Legal Persons and Real Property

CHAPTERCHAPTER 1313

Laws are made to protect the trusting as well as the suspicious. Hugo L. Black, Associate Justice of the U.S. Supreme Court, 1937–1971 This chapter addresses several aspects of human relationships and the law that governs those relationships. Part I begins with the concept of a legal person. In its wisdom, the law has recognized various entities as fictional “persons”— corporations, partnerships, and unincorporated associations, to name a few. These entities are considered to be a person under the law, just as much as the reader is. Consequently, the law of human relationships includes the legal stand- ing, rights, and obligations of persons who are not individual human beings, but are entities created by humans. Part II summarizes the law of real property— commonly known as real estate: land, buildings, etc. Various forms of ownership will be discussed, as well as the rights, limitations, and liabilities that come with ownership of real property. The student who has carefully read this chapter should be prepared to an- swer these questions: ■ What does it mean to be a “legal person”? ■ What types of legal persons (other than human individuals) exist under the law? ■ What are the legal “capacities” an individual might have? ■ What is the difference between personal property and real property? ■ What are the rights of property ownership? ■ What is the power of eminent domain? ■ What is an estate in property? ■ What are the different forms of property ownership? ■ What property interests can nonowners hold?

33 34 CHAPTER 13

SCENARIO

The paralegal arrived at the County Recorder’s Office at 7:35 A.M., sharp. The office would not open until 8:00, but Ginny wanted to be first in line to claim a computer terminal for reviewing the official property records. Her assignment was to find any records of real property owned by the defendant in the client’s case. “Why doesn’t the county have these records available on-line?” she asked herself silently. When the Recorder’s Office finally opened at 8:03, there were about a dozen other people in line behind Ginny. She recognized several as being employees of various attorney services whom she had encountered previously in the court clerk’s office on the other side of the civic center plaza. She smiled and murmured a greeting now when they made eye contact, but she had never exchanged names with any of them. She thought about the advantages of her own job. “I’m sure glad that I don’t have to spend all day rushing from law firms to the court and back again.” But, of course, today she was in the Recorder’s Office, wasn’t she? Seated at the terminal, Ginny began her search. The defendant’s name was Roger Maury Smith. Ginny hoped that if he held any property, it was recorded in exactly that name. Otherwise, with a family name like Smith, this could be a very long day. The attorney was positive that the defendant owned real property in this county, so there should be something in the county records. Within 10 minutes, Ginny knew that there was no real property in this county recorded in the name of “Roger Maury Smith.” There were several property records for “Roger M. Smith,” but who could know whether the “M” stood for Maury? It could just as well be “Morton,” “Maxwell,” or “Matthew.” To make matters worse, there were about a dozen properties owned by one or more persons named simply “Roger Smith.” Of course, later she could check with the escrow and title companies to which the recorded deeds had been mailed after recording. If the people at those offices knew—and if they were cooperative—they might be able to tell her if the property owner was the same individual as the defendant in the client’s case. But, in the meantime, she needed to exhaust the more likely alternative names in which the property might be held. “Let’s see, now . . . what other ways might he hold that property?” On a wild hunch, Ginny tried “RMS.” The computer screen went blank for about 10 sec- onds. Then it appeared: a grant deed to “RMS & Associates.” Unlike many deeds, this document showed a request that, after recording, it be mailed directly to the grantee. Remembering other documents in the case file, Ginny now recognized the grantee’s address to be the same as an old address for the defendant. Ginny silently mouthed her excitement: “Eureka!” Jotting down the document number, Ginny rose and walked over to the counter to order a printout of the grant deed. As she waited to place her order, Ginny thought, “I’ll bet Jerry’s impressed when he learns how I found this!” ■

SECTION I. LEGAL PERSONS

WHO—OR WHAT—COUNTS AS A LEGAL “PERSON”?

An individual is a human being In our natural way of speaking, a “person” is simply a human being. But in the (as opposed to a corporation, law, a human being—a flesh-and-blood person—is usually referred to as an partnership, etc.). individual. That is because there are other kinds of legal persons that are not Legal Persons and Real Property 35 human beings. In law, the term “person” includes much more than just human beings. Legally, a person is whoever or whatever: Under the law, a person is an individual or other entity that ■ can sue and be sued by others can sue and be sued, can be ■ is entitled to due process and equal protection of the laws under the prosecuted for a criminal 14th Amendment to the U.S. Constitution offense, and is entitled to due ■ is subject to prosecution for criminal offenses process of law. Legal persons include not only human beings, but also corporations, which have legal rights and obligations somewhat similar to those of individuals. In most ju- risdictions, partnerships and unincorporated labor unions, fraternal associations, and churches are legal persons as well. An individual has rights and obligations in all of her relationships with her debtors and creditors. She has other legal rights and obligations as a parent or child, as a spouse, as an employee or employer, and as landlord or tenant—legal relationships that are common among individuals in our society. But in some situations, the same individual might have multiple legal identities—referred to as legal capacities. That same woman might also be a trustee under a trust, an ex- One’s legal capacity is the role ecutor under a will, or a partner in a partnership. As a trustee, executor, or part- (e.g., individual, corporate ner she comes before the law in a completely different role, with powers and ob- officer, trustee, etc.) in which ligations that would not exist in her individual capacity. For example, trustees one comes before the court or and executors have special powers and obligations that they do not normally takes other legal action, and one’s authority and have as individuals, yet they might also have individual liability for wrongful acts responsibility under the law and omissions committed in their other capacities as a trustee or executor. varies according to that The responsibilities of trustees, executors, and partners are those of capacity. fiduciaries—persons who are in a position of special trust and responsibility toward others. Although fiduciaries have many duties, their central duty is loyalty to their beneficiaries, which requires them to act in the best interest of the beneficiaries and of no one else. People also become fiduciaries when they take on many other roles in life. Real estate agents, bankers, conservators, guardians, corporate directors—even spouses—owe a fiduciary duty to particular individuals (i.e., clients, shareholders, spouse, or others, as the case may be). Consequently, someone may sue (or be sued) as an individual and also as a trustee or partner—or in any other legal capacity he might have. It is possible to be sued in multiple capacities in the same lawsuit (e.g., both as a trustee and an individual). To clarify the legal capacities that are at issue, court papers usually identify plaintiffs and defendants as individuals, trustees, corporations, partnerships, unincorporated associations, etc.

