Real Estate Ownership & Property Rights-Module 4 of 5

Real Estate Ownership & Property Rights-Module 4 of 5


Module 4: Real Estate Ownership & Property Rights

 

Deeds and Legal Title

A person seeking to be the legal owner of a parcel of land must possess legal title.[1]  A deed is a written instrument that conveys legal title to real property from one owner to another.[2]  The deed must be a written document, according to the Statute of Frauds. The deed is the vehicle that drives real estate ownership since a buyer does not actually own property until the deed is in her name.

Every deed must do the following:

·       identify the owner as grantor and certify that he can carry out the transfer;

·       identify the purchaser, who is called the grantee;

·       include a legal description of the property;

·       provide words of conveyance; and

·       identify the consideration, or amount being paid, for the land. 

Once the grantor signs the deed in the presence of a witness, typically a notary public, he will then deliver the deed to the grantee and the grantee accepts it.[3] The grantee then records the deed in the local public land records office.  

There are three types of deeds: quitclaim deeds, special (or limited) warranty deeds and general warranty deeds. These vary in the guarantees that they assert. On one hand, a seller wants to limit her liability for title defects and will be reluctant to provide warranties. On the other hand, a buyer wants as many warranties as possible without any limitations, so she doesn’t face the threat of losing her property.

 

Types of Deeds

A.    Quitclaim Deed

“Quitclaim” is a formal release of some claim or right.[4]  A quitclaim deed is the easiest way for someone to convey property when she can’t make any guarantees regarding the title.  Rather, the seller merely “quits” her “claim” to the title without making any additional promises or representations

A quitclaim deed is most commonly used when property is transferred without a traditional sale, such as a property transfer between family members or when property is being transferred into a living trust.

The primary advantage of a quitclaim deed is its ease in drafting. Ready-made forms are inexpensive and available for purchase online or at most office supply stores and there is no need to have an attorney write one. A quitclaim deed makes it possible to quietly and cheaply transfer all or part of a property’s ownership from one person to another.

The biggest drawback to a quitclaim deed is that once a deed holder discovers a break in the chain of title, he no longer legally owns the property.[5]  He loses the property and has no legal right for redemption because he assumed the risk for loss.[6]

B.    General Warranty Deed

A general warranty, or “grant” deed is a written legal instrument that contains guarantees against title defects. The seller guarantees that he hasn’t sold the property to anyone else. He also guarantees that there are no liens, easements, or other encumbrances on the property. If the buyer discovers that there are easements or other restrictions on the property that she was not aware of, the seller may have to provide her with compensation.[7]

A general warranty deed guarantees against anything - past or present - that invalidates title. A seller providing a buyer with a general warranty deed will also make several other guarantees, that add on protection. First, the seller guarantees that he has actual ownership and possession of the property at the time of transfer.  Second, the seller guarantees that the property is conveyed without any liens or encumbrances other than those expressly disclosed in the deed. Third, the seller promises that there is no party with superior title or claim that could dislodge the buyer from possessing the property. Finally, the seller conveying a general warranty deed guarantees that he will compensate the buyer if a third-party claim on the property arises, or if the seller discovers a defect in the chain of title.[8]

C.    Special Warranty Deeds and General Warranty Deeds

A special warranty deed warrants that no defects against title arose during the time that the seller owned the property. He does not guarantee that prior to his ownership, there were no defects in title. A special warranty deed offers less protection against defects in clear title than general warranty deeds because the grantor is only liable for debts and encumbrances to the title which accrued during the time he owned the property.


Recording Statutes and Chains of Title

Any real estate transaction can expose the buyer to the potential risk of losing the property should a break in the chain of title be discovered. If another party can prove that he has a superior interest than a buyer, then the buyer does not legally own the property and he has limited options for recourse.[9] 

To prevent unfairness, each state has enacted a recording statute to make a prior unrecorded interest unenforceable against a later interest. This has the effect of encouraging people to record their deeds, thereby perpetuating the effectiveness of the recording system. Because recorded instruments are public record and can usually be searched online, the recording system also makes title searches much more effective and much easier.

A recording statute provides a framework for alerting everyone of a legal notice of changes in property ownership, identifying encumbrances on the property and determining priority among conflicting claims. A recording statute motivates a buyer to record a deed so he “preserves” his place in line. Otherwise, someone else may later present a conflicting interest that prevails against the buyer’s interest.

There are three types of recording statutes: race, notice, and race-notice. 

