Property Outline A+ Test

1.

INTRODUCTION – THE BIG PICTURE A. COMMON THEMES THROUGHOUT PROPERTY LAW 1. 2.

3. 4. 5.

Property law = a system to allocate scare resources a. The question is how efficiently does the particular property regime do so? A series of rules defining a person’s relationship to a thing that others must respect a. Property law is not about one person’s relationship to a thing; it is about relationships between and among persons with regard to a thing i. Relativity of title – a person can have a relatively better title or right to possess than another, while simultaneously having a right inferior to yet another person b. Property law is about tenures – the many ways in which property may be used or possessed (i.e. it is NOT about the property itself) i. The rights of property (a.k.a. the “bundle of rights”) 1. The right of a person to exclude another from using a thing 2. The right to use – e.g. gain rents, profits, income from the thing 3. The right to possess 4. The right to transfer – give the thing to one person and not another (i.e. to transfer title), sell the thing Property is about balancing societal interests against economic development (big theme – see eminent domain, nuisance, infra) Property rights arise only through government (i.e. not through natural law) a. This is the legal positivist view A key question throughout property law: What were/are the parties’ expectations? a. Start with this, then think about whether or not the law should honor them

B. BASIC PRINCIPLES AND THEORIES 1.

2. 3. 4. 5.

6.

6.

Starting point: what is the absolute function of government? a. Schumudde: it is to maximize happiness i. Samuelson: Happiness = consumption/desire 1. Increase happiness by increasing consumption or decreasing desire a. How can property law achieve this? Property law = state law Ownership is title Possession is physical or constructive control a. Easier to prove than ownership (only land and cars really have clear titles) Levels of possession a. Occupancy b. Possession i. The right to possess/occupy the land but not to transfer title ii. Consists of two elements 1. Intent to possess on the part of the possessor 2. Actual control or holding of the property iii. Indicative of ownership, but does not necessarily prove it c. Ownership i. Confers the bundle of rights (supra) ii. Very few pieces of property in which this can be fully proved (e.g. house, car) Types of property b. Personal property – movable things i. Chattels – tangible, visible personal property ii. Intangible personal property – intellectual property, stocks/bonds c. Real property – land and the improvements on it Types of ownership a. No one owns the property b. Communal ownership – no one has the right to the property, but all can use it (everyone owns it) i. E.g. condominiums, Indian property system ii. Provides incentive to use the resources first – e.g. overfishing the communal pond  first one there to fish wins, overexploitation/overuse  tragedy of the commons

7.

iii. The “anticommons” – regulation is extensive, not allowing free use of the property; administrative costs and regulations are high  high costs of ownership, development is discouraged  underuse c. State ownership – the state owns the property and makes all the economic decisions i. Ideological architect would be Karl Marx ii. E.g. communist regimes iii. Shortages result when the market is not free to govern what should be produced and how it should be allocated 1. Price controls  shortages iv. More jobs produced but at the cost of economic growth  inefficiency (e.g. 3 guys doing a job that one can do) v. In defense: unrestricted free market leads to profiteering by some at the expense of others d. Private property (i.e. free enterprise) i. Ideological architect would be Adam Smith ii. Demsetz – private property regimes developed because the other systems have many costs, particularly in the form of externalities 1. Externality – an external cost which has no effect upon the person engaged in the activity, but has a cost on someone else engaged in society a. The goal is to make actors internalize these costs – how? i. Tax them in amount equal to externality ii. Legal action iii. Cap and trade (e.g. buying and selling the right to pollute) b. But this goal is difficult because of negotiation costs  costs of negotiating a settlement of external costs (how do we allocate them among many actors?) i. Coase – It’s difficult to get a large group of people to agree to a solution 1. If small number of actors, bargaining should be used 2. If large number, need regulation and legislation c. With externalities, a person’s self interest deviates from society’s interest d. Externalities  overconsumption (if producer had to internalize external cost, he would produce less) iii. Benefits of private property 1. Encourages owners to increase the value of their property a. Demsetz on why private property regimes developed – if you don’t own the property you lose the incentive to make the property more valuable i. No one washes a rented car b. Beneficial for communities as whole 2. Confers a reward  deserved on the basis of ones efforts (a la Locke’s theory) 3. Confers power and economic strength 4. Facilitates exchange in the free market (presumably better allocation as a result) 5. Essential human dignity – landownership increases notions of success and self worth (runs in sync with US dream, upward mobility, etc) Theories of property law a. First in time (first occupancy) – I was here first, so I should have it i. Critique: explains property rights, but doesn’t justify them – why does the occupier have a better claim? b. Labor-Desert (Locke) – I put my labor and sweat into this, so I deserve to have it i. People are entitled to the property that is produced by their labor ii. See also, doctrine of accession 1. One who in good faith applies labor to another’s property acquires title to the resulting project if this process (1) transforms the original item into a fundamentally different article or (2) greatly increases the value of the item. iii. Critique: people should own the value they add to the property, not the property itself iv. Critique: assumes an infinite supply of natural resources c. Utilitarianism (Traditional) – I will make the best use of this property, so I should have it i. Property exists to maximize the overall happiness of all citizens  property rights are allocated and defined in the manner that best promotes the general welfare of society 1. Property is a means to an ends (happiness) ii. Dominant American theory iii. But a lot of studies show that increasing ownership of property can lead to a lot of initial happiness, but it will only help marginally thereafter – above a certain level (once you have your basic needs covered) it will have minimal effects 1. Law of diminishing returns

2

d.

e. f.

2.

Utilitarianism (Law and Economics approach) – My use of this property will generate the most economic value, so I should have it i. Analyze property rights to the point where the best economic use is realized  decisions are based on the highest and best use of property ii. Ideological architect is Posner iii. Critique: underlying assumption that social value can be appropriately measured only by one’s willingness to pay is shaky iv. Critique: doesn’t measure basic human qualities like dignity, love, self-esteem Liberty – My right to vote stems from my ownership of this property (less relevant theory today) i. Ownership of private property is necessary for democratic self-government ii. Property rights give people the freedom to use their own economic and political judgment Personhood – This property represents who I am (“I am my fucking khakis”) i. Private property is essential to the full development of the individual ii. Some things are seen as so closely connected to a person’s emotional and psychological well-being that they become part of the person, thereby justifying broad property rights over such items. 1. E.g. wedding rings 2. This theory explains holdouts well

WHO IS THE OWNER?

A key question throughout property law: What were/are the parties’ expectations? A. ACQUISITION BY DISCOVERY 1. 2.

General rule: the first person to take possession of a thing owns it (i.e. first in time) a. Terra Nullis – a thing or territory belonging to nobody Johnson v. M’Intosh (1823) a. P wants D off land that was given to him by Indians in 1773. D says land was granted to him by US gov. thereafter via a patent (a deed for first issuance of property rights) b. Chain of title – you look back at where the person’s claim comes from (both chains are short here) c. Who has a better chain of title, P or D? i. Who had the right to transfer the property, Indians or US gov.? d. The discovery of Indian-occupied lands vested absolute title in the discoverers and rendered Indian inhabitants incapable of transferring title. Only the Gov. has the right to purchase from the Indians. Discovery gave the Europeans, and later the US government, the exclusive right to grant and extinguish the Indian title of occupancy (via purchase or conquest) i. P’s chain of title fails because the Indian right of ownership was invalid (only a right of occupancy) 1. Occupancy does not confer the right to transfer title e. Court says property was taken by discovery i. Major rationale for holding: economic theory – Indians were fierce savages, they won’t use the property well – Americans are civilized and will make better economic use of the property f. Positivist holding – property rights exist because they are recognized by the government under whose dominion the rights are asserted i. In the US, dominion is often based on the concept of discovery, validated in cases like this one g. BUT reasoning for “discovery” is suspect because everything in opinion points to acquisition by conquest (taboo at the time) i. Court needed to uphold US right to this property or else face loss of claim on most of the nation  the holding was there before the reasoning lead to it

B. ACQUISITION BY CAPTURE 1.

General rule: the first one to take possession (actual or constructive) acquires ownership a. Pursuit alone is not enough b. Same as first in time rule  first to possess is first in right c. Ratione Soli – “by reason of the soil” i. A landowner is in constructive possession of wild animals that are on his property 1. If the animals wander off his property, he relinquishes possession (but see, animus revertendi infra) 2. Others can’t come on land and hunt without permission

3

2.

3. 4.

5.

Wild animal cases are used as a prototype for other problems emerging in property law that adhere to this rule (“fugitive resources,” infra) a. Ferae naturae – wild animal b. Examples of fugitive resources: oil, gas, water Common theme in the animal cases: society wants the animal caught – the legal regime established should facilitate that goal Pierson v. Post (1805) a. P on hot pursuit of fox in an uninhabited area, D intercepts, kills fox and claims it. b. Court finds for D – the first person who has physical control has ownership  hot pursuit does not constitute constructive possession here  pursuit alone vests no property right (i.e. need a plus factor like actual possession or mortal wounding (constructive possession)) i. Appeal is in the fact that the rule is simple, easy to apply and fosters competition ii. Additional justification: A finding for P (that pursuit is possession) would cause a lot of quarrels/litigation c. Close pursuit after a mortal wounding gives a hunter a right to possession of the fox that is superior to another hunter’s subsequent intervention i. A mortal wound (constructive possession) is: 1. Something that objectively is likely to prove fatal to the animal 2. Which will, in time, deprive the animal of his natural liberty 3. Shows subjectively a manifest intention to seize the animal a. That the hunter isn’t just out to enjoy the chase – he actual wants the fox d. Dissent: should follow rule of custom – hot pursuit = possession i. Look to incentives/outcomes of adopted rule 1. This rule will discourage the hunting of “pernicious beasts” like foxes because why would you make great effort to hunt when the spoils of your labor can be so quickly taken from you by scavengers? a. Externality effect on other/potential hunters 2. We want to encourage people to hunt foxes a. No longer the case 3. Problems with using custom a. It benefits the actors involved, but it may neglect the interests of those outside the specific group i. Should we let the NRA set gun laws? b. In can be dangerous to those in industry c. It can be wasteful of the resource d. It can lead to overinvestment in technology 4. Generally, custom prevails only when it coincides with the law’s needs e. Dissent and Majority disagree about what defines possession When should custom set the law (trumping the rule of capture)? a. Glen v. Rich (1881) i. Rule: A court may look to the custom or usage in an industry to determine when property is acquired. ii. P spears finback whale with marked iron but doesn’t capture it, D finds the dead whale ashore, sells it, P sues 1. More than mere pursuit because whale was killed iii. Court evaluates 3 customs that define possession: 1. “Fast fish, loose fish” – the animal is owned only when it is captured (actual possession) a. Increased danger is a problem with this rule – many fishermen died as a result of attempting actual possession 2. “Iron holds the whale” – whale is owned when a harpoon is fixed to it as long as the claimant is still in hot pursuit (constructive possession) 3. Value of the carcass is split between the first harpooner and the ultimate seizer  the guy who finds the whale gets a cut iv. Court finds for P under “iron holds the whale” logic 1. Why break with rule of capture and go with custom? a. If an entire industry embraces a custom that affects very limited people and is unlikely to affect the rest of mankind (i.e. virtually no externalities), then we can adopt industry custom as the law b. Public policy rationale – we don’t want to discourage people from hunting whales (same as with Pierson v. Post)  if scavengers can reap the fruits of your labor, why would you take the effort to hunt?

4

6.

i. If D wins, whale hunters will have to stay with whale and hope to capture it then and there  makes it more dangerous to hunt whale  less people would do it, etc c. In sum, holding is limited to whaling and necessary for maintaining incentive to whale (also it “works well in practice”) Malicious interference (with capture) a. Malicious interference with another’s (B) livelihood is not allowed, even if done on interferer’s (A) own property, provided that: i. B is earning a livelihood in a legal fashion ii. A is not trying to promote his own livelihood Keeble v. Hickeringill (1707, Queen’s Bench) P has decoy duck pond used for capturing ducks, D comes by and shoots guns to scare away P’s ducks. D argues no cause of action because P didn’t own the ducks. Judgment for P. Court says violent or malicious act to interfere with a trade is unlawful; harming by competition is not  e.g. schoolmaster starting a new school and luring away students from established school is OK. Scaring them away from attending established school with gun is not OK.  Every man may use his property legally for his pleasure and profit; and where a malicious act is done to a man’s occupation, there an action lies in all cases.

7.

8.

9.

iii. Court said the action is not brought to recover damages for the loss of the fowl (via constructive possession), but for the disturbance of the P’s taking possession of them b. Focus is on means (fair competition, e.g. luring away) and intentions (promoting your own livelihood) Animus Revertendi – If wild animals escape from a possessor, the possessor loses property rights, but if the animal has a habit of returning, then the original possessor does not lose title – he still owns the animal a. Locke-like theory: the taming of wild animals (to return) is a method of adding value to the animal  domesticated animals are valuable to society and the effort to tame wild animals is rewarded If a wild animal with no animus revertendi escapes, the captor loses possession. a. BUT, if the animal is not native to the area, the new captor may be put on notice that the animal has escaped and someone else has prior possession  legal effect of notice is unclear b. Inquiry notice - when someone takes something into possession that he may have an inkling did not belong to him and that someone may be looking for it c. Constructive notice – trespasser should really know that property is being sought by the original owner. Hypo - T takes animal off O’s land and brings it to its own land. T2 takes the animal off T’s land. T sues T2 for the animal, and T2 says T never had rights to the animal to begin with. Who wins? a. T b/c in the case between them T2 is the trespasser and T solidified possession by bringing the animal on his own land  we protect possession, the earlier possessor (even though someone else has a greater claim to the property)

10. Government regulates wild animals to prevent extinction, but it is not responsible for the damage they may cause  gov assumes ownership for purposes of regulation a. They can deregulate in the face of overpopulation 11. Oil and gas – two ways of looking at it a. Rule of capture – like wild animals, the person who subdues the oil reserve, owns it (actual possession) i. We want to encourage people to extract these resources ii. A landowner can make a well on his property to drain a reservoir that is under his, and another’s, property 1. BUT you can’t angle the well down and across to tap the neighbor’s reserve  trespass/conversion b. Proportional ownership – you have to figure out how much each person owns (difficult to determine) (constructive possession) i. Whoever owns the surface owns to the depths of the earth ii. Helps to discourage overdrilling and saves oil for future c. Also, state statute and regulations allocate usage 12. Surface water a. Geography determines rule – water-scare Western states vs. water-rich Eastern (a.k.a. riparian) states i. Riparian states – each person with land abutting a water course may take water from it for any reasonable use 1. Limits on this rule in times of scarcity a. Can’t use water to benefit non-riparian lands ii. Western states – “prior appropriation” – the person who first appropriates the water and puts it to reasonable and beneficial use has a right superior to later appropriators

5

b.

In many ways, once allocated, water is treated like personal property – the right to use it can be transferred (treated separately from the land on which it is used) 13. Groundwater (2 types) a. Underground stream – groundwater that flows in a channel i. Same rules as surface water are used b. Percolating waters – groundwater that doesn’t flow in channel i. Two legal approaches 1. Owner of the property has an absolute right to withdraw percolating water and use it as he wills, on the land or elsewhere 2. Reasonable use doctrine (the American rule) – the water must be used solely on the overlying land if elsewhere would cause hardship to other landowners with access to the common underground pool of water ii. Minority approach – “correlative rights doctrine” – divvy up the water to all owners in proportion to land acreage owned C. ACQUISITION BY CREATION 1.

2.

3.

4.

5.

General rule: one can acquire property by creating it a. A person might invent or create a thing, and be entitled to obtain a patent or copyright under federal law, or a right to sue to prevent its misappropriation b. Well supported by Locke’s labor theory (“sweat of the brow”/accession) and personhood theory Intellectual property – property created by the exercise of the mind a. E.g. patents, copyrights, trademarks, ideas/persona b. Trade secrets i. E.g. the formula for coke c. Patents – a new idea that someone has developed i. Protection for novel, useful, and nonobvious processes or products ii. Greatest protection in IP is for patents iii. 20 years of protection and profits generated are taxed as long term capital gains (i.e. 15%)  huge tax incentive iv. Downside is that patent lifeline starts at application, not approval d. Copyrights – original works of authorship (books, songs, writings) i. Protect the expression of ideas ii. Protected for your lifetime plus 70 years iii. Also, the right of publicity – the right of each individual to benefit from their own publicity e. Trademarks – words, names, symbols, or devices used to distinguish some goods from others  anything which invokes a recollection of the product i. Protection is lost when insignia is abandoned or when the mark becomes generic (e.g. aspirin) INS v. AP (1918) – protection for quasi-property (at common law) a. AP would come out with stories, INS would copy them and provide them to their member outlets (also bribed AP employees for access to news) i. Between two competing news services, the systematic misappropriation of “hot news” stories by INS was sufficient to justify an injunction until the commercial value of the stories dissipated ii. Turns on the issue of unfair competition in business 1. By putting time, effort, and money in bringing a product to market, you create a quasiproperty right in that product against competitors in the field a. You can’t own the news itself, but you can own the writing of the story – until it reaches wide dissemination Two competing theories in intellectual property law a. Economic – we grant limited monopoly power to innovators in order to create an incentive for them to take the risk in developing a new product i. Very significant grant of power 1. But hopefully not enough to quell competition ii. Controversial with stuff like new/life-saving drugs 1. Other countries don’t give as much protection here, but US is largest producer of new drugs ( system works) 2. Two tier system – sell drugs for reduced prices in 3rd world b. Creative – we give legal protection in order to spur/encourage creativity and reward creativity The problem is finding the right mix between creativity and economics – how do we nurture creativity and reward labor without going too far by creating monopolies stifling creativity a. We want to encourage competition, too

6

6.

7.

General exception to above rule: intellectual property protection is going to be limited when its good for society to do so a. Smith v. Chanel (1968) – If no patent, one can copy, imitate and even say they’re equivalent to the product (but they can’t claim to be that product) i. “The copyist serves an important public interest by offering comparable goods at lower prices” There is no common law intellectual property protection  it’s only enforced in a limited sense via legislation (statutory protection) a. Common law – copying and imitation are allowed generally Cheney Brothers v. Doris Silk (1929) P makes seasonal patterns, one in five is successful. D copies a pattern and undercuts price. INS did not create common law patent or copyright protection  absent some recognized right at common law or under a statute, a man’s property is limited to the chattels which embody his invention  the intellectual property can be imitated at will.

8.

Cheney is no longer good law  Today anything expressive can be copyrighted, provided the expressive aspect can be separated from the functional 9. Additional cases a. Nichols v. Universal (1930) – D’s movie too unlike P’s play to be an infringement, despite that in some respects D used P’s work b. Diamond v. Chakrabarty (1980) – P’s nonnaturally occurring micro-organism can count as a “manufacture” or “composition of matter” within the statute  Congress contemplated wide scope for patent laws c. (Vanna) White v. Samsung Electronics (1993) i. Majority: the right of publicity extends beyond name and likeness, to any appropriation of White’s identity – anything that invokes her personality (e.g. robot with blonde hair in front of wheel) ii. Dissent: Slippery slope that will choke off creative elements of society. Unlike Midler case, no one would think White is endorsing this product – “Overprotecting intellectual property as harmful as underprotecting it.” (also, right to parody is key) d. MGM v. Grokster (2005) – D distributes free software products that allow computer users to share electronic files. P argues that much music is being pirated  One who distributes a device with the objective of promoting its use to infringe copyright, as shown by clear expression or other affirmative steps taken to foster infringement, is liable for the resulting acts of infringement by third parties. i. Affirmative steps = advertising an infringing use, instructing use ii. Diff from VCR b/c VCR was capable of commercially significant noninfringing uses  where an article is good for nothing else but infringement…there’s no injustice in imputing an intent to infringe 1. Infringing potential is not enough for liability 10. Ownership in one’s own body a. “Every man has property in his own person” – Locke b. The law generally acknowledges the authority of people to control the destiny of their body parts, but restrictions apply c. Blood, hair, semen have long been sold on market, but not organs d. Moore v. Regents of University of California (1990) i. D kept P’s excised cells after treatment, developed and marketed them into commercial success without P’s permission ii. For conversion, P must establish an actual interference with his ownership or right of possession iii. Court is concerned with public policy repercussions 1. Majority: All researchers who come in contact with cells would be liable for conversion (strict liability tort) a. Statute limits patients’ control over hazardous biological waste b. Cell line is product of D’s invention 2. Concurrence: A market for body parts / selling one’s body for profit is no good – issue for legislature to decide iv. Look to the parties’ expectations  P did not expect to retain possession of cells, but now wants to benefit v. P does not have property right to the cells (no conversion claim). D acquired original ownership. P could sue for breach of fiduciary duty and lack of informed consent though (rights still protected) vi. Dissent: P at least had the same right to own his cells as D did 1. Concerned with bundle of rights 11. The Right to Exclude (Bundles of Rights, supra) a. You have a right to exclude people from your property i. Jacque v. Steenberg Homes – D had mobile home to deliver, fastest way was over P’s land, P refused access, D went anyway  Right to exclude has no practical meaning unless protected by state

7

b.

c.

But there are exceptions to this right in certain situations (public/private necessity, state-sanctioned services, etc)  it’s not an absolute right i. State v. Shack – P tries to stop state employees (D) from seeing migrant workers housed on his farm  Title to real property cannot include dominion over the destiny of persons the owner permits to come upon the premises 1. “One should so use his property as not to injure the rights of others” The right to exclude and the right to include are both necessary conditions of transferability

D. ACQUISITION BY FIND 1.

General rule: the finder acquires an interest superior to everyone but the true owner (but there are exceptions) a. Finder must satisfy the two elements of possession (control & intent) Armory v. Delamirie (1722) Chimney sweeper (prior possessor) who finds jewel is entitled to its return from goldsmith who refuses to return it. If goldsmith does not return it, reimbursement for jewels will assume they are of highest quality/value

2. 3.

4.

The finder acquires title superior to everyone else except (1) the true owner and (2) sometimes the landowner 3 factors dominate the analysis of finders’ rights a. The presumed intent of the original owner b. The identity of the competing claimants c. The location where the item is found First Stage of Analysis: The presumed intent of the original owner a. The rights of a finder (vs. other claimants) turn on which of the 4 traditional categories the “found” object fits into i. Abandoned property 1. Owner intentionally and voluntarily relinquishes all right, title, and interest in the property 2. First to take possession (i.e. finder) acquires title valid against everyone (including prior owner) ii. Lost property 1. Owner unintentionally and involuntarily parts with his property through neglect or inadvertence and does not know where it is 2. Owner retains title 3. Finder has superior claim to the property over landowner Hannah v. Peel (1945) D buys house, stands empty for years, then is requisitioned by the army. P is stationed there, finds brooch. Turns it in, is given to D  a man possesses everything which is attached to or under his land. However: a man does not necessarily possess a thing which is lying unattached on the surface of his land even though the thing is not possessed by someone else. iii. Mislaid property 1. Owner voluntarily puts his property in a particular place, intending to retain ownership, but fails to reclaim it or forgets where it is 2. Owner retains title 3. Landowner (i.e. owner of the locus in quo) has superior claim to property over finder a. Rationale: best way to protect rights of true owner i. Landowner becomes bailee for owner McAvoy v. Medina (1866) P, customer in shop, finds wallet on table. Leaves in care of D, shop owner. After a while, when unclaimed, P wants, D doesn’t give  mislaid property belongs to the owner of the locus over anyone but the true owner iv. Treasure trove 1. The property (usually gold, silver, currency, etc) has been intentionally concealed by an unknown owner in a secret location a. Old rule was that it would escheat to the sovereign b. Nowadays, it is treated under the lost/mislaid/abandoned rule

8

2.

5.

6.

7.

Shipwrecks - finder is entitled to abandoned shipwreck unless the wreck was embedded in land owned or possessed by another a. But under maritime law, it stays owner’s property, but subsequent possessors get salvage award Second Stage of Analysis: Identity of claimants & location of property a. Rights to property found in public places i. Analysis will consist primarily of first stage – intent of owner b. Rights to property found under soil i. If found under or embedded in soil, it is awarded to the owner of the premises, not the finder 1. Treasure trove is an exception – intentionally buried with intent to return to claim it, supra c. Rights to property found on private land (finder’s actual possession vs. owner’s constructive possession) i. Lost objects found either within a house or embedded in the soil are generally awarded to the landowner, not the finder. ii. Status of finder is relevant sometimes 1. Long term tenant finder will often prevail over landowner a. See Hannah v. Peel (landowner was never in possession  unaware of articles in house) 2. Finder who is landlord’s employee usually won’t prevail a. If finder on premises for limited purpose usually owner is entitled to property Statutes Defining Rights of Finders a. Many states have statutes governing rights in “found” property which supersede the common law. b. Typical statute requires finder to turn over the item to the local police department; the find is then advertised and the true owner has a set period to file a claim. If no claim is made within this period, the item belongs to the finder. If the true owner makes a timely claim, some jurisdictions require that she pay a reward to the finder. Causes of Action Involving Personal Property a. Replevin – give it back (specific remedy) i. Similar to ejectment in real property b. Trover – pay for your use/control (damages) i. Similar to trespass in real property

E. THE LAW OF BAILORS AND BAILEES 1.

2.

3.

4.

Bailment – the rightful possession of personal property by someone who is not the owner a. The relationship created by the transfer of possession of personal property by a bailor to a bailee without a transfer of title and for the accomplishment of a certain, limited purpose i. E.g. borrow book from library, rent car, lend someone $5, etc b. Return of the property in the same (undamaged) condition is contemplated i. Or disposal of the property according to the terms of the bailment c. Property in bailment is usually tangible, but securities, etc can be used too Elements of a Bailment a. Delivery by bailor (actual, constructive, or symbolic) b. Acceptance by bailee i. Bailee must acquire possession 1. Physical control and intent to exercise control ii. Bailee must consent to bailment 1. Similar to intent aspect of possession 2. Mere custody of a chattel is insufficient to constitute possession iii. Knowledge of property’s presence 1. Bailee must be aware of the item creating the bailment 2. Bailment does not exist in regard to something concealed within the property that is the subject of the bailment a. E.g. a garage attendant takes possession of your car, not what’s inside the glove compartment Constructive Bailment a. Possession of personal property is acquired and retained under circumstances in which the recipient should keep it safely and return it i. Arises when delivery and/or acceptance are lacking 1. E.g. context of mislaid property found in shop Bailment vs. Lease vs. License a. Important distinction because of liability issues

9

5.

F.

b. If parking your car in a lot constitutes a bailment, the lot operator becomes bailee and is responsible to care for your car c. If the lot operator merely gives the owner a license to use the space to park his car, no bailment arises and car remains under owner’s control Bailee’s Liability a. A failure to redeliver (i.e. misdelivery) renders the bailee strictly liable i. Some states have replaced this with a presumption of negligence b. Liability in negligence arises when the bailed property is lost or damaged i. 3-pronged rule 1. When the benefit to the bailee (from the bailed property) is slight, the care required of the bailee is slight  only liable for gross negligence a. E.g. gratuitous bailment, such as taking care of object for friend 2. If the bailment benefits both bailor and bailee mutually and is equally beneficial, the standard of care rises and bailee is liable for negligence  duty of reasonable care under circumstances 3. If the bailment benefits the bailee, the bailee’s standard of care rises again  merest neglect renders bailee liability a. E.g. repair shops, transport companies

ACQUISITION BY GIFT 1.

2.

A gift is a voluntary, immediate transfer of property without any consideration a. If there is consideration, law of gifts does not apply (law of contracts does) b. A gratuitous promise/agreement to make a gift in the future is not binding i. But see, promissory estoppel in contract law There are 2 types of gifts a. Inter vivos gift – given during the donor’s life i. 3 elements 1. Donative Intent – donor must intend to make an immediate transfer of ownership to the donee a. Statements and actions of the donor usually provide best evidence of intent b. If donor intends the gift to take effect in the future, it is invalid c. A gift cannot be subject to a condition precedent d. No gift is made if donor retains the right to revoke 2. Delivery – usually the actual physical delivery of the gift a. If manual delivery is not practical, there are 2 alternatives i. Constructive delivery – delivering something that will provide access to or control of the gift (e.g. a key to a car, safe) ii. Symbolic delivery – handing over something symbolic of the property given (e.g. a written instrument declaring the gift) b. BUT if an object can be handed over, it must be i. See, Newman v. Bost (constructive delivery is sufficient if actual delivery isn’t possible) c. You can deliver through, but not to, a third person d. Manual delivery of check is no good b/c check simply orders the bank to perform the delivery 3. Acceptance – the donee must accept the gift a. This is presumed when a gift is unconditional and valuable to the donee (rebuttable though) ii. Inter vivos gifts are irrevocable 1. Some states have exceptions, like for engagement rings Gruen v. Gruen (1986) Father gives P painting for his birthday by letter, but says father will hold onto it until he dies. Then writes new letter without life estate provision  a valid inter vivos gift can be made where the donor has reserved a life estate and the donee never has had physical possession of it (reservation of the life estate didn’t invalidate the gift). Also, Actual delivery was impractical / redundant b/c donor retained possession – letter was sufficient b.

