Introduction to Property II

Transcription

1 1 Introduction to Property II Co-Ownership and Marital Interests Landlord-Tenant Law Private Sector Control of Land Use through Easements and Other Servitudes Judicial Control of Land Use through Nuisance Law Legislative Control of Land Use Through Zoning and Other Mechanisms Eminent Domain and the Problem of Regulatory Takings

2 2 Introduction to Forms of Concurrent Ownership Concurrent ownership can be thought of in terms of the vehicles through which two or more individuals can own a property interest any kind of property interest. Tenants in common may, for example, own a fee, a leasehold estate or a piece of personal property. We shall consider the following forms of concurrent ownership: tenancy in common joint tenancy tenancy by the entirety tenancy in partnership

3 3 Introduction to Forms (Cont d) Forms of co-ownership we shall not consider in this course limited partnership corporation limited liability company trust Each form involves two kinds of issues: What are the rules that govern the relations among co-owners? What are the rules that govern relations between co-owners (or the co-ownership vehicle) and third parties?

4 4 Tenancy In Common Tenancy in Common sole and several tenancy without the right of survivorship. Have separate but undivided interests in the property. The interest of each is descendible and may be conveyed by deed or will. There are no survivorship rights between Ts/C.

5 5 Tenancy in Common (cont d) Suppose my mother dies and leaves her condo to my sister and me, saying nothing about the form of co-ownership? What form is created? How do I tell my sister what she has? Recall the text: Each tenant in common owns an undivided share of the whole. In the case of a condo, what do you think is the whole? What if we both want to use it on the same week? Note the range of practical problems that can arise almost immediately.

6 6 Tenancy in Common (cont d) Suppose my sister and I are tenants in common who conclude that we cannot satisfactorily arrange our mutual undivided ownership of the whole. My sister seeks your help. What do you advise her are her rights?

7 7 Joint Tenancy Form of concurrent ownership in which each joint tenant is considered to be the owner of an undivided part and of the whole estate. Per my et per tout. Suppose my mother dies and leaves her condo to my sister and me as joint tenants, and not as tenants in common. Each of is seized per my et per tout. What happens if my sister and I take the condo, own harmoniously, then I die? Does my half pass to my sister? The answer has been stated in terms of the entity theory of the joint tenancy.» I vacate the entity.

8 8 Hypothetical: My Mom Assume that Mom has two children, S, age 58, and D, age 42. M wants to transfer the condo so that D will own the condo outright when S dies, which is expected to be long before the death of D. Is it not clear that Mom s intent will be realized by conveying the condo to S and D as joint tenants with right of survivorship, and not as tenants in common?

9 9 My Mom (cont d) How Fragile the Right of Survivorship What is clear is that Mom s intent may not be carried out. What are the things that might happen to defeat her intent? S might file an action for partition S might convey S s interest to a third party S s creditors may pursue his interest What alternatives might more clearly secure mom s goal?

10 10 Possible Alternatives for Mom: What do you advise her to do?) 1. Convey: To S and D for their joint lives, remainder to the survivor. --Creating a tenancy in common for their joint lives with a contingent remainder in fee to the survivor. 2. Or convey: To S and D and their heirs, but if S predeceases D, then to D and her heirs, but if D predeceases S, then to S and his heirs. --Creating a tenancy in common in fee, with an executory interest in the survivor.

11 11 Joint Tenancy (cont d) Problems of Creation The common law required that the interests of joint tenants be equal in all respects. Four unities were considered essential to the creation of a joint tenancy: Unity of time the interest of each joint tenant must be acquired at the same time Unity of title each joint tenant must acquire by the same instrument or adverse possession. Unity of interest each joint tenant must have an equal undivided interest, even as to duration. Unity of possession each joint tenant must have a right to possess the whole.

12 12 More on Joint Tenancies At common law, if the 4 unities do not exist, a joint tenancy is not created. Rather, a tenancy in common is created. Statutes in some states abolish the requirement of the 4 unities and provide that a joint tenancy may be created by an explicit statement of intent to do so. Joint tenants can change their interests by severing the four unities. Joint tenants can agree that they will hold as tenants in common rather than as joint tenants. An individual joint tenant my unilaterally sever the interest. As a general proposition: the creditor of any person can attach that person s property rights.

13 13 Tenancy By The Entirety At common law, a tenancy by the entirety can only be created in husband and wife. Rare exceptions today, see Hawaii s reciprocal beneficiaries statute Embraces same-sex couples Also embraces parent and child 5 unities are traditionally required: time, title, interest, possession (as in a joint tenancy); plus unity of marriage.

14 14 Tenancy by the Entirety (cont d) Tenants by the entirety are considered to hold as one person. Neither has a separate undivided interest in the underlying property Each is said to be seised per tout et non per my. As a result, neither can unilaterally defeat the survivorship right of the other (except by divorce). Divorce terminates the tenancy by the entirety usually resulting in a tenancy in common.

15 15 Some Policies External to the Doctrinal Logic At common law, there was a policy against dividing land into very small parcels. One consequence was presumption in favor of the creation of a joint tenancy rather than a tenancy in common. Today, in most states, the presumption is reversed. often by statute some states expressly require mention of survivorship to create a joint tenancy except, in some states, in the case of a conveyance to a husband and wife. Can you see why there might be a modern presumption in favor of a tenancy in common as opposed to a joint tenancy?

