Understanding Real Estate: Property Rights and Classifications, Exams of Law

Download Understanding Real Estate: Property Rights and Classifications and more Exams Law in PDF only on Docsity! 16 Principles of Real Estate Practice 2 Rights in Real Estate Real Estate as Property Real Versus Personal Property Regulation of Real Property Interests REAL ESTATE AS PROPERTY Land Real estate Property Real property rights Water rights A simple definition of real estate is that it is air, water, land, and everything affixed to the land. Real estate in the United States may be owned privately by individuals and private entities or publicly by government entities. Private ownership rights in this country are not absolute. The government can impose taxes and restrictions on private ownership rights, and it can take private property away altogether. In addition, other private parties can exert their rights and interests on one's real property. A bank, for example, can take a property if the owner fails to pay a mortgage. A neighbor can claim the right to walk across one's property whether the owner likes it or not, provided he or she has done so for a certain number of years. In attempting to define real estate, it is essential to understand what rights and interests parties have in a parcel of real estate. And to understand real estate rights and interests, one must first recognize the distinctions between:  land and real estate  real estate and property  real property and personal property Land The legal concept of land encompasses  the surface area of the earth  everything beneath the surface of the earth extending downward to its center  all natural things permanently attached to the earth  the air above the surface of the earth extending outward to infinity. Land, therefore, includes minerals beneath the earth's surface, water on or below the earth's surface, and the air above the surface. In addition, land includes all Chapter 2: Rights in Real Estate 17 plants attached to the ground or in the ground, such as trees and grass. A parcel, or tract, of land is a portion of land delineated by boundaries. Physical characteristics. Land has three unique physical characteristics: immobility, indestructibility, and heterogeneity. Land is immobile, since a parcel of land cannot be moved from one site to another. In other words, the geographical location of a tract of land is fixed and cannot be changed. One can transport portions of the land such as mined coal, dirt, or cut plants. However, as soon as such elements are detached from the land, they are no longer considered land. Land is indestructible in the sense that one would have to remove a segment of the planet all the way to the core in order to destroy it. Even then, the portion extending upward to infinity would remain. For the same reason, land is considered to be permanent. Land is non-homogeneous, since no two parcels of land are exactly the same. Admittedly, two adjacent parcels may be very similar and have the same economic value. However, they are inherently different because each parcel has a unique location. Real estate The legal concept of real estate encompasses:  land  all man-made structures that are "permanently" attached to the land Real estate therefore includes, in addition to land, such things as fences, streets, buildings, wells, sewers, sidewalks and piers. Such man-made structures attached to the land are called improvements. The phrase "permanently attached" refers primarily to one's intention in attaching the item. Obviously, very few if any manmade structures can be permanently attached to the land in the literal sense. But if a person constructs a house with the intention of creating a permanent dwelling, the house is considered real estate. By contrast, if a camper affixes a tent to the land with the intention of moving it to another camp in a week, the tent would not be considered real estate. 20 Principles of Real Estate Practice person may sell mineral rights without selling the right of possession. On the other hand, the owner may convey all rights to the property except the mineral rights. While all rights are transferrable, the owner can only transfer what the owner in fact possesses. A property seller, for example, cannot sell water rights if there are no water rights attached to the property. The right to encumber the property essentially means the right to mortgage the property as collateral for debt. There may be restrictions to this right, such as a spouse's right to limit the degree to which a homestead may be mortgaged. The right to exclude gives the property owner the legal right to keep others off the property and to prosecute trespassers. The bundle of real property rights also applies separately to the individual components of real estate: the air, the surface, and the subsurface. An owner can, for example, transfer subsurface rights without transferring air rights. Similarly, an owner can rent air space without encumbering surface or subsurface rights. This might occur in a city where adjoining building owners want to construct a walkway over a third owner's lot. Such owners would have to acquire the air rights for the walkway. If the city wants to construct a subway through the owner's subsurface, the city has to obtain the subsurface rights to do so. An ordinary lease is a common example of the transfer of a portion of one's bundle of rights. The owner relinquishes the right to possess portions of the surface, perhaps a building, in return for rent. The tenant enjoys the rights to possess and use the building over the term of the lease, after which these rights revert to the landlord. During the lease term, the tenant has no rights to the property's subsurface or airspace other than what the building occupies. Further, the tenant does not enjoy any of the other rights in the bundle of rights: he cannot encumber the property or transfer it. To a limited degree, the tenant may exclude persons from the property, but he may not exclude the legal owner. Surface rights. Surface rights apply to the real estate contained within the surface boundaries of the parcel. This includes the ground, all natural things affixed to the ground, and all improvements. Surface rights also include water rights. Air rights. Air rights apply to the space above the surface boundaries of the parcel, as delineated by imaginary vertical lines extended to infinity. Since the advent of aviation, air rights have been curtailed to allow aircraft to fly over one's property, provided the overflights do not interfere with the owner's use and enjoyment of the property. The issue of violation of air rights for the benefit of air transportation is an ongoing battle between airlines, airports, and nearby property owners. Subsurface rights. Subsurface rights apply to land beneath the surface of the real estate parcel extending from its surface boundaries downward to the center Chapter 2: Rights in Real Estate 21 of the earth. Notable subsurface rights are the rights to extract mineral and gas deposits and subsurface water from the water table. Water rights Water rights basically concern the rights to own and use water found in lakes, streams, rivers, and the ocean. In addition, they determine where parcel boundaries can be fixed with respect to adjoining bodies of water. What water rights does an owner of a property that contains or adjoins a body of water enjoy? The answer depends on three variables:  whether the state controls the water  whether the water is moving  whether the water is navigable Doctrine of Prior Appropriation. Since water is a resource necessary for survival, some states -- particularly those where water is scarce -- have taken the legal position that the state