About half the states have implemented “notice” recording statutes. A notice statute provides that where two people have successively purchased deeds or interests in the same property, the second purchaser wins the superior interest unless the second purchaser had notice that the first transaction took place, assuming the deed to the first transaction was not recorded before the second transaction took place. If the first transaction’s deed was recorded, it is assumed that the second purchaser should have discovered that transaction in a title search and so his interest will be inferior to that of the first purchaser. 

This encourages people to record their deeds quickly so that their interests will not be subordinated to those of subsequent purchasers.

A “race-notice” recording statute is similar to a “notice” recording statute except that the second purchaser must also record his interest before the first recipient does. If the second purchaser obtains his deed without notice of the first transaction but the first transaction is recorded first, the first transaction will have priority over the second.[10]

Only a few states have “race” recording statutes. Any adverse claims under race statutes are resolved by who recorded first, making it a “race” to get to the records office to file a deed.[11] In a “race” jurisdiction, a second purchaser who records first has priority over a first purchaser even if the second purchaser knew of the first transaction before the second transaction.

Consider the following example. Boris sells Whiteacre to Alex on May 30th by deed. On June 5th, Boris sells Whiteacre to Clara, also by deed.  Clara doesn’t know that Boris has sold Whiteacre to Alex. If Alex records her deed on June 10th and Clara records her deed on June 12th, in a notice jurisdiction, Clara gets title to Whiteacre because Alex didn’t record her deed before Clara bought it. In a race-notice (or race) jurisdiction though, Alex would get title to Whiteacre because she recorded her deed first, and so she “won” the race. 

While this example covers sales, recording system statutes also apply to security interests. If instead of two purported sales to the property, one of the transactions was a sale and the other granted a security interest, such as a mortgage, the priority rules established by the recording statutes determine whether the sale will be subject to the mortgage. If, under the recording statutes, the mortgage interest is considered superior to the sold interest, then the purchaser will take the property subject to the mortgage interest. Otherwise, the mortgage interest is extinguished and the purchaser has the property free and clear.

 

Legal Rights Associated with Real Estate Ownership

The most important aspects of property ownership are the property rights a property owner gains after purchase.[12]  Each of these rights are independent of one another and can be sold or encumbered individually.  Property rights include airspace rights, mineral rights, water rights, the right to exclusion, and the right of quiet enjoyment. 

A.    Airspace Rights

Though higher-altitude airspace is navigated by airplanes under the sole authority of the federal government, a property owner is entitled to the non-navigable airspace immediately above the surface of her land.[13]  This right has become more meaningful and valuable, especially in densely-populated urban areas, as technology has evolved.[14]

Airspace rights also include a right to access air flow and sunlight, two commodities that have become increasingly valuable with increased reliance on renewable energy. Since airspace can be bought and sold separately from the underlying property, several states have passed solar easement laws that create a legal framework facilitating easements to guarantee adequate solar exposure on neighboring properties.[15] 

B.    Mineral Rights

The property owner also has a right that extends down through the subsurface material under his land.  He owns all the minerals and other natural substances underneath his property, including valuable deposits like gemstones, precious metals, oil, and natural gas.[16]  

If he sells his mineral rights but keeps his land, he has created a “split estate,” where the surface property is owned separately from the mineral rights.[17]  Mining and extraction companies purchase mineral rights in exchange for a royalty payment, so these rights can be very valuable.[18]  No matter how much the mineral estate owner extracts, however, it cannot remove so much of the land underneath the property in a manner that weakens the support of the surface.[19] 

Once a company purchases the mineral rights, it can access and occupy as much surface land as necessary to extract the minerals underneath.  This can inconvenience the surface estate owner because mineral extraction requires heavy machinery and extensive excavation. The two owners can get around this problem, however, with a written agreement specifying when and where extraction can occur. 

C.    Water Rights

The third right is that of ownership of the water that runs on or under their land.  However, if a river, stream or lake on property crosses property lines, adjoining property owners must share use of the water.  Nationwide, there is no water rights management system in place, so states approach this relationship in different ways. 

Many states follow the doctrine of riparian rights, which calls for all property owners to share a common water source equally. In some western states where competition over water is fiercer due to scarcity, the law of prior appropriation applies.  Under prior appropriation, the person who uses the water first has a superior claim over anyone else who needs access to the water source.[20]   In a state that follows prior appropriation, an administrative agency will issue water permits that define each landowner's allocation.  These permits can be bought and sold separately from the land itself, so it is possible that property will not include any water rights.[21] 


Possession, Use, and Enjoyment Rights

As part of the right to possess and occupy the land, the property owner can determine who may enter and use the property.  Every state has trespass laws that protect the owner’s right of exclusive possession and impose liability for intentional or accidental entry onto someone else’s property.

