1real estate law, 6th ed., by siedel and aalberts real estate law, 6 th edition by george j. siedel,...

1Real Estate Law, 6th ed., by Siedel and Aalberts Real Estate Law, 6 th Edition by George J. Siedel, III and Robert J. Aalberts Slides prepared by Heidi Bulich

2Real Estate Law, 6th ed., by Siedel and Aalberts 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

3Real Estate Law, 6th ed., by Siedel and Aalberts 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

4Real Estate Law, 6th ed., by Siedel and Aalberts The Court System Chapter 1

5Real Estate Law, 6th ed., by Siedel and Aalberts 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

6Real Estate Law, 6th ed., by Siedel and Aalberts 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

7Real Estate Law, 6th ed., by Siedel and Aalberts Fixtures 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 Fixture a tangible object formerly treated as personal property but now has become so connected with the real property that it becomes real property Chapter 2

8Real Estate Law, 6th ed., by Siedel and Aalberts 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

9Real Estate Law, 6th ed., by Siedel and Aalberts Cont. Fixtures Important to distinguish personal property from fixtures: 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 property. Foreclosure sales fixtures, not personal property are subject to sale Tenant fixtures Chapter 2

10Real Estate Law, 6th ed., by Siedel and Aalberts 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, soybeans). 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

11Real Estate Law, 6th ed., by Siedel and Aalberts 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 govern If severed by B then real property law governs Chapter 2

12Real Estate Law, 6th ed., by Siedel and Aalberts Doctrine of Emblements Emblements are annual crops produced by labor and industry. Doctrine applies in L T situation. T in interest of fairness, keeps fruit of labor if: 1.Period of Tenancy of uncertain duration 2.Tenancy terminated by L or Act of God; and 3.T can prove he or she planted crop during tenancy Chapter 2

13Real Estate Law, 6th ed., by Siedel and Aalberts 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

14Real Estate Law, 6th ed., by Siedel and Aalberts Fixture Financing 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) When property is transferred, the following rules apply: Chapter 2

15Real Estate Law, 6th ed., by Siedel and Aalberts 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

16Real Estate Law, 6th ed., by Siedel and Aalberts Creating Security Interests In Personal Property TO OBTAIN: execute security agreement between B & (Seller or Lender) or take possession of article 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 FILES FIRST 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

17Real Estate Law, 6th ed., by Siedel and Aalberts 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

18Real Estate Law, 6th ed., by Siedel and Aalberts 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

19Real Estate Law, 6th ed., by Siedel and Aalberts Water Rights Limited Resource Who owns land under water? Who has right to use water? How should water be used? 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

20Real Estate Law, 6th ed., by Siedel and Aalberts 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

21Real Estate Law, 6th ed., by Siedel and Aalberts 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 waters. Control - Congress over navigable waters which affect interstate commerce. States all navigable waters which do not affect interstate commerce. Private owners all non-navigable waters. Chapter 3

22Real Estate Law, 6th ed., by Siedel and Aalberts 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

23Real Estate Law, 6th ed., by Siedel and Aalberts 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 of amount emitted in 1980) 2. Since 1995 US companies permitted to trade units (called allowances) of certain air emissions. 3. Clear Skies Initiative. Chapter 3

24Real Estate Law, 6th ed., by Siedel and Aalberts 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

25Real Estate Law, 6th ed., by Siedel and Aalberts 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

26Real Estate Law, 6th ed., by Siedel and Aalberts Environmental Liens Comprehensive Environmental Response, Compensation & Liability Act of 1980 (CERCLA or Superfund) 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

27Real Estate Law, 6th ed., by Siedel and Aalberts 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

28Real Estate Law, 6th ed., by Siedel and Aalberts 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 Assessments 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

29Real Estate Law, 6th ed., by Siedel and Aalberts 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 programs. Chapter 3

30Real Estate Law, 6th ed., by Siedel and Aalberts Easements 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. Easement = interest in land which gives the owner the right to use real estate owned by another for a specified purpose Chapter 4

31Real Estate Law, 6th ed., by Siedel and Aalberts 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

32Real Estate Law, 6th ed., by Siedel and Aalberts 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 time. Chapter 4

33Real Estate Law, 6th ed., by Siedel and Aalberts 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

34Real Estate Law, 6th ed., by Siedel and Aalberts 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 runs. Dominant estate -- tract which benefits from easement. Is ALIENABLE and can be SUBDIVIDED 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

35Real Estate Law, 6th ed., by Siedel and Aalberts Cont. Types of Easements 2. Easement in Gross -- personal interest in or right to use land of another that is NOT appurtenant to ownership or possession of real estate. - 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

36Real Estate Law, 6th ed., by Siedel and Aalberts Creation of Easements EXPRESS must satisfy formal requirements in writing, signed, witnessed and recorded IMPLIED 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

37Real Estate Law, 6th ed., by Siedel and Aalberts Easement by Estoppel If owner of servient estate allows user to make improvements re: use, servient owner is estopped from denying existence of easement. ILLUSTRATION 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

38Real Estate Law, 6th ed., by Siedel and Aalberts 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

39Real Estate Law, 6th ed., by Siedel and Aalberts 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

40Real Estate Law, 6th ed., by Siedel and Aalberts 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