SECTION II. THE LAW OF PROPERTY

The law of property is concerned with both real property and personal property. Real property is the land and everything “attached” to the land (e.g., growing Real property is land and all crops, trees, buildings, brick walkways, etc.). Personal property is all other that is permanently attached to property. Stocks and bonds do not bestow direct ownership rights to any land, the land (e.g., buildings and crops, or buildings, so they are considered personal property. Our clothing, trees). automobiles, books, stamp collections, cash, checking and savings accounts, patent rights to inventions, skateboards, club memberships, and any court judg- Personal property is all ments we have won against others for damages are personal property. Our name property that is not real and our photographic image are personal property and, if we are sufficiently fa- property. mous, we might be able to command generous fees for their use in advertising. 36 CHAPTER 13

THE RIGHTS OF PROPERTY OWNERSHIP The most basic question for the law of property is “Who owns it?” If an owner does not exist or is not identifiable, the government usually presumes to own that property in the name of society. Property of a person who dies without heirs and long-abandoned bank accounts both pass to the state under the rule of Escheat is the reversion of escheat. For any property with significant value, we can be sure that if its exis- property to the state when there tence is known, someone will claim an ownership right. That does not neces- is no living owner or qualified sarily mean the claimant will gain control of that property because he might be heir. asserting no more than a “hollow claim” with little basis in law or fact. Ownership bestows the rights of possession, use, and transfer. The right of possession includes the right to post “no trespassing” signs and deny entry to others. The right of use includes the right to build structures on the land or to dig a pit from which gravel is extracted. The right of transfer includes the right to sell, lease, or give the property to others.

Limitations upon the Rights of Ownership In exercising these rights of ownership, however, we are limited by statutes and the common law. For example, our use of the property is subject to zoning laws and building codes. In leasing or selling our land, we may not violate “fair hous- ing” statutes that prohibit certain types of discrimination. Any unreasonable use of our land that deprives neighboring landowners of the reasonable use and enjoyment of their own properties can be prohibited as a nuisance.

Eminent Domain and Condemnation We can be forced to sell our real property to the government under its power of Eminent domain is the power of eminent domain. This occurs frequently when private land is needed for a pub- government to force an lic purpose, such as a highway, park, or school. The power of eminent domain involuntary sale of private has even been used by government redevelopment agencies to buy up decaying property so that it can be used neighborhoods, which are then resold to developers who upgrade the residen- for public purposes. tial and/or commercial uses of the property, turning blighted neighborhoods into attractive and prosperous areas. Under eminent domain, if we refuse to sell our land the government can take us to court and force its sale through a legal Condemnation is the judicial process called condemnation. process by which a private person is compelled to sell Inverse Condemnation property to the government (under the power of eminent The government occasionally “takes” or diminishes the value of private prop- domain). erty for a public purpose, but without using the formal condemnation process under the power of eminent domain. This can occur in a variety of ways. For example, construction of a major freeway immediately adjacent to an outdoor con- cert hall might make the hall unusable for concerts due to the intrusive noise of traffic. The city of Los Angeles was compelled to purchase large numbers of ex- pensive private homes with beautiful ocean views because runway additions to the international airport had made them unliveable due to the noise of depart- ing jet aircraft. A public flood control project might result in the unintended flooding of private lands previously not in danger of flooding. These actions by government agencies are known as “constructive condemnation.” The affected Inverse condemnation is a civil action brought by a property property owners can bring inverse condemnation actions against the public owner against a government agency to collect damages for the diminished value of their properties. agency to recover compensation A government agency may escape liability for inverse condemnation if pri- for taking or damaging of the vate property is taken or damaged in response to an emergency. Thus, a farmer private property without just would be unable to assert an inverse condemnation claim for crops that fire- compensation. fighters had burned to create a firebreak in the path of an approaching wildfire. Legal Persons and Real Property 37

In the following Case in Point, California farmers filed an inverse condemnation suit against a government agency that intentionally flooded their croplands to reduce the danger of flooding in nearby commercial and residential neighborhoods. At issue was whether a genuine emergency justified flooding the farmer’s croplands. In Odello Brothers v. County of Monterey, the defendant county government was granted a summary judgment by the trial court. As explained in its decision excerpted here, the California Court of Appeal reversed the trial court’s finding that triable issues of material fact did not exist. (In California civil practice, a motion for “judgment on the pleadings” is more commonly known as a motion for “summary judgment.”)