Gift causa mortis – given by donor in contemplation of and in expectation of immediate approaching death (can’t be real estate)

10

i. Control over the gift is immediate, but absolute upon death 1. An attempt by donor to reserve control until death invalidates the gift b/c it is subject to a condition precedent ii. A transfer of property (by will) after a person’s death is not a gift iii. 4 elements 1. Donative Intent, supra a. Donor must have present intention to deliver absolute ownership at death 2. Delivery, supra 3. Acceptance, supra 4. Anticipation of imminently approaching death a. Expectation of imminent death is subjective b. The illness/peril/etc prompting the expectation must be objective (e.g. minor surgery is insufficient) iv. Death must result from the same illness/peril/etc that gave rise to the expectation of death, not some other illness/peril/etc 1. BUT initial illness/peril/etc doesn’t need to be sole cause v. Courts are typical hostile to a gift causa mortis – great chance of fraud, should have made will  more restrictions on these gifts 1. High standard of proof to uphold these gifts 2. E.g. If donee is already in possession of the property, there must be a redelivery to effect a valid gift causa mortis, but not if the gift is inter vivos 3. Will = usually must be written and have 2 witnesses (otherwise intestate succession is utilized) vi. A gift causa mortis is revocable 1. If donor recovers, gift is revoked by operation of law 2. If donor changes his mind (before he dies) it’s revoked vii. Subject to the claims of creditors of the donor’s estate 3.

WHO CAN TAKE TITLE? A. ADVERSE POSSESSION (“ACQUISITION BY THEFT”) 1.

Adverse Possession is a process through which a person who uses property for a statutorily determined period of time becomes owner of the property a. If owner doesn’t take legal action (during timeframe) to eject a possessor who claims adversely to the owner, the owner is thereafter barred from bringing an action in ejectment and adverse possessor has title to land i. Filing an ejectment action stops the statute, not actual ejection b. Adverse possession creates new title to land by operation of law i. Adverse possessor's right to possession, which had been good against everyone except the true owner, is now perfected against the true owner as well (as title) ii. Adverse possessor can take ownership by using property long enough and visibly enough, as would its true owner c. Clearing title – this has been the state of affairs for so long that we should give the imprimatur of the state and keep the status quo

2.

Theoretical support a. Earning theory – possessor is using the land more productively by putting in work and putting property to better use  focus on merits of possessor b. Sleeping theory – if the owner has seen so little use of this property as to not even care that someone is using it, then we shouldn’t protect their interest  focus on demerit of actual owner c. Expectations theory – this has been the state of affairs for so long that we should keep it, give imprimatur of the state  honor/reward expectations Van Valkenburgh v. Lutz (1952) L gets lots, builds house, makes pathway through adjacent property, builds garden and builds house for his brother there. VV moves nearby, start to hate L, buy the property adjacent to L’s where L has built house, garden, pathway, brings action to eject L, builds fence to block pathway  you must satisfy all the elements of adverse possession to get property rights (i.e. title)  possession must be actual, exclusive, open, notorious, hostile under CoR, continuous  NY statute goes further than

11

common law elements – possessor must have substantial enclosure and have regularly cultivated and improved the property (L didn’t) 3.

The elements of adverse possession (statute and case law) a. Actual Possession i. Adverse possessor must physically use the land in the same manner that a reasonable owner would given its nature, character, and location (e.g. paying taxes, etc) 1. Adverse possessor generally gains ownership of only so much of the property that he actually possesses a. BUT under color of title this can be expanded to the entire property  constructive possession of whole i. BUT true owner’s actual possession of part of property negates constructive possession reach and it goes back to the original tract ii. Color of title – possessor claims ownership pursuant to a written document (i.e. deed) that transfers it to him, but it is defective 1. In most states, it has important advantages for the adverse possessor  Some states have reduced statute of limitations for color of title claimants 2. Hypo – X and Y own adjacent lots, A enters X’s lot but not Y’s under color of title for both lots. After SoL, what does A get? Probably just X’s lot  turns on a fairness issue – Y never had notice of the adverse possession’s claim b. Exclusive Possession i. Adverse possessor cannot share possession with either the true owner or the general public – possession must be as exclusive as would characterize an owner’s normal use for such land 1. BUT persons acting in concert can adversely possess a. They become tenants in common, or joint tenants under very specific circumstances (2 adverse possessors taking the land under a faulty deed which names them as joint tenants) c. Open and Notorious Possession i. Adverse possessor’s possession must be so visible and obvious that a reasonable owner who inspects the land will receive notice of an adverse title claim  gives reasonable notice to owner/community Mannillo v. Gorski (1969) Tiny protrusion of porch steps onto neighbor's land did not provide notice  when encroachment of adjoining owner is of small area and not apparent to naked eye, it is not open and notorious. Also, court abandons Maine doctrine for Connecticut doctrine, infra. ii. You can best protect yourself here by getting a survey iii. Sometimes this element can be tricky 1. Marengo Cave – underground nature of a cave did not give adjacent owner notice of the encroachment on his rights d. Hostile or Adverse Possession (Under a Claim of Right) i. Adverse possessor does not have the true owner’s permission to be on the land  e.g. leasing it, having permission, etc is no good ii. 3 approaches as to what satisfies this element 1. Good faith view – possessor actually believes the land he is on is his  good faith belief that he owns the land a. “I thought I owned it” 2. Bad faith view – possessor knows the land he is on is not his but intends to make it his regardless (i.e. trespassing) a. “I thought I didn’t own it but I intended to make it mine” b. Called “Maine Doctrine” in boundary dispute cases 3. Objective view – possessor’s state of mind is irrelevant a. Majority rule b. “Connecticut Doctrine” in boundary dispute cases i. “NJ Doctrine” adds the Mannillo exception e. Continuous Possession (For the Statutory Period) i. Adverse possessor’s possession must be as continuous as those of a reasonable owner, given the nature, location, character of the land Howard v. Kunto (1970)

12

Survey reveals that everyone on a beach strip actually owns the property one over from to where their house is on. Dispute is over summer home that D possessed but was on P’s land. D purchased house from previous adverse possessor (to P)  summer occupancy is ordinary use of ownership (i.e. satisfies continuity) & tacking b/c previous & current possessors in privity

4. 5. 6.

ii. The filing of an ejectment action stops SoL, not actual ejectment iii. Period of time needed for adverse possession varies by state iv. Tacking – successive periods of adverse possession by persons in privity can be combined to satisfy the full statutory duration requirement  final adverse possessor gets title 1. Privity is satisfied if subsequent possessor takes by descent, devise, gift, transfer, deed purporting to convey title 2. Tacking is not permitted when: a. One adverse possessor ousts a preceding one b. One adverse possessor abandons and a new one then goes into possession 3. Hypo – 10 year SoL, A enters Blackacre owned by O in 1996, B ousts A in 2003 and takes possession, in 2006, who has an action to recover from B? a. A – yes, A is a prior possessor b. O – yes, O is owner, B’s ousting of A isn’t privity 4. What if A regains property 6 months after being ousted? a. ALI says SoL was tolled for those 6 months, so now A can finish up the 10 year SoL – now its 10 years, 6 months total v. A change in ownership does not affect continuity element  AP runs against different owners (but see, AP limitations, infra) An adverse possessor may eject other trespassers and adverse possessors even before the statute runs, as long as he entered the property first Adverse possessor may sell or give his interest to another person The statute of limitations for an adverse possession will not run against a true owner who is under a disability when the adverse possession commences  Statute is tolled until the disability is removed (b/c owner can’t protect interests) a. Essentially it is the later of SoL or when disability is removed b. Usual disabilities are: owner is a minor, of unsound mind, imprisoned c. Disability must exist on the date of the adverse possessor’s entry i. No good if it arises later (won’t toll statute) d. You can’t tack disabilities i. E.g. Owner gets new one after old one is removed, heir (passed to before SoL is over) has disability  neither will have any effect e. Hypo i. SoL is 21 years; time after disability is removed is 10 years 1. Whichever is later is the time it takes for AP

1980 Entry on land in AP; true owner is 2 years old

1996 True owner's minority status ends; 10 year clock starts ticking

2001 APer's claim becomes perfected under normal circumstances

f.

7.

2006 True owner can make claim until this date – 10 years after shedding minority status

A person taking from or through a true owner under a disability will also benefit from the tolled statute  disability is deemed to end upon sale/gift g. If owner disappears and is not heard from, after 7 years death certificate can usually be issued Doctrines to resolve boundary disputes a. Agreed boundaries – an oral agreement to settle a boundary dispute is enforceable if the neighbors subsequently accept the line for a long period of time b. Estoppel – one neighbor makes representations about (or engages in conduct that tends to indicate) the location of a common boundary, and the other neighbor then changes his position in reliance on the representations or conduct  first neighbor is then estopped to the deny the validity of his statements or acts i. When one party remains silent and the other party acts to the first party’s detriment by acts or expenditures ii. E.g. A sits back and watches B build a house that comes onto A’s land – B can argue estoppel here (and keep the house where it is) c. Acquiescence – long acquiescence – though perhaps for a period of time shorter than the SoL – is evidence of an agreement between the parties fixing the boundary line

13

8.

The Mistaken Improver (like in Mannillo) a. 3 approaches i. Traditional common law – anything built on the wrong land, whether in good faith or not, became the property of the landowner (subject to the boundary dispute exceptions, supra) ii. Modern tendency – ease the plight of innocent improvers 1. Force conveyance of land from owner to improver 2. Or give landowner option to buy improvement 9. Limits of Adverse Possession a. Adverse possession is not available against land owned by the government b. Future interests – the statute of limitations does not run against the holder of a future interest (e.g. remainder) until that interest becomes possessory i. If adverse possessor enters the property after conveyance to life tenant and remainderman, he can only divest the life tenant and the statute does not begin to run against the remainderman until the life tenant dies and the remainderman gets right of possession 1. BUT if adverse possessor enters land before conveyance to life tenant and remainderman, statute begins to run against both of them ii. Possibility of reverter – statute runs on happening of event iii. Right of reentry – happening of event does not trigger statute c. Leins and Easements – if land is subject to them so is adverse possessor 10. Adverse Possession of Personal Property a. SoLs for personalty are typically shorter than similar ones for realty i. Replevin – action to recover the chattel itself ii. Trespass – action to recover damages for dispossession of chattel iii. Trover – action to recover the value of the chattel along with damages for its dispossession 1. Conversion is an action in trover (forced sale) b. Traditional rule – when chattels are fraudulently concealed, SoL is tolled c. Biggest difficulty for AP claims is showing that the AP is open and notorious sufficient to give the true owner notice d. 2 approaches i. Demand and Refusal Rule – cause of action (i.e. SoL) does not begin to accrue until the true owner discovers the chattel’s whereabouts (or possessor’s identity), makes a good faith demand for its return, and possessor refuses 1. Easier to apply and more protection for owners (discovery usually comes before demand/refusal) 2. This is the NY law – See Guggenheim case ii. Discovery Rule – cause of action (i.e. SoL) begins to accrue when P first knew or should have known, through due diligence, the identity of the possessor (or whereabouts of chattel, etc) 1. Discovery of the facts is the key here  no demand is necessary  conduct of the owner is controlling 2. Burden is on owner to establish facts for SoL 3. Due diligence required will vary with nature, value, and use of personal property in question 4. Minority rule O’Keefe v. Snyder (1980) Georgia O’Keefe’s art is stolen, she doesn’t report it for 26 years. Finally art shows up, possessor says he had possession (via chain of people) for long time, and it was on display at his house (he had also showed it at an art show), O’Keefe sues for replevin  Court adopts discovery rule (cause of action will not accrue until P discovers, or should have discovered, the facts which for the basis of the cause of action)  possessor wins, but remand to see if painting was stolen  if stolen, thief acquired no title and could not transfer good title to others regardless of their good faith and ignorance of the theft iii. Exception – Native American Graves Protection and Repatriation Act of 1990 1. Museums must inventory and return, upon request, sacred objects and other cultural artifacts to Native Americans  to keep the object, museum must prove that its possession was obtained with the voluntary consent of one who had authority of alienation 11. Good Faith Purchasers and Thieves a. A seller of personal property cannot pass on better title than he possesses i. Two exceptions to this rule 1. Good faith purchasers

14

a.

2.

If you are a good faith purchaser for value (buyer paying fair market value and without notice that something sketchy is going on) and the seller has voidable title transaction is OK  buyer can get good title (against true owner) b. The key here is void title vs. voidable title i. Voidable title = owner is tricked by fraud or misrepresentation into voluntarily parting with title (e.g. bad check, buyer’s false identity) ii. Void title = no title (can’t transfer title) 1. E.g. thief, bailee, etc have no title iii. Voidable title is good until true owner rescinds  then it becomes void c. True owner still has recourse against seller d. Donees receiving or inheriting gifts are not purchasers and are not protected by this rule e. Market Overt Doctrine – in some countries a bona fide purchaser for value may acquire good title if the sale takes place in an open market Entrustments a. When the owner of chattel delivers it to a bailee who is a merchant in goods of that kind and the bailee sells it to a person who buys it in the ordinary course of the bailee’s business, the transaction is OK  buyer can get good title (against true owner) b. Merchant can transfer good title to the purchaser in the ordinary course of business, regardless of any agreement between owner and bailee (e.g. “don’t sell this no matter what”) c. True owner still has recourse against bailee

B. EMINENT DOMAIN 1.

2. 3.

Unlike private persons who must find a seller, governments can force unwilling persons to sell private property to the government  taking property from its owners and reallocating it to government preferred uses a. “Eminent Domain” – the power to take private property b. “Condemnation” – the process by which the property is taken and just compensation is paid “Nor shall private property be taken for public use without just compensation” – 5th Amendment (confirms eminent domain power) a. Incorporation via 14th amendment makes this applicable to the states and subject to due process requirements 2 requirements of 5th amendment a. The taking had to be for public use i. Things that will benefit the public at large – how it was commonly understood throughout history  highest and best use of the land 1. This changed in the Poletown case (1981) a. Detroit suburb (not blighted) in a downward trend, GM wanted to put a new manufacturing center in the town (create jobs, etc  promote economic development), 7 holdouts are stopping project b. Michigan Supreme Court held this was a public purpose, gave GM the property – the GM facility ended up creating tremendous economic progress c. This decision was later rejected by the Michigan Supreme Court, BUT this was the decision that opened up the meaning of public use – broadened it to encompass economic development economic development is a legitimate use of eminent domain  supports expansion of ED to new arenas such as urban renewal and commercial development 2. “Holdouts” – people who will not agree to sell a. A “holdout problem” – economic analysis suggests they are simply holding out for more money (amounts in excess of the opportunity cost of the land)  they get more leverage by holding out b. Posner – eminent domain must exist if only to deal with holdouts (it’s necessary to prevent monopoly) c. Personhood theory also explains the holdout problem  personal value exceeds economic value ii. The achievement of a public purpose qualifies as a public use  condemned property doesn’t literally need to be put to public use Hawaii Housing Authority v. Midkiff (1984)

15

SCOTUS held that Hawaii could condemn land and immediately transfer it to private citizens to use as private residences (went from landlords to tenants)  taking must be rationally related to the furtherance of a legitimate state interest/purpose  state had a legitimate state interest in diversifying land holdings in Hawaii (highly concentrated in a few owners) and condemnation was a legitimate means to accomplish that goal

4.

5.

6.

iii. A public purpose may be found even when the taking transfers ownership from one private party to another (Kelo expands this) b. There must be just compensation in return for the taking i. Just compensation is the fair market value of the property when the taking occurs  the amount that a willing buyer would pay to a willing seller 1. This generally does not consider any sentimental or subjective value the property may have, but some personal value is factored in (as it would be for a market transaction) 2. Relocation compensation is included ii. If only a portion of property is taken, state must compensate owner for the fair market value of the portion taken ED procedure a. Usually begins with the government’s attempt to negotiate a voluntary purchase from the owner  If negotiations fail, the condemning agency will bring suit – a specialized form of litigation, but with limited issues (usually only real issue is the fair market value of the property taken) Theoretical issues a. ED comes down to balancing between private value and public benefit b. To analyze ED questions, you must first face this question: is there an individual right to private property, and if so, where does it come from? i. Fundamental right ii. Economic right (i.e. you are given the right to the property by the legal system  leads to the question of who will make the best use of the property  back to Demsetz, supra) iii. Life, liberty, pursuit of happiness 1. Within pursuit of happiness is the right to own property iv. Other, less persuasive arguments: divine right to own property, natural law explanations, human right, etc The Kelo Case and its impact (Kelo v. City of New London, SCOTUS 2005) a. New London approves development plan to create jobs, increase (tax) revenues, revitalize economically distressed city. For plan, City condemned private property and transferred it to private nonprofit entity planning to build a coordinated village, conference center, marina, new residences, office spaces (for PFE), restaurants, stores  legitimate public uses/purposes includes promoting economic development and increasing tax revenue  government can take property, even if it isn’t blighted, and transfer it to private developers to achieve the legitimate public purpose b. Important points from decision i. Court recognized that the definition of public use varied across the country and across time (not necessary bad)  it should adapt to the times, and circumstances 1. Public use is broadly interpreted to mean public purpose ii. A showing of blight is not necessary (though in this case the area was “sufficiently distressed” to justify rejuvenation program) iii. Court expressed great deference to the plan (“affording legislatures broad latitude in determining what public needs justify the use of the takings power”) 1. Schmudde thinks this is important 2. Court recognized that this was a very well thought out plan, hearings, group that was wellrepresented, and the plan was deemed to be important to the growth and recovery of city iv. States are free to add more restrictions to eminent domain use c. Impact of the decision i. Overwhelming disapproval for states and public ii. Tide since Kelo has changed significantly – many states have changed their laws to make stuff like that impermissible and most courts have at least made it more difficult (e.g. finding blight first) 1. 8 states have reformed their constitutions 2. 3. 4.

34 states have amended laws on ED making it stricter About 20 states require a finding of blight a. If not blighted, is this just gentrification (w/o value added)? 31 states adopted the bright line rule that P wanted – economic development would not be public use a. A few states interpret public use (literally) as use by the public/gov.

16

7.

5. Some states have upped just compensation to 125% of fair market value Permanent Physical Occupations (and Regulatory Takings) a. Usually ED involves government entity taking permanent physical possession of land, BUT government actions that, though not intended to take property, may be held by courts to have done so  key Q: has a taking occurred? i. An overly-restrictive land use regulation might also be a taking 1. But def not everything (e.g. laws against discrimination) b. A taking may occur when the government physically invades or occupies private property, or by statute or regulation authorizes a third party’s physical invasion or occupation of private property Loretto v. Teleprompter Manhattan CATV Corp. (1982) NY law required landlords to permit installation and maintenance of certain cable television wires on their property. Prior to P’s acquisition of property, D installed minor cable television wires on P’s property pursuant to the law and with the previous owner’s consent (and to P’s benefit)  Court establishes per se (categorical) rule that any permanent physical occupation authorized by government is a taking without regard to the public interests it may serve  good faith or public benefit derived from the government action makes no difference  no degrees, no balancing test, permanent physical presence constitutes a taking i. Loretto added key distinction between permanent occupations (always takings) and temporary invasions (require balancing test) c. Reverse legal posture (“inverse condemnation”) – P claims government has physically occupied or taken some property right from him without compensation and without initiating the condemnation process (or that government has constructively taken the property via regulations) i. P need only show physical invasion/occupation to prevail  government has no legal defense for the invasion d. Rationale for rule: because any permanent physical occupation effectively destroys all of the owner’s basic property rights, SCOTUS reasoned that a bright-line rule was appropriate  a physical invasion doesn’t just remove one stick from the bundle, it shortens each of them i. Also, few problems of proof and easy to apply (no line drawing)

4.

ESTATES IN LAND

“It is revolting to have no better reason for a rule than that it was laid down in the time of Henry IV. It is still more revolting if the grounds upon which it was laid down have vanished long since, and the rule simply persists from imitation of the past” – Oliver Wendell Holmes 1.

ESTATES GENERALLY 1.

2.

In law, a person does not “own” land  he owns certain legally-enforceable rights concerning the land a. Interests refer to when ownership begins (now or later) i. Present interest – the right to possession now ii. Future interest – the (possible) right to possession later b. Estates refer to when and how ownership ends i. Estates are a subset of interests and further classify them ii. The word “estate” is drawn from and implies status There are 3 main ways to classify an estate a. Freehold or nonfreehold i. Freehold – normal rights to hold (i.e. “tenures”) 1. Forms of “owning” land 2. Possession under legal title ii. Nonfreehold – a less complete form of ownership than a freehold 1. Forms of “leasing” land 2. Mere possession b. Absolute or defeasible i. Absolute – estate’s duration is restricted only by the standard limit that defines the category of estate ii. Defeasible – estate’s duration is subject to a special provision that may end the estate prematurely if a particular event occurs 1. Determinable, subject to condition subsequent, subject to an executory interest c. Legal or equitable

17

3.

4.

5. 6. 2.

TERMINOLOGY 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18.

3.

i. This relates to the issue of trusts There are 6 types of estates a. 3 are freehold estates i. Fee simple, life estate, fee tail b. 3 are nonfreehold estates i. Term of years tenancy, periodic tenancy, and tenancy at will Fragmentation of ownership interests over time is the basic concept underlying present and future interests a. Those who held estates in land found it advantageous to create new estates and new interests  to “carve out” smaller pieces i. 2 or more persons can have interests in the same land (at different times)  Present and future interests ii. 2 or more persons can have rights to the same land at the same time (now or later)  Co-ownership or cotenancy The system of estates is an elaborate hierarchy of interests in land Estates and future interests originate in 2 main sources: deeds and wills

Tenure – the right to hold Seisen – title with the right to possession Devisability (aka testamentary power) – the right to transfer or dispose of one’s property by will after death Alienability (aka power to alienate) – the right to dispose of one’s property during their lifetime Descendible (aka inheritable) – capable of passing by the state’s intestacy statute to heirs Decedent – a person who dies Testate – leaving a will when you die a. Testator – a person who leaves a will when they die Intestate – dying without a will Heir – people who survive the decedent and are designated as intestate successors under the state’s statute a. No living person has heirs (yet) b. Heirs do not have interests in property until decedent dies Issue – descendants (children, grandchildren, great-grandchildren, etc) a. Going down Ancestors – parents, grandparents, great-grandparents a. Going up Collaterals – all persons related by blood to the decedent who are neither issue nor ancestors (e.g. brothers, sisters, nephews, nieces, uncles, aunts, cousins, etc) Escheat – process by which a person dying intestate with no heirs has their property turned over to the state Probate – going to court to issue a directive to change title of property after someone dies Condition subsequent – the occurrence of nonoccurrence of an event that can cut short an estate Words of purchase – language signifying who owns an estate a. E.g. “To A” Words of limitation – language signifying what type of estate was granted a. E.g. “and his heirs” = fee simple Fee simple – the property is alienable, devisable, and descendible a. Unrestricted right to transfer by will or deed, and no limitations on inheritability b. Partial restraints on alienation of a fee simple may be allowed if reasonable in nature, purpose, and duration.

HISTORY OF ESTATE SYSTEM (THE FEUDAL FOUNDATION) 1.

The English property law system can be traced to the Norman Conquest of 1066  When William the Conqueror became the King of England, he redistributed land (tenures) to his supporters in order to protect his reign from foreign and domestic opposition a. King owned the land, lords (i.e. the knights) that supported him became the tenants in chief (land lords) i. Through subinfeudation tenants had their own tenants b. Tenants worked the land and gave stuff to the lord  tenants in chief owed both service and incidents to the king i. Service may include providing a specified number of knights on demand, making an annual payment, or performing another action ii. Incidents were specific rights – e.g. homage and fealty, aids, forfeiture, and certain liabilities at the death of tenant

18

1.

2. 3. 4.

5.

4.

E.g. the incident of wardship allowed the king to take possession of the land after the holder’s death until the orphaned son reached age 21 c. Over time, tenants in chief became interested in control of their land after their deaths (for their families, children etc)  interested in 2 rights i. The right to transfer or dispose of their property after their deaths 1. i.e. devisability or testamentary power, ability to set up a line of successors ii. The right to dispose of their land during their lifetimes 1. i.e. alienability or power to alienate Subinfeudation – each tenant holding from the king (i.e. tenant in chief) could create subtenures with others (tenants of the tenants in chief) a. One parcel of land could be the subject of many different tenures Over time, services became less valuable (e.g. knights become obsolete by changes in war technology), and incidents became more important  However, tenants could circumvent the incidents through subinfeudation Statute of Quia Emptores (1290) – abolished subinfeudation and established free alienation of land  tenants are free to move somewhere else and to transfer their land without the overlord’s consent (and thus to profit from the sale of the land)  first time this happens (i.e. freedom) a. A transfer of land would be “to A and his heirs”  giving A the right to pass it to his heirs (i.e. transferability) i. “Feoffment with livery of seisin” – a transfer of interest in real property with a taking b. Black death wiped out so many people that wages became high for healthy people who could work As feudalism declined, the system of free tenures gradually evolved into private ownership of land, in the form of three key estates: the life estate, the fee tail, and the fee simple a. Between 1500 and 1700, a series of common law restrictions were adopted that curtailed future interests

ABSOLUTE FREEHOLD ESTATES 1. 2.

3.

4.

Absolute = duration is restricted only by the standard limit that defines that category of estate Estates in land are possessory interests in land a. They may be presently possessory (present estates) or they may become possessory in the future (future interests) b. Nonpossessory interests include easements, covenants, servitudes, etc Fee Simple Absolute a. The closest thing to complete ownership i. The largest aggregation of property rights recognized under American law b. Largest estate in terms of duration  it may endure forever c. Unrestricted right of possession d. Alienable, dividable, devisable, and descendible i. Owner may sell or give the property away, devise it by will, or die without a will and have the property go by operation of law under the canons of descent to his heirs e. Invests owner with full possessory rights now and in the future f. Denoted by this language: “To A and his heirs” i. Though simply “To A” will suffice in most states g. Presumed to be intended to pass by a grant of real property unless it appears from the grant that a lesser estate was intended h. Owner has seisin i. Estate can be defeasible or indefeasible Fee Tail a. Estate that limited inheritance to lineal descendants of the grantee  a freehold estate in which there is a fixed line of succession limited to the heirs of the body of a grantee or devisee, by which the regular, default rules of succession are cut off i. Potentially infinite duration, except that it will necessarily cease if and when the first fee tail tenant has no lineal descendants to succeed him in possession 1. Heirs is broader category than lineal descendants ii. Basically a series of life estates to issue b. Endures as long as grantee’s bloodline c. Not devisable or generally inheritable because the property passes from one generation to the next under the terms of the fee tail grant i. Current owner cannot cut off inheritance rights of issue d. If no lineal descendants survived at the grantee’s death (i.e. without issue), the property either reverted to the grantor or her successors or passed to a designated remainderman e. Abolished in most states

19

5.

6. 7.

i. Only 4 states still have it, and in those states, the holder of the fee tail can disentail the property simply by conveying his interest in fee simple absolute to a third party f. Denoted by “to A and the heirs of his body” g. Owner has seisin Life Estate a. An estate that will necessarily end at the death of a person (usually the grantee) i. Duration could be measured by the life of one (life estate) or more (life estate pur autre vie) specified persons ii. Not terminable at any fixed or computable period of time, but cannot last longer than the specified life b. Alienable, but generally not devisable or descendible (unless life estate pur autre vie) c. It can arise by conveyance or by operation of law (dower and curtesy) d. Denoted by this language: “To A for A’s life” i. Grantor still possesses the fee simple  life estate is being carved out of his estate  now grantor has a future interest (reversion) e. Who gets the property after the life tenant’s death? i. Reversion – original grantor receives property upon life tenant’s death ii. Remainder – third party receives property upon life tenant’s death iii. Reversions and remainders are future interests f. Life estate pur autre vie is an estate measured by the life of a person other than the grantee i. It can be created directly or indirectly 1. Directly – O grants “To A for the life of B” 2. Indirectly – O grants “To A for life” then A later conveys it to B  B owns an estate measured by A’s life g. Owner has seisin i. Holder of estate may use the property, collecting all the rents and profits generated from it ii. Holder may use the property as would its owner, but he must not destroy the value of successive future interests (doctrine of waste) 1. Must keep premises in ordinary repair (not extraordinary repairs from fire, etc), pay taxes, interest on any mortgage 2. BUT not obliged to improve the property (can’t seek payment from future interest holders if he does improve it) or pay principal on mortgage (can seek contribution on payment of principal from future interest holder) iii. Holder of the life estate can exclude others from the property, including any holder of a future interest (reversion/remainder) h. Tax advantages – upon life tenant’s death, interest expires, so it doesn’t go to decedent’s estate (subject to estate taxes) i. Estate can be defeasible or indefeasible Fee simple, fee tail, and life estate are the freehold estates a. Holders have seisin – title with right to possession The doctrine of waste a. The life tenant should not be able to use the property in a manner that unreasonably interferes with the expectations of future interest holders b. Waste of property by a life tenant is an actionable legal injury for a remainderman or reversioner, with damages or injunction as the remedy c. Waste occurs when the possessory life tenant permanently impairs the property’s condition or value to the future interest holder’s detriment i. Affirmative (voluntary) waste – when the life tenant actively changes the property’s use or condition, usually in a way that substantially decreases the property’s value ii. Permissive waste – life tenant fails to prevent some harm to the property 1. Duties: ordinary repairs, interest on debt (mortgage), taxes, insurance in some states, but usually no, etc iii. Economic waste – when the income from property is insufficient to pay the expenses the life tenant has a duty to pay Baker v. Weedon Decedent, married 3 times, leaves his property to current wife, P. will says “To P for life, if P dies without issue, to my grandchildren.” P has no issue, remarries, continues living on property, improving it, grandchildren had never even been there. The State wants to buy the property, but P is only life tenant. P needs the money for the property and wants to sell it now to the state (for 168k), but grandchildren, holders of the future interest, don’t want to sell b/c they think property will raise in value in several years (to 336k)  a court may order the sale of property which is held subject to a future interest, but only if a sale is necessary for best interests of both the life tenant and the

20

remainderman. Schmudde thinks under desert theory, property should go to P as a matter of fairness, and that valuation is wrong

8.