41Real Estate Law, 6th ed., by Siedel and Aalberts 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

42Real Estate Law, 6th ed., by Siedel and Aalberts 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 easement. 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 maintenance. 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 road. 6. If easement owner allows right-of-way to fall into disrepair, no right to travel along another route. BUT, IF: 7. If Landowner impedes easement owner from using easement, easement owner may travel around obstruction and over other land belonging to landowner. Chapter 4

43Real Estate Law, 6th ed., by Siedel and Aalberts 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

44Real Estate Law, 6th ed., by Siedel and Aalberts 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. REQUIREMENTS: 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

45Real Estate Law, 6th ed., by Siedel and Aalberts 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. 99 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

46Real Estate Law, 6th ed., by Siedel and Aalberts 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.) ILLUSTRATIONS A owns house -- constructs garage. Builds driveway over part of B's lot without B's permission. After 20 years has prescriptive easement. 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

47Real Estate Law, 6th ed., by Siedel and Aalberts Estates in Land 4 Types of Freehold Estates 1. Fee Simple 2. Fee Simple Determinable 3. Fee Tail 4. Life Estate Chapter 5

48Real Estate Law, 6th ed., by Siedel and Aalberts Fee Simple Absolute ownership greatest extent of ownership interest recognized by law 1. Holder is entitled to all rights of property ownership. 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., nuisance) TO CREATE INTEREST IN FEE SIMPLE "TO BOB"--This is enough even if NOT expressed as estate in fee simple, most statues assume conveyance of fee simple estates Chapter 5

49Real Estate Law, 6th ed., by Siedel and Aalberts 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

50Real Estate Law, 6th ed., by Siedel and Aalberts 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 retained a POWER OF TERMINATION or a RIGHT OF RE-ENTRY. (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

51Real Estate Law, 6th ed., by Siedel and Aalberts 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 expiration. Chapter 5

52Real Estate Law, 6th ed., by Siedel and Aalberts 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

53Real Estate Law, 6th ed., by Siedel and Aalberts 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 parties 2. Legal life estate - created by operation of law Chapter 5

54Real Estate Law, 6th ed., by Siedel and Aalberts 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

55Real Estate Law, 6th ed., by Siedel and Aalberts 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

56Real Estate Law, 6th ed., by Siedel and Aalberts 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, 3 rd party owns subject to Ws dower rights Chapter 5

57Real Estate Law, 6th ed., by Siedel and Aalberts 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

58Real Estate Law, 6th ed., by Siedel and Aalberts 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 obligation. Chapter 5

59Real Estate Law, 6th ed., by Siedel and Aalberts 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

60Real Estate Law, 6th ed., by Siedel and Aalberts 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 repairs. 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

61Real Estate Law, 6th ed., by Siedel and Aalberts 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 produces. 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

62Real Estate Law, 6th ed., by Siedel and Aalberts Concurrent Ownership Joint TenancyPlanned Unit Development Tenancy By the EntiretyCondominium Tenancy in CommonTimesharing Community Property UNITIES TimeTitleInterestPossessionPerson Joint Tenancy X X X X T by the Entirety X X X X X T in Common X Chapter 5

63Real Estate Law, 6th ed., by Siedel and Aalberts 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 shares. (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 instrument. Chapter 5

64Real Estate Law, 6th ed., by Siedel and Aalberts 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 will. 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

65Real Estate Law, 6th ed., by Siedel and Aalberts Joint Tenancy Viewed as a special type of Tenancy in Common, with one important difference right of survivorship 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

66Real Estate Law, 6th ed., by Siedel and Aalberts 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

67Real Estate Law, 6th ed., by Siedel and Aalberts 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 Tenants 4. Dower and curtsey interests of spouse of deceased Joint Tenant 5. Divorce depends on state Chapter 5

68Real Estate Law, 6th ed., by Siedel and Aalberts Tenants by the Entireties Like a Joint Tenancy: 1. Owners have rights of survivorship 2.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

69Real Estate Law, 6th ed., by Siedel and Aalberts Forms of Ownership for Investment Purposes Factors to Consider in Choice of Entity 1.Limited Liability Corporations, Limited Partnerships, Limited Liability 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

70Real Estate Law, 6th ed., by Siedel and Aalberts Cont. Factors to Consider in Choice of Entity 2.Transferability Can the owners freely sell or transfer their interests to a third party? 3.Taxation Is the business entity a flow-through entity for federal income taxation purposes or does the entity pay taxes on the income? 4.Control Are the entitys business and affairs controlled by its owners or by a central management that can act without the owners approval? Chapter 5

71Real Estate Law, 6th ed., by Siedel and Aalberts Partnerships 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

72Real Estate Law, 6th ed., by Siedel and Aalberts 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

73Real Estate Law, 6th ed., by Siedel and Aalberts Corporations Very important form of business entity. It provides a 1) continuous existence and a vehicle for investment which is 2) safe from personal liability. Corporations governed by state law. Most states have adopted the MODEL BUSINESS CORPORATION ACT. 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. * CENTRALIZATION OF MANAGEMENT--Corp. is 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. * FREE TRANSFERABILITY OF INTERESTS--Shareholders can sell shares of corporate stock without consent of corporation. All rights of transferor-shareholder conferred on transferee. Chapter 5

