Lesson 2: Basics of Real Estate Law

Lesson 2: Basics of Real Estate Law Lesson Topics This lesson focuses on the following topics: Real Property and the Law Land, Real Estate and Real Property Real Property vs. Personal Property Characteristics of Real Property Forms of Real Estate Ownership Ownership of Real Estate by Business Organizations Condominiums, Cooperatives, Townhouses and Time Shares Laws Affecting Real Estate Lesson Learning Objectives By the end of this lesson, you should be able to: Be able to acknowledge the difference between land, real estate, real property and personal property. Understand the various forms of ownership. Know the definitions of condominiums, cooperatives, townhouses and time shares. Be more knowledgeable about laws that affect real estate. Page 1 of 51

The Language of Real Estate Lesson Two introduces several new real estate terms. You will find the following terms within the lesson. These are terms a real estate student must know. Watch for these words and be sure you understand the meaning before moving on. allodial feudalism severance annexation personalty fixture trade fixture chattel fructus naturales fructus industriales emblements land real estate real property air rights sub-surface right surface rights water rights community property joint tenants tenants in common freehold estate life estate fee simple absolute estate condominums town houses cooperatives time shares Real Property and the Law The basis of all laws starts with the constitutions, the U.S. Constitution and the State Constitutions. Within these constitutions are laws that affect not only how we practice real estate such as the fair housing laws, but also rights as property owners such as homestead and community property laws. These constitutions not only establish the rights of citizens but also limit the authority of the government and passes on these rights and powers to the state governments. The principal governing bodies that directly affect the real estate industry are the Texas State Legislature and the Texas Real Estate Commission (TREC). Page 2 of 51

Texas State Legislature The Texas State Legislature is a broad term that refers to the state Senate and the House of Representatives. The Texas Legislature is responsible for all laws in Texas, which includes those laws that directly affect the real estate industry. For additional information on the State Legislature, consider visiting their website: http://www.capitol.state.tx.us Texas Real Estate Commission (TREC) The state legislature created The Texas Real Estate Commission (TREC). TREC has two main functions: 1. To enforce all real estate-related statues in the Texas Occupations Code, Chapter 1101 and 1102, also referred to as The Texas Real Estate License Act (TRELA) 2. To adopt and enforce new rules governing the practice of real estate, as needed to administer the law and protect the public The Real Estate License Act provides that The Commission is granted the authority to enforce all the statutes contained in the Act as well as provide for the commission to adopt and enforce new rules. Licensed real estate professionals and licensed real estate inspectors are responsible for adhering to the Texas Real Estate License Act, and abide by the rules of the Texas Real Estate Commission (TREC). One of the basic common laws regarding property is that of real property and personal property. The land and everything under the land and everything over the land is considered real estate. All things attached to the land or growing in or on the land are still real property. Unattached, moveable items are personal property. Real estate law is also known as real property law. In our country, people have the right to own, use, encumber, and transfer land and the improvements attached to the land. Many laws affect the practice of real estate. Most states have their own state laws and there are many federal laws that affect real estate. We will be exploring many of these laws throughout this course. Page 3 of 51

The use, control, and disposition of land are regulated by both state and federal laws. It is interesting to note that not only the surface of the land is owned but an owner owns everything above the surface (to infinity) and everything below the surface. Below the surface rights are called sub-surface rights and include gas, oil, water, and other minerals. Above the surface rights are called air rights. Sometimes both air rights and sub-surface rights can be sold or leased separate from the surface rights. Unless air rights or subsurface rights are specifically excluded when a seller sells a property, everything the seller owns automatically transfers to the buyer. The Purpose of Licensing Laws What a Licensee Can Do and Cannot Do Imagine what real estate was like before the real estate license act was adopted. Vendors discovered that there was money to be made by putting buyers and sellers together for the purpose of buying and selling real estate. There were no regulations. Most vendors represented only their own pocketbook. There were also no recording laws to keep up with who owed what. It was not terribly unusual for a seller to take money and give a deed to one buyer this week and another buyer next week. By the time it was discovered the seller had usually disappeared with the money. There were some honorable people getting involved in real estate sales that could see how unethical it was. A group of them got together and formed what much later became the National Association of REALTORS. That group wanted to be able to distinguish themselves from the pack. They had the foresight to see what a great and good business the real estate industry would become. They developed a Code of Ethics they all agreed to comply with and set about upgrading the real estate industry. While that was happening the states were also looking at the fraud and misrepresentation in the business and deciding legislation was needed to put a stop to it. Many states Page 4 of 51