Privately owned land includes the right to use and enjoy their land, meaning a landowner can use her land in a manner that is reasonably unimpeded by others.[22] There are limits, however. The value of the individual right to quiet enjoyment are balanced against the public health, safety, and welfare, as well as the equally valuable rights for a landowner’s neighbors to use and enjoy their land without unreasonable interference.[23]  Additionally, local land use laws that regulate the right to quiet enjoyment because these laws can prohibit certain activities from taking place on private property.[24] 

The government has the power to seize a person’s property through eminent domain, even if she has legal title. The Fifth Amendment of the United States Constitution is the source of this authority and federal and state governments have a great deal of discretion to occupy and possess private land.[25] Should either decide to exercise its power of eminent domain to take private property for public use, the property owner is entitled to reasonable due process and the government must pay “just compensation” for the property.  The general rule is that the government must pay fair market value for the property seized. Fair market value isn’t the value that the owner places on the property, but the amount that the property is worth, which includes reference to factors including the property’s accessibility, zoning, level of development and current or potential use.

 


[1] Kelley v. Leucadia Financial Corp. 846P.2d 1238 (1992); Madbeth, Inc. v. Weade, 204 Va. 199 (1963) (holding sellers or real estate legally responsible to demonstrate merchantable title to real property).

[4] Black’s Law Dictionary 3937 (8th ed. 2004).


[5] See, e.g. Spreckels v. Brown, 212 U.S.208 (1909).

[6] Dashoff, B., Antonacci, J., Understanding Real Property Interests and Deeds, American Bar Association Law Trends & News Vol. 7 (Summer 2011)  available at https://www.americanbar.org/newsletter/publications/law_trends_news_practice_area_e_newsletter_home/2011_summer/real_property_interests_deeds.html.

[7] Id.

[9] See e.g. Cary v. Guiragossian, 508S.E.2d 403 (Ga. 1998) (declaring subsequent bona fide purchaser’s claim on real estate invalid due to a previous foreclosure that had broken chain of title).

[10] Hinkel, D., Essentials of Practical Real Estate Law 248-49 (6th ed. 2016).


[11] See e.g. Eastern Savings. Bank, FSB v.CACH, LLC, Dkt. No. N13A-09-008 (Delaware Supreme Court Sept. 28, 2015)(interpreting Delaware’s pure race recording statute, 25 Del. C. § 2106).

[12]United States v. Croft, 535 U.S. 274,274 (2002) (“A common idiom describes property as a "bundle of sticks"-a collection of individual rights which, in certain combinations, constitute property.”).

[14] Schwartz, M. It’s Up in the Air: Air Rights in Modern Development, American Bar Assoc. (May 2015) available at https://www.americanbar.org/content/dam/aba/publishing/rpte_ereport/2015/3-May/its_up_in_the_air.authcheckdam.pdf

[15] U.S. Dept. of Energy, Solar Easements & Rights Laws, Solar Easements & Rights, https://energy.gov/savings/solar-easements-rights-laws-0 (accessed Nov. 30, 2017).

[16] See Kriss v. Mineral Rights, Inc., 911P.2d 711 (Co. Ct. App. 1996).

[17] See e.g. Beulah Coal Mining Co. v. Heihn. 180 N.W. 787 (N.D. 1920).

[18] Phillips, R., Five Things New Oil and Gas Attorneys Should Know, American Bar Assoc. Section of Energy Litigation (Jan. 30, 2013) available at http://apps.americanbar.org/litigation/committees/energy/articles/winter2013-0113-five-things-new-oil-gas-attorneys-should-know.html.

[19] Carr, A., Important Considerations Involving the Sale or Lease of Subsurface Property Rights (Aug. 16, 2011) http://www.leechtishman.com/client-alerts/important-considerations-involving-the-sale-or-lease-of-subsurface-property-rights/; see also Jones, K.P., Welborn, J.F., Russell, C.J. “Split Estates and Surface Access Issues,” Landman’s Legal Handbook, 181-86 (Rocky Mt. Min. L. Fdn., 5th ed. (2013).

[20] Kansas v. Colorado, 206 U.S. 46 (1907) (discussing riparian rights and prior appropriation in the context of a interstate water dispute).

[21] Hinkel, D., Essentials of Practical Real Estate Law 6-7 (6th ed. 2016).


[22] See Ginsberg v. Eden, Dkt. No. B222284 (Cal. Ct. App. April 30, 2012).

[24] See Ginsberg, supra note 26 (interpreting California’s law regarding the implied right of quiet enjoyment).

 

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