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Property Review SessionSpring Semester 2013

Professor Ausness

Chapter 1: Original Title

As the name implies, original title involves the acquisition of property rights that are not derived from those of a previous owner. Original title can be based on discovery, capture or creation.

The Rule of Capture

Title to wild animals (ferae naturae) is acquired by capture, that is, by killing, wounding or confining the animal so that its freedom of movement is terminated.

The "Rule of Capture" has also been applied to fugitive substances, such as surface water, ground water, oil and gas. Under this approach, one who has physical access to the resource, such as an appurtenant or overlying landowner, may acquire title to it by removing, extracting or transporting it from its original situs.

Creation

This mostly applies to intellectual property.

Chapter 2: Subsequent Possession

Title by subsequent possession is derivative and is acquired from a previous owner. Methods of acquisition include purchase, devise, intestate succession, find, adverse possession and inter vivos gift.

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1. Acquisition by Find

When property is lost, a finder who is lawfully on the land usually has good title against everyone except the true owner. However, in certain situations, the owner of the land where the property is found may be deemed to have constructive possession that defeats the rights of the finder. This is known as the principle of ratione soli. Courts are especially likely to apply this doctrine to finders who are trespassing in order to protect owners against trespassers.

If property is mislaid, the owner of the land where the property is found usually prevails over the finder. On the other hand, if property has been abandoned by its owner, a finder who is rightfully on the land usually prevails over the landowner. Property is deemed to be abandoned when its owner voluntarily gives up possession with no intention of reclaiming the property.

The concept of relative title is applicable to finders. That is, A's right or title to a piece of property may be better than B's, a subsequent finder, but not as good as O's, the true owner.

Example: O, the owner of a valuable watch, loses it. The watch is found by A. A then loses the watch and it is subsequently found by B. Because A's title is relatively better than B's, A can recover the watch from B. However, O's title is better than either A or B. Therefore, O can recover the watch from either of them.

2. Adverse Possession: Requirements

To acquire title by adverse possession, there must be an actual entry onto the property that gives exclusive possession to the adverse possessor. This possession or occupancy must be open and notorious, adverse and under a claim of right, and continuous for the statutory period. It must not be permissive.

In most states, the claim of right (or claim of title) requirement is satisfied on an objective basis, but some states also look to the adverse possessor's subjective state of mind. According to the "good faith" approach, the adverse possessor must

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really think he or she owns the property. However, the exact opposite state of mind is required under the "aggressive trespasser" standard. There, the adverse possessor must believe that he or she does not own the land but intends to occupy it anyway. This approach is often applied to boundary disputes.

3. Adverse Possession: Color of Title and Constructive Adverse Possession

An adverse possessor who claims the land based on an invalid written instrument, such as a deed, can acquire title by adverse possession to the all of the property described in the written instrument even though he or she physically occupies only a portion of the property in question. This assumes that the adverse possession obtained the written instrument in good faith and not fraudulently.

4. Adverse Possession: Tacking

Ordinarily, when an adverse possessor abandons the property before perfecting title, the statute of limitations starts to run all over again if another adverse possessor subsequently enters the property. However, if there is a succession of interest between the first adverse possessor and the second (known as privity of estate), the second adverse possessor gets credit for the time spent by the first adverse possessor. This is known as tacking. The second adverse possessor may take advantage of tacking when he or she succeeds to the first adverse possessor's interest as the result of an inter vivos conveyance, devise in a will or under the laws of intestate succession.

5. Adverse Possession: Disabilities and Tolling Statutes

Disability must exist at time of first entry (i.e., when cause of action for trespass first accrues). Disabilities that arise after this time do not toll the statute of limitations. The alternative limitation period begins to run when disability ends or when disabled person dies. Using the alternative limitation period is optional with the true owner.

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Example: O, the true owner of Blackacre is out of possession and insane in 1980 when A, an adverse possessor, first enters Blackacre under claim of right. O dies intestate in 1995. O's sole heir, B, is 10 years old at the time of O's death. The statute of limitations for adverse possession is 21 years from the time of first entry or 10 years after the true owner's disability is removed. The age of majority is 18 years. The 21-year statute of limitations expires in 2001. The alternative statute of limitations expires in 2005, that is, 10 years after O dies. It does not matter that B is a minor and, therefore, under a disability, when O dies.

6. Personal Property: Void and Voidable Title

Void Title: One who obtains possession of personal property by theft has void title, meaning no title at all. Ordinarily, a thief cannot convey good title to anyone, even a bona fide purchaser. However, one who has void title, or his or her successor in interest, can obtain good title when the statute of limitations for replevin bars the true owner from bringing suit to recover possession of the property. On the other hand, the statute of limitations is tolled as long as the property is fraudulently concealed.

Voidable Title: When a person obtains possession from true owner by fraud, that is, where true owner has voluntarily transferred possession to this person, he or she has voidable title.

The true owner can recover the goods from the original transferee. However, as long as the transferee has possession of the goods, he or she can transfer good title to a bona fide or good faith purchaser, thereby cutting off any rights the true owner would have had against the bona fide purchaser.