74Real Estate Law, 6th ed., by Siedel and Aalberts Cont. Corporations DOUBLE TAXATION * 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

75Real Estate Law, 6th ed., by Siedel and Aalberts Subchapter S Corporations Characteristics: 1.No double tax -- tax attributes passed through to shareholder. 2.Like a corporation, the shareholders are shielded from liability. 3.Profits and losses MUST be shared by shareholders proportionately in relation to stock ownership. 4.Eligible Shareholder MUST be U.S. citizens, estates, certain tax-exempt org. or qualified trusts. 5.No more than 75 shareholders. 6.Corporation may only have one class of stock issued and outstanding. Chapter 5

76Real Estate Law, 6th ed., by Siedel and Aalberts Limited Partnership Characteristics: 1.Governed by state statute Most states have adopted ULPA 2.Must contain at least 1 general partner who is personally liable for limited partnerships debts, liabilities and obligations. 3.Also contains 1 or more limited partners who are not personally liable for limited partnerships obligations. 4.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 otherwise. Chapter 5

77Real Estate Law, 6th ed., by Siedel and Aalberts Cont. Limited Partnerships Cont. Characteristics: 5.Flow-through taxation. 6.Managed by GP. LPs are passive investors who do not participate in management. Safe harbor under ULPA. 7.Limited Partnership can lose limited liability status if it has more than 2 attributes of a corporation. Chapter 5

78Real Estate Law, 6th ed., by Siedel and Aalberts 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: 1.Governed by ULLCA. 2.Owners are called members 3.Members may be individuals or business entities 4.Members may participate in management or be passive 5.Members are not personally liable for for LLCs debts, liabilities and other obligations Chapter 5

79Real Estate Law, 6th ed., by Siedel and Aalberts Cont. Limited Liability Company Cont. Characteristics: 5.Members can lose no more than their investment 6.Ownership interest consists of financial rights and management rights. Financial rights are personal property and can be transferred without restriction. Restrictions on remaining interests. 7.Flow-through taxation of federal income taxes no double taxation 8.LLC may elect to be taxed as a corporation 9.Control determined by operating agreement Chapter 5

80Real Estate Law, 6th ed., by Siedel and Aalberts Limited Liability Partnership Characteristics: 1.Partners have limited liability 2.Partners may freely transfer their financial interests, Management and other non-financial interests cannot be sold or transferred without consent of all remaining partners 3.Taxed same as General Partner. 4.Controlled by partners each partner has equal voice, unless partnership agreement provided otherwise Chapter 5

81Real Estate Law, 6th ed., by Siedel and Aalberts The Search for Real Estate Listing Agreement 1.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 brokers. - prescribe standards and qualifications for licensing brokers. - maintain high standards in real estate profession. - protect licensed brokers from unfair competition. Chapter 6

82Real Estate Law, 6th ed., by Siedel and Aalberts 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 commission. - 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

83Real Estate Law, 6th ed., by Siedel and Aalberts 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 agreement. Note situations where brokers given express authority to perform certain acts and other apparent authorities are assumed granted Chapter 6

84Real Estate Law, 6th ed., by Siedel and Aalberts 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 authority. 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 principals. Notice - Broker must keep principal fully informed at all times of all facts which might affect principal's business decisions. Chapter 6

85Real Estate Law, 6th ed., by Siedel and Aalberts 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 property. Chapter 6

86Real Estate Law, 6th ed., by Siedel and Aalberts Cont. Listing Agreement 2.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 Broker. 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

87Real Estate Law, 6th ed., by Siedel and Aalberts Cont. Listing Agreement 3.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

88Real Estate Law, 6th ed., by Siedel and Aalberts Cont. Listing Agreement 4.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

89Real Estate Law, 6th ed., by Siedel and Aalberts 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 situations: 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 pay. 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

90Real Estate Law, 6th ed., by Siedel and Aalberts Discrimination in Selling or Leasing Real Estate A.Civil Rights Act of 1866 - prohibits any type of discrimination based on race. Notable limitations: a. ONLY applied to discrimination on basis of race. 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 loans. 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

91Real Estate Law, 6th ed., by Siedel and Aalberts Cont. Discrimination in Selling or Leasing Real Estate B.Civil Rights Act of 1964 - Prohibits discrimination in any housing program that receives whole or partial federal funding. C.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. 179. NOTE: FHA DOES NOT APPLY TO: 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 addition 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

92Real Estate Law, 6th ed., by Siedel and Aalberts Cont. Discrimination in Selling or Leasing Real Estate 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 allowed. Chapter 6

93Real Estate Law, 6th ed., by Siedel and Aalberts Cont. Discrimination in Selling or Leasing Real Estate D.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 E.1988 Amendment to FHA provided for more effective enforcement mechanisms; and provided protections for the disabled and for families. Chapter 6

94Real Estate Law, 6th ed., by Siedel and Aalberts Cont. Discrimination in Selling or Leasing Real Estate F.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

95Real Estate Law, 6th ed., by Siedel and Aalberts 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 ContractBilateral 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 Bridge Offer calls for acceptance to occur Form of contract when an offer requires by performance of an act. The unilateralacceptance in form of a promise to perform. contract is accepted by actually performing duties requested by the offer. Chapter 7

