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Real Estate Law, 6th Edition


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Title: Real Estate Law, 6th Edition

Real Estate Law, 6th Edition
  • by George J. Siedel, III
  • and Robert J. Aalberts

Slides prepared by Heidi Bulich
Real Estate Law
  • What is Law? System of rules and principles
    devised by organized society for the purpose of
    controlling human conduct.
  • Sources of Law
  • US Constitution Sets up 3 branches of
    government. Powers are express and implied.
  • Bill of Rights
  • Remaining amendments
  • State Constitutions
  • Statutes
  • Judicial
  • Administrative

Chapter 1
Important Principles
  • Common Law court-made law
  • Stare decisis courts must rely on earlier
    decisions involving similar facts and higher
    court decisions trump
  • Equity to provide relief to parties who had
    just claims but who can not be adequately
    compensated with monetary damages

Chapter 1
The Court System
Chapter 1
Nature of Property
  • Property refers to rights and interests of
    ownership. Rights include
  • Possession
  • Control within the law
  • Enjoyment within the law
  • Exclusion
  • Ability to convey

Chapter 2
Real Property vs. Personal Property
  • Real Property Immovable, fixed and permanent
  • Governed by case law and state statutes
  • Oftentimes conveyed with a deed
  • Often taxed
  • Personal property everything that is not real
    main characteristic it is moveable, may be
    tangible or intangible
  • Governed by UCC Article 2
  • Sometimes a bill of sale is required
  • Oftentimes NOT taxed

Chapter 2
Fixture a tangible object formerly treated as
personal property but now has become so connected
with the real property that it becomes real
  • Annexation Attachment. Two types of annexation
  • Permanent Removal would cause serious damage
    i.e. furnace, pipes.
  • Constructive Property may not be physically
    attached, but look at its relationship with the
    real property i.e. screens for storm windows,
    garage door opener

Chapter 2
Cont. Fixtures
  • Adaptation Adaptation of article to use in
    property i.e. plumbing apparatus designed for use
    in a plumbing system, air conditioning unit
    installed into a specific site. Some courts look
    to see if articles are necessary or beneficial to
    enjoyment of real estate.
  • Intent Most important. Did he/she intend to
    make article a permanent part of the real estate?
    Best if expressed in a contract.

Chapter 2
Cont. Fixtures
  • Important to distinguish personal property from
  • Different laws apply
  • Means of conveying differ
  • Fixtures are taxed
  • Eminent Domain
  • Mortgage instrument often describes a security
    interest in all mortgagors originally owned and
    after acquired real property NOT personal
  • Foreclosure sales fixtures, not personal
    property are subject to sale
  • Tenant fixtures

Chapter 2
Growing Crops
  • Fructus naturales Any plant with perennial
    roots (trees, shrubs, grasses) which is produced
    by the power of nature alone.
  • Fructus industriales Sometimes known as
    emblements. Plants which are sown annually and
    grown primarily by human labor (wheat, corn,
  • If real estate is sold all unsevered growing
    things pass with the land.
  • If growing crops are sold separately from land
    UCC 2-107 applies (sale of forestry rights, sale
    of potatoes)

Chapter 2
UCC 2-107
  • If articles can be severed without material harm
    to real estate, then they are
  • Personal Property
  • If material harm caused to real property if
    severed. . . Look to see WHO severed
  • If severed by S then personal property law
  • If severed by B then real property law governs

Chapter 2
Doctrine of Emblements
  • Emblements are annual crops produced by labor and
  • Doctrine applies in L T situation.
  • T in interest of fairness, keeps fruit of labor
  • Period of Tenancy of uncertain duration
  • Tenancy terminated by L or Act of God and
  • T can prove he or she planted crop during tenancy

Chapter 2
Competing Interests -- Fixtures
  • Transfer of Real Estate Unless specified in the
    purchase agreement to be personal property, will
    be considered real property and pass to the Buyer
  • Tenants Fixtures Some will be considered
    fixtures and remain on the property at the
    termination of the tenancy. If the tenants
    fixture is a trade fixture, agricultural fixture
    or a domestic fixture AND
  • 1. Tenant can remove fixture without
    subjecting harm to premises and
  • 2. Articles are removed before surrendering
    premises to landlord, THEN Article may be
    removed by tenant at termination of tenancy.

Chapter 2
Fixture Financing
When property is transferred, the following rules
  • Real Property Deed is used between B S.
  • Mortgage is used between ME B.
  • Personal Property Bill of Sale is used between
    B S.
  • Security agreement is used between B
    (Seller or Lender)

Chapter 2
Important Definitions
  • UCC Compilation of commercial laws which were
    drafted by legal scholars. Adopted by every
    state except LA, therefore uniform laws in US
    regarding sale of personal property.
  • Article 9 Applies to any transaction which is
    intended to create a security interest in
    personal property or fixtures. To create a
    security interest, must obtain and perfect
    security interest.

Chapter 2
Creating Security Interests
  • In Personal Property
  • TO OBTAIN execute security agreement between B
    (Seller or Lender) or take possession of
  • TO PERFECT file financing statement (UCC-1)
    with Secretary of State. This gives secured party
    rights against third parties.
  • PRIORITY Determined by who files first
  • In Real Property
  • TO OBTAIN Execute security agreement
    between B (Seller or Lender) or take possession
    of article.
  • TO PERFECT file financing statement (UCC-1A)
    with Register of Deeds). This gives secured party
    rights against third parties.
  • PRIORITY Determined by
  • Against Concurrent or later creditors WHO
  • Against all prior security interests, except
    construction mortgages must be perfected at
    time fixture affixed or within 20 days to take
    priority over prior security interests (except
    construction mortgages)

Chapter 2
3 Common Fixtures Scenarios
  • ME vs. MR Many mortgages cover fixtures,
    therefore, all articles annexed to real property
    become subject to lien of mortgage and cannot be
    removed by owner.
  • Owner vs. Secured Party If security agreement
    executed and no other creditors, no need to
    perfect and secured party may repossess articles.
  • Secured Party vs. Other Creditors See page 38.