including Texas, used that original Code of Ethics as a guide to write the first real estate laws. In 1949 the Texas Legislature passed the first Texas Real Estate Licensing act and established the Texas Real Estate Commission to enforce the Texas Real Estate Licensing Act (TRELA). The National Association of REALTORS Code of Ethics is reviewed and updated annually. TRELA is reviewed and updated every two years when the Texas Legislature meets. The Code of Ethics and TRELA guide real estate agents to do the right thing every day. The following Section of the License Act defines the minimum level of service a Texas broker can offer their sellers Sec. 1101.557. ACTING AS AGENT; REGULATION OF CERTAIN TRANSACTIONS. (a) A broker who represents a party in a real estate transaction or who lists real estate for sale under an exclusive agreement for a party is that party's agent. (b) A broker described by Subsection (a): (1) may not instruct another broker to directly or indirectly violate Section 1101.652(b) (22); (2) must inform the party if the broker receives material information related to a transaction to list, buy, sell, or lease the party's real estate, including the receipt of an offer by the broker; and (3) shall, at a minimum, answer the party's questions and present any offer to or from the party. Page 5 of 51

Real Estate A Business of Many Specialties Real estate has many aspects and specializations such as: Residential Commercial Industrial Recreational Unimproved land Farm and ranch sales and leasing Property management Apartment locating Time share sales Property development Real estate professionals who the facilitate buying, selling, leasing, or managing real estate may require some of the real estate industry specializations, which may include brokerage management and ownership, inspectors, surveyors, appraisers, title and abstract, counseling, education, and financing. The real estate industry is heavily governed by statutes and professional organizations, which we will discuss throughout these courses. So How does a License Holder Prepare for Some of These Specialties? Article 11 of the National Association of REALTORS says it well: The services which the REALTORS provide their clients and customers shall conform to the standards of practice and competence which are reasonably expected in the specific real estate disciplines in which they engage; specifically, residential real estate brokerage, real property management, commercial and industrial real estate brokerage, real estate appraisal, real estate counseling, real estate syndication, real estate auction, and international real estate. Page 6 of 51

REALTORS shall not undertake to provide specialized professional services concerning a type of property or service that is outside their field of competence unless they engage the assistance of one who is competent on such types of property or service, or unless the facts are fully disclosed to the client. Any persons engaged to provide such assistance shall be so identified to the client, and their contribution to the assignment should be set forth (Amended 1-95). What does this mean? Article 11 explicitly describes a REALTOR 's obligation to provide only those services that he or she can deliver competently. For example, if a REALTOR acting as a residential broker with no commercial experience was asked to market a complex business property, the REALTOR would be obligated to disclose to the client that he or she does not possess the experience and expertise to provide the requested service. In certain instances, a prospective client may value the general abilities and integrity of a particular REALTOR and may insist on engaging in the REALTOR 's services despite the REALTOR 's lack of experience and competency needed to undertake the assignment. In such a case, the REALTOR may undertake the assignment only after fully disclosing his/her lack of experience, and if the REALTOR obtains assistance from someone competent in the field. The REALTOR must fully inform the client as to whose assistance was utilized and the degree to which that person contributed to the assignment. How would you summarize the basic concept(s) of Article 11? REALTORS shall be competent in the services they perform and shall not attempt to provide services outside their scope of expertise without getting assistance from a person who is competent in the area where the REALTOR is lacking. Page 7 of 51

What Do You Think Will Happen? Mary just got her sales license six months ago. She has just sold a couple of homes. Recently a friend of hers asked her to help them buy a condo from a from an owner. The friend cannot afford to pay Mary or her broker anything but really want the property. The seller is in a financial bind and cannot pay anything either. Mary figures it will be a good learning experience. Mary thought it could not be too hard, so she said she would do it. Mary and her buyer friend had no idea of all the paperwork they should have been reading before buying that condo. Now it has closed and the buyer has found out they owe monthly homeowner association dues in addition to a special assessment that is on the property. Not only that but the homeowner s association tells them they cannot park their pick-up truck in their driveway. Mary s friend is furious. She has called the broker and is threatening to file a complaint with TREC. Mary s broker is really angry with her because he did not give her the authority to sell condos yet and certainly did not give her permission to do a free transaction for her friend. Answer: Mary s broker has every right to be angry with her. Now it will take time and energy to try to make it up to the buyer and they may end up trying to defend this with TREC. Hopefully the buyer will not go further and talk to an attorney. Mary s broker may very well decide to return Mary s license to TREC and ask her to find a new broker. If it gets to TREC, Mary definitely violated the license act and acted incompetently. We also know Mary violated the Code of Ethics. Wonder if her friend knows she can file a complaint at the Association of REALTORS too. This was not a very good day for Mary. Land, Real Estate, and Real Property History of Land Ownership In medieval Europe, the average person did not own land in the way that we think of someone owning land today. Much contemporary land ownership is what we call allodial, Page 8 of 51