9.

iv. The life tenant cannot sell a fee simple unless all other persons having an interest in the property consent or unless a court of equity orders the sale and reinvestment of the proceeds 1. When the property is sold, the property just changes form to cash and the law of property just applies to that v. Open mines doctrine – life tenant may mine and remove minerals (and keep the profits) if the grantor had opened up the mines or began the mining and removal before he granted the life estate 1. BUT unless the future interest holder consents, the life tenant cannot begin or conduct mining operations on the property if no mining took place on the property before the life estate began A trust could have solved the Baker v. Weedon problem a. Trusts are the way most estate planning is done b. Trustee hold legal fee simple – as manager of trust, he may be directed to pay all the income to the life tenant or let life tenant into possession i. Trustee makes the decisions for the beneficiaries ii. If beneficiary is not being treated fairly by the trustee, he can sue c. Trustee administers the trust for the benefit of the life tenant and remainderman  trustee has power to sell, leae, mortgage, etc Valuing a life estate and remainder interest a. Present estate (life estate) + future interest (remainder interest) = 100% b. Key to analysis – future value and present value i. The value of $1 today is $1 ii. The value of $1 tomorrow is less than $1 today  you look at future cash flows (interest) c. Present value reflects future expected cash flow

i. Formula = PV = CF /(1 + i) ^n 1. CF = cash flow ($ you’ll get in the future) 2. i = interest rate 3. n = years remaining ii. Assuming interest rate of 3% means that you should pay 97 cents for $1 a year from now d. If the life tenant is 1-2 years old, the valuation of their interest will be around 98%ish i. This starts out a little lower then gets higher, then begins to depreciate  this is because there is a slightly higher rate that an infant will die than a little kid 10. Was it a fee simple or a life estate? a. A court trying to figure out what type of estate was conveyed will first read the plain language of the document, attempting to ascertain the grantor or testator’s intent  cardinal rule of testator’s intent b. If that doesn’t work, the court uses the rules of construction c. One rule of construction is that the testator intended to give away all his property through his will (partial intestacy is disfavored) d. Another rule is that a grantor or testator conveys his full interest in the property unless the intent to pass a lesser estate is clearly expressed or necessarily implied by the terms of the deed or will i. Presumption that fee simple was intended White v. Brown Decedent conveys state “to P to have my home to live in and not be sold.” In reading wills, when its unclear, look to the intentions of the grantor (i.e. testator), when its confusing, the default rule is fee simple  this tends to clean up title  when a will is susceptible of 2 constructions, by one the testator disposes of his whole estate and by the other he dispose of only a party of his estate, the construction disposing of the whole estate is preferred if that construction is reasonable and consistent with the general scope and provisions of the will (no partial intestacy unless the intention of that is clear). Court said this was not a life estate and the restraint on alienation was void  turns it into a fee simple absolute to P. Dissent thinks “to live in” created a life estate e. The law construes the words of a grant against finding that an estate is entailed 11. Absolute restraints on alienation are void a. Why? i. Makes property unmarketable (eliminates marketability) ii. Discourages improvements on the land iii. Perpetuates concentration of wealth by making it impossible for the owner to sell the property

21

iv. Prevents owner’s creditors from reaching the property (hardship on creditors who rely on the owner’s enjoyment of property when extending credit) – especially for unsecured debt v. Ties up property well into the future (see rule against perpetuities) b. Basic economic tenet of property law is that property should be freely alienable  if we take this away it leads to inefficient economic use c. The only real argument to allow restraints on alienation is that they encourage charitable giving 12. Types of restraints a. Disabling restraint – holds from the grantee the power to transfer his interest b. Forfeiture restraint – if the grantee attempts to transfer his interest, it is forfeited to another person i. Could be valid in life estates c. Promissory restraint – grantee promises not to transfer his interest i. Enforceable by contract remedies (damage or injunction) 13. Restraints on marriage are often struck down as violations of public policy a. If the purpose of the restraint is to penalize marriage, the restraint may be struck down b. If the purpose is to give support until marriage, when the new spouse’s obligation of support arises, the restraint is valid 14. Partial restraints may be permitted if reasonable in purpose, effect, and duration 15. Intestate succession – Inheritance/descendabilty a. If a person dies testate, his estate is distributed according to his wishes b. If a person dies intestate, the decedent’s real property descends to his heirs i. The intestate’s estate is distributed pursuant to state law ii. You go to surrogate court, make administrator’s name, contract all heirs, etc  lengthy and messy process c. Heirs are persons who: i. Survive the decedent and ii. Are designated as intestate successors under the state intestate succession laws d. We don’t know who the heirs are until the person dies  the statute only applies at death e. An heir has no interest in the real property until the death of the decedent f. The order of inheritance via intestate succession is this: i. Issue 1. Descendants (not just children) 2. 2 methods of distributing property to issue a. Per capita – each generation shares equally (lockstep) i. A is decedent ii. B, C, D are issue iii. B is dead but has 2 issue B1 and B2 iv. D is dead but has 1 issue D1 v. C gets 1/3, you split the remaining 2/3s 3 ways to go to B1, B2, and D1 (each of them now gets 2/9) b. Per stirpes (“by representation” in NY) – the right of representation within a generation (trickle down) i. Only has impact when a child predeceases the decedent 1. A is decedent 2. B, C, D are issue 3. B is dead but has 2 issue B1 and B2 4. B, C, and D would each get 1/3 of A’s estate, but now C and D get their 1/3 AND B1 and B2 each get 1/6 (i.e. B’s share) 5. If D was dead and had 1 child, that child would get D’s 1/3 share ii. If no issue, then ancestors 1. Parents, grandparents, great-grandparents iii. If no ancestors, then collaterals 1. All persons related by blood who are not descendants nor ancestors a. Brothers, sisters, nephews, nieces, uncles, aunts, etc

g.

iv. If no collaterals, then it escheats tot the state 1. If a person dies intestate, without any heirs, the estate is said to escheat to the state Inheritance hypo i. O conveys Greenacre to “A and his heirs” ii. A’s only child, B, runs up a lot of debt iii. Can B’s creditors attach B’s property to satisfy his debt iv. Does B have an interest in Greenacre reachable by B’s creditors?

22

1.

2.

No, B has no interest in Greenacre which the creditors could reach. A hope of inheritance is a “mere expectancy.” The status of being an heir is not determined until the death of A a. Future interest = property interest that will become possessory (i.e. remainder or reversion) b. Creditors could still not touch a future interest Remember that the word heir means the interest at the death of that person  the heirs are not determined until A dies

Estate Fee Simple (freehold) Fee Tail (freehold) Life Estate (freehold) Term of Years (nonfreehold)

5.

Duration Forever (infinity) Until original grantee’s lineage dies out For the life of the grantee (or 3rd person) Fixed period measured in years, months, or days

DEFEASIBLE FREEHOLD ESTATES 1. 2. 3. 4.

Defeasible = subject to a special provision that may end the estate prematurely, if a particular event occurs a. Opposite of absolute All these estates are potentially infinite in duration, devisable, descenable, alienable Generally used to restrict the use of the property (common for charitable stuff) 3 types of defeasible fee simple estates a. Fee simple determinable i. Automatically ends when a stated event happens ii. Fee simple reverts back to the grantor 1. Future interest created: possibility of reverter iii. Created by language connoting that the transferor is conveying a fee simple only until an event happens 1. “so long as the premises are used for school purposes” 2. “while used for school purposes” 3. “during the continuance of said school” 4. “until it is no longer used for a school” iv. Present interest: fee simple determinable v. Future interest: possibility of reverter 1. Held by grantor b. Fee simple subject to condition subsequent i. Does not automatically terminate but may be cut short at the grantor’s election when a stated condition happens ii. Grantor has a right to re-enter and retake the premises iii. Created by language connoting that the fee simple may be divested by the grantor if the event happens 1. “but if …” 2. “provided, however, that when the premises” 3. “on condition that if the premises” 4. Extremely subtle differences between this and language used to create the fee simple determinable iv. Fee simple may go back to grantor if he exercises his rights to take it v. Present interest: fee simple subject to condition subsequent vi. Future interest: right of entry 1. Held by grantor Mountain Brow Lodge v. Toscano Grantors put clause in deed that says property is for the use of the lodge only, if it is not used by the lodge or transferred to another party, it reverts back to grantor. Is it a defeasible fee or an unlawful restraint on alienation?  the objective in construing a deed is to ascertain the intention of the grantor from words and surrounding circumstances  language which expressly restricts sale or transfer of property will be stricken as an impermissible restraint against alienation, BUT limitations on the use of property, although may serve to impede its transfer, will not be void as a restraint against alienation. Dissent says restriction here is a restraint against alienation

23

vii. Language creating this type of estate might be construed by a court to create either the fee simple subject to condition subsequent (enforceable by forfeiture) or a covenant imposed to benefit the grantor’s retained land (enforceable by injunction or damages) viii. In most states, the possibility of reverter and the right of entry are transferable inter vivos Mahrenholz v. County Board of Trustees H gave land to school out of their lot, deed said “this land is for school purposes only, otherwise to revert to grantors herein”  determinable or condition subsequent? H then sells all of land AND their reverter interest in the school’s land (their future interest) to J. Under that state’s law, neither interest could be alienated or devised (BUT the modern trend is that they can be transferred to other people)  so their transfer was void. J transfers to M. H dies – leaving estate to son. School starts using land as storage space – school purposes? Son disclaims his interest in favor of defendants AND he disclaims his interest and released the any possibility of reverter or right or reentry to school’s ground  upon a grant of exclusive use followed by an express provision for reverter when that use ceases, a fee simple determinable rather than a fee simple subject to condition subsequent is created c.

d.

e.

5.

Fee simple subject to executory limitation i. Property may go to a third party upon the happening of some event ii. Created by the Statute of Uses in 1536 – allowing grantors to pass future interests following a defeasible fee simple to a third party iii. Present interest: Fee simple subject to executory limitation iv. Future interest: executory interest 1. Held by grantee Adverse possession and defeasible estates i. Statute of limitations begins running against the holder of a possibility of reverter on the day the condition subsequent happens ii. Statute of limitations begins running against the holder of a right of entry only when the holder exercises his right to retake Eminent domain and defeasible estates i. Gov. condemns land owned in fee simple defeasible with a future interest retained in grantor/grantee or their heirs  city has to pay fair market value of land, but how is that divided? ii. Majority view – Where a defeasible fee is condemned, the holder of the fee takes the entire condemnation award  future interest holder takes nothing iii. Rest. – if the defeasible fee would probably not end within a reasonably short period of time, the fee owner should have the entire award iv. City of Palm Springs v. Living Desert Resort 1. Gov is given land under fee simple subject to conditional subsequent, but gov wants to use it for other stuff, so they use eminent domain and condemn it  when the condemnor owns the present possessory interest in the land, the action of condemnation itself makes violation of the condition imminent  future interest holder is compensated for 100% of the value of the unrestricted fee in the land v. Ink v. City of Canton 1. Guy gave land to city on condition that it be used for park, state condemned all but a little piece of it  court awarded the city only the value of the land as restricted to use as a public park – original grantors were awarded the difference between that amount and the value of the land in fee simple absolute (also given a reversionary interest in the remaining piece of land and in the proceeds awarded the city in the event that the city did not use the proceeds to maintain the park (on the land they had left))

FUTURE INTERESTS A person’s interest in property has 2 analytical components  Interest is either a present interest or a future interest  The interest is held in some type of estate “X has a (present/future) interest in _______” “X has a vested remainder held in life estate” 1.

GENERALLY

24

1.

2. 3. 4.

5.

6.

A future interest is a nonpossessory interest that will—or may—become a possessory estate in the future  i.e. a future possessory interest a. E.g. if O conveys land “to A for life,” O retains a future interest to retake possession when A dies b. Future interests confer rights to the enjoyment of property at a future time c. Future interests are not mere expectancy (i.e. heirs), they are legally protected property rights Future interests are presently existing interests but not presently possessory interests Rules governing future interests arose out of the social and economic conditions prevailing in England after the decline of feudalism Future interests show the historic tension in English law between individual autonomy and social welfare  common law is a grudging compromise between these goals  Future interests could be created, but were restricted by various devices About remainders a. Remainders are created in persons other than the transferor b. A remainder is a future interest that is capable of becoming possessory at the termination of the prior estate  it is not required that the future interest be certain of future possession only that it be possible for the interest to become possessory when the prior estate ends i. If, at the time of creation, it is not possible for it to become possessory upon the termination of the prior estate, it is not a remainder 6 types of future interests a. 3 interests retained by the transferor: i. Reversion 1. When an owner conveys an estate smaller than the estate he owns, he retains a future interest called a reversion  The interest left in an owner when he carves out of his estate a lesser estate a. Arises in the case of life estates, leaseholds, etc 2. “Reverts” back after the normal termination of the previous estate 3. Freely transferable ii. Possibility of Reverter 1. Arises (automatically) when an owner carves out of his estate a determinable estate of the same quantum a. Almost always a fee simple determinable, but it can be a life estate too 2. Termination after the occurrence of an event 3. Freely transferable iii. Right of entry 1. When an owner transfers an estate subject to condition subsequent and retains the power to cut short or terminate the estate, the transferor has a right of entry 2. Freely transferable b. 3 interests created in a transferee: i. Vested remainder 1. A future interest in a transferee that is certain to become possessory upon the expiration of the prior estate created at the same time  ascertained and no condition precedent 2. E.g. “To A for life, then to B and her heirs” a. B has a vested remainder in fee simple b. Upon A’s death, B or his heir is entitled to possession in fee simple c. A = present interest d. B = future interest (vested remainder in fee simple) e. Doctrine of merger – you negotiate with A & B to buy their both interests and create (“merge”) a fee simple absolute 3. Natural termination 4. 3 types of vested remainders a. Indefeasibly vested remainder – it is certain of becoming possessory and cannot be divested i. E.g. “To A for life, then to B and his heirs” b. Vested subject to open – created in a class of persons in which one member of the class is ascertained and there is no condition precedent i. E.g. “To A for life, then to A’s children and their heirs” 1. A has 1 child, B 2. B has a vested remainder subject to open c. Subject to divestment – vested to someone but something can occur that will cause them to lose their vested interest (condition subsequent) ii. Contingent remainder

25

1.

7.

A future interest in a transferee who is unascertained or whose interest will become possessory at an unestablished time  unascertained party or subject to a condition precedent 2. E.g. “to A for life, then to A’s eldest son and his heirs” 3. Natural termination iii. Executory interest 1. Created by the Statute of Uses (1536)  fee simple subject to executory limitation 2. Ordinarily treated as contingent interests because they are subject to a condition precedent and don’t vest until they become possessory 3. An executory interest divests or cuts short the preceding interest a. It doesn’t wait until the natural conclusion of the prior estate, like a remainder does 4. A fee simple divested in favor of a third party is a fee simple subject to executory limitation 5. 2 types of executory interests a. Springing – divests the grantor b. Shifting – divests a third party When analyzing this shit, look at two things a. Who is it going to – grantor or grantee? b. When is it going there – natural termination or occurrence of an event?

Grantor/Transferor

Natural Termination Reversion

3rd Party

Remainder 8.

Divests/Cuts Short Possibility of Reverter Right of Entry Executory Interest

Some hypos a. O conveys “To A for life, then to B and her heirs” i. A has a present interest in life estate ii. B has a (vested) remainder interest in fee simple absolute (a future interest) iii. O has no interests left b. O conveys “To A for life, then to B and the heirs of her body” i. A has a present interest in life estate ii. B has a remainder interest in fee tail iii. O has a reversion interest – remote possibility that if B has no heirs of the body (i.e. dies without issue), it would come back to O c. O conveys “To A for life, then to B and her heirs if B attains the age of 21 before A dies.” B is 15 at time of conveyance i. A has a present interest in life estate ii. B has a (contingent) remainder interest in fee simple absolute iii. O has reversionary interest – if A dies and B is not yet 21 d. O conveys Blackacre “To A for life, then to B for life.” O dies testate devising all property to C. i. A has life estate ii. B has (vested) remainder interest in life estate iii. O has reversion interest – he has the right to devise (or sell) it to C iv. C has a vested remainder interest in fee simple absolute e. O conveys “To A for life, then to B if B gives A a proper funeral” i. A has present interest in life estate ii. B has executory interest b/c it is divesting O’s reversionary interest 1. Look at time between the death and funeral f.

g.

iii. B is not getting the property at the natural termination (springing executory interest) O conveys “To A for life, then to B and her heirs if B graduates from law school, whether her graduation is before or after A’s death” i. A has a present interest in life estate ii. For B 1. Shifting executory interest if she graduates before A dies 2. Springing executory interest if she graduates after A dies O conveys “To A for life so long as she farms Blackacre, but if she does not, to B” i. A has a present interest in a determinable life estate ii. B has a remainder – possessory at A’s death 1. It can also come sooner – by A’s not farming – but that earlier termination does not turn B’s interest into an executory one  it would be if that were the only possible way B’s interest

26

could end, but it isn’t  A’s life estate being determinable does not prevent B’s interest from being a remainder h. O conveys “To A for life, then to A’s children and their heirs.” A has one child, B. i. B has a vested remainder subject to open (the class could grow) 1. We’ll know B’s share only when A dies ii. If A had no children, this remainder interest would be contingent – it’s vested b/c there’s a child in existence i. “To A for life, and in the event of A’s death, to B and her heirs” i. Vested remainder, just phrased oddly j. If B conveys her interest back to O, what interest does O have? i. This doesn’t change anything – its still a vested remainder 1. How does it differ from a reversion? It doesn’t but you don’t change the name k. “To A for life, then to A’s children who shall reach 21.” A’s oldest child, B, is 17 i. Contingent remainder b/c we don’t know if A will reach 21 (condition precedent) l. B reaches 21 i. Now its vested remainder but subject to open (A can have more children who reach 21) 9. Vested remainders have always been alienable, devisable, descendible 10. In most states, contingent remainders are transferable and reachable by creditors Estates in Real Property, with Future Interests Freehold Estate

Future Interest

Type

Wording

Grantor

Third Person

Fee Simple Absolute

“To A” “To A and his heirs”

None

None

Fee Simple Determinable / Subject to an Executory Limitation

“To A so long as…” “while…” “during…” “unless…” “until…”

Possibility of Reverter

Executory Interest

Fee Simple Subject to a Condition Subsequent / Executory Limitation

“To A provided that…” “on condition…” “but if…”

Right of Reentry

Executory Interest

Fee Tail

“To A and the heirs of his body”

Reversion

Remainder

Life Estate

“To A for life”

Reversion

Remainder Executory Interest

Non-Freehold Estate Term of Years

2.

Future Interest

“To A for __ years”

Reversion

Remainder

THE RULE AGAINST PERPETUITIES

Step 1: Determine which future interests have been created by your conveyance Step 2: Identify the conditions precedent to the vesting of that suspect future interest Step 3: Find a measuring life Step 4: Will we know with certainty within 21 years of the death of your measuring life if your future interest holder can or cannot take?

27

1.

Its all about when it will vest, not when it will come into possession a. It’s not about if there is someone there for it to vest in, its about whether or not we will know if it will vest or not

2.

A future interest, in order to be valid, must vest, if at all, within 21 years of the death of a life in being (any life that is alive right now, at time of conveyance) a. It must be logically provable that within the specified period a covered contingent interest will either vest (that is, change into a vested interest or present estate) or forever fail to vest (that is, never vest after the period ends), based only on facts existing when the future interest becomes effective Each future interest must be assessed separately and must have its own validating life (they can all be the same validating life)

3.

Step 1: Determine which future interests have been created by your conveyance 4. 5.

Vested remainders are not subject to the rule What is subject to RoP a. Contingent remainder b. Executory interests c. Class gifts (subject to open) – “all or nothing” rule i. All or nothing rule – if a gift to one member of the class might vest too remotely, the whole class gift is void  a class gift is not vested in any member of the class until the interests of all members have vested ii. For a class gift to be vested under the rule, the class must be closed – each and every member must be in existence and identified and all conditions precedent for each and every member must be satisfied within the perpetuities period

Subject to RAP Contingent remainders Vested remainders subject to open Executory interests

Not subject to Rap Vested remainders Vested remainders subject to defeasance Reversions Possiblities of reverter Rights of entry

Step 2: Identify the conditions precedent to the vesting of that suspect future interest 6.

What has to happen before your future interest holder can take?

Step 3: Find a validating life 7.

8.

9.

We need to find a validating life – a person who can affect vesting or termination of the lease a. We need a person who will enable us to prove that he contingent interest will vest for fail: i. Within the life, or ii. At the death of the person, or iii. Within 21 years after the person’s death Pool of possible people includes a. Those who can either affect the vesting or taking possession of the challenged interest  those who will either make it happen or who stand ready to receive its benefits, or b. Those who are in some way connected to the transaction Pool includes all those who can control the termination of the preceding estate or who can meet any precondition to vest in the challenged interest itself

Step 4: Will we know with certainty within 21 years of the death of your measuring life if your future interest holder can or cannot take? 10. Some hypos a. “To A to life, then to B, if B attains the age of 30. B is 2” i. Step 1: it is a contingent interest (remainder) ii. Step 2: B must reach 30 iii. Step 3: B’s life and death are relevant to condition  validating life

28

iv. Step 3: We will know for sure if this condition is met at B’s death v. VALID b. “To A for life, then to A’s widow if any, for life, then to A’s issue then living” i. The life estate to the widow 1. Step 1: contingent remainder 2. Step 2: A must marry and die first 3. Step 3: A’s life is relevant to this condition being met 4. Step 4: At A’s death we’ll know if its vesting or not (either he has a widow or he doesn’t) 5. VALID ii. The fee simple absolute to A’s issue then living 1. Step 1: contingent remainder (unascertained persons) 2. Step 2: A must have children and they must be living after any potential widow has died 3. Step 3: the widow’s life is relevant to these conditions being met  but the widow isn’t determined until A’s death 4. INVALID – We don’t necessarily know within 21 years of a life in being if it will vest a. A’s wife could die and he could remarry – new wife is not a life in being c. “To A for life, then to A’s first child to reach 21.” A has no children i. 1: unascertained person ii. 2: A must have children, one must reach 21 iii. 3: A’s life is relevant to this condition being met iv. 4: We will know for sure at A’s death + 21 years because any child of A who reaches 21 will necessarily reach it within 21 years of A’s death  any age older will be a problem 11. Speed hypo 12. T devises “To A for life and upon A’s death to A’s children for their lives, and upon the death of A and A’s children to ______ (A & B survive T) a. B if A dies childless i. Valid (we’ll know at A’s death if it vests) b. B if A has no grandchildren then living i. Invalid (we won’t know until the death of A’s children  a class not in being at time of conveyance) c. B’s children i. Valid (we’ll know at B’s death if it vests) d. B’s children then living i. Invalid 1. The possibility is that B could have an afterborn child after the death of A’s children  its not fixed within the death of either A or B a. Afterborn – a child born after execution of a will or after the time in which a class gift closes e. A’s grandchildren i. Invalid (not determined until after the death of A’s children and A’s last child may be afterborn (i.e. not a life in being) f. T’s grandchildren i. Valid (T’s children is a closed group, so they are validating lives) 6.

CO-OWNERSHIP OF PROPERTY 1.

CONCURRENT INTERESTS 1. 2.

Concurrent interest – a present estate in real or personal property can be simultaneously owned by two or more persons, each holding the right to concurrent possession  ways to own property with at least one other person 3 basic types a. Tenancy in Common i. Each co-owner holds a separate, undivided share in the whole 1. Each owns a specific portion of the whole 2. Each has seisin (title and right to possession) 3. Each is presumed to own the property in proportion to his contribution ii. Each co-owner is entitled to simultaneous possession and enjoyment of the whole parcel – even if they own vastly different shares of the property iii. No right of survivorship 1. If one dies, it goes to the that guy’s heirs, NOT to the other guy iv. Any devise to two or more unmarried persons is presumed to create a tenancy in common (e.g., “to A and B”)

29

v. Freely transferable during the holder’s lifetime and at death  alienable, devisable, descendable 1. One co-tenant can mortgage his interest 2. Transferees become tenants in common with the remaining tenants in common vi. Can be reached by creditors 1. Creditors can reach your interest (and become a tenant in common with the remaining guy) b. Joint Tenancy i. Each co-owner owns an undivided portion of the whole ii. Differs from the tenancy in common in that a joint tenant has a right of survivorship 1. Interest in a joint tenancy is not devisable nor descendible a. Cannot arise from intestate succession b. Could possibly arise from adverse possession – 2 people taking under faulty deed naming them as joint tenants 2. If O conveys land “to A and B as joint tenants, with right of survivorship,” and A dies first, then B holds fee simple absolute a. If A and B die simultaneously, most courts treat the half property as if one survived and the other half as if the other  treating it as a tenancy in common and giving heirs of each an equal share b. If A murders B, the murderer forfeits the right of survivorship, but not his interest i. Murder turns it into a tenancy in common 3. Eliminates need to go through probate – judicial supervision of the administration of the decedent’s property a. Probate = costly, long b. Joint tenancy is often used as a will substitute 4. A joint tenant may transfer or assign his share inter vivos  this ends the joint tenancy as to the transferee, who now holds as a tenant in common with the other tenants (who remain joint tenants) iii. Need 4 unities to create and continue a joint tenancy 1. Joint tenants must: a. acquire title at the same time b. acquire title by the same deed or will c. share equal interests, identical in size, duration, etc d. each have an equal right to possession of the whole i. (this is the only unity that a tenancy in common requires too) 2. If one guy with fee simple wants to create one, he needs a strawman (but many states have eliminated this requirement  permit direct transfer from one person to himself and another) iv. Not presumed 1. Joint tenancy must be designated – otherwise it is tenancy in common (default) a. So to make a joint tenancy, you need the 4 unities and you need the specific language that this is a joint tenancy (i.e. “with right of survivorship”) v. No limit on number of co-tenants vi. Consent by one co-tenant to permit others into house (e.g. police) is not consent binding on others 1. “The act of one joint tenant without express or implied authority or consent from the other cannot bind or prejudicially affect the other” (Sampson) vii. Right of survivorship creates important consequences for creditors 1. If a creditor acts during a joint tenant’s life, the creditor can seize and sell the joint tenant’s interest 2. If he waits past death, he can’t (it belongs to other tenants) viii. Hypo 1. “To A and B as joint tenants, remainder to survivor of them” a. This DOES NOT create a joint tenancy with a right of survivorship b. It creates joint life estates, with a contingent remainder in the survivor c. Different legal consequences d. If joint tenancy, any tenant can unilaterally sever his interest and become a tenant in common  destroys survivorship rights of other party e. If joint life estates with contingent remainder, neither tenant can unilaterally terminate survivorship of the other ix. Severing a joint tenancy (turning into a tenancy in common) 1. Severance = destruction of the 4 unities 2. What severs it? a. Written agreement by parties (intent must be clear)

30

3. 4.

i. An agreement giving on party rent from and possession of the land for life doesn’t destroy the unity of possession – it just amends the rights with respect to possession b. Conveyance of an interest by one party c. Partition d. Mortgage (in some title theory states, foreclosure in lien theory states) e. Murder by one joint tenant of the other Conveyance – a strawman used to be required to do this Now they just let a joint tenant execute a deed to himself – joint tenancy can be severed by either tenant without giving notice to the other party a. No notification/consent of the other tenant b. No notification of the third party c. No recordation (putting it in the registrar’s office)

Riddle v. Harmon P’s wife, the decedent, owned property in joint tenancy with P. She did not want her interest to pass to P, grants herself an undivided one-half interest in the property, making her a tenant in common, deed was drawn up, will devising her tenancy in common to a third party was executed. P challenged estate plan  A joint tenancy may be terminated by the conveyance by one joint tenant of his interest in the joint tenancy property to himself (discards rule that you can’t enfeoff yourself)  one joint tenant may unilaterally sever the joint tenancy without the use of an intermediary device 5. 6. 7.