16 16 Problems and Note Problem 1 at p. 342: 1. O conveys Blackacre to A, B, and C as joint tenants. 2. A subsequently conveys his interest to D. 3. B dies intestate, leaving H as his heir. Consider first the state of the title upon O s conveyance. Consider next the state of the title after, and as a result of, A s conveyance to D. What result is suggested by the logic of the 4 unities? What result is suggested from the intent of the parties? Consider finally the effect of B s death intestate. What result if B had died leaving a will devising B s interest to X?

17 17 Problem 3, p A and B are planning to be married. Two weeks before the ceremony, they buy a house and take title in A and B as tenants by the entirety. Several years after the marriage, A moves out of the house and conveys his interest to his brother C. C brings an action to partition the property. What result?

18 18 Problem 3 (cont d) What was the state of title at the time of the initial conveyance? According to the logic of the four unities? How do you implement the parties intent? What of the presumption of tenancy in common? Is it overcome by a showing of contrary intent to have a right of survivorship? Statutes may play a role What effect did the marriage have? Is the law of equitable conversion relevant?

19 19 Problem 3 (cont d) Equitable conversion: if there is a specifically enforceable contract for the sale of land, equity regards as done that which ought to have been done. The buyer is viewed in equity as the owner from the date of the contract. The seller has a claim for money secured by a vendor s lien. The seller is said to own legal title as trustee for the buyer Ex ante, how would you accomplish the goal of A and B? As their lawyer, ask: How do I help them?

20 20 Note 4 at 342 Conveyance to grantees, jointly, as tenants in common, with equal rights and interest in said land, and to the survivor thereof, in fee simple.... To Have and to Hold the same unto the said parties hereto, equally, jointly, as tenants in common, with equal rights and interest for the period or term of their lives, and to the survivor thereof at the death of the other. What has been created?

21 HYPO: A conveys Abeleacre to A and B as joint tenants, and not as tenants in common. Assume A dies first and A s heirs want to establish that they have an undivided ½ interest in Blackacre. What are A s heirs likely to argue in opposition to a joint tenancy? Based on the 4 unities? That an owner cannot transfer his ownership to himself it was there all along. Therefore, the conveyance communicated only an undivided ½ interest to B. Therefore, A and B did not get their interests (1) by the same document or (2) at that same time. Therefore, the unities of time and title are lacking, and no joint tenancy is created. Based on intent? Based on statute? 21

22 22 Ableacre Hypo (cont d) B s Arguments to find a joint tenancy. Clear intent of the grantor. Theory: the creation of the joint tenancy is a conveyance to an entity. Therefore, it is not like A conveying directly to himself but only indirectly through the entity. The application of the 4 unities in this case places an excessive emphasis on formalism. It would have been entirely permissible for A to have conveyed to a Straw, who then immediately conveyed to A and B. That is, no fundamental policy was being violated by the creation of a joint tenancy. In general, the law should avoid imposing unnecessary transactions costs.

23 23 Avoidance of Probate Joint tenancies are particularly popular and useful to avoid probate. Probate is the judicial supervision of the administration of a decedent s property that passes to others at the decedent s death. The probate court appoints an administrator or executor who collects the decedent s assets, determines and pays liabilities, including taxes, and distributes or changes title to the remaining property.

24 24 Avoidance of Probate (cont d) Probate can be costly and lengthy. Under the theory of a joint tenancy, no interest theoretically passes on the death of a joint tenant. Therefore, there is no property that must pass through probate. In effect, we adhere to the fiction that nothing passes because it lowers transaction costs throughout our society.

25 25 A Word on Taxes The entity theory conclusion that nothing passes is not useful from the point of view of a government seeking to raise revenue from an estate tax. For federal estate tax purposes, when a joint tenant dies, her share of the jointly held property is subject to taxation. If the joint tenants are husband and wife, one-half is subject to taxation when one spouse dies although no taxes are paid because the amount passing to the surviving spouse qualifies for the marital deduction and passes tax-free. If the joint tenants are not husband and wife, when one dies, the portion of the value of the jointly held property attributable to the consideration furnished by the decedent is subject to federal estate taxation. Under most state inheritance laws, the fractional share of a joint tenancy owned by the decedent is taxed; That is, state laws do not follow the federal approach of looking at who furnished the consideration.

26 26 RIDDLE v. HARMON Wife, in the process of planning her estate, discovers that her husband takes all as surviving joint tenant if she dies first. -Her intent: Terminate the joint tenancy so she can dispose of her interest by will (so she can devise it). -Her means: - a) prepare a grant deed from herself as joint tenant to herself as tenant in common, reciting in the deed its purpose to terminate ( sever ) the joint tenancy; and - b) prepare a will disposing of her interest.

27 27 Riddle v. Harmon (cont d) - ISSUE: Is a conveyance to a straw person required to sever a joint tenancy? - W was advised by counsel. In light of - what you know, or - in light of the earlier case of Clark v. Carter (saying the straw person was indispensable [because one can not convey property to oneself]), - was her counsel negligent? - Recall, the trial court held: NO SEVERANCE - What might the 1955 California statute (fn. 5, p. 346) have said about this case? (13 yrs. before Clark v. Carter).