A bona fide purchaser is one who takes the goods without notice of the rights of the true owner and who pays fair value for the goods.

Entrustment: The Uniform Commercial Code § 2-403 (2) provides that if transfers possession of goods to a merchant who deals in goods of that kind, the merchant can transfer whatever title the entruster has to one who purchases the goods from the merchant in the ordinary course of business.

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Due Diligence: The O'Keefe case applied a due diligence rule to stolen property. Under the traditional rule, the statute of limitations for recovery of the property by means of a replevin action is not tolled unless the transferee fraudulently conceals the property. A few states apply the rules that govern adverse possession of real property to personal property as well. However, this approach raises questions about whether the open display of the property in a private residence is sufficiently "open and notorious" to enable the transferee to acquire title to the property by adverse possession.

Under the due diligence rule, the statute of limitations for replevin is tolled as long as the true owner exercises due diligence to recover the stolen property. What constitutes due diligence will depend on the value of the property and what resources are available to the true owner to discover the whereabouts of the stolen property.

7. Acquisition by Gift

An inter vivos gratuitous transfer of title to personal property (that is, a gift) requires: (1) donative intent, (2) delivery of the property, and (3) acceptance of the property by the donee. (In contrast, gratuitous inter vivos transfers of real property require execution, delivery and acceptance of a written instrument.

There are three forms of delivery of tangible personal property: (1) manual, (2) constructive, and (3) symbolic. Manual delivery requires a physical transfer of possession of the property itself from the donor to the donee. Constructive delivery is usually achieved by physical transfer of keys or other objects that permit access to the property. Symbolic delivery involves the transfer of a writing that identifies the property in question and evidences the fact that the donor is transferring title to this property to the donee.

Although manual delivery was traditionally preferred, the trend is toward expanding the types of situations where symbolic delivery is acceptable.

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Chapter 3: Possessory Estates

The fee simple, fee tail and possessory life estates were known as freehold estates because the owner possessed seisin. A leasehold was not a freehold estate.

The fee simple absolute is the highest inheritable estate in real property. Other types of fee simple estates include: (1) the fee simple determinable, (2) the fee simple subject to condition subsequent and the fee simple subject to executory limitation. Another type of fee simple, the fee simple conditional, is obsolete. Another type of inheritable fee estate, the fee tail, is only recognized in a few states and can easily be converted into a fee simple by the tenant in possession, known as the tenant in tail.

1. Fee Simple Determinable

A fee simple determinable is an inheritable possessory estate in which the grantor retains a reversionary future interest known as a possibility of reverter. The property automatically property reverts back to the grantor if the condition or restriction is violated.

Example: O conveys Blackacre "to A so long as the property is used for school purposes."

A has a fee simple determinable

O has a possibility of reverter

A's interest will terminate automatically when the stated event happens. O's possibility of reverter is considered to be a vested interest and can last indefinitely.

2. Fee Simple Subject to Condition Subsequent

A fee simple subject to condition subsequent is an inheritable possessory estate in which the grantor retains a reversionary interest known as a right of entry

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(or power of termination). The grantor must affirmatively exercise a right of entry in order to terminate a fee simple subject to condition subsequent.

Example: O conveys Blackacre "to A & his heirs, but if the property is not used for school purposes, O shall have the right to re-enter and re-take the property."

A has a fee simple subject to condition subsequent. O has a right of entry or a power of termination.

When the condition is broken, A's interest does not terminate until O exercises his or her right of entry.

O's right of entry is considered to be a vested interest and can last indefinitely.

3. Fee Simple Subject to Executory Limitation

In a fee simple subject to executory limitation property is transferred to a third person if the condition is broken instead of reverting to the grantor.

Example: O conveys Blackacre "to the School Board, but if the property ceases to be used for school purposes during the next 21 years, then to A and his heirs."

The School Board has a fee simple subject to executory limitation.

A has an executory interest.

O has no interest at all.

Title to the property automatically shifts from the School Board to A if the condition is broken. The fee simple subject to executory limitation differs from other two defeasible estates because the grantor creates a future interest in a third person instead of retaining a reversionary interest.

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A's executory interest is subject to the Rule Against Perpetuities and must vest or fail to vest within a life in being plus 21 years. In the above example, A's executory interest is valid because it will necessarily vest (by divesting School Board) or fail to vest (and thus terminate) within 21 years.

4. Inheritability

Possessory interests, such as a fee simple determinable, fee simple subject to conditions subsequent or fee simple subject to executory limitation can be freely transferred inter vivos. In addition, these interests can be devised by will and transferred to the owner's heirs by intestate succession.

At common law, future interests, such as a possibility of reverter or right of entry, were inheritable under the laws of intestacy, but could not be devised by will or transferred by an inter vivos conveyance. However, nowadays, these interests (including executory interests) are usually freely transferrable and devisable.

5. Life Estate

A life estate is an estate of limited duration; it terminates when the occupant or life tenant dies. It is possible to create a terminable life estate which may terminate before the death of the life tenant if some event occurs. For example, it was a popular custom in the eighteenth and nineteenth centuries for husbands to give their wives life estates which would terminate if the widow remarried.

