Chapter 9 Legal Concepts in Real Estate 1 Chapter Objectives Identify the essential elements of a valid contract. Contrast real property and personal property. Identify the bundle of real property rights. Identify public and private restrictions on real property. 2 Civil Law Concepts Civil law: Body of law concerned with the rights and liabilities of one individual in relation to another Contracts: Agreement between two or more parties to do, or not do, a certain thing; a legally binding promise that requires: Competent parties (each side must have the capacity to enter into a contract, legal age) Consideration (such as money or services to be performed) Mutual agreement (also known as meeting of the minds, which requires offer and acceptance) Torts: A breach of the standards of reasonable conduct imposed by law that causes harm to another person Property: Something that is owned real or personal and includes the rights of ownership 3 1
Legal Issues Two neighbors have a property dispute; each claims to own a particular strip of land. One neighbor s tenant slips and breaks her collarbone. It s not clear whose property she was on when she slipped. In lawsuit to determine liability, what issues may lawyers have to sort out? Contract issues? Property issues? Tort issues? 4 Real or Personal Property Real property: Physical land, everything attached to it, bundle of rights; also called realty Encompasses: Items attached (attachments or improvements) Rights that go with ownership (appurtenances) Limitations on use (public / private restrictions) Personal property: Tangible items not permanently attached, intangible items that represent value; also called personalty or chattel Personal property on the land but not permanently attached not included with transfer 5 Real or Personal Property Bathtub Washer and dryer Custom window treatment Chandelier Fire pit Treehouse House key Real Personal 6 2
Determining Real or Personal Presence or absence of built-in items might affect the value of the property Personal property items should not influence value Fixtures may be detached from real property through the process of severance, becoming personal property Purchase contract should specifically list any questionable items to make sure everyone knows what is and isn t intended to be part of the sale 7 Attachments and Fixtures Attachments: Things connected to the land, whether natural or man-made Generally real property until severed Fixtures: Man-made attachments Improvement: Major fixture that impacts property value Trade fixtures: Equipment or personal property a tenant installs for business Tenant can usually remove at end of lease Annexation: Legal term for attaching or affixing personal property to real property 8 Property Dispute Considerations Objective evidence of annexer s intent Item acquired to improve property or for personal use? Purpose of the annexation Item closely associated with property (e.g., keys) Physical attachment may not be deciding factor Relationship of parties involved Buyers generally favored over sellers Lenders generally favored over borrowers Tenants generally favored over landlords 9 3
Uniform Commercial Code (UCC) Comprehensive model code governing transactions of personal and real property Supports concept that personal property becomes real property when attached May be able to protect rights at time of sale Home sold with financed furnace: Who pays? UCC requires vendors to file financing statement with county recorder when installing fixtures Property disputes may impact value of collateral 10 Real Property Rights Bundle of rights conferred with ownership Possession: Physically occupy and use land Enjoyment: Use land without undue interference Disposal: Transfer all or some of the bundle of rights to others Sell Divide and retain part Lease Give it away Bequeath it upon death Dispose of it in some other way Exclusion: Stop others from using or entering the property Control: Do what you want with the property (assuming no legal restrictions) 11 Appurtenances Rights that go with real property Access rights Surface rights Subsurface rights Mineral rights Some water rights Limited air rights May be sold separately Past transactions could restrict new owner or impact value 12 4
Public Restrictions Property rights can be restricted voluntarily or involuntarily Public restrictions imposed by government entities (federal, state, local) Can have serious impact on land value Four main powers (remember P E T E): Police power Eminent domain Taxation Escheat 13 Public Restrictions: Police Power Power of state (and local) governments to enact and enforce laws that protect public health, safety, morals, general welfare Zoning laws: Local ordinances dividing a jurisdiction into zones of land usage Building codes: Set construction standards for methods and materials Environmental protection laws: Regulations for protecting the environment; may block or restrict land use 14 Other Public Restrictions Eminent domain: Constitutional power to appropriate (condemn) private property for public use if owner is paid just compensation Taxation: Power to levy charges on people or items Property or ad valorem taxes Special assessments Escheat: Property reverts to state after person dies without leaving a valid will and without heirs or creditors 15 5