28 28 RIDDLE v. HARMON (cont.) -Cal. Civil Code Sec. 683(1955) provides: A joint interest is one owned by two or more persons in equal shares, by a title created by a single will or transfer, when expressly declared in the will or transfer to be a joint tenancy, or by transfer [a] from a sole owner to himself and others, or [b] from tenants in common or joint tenants to themselves or some of them, or [c] to themselves or any of them and others, or [d] from a husband and wife, when holding title as community property or otherwise to themselves and others or to one of them and to another or others, when expressly declared in the transfer to be a joint tenancy, or [e] when granted or devised to executors or trustees as joint tenants.

29 29 Riddle v. Harmon (cont d) What did Riddle v. Harmon say about the requirement that there be two to transfer? Is Riddle v. Harmon, then, an enlightened opinion? Setting aside formalities from the time of livery of seisin Common sense as well as legal efficiency dictate that a joint tenant should be able to accomplish directly what he or she could otherwise achieve indirectly by the use of elaborate legal fictions.

30 30 Riddle v. Harmon (cont d) Stated differently, does Riddle s enlightened approach reach the wrong result? Burke said the wife was subject to ethical criticism and that her approach was stealthy Is it enlightened to facilitate behavior like hers? Should a single-party severance instrument be effective: - without notifying the other joint tenant; - without notifying any third party; and - without recordation? Are H and W in a fiduciary relationship?

31 31 Notice And Commitment Riddle v. Harmon allows severance by conveyance to one s self (without a conveyance to a straw) to permit a J/T to become a T/C who may then devise her interest Why not simply permit a J/T to directly devise her interest (eliminate the unnecessary paperwork entailed in the formality of the conveyance to one s self, arguably reducing transaction costs even further)? To preserve a device to avoid probate? To avoid questions about the intent of a will? a general devise of all real property? a residuary clause?

32 32 Was it ethical to help the unethical, stealthy client? Model Rule of Professional Conduct 1.2(d): A lawyer shall not counsel a client to engage, or assist a client, in conduct that the lawyer knows is criminal or fraudulent, but a lawyer may discuss the legal consequences of any proposed course of conduct with a client and may counsel or assist a client to make a good faith effort to determine the validity, scope, meaning or application of the law. The Model Rules also provide: Knowingly, Known, or Knows denotes actual knowledge of the fact in question. A person s knowledge may be inferred from circumstances.

33 33 RECORDING Should a deed such as the wife used in Riddle v. Harmon be effective without recordation? California statute provides that a severance of a joint tenancy of record is effective against the right of survivorship of the non-severing joint tenant only if either: an instrument severing the joint tenancy is recorded prior to the death of the severing joint tenant; or the severing instrument is executed and acknowledged before a notary public within 3 days before the death and recorded within 7 days after the death of the severing joint tenant.

34 34 Indestructible Right of Survivorship Riddle v. Harmon concludes by emphasizing that it does not eliminate the three basic ways to create an indestructible right of survivorship: by a joint life estate with contingent remainder in fee to the survivor; by a tenancy in common in fee simple with an executory interest in the survivor; or by a fee simple to take possession in the future.

35 35 EVOLUTION OF PROTECTION OF MORTGAGORS Stages to Present Defeasible fee enforced according to its terms Borrower Deed Fee Simple Subject to Condition Subsequent Lender Lender s fee ends ONLY if borrower pays everything off exactly on time

36 Evolution of Mortgage Law Equity relieved a borrower in special circumstances (part of an equity court s general jurisdiction to grant relief from a forfeiture). Special circumstances were always found: Equity of Redemption became an estate in land. Rule developed: a contemporaneous waiver of the equity of redemption is unenforceable. The procedure of strict foreclosure was created to preserve for the lender the value of the conveyance as a security. The strict foreclosure decree said simply: pay late or take nothing. (cont d) 36

37 37 Evolution of Mortgage Law (cont d) The procedure of foreclosure by judicial sale was created to add some protection for the borrower. The resulting decree can say: 1.The borrower has a right to redeem from the mortgage (pay it late). 2.If the borrower can not pay up, the property will be sold to pay the lender the lender s due and give the borrower any surplus. 3.If the sale proceeds are insufficient to pay the lender the lender s due, the lender is entitled to a deficiency judgment. Many states have added a statutory right to redeem from the foreclosure sale. Maitland states that the history of the mortgage deed is one long suppresio veri et suggestio falsi.

38 38 Bob & Betty Byar SELLS for $100,000 DEED $10,000 cash Seller $75,000 Note BANK $75,000 1st Mortgage to BANK secure $75,000 note 2nd Mortgage to secure $15,000 forbearance Byars default on bank loan. Bank forecloses. The property is sold for $60,000. How is this $60,000 distributed? Suppose Byars keep paying on the Bank loan but default on the 2 nd mortgage to seller. What are the rights of the 2d mortgagee?

