I. PROPERTY OWNERSHIP A. CLASSES OF PROPERTY:

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1 PSI Exam Topics Step 1 Property Law Property Ownership PSI Bulletin Alert The VA PSI Bulletin indicates that salesperson candidates will receive 7 exam questions and broker candidates will receive 6 exam questions on Property Ownership, which includes the following subtopics covered below: Classes of Property; Land Characteristics and Legal Descriptions; Encumbrances; and Types of Ownership. See for more information on PSI Topics, State testing procedures, and preparation tips. I. PROPERTY OWNERSHIP A. CLASSES OF PROPERTY: In the following section, we will discuss the two broad classes of real property personal property (goods and intangible interests) versus real property (land and improvements) while also defining fixtures. 1. Personal Property: Personal property is generally moveable and unattached to land. It may be tangible like cars, boats, jewelry, horses, and cattle, or intangible like stocks, bonds, notes, and mortgages.personal property includes the following: trade fixtures, leases, and fructus industriales (emblements). It is also known as personalty and chattel. a. Special Types of Personal Property: Despite the general rule, some property may be affixed to land but remain personal property. i. Trade Fixtures: Articles of tangible personal property that are necessary to a tenant s trade or business. Even if a trade fixture is firmly affixed to real estate, it remains the personal property of the tenant. Contrast a trade fixture with a fixture, where the ability to remove (sever) an item is limited. However, trade fixtures must be removed by or before the expiration of a lease or within an agreed upon reasonable time thereafter in order to remain the tenant s personal property (otherwise the trade fixture could become the landlord s property). The tenant is responsible for any damage to the premises caused by removing or installing a trade fixture. Trade Fixture: EXAMPLE: If a tenant rented space to operate a car repair garage and installed a hydraulic car lift by bolting it securely to the floor, the lift could be considered a trade fixture and therefore the personal property of the tenant so long as it is timely removed. This is so because it is a necessary part of the tenant s trade or business. Trade Fixture: EXAMPLE: A replacement air conditioner for the car repair garage, or a new bar installed in a tavern to replace an old one. These replacement items normally would not be considered trade fixtures they would become the property of the landlord, and the tenant would not be entitled to remove them at the end of the lease term unless the parties otherwise agree. 3

2 Property Law Step 1 PSI Exam Topics ii. Fructus Industriales: Growing crops, also known as emblements, that are produced annually through labor and industry, such as corn, wheat, fruits and vegetables. Fructus Industriales is a Latin phrase meaning the fruits of industry or labor. These items are personal property even before harvest, despite the fact that they are affixed to the land. Note the difference from other types of personal property that are affixed to the land, which become real property (such as non-trade fixtures). Here, special rules were created to protect farmers who lease or sell land. Once growing, the tenant has the right to remove his crops even after a lease expires. Fructus Industriales: EXAMPLE: A landlord cannot lease property to a tenant farmer and then terminate the lease without allowing the tenant to re-enter the land to harvest his crops. b. Rights in Personal Property: Personal property rights include intellectual property (protected by patent or copyright), business reputation (good will), leases (transfers possession and use without ownership), and partnership interests (business association of 2 or more persons). 2. Real Property: The term real estate is virtually synonymous with the term real property. However, the term land has a narrower meaning. Like real property and real estate, land includes the surface of the earth and the space above and below it, but only includes natural items like trees, crops, minerals, and water. Unlike land, real property also includes any improvements or fixtures, such as infrastructure, developments, and houses. Unlike personal property, real property is not moveable. a. Types of Real Property: Includes land, improvements (valuable additions to land such as buildings and infrastructure development), and real estate (land plus improvements). Houses are a common improvement. Other improvements include: i. Fructus Naturales: Permanent plantings (perennials) such as flowers, grasses, trees and bushes. Fructus naturales is a Latin phrase meaning the fruits of nature. Because they are classified as real property, these items may not be removed from the land absent an agreement (unlike personal property). ii. Fixtures: Items that were once moveable (personal property), such as fences, buildings, trees, or bricks in a wall, that have been affixed to real estate. Once affixed, such items become real property. When an owner sells her real property, she retains the right to remove her personal property (cars, clothes, jewelry, etc.) as the real property (including fixtures) passes to the new owner. Severance is the act of removing a fixture. Through severance, a fixture can again become personal property. However, some items cannot be severed. Fixtures are real property unless they can be severed. Fixtures: EXAMPLE: A farm fence is classified as real property because it is affixed to real estate. However, the fencing materials are personal property (rolls of wire and posts) before installation. 4