owns and controls all bodies of water. Called the Doctrine of Prior Appropriation, this position requires that property owners obtain permits for use of water. If a proposed usage is reasonable and beneficial, the state will grant a permit which, over time, can attach to the property of the permit holder. If a state does not operate under prior appropriation, it operates under the common law doctrines of littoral rights and riparian rights. Littoral rights. Littoral rights concern properties abutting bodies of water that are not moving, such as lakes and seas. Owners of properties abutting a navigable, non-moving body of water enjoy the littoral right of use, but do not own the water nor the land beneath the water. Ownership extends to the high- water mark of the body of water. Exhibit 2.4 Littoral Rights The legal premise underlying the definition of littoral rights is that a lake or sea is a navigable body of water, therefore, public property owned by the state. By contrast, a body of water entirely contained within the boundaries of an owner's property is not navigable. In such a case, the owner would own the water as well as unrestricted rights of usage. 22 Principles of Real Estate Practice Littoral rights attach to the property. When the property is sold, the littoral rights transfer with the property to the new owner. Riparian rights. Riparian rights concern properties abutting moving water such as streams and rivers. If a property abuts a stream or river, the owner's riparian rights are determined by whether the water is navigable or not navigable. If the property abuts a non-navigable stream, the owner enjoys unrestricted use of the water and owns the land beneath the stream to the stream's midpoint. If the waterway in question is navigable, the waterway is considered to be a public easement. In such a case, the owner's property extends to the water's edge as opposed to the midpoint of the waterway. The state owns the land beneath the water. Exhibit 2.5 Riparian Rights One's riparian rights to use flowing water are subject to the conditions that:  the usage is reasonable and does not infringe on the riparian rights of other owners downstream  the usage does not pollute the water  the usage does not impede or alter the course of the water flow. Like littoral rights, riparian rights attach to the property. Chapter 2: Rights in Real Estate 25 Conversion The classification of an item of property as real or personal is not necessarily fixed. The classification may be changed by the process of conversion. Severance is the conversion of real property to personal property by detaching it from the real estate, such as by cutting down a tree, detaching a door from a shed, or removing an antenna from a roof. Affixing, or attachment, is the act of converting personal property to real property by attaching it to the real estate, such as by assembling a pile of bricks into a barbecue pit, or constructing a boat dock from wood planks. Exhibit 2.6 Real Property vs. Personal Property PROPERTY INTERESTS Areas of regulation Federal regulation State regulation Local regulation Judicial regulation Although the Constitution guarantees private ownership of real estate, laws and regulations at every level of government qualify and limit individual real property ownership and the bundle of rights associated with it. Areas of regulation Government entities regulate the following aspects of real property interests:  the bundle of rights: possession, usage, transfer, encumbering and exclusion  legal descriptions  financing  insurance  inheritance  taxation Regulation takes the form of federal and state laws and regulations; county and local ordinances and codes; and court decisions in the judicial system. Federal regulation In regulating real property rights, the federal government is primarily concerned with broad standards of real property usage, natural disaster, land description, and discrimination. Real Property Personal Property land fixtures attachments conversions by affixing trade fixtures emblements conversions by severance 26 Principles of Real Estate Practice Federal agencies such as the Federal Housing Administration promote and regulate home ownership. The Environmental Protection Agency establishes protective usage restrictions and guidelines for dealing with hazardous materials and other environmental concerns. Federal flood insurance legislation requires certain homeowners to obtain flood insurance policies. Federal laws such as the Federal Fair Housing Act of 1968 prohibit discrimination in housing based on race, religion, color, or national origin. Such laws as the Americans with Disabilities Act prescribe design and accessibility standards. The federal government does not levy real estate taxes. State regulation State governments are the primary regulatory entities of the real estate business. State governments establish real estate license laws and qualifications. In addition, state governments have established real estate commissions to administer license laws and oversee activities of licensees. State governments also exert regional influence in the usage and environmental control of real estate within the state. Relevant state laws might include laws relating to flood zones, waste disposal, drainage control, shore preservation, and pollution standards. States also play a role in defining how real property may be owned, transferred, encumbered, and inherited. For example, in some states a mortgaged property becomes the legal property of the lender until the mortgage loan is paid. States have the power to levy real estate taxes but generally pass this power to local government. Local regulation County and local government regulation focuses on land use control, control of improvements, and taxation. Land use regulations and ordinances control how all property within the jurisdiction may be developed, improved, demolished, and managed. County and local governments have the power to zone land, take over land for the public good, issue building permits, and establish the rules for all development projects. County and local governments, along with school districts and other local jurisdictions, have the power to levy real estate taxes. Judicial regulation The judicial system exerts an influence on real estate ownership and use through decisions based on case law and common law, as distinguished from statutory law. Case law consists of decisions based on judicial precedent. Common law is the collective body of law deriving from custom and generally accepted practice in society. Chapter 2: Rights in Real Estate 27 Exhibit 2.7 Regulation of Real Property Interests Federal Constitution Establishes absolute right of private ownership of real estate Prohibits federal government from levying real property taxes Laws Create, regulate real estate-related agencies Prohibit discrimination Create standards for legal descriptions of real estate Establish environmental standards for all property Establish standards for protecting interests of handicapped people Agencies Establish mortgage lending standards Establish housing construction standards Establish environmental standards State Constitution May establish right to levy tax; or may delegate right to counties and municipalities Laws Regulate real estate licensing Establish broad usage standards Define, qualify ownership rights Agencies Regulate practitioners, administer real estate license laws Local Laws Create and enforce real estate taxation Control land usage over specific parcels of land Courts Common law Regulates real estate ownership and usage according to customary and accepted practices Case law Regulates real estate ownership and usage according to prior court decisions