96Real Estate Law, 6th ed., by Siedel and Aalberts 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. 1.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

97Real Estate Law, 6th ed., by Siedel and Aalberts 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. NO MUTUAL ASSENT IF: Misrepresentation. Fraud, Mistake, or Duress, Undue Influence or Menace. Chapter 7

98Real Estate Law, 6th ed., by Siedel and Aalberts 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 fraud. Chapter 7

99Real Estate Law, 6th ed., by Siedel and Aalberts 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 contract. Real Estate Contracts -- promise by owner to convey title to B and promise by B to pay purchase price for property 2. Satisfaction of Special State Laws - Satisfy specific state regulations (i.e., Statute of Frauds) Chapter 7

100Real Estate Law, 6th ed., by Siedel and Aalberts The Real Estate Contract REQUIRED PROVISIONS IN ALL CONTRACTS FOR THE SALE OF LAND: 1. Writing - every state has a Statute of Frauds which requires contracts for the sale of land to be in writing. Every statute derived from 1677 English law -- Statutes of Frauds. Verbal contracts for sale of land are unenforceable. Statute of Frauds satisfied if "Rule of 4 Ps" is satisfied--in MI: 1. names of parties 2. description of property 3. price 4. terms of payment 2. Description of Parties: Contract must contain names of both Buyer and Seller 3. Description of Real Estate: Contract must contain a reasonably certain description of land to be sold Chapter 7

101Real Estate Law, 6th ed., by Siedel and Aalberts The Real Estate Contract 4. Sale Price (i.e., Consideration): Contract must contain sales price and must state how purchase price will be paid. The payment terms are broken down into: 1. Total purchase price; 2. Down payment; and 3. Form of financing (mortgage assumption, land contract, mortgage) 5. Signature of Parties: Purchase Agreement enforced against parties who sign. If you do NOT sign, you are NOT liable under contract. Chapter 7

102Real Estate Law, 6th ed., by Siedel and Aalberts The Real Estate Contract Once four essential terms in the written agreement -- P.A. will be enforceable, even if negotiations were informal. Four Essential Terms in P.A. 1. Parties described 2. Description of real estate 3. Consideration specified (i.e., payment terms) 4. Agreement signed Chapter 7

103Real Estate Law, 6th ed., by Siedel and Aalberts The Real Estate Contract OTHER COMMON PROVISIONS IN PURCHASE AGREEMENT 1. Description of personal property to be transferred with premises. (i.e., contracts, franchises, permits, leases). 2. Survey 3. Condition and Inspection of Property 4. Prorations - Property taxes and assessments 5. Closing 6. Possession 7. Real Estate Brokers: Purchase agreement should define his or her responsibility for holding earnest money, preparing closing documents, etc. 8. Warranties Chapter 7

104Real Estate Law, 6th ed., by Siedel and Aalberts The Real Estate Contract Sellers Warranties 1. Good and marketable title. 2. Premises and any personal property conveyed are sole property of Seller. 3. Seller knows of no claims or encumbrances upon property. 4. No alleged claims or litigation regarding property. 5. All taxes and assessments paid. 6. Seller will indemnify Purchaser as to warranties. Buyers Warranties 1. Authorized to enter into transactions. 2. Present proof of ability to complete transactions. Chapter 7

105Real Estate Law, 6th ed., by Siedel and Aalberts The Real Estate Contract Marketable Title - Seller must have good title, free from liens, encumbrances or defects other than those specified in contract. Title unmarketable if: 1. Seller lacks all or part of title alleged OR 2. Title subject to encumbrance OR 3. Reasonable possibility of #1 or #2. Title Held By Seller: Unless purchase agreement indicates otherwise, purchaser is entitled to undivided fee simple absolute to all property purchased. Title Free From Encumbrances: Unless purchase agreement provides otherwise, marketable title is free from all encumbrances. Types of encumbrances: 1. Easements 2. Zoning and Building Restrictions 3. Mortgages and Other Liens 4. Encroachments Chapter 7

106Real Estate Law, 6th ed., by Siedel and Aalberts The Real Estate Contract Equitable Conversion Once Purchaser gets interest in real estate by executing a purchase agreement -- Purchaser becomes equitable owner. Seller retains legal title and this title is only held as security to receive money from Purchaser. Risk of Loss (After contract signed, before closing): 1. (Majority View) Buyer is regarded as equitable owner and therefore, real owner of property. Therefore, he or she bears risk of BOTH profit and loss during contract period. Buyer can not withdraw from contract because property damaged. 2. (Minority View) Risk of loss remains with Seller unless legal title conveyed to Purchaser or unless Purchaser causes loss--Uniform Vendor and Purchaser Risk Act. Chapter 8

107Real Estate Law, 6th ed., by Siedel and Aalberts Title and Insurance After purchase agreement is signed, three important things happen: 1. Seller proves he has title to real estate. 2. Buyer makes arrangements for property and liability insurance; and 3. Buyer borrows money to finance purchase. Proving Good Title Seller must deliver abstract of title or title commitment to protect real estate purchasers and creditors, public records are maintained to help officially establish: 1. Who owns what real estate. 2. To give notice of encumbrances. 3. Establish lien priorities. Chapter 8