3 PSI Exam Topics Step 1 Property Law In the event of a dispute, courts apply a 4 part test to determine if a fixture may be severed (removed) as follows: 1) Method of Attachment: The permanence with which an object is attached to real property is a factor in determining whether it may be removed. The more permanent the attachment (built-ins), the less likely it may be severed. Method of Attachment: EXAMPLE: If a refrigerator is freestanding it is likely to be personal property (barring any agreement to the contrary), but if it is built in it is more likely to be a fixture. 2) Adaptation: If an object was specially adapted or made to suit a particular or unique feature of a building, then it is classified as a fixture (book case). Adaptation: EXAMPLE: A house key, track lighting, and bay windows are all specially adapted and likely to be fixtures. 3) Agreement: An agreement between the parties may permit removal of a fixture, or prevent a dispute about whether an item is or is not a fixture. Written agreements are the best way to avoid fixture disputes, as litigation is always uncertain. 4) Relationship of Parties: Residential renters less likely than commercial renters to be able to sever (compare trade fixtures). Relationship of Parties: EXAMPLE: A large, firmly affixed chandelier in a residential home sale is likely to be a fixture (barring any agreement to the contrary). However, if a renter replaces his landlord s light fixture with a large chandelier of his own, that chandelier would likely remain the personal property of the renter (upon expiration of the lease, so long as the renter reinstalls the original fixture). b. Rights in Real Property: Includes ownership rights in the surface of land, airspace above land, space below the surface (mining rights), any easements (use of land), and use of appurtenant (adjoining) land. i. Bundle of Legal Rights: Phrase that is used to describe the 6 distinct principal intangible legal rights of property ownership. These rights are: the right to Possess property, the right to Control property within legal limits, the right to Enjoy property and use it legally, the right to Exclude others from property, the right to Encumber property by lessening one s rights of ownership in any way, and the right to Dispose of property by sale, will, or other transfer. Along with the physical elements of ownership (land, improvements, fixtures, etc.), these intangible rights pass to the new owner in whole or in part with the sale or transfer of land. In short, these rights are: possess, control, enjoy, exclude, encumber, and dispose. 5

4 Property Law Step 1 PSI Exam Topics Bundle of Legal Rights: EXAMPLE: You may receive an appurtenant right to cross your neighbor s land to get to your own land where you otherwise have no direct access (landlocked parcel). Bundle of Legal Rights: EXAMPLE: A property owner who leases her property temporarily transfers only her right to possess and use her property, to a lessee, for a specified duration, but not her right to dispose of or encumber the property. When you think about an owner s bundle of legal rights, it might help to imagine a bundle of sticks that the owner may keep in her hand or sell or transfer as she chooses. Some types of ownership may include more legal rights than others. When ownership rights are sold, the value of the underlying real estate (the land and improvements) is affected. Bundle of Legal Rights: EXAMPLE: The Museum of Modern Art in New York City sold the airspace above one of its buildings to developers who constructed a 44-story residential condominium thereon. The developers have no ownership interest in the Museum or in the land on which the museum sits they have ownership rights only in the airspace. ii. Water Rights: A property owner s entitlement to use and maintain water for agricultural, recreational, or personal use. Water rights are significant in states where water is in limited supply. Most states follow one of the following three legal doctrines to determine who has the intangible right to use or divert water and how much: riparian (reasonable use for those with property bordering moving water), littoral (reasonable use for those with property bordering non-moving water), and prior appropriation (owner who first diverts water has superior rights to all others). c. Uses of Real Property: Public (zoning) and private (deed restrictions) controls limit how property may be used and influence its value. Commonly available property uses include: residential, commercial, industrial, agricultural, recreational, specific purpose (churches, hospitals, colleges, cemeteries), and public (state, federal, and municipal land). >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> PSI Exam Trainer Question 1 Allow 2-minutes to answer the following question. Rate the difficulty of this question in the spaces provided below. A thorough review of the Question, Answer, Difficulty, and Trap using the Question Analysis on the following even-numbered page is essential for your exam success. 1. Former personal property that automatically conveys is most likely to: 1. occur only by agreement 2. be a chattel 3. be a trade fixture 4. be a fixture Answer: Difficulty (circle one): Easy Medium Hard Very Hard >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> 6