39 39 3 BASIC THEORIES OF MORTGAGES 1. Title Theory: The mortgage conveys title (in accordance with the traditional language in the mortgage instrument). 2. Intermediate Theory: No matter what the mortgage states, title does not pass at the execution of a mortgage However, title does pass automatically on default. 3. Lien Theory: No matter what the mortgage states, a mortgage is nothing but a lien. What is a lien? The theory of a mortgage came to have little predictive value. For example: Assume there is a casualty insurance policy that states that it ends if the insured transfers the title. The insured executes a mortgage. There is a casualty. In a title theory jurisdiction, has there been a transfer of title that ends the insurance policy?

40 40 Harms v. Sprague In 1973, William and brother John bought land as joint tenants. Without William knowing, brother John executed a mortgage on John s interest in the joint tenancy The mortgage was to secure the payment of a note to purchase the Simmons property with his friend Sprague The mortgage was executed to the Simmons John and Sprague purchased the Simmons property and moved into it. December 10, 1981, John died, devising Sprague his entire estate. December 29, 1981, the mortgage to the Simmons was recorded. Sprague claims the mortgage severed the joint tenancy and he takes John s half subject to the mortgage.

41 41 HARMS v. SPRAGUE (cont d) RO Surviving J/T William and his brother John were J/Ts. Sprague was the devisee of brother John. Joint Tenants William Harms John Harms Seller Simmons K to buy K to sell $18,000 cash $7,000 note (w/john Harms) Buyer Sprague 6/12/81 W/out Wm.knowing John Harms Executes $7,000 note with Sprague to Simmons M on his ½ interest Note: the principal sum of $7,000 was to be paid from the proceeds of the sale of John Harms interest in the joint tenancy property, but in any event, no later than 6 months from the date the note was signed.

42 42 12/10/81 12/29/81 John Harms moved on to the Simmons property with Sprague John Harms died, devising Sprague his entire estate (all real and personal property) M is recorded 5 ½ months after execution Sprague 1. Did the mortgage by one joint tenant sever the joint tenancy? 2. If not, did the mortgage nevertheless survive the death of the mortgagor?

43 43 Harms v. Sprague (cont d) Who is suing whom and for what? William seeks to quiet title, naming as defendants: 1. His deceased cotenant s devisee; and 2. His deceased cotenant s alleged mortgagee. As to the severance issue: In what direction are you taken my an application of the logic of the 4 unities? In what direction are you taken by an examination of the intent of the parties? Court says that an involuntary severance of any of the 4 unities will sever the joint tenancy. How do you mesh the logic of the 4 unities with the theory of a mortgage?

44 44 Harms v. Sprague (cont d) What happens if there is execution under a judgment lien and a judicial sale of the interest of a joint tenant? Is it not clear that the sale severs the joint tenancy? No, it is not clear. Indeed, it is not so: for this purpose, there would be no conveyance until the redemption period had expired without a redemption. A lien on a joint tenant s interest in property will not effectuate a severance of the joint tenancy, absent the conveyance by a deed following the expiration of a redemption period.

45 45 Harms v. Sprague (cont d) Is no severance the right result? Hasn t much more happened here than in the first case of a more secret severance? What did the parties intend? Given no severance, such that surviving joint tenant takes pursuant to the right of survivorship, does he take the deceased joint tenant s ½ interest subject to the mortgage? What is the answer of the court and why?

46 46 Harms v. Sprague (cont d) The court responds with what sounds like the entity theory of the joint tenancy: A surviving joint tenant succeeds to the share of the deceased joint tenant by virtue of the conveyance which created the joint tenancy, not as the successor of the deceased. The property right of the mortgaging joint tenant is extinguished at the moment of his death. Nothing passes from one cotenant to another The deceased simply vacates the entity This is the same reasoning that prevents a joint tenancy from being viewed as an invalid testamentary transfer.

47 47 Harms v. Sprague (cont d) The joint tenancy defeated Sprague, even though Sprague was the devisee of the deceased joint tenant s entire estate. Is this the right result? From the point of view of the estate of the deceased joint tenant? From the point of view of that joint tenant s mortgagee? Should the lender take the risk of losing security if one of the joint tenant s does not agree to the mortgage? Some cases hold that the surviving joint tenant takes the decedent s ½ subject to the mortgage.

48 48 Statute in Harms v. Sprague What is the effect of the statute at p. 355? When any real estate... subject to an encumbrance... is specifically bequeathed or passes by joint tenancy with right of survivorship... the legatee [or] surviving tenant... takes it subject to the encumbrance and is not entitled to have the indebtedness paid from other real or personal estate of the decedent.

49 49 Heydon s Case (1584) on statutory construction What was the common law before the making of the Act? What was the mischief and defect for which the common law did not provide? What remedy the Parliament hath resolved and appointed to cure the disease of the commonwealth? The true reason for the remedy; and then the office of all the Judges is always to make such construction as shall suppress the mischief, and advance the remedy, and to suppress subtle inventions and evasions to continuance of the mischief, and pro privato commodo, and to add force and life to the cure and remedy, according to the true intent of the makers of the Act, pro bono publico.