or complete, whereas in medieval times, a kind of abbreviated land ownership was established through a system known as feudalism. Feudalism was a system of land ownership in which all the land in the kingdom was considered to be owned by the head of the state (the king or queen). The king would allow a few lords (the king s vassals) to use some of the land in exchange for taxes and allegiance. The lords, following the same system, would allow peasants or their vassals to live on and work the land in exchange for survival. Within the feudal system, however, the lord did have responsibilities to the vassal, which included the provision of: A portion of land called a fief that was neither given nor sold to vassals, but only loaned for use to provide a return to the owner Just protection under the law Maintenance of the land In brief, the lord had to protect the vassal s land interest and guarantee the vassal s quiet occupation. If the vassal became involved in a dispute, then the lord was obligated to defend the vassal in order to protect his land. In return for the use of the lord s land and his broad protection, a vassal had responsibilities to the lord. He was generally obligated to provide certain services to the lord, including military service if the lord became involved in a military campaign. These services were the means by which the vassal gained his property rights (but not yet ownership) and the protection of those rights. Allodial Land Ownership In contrast to feudal land tenure with obligations and duties to the owner, an allodial ownership system is one in which the land is owned completely without an obligation of services or duties to another. The land is owned absolutely and may be passed to heirs. This sort of complete ownership is commonly called an allodial estate or fee simple estate. This contemporary concept of land ownership stands in stark contrast to the reciprocal obligations and ongoing relationships under medieval feudalism. Page 9 of 51

Land, Real Estate and Real Property At first glance, the terms land, real estate, and real property appear to be interchangeable. The technical use of these terms in real estate practice involves subtle but important differences that licensees must understand. Each of these three terms, beginning with land, builds upon the previous term adding more characteristics. We must consider the characteristics of each of the commodities individually: Land -- Refers to more than a tract of earth. Land is defined as not only the natural resources seen on the surface of the land but the minerals below the surface and the air above the surface. When a person acquires land, it is possible to acquire all that lies below and above it as well. Real estate -- Encompasses everything in the definition of land, but it adds permanent buildings and structures (known as improvements) to the definition, which basically comprises the land and everything attached to the land. Real estate is also referred to as realty. Real property -- Property ownership includes a set of legal rights, specifically the owner's rights, which deals with the right to control the property, the right of exclusion, the right of possession, the right of disposition, and the right of enjoyment. While real estate refers to the land and improvements on it, real property refers to both the real estate and the set of rights associated with it. General Considerations As a practical convention, real estate licensees do not burden a conversation with the technical distinctions between the three commodities. In everyday use, these terms are interchangeable. While in the field or otherwise discussing land, real estate, or real property, it is not generally important that one differentiate between the three. In fact, we will use the three terms interchangeably in subsequent lessons. It is still important for the student to understand these basic technical distinctions for their own professional education and for the state licensing exam. Land is the land and everything naturally associated with its surface, what lies beneath it, and the air above it. Real estate is the land plus any buildings. Real property is real estate plus the rights of ownership. Page 10 of 51

Real Property vs Personal Property Personal property is a type of property that can include any asset other than real estate. The distinguishing factor between personal property and real estate is that personal property is movable. That is, the asset is not fixed permanently to one location as with real property such as land or buildings. The Texas One to Four Residential contract describes the mounts and brackets, that are attached to the wall for speakers or television sets as real estate. The speakers and the TV set are personal property. Real estate is the land, including everything on, under, and above the land. Also recall that real property is the definition of real estate plus the set of owner s rights associated with it. So, simply put, personal property is all that is not covered by real property s definition. Therefore, personal property includes objects that can be moved such as couches, tables, and clothing. Personal property is sometimes also called personalty or chattels. Another difference between real property and personal property is the way in which each transfers. Ownership to a parcel of real estate is transferred by a recordable document such as a deed or will, whereas ownership to personal property usually transfers by a bill of sale. A bill of sale is a written agreement used to sell, reassign, or transfer one s right to or interest in personal property. A deed, on the other hand, is a written instrument used specifically to transfer real property, which the owner (sometimes called the grantor ) uses to convey ownership in real property to the buyer (or grantee ). In the same way that there are subtle differences between the concepts of real estate, land, and real property, there are specific technical terms used to discuss subtle differences in personal property. The term personal property actually refers to the theory of ownership rights in personal property (like the set of rights associated with real property). Personalty is effectively a synonym for personal property but personalty refers to the actual, tangible object itself, such as a chair (this distinction corresponds to Page 11 of 51

