2. 5 Property Personal Property and Bailments Real Property
Landlord and Tenant
Estates and Trusts
Insurance Law
McGraw-Hill/Irwin Business Law, 13/e
© 2007 The McGraw-Hill Companies, Inc. All rights reserved.

3. 24 C H A P T E R
Real Property
“Study how a society uses its land, and you can come to pretty reliable conclusions as to what its future will be.”
E.F. Schumacher, Small is Beautiful (1973)

4. Learning Objectives Scope of real property
Rights and interests in real property
Acquisition of real property and transfer by sale
Obligations related to property condition
Land use
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5. Overview
The law of real property concerns the ownership, acquisition, and use of land
Real property includes not only land but also things firmly attached to or embedded in land:
Buildings
Trees, crops, and other vegetation
Water and groundwater
Minerals
Airspace above
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6. Fixtures
A fixture is an item of personal property that has become attached to or used in conjunction with real property in such a way that it ceases being personal property and becomes part of the real property
Fixtures belong to owner of real property
Example: chalkboard
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7. Factors To Determine Status as Fixture
Attachment
If firmly attached to real property so it cannot be removed without damaging property, the item is likely to be a fixture
Adaptation
When an item would be of little value except for use with real property, item likely to be a fixture
Intent
Judged by what the circumstances indicate as intended not person’s subjective intent
Attachment. Actual physical attachment to real property is not necessary, however. For example, heavy machinery or remote control devices for automatic garage doors may be considered fixtures even though they are not physically attached to real property.
Adaptation. For example, keys and custom-sized window screens and storm windows have been held to be fixtures.
Intent. If the owner does not want an attached item to be considered a fixture, he must specifically reserve the right to keep the item.
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8. Trade Fixtures
An exception to the usual fixture rules involve trade fixtures, which are personal property attached to leased premises by a tenant for the purpose of carrying on the trade or business
Trade fixtures remain the tenant’s personal property and may be removed at lease end
Though “trade fixtures” are an exception to the general rule of fixtures becoming part of the real property, a business would be very wise to specify their trade fixtures as personal property in the commercial lease agreement or risk a dispute over the property at lease termination.
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9. Security Interests in Fixtures
Personal property may be subject to a lien or security interest at the time it is attached to real property
Example: appliance store takes a security interest in a dishwasher installed in home and perfects the interest by filing a financing statement in the appropriate real estate records office
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10. Estates in Land
The term estate is used to describe a person’s ownership interest in real property
Classified as either freehold or nonfreehold
Freehold estates are ownership interests of uncertain duration
Nonfreehold (or leasehold) estates are those held by persons who lease real property

11. Freehold Estates
Most common forms of freehold estates (rights to exclusive possession) are fee simple absolute and life estate
Fee simple absolute is the normal concept of “full ownership” of land
A life estate gives a person the right to possess and use property for a time measured by his or another person’s lifetime

12. Co-Ownership
Co-ownership of real property exists when two or more persons share the same ownership interest in property
Seven types of co-ownership are recognized in the United States: tenancy in common, joint tenancy, tenancy by the entirety, community property, tenancy in partnership, condominium ownership, cooperative ownership
For details, see Fig. 1 on page 590 of the text

13. Easement
An easement is the right to make certain use of another person’s property (affirmative easement) or to prevent another from making certain uses of his own property (negative easement)
Easements may be acquired by grant, reservation, prescription, or implication
By grant. When an owner of property expressly provides an easement to another while retaining ownership of the property, he is said to grant an easement.
By reservation. When one transfers ownership of her land but retains the right to use it for some specified purpose, she is said to reserve an easement in the land.
By prescription. An easement by prescription is created when one person uses another’s land openly, continuously, and in a manner adverse to the owner’s rights for a period of time specified by state statute.
By implication. Sometimes, easements are implied by the nature of the transaction rather than created by express agreement of the parties. Such easements, called easements by implication, take either of two forms: easements by prior use and easements by necessity.

14. Easement
An express grant of an easement normally is subject to the statute of frauds and must be in writing to be enforceable
The other types of easements are enforceable despite the lack of a writing
The photo depicts power cables that require easements. Utility easement typically are express easements granted by a written deed.
A utility easement

15. Profit & License
A profit is a right to enter another’s land and remove some product or part of land
A license is a temporary right to enter another’s land for a specific purpose
The tenant who planted the cotton crop has a profit, the combine crew has a license to pick cotton

16. Restrictive Covenants
Real estate owners may create agreements that restrict use of real property called restrictive covenants
Covenants “run with the land” and bind subsequent owners of the property
Enforceability of covenants depends on purpose, nature, scope of restrictions
Restrictive covenants are common in subdivisions (e.g., no trailers or inoperable cars in the front yard, no farm animals, pet limitations, pre-approval requirements for painting or home improvements).

