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

Introduction This lesson will discuss: the different types of possessory interests in real property (estates in land) the different ways title to real property can be held © 2011 Rockwell Publishing

Estates in Land Interests in real property Interest: An interest in real property is a right concerning the property or a claim against it. Interests may be: possessory (also called estates) nonpossessory (also called encumbrances) (Nonpossessory interests are covered in the next lesson.) © 2011 Rockwell Publishing

Estates in Land Types of estates Two basic categories: freehold estates (include title) leasehold estates (do not include title) © 2011 Rockwell Publishing

Types of Estates Freehold estates Two main types of freehold estates: fee simple estates life estates © 2011 Rockwell Publishing

Freehold Estates Fee simple estates Most common type of freehold estate. Highest and most complete form of land ownership. Can potentially last forever. Perpetual, transferable, and inheritable. Also called a fee simple absolute. © 2011 Rockwell Publishing

Fee Simple Estates Fee simple absolute Fee simple absolute is the default: If a fee simple owner transfers title, grantee receives fee simple absolute unless deed makes it clear that grantor intended otherwise. © 2011 Rockwell Publishing

Fee Simple Estates Qualified fee Qualified fee: Fee title with a condition or qualification attached. Estate will end if condition no longer met or if specified event occurs. Also called fee simple defeasible. © 2011 Rockwell Publishing

Freehold Estates Life estates Other category of freehold estates (aside from fee simple estates) is life estates. Life estate: limited in time lasts only as long as a specified person is alive © 2011 Rockwell Publishing

Life Estates Example James donated his farm to the Children’s Aid Society, but retained a life estate in the farm. James has exclusive possession and use of farm until he dies. When James dies, farm will belong to the Children’s Aid Society. While James is alive, he is the life tenant. © 2011 Rockwell Publishing

Life Estates Duration Measuring life: Life on which a life estate depends. May be life tenant’s own life. “To Alice for life” - Alice’s life estate ends when she dies. But someone else’s life can be used instead (pur autre vie). “To Alice for the life of Beverly” -Alice’s life estate ends when Beverly dies. © 2011 Rockwell Publishing

Life Estates Future interests Future interest: Ownership interest that will become possessory when life estate ends. When life estate created, future interest created at same time. Future interest may be: estate in reversion estate in remainder © 2011 Rockwell Publishing

Future Interests Estate in reversion Margarita grants a life estate to John. If she stipulates that the property will come back to her (or to her heirs) when John dies, Margarita and her heirs have an estate in reversion. © 2011 Rockwell Publishing

Future Interests Estate in remainder But if Margarita stipulates that the property will go to Sam (not back to her or her heirs) when John dies, then Sam has an estate in remainder. Sam would be called a remainderman. If no remainderman named, future interest is estate in reversion. © 2011 Rockwell Publishing

Life Estates Duties of a life tenant Must pay taxes, assessments, other liens. Must not commit waste by permanently damaging property or using up resources. Must allow holder of future interest to inspect property periodically. © 2011 Rockwell Publishing

Summary Freehold Estates Fee simple absolute Qualified fee Life estate Life tenant Measuring life Future interest Estate in reversion Estate in remainder © 2011 Rockwell Publishing

Types of Estates Leasehold estates Leasehold estate: Limited, temporary estate created by a lease contract. Parties = landlord and tenant Tenant gets right to exclusive possession and use of property. Landlord retains title to property. © 2011 Rockwell Publishing

Leasehold Estates Types of leasehold estates Estate for years Periodic estate Estate at will Tenancy at sufferance © 2011 Rockwell Publishing

Types of Leasehold Estates Estate for years Estate for years: Leasehold estate that lasts for any fixed term. Created only by express agreement. Ends automatically when term expires. Notice of termination not required. Also called tenancy for years or term tenancy. © 2011 Rockwell Publishing

Types of Leasehold Estates Periodic estate Periodic estate: Leasehold estate that is not limited to a specific term. Continues from rental period to rental period until landlord or tenant gives notice of termination. Required notice period generally equals rental period. Also called periodic tenancy. © 2011 Rockwell Publishing

Types of Leasehold Estates Estate at will Estate at will: Tenant in possession with landlord’s consent for indefinite period. Rent may be paid on irregular basis or not at all. Can be terminated at any time with proper notice. Also called tenancy at will. © 2011 Rockwell Publishing

Types of Leasehold Estates Estate at will Differences between estate at will and other leasehold estates: Estate at will cannot be assigned to another person. Estate at will ends automatically upon death of either party. © 2011 Rockwell Publishing

Types of Leasehold Estates Tenancy at sufferance Tenancy at sufferance: Tenant took possession under valid lease, but no longer has right to possession. Tenant stays on after lease expires, without landlord’s consent. Not a true estate; tenant does not have a leasehold interest. Also called holdover tenancy. © 2011 Rockwell Publishing