50 More on the Harms Statute The common law before the making of the Act: A specific devisee of mortgaged property is entitled to have the mortgage paid off ( exonerated ) out of the residuary estate. The mischief and defect: the maker of the will probably only intended to leave the specific devisee the net equity in the property. The remedy: Provide that the right to exoneration does not exist The construction that will advance the remedy Hold that, in either situation, the specific beneficiary is only entitled to the net equity in the property, not to its value? But this only applies if the mortgage survives? That is, if the real estate was subject to the encumbrance [as opposed to the interest of a deceased joint tenant] 50

51 51 Yet More on the Harms Statute The authors say: the common law rule of exoneration did not apply to a surviving joint tenant, who took the whole by virtue of the joint tenancy and not by will, and had no claim on the residuary estate of the deceased tenant. They say the statute says expressly that the surviving joint tenant takes it [the real property] subject to the encumbrance, which means to us that the lien continues against the surviving joint tenant. They conclude William should have taken John s one-half share subject to a mortgage upon it. Do you agree? Is there a difference between a mortgage on one joint tenant s interest versus one on all the joint tenancy property? The court concludes: because... the lien of the mortgage no longer exist against the property, [the statute] is inapplicable, since... the surviving joint tenant, did not take the property subject to the encumbrance.

52 Problem 1, p. 355 JT n JT 1 JT 2 JT 2 N & M Satisfies the M, then Dies 52 Logical Possibilities in Harms 1. Severance A 4 unities, or B Intent to sever 2. Temporary Severance 3. No severance A No relief for lender B Relief for lender Suppose that a court had held that a mortgage severs a joint tenancy. What result if: a) the note had been paid and the mortgage released during John Harm s life; and b) John died first?

53 53 Problem 1, p. 355 (cont d) Suppose, instead, that William (the nonmortgaging joint tenant) had died first, the note had not been paid, and the Mortgagee foreclosed. That is, assume that the mortgaging cotenant is the surviving joint tenant. Is the entire parcel subject to the mortgage or only a ½ interest in it?

54 54 Problem 2, p. 356 A and B own Blackacre in joint tenancy. A conveys a 10-year term of years in Blackacre to C. After 5 years, A dies, devising all of his property to D. What are B s rights? See the memo I have posted on Temporary Severances.

55 55 Joint Bank Accounts Hypo: Mom opens an account with her money but with my name is on it as joint tenant and survivor Three Basic Possibilities 1. True joint tenancy Present gift of ½ of the deposit. 2. Payable on death account. Present gift of survivorship rights only. 3. Convenience account. No gift. Note: The bank card Mom and I sign states that either one of us has the right to withdraw all the money on deposit during our joint lives, with the balance going to the survivor.

56 Joint Bank Accounts (cont d) In some jurisdictions, a payable on death account is not permitted because it is viewed as a testamentary transfer that is not signed and witnessed in accordance with the Statute of Wills (compare p. 637) However, thanks to the Uniform Probate Code, these are now widely recognized. A convenience account is a substitute for a power of attorney, which expires on the death of the principal. 56

57 57 Sums Remaining on Deposit While Both Are Still Alive Majority rule: during the lifetime of the parties, the presumption is that a joint account belongs to the parties in proportion to the net contributions of each party. In our hypo, the presumption is that mom did not make a present gift of half her deposit. The presumption that a depositor did not intend to make a gift to the other person(s) listed on the account can be overcome by clear and convincing evidence of a different intent. Minority rule: equal fractional shares (as in a true joint tenancy) are presumed.

58 58 Sums Remaining on Deposit (cont d) On Death Majority holds that the surviving joint tenant takes sums remaining on deposit in a joint account unless there is clear and convincing evidence that a convenience account was intended. Minority holds that there is a conclusive presumption that survivorship rights were intended.

59 59 Text Problems on Sums Withdrawn 1. O, a widower, opens a joint bank account with his niece, A. O tells A: I ll want your name on this account so that in case I am sick you can go and get money for me. O dies. Is A entitled to the money in the bank account? 2. H and W and their son, S, open a joint savings account. H and W are in their sixties. The money deposited comes from savings from H s salary that H formerly had in a separate savings account. H dies. W, claiming that the entire amount in the account is hers, withdraws the balance. Does S have any rights in the money?

60 60 A Word on Tenancies by the Entirety Traditionally, in Florida, there are different rules for the creation of a tenancy by the entirety depending on whether real or personal property is involved. With respect to real property, a tenancy by the entirety has been presumed from a conveyance that creates the five unities. With respect to personal property (such as a bank account), in addition to the five unities, there must be an expression of intent to create a tenancy by the entirety.

61 61 DELFINO v. VEALENCIS Fee is 20.5 acre parcel with s dwelling unit and garbage removal business on 1 acre. Πs own undivided 2/3 interest as T/C with, who owns undivided 1/3 interest. Πs seek partition by sale (anticipating subdivision into 45 residential building lots). They believe they will be the highest bidders at the sale. wants partition in kind.

62 62 Delfino (cont d) What does the statute say? a court may order sale when it will better promote the interests of the owners. What does the court say? a court may not order sale unless two conditions are met: 1) the physical attributes of the land are such that physical partition is impracticable or inequitable; and 2) the interests of the owners would be better promoted by a sale.

63 63 Delfino (cont d) Court further states that the burden is on the party seeking sale to prove that such a sale will better promote the owners interests. Reason: because the law has presumed that in-kind partition is best Is this an interpretation of the statute that will suppress the mischief and advance the remedy? 1720 statute provided an absolute right to partition by physical division.

