.” If the university were to destroy the building or let it fall to ruin, a large portion of the campus, both land and buildings added to the land by the university, would revert to the donor’s heirs.

Qualified fee estates are present interests in real property, but each qualified fee estate must also be accompanied by a future interest in the property. The future inter- ests that follow qualified fee estates are known as reversions. If the condition speci- fied is ever violated (for example, removal of the Lumpkin house), ownership in the property reverts to the grantor (or the grantor’s heirs). Depending on the language used to initially create the qualified fee estate, the reversion may happen automati- cally if the stated condition is violated or may require the holder of the reversion interest to initiate legal action to enforce the condition.

Many qualified fee estates are set up to protect a grantor’s personal preferences or wishes. A landowner once sold a parcel of land with the qualification that the property never be used for the distribution of alcoholic beverages (the grantor was a recovering alcoholic). If this condition were ever violated, the property would revert back to the grantor. The grantee accepted this condition because he had no intention of using the property in that fashion. After some years went by, the current owner decided to sell the land and was approached by a national convenience store chain about the property. Upon learning the condition the previous owner had placed on the land when he sold the land to the current owner, the convenience store chain quickly lost interest in the property. Had the chain bought the property, built a store, and sold a six-pack of beer or a bottle of chardonnay, the property rights purchased by the chain would have terminated immediately, and the original grantor or the grantor’s heirs would be the owner of the land and the store.

Life Estates A life estate is a type of freehold estate that terminates automatically and imme-

diately upon the death of a named person. The named person may or may not be the holder of the life estate. For example, a father may leave a last will and testament that creates a life estate in a property he owned at the time of his death for his daughter Sarah with the words “To Sarah, for her life” or “To Sarah, for Ann’s life.” In the first case, Sarah would be the owner of the property for as long as she lives. In the

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26 PA RT O N E Real Estate Legal Analysis

second case, Sarah would own the property as long as Ann lives. In both cases, Sarah is known as the life tenant. When the life tenant is someone other than the person whose life the life estate is tied to, the life estate is known as an estate pur autre vie (estate for the life of another).

Because it is impossible to know how long the named person will live, life estates have an indeterminate duration, but all life estates will eventually terminate (everyone dies sooner or later). Therefore, all life estates must have a future interest associated with them. If the grantor of the life estate does not specify to whom the property will belong on termination of the life estate, then the future interest is the reversion interest we described earlier in our discussion of qualified fee estates, and the property will revert back to the grantor (or the grantor’s heirs, if the grantor is dead) on the death of the named person. On the other hand, the grantor of the life estate may specify that a party other than the original grantee will become the owner of the property upon the termination of the life estate.

For example, the grantor could create a life estate with the words “To Sarah, for her life, and then to Robert.” In this situation, Robert holds the remainder interest in the property while Sarah is alive. The party who holds the remainder interest associ- ated with a life estate is known as the remainderman. Notice that on Sarah’s death, the life estate terminates, and Robert will own all of the rights to the property origi- nally held by the grantor of the life estate and the remainder interest. If the grantor had a fee simple absolute estate, then Robert will own a fee simple absolute estate upon Sarah’s death. If the grantor had a qualified fee estate, then Robert will own only a qualified fee estate upon Sarah’s death.

Remainder interests can take the form of a vested remainder or a contingent remainder. A vested remainder exists when the remainderman is guaranteed own- ership of the property at some time in the future, but a contingent remainder exists when there are conditions attached to the remainder interest that could prevent the remainderman from receiving a present interest in the property. For example, Alan could grant a life estate to “Nell for her life, then to Billy if he is married at the time of Nell’s death, otherwise to Clyde.” In this situation, both Billy and Clyde hold con- tingent remainder interests in the property. If Billy is married when Nell dies, then Billy will own the land on Nell’s death. If Billy is not married when Nell dies, then Clyde will own the land on Nell’s death.

The life estate is a very useful technique in estate planning. John might, for example, put the family home and farm in trust for his children Sue and Sally but give his wife Mary a life estate. Estate taxes have to be paid on John’s death. Mary may use the property during the remainder of her lifetime, but at her death, no addi- tional taxes are due because she possessed only a life estate. This often can reduce taxes greatly, particularly if the property has increased dramatically in value since John’s death.

Leasehold Estates

The term leasehold estate refers to the rights of use and possession (but not ownership) held by a tenant as a result of a lease agreement with a property owner.

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C H A P T E R 2 Property Rights and Legal Descriptions 27

The lease agreement may specify that the leasehold estate will last for a specific time period, or it may specify that the leasehold estate will last for as long as the lessor and lessee are willing to continue their relationship. In either case, the tenant pays rent and possesses and occupies the land or building for the duration of a lease with the understanding that the landlord retains full ownership of the real property. In other words, the landlord has a reversionary interest at the termination of the leasehold estate, often referred to as the right of reentry. While the tenant’s leasehold estate is in place, the landlord is said to hold a leased fee estate, meaning that the landlord is the owner of the property, but the property is currently leased to a tenant.

Leases, or tenancies, can be divided into the following four categories:

1. Tenancy for a stated period

2. Tenancy from period to period

3. Tenancy at will

4. Tenancy at sufferance

A tenancy for a stated period occurs when a landlord and a tenant enter into an agreement for a specified term. The stated period may be six months, a year, 10 years, or any mutually acceptable time period. In most states, leases that exceed one year must be written and signed by the parties. Of course, it is advisable always to have a written agreement even if the law does not require one.

A tenancy from period to period is created when landlord and tenant agree to continue their relationship from year to year or month to month, or some other period length. The agreement may establish an original term of one year, for example, with the provision that the lease is to continue yearly unless terminated at the end of a period with proper notice by either party. The method of giving proper notice should be set forth in the lease agreement. It is common to require notice of termination 30 to 60 days prior to the expiration of a period, depending on state law.

When parties enter into a lease agreement without specifying either a termi- nation date or a period length, the parties have created a tenancy at will. As the name implies, this lease lasts as long as both tenant and landlord desire and can be terminated at any time. Many states have statutes that specify the amount of time required in the termination notice for tenancies at will. A 30-day notice is most typi- cal for tenants; some states require, however, that the landlord give a 60-day notice of termination.

A tenancy at sufferance occurs when a tenant is in possession of a landlord’s property against the wishes of the landlord. Such a situation may occur when a ten- ant refuses to re-lease the premises at the termination of the lease but continues to possess the property until evicted by the landlord. A tenancy at sufferance also might occur when a property owner’s existing mortgage is foreclosed. The foreclosure ter- minates the borrower’s rights to the property, but the borrower may remain in pos- session of the property until evicted by the new owner. Eviction is the legal process used by lessors to terminate leasehold estates when lessees fail to abide by the lease terms or refuse to return possession of the property at the termination of a leasehold estate. Eviction laws vary from state to state, but the laws generally require that the

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28 PA RT O N E Real Estate Legal Analysis

r e a l e s t a t e t o d a y

c l o s e - u p

The Empire State Building

We can speak of a “bundle of rights” to describe the various elements of real estate owner- ship. The Empire State Building saga provides a vivid example of

how real estate ownership can be subdivided into leased fee and leasehold interests, how the terms of the lease can affect the division of value between the two elements of ownership, and how they can be recombined.

The Empire State Building is a legendary prop erty, for four decades the tallest building in the world, and celebrated in movies and legend. With its 2.24 million square feet housing 20,000 workers and its office space 95% occupied, the building is worth up to $1 billion. Then why did it sell in 2002 for only $57.5 million? Here’s a hint. Only the leased fee was sold. Almost all the value was in the lease hold interest.