Chapter 2
Scope of Real Property
  • Airspace Ownership of land generally includes
    ownership of airspace above its surface. Owner of
    air rights may sell rights separately from
    surface of real estate, i.e. high rise real
    estate projects.
  • Subsurface Rights - Ownership of land generally
    includes ownership of subsurface space below its
    surface. Owner of these rights may sell rights
    separately from surface of real estate, i.e.
    sale of minerals, oil and gas.
  • Special considerations for oil and gas leases --
    Some states permit oil and gas to be sold as real
    property (ownership principle). Other states do
    not consider oil and gas owned until they are
    captured. Right to extract personal property
    right (exclusive right).

Chapter 3
Water Rights
  • Limited Resource Who owns land under water?
    Who has right to use water? How should water be
  • Navigable Water If a stream or body of water
    may be used for commerce between or among the
    states, it is navigable water it becomes a
    public river or highway. Michigan has floating
    log test.
  • Ownership of Land Under Water If you are a
    riparian owner, how far does your land extend?

Chapter 3
Cont. Water Rights
  • First Question Is water navigable?
  • If YES STATE owns riverbed to high water mark
  • If NO You own to center of river, all submerged
    land and land on shore to high water mark.

Chapter 3
Use of Water
  • Distinguish ownership, use and control
  • Ownership Just discussed
  • Use Public has right to use all navigable water
    as long as federal and state laws not violated.
    BUT NOTE Right to use navigable water does not
    include license to go on riparian owners land.
    Private owners control use of non-navigable
  • Control - Congress over navigable waters which
    affect interstate commerce. States all
    navigable waters which do not affect interstate
    commerce. Private owners all non-navigable

Chapter 3
Cont. Use of Water
  • Riparian Rights Theories
  • 1. Natural Flow - each riparian owner entitled
    to have water maintained in natural state.
    Artificial wants OK as long as they do not
    materially change quantity or quality of water.
    (NOT Common)
  • 2. Reasonable Use each riparian owner allowed
    to use water benefits as long as owner does not
    interfere unreasonably with beneficial uses of
    other riparian owners.
  • Prior Appropriation FIRST come FIRST serve and
    first person must have used water

Chapter 3
Pollution Credits
  • Transferable rights related to the use of air.
  • 1. Clean Air Act standards 1990 Clean Air Act
    amendments established the Acid Rain Program
    permanent cap on total amount of sulfur dioxide
    emitted by electric utilities nationwide (about ½
    of amount emitted in 1980)
  • 2. Since 1995 US companies permitted to trade
    units (called allowances) of certain air
  • 3. Clear Skies Initiative.

Chapter 3
Priority Among Lien Holders
  • Look to state law to determine when liens attach
  • Some states when any construction began or
    materials first furnished
  • Others when work completed
  • Others when contract signed or work ordered and
  • Others when notice of lien recorded.

Chapter 3
Cont. Priority
  • 4/15/02 Owner of vacant lot hires contractor to
    build home
  • 5/15/02 Work begins
  • 8/15/02 Work completed
  • 9/15/02 House sold and mortgage to Last Bank.
    LB records mortgage.
  • 11/2/02 Notice of lien recorded because seller
    never pd. contractor. Contractor had 90 days to
    record lien IN MOST STATES contractor has to be
    paid by bank or purchasers to avoid property from
    being sold.
  • In most states, mechanics liens have priority
    over mortgages.

Chapter 3
Environmental Liens
  • Comprehensive Environmental Response,
    Compensation Liability Act of 1980 (CERCLA or
  • Federal statute for
  • 1. Cleanup of contaminated property, and
  • 2. Allocation of liability for costs
  • Retroactive, strict and where harm is
    indivisible, joint and several liability for
    costs of responding to a release. No showing of
    fault is required.

Chapter 3
Liability Under Superfund
  • Release has occurred or is threatened
  • Response costs were incurred
  • Person involved is 1 of the following
  • Current owner or operator of facility
  • Former owner or operator of facility
  • Person who arranges for transport, treatment or
    disposal of hazardous substances
  • Transporter of hazardous substances
  • Note exceptions apply

Chapter 3
Limited Defenses to Liability
  • Purchasers of Property/Innocent Landowners
  • Innocent owner did not know nor had reason to
    know it was there
  • Importance of conducting Phase I and Phase II
  • Property acquired after hazardous substance
    placed on property
  • Secured Parties
  • Court decisions finding secured lenders who
    acquired property through foreclosure or who
    have restrictive covenants in loan agreements to
    be owners or operators and liable under CERCLA.
  • EPA issued Lender Liability Rule in 1992. Struck
    down by DC Circuit.
  • 1996 Lender Liability Amendments passed by
    Congress - - codified the Lender Liability Rule

Chapter 3
Cont. Limited Defenses to Liability
  • Small Business Liability Relief and Brownsfield
    Revitalization Act
  • 1. Signed by President Bush on January 11, 2002
  • 2. Significant revision of Superfund law
  • 3. 2 parts of Act.
  • A. Part 1 Establishes superfund liability
    exemptions for small businesses and nonprofit
    organization which ship only extremely small or
    de micromis quantities of hazardous substances to
    a site or whose contribution consists of
    ordinary municipal solid waste.
  • B. Part 2 Establishes first federal statutory
    brownsfield program which includes federal money
    for remediation of brownsfield sites, liability
    protection for new purchasers of contaminated
    site and more support for state brownsfield

Chapter 3
Easement interest in land which gives the owner
the right to use real estate owned by another
for a specified purpose
  • Holder does not have an ownership interest in
    property, only a right to use
  • These rights include
  • 1. Use and enjoy land on limited basis.
  • 2. Entitled to protection from third parties.
  • 3. Easement owner NOT subject to will of owner
  • of land as with license holder
  • 4. Easement can be conveyed.
  • 5. Easement can be created in ways other than
  • by written agreement.

Chapter 4
Cont. Easements
  • 3 Different Ways Property Can Be Used
  • EASEMENT - Steve (Servient Estate) owns property
    in fee simple, grants right-of-way easement to
    Diane (Dominant Estate). Gives her an easement,
    NOT a possessory interest in Steve's property. 
  • - She may use road, but may NOT stop others from
    using it except to extent their use prevents her
    full enjoyment.
  •   - Steve, as possessor, may exclude all others,
    except Diane, even though crossings pose no harm
    to Steve.
  • - Steve may use road as long as it does not
    interfere with Diane.

