Real and Personal Property: Distinguishing Criteria and Related Rights.

Definition of Real and Personal Property:

• Real Property/Real Estate: Land and permanent improvements, rights and interests associated with land ownership, anything attached to the land permanently, incidental or appurtenant to the land, and anything that cannot be moved by law.
• Personal Property: Anything that is not real property, movable without damage or change in nature, including tangible and intangible items such as goods, securities, and intellectual property rights.

Criteria for Distinguishing Between Real and Personal Property:

• Attachment: The degree to which an item is connected to the land or building. If an item is permanently attached and cannot be separated without damage, it is considered part of the real property.
  • Physical Criterion: Is the item physically attached to the land or building? (e.g., walls, ceilings, floors)
  • Functional Criterion: Does removing the item affect the function of the property? (e.g., central heating system, plumbing system)
  • Example: A Manufactured Home, if permanently attached to a foundation in the same location, is likely to be considered part of the real property.
• Adaptability: The suitability of an item to the property and its ability to serve its function. If an item is specifically designed to function as part of the property, it is more likely to be considered part of the real property.
  • Functional Relationship: Is the item specifically designed for the property? (e.g., a heating system specifically designed for a particular house).
  • Example: House keys are usually considered part of the real property because their function is closely related to the specific property.
• Relationship of the Parties: The relationship of the parties involved, especially the party who installed the item, affects whether the item is considered real or personal property.
  • Purpose of Installation: What is the purpose of installing the item? (e.g., repairing the property, improving it, or using it in business).
  • Example: If a lender who has repossessed a property installs an air conditioner, the courts are likely to decide that the purpose is to repair the property and include it in the sale.
• Intention of the Interested Parties: The intention of the parties is one of the most important factors.
  • Express Agreement: Is there an express agreement between the seller and the buyer regarding the classification of the item? (e.g., an agreement that an antique chandelier is not part of the property and will be removed by the seller).
  • Surrounding Circumstances: Do the surrounding circumstances indicate a specific intention? (e.g., a tenant installing fixtures in the leased property with the intention of removing them at the end of the lease).
• Agreement of the Parties: Ownership of fixtures can be determined by their express agreement or by the surrounding circumstances.
  • Example: Tenants often install fixtures in leased properties with the intention of removing them at the end of the lease. In the absence of any agreement to the contrary, these items installed by the tenant are usually considered the tenant’s personal property, even if they are connected to the property.
• Trade Fixtures: Fixtures that a tenant installs in the leased property for the purpose of operating a business are considered trade fixtures.
  • Tenant’s Right: It is generally accepted that these fixtures remain the tenant’s personal property (unless specifically agreed otherwise), and the tenant can remove them at the end of the lease.
  • Responsibility for Damage: However, the tenant is responsible for repairing any damage to the property as a result of removing these fixtures.

Rights Related to Real Property (Bundle of Rights):

• Right of Use: The right to use the property for any legal purpose.
• Right of Enjoyment: The right to enjoy the property without disturbance.
• Right of Exclusion: The right to prevent others from entering or using the property.
• Right of Disposition: The right to sell, lease, mortgage, or bequeath the property.

Real Property Interests:

• Freehold Estates: Interests that grant the owner the right to own the property indefinitely.
  1. Fee Simple: The most complete form of real property ownership, including the entire bundle of rights.
  2. life estate❓: Ownership limited to the duration of a specific person’s life, whether it is the owner of the property or another person. Upon the death of this person, ownership transfers to another person specified in advance (Estate in Remainder) or reverts to the original owner (Estate in Reversion).
     • Calculating the Value of a Life Estate: The value of a life estate is affected by the benefits the property offers and the life expectancy of the life estate holder. Similarly, the value of reversionary or remainder interests is based on the value of the property and the life expectancy of the life estate holder.
• Less-Than-Freehold Estates: Interests that grant the owner the right to possess and use the property for a specified period of time, without owning the property. The most important types are leases.
  1. Estate for Years: A lease for a specific period that ends automatically on a specific date.
  2. Estate from Period-to-Period: A lease that automatically renews for periodic periods (monthly, quarterly, annually) until terminated by one of the parties.

Encumbrances:

• Financial Encumbrances: Debts and financial obligations attached to the property, such as mortgages and outstanding taxes.
• Non-Financial Encumbrances: Rights that others have to use the property, such as easements and profit a prendre.
  • Easement: The right of someone to use part of another person’s property for a specific purpose, such as passage or access to their property.
  • Profit a Prendre: The right of someone to extract natural resources from another person’s property, such as minerals or timber.

Role of the Appraiser:

The appraiser plays a crucial role in determining whether an item is considered part of the real or personal property. The appraiser must be fully aware of the criteria and apply them correctly to ensure an accurate valuation of the property.

• Gray Areas: The appraiser should indicate any gray areas regarding the classification of the property, so that it is determined whether the items are considered personal or real property in the loan agreement or purchase agreement of the parties.
• Mobile Home: If the appraiser is going to value a piece of land with a mobile home on it, including the value of the mobile home in the valuation may leave the lender with little security if it is later determined that the mobile home does not qualify as real property. State law governs the classification of mobile homes. In general, they must be on permanent foundations and subject to real property tax rather than license fees in order to be considered real property.