(A speech to the Clatsop Association of Realtors in 2002)
By: Charles A. Hillestad
If you are reading this, you probably either own or hope to own property. It might be useful therefore for you to have familiarity with some of the legal terms regarding that ownership, especially when using the wrong word in the wrong place in a document like a purchase or sale contract can make literally a million dollar difference to you. Here is a ten minute short course that outlines some of the important considerations when dealing with property issues.
Types of Property
There are two principal types of property. The first is “real” property such as land, buildings, fences, swimming pools and other improvements. Real property is essentially the dirt, everything nailed, screwed, glued, or otherwise permanently attached to it plus the air space above it. Theoretically, it forms a three dimensional wedge along the surface boundary lines of the property extending downward to the center of the earth and up to the edge of the atmosphere.
There are of course restrictions on use imposed by government such as zoning regulations, or by mutual agreement such as subdivision covenants or by custom such as some types of easements. In other words, you do not have unfettered use of your own property and never had in our culture. Among other things for example, you cannot erect a tower so high that it interferes with the flight path of airplanes. The FAA governs that space. In some cases, you cannot even build so high as to block the view of neighbors if height restrictions exist.
Nor can you dig downward unrestrained. Sometimes such an excavation restriction might be a governmental prohibition against mining in your neighborhood. Or, it might be something as simple as the liability for damages you face when you dig down on your property and the resulting removal of the buttressing for your neighbor’s house causes it to collapse.
The second form of property is “personal” property. It comes in two types, the personal property you can touch and the personal property you can’t. The former is known as “tangible” property and includes items such as furniture, fixtures, equipment and inventory. The latter is called “intangible” property and involves such things as good will, business names, logos, copyrights, trade secrets and other forms of intellectual property.
Don’t let the ephemeral nature of intangible property mislead you. It is quite substantial for many purposes. Expect for instance, your business to be taxed on whatever intangible property it owns.
Some property might become a mixture of both real and personal property such as trade fixtures. Trade fixtures are often semi permanently attached to real estate in some way, but are capable of being moved later. Even whole buildings can be removed from their foundations and relocated. That can create a “grey area” or ambiguity. Therefore, when documenting transactions make sure all ambiguities are cleared up.
This will make a critical difference as to things like leases, loans and taxes. As to leases, suppose, for example, you merely lease the space for your business. Suppose, further, the business is a restaurant. Your landlord owns the real estate obviously. However, suppose you need a commercial kitchen and elect to put in your own restaurant kitchen equipment at your own expense. If you do, you certainly want to make sure you are legally permitted to take it with you when the lease expires. Otherwise, you might have to leave it for the landlord. If nothing is said about the equipment, there is a potential risk of the attached type of equipment being deemed to be automatically converted to real estate once installed. The way to avoid any risk is to have the parties agree otherwise in advance in the original lease or in a subsequent amendment document granting you permission to remove the specified kitchen trade fixtures on expiration of the lease.
Similarly, if you own the equipment, but are getting a loan, you may or may not be willing to let the lender take a security interest against it. Remember, if you do, you probably cannot borrow a second time against it and certainly cannot sell it until the loan is paid off or modified, an occasionally daunting task. Read the loan fine print carefully as to what the lender is taking as security for repayment of the loan. Sometimes lenders get greedy and want to have a “blanket” clause encompassing everything as being encumbered by the security for the loan. That makes it difficult if you are ever later in a temporary cash squeeze and you need some unencumbered assets on which to get a new or additional loan.
This ambiguity as to “attached” equipment and whether it is real or personal property also makes a difference regarding taxes. If, for instance, such kitchen equipment like the oven hood attached to the wall is declared to be “personal” property, you can fully depreciate it over just a few years, i.e. write off a portion of its cost against your taxes. On the other hand, if it is “real estate”, then it might be decades before it can be fully depreciated. Make sure you are fully aware how property is labeled and the consequences of such labeling.
Ways to Own Property
There are four principal ways for ownership of property. It can be individually owned (i.e. "John Doe") which, upon death, would transfer to the heirs pursuant to instructions in that individual’s will, if any, or by intestate succession if no will existed.
Or, ownership can be a tenancy by the entirety, usually a husband and wife situation, where the relationship is specified in the original deed to the parties ("John and Mary Doe, as husband and wife"). In this case, the law assumes by such language that the parties intended upon death of one spouse for the surviving spouse to automatically get all the property once a death certificate is recorded given proof of that fact.
Joint tenancy is another alternative ("John Doe and Tom Green, with rights of survivorship"). Technically, some states, like Oregon, do not have joint tenancies per se, but the same effect of automatic transfer on death of one of the owners is accomplished if words indicating survivorship is intended are clearly included in the document conveying original title to the parties named.
