Real Property Interests: Estates and Encumbrances

Chapter 1: Real Property Interests: Estates and Encumbrances

Introduction

The terms “real estate” and “real property” are often used interchangeably, but a crucial distinction exists. Real estate encompasses the physical land and any improvements affixed to it. Real property, however, represents the broader concept of the interests, benefits, and rights inherent in the ownership of that real estate. This includes the land itself, anything permanently attached to it, anything incidental or appurtenant to the land, and anything legally considered immovable. In essence, real property is a bundle of rights associated with the tangible real estate. The value estimated in a real estate appraisal is always the value of a specific, defined real property interest. This chapter will delve into the various types of real property interests, focusing on estates and encumbrances.

A. Bundle of Rights

Real property ownership is often conceptualized as a “bundle of rights” pertaining to a specific parcel of real estate. This analogy portrays ownership as a collection of distinct rights, each representing a different aspect of control and benefit associated with the property.

• Key Rights in the Bundle:

  • Right to Use: The ability to utilize the property for lawful purposes, subject to zoning regulations and other restrictions.
  • Right to Enjoy: The freedom to possess and appreciate the property without undue interference.
  • Right to Exclude Others: The power to prevent others from entering or using the property without permission.
  • Right to Occupy: The right to live or otherwise be present on the property.
  • Right to Sell: The authority to transfer ownership of the property to another party.
  • Right to Lease: The power to grant temporary possession and use of the property to a tenant in exchange for rent.
  • Right to Encumber: The ability to use the property as collateral for a debt, creating a lien.
  • Right to Dispose: The power to transfer ownership of the property through a will or other legal means.

• appurtenance❓s: An appurtenance❓ is a right or item that is attached to and passes with the property. Examples include easement❓❓❓❓s and riparian water rights. Although not physically part of the property, they are legally inseparable and transfer with the title.

  Example: A property lacking direct access to a public road typically possesses an easement granting right-of-way across an adjacent parcel. This right of way is part of the bundle of ownership rights that goes with ownership of the property.

B. Estates

An estate represents the degree, nature, and extent of interest or rights a person possesses in real property, encompassing the exclusive right to occupy and use the real estate (the right to possession). The right to possession within an estate may be present (current right of occupancy) or future (a right to occupy at a later date). For instance, a landlord leasing a property relinquishes the right of possession to the tenant during the lease term. However, the landlord retains an estate because they are entitled to regain possession upon the lease’s expiration.

• Types of Estates: Estates are categorized based on whether they include title to the property.

  • Freehold Estates: Involve ownership (title) of the property.
  • Less-Than-Freehold Estates (Leasehold Estates): Grant possession without title.

1. Freehold Estates (Fee Simple and Life)

   Freehold estates convey ownership and are characterized by an indefinite duration.

   • Fee Simple: The most comprehensive form of real property interest, encompassing the entire bundle of rights. It is also the most commonly appraised interest in residential real estate appraisals. It is inheritable and transferable without restriction.

     • Fee Simple Absolute: Unrestricted ownership.

     • Fee Simple Defeasible (Qualified Fee): Ownership subject to certain conditions or limitations. Failure to meet these conditions could result in loss of ownership.

       • Fee Simple Determinable: Ownership automatically reverts to the grantor if a specific condition is violated. The language typically includes words such as “so long as,” “while,” or “during.”
       • Fee Simple Subject to Condition Subsequent: Ownership is subject to a condition, but the grantor must take legal action to reclaim the property if the condition is violated. The language typically includes words such as “but if,” “upon condition that,” or “provided that.”
       • Formula: Time until reversion = Time until event triggering condition occurs. The precise mathematical modeling of this varies depending on the statistical distribution of the event (e.g., Poisson process for some environmental hazards).

   • Life Estate: An estate whose duration is limited to the lifetime of a specific person (the life tenant) or the lifetime of another person (pur autre vie).

     • Estate in Reversion: The property reverts back to the grantor (or their heirs) upon the death of the life tenant.