the way that the terms real estate and realty identify the tangible buildings and trees associated with a parcel of land, in addition to the land itself). This technical distinction arises only rarely; however, these ideas may shed more light on the nature of real property, real estate, and land, all of which are important concepts for this course. Severance It is possible to turn some elements of real estate into personal property. The most common way that real estate is converted to personal property is through severance. Severance is the act of separating some element of the real estate from the land. For example, a tree is real estate, but if the owner cuts down the tree, literally severing it from the earth, the tree is now personal property, which can be carried off. Fixtures Conversely, personal property can be turned into real estate. This is accomplished by making that personal property a fixture. A fixture is a chattel bound to real estate and refers to an object that was once personal property but which has now been firmly attached to the land in such a way that it becomes part of the real estate. For example, a person can purchase wood, nails and paint, which are all personal property. But when the wood, nails and paint are made into a fence on the land, the former items of personal property are now real estate. The items have been transformed from movable personal property into an attached fixture on the land, i.e. real estate. The most common way to turn personal property into real property is by permanently affixing the object(s) to real estate. Some examples of fixtures are: Elevators Central air conditioning units Garage door openers Trade Fixtures When a tenant makes a physical alteration or permanent addition to the property he or she is renting, the altered or added object usually belongs to the landlord upon expiration Page 12 of 51

of the lease agreement. For example, if a tenant installs new kitchen cabinets in his or her apartment, generally speaking, these cabinets are considered fixtures, and thus revert to the landlord s possession when the lease agreement expires. One can see how this might impose undue hardship on a tenant who is leasing commercial property because of the large amount of money that many businesspeople have invested in items they use in the course of business and have affixed to the real estate they lease. For example, what if a tenant is leasing a commercial retail property in a shopping mall: Are all the shelving, racks, and cash registers that the tenant installs automatically the landlord's property when the lease expires? Generally, they are not. Objects affixed to the leased property that are owned by and necessary for the tenant s trade or business are called trade fixtures, and they are not subject to the same rules of transfer as fixtures in general. Trade fixtures are items that the tenant owns but has attached in some permanent way to leased (especially commercial) real estate. Trade fixtures remain the tenant's property when his or her lease expires. Examples of trade fixtures include: Check-out stands Coolers Display shelves Display racks Counters Desks Courts usually conclude that all trade fixtures are the tenant's property, regardless of the method of installation. Nevertheless, for a tenant to retain ownership of a trade fixture, the tenant must remove the fixture by the last day of the lease. That is to say, a tenant may not leave a trade fixture on a property after the lease has expired and then later request that the landlord relinquish the item. Page 13 of 51

Determining What Counts as a Fixture While the exact definition of a fixture varies slightly between states, there are some common attributes that allow us to make some general remarks about what sort of thing counts as a fixture. All licensees should acquaint themselves with state and local regulations that help to identify fixtures for the type(s) of property with which they work. When trying to determine whether something is a fixture, we can consider the following issues: annexation, adaptation, and intention. Annexation One trait that separates fixtures from non-fixtures is the way the item is annexed, or attached, to the land. Usually, personal property can be removed without the aid of tools or heavy machinery; we can see this in the case of furniture, decorative items, utensils, wall hangings, and the like. With a comparatively minimal amount of effort, one can easily remove, shift, and replace a chattel. This is not the case with a fixture, the removal of which generally involves a great deal of effort and can require professional assistance because of its permanent nature. Earlier, we mentioned an elevator as an example of a fixture, and it is easy to see how annexation might be used as a criterion for identifying it as such. The installation and removal of an elevator is a lengthy and often costly endeavor, which will probably require the aid of several professionals and a few days of labor. If an owner installs an elevator on his or her property, then unless it needs to be replaced, he or she generally intends to leave it there indefinitely. Adaptation As real estate transactions become increasingly complex, so do our definitions of key terms like fixture. In the past, the definition of a fixture depended solely on the means of attachment, that is, annexation. Nowadays, it is important to consider the issue of adaptation as well. Adaptation refers to the use and modification of a particular item for a specific use in a property. If one can show that an item was custom designed for a Page 14 of 51

specific use on the property, then it is likely that the item would be considered a fixture rather than a chattel. Intention The most important characteristic to consider when deciding whether something is a fixture is the owner s intent for that item. Intention is inferred from the nature of the item and blends annexation and adaptation. We can look at how the item is attached and the way in which it has been modified to suit its purpose or role in a given property. From these we can often infer whether the item was intended to be a fixture or personal property. Each case is unique and the individual parties involved in the decision must consider the method and purpose of adaptation and annexation when determining whether something is a fixture. It is often best to ask when unsure and write into a contract what will stay on the property and what is intended to be removed. The Texas Real Estate Commission has an approved form called the Non-realty Items Addendum. If the parties agree that something that is personal property is to stay with the property they can use the addendum to clarify that this agreement is separate from the sale of the property. A copy of the Addendum follows: Page 15 of 51