Courts have disagreed over whether a severance results from one joint tenant’s granting a mortgage to secure a loan  distinction comes down on title theory vs. lien theory Title theory – a mortgage conveys legal title to the creditor  creditor owns the debtor’s interest in fee simple determinable, to revert back to debtor when the debt is paid a. In title theory states, a mortgage will sever the joint tenancy Lien theory – a mortgage is security for a loan  title remains with the debtor a. In lien theory states, a mortgage will not sever it i. But it does attach to the property, and if the creditor forecloses it can sever it ii. Some states say the attachment stays even if mortgaging tenant dies, some say no b. FYI: a lien is an interest in property but not as much as seisin (more like a stamp on the property)

Harms v. Sprague 2 brothers have joint tenancy, one takes out a mortgage on it, doesn’t tell the other. Then that brother dies. Does the other inherit the debt? Depends on if mortgage severs joint tenancy (If mortgage severs the joint tenancy, the mortgage would apply to one half of the interest). Court says it doesn’t sever it  a mortgage on a joint tenant’s interest does not survive the mortgagor. A mortgage will not constitute a change of title until foreclosure plus the running of any redemption period. Since a mortgage does not sever a joint tenancy, the entire estate of the decedent joint tenant passes to the survivor. This effects a nullification of any liens thereon 8. 9.

If you are a mortgagee, make sure all tenants sign a. They usually won’t give one otherwise Generally a lease does not sever a joint tenancy  a short-term lease by one joint tenant definitely doesn’t a. BUT the lease will end on the death of the leasing tenant  lessee has possessory rights through the lessor joint tenant  when that tenant no longer has an interest, the leasee loses his (regardless of whether leasee has notice or lease hasn’t run out i. BUT, leasee can sue decedent’s estate for damages for the premature termination b. During the term of the lease, the non-leasing joint tenants have no cause of action to cancel it

Swartbaugh v. Sampson (the boxing ring case) Husband and wife are joint tenants. Husband leases 2 lots to other guy – wife doesn’t consent, is not happy with this, sues to have leases cancelled. Court says she wasn’t ousted (her use of the property hasn’t been interfered)  Lease is valid  lease didn’t sever the joint tenancy, wife entitled to rent,

31

could ask for partition  lease will end at the death of the tenant that made it  this is a risk that the leasee takes 10. If you are leasee, make sure both tenants sign it x. Generally, you don’t want a joint tenancy – too many problems xi. Hypo 1. A and B have joint tenancy, A racks up a large credit card debt, his creditors sue to get a lien on the property that is jointly owned a. Court will allow the creditor to put a lien on the property, when its sold the lien must be paid i. Or levy and sale of joint tenant’s interest will sever it – if that point comes b. What if A dies? c. His interest dies and the lien dies with him d. If B dies, then A gets the whole property and the creditor can enforce his lien xii. Partition (available to joint tenants and tenants in common, not tenants by the entirety) 1. One party wants to sell it and leave the other does not 2. The party who wants out brings a partition action 3. Two types of partition a. Partition in kind i. Physical partition ii. Favored by courts (doesn’t require forced sale) iii. Court divides the property into parcels of equal value, each co-tenant receives a separate share iv. When fewer than all co-tenants seek partition, they receive separate parcels and the others own the rest as co-owners v. If a court can’t partition it fairly, sometimes a party may be ordered to buy out the other – this is called owelty vi. Criticism – may not ensure best economic use of the property b. Sale – ordered to be sold and proceeds are split i. More common than in-kind partition b/c parties prefer it or court things it’s the fastest and fairest way to resolve the conflict ii. When partition in kind is not practical or advisable (e.g. single family residence) iii. Judicial discretion used in administering sale iv. Works best when physical partition would be messy (shape of property, nature, etc) v. Criticism – forces a tenant to give up possession of his own land (sentimental) Delfino v. Vealencis P owned undivided 99/144 interest in land which D owned 45/144 interest. Property held as a tenancy in common. P wanted to develop residential housing on the tract and sought a partition sale. D wants partition in kind, used her portion for operating garbage removal business, says property rectangular and easy to physically partition  Partition sales are employed only where partition in kind is unavailable. Partition sales should be employed only in extraordinary circumstances, as the forced sale of a party’s interest should be avoided. Here, limited number of interests and relative ease of division makes partition workable 4. You can’t make an agreement not to partition – it would be a restraint on alienability xiii. Joint bank accounts 1. True joint tenancy account – either party has access to the funds and the surviving party receives proceeds on the death of the other party 2. Payable-on-death account – only survivorship rights a. Sounds like a will – only recently been accepted 3. Convenience account – only power to draw on the account (no survivorship rights) 4. Majority rule over survivorship  a joint bank account means survivorship but this can be rebutted with clear and convincing evidence of the intent of the parties 5. Majority rule over present access  each party owns the account to the extent of their respective contribution xiv. Hypos

32

1.

c.

3.

O, a widow, opens a joint bank account with A. O tells A “I’ll want your name on this account so that in case I am sick you can go and get the money for me” O dies. Is A entitled to the money? a. No, O didn’t intend to create joint tenancy here 2. A and B have a joint savings account for 40k. How much of the account can A’s creditor reach? a. They would be allowed to look at where the money came from in the account – if it didn’t all come from the other owner, it would be proportional and they could reach your proportion Tenancy by the Entirety i. Exists in fewer than half the states (21) ii. Can only be created in husband and wife 1. They own the property as a unit, not by equal shares 2. Right of survivorship is in the surviving spouse iii. Requires the same 4 unities as the joint tenancy PLUS the fifth unity of marriage 1. They must be married at the time they acquire the property 2. Engagement is insufficient iv. It can only be terminated only by divorce, the death of one spouse, or mutual agreement of the spouses  tenancy in common results (minority rule says joint tenancy results) 1. One spouse cannot unilaterally sever the tenancy 2. Neither spouse can seek judicial partition v. The danger in this is the case of a divorce or split up – now you have property in your spouse’s name vi. In states allowing it, a grant to husband and wife is presumed to create a tenancy by the entirety unless a different form is indicated in the deed (Ox says you must specifically use language for it) vii. How does it differ from joint tenancy? 1. Historically, it’s been given more protection from creditors (they can’t reach it) a. The law devised this to protect families 2. BUT, in most states, a creditor can foreclose on the property if both spouses are liable for the underlying debt or both have executed a mortgage (both must execute deeds on the sale of the property) 3. In some states creditors of one spouse cannot levy on property held in tenancy by the entirety viii. Sawado v. Endo 1. D gets in car accident (no insurance) with P, guy has judgment against him, only asset he has is his home which is held by tenancy by the entirety – can P get to his home? 2. D conveys the deed to his property to his son before the judgment – fraudulent transfer? a. Fraudulent transfer – a transfer with the intent to defraud someone (“I have no assets to pay you, sorry”) 3. Court doesn’t look at the fraudulent transfer issue b/c they first want to see if they could reach the property  even if it was fraudulent could we get it? 4. Court says NO – the separate creditors of either spouse cannot reach a tenancy by the entirety ix. Common law rule was that creditor can put a lien on the property, and hope the debtor survives the spouse – so they can collect (not really used much) x. Majority rule – you cannot break a tenancy by the entirety and a creditor cannot reach it 1. The only way the creditor can reach the property is if the debt is from both spouses 2. If the other spouse dies first though, and the debtor gets the property, then creditor can go after it xi. The IRS can reach a tenancy by the entirety (See Craft) – this may be expanded to let other creditors reach it too 1. Homestead protection doesn’t apply to IRS either xii. Homestead exception – statutory laws that give your principle residence protection for creditors 1. Statutes vary by how much in value is protected (e.g. in NY only the first 50k is) 2. Texas and Florida give the most protection  creditor cannot reach a person’s principle residence (but IRS can) xiii. Federal forfeiture law – if property is used in an illegal act, it is forfeited, except for any interest in an innocent owner  if you can prove you’re an innocent owner, then you don’t lose it

Rights and duties between co-tenants (for common, joint, by entirety) a. Each cotenant has an equal right to possession and enjoyment of the whole property, regardless of the share of his fractional interest (G&M) b. Majority view – even a cotenant in exclusive possession of the property is not liable to the other cotenants for rent, unless there has been an ouster

33

i. Ouster – occupying cotenant refuses a demand of other cotenants to be allowed to use and enjoy the property  you have to have requested to be let in and use the property and you have to be refused  this is the threshold for ouster (pretty high) 1. Other places have set the threshold lower 2. If you oust the cotenants, you have to pay them rent Spiller v. Mackereth P and D owned building as tenants in common. Their lessee, vacated, D entered, began using as a warehouse. P demands D vacate half of the building or pay half the rental value, D does neither  where there is no agreement to pay rent or an ouster, cotenant in possession is not liable to cotenants for the value of his use and occupation of the property c.

4.

Each cotenant is entitled to a pro rata share of (1) rents paid by third persons and (2) profits from the land i. “Accounting” – an action for contribution from other cotenants on the basis of rent and profits from land ii. Absent ouster, accounting is usually based on actual receipts, not fair market value iii. A cotenant doesn’t only have to lease out his share, he could lease out the whole thing – but then we have the issue of ouster (if the lease is ousting the other cotenant) 1. See Sampson (boxing lease) – no ouster, but yes rent d. Each cotenant has a duty to pay the taxes and interest on the mortgage i. Cotenant paying more than his share can sue others for contribution ii. BUT if cotenant is only one using the property, no contribution is permitted for carrying charges up to the fair rental value e. Each cotenant has a duty to pay for necessary repairs f. Improvements are not a duty of the cotenants (you don’t get contribution from the other cotenants on account of this) i. But you will get credit for value added if there is a partition g. Cotenant who makes a mortgage principal payment may seek contribution i. But not if he prepays entire thing, others pay as payment is due h. Generally, cotenants are not fiduciaries with respect to each other i. Each is expected to look after his own interest ii. BUT in some situations courts may treat them as having fiduciary duties, including: 1. Cotenants are members of the same family 2. One cotenant buys in concurrently owned property at a mortgage foreclosure or tax sale and then assert superior title against cotenants  buyer may have to hold the superior title for the benefit of all cotenants provided they reimburse him 3. Claim of adverse possession by one cotenant in exclusive possession (where they are kindred) a. Adverse possession against cotenants is not easily achieve  claim of sole ownership must be so unequivocal and notorious to put others on actual notice of the hostile claim (ouster alone may not be sufficient) Some other ways to hold property with other people (statutory) a. Partnership – much better choice than joint tenancy – all the provisions are spelled out in the agreement b. LLC – liability is limited like a corporation , but taxed like a partnership (very popular method of joint ownership of property) c. Corporation – only real reason to want this is to be publically traded Concurrent Ownership

Type of Tenancy

Definition

Creation

Termination

Tenancy in Common

Each tenant has a distinct, proportionate, undivided interest in the property. There is no right of survivorship

“To A and B”

May be terminated by partition

- OR “To A and B as joint tenants.” Only unity required is possession.

34

Joint Tenancy

Each tenant has an undivided interest in the whole estate, and the surviving co-tenant has a right of survivorship

“To A and B as joint tenants with the right of survivorship” (without survivorship language, it may be construed as a tenancy in common). Joint tenants must take: 1) identical interests 2) from the same instrument 3) at the same time 4) with an equal right to possess (the 4 unities)

Tenancy by the Entirety

2.

Husband and wife each has an undivided interest in the whole estate and a right of survivorship

“To H and W.” Many states presume a tenancy by the entirety in any joint conveyance to husband and wife where the four unities (above) are present

The right of survivorship may be severed (and the estate converted into a tenancy in common) by: 1) A conveyance by one joint tenant 2) agreement of joint tenants 3) murder of one co-tenant by another 4) simultaneous deaths of co-tenants A joint tenancy can be terminated by partition (voluntary or involuntary)

The right of survivorship may be severed by death, divorce, mutual agreement, or execution by a joint creditor. Tenancy by the entirety cannot be terminated by involuntary partition

MARITAL INTERESTS At marriage, it’s about romance; At divorce, it’s about property 1.

2.

3.

What is marriage? a. Economic partnership theory – you are stating that you agree to be subject to the laws with respect to the property ownership rights as set out by the state i. The partnership owns the property and the joint entity works together to collect assets and liabilities and they have an equal interest in these assets ii. Divorce is about the contributions of the parties – tough to value a lot of the time (like in O’Brien)  how do we value the contribution of the lesser earning spouse? 1. How the fuck do you value a degree? 2. Repugnant to Locke’s labor theory (or is it…, infra) b. Contract theory – you are making a contract with the other person with respect to the rights and duties of the parties (a quasi contract) Traditionally, the common law allowed men to exercise almost total control over marital property during the marriage, upon divorce, and at death a. Also, a spouse was not an heir of his or her husband or wife – but by virtue of the marriage, each held a life estate in some property of the other i. Husband obtained a life estate in all freehold lands owned by his wife during the marriage ii. At divorce, property was divided between the spouses according to who had title iii. At death: 1. Widow received dower – a life estate in one-third of her husband’s real property seised in fee simple 2. Widower received curtesy – a life estate in real property owned by his wife in fee simple or fee tail. 2 different systems of marital property have emerged a. Modern common law system – property is owned by the spouse who paid for or inherited it  a person’s property is separate from his/her spouse’s i. Via Married Woman’s Property Acts, rights in property during marriage are based on which spouse acquires it b. Community property system – husband and wife work as a unit for their mutual benefit  whatever one earns, and the proceeds of those earnings, is deemed owned by both as community property (i.e. property bought with husband’s wages is owned half by husband, half by wife) i. During marriage, the spouses have equal rights to use and control the community property

35

ii. Fundamental idea is that earnings of each spouse during marriage should be owned equally in undivided shares by both spouses iii. Neither spouse can convey his/her undivided share of the community property except to the other spouse iv. Neither can change community property into separate property without the consent of the other v. 8 states follow this approach 4.

5.

6.

Divorce a. Some states require marital fault before a divorce is granted (e.g. NY) b. Big movement in divorce is mandatory mediation  when you file a divorce you must try to go through mediation c. Gifts and inheritance are excluded in all systems/states d. Ante-nuptial agreements are usually about the property each party has coming into the marriage, though it could be anything (could just be a lump sum) i. The main issue regarding the validity of these agreements is whether the parties were counseled – if they did not have representation, then it will probably be thrown out ii. As long as its fair and the other party was counseled, its good iii. Unconscionability is a defense (there was insufficient disclosure of wealth and the agreement was unconscionable when made) iv. Extreme unfairness at the time the agreement was entered (not at the time of the divorce) e. The things that are at issue in a divorce are i. Property distribution 1. Assets and liabilities ii. Alimony 1. Idea that it is a lifelong obligation is no longer applied a. Lifetime alimony in the US is very rare 2. Support for a limited period of time until the spouse can enter the job market and become self-sufficient a. 3-5 years is usually the max 3. Now its called “rehabilitative maintenance” iii. Child support 1. Percentage of the non-custodial parent’s income 2. Set by statute, but judge has leeway How the 2 systems approach divorce a. Equitable distribution (common law approach) i. The marital property should be distributed equitably  gives the judge great latitude and lays out the factors to be used ii. During the marriage, each party maintains title to their property  then in the divorce, distribution is considered 1. Who holds title is not determinative 2. Separate property remains such – inheritance, devise, gifts, stuff each party brought into marriage iii. Start with 50/50, then look at all the factors to see how it will varies 1. Factors include the income of each spouse, the duration of the marriage, the occupational skills of each spouse, etc 2. Lesser earning spouse usually ends up with about 40% iv. Fault is not a factor, but waste is (e.g. hotel room for affair) b. Community property – property is 50/50, no questions asked i. Everything that comes into the marriage (except inheritance, devise, and gifts) is shared 50/50 ii. Property acquired before the marriage is separate property and belongs to the spouse who owned it before the marriage iii. Community property is divided between the spouses, often using equitable criteria – but 50/50 is the major theme to this system Valuing professional degrees a. Because professional degrees are not transferable and cannot be valued, are they “property” that is subject to distribution? b. Courts are split – 3 approaches i. Professional Degrees are not Divisible Property (majority) 1. In re Marriage of Graham a. Husband was engineer who went for MBA degree (worked part-time), wife is stewardess (contributing 70% of financial support during marriage) b. Degree not property that can be divided  not transferable, doesn’t have exchange value in any type of market, not descendible  product of hard work

36

c.

No basis in precedent, not encompassed even by the broad views of the concept of property. There are other ways for a spouse contributing to education to be compensated 2. Locke’s labor theory says the person who put in the time and effort earns the degree  BUT it could just as easily be used to support wife’s claim that she put in time and effort too (as a partner) ii. Professional Degrees are Divisible Property (minority/NY) 1. O’Brien v. O’Brien (what were parties’ expectations?) a. Wife contributed 76% of the parties’ income during marriage (husband was off in med school) b. Husband’s medical license is marital property that must be assessed for fair market value and divided  Present value analysis of future earnings as an average college graduate up to 65 compared to the present value of future earnings of an average doctor to 65 (regardless of how you are using the degree – e.g. volunteer doctor, etc) i. Commonly-used, across-the-board formula for these kind of cases c. It’s OK to value this kind of stuff, we do it all the time in tort (e.g. wrongful death, etc) 2. Elkus v. Elkus – extends O’Brien even further to professional career earnings  Wife’s career as opera star is marital property (husband facilitated – voice coach, took care of kids, etc; she wasn’t rich/famous before) 3. Schmudde doesn’t like how this kind of claim is just asserted like that – who knows if he actually did stuff that helped her – its just one testimony against the other iii. Reimbursement Alimony Approach – the spouse’s contribution to the other’s successful professional training is a factor to be considered in calculating maintenance (middle ground) 7. Professional goodwill is a divisible marital asset in most jurisdictions, even in those that do not treat enhanced earning capacity from a professional degree as a marital asset subject to equitable distribution 8. Palimony – compensation made by one member of an unmarried couple to the other after separation a. Marvin Mitchellson case (CA – no common law marriage here) i. Contract theory  equivalent to marriage  he promised me he was going to take care of me in the future ii. Bringing in contract law to achieve what common law marriage does  marriage/support as an express/implied promise 9. Common law marriage a. Used to be a common law concept b. Exists in 11 states today (not NY) c. The rule is that generally if parties cohabit for over 7 years, they will be treated as being married (legally) d. Parties must manifest their intention to be husband and wife and hold themselves out to the public as husband and wife (and sustain the year requirement) e. Parties married under common law have same rights as couples married with license and ceremony 10. How the 2 systems approach death of a spouse a. Old common law approach was dower and curtesy (life estates) i. Wife got 1/2 if there were no children, 1/3 if there were children (you couldn’t write the spouse out) ii. Husband got all of the wife’s personal property, but no inheritance right to real property iii. Dower/curtesy still used in 4 states b. Elective share (current common law approach) i. According to state law, the surviving spouse may elect to either abide by the terms of the decedent spouse’s will or take a share (normally 1/3 to 1/2) of all property the decedent owned at death 1. In every state there is marital election  you cannot write a spouse out of the will ii. The elective share has replaced dower and curtesy in almost all common law jurisdictions iii. You can get around elective share with a prenup iv. When a spouse is given less than an elective share, they can opt to contest the will and go with their share under elective share statute v. Elective share only applies to property owned by decedent at death 1. It doesn’t apply to joint tenancy property (with the right of survivorship, that passes automatically to other tenant) 2. It doesn’t apply to insurance proceeds (you can opt to leave that fully to your kids, not your spouse, if you choose to) c. Community property system i. At death the decedent spouse may transfer by will one half of the community property; the other half belongs to the surviving spouse

37

ii. No survivorship feature iii. In most community property states, if a spouse dies intestate, his/her share of community property goes to surviving spouse 11. Migrating couples a. Whether property is characterized as in accord with community property system or common law property system depends on the domicile of the spouse where the property is acquired i. E.g. wife earns 1k and buys horse with it – if parties are domiciled in NY, the horse belongs to the wife alone; if domiciled in Texas, it’s community property b. Once the property has been initially characterized as separate or community, the ownership does not change when the parties change their domicile unless both parties consent to the change c. When a person dies, the law of the decedent’s domicile at death governs the disposition of personal property and the law where the land is located governs the disposition of land d. Community property laws in most states do not give the surviving spouse a forced share in the decedent spouse’s property owned at death 12. Rights of domestic partners (two theories) a. Gay marriage b. Domestic partnership i. Many states have adopted this theory ii. Allows gays to form economic partnership and have the same rights as legally married couples (without some of the same rights as marriage) c. Rights that are currently not available to gay couples who wish to marry: i. Social security rights, health benefits, income tax filing stuff (joint filing), homestead protections, tenancy by the entirety, elective share statutes, intestate succession, equitable distribution upon divorce, maintenance, pension options, benefit plans, preferential treatment under state medical programs, veteran’s benefits, etc d. Goodridge case i. The state’s arguments against allowing gay marriage 1. Procreation 2. Best setting for child rearing 3. Preserving financial resources e. Emerging issue – what happens when you marry in a place that recognizes gay marriage, but move somewhere that doesn’t? i. The answer is probably that it will be recognized (but see, Mass) 7.

LEASEHOLDS – LAW OF LANDLORD AND TENANT 1.

MAJOR THEMES 1. 2. 3.

4.

5. 6. Landlord

A lease is a both a conveyance of an estate in land and a contract granting a lessee exclusive possession a. A leasehold estate is a nonfreehold estate (no seisin) Statute of frauds – lease with term longer than a year must be in writing The landlord has: a. A reversionary interest in possession at the end of the lease (he conveyed less than the extent of his full estate – “carved out” a lease) b. A contractual set of obligations Traditional law was mainly oriented toward protecting landlords, modern law increasingly seeks to protect residential tenants a. Early English landlord-tenant law developed when the lease was a commercial transaction for agricultural land. The lease was viewed as the conveyance of an estate to the tenant  the landlord had virtually no duty to the tenant during the lease period, except to refrain from interfering with the tenant’s use and enjoyment of the land What are the goals overall? a. It is one of the promoted social goals of the government to provide as much as possible in order for people to own their own home What are the actors’ goals? Goals Earn a reasonable return No damage to premises Collect rent Evict non-payers

Duties Provide possession of premises Maintain habitable premises Allow quiet enjoyment Avoid tort liability

38

Keep premises maintained Pay reasonable rent Habitable premises Access to promised services Quiet enjoyment of premises Necessary repairs Ability to alienate (e.g. sublease) No discrimination

Tenant

7.

8.

2.

Pay rent Don’t damage premises Don’t disturb others No illegal purposes

There is a huge distinction between commercial and residential property a. Residential tenants are given far greater rights/protection by the law i. In commercial transactions, we assume equal bargaining power and will more freely evict a tenant if it is warranted ii. Courts are very sympathetic to residential tenants and will rarely throw them out (even when they don’t pay – with qualifications) 1. Schmudde: one of the last things you’d ever want to be is a landlord in NY Economic issues in landlord/tenant law a. How do we allow for reasonable return for the landlord? i. We need to protect the rate of return to encourage building/development (but we want to keep the rents reasonable at the same time)  Tension between reasonable return for landlords and affordable rents for tenants ii. Rent control, stabilization, IWH, etc lead to shortages  raise minimum rents and “price” some people out of the market

LEASES AND SUBLEASES 1.

Types of Leaseholds (4) a. Term of years i. Endures for a designated period that is either fixed in advance or computed using a formula that is agreed upon in advance 1. A day, a month, year, 100 years 2. Just need calendar dates that can be identified on the first and last days of the lease a. Can be dates, familiar days, or based on a fixed term (“six months beginning 1/1/09) ii. May commence at execution or some point in the future iii. Automatically expires at the end of the agreed period iv. No notice of termination needed to terminate by landlord or tenant 1. The lease itself provides notice  self-executing and automatic v. Death of landlord or tenant has no effect on lease – it continues 1. Lease is devisable/descendible (so is landlord’s interest) vi. Ground leases 1. More complex than regular leases, but fairly common (many shopping malls and retail stores are ground leases) 2. Ground leases in excess of 30 years have values comparable to how much the price would sell for 3. Lets you maintain the concentration of wealth within your blood line (for later generations) for a certain period of time a. Functional equivalent of a fee tail vii. Hypos 1. “To T for 100 years, if T so long lives” a. Determinable term of years 2. “To T for duration of the war” a. Term of years viii. Alienable, descendible, devisable ix. A lease failing as a term of years becomes either a periodic tenancy, a tenancy at will, or a license depending on the lease 1. License – an authorization from an owner to enter premises without liability (revocable at will by owner)  nonpossessory 2. It’s a big deal if it’s a lease or license b/c leases give rise to landlord-tenant relationships, licenses don’t b. Periodic tenancy

39

i. Lasts for an initial fixed period (e.g., one month) and then automatically continues for additional equal periods until either the landlord or the tenant terminates the tenancy by giving advance notice 1. E.g. week-to-week, month-to-month, year-to-year 2. If the lease does not stipulate the length of the lease term, the initial term’s length will conform to the frequency of rent payments a. E.g. if rent is payable monthly  month-to-month lease 3. If lease has a starting date but no termination date, it is a periodic tenancy because by default it is governed by the rental period ii. If notice is not given, the term automatically renews iii. Either party can terminate the lease iv. In order to terminate, express notice must be given 1. Improper notice is ineffective v. The modern rule is that the notice required is equal to the length of the period defining the lease 1. If week to week, you need to give 1 week notice 2. If month to month, you need to give 30 days notice a. If you give notice on May 15, is 30 days notice going to be June 15 or June 30? i. Most states will want June 30

c.

vi. Periodic tenancies of 1 year or more can be terminated on 6 months notice vii. Death of landlord or tenant has no effect on lease – it continues viii. Can be created by express agreement or by implication – term of years with an annual term expires, and tenant continues to pay rent as it comes due and landlord continues to accept it and does not attempt to reenter the premises (see tenancy at sufferance, infra) 1. The terms (e.g. rent) and conditions for the original lease are carried over into the new one Tenancy at will i. Endures only as long as the tenant/landlord agree it shall 1. Continues only by mutual agreement ii. Lasts until either party elects to terminate it 1. No renewal 2. No fixed date of termination iii. A transfer of the landlord’s title, assignment of the landlord’s rights, death of landlord end it 1. Death of the tenant ends it as well iv. Not alienable, devisable, descendible v. Many states first require notice for termination (usually 30 days – though this was not the case in common law (you could leave whenever you felt like it)) 1. Second by indication (e.g. you move out) vi. Mostly found where the relation of landlord and tenant is an informal one (e.g. friends) 1. E.g. where one friend permits another to stay at his house vii. Rarely found in commercial transactions – businesspeople require more certainty viii. When it is clear on the face of the agreement that both parties intend to establish this type of tenancy, provisions for notice to terminate and rent at intervals don’t instead create a periodic tenancy ix. Hypo: 1. “To A while she continues law school, paying me as she is able”  tenancy at will x. A conveyance “To T so long as he wishes” or “as long as he pays rent and resides on the premises” might be examples of tenancy at will or determinable life estates  courts may construe toward the higher estate and find a life estate, but majority rule says no Garner v. Gerrish (THIS IS THE MINORITY RULE) Lease grants tenant the right to terminate at a date of his choice  did this create a determinable life tenancy or a tenancy at will (i.e. meaning that the lessor also has the right to terminate). Everything was going well until lessor died and his estate wants tenant out – tenant refuses, saying it’s a determinable life estate. Court says the lease expressly and unambiguously grants the tenant the right to terminate and does not reserve to the landlord a similar right  court says intent of the parties is for the determinable life estate [But this is a bit strange b/c a life tenancy denotes seisin and seisin = ownership interest]

d. Tenancy at sufferance i. Not a true estate – it’s a type of wrongful occupancy ii. Occurs when a tenant enters into a valid lease of any of the 3 types and then holds over past the end of the lease term iii. When a tenant wrongfully holds over, the landlord may either: 1. Elect to evict the tenant as a trespasser (and recover damages), or

40

a. b. c.

2.

Landlord need not give a notice to quit and may oust the tenant at any time In some states, tenant will have to use judicial process to oust him (no self-help) Once the landlord elects to treat the tenant as a trespasser, the landlord cannot change his mind and try to extend the lease (But see, Crechale & Polles) Consent to the tenant’s continued possession and hold him liable for a similar term a. Some courts say the renewed lease must be the same duration as the original b. Others say it will last the period covered by one rent payment c. In most states, holding over giver rise to a periodic tenancy (but max period of 1 year) d. Tenancy resulting from holdover is subject to same terms and conditions as those in original lease e. Many states have enacted statutes abrogating the rule that holdover may be treated as a periodic tenant, and instead impose double liability for each day of a holdover period f. Sometimes holding them over for another 5 year lease is inequitable though  modern law does not make you stay for a whole additional term like that

Crechale & Polles, Inc. v. Smith 5 year term lease. T tells L his new place won’t be ready in time, wants to stay for a few extra months past lease. L wants to sell it, isn’t cooperative. After a meeting where L does not sign lease extension agreement, T’s lawyer sends letter that says its confirming agreement as to the extension (cheap lawyer trick – need to respond back to that now so that your silence does not imply an agreement). T holds over, submits rent for next month, L cashes check  Once a landlord elects to treat tenant as trespasser and refuses to extend the lease on a month-to-month basis, but fails to eject tenant and accepts monthly checks, he in effect agrees to an extension of the lease on a month-to-month basis. Court treats each payment as an extension for that next month – not a new 5-year term like L wants 3.

2.

