© 2011 Rockwell Publishing Washington Real Estate Fundamentals Lesson 2: Estates in Land and Methods of Holding Title

© 2011 Rockwell Publishing

Washington Real Estate Fundamentals

Lesson 2:

Estates in Land and Methods of Holding Title


Introduction

This lesson will discuss: the different types of possessory

interests in real property (estates in land)the different ways title to real property

can be held


Estates in LandInterests in real property

Interest: An interest in real property is a right concerning the property or a claim against it.

Interests may be:possessory (also called estates)nonpossessory (also called

encumbrances)

(Nonpossessory interests are covered in the next lesson.)


Estates in LandTypes of estates

Two basic categories: freehold estates (include title)leasehold estates (do not include title)


Two main types of freehold estates: fee simple estateslife estates

Types of EstatesFreehold estates


Fee simple:Most common type of freehold estate.Highest and most complete form of land

ownership.Can potentially last forever.Perpetual, transferable, and inheritable.Also called a fee simple absolute.

Freehold EstatesFee simple estates


Fee Simple EstatesFee simple absolute

Fee simple absolute is the default:If a fee simple owner transfers title,

grantee receives fee simple absolute unless deed makes it clear that grantor intended otherwise.


Fee Simple EstatesQualified fee

Qualified fee: Fee title with a condition or qualification attached.

Estate will end if condition no longer met or if specified event occurs.

Also called fee simple defeasible.


Freehold EstatesLife estates

Other category of freehold estates (aside from fee simple estates) is life estates.

Life estate:limited in timelasts only as long as a specified person

is alive


James donated his farm to the Children’s Aid Society, but retained a life estate in the farm.

James has exclusive possession and use of farm until he dies.

When James dies, farm will belong to the Children’s Aid Society.

While James is alive, he is the life tenant.

Life EstatesExample


Life EstatesDuration

Measuring life: Life on which a life estate depends.

May be life tenant’s own life.“To Alice for life” - Alice’s life estate

ends when she dies.But someone else’s life can be used

instead (pur autre vie).“To Alice for the life of Beverly” -

Alice’s life estate ends when Beverly dies.


Life EstatesFuture interests

Future interest: Ownership interest that will become possessory when life estate ends.

When life estate created, future interest created at same time.

Future interest may be:estate in reversionestate in remainder


Margarita grants a life estate to John.

If she stipulates that the property will come back to her (or to her heirs) when John dies, Margarita and her heirs have an estate in reversion.

Future InterestsEstate in reversion


But if Margarita stipulates that the property will go to Sam (not back to her or her heirs) when John dies, then Sam has an estate in remainder.

Sam would be called a remainderman.

If no remainderman named, future interest is estate in reversion.

Future InterestsEstate in remainder


Life EstatesDuties of a life tenant

Must pay taxes, assessments, other liens.

Must not commit waste by permanently damaging property or using up resources.

Must allow holder of future interest to inspect property periodically.


SummaryFreehold Estates • Freehold estate• Fee simple absolute• Qualified fee• Life estate• Life tenant• Measuring life• Future interest• Estate in reversion• Estate in remainder


Types of EstatesLeasehold estates

Leasehold estate: Limited, temporary estate created by a lease contract.

Parties = landlord and tenantTenant gets right to exclusive possession

and use of property.Landlord retains title to property.


Leasehold EstatesTypes of leasehold estates

Estate for yearsPeriodic estateEstate at willTenancy at sufferance


Types of Leasehold EstatesEstate for years

Estate for years: Leasehold estate that lasts for any fixed term.

Created only by express agreement.Ends automatically when term expires.Notice of termination not required.Also called tenancy for years or term

tenancy.


Periodic estate: Leasehold estate that is not limited to a specific term.

Continues from rental period to rental period until landlord or tenant gives notice of termination.

Required notice period generally equals rental period.

Also called periodic tenancy.

Types of Leasehold EstatesPeriodic estate


Types of Leasehold EstatesEstate at will

Estate at will: Tenant in possession with landlord’s consent for indefinite period.

Rent may be paid on irregular basis or not at all.

Can be terminated at any time with proper notice.

Also called tenancy at will.


Types of Leasehold EstatesEstate at will

Differences between estate at will and other leasehold estates:

Estate at will cannot be assigned to another person.

Estate at will ends automatically upon death of either party.


Types of Leasehold EstatesTenancy at sufferance

Tenancy at sufferance: Tenant took possession under valid lease, but no longer has right to possession.