A CASE IN POINT

Odello Brothers v. County of Monterey 63 Cal.App.4th 778 (1998)

* * * * Appellants sued the County of Monterey (County) for trespass and inverse condemnation, alleging that County was liable because County intentionally breached a levee and flooded appellants’ property. [Footnote omitted.] County moved for summary judgment and the trial court granted the motion. The trial court concluded that appellants’ inverse condemnation claim was barred under the emergency exception to the just compensation requirement. The trial court also determined that appellants’ trespass claim was barred because of the im- munity afforded County. ... [W]e conclude that triable issues exist with respect to the inverse condemnation claim but that there are no triable issues with respect to the trespass cause of action. Accordingly, we will reverse the trial court’s granting County’s motion for summary judgment and remand the matter for further proceedings consistent with this opinion.

Facts and Procedural Background

The Odello Coast Ranch (Ranch) is located directly south of the Carmel River. The boundaries of the Ranch extend east and west of State Route 1 (highway 1). Appellants are the owners and lessees of the Ranch; they have grown ar- tichokes on the property since the 1920’s. Commercial and residential property is located north of the Carmel River. The primary commercial presence is a shopping complex known as “The Cross- roads” while the primary residential presence is a Carmel neighborhood known as “Mission Fields.” The Ranch is protected from the Carmel River by the Odello Levee which borders the river’s south side. Part of the Odello Levee protects the eastern fields of the Ranch. The portion of the Odello Levee west of highway 1 protects land appellants lease from the state (the western fields). [Footnote omitted.] The Mission Fields Levee, which is located on the river’s north side, protects the commercial and residential areas. The protection provided by the Mission Fields Levee is not as great as the protection provided by the Odello Levee because parts of the Odello Levee are higher than the Mission Fields Levee. In 1985, a County Board of Supervisors resolution recognized the existence of a flood hazard in the lower Carmel valley and endorsed the concept of a flood control project. In 1989, the Monterey County Flood Control and Water Conser- vation District developed [a plan for] the Lower Carmel River Flood Control 38 CHAPTER 13

Project. . . . The flood project [plan] was never implemented by County. Accord- ing to one county official, the project was never implemented because County did not have sufficient resources. [Footnote omitted.] In January 1995, the Carmel River overflowed its north bank and flooded Mission Fields. Appellants’ property was protected by the Odello Levee and therefore did not suffer serious damage during the January 1995 flooding. In March 1995, heavy rains again raised the threat of flooding. On March 10, 1995, County declared a state of emergency and decided, without appellants’ permission or prior warning to appellants, to breach the western portion of the Odello Levee. By breaching the levee, County hoped to compensate for the fact that parts of the Odello Levee were higher than the Mission Fields Levee, and therefore prevent flooding in the residential and commercial areas. When the western portion of the Odello Levee was breached, river water was sent rushing onto appellants’ property thereby flooding and creating a lake in appellants’ western field. The flooding resulted in damage and destruction of appellants’ artichoke crop and other property. At about noon on March 10, 1995, a County official, Ronald Lundquist, in- formed appellants that County also intended to cut a hole in the part of the Odello Levee located east of highway 1. Appellants responded by moving their transportable equipment from the eastern field to high ground on land owned by them. However, they did not have sufficient time to move any of their pack- aging inventory, packing machinery or other equipment from the packing shed on the field. Once County crews had bulldozed a gap in the eastern portion of the Odello Levee, water from the Carmel River rushed across the field and created what was, in effect, a second lake. The floodwater diverted onto the eastern field damaged or destroyed appellants’ artichoke crop, a packing shed, and farm worker residences located there. Appellants filed a claim pursuant to the California Tort Claims Act. That claim was denied. Appellants then filed suit against County, asserting causes of action for trespass and inverse condemnation. County moved for summary judgment, arguing that it was immune from liability. In support of its motion, County established that County had declared a state of emergency on March 10, 1995. In response to the motion, appellants claimed that the destruction of the Odello Levee did not occur in the context of a “true emergency.” According to appellants, County’s declaration of an emergency was simply a label used by the County to shield itself from responsibility for its prior failure to take steps to protect the residential and commercial areas from flooding. Appellants alleged that County had a deliberate plan to shift the expense of a viable flood control plan to appellants. Appellants allege that after the January 1995 flooding, there was a public outcry over the inadequacy of the flood control north of the Carmel River. According to appellants, County nonetheless took no steps to implement its flood control plan because County had decided to breach the Odello Levee if there was an immediate threat of flooding. In support of their position, appellants submitted evidence of the 1985 board of supervisors resolution, as well as evidence of the 1989 flood control project [plan]. . . . Appellants also submitted a February 1995 memorandum from Joe Madruga, the assistant general manager of the Monterey County Water Re- sources Agency. The memorandum set forth Madruga’s account of the January 1995 flooding, including his statement that during the January 1995 flooding, County officials “requested an assessment of the advisability of breaching the Odello levee to protect the commercial area. . . .” Madruga reported that it was ultimately determined that the January 1995 flooding did not require that the Odello Levee be breached. Legal Persons and Real Property 39