Must show clear intent to be establishing a new lease (e.g. accepting rent, suing for rent, notice) iv. The tenant’s holding over must be voluntary, and not for reasons out of his control 1. A delay in vacating caused by the landlord’s failure to provide services excuses the holdover, negotiations with landlord spilling over past lease, etc 2. Tenant may leave personal property on the premises after the term so long as what is left does not interfere with the landlord’s or new tenant’s possession 3. Fraction of a day is not a holdover e. Hypos i. T, a month to month tenant, tells L on 11.16.01 that she will vacate on 11.30.01. T leaves on 11.30.01 1. Is notice here effective? a. 3 possibilities here i. Notice is ineffective, lease doesn’t terminate ii. Lease terminates on 12.16.01 1. Responsible for more rent iii. Lease terminates on 12.31.01 1. Responsible for more rent 2. The general rule would hold the tenant responsible for the next month’s rent  12.31.01 is when it would be terminating ii. T leaves premises but leaves office equipment behind – is he a holdover? 1. Send them a letter, give them 30 days, then do what you want with it 2. If it does interfere with the L’s use of the property then it could possibly become a holdover situation Is a lease a conveyance of real property interest or a contract? BOTH a. Lease transfers possessory interest in land so it’s a conveyance creating property rights b. BUT lease is a contract too, creating contractual rights c. Historically considered real property interest (fee simple interest existed and leasehold sat upon it, sublease would then sit on that (i.e. carved out)) d. Modern theory is that it’s a contract – use contract principles, not property  what we have now is a mixture of these concepts with the law moving towards contract law i. Sparked by concerns about appalling housing conditions, a wave of change began sweeping over American landlord-tenant law in the 1960s  courts and legislatures abandoned/revised settled rules in order to accommodate needs of modern urban tenants, particularly poor tenants living in slum conditions. As part of this trend, many courts began to view the lease as a contract, not a conveyance

41

Leasehold Estates Type of Leasehold

Definition

Creation

Termination

Tenancy for Years

Tenancy that lasts for some fixed period of time

“To T for 10 years”

Terminates at the end of the stated period without either party giving notice

Periodic Tenancy

Tenancy for some fixed period that continues for succeeding periods until either party gives notice of termination

“To T from month to month”

Terminates by notice from one party at least equal to the length of the time period (e.g. one full month for a monthto-month tenancy).

- OR “To T, with rent payable on the first day of every month”

Exception – only six months notice is needed to terminate a year-to-year tenancy

- OR L elects to bind holdover T for an additional term Tenancy at Will

Tenancy of no stated duration that lasts as long as both parties desire

“To T for and during the pleasure of L” (Even though the language gives only L the right to terminate, L or T may terminate at any time) - OR -

Usually terminates after one party displays an intention that the tenancy should come to an end. May also end by operation of law (e.g. death of a party, attempt to transfer interest)

“To T for as many years as T desires” (Only T may terminate – defeasible life estate) Tenancy at Sufferance

3.

Tenant wrongfully holds over after the termination of the tenancy

T’s lease expires, but T continues to occupy the premises

Terminates when landlord evicts tenant or elects to hold tenant to another term

DISCRIMINATION AND PROPERTY 1. 2. 3.

The common law did not restrict a landlord’s freedom in selecting or evicting tenants Today federal and state statutes prohibit certain types of discrimination in the rental or sale of real property Civil Rights Act of 1866 a. Only applied to racial discrimination and didn’t provide much protection  only with 1968 act did it become illegal

4.

Fair Housing Act of 1968 bars discrimination based on race, color, religion, sex, familial status, national origin, or handicap in connection with the sale or rental of most dwellings a. Protects against denial of premises overall and terms/conditions/privileges in regard to premises b. Familial status – parents or a parent with dependent children under 18  ambiguous c. Handicap – physical or mental impairment which substantially limits one or more of such persons major life activities, a record of having such impairment, being regarded as having such impairment i. Excludes drug addicts ii. Includes recovering drug addicts and alcoholics and person with AIDS iii. Tenant cannot claim protection under the act when a tenant turns threatening (e.g. mental handicap leads to violent behavior) – but landlord must make reasonable accommodations (doesn’t have to provide housing) d. Exemptions: i. Does not apply to commercial property, only to dwellings ii. Private clubs, dwellings for religious organizations and certain specified persons exempt from the act

42

5.

4.

iii. Single-family dwellings: person leasing or selling dwelling she owns is exempt if: 1. she does not own more than three such dwellings 2. she does not use a broker 3. she does not advertise in a manner that indicates her intent to discriminate iv. Small, owner-occupied multiple unit: building of four units or less, one of which owner occupies where person does not advertise in a discriminatory manner v. Freedom of intimate association: an individual has right to request a male or female roommate; a landlord does not have this privilege (“Female roommate wanted”) e. Advertising – act prohibits any public statement indicating discriminatory preference (no exceptions – except for freedom of intimate association) f. Proving Discrimination i. Discriminatory motive need not be shown, only proof of discriminatory effect ii. Prima Facie Case: plaintiff must show 1. she's a member of a statutorily protected class 2. she applied for and was qualified to rent the dwelling 3. she was denied the opportunity to inspect or rent the dwelling 4. the housing opportunity remained available to others iii. Burden then shifts to D to produce evidence that refusal to rent was motivated by legit considerations having nothing to do with a protected status iv. Then burden shifts back to plaintiff to show that the alleged legit reasons are pretext (not real reasons) g. One of the major problems with this statute is the problem of proof – how do you prove discrimination took place? h. White/black, male/female testers go in and see if they are treated differently  disparate effect is sufficient for prima facie case i. Damages are typically legal fees j. Most of the cases are brought by organizations FHA Hypos (380) a. “For rent: furnished basement apt in private white home” – ad by single old woman living alone. Black couple is rejected b/c of race i. The rejection is acceptable (b/c owner doesn’t own more than 3 residences), BUT the advertisement is not 1. BUT the 1866 act could provide relief here on account of the refusal itself b. Same woman discriminates against German people in renting her basement i. This is fine b/c she is exempt from the general prohibition and she is not advertising here c. Place only allows for 4 people and you have a husband and wife with 3 kids trying to rent it  even if this has a discriminatory effect, if you can show there is a rational business purpose for it (like keeping down wear and tear), it will be permitted d. What if you just have a rule that says no children? i. There are age restrictive condominiums that don’t allow children to visit for more than a week at a time – these have been challenged in the courts and have been permitted ii. Increase tax base without increase on demand on services, reduced rush hour transit, etc – rational reasons e. But familial status rule is violated in case in which landlord refuses to rent out 1 bedroom apt (that he usually rents out to couples) to a father and child f. Refusal to rent to unmarried couples is not covered by the act unless it can be demonstrated to have a disproportionate racial, ethnic, religious, or gender-based impact g. The act doesn’t prohibit sexual preference/orientation discrimination (but local statutes have added this) h. Sexual harassment by a landlord does violate the act i. No pets policy but woman needed pet for her schizophrenia? i. If tenant can show that for a medical condition/handicap she needs the dog, the dog can be allowed j. Can you refuse to rent to unmarried couples on religious grounds? i. No, the religious belief does not exempt you from the statute ii. Cardozo tried to turn away planned parenthood from leasing in their building (commercial property) 1. The building is owned by an organization (Yeshiva) that is strongly opposed to what planned parenthood stands for  Court said you can’t use religious ideas to refuse to rent to someone in a commercial setting k. Can you refuse to rent to lawyers? i. FHA doesn’t apply – doesn’t say anything about discriminating on the basis of professions ii. Some local statutes prohibit this kind of discrimination

DELIVERY OF POSSESSION

43

1. 2.

Landlord must deliver legal possession a. If he fails to, tenant can break the lease 2 different views on the landlord’s duty to deliver actual possession a. English view – landlord is required to deliver actual possession of the leased premises to the tenant when the lease term begins (implied covenant to do so)  landlord has to deal with any holdovers i. Tenant’s remedies are against the landlord 1. He may terminate the lease and/or sue for damages ii. He can also sue the wrongful occupier to recover possession or damages if he wants iii. Rationale: landlord is in better position to know what’s up iv. Views lease as creating contractual right b. American view (minority)– the landlord need only deliver the legal right to possession, and thus has no duty to oust a holdover tenant i. Tenant’s remedies are against the person wrongfully in possession ii. Rationale: holdover tenant is trespassing on tenant, not landlord iii. Views lease as creating property right Hannan v. Dusch Lease is silent on delivery of possession. Tenant arises to take occupancy, but there is someone living there. Court holds for American rule, as otherwise, one clearly without fault (lessor) is held responsible for the independent tort of another in which he has neither participated nor concurred and whose misdoings he cannot control. Besides, landlord is not required to evict a trespasser after the tenant takes possession

3. 4.

5.

All of this can be solved with an express agreement to exclusive possession Hypo – you’re in property by lease and you find out someone else is being leased it too a. Simply having two leases has not interfered with your legal possession yet – until you are not permitted access pretty much  but see if agreement says exclusive legal possession

ASSIGNMENTS AND SUBLEASES 1. 2.

3.

2 ways in which a tenant can transfer his interest to another tenant a. Assignment b. Sublease Common law objective test a. Assignment – tenant transfers the right of possession for the entire remaining term of the lease  nothing is left, old tenant’s entire interest goes to the new tenant i. The original tenant is in privity of contract with the assignee ii. The landlord is in privity of estate with the assignee 1. Both are required to perform all those covenants in the original lease that run with the land (most do) 2. Landlord can sue assignee for the rent iii. The original tenant is still in privity of contract with landlord 1. T1 will be liable to L – secondary liable (like a guarantor) 2. Liable for all the covenants in the original lease 3. Consent to an assignment is not a release from liability (this is true with people who lease cars too) 4. If you want to get away from being liable, make an express agreement that you will not be held liable b. Sublease – tenant transfers less than his entire interest to subleasee – something remains, only part of the remaining term is transferred i. Original tenant remains in privity of estate with landlord ii. Subtenant is in privity of contract with original tenant 1. Landlord-tenant relationship created between them iii. The only possible way the subtenant may be liable to the landlord is through a third party beneficiary theory – a theory different from privity of estate, means someone on the estate may be responsible for rent 1. The law is moving towards finding subleasee directly liable to the landlord Modern approach (but less common) – consider the intentions of the parties a. Actual words used (e.g. sublease, etc) are persuasive, not conclusive

44

Ernst v. Conditt Tenant and D approach P to take over lease and extend it. The new lease says it is being “sublet” but tenant is losing his entire interest. New lease said tenant was liable. D stops paying rent. P sues. D says tenant is liable. Was it a sublease or an assignment? Court says this is an assignment using common law or modern rule  tenant not primarily liable. Ox says tenant should clearly be liable b/c he expressly contracted 4.

Unless there is a prohibition in the lease, a tenant can assign away his entire interest a. Most modern leases restrict the tenant’s right to transfer all or part of the leasehold interest i. Rationale: landlord wants to be protected – a chance to review the new tenant, his credit, etc b. BUT the landlord cannot unreasonably withhold his permission to assign or sublease Kendall v. Ernest Pestana, Inc. (commercial reasonableness) Lease provision says landlord must approve an assignment or sublease and he refuses to do so without a good reason  Because we don’t like restraints on alienability and we have the implied contract duty of good faith and fair dealing, Where a commercial lease provides for assignment only with the prior consent of the lessor, such consent ma be withheld only where the lessor has a commercially reasonable objection to the assignee or the proposed use. Denying consent solely on the basis of personal taste, convenience or sensibility is not commercially reasonable [This case is really about who should benefit from the increased value of the lease: the landlord or the original tenant] c. d.

5. 6. 7. 8. 9.

Property theory  the interest belongs to the tenant, he can do as he pleases with it Contract theory  given the provision, the landlord should have the right not to approve i. But this would create an unreasonable restraint on alienation The Rule of Dumpor’s case – in a no-assignment-without-consent provision in the lease, once the landlord consents to a first assignment, without reserving a right to consent to future assignments, he is deemed to have waived the right to consent to further  future assignments can be made without consent The landlord is typically able to transfer (sell or assign) his interest freely a. Any transfer will be subject to any outstanding lease If original tenant voluntarily surrenders his lease a. Assignment/Sublease remains intact b. Assignee/Sublessee comes into privity of estate with the landlord If original forfeits the lease a. Assignee/Sublease’s rights end Hypos a. L leases land out to T, T sublets to T1, no one pays rent to L i. L can sue T under privity of estate theory (he is primarily liable) ii. L can sue T1 under third party beneficiary theory iii. T can sue T1 under privity of contract theory (to indemnity) b. L leases to T for 5 years, T wants to assign to T1 (who is a tenant in L’s other building), L says no you can’t assign to him – is this unreasonable? i. Yes – he’s merely looking to protect his own interest c. What if T1 is a competitor of L’s, can he refuse then? i. May be reasonable  but doesn’t seem different from prior hypo d. What if L refuses on the grounds that they are against what T1 stands for i. That will not fly – see Cardozo case with planned parenthood Assignment vs. Sublease Assignment by Tenant

Sublease by Tenant

Assignment by Landlord

Consent Required?

Landlord’s consent may be required by lease

Landlord’s consent may be required by lease

Tenant’s consent is not required

Privity of Estate

Assignee and landlord are in privity of estate

Sublessee and landlord are not in privty of estate.

Assignee and tenant are in privity of estate

Original tenant remains in

45

privity of estate with landlord. Privity of Contract

Liability for Covenants in Lease

Assignee and landlord are not in privity of contract.

Sublessee and landlord are not in privity of contract.

Assignee and tenant are not in privity of contract.

Original tenant and landlord remain in privity of contract

Original tenant and landlord remain in privity of contract

Original landlord and tenant remain in privity of contract

Assignee liable to landlord on all covenants that run with the land

Sublessee is not personally liable on any covenants in the original lease and cannot enforce the landlord’s covenants

Assignee liable to tenant on all covenants that run with the land

Original tenant remains liable for rent and all other covenants in the lease

6.

Original tenant remains liable for rent and all other covenants in the lease and can enforce the landlord’s covenants

Original landlord remains liable on all covenants in the lease

THE TENANT IN DEFAULT – LANDLORD’S OPTIONS

While the common law provided the residential landlord with broad discretion in this area, the modern trend is to curtail these rights 1. 2.

A landlord may want to evict a tenant who defaults on a lease covenant (e.g. not paying rent, being too rowdy, having pets, illegal activity, etc) – here are the options: Self-help – When the tenant defaults under the lease, most jurisdictions still allow the landlord to exercise self-help to retake possession of the premises a. Some allow the landlord to use reasonable force for this purpose b. Most insist that any self-help eviction must be peaceable c. Modern trend is toward abolishing the self-help remedy, and requiring the landlord to evict through judicial process Berg v. Wiley Tenant makes altercations without landlord’s consent, landlord says you have to change the shit back (city health board also says make changes), on final day to make changes, tenant closes up, says “closed for renovations.” Tenant’s lease was still good for a while longer and was paying rent all throughout, landlord comes and changes locks (self help), and relets  was there a default on tenant’s behalf? (abandonment would have been a better claim for landlord here). Court gets rid of self-help doctrine  the only lawful means to dispossess a tenant who has not abandoned nor voluntarily surrendered but who claims possession adversely to a landlord’s claim of breach of a written lease is by resort to judicial process. No more self-help to retake the premises when the landlord has determined a default has occurred (this is a commercial tenancy – prob give more rights for residential)

3. 4. 5. 6.

Ejectment - the traditional common law cause of action for the recoveyr of possession of real property and for damages due to withholding of possession a. Frustratingly slow, costly remedy (to cover losses, landlords raise rents) Summary eviction proceedings – a special, expedited proceeding to recover possession (and sometimes rent) from the breaching tenant (a few weeks)  short deadlines, simple procedure a. Generally available in commercial transactions, not as easy in residential What can a landlord recover other than possession? a. Unpaid rent, back rent, damages to premises What steps does the landlord take to protect their interest a. Careful drafting of the lease i. Rent acceleration clauses 1. Once tenant is in arrears, entire balance of rent due under lease becomes immediately due b. Selection of tenants i. Credit checks are key – good picture of what the person is about  what’s their level of debt, etc ii. Income verification iii. References (certainly from their last landlord)

46

c.

7. 8.

7.

Security deposit i. Usually 2 months rent ii. Most states require that interest be paid on this (hold it in a separate account) d. Eviction – the ultimate remedy i. Tenant must be given significant notice and time to cure ii. After rent has been due for a while, landlord can go into court and seek an eviction via ejectment/summary proceeding, court may grant it, if they do, the sheriff comes and evicts Today, often before a foreclosure takes place there is a short sale to get rid of it When you make a contract to purchase real estate, you typically put 10% down a. 2 rules with respect to walking away from contract to purchase real estate i. Actual damages (i.e. expectancy) 1. Trend goes this way ii. Liquidated damages (i.e. you walk away from down payment)

ABANDONMENT AND SURRENDER – TENANT’S OPTIONS 1. 2.

3.

4.

5. 6.

When a tenant wants to end the lease early, he can try to assign or sublease – alternatively, he may surrender the premises back to the landlord or abandon them Surrender – the landlord and the tenant mutually agree to terminate the lease, ending their respective rights and duties (tenant transfers lease back to landlord and landlord accepts it)  tenant is relieved of responsibility for future rent, but not accrued rent or damages for breaches of any other covenants a. If landlord engages in activity inconsistent with tenant’s continuing obligations, a surrender will arise by operation of law – bad for L Abandonment – occurs when the tenant a. Vacates the premises without justification, and b. Lacks the present intent to return, and c. Defaults in the payment of rent When tenant abandons, landlord has 3 options: a. Leave the premises vacant and sue later for accrued rent (i.e. do nothing) b. Mitigate damages by reletting the premises to a new tenant and then sue the original tenant for the unpaid balance c. Accept as a surrender (terminates the lease) Common law view is that there is no duty to migitate (NY follows this) a. Rationale: tenant cannot impose a duty on the landlord by his own wrongdoing  tenant has “purchased” an interest in property and is stuck with it (property rule) Most jurisdictions require that the landlord either mitigate damages or terminate the lease (contract-based rule)  returns property to productive use, not idleness a. Reasonable efforts, not extraordinary efforts  but you can’t try to withhold it from being rented (must put it back into normal rentable stock) i. Placing an ad seems to be the minimal thing to do b. Landlord has the burden of proving that he used reasonable diligence in attempting to relet the apartment Sommer v. Kridel Guy put up deposit, signed 2 year lease, then writes landlord that he can’t take possession of apartment b/c his wedding plans, etc have fallen through (abandonment b/c letter states intention not to fulfill lease)  Court says based on fairness and equity, a landlord does have an obligation to make a reasonable effort to mitigate the damages when he seeks to recover rents due from a defaulting tenant (reasonable diligence)

8.

LANDLORD’S DUTIES, TENANT’S RIGHTS 1.

2.

Early common law implied covenants concerning title and possession, but not the condition of the premises  tenants took premises “as is” and landlords were under no obligation to warrant their fitness a. Landlord really had no duties with keeping the premises maintained  BUT this has changed dramatically with urbanization and specialization Landlord’s promise that neither he nor anyone else will interfere with tenant’s lawful possession implies the covenant of quiet enjoyment (CQE) a. Tenants look to this covenant for most of their protection

47

b.

3.

4.

Landlord can breach CQE by someone other than the landlord exerting superior legal title or by landlord actually or constructively evicting tenant i. Tenant’s obligation to pay rent ends upon eviction Actual eviction – premises are such that no reasonable tenant could stay  usually this is when landlord excludes or lock the tenant out of the premises a. Partial actual eviction – landlord or agent takes over part of the premiess and denies tenant use of a portion of the premises crucial to use of the whole  still relieves tenant of rent (Rest. says no though) Constructive eviction (based on breach of CQE) a. Act or omission of landlord or his agents which renders the premises substantially unsuitable for the purposes for which they were leased, or which seriously interferes with the tenant’s use/enjoyment of the premises i. Elements 1. Intentional acts of the landlord that breach a duty owed to the tenant and cause substantial interference with the tenant’s enjoyment of the premises or render it unfit 2. Landlord’s notice of the disturbance and reasonably opportunity to cure 3. Tenant vacates the premises 4. Vacation is within a reasonable time after landlord’s acts b. Only catch – make sure the breach is substantial enough to reach this level  if it’s not, tenant is the breacher c. This doctrine was the exception to the old common law rule that promises (covenants) expressed in leases were independent of each other  tenant’s obligation to pay rent was dependent upon tenant’s having possession undisturbed by the landlord (or someone claiming through him) i. Landlord’s breach of covenant used to just give damages d. Implied in all leases, residential and commercial e. Usually used for an affirmative defense – it’s tenant’s self-help Reste Realty Corp v. Cooper D leases basement of building for office, every time it rains, it floods, lessor ignores complaints, D signs new lease (says part of that deal to renew lease was to fix the problem). P doesn’t fix it, D vacates, claiming constructive eviction. Flooding not known to D, while was known to P and should have been disclosed. Court – it cannot be said as a matter of law that by taking the second lease, D accepted the premises in their defective condition  when a landlord causes a substantial interference with the beneficial enjoyment and use of the leased premises, the tenant may claim constructive eviction

5. 6. 7.

8.

If tenant does not vacate after breach of CQE via constructive eviction, tenant can always sue for damages on the basis of the covenant itself (difference between rent under lease and fair rental value realized) Seeking a declaratory judgment of a breach of the covenant is preferred by courts Hypos a.

Landlord causes nuisance that interferes with tenant at will’s business, T vacates, rents equivalent space for more, sues for damages i. L has right under lease to put the T out at any time, but T can sue for damages here b. T has term of years, _______, T vacates premises, L sues, T asserts defense of constructive eviction i. L fails to control neighbors’ partying 1. T has to notify L so he can take some steps to repair. If L’s doing everything he can, it becomes difficult to show he failed to perform some duty (e.g. what could a landlord do about second hand smoke smell from other tenants? Some courts may find this breach of CQE, but it’s a gray area) a. Animal House law – its on the landlord to keep his tenants under control, if he doesn’t, he gets fined ii. Building has repeated criminal activity, L installs deadlocks, hires security guards, etc, but problems continue 1. L is not an insurer against criminal activity, he only needs to take reasonable measures (like he has in this here) iii. T is performing abortions, protests outside all the time, make noise, problems, etc. T complains to L, who does nothing 1. Court said it didn’t affect CQE – use of premises was not diminished. And this was a cause of T, not L  no breach Other theories of relief for tenants a. Implied warranty of habitability (IWH) – each residential lease is deemed to contain an implied warranty that the landlord will deliver premises that are safe, clean, and fit for human habitation and maintain them in that condition during the lease term

48

i. E.g. broken windows, leaky roofs, continued loud noise, no heat, rodent infestation normally render a rented dwelling uninhabitable 1. Applies only to conditions that make premises physically habitable (not luxury items) ii. Elements 1. Landlord must have notice of defective condition 2. Defect must be substantial (considering its violation of housing code, effect on tenant’s health/safety, length of time it exists, seriousness) 3. Landlord must be given a reasonable time to repair the defect and not done so iii. Makes tenant’s covenant to pay rent and landlord’s duty to repair uninhabitable conditions into dependent covenants iv. Applies only to residential leases (few places do commercial) v. Cannot be waived vi. Landlords are not responsible for defects caused by the tenants 1. Stuff may affect health/happiness of tenant, but unless landlord is somehow responsible for causing it (or responsible for alleviating it via statute), they do not affect the physical conditions of premises and don’t breach IWH vii. Standards for breach 1. Breach occurs when premises are “uninhabitable” in the eyes of a reasonable person  must be substantial 2. Housing code violations are compelling but not conclusive a. A substantial violation of the housing code is a prima facie case of a breach b. A few minor violations of the housing code is not a breach (but may be a CQE breach). c. Trial courts must look beyond the housing code – is a defect having an impact on health and safety 3. The only thing that really differs between jurisdictions is the minimum standard viii. Remedies 1. Withhold rent until necessary repairs are made (escrow) 2. Repair the condition, deduct for reasonable cost of repair 3. Actual Damages = difference between value of dwelling as warranted and the value as it existed in its shitty condition 4. Punitive damages (if breach is willful and wanton) ix. You need not vacate to claim IWH breach x. Why this change from common law? 1. Leases are now for dwellings, not land (as it used to be) 2. Modern tenants are not renaissance men who can fix all kinds of shit (as they used to be) xi. Rationale: our society is at a point where we will not allow people to enter leases that do not meet a minimum standard xii. Criticism – you are now eliminating housing from the market and taking away the possibility of someone accepting a lower standard for a lower price  decreases supply (no effect on demand)  puts more people on the street b/c of higher rents Hilder v. St. Peter (You down with IWH?) P moves into shitty house, requests landlord to repair stuff, and finally fixes stuff himself (raw sewage odor, broken windows, falling plaster, bathroom light/toilet didn’t work, etc). P didn’t abandon premises, claiming IWH. Court rules that in any rent of residential property whether lease is oral or written, there exists a covenant that the landlord will deliver and maintain premises that are safe, clean and fit for human habitation. It covers all latent and patent defects in the essential facilities as well. It covers all tenancies (term, periodic, will) b.

9.

Illegal lease – a lease of unsafe and unsanitary premises that violate the local housing code is deemed an illegal – and thus unenforceable – contract, allowing the tenant to withhold rent but remain in possession i. Does not apply if code violations develop after making of the lease ii. Minor technical violations do not render a lease illegal iii. Violations of which landlord had neither actual nor constructive notice don’t make a lease illegal The analysis a. Step 1: Is it a violation of the covenant of quiet enjoyment? i. Actual or constructive breach? b. Step 2: Is it a violation of the implied warranty of habitability? c. Step 3: Is it an illegal lease?

49

i. If there is a violation of the housing code in place, and the premises are in breach of it - Brown v. Southall Realty 1. This would usually be a violation of the quiet enjoyment covenant too 10. Retaliatory eviction – a landlord cannot evict a tenant in retaliation for complaining about housing conditions or taking other action to correct such conditions a. Common approach – create a rebuttable assumption of retaliatory purpose if landlord seeks to terminate tenancy, increase rent, or decrease services within some given period after a good faith complaint or similar act b. Applies mainly to residential (few places use for commercial) c. This and discrimination are the 2 big strains on landlord’s ability to terminate leases at will (some states have more) d. Burden is on tenant to show applicability of doctrine, but some statutes create legal presumptions the other way 11. Landlord’s tort liability a. General rule is that landlord’s liability ended once the landlord delivered the premises to the tenant – but there are key exceptions: i. Latent defects – landlord must disclose latent defects where there is an unreasonable risk of physical harm if tenant doesn’t know of the defect and can’t reasonably discover it on inspection 1. Landlord has a duty to disclose what he knows, once he does, his liability ends ii. Public use – where the lease contemplates that the premises will be used for public use, the landlord will be liable if: 1. Has knowledge or should have known of a dangerous condition existing at the time the lease is entered, 2. Has reason to believe that the tenant will not control the condition, and 3. Fails to exercise reasonable care to correct

b. c.

9.

iii. Common areas controlled by L: L liable if he could have reasonably discovered the condition and made it safe 1. Negligence standard – duty of reasonable care 2. Even for criminal activities that are reasonably foreseeable (past occurrences can play a key role) iv. Exculpatory clauses generally do nothing A few states have cited IWH as a reason to impose a general standard of care (negligence standard) on landlords under all circumstances CA once had a strict liability standard, but switch back to neg

TENANT’S DUTIES 1.

2. 3. 4. 5. 6.

Duty to pay rent a. The duty to pay rent is independent of the landlord’s performance of his duties (but this is subject to the exceptions about, e.g. IWH) i. Depending on the jurisdiction this can change (i.e. with IWH)  it flips and the covenant becomes dependant 1. But the habitability issue has to be legit, can’t be some shit like the door sticks when I close it ii. If the landlord fairs to repair – tenant must still pay rent Duty to repair a. Tenant must make ordinary repairs b. Tenant need not make substantial repairs, but must act to protect the premises Duty not to commit waste a. The tenant must not damage the premises Duty not to disturb other tenants Duty not to use the premises for illegal purposes Landlord’s remedies when tenant breaches any of these a. Under the common law the landlord could seize the tenant’s chattels b. Many states provide a statutory lien on the tenant’ personal property i. Not a right to seize, a right of interest in the property c. Security deposits i. Most significant remedy ii. Typically 2 months rent d. Eviction of tenant i. With a right of entry clause, landlord must give reasonable notice and time (self-help) ii. Judicial eviction

50

10. THE RENT CONTROL DEBATE 1. 2. 3. 4.

5.

6.

8.

Tenants are receiving an implied warranty of habitability: in the absence of some restrictions, the landlords will simply raise rents a lot to compensate for the imposition of IWH Rent control can be counter productive: a. it forces out the poorer tenants and creates more middle class housing. b. It reduces the supply of housing: limits the rental value and drives up the price of available housing Rent controls need to allow landlord to get fair return on the property in response to changing market conditions (forces landlord to bear burden of social policy) Ox doesn’t think rent controls ever make sense a. The experience is that affordable housing projects work in the short term but in the long term they lead to shortages b/c developers opt not to build b. The price ceiling causes less suppliers to supply and more demanders to demand (the difference between the 2 is the shortage) The application of the implied warranty of habitability a. 2 results i. Apts are in better shape now, so demand shifts up ii. Supply shifts down b/c it costs more to bring it on the market & certain units are going to come off the market all together Chicago Board of Realtors, Inc. v. City of Chicago a. City Council enacted statute, codifying implied warranty of habitability

TRANSFER OF REAL PROPERTY 1.