17. Gardner v. Jefferys Facts and Procedural History:
Large tract of land conveyed to 3 separate parties
Jefferys (son of original owner), Gardners, Soules
The deed to land in question included a restrictive covenant and landowner Gardners filed suit to determine effect of the covenant, but began to build in the restricted area of the property
Trial court ruled that the benefit of the restrictive covenant ran with the land and Gardners had violated the covenant by beginning construction
Gardners appealed
In 1957, William & Ena Jefferys (parents of William Jefferys III) purchased 200 acres of farm land in Fayston, Vermont, known as the Strong Farm. Beginning in 1966, the elderly Jefferys began selling off parcels of the farm. In 1969, Sheldon and Carin Gardner purchased a ten-acre parcel of undeveloped land from the Jefferys. The deed contains a restrictive covenant providing that a specified part of the premises “shall forever be and remain open and free of all buildings and structures, except the right to construct on said open land a private swimming pool, and/or tennis court, and, the usual fences and structures appurtenant thereto and such other buildings and structures as meet the approval in writing of the Grantors herein, their heirs and assigns.” The provision further states that rights secured therein are “to be enjoyed by the Grantors, their heirs and assigns.”
In 1975, the Jefferys conveyed a five-acre parcel of land to Karin Souminen, who, in turn, sold the parcel to George and Janice Soules in The Soules built a house on the land and lived there. Their property is located next to the Gardners’ land. In 1979, the elderly Jefferys conveyed the remainder of their Fayston property to their son, William Jefferys III, and his wife, Susan.
In the late summer and early fall of 1999, the Gardners wrote to William and Susan Jefferys twice requesting approval to build a two-story structure within the area restricted by the covenant. The Jefferys gave the Soules a copy of the request. In June 2000, the Soules wrote the Gardners a letter stating that they were interested parties to the restrictive covenant. In September 2000, the Gardners filed a declaratory judgment action asking the court to determine the effect of the restrictive covenant in their deed. The Soules filed a counterclaim. In May 2001, the Gardners began building a shed in the restricted area. Shortly thereafter, the superior court granted the Soules’request for a preliminary injunction stopping the construction. In the fall of 2001, the Gardners began planting white pines in the restricted area directly in the Soules’ view.
In July 2003, the superior court ruled that the benefit of the restrictive covenant ran with the land and was enforceable by both the Soules and the Jefferys, and that the Gardners had violated the covenant by beginning construction of the proposed shed and by planting trees in the restricted area. Accordingly, the court enjoined the continued existence of the shed and the trees. Further, the court prohibited the Gardners from allowing plants or crops in the restricted area to exceed six feet in height. The Gardners appealed.

18. Gardner v. Jefferys Legal Reasoning & Holding:
A restrictive covenant will “run with the land” so that successor property owners may enforce its terms if: (1) covenant is written; (2) parties to the covenant intended it to run with the land; (3) the covenant does “touch and concern” the land; and (4) privity of estate exists between the parties
Evidence demonstrates the parties intended the restrictive covenant to run with the land and the intent was to maintain an open meadow
Affirmed in favor of Jefferys and Soules
Court: “Gardner first contends that the restrictive covenant does not run with the land to the benefit of the Soules because the parties intended the covenant to bind only the grantors, their heirs and assigns, and neither the Soules nor the Jefferys are heirs or assigns of the grantors. We do not find this argument persuasive. … Gardner further states that neither the Soules’ deed nor the Jefferys’ deed includes an assignment from the elderly Jefferys, and that the Jefferys are not heirs because Ena Jefferys is still alive, and they did not obtain the land through inheritance. …We conclude that the record in this case overwhelmingly demonstrates that the parties intended the restrictive covenant to run with the land. …Well settled that where a restrictive covenant contains words of succession, i.e., heirs and assigns, a presumption is created that the parties intended the restrictive covenant to run with the land…. Ena Jefferys, one of the original grantors, testified that she always assumed that the phrase “open and free of all buildings and structures” meant that nothing would interfere with the view…overwhelming evidence that the intent underlying the restrictive covenant at issue here was to maintain the restricted area as an open meadow…Affirmed in favor of the Jefferys and Soules.”