108Real Estate Law, 6th ed., by Siedel and Aalberts Title and Insurance How do we ensure these records are accurate? 1. Statute of Frauds requirements 2. Public recording rules NOTICE - CONCEPTS All Buyers and Lenders are charged with constructive notice Contrast with actual notice -- everything the Buyer has direct knowledge of ILLUSTRATION Bill mortgages land to Jane. Jane does not record mortgage, but she does take possession of land. Bill later mortgages same land to Ed, who knows of earlier mortgage to Jane. Thus, Ed is charged with actual knowledge, so his mortgage is second to Jane's mortgage. ILLUSTRATION Bill conveys land to Jane, who records deed. Then Bill persuades Ed to buy the same land, telling Ed he owns land. Ed fails to examine title. Ed has constructive notice of deed to Jane, Jane has priority. Chapter 8

109Real Estate Law, 6th ed., by Siedel and Aalberts Title and Insurance Three different types of Notice statutes: Bona-Fide Purchasers -- one who has paid purchase price in good faith and without knowledge of prior unrecorded deed or mortgage. 1. Notice Statute - Unrecorded deed. Not valid against later Bona-Fide purchasers. Bona-Fide purchasers win. 2. Notice-Rule Statute - Later Bona-Fide Purchaser only has priority if he records first. Thus, subsequent Ps must be (1) bona-fide purchasers, and (2) record 1st to have priority. 3. Race Statute - First to record wins, therefore, A has title. No need for subsequent purchaser to be bona-fide. Chapter 8

110Real Estate Law, 6th ed., by Siedel and Aalberts Title and Insurance Chain of Title Tract Index - Index at recorder of deeds which allocates a separate page to each piece of property in the county. All recorded deeds and other documents relating to property are listed on this page. Grantor-Grantee Index - These records show ownership of land passing from one person to another. Because most marketable title legislature only requires us to look back 40 years, start with current owner and go back 40 years. Chapter 8

111Real Estate Law, 6th ed., by Siedel and Aalberts Title and Insurance Proof of Title Abstract - Brief history of instruments appearing in county record that affect title to property Title Insurance - Issued by a title insurance company after it reviews recorded instruments. Contract by which a title insurance company agrees, subject to terms of policy, to indemnify the insured against loss sustained as a result of defects in title other than specific title exceptions listed on policy. OWNER'S POLICY: If a Seller wishes to obtain a title insurance policy to prove his or her ownership in land, he applies to title insurance company and agrees to pay a fee. MORTGAGE POLICY: Only protects lender for amount of mortgage loan and risks that affect security interest or lender. Chapter 8

112Real Estate Law, 6th ed., by Siedel and Aalberts Title and Insurance Standard Coverage - Generally insures against defects in public records, plus things such as forged documents, documents of incompetent grantors, incorrect marital statements. Extended Coverage - Everything covered with standard policy, plus additional risks which could be discovered by: 1. Walk-through of property; 2. Inquiries made of persons in possession; or 3. Examining the survey Chapter 8

113Real Estate Law, 6th ed., by Siedel and Aalberts Title and Insurance POLICY DOES NOT INSURE: (EXCEPTIONS) -- some or all of these can be waived by title ins. companies if presented with appropriate documentation or higher premium. Specific>1. Defects or liens listed in policy which are specific to property. General>2. Unrecorded defects >3. Rights of parties in possession. >4. Questions regarding survey. (EXCLUSIONS) 1. Losses resulting from government regulations of property. 2. Losses resulting from government right to take property. 3. Defects or liens: created by insured, known by insured, but NOT by company, causes no loss to insured, created after policy issued. Chapter 8

114Real Estate Law, 6th ed., by Siedel and Aalberts Title and Insurance HAZARD OR PROPERTY INSURANCE MORTGAGE INSURANCE - Property insurance obtained by ME or by MR for benefit of ME to insure security interest. HOMEOWNER'S INSURANCE - Property insurance obtained by Purchaser as homeowner. When should it be purchased? Types of Coverage: Basic, Broad and Comprehensive (note exclusions) Liability provisions often protect insured from accidents caused by insured or on insureds premises Chapter 8

115Real Estate Law, 6th ed., by Siedel and Aalberts Financing the Real Estate Purchase OTHER COMMON SECURITY DEVICES: security interests, guarantees and suretyship MORTGAGE - Conveyance of land given as transaction security for payment of debt. Definitions: Mortgagor or Debtor - Gives interest in real estate as security for debt. Mortgagee or Creditor - Person who takes interest in property as security for debt. Mortgage Loan - Loan obtained to pay portion of purchase price for real property which is secured by real property. Deed of Trust - Regular mortgage only involves two parties - borrower and lender, with a Deed of Trust, Borrower conveys land to third party (Trustee) in trust for benefit of lender or party who holds mortgage note. Chapter 9