5 PSI Exam Topics Step 1 Property Law B. ECONOMY AND SOCIAL IMPACT OF REAL ESTATE 1. Real Estate as Economic Indicator: An economic indicator is a measurable economic factor that changes before the economy starts to follow a particular pattern or trend. Leading indicators are used to predict changes in the economy. Real estate is considered to be an indicator of the economic health of a community or a country. Investors and economists closely watch the monthly report of New Residential Construction Statistics (new housing starts) found on the US Census Bureau website. Because all related factors associated with building construction (financing, material supply, employment) are important economic activities, housing starts can give a clue as to the state of the economy in the near future. Sustained declines in housing starts slow the economy and can push it into a recession. Likewise, increases in housing activity triggers economic growth. Other real estate-related economic indicators include foreclosure rates, defaulted mortgage loans, and late payments. If these numbers rise suddenly, it can indicate that the national or local economy is under stress. If these rates are very low, this can indicate that the national or local economy is doing well. Only a good economy can support the high loans and payments necessary to purchase and support a home. 2. Social Impact of Home Ownership: If more people in a community own their homes, the home values tend to rise because people tend to take more pride in property that they own than in property they rent. Homeownership can lower the crime rates in communities. Activity such as voting and participation in civic organizations is statistically higher among homeowners than renters. In addition, as the property value increases, the chances of being able to sell the home also increases, making it possible for homeowners to improve their lives. Although business cycles affect the purchase price of a home in a number of ways, one of the primary influences on home prices is the supply and demand in the local real estate market. 3. Impact of Supply and Demand on Real Estate Prices: Supply and demand is a basic economic principal: If a product is in high demand but in low supply, the price of this product will rise because market conditions will support a higher price. However, if the product is in low demand, and is in high supply, the price of this product will decrease, because market conditions are influenced by the high availability of this product. Supply and demand in real estate is not as easy to balance as it is in manufactured commodities. The construction of more buildings takes time, and there may not be room to build in any given area. Buildings cannot move to where buyers are. The unique characteristics of the real estate market must be considered. These characteristics include: a. Real Estate is Heterogeneous Real estate is heterogeneous. This means that every piece of real estate is unique, both in terms of its location and in terms of the nature and quality of structure, if any, on it. You cannot fill a real estate supply shortage by manufacturing more identical units. Each piece of land is different and, unlike manufactured commodities, there is a limited (finite) supply. Though you might be able to create more condominiums on a given piece of land (by building a taller building), the land itself cannot grow to accommodate a short supply. 7

6 Property Law Step 1 PSI Exam Topics >>>>>>>>>>>>>>> PSI Exam Trainer Question 1 Analysis Answer: 4 Difficulty: Medium PSI Topic/Subtopic: Property Ownership/ Classes of Property Trap: The phrase most likely is a good indicator that there are at least two answers choices that will appear to be correct. The best answer will have the fewest limitations and will have the broadest applicability. Explanation: When personal property is affixed or attached to land it can become real property that will convey with the land. This is known as a fixture. Trade fixtures are also personal property that can be attached to land. However, trade fixtures are installed by a tenant in connection with her trade or business and do not become real property unless they are not timely removed. Chattel is another name for personal property, which may or may not transfer with land. Choice one is incorrect because the word only is too restrictive. b. Real Estate Cannot be Moved: Another primary characteristic of real estate is that it is immobile. Unlike many material goods, consumers must come to the good rather than the good going to the consumer. If there is a shortage of land for homes in a given area, you cannot move in more land to alleviate the shortage. Because real estate cannot be moved, it will always be a local commodity influenced by local conditions. c. Over-supply/Lower Prices: Because real estate is heterogeneous and immobile, you can usually expect there to be a fall in prices when there is an over-supply of homes or land in a given area. You cannot move the overage to another area to keep prices stable. d. Under-supply/ Higher Prices: If there is not enough land or homes in a given area, then prices will almost always rise. Even if there is the ability to construct more homes, the time delay associated with the construction industry cannot fill the short term demand, and prices will rise. 4. Factors affecting Real Estate Supply and Demand: Some factors that affect the supply and demand of real estate, and consequently, real estate prices, include: a. Demographics. The main demographic determinants on the demand for housing are: population size and population growth. The more people in the area, the greater the demand for housing. Family size, as well the age and income of the population also play a role in the demand for real estate. b. Unemployment/Income. If job opportunities are limited and salaries are low, the demand for homes usually decreases. As unemployment rises, supply may increase because there are a number of homeowners who are forced to sell their homes due to their inability to fulfill the financial obligations that come with owning a home. High unemployment rates also affect demand because prospective homebuyers are deterred from buying due to fears over job security. c. Cost/Availability of Credit. If mortgage interest rates are low, and financing is relatively easy to obtain, the demand for real estate will usually increase. d. Cost/Availability of Labor and Materials. Housing supply is produced using land, labor, utilities, and building materials. If these commodities are readily available, their use will contribute to the overall supply of housing in a market. e. Governmental Policies. Federal, state and local government policies and regulations can influence real estate markets. For example, favorable tax incentives for homeowners can increase demand, while high local property taxes can decrease demand. The local land use controls and zoning policies can affect the supply of land available for residential and other uses. >>>>>>>>>>>>>>> 8