Appellants offered a February 1995 memorandum from the Monterey County Office of Emergency Services. The memorandum analyzed the January 1995 flooding. Included in the analysis was the recognition that officials had considered breaching the Odello Levee but had decided against such action because “to be effective, this action would have to be planned ahead of time and em- ployed expeditiously.” . . . * * * * After considering the evidence, the trial court granted County’s summary judgment motion. . . . The court determined that appellants could not state a cause of action for inverse condemnation because the case fell within the emergency exception to the just compensation requirement. * * * * Standard of Review Summary judgment is granted when there are no triable issues as to any material facts and the moving party is entitled to judgment as a matter of law. [Citation omitted.] When reviewing a trial court’s decision to grant summary judgment, we must identify the issues framed by the pleadings, and determine whether the moving party has established facts which negate the opposing party’s facts and justify a judgment in the moving party’s favor. When the moving party’s facts prima facie justify a judgment, we determine whether the opposing party has demonstrated the existence of a triable issue of material fact. {Citation omitted.] Discussion I. Inverse Condemnation Appellants argue that there are triable issues of fact regarding appellants’ cause of action for inverse condemnation. We agree. Article I, section 19 of the California Constitution provides: “Private property may be taken or damaged for public use only when just compensation, as- certained by a jury unless waived, has first been paid to, or into court for, the owner.” Under this provision, if private property is wrongfully damaged or destroyed by government action, then an inverse condemnation action may lie to establish the owner’s damages. [Citations omitted.] The inverse condemnation action is based upon the constitutional provision. It is independent of any right to sue under traditional tort theories. [Citations omitted.] A. Legal Right There are two general exceptions to this rule of inverse condemnation liability. [Citation omitted.] The first exception evolved from the common law right to in- flict damage. [Citations omitted.] . . . This exception to inverse condemnation liability was eventually criticized by both courts and commentators. [Citations omitted.] . . . In response to this criticism, [the California Supreme Court in] Belair v. River- side County Flood Control Dist., supra, 47 Cal.3d 550 refined the parameters of the legal right/common enemy exception. In Belair, private property was damaged when a flood control levee failed. After analyzing the property owners’ inverse condemnation claim, the California Supreme Court held: “[W]here the public agency’s design, construction or maintenance of a flood control project is shown to have posed an unreasonable risk of harm to the plaintiffs, and such unreasonable design, construction or maintenance constituted a substantial cause of the damages, plaintiffs may recover regardless of the fact that the project’s purpose is to contain the ‘common enemy’ of floodwaters.” (Belair, supra, 47 Cal.3d at p. 565.) . . . * * * * 40 CHAPTER 13

B. Emergency Exception The second exception to the just compensation requirement, and the exception directly implicated in this case, is based upon the proper exercise of the public entity’s police power. [Citations omitted.] A specific application of this rule con- cerns emergency conditions, i.e., “when damage to private property is inflicted by government ‘under the pressure of public necessity and to avert impending peril.’ ” [Citations omitted.] Courts have narrowly circumscribed the types of emergencies that will shield a public entity from inverse condemnation liability. [Citations omitted.] . . . The importance of tightly defining this exception was explained in House v. L.A. County Flood Control Dist., supra, 25 Cal.2d 384, 388-389: “‘The state or its subdivisions may take or damage private property without compensation if such action is essential to safeguard public health, safety, or morals. [Citations.] In certain circumstances, however, the taking or damaging of private property for such a purpose is not prompted by so great a necessity as to be justified without proper compensation to the owner. [Citations.]’ . . . Thus there is recognized the incontestable proposition that the exercise of police power, though an essential attribute of sovereignty for the public welfare and arbitrary in its nature, cannot extend beyond the necessities of the case and be made a cloak to destroy constitutional rights as to the inviolateness of private property.” . . . * * * * C. Analysis Having considered the applicable legal principles, we must now determine whether the emergency exception to the just compensation requirement shields County from liability...... County argues the emergency exception is a “bright-line” rule that must be applied because it is undisputed that an emergency existed on March 10, 1995. Accordingly, County contends that it does not matter what County did or did not do prior to March 10, 1995 because on March 10, 1995, it was manifestly necessary to breach the Odello Levee. No case has considered this precise issue. Although [earlier cases cited here] involved the failure of public works, they did not involve a public entity’s deliberate decision to breach a levee. Nor did they involve an allegation that the public entity’s response to an emergency situation was necessitated by the inadequacy of a public work. Thus, this case represents a unique situation: County declared an emergency and decided to breach the Odello Levee due to the inadequacy of another public work—the Mission Fields Levee. We are certainly mindful of the danger of second-guessing the decisions of public entities regarding public works and emergency situations. On the other hand, we do not think that the public interests are served by simply ignoring County’s prior knowledge of the flood threat. Nor do we think it is either fair or reasonable to deny appellants compensation simply because County has established that it declared an emergency on March 10, 1995. This is especially true since it seems clear that if County had in fact chosen to implement its existing flood plan, and had condemned part of appellants’ property, then County would have been required to compensate appellants for the property taken. . . . * * * * ... We have rejected the claim that County is automatically shielded from inverse condemnation liability. Accordingly, we shall conclude that the trial court erred in granting summary adjudication on the inverse condemnation claim. Legal Persons and Real Property 41

ESTATES IN REAL PROPERTY An individual’s ownership rights are commonly referred to as his or her estate. An estate is an ownership The type of estate determines the degree and nature of a person’s interest in interest in property—real or property. The most complete and unlimited estate in real property is held in personal. fee simple absolute (often called “fee simple”). When property held in fee simple is sold, given away, or devised (i.e., given by will), the new owner usually Ownership in fee simple receives an estate in fee simple, so that full ownership rights continue to pass absolute is an interest in the with the property through countless generations of owners. However, the entire property with unlimited holder of an estate in fee simple could transfer only a portion of his ownership power to convey the property by sale, gift, or bequest. estate, in which event the recipient would not hold—or be able to transfer to another person—an estate in fee simple. To devise real property is to In most real estate transactions, a primary objective of the title search is to give it by will to another person. ensure that the seller is able to transfer an estate in fee simple. Buyers usually obtain a policy of title insurance to protect themselves against a later discovery A title search is a review of that the seller did not own an estate in fee simple. If the buyer’s ownership in- public records to determine terest later turns out to be less than stated in the deed, the title insurance com- whether someone has a clear pany must compensate that buyer for her loss. title to real property and is able to convey that title to another.

