1. Unit 2: Property Ownership and Interests

2. I. The Concept of Property
A. The Bundle of Legal Rights (mnemonic is DEEP C) (see Figure 2.1) 1. Disposition—right to determine how to dispose of the property 2. Enjoyment—uninterrupted use without harassment or interference from a third party with a superior title 3. Exclusion—right to legally refuse to create interests for others 4. Possession—the right to occupy the premises 5. Control—the right to determine the use of the property within the framework of the law

3. I. The Concept of Property
Disposition
Enjoyment
Exclusion
Possession
Control

4. I. The Concept of Property
B. Appurtenances—rights or privileges that “run with the land” are passed with the property ownership unless legally severed 1. Improved Land versus Improved Lot a. Improved land usually refers to land that has a structure on it (a house) b. Improved lot means that basic services are available (electricity, phone, street access, etc.).

5. I. The Concept of Property
2. Subsurface and Air Rights a. Subsurface rights may be sold or leased separately from the property surface and include the right to remove natural resources from the ground. (1) Mineral rights can be deeded separately for particular minerals or be all inclusive. (2) Oil and gas rights have frequently been severed from the land in states like Texas. (3) North Carolina law now requires a property owner to disclose if oil and/or gas rights have been severed by a previous or current owner. This will be discussed in more detail under property disclosure requirements.

6. I. The Concept of Property
b. Air rights may also be sold or leased independently of surface ownership. (1) Solar or sun rights have become an ownership issue, primarily because of solar energy applications that require direct access to sunlight. (2) View rights, particularly scenic views from a property, have become increasingly valuable. (3) Cities and private owners can lease air space for enclosed pedestrian walkways over public streets and privately owned parcels or for elevated transit systems.

7. I. The Concept of Property
3. Water rights address the right to use adjacent water. a. Riparian rights—generally pertain to non-navigable waters (see Figure 2.2) (1) In North Carolina, adjacent landowners own the land under the non-navigable waters to the center. (2) In North Carolina, adjacent landowners own only to the banks of navigable waters.

8. I. The Concept of Property
Nonnavigable Navigable

9. I. The Concept of Property
b. Littoral rights—generally pertain to navigable waters with a tide (see Figure 2.3) (1) In North Carolina, adjacent landowners have unrestricted use of the navigable waters but only own up to the average high water mark. (2) The land between the high and low tide marks (the foreshore) is owned by the state of North Carolina.

10. I. The Concept of Property

11. I. The Concept of Property
(3) Natural action of water may affect the boundaries of land by: (a) Accretion—a gradual increase in land resulting from the deposit of soil by water. (b) Reliction—a gradual increase in land as a result of permanently receding or disappearing water. (c) Erosion—a gradual decrease in land caused by flowing water or other natural forces. (d) Avulsion—a rapid decrease in land caused by an act of nature such as a flood—property boundaries do not change.

12. I. The Concept of Property
4. Support rights require that owners of subsurface rights or adjacent property must not cause or facilitate the collapse of the property. a. Lateral support—adjacent property keeps the natural boundaries of the property in place. b. Subjacent support—use of subsurface rights must continue to support the surface of the property.

13. I. The Concept of Property
C. Real Property Versus Personal Property 1. Plants are fruits of the soil and fall into one of two categories: a. Fructus naturales—trees, perennial shrubbery, and grasses not requiring annual cultivation are real property. b. Fructus industriales—crops with a growing season of less than a year (annuals such as wheat, corn, vegetables, and fruit), known as emblements, are personal property.

14. I. The Concept of Property
c. An item of real property may be changed to personal property through severance. (1) A farmer that has sold his crop while it is still growing in the field has severed the crop from the land through a contract. (2) A seller that detaches a chandelier before selling the property has severed the fixture from the real estate. d. An item of personal property may become real estate through attachment. This process is called annexation. (1) Construction materials routinely become real estate. (2) Home improvement items such as ceiling fans are frequently annexed by homeowners.

15. I. The Concept of Property
2. Fixtures a. Fixture—an article that was once personal property but has been so affixed to land or a building that the law now recognizes it as part of the real estate b. Legal tests of a fixture: Total Circumstances Test (IRMA is mnemonic) (1) Intention of the annexor (most important factor) (2) Relationship of the annexor as well as the existence of an agreement (3) Method of annexation (4) Adaptation to real estate

16. I. The Concept of Property
c. Trade fixture—an article owned by a tenant and attached to rented space or a building for use in operating a business (i.e., supermarket shelving, retail checkout stands, or petroleum storage tanks) must be removed by the end of the lease term or it becomes the landlord’s property. d. Agricultural Fixtures—considered real property in North Carolina even if installed by a tenant farmer; tenant needs written permission of landlord to remove at end of lease.