In 1961 a partnership bought the building for $68 million. An insurance company provided $29 million in financing and was given ownership of the fee interest in order to receive tax advantages that reduced the cost of financing for the partner- ship. The other partners received a 114-year mas- ter lease that allowed them to control the building until the year 2075.

After the insurance company had exhausted the tax benefits, it sold the building, but the sale brought only $40 million because the fee owner received only $1.72 million in lease payments per year plus regain ing control of the building when it would be 123 years old. All the rental income went to the leasehold inter est.

Finally, the investor group that holds the lease purchased the building for $57.5 mil- lion, once again combining the leased fee and leasehold interests into a simple fee ownership. This accomplished, the owners embarked on a five-year, $600 million renovation to update the eight-decades-old building to provide state-of- the-art utilities and amenities to attract larger and better-paying tenants. In the first two years alone, the number of tenants was reduced from 550 to 320 with average rents increasing from under $30 per square foot to the mid-$50s. Included in the renovations are massive green renovations, which will reduce energy use by 38%, saving over $4 mil- lion annually and making the building much more attractive to potential tenants.

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C H A P T E R 2 Property Rights and Legal Descriptions 29

lessor notify the lessee of the violated lease terms and give the lessee a prescribed amount of time to remedy the violation or return possession of the property to the lessor. If the lessee fails to remedy the violation or return possession of the property, the lessor can seek the court system’s assistance to recover damages and/or have the tenant physically removed from the property.

| concurrent estates _____________________________________

The preceding discussion of property interests was based on the assumption that only one person or legal entity owns each interest. These interests are known as estates in severalty, that is, estates “standing alone.” Nevertheless, most of the real property interests discussed above may be owned simultaneously by more than one person or legal entity. Perhaps you want to buy a house with your spouse, another relative, or even an unrelated person; perhaps your Aunt Matilda left you and your sister Bess a farm to be owned jointly; perhaps you want to make a real estate invest- ment with business associates. All these situations involve the ownership of property simultaneously by two or more persons or entities and are examples of concurrent estates or, more simply, joint ownership. The most common types of concurrent estates are

■■ tenancy in common,

■■ joint tenancy,

■■ tenancy by the entirety, and

■■ community property.

Note that although the word tenancy is used here, it should not be confused with a tenant’s relationship with a landlord.

Tenancy in Common

The traditional form of concurrent ownership is tenancy in common. Each of the joint owners holds an undivided, proportional interest in the entire property. For example, if Jack and Bob own a warehouse as tenants in common, each owns a por- tion of the entire property, but neither knows which portion is his. Each owner can dispose of his or her portion of ownership through sale or will.

Tenants in common who become unhappy with the joint relationship can demand a partition of the property. Voluntary partitions result when cotenants agree how to divide the property. If they cannot agree, however, a court may order a compulsory partition.

Joint Tenancy

Joint tenancy is similar to tenancy in common except it carries with it the right of survivorship. If a co-owner should die, the other owner or owners automatically divide the share owned by the deceased. This type of ownership often is used to

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30 PA RT O N E Real Estate Legal Analysis

ensure the continued operation of an investment property should one of the owners die. The joint tenancy ends if any tenant sells his or her share of the property to a third party. The joint tenancy then converts to a tenancy in common.

Historically, to establish a valid joint tenancy, the four unities of time, title, interest, and possession had to be present. To satisfy the unity of time, the joint ten- ants’ ownership had to be created at the same time by the same conveyance. The unity of title exists when the owners have the same estate in the land, such as a fee simple estate, a life estate, or another estate discussed in this chapter.

Joint tenants meet the unity of interest requirement only when they have the same percentage interest in the real estate. For example, two joint tenants must each own 50% of the undivided property, three must own 33.33% each, four must own 25% each, and so forth. Finally, joint tenants have unity of possession only when each owner has the right to possess all of the real estate subject to the other owners’ rights of possession.

Originally, due to the unity of time requirement, a grantor who was the sole owner of real estate could not create a joint tenancy with the right of survivorship between himself and another person. To get around this problem, the grantor had to deed the property to a friendly third party, known as a “straw man,” who would then transfer that property to the grantor and the other party as joint tenants. Some states have abolished the need to use a straw man in the above situation and thus have relaxed the unity of time requirement under particular circumstances.

Tenancy by the Entirety

A tenancy by the entirety is a specialized type of joint tenancy that can be cre- ated only between husbands and wives. The spouses share ownership equally, shares automatically pass to the surviving spouse, and individual interests cannot be sold without the consent of the other spouse or without division by a court in case of divorce. Some states do not recognize tenancy by the entirety.

Community Property

Some states recognize a system of property rights between husbands and wives generally called community property. In these states, all property acquired during the marriage, whether real or personal, is considered property of the “marital com- munity.” In other words, property ownership is divided equally between husband and wife. This division may disregard the financial contribution each spouse actually made to the property’s acquisition.

It is possible for married couples in one of these community-property states to acquire property not subject to a spouse’s interest. Examples of this separate prop- erty include property owned prior to the marriage or property received by one of the spouses as a gift or an inheritance. Generally, any income derived from a spouse’s separate property also is separate income.

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C H A P T E R 2 Property Rights and Legal Descriptions 31

| condominium ownership __________________________________

In addition to the traditional forms of concurrent ownership, the condominium and cooperative are two other ways to own real estate jointly. In a condominium (condo) all owners typically have fee simple titles to their personal units, while com- mon areas such as sidewalks, yards, entrances, hallways, pools, tennis courts, and other recreational facilities are jointly owned in a tenancy in common or some other form of concurrent ownership. (If the condominium is built on land that is leased with a ground lease, the unit owners hold a leasehold interest in the land rather than a fee interest.) A condominium association handles the maintenance of the common areas, and each unit pays a mandatory fee to cover the expenses of the association. The officers or directors of the association are typically elected by majority vote from all of the unit owners. Condos are also common for commercial and industrial uses.

All states have laws governing the formation of condominiums. These stat- utes require that three basic documents be filed—the condominium declaration, the bylaws, and deeds conveying the individual units. The purchase of a condominium interest is legally more complex and potentially more demanding than the typical single-family home purchase. In most states, this complexity and past abuses have led to more rigorous disclosure of information to prospective buyers of condomin- ium homes. In Florida, for example, where condos abound, condo developers are required to give potential buyers 15 days to rescind a contract to purchase a new condo. Sales of existing condos require a rescission period of 3 days. The clock for these rescission periods starts ticking when the buyer is given copies of condo- minium documents to examine rather than the effective date of the contract, so most developers and sellers give such documents to potential buyers in advance of signing a contract.

Condominium Declaration

The condominium declaration identifies the individual units and all common areas, assigns a specific share of the common areas to each unit, creates an associa- tion to govern the project and maintain the common areas.

Bylaws

The bylaws represent a private contract among property owners regarding the operation of the condominium. They provide for the selection of the board of direc- tors, the powers and duties of the directors, meetings, regulations for the common areas, assessment and collection of association fees, and other relevant matters. The bylaws, which may be amended by the condominium association, are often quite extensive and often deal with such details as the color of curtains in the windows and whether or not unit owners may keep household pets.

