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© 2010 Rockwell Publishing
Lesson 2:
Estates in Land and Methods of Holding Title
Principles of California Real Estate
© 2010 Rockwell Publishing
Introduction
This lesson will discuss: types of estates in landways of holding title to property
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Estates in LandInterests 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
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Estates in LandInterests in real property
Estate: Absolute and exclusive right to possess property now or in the future.
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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.
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Two main kinds of freehold estates: fee simple estateslife estates
Types of EstatesFreehold estates
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Fee simple:most common type of estate highest and most complete form of land
ownershipcan potentially last forever
Fee simple estate is perpetual, transferable, and inheritable.
Freehold EstatesFee simple estates
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Two types of fee simple estates: absolutedefeasible
Fee Simple Estates
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Fee Simple EstatesFee 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.
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Fee Simple EstatesFee 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.
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Freehold EstatesLife estates
Life estate:limited in timelasts only as long as a particular person
is alive
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Life EstatesDuration
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.
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Life EstatesFuture interests
When measuring life ends, title will pass to holder of:
estate in reversion, orestate in remainder.
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Life EstatesEstate 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.
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Life EstatesEstate 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.
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Life EstatesSale or lease
Life tenant may sell or lease only interest she has in property.
Life tenant must maintain property in good condition.
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SummaryFreehold Estates
• Freehold estate
• Fee simple absolute
• Fee simple defeasible
• Life estate
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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.
Categories of EstatesLeasehold Estates
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Because lease is considered personal property (even though it represents interest in real property), it may also be called chattel real.
Leasehold EstatesChattel Real
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Leasehold EstatesTypes of estates
Types of estates:term tenancyperiodic tenancytenancy at willtenancy at sufferance
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Types of Leasehold EstatesTerm tenancy
Term tenancy: A leasehold estate that lasts for any fixed term; also called estate for years.
One-week lease is estate for years.
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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.
Types of Leasehold EstatesPeriodic tenancy
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Types of Leasehold EstatesTenancy 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.
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Types of Leasehold EstatesTenancy 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.
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SummaryLeasehold Estates
• Leasehold estate
• Term tenancy
• Periodic tenancy
• Tenancy at will
• Tenancy at sufferance
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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.
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Ways of Holding TitleOwnership 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.)
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Ways of Holding TitleConcurrent 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
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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
Concurrent OwnershipTenancy in common
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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.
Concurrent OwnershipTenancy in common
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Tenant in common may will interest to someone other than remaining tenant(s) in common.
Concurrent OwnershipDeath of tenant in common
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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.
Concurrent OwnershipTerminating a tenancy in common
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Concurrent OwnershipJoint tenancy
In joint tenancy, two or more persons are joint and equal owners of property.
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Joint TenancyFour unities
Requirements for joint tenancy:unity of interestunity of titleunity of timeunity of possession
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Joint TenancyRight of survivorship
Right of survivorship is key feature of joint tenancy.
When joint tenant dies, her interest:automatically passes to surviving joint
tenantsis not part of her estate and cannot be
willed
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Joint TenancyTermination
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.
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Concurrent OwnershipCommunity property
Community property is property owned jointly and equally by husband and wife.
System is used in California and 8 other states.
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Concurrent OwnershipCommunity 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
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Community PropertySeparate property
Separate property:property owned before marriagegift or inheritance acquired during
marriageanything purchased with separate
property fundsprofits or proceeds from separate
property
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Summary Individual and Concurrent ownership
• Ownership in Severalty• Concurrent ownership• Tenancy in Common• Joint tenancy• Community property
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Ways of Holding TitleBusiness organizations
Real property may also be owned by business entity:
general partnerships and limited partnerships
corporationslimited liability companiesreal estate investment trusts
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Business OrganizationsPartnership
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 partnershiplimited partnership
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PartnershipsGeneral partnership
General partnership: Each partner has:ownership interest voice in management right to share in profitsobligation to share in losses
The partnership is not taxed, but each partner’s earnings are taxed individually.
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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.
General PartnershipProperty ownership
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General PartnershipLiability
Each partner may be held personally liable for debts and obligations of general partnership.
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PartnershipsLimited 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.
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PartnershipsLimited 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 liabilityno control over partnership propertypassive role in management
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Business OrganizationsCorporation
Corporation: Artificial person with perpetual existence. Made up of:
shareholdersboard of directorscorporate officers
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Corporations:can own propertycan incur debtsare subject to double taxation (profits are
taxed before distribution to shareholders, then taxed again as ordinary income to the stockholders)
Business OrganizationsCorporation
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Shareholders:own shares in corporationhave no managerial control are liable only up to value of their stock
Business OrganizationsCorporation
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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.
Business OrganizationsLimited liability company
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Business OrganizationsReal 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 treatmentmust have at least 100 investors
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SummaryBusiness Organizations
• General partnership
• Limited partnership
• Corporation
• Limited liability company
• Real Estate Investment Trust (REIT)
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Ways of Holding TitleCondominiums and cooperatives
There are two types of properties that combine elements of individual ownership and concurrent ownership:
condominiumscooperatives
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Condos and Co-opsCondominiums
Condominiums are usually residential and resemble an apartment complex.
Residents:own individual units in severaltyshare ownership of common elements
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CondominiumsCommon elements
Common elements: Parts of a condominium property that are usable by all residents.
Examples:grounds elevator hallways swimming pool
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CondominiumsSeparate properties
Buyer of condominium unit:receives deed for unitfinances purchase with separate loan obtains separate title insurance policypays separate taxes
If lien against one unit is foreclosed, other units are not affected.
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CondominiumsGoverning board
Elected governing board usually manages condominium and enforces rules.
Condominium seller must give prospective buyer:
copy of bylawslatest financial statementsCC&Rs for the project
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CondominiumsUses
Condominium can be designed for residential, commercial, or industrial use.
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Condos and Co-opsCooperatives
Residential co-op might look like condominium, but ownership structure is very different.
Title is held by corporation.
Residents:own shares in corporationhave long-term lease on unit
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Condos and Co-opsCooperatives
Cooperative project is:financed with single mortgagetaxed 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.
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SummaryCondos & Co-ops
• Condominium
• Common elements
• Governing board
• Cooperative