Title insurance is a contract in CENARIO S which an insurance company agrees to compensate the Derek Courtney is a legal assistant to the in-house counsel of a large commercial policyholder if the title to the real estate brokerage company. “Most of my work involves complex real estate subject property is less than transactions, but I also do some work on title issues and, now and then, litiga- what the title report states. tion. I like working in this environment because my boss, one legal secretary, and myself are the entire legal department. The three of us have been working together for about 4 years, and we work well as a team. Since we only have one attorney in-house, a good part of our legal work is farmed out to a firm that we have on retainer, and I do a lot of the coordination with the attorneys and para- legals in their office.” Derek reports that he was surprised at the wide range of legal matters in his office. “When I accepted the position, I didn’t think it would offer a lot of variety, but it does. Although something like 60 percent of my work is transactional, the other 40 percent has involved everything from defending against a wrongful ter- mination suit by a former employee of the company, to resolving an adverse possession claim on some farmland that was being sold to a commercial developer. I’ve gradually taken on more of the legal research responsibilities, which has been an incredibly effective way to learn the law on these issues. Who would have thought that I would ever sit down with an attorney and have a really meaty discussion about a complex legal problem? If I hadn’t been doing the legal research, that wouldn’t have been possible.” The brokerage company is often involved in all facets of a major real estate transaction. Derek explains, “We get involved in arrangements for financing, struc- turing limited partnerships for the purchasers, obtaining tax advice from outside counsel, solving zoning problems, up-front leasing to future commercial tenants, clearing up title problems—you name it. I have learned so much about commercial real estate, I’m mulling over the idea of getting my agent’s license and moving into that part of the business. Potentially, it could be much more financially re- warding than my present position. But I hate to leave the legal field, which I enjoy so much, and who knows if I have what it takes to be successful in sales?” ■ 42 CHAPTER 13

Forms of Ownership Practice Tip Someone might own an entire house, farm, or company “lock, stock, and barrel” Legal assistants are frequently (as our grandparents might say), or they might share ownership of that property involved in researching title to with other persons. Consider, for example, an acre of land. Shared ownership can real property. In its simplest exist in a variety of forms, each of which is identified by the manner in which title form, this might involve is held. When one person alone holds all ownership interests in property, she contacting a title insurance holds title in severalty (i.e., individually). When several persons share ownership, company to request a property title may be held as partners, tenants in common, or as joint tenants, for example. profile. Property profiles provide Joint tenants or tenants in common usually own undivided, equal shares of a legal description of the the property. That means that there is no distinct half acre owned by Ms. A and property and a copy of the deed a different half-acre owned by Ms. B. The acre of land is owned in its entirety by held by the current owner. They A and B together, each owning a 50 percent share of the whole acre, and each might also contain a plat map of having unlimited access to the entire parcel of land. However, tenants in common the surrounding area and infor- may hold undivided, unequal shares of the property. For example, one tenant mation about existing liens might own an undivided 60 percent share, while two other tenants each own un- against the property. Other divided 20 percent shares. Two or more joint tenants, however, always own sources of information are tax equal, undivided shares. Unless otherwise stated in the deed, multiple owners assessor rolls and county are presumed to be tenants in common. recorder’s records, which may be available on-line for access by Right of Survivorship the law firm’s computers. Parale- gals are often called on to use Ownership in joint tenancy also carries the right of survivorship. In most cases, computers in searching database there are two joint tenants (often a married couple). Upon the death of one joint records for property owned by tenant, the surviving joint tenant owns the property in severalty (i.e., 100 per- particular individuals or cent, without sharing ownership with any other person). Although joint tenants companies. In real estate trans- need not be married, many married couples prefer to own property in joint ten- actions, the paralegal might be ancy or tenancy by the entirety because those forms allow the property rights responsible for coordinating with of the deceased spouse to be transferred automatically upon death to the sur- title insurance companies, viving spouse without going through the probate court. However, three or more clients, and real estate brokers. persons may hold title as joint tenants, and upon the death of one, the remaining joint tenants continue to hold title in joint tenancy. Joint tenancy requires that “four unities” exist: A property profile is a brief report prepared by a title ■ The joint tenants have identical ownership interests in the property. company, showing how and by ■ The joint tenants receive title by the same conveyance (e.g., a deed or whom title to a particular parcel court order). of land is currently held, and ■ The ownership interests of the joint tenants commence simultaneously. containing a legal description of the property and any ■ The joint tenants hold identical, undivided possession to the property. immediately apparent liens In most states, tenancy in common does not carry that right of survivorship. against the property. Instead of going automatically to a “surviving tenant in common,” the deceased Severalty is ownership by one tenant’s share of the property passes to her estate and might be subject to pro- individual alone. bate, depending upon state law. In spite of this, some married couples prefer to Joint tenants are two or more hold property as tenants in common so that they may bequeath their interest to persons who each own an a particular person, or for tax reasons. undivided, equal share of the Some states recognize a “tenancy in common with right of survivorship” that property, with right of does not require the “four unities” that identify a joint tenancy. Some states rec- survivorship upon the death of ognize a tenancy by the entirety between a husband and wife that, like joint ten- any joint tenant. ancy, provides for the “right of survivorship” but does not permit either the hus- Tenants in common are two or band or wife to give, sell, or devise his/her ownership rights without the consent more persons who each own an of the spouse. undivided share of the property, with a continuing, unchanged Destruction of Joint Tenancy interest in that property after the death of another tenant in In contrast to a tenancy by the entirety, a joint tenant can transfer his ownership common. rights without consent of the other joint tenant(s)—but the result is the auto- Legal Persons and Real Property 43 matic destruction of the joint tenancy and the creation of a tenancy in common. The right of survivorship is the In other words, those who were joint tenants become tenants in common. The right of one co-tenant to reason for this can be illustrated by a hypothetical situation. Consider a situa- automatically receive the tion in which a brother and two sisters own property in joint tenancy. Upon the ownership interest of another death of the brother (or of any one sibling), the other two siblings would own co-tenant upon the latter’s death. the entire property by right of survivorship and would continue as joint tenants. But if the brother had sold his interest in the property to a stranger, and if the Tenancy by the entirety is co- ownership of property by joint tenancy were not extinguished by that sale, that stranger would have ac- husband and wife, with the right quired the right of future survivorship and could “inherit” (in a figurative sense, of survivorship but no individual not a legal sense) a larger share in the ownership rights upon the subsequent right to convey that spouse’s death of one of the sisters. share to another. Because each joint tenant must be able to choose who will have the right of survivorship upon her own death, a joint tenancy interest in property may not be sold. In our hypothetical example, the other two siblings would be deprived of that choice if the joint tenancy continued. That is why the joint tenancy is extinguished by operation of law whenever a joint tenant transfers ownership of her share.