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32 PA RT O N E Real Estate Legal Analysis

Individual Unit Deed

Deeds for condominium units are similar to other deeds conveying real property. These deeds are described in Chapter 5.

| cooperative ownership _________________________________

In the cooperative form of ownership (often abbreviated to co-op), the land and building usually are owned by a nonprofit corporation specifically created for the purpose of owning the property. Individual residents own stock in the corporation that owns the property and thus have the right to occupy a particular unit in the prop- erty. Rather than a fee simple ownership of real property, owners in a co-op have a proprietary lease for a specific unit. The lease period is typically indefinite because it is tied to the tenant’s interest in the cooperative corporation. The lease does not require the tenant to pay rent, but the tenant must pay a periodic fee to the co-op for the tenant’s proportionate share of maintenance, repairs, mortgage payments, taxes, and so on. The tenants vote for and elect a board of directors or officers for the coop- erative pursuant to the organization’s bylaws.

| time-shares _____________________________________________

Time-share, or interval ownership, is a type of concurrent estate that splits own- ership by time. Most of the activity in the time-share is vacation oriented, with sev- eral large companies such as Disney and Marriot expanding into this market. There are two basic categories of time-sharing interests, a fee interest time-share and a right-to-use time-share. A fee interest time-share divides the ownership of a unit, usually a resort condominium, into 52 separate, weekly intervals. Owners receive a fee simple title to their particular ownership period. A right to use time-share, on the other hand, basically is a lease arrangement with a leasehold interest for a spe- cific number of years.

Whether or not it is deserved, the time-share industry is sometimes regarded as having a less than stellar reputation because of the high-pressure sales tactics used by some developers and promoters. Potential buyers often are lured to the property on the pretense of a free vacation, only to find that the time they planned to lie in the sun by the pool is eaten up with relentless sales presentations and guilt-producing pitches from aggressive sales agents. The entry into the time-share market by larger, more stable companies may be a signal that the reputation of the time-share industry is poised for improvement.

| legal descriptions _____________________________________

A proper legal description of the property involved is essential in all documents that affect title to real estate. When it comes to the actual transfer of title to real estate through a deed, for example, a precise legal description is necessary. Speci- fication of the exact boundaries of the land being conveyed is essential for a valid

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C H A P T E R 2 Property Rights and Legal Descriptions 33

transfer. In the United States, three methods commonly are used to obtain a precise legal description of land—the metes-and-bounds system, the rectangular survey sys- tem, and reference to recorded plats. Each property has a unique legal description.

Preparing the Legal Description

For existing properties, a proper legal description of a property often can be obtained from the tax office or other public records. A new, original legal descrip- tion will be needed, however, for a property that is being subdivided from an exist- ing parcel or created by combining multiple existing parcels. New, original legal descriptions should be prepared by an attorney and a certified land surveyor. This avoids potential risks for buyer, seller, and real estate professional (broker, appraiser, etc.) that can result from an improperly drafted legal description. A correctly drafted legal description is important, particularly in deeds, mortgages, and other instru- ments directly affecting title to land.

Metes and Bounds

The original way to achieve a formal legal description of the exact boundaries of any piece of land was to refer to its corners and boundary lines in a metes-and- bounds description. Metes are the distances used in a description, and bounds are the directions of the boundaries that enclose a piece of land. A metes-and-bounds descrip- tion starts at a designated point of beginning and, through specific distances, directions,

f i g u r e 2.2 Angles in a Circle

N. 75o 0' 0" W.

S. 45o 0' 0" W.

N. 45o 0' 0" E.

S. 15o 0' 0" E.

N. 90o 0' 0" E. or “Due East”

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34 PA RT O N E Real Estate Legal Analysis

and reference points, locates the boundary lines and corners of the parcel of land. When a surveyor uses the legal description to identify the exact boundaries of a par- cel of land, he or she usually drives an iron pin or stake deep into the ground at each corner of the property to establish “monuments.” These pins serve as the reference points in the legal description and can easily be located (perhaps with a metal detec- tor) many years after they are placed in the ground.

In modern metes-and-bounds descriptions, distances are measured in feet to the near- est one-tenth or one-hundredth of a foot, and the angles are measured in degrees, minutes, and seconds. Recall that there are 360 degrees in a circle and that a circle can be divided into four quadrants: northeast, southeast, southwest, and northwest. Each quadrant con- tains 90 degrees (90°); each degree contains 60 minutes (60'); and each minute contains 60 seconds (60"). Figure 2.2 demonstrates various angles using this system.

The following metes-and-bounds description describes the property depicted in Figure 2.3.

Beginning at an iron pin on the northern side of Lava Street 95.0 feet due East of the northeastern corner of the intersection of Sixth Avenue and Lava Street, as

f i g u r e 2.3 Metes-and-Bounds Description N

. 8 o

0' 0

" E

. 20

0 fe

Iron Pin

100 feet

20 0

fe et

S . 1

5o 0

' 0 "

E .

S ix

th A

ve n

u e

Lava Street

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C H A P T E R 2 Property Rights and Legal Descriptions 35

measured along the northern side of Lava Street; running thence N. 8° 0' 0" E. 200.0 feet to an iron pin; running thence due East 100.0 feet to an iron pin; running thence S. 8° 0' 0" W. 200.0 feet to an iron pin; running thence due West 100.0 feet to the point of beginning.

While a metes-and-bounds description may look a bit cryptic at first glance, it simply describes the boundary lines and corners of the parcel of a particular parcel of land. Each metes-and-bounds description must start with a point of beginning (POB). Thereafter, each boundary is detailed—its length, its direction, and the points where it begins and ends. It is vital that the boundaries described actually enclose the property involved. In other words, each boundary must begin at the preceding boundary’s end and end at the next boundary’s beginning. The description of the last side always must conclude at the original POB.

The metes-and-bounds method easily addresses irregular shaped parcels of land, even those with curved boundary lines. Curved boundary lines are described by referring to the length of the curve and its radius. With this system, land surveyors can accurately identify the corners of a parcel of real estate and the boundary lines that connect them.

By now, it should be obvious that reference points are crucial to the metes- and-bounds description. Before developers began to use iron pins to mark these points, natural monuments often were used. Such a monument might be “the large oak tree,” “the spring-fed stream,” or “the old Indian rock mound.” Although refer- ence to such natural objects could cause some confusion because they are subject to change over time, they still are used today to describe some rural land. The following land description, found in an old deed in North Carolina, demonstrates an interest- ing use of natural monuments as reference points in a standard metes-and-bounds description.

Beginning at an ash bush on the North bank of Withrow’s Creek above the bridge, corner to the lands of R. N. Barber, and running thence North 14 degrees West 17.50 chains [one chain equals 66 feet] to a stone pile, in the line of Mrs. E. M. Summerell; running thence North 68 degrees East 6.56 chains to a post oak, corner to the lands of Elias Barber; running thence South 27 degrees East 8.80 chains to a hickory on the North bank of Withrow’s Creek, corner to the lands of Jane Barber; running thence Southwesterly up said creek 13.75 chains to the point of beginning, containing 12 acres, more or less.

Legal descriptions do not describe “the side of the hill”; they define a flat plane that may or may not have a mountain in it. In mountain states, many sellers will tell you they have, say, 20 fenced acres, thinking they are really selling 20 acres—not their actual larger number of surveyed acres. For example, suppose a tract of land measures 1,000 feet by 1,000 feet, or approximately 23 acres. If the property con- tains a steeply sloped hill within its boundaries, the actual ground area of this tract could be much more than 23 acres.

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36 PA RT O N E Real Estate Legal Analysis

Rectangular Survey System

Shortly after the end of the Revolutionary War, when the westward movement from the original states began, a method of describing wilderness land was required. The U.S. Congress approved a description method known as the rectangular survey system (also called the congressional survey system or government survey system). With the exception of Texas, land descriptions in all states west of the Mississippi, the five states formed from the Northwest Territory, and most of Alabama, Flor- ida, and Mississippi are based on this method.