Summary Leasehold Estates Estate for years Periodic estate Estate at will Tenancy at sufferance © 2011 Rockwell Publishing

Methods of Holding Title Real property may be owned by: one individual more than one individual a business, agency, or other organization Depending on number and type of owners, title can be held in different ways. © 2011 Rockwell Publishing

Methods of Holding Title Ownership in severalty Ownership in severalty: Ownership by one individual. Also called sole ownership. Individual owner may be: natural person (human being) artificial person (legal entity such as corporation) © 2011 Rockwell Publishing

Methods of Holding Title Co-ownership Co-ownership: Ownership by two or more persons at the same time. Also called concurrent ownership. Three types of co-ownership in Washington: tenancy in common joint tenancy community property © 2011 Rockwell Publishing

Forms of Co-ownership Tenancy in common Tenancy in common: Most basic form of co-ownership. Default form of co-ownership: If one of the other forms does not apply or is not specified, it’s a tenancy in common. © 2011 Rockwell Publishing

Tenancy in Common Undivided interests Like other co-owners, tenants in common have undivided interests. They share possession of the whole property (unity of possession). In a tenancy in common, shares don’t have to be equal. Example: A and B own some land as tenants in common. A has a 1/4 interest and B has a 3/4 interest. © 2011 Rockwell Publishing

Tenancy in Common Transfer of interests One tenant in common is free to sell, will, or mortgage his interest without the consent of the other(s). © 2011 Rockwell Publishing

Tenancy in Common Partition Tenancy in common will end if: all co-tenants agree to sell the property, all agree to partition (divide) the property into separate parcels, or one co-tenant files a partition suit to force a division or sale. © 2011 Rockwell Publishing

Forms of Co-ownership Joint tenancy In a joint tenancy, two or more persons are joint and equal owners of a property. How joint tenancy differs from tenancy in common: Joint tenants must have equal shares. Joint tenants have right of survivorship. © 2011 Rockwell Publishing

Joint Tenancy Four unities Requirements for creation or continuation of a joint tenancy: unity of interest unity of title unity of time unity of possession © 2011 Rockwell Publishing

Joint Tenancy Right of survivorship Right of survivorship: Key feature of joint tenancy. When a joint tenant dies, her interest automatically passes to the surviving joint tenant(s). Joint tenancy interest cannot be willed and is not part of estate. © 2011 Rockwell Publishing

Joint Tenancy Termination Like tenancy in common, joint tenancy can be terminated through partition suit. Also, joint tenancy terminates automatically if any of the four unities is destroyed. If one joint tenant conveys interest, purchaser is tenant in common. But other co-tenants remain joint tenants in respect to each other. © 2011 Rockwell Publishing

Forms of Co-ownership Community property In Washington and certain other states, property owned jointly and equally by husband and wife is community property. © 2011 Rockwell Publishing

Community Property Basic rules In community property states: Everything owned by married couple that isn’t separate property of one spouse is community property of both spouses. Legal presumption that all property acquired during marriage is community property. © 2011 Rockwell Publishing

Community Property Definitions Separate property: property owned before marriage gift or inheritance acquired during marriage anything purchased with separate property funds profits or proceeds from separate property © 2011 Rockwell Publishing

Community Property Definitions Community property: All property (including money) acquired during marriage: through skill or labor, or using community funds or community credit. © 2011 Rockwell Publishing

Community Property Joinder requirement Signatures of both spouses necessary to: list, sell, or encumber community real property purchase property that will be community real property (By contrast, spousal approval usually not required for transfer of community personal property.) © 2011 Rockwell Publishing

Forms of Co-ownership Marital property in other states In non-community property states, property ownership by a married couple may be: no different than co-ownership by unmarried parties, tenancy by the entireties, or some other form of marital property. © 2011 Rockwell Publishing

Summary Co-ownership Ownership in severalty Co-ownership Undivided interests Tenancy in common Joint tenancy Four unities Right of survivorship Community property Separate property © 2011 Rockwell Publishing

Methods of Holding Title Business organizations How a business is organized affects how title to property is held. Syndicate: Group of individuals who pool resources to form a business enterprise. © 2011 Rockwell Publishing

Business Organizations Forms of organization Business may be organized as: general partnership limited partnership corporation limited liability company joint venture real estate investment trust © 2011 Rockwell Publishing

Business Organizations Partnerships Partnership: Association of two or more persons to conduct a business as co-owners and divide profits. Types of partnerships: general partnership limited partnership © 2011 Rockwell Publishing

Partnerships General partnerships In a general partnership, each partner has: ownership interest voice in management decisions right to share in profits obligation to share in losses and liabilities © 2011 Rockwell Publishing

General Partnerships Unlimited liability All partners have unlimited liability. Each may be held personally liable for debts and obligations of general partnership. © 2011 Rockwell Publishing