Chapter 4
Cont. Easements
  • LEASE - Steve leases road to Diane -- transfers
    full possession. Diane can exclude Steve and all
    others from road. Steve transferred full
    possession to Diane, therefore she could have
    excluded Steve and all others from road during
    term of lease. 
  • LICENSE - Steve grants Diane a right-of-way for
    10 years -- NOT written down. Statute of Frauds
    requires grants of interests in land over one
    year MUST BE IN WRITING. Steve may rescind at any

Chapter 4
Types of Easements
  • Affirmative and Negative Easements
  • Affirmative - owner of easement has right to use
    land that is subject to easement. (i.e.,
    construct sewer tunnel, walk on it.)
  • Negative - owner of easement can prevent owner
    of land from performing certain acts on land.
    (i.e, negative easement to prevent sun.)

Chapter 4
Cont. Types of Easements
  • Easements Appurtenant and in Gross
  • 1. Appurtenant - an easement which benefits
    easement owner in that easement owner uses land
    appurtenant to his land. Must have two tracts of
    land owned by different parties. Two tracts need
    NOT adjoin, though they generally do. 
  • Servient estate -- tract over which easement
  • Dominant estate -- tract which benefits from

Easement appurtenant is considered PART of the
dominant estate. If dominant estate is conveyed,
easement passes with title HOWEVER, title to
actual land over which easement runs is retained
by owner of servient estate -- such as easement,
"runs with the land.
Chapter 4
Cont. Types of Easements
  • Easement in Gross -- personal interest in or
    right to use land of another that is NOT
    appurtenant to ownership or possession of real
  • - ONLY have servient estate no dominant.
  • (Alienability) Right to Convey Easement in Gross
    -- this right connected to the easement is
    dependent on whether the easement is commercial
    or noncommercial.
  • Subdivision or Apportionment of Easement in Gross
    -- If easement in gross is transferable, can it
    be sold to more than one buyer? Look at intent
    of parties of original easement agreement.

Chapter 4
Creation of Easements
  • EXPRESS must satisfy formal requirements in
    writing, signed, witnessed and recorded
  • 1. By Reference to Easement or to Plot--where
    legal description identifies road or path as
    boundary and GR owns fee in such path, easement
    is path passes to GE.
  • 2. By Prior Use -- Parties situated in such a
    way that easement could have been granted or
    reserved by express language, BUT NO STATEMENT
    made. Commonly occurs when owner of two tracts
    of land sells or mortgages one tract and does not
    mention an easement, BUT as a result of
    transaction, an easement is created.
  • 3. By Necessity

Chapter 4
Easement by Estoppel
  • If owner of servient estate allows user to make
    improvements re use, servient owner is estopped
    from denying existence of easement.
  • R owns sewer and water pipes in street running
    past his house and vacant land he owns. - sells
    lot to E, but says nothing of pipes. E builds
    house and R without objection watches E tie into
    sewer and water pipes. Thus, easement to use
    sewer and water created by estoppel.)

Chapter 4
Extent of Easements
  • General Rule Scope of use is determined by how
    and for what reason the easement was created.
  • Owner of easement cannot materially increase
    burden on servient estate or impose a new and
    additional burden.
  • a. If conditions for use specifically provided
    in easement, use is limited to that use and those
    which are necessary to its proper enjoyment.
  • b. General grant however, may be used any way as
    long as it is reasonable

Chapter 4
Cont. Extent of Easements
  • Easement Appurtenant - used only for benefit of
    dominant estate. May not be used for benefit of
    any other tract of land. Thus, land acquired by
    owner of dominant estate AFTER creation of
    easement, has no right to use easement.
  • Note situations regarding development and
    subdivision of dominant estate.
  • Easement by Prescription - use of easement after
    prescriptive period must remain almost the same
    as use at the beginning of prescriptive period.
    (i.e., private right-of-way acquired by
    prescription is limited to uses made during
    prescriptive period. Prescriptive easement to
    carry water in open ditch over another's
    property, does not include the right to carry
    same quantity in covered pipes in a closed
    ditch). No different or materially greater use
    may be made of easement except by further adverse
    use for a prescriptive period (i.e., in first
    example--if G continued to ride motorcycle for
    another 10 years--would have prescriptive easemt.
    to ride motorcycle.) 

Chapter 4
Cont. Extent of Easements
  • Easement by Prior Use - Look to prior use, may
    use easement for uses which existed at time
    original estate was severed AND all uses
    reasonably contemplated by parties.
  • Easement by Necessity - Lasts as long as there
    is a necessity
  • Express easements - Usually provided by terms.

Chapter 4
Use by Easement Owner
  • Since easement is a RIGHT to use another's land
    for a specific purpose, easement owner must use
    easement premises only for that purpose. (i.e.,
    If I grant Bob an easement for ingress and egress
    over part of my land, Bob has no right to lay gas
    pipes in the easement.)
  • Also use by easement owner must not interfere
    with landowner's use. (i.e., If I give Mary a
    driveway easement over my land, I do not expect
    her to park in my driveway all night and prevent
    me from entering my garage.)