Community Property An increasing number of states recognize community property as the presumed Community property is all mode of ownership for all property acquired by a husband and wife during their property owned in common by marriage. However, property acquired prior to the marriage continues to be sep- husband and wife, each having arate property, unless transferred into some form of joint ownership during the an undivided half interest in the marriage. Also, property received during the marriage by one spouse as a gift or entire property. There is no right bequest nonetheless remains the separate property of that spouse. All other of survivorship in community property. property received—including wages and salaries—is owned in equal, undivided shares by the two spouses. Upon the death of one spouse, the surviving spouse retains ownership of one-half of the community property, the remainder going to the estate of the deceased spouse. In the case of divorce, community property is divided equally between the husband and wife.

Property Interests that Are Not Held in Fee Simple In early times, all property was held in fee simple—even if that term was not used. All ownership of real property was on equal terms, in the sense that each property owner held the same ownership rights as every other property owner. He—only males held title to property—was free to use, give away, loan, sell, or devise the property as he saw fit. Those few legal restrictions that were imposed by the crown applied equally to all property owners. Over time, however, property interests were subdivided in various forms. Once any substantial property interest was withheld, that property was no longer held in “fee simple absolute.”

Life Estates Property may be held in a life estate (or life tenancy), an ownership interest that A life estate is a tenancy held expires upon the death of the life tenant (or another designated person). A life only until the death of the life estate is the opposite of a fee estate, in which ownership rights last forever, pass- tenant (or other designated ing to heirs or beneficiaries. Life estates are frequently created by will for the person), with the right of use benefit of a spouse, an elderly parent, or an ill sibling, but the full ownership and enjoyment, but no right to rights usually pass to a different beneficiary upon the life tenant’s death. The life convey title to another. tenant typically enjoys the use and income of the property but not its full ownership, and therefore cannot transfer full ownership rights to another person or do anything that damages the rights of the ultimate heir or beneficiary (i.e., the ultimate owner of that property). 44 CHAPTER 13

Land Sale Contracts A buyer of real property might be unable—or unwilling—to pay the full price for the property at the time he takes possession. In that event, the seller and buyer A land sale contract is a may enter into a land sale contract (also known as an installment land contract). purchase agreement by which Under a land sale contract, the seller retains legal title to the property—that is, the buyer takes immediate the seller’s name remains on the county records—until the buyer has paid the possession of the property, but full purchase price, usually in monthly or annual installments. If the land sale pays for it in installments, the contract is recorded, it encumbers the property just as a recorded mortgage seller holding legal title until the does. The buyer usually obtains immediate possession of the property and as- full price has been paid. sumes the risks of ownership (e.g., declining land values). The buyer also has Equitable title is the right to equitable title, which means that he will obtain legal title when the full price has receive legal title upon been paid. fulfillment of some obligation, and in the meantime to possess Leaseholds and use the property. A lease or rental agreement generally gives the tenant/lessee temporary possession and use of property belonging to another. Apartments, farms, commercial buildings, motor vehicles, and machinery are routinely leased. Many airline companies do not own the jet aircraft they operate—the planes are leased. In some residential developments, the land itself is never sold to the homeowners who buy the houses. They own their “homes” (i.e., the buildings they live in), but A leasehold is the ownership occupy the land as leasehold tenants. When they sell, they sell the buildings and interest held by a tenant under a their remaining leasehold rights to the land. lease for a defined period of time. Easements An easement is the right to enter An easement is a very limited property right that does not include actual pos- the land of another for some session of the property, but only a limited use of that property. For example, the specific and limited purpose. telephone company might have an easement that allows it to cross our property to reach a utility pole. That easement might be 10 feet wide and 100 feet long, but the telephone company does not actually own that strip of land. Its right of easement is limited to the access that is reasonable and necessary to service and maintain that utility pole. It is not a license for unlimited access to, or use of, our property. In rural areas, landowners often have an easement across another person’s land so that they can reach a public road. Easements are created by deed or by open and uncontested use. When a landowner permits neighbors to use a path or road across his property for a number of years, the easement has been created. The right of easement is strengthened if there is no practical, alternative route for reaching a public road A public right of way is an or another parcel of the neighbor’s land. In some states, a public right of way easement held by the general may be created in a similar manner: the open, uncontested travel by the general public, most often to pass public across private land for an extended period of time. The main difference through another’s property to between an easement and a public right of way is the persons who may make use reach the other side. of them. An easement is established for the benefit of a limited number of persons, such as public utilities or neighboring landowners. A public right of way is established for the benefit of the general public. The establishment of a public right of way can be prevented by posting a reservation of the property owner’s right to deny public access, or by physically barricading the road in question (e.g., one or more days each year).