116Real Estate Law, 6th ed., by Siedel and Aalberts Financing the Real Estate Purchase Purchase Money Mortgage - or - Seller Financed Mortgage - Seller takes a mortgage from Borrower for any amount of purchase price not paid. Equitable Mortgages - Any written instrument by which parties show intention that real estate be held as security for payment of debt will be considered an equitable mortgage. ALSO an instrument intended as a regular mortgage, but which contains a defect will be treated as an equitable mortgage. Example where court finds equitable mortgage to protect creditor Example where court finds equitable mortgage to protect Debtor Title Theory States - Adheres to view that mortgage gives mortgagee some form of legal title to land. Lien Theory States - View that mortgage is not really a conveyance of land, but only a lien. Mortgagee has lien to secure the debt. Chapter 9

117Real Estate Law, 6th ed., by Siedel and Aalberts Financing the Real Estate Purchase THE MORTGAGE TRANSACTION Application and Commitment 1. Loan Application serves two purposes: a. Provides information to lender so lender can determine whether to make loan. b. Defines term of loan contract. 2. Commitment lender communicates acceptance to loan applicant Mortgage Note Note - The promise or agreement to repay debt in definite installments with interest. Chief function of Note is to make Mortgagor personally liable for payment of mortgage debt. Chapter 9

118Real Estate Law, 6th ed., by Siedel and Aalberts Financing the Real Estate Purchase Cont. Mortgage Note Notes can be negotiable or non-negotiable - Is negotiable when its holder, i.e., lender, may transfer his or her right to payment to third party by assigning instrument over to third party. Meets requirements of Section 3-104 of UCC. Three main provisions of a Note 1. Payment Plans - Most payable monthly and payments computed by number of different payment plans. 2. Interest - Charge for the use of money. Generally, the interest portion of each payment covers charge for using borrowed money during previous month. a. Usury b. Prepayment 3. Acceleration - Mortgage and Note usually provide that if B defaults, the entire principal sum shall become immediately due and payable -- acceleration clause. Chapter 9

119Real Estate Law, 6th ed., by Siedel and Aalberts Financing the Real Estate Purchase Requirements of a Mortgage Note 1. Promise to pay 2. Amount of debt (principal amount) 3. Interest Rate 4. Time and amount of principal and interest payments 5. Reference to the notes security 6. Mortgagors signature Due on Sale Clauses - Prevents a future purchaser of property from being able to assume old loan at old low rate of interest. Clause provides that upon the sale of property by Borrower, lender has choice of either declaring entire debt immediately due and owing or permitting a qualified buyer to assume loan at current market rates. Enforceable under Garn - St. Germain Depository Institutions Act of 1982. Chapter 9

120Real Estate Law, 6th ed., by Siedel and Aalberts Financing the Real Estate Purchase The Mortgage - The conveyance of land given as security for payment of debt Describing the Debt - Must be defined with reasonable certainty to prevent subsequent purchasers or creditors from acquiring rights superior to those of Mortgagee. Parties must also be described with reasonable accuracy. Accurate Description of Property Mortgage Sets Forth Duties and Obligations of Mortgagee and Mortgagor Duties of Mortgagor 1. Pay debt in accordance with terms of Note 2. Pay real estate taxes on property given as security. 3. Maintain adequate insurance to protect lender in event of casualty 4. Obtain lender's authorization in event of major alterations to property 5. Maintain property in good repair Chapter 9

121Real Estate Law, 6th ed., by Siedel and Aalberts Financing the Real Estate Purchase Default Provisions 1. If Mortgagor fails to meet any of his duties, generally causes default of mortgage. Generally, grace period provided before lender exercises right to foreclose. 2. Note: Use of acceleration clause - which allows lender to accelerate maturity of debt -- to declare entire debt due and owing. 3. Also, if Mortgagor fails to maintain property, pay taxes or pay insurance premiums, generally Mortgagee has right to maintain or make necessary payments. 4. Finally, some Mortgages provide that in addition to foreclosure remedies of 1) power of sale or 2) judicial foreclosure, Mortgagee may appoint receiver to take care of property. Chapter 9

122Real Estate Law, 6th ed., by Siedel and Aalberts Federal Laws Governing Real Estate Lending Fair Lending Laws 1. Fair Housing Act See notes in section regarding Brokers 2. Equal Credit Opportunity Act - prohibits lenders from discriminating against credit applicants on basis of race, color, religion, national origin, sex, marital status, age or dependence on public assistance. State laws and local ordinances may increase the number of protected classes. a. Lender must notify loan applicant with 30 days of credit decision. b. Lender must provide notice of right to receive copy of appraisal. c. Special rules regarding collecting information about principals or borrowers spouse. 3. Community Reinvestment Act Attempt to eliminate redlining. Redlining is a practice of refusing to make mortgage loans or issue insurance policies in certain areas without regard to economic qualifications of applicant. Chapter 9

123Real Estate Law, 6th ed., by Siedel and Aalberts Federal Laws Governing Real Estate Lending 4. Home Mortgage Disclosure Act (HMDA) Requires lender to report statistical information to the federal government regarding applications and loans to purchase or refinance a home. Information is collected for multi-family and single- family residences. 5. Home Ownership and Equity Protection Act (HOEPA) Created to protect borrowers from predatory lending practices. Chapter 9

124Real Estate Law, 6th ed., by Siedel and Aalberts Federal Laws Governing Real Estate Lending Disclosure of Loan Terms and Procedures Truth in Lending Act - Enacted in 1969. Object of law was to require credit institutions to inform borrowers of true cost of obtaining credit. 1. Regulation Z issued by FRB to implement Truth in Lending. 2. All residential real estate transactions are protected by Act. 3. Additionally, credit transactions with individuals are covered for personal, family, household and agricultural uses NOT exceeding $25K. 4. Regulation Z does NOT apply to business or commercial loans. Chapter 9