APPROVED BY THE TEXAS REAL ESTATE COMMISSION (TREC) FOR VOLUNTARY NON-REALTY ITEMS ADDENDUM TO CONTRACT CONCERNING THE PROPERTY AT (Address of Property) A. For an additional sum of $ and other and good valuable consideration, Seller shall convey to Buyer at closing the following personal property (specify each item carefully, include description, model numbers, serial numbers, location, and other information): B. Seller represents and warrants that Seller owns the personal property described in Paragraph A free and clear of all encumbrances. C. Seller does not warrant or guarantee the condition or future performance of the personal property conveyed by this document. Buyer Seller Buyer Seller This form has been approved by the Texas Real Estate Commission for voluntary use by its licensees. Copies of TREC rules governing real estate brokers, salesperson and real estate inspectors are available at nominal cost from TREC. Texas Real Estate Commission, P.O. Box 12188, Austin, TX 78711-2188, 512-936-3000 (http://www.trec.texas.gov) OP-M Page 16 of 51

Changing Chattels into Real Estate and Vice Versa Because a chattel can be converted to real estate, and vice versa, the difference between the two can be confusing. The following screens will provide a few more examples and explanations to help you better understand when a thing is real estate and when a thing is personal property. Trees and Crops Plants pose a unique challenge when we are trying to judge whether they are real estate or personal property. Are crops, which can be harvested and sold, personal property or real estate while they are still attached to the earth? What about trees and decorative flora that one could remove are they chattels or realty? To decide whether plants are personal property or real property, one must generally consider their use and the duration of their existence. Trees, persistent decorative plantings (such as perennial landscape plants) and uncultivated plants are referred to as fructus naturales and are usually considered to be realty because of their permanence. Annually-cultivated crops are called fructus industrials, or emblements, and are generally considered to be personal property, even prior to harvesting. Therefore, the broad general rules for making judgments about plants are as follows: Trees, bushes, and grasses, or fructus naturales that do not require annual cultivation are real estate. Cultivated annual crops, or emblements, are personal property. Minerals When substances are still underground, they are considered real estate. But when an owner extracts things from underground and stores them topside, the item is converted from real estate into personal property. Page 17 of 51

Mobile Homes or Manufactured Housing Mobile homes are, for the most part, movable. Therefore, mobile homes fall into the personal property category. If a mobile home is sold in conjunction with a parcel of land or is permanently attached, then it may be considered real estate. Some states, such as Texas, require the home to be connected to utilities and permanently attached to the land in which the owner of the home also owns through a deed or contract for deed filed in the county records as real property. It is worth noting here that real estate licensees should be familiar with their local real estate laws before attempting to market mobile or manufactured homes. They should also make sure they are acquainted with any clauses of their state licensing laws that apply to the sale of mobile or manufactured homes, because some states impose special restrictions regarding this type of property. Mortgage lenders as well as insurance companies may have special requirements or may not offer services on mobile or manufactured houses. Characteristics of Real Property Real estate investment can be attractive to investors because of some of its unique characteristics when compared to other investments. Real estate ownership can last indefinitely. No fixed maturity. Like some investments. Real estate is tangible. It can be seen, felt and touched. In a good market, return on investment can exceed other investments. Some of the concerns investors have with real estate investment is that: Real estate requires management, High transaction costs can eat into returns, Lower Liquidity. Takes time to sell and take money out, Are good tenants available Inefficient markets can make it difficult to sell or lease Page 18 of 51

Ownership Rights There are four ownership rights associated with real property: subsurface rights, surface rights, air rights, and water rights. We defined real property earlier as covering real estate plus the owner s set of rights. It is important to understand that these four different rights may be sold separately, sometimes to different persons, thus creating situations in which multiple people can have an ownership interest in the same piece of property. We will now discuss the details of these various rights. Subsurface Rights Subsurface rights relate to everything beneath the surface of a tract. The importance of this right lies largely in the fact that it may secure ownership of mineral deposits located under the surface of a property. In some states, subsurface rights are sold separately from surface rights. In the event that two parties each hold an interest in a property one holding the subsurface rights and the other holding the surface rights the holder of subsurface rights may legally enter the property to extract the minerals he or she has rights to, but he or she must take care to not materially disturb the surface. Surface Rights Surface rights are rights and interests with respect to the surface of the earth, including natural elements and structures built on or attached to it. Air Rights Air rights are the right to use the airspace above a property. These rights may be sold or leased independently of the tract itself. Water Rights When a property borders a body of water or a river, the right to enjoy the water is usually included in the bundle of rights. There are two types of rights associated with waterfront properties: riparian rights and littoral rights. Page 19 of 51