Chapter 4
Duty to Repair
  • If I give Mary an easement over my property, who
    has duty to keep it in repair? 
  • 1. The fact that I gave an easement does not
    impose duty on me, the servient tenant, to repair
  • 2. Parties could agree in express easement who
    would be responsible. 
  • 3. If no express agreement, easement owner
    (Mary) does have duty to make easement usable.
    To repair existing road, trim encroaching trees,
    remove impediments. 
  • 4. In order for easement owner to perform duty
    to repair, has right to enter servient estate at
    all reasonable times to make repairs and
  • a) This right called a "secondary easement" --
    may be used only when necessary and in a
    reasonable manner so as to NOT burden owner of
    servient estate. 
  • 5. If both easement owner and landowner use road
    -- they share costs in proportion to use of
  • 6. If easement owner allows right-of-way to fall
    into disrepair, no right to travel along another
  • BUT, IF 
  • 7. If Landowner impedes easement owner from
    using easement, easement owner may travel around
    obstruction and over other land belonging to

Chapter 4
Termination of Easements
  • Cessation of Purpose terminates when purpose no
    longer exists
  • Expiration of Period Express easements freq.
    Have term -- when term expires, easement expires
  • Merger When 1 owner acquires both servient and
    dominant estates
  • Abandonment Requirement of intent
  • Destruction of Servient Estate
  • Estoppel
  • Prescription
  • Cessation of Necessity Applies to easements
    implied by necessity
  • Condemnation
  • Release

Chapter 4
Prescriptive Easements
  • By Prescription --acquiring right to use land NOT
    by express agreement or agreement between
    parties, BUT by lapse of time and certain use of
    property during that time.
  •   1. Use must be ADVERSE (hostile, open,
    notorious and visible)-- no permission by O --
    NOT a neighborly accommodation. (i.e., A's
    driveway used by B to get car into B's backyard.
    Never got A's permission. Prescriptive easement,
    not a neighborly accommodation.)

Chapter 4
Cont. Prescriptive Easements
  • Cont. Requirements
  • a. Hostile -- User does not recognize owner of
    land has authority to prevent his use--use is
    hostile in that he does not recognize authority
    of owner. i.e., Preshlock never thought Brenner
    could prevent his use of driveway. See case p.
  • b. Open, Notorious, Visible -- Use must be open,
    notorious and visible so that owner would learn
    about it if he kept informed about his property
    through ordinary inspections. p. 101 Downie

Chapter 4
Cont. Prescriptive Easements
  • Cont. Requirements
  • 2. Use must be continuous and uninterrupted for
    the required period. (i.e., occasional entries
    on neighbor's land DO NOT ripen into a
    prescriptive easement.)
  • A owns house -- constructs garage. Builds
    driveway over part of B's lot without B's
    permission. After 20 years has prescriptive
  • A builds driveway over B's land -- uses it for
    five years without B's permission.  A sells land
    to C -- uses for 5 years. C sells to D -- uses
    for 10 years. D now has prescriptive easement.
    Prescriptive uses of A, B, C and D can be tacked
  • - since easement benefits TRACT A -- becomes
    easement appurtenant

Chapter 4
Estates in Land
  • 4 Types of Freehold Estates
  • 1. Fee Simple
  • 2. Fee Simple Determinable
  • 3. Fee Tail
  • 4. Life Estate

Chapter 5
Fee Simple
  • Absolute ownership greatest extent of ownership
    interest recognized by law
  • 1. Holder is entitled to all rights of property
  • 2. No time limit on existence -- upon death,
    passes to heirs.
  • 3. Owner can dispose of property as she wishes
  • 4. Only subject to government regulations and
    duties which arise out of tort law (i.e.,
    is enough even if NOT expressed as estate in fee
    simple, most statues assume conveyance of fee
    simple estates

Chapter 5
Fee Simple Defeasible
  • Occurs when fee simple is qualified by
    language which causes fee simple to end when a
    certain event occurs. Three types.
  •   1. Fee Simple Determinable - fee simple estate
    continues as long as certain event continues or
    building remains, etc. (See pp. 130-131) Thus,
    when grantor conveys estate, there is a
    possibility estate would revert back to him or
    his heirs.
  • POSSIBILITY OF REVERTER (i.e., Bob holds land
    in fee simple. Conveys land to Ellen and her
    heirs as long as land is used to farm. Ellen has
    fee simple determinable and Bob has a Possibility
    of Reverter. Bob or his heirs will get land back
    automatically if Ellen or her heirs stop farming.
    Thus estate--fee simple determinable with
    Possibility of Reverter

Chapter 5
Cont. Fee Simple Defeasible
  • b. Fee Simple Subject to Executory Limitation -
    Fee simple estate ENDS when certain event
    automatically occurs and passes to 3rd person.
    (See pp. 130-131)  
  • c. Fee Simple Subject to a Condition Subsequent -
    Fee simple estate ends if a certain event occurs,
    but unlike above, where grantor automatically
    gets land, here, grantor MUST TAKE SOME ACTION TO
    RETAKE PROPERTY. (i.e., Go to court) (See p.
    131). Grantor's interest is right of entry or
    power of termination.
  • Thus, when grantor conveys estate, he has
  • (i.e., Bob holds land in fee simple. Conveys to
    Ellen, but if liquor is ever sold on the land
    then Grantor may re-enter and repossess. Bob has
    a power of termination. Ellen has fee simple
    subject to condition subsequent.)

Chapter 5
Cont. Fee Simple Determinable
  • Limitations on creating fee simple defeasible
    which LIMIT use of property
  • May not unreasonably restrict ability of
    grantee to transfer real estate.
  • In Michigan a reversion or right of entry is
    unenforceable if specified contingency does not
    occur in 30 years. May extend contingency for
    another 30 years if record affidavit that
    construction began within 5 year period prior to

Chapter 5
Fee Tail
  • Estate conveyed to grantee until grantee dies
    without children surviving then back to grantor.
    Can not be inherited by others outside family.
  • If grantee dies without heirs, property
    reverts to grantor.
  • Abolished by statute in most states because it
    is a severe restraint on alienation.

Chapter 5
Life Estates
  • Generally is an estate whose duration is
    measured by life of a person. Two types
  • 1. Conventional life estate - created by act of
  • 2. Legal life estate - created by operation of

Chapter 5
Conventional Life Estate
  • 1. Ordinary - limited to lifetime of owner of
    life estate, the life tenant.
  • Upon death of life estate owner, FULL
    ownership reverts to original owner or his heirs.
    THUS, grantor conveys life estate and retains a
    reversionary interest or may pass to third party
  •  2. Pur Autre Vie - estate limited to life of a
    third party.
  • Upon death of third party, FULL ownership
    reverts to grantor, THUS, grantor conveys life
    estate pur autre vie and retains a reversionary
    interest or FULL ownership can pass to another
    party, thus party gets remainder interest.