Tenant stays on after lease expires, without landlord’s consent.

Not a true estate; tenant does not have a leasehold interest.

Also called holdover tenancy.


SummaryLeasehold Estates

• Leasehold estate• Estate for years• Periodic estate• Estate at will• Tenancy at sufferance


Real property may be owned by:one individualmore than one individuala business, agency, or other organization

Depending on number and type of owners, title can be held in different ways.

Methods of Holding Title


Methods of Holding TitleOwnership in severalty

Ownership in severalty: Ownership by one individual. Also called sole ownership.

Individual owner may be:natural person (human being)artificial person (legal entity such as

corporation)


Methods of Holding TitleCo-ownership

Co-ownership: Ownership by two or more persons at the same time. Also called concurrent ownership.

Three types of co-ownership in Washington:tenancy in commonjoint tenancycommunity property


Tenancy in common: Most basic form of co-ownership.

Default form of co-ownership:If one of the other forms does not

apply or is not specified, it’s a tenancy in common.

Forms of Co-ownershipTenancy in common


Like other co-owners, tenants in common have undivided interests.

They share possession of the whole property (unity of possession).

In a tenancy in common, shares don’t have to be equal.

Example: A and B own some land as tenants in common. A has a 1/4 interest and B has a 3/4 interest.

Tenancy in CommonUndivided interests


One tenant in common is free to sell, will, or mortgage his interest without the consent of the other(s).

Tenancy in CommonTransfer of interests


Tenancy in common will end if:all co-tenants agree to sell the property,all agree to partition (divide) the property

into separate parcels, orone co-tenant files a partition suit to force

a division or sale.

Tenancy in CommonPartition


Forms of Co-ownershipJoint tenancy

In a joint tenancy, two or more persons are joint and equal owners of a property.

How joint tenancy differs from tenancy in common:

Joint tenants must have equal shares.Joint tenants have right of survivorship.


Joint TenancyFour unities

Requirements for creation or continuation of a joint tenancy:

unity of interestunity of titleunity of timeunity of possession


Joint TenancyRight of survivorship

Right of survivorship: Key feature of joint tenancy.

When a joint tenant dies, her interest automatically passes to the surviving joint tenant(s).

Joint tenancy interest cannot be willed and is not part of estate.


Joint TenancyTermination

Like tenancy in common, joint tenancy can be terminated through partition suit.

Also, joint tenancy terminates automatically if any of the four unities is destroyed.

If one joint tenant conveys interest, purchaser is tenant in common.

But other co-tenants remain joint tenants in respect to each other.


Forms of Co-ownershipCommunity property

In Washington and certain other states, property owned jointly and equally by husband and wife is community property.


Community PropertyBasic rules

In community property states:Everything owned by married couple that

isn’t separate property of one spouse is community property of both spouses.

Legal presumption that all property acquired during marriage is community property.


Community PropertyDefinitions

Separate property:property owned before marriagegift or inheritance acquired during

marriageanything purchased with separate

property fundsprofits or proceeds from separate

property


Community PropertyDefinitions

Community property: All property (including money) acquired during marriage:

through skill or labor, orusing community funds or community

credit.


Community PropertyJoinder requirement

Signatures of both spouses necessary to:list, sell, or encumber community real

propertypurchase property that will be community

real property

(By contrast, spousal approval usually not required for transfer of community personal property.)


Forms of Co-ownershipMarital property in other states

In non-community property states, property ownership by a married couple may be:

no different than co-ownership by unmarried parties,

tenancy by the entireties, orsome other form of marital property.


SummaryCo-ownership

• Ownership in severalty• Co-ownership• Undivided interests• Tenancy in common• Joint tenancy• Four unities• Right of survivorship• Community property• Separate property


Methods of Holding TitleBusiness organizations

How a business is organized affects how title to property is held.

Syndicate: Group of individuals who pool resources to form a business enterprise.


Business may be organized as:general partnershiplimited partnershipcorporationlimited liability companyjoint venturereal estate investment trust

Business OrganizationsForms of organization


Business OrganizationsPartnerships

Partnership: Association of two or more persons to conduct a business as co-owners and divide profits.

Types of partnerships:general partnershiplimited partnership


PartnershipsGeneral partnerships

In a general partnership, each partner has:ownership interestvoice in management decisionsright to share in profitsobligation to share in losses and liabilities


General PartnershipsUnlimited liability

All partners have unlimited liability.Each may be held personally liable for

debts and obligations of general partnership.