Riparian rights govern the use of flowing water, such as rivers and streams, that pass through or border a property. In accordance with riparian rights, a property owner does not own the water, but he or she may use the water and shares those same rights and uses with other property owners whose land also borders the water. Littoral rights govern lakefront or seafront property and usually allow the property owner to use the water bordering his or her property. Littoral use does prohibit the property owner from artificially changing the water s location. It is important to note that water rights connect to surface rights in that a permanent right to enjoy a body of water surrounded by privately-owned realty usually necessitates surface ownership of waterfront property. Forms of Real Estate Ownership Real estate ownership can take basically four different forms in Texas. These include: Sole Ownership: Property is owned entirely by one person. Words in the deed such as "John, a single man," establishes title as sole ownership. Community Property: Texas recognizes community property, a special form of joint tenancy that exists between husband and wife, with each owning a one-half interest. Upon death, the decedent's interest passes in a manner similar to tenants in common. Words in the deed such as "John and Mary, husband and wife as community property," establishes community property ownership. Tenants in Common: Tenants in common provides for multiple percentages of ownership interest, if desired, and inheritance rights for the heirs of each grantee. When someone who is a tenant in common with another person dies, the interest the deceased person has does not automatically pass to the other owner. Instead, that interest is transferred to the estate of the deceased owner. Joint Tenancy: Property is owned by two or more persons at the same time in equal shares. The unities of time, title, interest, and possession are vested in each joint tenant (four unities). Each joint tenant has an undivided right to possess the whole property and a proportionate right of equal ownership interest. When one joint tenant dies, his/her interest automatically vests in the surviving joint tenant(s) Page 20 of 51

by operation of law. Words in the deed such as "John and Mary, as joint tenants with right of survivorship and not as tenants in common," establishes title in joint tenancy. Some states do not allow this form of property ownership. It is a legal form of ownership in Texas. Real property laws include different classes of estates in real estate. One of the most important classes is the Freehold Estate. A freehold estate is ownership of real property for an indefinite period of time. Two types of freehold estates are the fee simple absolute estate and the life estate. A fee simple absolute estate means the property can be owned and passed down to heirs as long as the family wants to keep it. A life estate is another type of freehold estate. A life estate is owned for the duration of the life owner s life. The life estate documents name the party the estate will go to at the time of the life owner death. Sometimes it passes to a third party new owner and sometimes it reverts back to the original owner. Non-Freehold Estates are for a limited period of time. A leasehold estate is a non-freehold estate. Leasehold estates include estates for years, estates at will, periodic estates and tenancy at sufferance. Ownership of Real Estate by Business Organizations Many businesses invest in real estate and there are different ways title to real estate can be held. There are various laws and tax consequences determined by types of ownership. Anyone setting up a company to purchase real estate needs both legal and tax advisers to assist them. Real estate investments can be held by the following types of entities: Corporations S Corps Page 21 of 51

Limited Liability Corporations Trust Partnerships Limited partnerships Condominiums, Cooperatives, Townhouses and Time Shares Condominiums, Cooperatives, Townhouses and Time Shares are all residential properties. They are homes that consumers live in. Condominiums Condo owners do not own the land or the exterior of the building, only the inside of the unit itself. There are also freestanding condos. Any common areas outside the unit are owned collectively by all unit owners. A homeowner s association is frequently responsible for exterior maintenance; Condo owners have homeowner association (HOA) dues to pay for that maintenance. Cooperatives A housing cooperative, or co-op, is a legal entity, usually a corporation, which owns real estate, consisting of one or more residential buildings. The corporation is membershipbased, with membership granted by way of a share purchase (stock) in the cooperative. Each shareholder in the legal entity is granted the right to occupy one housing unit. A primary advantage of the housing cooperative is the pooling of the members resources so that their buying power is leveraged, thus lowering the cost per member in all the services and products associated with home ownership. Townhouses When a buyer purchases a townhouse, he owns both the structure itself and the land it is on. Unlike a condo, a townhouse has its own roof and may have a garage and private yard, which the buyer also owns. Townhouse owners never have upstairs or downstairs neighbors, though they may have neighbors on either side. Usually there is a Page 22 of 51