INTRODUCTION

How a selling transaction goes down 1. Get a broker (enter into broker’s agreement) 2. Find a buyer 3. Negotiate a price 4. Enter into contract of sale (most important document in transaction, even deed) a. Where all the conditions of the sale are set forth b. Doctrine of merger – when a transferee accepts a deed, all their remedies under the contract of sale are merged into the deed i. Every issue must be taken care of before the deed is transferred ii. Caveat emptor – once you accept deed you have no more remedies 5. Financing a. Apply for a mortgage b. Lenders won’t accept mortgage application without signed contract of sale c. Once the mortgage application is approved the lender issues a commitment letter – they agree to make the mortgage on the agreed terms 6. Title search a. Makes sense to do this earlier, but it isn’t the tradition b. Most counties have their title databases online c. Title insurance is useless – they don’t insure much and they don’t pay 7. Closing a. Everybody gets together and they transfer the closing documents i. Deed is transferred, mortgage is transferred, promissory note which reflects the debt, title insurance is issued b. RESPA i. 2 main provisions 1. Lender must give the borrow a good faith estimate of closing costs 2. Lender provide a borrower with a statement of what the closing costs really were 1.

Most important things to walk away with when you buy property a. A house in good condition i. Get an inspection (from someone with deep pockets) b. Good financing i. Made up of mortgage (traditionally 80%) and cash (traditionally 20%)

51

ii. Fixed rate iii. Adjustable rate (typically tied to LIBOR, or prime rate – e.g. LIBOR + 3%) 3 parties to a real estate transaction – who are they and what do they want? Buyer (2 key goals) Want to make sure the property is in good condition (contingency clause requiring inspection  Once a problem is found, everything goes back to zero) Want to secure financing (mortgage contingency clause – buyer doesn’t know they are going to get a mortgage or not until after they’ve signed the contract  lender won’t agree to a mortgage without a signed contract)

2.

Seller (2 key goals) Want the maximum price for his property Want the most liquid asset for the property (i.e. cash)  (wire transfers are best)

Lender (3 key goals) Want to know the credit of the buyer (generally need credit score of at least 720) Want to know income of buyer (standard test: buyers should be paying 28% of gross income towards mortgage payments and real estate taxes) Want to know value of property (only want to lend up to 80% of the value of the property)

BROKERS 1.

2. 3.

4. 5.

6.

Often hired by sellers to attract prospective buyers and facilitate the transaction a. How do they do this? i. Marketing a seller’s property ii. Listing residential properties on multiple listing service iii. Negotiating purchase agreements iv. Serving as intermediary between buyers and sellers v. Participating in physical inspections of the property vi. Assisting in arranging financing Recently, buyers have been using them too Types of brokers a. Listing broker – contract with seller to sell the property i. Is empowered by seller to act as seller’s agent in selling property b. Selling broker – introduce the buyer to the seller’s property i. Indirect relationship with seller ii. Buyer usually initiates relationship with selling broker iii. Often works with buyer for a long time, develops relationship  iv. Get compensated by splitting the listing broker’s commission A listing and selling broker’s sole duties are to seller (selling broker is subagent) Brokers owe their principals certain fiduciary duties and are expected to adhere to high ethical and professional standards  usually duty of loyalty and good faith a. Brokers’ actions cannot diverge from clients interests or expectations i. Obligated to maximize sale price (when seller wants this) b. Selling brokers have duty to report to the seller any information buyer shares with them c. Breaching duty of loyalty/good faith = losing license, civil liability In the vast majority of instances, the seller is hiring the broker, and the broker has a duty of good faith and fair dealing toward the seller (not the buyer) Licari v. Blackwelder Brokers working for P buy the property themselves below market value and sell it to someone else (who P didn’t want to sell to). P sues for breach of fiduciary duty. Brokers are fiduciaries, must exercise fidelity and good faith  a broker acting as a subagent with the express permission of another broker who has the listing of the property to be sold is under the same duty as the primary broker to act in the utmost good faith  he must make a full, fair and prompt disclosure to his employer of all facts within his knowledge which are, or may be material to the connection with which he is employed, which might affect his principal’s rights and interests, or his action in relation to the subject matter of the employment, or which in any way pertains to the discharge of the agency

52

which the broker had undertaken  Upon hearing that a more advantageous sale or exchange can be made, which the principal doesn’t know about, the broker has a duty to communicate it to him 7.

Multiple listing service – allows brokers and appraisers to share residential listing information for a fee on one large database (no MLS for commercial properties)  allows for maximum exposure (but limited to MLS members) a. Internet has torn this down pretty much – everyone has access to listings

8.

Brokers’ fees usually 6%  split 4 ways between selling/listing agents/brokers a. Agents can’t accept fees themselves, they must be working for a broker 9. Duty to disclose defects a. Broker representing the buyer is required to disclose known defects in the property as part of his fiduciary duty b. In many states, brokers must also disclose to the buyer any material defects known by the broker and unknown to the buyer i. These jurisdictions require the seller’s agent to disclose such defects to the buyer – duty to the buyer to disclose material information about the property if they have actual knowledge of it 10. Listing – an employment contract between a broker and a seller a. 3 types of listings i. Open listing – seller retains the right to sell the property himself or use a different broker without paying the open listing broker a commission 1. Least protection for broker, best listing seller can get ii. Exclusive agency listing – permits only one broker to sell the property for a specified period of time 1. The exclusive agent gets paid if he gets the buyer or if a separate broker secures a buyer (no competition) 2. Only if seller secures a buyer will you not have to pay him iii. Exclusive right-to-sell listing – owner has to pay the broker no matter who sells the property 1. Most protection for broker, worst for seller 11. When the commission is due a. The general rule – if the broker presents a buyer to the seller who is ready, willing, and able to buy, then the commission is earned (i.e. it doesn’t have to close) i. Buyer need only be willing to pay price and have enough assets ii. Broker gets commission if buyer or seller default b. Minority rule/industry custom – a commission is not due until the closing 12. Brokers cannot engage in the unauthorized practice of law, but can fill in blanks

3.

THE STATUTE OF FRAUDS 1. 2.

3. 4.

5.

A contract for the sale of an estate or interest in real property is enforceable only if it also satisfies the Statute of Frauds a. Includes leases for a year or more, easements, liens, remainders, water rights, etc 3 requirements for SOF a. The essential terms of the sales contract i. Necessary terms – names of the parties, description of the property (address in contract, metes and bounds description in the deed), purchase price, any other conditions, intent to buy/sell 1. But if no price agreed on, reasonable one can be substituted b. Must be contained in a memorandum or other writing i. Could be series of writings ii. E-Sign allows electronic signatures, writings, etc to count iii. There is no signature in emails – they are generally no good to satisfy the writing requirement iv. Faxes are good usually c. that is signed by the party against whom enforcement is sought 2 exceptions to the SOF (i.e. oral agreements OK)  specific performance a. Part performance b. Estoppel Part performance – allows specific enforcement of oral agreements when particular acts of unequivocal reference to the agreement have been performed by one of the parties (not for damages) a. Buyer must have done 2 of the following 3 i. Take physical possession of the property ii. Pay part or all of the contract price iii. Improve the property (raises its value) Estoppel (not for damages) – occurs when:

53

a.

Party seeking enforcement has been induced by the other to substantially change position in justifiable reliance on an oral contract and serious or irreparable injury would result from refusing enforcement of the contract Hickey v. Green P buying house from D, tells D he’s selling his house, gives check for property that has no payee on it and says “deposit on lot X, subject to variance by town,” D is trying to get out of the deal after P sold his property (in reliance), D has another buyer willing to pay more (which P actually matches), P sues for specific performance  An oral contract for the transfer of interest in land may be specifically enforced despite the SOF if the party seeking performance changed his position in reasonable reliance on the contract and injustice can be avoided only through specific performance. Reliance was reasonable, D fully aware of change in position when refused to honor contract, would be unjust to refuse specific performance despite SOF. BUT if agreement to sell P’s house has been abrogated then we will probably only have restitution, but if that agreement has gone through, then we will probably have specific performance

6. 7.

4.

These exceptions help by preventing opportunistic behavior Despite these exceptions, its always bad to act to your detriment when no writing

THE REAL ESTATE CONTRACT 1. 2. 3. 4.

5. 6.

7.

Real estate contracts are almost always executory – title is not transferred immediately upon signing the agreement because buyers and sellers must do certain things between contract and closing (e.g. financing, title search, inspect) Contract doesn’t need all the specifics, deed has that – just need address  something sufficient to identify the property When you submit the contract, you give a small down payment (“earnest money”) a. 5-10%, but negotiable Two theories in regard to down payment a. Actual damages – if buyer walks away from the contract, they will have to pay actual damages (i.e. diff between contract price and (later) sale price) b. Liquidated damages – if buyer walks away from the contract, they give up their down payment and that is it (Schmudde thinks this is better) At the closing, the buyer will present the rest of the payment (i.e. 90%) Usually closing is held at the bank making the loan (seller gets the money right then and there) a. Location of closing varies from place to place b. Neither party really needs to go to closing c. Attorneys have escrow accounts (keeps down payment, and other payments there) and makes transfer via this account from seller to buyer Items in the real estate contract a. Mortgage contingency clause i. Usually takes bank about 60 days to process the mortgage ii. Terms of mortgage (e.g. 5% interest rate, etc) are specified in this clause – stuff buyer needs to get before proceeding with closing 1. Good faith requirement that buyer go forth and try to get the needed mortgage  if no good faith effort, then breach b. Time is of essence clause i. If you put this clause in the contract then there needs to be a written agreement for extension and either party is in breach if they are not ready to close by the specified date c. Prorations (take part at closing) i. Buyer will have to credit seller for any real estate taxes the seller has paid ahead of time 1. Depends on when the taxes are paid in the jurisdiction d. Attorney review period (typically 5 day) e. Inspection contingency clause i. Buyer typically wants to do a survey of property (are there easements? AP concerns?) ii. If they’re not going to do an inspection there is an “as is” clause – no warranty (generally you don’t want prebuilt development) f.

Real estate tax escrow i. Lender collects 2 months real property taxes from buyer/seller and keeps in escrow, and uses mortgage payments to replenish this so they don’t have to worry about government taking their investment ii. If you don’t pay real estate taxes, that jumps ahead of a lien (usually the first to record gets precedent, but this is an exception to that)

54

g. h.

8.

5.

Type of deed to be presented (e.g. marketable/merchantable title, etc) Damage to real estate prior to closing (best to get insurance for this) i. About 60 days between contract and closing for residential properties (and it can be a lot more in commercial properties) ii. By statute in NY, current owner is responsible for the property up until closing, except if the buyer takes possession before closing i. Walkthrough on the day of the closing (make sure they didn’t switch shit) j. Guarantee that if there is homeowner’s association, seller is up to date on dues, etc k. Flood insurance – county can tell you if you are in risk for floods Equitable conversion – once a contract is signed and each party is entitled to specific performance, equity regards the purchaser as the owner of the real property and the seller as the owner of the personal property (the payment) a. Bare legal title (and possession) remain in seller – held in trust for buyer b. If property is destroyed (without fault of either party) after contract but before closing, the risk of loss is on the buyer (unless contract says no) c. Minority rule – the risk of loss remains with the seller until either possession or title are transferred to the buyer

MARKETABLE TITLE 1.

Unless there is a provision in the contract of sale stating otherwise, it is implied that the seller must furnish the buyer with good and marketable title at closing a. Marketable title – title is solid enough that a reasonable person knowing all the facts would accept and pay for the title  it’s free from reasonable doubt as to the promised title’s validity (need not be perfect title) b. Unmarketable title – acquiring the property would subject the purchaser to a real risk of litigation (related to the property) i. Things that make it unmarketable 1. Reasonable probability that seller doesn’t own full title a. Defect in chain of title (e.g. possibility that unknown or missing heir surviving the decedent is out there is not enough) 2. Undisclosed encumbrance a. Most property is subject to encumbrances, but they must be disclosed and made part of bargain b. Encumbrances include: i. Mortgages or liens, easements affecting value, leases, mineral rights, covenants, adverse possession, violation of federal/state statute or zoning ordinance 1. Slightly different for deeds 3. Unreasonable risk that purchaser is buying a lawsuit 4. Not unmarketable if buyer waives any of these ii. Mere suspicion that title is flawed is not enough iii. Presence of hazardous waste on property doesn’t make it unmarketable  it has nothing to do with the title record  title issues are about chain of title and encumbrances on the title Lohmeyer v. Bower P contracted to buy parcel from D. Contract said D would convey good merchantable title, but subject to all recorded restrictions/easements applying to the property. It also allowed D time to cure any problems. P learns of 2 restrictions on property – covenant restricting property to a 2 story home (its currently 1 story, in violation of covenant) and zoning ordinance setting setback rules (its currently in violation of this). P says these two restrictions make the title unmarketable  to make title unmarketable, defect must be of a substantial character and one from which P may suffer injury  neither of the restrictions are themselves an encumbrance, but the violation of either is (subjects buyer to possible lawsuit)  Municipal restrictions are not encumbrances, covenants and other private restrictive agreements may be. D is free to cure, but P can walk away c.

Unless seller cures all defects by the scheduled closing date, a purchaser can refuse to close and can rescind the sales contract if the title is unmarketable i. BUT, buyer must rescind on this basis before closing b/c of merger doctrine  if closing occurs, sales contract is merged with deed and buyer is now limited to the rights in flowing from the warranties of title included in the deed  BUT, courts often find ways around this to allow contract right to survive closing

55

d.

2.

6.

The fact that a contract calls for quitclaim deed does not affect any warranty to provide marketable title unless so provided in contract Insurable title – a title insurance company is willing to insure the title (lesser standard) a. Theoretically there is some problem out there that is preventing it from being good/marketable

LIABILITY OF A SELLER TO A BUYER FOR DEFECTS 1.

2.

Old common law approach – seller of real property had no duty to disclose latent defects to the buyer, absent fiduciary duty or other special circumstances  buyer recovers only when seller intentionally misrepresents facts/defects about property a. Caveat emptor – buyer must make inspection and rely on that inspection b. Merger – once buyer accepts he deed, all remedies under the contract are extinguished  riddled with exceptions, most places no longer apply Modern rule – seller of mainly (mainly residential) who knows or has reason to know of a latent defect that substantially affects the value or desirability of the property must disclose it to the buyer a. If seller breaches this, buyer can rescind the contract or sue for damages Johnson v. Davis Buyer buys house from seller, seller says roof doesn’t leak when he knows does (affirmative representation that roof is fine). Buyers sue to rescind  Where the parties are dealing at arm’s length and the facts lie equally open to both parties, with equal opportunity of examination, mere nondisclosure does not constitute a fraudulent concealment (patent defects). Where the seller of a home knows of facts materially affecting the value of the property which are not readily observable and are not know to the buyer, the seller is under a duty to disclose them to the buyer – this applies to new and used real estate

3.

4.

2 tests for deciding whether a defect is material a. Objective Test – Whether a reasonable person would attach importance to it in deciding to buy i. Neighborhood violence? Sex offenders? Party people next door? b. Subjective Test – Whether the defect affects the value or desirability of the property to the buyer The law is less clear concerning the seller’s duty to disclose “intangible” defects, such as whether a house has a reputation for being haunted  stigmatized properties (e.g. people murdered here, owner died of AIDS, haunted) a. Some states have statutes which shield sellers from failure to disclose psychological or prejudicial factors that might affect market value Stambovsky v. Ackley Sellers made no disclosures to the buyers about ghosts in house. Sellers had told everyone around town about the ghosts. Under caveat emptor there would be no remedy for buyers. Court doesn’t go to the point to saying latent defects MUST be disclosed  Where a condition which as been created by the seller materially impairs the value of the contract and is peculiarly within the knowledge of the seller or unlikely to be discovered by a prudent purchaser exercising due care with respect to eh subject transaction, nondisclosure constitutes a basis for rescission as a matter of equity [NY now requires complete disclosure – you don’t have to disclosure if you reduce the purchase price by $500]

5. 6.

7.

“As is” clauses – upheld only if the defects are reasonably discoverable and there is no fraud  if fraudulent representation or concealment, they’re no good CERCLA – Strict liability for cleanup costs of a hazardous waste site upon a. Any current owner or operator of a site containing hazardous waste b. Any prior owner or operator of the site at the time it was contaminated c. Any generators or transporters of hazardous waste d. Statute really just targets current owner first, then prior owner (if it can be shown this person was there at the time – hard to prove) e. Bona fide prospective purchaser defense – if you show you did everything possible to find contamination and you didn’t find it, then you can raise this defense i. Defense is available if the release of hazardous materials took place before purchaser bought the property, the purchaser made all appropriate inquires into the previous ownership and uses of the property, and purchaser exercises appropriate care with respect to hazardous substances found at the facility Builder’s implied warranty of quality (very extensive) a. Old common law – builder who constructed a new home and then sold it to a buyer had no liability for defects, even if home was negligently built

56

b.

Modern rule – an implied warranty accompanies the sale of a new home by a builder, developer, or other “merchant” of housing i. This warranty provides that the house has been constructed in a workmanlike manner and is fit for human habitation ii. Suits on this warranty can arise only after the closing has taken place and buyer has accepted the deed iii. Plaintiff has the burden to show defect was caused by defendant Lempke v. Dagenais (transcending privity) Contractor builds garage for owner, 6 months later owner sells property, new owner finds problems with it (roof line uneven, etc  latent shit), asks builder to fix, builder doesn’t, sues builder (no privity between P and builder)  Privity of contract is not necessary for a subsequent purchaser to sue a builder or contractor under an implied warranty theory for latent defects which manifest themselves within a reasonable time after purchase and cause economic harm (this warranty will follow the property for a reasonable time)

8.

c. Builder is in the best position to handle these problems and with least cost d. Buyer’s reasonable expectations are to be buying legit shit e. Ox thinks you should be able to disclaim this warranty (law unclear here) Remedies for breach of sales contract a. Specific performance – breaching party must perform sales contract i. Awarded only if damages is inadequate (court’s broad discretion) b. Damages i. Actual damages – basic measure is the difference between the contract price and the fair market value of the property at the time of the breach 1. Alternative measure is difference between contract price and actual sale price (Ox likes this – easier to figure out) ii. Liquidated damages (NY rule) – down payment is usually the protection (typically 10% of purchase price) – Ox likes this best Jones v. Lee Buyers made 6k down payment (“earnest money”), contract had no liquidation clause. Buyer offered to forfeit their 6k in return for rescission of contract. Seller resells for 70k less than they would under contract. What is the cost of cover here? Market value at time of breach or difference between contract price and resale price  when a purchaser breaches an executory real estate contract, the seller’s measure of damages is the difference between the purchase price and the market value of the property at the time of the breach

9.

Common law – buyer can’t recover deposits when he breaches, even if seller profits from it (i.e. regardless of actual damages suffered by seller, if any) 10. Modern approach – Whenever the breaching buyer proves that the deposit exceeds the seller’s actual damages suffered as a result of the of the breach, the buyer may recover the difference – Kutzin v. Pirnie a. Breaching buyer entitled to restitution for extra benefit conferred on seller b. This is basically the liquidated damages rule – must be reasonable 9.

DEEDS 1.

INTRODUCTION 1.

2.

The deed is the basic document used to transfer an estate or other interest in land during the owner’s lifetime a. The contract of sale is the document with drives the transaction b. The sales contract controls the relationship between the buyer and seller during the executory period c. Merger – sales contract typically merges into the deed and buyer’s rights are limited to those warranties and covenants found in the deed i. Exceptions are chipping away at this doctrine 1. Buyer can resort to the contract to show seller’s fraud 2. Contract itself may provide expressly that it survives closing 3. Courts are more willing to identify some sales contract matters not normally incorporated into the deed and enforce these contract provisions as collateral/independent covenants One who transfers title by deed is a grantor; one who receives title is a grantee

57

3. 4.

2.

The warranties and covenants in the deed are the grantor’s promises either that certain facts are true as of closing or that the grantor will remedy the problem or pay damages if a third party successfully asserts an undisclosed interest in the property Important aspects of a deed a. Consideration i. The deed mentions consideration, but exact consideration is never included in it 1. It just mentions a nominal consideration – BUT some states have statutes that require the filing of a document that states the actual consideration (i.e. purchase price)  more transparency, better real estate assessments for tax purposes b. Warranty clause (“habendum” clause) i. This varies from deed to deed depending on the type of deed (infra) ii. Includes the title covenants c. Seal (or acknowledgement) – needs to have been witnessed by a notary for recordation (critical to protecting title) i. An unacknowledged deed transfers title, but most purchasers insist on acknowledgement d. Description of tract i. The deed must contain a description of the parcel of land conveyed that locates the parcel by describing its boundaries 1. Reference to a government survey or other record 2. Metes and bounds description (how many feet on each side, what the angles are – this comes from a surveyor and specifically delineates the property) 3. Reference to the street and number or name of property e. Title covenants i. Express promises by the grantor about the state of title being conveyed ii. If one of these covenants is breached, the grantee (and sometimes his successors) may recover damages from the grantor

TYPES OF DEEDS 1.

3 main types of deeds a. General Warranty Deed i. The classic type of deed ii. Contains 6 specific covenants of title that warrant against any defect regardless of who created the problem (grantor or previous owners)  Warrants title against defects arising before as well as during the time the grantor has title 1. Covenant of seisin (present covenant) a. Grantor warrants that he owns the estate being transferred i. If it turns out he didn’t own the property, you’d have an action for breach of the warranty of seisin 2. Covenant of a right to convey (present covenant) a. Grantor warrants that he has the right to convey the property b. Sometimes you can have seisin but not the right to convey (e.g. you’re a trustee, you have title but you need the beneficiaries’ permission to convey) 3. Covenant against encumbrances (present covenant) a. Grantor warrants there are no encumbrances on the property except those mentioned in the deed (e.g. liens, easements, covenants, etc) i. An encumbrance mentioned in the deed cannot be the foundation of a breach of this warranty ii. Must exist at conveyance (Frimberger) b. If one turns up, you can seek remedy under this covenant c. This is similar to marketable title in the sales contract (it jumps from contract to deed) i. In contract, it warrants rescission d. BUT, many courts will allow a purchaser during the executionary period to rescind because of a violation of a zoning ordinance or environmental law, but won’t find this to be an encumbrance in the deed context (Frimberger) 4. Covenant of general warranty (future covenant) a. Grantor warrants he will defend against lawful claims and will compensate the grantee for any loss that the grantee may sustain by assertion of superior title (e.g. attorneys fees, damages, etc)

58

iii.

iv.

v. vi.

i. E.g. someone shows up and says they own the property, grantor says he will take steps necessary to handle this b. Not breached until grantee has been evicted or had an interest enforced against him  the mere existence of paramount interest is not enough 5. Covenant of quiet enjoyment (future covenant) a. Grantor warrants that the grantee will not be disturbed in possession or enjoyment of the property by the assertion of superior title b. Usually the covenant most used for a remedy i. People are actively using this for constructive eviction 6. Covenant of further assurances (future covenant) a. Grantor will execute any other documents necessary to perfect the title conveyed b. Prevents grantor from extorting extra money to sign documents later c. Only covenant enforceable via specific performance Present covenants are broken, if ever, at the time the deed is delivered 1. Grantor either owns the property or he doesn’t, there’s either an encumbrance at that time or there isn’t 2. Statute of limitations begins to run when deed is delivered Future covenants cannot be broken until the grantor refuses to act or the grantee has been ousted or evicted by someone having a paramount claim 1. Grantee can’t bring suit against grantor unless and until the covenant is actually breached 2. Statute of limitations begins at the time they are broken, not at the time of the deed Future covenants run with the land to all successors in interest of the grantee 1. A gives general warranty deed to B, B sells it to C  A is liable to C on any of the future covenants in A’s deed Grantee can always assert a breach of both present and future covenants or a breach of 2 present or 2 future warranties 1. E.g. grantee discovers the encumbrance before the third party asserts paramount title to the property Brown v. Lober (P should have done a title search) Deed is given to D, but another party owns 2/3s of mineral rights, 10 years later, D sells to P under general warranty deed, but they don’t tell them about the 2/3s ownership of mineral rights belonging to someone else (D sold more than owned). P tries to sell mineral rights to X, X does title search and sees P only owns 1/3. P sues D’s executor. SoL has expired for covenant of seisin (most applicable), so P sues on quiet enjoyment covenant – no good  the warranty of quiet enjoyment does not warranty that the grantor is the owner of the entire estate as conveyed, need constructive eviction (failing to sell b/c not owning all of property is not constructive eviction – need to have taken possession of mineral rights and been put off from using them)

b. Special Warranty Deed i. More common than general warranty deed ii. Usually contains the six title covenants found in the general warranty deed, but applies them only to defects caused by the acts or omissions of the grantor (grantor’s acts ONLY) 1. E.g. if the defect is a mortgage on the land executed by grantor’s predecessors in ownership, grantor is not liable 2. E.g. A, having no title whatever to a parcel of land, purports to convey title to B, and B in turn conveys to C using a special warranty deed; because the title defect was caused by A, not B, B is not liable to C c. Quitclaim Deed i. Simply says grantor is transferring his interest to grantee ii. Contains no title covenants iii. Grantor does not warrant that she owns the property or – if she has any title – that her title is good iv. It merely conveys whatever right, title, or interest the grantor may have in the land v. If grantee of this deed takes nothing by deed, they can’t sue grantor vi. Granting this deed may give inquiry notice that something is amiss Frimberger v. Anzellotti (encumbrances? Or not?) D’s brother subdivides land, builds bulkhead to separate it from wetlands (get a lot of protection from federal/state environmental protection agencies). Quitclaim deed from D’s brother to D (red flag – why would a builder give a quitclaim deed when there are already warranties on builder from the state?). D deeds general warranty deed to P. Survey shows violation of DEP regulations, DEP says P needs to submit application on why he needs bulkhead (potential administrative remedy). P sues D for

59

breach of warranty against encumbrances  Latent land use violations not appearing in records (or warranting recordation) and are unknown to seller don’t amount to encumbrances when the agency charged with enforcement has taken no official action to compel compliance at the time the deed was executed  until DEP turns down his application, then we may have an issue, But that prob wouldn’t be an encumbrance either b/c its curable  Only when its not curable can it rise to an encumbrance  Zoning violations can make a property unmarketable, but this is different here (its not the end of the story, it can be curable, etc) 2.

3.

3.

Other types of deeds a. Bargain and sale deed – the deed used when property is sold i. This is a special warranty deed guaranteeing against grantor’s acts ii. Implies that the grantor has the right to convey title but makes no warranties against encumbrances b. Gift deed – not a sale, a gift c. Executor’s deed – when someone dies, the executor can make the transfer of their property d. Sheriff’s deed – when the property goes into foreclosure, the court orders a sale by the sheriff, and the sheriff giver the deed to the buyer i. Gives no warranties whatsoever  less than a quitclaim deed (you can’t even really inspect) Damages for breach of title covenants a. Grantee can receive monetary damages from the grantor for the breach of a deed/title covenant b. Amount of damages depends on which covenant is breached i. Damages of violation of covenant against encumbrances will be the cost of removing it (if practical – e.g. lien) or the decrease in property’s fair market value (e.g. restrictive covenant, easement) ii. Measure of damages for breach of covenant of seisin is return of all or a portion of the purchase price c. Maximum damages grantee can get is the original amount he paid the grantor for the property

DELIVERY OF DEEDS To be effective, a deed must be delivered 1. 2.

3.

4.

5.

A deed must be in writing, be signed by the grantor, identify the grantor and grantee, contain words of conveyance, and adequately describe the land A deed transfers title only when a. The grantor intends to presently convey an interest in property i. Manifested by words or actions b. The grantor delivers the deed to the grantee i. Either the deed is handed to the grantee, or placed in the hands of an escrow agent, to be handed over after the purchase price is paid ii. Giving the deed to the agent is not a delivery until the agent gives the deed to the grantee c. The grantee accepts the deed i. This element is presumed Grantor’s delivery of the deed is a physical demonstration of the grantor’s intent to convey title (2 elements in 1) a. But there are exceptions if it’s clear a transfer was not intended i. Physical transfer of a deed is not necessary for valid delivery 1. Just need an act to evince intent to be immediately bound by transfer (e.g. grantor’s declaration that he is bound) ii. Physical transfer alone does not establish delivery – though it may raise a presumption of it Grantor-Grantee Delivery a. When grantor has possession of deed, a rebuttable presumption arises that there was no delivery b. If grantee has possession of deed, a rebuttable presumption arises that there has been valid delivery c. If deed is recorded, a rebuttable presumption arises that there has been valid delivery d. If grantor has acknowledged his signature, a rebuttable presumption arises that there has been valid delivery e. Once delivery is shown, it is presumed to have taken place on the date of grantor’s signature Retention of interest by grantor or conditional delivery a. Problems arise when grantor attempts to retain an interest in the property or attempts to make the passage of title dependent upon the happening of an event other than delivery b. If deed is properly executed and delivered but contains provision that says title will not pass until grantor’s death, the effect is to create a present possessory life estate in the grantor and a future interest in the grantee i. If the condition is that the grantee survive the grantor, delivery is valid, BUT the interest must be intended to pass now, not at death  otherwise you have a statute of frauds problem 1. If grantor intends that no interest should arise until death, no delivery during life has taken place and deed cannot take legal effect at death b/c of statute of frauds

60

c. d.