Principal Meridians and Base Lines The rectangular survey system is based first on principal meridians running

north and south and base lines running east and west. Placement of these meridians and base lines generally coincides with an established landmark, such as the mouth of the Ohio River. The principal meridian was drawn north-south through the river’s mouth, and the base line was drawn east-west to intersect the meridian at the land- mark. The principal meridians and base lines around the United States are shown in Figure 2.4. Because the earth is round, lines that are drawn to run north and south eventually converge at the north and south poles. Surveyors use reference points cre- ated by “guide meridians” and “standard parallels” to account for this convergence when locating the corners of a property using the rectangular survey method.

r e a l e s t a t e t o d a y

l e g a l h i g h l i g h t

How Did an Acre Get to Be an Acre?

Unlike the rational metric system, the English system of land measurement that the United States inherited does not seem to make much sense. It does,

however, but only if related to experience rather than to mathe matics. Village farmland in medieval England was laid out in long rows so that plows drawn by oxen would not have to turn around often. A strip of land a furrow long and wide enough to be plowed in a day was called an acre. Its actual size

varied from one part of the country to another, however, until a standard measure was introduced by one Edmond Gunter during the time of King James I. Gunter defined a chain as 66 feet and a furlong (the length of furrow for an ox-drawn plow) as 10 chains. An acre was defined as the length of a furlong by the width of one chain (660 feet by 66 feet), or 43,560 square feet). Eight furlongs stretch 5,280 feet, or one mile, and 640 rectangular acres fit in a square mile. It is all very logical, but only if your frame of ref erence is medieval England.

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C H A P T E R 2 Property Rights and Legal Descriptions 37

Townships The land on each side of the principal meridian is divided into six-mile-wide

strips by range lines, which run north and south and are numbered consecutively east or west of the principal meridian. For example, the first range line to the east of the principal meridian is numbered 1 East, the second is numbered 2 East, and so forth. Similarly, the land above and below the base line is divided into six-mile wide strips by township lines, which run east and west and are numbered consecutively north and south of the base line. For example, the first township line north of the base line is numbered 1 North, the second is numbered 2 North, and so forth. The range and township lines form the basic unit of the rectangular survey, the township, an area of land six miles square.

To identify a specific township, reference is made to the intersection of the town- ship and range lines. For example, the shaded township in Figure 2.5 is Township 3 North, Range 2 West, abbreviated as T3N, R2W. It’s often useful to count the spaces (the townships) rather than the township and range lines when locating townships on maps.

Townships are not only the basic unit of the rectangular survey system, they often are the basis of political subdivisions as well. Somewhat confusingly, however,

f i g u r e 2.4 Principal Meridians and Base Lines in the United States

= Meridians

= Base lines

= States using the rectangular survey system

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38 PA RT O N E Real Estate Legal Analysis

f i g u r e 2.5 Principal Meridians and Base Lines Numbering Method

Principal Meridian

T. 3N.

T. 2N.

T. 1N.

Township line 1S.

T. 2S.

T. 3S.

Base Line

R . 1E

R . 2E

R . 3E

R . 1W

R . 2W

R . 3W

T. 3N., R. 2W.

f i g u r e 2.6 A Township Divided into Sections

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C H A P T E R 2 Property Rights and Legal Descriptions 39

the term is also used to describe political subdivisions in states that were not sur- veyed under the rectangular system.

Sections The rectangular survey system divides each township into 36 equal-sized sec-

tions. Within any given township, sections are numbered beginning in the northeast corner, moving westerly, then southerly one section, and back easterly. The process continues until all sections are numbered. Figure 2.6 demonstrates this numbering process. Each section consists of one square mile, or 640 acres.

In the states covered by the rectangular survey, rural land is generally sold in patchwork pieces. Of course, farms in these states may be smaller than the sectional size of 640 acres. For example, farms claimed under the Homestead Act were one- quarter section, or 160 acres. As another example, a buyer might purchase the land indicated in Figure 2.7, the northwest quarter of the southeast quarter of the northeast quarter of the Section. How many acres did the buyer purchase? The answer is 10.

f i g u r e 2.7 Subdivision of a Section (640 Acres)

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40 PA RT O N E Real Estate Legal Analysis

Aerial photographs clearly show the effect a particular method of land survey has on rural areas. Under the metes-and-bounds survey system, farmlands are laid out in the random pattern illustrated in Figure 2.8, a photograph of farmland in the eastern United States. A comparable rural area that was surveyed under the rectangu- lar system, with its even patchwork pattern, is shown in Figure 2.9. This photograph of land in Kansas is typical of the midwestern and western United States.

Combined Use of Metes-and-Bounds and Rectangular Survey Systems

The rectangular survey system describes very accurately the extensive acre- age involved in farmland. It becomes difficult to use, however, when one wishes to describe the small, non-rectangular subdivision lots found in most communities. Sub- dividing a section of 640 acres into lots of one-half acre or less is an all but endless task. Therefore, metes-and-bounds descriptions become vital to clear legal descrip- tions. Many properties are described by some combination of the metes-and-bounds

f i g u r e 2.8 Aerial Photograph of Land Surveyed under the Metes-and-Bounds System

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C H A P T E R 2 Property Rights and Legal Descriptions 41

and rectangular survey methods. For example, a combined description might appear as follows:

Part of SW ¼ of the SE ¼ of Section 14, T43S,R34E., Tallahassee Principal Meridian, Hendry County, State of Florida, beginning at a point being 202 feet East of the SW corner of the SE ¼ of said Section 14; running thence North 8 degrees East 200 feet to an iron pin; running thence due East 100 feet to an iron pin; running thence South 8 degrees West 200 feet to an iron pin; running thence due West 100 feet to the point of beginning.

Figure 2.10 shows the parcel described previously. The parcel is located within the southwest quarter of the southeast quarter of Section 14 in Township 43 South, Range 34 East of the Tallahassee Principal Meridian.

Figure 2.11 shows a residential development that has grown up in and around farmland that was surveyed under the rectangular survey system. Here, we see the combined use of the metes-and-bounds system applied with the rectangular survey system. Notice that the undeveloped tracts still appear rectangular, but the newer subdivided tracts reflect irregularly shaped lots on curving streets.

f i g u r e 2.9 Aerial Photograph of Land Surveyed under the Rectangular Survey System

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42 PA RT O N E Real Estate Legal Analysis

References to Recorded Plats

A common alternative and supplement to these methods of legally describing real estate is to refer to engineers’ drawings of parcels of real estate called plats that have been recorded as part of the official public record. Plats show the streets, blocks, and lots as they actually exist. A plat of a subdivision appears in Figure 2.12. Notice that the plat contains the precise distances and directions (metes and bounds) of each property boundary. Once this document is part of the official public record, properties can be described simply by reference to the numbers of the lots as they appear in the plat of the block of the subdivision in which the lot is located. For example, we could identify the parcel highlighted in Figure 2.12 as “Lot 4 of Block G” of this subdivision as recorded in the public records of the county where the sub- division is located.

In the case of a condominium, each individual unit of the complex is described separately by referring to a previously recorded plat of the complex. In addition, a condominium description includes a reference to the fractional share (based on the number of units) of the common areas within the complex.

f i g u r e 2.10 Parcel Indicated by Combined Description

SE 1/4 of Section 14

Section

SW corner of the SE 1/4

202 ft

100 ft 200 ft

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C H A P T E R 2 Property Rights and Legal Descriptions 43

An interesting issue in legal description arises when the property involves an air lot, which means the property does not actually touch the ground. In these cases, ver- tical distances are measured from a point of known vertical height. The most com- mon vertical reference is mean sea level, but official benchmarks that can be used as reference points for both horizontal and vertical distances have been established throughout the United States by the Coast and Geodetic Survey. Thus, the air lot of a 32nd-floor condominium might be described by identifying the parcel of land under- neath and the vertical measurements of the airspace above the ground.

| chapter review __________________________________________

■■ Real estate refers to land and things attached to the land. Real property refers to the legal interests associated with real estate. Personal property

f i g u r e 2.11 Aerial Photograph of Land Surveyed by the Combined Metes-and-Bounds and Rectangular Survey System

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44 PA RT O N E Real Estate Legal Analysis

refers to all movable items (not real estate) and the rights associated with them.