Life estates can be transferred. The transferee is deemed to have a life estate pur autre vie. It will terminate when the original life tenant dies. At common law, if the transferee died before the original life tenant, the property went to the general occupant, that is, the first person to take possession. The general occupant could occupy the property until the original life tenant died.

Nowadays, life estates usually involved personal property, such as stocks and bonds, held in trust. The holders of such life estates are referred to as income beneficiaries.

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Chapter 4: Future Interests

Future interests are classified as those retained by the grantor when a possessory estate is conveyed to another person. These include possibilities of reverter and rights of entry as well as reversions. Future interests may also be created in someone other than the grantor. These include vested remainders, contingent remainders and executory interests.

1. Reversions

A reversion does not have to be created expressly; it is implied by the fact that the grantor has transferred less than his or her original interest in the property. What has not been transferred is automatically retained. A reversion is considered to be a vested interest even though in some cases, it may terminate.

Example: O conveys Blackacre "to A for life."

A has a life estate.

O has a reversion.

Although a reversion is a vested interest, it may terminate when another interest, such as a contingent remainder, vests.

Example: O conveys Blackacre to A for life; remainder to B and her heirs if B reaches the age of 21.

O retains a reversion at the time of the conveyance, but it will terminate when and if B reaches the age of 21.

2. Vested Remainders

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A remainder is vested if it given to a living, ascertained person and is not subject to a condition precedent. Vested remainders may be: (1) indefeasibly vested; (2) subject to open or partial divestment; or (3) subject to complete divestment.

An indefeasibly vested remainder is one that is certain to become possessory once the preceeding possessory estate or estates terminate.

Example: O conveys Blackacre "to A for life, then to B & her heirs."

A has a possessory life estate.

B has an indefeasibly vested remainder. B does not have to survive A in order to acquire Blackacre. If B predeceases A, B's heirs or devisees will take in B's stead.

O has no interest at all.

A vested remainder subject to open (or subject to partial divestment) involves a transfer to a class that is still open.

Example: O conveys Blackacre "to A for life, then to A's children & their heirs." Assume that A has at least one child (named B) at the time of the conveyance.

A has a possessory life estate.

B has a vested remainder subject to open. B's interest is subject to open because the remainder is a class gift and the class is still open, that is, B's interest will be reduced proportionally if A has additional children.

O has no interest at all.

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A vested remainder subject to complete defeasance is an interest that may be terminated and transferred to someone other than the grantor if a condition subsequent occurs. The potential transferree has an executory interest.

Example: O conveys Blackacre "to A for life, then to B & her heirs, but if B does not survive A, then to C & her heirs."

A has a possessory life estate.

B has a vested remainder subject to complete divestment.

C has an executory interest.

C's executory interest will divest B if B fails to survive A. At B's death, C's executory interest will become an indefeasibly vested remainder and at A's death, C will have a possessory feed simple absolute in Blackacre. On the other hand, if B is alive when A dies, C's executory interest will fail and B will have a possessory fee simple absolute in Blackacre.

O has no interest at all.

3. Contingent Remainders

A remainder may be contingent because: (1) all of the remaindermen are unborn; (2) the remaindermen cannot be ascertained; or (3) the remainder is subject to a condition precedent.

A remainder is contingent when the remaindermen are unborn.

Example: O conveys Blackacre to A for life, then to A's children & their heirs. Assume that A has no children at the time of the conveyance.

A has a possessory life estate.

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The unborn children of A have a contingent remainder.

O has a reversion. Blackacre will revert to 0 if A dies without issue.

A remainder is also contingent if the remaindermen cannot be identified.

Example: O conveys Blackacre to "A for life, then to the heirs of B." Assume that B is alive at the time of the conveyance.

A has a possessory life estate.

The heirs of B have a contingent remainder because they cannot be ascertained until B dies.

O has a reversion.

When B dies, the heirs will be ascertained. Assuming that A is still alive, the heirs of B will then have an indefeasibly vested remainder.

A remainder is contingent when it is subject to a condition precedent.

Example: O conveys Blackacre "to A for life, then to B & his heirs if B survives A."

A has a possessory life estate.

B has a contingent remainder. The remainder is contingent because it is subject to a condition precedent. B must survive A.

O has a reversion.

B's remainder fails if B dies before A. On the other hand, if A dies before B, B will have a possessory fee simple absolute. O's reversion will also terminate at that time.

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It is possible to have alternative contingent remainders. This occurs when two contingent remainders are subject to opposing or inconsistent conditions.

Example: O conveys Blackacre "to A for life, then to B & her heirs if B survives A, and if B does not survive A, then to C & his heirs."

A has a possessory life estate.

B has an alternative contingent remainder.

C has an alternative contingent remainder.

O has a reversion.

If A dies before B, B's contingent remainder will vest and C's will fail. B will have a possessory fee simple absolute and O's reversion will also fail. On the other hand, if B dies before A, B's contingent remainder will fail and C's contingent remainder will become an indefeasibly vested remainder. O's reversion will terminate at this time as well. At A's death, C will have a possessory fee simple absolute.