64 64 Delfino (cont d) Supreme Court gives a very narrow construction to the statute, stating that its intent is to authorize a sale for an emergency, when a division cannot well be made in any other way. The statute announces no new principles. If physical partition results in unequal shares, a money award ( owelty ) can be made from one tenant to another to equalize the shares. Here, the defendant was required to pay $26,000 in owelty to the plaintiffs to compensate them for the adverse impact of her garbage operation on their proposed subdivision.

65 65 Delfino (cont d) It is the interests of all of the tenants in common that the court must consider; and not merely the economic gain of one tenant, or a group of tenants. Economic interests and non-economic interests? Recall, the trial court said there could be no partition in kind without material injury to the majority cotenants. How do you argue that partition in-kind is impracticable. Webster s says, infeasible; also, not usable.

66 66 Delfino (cont d) Supreme Court says that it may have some validity, but is not dispositive that: FMV of the remaining land will decline; Some potential building lots will be lost to accommodate the trash business; and A proposed subdivision road must be relocated.

67 67 Delfino Factors (cont d) Supreme Court gave more weight to: shape of the land presence of access roads limited number of cotenants her actual and exclusive possession for many years; the fact she had made her home on the property; and the fact that she has made her livelihood on the property for years. What would you decide and why?

68 68 JOHNSON v. HENDRICKSON 1904 H Dies intestate with 160 acre farm They all live on the homestead in the corner of the farm. C 1, C 2, C 3 grew up and left home. Widow 3/9 C 1 2/9 C 2 2/9 C 3 2/ W marries Karl KS 1 KS W dies, devising her 3/9 interest to Karl and his two sons W, K and KS 1 and KS 2 move in together on the homestead in the corner of the farm. K and his sons buy an adjacent farm across the road from the family homestead.

69 69 Johnson v. Hendrickson (cont d) Johnson statute authorized partition by sale [only] if physical partition cannot be made without great prejudice to the owners. Recall the Delfino statute a court may order sale when it will better promote the interests of the owners. Does the Johnson v. Hendrickson statute restrict partition by sale more than the Delfino statute?

70 70 Johnson v. Hendrickson (cont d) What does the court say the statute means? Stated differently, when would physical partition result in great prejudice? A sale is justified if... the value of the land when divided into parcels is substantially less than its value when owned by one person. Intent of the legislature? What of the subjective interest in the homestead?

71 71 Johnson v. Hendrickson (cont d) What if there were a partition in kind? Would Karl and sons get the portion closest to the adjoining land they bought? Karl and sons asserted two interests: 1. Subjective interest in remaining on the homestead. 2. Economic interest in receiving the portion next to their adjoining land. Court gave the subjective interest no weight Court said the economic interest was immaterial. Why do courts refuse to take into consideration the advantage to one cotenant of acquiring the portion of the tract adjacent to that cotenant s other land? See Gray v. Crotts. Even thought the court did partition in kind (into four lots), it made the four cotenants draw straws for the lot next to the adjoining lot owned by one of them.

72 72 Delfino versus Johnson If there is partition in kind, the partition must be done according to the values set by appraisers Note that sec authorizes the court to appoint a committee to effect the partition Which would rather have your committee do, plan a sale or work with appraisers to physically partition? Note: the sale will not capture subjective value, ex., of living in a home. Delfino is exceptional most courts are more influenced by the reduction in value. Perhaps the homestead is special

73 73 Delfino versus Johnson (cont d) Cotenants are generally treated proportionately with reference to the coowned property, not with reference to a larger framework. Nonetheless, ownership of an adjacent tract by one cotenant may mean that the tract to be sold will be more valuable to this cotenant than to others Thus, the cotenant who owns an adjoining tract may have a comparative advantage in bidding at a public sale

74 74 Agreement Against Partition A and B own Blackacre as Tenants in Common. Each agrees in writing with the other never to bring an action to partition the land. What result if A subsequently brings an action to partition? What is the doctrine likely to be invoked? No unreasonable restraints on alienation. The time stated must be reasonable in terms of the purposes of the agreement. What are the policies that are implicated? What does Demsetz say?

75 75 DEMSETZ TOWARD A THEORY OF Property Rights PROPERTY RIGHTS some: property rights are one s relation to an asset (rather than the asset itself). others: property rights are one s relation to other persons, rather than one s relations to the asset. Property rights derive their significance from the fact that they help a man form those expectations which he can reasonably hold in his dealings with others. The owner has the consent of others to act in particular ways. The owner expects the community to prevent others from interfering with the owner s actions.

76 76 Demsetz (cont d) Property rights convey the right to benefit or to harm oneself or others. Property rights specify how persons may be benefited and harmed and, therefore, who must pay whom to modify actions taken by the parties. Externalities externalities exist whenever some person, say X, makes a decision about how to use resources without taking full account of the effects of the decision. X ignores some of the effects some of the costs or benefits that would result from a particular activity, for example because they fall on others. They are external to X, hence the label externalities. As a consequence of externalities, resources tend to be misused or misallocated : used in one way when another would make society as a whole better off.

