Real Property Ownership: The Estate System and Future Interests




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The Estate System

“This is my land. I currently own it and my family has owned it for a long time. So, I can do whatever I want on it…right?” This is a question many clients quickly ask when meeting with their real estate lawyers. Like many other aspects in law, real property ownership is not black and white. Understanding the estate system, real property ownership interests, and how certain interests are created are all necessary to answering that question.

The real property system under the common law is known as “the estate system.” An estate is defined as an interest in real property.[1] Real property ownership and an owner’s abilities to transfer or use the land can vary depending on the interests that the owner possesses.

The metaphor of “possession of a bundle of sticks” is commonly used to describe the different estates and interests. On one end of this spectrum, an individual can possess and control the full bundle of sticks, giving that individual owner the highest degree of control and possession. As you move away from this end of the spectrum, an individual owner can have control of a fewer number of sticks in the bundle and as a result can be restricted in his abilities.

The purpose of this presentation is to provide an overview of the primary estates and interests in real property as well as examples of each. Additionally, this presentation shall delve into issues with transferring interests in real property.

Fee Simple Absolute Estate

The first type of estate or interest is the fee simple absolute. Fee simple absolute, also referred to as fee simple, is as close to the idea of absolute ownership of a piece of real property as possible.[2]

Simply put, an owner with a fee simple absolute has control of the ENTIRE bundle of sticks. It is the strongest form of ownership and nobody can possess more than a fee simple absolute interest in the land.[3] It is the most extensive interest an individual can possess. If a grantor wants to create a fee simple absolute interest, the grantor must use some form of the following language: “To A,” or “To A and his heirs.”

A fee simple absolute interest has unique attributes. The first is the heritability characteristic. This means that a landowner with a fee simple absolute interest can pass the land to his heirs at death. The second is the alienability characteristic. While alive, a landowner with a fee simple absolute interest can sell, control, give, or exclude others from the land. Again, they have absolute control and ownership and are only restricted by laws such as zoning ordinances or private restrictions such as covenants.

Defeasible Estates

Not every interest in real property provides as full of control as the fee simple absolute. The other two primary types of interests in real property provide an owner with less control than the fee simple absolute interest. Both interests fall under the category of defeasible estates. Using the metaphor mentioned earlier, a defeasible estate provides an owner with fewer sticks in the bundle.[4]

Fee Simple Subject to A Condition Subsequent

The first sub-category of defeasible estates is a “fee simple subject to a condition subsequent.”[5] The necessary language to create a fee simple subject to a condition subsequent is “To A, upon condition that…,” or “To A, but if a certain condition is breached, then the grantor reserves the right to reenter and retake.”

This type of defeasible fee could be of infinite duration. What is key, however, is that the fee simple subject to a condition subsequent does not automatically terminate. The grantor has the option to exercise right of entry and the grantor MUST exercise their right of reentry in a timely manner after the condition’s breach.

An example of a fee subject to a condition subsequent estate is the following: To A, but if A does not use the property for a car wash, then the grantor reserves the right of reentry. A has a fee simple estate subject to a condition subsequent and if the property is not used for a car wash, then the grantor MUST take steps to recover the property.

Fee Simple Determinable

The second sub-category of defeasible estates is a “fee simple determinable.”[6] The necessary language to create a fee simple determinable is “To A, so long as…,” “To A until…,” or “To A while…” Clear durational language must be used and an owner’s interest could potentially be infinite, so long as a certain event occurs. The fee simple determinable estate automatically terminates if the certain event does not occur. What distinguishes this defeasible fee from the one above is that the grantor has a reversion interest. This means that the land will AUTOMATICALLY revert to the grantor if the certain event does not occur.[7] The grantor does not have to exercise the right of reentry in a timely manner because of this automatic reversion.

An example of a fee simple determinable estate is the following: To A for as long as the property is used for a car wash. A has a fee simple determinable and will hold the land for as long as it is used as a car wash. If the car wash is never built, or if it closes, the property automatically is transferred to the grantor.

Life Estate

The owner of a fee simple interest has complete control of all the sticks in the bundle. Another stick that this fee simple owner can grant is a life estate in real property. A life estate is an ownership interest that is limited to the duration of some person’s lifetime.[8] The lifetime can be measured by the life of the individual who is holding the life estate, known as the life tenant, or another designated person. When the life estate is measured by the life span of another designated person, it is called a life estate pur autrie vie, which in French means for “another’s life.”[9]

A life estate is very simple to create. The grantor is simply required to specify in the deed that the grantee is receiving a life estate in the property and can use the language of “To A for life.” When the life tenant dies, the grantor will get the land back.

The life tenant has many ownership rights and can benefit from the property. The life tenant is not only able to possess the real property, but can also mortgage and utilize the real property. Despite these abilities, the life tenant is limited because he or she cannot alienate the property. Additionally, the life tenant cannot cause waste. This means that the life tenant cannot allow the real property to fall into deterioration or be destroyed. If he or she does, the holder of the remainder interest can potentially sue the life tenant for damages caused to the property in much the same way that a landlord can sue a tenant for damage to rented property.

Over hundreds of years, the common law has evolved to provide real property owners with the estates system. This system provides guidance on an owner’s rights, abilities and interests. Upon initial glance, the terminology can be complicated and confusing. Despite this, further analysis reveals a system that is easily comprehensible and navigable.



Footnotes


[1] Thomas R. Van Dervort, American Law and the Legal System: Equal Justice Under The Law, (2000).

[2] David Thomas, Thompson on Real Property, (2016).

[3] W. Benjamin Barros, “Toward a Model Law of Estates and Future Interests”, 66 Wash & Lee L. Rev. 3, (2009).

[4] Jerry L. Anderson. "The Divergent Evolution of English Property Law" ABA Probate and Property Vol. 29 Iss. 5 (2015).

[5] Mary Ann Hallenborg, Real Estate Due Diligence: A Legal Perspective, (2016).

[6] Thomas P. Gallanis and Lawrence Waggoner, Estates, Future Interests, and Powers of Appointment, (1993).

[7] John W. Reilly, The Language of Real Estate, (2000).

[8] Robert Maki, “Pros and Cons of Life Estates,” http://www.makiandoverom.com/articles/le.html, (2010).

[9] The Wolters Kluwer Bouvier Law Dictionary, (2012).