If grantor executes a deed but fails to delivery during his lifetime, no conveyance of title takes place If grantor executes and delivers a deed but fails to have it recorded, title passes (even though parties thought the deed would be ineffective until recording) i. An agreement between grantor and grantee that the deed will not be recorded until some event takes place in the future does not affect the passage of title Sweeney v. Sweeney (too many legal elements come together) M wants his J to have the property but wants to protect himself in case J dies first, they create 2 deeds. M deeds to J (records it and hands over  delivery), J deeds to M (hands it over but doesn’t record). M gives back to J, J gives it to lawyer, burns in fire. M dies. M’s wife brings suit. Was the deed to M effective delivery? Physical possession of a dully-executed deed is not conclusive proof that it was legally delivered, but it creates a presumption. Delivery must be made with intent to pass title if it is to be effective  since M and J’s purpose would have been defeated had there been no delivery with intent to pass title, there was intent and effective delivery. If they wanted to make it conditional, it has to be given to a third person to be kept by him until the happening of the event upon the happening of which the deed is to be delivered over by the third person to the grantee. Also, oral conditional (between M/J) is no good, it must be written (statute of frauds)

e.

6.

What could they have done in Sweeny? i. Joint tenancy with remainder in survivor ii. Revocable trust 1. Property is held in a trust but trust is revocable until death 2. Many states allow a surviving spouse to go into a revocable trust for the marital elective share – so this wouldn’t help iii. Irrevocable trust 1. Once the grantor puts it into the trust, he can’t get it back 2. Treated as completed gifts – property is passed completely to the other person Grantor-Third Party-Grantee Delivery (delivery subject to a condition) a. When grantor gives deed to third party the rules are different i. A executes deed to B and hands it to C with instructions to give it to B upon A’s death  most courts say grantor cannot get deed back because intent was to presently convey a future interest to grantee ii. Make sure grantor’s intent is that the deed be operative immediately to convey a future interest b. When A’s instructions to C are to delivery the deed to B only if B survives A, it is generally held there is no valid delivery because it was A’s intent to retain title and possession until her death Rosengrant v. Rosengrant (intent defeats legal presumption) They want to give their farm to nephew. They give oral instructions to third party to hold it in escrow. They give it to banker, banker gives it to nephew, nephew gives it back to banker to hold. Banker puts it in envelope that says “H and J.” They made physical handover and gave banker to hold it in escrow. Court says can’t enforce conveyance b/c no legal delivery and it didn’t comply with the statute of wills  There was no intention of a present gift of the property b/c it is clear H wanted to retain it before letting J have it (revocable escrow, language on envelope, etc)  need to have irrevocable effect. Written instructions would have been sufficient, recording the deed would be sufficient

7.

Hypo a.

Seller is ready to deliver a deed to buyer, buyer doesn’t have money. Seller says you can take the deed now and just pay me later. Buyer takes the deed and records. Does not pay seller. i. Once actual delivery is made, its been transferred. Maybe you can sue for the purchase price ii. Don’t’ deliver until you’re satisfied that you have good funds – wire transfer is best

10. CONDOS AND CO-OPS 1.

CONDOMINIUMS 1. 2.

Very common form of ownership in United States a. Vast majority are for residential purposes, but some commercial A condominium does not have to be the traditional high-rise apartment project a. It could be a marina, parking structure, office building, shopping center, or any type of property where there is a benefit to have some common ownership interests b. The condominium ownership form has nothing to do with the physical aspects of property, it is purely a legal definition of an ownership form

61

3. 4.

Owner does own real estate (not like in co-op) Each owner holds a 2-part package: a. Fee simple title to an individual unit, and i. Usually a cube of airspace 1. You own the air within the 4 walls of your condo ii. Condo association owns the exterior walls, common areas, etc iii. Your ownership is specified in the deed as an address (no metes and bounds)

b. A proprietary interest, usually as a tenant in common, in an association which owns and controls the common areas of the development i. This is your ownership interest in (typically) a condominium association 1. The association may or may not be incorporated 2. The association controls the exterior of the building, recreational facilities, parking lot, etc 3. You have an undivided interest in the building, etc ii. The ownership interest in the common areas is defined as a percentage 5. You are responsible for the interior of the building, the association controls the exterior a. Approval must be gained for any changes in the exterior of the property b. The association maintains the exterior, and insures the exterior of the unit 6. You make 3 payments when you own a condo a. Maintenance fee – goes to condo association that uses it to take care of the building i. Used to pay real estate taxes on common areas, maintenance expenses, and for improvements to common areas ii. Failure of a member to pay maintenance on the unit can allow the association to file a lien against the fee title 1. If the fees remain unpaid, the association could foreclose the property and sell it  this is the primary method of collecting overdue maintenance payments. b. Real estate taxes (to the municipality) – because you own real estate c. Mortgage payments (if you borrow money) i. As a general rule, you want a fixed rate mortgage ii. Very little difference between mortgage on condo and house 7. The condominium association is an elected organization a. Elected officials are managers of condo association b. An elected group, the board of directors, including officers, is responsible for the operation and maintenance of the common areas c. Very similar to the operation of a corporation d. The association will operate pursuant to by-laws and house rules i. The by-laws are a set of rules adopted by the property owners’ association to manage and govern the association 1. The by-laws may be freely changed, but must not conflict with state law 2. Most condominiums provide in their by-laws that the board of directors can authorize the condominium association to exercise a right of first refusal when a unit is sold a. But this is rarely exercised ii. The house rules are very specific rules detailing the operation of the association and its common areas 8. Board of directors has responsibility and control over the operation of the association a. Board establishes policy and enforces the rules of the association i. Typically responsible for functions such as maintaining the common area, hiring staff, enforcing the covenants, collecting monetary assessments from the owners, etc b. Board must collect funds and disburse amounts for maintenance, repair, and improvements c. Each board member must act in the best interests of the association, and has a fiduciary responsibility to maintain the property and fund of the association d. The board is given great latitude in regulating the exterior portion of the units i. The only requirement imposed upon the board is that it is reasonable in its rules and operation 9. Funds are maintained in a reserve for future maintenance, and are invested in secure investments 10. Voting interests in the association are either based upon the percentage ownership in the whole property, or may simply be allocated one vote per unit, without regard to size or value of the unit 2.

COOPERATIVE APARTMENTS 1. 2.

Less favorable for owners than the condo form of ownership a. Very different type of ownership than condo Co-ops became popular, in a rising real estate market, because they were more profitable for developers who wished to convert existing rental properties into ownership buildings

62

3. 4.

5.

6. 7.

8.

9. 10. 11. 12.

13.

a. There have been no new co-ops since 1989 b. Few co-ops outside of NY – mostly in major cities (but they are pretty much unique to NY) Owner does not own real estate Each owner holds a 2-part package (but a very different one): a. Shares of stock in the corporation owning the co-op building i. You buy shares in the corporation and become a shareholder ii. You do not own real estate – not defined by real estate law iii. You own shares of stock, not a real estate interest iv. Shares are allocated by relative value of apartment b. Proprietary lease with the corporation (which is the landlord) entitling the purchaser to occupy a specific apartment upon the payment of a variable monthly maintenance charge Your status is tenant-shareholder a. You have an ownership interest as a shareholder, and a status with the corporation as a tenant b. Hybrid form of ownership, part shareholder, part real estate lessee i. The law gives the owner rights and duties under both statuses 1. As a shareholder, the owner is given the right to vote for corporate directors 2. As a tenant, the owner has rights very similar to a person who is renting an apartment a. The laws of landlord-tenant apply here b. Co-op corporation is the landlord The corporation owns the fee simple title to the building a. They pay the real estate taxes, mortgage payments The corporation has a mortgage on the building – the underlying mortgage a. Usually a 10-year, interest only, balloon payment mortgage (all they do is pay interest) b. When it becomes due, they refinance it and get another balloon mortgage c. So when you are buying a share stock in the corporation, you are taking on a portion of that mortgage – part of your purchase price is an assumption of that underlying mortgage The 2 main costs of a co-op a. Maintenance (includes 3 components) i. Actual maintenance 1. maintaining building, common areas (similar to condo) ii. A portion of the real estate taxes the corporation pays 1. This is pretty much the same as with a condo, just aggregating and dividing instead of each person paying there share iii. Interest on the underlying mortgage 1. You’re not paying this on a condo b. Mortgage (on your individual share) i. This mortgage is a UCC lien (the same type a bank gets on a car) The monthly payment to the cooperative corporation is larger than in a condominium because of the payment of real estate taxes and the underlying mortgage a. If tax deductions are more than 50%, that’s not good – underlying mortgage is too big If the co-op defaults on the underlying mortgage, the entire building can be foreclosed on and lost  co-op boards strictly review each person’s finances Getting a mortgage on a co-op a. Mortgages on cooperative corporation shares, since they are not secured by real estate, require a higher interest rate than those on a condominium or single-family home. This is usually a premium of from .25 to .5 % Operation of the corporation a. The corporation’s board is run very similar to condo board i. By-laws, house rules, managerial functions, etc (supra) b. Cooperative corporation boards have the right to reject any proposed purchaser of the shares of the corporation c. Courts and legislatures have given cooperative corporations much more leeway in rejecting proposed owners i. A default by one owner in maintenance payments will have a great impact on the other owners, and could result in a default on the entire building  b/c of this, co-op corporation boards are allowed to make substantial inquiry into a new owner’s financial and income status 1. Many boards have allowed this control to develop into a mechanism for discrimination. ii. The burden of proving discrimination lies upon the rejected purchaser, and has rarely been met 1. In NY, the percentage of rejected purchasers is nearing 10 percent, while in some “exclusive buildings” it is far higher d. Some buildings require a new owner to purchase with cash, not allowing an outside mortgage on the specific unit shares e. Many cooperative apartments also restrict the ability of an individual owner to sublease the apartment Co-ops only benefit the original owner – here is how it happens a. Owner has a rental building, he’s paid off his mortgage, its his

63

b. The real estate market is booming – but b/c of rent stabilization or control, he can’t make any more from it c. Owner can sell the building for 1M and be done OR he can convert it into a co-op i. Co-op  owner takes out the biggest mortgage he can on the property (i.e. 80% -- 800k) ii. Now owner owns the building with an 800k mortgage and has 800k in his bank account d. Owner transfers the building to a corporation he set up (tax free transfer) i. He transfers the building subject to the mortgage to the corporation  he now owns 100% of the shares of the corporation e. The building is now owned by coop corporation with an 800k mortgage, and owner owns all of the shares f. Owner sells off the units for 1M and still has the 800k i. Each buyer is assuming part of the mortgage (b/c their property is subject to the mortgage) g. Owner has cashed out twice 3.

BUYING A CONDO OR CO-OP 1.

2.

3.

4. 5. 6.

The most important thing in buying a coop or condo is knowing the financial condition of the organization a. If they won’t show you the financials it’s a bad sign b. They have to give the financial statements to the owners each year i. The association should have certified financial statements for each year of operation 1. These statements should be certified by a CPA 2. As part of these certifications, the CPA is required to review a reserve study at least every five years 3. The reserve study is an analysis of how well the association has saved funds to prepare for needed replacements c. The building should have a substantial reserve fund d. You never want to buy into a building that hasn’t been developed yet because you don’t know the financial condition The things you want to look at when buying condo or coop a. By laws and house rules – you will be subject to these b. The proprietary (underlying) lease – if this is a coop c. Prospectus (describes everything about the building) – gives a very significant feeling of how the building is structured (financially, etc) d. Minutes of the board (what concerns are there, what are the issues, what is the relationship between tenants and board) e. Financial statement (see what kind of financial state they’re in) Differences between co-op and condos a. The biggest disadvantage to co-ops is the underlying mortgage i. This mortgage was only favorable to the original sponsor of the corporation; it does not benefit the individual tenant-shareholders ii. Payments made on the underlying mortgage generate tax deductions, but at the cost of a substantial cash outflow iii. The cost of servicing the underlying mortgage is reflected in the lower cost to purchase a cooperative apartment b. The difficulty of gaining board approval for a purchaser is another disadvantage to cooperative apartment ownership i. Many people have had to find two or three or more purchasers before finding one who can gain approval 1. Each of these transactions takes a few months, much delaying the sale of the apartment ii. Condos are not this restrictive on sales c. Co-op boards are usually more intrusive in their management of the building d. Co-ops generally restrict subletting and assigning e. A default in maintenance payments by one tenant-shareholder puts the entire building in jeopardy  financial ruin for everyone i. If the underlying mortgage on the building goes into default, a heavy burden falls on the tenantshareholders to save the building from foreclosure ii. Condos are not so significantly subject to the default of owners In co-ops, you generally have more interaction with owners (you are one) In co-ops, a default by one owner can mean financial ruin for everyone Co-ops have had less trouble in the current economy b/c they are so restrictive of their shareholder-tenants  they get financially responsible people who aren’t taking out 100% mortgages

64

11. MORTGAGES 1.

GENERALLY 1. 2.

3.

4. 5.

6.

Virtually all land purchases are financed with borrowed money a. The lender will require that the borrower post security for the loan, so that if the loan is not repaid as promised the lender may cause the security to be sold and repay the loan from the sales proceeds A mortgage is the conveyance of an interest in real property as security for performance of an obligation a. The obligation is almost always a loan of money evidenced by a promissory note b. If the borrower (the mortgagor) fails to make the payments required by the note or otherwise defaults on the obligation, the lender (the mortgagee) may cause the secured property to be sold and apply the sales proceeds to satisfy the unpaid debt  This process is called foreclosure A mortgage consists of 2 documents a. A promissory note i. A specialized form of contract between the lender and the borrower ii. It includes the loan amount, interest rate, term, and repayment schedule 1. I promise to repay the principal in 360 monthly payments of $X with interest iii. Often contains: 1. Prepayment clause – allows the mortgagor to repay the loan in advance of the due date in return for payment of a monetary penalty (they are legal) a. Never sign a mortgage with a prepayment penalty 2. Due-on-sale clause – allows the mortgagee to demand repayment of the entire loan if the mortgaged property is sold or otherwise transferred b. The mortgage i. A lien that gives the mortgagee a property interest in the mortgaged property  a security interest in the property which allows the mortgagee to reach the property in case of a default by a mortgagor ii. Secures repayment of the loan evidenced by the promissory note When you buy property and finance it with a mortgage you get a deed and you record it and you record the mortgage Creating a mortgage a. Because the mortgage is viewed as the transfer of an interest in real property, the formalities required for an effective deed also apply to the mortgage i. At a minimum, (1) the material terms of the mortgage (names of parties, description of property, words manifesting intent, etc.) must be set forth in a writing signed by the mortgagor and (2) the mortgage must be delivered to the mortgagee Types of mortgages a. Fixed rate fully amortized mortgage i. The rate is set throughout the entire time of the mortgage (typically 30 years)  mortgagor makes a constant payment each month which includes both a component for interest and one for principle ii. If you make that payment the entire course of the mortgage, the principal will eventually drop to 0 iii. This is the typical mortgage people get b. Adjustable rate mortgage i. The rate adjusts every year according to current interest market ii. First year you get a low teaser rate (2% below the market rate) iii. Then rate is usually 3% + LIBOR or some other debt index iv. Same as above, after 30 years principal is paid off v. You generally can refinance without a penalty 1. You can just pay the teaser then refinance vi. The bad subprime mortgages had these c. Balloon mortgages i. Principal payments are postponed 1. You only pay interest, principal stays put ii. Typically have 10 year term – at the end of 10 years you pay off all the principal  usually you just get another mortgage then iii. This is what co-ops use, but some people get them on their homes (not typical in residential mortgages) d. Negative amortization i. Below-market interest rates with the difference between the market rate and the lower rate added to principal e. Wraparound mortgage

65

7.

8. 9. 10. 11. 12.

13.

2.

EVOLUTION OF MORTGAGE DEFAULT 1. 2. 3. 4.

3.

i. A form of secondary financing in which a seller extends to a purchaser a junior mortgage which wraps around and exists in addition to one or more superior mortgages ii. Seller has first mortgage at 6%, sells the whole property with a rate of 8% on a wraparound mortgage  He make a 2% middle on the first mortgage amount, using other people's money to make money The rules required for a conforming mortgage a. Made by Fannie Mae and Freddie Mac – government-sponsored enterprises created to establish a secondary market in which mortgages could be bought and sold like stocks, thereby evening out credit flows across the nation b. FICO score of the mortgagor has to be more than 720 i. Credit score from Fair Isaac Corporation used by many mortgage lenders that use a risk-based system to determine the possibility that the borrower may default on financial obligations to the mortgage lender c. Mortgagor must put 20% cash into the property i. You can get up to an 80% mortgage – measured on the appraised value (not just on what you pay) ii. Jumbo mortgage 1. A mortgage with a loan amount above the industry-standard definition of conventional conforming loan limits d. Income test i. Part 1 – the monthly payment (mortgage payment and 1/12 of annual real estate taxes) cannot exceed 28% of your gross (i.e. not reduced by taxes) monthly income 1. Look at last 2 wage statements you have and last 2 years income tax returns ii. Part 2 – all your debt payments including mortgage and real estate tax cannot exceed 35% of your gross income  credit card payments, car payments, etc + mortgage payments Mortgages that don’t meet the conforming rules are Alt-A mortgages a. Higher interest rate Mortgages that don’t meet the Alt-A standard are subprime a. Even higher interest rates Fannie and Freddie would not buy mortgages unless it met the conforming rules In the 2004 era, no one was really following these rules, the mortgages were being lumped together and sold as good mortgages (no one was looking at the individual mortgages) HOEPA (1994)– Congress gave federal reserve power to regulate shadow banking industry a. 2008 – they finally issued regulations  lender must consider buyer’s ability to repay the loan, creditor must verify borrower’s assets, lenders can’t compensate brokers for yield spread mortgages (incentive to sell bad loans), no coercing an appraiser, etc Equity in property a. The fair market value minus the mortgage balance = equity b. If you have a conforming mortgage and are up with payments, your equity should never drop below 20% c. Negative equity = underwater = you owe more on the house than the house is worth i. Virtually everyone is underwater in cars because they lose value so quickly

By the 17th century, English courts routinely allowed the mortgagor to recover the property if the entire loan was repaid within a reasonable period after its due date  this right was the mortgagor’s equity of redemption A mortgagee could petition the court to end or foreclose this equity of redemption, and set a final date for payment, a process called strict foreclosure Because strict foreclosure was often unfair to the mortgagor, most states adopted legislation that mandated judicial foreclosure—a public sale of the property under court supervision and distribution of excess sales proceeds to the mortgagor With the development of the power of sale mortgage, foreclosure could occur through a public auction sale without any judicial involvement; this is called power of sale foreclosure

DEFAULT TODAY 1. 2. 3.

Default is typically when you are 2 months behind in mortgage payment Once there is a default, the mortgagee can take steps to reclaim the property via a foreclosure suit  Mortgagee must go into court, prove a default, then sheriff sells it on market Judicial foreclosure a. Specialized type of litigation

66

b.

4. 5. 6.

7. 8. 9.

The successful mortgagee receives a judgment that states the amount due on the mortgage, directs the property to be sold at public auction, and specifies the terms of the sale c. Once the sale occurs, it must be confirmed by the court; the court has the power to deny confirmation if needed to protect the mortgagor’s legitimate interests (e.g., if the sale was conducted in an illegal manner) d. The foreclosure proceedings is to provide protection to borrowers In most states, the minimum notice required for a foreclosure sale is an ad in the paper Any time that a foreclosure sale is in excess of mortgage balance, the excess has to be returned to the mortgage owner (the borrower) If the foreclosure sale does not fully satisfy the mortgage, the lender gets a deficiency judgment for the residual a. This is a judgment requiring the mortgagor to pay the unpaid balance b. Lender usually has about 20 years to collect this remainder c. Legislation in some states restricts these actions i. Many states limit the amount of any deficiency judgment to the difference between the unpaid balance and fair market value ii. Some states bar deficiency judgments altogether iii. Some Anti-deficiency statute say lender cannot get a deficiency judgment against you in foreclosure if its your primary residence Judicially-created right of equity of redemption helped mortgagors facing foreclosure  gives mortgagor more time to pay Statutory redemption – Some states provide by statute, a right to buy back title form the purchaser at a judicial foreclosure sale within a certain period of item after the foreclosure a. Comes into play after foreclosure extinguishes borrower’s equity Ways of avoiding foreclosure a. b. c.

d.

Deed in lieu of foreclosure – instead of going through foreclosure proceedings, you simply give the deed to the lender and let them just have it straight up Strict foreclosure – mortgagee does not have to go to a court to get a foreclosure, they can just declare a default, foreclose on the property, take it back and simply sell it Deed of trust (financing device) i. The borrower (or trustor) executes a written instrument conveying an interest in the property to a trustee as security for an obligation owed to the lender (or beneficiary) ii. If the trustor defaults, the trustee is empowered to conduct an auction sale and repay the beneficiary with the sales proceeds iii. Mortgagor gets a deed at the closing, signs another deed to the mortgagee and this deed is held in trust – at default, the deed in trust is turned over to lender sells land without going to the courts Power of sale foreclosure (incorporated into mortgage) i. A purely private procedure, without judicial involvement ii. Gives the lender the right, upon a default, the right to take the property and sell it iii. Permitted only when authorized by the express terms of the mortgage iv. While most states allow this form of foreclosure, statutory safeguards are generally provided for the mortgagor 1. E.g. specified advance notice must be provided to the mortgagor and to the public, the auction must occur in a public location, etc. v. Most states allow the mortgagor to bring suit to cancel the sale only where the bid price is so grossly inadequate or if fraudulent or unconscionable conduct has occurred Murphy v. Fin. Dev. Corp. P is behind in mortgage (with power of sale clause), then just barely makes payment, then falls behind, then P can’t do it anymore, lender wants to sell the property. Nobody shows up to foreclosure sale, lender buys property (bids the remaining mortgage price of 27k (common practice)), then sells it for 38k 2 days later, seems sketchy  Where there is a strict foreclosure or power of sale close, the lender has a fiduciary duty to deal fairly with the borrow and take efforts to make sure the sale is fair  a mortgagee must exert every reasonable effort to obtain a fair and reasonable price under the circumstances They have to exercise due diligence and try to determine and receive fair market value (here it would have been 38k) – the test is whether a reasonable man in lender’s place would have called off the foreclosure sale and tried other methods to get a fair price (if he knows or should know he could get a better price, he’s breached)

10. Purchase money mortgage (alternative financing device) a. Usually when you have a desperate seller and a buyer who can’t get a mortgage  Seller gives buyer the mortgage

67

b. Not really all that different from a regular mortgage – you still have a mortgage that’s recorded c. But the rules are different from the mortgage industry rules d. Seller transfers title to buyer at transaction 11. Installment land contracts (alternative financing device) a. Frequently used as an alternative to the mortgage – its like a lay away plan b. Buyer gets possession and agrees to pay the purchase price in installments to the seller over a period of years c. Seller retains title until all payments are made, then transfers title to buyer d. Title doesn’t pass until the end  but this legal, not equitable, title Bean v. Walker (equitable conversion applies) D has 15k installment sale contract to be paid over 15 years to P, contract says if D defaulted and didn’t cure within 30 days, P could call the balance immediately or terminate contract and repossess premises. This happens. Can P just take it? No  buyer (D) acquires equitable title and P merely holds legal title in trust for buyer, subject to P’s equitable lien for the payment of the purchase price in accordance with the terms of the contract  buyer may not enforce his rights by an action in ejectment, must foreclose D’s equitable title or bring an action at law for the purchase price e.

12.

13.

14.

15.

Seller must give notice of a possible forfeiture either in a manner prescribed by statute or in a reasonable manner satisfactory to a court f. If you do this, make lots of payments, then can’t anymore, you don’t just lose it (see Bean) i. Courts often restructure these into purchase money mortgages, to give you credit for the equity you have put in Purchasing a property with a mortgage a. “subject to the mortgage” – purchaser takes property without any personal liability for mortgage, but with risk that land may be foreclosed b. “assuming the mortgage” – purchaser promises to pay off the mortgage Refinancing a. What you do when the interest rate is lower now than when you got the mortgage b. Traditional refinancing – You have been paying interest payments and you’ve lowered your principle, but now the interest rate is lower, so you take out a new mortgage to pay off the principle and now you have a new mortgage based on that i. Costs about 2k – 2.5k to do this (b/c they make you buy a new title insurance policy) ii. You do this when its going to lower your payments significantly (at least exceeding the 2-2.5 cost) c. Cashout refinancing – When fair market value of property has increased, bank will now lend you 80% of increased value – you use this bigger loan (i.e. mortgage) to pay off the old mortgage and pocket the extra cash (for kids tuition, new car, etc) Once lenders make a mortgage, they don’t keep those mortgages, they sell them to investors a. Companies like Fannie and Freddie, and MBS market are increasing liquidity in the mortgage market i. In 2004, the MBS market was bigger in volume than NYSE ii. MBS’s combine a bunch of different mortgages into the same security, tranches are used to mix in bad mortgages with good ones, and credit rating agencies were giving them AAA ratings 1. Credit rating agencies are exempt from suit from investors (by a congressional act) 2. Credit rating agencies never even looked at the mortgages, they just had mathematical models Subprime mortgage mess was more than just poor people fucking shit up, a lot of speculators were the ones involved a. Hudson City Savings bank adhered to all of the lending regulations and had only one default throughout the period

12. TITLE ASSURANCE 1.

THE RECORDING SYSTEM 1.

The recording system is used to assure title  determines priority of rights to a parcel a. At common law, as between successive grantees, priority of title was determined by priority in time of conveyance b. The recording system changes this by adopting the equitable doctrine of bona fide purchaser  A subsequent bona fide purchaser is protected against prior unrecorded interests i. The protection afforded the BFP is determined by the system used ii. BFP = subsequent purchaser or creditor who purchases for valuable consideration and does not have notice of prior interests

68

c.

Why protect the BFP? i. Protect against fraud by double dirty dealers, etc ii. Comparative fault between the prior buyer (who can avoid the conflict by recording promptly) and the later buyer (who cannot)  it makes sense to allocate the loss to the person who is best situated to avoid it 2. The public recording system serves the needs of society in facilitating land ownership and land transfers a. The recording acts in almost all states provide that a subsequent purchaser is charged with constructive notice of a prior recorded interest – even if he fails to search the records –and cannot qualify for protection as a BFP (but not all recorded documents provide constructive notice) b. The recording acts do not affect the validity of a deed or other instrument  the deed is valid and good against grantor upon delivery without recordation 3. The system has 2 basic purposes a. It protects existing owners from losing their property to later purchasers by providing constructive notice b. It protects new buyers by allowing them to qualify for bona fide purchaser protection after careful title searching reveals no prior interests 4. First instance of a recording system was the Domesday Book in England  started the idea of keeping a record at a central place 5. Today every county has a recording office where instruments affecting an interest in land are recorded – e.g. deeds, mortgages, liens, contracts of sale, wills, etc (in deed book, lien book, etc) a. Leases can be recorded, they need not be (but long term ones usually are) b. Lis pendens – notice of a pending lien i. If you have any claim at all you can file a lis pendens to stop a closing (to sell the property to someone else) but you may be liable for tortious interference with contract if you’re wrong 6. Statutes typically require a deed be acknowledged before a notary public or other public official before it can be recorded (Messersmith) a. Most states also restrict the types of documents that are recordable 7. Title registration – the state registers title and issues a title certificate to the owner, which is reissued to each new purchaser of the property 8. How to record a. Present the original document to the appropriate local official and pay a small fee b. The official stamps the date and time of recordation on the original, a copy of the document is filed in the land records, and later the relevant indices are updated to include the document 9. How to search a. The recording system functions like a specialized library b. Deeds and other instruments are placed in the public land records; a written catalogue (usually consisting of two indices) lists all recorded documents c. A title searcher must examine the indices that affect the parcel at issue, read the relevant documents, and independently evaluate their legal significance to determine the state of title 10. The indexes a. Tract index i. Documents are indexed by a parcel identification number assigned to a particular tract (county divided into designated lots/blocks) ii. Look up lot and block number of a specific parcel and look in tract index that has every transaction relating to that parcel iii. This type of index does not exist in most states b. Grantor-Grantee index i. Separate indexes kept for grantors and grantees ii. In each index, instruments are listed alphabetically and chronologically by grantor or grantee’s surname iii. Sometimes there is a separate index for each instrument c. The reference in the index to a document lists the essentials: grantor, grantee, description of the land, date of recording, volume/page number d. These records have become computerized in the last few years, but most counties have not been spending money putting older records into the computer, only ones from here on out 11. Procedure a. First you search in the grantee-grantor index back in time to determine when the current owner received title b. Then you repeat the process from owner to owner back in time c. Shifting to the grantor-grantee index, you now searches forward in time, under the name of each owner, to determine if any of them made conveyances during their respective period of ownership other than the known conveyances to each other d. How far back you go depends on the jurisdiction (some say sovereign)

69

e. Then you read relevant documents and evaluate their legal significance f. You can always pay a title company to do a title search for you 12. A recorded document provides constructive notice if it meets the formal requirements for recording, contains no technical defects, is recorded in the chain of title, and is properly indexed (But See Luthi) Orr v. Byers (make sure you record the name write) One guy obtains a judgment against other guy, records the wrong name (Eliot instead of Elliott) – is the lien effective with a mistake in the spelling of the name. Idem so nans doctrine – if it sounds the same its close enough. Court rejects this doctrine  an abstract of judgment containing a misspelled name does not impart constructive notice of its contents – the spelling has to be exactly right to provide notice 13. Recording acts establish the priority persons have to a parcel of land- BUT, you must determine the type of recording act in the state a. Race jurisdictions – when 2 persons hold competing claims to real property, the first person to officially record prevails  the first person to record wins even if he knows about a previously unrecorded conveyance i. Notice means nothing ii. Only a few states have this system iii. Creates a very strong incentive to record b. Notice jurisdiction – a subsequent BFP or creditor prevails over prior claimants so long as the subsequent purchaser acquires the interest without notice of the prior claim i. The subsequent purchaser does not have to be the first to record ii. The subsequent purchaser does not even have to record at all to prevail against the prior unrecorded claimant 1. He only needs to record himself if he wants protection against yet another purchaser iii. O conveys to A, and then O conveys to B, who pays value to O and has no notice of A’s interest. As a bona fide purchaser, B prevails over A c. Race-notice jurisdictions – a subsequent BFP or creditor who first records prevails against a person claiming a prior, unrecorded interest as long as the subsequent purchaser did not have notice of the preceding interest when he acquired his interest i. He can have notice about the interest when he records, just not when he purchased ii. If you are a subsequent purchaser in a race-notice jurisdiction, to prevail you must: 1. Acquire your interest without notice of the prior purchaser 2. Record first iii. Most common system iv. O conveys to A; then O conveys to B, who pays value to O, has no notice of A’s interest, and who records before A does. B prevails over A 14. There are 3 types of notice a. Actual notice – knowledge of the prior interest b. Constructive notice – notice of any prior interest that would be revealed by an appropriate search of the public records affecting land title i. A subsequent purchaser is charged with notice of such a prior interest even if he never actually conducts a title search Luthi v. Evans (mother hubbard) Woman sells 7 leases to guy, puts clause in contract saying it is conveying all of her oil and gas leases in the county. “Mother Hubbard” clause – includes everything in the cubbard all in one deed. Next guy buys different lease from woman (not one of 7). First guy says he owns it. Does hubbard clause give (constructive) notice to everyone with respect to the all the property included  This court says no  when you do a title search, you need only do it with respect to the specific property you are looking at  the Mother Hubbard clause is not effective as to subsequent purchasers and mortgagees unless they have actual knowledge of the transfer. Also, if an instrument containing a specific description of the property conveyed is properly recorded but not properly indexed, constructive notice still arises c.