■■ Items that were once considered personal property but have become part of the real property are called fixtures.

■■ Real estate can be physically divided into surface rights, mineral rights, air rights, and water rights.

■■ Real property can be divided into different bundles of property rights called estates in land.

■■ Estates in land can be divided into freehold (ownership) and leasehold estates.

■■ Freehold estates include the fee simple absolute estate, qualified fee estates, life estates, and reversion and remainder interests.

■■ Leasehold estates include tenancy for a stated period, tenancy from period to period, tenancy at will, and tenancy at sufferance.

f i g u r e 2.12 Plat of a Subdivision

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C H A P T E R 2 Property Rights and Legal Descriptions 45

■■ Freehold estates are generally transferred by a legal document called a deed. Leasehold estates are transferred by a legal document called a lease.

■■ When more than one owner has rights to the same real estate, the owner- ship is referred to as concurrent ownership.

■■ Examples of concurrent ownership include tenancy in common, joint ten- ancy, and tenancy by the entirety.

■■ Other ways the rights to real property can be divided among multiple own- ers include condominiums, cooperatives, and time-shares.

■■ Three different methods are used to describe individual parcels of real estate: metes and bounds, rectangular survey, and references to recorded plats.

| key terms _____________________________________________

air lot

air rights

base lines

chattel

community property

concurrent estates

condominium

contingent remainder

cooperative

deed

estate pur autre vie

estates in land

estates in severalty

eviction

fee interest time-share

fee simple absolute estate

fixture

freehold estates

grantee

grantor

joint tenancy

lease

leased fee estate

leasehold estates

lessee

lessor

life estate

life tenant

metes-and-bounds description

mineral rights

personal property

plats

principal meridians

prior appropriation doctrine

property

proprietary lease

qualified fee estate

range lines

real estate

real property

rectangular survey system

remainder

remainderman

reversions

right of first refusal

right of reentry

right of survivorship

right to use time-share

riparian rights doctrine

sections

tenancy at sufferance

tenancy at will

tenancy by the entirety

tenancy for a stated period

tenancy from period to period

tenancy in common

test of adaptability

test of attachment

test of intent of the parties

time-share

title

township

township lines

trade fixtures

vested remainder

water rights

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46 PA RT O N E Real Estate Legal Analysis

| study exercises _________________________________________

1. What is the difference between the terms real estate and real property?

2. What are fixtures and why is it important to be able to identify them?

3. What are the three general physical divisions of property rights?

4. Fred leases a building from George for his new restaurant. To increase his business, Fred installs an antique bar in the center of the restaurant, com- plete with water and drain lines. A year later, Fred’s business is so success- ful he decides to move to a larger building. He plans to remove the bar and take it to the new location, but George protests, claiming the bar is a fixture and cannot be removed. Does Fred have the right to remove the bar? Why or why not?

5. Distinguish between the riparian rights doctrine and the prior appropriation doctrine of water rights.

6. If Bob buys a parcel of land from Sarah, who is the grantor and who is the grantee?

7. Define each of the following terms with respect to the fee simple estate: alienable, devisable, descendible.

8. What is the primary difference between a fee simple absolute estate and a qualified fee estate?

9. What is the difference between a life estate and an estate pur autre vie?

10. Madeline has an opportunity to invest in either a cooperative or a condo- minium. What are the differences between these types of ownership?

11. Dick agrees to rent a two-bedroom house from Larry for a two-year period with monthly rent payments. What type of leasehold estate is involved in this transaction?

12. Charles rents a home from Woodley on a month-to-month basis. On June 1, Woodley gives proper notice to Charles that he wishes to terminate the ten- ancy on August 31. On September 2, Charles has still has not vacated the property. Under what kind of tenancy is Charles now holding possession?

13. According to the rectangular survey system, if a buyer purchases the south half of the northeast quarter of a section of land, how many acres has he or she purchased?

14. How many square feet are in an acre? How many acres are in a section? How many sections are in a township?

15. Use a simple sketch to show the location of T5S, R6E. Appropriately label the principal meridian, base line, and each of the range and township lines in the sketch.

16. Use a simple sketch to show the location of section 17 in a township.

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C H A P T E R 2 Property Rights and Legal Descriptions 47

17. Use a simple sketch to show the location of the parcel described as “the NW 1/4 of the NE 1/4 of the SE 1/4 of the SE 1/4” of a section. How many square feet does the parcel contain?

18. Use a simple sketch to show the boundaries and reference points of a prop- erty described as follows:

“Beginning at a point 200 feet due North of the southwest corner of Section 11; running thence 100 feet N. 45° E to an iron pin; running thence 100 feet S. 45° E. to an iron pin; running thence 100 feet S. 45° W. to an iron pin; running thence 100 N. 45° W. to the point of beginning.”

| further reading _________________________________________

Jennings, Marianne M. Real Estate Law, 9th ed. Mason, Ohio: West Thomson South- Western, 2011.

Karp, James, and Elliot Klayman. Real Estate Law, 8th ed. La Crosse, Wisconsin: Dearborn Real Estate Education, 2013.

McCormak, Jack C. Surveying, 6th ed. New York: John Wiley and Sons, 2012.

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3c h a p t e r Private Restrictions on Ownership

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c h a p t e r p r e v i e w

Even though someone may own the entire fee simple ownership rights in a parcel of real estate, this interest is often limited by certain restrictions placed on the property by public or private entities. These restrictions and limita- tions, known collectively as encumbrances, generally run with the land; in other words, they are binding on anyone who gains a subsequent interest in the property. In some cases, encumbrances may adversely affect both the use and the value of the property. In extreme cases, the land may be so encumbered that it would be valueless for a potential purchaser. Conversely, some public or private land-use restrictions may enhance the value of a property by protecting it from detrimental actions by others.

We consider several forms of private restrictions on ownership in this chap- ter, and we will consider public restrictions on ownership in the next chapter. The private restrictions we will consider in this chapter include

■■ covenants, conditions, and restrictions (CC&Rs);

■■ liens;

■■ easements;

■■ profit a prendre;

■■ adverse possession; and

■■ encroachments.

close-up Meadow Brook

Ranch Use Covenants

legal highlight Validity of Restrictive Covenants

legal highlight Restrictive

Covenant Disputes

legal highlight A Cautionary Tale

on Mechanics’ Liens

legal highlight Prescriptive Easement

legal highlight The Case of the

Landlocked Parcel

close-up Use of

Conservation Easements

legal highlight Adverse Possession

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| covenants, conditions, and restrictions __________________

Covenants, conditions, and restrictions, often abbreviated as CC&Rs, are private encumbrances that limit the way a property owner can use a property. The CC&Rs are essentially promises made by a landowner about how the property will or will not be used that are enforceable through the court system by the parties who expect to benefit from the promises. These promises are typically found in the deed or plat associated with the property and are recorded in the public record system. Once attached to a property, these covenants “run with the land” and are binding on successive owners of the property. For example, a developer who wants to limit the uses of the properties in the project may attach covenants to the deeds for each parcel that prohibit or require certain uses of the property. The developer’s goal is to increase the value of the property to prospective purchasers by assuring them that they will be protected from detrimental uses of the properties by their neighboring property owners. Of course, the use of CC&Rs is not limited to developers. Indi- vidual property owners may also attach limitations on how their properties can be used by subsequent owners. For example, the seller of a property may attach restric- tions that prohibit any commercial use of the property or that preserve a scenic view available to other properties.