125Real Estate Law, 6th ed., by Siedel and Aalberts Federal Laws Governing Real Estate Lending Real Estate Settlement Procedures Act 1. Enacted: (a) to ensure that both Buyer and Seller in residential real estate transactions have knowledge of all settlement costs; (b) eliminate kickbacks or referral fees that tend to increase certain settlement services; and (c) reduce amount needed to place in escrow account 2. RESPA applies to all purchases financed by a federally related mortgage loan; loan secured by first or subordinate lien on residential property; and residential property contains 1 to 4 family structure. Chapter 9

126Real Estate Law, 6th ed., by Siedel and Aalberts Federal Laws Governing Real Estate Lending 3. REQUIREMENTS OF RESPA a. Lender must provide copy of HUD book, "Settlement Costs and You" to every person making loan application within three days. (General information regarding settlement costs.) b. Lender must provide Borrower with good faith estimate of settlement costs within three business days after submission of loan application. Amounts stated as dollar amount or dollar range. c. Loan closing information must be prepared on special HUD form which details transaction -- Itemizes all charges imposed by lender. d. Borrower permitted to review settlement statement one day prior to closing. e. Prohibits kickbacks (i.e., when insurance company pays lender for referring one of lender's customers to agency.) f. Limits amount Borrower required to pay into escrow account at closing. Chapter 9

127Real Estate Law, 6th ed., by Siedel and Aalberts Termination of Mortgage Relationship Payment of Entire Mortgage debt. Generally made when property is sold or refinanced. MORTGAGE DOES NOT HAVE TO BE TERMINATED IF PROPERTY CONVEYED TO THIRD PARTY. IT CAN SURVIVE CONVEYANCE -- Sale "Subject to" Mtg. and Mtg. Assumption Sale Subject to Existing Mortgage. Describes conveyance where third party accepts property "subject to" existing Mortgage. Third party takes property subject to mortgage lien, but has no personal responsibility to pay obligation. Mortgage Assumption. Grantee takes land encumbered by Mortgage and becomes personally liable for Mortgage debt. NOTE -- When a third party has assumed a Mortgage, the Mortgagor is still liable -- Mortgagor remains a surety -- a person equally liable with third party. Novation -- A release which Mortgagor can obtain from Mortgagee when he conveys property to third party. It prevents Mortgagee from going after Mortgagor for deficiency Chapter 9

128Real Estate Law, 6th ed., by Siedel and Aalberts Termination of Mortgage Relationship Foreclosure - Legal process by which property pledged as security in mortgage or trust deed is sold to satisfy the debt. TWO TYPES OF FORECLOSURE Judicial Foreclosure - Property pledged as security, sold by court order after Mortgagee gives sufficient public notice. Process: 1. Mortgagor defaults. 2. Mortgagee accelerates due date of all remaining monthly payments. 3. Mortgagee's atty. files suit to foreclose lien. 4. Court orders property to be sold. 5. Public sale is advertised and held. Real estate sold to highest bidder. 6. Third party who purchases property, purchases it free and clear of the Mortgage and all junior liens filed subsequent to Mortgage. 7. Junior liens are extinguished by foreclosure. Chapter 9

129Real Estate Law, 6th ed., by Siedel and Aalberts Termination of Mortgage Relationship Power of Sale - Foreclosure by Advertisement. Can only be utilized when loan document contains a power of sale clause. Mortgagee authorizes Mortgagor to sell property after default at a public sale without court proceedings. Notice Requirements. To foreclose, Mortgagee simply records notice of default in county register of deeds to give public notice of intended sale AND publishes advertisements in local newspapers which state total amount due and date of public sale. Sometimes, notices must also be posted on property in a conspicuous location. Chapter 9

130Real Estate Law, 6th ed., by Siedel and Aalberts Termination of Mortgage Relationship Principles of Equitable and Statutory Redemption Equitable Redemption Time between event of default and foreclosure. Permits Borrower or any other person with interest in real estate to pay lender the amount due, plus costs, and debt will be reinstated. Statutory Redemption Time period after the foreclosure sale whereby Borrower can pay back debt plus costs to reinstate debt. Only permitted in some states. Statutory redemption occurs by payment made to public officer who held sale or another person designated by law of amount of foreclosure sale plus interest. Mortgagor then holds land free and clear of mortgage and foreclosure sale AND any junior liens. If NO redemption made, purchaser owns property free and clear. Chapter 9

131Real Estate Law, 6th ed., by Siedel and Aalberts Termination of Mortgage Relationship POST SALE PROCEDURES 1. Deed executed by public official conducting sale, BUT deed is subject to any rights of redemption. 2. If sale price exceeds debt, Mortgagor or junior Mortgagees, if any, receive excess after expenses of sale are paid. 3. If sale price is less than debt, Mortgagee may recover deficiency from Mortgagor. Remember, this is only recoverable if Mortgagor signed a promissory note. 4. Sheriff's Deed - Delivered to Purchaser after foreclosure sale. All liens recorded before Mortgage are not affected. All liens recorded after Mortgage are extinguished, except special notice required for federal tax liens. Chapter 9