7 PSI Exam Topics Step 1 Property Law 5. Licensee Must Know the Local Market: It is important for real estate professionals to keep up with trends in interest rates, national home price trends, new housing starts and the other economic indicators that influence real estate markets. However, the licensee should always keep in mind that real estate is a local business. There can be many forces influencing your local market that will have little or no impact in other areas, and vice versa. If you are in a market that has industry and a great many job relocations, watch your local businesses and industries carefully for expansion or downsizing. If your market is a resort or second-home community, factors, such as local weather trends, aging population, and stock market fluctuations, can a have great impact. Factors that impact discretionary income have more of an influence on this type of market. Therefore, while the licensee should keep up with the overall national market outlook, supply and demand in real estate will always primarily be a local issue. C. LAND CHARACTERISTICS AND LEGAL DESCRIPTIONS 1. Physical Land Characteristics: Land includes the surface of the earth and the space above and below it. Owners may sell or transfer surface, air, and subsurface rights. All land has the following three physical characteristics that influence value: immobility, indestructibility, and uniqueness. a. Immobility: Describes how property cannot be moved from one geographical location to another. Due to this characteristic, the value of real property is directly affected by its external surroundings. However, small bits of land may erode over time (natural forces, such as water and weather, cause land to erode over time). b. Indestructibility: States that land cannot be destroyed. The concept of indestructibility is the legal basis for neither insuring land nor being able to depreciate it. Its value may be destroyed by changing conditions, but land exists forever. c. Uniqueness: Also known as heterogeneity, and states that every parcel of real property is distinct land and improvements are not standard. Parcels of land differ in size, shape, location and appearance. Uniqueness is the legal basis for specific performance lawsuits, or lawsuits that seek to force the sale of land as agreed upon in a valid contract where the seller refuses to carry through with the sale as promised. Immobility: EXAMPLE: A very attractive, well-maintained house will lose value if the neighborhood around it seriously deteriorates because it is immobile. 9

8 Property Law Step 1 PSI Exam Topics 2. Economic Land Characteristics: Land has the following five non-physical economic characteristics that influence its value: scarcity, area preference, improvements, investment permanence, and assemblage. a. Scarcity: Economic principle stating that there is a limited supply of land on earth. The concept derives from the fact that the supply of land on earth is fixed and can never be increased. Scarcity can produce an increase or a decrease in the economic value of land depending upon the local supply and demand for land as available land becomes scarce its value tends to rise. b. Area Preference (situs): Refers to a person s preference for one location over another. The phrase location, location, location is another way of explaining how a difference in area preference can cause two physically similar parcels of real estate to have very different economic values. Area preference, also called situs, is often identified as the most important economic characteristic of land. c. Improvements: Additions made to land that are intended to enhance its value. Improvements include houses and commercial buildings, as well as sewers, sidewalks, and fences. Not all improvements enhance value, and some improvements may be restricted by government or neighborhood associations. d. Investment Permanence: Describes the permanence of investment in infrastructure improvements. Infrastructure improvements include sewage, drainage and electricity systems. Combined with the immobility of the underlying land, these types of improvements produce relatively stable and long-term returns. Infrastructure improvements offer greater options for future development than a specific improvement like a residential home or a commercial building. e. Assemblage: Describes how combining two or more contiguous parcels of real estate into a single parcel under the same ownership can increase its overall value. Assemblage is viable when the combined property will be more valuable than the sum of the individual parcels. Any increase in value resulting from assemblage is known as plottage value. Area Preference: EXAMPLE: Undeveloped land located in a very rural area will tend to cost far less than undeveloped land in an urban or heavily populated area due to area preference. Improvements: EXAMPLE: Developing land into a subdivision may increase its value, while developing it into a landfill may decrease its value along with surrounding properties, according to the economic characteristic of improvement. 3. Types of Legal Property Descriptions: Method of locating real estate that is sufficiently accurate for a deed, mortgage, or other formal instrument. A property description is legally sufficient if it can be reasonably identified by a typical surveyor. The three principal methods of legally describing real property are metes and bounds; government survey; and lot, block and subdivision. In some cases, land is described by referring to another publicly recorded document such as a deed or a mortgage. Such a reference is legally valid only if the referenced document contains a valid legal description. 10

9 PSI Exam Topics Step 1 Property Law a. Principal Legal Descriptions: Legal descriptions are essential for deeds and titles (but not listing agreements, which may use non-legal descriptions). Principal legal descriptions include the following: i. Metes and Bounds: Method of legally describing real property, which identifies the outer edges of a parcel by establishing a well-marked starting point, called a point of beginning or POB, and then describing in which direction and how far the property boundary runs from the POB. For ease of locating, POBs are usually marked by permanent artificial monuments, like a survey stake. A legal metes and bounds description must start and finish at the POB or the description is defective. Metes and bounds is well suited for identifying irregularly shaped parcels because one can navigate in any direction from the POB, unlike other methods that rely on regular shapes, like the government survey method. A mete is an old term for measure, and a bound is a term for boundary. 1) Metes: Measured in inches, feet, yards and sometimes miles, and usually require reference to a compass setting. 2) Bounds: Can be established using artificial monuments (iron pipes, brass disks set into concrete, road intersections, and highways), and natural monuments (lakes, large boulders, and noteworthy trees). 3) Compass Angles: Surveyors define direction through the use of compass angles. A surveyor uses both precision instruments and known natural and artificial bounds to measure the exact angles and distances in order to establish the boundaries of a parcel. Metes and Bounds: EXAMPLE: Commence at the Northeast Corner of Section 6, Township 2 South, Range 4 East, and run west along the north line of said Section a distance of 1,411 feet to the east right-of-way boundary of State Road 91; thence run south along the east right-of-way boundary of said road a distance of 968 feet for a point of beginning; continue thence south along said right-of-way a distance of 1,316 feet; thence run N 89 E a distance of 863 feet more or less to the western shoreline of Smith Lake; thence run northeasterly along the wandering shoreline of said lake a distance of 310 feet; thence run N W a distance of 374 feet more or less; thence run N 90 W a distance of 1,201 feet to the point of beginning. ii. Government Survey: Method of surveying land adopted by the United States in 1785 to facilitate the government s sale of large tracts of land as the population rapidly expanded westward. The government survey method is also known as the geodetic or rectangular survey system and it is used in more than 30 states, mostly in the mid-west. This method employs the use of imaginary lines running north/south and east/west. These lines form a checkerboard pattern as they intersect, which are further divided into smaller units. This method works well for identifying large parcels, but not so well for describing small or irregularly shaped lots. 1) Principal Meridians: Series of numbered imaginary lines running from north to south across the United States, created by the government for the purpose of surveying land. Land surveyors using the government survey method depend on principal meridians to survey land. 11