17. I. The Concept of Property
e. To avoid confusion about which items are intended to be included in the sale, fixtures should be clarified when a property is listed and the sales agreement is negotiated by using the Fixtures Provision in both the Listing Agreement and the Offer to Purchase and Contract. f. Effect of the North Carolina Uniform Commercial Code (UCC) (1) In North Carolina, filing of a security agreement legally makes a financed fixture personal property until paid in full. (2) Title search should reveal any such agreements.

18. I. The Concept of Property
g. Manufactured Homes Versus Modular Homes
(1) Manufactured homes are factory built by HUD construction standards and have a HUD label located on the rear exterior wall or under the kitchen sink of the unit.
(a) Must be transportable in one or more sections with a permanent chassis
(b) Must be designed as a dwelling with or without a permanent foundation

19. I. The Concept of Property
(c) Also called trailers or mobile homes and are considered personal property that have a Vehicle Identification Number registered with the North Carolina Department of Motor Vehicles
(d) To convert to real property in North Carolina, the wheels, axles, and trailer hitch must be removed after the home is attached to a permanent foundation and then the DMV title must be cancelled.
(2) In North Carolina, modular homes are factory built by state building codes and become real property as soon as they are assembled on site.

20. II. Estates in Real Property
(see Figure 2.4)—determines the owner’s degree, quantity, nature, and extent of interest in real property
A. Nonfreehold or Leasehold Estates—possessory estates for fixed periods of time involving tenants
1. Estate for years
2. Estate from year to year
3. Estate at will
4. Estate at sufferance

21. II. Estates in Real Property
B. Freehold Estates—ownership estates for a potentially unlimited period of time 1. Fee simple estate—an estate of inheritance that is always legally transferable but not always free of encumbrances a. Fee simple absolute—no limitations on fee simple ownership; the highest type of interest in real estate recognized by law

22. II. Estates in Real Property
Fee simple defeasible—also called qualified (limited); may be lost by the occurrence or nonoccurrence of a specified event
(1) Fee simple subject to a condition subsequent—exists provided condition is not violated; former owner retains a future right of reentry through court proceedings
(2) Fee simple determinable—exists “so long as” limitation is met; former owner retains the possibility of an automatic reverter in the future

23. II. Estates in Real Property
2. Life estate—limited to the duration of a lifetime; either that of the owner or of another designated person a. Conventional life estate—created by the owner by deed or will for the lifetime of the new owner (life tenant) b. Life estate pur autre vie—created by the owner by deed or will for the lifetime of a third party called the measuring life. The measuring life has no ownership interest.

24. II. Estates in Real Property
c. Remainder and Reversion (1) Remainder interest—the grantor names a party to receive title at the end of the life estate. (See Figure 2.5) (2) Reversionary interest—the grantor does NOT name another party to receive title when the life estate terminates, therefore title reverts back to the grantor or the grantors’ heirs or devisees. (See Figure 2.6)

25. II. Estates in Real Property
d. Rights of life tenants (1) Rights of life tenant include all income/profit from property during tenancy, use of property resources to maintain property (estovers), and ability to mortgage or sell life interest. (2) Life tenant must pay real estate ad valorem taxes and special assessments arising during tenancy and interest on any pre-existing financing secured by the property. (3) Life tenant cannot permanently injure or waste the property.

26. II. Estates in Real Property
C. Tax Advantages 1. Legal life estate—A legal life estate is one created by statute rather than common law. 2. Homestead—a legal life estate involving the family home in some states that protects the at least some part of the home from most creditors. North Carolina has a very limited homestead exemption.

27. III. Ownership of Real Property
A. Ownership in Severalty—title vested in one natural or legal person or entity; sole ownership B. Concurrent Ownership; Co-ownership; Co-tenants—held by two or more persons or entities at the same time 1. Tenancy in common (see Figure 2.7) a. Two or more natural or legal owners b. Each owner with an undivided interest; unity of possession c. Interest does not have to be equal. d. Each owner may encumber or convey her interest. e. Each interest is inheritable; no right of survivorship possible.

28. III. Ownership of Real Property
2. Joint tenancy a. Two or more owners with equal interest delivered simultaneously by the same instrument (deed). In North Carolina, interest can be unequal. b. Joint tenants usually have right of survivorship between tenants; last surviving joint tenant will own the property in severalty (see Figure 2.8).