Chapter 5
Legal Life Estates
  • Legal life estate - marital estates of dower,
    curtsey, homestead and community property. 
  • 1. Curtsey - Husband's life estate in real
    estate of deceased wife. At wife's death,
    widower entitled to life estate in all wife's
    real property inheritable by issue of M W IF a
    child of marriage was born alive.
  • 2. Dower - Wife's (life) estate in real estate
    of deceased husband. Unlike curtsey, dower did
    not require birth of child, only that child be
    capable of inheritance. Dower attaches at
    marriage, or when property is acquired. After
    dower attaches, H is powerless to defeat it. Not
    terminated by divorce. Can only be released by
    wife's consent. See also Chapter 10.

Chapter 5
Cont. Legal Life Estates
  • In Michigan, the W is entitled to 1/3 of all
    lands H held in fee simple estate during the
    marriage. Thus, dower does not apply to
  • 1. Leases
  • 2. Life Estates
  • 3. Joint Tenancies
  • 4. Partnerships
  • 5. Land Contracts
  • 6. Oil and gas leases
  • W must be party to conveyance of property
    acquired during marriage if not, 3rd party owns
    subject to Ws dower rights

Chapter 5
Cont. Legal Life Estates
  • Homestead - A tract of land that is owned and
    occupied as the family home. As a homestead,
    protected from claims of owner's general
    creditors and can only be subjected to certain
    liens need to look at particular state law. 
  • Community Property - Adopted by eight western and
    southwestern states. Consists of all property
    real and personal acquired by either spouse
    during marriage. Each spouse owns 1/2 of
    community property 
  • Separate Property - is not subject to community
    property. This is property acquired and owned by
    either spouse prior to marriage or acquired by
    gift, devise or descent.

Chapter 5
Life Tenants Use of Property
  • Rule Life Tenant's interest in real property is
    a true ownership interest and generally Life
    Tenant can do what he or she pleases with
    property without consultation from grantor of
    life estate or remainderman if life estate passes
    to third party.
  • Taxes and Interest
  • 1. Life Tenant pays all taxes and interest on
    debts on land IF Life Tenant has received
    profits, rents or income from property. In some
    states, once Life Tenant has earned profits
    derived from land, must pay taxes. In others,
    mere possession is enough to trigger tax

Chapter 5
Cont. Life Tenants Use of Property
  • Special Taxes and Assessments - Life Tenant NOT
    responsible for special taxes or assessments.
    (i.e., city installs new sidewalks and assesses
    each property owner an assessment.) Considered
    permanent public improvement that raises the
    value of property -- so property will be worth
    more when it reverts to grantor.
  • Insurance - Who insures improvements on real
    property? Who is entitled to proceeds of
    insurance if buildings are destroyed?
  • Neither Life Tenant nor remainderman has duty
    to insure but if either insures, he or she is
    entitled to proceeds, depending on facts

Chapter 5
Cont. Life Tenants Use of Property
  • Duty to Repair and Rules Regarding Life Ts Use
    of Property
  • General Rule Life T is NOT to commit waste on
    life estate. Life T has role of trustee of life
    estate in the sense that he or she cannot injure
    or dispose of the property to the injury of the
    rights of remaindermen BUT he or she can use the
    property for his or her exclusive benefit and
    take all the income and profits.
  • Extent of Duty to Repair
  • 1. Life T has obligation to return premises to
    remaindermen unimpaired by neglect.
  • 2. Life Tenant not responsible for extraordinary
  • 3. If Life Tenant makes improvements, these are
    considered fixtures and may be removed at
    termination of life estate, provided improvement
    is not an integral part of real estate.

Chapter 5
Cont. Life Tenants Use of Property
  • Life Ts Use of Property - Life Tenant may act as
    fee simple owner would if owner were on property,
    BUT he may not use property in such a way to
    limit or diminish market value for remainderman. 
  • 1. Life Tenant may keep rents and profits he
  • 2. Life Tenant may sell his interest in
    property BUT he may not sell more than he owns.
  • 3. Life Tenant may continue profitable
    operations on the land if land used for such
    operations BEFORE creation of life estate.
  • 4. Life Tenant not permitted to commence waste
    -- to destroy property in such a way to cause
    harm to reversion or remainder.
  • 5. Right of Estovers Life T may take
    whatever he/she needs from land to make necessary
    repairs. May NOT take timber for purely
    commercial purposes.

Chapter 5
Concurrent Ownership
  • Joint Tenancy Planned Unit Development
  • Tenancy By the Entirety Condominium
  • Tenancy in Common Timesharing
  • Community Property
  • Time Title Interest Possession Person
  • Joint Tenancy X X X X 
  • T by the Entirety X X X X X
  • T in Common X

Chapter 5
Tenants in Common
  • Characteristics
  • When a parcel owned by two or more person as
    Tenants in Common, EACH of owners has undivided
    interest in fractional part of parcel.
  • 1. Deed creating Tenancy in Common can state
    fractional interest held by each co-tenant. If
    no fractional interest is specified and two
    people hold title to property - EACH has
    undivided 1/2 interest.
  • 2. Tenants in Common do not need to hold equal
  • (i.e., one can hold 1/10th interest and other,
    the remaining 9/10ths interest.)
  • 3. Tenants in Common NEED not acquire their
    interests in property at same time or by same

Chapter 5
Tenants in Common
  • Rights in Property
  • 1. Entitled to share the possession and rents of
    property according to their shares in property. 
  • 2. EXCEPT for sharing of possession and rent,
    almost as if EACH T in Common owned separate
    parcel of real estate. 
  • 3. EACH T in Common can sell, convey, mortgage or
    transfer his or her share without consent of
    other co-tenants. Also, share of each co-tenant
    subject to judgment lien against him. 
  • 4. Death of co-tenant -- his or her divided
    interest passes to heirs or devisees according to
  • 5. Partition - If Ts in Common or Joint Tenants
    wish to terminate their joint possession, any of
    co-tenants may file a suit to partition real
    estate OR agree among themselves to terminate.