It is increasingly common for developers to attach covenants that subject each parcel in the development project to the authority of a property owners’ association that is empowered by a majority vote of all property owners (with each parcel getting one vote) to adopt rules and restrictions that all property owners must adhere to. Because the developer owns all of the properties in the project when the association is first created, the developer will establish the initial rules and restrictions. As the parcels in the project are sold to individual property owners, the owners will eventually gain majority control of the property owners’ associa- tion and can change the rules as they collectively see fit. Such rules can be very specific. For example, the CC&Rs for a residential subdivision may restrict the use of the properties in the project to single-family uses only, may require that houses be a certain minimum size, and/or may prohibit business enterprises, nondomestic animals, or large antennas. The CC&Rs may also require the approval by the association of all buildings and landscaping plans, prohibit the use of certain building materials, and even mandate the painting of homes at regular intervals with approved paint colors. It is important to note that CC&Rs cannot create unreasonable or unlawful limitations on an owner’s use of land. For example, restrictions preventing the sale of property to a person of a particular ethnic or racial group clearly are unenforceable because they violate the laws and the Constitution of the United States.

The Real Estate Close-Up on the next page shows some of the CC&Rs in a rural subdivision called Meadow Brook Ranch.

CC&Rs are particularly important to the owners in residential communities. Sup- pose, for example, that the owners of one unit in a condominium project paint their unit in their college’s colors—a brilliant orange and green. Or suppose they decide that bright pink plastic flamingos would be just the thing for the front lawn. Not only might these actions have definite detrimental aesthetic impacts, they would have eco- nomic impacts on fellow property owners and, therefore, could be prevented through

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C H A P T E R 3 Private Restrictions on Ownership 51

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Meadow Brook Ranch Use Covenants

1. All lots in Meadow Brook Ranch are restricted to use for residential purposes only. No signs shall be placed on any part of these residential lots indicating a com mercial or nonresidential use thereof.

2. No animals or fowl shall be permitted other than those types of animals or fowl normally found on rural property that are raised for per sonal family use and/or plea- sure on a strictly noncommercial basis. Permitted types of animals shall include horses, chickens, and household pets. No swine shall be permitted. A maximum of two (2) dogs per lot shall be permit- ted. Exotic Game shall be allowed upon the property, with the exception of those that would affect the health, safety, and/or welfare of any of the land owners within the subdivision. Any and all ani mals, including household pets, require appropriate fenc- ing to confine them to their lot. No animal shall be permitted until this appropri ate fencing is completed.

3. No junk or junkyards of any kind or charac- ter shall be permitted, nor shall accumula- tion of scrap, used materials, inoperative automo biles, or machinery, or other unsightly storage of personal property be permitted.

4. No portion of the property shall be used in a manner that adversely affects adjoining property owners or creates an annoyance or nuisance to other property owners. This

shall include noise pollution such as bark- ing dogs, loud music, or any animal or fowl that causes a nuisance.

5. No hunting with firearms shall be permitted on any lot. Bow hunting shall be allowed on lots of at least 10 acres. No discharg- ing of any fire arms or fireworks shall be permitted on any lot.

6. No residence shall be erected on any part of said property or building site having less than 1,700 square feet of floor space livable area in the main building with one- half (½) thereof of masonry construction, with the exception of log homes, which will not require one-half (½) masonry construction.

7. All buildings erected on the premises shall be of new construction and materi- als. No buildings or portion of buildings of old material may be moved into said subdivision.

8. It is the intent of the undersigned that all dwellings and other structures have a neat and attractive appearance. No metal walls or walls of temporary sheeting will be allowed. The entire exterior walls of all dwelling units or other buildings hereafter constructed must be com pleted within one year after the commencement of work thereon or the placing of materials there- fore on said property, whichever occurs the earliest, and in connection therewith it is under stood that the use of the word “completed” also means the finishing of all such exterior walls.

(continued)

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52 PA RT O N E Real Estate Legal Analysis

CC&Rs (stating, for instance, that outside paint colors must meet the approval of a homeowners’ association and that no statuary or other furniture may be placed in front yards).

Because CC&Rs are a type of contractual agreement, parties to the agreement may enforce it through the court system. To recover damages or obtain an injunction, the nonbreaching party (usually the property owners’ association) must be able to show that some damage has been suffered. In other words, to be justified in enforc- ing the CC&Rs, the party must be able to show how the intended benefit has been denied.

Suppose, for example, that Mary violates the covenants in the deed to her home by erecting a 12-foot statue of her favorite sports celebrity in her front yard. Either the developer or other property owners could secure a court injunction to force the removal of the offending statue. If the covenant violation were even more severe, they could seek monetary damages.

Covenants generally run with the land, from owner to owner. They may exist only for a stated period of time—say, 20 years—or they can be terminated by the agreement of all affected parties should the right of enforcement be waived or aban- doned or if the restricted land is condemned for a public use. Alternatively, an owner

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Meadow Brook Ranch Use Covenants

9. No more than one residence shall be erected per each two and one-half (2.5) acres.

10. No outside toilets, privies, or cesspools will be permitted, and no installation of any type of sew age disposal device shall be allowed that would result in raw or untreated or unsanitary sewage being carried into any water body; all septic tanks must conform to the regulations of the State and County concerning septic systems.

11. No tents, campers, or trailers shall be used on any of the property for residential purposes, on a temporary or permanent basis. No premanu factured, modular,

trailer, or any other structure not built on the site shall be permitted.

12. All tracts shall be kept in a clean and orderly condition at all times, and all trash, garbage, and other waste shall be kept in sanitary con tainers.

13. No structures used for storage purposes shall be erected or placed upon any par- cel that will be vis ible from any roadway, unless placed within the most rear one- third (1/3) of the parcel, that being such portion farthest away from any roadway. All such structures shall be neatly maintained.

14. No resubdivision of any tract of less than two and one-half (2.5) acres shall be permitted.

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C H A P T E R 3 Private Restrictions on Ownership 53

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Validity of Restrictive Covenants

Salma Worthington purchased a home in the Mains Farm subdivi- sion near Sequim, Washington, for the purpose of establishing an adult-care facility. She knew

restrictive cove nants limited land use in the subdivision to “single-family residential purposes only,” but contended that the proposed use did not violate the covenants. She and her daughter moved into the home, along with four elderly residents. The home owners’ association sued to enforce the deed restric tions. The association won.

The court held that Worthington’s use of her home was not for “single-family residential pur- poses only” because of the business elements involved. Since Worthington provided 24-hour care for fees of $500 to $1,000 per person per month, the property’s use was essentially commer- cial, a use that was inconsistent with a residential purpose.

Worthington also contended that even if her use violated the restrictive covenants, the cov- enants could not prevent a home-care facility because the state legislature had adopted legisla- tion per mitting such facilities in all areas zoned for residential or commercial purposes, includ- ing areas zone for single-family dwellings. She contended that this enactment established the fact that maintaining disabled persons out side institu- tions is of greater value to the public than is the right to restrict the use of land through restrictive covenants.