General PartnershipsProperty ownership

Partnership property:acquired in partnership’s name, oracquired in name of one or more

partners and deed refers to the partnership


Partner:has right to use partnership propertyis not co-owner of the property and does

not have a transferable interest in it

But partner’s interest in partnership can be transferred.

General PartnershipsProperty ownership


PartnershipsLimited partnerships

Limited partnership: At least one general partner, plus one or more limited partners.

More structured and regulated than general partnership.

Must meet requirements of Uniform Limited Partnerships Act.

Certificate of limited partnership filed with secretary of state’s office.


PartnershipsLimited partnerships

Limited partners have limited liability.Limited liability: Individual investor not

personally liable for business’s debts.

Originally, limited partners not allowed to participate in management and control.

Now full participation permitted without jeopardizing limited liability.


Business OrganizationsCorporations

Corporation: Owned by shareholders, who purchase shares as investment.

Legal entity (“artificial person”).Enters into contracts, owns property,

incurs liabilities.Potentially perpetual existence (no joint

tenancy).


CorporationsSecurities

Shares in a corporation are securities.Securities: Investment instruments such as

stocks and bonds.Give investors financial interest in

enterprise without managerial control.Sale of securities regulated by federal

Securities & Exchange Commission (SEC).Only licensed securities dealers may sell

securities.


Shareholders have:limited liabilityno direct managerial control

Corporation is:governed by board of directors elected

by shareholdersmanaged day-to-day by corporate

officers chosen by board

CorporationsManagement


Problem with corporate form: double taxation on all but smallest corporations.

Corporation pays corporate income taxes on profits.

Profits distributed to shareholders as dividends.

Shareholders pay personal income taxes on dividends.

CorporationsDouble taxation


Business OrganizationsLimited liability companies

Limited liability company: Combines advantages of partnership with advantages of corporation.

All LLC members have limited liability, even managing members.

No double taxation.


Business OrganizationsJoint ventures

Joint venture: Two or more individuals or organizations join together for specific project.

Not an ongoing business endeavor.No formal requirements for creation.


Business OrganizationsReal estate investment trusts

REIT: Syndicate created by investors to finance large real estate projects.

No double taxation if:100+ investors75% of assets invested in real estate90% of income distributed to investors

Investors have limited liability.Shares are securities, subject to federal

regulation.


SummaryBusiness organizations

• Syndicate• General partnership• Limited partnership• Corporation• Securities and Exchange

Commission (SEC)• Limited liability company (LLC)• Joint venture• Real estate investment trust (REIT)


Methods of Holding TitleCo-ownership properties

Three special types of properties involve co-ownership:

condominiumscooperativestimeshares


Co-ownership PropertiesCondominiums

Condominium owner:owns individual unitshares ownership of common elements

with other unit owners (tenancy in common)

Condominium governed by homeowners association (also called unit owners association or condo association).


CondominiumsCommon elements

Common elements: Aspects of condo property for use by all residents.

Also called common areas.Examples: lobby, elevators, pool


CondominiumsLimited common elements

Limited common elements: Common elements reserved for exclusive use of owners of specified units.

Examples: parking spaces, balconies


CondominiumsUnits as separate properties

Buyer of condominium unit:receives deed for unitfinances purchase with separate loan obtains separate title insurance policypays separate property taxes


Co-ownership PropertiesCooperatives

Cooperative may look just like condominium, but has very different ownership structure.

Title to cooperative property held by single entity (usually corporation).

Residents:own shares in the corporationhave long-term proprietary lease

on unit


Co-ownership PropertiesCooperatives

Cooperative project is:financed with single mortgagetaxed as single property

Rent paid by shareholder-tenant is share of co-op’s mortgage payment and operating expenses.

Default by one tenant could result in foreclosure on entire building.


Co-ownership PropertiesTimeshares

Some condos are offered for sale under a timeshare arrangement.

Buyer purchases right to occupy unit during a certain time slot each year.


Co-ownership PropertiesTimeshares

Washington Timeshare Act requires:disclosure statementregistration of timeshare propertiesregistration of timeshare salespersons

(real estate licensees exempt)

Buyers have right of rescission for 7 days after signing purchase agreement or receiving disclosure statement.


SummaryCondos and Co-ops

• Condominium• Homeowners association• Common elements• Limited common elements• Cooperative• Proprietary lease• Timeshare• Right of rescission

Documents

© 2011 Rockwell Publishing Washington Real Estate Fundamentals Lesson 2: Estates in Land and Methods of Holding Title