77 77 Demsetz (cont d) Externalities (effects that are not considered by the actor because they fall on others) are both pecuniary and non-pecuniary include both costs and benefits Internalizing these effects refers to a process, usually a change in property rights, that enables these effects to bear (in greater degree) on all interacting persons. A primary function of property rights is to guide incentives to achieve a greater internalization of externalities. What makes a harmful or beneficial effect an externality is that the cost of bringing the effect to bear on the decisions of one or more of the interacting parties is too high to make it worthwhile. Allowing transactions increases the degree to which internalization takes place. How would you describe the function of partition?

78 78 Demsetz (cont d) His thesis: Property rights develop to internalize externalities when the gains of internalization become larger than the cost of internalization To adjust to new cost-benefit possibilities The adjustments are largely as a result of gradual changes in social mores and in common law precedents. Economists have long cited the over-hunting of game as an example of an externality. Because of the lack of control over the hunting of others, it is in no person s interest to invest in maintaining or increasing the stock of game. Over-intensive hunting of game takes place. Thus, a successful hunt is viewed as imposing external costs on subsequent hunters costs that are not taken into account fully in determining the extent of hunting or of animal husbandry.

79 79 Demsetz (cont d) Labrador Indians offer an example. Prior to the fur trade, hunting was carried on primarily for food, and relatively few furs were required by the hunters for their family use. The advent of the fur trade increased the value of the furs to the Indians; and hence, the level of fur trade increased. The fur trade made it economic to encourage the husbanding of animals. Husbanding requires the ability to prevent poaching. The property rights system changed toward private property to allow actors to internalize the benefits of their actions. This was a move away from communal ownership, which he defines as a right that can be exercised by all members of the community.

80 80 Demsetz (cont d) Communal ownership means that the community denies to the state or to individual citizens the right to interfere with any person s exercise of community owned rights sound like concurrent ownership? Private ownership implies that the community recognizes the right of the owner to exclude others from exercising the owner s private rights. State ownership implies that the state may exclude anyone from the use of a right as long as the state follows accepted political procedures for determining who may not use state-owned property.

81 81 Demsetz (cont d) Suppose that land is communally owned: every person has the right to hunt, till, or mine the land. Communal (concurrent?) ownership fails to concentrate the cost associated with any person s exercise of his communal rights on that person. If a person seeks to maximize the value of the person s communal rights, the person will tend to overhunt and overwork the land because some of the costs of doing so are borne by others. The stock of game and the richness of the soil will be depleted too quickly. Sound like Delfino?

82 82 Demsetz (cont d) In the case of communal ownership, each person could agree to abridge the person s rights to hunt However, the costs of reaching agreement may be very high. Negotiating costs may be very large It is difficult for many persons to reach agreement, Especially when each holdout has the right to consume as fast as the holdout pleases. It is also hard to bring the full expected costs and benefits of future generations to bear on current users. Policing costs may be high, even if an agreement can be reached.

83 83 Demsetz (cont d) Contrast private property, in which a single owner will attempt to maximize its present value by taking into account alternative future streams of benefits and costs and selecting the one the owner believes will maximize the present value of the owner s rights. this means the owner will attempt to take into account the supply and demand conditions that the owner thinks will exist after the owner s death. In effect, an owner of a private right to use land acts as a broker whose wealth depends upon how well the owner takes into account the competing claims of the present and the future.

84 84 Demsetz (cont d) Consider the value of an office building. Project net cash flows (by looking at both receipts and expenses) some years into the future. Discount them to present value. With communal claims, there is no broker. The claims of the present generation will be given an uneconomically large weight in determining the intensity with which land is worked.

85 85 Demsetz (cont d) Advantages of private property: 1. effects a partial concentration of benefits and costs an owner may economize on the use of those resources from which the owner has a right to exclude others. However, because the owner cannot exclude others from their private rights to land, the owner has no direct incentive to economize in the use of the owner s land in a way that takes into account the effects the owner produces on the land rights of others (same problem as in communal ownership).

86 86 Demsetz (cont d) Advantages of private property (cont d) 2. greatly reduces the costs of negotiating over the remaining externalities (his point: often overlooked) The externalities that accompany private ownership of property do not affect all owners, and, in general, only a few need reach an agreement that takes the effects into account: negotiating costs are lower than if all members of the community had to be brought to agreement.. The reduction in negotiating cost that accompanies the private right to exclude others allows most externalities to be internalized at rather low cost.. Exception: externalities that are associated with activities that generate external effects impinging on many people (pollution from a factory). Especially if there are many generators of the external effects (the smoke comes from many factories), it may be too costly to internalize effects through the marketplace.

87 87 Authors Timber Example Assume a communal forest of 1,000 trees. Owned in common by members of a primitive tribe. Each had an undivided 1/100 interest in 1,000 trees If X chops a tree and puts it to his own use, he Gains the full 1 tree Loses only 1/100 of an interest in a tree BEFORE 1/100 interest in 1,000 trees: 10 AFTER 1 tree plus 1/100 interest in 999 trees, or 9.99=10.99 The other neighbors pay most of the COST BEFORE they had 99/100 of 1,000 trees or 990 AFTER they have 99/100 of 999 trees or trees He GAINS.99 and they LOSE.99 His imposition of a cost on them is an externality under a system that says he has a right to do this it is an external cost that he need not take into account