Liens and Mortgages A lien is a claim against the Another limited property interest, a lien, is a claim or charge against a specific property of another. piece of real or personal property to secure some debt or obligation that is owed. A mortgage, a mechanic’s lien, and a judgment lien are common examples. Legal Persons and Real Property 45

A mortgage is a written instrument that creates an interest in real property, in A mortgage is a security interest which an owner of that real property offers it as collateral for a loan. A promissory in some property as collateral note is executed by the borrower as evidence of the loan and the mortgage is ex- for a debt. ecuted to secure payment under that note. A purchase money mortgage secures a loan to purchase the land in question. Upon repayment of the loan secured by a A promissory note is a written mortgage, the lender’s property interest under the mortgage becomes void. Un- promise to pay a debt. der the Statute of Frauds (discussed later in this chapter), a mortgage must be in writing. It should also be recorded in public records to give notice to other per- A purchase money mortgage is sons that the real property is encumbered by the mortgage. A document is a mortgage securing a loan to buy the property that serves as recorded when it is added to the official property records of the county in which collateral for that same loan. it is located. The mortgage holder can foreclose on the real property if the borrower Documents are recorded when defaults on the loan or commits some other serious breach of the mortgage they are entered into the official terms. Foreclosure requires a lawsuit in which the lender proves default or records of the state or county. other breach, after which the court orders the sheriff to conduct an auction. Some states, however, permit a foreclosure sale without resort to the courts To foreclose on property is to if the mortgage contains foreclosure provisions. In all states, the foreclosure terminate the ownership rights action must conform to statutory restrictions as well as the terms of the of the landholder who defaults mortgage. under a mortgage. If the sale in foreclosure does not yield enough to pay the balance owed, the lender can seek a deficiency judgment for the difference between the debt and A deficiency judgment is given the proceeds from foreclosure. In some states, however, the holder of a purchase by the court against a debtor for money mortgage cannot go after other assets of the borrower—the real prop- the difference between the erty is the sole collateral for the loan. Other mortgages (e.g., those for refinanc- amount recovered through ing) are generally not subject to that restriction. foreclosure and the debt owed.

Trust Deeds In some states, a trust deed (or “deed of trust”) is used in lieu of a mortgage. By A trust deed conveys title to a executing the trust deed, the owner of real property transfers ownership of the trustee, who holds title as property to a named trustee, who holds that property as security for a loan by security for the debt, with the a third party, such as a bank (the beneficiary of the trust). The trustee has the power to sell the property if the power to sell the property if the borrower defaults on the loan. The advantage debtor defaults. of a trust deed is that a neutral third party (the trustee) has a fiduciary duty to both the borrower and the lender, and it is less likely that the trustee will make a bad faith attempt to sell the property in foreclosure. Upon repayment of the loan, the trustee returns title to the borrower/original owner by recording a reconveyance. A reconveyance transfers title from the trustee to the purchaser (i.e., borrower) after Mechanics’ Liens the debt secured by the In those states where authorized by law, a mechanic’s lien protects a contrac- property has been paid in full. tor or supplier who has provided labor or materials for construction work on a piece of real property. For example, if a landowner contracts to build a house, A mechanic’s lien is a claim against real property, under the general contractor, subcontractors, and their suppliers can place mechan- which the property becomes ics’ liens against the land to secure their claim to payment for their services security for the payment of and/or materials. In most states, the mechanic’s lien must be recorded to have labor and materials that have any legal effect. If the owner tries to sell the property, potential buyers know been furnished for that the mechanic’s lien must be paid before they receive clear title to that improvements of that property. land. The contractor or supplier must usually commence legal action to collect the claim within a limited period of time, or the lien is automatically extinguished. The mechanic’s lien can also be voided by recording a court judgment to that effect or by recording a release of that claim executed by the contractor or supplier. 46 CHAPTER 13