homeowner s association that is responsible for maintenance of the common areas (pools, club houses, playgrounds, etc.). Townhouse owners will have HOA dues. Timeshares This is a form of shared property ownership, commonly in vacation or recreation condominium property, in which rights vest in several owners to use property for a specified period each year. The form of a timeshare agreement varies. Usually, the person has the right of exclusive use of the unit during the same time each year or other specified period. Each timeshare unit is considered an estate or interest in real property, separate and distinct from all other timeshare estates in the same unit or any other unit. Therefore, estates may be separately conveyed and encumbered. Timeshare agreements are affected by various federal and state statutes. Types of Commercial Property Commercial properties are income producing properties. They are places that people conduct business. Some licensees specialize in leasing and sales of commercial property. Retail Properties The percentage lease, discussed above, will be especially applicable to retail properties; the landlord will benefit from the profits of his or her tenants. Leases for freestanding, single-tenant retail properties are fairly simple, but leases for multi-tenant properties such as malls and strip shopping centers may involve prorated utilities and other negotiations about shared space and resources. Office Properties Again as in retail properties single-tenant and multi-tenant properties will have different needs and lease requirements. Large office complexes will have a number of shared-space issues pertaining to parking, utilities, common areas, grounds and food services. A property manager or, more specifically, a leasing manager may handle leases Page 23 of 51

for large multi-tenant properties. Percentage leases may also apply to office spaces, to be calculated by tenant company profits. Warehouse Space Percentage leases may not be applicable to warehouse spaces because their purpose may be for storage of non-saleable goods only. In some cases, a landlord may take a percentage of a tenant company s total profits. Special Purpose Property (Non-Residential) Commercial leases will generally be applicable to for-profit, special-purpose properties. Non-profit tenants will require similar types of leases, with some differences: percentage leases, for instance, will likely be inapplicable to non-profit tenants. Some for-profit, special-purpose property tenants are restaurants, bars, movie theaters, live-performance venues, art galleries, hotels and motels. Hospitals, nursing homes and medical offices may be for-profit or non-profit. Legitimate churches and schools are generally non-profit, as are charitable organizations and non-profit foundations. Combined-Use Properties An increasingly popular type of commercial real estate is the combined-use property, in which a landlord rents a facility to a diverse group of tenants; one of the best examples of combined- or mixed-use property is the mall complex, which may contain shops, restaurants, movie theaters, hotels, apartments, and office spaces all under one roof. Some urban skyscrapers have similarly diverse features. The combined-use property concept is an old one; historic downtown areas are increasingly being converted back to mixed-use purposes, with retail space on the ground floor and office or loft space above, and a number of new suburban complexes are following suit. Issues of competition, shared resources and varying percentage leases will be critical to mixed-use developments. Page 24 of 51

Laws Affecting Real Estate In addition to real property laws there are many federal and state laws that affect real estate, including: The Federal Fair Housing Act protects consumers of real estate services from discrimination based on race, color, religion, sex, familiar status, handicap or national origin. The statute of frauds which requires all real estate contracts (listing agreements, property management agreements, buyer representation agreements, commission agreements, sales contracts, etc.) to be in writing. The doctrine of laches is a principle used by the courts to disallow aged claims The Texas Real Estate License Act (TRELA) discussed in Lesson One. Promissory estoppel is a legal doctrine that forces a party to keep a promise and prevents a party from backing out of an agreement. Promissory estoppel is enforced when there is no actual contract. Usually, courts will not force performance when there is not an actual contract; however, if a party suffers a detriment due to another party s withdrawal from a contract, the courts will enforce promissory estoppel. The parol evidence rule is a common law rule that prevents a consumer from using things outside of the written contract to make a claim. Verbal promises not in the contract will not be upheld by the court. There could be a possible claim if fraud could be proven. The Rules of the Texas Real Estate Commission discussed in Lesson One. The Uniform Commercial Code regulates the sale or transfer of personal property. Does not apply to real estate. Deceptive Trade Practices Act a law that protects consumers from deceptive practices by sellers of products. Real estate licensees are included if they are guilty of fraud, unconscionable acts or misrepresentation of material facts. Statute of Limitations a law that limits the amount of time one has to file law suits after a situation occurs The Federal Lead Based Paint Disclosure Act requiring a disclosure on all residential property built before 1978. Requires a disclosure by the seller, a 10 day Page 25 of 51

time for buyer inspections for lead and a booklet to the buyer called Protect Your Family for Lead in Your Home More Texas State Laws The Texas Property Code Section 5.011 (a) A person who sells an interest in real property in this state shall give to the purchaser of the property a written notice that reads substantially similar to the following: NOTICE REGARDING POSSIBLE ANNEXATION If the property that is the subject of this contract is located outside the limits of a municipality, the property may now or later be included in the extraterritorial jurisdiction of a municipality and may now or later be subject to annexation by the municipality. (a) Each municipality maintains a map that depicts its boundaries and extraterritorial jurisdiction. To determine if the property is located within a municipality's extraterritorial jurisdiction or is likely to be located within a municipality's extraterritorial jurisdiction, contact all municipalities located in the general proximity of the property for further information. (b) The seller shall deliver the notice to the purchaser before the date the executory contract binds the purchaser to purchase the property. The notice may be given separately, as part of the contract during negotiations, or as part of any other notice the seller delivers to the purchaser. (c) This section does not apply to a transfer: (1) under a court order or foreclosure sale; (2) by a trustee in bankruptcy; (3) to a mortgagee by a mortgagor or successor in interest or to a beneficiary of a deed of trust by a trustor or successor in interest; (4) by a mortgagee or a beneficiary under a deed of trust who has acquired the land at a sale conducted under a power of sale under a deed of trust or a sale under a court-ordered foreclosure or has acquired the land by a deed in lieu of foreclosure; Page 26 of 51