4. Executory Interests

An executory interest is a future interest, created by the Statute of Uses in 1536, that fully or partially cuts off or divests a present possessory estate or a vested remainder. An executory interest does not cut off interests, such as contingent remainders, that are not vested.

A springing executory interest divests the interest of the grantor, while a shifting executory interest cuts off an interest that has been created in someone other than the grantor.

A springing executory interest divests the grantor's interest.13

Example: O conveys Blackacre "to A & his heirs one year from now."

O has a fee simple subject to executory limitation.

A has a springing executory interest.

A shifting executory interest cuts off the interest of a third party.

Example: O conveys Blackacre to A and his heirs, but if B marries C, then to B and her heirs.

A has a possessory fee simple subject to executory limitation.

B has a shifting executory interest

If B marries C, A's fee simple will be divested and B will then have a possessory fee simple absolute.

O has no interest.

Executory interests can also cut of vested remainders.

Example: O conveys Blackacre "to A for life, then to B & his heirs, but if B dies before reaching the age of 21, then to C & her heirs." Assume that B is 15 at the time of the conveyance.

A has a possessory life estate.

B has a vested remainder subject to complete divestment.

C has a shifting executory interest.

O has no interest at all.

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5. Destructibility of Contingent Remainders

The traditional rule required that contingent remainders vest before or at the termination of the preceding freehold estate.

Example: O conveys Blackacre "to A for life, then to B & her heirs if B reaches 21. Assume that A dies before B reaches the age of 21. B's contingent remainder would terminate at A's death, regardless of whether B ever reached the age of 21, and Blackacre would revert to O.

Most states have abolished the destructibility doctrine. Under the modern rule, contingent remainders that would otherwise terminate are converted into executory interests.

Example: O conveys Blackacre "to A for life, then to the first child of A to reach the age of 21. At A's death, his only child, B, is 10 years old.

Under the modern rule, Blackacre reverts to O as a fee simple subject to executory limitation. B's contingent remainder is converted into a springing executory interest. If B reaches the age of 21, B's interest will become a fee simple absolute and divest O of his interest in Blackacre. On the other hand, B's executory interest will fail if B dies before reaching the age of 21.

6. The Rule Against Perpetuities

According to the traditional Rule Against Perpetuities, known as the “what might happen” approach, a contingent interest, such a contingent remainder, a vested remainder subject to open or an executory interest, must be certain to either vest or fail to vest within a maximum period of 21 years after the death of an ascertainable person who is alive at the time the interest is created.

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Example: O conveys Blackacre "to A for life, then to A's first child to reach 21." Assume that no child of A has reached the age of 21 at the time of the conveyance.

A has a possessory life estate. This is a vested interest and, therefore, is not subject to the Rule Against Perpetuities.

The contingent remainder in A's children satisfies the Rule Against Perpetuities because any child of A who satisfies the condition precedent will necessarily do so within 21 years of A's death.

Notice that the interest of A's children is a contigent remainder because it is subject to a condition precedent, i.e. reaching the age of 21. When the first child of A reaches the age of 21, assuming that A is still alive, he or she will have an indefeasibly vested remainder and the contingent remainders of A's other children will fail.

Example: O conveys Blackacre "to A for life, then to A's first child to reach the age of 25." No child of A has reached the age of 25 at the time of the conveyance.

The contingent remainder in A's children violates the Rule Against Perpetuities because it is not certain to vest or fail to vest within 21 years of A's death, and there are no other living persons who can serve as measuring lives. A's children cannot serve as validating or measuring lives because they do not constitute a closed class.

The Rule Against Perpetuities also applies to class gifts. For a class gift to be considered vested, the class must be closed (that is, each member of the class must be identified) and all conditions precedent must be satisfied for each class member within the perpetuities period.

Vested remainders subject to open (which necessarily involve class gifts) are treated as contingent, not vested, under the Rule Against Perpetuities.

Example: O conveys Blackacre "to A for life, then to A's children." A has one child, B, at the time of the conveyance.

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A has a possessory life estate.

B has a vested remainder subject to open.

B's remainder satisfies the Rule Against Perpetuities because the class (A's children) will close at A's death. A serves as the validating life.

Example: O conveys Blackacre "to A for life, then to A's children for life, then to A's grandchildren & their heirs."

A has a possessory life estate.

A's children have vested remainders for life. This is a class gift; however, it satisfies the Rule Against Perpetuities because the class will close at A's death. A's grandchildren have a vested remainder subject to open. However, their interest does not satisfy the Rule. A cannot serve as the validating life because the class will not close until all of A's children die and this may occur more than 21 years after A's death. In order for A's children to serve as the validating lives, all of then must be in existence at the time the grandchildren's interest is created. This requirement is not satisfied since A may have additional children. Finally, because the class of A's grandchildren children has not yet closed, they cannot serve as validating lives either.

Watch out for the Fertile Octogenarian Rule.

Example: T devises a $1,000,000 in trust to A for life, then to A's children for their joint lives, and upon the death of the last surviving child of a, to A's grandchildren then living. A is an 80-year-old woman.