132Real Estate Law, 6th ed., by Siedel and Aalberts Land Contracts or Installment Contracts Definition Contract between Seller and Purchaser whereby Seller agrees to convey title to P when P has paid the purchase price and has performed other obligations specified in the contract. Similar to a Purchase Agreement in that S agrees to convey title at a later point after satisfying certain conditions and similar to a Mortgage since it includes specific financing terms and imposes obligations on P which are similar to those imposed on a mortgagor. Usually paid over a number of years. Peculiarities 1. Title to real estate remains in Seller's name during term of Contract. 2. Purchaser does NOT receive deed until entire purchase price has been paid AND terms of contract fully complied with. Seller retains fee ownership legal title. 3. Purchaser takes possession when contract is signed, generally pays property taxes, insurance premiums and maintains property. Purchaser has possession, therefore, equitable interest in property. Chapter 9

133Real Estate Law, 6th ed., by Siedel and Aalberts Land Contracts or Installment Contracts WHY USE A LAND CONTRACT? SellerPurchaser 1. To offer attractive financing terms to 1. Lower down payment. sell property.2. More flexibility 2. More flexible.3.Can purchase home even if poor credit risk. 3.Not subject to as many regulations and policies regarding mortgages. 4. More alternatives in event of Purchaser's default. 5. Retains interest in land -- greater control over use of land Chapter 9

134Real Estate Law, 6th ed., by Siedel and Aalberts Land Contracts or Installment Contracts DEFAULT - Two remedies Forfeiture - (Most popular) - Terminates contract. Seller sometimes retains all payments made and evicts Purchaser. Payments already made to S are kept by S as either liquidated damages or as reasonable rental value of premises for time P in possession. Foreclosure Similar to foreclosure of mortgage. Chapter 9

135Real Estate Law, 6th ed., by Siedel and Aalberts Monetary Encumbrances Liens Real Estate Taxes Mortgages Mechanics Liens Judgments Environmental Super Liens Nonmonetary Encumbrances Encroachments Licenses Deed Restrictions/Covenants Easements 1. Appurtenant 2. In Gross 3. By Necessity 4. By Prescription Encumbrances Chapter 9

136Real Estate Law, 6th ed., by Siedel and Aalberts Encumbrance = charge or burden on property that may diminish its value or obstruct use of property, BUT does not necessarily prevent transfer of title. Two Types of Encumbrances 1. Monetary encumbrances or liens -- affect title 2. Non-monetary encumbrances -- affect physical condition and use of property Encumbrances Chapter 9

137Real Estate Law, 6th ed., by Siedel and Aalberts Statutory Liens Lien = right of creditor to have Debtor's property sold and be paid from proceeds. Allows creditor to force sale of property. Example: ABC Stereo Comp. sells Tom a $1,000 stereo. Tom only has $200, he finances remaining $800 with ABC Stereo Comp. Tom fails to make final payment. ABC Stereo Comp., which has a lien on stereo can repossess and sell to recoup loss. Voluntary -- most common is mortgage where owner of property agrees to use title to real estate as security for a debt. Liens also arise by operation of contract. (i.e., Contract with electrician to perform work on home) OR Involuntary - by operation of law. (i.e., tax lien, judgment liens, Super liens - environmental) Chapter 9

138Real Estate Law, 6th ed., by Siedel and Aalberts Mechanics Liens When does owner subject real property to lien? Contract states -- lien claimant must show he was hired by landowner or his agent to furnish labor or materials. Consent states -- sufficient for lien claimant to show owner had knowledge of and consented to doing work, even if work ordered by person other than Owner, i.e., Tenant. (Courts recognize that Landlord is often powerless to prevent Tenants from improving, therefore need affirmative consent of Landlord. (i.e., provision in lease permitting additions.) Chapter 9

139Real Estate Law, 6th ed., by Siedel and Aalberts Cont. Mechanics Liens Who is entitled to lien? Driven by state statute -- Generally, both contractor and subcontractor can recover, anyone who furnishes labor or materials to improve real estate. In some states, the landowner is responsible for making sure subcontractor is paid even when landowner has paid general contractor in full and general contractor has NOT paid subs. Always best for landowners to get lien waivers from general contractor before making any payment. Chapter 9

140Real Estate Law, 6th ed., by Siedel and Aalberts Cont. Mechanics Liens What type of work is covered ? Mechanics' liens only available for work which results in permanent improvements. (i.e., if contractor installs removable shelving in home which could be removed without serious damage to home, no lien could attach since shelving did not constitute permanent improvement.) Chapter 9

141Real Estate Law, 6th ed., by Siedel and Aalberts Cont. Mechanics Liens What's the procedure for claiming a lien? Every lien claimant MUST record lien statement with register of deeds specifying amount due and nature of improvement within certain time after work completed. This appears on title work. Then claimant must commence an action to enforce lien within a limited time period after work is completed. If court decides lien is valid -- property is sold to satisfy debt. Chapter 9

142Real Estate Law, 6th ed., by Si

1real estate law, 6th ed., by siedel and aalberts real estate law, 6 th edition by george j. siedel,...

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