Private Restrictions: Deeds/CC&Rs Can be imposed by former owner or developer; may impact land value Runs with the land; enforceable against future property owners Deed restrictions: Limits real property use Imposed by former owner through the deed Declaration of covenants, conditions, and restrictions (CC&Rs): Often placed by developers or subdividers Keeps subdivision attractive; protects market value 16 Restrictions: Easements Right to use another person s real property for a particular purpose Public (e.g., for a sidewalk) Private (e.g., access a landlocked parcel) May be: Placed in deed Created and recorded separately Restricts use of land; may prohibit building Can be beneficial to property owner A right of way grants access to property Often held by governments, utility companies 17 Interference: Trespass Activities that interfere with property owner s bundle of rights Physical invasion of land by someone with no lawful right to enter Interferes with owner s possessory interest Diminishes rights of use and enjoyment Must cause direct damage to be actionable 18 6
Interference: Encroachment Physical object intruding onto neighboring property (as opposed to a person) Often a mistake over the boundary lines Legal action against encroaching landowner: Remove object Purchase land being encroached upon Location survey Does not certify exact boundaries but determines whether Buildings encroach onto adjoining property Adjoining property buildings encroach on subject property 19 Interference: Nuisance and Waste Nuisance: Interference with quiet enjoyment of land from outside Does not interfere with possessory rights If permanent, called external obsolescence Can affect property values Must be multiple occurrences to be actionable Waste: Use or abuse of property in any way that permanently damages/reduces market value Mortgagor typically contractually obligated to preserve property and prevent waste May include maintaining property insurance 20 Recall: Bundle of Rights Mind your Ps and Qs, or I ll DEC(k) you! Possession Quiet enjoyment Disposition Exclusion Control 21 7
Key Term Review Annexation Appurtenances Attachments Bundle of Rights Contract Deed Restrictions Easement Eminent Domain Encroachment Escheat Fixtures Improvement Location Survey Nuisance Personal Property Police Power Real Property Trade Fixtures Trespass Waste 22 Summary 1. Civil law: Rights and liabilities of one individual in relation to another Contract: Voluntary agreement between two or more parties to do, or not do, a certain thing Tort: Breach of standards of reasonable conduct imposed by law Property: Something that is owned, real or personal, and rights of ownership Allows owner to use, possess, transfer, or encumber property 23 Summary 2. Real property: Land and everything attached or appurtenant to it Ownership defined as a bundle of rights: Use, enjoyment, disposal, exclusion. If one secures the entire bundle of rights from another, that person is said to be the owner. 3. Attachments: Part of real property transferred along with the land Natural attachments, such as plants and trees Man-made attachments, or fixtures Major fixture, such as a building, is called an improvement 24 8
Summary 4. Fixture: Item of personal property that has been attached to or closely associated with real property Legally part of the real property In dispute, court tries to determine: Intention of the annexer Nature of the item Manner of annexation Purpose for which it was annexed Relationship of the parties Any written agreement (takes precedence) Trade fixtures: Installed by a tenant for use in business Generally may be removed at end of lease 25 Summary 5. Public and private restrictions on land can affect value Public restrictions include four powers of government: Police power, eminent domain, taxation, and escheat (P E T E) Government restrictions via police power that can impact land value include zoning, building codes, and environmental laws Private restrictions on ownership include deed restrictions (restrictive covenants, CC&Rs) and easements May be used by the original subdivider or added later 26 Summary 6. Appurtenance: Right that goes along with or relates to real property Includes air, water, mineral, and support rights Ordinarily transferred with the land, but may be severed and sold separately Trespass, encroachment, and nuisance are three kinds of interference Waste is use or abuse of property that would permanently damage or reduce market value Likely limited by lender in mortgage/note 27 9
1. Which is NOT a primary focus of civil law? A. compensating a tort victim B. determining ownership rights C.enforcing a contract D. punishing a criminal 28 2. In determining whether an item is a fixture, the most important test is the A. intention of the annexer. B. physical attachment to realty. C.relationship of the parties. D. size of the item. 29 3. Trade fixtures A. are considered the landlord s personal property. B. are considered real property and can t be removed by the tenant. C. can be removed by the tenant before the lease expires. D. can t be removed unless the lease specifically states they are personal property. 30 10
4. Which is NOT included in the bundle of real property rights? A. disposal B. enjoyment. C. escheat D.exclusion 31 5. Which is NOT a police power of government? A. building codes B. environmental laws C. restrictive covenants D.zoning laws 32 6. The government s constitutional power to take private property for public use, so long as the owner is paid just compensation, is called A. condemnation. B. confiscation. C. eminent domain. D. immediate possession. 33 11
7. Private restrictions on land can include all of the following ECEPT A. deed restrictions. B. easements. C. property tax liens. D. restrictive covenants. 34 8. An easement granting access to property may be referred to as a A. DHA. B. FHA. C. POW. D. ROW. 35 9. In looking for encroachments, a lender is most likely to order a(n) A. appraisal. B. location survey. C. survey. D. title search. 36 12
10.A(n) is something that occurs outside of the property. A. encroachment B. nuisance C. trespass D. waste 37 13