One could argue that the class of A's children is closed because A cannot biologically have any more children at the age of 80. If that were the case, A's children could serve as the validating lives for A's grandchildren. That is, the interests of the grandchildren would vest when the last child of A died.

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However, under the traditional "what might happen" approach, we presume that A might have additional children. Consequently, the class of A's children is not closed and A's children cannot serve as validating lives for A's grandchildren.

Another sneaky rule is the Unborn Widow Rule.

Example:

A has a possessory life estate; the widow has a contingent remainder for life; and A's issue have a contingent remainder in fee simple.

The widow's interest is valid because A can serve as the validating life. Her interest will vest, if at all, at A's death. However, the interest of A's children violates the Rule Against Perpetuities. Only issue who are alive at the widow's death will take a share of Blackacre. If we knew for certain that A's widow was alive at the time of the conveyance, she could serve as the validating life. Remember that A’s present wife may not married to A at his death; someone else may be his widow. Therefore, it is possible that the widow might not be born at the time of the conveyance. In that case, the widow could not serve as a validating life since she is not "life in being." A cannot serve as a validating life either because his widow may die more than 21 years after A dies.

Keep in mind that the Rule Against Perpetuities is concerned with vesting and not with possession. This can be illustrated by changing the unborn widow example slightly.

Example: O conveys Blackacre to A for life, then to A's widow, if any, for life, and then to A's children and their heirs.

In this case, A's children have a vested remainder subject to open. Although the interest of a's children does not become possessory until A's widow dies (assuming A is married at his death), their interest vests at A's death when the class closes. For this reason, A can serve as the measuring life for A's children and their interest is valid.

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Chapter 5: Concurrent Estates

There are three concurrent estates: (1) the tenancy in common, (2) the joint tenancy and (3) the tenancy by the entirety.

1. The Tenancy in Common

Normally, tenants in common have interests that are inheritable and may be transferred inter vivos by deed. Such transfers do not affect the validity of a tenancy in common; the heir, devisee or transferree simply steps into the shoes of the former tenant in common. The interests of tenants in common do not have to be equal. A tenant in common may terminate concurrent ownership by asking a court to partition the property. (It is possible for tenants in common to have only a joint life estate.)

2. The Joint Tenancy

The interest of a joint tenant is not inheritable; if a joint tenant dies, his or her interest terminates. Although nothing passes to the surviving joint tenants when one joint tenant dies, the value of the interest of the survivors is effectively increased since there is one less person with a beneficial interest in the property. There can be any number of joint tenants, but each joint tenant's interest must be equal.

Joint tenants must share the four unities of time, title, interest and possession. Thus, a joint tenancy is automatically converted into a tenancy in common if one joint tenant conveys his or her interest to a third party because the unities of time and title are broken. Any joint tenant can ask a court to partition the property and this will also destroy a joint tenancy.

3. Tenancy by the Entirety

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Only married couples can acquire and hold property as tenants by the entirety. In addition to the four unities associated with joint tenancy, the tenants by the entirety also have the unity of marriage. Like joint tenants, tenants by the entirety have a right of survivorship in the property. However, neither tenant by the entirety can unilaterally sever a tenancy by the entirety by purporting to transfer his or her interest in the property to a third party. Both parties must join in the sale. A tenancy by the entirety will be automatically converted into a tenancy in common or a joint tenancy if the married couple is divorced.

4. Rights and Obligations of Co-tenants

Each tenant is said to have an undivided interest in the property. This means that a tenant has an equal right to occupy the entire property, regardless of the size of his or her share. Furthermore, in the absence of ouster or an express agreement, a tenant in possession has no obligation to pay rent to a tenant in possession. Any tenant can rent the property, but must pay the other tenant or tenants a pro-rata share of the rent.

5. Partition

Any tenant in common or joint tenant can bring a lawsuit to have the property partitioned. The parties can also partition the property by voluntary agreement. A tenancy by the entirety cannot be partitioned unless the married couple gets a divorce.

Partition can be physical (or in kind) or it can be by sale. Physical partition means that the property is physically divided, with each tenant receiving a share as a fee simple. When partition by sale occurs, the property is sold and the proceeds of the sale are divided on a pro rata basis between or among the tenants.

Chapter 6: Landlord and Tenant

1. Types of Leases

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There are three types of leases: (1) term of years, (2) periodic tenancy, and (3) tenancy at will.

1. Term of Years

A term of years, which can last for any period, is characterized by a starting date and an ending date. The tenancy ends automatically when the period expires and there is no need for either party to give notice.

2. Periodic TenancyA periodic tenancy also lasts for a specific period of duration, such as a week

or a month or a year, but is automatically renewable unless one party or the other gives timely notice of his or her intention not to renew.

3. Tenancy at Will

A tenancy at will does not last for any fixed period of duration, but can be terminated by either party at any time. In addition, it will automatically end if either the landlord or the tenant dies.