10 Property Law Step 1 PSI Exam Topics 2) Base Lines: Series of imaginary lines that run east-west, established by the Government, that intersect principal meridians. 3) Further Divisions: Rectangles formed by principal meridians and base lines may be subdivided as follows: checks (24 square miles), townships (6 square miles within a check), and sections (640 acres within a township). Further, a township is formed where township tiers and range lines intersect. Township tiers are imaginary lines that run east-west, parallel to base lines. Range lines are imaginary lines that run north-south, parallel to principal meridians. Townships are located by their distance north or south of base lines and east or west of primary principal meridians. There are 36 numbered sections within a township. The numbering begins in the northeast corner, which is always section number 1. Sections may be further broken down into halves, quarters, and so on. A physical marker called a survey monument is located at each section corner. Further Divisions: EXAMPLE: Township 4 South, Range 3 East, is usually written as T4S, R3E. iii. Lot, Block, and Subdivision (Recorded Plat): Method of legally describing property, which begins with a large tract of land known as a subdivision plat. Subdivision plats are initially located by either metes and bounds or government survey. A subdivision plat is a large map which notes the layout of lots and their numbers. Once established and named, subdivision plats are further divided into blocks and lots. Subdivision plats must be preapproved by local governmental units in charge of zoning before they may be recorded. Each recorded plat receives a book and page reference number, and all plat books are available for public inspection. If a parcel of real property is part of a recorded plat, the legal description need only include the lot and block number, tract name, map book reference, county, and state. In order to have any legal effect, all subdivision plats must be recorded in the public recorder s office, clerk s office, or land records office of the locality in which it is situated. A block is a group of contiguous lots, which are usually divided by an access road. A lot is generally the smallest unit of measure in this system, intended to be conveyed in its entirety. Subdivisions may be further subdivided or altered after the initial plat is recorded. This requires creating and recording new plats, usually partial plats reflecting changes to the initial plat. When this occurs, the legal description may need to refer to all of the plats, reflecting the history of the description of the parcel at issue. Lot, Block, Subdivision: EXAMPLE: Lot 3, Block A, Buckingham Subdivision, as recorded on page 16 of Plat Book 68 of the Public Records of Buckingham, VA. 12

11 PSI Exam Topics Step 1 Property Law iv. Geodetic Surveys: Geodetic surveys include both horizontal and vertical land description methods that rely on a series of permanent ground markers (monuments, or benchmarks) and a datum (imaginary markers that serve as baselines for horizontal and vertical measures). b. Non-Legal Descriptions: Method of describing real property for convenience only, and not for the purpose of a deed, mortgage, or other instrument requiring a legal description. While deeds and titles require legal property descriptions, consumers often use less formal descriptions to discuss and characterize real property (can be used in advertising or listing agreements). The most common example of such informal methods is the street address. The street address is useful in locating real property, but it is insufficient to locate real property borders by survey. However, the simple street address of a parcel is a sufficient description in a sales contract. Front footage is another example of a non-legal description of property (portion of land that abuts a street or water). 4. Usage of Legal Property Descriptions: Any document filed in land records concerning a property must identify the property using the legal description, rather than an informal description such as the property address. Examples include deed, deed of trust, mortgage, easement, or power of attorney. D. ENCUMBRANCES: Interest in land held or asserted by someone other than the landowner, which may diminish its value. Encumbrances can affect rights to use, as well as rights to convey property. These limitations may be created by both individual and government action. In order to protect the purchaser of property, as well as the person benefiting from the encumbrance (mortgagor, lienholder, etc.), encumbrances should be noted in deeds and in the public record. 1. Liens: Encumbrance on property that functions to guaranty payment of debts by using property as collateral. If a borrower defaults on a loan secured by a lien, the creditor can seek his share of the collateral to satisfy the borrower s debt. As such, liens always create an impediment to clear title. a. Creation: Liens always arise from a debt, either through agreement (like a mortgage) or by operation of law (unpaid taxes), and from a variety of sources including mortgages, work on the property (mechanics liens), and court orders (judgment liens). b. Effect on Transfers: A lien does not transfer title to property, and does not prohibit the owner from conveying his interest in the property to another (although the property may be less marketable with the lien in place). However, the lien, once properly established, is said to attach to the property until or unless it is released (the debt is satisfied). If a lien is not released prior to sale, the buyer buys the property along with the existing lien. Satisfying a lien implicates three basic concepts: priority, satisfaction, and enforcement. c. Removing Liens Basic Concepts: i. Priority: The priority of a lien describes the lien s position in line with other liens, or the order in which a creditor will be paid in the event the property is sold (usually by foreclosure). The priority of a lien is determined by law (tax lien), the date it was recorded, or by the date it attached to the property (collateral). 1) Recorded Liens: It is important for a creditor to record the appropriate document as soon as the lien is created in order to establish the lien s priority. Liens generally receive first-in-line, first-in-time treatment. 13

