Rights of Ownership: Freeholds (Ownership Estates) LEARNING OBJECTIVES Upon completion of this section, the student should be able to: • Describe the two types of estates in land. • Define and give examples of fee simple estates: fee simple absolute, fee simple defeasible, fee simple with a special limitation (determinable fee), and fee simple subject to a condition subsequent. • Define a life estate and differentiate between a conventional life estate and a legal life estate, citing examples of each. • Define and differentiate between remainder and reversionary interests. VOCABULARY What is an estate? • Identifies the amount, length, and restrictions of an owner’s interest in real property. Freehold Estate Major Types 1. Fee Simple 2. Life Estate Freehold Estate Fee Life Simple Estate ABC Real Estate School 3st ed National Workbook August 2010 Page 38 Freehold Estate A buyer is purchasing a property. What are his ownership limitations? How long can he own the property? Is there a deeded use that is off limits (maybe using the property for a tavern)? Is there a use that must continue (maybe conservation…not buildable)? Can his heirs inherit the property or is there a pre- determined ownership upon his death? These questions are all answered upon inspection of the type of freehold estate. The type of estate identifies the amount, length, and restrictions of an owner’s interest in real property. There are 2 major types of freehold estates: (1) fee simple estate and (2) life estate. There are multiple subtypes under these major types. Fee Simple Freehold Estate Fee Simple Freehold Estate Fee Simple Fee Simple Absolute Defeasible Determinable Limitation Condition Subsequent There are 2 types of fee simple freehold estates and they are very different. Because a fee simple absolute is the most common type of fee simple freehold estate and a fee simple defeasible is rare, sometimes people forget that there is a defeasible or defeatable type of fee simple freehold estate and they use the terms fee simple and fee simple absolute interchangeably; but on the real estate exam, questions will distinguish between the 2 types. Fee Simple Absolute A fee simple absolute freehold estate is the most complete private ownership interest that can be held in real property. Fee simple ownership ABC Real Estate School 3st ed National Workbook August 2010 Page 39 represents absolute ownership of real property but as always is limited by basic government powers of taxation, eminent domain, police power, escheat, and any other recorded deed restrictions. The owner is entitled to all legal rights to the property, including use of the property forever, and the right to will the property to designated heirs. Fee Simple Defeasible A fee simple defeasible freehold estate is ‘defeatable’. In other words ownership can be terminated if the owner fails to properly use the property. Ownership has its limits. “A defeasible estate is created when a grantor transfers land conditionally. Upon the happening of the event or condition stated by the grantor, the transfer may be void or at least subject to annulment. (An estate not subject to such conditions is called an indefeasible estate.) Historically, the common law has frowned on the use of defeasible estates as it interferes with the owners' enjoyment of their property and as such has made it difficult to create a valid future interest. Unless a defeasible estate is clearly intended, modern courts will construe the language against this type of estate. Three types of defeasible estates are the fee simple determinable, fee simple subject to an executory limitation or interest, and the fee simple subject to a condition subsequent. Because a defeasible estate always grants less than a full fee simple, a defeasible estate will always create one or more future interests. Fee simple determinable A fee simple determinable is an estate that will end automatically if the stated condition occurs. The interest will revert to the grantor or the heirs of the grantor. A possibility of reverter follows a fees simple determinable. Durational language such as "to A as long as the property is used for a park" creates a fee simple determinable and a possibility of reverter. Fee simple subject to a limitation A fee simple subject to a limitation is an estate that ends when a specific condition is met and then transfers to a third party. The interest will not revert to the grantor. If the condition is met, the grantee loses the interest and the third party gains it automatically. ABC Real Estate School 3st ed National Workbook August 2010 Page 40 Example: O grants Blackacre to A and A's heir; but if A ever accepts a candy bar from C, then to B and B's heirs. Here, O is the original owner. She grants A a fee simple subject to the subsequent condition that he doesn't accept a candy bar from C. But unlike a fee simple subject to a condition subsequent, Blackacre goes to a third party (B) instead of the grantor (O) if the condition is met. Also unlike a fee simple subject to a condition subsequent, B then automatically gains the interest in Blackacre and does not only have a mere right to sue for re-entry. What would happen if the property were conveyed? Let's say A sold Blackacre to D. If A afterwards accepted an offer for a candy bar from C, Blackacre automatically goes to B. But if A died without ever accepting a candy bar from C, the condition could not possibly be met. D would then have a fee simple absolute. Fee simple subject to condition subsequent A fee simple subject to a condition subsequent is created when the words of a grant support the conclusion that the grantor intends to convey a fee simple absolute but has attached a condition to the grant so that if a specified future event happens the grantor will get its fee simple absolute back, provided that the grantor exercises his right of entry(or power of termination). Thus, a fee simple subject to condition subsequent does not end automatically upon the happening of the condition. The future interest is called a "right of reentry" or "right of entry," and the property only reverts back to the original grantor if he exercises this right. The right of entry is not automatic, but rather must be exercised to terminate the fee simple subject to condition subsequent. To exercise right of entry, the holder must take substantial steps to recover possession and title, for example, by filing a lawsuit. Physical entry is not required, but the holder must do more than just proclaim an intent to take back. One of the languages used to create a fee simple subject to condition subsequent and a right of entry is "to A, but if A sells alcohol on the land, then grantor has the right of entry(or power of termination). Common uses include language such as "may", "but if", "however", or "provided that..."”5 5 http://en.wikipedia.org/wiki/Defeasible_estate Accessed July 8, 2010. ABC Real Estate School 3st ed National Workbook August 2010 Page 41 Fee Simple Freeholds Review A. Fee Simple Absolute 1. the highest interest in real estate recognized by law 2. holder is entitled to all legal rights to the property B. Fee simple Defeasible (Defeatable) Estate 1. a qualified estate 2. subject to the occurrence or non-occurrence of some specific event 3. 3 types: a) Determinable (1) As long as the property is used for…. b) condition subsequent (1) As long as you don’t… (2) new owner may not perform some action or activity (3) former owner retains rights if condition is violated c) special limitation (1) As long as you do or don’t….. (2) former owner reacquires full ownership if the condition is violated (3) also called a fee simple determinable Fee Simple Life Estate A life estate is a concept used to designate the ownership of land for the duration of a person's life. It is an estate in real property that ends at death. The owner of a life estate is called a "life tenant". Although the ownership of a life estate is of limited duration because it ends at the death of the person who is the "measuring life", the owner has the right to enjoy the benefits of ownership of the property, including income derived from rent or other uses of the property, during his or her possession. This life tenant may farm, lease, mortgage or sell his interest, but cannot effect the remainder. Because a life estate ceases to exist at the death of the measuring person's life, this temporary ownership agreement cannot be willed by the life tenant. At death, ownership of the property involved in a life estate either moves on to a 3rd party named by the original owner, or reverts back to the original owner. If the property moves on to a 3rd party, named the remainderman ,the new ownership is typically fee simple absolute. ABC Real Estate School 3st ed National Workbook August 2010 Page 42 A life estate could also be named "pur autre vie", or the life of another. Such a life estate can also be conveyed originally, such as "to A until B dies." For example, because Grandma Wells has Alzheimer’s, the property will be given to Grandpa Wells while he cares for Grandma until her death. Upon Grandma Wells’ death, the property ownership will change either back to the original owner or a 3rd party named in the deed. II. Life estate A. freehold estate limited in duration to the life of the owner B.