Chapter 5
Joint Tenancy
  • Viewed as a special type of Tenancy in Common,
    with one important difference right of
  • Creation -- Cannot be implied or created by
    operation of law. Created only by grant or
    purchase or by devise. Need 4 Unities to create
  • 1. Unity of Time - All Joint Tenants acquire
    interest at same time.
  • 2. Unity of Title - All Joint Tenants acquire
    this interest by same instrument of conveyance.
  • 3. Unity of Interest - All Joint Tenants have
    equal ownership interests.
  • 4. Unity of Possession - all Joint Tenants
    have undivided interest in property.
  • Some states have eliminated technical
    requirements of 4 Unities. Modern view is that
    conveyance from owner to herself and Joint
    Tenants is sufficient despite failing to meet
    unities of time and title. Michigan follows
    modern view. 

Chapter 5
Joint Tenancy
  • Right of Survivorship -- The death of one Joint
    Tenant does not destroy the unit. It only
    reduces by one the number of persons who own the
    unit. The remaining Joint Tenants receive
    interest of deceased Tenant by right to
    survivorship. This then avoids need for probate.
  • Termination of Joint Tenancy -- Either Joint
    Tenant can break Joint Tenancy if he desires and
    convert it into Tenancy in Common. To sever
    Joint Tenancy
  • 1. Conveyance by Joint Tenant to a third party
  • 2. Involuntary Transfer of Title
  • 3. A Joint Tenant files partition suit and
    partition decree entered.
  • 4. Contract by one Joint Tenant to sell or convey
    interest in land to third party
  • 5. Any agreement between Joint Tenants that shows
    intention to treat land as Tenancy in Common.

Chapter 5
Joint Tenancy
  • The following will not sever a Joint Tenancy
  • 1. A will by deceased Joint Tenant
  • 2. Lien created against one of the Joint Tenants
  • 3. Creation of easement by one of the Joint
  • 4. Dower and curtsey interests of spouse of
    deceased Joint Tenant
  • 5. Divorce depends on state

Chapter 5
Tenants by the Entireties
  • Like a Joint Tenancy
  • 1. Owners have rights of survivorship
  • Cannot be created by operation of law
  • Important Differences
  • 1. Owners must be husband and wife
  • 2. Title can only be conveyed by deed signed
    by both parties
  • 3. No independent right to partition.

Chapter 5
Forms of Ownership for Investment Purposes
  • Factors to Consider in Choice of Entity
  • 1. Limited Liability
  • Corporations, Limited Partnerships, Limited
  • Partnerships, Limited Liability Limited
    Partnerships and
  • Limited Liability Companies have one important
    trait in common their owners, i.e.
  • for Corp. -- SH
  • for Limited Partnership -- LP
  • Limited Liability Company -- Members
  • Limited Liability Partnerships Partners
  • Limited Liability Limited Partnerships -- LP
  •  ARE shielded from liabilities of entity

Chapter 5
Cont. Factors to Consider in Choice of Entity
  • Transferability Can the owners freely sell or
    transfer their interests to a third party?
  • Taxation Is the business entity a flow-through
    entity for federal income taxation purposes or
    does the entity pay taxes on the income?
  • Control Are the entitys business and affairs
    controlled by its owners or by a central
    management that can act without the owners

Chapter 5
  • Partnership - very informal form of business
    entity. Because of its informality, it is quite
    common today.
  • 1. Partnerships are governed largely by state
    law. Every state BUT LA has adopted the Uniform
    Partnership Act.
  • 2. UPA defines partnership as "an association of
    two or more persons to carry on as co-owners of a
    business for profit."

Chapter 5
Cont. Partnerships
  • Receipt of profits - prima facie evidence that
    partnership exists.
  • Partners share profits AND losses. If losses,
    creditors attach to partners' individual
    property. (i.e., owners ARE personally liable.)
  • Partnership MUST be a business for profit,
    therefore, partnership law does NOT apply to
    nonprofit organizations.
  • Partnership is an association of persons --
    including corporations, other partnerships, etc.
  • Partnership created by a voluntary agreement
    among person who contract to act as co-owners in
    a business for profit. DOES NOT have to be
    express, may be IMPLIED. (i.e., sharing profits)
  • ALSO, partners jointly and severally liable for
    obligations of partnership.

Chapter 5
  • Very important form of business entity. It
    provides a 1) continuous existence and a vehicle
    for investment which is 2) safe from personal
  • Corporations governed by state law. Most states
  • Four corporate characteristics -- NEED all four
    or else "corporate veil will be pierced"
  • LIMITED LIABILITY--Creditors of entity can
    not sue personally any owners of corp. for debts
    of corp.
    governed on a continuing and exclusive basis by
    officers and directors.
  • CONTINUITY OF LIFE--Corp. continues to
    exist regardless of death, incapacity or
    bankruptcy of individual shareholders.
    rs can sell shares of corporate stock without
    consent of corporation. All rights of
    transferor-shareholder conferred on transferee.

Chapter 5
Cont. Corporations
  • Corporation taxed as a separate entity. It does
    not offer flow-through tax benefits.
  • AND
  • Income distributed to shareholders as dividends
    is taxed at shareholder tax rate.

Chapter 5
Subchapter S Corporations
  • Characteristics
  • No double tax -- tax attributes passed through to
  • Like a corporation, the shareholders are shielded
    from liability.
  • Profits and losses MUST be shared by shareholders
    proportionately in relation to stock ownership.
  • Eligible Shareholder MUST be U.S. citizens,
    estates, certain tax-exempt org. or qualified
  • No more than 75 shareholders.
  • Corporation may only have one class of stock
    issued and outstanding.