     • Estate in Remainder: The property passes to a third party (the remainderman) upon the death of the life tenant.

       Consider a scenario: A parent grants a life estate to their child, with the estate in remainder to their grandchild. Upon the child’s death, the grandchild receives full ownership of the property.

       The value of a life estate would be affected by the benefits the property offers and the life expectancy of the holder of the life estate. Similarly, the value of reversionary or remainder interests would be based on the property value and the life expectancy of the holder of the life estate.

       Formula for approximating the present value of a remainder interest (simplified):

       *PVr = FV / (1 + r)^n*
       
       Where:
       
       *   *PVr* = Present Value of Remainder Interest
       *   *FV* = Future Value of Property (at the end of the life estate)
       *   *r* = Discount Rate (reflecting risk and opportunity cost)
       *   *n* = Number of years until the end of the life estate (estimated based on life expectancy)
       

2. Leasehold Estates (Tenancy For Years and Periodic)

   A leasehold estate grants a tenant (lessee) the right to possess and use real property for a specific period, as defined by the lease agreement.

   • Tenancy for Years: A lease with a fixed term, terminating on a specific date.

     For example: A lease for six months or one year.

   • Periodic Tenancy: A lease that automatically renews for a specific period (e.g., month-to-month) until one party provides notice to terminate.

   • Tenancy at Will: The landlord allows the tenant to remain in possession for an indefinite period, often while negotiating a new lease. Terminable by either party at any time.

   • Tenancy at Sufferance: The tenant remains in possession without the landlord’s consent, essentially as a holdover tenant.

The value of a leasehold interest can be important in division of interests such as in estates, partnership dissolution and when marriages end. In addition, when property is taken by eminent domain, the tenant might be entitled to compensation for his or her leasehold interest.

Example: In some areas of the country there are a great many homes built on leased land, such as Indian leases. The appraiser should consider the term remaining on the lease, the likelihood of renewal and lease conditions in the appraisal of the leasehold interests.

C. Encumbrances

Encumbrances are non-possessory interests in real property that burden or affect the title. They do not grant the right to use and occupy the property. Encumbrances can impact the property’s value or restrict its use.

1. Financial Encumbrances

   Financial encumbrances, commonly known as liens or security interests, represent a claim against the property as collateral for a debt.

   • Lien: A creditor’s right to seize and sell the debtor’s property to satisfy an unpaid debt.

     • Foreclosure: The legal process of selling property to satisfy a debt.
       *Liens can be classified as:

     • Voluntary Lien: A lien intentionally created by the property owner (e.g., a mortgage).

     • Involuntary Lien: A lien imposed by law, without the owner’s consent (e.g., tax lien, judgment lien).

     • General Lien: A lien that attaches to all of the debtor’s real and personal property. Judgment liens are usually general liens, since they apply to any property that the judgment debtor owns.

     • Specific Lien: A lien that attaches only to a specific property (e.g., a mortgage on a particular house, a property tax lien). Voluntary liens (such as mortgages) are usually specific liens, since they usually specify the particular property or properties that will serve as security for the mortgage debt. Some types of involuntary liens (such as property tax liens or construction liens) are also specific to a particular property.

2. Non-Financial Encumbrances

   Non-financial encumbrances affect the use of the real estate but do not involve monetary claims. The three most common forms of non-possessory use rights are easements, profits, and private restrictions.

   • Easements: A non-exclusive right to use another person’s property for a specific purpose (e.g., right-of-way, utility easement).
   • Profit a Prendre: The right to enter another’s property and remove something of value (e.g., timber, minerals, crops).
   • Emblements: Refers to annual crops cultivated on the land by a tenant farmer. These crops are considered the tenant’s personal property, even though they are attached to the land.
   • Private Restrictions (Restrictive Covenants): Limitations on the use of property imposed by developers or previous owners, typically recorded in the deed (e.g., restrictions on building height, architectural style, or permitted uses).