Inquiry notice – actual notice of facts that would cause a reasonable person to investigate further i. If charged with this a subsequent purchaser is deemed to know the additional facts that inquiry would uncover whether he inquires or not Harper v. Paradise S conveys to M for life, remainder to M’s children (deed lost, but everyone lives up to it), S dies, survived by children, ¾ of S’s children convey via quitclaim to M in fee simple (deed acknowledges

70

lost prior deed). M takes out mortgage on property to T, defaults, sheriff’s deed to T, T conveys to P, original deed found, children sue to recover possession when M dies  Court says P had inquiry notice from M’s deed because it referenced earlier deed  when you see that in the deed you have to do more b/c something is amiss, out-of-line  it was incumbent upon P to ascertain through diligent inquiry the contents of the earlier deed and the interests conveyed therein. P only got life estate from T. No AP claim until M died. Sheriff’s deed didn’t clear title 15. Recorded instruments that do not provide constructive notice a. Defective document i. A recorded document that fails to meet the requirements for recording does not provide constructive notice ii. E.g. if the acknowledgment is defective on its face (e.g., because it shows the notary’s commission had previously expired), the document is deemed to be unrecorded Messersmith v. Smith C conveys land to P, then conveys mineral rights to S (this conveyance not properly acknowledged by notary). S conveys to D. D records. P records, says S’s deed was not entitled to be recorded  An improperly acknowledged deed is not capable of being recorded and has no effect when it is recorded  D cannot prevail because the deed was improperly acknowledged when C did not sign it in front of the notary  it was legally incapable of being recorded  D cannot claim to be a BFP [court examined the entire chain of D’s title, not just the last conveyance from S to D which would be OK under shelter rule]

b.

iii. Messersmith – the recording of an instrument affecting the title to real estate which does not meet the statutory requirements of the recording affords no constructive notice 1. Some legislatures have passed statutes that when there is a documents recorded, whatever that document says gives notice of that – Ox thinks this is a better rule Document outside the chain of title (“wild deeds”) i. Recorded documents that cannot be located using the standard title search are deemed to be “outside” the chain of title, and do not provide constructive notice ii. E.g. O conveys to A (who fails to record), A then conveys to B (who records), and finally O conveys title to C (who records). Because the recorded A-B deed cannot be found in a standard title search, it is outside the chain of title and provides no notice to C Board of Education Of Minneapolis v. Hughes Hoerger sells to D (not recorded, also deed doesn’t have grantee’s name but court says this is OK to fill in if you have either express or implied authority from the grantor). Hoerger sells to D&W (not recorded). D&W sell to P (not recorded). P records. D fills in name and records. D&W record. Court says because D’s deed was only effective when he filled in his name as grantee, he was BFP. The record of the deed from D&W to P was not notice to D of the prior unrecorded conveyance by Hoerger, it was merely the record of a deed from a stranger (P purchased wild deed)  It was necessary, not only that the deed to P should be recorded before the deed to D, but also that the deed to P’s grantor should first be recorded

c.

Deeds from a common grantor – SPLIT i. E.g. O owns lots A & B, only one of the deeds mentions a covenant that applies to both. O sells A to P. O sells B to D. D tries to do something violating the covenant that is in P’s deed. P sues. ii. Half the states say D is not obligated to check on all the deeds to surrounding properties or on all the deeds from O, the common grantor  you only need to follow your chain of title iii. The other half say D is obligated because purchasers and their representatives should know many covenants are included in only one deed from a common grantor Guillette v. Daly Dry Wall, Inc. (greater duty to search) Developer put restrictions on lots being divvyed up (only for single family homes). G is selling off the lots, he recorded the plan only in some of the deeds. D buys lot, his deed has no restriction, D wants to put up 36 apt buildings, gets permit for this, others in area whose deeds have restriction bring suit to enjoin D from doing this, are the restrictions in P’s deed applicable to D? At some point, D probably found out about the restrictions on the other deeds. Court says – when its from a common grantor you have to do a larger title search  Where the grantor binds his remaining land by writing, reciprocity of restriction between grantor and grantee can be enforced  Each of the several grantees, if within the scope of the common scheme, is an intended beneficiary of the restrictions and may enforce them against the others

71

d.

Improperly Indexed Document i. In most states, a document that is improperly indexed or non-indexed does provide constructive notice ii. A minority of states (including California and New York) treat such a document as unrecorded 16. When notice is effective a. If a BFP receives notice before he has fully purchased, he loses his protection b. Actual notice during the executory period of an outstanding, unrecorded interest defeats reliance on public records Daniels v. Anderson (if only he paid in full right away) P buys lot from J adjacent to J’s other lot, he doesn’t buy both, but J gives him right of first refusal  if J ever contemplates selling the other lot, he would have to, at the same price, offer it to P who could accept or reject it. This contract not recorded, no one has notice of P’s right of first refusal. Later, J sells lot to D without telling P, D puts down deposit, P’s wife tells D, D has notice, D completes payments and record s Court says as soon as you have actual notice, you are no longer BFP without notice, P gets to buy lot for what D was going to pay, but he has to reimburse D

c.

i. 3 ways of handling this problem: 1. Award the land to the prior claimant upon reimbursement of the subsequent purchaser or money paid a. This is what happened in Daniels b. Later purchaser is not a BFP until paid in full 2. Award the subsequent purchaser a fractional interest proportional to the amount of the purchase price paid before the notice 3. Award the land to the subsequent purchaser but require the remaining payments be made to the prior claimant An interest filed a day or two before a transaction may not provide notice to the parties Lewis v. Superior Court (you don’t have to check each day) Just before P is closing, someone files a lis pendens but it is not indexed until after the closing (not searchable). P makes renovations, etc. Guy wants to enforce lien against house. P moves to quiet title. Court says there was no constructive notice, lis pendens expunged – not practical to require buyer to make checks all throughout closing  you’re not required to keeping going and checking. This is really just the government’s fault for not indexing promptly

17. The shelter rule (powerful) a. A grantee from a BFP is protected as a bona fide purchaser, even though the grantee would not otherwise qualify for this status  a person who takes from a protected BFP will prevail over any interest which that BFP would have prevailed over, even if that person had knowledge of a prior unprotected interest  you acquire the BFP’s protection b. O conveys to A, and then to B (a BFP). Before B can convey to C, A notifies C about the O-A deed; because C has notice, C cannot be a BFP. However, under the shelter rule, C prevails over A 18. Hypos a. O conveys to A. A doesn’t record. O dies leaving H as heir. H then conveys to B, who purchases for valuable consideration without notice of A’s deed (BFP w/o notice). B records i. B would win (in any type of jurisdiction) b. O conveys to A. A doesn’t record. O conveys to B (BFP). B does not record. A then records. A conveys to C (BFP). B records. C records. i. Notice jurisdiction: 1. B vs. A  B wins a. B can sue O for fraud (selling same property twice) 2. C vs. B  C wins a. B can sue O for fraud (selling same property twice) ii. Race notice jurisdiction 1. B vs. A  A wins 2. C vs. B  C b/c of Shelter rule 19. Mortgages work on a race basis – you don’t do the race-notice / race analysis  in respect to liens, it is the first to record 20. Hypo a. Property worth 50k b. O gives mortgage to A for 10k c. A does not record

72

d. e. f. g. h. i. j. k.

O gives another mortgage to B for 14k B has actual notice of A’s mortgage B records O gives mortgage to C for 5k C has no notice of A’s mortgage C records (he sees only that B has priority) Property is sold for 20k Race basis system results i. B gets first 14 k ii. C gets seconds – 5k iii. A gets 1 k l. Expectations analysis i. B gets 10 because he only knows of A’s prior interest, so he’d be getting what’s left after A takes ii. C gets 5k because he only knows of B and there would be more left after B would take iii. A would get 5 because he didn’t record and couldn’t have any expectations  but his interest will still be honored after everyone else has taken – 5k [A is going to get punished for not recording] 21. Marketable Title Acts a. Many states have enacted these b. If owner has clear record chain of title back to a root of title (e.g., a deed) for a specified period (usually 20 to 40 years), then the act will provide that title is free from all interests that were recorded before the root of title i. After a certain period of time all interests on a deed that have not been recorded are wiped clean off it  when one person has a record title to land for a designated period of time, inconsistent claims or interests are extinguished ii. Claimants of interests in land, to be safe, must file notice of claim every 30-40 years after recording their instruments of acquisition 22. Title insurance a. Company does a title search and issues an abstract of title (a chain of title and everything on the record) and makes a decision as to whether they will insure that title  all they will insure is that they were not negligent in making their search b. Title insurance policy is a contract of indemnity between the company and property owner or mortgagee  company promises to compensate or indemnify the insured against losses caused by covered title defects i. Title insurance company will not insure a property with a lis pendens on it no matter what c. d.

If you get a mortgage, they require you to get this Current stats show that of the premiums collected, payout is less than 5%

13. NUISANCE 1.

GENERALLY

The most common type of nuisance is the substantial, intentional, and unreasonable interference with another’s private use and enjoyment of land 1.

2. 3.

4.

Nuisance – an unprivileged interference with another’s use and enjoyment of land a. Part torts, part property law b. Judicial zoning – it’s a judicial remedy c. Principle: one should not use one’s own property in such a way as not to injure the property of another Usually an issue of jobs, economic growth, etc. vs. individual rights a. Usually a manufacturing facility that is creating noise or odors, etc and people are complaining about it Typical situation: D maintains on his land some condition that interferes with P’s use and enjoyment a. In a trespass there’s a physical invasion b. In a nuisance there is no physical invasion i. Smoke, odors, dust, noise, vermin, vibration could give rise to a nuisance claim although not a trespass claim Types of nuisance a. Public nuisances – an interference with the rights common to the general public  affects rights enjoyed by citizens are part of the public i. Almost any intentional conduct that unreasonably interferes with the public health, safety, welfare, or morals may constitute a public nuisance

73

ii. E.g. a plant emitting pollution that affects entire community (like in Cheshire, Ohio), keeping diseased cattle, detonating explosives on a residential street, operating an unlicensed casino iii. More than just a few homes like with private nuisance iv. Same requirements as for private nuisance 1. Must be substantial 2. Can be intentional and unreasonable or unintentional but negligent (or reckless, abnormally dangerous) v. Usually a public nuisance action is brought by a city or other governmental entity. vi. A private party may sue only if he has suffered special injury b. Private nuisances – an interference with the private use of one or more nearby properties i. Affects single individual or definite small number of persons in the enjoyment of private rights not common to the public ii. Only a substantial interference with the use or enjoyment of property will amount to a private nuisance 1.

Slight inconveniences or petty annoyances do not give rise to nuisance liability  persons of normal sensitivities would consider the interference to be substantial iii. There are 2 types of private nuisances 1. Intentional and unreasonable a. More important type b. Intentional does not mean D intends to interfere with P’s use and enjoyment of the land  just that D knows or should know its activities or property condition will affect the use or enjoyment of neighboring property, but feels its OK Morgan v. High Penn Oil Co. P claims it makes them sick. Is it sufficient to be a nuisance? Court imposes injunction against oil refinery, despite the refinery being zoned and authorized  It doesn’t have to be negligence for nuisance liability to arise  it doesn’t matter if the D exercised great care  if you cause a nuisance by an intentional and unreasonable act, you will be liable  injunction granted 2.

Unintentional but negligent a. Usually resulting from negligent, reckless, or abnormally dangerous activities iv. It may be an abnormally dangerous activity, but sometimes its not (it’s an acceptable activity) v. The Restatement requires bodily harm 1. Rest. has been driving force in nuisance law, but not all courts follow it Estancias Dallas Corp. v. Schultz (looser than Rest. standard) Noise from air conditioning unit – is it a nuisance  yes, a noise that is significant enough can be a nuisance  Even though a jury finds facts constituting a nuisance, there should be a balancing of equities in order to determine if an injunction should be granted. Rest. requires physical injury (not just an annoyance) – but Court says noise even when it is not yet a physical injury can be enjoined  Significant noise in a residential area can be a nuisance  Complying with statutes will not protect you from nuisance liability 5.

Determining a nuisance a. Most courts look to balancing the equities (via a cost/benefit analysis) i. We want to know if the gravity of the harm outweighs the utility of the defendant’s conduct  if so, the interference is unreasonable ii. So use these factors below after determining if it’s substantial b. Courts have been struggling to make bright line rules  they consider factors like these: i. Gravity of harm 1. Generally need physical, bodily harm 2. Outweighs social utility of defendant’s conduct 3. Take into account length and duration ii. Character of harm 1. Does it just make them uncomfortable? Or is it worse? iii. Suitability of the particular use or enjoyment invaded compared to the character of locality 1. Is it occurring in an industrial area and you are the only one living there, or is it a residential area where ppl are living and don’t expect this kind of interference a. If you live by an airport, you have to expect some noise/pollution

74

2.

6.

7.

8. 9.

2.

Coming to the nuisance – if the nuisance was there first and you move in to the area, you don’t have a right to complain iv. The burden on plaintiff avoiding the harm 1. How often does it occur, how bad is it? Can you easily take care of it? v. The social value of plaintiff’s use and enjoyment of the land 1. Difficult to measure c. Also look at defendant’s conduct – its social value, suitability to the locality in question, impracticality of him having to prevent the harm i. What is the cost of not producing the nuisance Defenses to nuisance liability a. Coming to the nuisance i. Plaintiff who moved into the area after the offending conduct began was not entitled to recover ii. Today almost all courts reject this defense (Spur) 1. Even in a “coming to the harm” case, a court may side with the plaintiff (generally for economic reasons) and issue and injunction – but, to be fair, may make the party who came to the harm pay for relocation costs of the nuisance party b. Consented or acquiescence i. The longer it takes for you to complain, the longer you have acquiesced c. Reasonableness  Economic analysis via balancing i. Economic analysis asks what is the higher use of the land? 1. We want the highest and best use of the land ii. This is like waiving rights of property owners for the good of society  goal is to have resources allocated most efficiently 1. E.g. Cheshire case – value of the powerplant is tremendous (greater than the value of the town) a. Powerplant buys the town – they buy everyone out  they offer everyone significantly more than value of their homes (hold-ins don’t accept offer) iii. Nuisance law is all about unreasonable use 1. Does the gravity of the harm outweigh the actor’s conduct  courts always do this balancing test 2. How impractical is it to prevent the harm 3. Economic benefits of the use a. Generation of low cost power, jobs, etc 4. Private costs of the use a. Illness, diminution in value of homes, etc 5. Public costs a. Pollution, etc Approaches to solving the problem of nuisance a. It’s inefficient to impose these external costs on others and not internalize – the arguments is how to best do it (pollution is an external cost)  how do we make polluters internalize the costs of their pollution? i. Cap and trade is one idea of how to fix things ii. Impose a fine sufficient to put that cost on the polluter iii. Make them pay damages iv. Tax the pollution equivalent to external cost (proposed, not done) v. Stop the production completely (via an injunction) 1. But this indirectly increases the costs to everyone vi. Require a cleansing apparatus (regulatory controls) b. No matter what method you choose, forcing polluters to internalizing costs will lead to higher prices for endusers (i.e. consumers) The primary purpose of eminent domain is to deal with the hold outs (the ideal situation is to just reach an agreement to buy them out) In nuisance we have the hold-ins – someone who really does value this property more than the buyout price

REMEDIES

4 ways to resolve nuisance claims  Enjoin the activity (traditional thinking, Morgan)  Let the activity continue  Let the activity continue if D pays damages (i.e damages, Boomer)  Enjoin the activity if the P pays damages (the new thinking, Spur)

75

1. 2.

If the defendant’s use is unreasonable, is the better remedy an injunction or damages? Injunctions a. The traditional remedy in private nuisance cases (draconian) i. Old rule is that when a nuisance has been found and where there has been any substantial damage shown by the party complaining an injunction will be granted b.

BUT, in almost all jurisdictions today, the plaintiff no longer has an automatic right to this remedy  the court will use a balancing test (balancing the equities) to determine if an injunction is appropriate on the facts of the particular case Boomer v. Atlantic Cement Co. (breaks with old rule) Cement plant creating dirt, smoke, vibrations – no one getting sick really, but main allegation is that its unpleasant, decreased value of the property. Court thinks air pollution is serous problem beyond the power of courts to solve. Social benefit of plant outweighs damages  large disparity in economic consequence between the effect of the injunction and the effect of the nuisance  Court awards damages – amount includes whole damages past and future resulting from the nuisance (if they don’t pay, then injunction). Rationale is that risk of having to pay permanent damages should also spur research to better techniques to minimize nuisance liability. Dissent – majority is licensing a continuing wrong, no incentive to fix it, should grant injunction

c. d.

3.

4. 5.

6. 7.

Generally, a court will issue an injunction only if the resulting benefit to the plaintiff is greater that the resulting damage to the defendant The benefit of injunctions  if granted, the general result is that if forces the parties together to negotiate and settle (only now the chips are stacked differently) i. People who won in court have upper hand ii. Ox thinks settlement is the way to do this (trial = waste of time = trial is only when one part completely misunderstands its position = failure of the system) 1. Mediation is mandatory as a first step in some courts (e.g in SDNY it’s a parallel process with trial)

Damages a. If the nuisance is deemed permanent, the plaintiff receives damages for past and future harm in one lawsuit (Boomer) i. Damages are measured by the extent to which the nuisance diminishes the fair market value of the affected property. b. If the nuisance is temporary or continuing, the plaintiff only receives damages to compensate for past harm (usually measured by diminished rental value or use value), and must sue again in the future as additional damages are suffered c. Damages have the benefit of making the producer internalize the externalities AND compensate the plaintiff d. Problem – the ongoing polluter (what have we solved by this?) e. Courts like to award damages because they are simple to do Injunction and damages Which makes more sense damages or an injunction a. Damages creates incentive to make better decisions (Boomer thinking) b. Injunction is more heavy-handed  theory is that it forces bargaining and affects future decisions (may chill behavior that will create nuisance) Epstein – corrective justice  strict liability and damages as a punishment for people who cause nuisances Siegelman article about Cheshire a. Pollution was causing sickness in small Ohio town b. Approaches to stopping it i. Legislative – lower the limits on permissible pollution ii. Regulatory – regulate the pollution and charge the polluter 1. Doesn’t necessarily help the people suffering iii. Judicial action 1. Damages, injunction, etc iv. Private action 1. American Electric Power came to the conclusion that their profits would be higher if they bought out the surrounding town rather than spending money to reduce pollution 2. Bargaining can be proactive now c. Most important part of this article  the idea of hold-ins

76

i. These people aren’t simply holding out for more money ii. Even in the town ceased to exist, they would still hold out iii. They really value this property more than the buyout price 8. Coase theorem a. Assuming zero/low transaction costs, the efficient outcome will occur regardless of legal entitlement i. The market determines whether the activity causing the nuisance will continue, not the initial allocation of rights by the courts ii. The initial allocation only makes one party richer and will not stop pollution  gives the polluter the option to pay damages/taxes or clean-up iii. Artificial limits, imposed by the legislature, do not work b/c they are not economically efficient b. Transaction cost assumption is that A and B can easily transfer rights to each other at little or no cost c. If bargaining is easy, the parties will strike a deal  however, if there are many parties involved, transaction costs will be high i. These high transaction costs impede public bargaining ii. Hence the proliferation of class action suits (lower transaction costs for large parties) 9. Calabresi article a. Injunctions should be favored when transaction costs are low i. Better probability the people will now settle because there is much more pressure on the polluter to settle 1. Polluter is negotiating for the purchase of the injunction b. Damages should be favored when transaction costs are high i. Probability of settlement is lower 10. Other issues in nuisance law a. Fear i. Halfway houses where towns put people coming from prison – does that rise to the level of nuisance? Megan’s law issues? ii. One argument is that it causes a depreciation in property value iii. If use is dangerous and puts adjoining neighbor in fear of harm, this is a significant factor iv. May be permitted to exist because of the high social value  we have to put prisons somewhere b. Light and air i. Drive in movie case – the problem wasn’t from D’s abnormal conduct but the highly sensitive nature of P’s business ii. Prah v. Maretti (solar panel case) 1. People next door build 2 story house that blocks access to light that neighbor’s solar panels needed 2. The gravity of the harm outweighed the utility of the D’s conduct (strange holding) c. Spite fence i. People put up a fence to spite their neighbors (no social utility) ii. NY has a statute that you can’t build a residential fence over 6 feet d. Plain old ugly i. Just not to aesthetic pleasing 1. e.g. one neighbor paints their house bright pink ii. Aesthetic issues are generally not nuisances 1. Unsightliness alone does not make a nuisance  there must be an additional offensive or unreasonable conduct or it must be done with malice (spite, etc) 11. Spur Industries v. Del E. Webb (the new thinking on nuisance) a. Feedlot has been in area for a while, developer buys land a couple miles away and slowly develops closer and closer to the feedlot and smell/flies start to become a problem, developer sues to enjoin operation of the feedlot  Can the feedlot be enjoined by a developer when the developer comes to the nuisance? The developer created the problem in a sense b. Court finds feedlot to be a public and private nuisance c. BUT, developer has to indemnify the feedlot for loses caused by an injunction i. Court grants injunction but developer has to bear the expense of relocating the feedlot d. This relief to feedlot is limited to a case wherein a developer has, with foreseeability, brought into a previously agricultural or industrial area the population which makes necessary the granting of an injunction against a lawful business and for which the business has not adequate relief

77

RANDOM SHIT FROM NOTES 

 



The closing cost o Title insurance (about 2k) – lender requires you buy it, and if you want it for yourself you need an additional personal policy (about 500 more) o Lawyers fees (1k) – and you have to pay the lawyer for your bank too o Allocated real estate taxes o Fees to the lender (about 500) o Recording fee (for deed and mortgage – some states add a mortgage recording tax (1% of mortgage) (regular fee is like 50) RESPA requires complete disclosure of all these fees For any real estate document to have effect, it has to be recorded

Marketable record title act – after a certain period of time has elapsed (e.g. 20 years), all encumbrances or issues with title elapse too  they go away o The idea is that if you have these issues that are so old and are virtually impossible to clear up, they probably aren’t going to be o Usually 20 or so years

. The Statute of Frauds: similar to the requirements for gifts, it avoids fraud, provides evidence of intent, and it is a cautionary measure (do I really want to do this transaction) 1) An interest in land cannot be created by a party unless it is in writing. 2) Part performance (an act of unequivocal reference to the contract, i.e. pay in part, making improvements, or taking possession) may satisfy the SOF even if contract not in writing: you paid the money and now you are in possession. Estoppel (applies when a significant injury would occur if the contract were not enforced) also provides a remedy: if the oral agreement induced you to rely on it in a manner which was injurious… 3) Basically, the SOF said for sale of land there need be description of property (street address), description of parties, price, and signed by both parties to be bound. a. There is a problem with it: while it protects against fraud, it also facilitiates it: those who make oral agreements can walk away because they are not enforceable.

OX QUESTIONS  Brokers – usually are not, but can be found liable for nondisclose ?? to what extent are they liable?

MORTGAGES 

Mortgages come in a number of ways o Fixed rate – the rate you get at the beginning is set throughout the period (its set on the date you apply) – e.g. 4.6% 30 year = for 360 payments, you will have the same amount due every month until its paid off (each payment takes off from interest and principle)  You can prepay it off early (good thing to do)  Your total payments are usually almost twice what you borrowed

78

ARM (adjustable rate mortgage)  1/1 – fixed rate first year, adjusted next year, fixed year after, etc (usually tied to LIBOR)  First year teaser rate is usually very low  Interest Only Balloon Payment Mortgage  300k mortgage, 5% -- you make monthly payments, but its all interest – principal balance stays at 300k, and then the entire amount is due at certain time (usually 10 years) o If you’re only paying interest, that’s the lowest type of payment o Kinda like you are paying the interest as rent o At the 10 year point, you need to refinance o Normal application fee for a mortgage is $400 Refinancing (what you do when the interest rate is lower now than when you got the mortgage) o Traditional refinancing – You have been paying interest payments and you’ve lowered your principle, but now the interest rate is lower, so you take out a new mortgage to pay off the principle and now you have a new mortgage based on taht  Costs about 2k – 2.5k to do this (b/c they make you buy a new title insurance policy)  You do this when its going to lower your payments significantly (at least exceeding the 2-2.5 cost) o Cashout refinancing – When fair market value of property has increased, bank will now lend you 80% of increased value – you use this bigger loan (i.e. mortgage) to pay off the old mortgage and pocket the extra cash (for kids tuition, new car, etc) o



o o

The lower your credit score below 720, the higher interest rate you will pay – and at some point you won’t get a mortgage  In 2005-6, they weren’t even looking at credit scores Once you’re locked into a mortgage rate, you can’t change the interest rate even if your credit gets better  But you can refinance

o

The biggest risk in buying a house today – if there is an oil tanker on the property, and it leaks, you are responsible for cleaning it up (>150k)  Don’t buy a house that has a steel oil tank in the ground

o

You generally don’t want to buy a pre-developed project – before its been built





Habitable premises (clean, acceptable places to live) o Should the properties have to meet a certain rental standard in order to be put on the market?  This may raise the minimum rents and preclude some people from the market – “pricing” a certain population out of the market Rent control o It still exists but its rare  The poor, elderly o Leads to shortages in economics and in practice o In NY - You have to have been continuously living in the apt since 1961  It’s called “rent stabilization” in NY – a regulation of the increase in the rent  Applies only to your principle residence  Phases out when rent exceeds 2k a month  Also leads to shortages b/c developers just don’t build buildings

79







Lien = stamp on a piece of property – i.e. I have an interest in this o Creditor brings a foreclosure action to collect o Lien attaches to the property when it becomes choate (i.e. you have a judgment, everything is legally in order, etc) o A lien turns an unsecured creditor into a secured creditor What happens to creditors? o Two types of creditors  Secured – makes the loan with a secured property interest (usually a lien)  E.g. when you get a mortgage, you agree to put a lien on the property  Unsecured – when there is no lien created  E.g. credit card debt  Creditor has to sue you, get a judgment, then the court orders a lien on the property Lien = stamp on a piece of property – i.e. I have an interest in this o Creditor brings a foreclosure action to collect o Lien attaches to the property when it becomes choate (i.e. you have a judgment, everything is legally in order, etc) o A lien turns an unsecured creditor into a secured creditor o o

Bankruptcy stays on your credit score for 7 years (after that it drops off) – the further into those 7 years, the better it gets Federal tax lien stays on your credit for 7 years also; same with a foreclosure



Nonfreehold estates – when possessor of the land does not have seisin

80