12 Property Law Step 1 PSI Exam Topics 2) Operation of Law: Real estate property tax liens and assessments take priority over other types of liens regardless of their date of recording. Generally, lien priority follows the following order: tax liens, mortgages, mechanic s liens, other liens in the order they were recorded, and unrecorded liens. ii. Satisfaction: Satisfaction refers to the process of removing a lien upon full payment of the underlying debt. Because a lien is an encumbrance on a title, the lienee (owner) should make certain that the lienor (creditor) executes and records a satisfaction of lien as soon as the lien has been paid in order to remove the cloud on title. Evidence of satisfaction is usually in the form of an instrument called a quitclaim deed. iii. Enforcement: If a landowner defaults on a loan secured by a lien on his property, enforcement of the lien usually requires a court order. That is, a creditor must take legal action and request a court of proper jurisdiction to order the sale of the property in question. When a court orders that an encumbered property be sold to satisfy unpaid debts, liens are paid from the proceeds of the sale in order of priority. Enforcement: EXAMPLE: A court orders the sale of real estate to satisfy a mechanic s lien, which was recorded on May 18, 1991, subject to unpaid real estate taxes and a first mortgage. The property sells at a public auction. First, the proceeds of the sale are applied to the property taxes. Next, the remaining proceeds are applied to the entire outstanding balance of the mortgage loan. Then, the remaining proceeds are applied the mechanic s lien of May 18th. Finally, the remaining proceeds are applied to court costs and costs from the sale. After deducting all paying all liens and costs, $500 remains. If there are no other liens or charges, the former owner receives the remaining $500. iv. Lis Pendens: Latin phrase meaning action pending, which describes the concept of providing notice of a possible future lien. A lis pendens provides constructive notice that an action affecting particular real estate has been filed and that the real estate is, or is about to become, involved in a lawsuit. If the suit is successful, the priority of the lien dates back to the date the lis pendens was filed (not the date of the final court decision). d. Scope of Liens: Liens may be general (applies to individual debtor and all of his personal and real property), such as federal tax liens and some judicial liens, or specific (applies to specific property of the debtor only), such as mortgages, property tax, and mechanic s liens. e. Common Liens: Common liens include the following: mechanic s liens (specific, statutory, and involuntary; generally effective when work begins), judgment liens (general, equitable, and involuntary), and attachment liens (property seized and held pending a lawsuit). i. Property Tax Lien: Specific (attaches to a specific parcel of real estate), statutory (arising from legislation), involuntary (created by operation of law) liens filed against real property at the beginning of each tax year (usually January 1). The effective date of property tax liens is the date taxes are assessed. Property tax liens are superior liens, meaning that they take priority over other types of liens regardless of when they were recorded. Overdue Property taxes become liens automatically, without a requirement to file or record the lien. 14