Judgment Liens Practice Tip To establish a judgment lien, someone who has won a money judgment in a law- A paralegal can do a large suit records an abstract of judgment in the county where the defendant owns portion of the legal work real estate. An abstract of judgment, which is evidence that a judgment has been involved in a mechanic’s lien won, is usually a form prepared by the court clerk that summarizes the judg- practice. In most states, it is a ment. Because the abstract of judgment has been recorded, anyone buying the highly structured procedure property is on notice that a portion (or all) of the purchase money must go to with strict time limitations, the judgment creditor, not to the seller. standardized forms or formats for documents, and little necessity for court appearances Ethics Watch (unless a lien is contested). When any type of lien (e.g., mortgage, judgment lien, etc.) is recorded against real Recording a mechanic’s lien property, the priority of the lien is determined by its time of recording—any other lien involves preparing documents recorded before that of our client generally has automatic priority. As a fiduciary, the with close attention to detail attorney is obligated to act promptly and efficiently on the client’s behalf. The legal and accuracy. A legal descrip- assistant is often the person actually responsible for coordinating and recording the tion of the property and documents. Although the legal assistant might not go personally to the county itemized statements of the recorder’s office to record the documents, she will be responsible for coordinating labor and material costs being with the attorney service or messenger who does so, and confirming that the docu- claimed are the main ingredi- ment has, in fact, been recorded. ents. Prepared in the proper format (or entered on the appropriate blank form), the lien is ready for recording with Adverse Possession the county. In some jurisdic- tions, a preliminary notice A “squatter” is someone who occupies land with the intention of gaining owner- must be served on the ship without payment. It is entirely possible for a person to lose all title to real landowner as a “warning” property simply because someone else has occupied and claimed that property. prior to recording the lien. This is called obtaining title by adverse possession. Fortunately, adverse pos- Virtually everything can be session is subject to numerous limitations. To be effective, adverse possession prepared by the legal assistant, must be open, notorious, and hostile (i.e., adverse) to the ownership interests ready for the attorney to of any other person, including the holder of legal title. The adverse possessor review and sign prior to service must occupy the property for a minimum period of time set by state statute— and/or recording. usually 10 or 20 years. Some states require that the adverse possessor actually pay the property taxes. In these states, adverse possession is generally effective only when the legal owner has allowed those taxes to go unpaid. A judgment lien is a claim against property, under which the property becomes security for the payment of damages A QUESTION OF ETHICS awarded by a court. Erik Morella has been a legal assistant for only 18 months. He works for a sole An abstract of judgment is a practitioner in a mountain resort community. The attorney’s practice is a gen- brief record of a court judgment, eral one, encompassing business law, litigation, real estate, and probate. The prepared by the clerk of the clients are mostly individuals and small proprietors. Erik enjoys the variety in court as evidence that a final his assignments but is keenly conscious of the difficulty of becoming an expert judgment was entered by that in any particular field of practice. court. Currently, one of Erik’s assignments is a client’s participation in a compli- cated Internal Revenue Code Section 1031 exchange of real properties. The client Adverse possession conveys has two valuable lakefront properties that are going into the pool of exchange ownership of real property to one who claims it through properties, and he will receive a single piece of ranch property plus a sizeable continuing, open, and notorious amount of cash “boot” when escrow closes on the entire transaction. Although possession and use of that this is a community property state, and the client is married, the client’s prop- property, although legal title is erties were inherited from his mother and are his separate property outside of vested in another. the couple’s community property estate. Legal Persons and Real Property 47

Shortly after escrow opened, the client left with his wife on a sailing trip to Australia. The two of them would be alone at sea for some weeks. Although all terms of the exchange had been determined, as a precaution the client proposed giving a formal power of attorney—limited to that particular transaction—to Erik’s supervising attorney. The attorney demurred, saying that it might present the appearance of a conflict of interest. Instead, he suggested that the client give the limited power of attorney to Erik. “If anything unexpected were to come up, I could advise Erik about how to proceed on your behalf,” he told the client. Erik felt a bit odd about the situation but did not object. About 20 days before the exchange was to close, the attorney mentioned to Erik that he had discovered an oversight in the escrow instructions. He said that the instructions provided that title to the ranch property was to be vested in the client’s name, alone. “But I recall him saying that he wanted to place the ranch into community property with his wife,” the attorney said. For the next 5 days, the attorney attempted to contact the client at sea by radio, but without luck. “I think you better act on his behalf, Erik, and execute an amended instruction to vest the ranch in the husband and wife as their community property.” Erik felt uncomfortable about taking this action, but executed the amended instruction as suggested by his employer. Did Erik do the right thing? Was there a better way to handle the situation?

CHAPTER SUMMARY

■ Any individual or entity that can sue or be sued is a “person” under the law. ■ Legal persons include individuals, corporations, partnerships, unincorporated associations, and other entities. ■ An individual may have several legal capacities and may be sued in each of them. ■ All property is either real property or personal property. ■ Real property is land and everything attached to the land. ■ Ownership rights include the right to possess, use, give, sell, rent, or devise the property owned. ■ The most complete ownership right is fee simple absolute. ■ Title in real and personal property may be held in various forms of tenancy. ■ Nonownership property interests include mortgages, trust deeds, liens, and easements.

KEY TERMS abstract of judgment eminent domain inverse condemnation adverse possession equitable title joint tenants community property escheat judgment lien condemnation estate land sale contract deficiency judgment fee simple absolute leasehold devise foreclose legal capacities easement individual lien 48 CHAPTER 13 life estate public right of way tenancy by the entirety mechanic’s lien purchase money mortgage tenants in common mortgage real property title insurance person reconveyance title search personal property record trust deed promissory note right of survivorship property profile severalty

ACTIVITIES AND ASSIGNMENTS

1. Survey married couples among your close friends 3. Obtain a blank copy of a standard “real estate and relatives. How many of them hold their home purchase agreement.” You might be able to obtain in each of the following forms: the form generally used by real estate agents in ■ joint tenancy your community (perhaps one published by your state’s Realtor’s® Association) or purchase one ■ tenancy by the entirety from a stationery store that sells legal forms. ■ tenancy in common Review the boilerplate provisions in the ■ community property agreement and prepare a chart summarizing five ■ severalty key provisions of that agreement, and indicating whether it appears to: Find out why each couple selected that particular form of ownership. Was the decision based upon ■ favor the seller the advice of a lawyer, real estate agent, or tax ■ favor the buyer advisor? Do they believe that they understand the ■ favor the agent advantages and disadvantages of their chosen ■ be neutral form of ownership? Would they choose the same form if they were to purchase a home today? 2. Check the legal notices in a local newspaper for announcements of foreclosure sales on private residences. Attend one such sale and prepare a report on the following: ■ Was the sale authorized by a court or by a trustee under a deed of trust? ■ Who conducted the sale? ■ Was it by sealed bid or by auction? ■ How many people attended and participated? ■ How many bids were offered?