Principles of California Real Estate Lesson 2: Estates in Land and Methods of Holding Title © 2010 Rockwell Publishing

Introduction This lesson will discuss: types of estates in land ways of holding title to property © 2010 Rockwell Publishing

Estates in Land Interests in real property Interest: Interest in real property is a right to the property or a claim against it. Interests may be: possessory (also called estates) nonpossessory © 2010 Rockwell Publishing

Estates in Land Interests in real property Estate: Absolute and exclusive right to possess property now or in the future. © 2010 Rockwell Publishing

Categories of Estates Two basic categories: freehold estates (include title) leasehold estates (don’t include title) Both freehold and leasehold estate may exist at same time in same property; this relationship is known as privity. © 2010 Rockwell Publishing

Types of Estates Freehold estates Two main kinds of freehold estates: fee simple estates life estates © 2010 Rockwell Publishing

Freehold Estates Fee simple estates most common type of estate highest and most complete form of land ownership can potentially last forever   Fee simple estate is perpetual, transferable, and inheritable. © 2010 Rockwell Publishing

Fee Simple Estates Two types of fee simple estates: absolute defeasible © 2010 Rockwell Publishing

Fee Simple Estates Fee simple absolute Estate transferred is fee simple absolute unless grantor makes clear some other estate intended. Fee simple absolute owner is not subject to any special limitations or conditions. © 2010 Rockwell Publishing

Fee Simple Estates Fee simple defeasible Fee simple defeasible: Fee title with condition or qualification attached. Interest will end if specified act or event occurs at some later date. © 2010 Rockwell Publishing

Freehold Estates Life estates limited in time lasts only as long as a particular person is alive © 2010 Rockwell Publishing

Life Estates Duration Life tenant: Person who owns property for duration of measuring life. Measuring life: Person whose life is used to measure length of life estate; usually same person as the tenant.   © 2010 Rockwell Publishing

Life Estates Future interests When measuring life ends, title will pass to holder of: estate in reversion, or estate in remainder. © 2010 Rockwell Publishing

Life Estates Estate in reversion Estate in reversion: If deed giving title to life tenant states that title shall revert to grantor on death of measuring life, grantor has estate in reversion. © 2010 Rockwell Publishing

Life Estates Estate in remainder Estate in remainder: If deed giving title to life tenant states that title shall pass to third party on death of measuring life, third party has estate in remainder. © 2010 Rockwell Publishing

Life Estates Sale or lease Life tenant may sell or lease only interest she has in property. Life tenant must maintain property in good condition. © 2010 Rockwell Publishing

Summary Freehold Estates Fee simple absolute Fee simple defeasible Life estate © 2010 Rockwell Publishing

Categories of Estates Leasehold Estates Leasehold estate: Limited, temporary estate created by lease contract. Parties: landlord and tenant. Tenant gets right to exclusive use and possession of property. Landlord retains title and holds reversionary interest in property. © 2010 Rockwell Publishing

Leasehold Estates Chattel Real Because lease is considered personal property (even though it represents interest in real property), it may also be called chattel real. © 2010 Rockwell Publishing

Leasehold Estates Types of estates term tenancy periodic tenancy tenancy at will tenancy at sufferance © 2010 Rockwell Publishing

Types of Leasehold Estates Term tenancy Term tenancy: A leasehold estate that lasts for any fixed term; also called estate for years. One-week lease is estate for years. © 2010 Rockwell Publishing

Types of Leasehold Estates Periodic tenancy Periodic tenancy: Leasehold that is not limited to specific term; also called periodic estate. Automatic renewal: continues from rental period to rental period until terminated by landlord or tenant, with proper notice. Required notice period = rental period. © 2010 Rockwell Publishing

Types of Leasehold Estates Tenancy at will Tenancy at will: Often arises when lease has expired and parties are negotiating new lease; also called estate at will. No agreement exists. Tenant in possession with landlord’s consent. California requires 30 days’ notice of termination. © 2010 Rockwell Publishing

Types of Leasehold Estates Tenancy at sufferance Tenancy at sufferance: Not true estate; tenant does not have leasehold interest. Tenant keeps possession after valid lease expires, without landlord’s consent. Commonly called holdover tenancy. © 2010 Rockwell Publishing

Summary Leasehold Estates Term tenancy Periodic tenancy Tenancy at will Tenancy at sufferance © 2010 Rockwell Publishing

Ways of Holding Title Title to real property may be held by one person, known as ownership in severalty; or it may be held by two or more persons, known as concurrent ownership. © 2010 Rockwell Publishing

Ways of Holding Title Ownership in severalty Ownership in severalty: Ownership by one individual (often called “sole” ownership). Individual owner may be: natural person (human being) artificial person (corporation, LLC, etc.) © 2010 Rockwell Publishing

Ways of Holding Title Concurrent ownership Concurrent ownership: Ownership by two or more persons at same time. In California, there are three types of concurrent ownership: tenancy in common joint tenancy community property © 2010 Rockwell Publishing

Concurrent Ownership Tenancy in common Tenancy in common is most basic form of concurrent ownership. It’s default form if: arrangement doesn’t fit into one of other categories deed did not specify another type © 2010 Rockwell Publishing

Concurrent Ownership Tenancy in common Tenants in common have undivided interest in property as a whole. This is called unity of possession. Interests don’t have to be equal. No matter how small tenant’s interest, he may share possession of entire property. © 2010 Rockwell Publishing

Concurrent Ownership Death of tenant in common Tenant in common may will interest to someone other than remaining tenant(s) in common. © 2010 Rockwell Publishing

Concurrent Ownership Terminating a tenancy in common Tenancy in common may be terminated by a partition suit. Court will either divide property into separate parcels or order sale of property with proceeds to be divided among co-tenants. © 2010 Rockwell Publishing

Concurrent Ownership Joint tenancy In joint tenancy, two or more persons are joint and equal owners of property. © 2010 Rockwell Publishing

Joint Tenancy Four unities Requirements for joint tenancy: unity of interest unity of title unity of time unity of possession © 2010 Rockwell Publishing

Joint Tenancy Right of survivorship Right of survivorship is key feature of joint tenancy. When joint tenant dies, her interest: automatically passes to surviving joint tenants is not part of her estate and cannot be willed © 2010 Rockwell Publishing

Joint Tenancy Termination Joint tenancy can be terminated by partition suit. Also terminates if any of four unities is destroyed. Example: If joint tenant transfers her interest to another, new owner is not joint tenant. © 2010 Rockwell Publishing

Concurrent Ownership Community property Community property is property owned jointly and equally by husband and wife. System is used in California and 8 other states. © 2010 Rockwell Publishing

Concurrent Ownership Community property In community property states: everything owned by married couple that isn’t separate property of one spouse is community property of both spouses each spouse has an undivided ½ interest in community property © 2010 Rockwell Publishing

Community Property Separate property property owned before marriage gift or inheritance acquired during marriage anything purchased with separate property funds profits or proceeds from separate property © 2010 Rockwell Publishing

Summary Individual and Concurrent ownership Ownership in Severalty Concurrent ownership Tenancy in Common Joint tenancy Community property © 2010 Rockwell Publishing

Ways of Holding Title Business organizations Real property may also be owned by business entity: general partnerships and limited partnerships corporations limited liability companies real estate investment trusts © 2010 Rockwell Publishing

Business Organizations Partnership Partnership: Association of two or more persons to conduct business as co-owners and share profits. Partnerships are formed by contract. Types of partnerships: general partnership limited partnership © 2010 Rockwell Publishing

Partnerships General partnership General partnership: Each partner has: ownership interest voice in management right to share in profits obligation to share in losses The partnership is not taxed, but each partner’s earnings are taxed individually. © 2010 Rockwell Publishing

General Partnership Property ownership Partner has right to use partnership property but is not co-owner of property and has no transferable interest in it. But partner’s interest in partnership itself may be transferred. © 2010 Rockwell Publishing

General Partnership Liability Each partner may be held personally liable for debts and obligations of general partnership. © 2010 Rockwell Publishing

Partnerships Limited partnership Limited partnership is more regulated than general partnership. Agreement must be in writing. Only general partners have liability for partnership debt and obligations, and right to manage business. © 2010 Rockwell Publishing

Partnerships Limited partnership A limited partnership has at least one general partner, plus one or more limited partners. Most California real estate syndicates are limited partnerships. Limited partners have: limited liability no control over partnership property passive role in management © 2010 Rockwell Publishing

Business Organizations Corporation Corporation: Artificial person with perpetual existence. Made up of: shareholders board of directors corporate officers © 2010 Rockwell Publishing

Business Organizations Corporation Corporations: can own property can incur debts are subject to double taxation (profits are taxed before distribution to shareholders, then taxed again as ordinary income to the stockholders) © 2010 Rockwell Publishing

Business Organizations Corporation Shareholders: own shares in corporation have no managerial control are liable only up to value of their stock © 2010 Rockwell Publishing

Business Organizations Limited liability company LLC may be organized like partnership or like corporation. Owners are called “members.” Income not taxed at entity level, so no double taxation. Owners have limited liability. © 2010 Rockwell Publishing

Business Organizations Real estate investment trust REIT: One or more trustees manage real property for benefit of investors (the beneficiaries). Investor liability is limited to amount of investment. An REIT: qualifies for special tax treatment must have at least 100 investors © 2010 Rockwell Publishing

Summary Business Organizations General partnership Limited partnership Corporation Limited liability company Real Estate Investment Trust (REIT) © 2010 Rockwell Publishing

Ways of Holding Title Condominiums and cooperatives There are two types of properties that combine elements of individual ownership and concurrent ownership: condominiums cooperatives © 2010 Rockwell Publishing

Condos and Co-ops Condominiums Condominiums are usually residential and resemble an apartment complex. Residents: own individual units in severalty share ownership of common elements © 2010 Rockwell Publishing

Condominiums Common elements Common elements: Parts of a condominium property that are usable by all residents. Examples: grounds elevator hallways swimming pool © 2010 Rockwell Publishing

Condominiums Separate properties Buyer of condominium unit: receives deed for unit finances purchase with separate loan obtains separate title insurance policy pays separate taxes If lien against one unit is foreclosed, other units are not affected. © 2010 Rockwell Publishing

Condominiums Governing board Elected governing board usually manages condominium and enforces rules. Condominium seller must give prospective buyer: copy of bylaws latest financial statements CC&Rs for the project © 2010 Rockwell Publishing

Condominiums Uses Condominium can be designed for residential, commercial, or industrial use. © 2010 Rockwell Publishing

Condos and Co-ops Cooperatives Residential co-op might look like condominium, but ownership structure is very different. Title is held by corporation. Residents: own shares in corporation have long-term lease on unit © 2010 Rockwell Publishing

Condos and Co-ops Cooperatives Cooperative project is: financed with single mortgage taxed as single property Rent paid to corporation is proportionate share of co-op’s expenses; if one tenant fails to pay rent, other tenants must cover to avoid foreclosure. © 2010 Rockwell Publishing

Summary Condos & Co-ops Condominium Common elements Governing board Cooperative © 2010 Rockwell Publishing