4. The Covenant of Quiet Enjoyment (Constructive Eviction)

Constructive eviction is based on the theory that the landlord has breached the covenant of quiet enjoyment (which can be express or implied) by creating, or in some cases allowing, a condition to exist which substantially deprives the tenant of beneficial use of the premises. Since the covenant to pay rent and the covenant of quiet enjoyment are dependent, the tenant can unilaterally terminate the lease if the landlord's conduct amounts to a constructive eviction. In theory, constructive eviction should apply to both residential and commercial leases.

5. The Implied Warranty of Habitability

In many states, a residential lease gives rise to an implied warranty of habitability. This "warranty," which cannot be disclaimed, requires the landlord to

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keep the premises in safe and habitable condition. If this warranty is breached, the tenant may vacate, withhold rent or deduct the cost of repairs from the rent. The tenant is also entitled to "loss of bargain" damages, damages for discomfort and emotional distress and possibly punitive damages. The implied warranty of habitability applies to residential property. However, there is a split of authority as to whether it applies to commercial property as well.

6. Abandonment

At common law, if a tenant abandoned the property before the end of the lease term, the landlord was under no obligation to find another tenant. Instead, the landlord could allow the property to remain vacant and sue the tenant for accrued rent at the end of the lease term. Most courts now require landlords to exercise due diligence to find a new tenant in order to mitigate the damages that would otherwise be owed by the original tenant.

Chapter 7: The Land Transaction

1. Contracts for the Sale of Land

a. The Statute of Frauds

The Statute of Frauds requires that a contract for the sale of land must be in writing and must be signed by the party against whom enforcement is sought. Ordinarily a contract for the sale of land is signed by both buyer and seller. The contract must also describe the property and state the selling price. The contract will usually set a date for the transfer of title and may contain other provisions and conditions as well.

b. Marketable Title

Unless the contract provides otherwise, the seller agrees to provide the seller with marketable title to the property. Marketable title is one whose validity is not subject to reasonable doubt and which a reasonable and informed buyer paying fair value for the property would accept.

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Title based on adverse possession may qualify as "marketable" under this standard even though someone other than the seller is the owner of record. However, to qualify as marketable, the property must be free of encumbrances, such as liens, easements and covenants unless they are expressly excluded.

c. Equitable Conversion

Under the doctrine of equitable conversion, when the parties execute a valid contract of sale, the seller is deemed to have transferred equitable or beneficial title to the buyer, while retaining legal title. Legal title must be transferred from the seller to the buyer by delivery of a deed. Traditionally, the buyer assumed responsibility for any damage to the property between the time the contract was executed and the time of closing.

d. The Seller's Duty to Disclose Defects

Under the traditional rule of caveat emptor, the seller had no duty to disclose defects in the property. However, the seller would be liable to the buyer if he or she made false representations of fact or engaged in fraudulent concealment of defects. The majority rule now appears to impose on the seller a duty to disclose all known conditions that materially affect the value of the property unless they are obvious. In some cases, the seller may also be required to disclose information about off-site conditions. If the seller breaches the duty to disclose, the buyer may rescind the contact or sale or may sue for damages if title has already passed.

e. The Implied Warranty of Quality or Habitability

Many states now provide that developers and builders of new housing impliedly warrant that the building has been properly constructed. This obligation does not apply to private sellers who are not in the business of building or selling homes. However, because privity of contract is not required in most states, subsequent purchasers can still sue the original builder or developer for breach of the implied warranty of quality and recover for physical damage to property as well

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as economic losses such as loss of bargain or the cost of repairing the defective condition.

The implied warranty of quality seems to be limited to new residential construction. Purchasers of commercial buildings must rely on express warranties. It appears that the implied warranty of quality can be disclaimed, although this right to disclaim is limited. Finally, unlike the UCC's implied warranty of merchantability that applies to the sale of goods, the duty imposed on sellers by implied warranty of quality seems to be one of reasonable care rather than strict liability.

f. Remedies for Breach

When one party defaults, the other party may sue for rescission, specific performance or damages. Damages include loss of bargain damages, special damages and sometimes punitive damages. The measure of loss of bargain damages is the difference between the purchase price and the actual market value of the property at the time of the breach. The parties may include a liquidated damages clause in the contract which a court will enforce if the liquidated damage amount is reasonable.

2. Deeds

There are three types of deeds: (1) general warranty deeds; (2) special warranty deeds; and (3) quitclaim deeds.

a. General Warranty Deed

A general warranty deed contains three present and three future warranties of title. The grantor warrants against any failure of title arising from acts committed by himself or his predecessors in title prior to the conveyance.

b. Special Warranty Deed

A special warranty deed warrants against acts committed by the grantor, but not against acts committed by the grantor's predecessors in title.

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c. Quitclaim Deed

A quitclaim deeds contains no warranties or title and merely purports to convey whatever interest, if any, the grantor might have in the property.

3. Warranties of Title

The present warranties of title include: (1) the covenant of seisin, (2) the covenant of right to convey, and (3) the covenant against encumbrances (that is, liens, leases, easements, etc.). The present warranties are breached, if at all, at the time of the conveyance and the statute of limitations begins to run at that time. Normally, present warranties extend only to the grantor's immediate grantee and do not run with the land.