29. III. Ownership of Real Property
c. North Carolina does not favor the right of survivorship among the owners; North Carolina statutes provide that upon the death of a joint tenant, his estate does not pass to the surviving joint tenant(s), but instead goes to his heirs in the same manner as estates held by tenancy in common unless a right of survivorship is written in. Example: this is a joint tenancy with the right of survivorship. (1) A person newly acquiring an interest in the property will be a tenant in common with the original remaining joint tenants (see Figure 2.9)

30. III. Ownership of Real Property
3. Termination of co-ownership by suit for partition a. Available to tenants in common and joint tenants b. The court may physically divide the property or order it sold and divide the proceeds among the disputing owners

31. III. Ownership of Real Property
4. Tenancy by the entirety a. Special form of ownership for married couples only; must be married at the time that title is received. Property owned prior to marriage does not automatically convert to tenancy by the entirety upon marriage. In North Carolina, a purchase by married couple will convey as tenancy by the entirety by default unless otherwise requested. b. Equal, undivided interest with inherent right of survivorship for the husband and wife c. Both husband and wife must sign documents to encumber or convey the property d. No right of partition e. Terminated by death of a spouse, divorce, or mutual agreement

32. III. Ownership of Real Property
C. Common Interest Community Ownership 1. Condominium Ownership (see Figure 2.10) a. Created under horizontal property acts b. Owner of each unit has title to airspace and undivided interest in the common elements of the building or area. Limited common elements are a special type of common element restricted for the use of some units to the exclusion of others. No land is owned by individual owners. c. Can be for any type of real estate, not just residential

33. III. Ownership of Real Property
d. Distinguish between the architectural style and ownership form e. No right to partition condominium ownership f. Require periodic fees for common area expenses g. Individual ownership unit is assessed for real property tax h. Title to individual units can be likened like any other real estate ownership

34. III. Ownership of Real Property
i. Creation of a Condominium - The North Carolina Condominium Act of 1986—a condominium is created and established when the developer of the property executes and records a declaration of its creation in the county where the property is located. (1) Declaration must include any covenants, restrictions, or conditions on the property. (2) Developer must file a plat map or plan of the condominium property, buildings, and any other improvements.

35. III. Ownership of Real Property
(3) Developer must prepare a set of bylaws, which usually provide the following: (a) Creation of a unit owners’ association giving a vote to each unit owner (b) The election of a board of managers from among the unit owners (c) The duties of the board of managers (d) The compensation of its members (e) Their method of election and removal (f) Whether or not a managing broker is to be engaged (g) The method of collecting the unit owners’ association monthly dues from each member to cover the costs of management and maintenance of the common areas

36. III. Ownership of Real Property
j. Consumer Protection - North Carolina law also requires the developer to provide a public offering statement to the purchaser before the purchase contract is signed (1) There is a seven-day rescission period on the sale of new units in which the purchaser can cancel the sale and receive a full refund of any earnest money deposit that must be held in escrow for seven days. (2) Resale unit—a resale certificate detailing a monthly dues assessment and any other fees payable by a unit owner that must be given to a purchaser prior to conveyance. (3) There is no right of rescission on resales.

37. III. Ownership of Real Property
2. Cooperative Ownership a. Title to the building is held by a corporation or land trust. b. The purchaser is a shareholder who receives the following: (1) A stock certificate in the corporation (2) A proprietary lease to an individual unit for the life of the corporation

38. III. Ownership of Real Property
c. Shareholders pay fees/assessments to support the corporation’s expenses d. The cooperative building’s real estate taxes are assessed against the corporation as owner e. Gaining popularity in North Carolina

39. III. Ownership of Real Property
3. Town House Ownership a. Each town house unit is individually owned. Each unit owner belongs to the homeowners’ association that owns the common areas b. Unlike a condominium unit, the owner of each town house unit also independently owns at least the land on which the unit is built

40. III. Ownership of Real Property
4. Time-Share Ownership a. Can be either a fee simple interest (time-share estate) or a right to use (time-share use) b. It is any right to occupy a unit for at least five separate time periods over at least five years. The purchaser usually receives the right to occupy a certain unit for a specified time frame each year (one week is the most common). c. The North Carolina Time Share Act regulates the development and sale of time-shares. Time-share salespeople must be active real estate brokers under the supervision of the project broker.

41. III. Ownership of Real Property
d. Time-share developers can be fined $500 per violation of the act and/or have the project’s registration certificate revoked; there is no maximum penalty amount. The time-share developer is the only entity that the North Carolina Real Estate Commission can fine. e. Time-share purchasers must be allowed five days to cancel the purchase without penalty. The down payment or earnest money deposit must be held in the trust account for 10 days or until the contract is canceled and the money is refunded.

42. III. Ownership of Real Property
5. Planned Unit Development (PUD) a. A PUD is a method of real estate development that normally includes a variety of land uses. b. Flexible zoning is a major feature of a PUD development.

43. IV. Trusts
A. Used in estate planning to limit time and cost of probate. 1. Assets in trusts pass to heirs outside of probate (reduces time and taxes) B. A trust is a fiduciary agreement that allows a third party or trustee to hold assets on behalf of a beneficiary. 1. Trustor (grantor, settler) – the person that creates the trust 2. Beneficiary – person or entity that benefits from the trust 3. Trustee – the fiduciary who exercises control over the subject property according to the instructions of the trustor in the agreement.

44. IV. Trusts
C. Legal and tax implications are complex and vary. 1. Real Estate professionals should be careful in dealing with real estate assets held by a trust. 2. Seek out legal counsel when dealing with trusts.