Chapter 5
Limited Partnership
  • Characteristics
  • Governed by state statute Most states have
    adopted ULPA
  • Must contain at least 1 general partner who is
    personally liable for limited partnerships
    debts, liabilities and obligations.
  • Also contains 1 or more limited partners who are
    not personally liable for limited partnerships
  • GP and LP may freely transfer shares of profits
    and losses and rights to distributions. Remaining
    rights may not be transferred without unanimous
    consent unless partnership agreement provides

Chapter 5
Cont. Limited Partnerships
  • Cont. Characteristics
  • Flow-through taxation.
  • Managed by GP. LPs are passive investors who do
    not participate in management. Safe harbor
    under ULPA.
  • Limited Partnership can lose limited liability
    status if it has more than 2 attributes of a

Chapter 5
Limited Liability Company
  • A hybrid entity that (1) has the flow-through
    federal tax advantages of a partnership (2)
    offers its owners the same limited liability as a
    corporations shareholders, and (3) has a
    flexible management structure
  • Characteristics
  • Governed by ULLCA.
  • Owners are called members
  • Members may be individuals or business entities
  • Members may participate in management or be
  • Members are not personally liable for for LLCs
    debts, liabilities and other obligations

Chapter 5
Cont. Limited Liability Company
  • Cont. Characteristics
  • Members can lose no more than their investment
  • Ownership interest consists of financial rights
    and management rights. Financial rights are
    personal property and can be transferred without
    restriction. Restrictions on remaining
  • Flow-through taxation of federal income taxes
    no double taxation
  • LLC may elect to be taxed as a corporation
  • Control determined by operating agreement

Chapter 5
Limited Liability Partnership
  • Characteristics
  • Partners have limited liability
  • Partners may freely transfer their financial
    interests, Management and other non-financial
    interests cannot be sold or transferred without
    consent of all remaining partners
  • Taxed same as General Partner.
  • Controlled by partners each partner has equal
    voice, unless partnership agreement provided

Chapter 5
The Search for Real Estate
  • Listing Agreement
  • The Real Estate Agent
  • A. Broker - One employed to negotiate the sale,
    purchase or exchange of land. Compensation
    generally in the form of a commission. 
  • B. Salesman - Employee of broker. Receives
    compensation from broker. Responsible only to
    the broker. Salesman's activities performed in
    the name of the broker.
  • C. License Requirements - All states and Canadian
    provinces require real estate brokers to be
    licensed. Purpose of licensing laws
  •   - protect public from dishonest or incompetent
  • - prescribe standards and qualifications for
    licensing brokers.
  • - maintain high standards in real estate
  • - protect licensed brokers from unfair

Chapter 6
Cont. Listing Agreement
  • - Real estate broker NOT entitled to commission
    unless he had license at time he was hired to
    perform services for which he received the
  • - Criminal penalties often imposed on person
    who violates broker's licensing statutes.
  • 2. The Agency Relationship - the Listing
    Agreement serves as an employment contract and
    establishes an agency relationship.
  • A. Parties in Agency Relationship
  • Principal (S or B)
  • Agent (Broker)
  • B. Powers and Duties of Agent Authority
    limited to agreement between principal and agent.
    Some duties set forth in agreement, others are
    implied by law.

Chapter 6
Cont. Listing Agreement
  • Broker is generally not given broad authority to
    act for principal. For example, broker may not
    represent condition of property, receive all or
    part of the purchase price, or make
    representations to a Buyer that the deposit will
    be returned if there is no sale unless these
    powers are specifically provided for in listing
  • Note situations where brokers given express
    authority to perform certain acts and other
    apparent authorities are assumed granted

Chapter 6
Cont. Listing Agreement
  • Implied Duties of Broker - (Derived from general
    agency principles). Broker always must put
    interest of principal first. Guidelines
  • Care - Broker must exercise a reasonable amount
    of care while transacting business.
  • Obedience - Brokers must act in good faith and
    in conformity with principal's instructions and
  • Loyalty - Brokers owe principal 100 loyalty.
    Place principal's interest above those of any
    other person she is dealing with.
  • Accounting - Broker must be able to report
    status of all funds entrusted to them by their
  • Notice - Broker must keep principal fully
    informed at all times of all facts which might
    affect principal's business decisions.

Chapter 6
Cont. Listing Agreement
  • Specific Issues Related to Agency Relationship
  • A. Dual Agent Licensee who is acting as agent
    of both the B and the S. General rule prohibits
    dual agent situation except when parties provide
    written consent.
  • B. Buyers Broker Buyer and agent enter into
    agreement whereby agent assists B in locating,
    financing and negotiating the purchase of

Chapter 6
Cont. Listing Agreement
  • Types of Listing Agreements
  • A. Exclusive Right to Sell - Most common form
    for residential sales. One broker is appointed
    as the sole agent of Seller and given the
    exclusive right to represent the Seller in
    marketing the property and finding a purchaser.
  • B. Exclusive Agency - One Broker is authorized
    to act as the exclusive agent of the principal,
    BUT Seller retains right to sell the property
    himself or herself without obligation to the
  • C. Open Listing - Most favorable to the Seller.
    Seller retains right to retain any number of
    Brokers to act as his or her agents. Brokers act
    simultaneously, all looking for buyers. Seller
    only pays commission to Broker who successfully
    produces a ready, willing and able buyer.

Chapter 6
Cont. Listing Agreement
  • Antitrust Concerns
  • A. Sherman Antitrust Act 2 considerations
  • 1. Per se violation of Sherman Act if real
    estate board's activities are found to cause a
    "restraint of trade" (i.e., price fixing). See US
    v. National Association of Real Estate Boards.
  • 2. Do the real estate activities affect
    Interstate Commerce? See McLain v. Real Estate
    Board of New Orleans.
  • B. Note, many states have their own Sherman Acts.

Chapter 6
Cont. Listing Agreement
  • The Brokers Commission
  • A. Broker is paid usually in form of commission
    ONLY entitled to commission IF
  • 1. Licensed
  • 2. Employed by Seller
  • 3. Procuring cause of sale (i.e., from a ready,
    willing and able buyer). To be considered the
    procuring cause of sale, Broker must have taken
    action to start or cause a chain of events that
    resulted in the sale.
  • B. "Ready, Willing and Able Buyer - Generally,
    once a Seller accepts an offer from a ready,
    willing and able buyer, Seller is liable for
    Broker's commission regardless of whether or not
    the buyer completes the purchase.

Chapter 6
Cont. Listing Agreement
  • "Ready, Willing and Able Buyer" is one who is
    prepared to buy on the Seller's terms as
    specified in the listing contract and ready to
    take necessary steps to close the deal.
  •   Broker gets commission in the following
  • 1) If Seller refuses to sign purchase
    agreement, generally no liability to buyer, but
    must pay Broker commission  
  • 2) OR owner's title has uncorrected defects  
  • 3) OR if purchase agreement signed and sale
    never consummated, Seller MUST pay commission
  • 4) OR owner's spouse refuses to sign deed, MUST
  • C. Cancellation of Listing Agreement Principal
    may terminate listing agreement but must be
    acting in good faith and agreement is not for a
    set term.