Again, the court disagreed, holding that unlike covenants that might attempt to restrict ownership by race, creed, color, national origin, or handicap, the covenants in question served the legitimate pub lic purpose of protecting residential

neighborhoods from the effect of business uses. Although the legis lature has restricted local gov- ernments from zoning adult family homes out of residential areas, it did not limit the right of private homeowners to adopt restrictive covenants that prohibit certain uses of land in residential areas.

[Mains Farm Homeowners Association v. Wor- thington, 824 P.2d 495]

Does a State Growth Management Act Override the Provisions of a Restrictive Covenant? In 1932, a developer sold 13 lots in what is now the city of Shoreline, Washington, and included a restrictive covenant stating that the lots could not be “sold, conveyed, or leased to any person not of the White or Caucasian race.” Another provision of the covenants restricted density to one house per half-acre.

In 2002, Viking Properties bought a 1.46-acre lot in the subdivision with the intention of devel- oping it to a higher density than allowed by the covenants. When the subdivision homeowners refused to release the covenant, Viking Properties sued, contending (1) that the racial provision in the covenants made them unenforceable and (2) that the density restriction violated a policy of the state’s Growth Management Act favoring dense develop- ment in urban areas.

The court agreed that the racial provision was unenforceable, but this did not void the entire cov- enant. It ruled that the density restriction was totally separate from the racial issue. While the density restriction did impede some of the Growth Man- agements Act’s goals, it protected private property rights and preserved neighborhood open space. Thus, it did not violate public policy.

[Viking Properties, Inc. v. Holm, 118 P.3d 322]

(continued)

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54 PA RT O N E Real Estate Legal Analysis

could place a permanent restriction on the land. CC&Rs can supersede public land use regulations if they are more restrictive than the public regulations, as the Legal Highlight shown above illustrates.

| liens ___________________________________________________

A lien is a claim on a property as either security for a debt or fulfillment of some monetary obligation. For example, an owner might give a mortgage on a property in order to borrow money, thus creating a lien on the property. The lien does not represent right of ownership for the creditor; rather, it amounts to a financial secu- rity interest in the property, a claim the creditor holds against the property to help ensure the debt will be repaid. If the creditor is a private individual or business, the mortgage lien creates a private restriction on ownership. If the creditor is a govern- ment, the resulting encumbrance is a public restriction on ownership. The property tax lien is a common example of a public restriction and will be considered in the next chapter.

Real estate liens may be either voluntary or involuntary. Voluntary liens are those placed on property by the owner, usually in the form of a mortgage to secure repayment of long-term debt. Involuntary liens protect the interest of persons who have valid claims against the owner of real property—such as those resulting from a judgment in a lawsuit, from not being paid for some service, or from unpaid taxes.

Liens are also classified as specific or general. A specific lien is created to secure debts that are associated with a particular parcel of real estate. A general lien—for example, a judgment lien or an income tax lien—is placed on all of the property that might be owned by an individual, including any real estate.

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Validity of Restrictive Covenants

When Is a Fence a Fence? In 1978, Sophie Bubis bought property across the street from the beach in Loch Arbour, New Jer- sey, with a view of the ocean through a chain-link fence on the beachfront property across the street. Then, in 1995, Jack and Joyce Kassin bought the beachfront property across the street and built a landscaped berm approximately 18 feet in height, restricting Mrs. Bubis’s view of the beach. She sued, claiming that the berm violated both the

village’s zoning ordinance and an 1887 restrictive covenant prohibiting fences higher than four feet on beachfront property. She won.

The New Jersey Supreme Court ruled that a fence could made be made of any material, includ- ing earth, and that the Kassin’s berm violated the covenant’s restriction. They ruled it also violated the village ordinance’s six-foot limit for fences.

[Bubis v. Kassin, 878 A.2d 815]

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C H A P T E R 3 Private Restrictions on Ownership 55

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Restrictive Covenant Disputes

Protective restrictive covenants some times lead to controversy when they are enforced. As these examples illustrate, some of these controversies involve

very substan tive issues, while others reflect rather trite neighborhood disputes.

The Case of the Unapproved Garage After Don and Carolyn Colliver bought a house in the Stonewall Equestrian Estates, they wanted to build a detached two-car garage on their lot. Under the restrictive covenants this had to be approved by the community association, but it turned down the plans. Subsequently, the parties could not reach agreement, and the Collivers began con- structing the garage without approval. The asso- ciation took legal action to enforce the covenants. Even so, the Colliv ers continued the construction, which when finished cost almost $70,000.

In court, the Collivers challenged the validity of the covenants and the right of the community asso ciation to enforce them. Unfortunately for them, the court disagreed and ordered that the garage be removed:

“Despite the pending litigation and relief sought, the Collivers continued with the construc- tion of the garage at their own peril. They took an unwise risk and expended a large amount of money in spite of this litigation and the Associa- tion’s clear disapproval of their garage. We require the Collivers to remove the structure in its entirety immediately.”

[Colliver v. Stonewall Equestrian Estate Assoc., 134 SW3d 521, Court of Appeals of Kentucky]

Is a Church a Residential Use? Eddie Chan and Fat Fan Cheung bought adja- cent houses in the Kingsbridge Park subdivision. Cheung sought and received permission from the Architectural Control Committee to add a “game room” to his house. When it was constructed it became apparent the room was designed and furnished not as a game room, but for worship.

Chan and Cheung deeded their houses to the Tien Tao Association, a nonprofit reli gious corpora- tion. Tien Tao erected three 30-foot flagpoles in the backyard of one of the homes, paved the back lawn, and repainted the home’s shutters an unap- proved color. They did not seek advance approval for these changes as required in the restrictive covenants. Tien Tao housed Cheung and another priest in one of the houses and provided accom- modations for followers who gathered to worship. The unauthorized changes, plus the apparent use of the properties for other than single-family resi- dential use as required by the covenants, led the community association to sue for compliance.

The court ruled that the flagpole and other alter ations violated the covenants, as did the use of the properties for religious purposes. Tien Tao also argued that the purpose of the covenants was to restrict their members’ religious freedom in violation of the Fair Housing Act. The court disagreed, ruling that the association sought to abate a nuisance, not to exclude Taoist believers from the community: “That the nuisance stemmed from a gathering of a religious nature does not exclude it from coverage by the restrictions.”

[Tien Tao Association v. Kingsbridge Park Com munity Association, 953 SW2d 525, Texas Court of Appeals, 1st District]

(continued)

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56 PA RT O N E Real Estate Legal Analysis

Specific Liens

The two types of specific liens that are created to protect creditors using real estate as their security for repayment of debts are mortgages and mechanics’ liens.

Mortgages Because few people buy real estate without borrowing money, a mortgage is

the most common encumbrance on an owner’s title. In return for a loan to buy real property, purchasers often pledge the property as collateral for the debt. In other words, the borrower creates a lien in favor of the lender. The borrower who pledges real estate as security or collateral against a loan is the mortgagor; the lender that receives the benefits of this lien is the mortgagee. (A helpful hint for keeping the “ors” and “ees” straight in all real estate terms: the “ors” give property rights or interests in property and the “ees” receive them.) Although mortgage liens put a restriction on a mortgagor’s ownership interest, they make it possible for purchasers to obtain long-term financing for relatively large real estate purchases.

A mortgage lien acts as a private restriction on ownership. If the loan is not repaid on schedule, or if other requirements of the loan contract are not met, the mortgagee may instigate foreclosure proceedings. In some states, the foreclosure process results in the property being sold at public auction with the proceeds of the auction being used to satisfy the debt. In other states, foreclosure results in the

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Restrictive Covenant Disputes

The Case of the Too-Large Plaque When Sol and Renee Silberman bought their home in Lakewood Greens they hung a 45'' by 25'' terra- cotta plaque that depicted three cherubs pouring water from a pail. During a routine property inspec- tion the community association’s prop erty manager noticed the plaque and told the Silbermans that under the restrictive cove nants it required the approval of the architec tural control board. After their application was denied, the Silbermans still refused to remove the plaque, contending it was hung with only two screws and did not require any architectural changes or modifications, that the model home had three terra-cotta urns, and that

many other homeowners had similar plaques or hangings. The association then filed suit to force removal of the plaque.