13 PSI Exam Topics Step 1 Property Law ii. Special Assessment Lien: A specific, statutory, and usually involuntary, lien filed against properties that will benefit from a proposed public improvement. iii. Tax Lien: General, statutory, and involuntary lien imposed for non-payment of federal estate taxes, federal income taxes, or payroll taxes. General liens attach to all real and personal property of the debtor. In order of priority, real estate tax and special assessment liens are superior to federal tax liens. However, some federal tax liens (such as liens involving federal estate taxes) are superior to most other liens, regardless of the date of recording. iv. Mortgage: A specific loan secured by a voluntary lien on real property, where a property owner enters into a contract to borrow money and voluntarily agrees to extinguish his rights in his real property in favor of the lender if he fails to pay the debt according to the terms of the loan agreement. Mortgages are equitable. v. Vendor s Lien: Specific, equitable, involuntary lien filed by a seller (vendor), against the property sold, in the amount of any unpaid purchase price. Vendor liens are not a direct interest in the property, but an equitable right in case all of the purchase money is not paid. vi. Mechanic s Lien: Specific, statutory, involuntary lien against real property by material men, or mechanics (laborers), for the value of materials or labor for improvements, repairs, or maintenance of real property. Mechanic s liens can only secure payment for work and materials that have actually become a permanent part of the building or the land (fixture). The effective date of a mechanic s lien varies from state to state, but is usually the day that work visibly commences. Mechanic s liens can be filed after settlement and some states require that notice of this possibility be provided in sales contracts. vii. Judgment Lien: General, equitable, involuntary lien that attaches to a debtor s real and personal property. Usually, judgment liens only cover real property located in the county where judgment is rendered. However, a creditor can file notice in other counties if he wishes to extend the lien s coverage. Judgment liens are enforced when the court issues a writ of execution directing the sheriff to seize and sell as much of the debtor s real and personal property as is necessary to pay the debt and cover the expenses of the sale. viii. Attachment Liens: Judicial action causing a defendant s real and personal property to be seized by a court and held as collateral pending a lawsuit. Real property is attached by recording a copy of the writ of attachment in the public record, thereby creating a lien against the property. This puts the world on notice, and assures the plaintiff that the property will be available to satisfy the judgment if necessary. The process of attachment does not apply to a secured obligation like a mortgage. A mortgagee must first attempt to satisfy the debt by seeking the sale of the mortgaged property. Then, if part of the debt remains unpaid, the mortgagee may seek to attach the rest of the debtor s property. 2. Easements: Limited right to use the land of another, which may be voluntarily or involuntarily conveyed. An easement is an encumbrance to land. A landowner who conveys an easement diminishes his ownership rights in the subject property. 15

14 Property Law Step 1 PSI Exam Topics There are two broad categories of easements: easements appurtenant and easements in gross. The primary difference between both turns on whether the easement is enjoyed by an owner of particular real estate (easement appurtenant) or whether the easement attaches to a particular person (easement in gross). Both private citizens and government entities may hold easements. Easements may arise by agreement, by adverse and hostile use, or by government action. Finally, because some easements attach to land and not to people, a buyer may take purchased real estate subject to an easement. An easement may be conveyed: expressly, by implication, by necessity, by prescription, and by condemnation. a. Distinguished from a License: A license is a personal privilege granted by one person to use the property of another (license does not transfer with land and may be revoked anytime). Easements: EXAMPLE: If a landowner gives a person oral permission to cross his land in order to gain access to the landowner s fishing pond, he has issued a license to use his land and pond, not an easement. If the landowner sells the land, the new landowner is not obligated in any way. b. Types of Easements: i. Easements Appurtenant: Limited right of one landowner to use the adjoining land of another for a specific purpose. An appurtenant easement requires two adjoining parcels of land that are owned by different parties. These parcels of land are known as the dominant estate and the servient estate. Both the benefit and the burden of an appurtenant easement generally conveys with the land. 1) Dominant Estate: Land owned by a person who has the right to use the land of another, or the person who benefits from an easement. 2) Servient Estate: Land that is subject to use (the burden ) by adjoining land. Easements Appurtenant: EXAMPLE: Farmer Brown wants to sell a portion of his back pasture that has no access to a public road. Jones wants to buy the back pasture if Brown will include an easement to a nearby county road across property that Brown will retain. An easement appurtenant attaches to the back pasture and the back pasture becomes the dominant estate. Farmer Brown s remaining land, including the portion Jones will use, becomes the servient estate. The easement appurtenant remains in force and is unaffected when either parcel is sold, given away, or willed to heirs. ii. Easements in Gross: Limited right of one person to use the land of another. Easements in gross (sometimes called personal easements in gross ) are property rights held by specific persons. Unlike easements appurtenant, personal easements in gross have a servient estate, but no dominant estate. Thus, the primary distinction between an easement appurtenant and an easement in gross is that the burden does not transfer with the land and the benefit cannot be transferred by the holder of the easement. However, commercial easements in gross do run with the land (ex. cable, telephone, or gas company easements). 16

15 PSI Exam Topics Step 1 Property Law Easement in Gross: EXAMPLE: Smith gives Jones a personal, written easement in gross to cross his pasture in order to reach a stream where Jones s cattle may drink. Jones is the owner of this easement and it attaches to him. The servient estate is Smith s pasture. This easement will terminate if Jones dies or if Smith, the landowner, sells to a new owner. Jones may not assign his easement to another. This is a more formal and protected interest than a license. c. Creation of Easements: i. Express Grant: Express easements must be conveyed in writing, usually through a deed, with a description of the easement and the subject property, that is signed, acknowledged, and recorded. ii. Express Reservation: Created by a landowner selling his property but retaining an easement (by reservation ) in the property. Express Reservation: EXAMPLE: Seller subdivides his lot keeping the back portion for himself and selling the front portion which has the road frontage to the Buyer. In the Buyer s deed, the seller reserves the right to cross over the Buyer s property. In this example, the seller has created an easement (appurtenant) by express reservation the retained parcel along with the right of use is the dominant estate, and the portion sold that he may cross is the servient estate. iii. Necessity: An easement may arise by necessity only where a particular use is strictly necessary, and despite any express grant or reservation. Easements by necessity are created by operation of law rather than by a formal written agreement. The classic example of an easement by necessity is one that arises when a piece of property is landlocked and requires access across another s property. The easement by necessity exists only so long as the necessity exists. iv. Implication: An easement may arise by implication from the acts or conduct of the parties. An easement by implication does not require a writing, and arises where: a larger parcel of land is divided into smaller parcels, the use requiring the easement existed before the land was divided, and the easement is reasonably necessary (unlike an easement created by necessity, which requires strict necessity). If property is subdivided, it is presumed the seller intended to grant the buyer all easement rights necessary for the buyer to use the property. Implication: EXAMPLE: A person who acquires mineral rights on a property also acquires an implied easement to enter the property for the purpose of removing the minerals, even if the deed does not expressly give him those rights. 17