(5) by a fiduciary in the course of the administration of a decedent's estate, guardianship, conservatorship, or trust; (6) from one co-owner to another co-owner of an undivided interest in the real property; (7) to a spouse or a person in the lineal line of consanguinity of the seller; (8) to or from a governmental entity; (9) of only a mineral interest, leasehold interest, or security interest; or (10) of real property that is located wholly within a municipality's corporate boundaries. (d) If the notice is delivered as provided by this section, the seller has no duty to provide additional information regarding the possible annexation of the property by a municipality. (e) If an executory contract is entered into without the seller providing the notice required by this section, the purchaser may terminate the contract for any reason within the earlier of: (1) seven days after the date the purchaser receives the notice; or (2) the date the transfer occurs. (Source:http://codes.findlaw.com/tx/property-code/prop-sect-5-011.html#sthash.uZYDQzrT.dpuf ) The Texas Property Code Section 5.012 (a) A seller of residential real property that is subject to membership in a property owners' association and that comprises not more than one dwelling unit located in this state shall give to the purchaser of the property a written notice that reads substantially similar to the following: NOTICE OF MEMBERSHIP IN PROPERTY OWNERS' ASSOCIATION CONCERNING THE PROPERTY AT (street address) (name of residential community As a purchaser of property in the residential community in which this property is located, you are obligated to be a member of a property owners' association. Page 27 of 51

Restrictive covenants governing the use and occupancy of the property and all dedicatory instruments governing the establishment, maintenance, or operation of this residential community have been or will be recorded in the Real Property Records of the county in which the property is located. Copies of the restrictive covenants and dedicatory instruments may be obtained from the county clerk. You are obligated to pay assessments to the property owners' association. The amount of the assessments is subject to change. Your failure to pay the assessments could result in enforcement of the association's lien on and the foreclosure of your property. Section 207.003, Property Code, entitles an owner to receive copies of any document that governs the establishment, maintenance, or operation of a subdivision, including, but not limited to, restrictions, bylaws, rules and regulations, and a resale certificate from a property owners' association. A resale certificate contains information including, but not limited to, statements specifying the amount and frequency of regular assessments and the style and cause number of lawsuits to which the property owners' association is a party, other than lawsuits relating to unpaid ad valorem taxes of an individual member of the association. These documents must be made available to you by the property owners' association or the association's agent on your request. Date: Signature of Purchaser (a-1) The second paragraph of the notice prescribed by Subsection (a) must be in bold print and underlined. (b) The seller shall deliver the notice to the purchaser before the date the executory contract binds the purchaser to purchase the property. The notice may be given separately, as part of the contract during negotiations, or as part Page 28 of 51

of any other notice the seller delivers to the purchaser. If the notice is included as part of the executory contract or another notice, the title of the notice prescribed by this section, the references to the street address and date in the notice, and the purchaser's signature on the notice may be omitted. (c) This section does not apply to a transfer: (1) under a court order or foreclosure sale; (2) by a trustee in bankruptcy; (3) to a mortgagee by a mortgagor or successor in interest or to a beneficiary of a deed of trust by a trustor or successor in interest; (4) by a mortgagee or a beneficiary under a deed of trust who has acquired the land at a sale conducted under a power of sale under a deed of trust or a sale under a court-ordered foreclosure or has acquired the land by a deed in lieu of foreclosure; (5) by a fiduciary in the course of the administration of a decedent's estate, guardianship, conservatorship, or trust; (6) from one co-owner to another co-owner of an undivided interest in the real property; (7) to a spouse or a person in the lineal line of consanguinity of the seller; (8) to or from a governmental entity; (9) of only a mineral interest, leasehold interest, or security interest; or (10) of a real property interest in a condominium. (d) If an executory contract is entered into without the seller providing the notice required by this section, the purchaser may terminate the contract for any reason within the earlier of: (1) seven days after the date the purchaser receives the notice; or (2) the date the transfer occurs as provided by the executory contract. (e) The purchaser's right to terminate the executory contract under Subsection (d) is the purchaser's exclusive remedy for the seller's failure to provide the notice required by this section. Page 29 of 51