The appeals court found that the Silber mans’ plaque was much larger than those hung by other homeowners, and that the other homeowners who had similar but smaller plaques complied with the cove nants. The Silbermans were ordered to remove the plaque, and the community was again safe from too-large terra-cotta cherubs.

[Lakewood Greens Homeowners Assoc. v. Sil berman, 765 So.2d 95, Florida Court of Appeals, 4th District]

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transfer of ownership from the mortgagor to the mortgagee. The mortgagee can then use or sell the property at it sees fit. Mortgage lending is discussed more fully in Chapter 16.

Mechanics’ Liens A mechanic’s lien (also known as a construction lien in some states) protects

those who provide labor or materials for real estate improvements, including sup- pliers, architects, engineers, landscapers, carpenters, plumbers, and similar workers. Any such suppliers of materials and labor who are not paid can file a mechanic’s lien on the property. If payment still is not made, foreclosure proceedings can result, with the property being sold to satisfy the debt.

Mechanics’ liens are not just a concern to persons who fail to pay for work done to their real property; they also can create problems for subsequent purchasers. Sup- pose, for example, that Marty and Carole Teem purchase a home from Potts Develop- ment. Some weeks after closing on the house, they are dismayed to learn that several subcontractors have filed mechanics’ liens on their home because they were not paid by the general contractor. Even though the Teems have already paid for the house, they may have to pay twice for the same work if the claims are valid. Needless to say,

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A Cautionary Tale on Mechanics’ Liens

Most homeowners have never heard of a mechanic’s lien, but every year some learn in a very painful way. Howard Krish had paid the final bill on his $9,600

roofing job, and he had the receipt. Even so, he was being sued by a building supply company for $3,100 to pay for the felt and shingles that were used on his Boynton Beach, Florida, home. Johnston Roofing had accepted his check but had not paid its suppli ers. Krish, along with 10 of his neighbors who had paid in full for new roofs, had to pay the building supply company to avoid having their homes sold to satisfy the mechanic’s lien.

Or consider the sad case of Maria Ghiran, a Chicago resident who decided to move to Florida.

She hired a contractor to build her house and paid him two installments totaling $57,000. When she flew down to inspect the work, she found a slab of concrete—and nothing more. The contractor had gone bankrupt after taking her money, and the subcontractors and suppliers placed mechanics’ liens on the property.

The moral of this story is clear. Homeown- ers need to check the mechanic’s lien law in their state before paying contractors for work on their property. In some states, homeowners can avoid paying twice if they can prove they paid the gen- eral contractor for the work. To avoid this painful surprise in other states, such as Florida in our sad tales, homeowners need to get signed lien releases before paying their general contractor.

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58 PA RT O N E Real Estate Legal Analysis

it is vital to see that all suppliers of material and labor are paid before the general contractor is fully paid or the house purchase completed.

General Liens

Like specific liens, general liens do not represent property ownership; they are, however, creditors’ claims against a property owner’s title. Unlike special liens, gen- eral liens normally may be filed on either personal or real property.

A common general lien is a judgment lien. The winner in a lawsuit who has not been paid may collect the debt by claiming an interest in the loser’s property, includ- ing any real estate. If the judgment debt still is not paid, the property can be sold to satisfy the creditor’s claim. Such a sale, commonly referred to as a judicial sale, is conducted as an auction by a sheriff or another legal authority. In some states, the debtor-owner of the real property may redeem ownership interest within a year of the sale by reimbursing the purchaser for the sales price and paying all costs of the sale.

Other general liens that could result in similar ownership limitations are public liens for delinquent taxes: federal income, federal estate, state income, and state estate or inheritance. As in a court-awarded judgment, such unpaid tax debts can be levied on real property. Ultimately, if the lien is not satisfied and removed, the land possibly could be sold at public auction through the foreclosure process.

| easements _______________________________________________

An easement is a right given to one party by a landowner to use the land in a specified manner. The landowner does not have to give up his or her land, but rather coexists with the holder of the easement. For example, property owners may grant a utility company the right to run a power line across their land, or one landowner may allow an adjoining owner to build a driveway across her property. From the perspective of the property that is subject to the easement, easements are restrictions on property rights.

f i g u r e 3.1 Easement Appurtenant Created by a Joint Driveway

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C H A P T E R 3 Private Restrictions on Ownership 59

Types of Easements

There are two types of traditional easements: an easement appurtenant and an easement in gross. An easement appurtenant exists when an easement is legally connected to an adjoining property. Suppose, for example, that Bill pays Susan to grant him an easement to run a sewer line from his house across her property to the city’s trunk sewer line. In this case, Bill’s land is being served or benefited by the easement and is known as the dominant estate. Susan’s land, on the other hand, is burdened by the easement and is known as the servient estate. Susan can continue to use her land, but she cannot do anything that would interfere with Bill’s use of the sewer line.

As with almost all encumbrances, this easement “runs with the land”; in other words, it continues when ownership of either the dominant or servient estate changes unless specifically terminated using one of the methods to be discussed below. Even though the new owners of Susan’s land may not want Bill’s sewer line to remain on their property, they have little choice in the matter.

In some cases, adjoining properties are both dominant and servient. Suppose that Ralph and Ed are neighbors, and each wants a paved driveway. To save money, they decide to share the building costs of one driveway that will serve both lots, as shown in Figure 3.1. Each grants the other an easement appurtenant to use the portion of the driveway on each other’s land. Both lots are simultaneously the servient estate and the dominant estate.

With an easement in gross there is no dominant estate, only a servient estate. For example, a utility company that acquires an easement to run its power line or pipeline across a property or the highway department that acquires an easement for a road right-of-way has acquired an easement in gross. The easements have been granted to the utility company or the highway department, not to parcels of land. The land over which the utility line or road crosses is the servient estate, and the ease- ment binds all future owners of the property.

f i g u r e 3.2 Easement Created by Express Grant

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60 PA RT O N E Real Estate Legal Analysis

Creation of Easements

Both appurtenant easements and easements in gross may be established in a number of ways. The most common method is by an express grant or reservation, but easements also may be established by implication and by prescription.

Express Grant or Reservation Most easements are created by either express grant or express reservation.

Suppose Scott sells half of his 10-acre lot to Darlene. If the property Darlene is pur- chasing has no road frontage, Scott may expressly grant her the right to use a portion of his remaining property for a driveway. In this case, Scott owns the servient estate, and Darlene owns the dominant estate. The deed Scott gives Darlene should specify the easement appurtenant that has been created. This easement is shown in Figure 3.2.

An easement also may be established by an express reservation. If Sam were to sell the front half of his land to Bob, the remainder of Sam’s property would be landlocked because it does not front on a public road. In the deed that transferred ownership of the frontage land to Bob, Sam could reserve a right of passageway through Bob’s newly acquired land. Sam owns the dominant estate, and Bob owns the burdened (servient) estate. By this express reservation in the sale of land, an easement appurtenant has been created, as shown in Figure 3.3.

Implication Sometimes, when one or more parcels are severed from a larger tract under com-

mon ownership, the right to use the land may be implied from the factual circum- stances even when an easement is not expressly created. The easement supposedly reflects the intentions of the parties and is called an easement by implication.

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