Future warranties of title include: (1) the covenant of general warranty, (2) the covenant of quiet enjoyment, and (3) the covenant of further assurances. Future warranties may be breached any time after the conveyance and may be enforced against whoever made them, that is, predecessors in title. However, a predecessor in title is only liable for the purchase price that he or she received for the property.

4. Mortgages and Other Financing Devices

Buyers may employ a variety of financing devices to pay for the purchase of real property when they are unable to pay the full purchase price in cash. These financing devices include mortgages, deeds of trust and installment sales contracts.

a. Mortgages

A mortgage is a consensual lien placed on real property to secure a debt. The debtor also signs a promissory note for the amount of the debt. If the debtor defaults on the loan, the creditor may sell the mortgaged property in order to pay off the loan. In addition, the debtor may be personally liable on the promissory note for any deficiency if the proceeds of the sale of the mortgaged property are

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not sufficient to pay off the loan. The debtor is known as the mortgagor and the creditor is known as the mortgagee.

A debtor may obtain more than one mortgage on a particular piece of property. The mortgage that is obtained first is known as a first mortgage and is senior to any subsequent mortgages. If the debtor defaults on a second mortgage, the second mortgagee can foreclose on the mortgaged property but must pay off the first mortgage before receiving any of the proceeds of the foreclosure sale.

Example: A purchases a house for $100,000 from B. A makes a $10,000 down payment, obtains a $75,000 first mortgage from C, a bank, and obtains a $15,000 second mortgage from B. A subsequently defaults and C forecloses. The house only brings $50,000 at the foreclosure sale. C gets $50,000. C may be able to recover the balance of the debt from A if A has any assets. Likewise, B may try to recover the balance of A's debt to him by suing him personally. However, B will get nothing from the sale of the house because his mortgage was junior to C's.

When the debtor defaults, the creditor normally asks the court to order a foreclosure sale. This sale is known as a judicial foreclosure sale and is conducted by the sheriff or some other public official. Many states permit the creditor to include a power of sale provision in the mortgage which allows the creditor to conduct a private foreclosure sale. In either case, the creditor can only recover the amount of the debt and must turn over any surplus, known as the equity of redemption, to the debtor. Most courts now hold that the creditor who sells the property in a private foreclosure sale must exercise due diligence to protect the debtor’s equity of redemption.

b. Deed of Trust

When a deed of trust is used, the debtor transfers title to the property to a trustee. The trustee has the power to sell the property at a private foreclosure sale if the debtor defaults. The trustee is required to re-convey the property to the debtor when the debt is paid off.

c. Installment Sales Contract

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When an installment sales contract is used, the seller retains title to the property. The contract of sale typically requires the buyer to make a series of equal payments to the seller (with interest) until the debt is paid. The contract also requires the seller to convey title to the buyer at the end of payment period.

Installment sales contracts often provide that a buyer who defaults can be removed from possession and will forfeit all payments previously made pursuant to the contract (as liquidated damages). However, courts now tend to protect buyers against such forfeiture provisions and require the creditor to conduct a foreclosure sale. Thus, as far as debtors’ rights are concerned, there is not much difference between a mortgage and an installment sales contract.

Chapter 10: Servitudes

Servitudes are non-possessory interests in land. They include: (1) easements, (2) real covenants and (3) equitable servitudes.

1. Easements

An easement is a nonpossessory interest in the land of another. Most easements are easements appurtenant. This means that the owner of one tract of land, known as the dominant tenement, is entitled to a benefit from the land of another. The land that is subject to this burden is known as the servient tenement.

Example: If the owner of tract A has the right to cross tract B to reach a public highway, this would be an easement appurtenant. Tract A would be the dominant tenement and tract B would be the servient tenement.

If a tract of land is burdened, but no adjacent land benefits from the easement, the easement is known as an easement in gross.

Example: The telephone company has the right to put telephone poles and wires across A's land. A's land is burdened, but there is no nearly property belonging to

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the telephone company that is benefitted. A's land is subject to an easement in gross.

If the easement is an affirmative easement, the holder of the easement can enter the land that is burdened by the easement or maintain something on it.

Example: The owner of tract A has the right to cross tract B to reach a public highway. The easement that burden's tract B is an affirmative easement because the owner of tract A can enter tract B in order to exercise the easement.

If the easement is a negative easement, the burdened land is subject to a restriction but there is no right to enter the land.

Example: The owner of tract A has agreed to not to construct any building on the property that is more than 20 feet in height in order to prevent solar collectors on tract B from being blocked from the sun. Tract A is subject to a negative easement.

a. Implied Easements

Most easements are express easements and must be created by a written instrument executed in accordance with the requirements of the Statute of Frauds. When the grantor reserves an easement in the land that is sold, the instrument is known as a reservation; when the grantor creates an easement in favor of the land that is sold, the instrument is known as a grant. Easements may also be implied by prior use or by necessity. In addition, easements can arise through prescription.

i. Easement Implied from Prior Use

An easement implied from a prior use may arise if a common owner uses his or her land in such a way that one portion benefits from the use while another portion is burdened. This is known as a quasi-easement. An implied easement may come into existence when the land is subsequently divided into two or more portions.

ii. Easement by Necessity28

An easement by necessity is created when property, owned by a common owner is divided into one or more separately-owned portions in a way that leaves one portion land-locked. This is known as strict necessity. An easement by necessity is implied to allow one owner to cross the land of the other to reach a public road.

iii. Prescriptive Easements

An easement can arise by prescription, a concept that is similar to adverse possession. In the United States, only affirmative easements can be acquired by prescription. To acquire an easement by prescription, one must use the land for the requisite period in a manner that is open, notorious and hostile to the rights of the true owner.