General Partnerships Property ownership Partnership property: acquired in partnership’s name, or acquired in name of one or more partners and deed refers to the partnership © 2011 Rockwell Publishing

General Partnerships Property ownership has right to use partnership property is not co-owner of the property and does not have a transferable interest in it But partner’s interest in partnership can be transferred. © 2011 Rockwell Publishing

Partnerships Limited partnerships Limited partnership: At least one general partner, plus one or more limited partners. More structured and regulated than general partnership. Must meet requirements of Uniform Limited Partnerships Act. Certificate of limited partnership filed with secretary of state’s office. © 2011 Rockwell Publishing

Partnerships Limited partnerships Limited partners have limited liability. Limited liability: Individual investor not personally liable for business’s debts. Originally, limited partners not allowed to participate in management and control. Now full participation permitted without jeopardizing limited liability. © 2011 Rockwell Publishing

Business Organizations Corporations Corporation: Owned by shareholders, who purchase shares as investment. Legal entity (“artificial person”). Enters into contracts, owns property, incurs liabilities. Potentially perpetual existence (no joint tenancy). © 2011 Rockwell Publishing

Corporations Securities Shares in a corporation are securities. Securities: Investment instruments such as stocks and bonds. Give investors financial interest in enterprise without managerial control. Sale of securities regulated by federal Securities & Exchange Commission (SEC). Only licensed securities dealers may sell securities. © 2011 Rockwell Publishing

Corporations Management Shareholders have: limited liability no direct managerial control Corporation is: governed by board of directors elected by shareholders managed day-to-day by corporate officers chosen by board © 2011 Rockwell Publishing

Corporations Double taxation Problem with corporate form: double taxation on all but smallest corporations. Corporation pays corporate income taxes on profits. Profits distributed to shareholders as dividends. Shareholders pay personal income taxes on dividends. © 2011 Rockwell Publishing

Business Organizations Limited liability companies Limited liability company: Combines advantages of partnership with advantages of corporation. All LLC members have limited liability, even managing members. No double taxation. © 2011 Rockwell Publishing

Business Organizations Joint ventures Joint venture: Two or more individuals or organizations join together for specific project. Not an ongoing business endeavor. No formal requirements for creation. © 2011 Rockwell Publishing

Business Organizations Real estate investment trusts REIT: Syndicate created by investors to finance large real estate projects. No double taxation if: 100+ investors 75% of assets invested in real estate 90% of income distributed to investors Investors have limited liability. Shares are securities, subject to federal regulation. © 2011 Rockwell Publishing

Summary Business organizations Syndicate General partnership Limited partnership Corporation Securities and Exchange Commission (SEC) Limited liability company (LLC) Joint venture Real estate investment trust (REIT) © 2011 Rockwell Publishing

Methods of Holding Title Co-ownership properties Three special types of properties involve co-ownership: condominiums cooperatives timeshares © 2011 Rockwell Publishing

Co-ownership Properties Condominiums Condominium owner: owns individual unit shares ownership of common elements with other unit owners (tenancy in common) Condominium governed by homeowners association (also called unit owners association or condo association). © 2011 Rockwell Publishing

Condominiums Common elements Common elements: Aspects of condo property for use by all residents. Also called common areas. Examples: lobby, elevators, pool © 2011 Rockwell Publishing

Condominiums Limited common elements Limited common elements: Common elements reserved for exclusive use of owners of specified units. Examples: parking spaces, balconies © 2011 Rockwell Publishing

Condominiums Units as separate properties Buyer of condominium unit: receives deed for unit finances purchase with separate loan obtains separate title insurance policy pays separate property taxes © 2011 Rockwell Publishing

Co-ownership Properties Cooperatives Cooperative may look just like condominium, but has very different ownership structure. Title to cooperative property held by single entity (usually corporation). Residents: own shares in the corporation have long-term proprietary lease on unit © 2011 Rockwell Publishing

Co-ownership Properties Cooperatives Cooperative project is: financed with single mortgage taxed as single property Rent paid by shareholder-tenant is share of co-op’s mortgage payment and operating expenses. Default by one tenant could result in foreclosure on entire building. © 2011 Rockwell Publishing

Co-ownership Properties Timeshares Some condos are offered for sale under a timeshare arrangement. Buyer purchases right to occupy unit during a certain time slot each year. © 2011 Rockwell Publishing

Co-ownership Properties Timeshares Washington Timeshare Act requires: disclosure statement registration of timeshare properties registration of timeshare salespersons (real estate licensees exempt) Buyers have right of rescission for 7 days after signing purchase agreement or receiving disclosure statement. © 2011 Rockwell Publishing

Summary Condos and Co-ops Condominium Homeowners association Common elements Limited common elements Cooperative Proprietary lease Timeshare Right of rescission © 2011 Rockwell Publishing