88 88 Authors Timber Example (cont d) Assume, now, a trader will pay $2 per tree Each time X sells a tree for $2 X GAINS $2 X s COST is only 1/100 X $2.00 = $ 0.02 If X stops chopping to conserve, he has no assurance any of the other 99 members of the tribe will stop chopping If X stops, X bears the full cost of stopping, the other 99 get the benefit it would be an external benefit In short, it is to the benefit of each member of the tribe to chop away

89 89 Authors Timber Example (cont d) Tragedy of the Commons If each individual acts in accordance with the individual s own best interests, society as a whole will lose because of the overconsumption of resources in the commons. How will society lose? One of its members gains a tree, although society loses a tree Assume that the tree might be more much more valuable in the future, so that a discounted present value of a tree chopped 10 years from now is $3. The tribe is selling trees worth $3 for $2 it is LOSING money Yet, no one will stop chopping under a communal ownership system. I won t wait to chop until the future value is greater, because someone will chop the trees out from under me my incentive is to chop (consume) too soon.

90 90 Authors Tree Example (cont d) All members theoretically could agree not to chop, but the negotiating costs to get 100 people to agree may be high Moreover, there is the problem of the holdout those members who would insist on very high payments to stop chopping There is also the problem of the freerider those members who would let others make all the payments to others to stop chopping the costs to police the agreement may be high

91 91 SPILLER v. MACKERETH 2 tenants in common owned a downtown building. A lessee vacated. One cotenant entered and began using the structure as a warehouse. The cotenant out of possession wrote a letter demanding that the cotenant in possession either vacate half of the building or pay half of the rental value. The cotenant in possession did neither. Trial court awarded $2,100 rent to the cotenant out of possession. Appellate court applies majority rule: In absence of (a) an agreement to pay rent or (b) an ouster of a cotenant out of possession, a cotenant in possession is NOT liable to the cotenant out of possession for the value of the use of the property Delfino type of situation There was no agreement to pay rent Was there an ouster of the cotenant out of possession that would trigger a liability to pay rent by the cotenant in possession?

92 92 Spiller v. Mackereth (cont d) How do you decide when there is an ouster? It depends upon why you are asking. 1. For Purposes of Determining Whether An Occupying Tenant Has Acquired Title By Adverse Possession Cotenant in possession claims to have established full ownership by adverse possession. The question is: when is there a sufficient ouster to begin the running of the statute of limitations on an action to recover the possession of land? Court says the essence of a finding of an ouster in the adverse possession cases is a claim of absolute ownership and a denial of the cotenancy relationship by the occupying cotenant. Two different things?

93 93 Spiller v. Mackereth (cont d) Some cases have said the assertion of complete ownership can be found in a composite of activities such as Renting part of the land without accounting Hunting the land Cutting timber Assessing and paying taxes Generally treating the land as if it were owned in fee for the statutory period. Delfino? Other cases find the assertion of complete ownership only from more overt activities such as a sale of the property under a deed purporting to convey the entire fee.

94 94 Spiller v. Mackereth (cont d) 2. For Purposes of Determining the Liability of An Occupying Cotenant for Rent Cotenant out of possession wants rent from cotenant in possession A claim of absolute ownership by the occupying cotenant is not essential. The normal fact situation which will render an occupying cotenant liable to out of possession cotenants is one in which the occupying cotenant refuses a demand of the other cotenants to be allowed into use and enjoyment of the land, regardless of a claim of absolute ownership. There must be some evidence that the cotenant seeking rent actually sought to occupy the bldg. but was prevented from moving in by the cotenant in possession.

95 95 Spiller v. Mackereth (cont d) Courts are split Majority: occupying cotenant is not liable for a proportionate share of the rental value to the cotenants out of possession notwithstanding a demand to either vacate or pay rent (unless there is an ouster). Minority: occupying cotenant is liable for rent if the occupancy continues after a demand to vacate or pay rent. Are these mandatory rules or default rules? Should there be a mandatory rule here? If not, what is the proper default rule? What rule would be efficient? What rule would be fair?

96 96 Spiller v. Mackereth (cont d) IWhat are the pluses and minuses of each rule? 1. Efficiency Considerations? Is the majority rule efficient to the extent it encourages a cotenant out of possession of vacant property to take possession and put it to good use? Is the majority rule inefficient to the extent it entails litigation costs over what constitutes an ouster? Is the minority rule efficient because it avoids litigation costs over what constitutes an ouster? Is the minority rule efficient because it places the burden on getting an agreement that no rent shall be paid on the acting party, the one moving in to take possession? Is the minority rule inefficient because it takes away the incentive to convert out of communal ownership? If you can get rental income, you are less likely to file a partition action.

97 97 Spiller v. Mackereth (cont d) 2. Fairness Considerations? What is fair? What are the reasonable expectations of the parties? Are the reasonable expectation of the parties also an efficiency consideration? What if my sister moves into my mom s condo, takes care of her until her death, and keeps living there? What if she moves into property my mom held as rental property?

98 The Partnership Analogy Existence RUPA 202(a): the association of two or more persons to carry on as co-owners a business for profit forms a partnership, whether or not the persons intend to form a partnership. RUPA 202(c)(1): Joint tenancy, tenancy in common, tenancy by the entireties, joint property, common property or part ownership does not of itself establish a partnership, even if the co-owners share profits made by the use of property. Principal factors indicating co-ownership of a business include the sharing of profits, losses and control 98