19. Acquisition of Real Property
Title to real property may be acquired by purchase, gift, will or inheritance, tax sale, and adverse possession
Adverse possession occurs when person wrongfully occupies land and acts in open and hostile manner as if he were the owner
True owner must take steps within a statutory time limit to eject the possessor from the land or forever lose the right to eject the possessor
Example of adverse possession: Vezey v. Green.
Adverse possession is very rare as of the printing of this text, and now is more typically related to disputes over a few inches where a neighbor builds a fence that is actually on another’s property.

20. Steps for Sale & Purchase
Contracting with real estate broker to locate buyer
Negotiating and signing a contract of sale
Arranging for financing of the purchase and other requirements (e.g., conduct a survey or acquire title insurance)
Closing the sale, primarily involving payment of the purchase price and transfer of the deed
Recording the deed

21. The Deed
A valid conveyance of real property occurs through execution and delivery of a deed
Written instrument that transfers title from one person (the grantor) to another (the grantee)
Log on to your state’s Secretary of State website or the state’s realtor’s association website to view examples of realty agreements.

22. Types of Deeds
A quitclaim deed conveys whatever title the grantor has at the time he executes the deed
Contains no warranty of title
A warranty deed contains covenants of warranty about the title
Two types: general and special
A deed of bargain and sale (grant deeds) grantor makes no covenants about the title
General warranty deed. Under a general warranty deed, the grantor warrants against (and agrees to defend against) all title defects and encumbrances (such as liens and easements), including those that arose before the grantor received her title.
Special warranty deed. Under a special warranty deed, the grantor warrants against (and agrees to defend against) title defects and encumbrances that arose after she acquired the property. If the property conveyed is subject to an encumbrance such as a mortgage, a long-term lease, or an easement, the grantor frequently provides a special warranty deed that contains a provision excepting those specific encumbrances from the warranty.
In grant deeds, the grantor implicitly represents that he owns the land, but makes no covenants

23. Recording Statutes
Race statute: first grantee who records a deed to a tract of land has superior title
Notice statute: a later grantee of property has superior title if his interest acquired without notice of earlier grantee’s claim to the property under an unrecorded deed
Race-notice statute: the grantee with priority is the one who both takes his interest without notice of any prior unrecorded claim and records first
A recorded deed operates to provide the public at large with notice of the grantee’s property interest.

24. Methods of Assuring Title
In a title opinion, an attorney examines the abstract of title and gives an opinion about whether the grantor has marketable title
Marketable title: title free from defects or reasonable doubt about its validity
Abstract of title: history of what public records show about the passage of title to, and other interests in, a parcel of real property
Not a guarantee of good title

25. Methods of Assuring Title
Under the Torrens system of registration (in a few states), one who owns land in fee simple obtains a certificate of title
Purchasing a policy of title insurance is the preferred and most common means of protecting title to real property
Title insurance obligates insurer to reimburse insured for loss if the title proves defective

26. Residential Property
Historically, sellers of residential property made no warranty that property was habitable or suitable for buyer’s use and had no duty to disclose hidden defects
Okay, so the picture is of a San Francisco house after the earthquake, but it gets the point across!

27. Residential Property
Over the last century, an implied warranty of habitability developed that guarantees the house is free of hidden defects rendering it unsafe or unsuitable for human habitation
Similar to implied warranties for sale of goods
Seller may be liable for damages if seller breaches the implied warranty
Damages measured by either the cost of repairs or the loss in value of the house

28. Premises Liability
Premises liability refers to negligence cases in which property owners or possessors (such as business operators leasing commercial real estate) are held liable to persons injured while on the property
Negligence: failure to exercise reasonable care to keep the property reasonably safe
Generally includes duty to take reasonable security precautions to protect persons lawfully on premises from foreseeable wrongful (including criminal) acts by third parties
These cases include the typical “slip and fall” cases, as well as the cases in which an invitee is attacked and injured.

29. Land Use Control: Nuisance
Society imposes duties on landowners by nuisance, zoning, & eminent domain laws
Nuisance refers to the lawsuit that may be filed if a property use unreasonably interferes with another person’s ability to use or enjoy her own property
Nuisance isn’t just the famous example of the smelly hog farm, but includes noise, light, and other bothersome activities.

30. Land Use Control: Zoning
Normally, zoning ordinances divide a city or town into various districts and specify or limit the uses to which property in those districts may be put
Single-family or high-density residential uses, or commercial, light industry, or heavy industry uses
Restrictions on building height, building footprint, and distance buildings must be from lot lines (setback regulations)

31. Land Use Control: Zoning
A zoning ordinance is prospective, thus the ordinance may require gradual phasing out of nonconforming uses and buildings that do not fit the general zoning plan
Property owners may seek a variance, allowing a deviation from the zoning law

32. Land Use Control: Eminent Domain
The Fifth Amendment to the Constitution guarantees that private property shall not be taken for public use without “just compensation”
This implies the government’s power of eminent domain to effect the taking
The key is “just compensation”
Eminent domain is controversial, perhaps more so given the Kelo decision
Note that the Fifth Amendment says “taken for public use.” The Kelo decision altered the traditional meaning of “public.”
State congressional bodies reacted to the Kelo decision by proposing statutes preventing the taking of private property for private use.