Chapter 6
Discrimination in Selling or Leasing Real
  • Civil Rights Act of 1866 - prohibits any type of
    discrimination based on race. Notable
  • a. ONLY applied to discrimination on basis of
  • b. Applied only to U.S. citizens.
  • c. Limited to rights enjoyed by white citizens
    -- note, women had no property rights in 1866
  • Executive Order No. 11063 Issued in 1962 by
    JFK. Guaranteed non-discrimination in all housing
    financed by government -- insured or guaranteed
  • Jones v. Mayer -- 1968 Supreme Court decision.
    Court held that statue intended to bar all racial
    discrimination, private as well as public, in
    sale or rental of property.

Chapter 6
Cont. Discrimination in Selling or Leasing Real
  • Civil Rights Act of 1964 - Prohibits
    discrimination in any housing program that
    receives whole or partial federal funding.
  • Fair Housing Law of 1968 - (Title VIII) Unlawful
    to discriminate on basis of race, color,
    religion, sex or national origin, disability or
    family status when selling or leasing residential
    property by means of the actions listed on p.
  • 1. Sale or rental of single-family home when
    home is owned by person who does not own more
    than three such homes at one time (therefore,
    sale by owner of single-family homes not
    covered.) AND
  • Broker or agent not used AND
  • Discriminatory advertising not used AND, in
  • IF owner is not living in dwelling at time of
    transaction or was not most recent occupant --
    ONLY one such sale is exempt from law in any two
    year period

Chapter 6
Cont. Discrimination in Selling or Leasing Real
  • 2. Rentals in Owner occupied one-family to
    four-family dwellings as long as NO
    discriminatory advertising.
  • 3. Religious organizations may limit sale or
    rental of noncommercial buildings to persons of
    same religion ONLY IF membership in religion is
    not restricted on basis of race, color or
    national origin.
  • 4. Private clubs may limit rental or occupancy
    of lodgings that it owns to members.
  • Compare 1866 law prohibits ALL racial
    discrimination without exception whereas FHA
    exempts individual homeowners and certain groups,
    therefore any aggrieved person may seek a remedy
    for racial discrimination under 1866 law against
    ANY homeowner. BUT, if discrimination based on
    grounds other than color, remedy may not be

Chapter 6
Cont. Discrimination in Selling or Leasing Real
  • 1972 Amendment to FHA
  • 1. Brokers must display equal opportunity poster
    which can be obtained from HUD
  • 2. Failure to display poster constitutes prima
    facie evidence of discrimination if broker is
    investigated for discriminatory practices by HUD
  • 1988 Amendment to FHA provided for more
    effective enforcement mechanisms and provided
    protections for the disabled and for families.

Chapter 6
Cont. Discrimination in Selling or Leasing Real
  • Americans with Disabilities Act - Prohibits
    discrimination. based on disabilities in
    employment, provision of government. services,
    transportation provided by public or private
    entities, places of public accommodation and
    commercial facilities avail. to public.
  • State and Local Laws - If a state or
    municipality has a fair housing law that has been
    ruled "substantially" equivalent to federal law,
    all complaints in that state or locality,
    including those filed with HUD, are handled by
    state enforcement agencies.

Chapter 7
The Real Estate Contract
  • Introduction to Contracts
  • DEFINITION -- A contract is a promise or set of
    promises which constitute a legally enforceable
    agreement between two or more people.
  • TYPES OF CONTRACTS Unilateral or Bilateral
    Expressed or Implied.
  • Unilateral Contract Bilateral Contract
  • "I offer to give you 100 if you cross "I
    promise to give you 100 if you promise
  • the Brooklyn Bridge." to cross the Brooklyn
  • Offer calls for acceptance to occur Form of
    contract when an offer requires
  • by performance of an act. The unilateral acceptan
    ce in form of a promise to perform.
  • contract is accepted by actually
  • performing duties requested by the offer.

Chapter 7
The Real Estate Contract
  • Express - parties state the terms and show
    intentions in words, either orally or in writing.
    (i.e., most listing agreements)
  • Implied - Prior conduct - agreement formed by
    acts and conduct of parties in past.
    ALSO--partial performance
  • Elements of a Valid Contract.
  • Competent Parties - all parties entering into
    contract must have legal capacity to contract
  • Mutual Assent - All parties must be mutually
    willing to enter into contract and contract must
    be signed as the "free and voluntary" act of each
    party. (i.e., "meeting of minds")

Chapter 7
The Real Estate Contract
  • Cont. Mutual Assent
  • Offer is accepted when offeree signs agreement
    and communicates acceptance to buyer.
  • Counter Offer - If any terms of original offer
    are changed, changes constitute total rejection,
    relieves original offeror of liability--Offeree
    has NOT accepted offer BUT MAKES NEW offer.
  • Contract Modification - Original contract stays
    if agreement modified after contract is signed by
    both parties. So if A and B enter into contract
    and THEN B decides to MODIFY agreement, original
    contract stays.
  • Misrepresentation. Fraud, Mistake, or Duress,
    Undue Influence or Menace.

Chapter 7
The Real Estate Contract
  • Misrepresentation - Innocent misstatement of
    material fact upon which someone relies and
    causes that person to suffer damages.
  • Fraud - Misrepresentation. of material fact
    knowing it to be false upon which another relies
    and causes that person to suffer damages.
  • Silent Fraud - Seller must disclose info. re
    defects in property in MI whether or not B
    inquires--MI Seller's Disclosure Act--Brokers
    probably. NOT liable for silent fraud in MI but
    liable in other states. AS IS clause is
    sometimes used in purchase agreements. B
    acknowledges in writing that S has made NO
    warranties re condition of property. In MI, as
    is clause does not shield S from fraud or silent

Chapter 7
The Real Estate Contract
  • Mistake - Mutual misunderstanding in negotiations
    between parties
  • 1. Consideration - Consideration is any promise
    or performance that is made in exchange for a
    promise or performance by the other party to a
  • Real Estate Contracts -- promise by owner to