Or, it could be a tenancy-in-common ("John Doe and Tom Green"). Here there is no automatic transfer to the survivor title holder. Instead, upon death of one, the heirs of the deceased person get the interest of the deceased. It is possible that the survivor title holder might coincidentally be the heir, but that does not happen automatically. If not, then the survivor title holder has to deal with a new co-owner.
Everything except ownership by an individual is deemed to be a type of co-ownership of property. There are other ways to have multiple parties involved in property. These include trusts and business entities such as corporations, partnerships and limited liability companies. But, despite the fact that these entities might have multiple "sub-owners" such as shareholders, the entities themselves are really considered just single "individuals" in the eyes of the law. These entities though do have the advantage of allowing the businesses to potentially continue operating on death of a trustee or shareholder because it is the entity itself that owns the property, not the individuals that constitute the entity.
Subdividing Property
So far, the discussion has been on the types of property and types of title to property. Now we will be looking into the various ways to subdivide and transfer title to property you own or plan to buy.
You can own less than all the property. In other words, you can give away pieces of the property to others by sale, gift or lease. You can transfer, for instance, some of the space by selling off, say, the northwest quarter. That is what the phrase “subdivision” is usually referring to in real estate contexts.
It can be other severances though. You can transfer some specific right such as the water rights allowing someone else to divert the water on your land. Depending on the water laws of your particular state, it can be severed entirely and dry up your land. Similarly, you can sell the subsurface mineral rights allowing others to extract it. Or, you can grant an easement for a utility company to string power lines across your land in the airspace above or under the ground. Sometime a utility company or a city can take the easement whether you want to give it to them or not. That is known as the condemnation power of government. Either way, once it takes place, you no longer own everything to be owned on your parcel of property.
Title
There are different types of “title” to property which describes what is owned and by whom. The best type of title to property for ownership purposes is called "fee simple" title which means you (whether "you" are an individual, a group or a corporation) own it all.
Owning by fee simple title though does not necessarily mean others might not have interests in the property as well. As discussed above, often times, there are easement holders, mortgage holders, lien holders, and lessees. There also might be covenants or reservations of record giving rights to others. Each means, for limited purposes, others have some piece of title or some sort of say in what can be done with the property. The ususal analogy is to think of property as a bundle of sticks which you can hold all yourself or give some to others to hold.
Less desirable "title", at least from a purchaser’s prospective, is being a purchaser under a "contract for sale", sometimes called a contract for deed, which means the seller still owns title, but some day you will ultimately get title if you finish paying for the property. A contract for sale is a document describing, in essence, future title.
Whatever is done, make sure the documents are properly recorded in the appropriate governmental records because that is the only completely safe way to give unarguable notice to all when title has changed. When there is a difference between actual title and record title, often it is record title that will carry the day. In Oregon, with some exceptions, in the event of disputes, usually the first to record wins.
Transferring Title
Documents for transferring title typically include, first, the drafting of some sort of an "earnest money contract" which details the particulars of the upcoming sale. The moment of sale itself is usually called a “closing” in which the documents and funds necessary to complete the transfer are exchanged. (Do not confuse that earnest money contract with the contract for sale mentioned above. The former, the earnest money contract, is merely a contractual agreement about a later transfer of title when ownership finally changes. It specifies whether closing will be by the deed itself or just a contract for deed.)
From the buyer’s perspective, it is often better to get full title now rather than later which is what a contract for sale delays. If it can be negotiated, the purchaser usually wants a deed at closing rather than wait.
Deeds
Deeds can be a general warranty deed, a special warranty deed, a bargain and sale deed, or a quit claim deed. The first is the best when buying. The last is the best when selling.
Again though, even if you get a warranty deed as a buyer, be sure to read the fine print on whatever deed you get. There might be exclusions from warranties of the seller. You might not like the exclusions. Remember, whatever is excluded, you don’t get to have.
Security Interests
Unless the purchase price is paid in full at closing, or unless a contract for sale is used, some sort of loan is involved either from seller or a third party lender. If so, the loan is usually evidenced by a promissory note. In addition to the promissory note, the note holder will want some sort of security documents that can be recorded at closing to give notice to the world that the loan holder has an interest in the property to be protected.
For real property, the note holder's security documents could be a mortgage or a trust deed as to real estate being used as security. (Do not confuse "trust deeds" with the deeds mentioned above.) A security agreement and financing statement are normally used when personal property is offered as security.
Leasing
An alternative to owning is leasing. There can be a single tenant or multiple leases. (By the way, do not confuse that type of lease co-tenancy with the concepts of co-ownership "tenancies" such as in the tenancy-in-common type arrangements mentioned above. They merely sound alike.)
Best Advice?
Get it in writing in advance. Get as much money up front as possible if you are selling. But, apply the Golden Rule to the extent possible when dealing with others.
Good luck.
|