33. Kelo v. City of New London
Facts:
New London was in serious economic decline
City authorized private developer to “rejuvenate” an area that included 115 private properties
Most of 115 properties were in good condition
Developer negotiated purchase of most properties, but some homeowners had been there many years, liked their homes with water views, and would not sell
New London, Connecticut, experienced decades of economic decline. In 1990, a state agency designated the city a “distressed municipality.” Conditions prompted state and local officials to target New London, and particularly its Fort Trumbull area, for economic revitalization. To this end, New London Development Corporation (NLDC), a private nonprofit entity established some years earlier to assist the city in planning economic development, was reactivated. In January 1998, the state authorized a $5.35 million bond issue to support the NLDC’s planning activities. In February, the pharmaceutical company Pfizer Inc. announced that it would build a $300 million research facility on a specific site and local planners hoped that Pfizer would draw new business, serving as a catalyst to the area’s rejuvenation. In May, the city council authorized the NLDC to formally submit its plans to the relevant state agencies for review. Upon obtaining state-level approval, the NLDC finalized an integrated development plan focused on 90 acres, which includes about 115 privately owned properties. The development plan called for the creation of restaurants, shops, marinas for both recreational and commercial uses, a pedestrian “riverwalk,” 80 new residences, a new U.S. Coast Guard Museum, research and development office space, and parking. The NLDC intended the development plan to capitalize on the arrival of the Pfizer facility and the new commerce it was expected to attract. In addition to creating jobs, generating tax revenue, and helping to build momentum for the revitalization of downtown New London, the plan was also designed to make the city more attractive and to create leisure and recreational opportunities on the waterfront and in the park. The city council approved the plan in January 2000, and designated the NLDC as its development agent in charge of implementation. The city council also authorized the NLDC to purchase property or to acquire property by exercising eminent domain in the city’s name.
The NLDC successfully negotiated the purchase of most of the real estate in the 90-acre area, but its negotiations with nine property owners, including the petitioners Susette Kelo, Wilhelmina Dery, and Charles Dery failed. As a result, in November 2000, the NLDC initiated condemnation proceedings. Kelo had lived in the area since 1997 and made extensive improvements to her house, which she prizes for its water view. Wilhelmina Dery was born in her house in 1918 and had lived there her entire life. Her husband Charles had lived in the house since they married some 60 years ago. In all, the nine petitioners own 15 properties. There is no allegation that any of these properties is blighted or otherwise in poor condition; rather, they were condemned only because they happen to be located in the development area.

34. Kelo v. City of New London
Procedural History:
City brought a “condemnation” action under the power of eminent domain and plaintiffs brought suit claiming the taking of their properties for private development was not a “public use”
Trial court granted a permanent restraining order prohibiting the taking of properties for one area but not another and both sides appealed to state supreme court which held all takings valid
Case appealed to the U.S. Supreme Court
In December 2000, the petitioners brought this action claiming, among other things, that the taking of their properties would violate the “public use” restriction in the Fifth Amendment. The trial court granted a permanent restraining order prohibiting the taking of properties in one area, but denied the order for properties in another area. Both sides appealed to the Supreme Court of Connecticut. That court held that all of the city’s proposed takings were valid. The petitioners then appealed to the U.S. Supreme Court.

35. Kelo v. City of New London
Issue & Legal Reasoning:
“Two polar propositions are perfectly clear” – general rule is that taking from private party for another private party is unconstitutional, but equally clear that transferring property from one private party to another is valid if future “use by the public” intended
“The disposition of this case therefore turns on the question whether the City’s development plan serves a ‘public purpose.’ …defined broadly…“
Stevens, Justice. “Two polar propositions are perfectly clear. On the one hand, it has long been accepted that the sovereign may not take the property of A for the sole purpose of transferring it to another private party B, even though A is paid just compensation. On the other hand, it is equally clear that a State may transfer property from one private party to another if future ‘use by the public’ is the purpose of the taking; the condemnation of land for a railroad with common-carrier duties is a familiar example. Neither of these propositions, however, determines the disposition of this case….The disposition of this case therefore turns on the question whether the City’s development plan serves a ‘public purpose.’ ”
“Without exception, our cases have defined that concept broadly, reflecting our long-standing policy of deference to legislative judgments in this field. Viewed as a whole, our jurisprudence has recognized that the needs of society have varied between different parts of the Nation, just as they have evolved over time in response to changed circumstances. For more than a century, our public use jurisprudence has wisely eschewed rigid formulas and intrusive scrutiny in favor of affording legislatures broad latitude in determining what public needs justify the use of the takings power.”