Example: O and A are adjacent landowners. For many years, A crossed O's land without O's permission in order to reach a public road. After the prescriptive period has expired, A will have acquired a legal right to cross O's land. In other words, A will now have an affirmative easement appurtenant or right of way across O's land.

In most states, to stop the prescriptive period from running, a landowner must physically prevent a person from using the land or must bring a lawsuit against him or her. However, a few states follow the “lost grant” theory which bases prescription on the presumption of a lost grant and the landowner’s acquiescence of the prescriptive user. In this case, the landowner can stop the statute of limitations from running by conduct that is inconsistent with such acquiescence. This rebuts the presumption of a lost grant.

b. Termination of Easements

An easement may be created that is of limited duration. An easement may also be terminated by merger, release, prescription or abandonment.

c. Negative Easements29

A negative easement imposes a restriction on the burdened land. Negative easements can be either appurtenant or held in gross. In England, there were only four types of negative easements that were recognized: light, air, lateral and subjacent support and flowage.

In the United States, prescriptive negative easements are not recognized. However, most states now recognize three additional types of negative easements: scenic easements, solar easements and conservation easements.

2. Real Covenants

A real covenant is a promise respecting the use of land. An affirmative covenant requires the promisor, or his/her successor in interest, to pay money or perform some act or service. A restrictive covenant requires the promisor, or successor in interest, to refrain from doing something on the land.

According to Spencer's Case (1583), in order for real covenants to benefit or burden successors in interest: (1) the contracting parties must intend to bind their successors in interest; the burden (and possibly the benefit) of the covenant must "touch and concern" the land; and there must be privity of estate between the original parties and between one of the original parties and a successor in interest. Real covenants are subject to the Statute of Frauds and cannot arise by implication.

Privity of estate includes horizontal and vertical privity. Horizontal privity refers to the relationship between the original contracting parties. In most states, the horizontal privity requirement is satisfied if there is a grantor-grantee relationship between the contracting parties at the time the covenant is made. However, the recently-published Third Restatement of Property does not require horizontal privity for either the burden or the benefit to run to remote parties.

Vertical privity refers to the relationship between one of the original parties and the present owner of the land that is either benefited or burdened by the covenant. Under the Third Restatement of Property, if the covenant is negative in nature, the restriction can be enforced by all users and possessors of land that is burdened or benefited. On the other hand, the burdens and benefits of affirmative

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covenants generally run those who satisfy the traditional requirements of vertical privity. However, the burden of affirmative covenants will run to adverse possessors.

3. Equitable Servitudes

An equitable servitude is nothing more than a promise respecting the use of land that is enforced in equity. Like real covenants, equitable servitudes can be either affirmative or negative (i.e. restrictive). When residential subdivisions are involved, equitable servitudes are often called “deed restrictions.”

In order to enforce a promise as an equitable servitude: (1) the original promisor and promisee must intend to bind their respective successors in interest; (2) the promise must "touch and concern" the land; and (3) remote parties must have notice of the promise in order to be bound by it. Horizontal privity of estate is not required for an equitable servitude to run with the land, nor is vertical privity required for the burden to run.

Normally, equitable servitudes are subject to the Statute of Frauds just like real covenants. They may be placed in individual deeds are recorded on a subdivision plat. However, most states will allow equitable servitudes to arise by implication under the theory of reciprocal negative easements. Under this theory, when a landowner, pursuant to a common scheme of development, places a restriction in the deed of a buyer, the grantor's remaining land is subject to the same restriction (which is really an equitable servitude). This restriction will bind all subsequent grantees who take with actual or constructive notice. Moreover, the physical character of the area may be sufficient to put a buyer on "inquiry" notice to discover the restriction in another landowner's chain of title even though it is not in the buyer's.

Equitable servitudes may terminate at the end of a specified period of time as provided in the instrument that creates them. In addition, a court in equity may refuse to enforce an equitable servitude if there is a change in the character of the area, the parties have abandoned or waived their right to enforcement or because of laches or estoppel.

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4. Constitutional and Statutory Restrictions

Equitable servitudes and real covenants are subject to constitutional and statutory limitations. Thus, restrictions on the use of property may be held invalid under state law due process grounds if they are unreasonable. In addition, restrictions that discriminate on the basis of race, religion or national origin may be struck down on equal protection grounds. Finally, restrictions may be held invalid if they conflict with the Fair Housing Act, Americans with Disabilities Act or some other federal or state antidiscrimination statute.

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