16 Property Law Step 1 PSI Exam Topics v. Prescription: A prescriptive easement is a right acquired by an adverse user, or a user that is using the land of another without permission and in conflict with the owner s interests. This type of easement is only acquired by the adverse, hostile, exclusive, open, uninterrupted, and continued use of another s property for a certain prescribed length of time (anywhere from seven to twenty years depending on applicable state law). Do not confuse an easement by prescription with adverse possession. Although they are based on the same legal principle, adverse possession involves gaining an ownership interest, while an easement by prescription involves gaining only the right of use (not title), by adverse means. vi. Agreement: Created by written consent. Agreement: EXAMPLE: Two adjacent owners may agree to share a common wall by creating an easement. Typically the wall will be located on the property line, it would provide structural support to both properties, and both owners would share equally in maintenance and repair costs. Such an agreement should be in writing, signed, acknowledged, and recorded. vii. Condemnation: An easement by condemnation arises by operation of law through the government s power of eminent domain. An easement taken by condemnation must be necessary for a public purpose. Where private land is taken for public purposes (eminent domain), the government must justly (fairly) compensate landowners for any loss in property value. The United States Constitution guarantees that the Government will not take property without just compensation. d. Termination of Easements: Easements by necessity commonly terminate when the underlying necessity no longer exists. Easements Appurtenant commonly terminate when there is a merger of the estates (The dominant and servient estates are merged and come under common ownership), there is a release from the dominant estate owner in writing, there is an abandonment of the dominant estate (requires an intent to abandon along with conduct manifesting such intent), or the servient estate is destroyed by an act of God. A court may also terminate an easement under proper circumstances. 3. Encroachments: Unauthorized physical intrusion that encumbers the land of another. An encroachment is a trespass if it encroaches on the land (a fence or driveway), and a nuisance if it violates a neighbor s airspace (as in the case of overhanging tree branches, loud noises, or bright lights). A survey will identify some encroachments. 18

17 PSI Exam Topics Step 1 Property Law >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> PSI Exam Trainer Question 2 Allow 2-minutes to answer the following question. Rate the difficulty of this question in the spaces provided below. A thorough review of the Question, Answer, Difficulty, and Trap using the Question Analysis on the following even-numbered page is essential for your exam success. 2. Mrs. Franklin is buying property from Mr. Akin. In order to get to the property, it is necessary to cross property owned by Mr. Travis. In the past, Mr. Travis has granted permission to Mr. Akin for this purpose. Mrs. Franklin wants to protect this privilege. What would best serve Mrs. Franklin s interests? 1. an easement in gross 2. a license 3. an appurtenant easement 4. either 1 or 3 Answer: Difficulty (circle one): Easy Medium Hard Very Hard >>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> E. TYPES OF OWNERSHIP: The following section discusses Types of Estates, Forms of Ownership, Leaseholds, Common Interest Properties, and Bundle of Rights. 1. Estates in Land: An estate describes the degree, quantity, nature, and extent of an ownership interest in real property. Everyone who holds title to real property has an estate, which simply describes his or her legal interest in the property. One does not necessary own land, but instead owns an estate in (or interest) in land that may be bought and sold. There are four broad categories of estates: freehold estates, future estates, non-freehold (leasehold estates) and statutory estates. There are multiple variations on each category of estate. a. Freehold Estates: Estate (ownership interest) in land in which one has both possession and (indefinite) ownership rights in real property. Persons holding freehold estates are said to be seized of the land. Seisin is defined as the possession and ownership of a freehold estate. There are two types of freehold estates: fee estates and life estates. i. Fee Estates: Highest and most unrestricted ownership interest in land, includes the fee simple estate (exists indefinitely; transferred without restrictions), and the qualified fee/defeasible estate (exists so long as a condition or event does or does not occur; transfers with conditions). Fee Estate: EXAMPLE: Patty property owner transfers undeveloped land to her son Sammy, so long as alcohol is not served on the premises. Sammy has a qualified fee estate because he has fee simple ownership so long as he does not serve alcohol on the land. If Sammy does serve alcohol on the premises, he could lose the property. 19