36. Kelo v. City of New London
Holding:
“The City has carefully formulated an economic development plan…To effectuate this plan, the City has invoked a state statute that specifically authorizes the use of eminent domain to promote economic development.”
“Because that plan unquestionably serves a public purpose, the takings challenged here satisfy the public use requirement of the Fifth Amendment.”
Affirmed in favor of the City
“The City has carefully formulated an economic development plan that it believes will provide appreciable benefits to the community, including—but by no means limited to— new jobs and increased tax revenue. As with other exercises in urban planning and development, the City is endeavoring to coordinate a variety of commercial, residential, and recreational uses of land, with the hope that they will form a whole greater than the sum of its parts. To effectuate this plan, the City has invoked a state statute that specifically authorizes the use of eminent domain to promote economic development. Given the comprehensive character of the plan, the thorough deliberation that preceded its adoption, and the limited scope of our review, it is appropriate for us to resolve the challenges of the individual owners, not on a piecemeal basis, but rather in light of the entire plan. Because that plan unquestionably serves a public purpose, the takings challenged here satisfy the public use requirement of the Fifth Amendment.”
“Just as we decline to second-guess the City’s considered judgments about the efficacy of its development plan, we also decline to second-guess the City’s determinations as to what lands it needs to acquire in order to effectuate the project. …As the submissions of the parties make clear, the necessity and wisdom of using eminent domain to promote economic development are certainly matters of legitimate public debate. This Court’s authority, however, extends only to determining whether the City’s proposed condemnations are for a “public use” within the meaning of the Fifth Amendment to the Federal Constitution. Affirmed in favor of the City.”

37. Regulatory Takings
Other takings litigation centers around land use regulations that make the use of property less profitable for development
Landowners challenge application of regulations
Example: Palazzolo v. Rhode Island – may a person who purchases property after regulations are in place bring a claim for inverse condemnation?
Answer: yes, they can bring the claim, but that doesn’t mean they’ll win!

38. Test Your Knowledge
True=A, False = B
For his two dogs, Brett built a dog kennel and run of wood posts and wire fencing behind his house. When Brett sells his house, the kennel is a fixture that has become real property.
Carol opened a restaurant in an empty leased space in the food court of City Shopping Center. Carol equipped the space with ovens, shelving, glass cases, and refrigerators. When Carol’s lease is over, Carol must leave the ovens and refrigerators.
True. A fixture is an item of personal property that has become attached to or used in conjunction with real property in such a way that it ceases being personal property and becomes part of the real property.
False. The ovens and refrigerators would be trade fixtures that Carol took take with her at lease end. The shelving and glass cases, however, may have become fixtures (real property) depending on how they were installed.

39. Test Your Knowledge True=A, False = B
Sheila has a drainage ditch behind her house that is described in the written deed. Sheila is not permitted to alter the ditch in any way. The drainage ditch is an easement.
The implied warranty of habitability guarantees that a house has no hidden defects rendering it unsafe or unsuitable for human habitation
A warranty deed contains promises about the quality of the house construction
True. The drainage ditch is an example of a utility or environmental easement.
True.
False. A warranty deed contains covenants of warranty about the title.

40. Test Your Knowledge Multiple Choice
Chris slipped on a tomato that had fallen on the floor in the grocery store’s produce section. If Chris sues the store, what type of law will apply?
(a) Tort law
(b) Premises liability law
(c) Breach of contract
(d) Both A and B
(e) All of the above
The correct answer is (d).

41. Test Your Knowledge Multiple Choice
Newton owned 500 acres and leased 300 to Kevin for farming beans. When Kevin is working the 300 acres he leased, he is:
(a) an invitee with the right to take the bean crop as a license
(b) a lessor with the right to work the bean crop for the benefit of Newton
(c) a licensee with the right to take the bean crop as a profit
(e) none of the above
The correct answer is (c).

42. Thought Questions
Is the cliché, “good fences make good neighbors,” a true statement?
What is your opinion of the Kelo decision?
Opportunity to discuss real property disputes and eminent domain.
See the full Kelo decision (and supporting documents) on the website of the U.S. Supreme Court: