DTS Property Review Session II

Leaseholds

Differences between Leaseholds and Freehold Estates Typically, the owner of a freehold estate has a more expansive set of rights in his property. The owner can alienate his rights in the property by selling, leasing, or giving them away. A lessee of property gains a possessory interest in the property. The landlord grants the lessee the right to possess the property in return for the lessee making rental payments to the landlord. In this way, the lessee gains a possessory interest in the property, but the landlord retains some rights as well. The lessee does not usually retain the exclusive right to exclude others from the leased property as the owner of a freehold estate might.

Term of Years A term of years lasts for a specified period of time which is determined by the parties. There must be a definite beginning and end date to the agreement. The period can be for any length – “years” does not mean that the term must be for a full year or more. This type of leasehold is not terminated by the death of either party. A term of years may conclude prior to the end date of the term upon some agreed upon condition or event. The landlord is not entitled to evict the tenant before the end of the term, unless the tenant has breached a material provision of the lease such as the obligation to pay rent. Example: “O to A for 10 years.”

Periodic Tenancy This leasehold renews automatically unless either the landlord or the tenant chooses to terminate the agreement. Notice is required before either party can terminate. The death of either party does not automatically terminate the agreement. The landlord may evict the tenant only if notice has been given that the tenancy will not be renewed. Example: Suppose that A pays rent on the first day of every month to O, but A has no written lease and no definite end date as to when the tenancy will terminate. This would create a month-to-month tenancy. There are different periods such as year-to-year or week-to-week, but the period is typically determined by how often the tenant pays rent.

Tenancy at Will This leasehold is similar to a periodic tenancy except that it can be terminated with no notice by either party. Many states have held that notice must be given to end a tenancy and this effectively abolished a primary difference between a tenancy at will and a periodic tenancy. Traditionally, the death of either party will terminate the agreement.

Holdover Tenant This term is used to describe a tenant who is rightfully in possession of the property but has wrongfully stayed on the property after the tenancy has been terminated. This term is used to distinguish between a person who wrongfully retained possession of the property after the lease terminated, and a trespasser who never had rightful possession of the property in the first place. If the landlord accepts payment from a holdover tenant, he may be held to have created a periodic tenancy. For example, if the lease has terminated but the tenant gives the landlord a check for one month of rent and the landlord accepts that check, then the parties have created a month-to-month periodic tenancy.

Duties and Rights of the Parties For each party’s duty, the other party has a corresponding right to the performance of that duty. These rights and duties used to be separate, but the law has come to view them as linked. Example: The tenant has the duty to pay rent, and the landlord has the right to receive rent. The landlord has the duty to give possession of the property, and the tenant has the right to receive possession. The tenant may alienate her rights in some situations via an assignment or a sublease – this will be discussed on subsequent slides.

Assignment v. Sublease Both assignments and subleases deal with a transfer of a leasehold by a tenant. It may be that the lease prohibits an assignment or sublease by the tenant and these provisions will generally be upheld. It may also be that the lease prohibits an assignment or sublease unless prior consent has been given by the landlord. Courts have tended to uphold these provisions but have implied a “reasonableness” standard whereby a landlord may not unreasonably withhold consent from a tenant.

Assignment v. Sublease An assignment conveys all of the former tenant’s property interests. The assignee (the new tenant) is directly responsible to the landlord for all obligations that the former tenant was responsible for. In other words, the tenant’s covenants run with the land. A sublease provides a possessory right in the estate to the new tenant. Unlike an assignment, the new tenant is not directly liable to the landlord to perform the tenant’s obligations. Imagine the landlord has not received rent from the tenant and has decided to sue to recover back rent. Under an assignment, the landlord may sue either the new or the former tenant. But under a sublease, the landlord may only sue the former tenant.

Covenant of Quiet Enjoyment and Constructive Eviction The tenant has the right of possession in the property and it may be that the landlord’s continued presence on the property can constitute a violation of this right. The landlord does have the right to perform maintenance and to keep up the premises, but he does not have the right to interfere with the enjoyment of the property by the tenant. Note: this covenant does not cover repairs or safety of the property – this is covered by the warranty of habitability. Constructive eviction is a defense that the tenant may use when she has not paid her rent. She must show that she had to vacate the property or a portion of the property (partial constructive eviction) because of a failure on the part of the landlord to perform his obligation under the covenant of quiet enjoyment.

Warranty of Habitability The landlord has the duty to provide a safe environment on the tenant’s property. This typically includes necessary repairs, and it may be linked to applicable housing codes. There are several possible remedies available to a tenant whose warranty of habitability has been breached by the landlord: recissionof the agreement, withholding of rent, rent abatement, repair and deduct, specific performance, criminal penalties, compensatory damages. In most cases the tenant is required to give notice to the landlord of the problem, and the tenant must also give the landlord a reasonable amount of time to fix the problem.

Eviction 3 types: Constructive (or partial constructive) eviction – when a landlord has interfered with the tenant’s enjoyment of the property to the extent that the tenant has been effectively evicted from the property. Actual eviction – this usually happens in cases of “self-help” where the landlord decides to evict the tenant without going through the proper channels. Judicial eviction – this is the only type of lawful eviction. The landlord must go through a court of law and state why the tenant should be evicted from the premises. The tenant may then raise a defense on his own behalf – for example, he may show that the landlord breached the warranty of habitability or the covenant of quiet enjoyment.

Servitudes and land use

Servitudes: Covenants A covenant is a promise by or to landowners intended to bind or benefit successors to the land. Restrictive Covenant – refrain from using land in certain ways. Affirmative Covenant – obligation to perform or use land in certain ways. Horizontal privity v. vertical privity

Servitudes: Easements An easement creates a right to enter and use land belonging to another and obligates the landowner to refrain from interfering with the authorized use. Land burdened by an easement is known as the servient estate. Land benefitted by an easement is known as the dominant estate.

Types of Servitudes Easement in Gross – benefit does not run with the land. (Appurtenant – runs with the land) Profit – easement + a right to remove natural resources. License – revocable right to use land.

Types of Servitudes Cont… Negative Easement – restriction on the use of a particular piece of land. Equitable Servitude – easement that is only enforced by an injunction. Quasi-Easement – owner makes use of one part of his land for the benefit of another.

Creation of Servitudes By a Writing (deed) By Prescription (prescriptive easement) – created by using land in a manner that meets all of the elements of adverse possession except exclusive use. By Estoppel – RS § 2.10 By Implication – implied easement by necessity or by prior use

Regulatory Takings Penn Central – 3 part balancing test Economic impact of the regulation on the owner Interference with landowner’s reasonable investment-backed expectations Character of Government’s action

Regulatory Takings Pennsylvania Coal – held that whether a regulatory act constitutes a taking requiring compensation depends on the extent of diminution in the value of the property. Lucas – 2 categories of regulatory action that are compensable without a case specific inquiry or balancing test. Does the regulation compel the property owner to suffer a physical invasion of his property? Does the regulation deny all economically beneficial or productive use of land?

Regulatory Takings General rule – If one of the 2 categories for compensable takings under Lucas aren’t met, then balance the following factors: Economic impact of the regulation on the claimant Reasonable investment backed expectations Character of governmental action Importance of the objectives the Government is attempting to achieve Average reciprocity of advantage effect

Zoning Village of Euclid – Zoning does not violate the 14th Amendment when done under the State’s police power. Ordinance must be for the benefit of the public welfare. Dolan – Reasonable relationship test to describe the necessary nexus between the land use and the state interest advanced.

Substantive v. Procedural Due Process Substantive due process refers to the “what” aspect of the due process, the protection of fundamental liberties both explicitly enumerated and implied in the Constitution. The controlling concept of “substantive” is “liberty.” Procedural due process refers to the “how” aspect of due process, or fairness in the way a law is enacted, applied and enforced. The controlling concept of “procedural” is “process” or “administration.”

Modern real estate transactions

Themes – note ANY “injustice” issues Brokers are repeat players in the legislation (state and federal level) They are effective lobbyists Formed (boilerplate) K usually favors the brokers Brokers are agents, usually of the seller (with fiduciary duty to the seller) “exclusive right to sale” – broker is entitled to fees even if the owner or some other person did the selling Open listing is not an exclusive right to sale Seller may k around the exclusive rights Minority rule: Tristam’s Landing v. Wait (broker gets fee even if deal does not go through)

Sales Contract Marketable Title (default position) Note: Professor Roisman thinks no one has a perfect title The warranty of marketable title is implied in every contract for sale of real property. The term is added to protect the legitimate expectations of buyers. A marketable title does not mean that the seller has good title. Rather, a marketable title is generally defined as one free from “reasonable doubt.” It is a covenant that the title transferred will be free of all reasonable risk of attack. The general rule is that the existence of an undisclosed encumbrance renders a title unmarketable (ostensible ownership problem) An exception is often made for visible easements (e.g., power lines).

The Deed General Warranty Deed – A deed in which the grantor warrants the title against defects rising before and during the time the grantor was connected with the land. Special Warranty Deed – A deed in which the grantor warrants the title against defects arising during the grantor’s association with the land, but not against defects arising before the grantor’s association with the land. Quitclaim Deed – A deed in which the grantor warrants nothing; the grantor merely transfers whatever title the grantor has.

The Deed (cont.) Delivery Required: A deed must be delivered by the grantor to give it legal effect. Forged Deed Void: The law consistently provides that a forged deed is void and the grantee receives no title Writing (Statute of Frauds)

Statute of Frauds Must be in writing, also note recording requirements A deed is not effective to pass an interest in land unless it adequately describes the land conveyed. Evidence must show that the words in the deed could refer to one piece of land. Method of description Survey of public land by the federal government Commonly used to describe agricultural land Not adoptable to small city lots Metes and bounds: reference to identifiable and permanent objects and locations Courses and distance

Statute of Frauds (cont.) There are ways to take something out of the Statute of Frauds Quantum meruit (reasonable value of services) Part performance Constructive fraud Variety of estoppel doctrines (must be unjust and unconscionable) Promise made Expectation of reliance Reasonable reliance Definite and substantial nature Enforcement is only way to prevent injustice Also must show not mere inconvenience, but reliance injury so substantial and independent as to constitute unjust and unconscionable injury FWR has found no cases in Indiana where the court has awarded this (it’s a very strict standard)

Brown v. Branch Brown: you “always have the 135 house”; Branch sued Brown for failure to convey the house; Trial court awarded the house to Branch; App Court affirmed because 1) Brown’s oral promise to give the house was not a sale within the meaning of the Statute of Frauds therefore did not need to be in writing to be enforced and 2) oral promise was enforceable under promissory estoppel Promissory estoppel: (must be unjust and unconscionable) Held: no infliction of an unjust and unconscionable injury and loss here

IC 32-21-1 Conveying real property Does not apply to a lease for a term of not more than three (3) years. Void unless in writing (Statute of Frauds) IC 32-21-1-13 Conveyance of land; written deed required Except for a bona fide lease for a term not exceeding three (3) years, a conveyance of land or of any interest in land shall be made by a deed that is: (1) written (Statute of Frauds); and (2) subscribed, sealed, and acknowledged . . .

Covenants for Titles Doctrine of Merger: once a deed is delivered, the contract of sale (and any other agreements) merges into the deed and disappears. Implied warranty of marketability of title disappears after the deed is delivered Grantee can only recover for breach of the warranties in the deed. A warranty that the grantee’s title is good guarantees that a described situation exists at the time the covenant is made Covenant for seisin: grantor guarantees that she owns the estate Covenant of the right to convey: grantor covenants that she has the right to convey Covenant against encumbrances: no mortgages, tax liens, etc.

The Mortgage Lien Theory – a mortgagor gives a lien to the mortgagee with respect to the mortgaged property. Title remains with mortgagor (lender) (IN?) Title Theory – a mortgagor gives the mortgagee legal title to the mortgaged property. In a title theory jurisdiction there is a strong argument that if one tenant mortgages his/her interest, then the joint tenancy is severed.

U.S. Bank v. Ibanez Securitized subprime mortgages case 2007; Original bank assigned the notes and mortgages in blank (without names of assignee); Could not obtain title insurance; brought action to remove a cloud from the title (quit title) Principle issue: state statute, also the securitization documents, required assignment of mortgage be in recorded form (which means having the assignee’s names) to unload mortgages from bank to investors MA is a title theory state: potential problem if no assignee’s name, then title legally does not belong to anyone (nothing is transferred)

Strict and Statutory Foreclosure Judicial foreclosure (lender goes to court gets foreclosure) Coleman v. Hoffman Strict foreclosure (not used often) Citizens St Bank v. Countrywide When statutory foreclosure is inappropriate: (there is only a mere lien on the land against owner of the legal title – plumber’s lien on work done) Strict foreclosure is used to cut off junior liens who were not parties to the foreclosure action (junior encumbrancers)

Power of Sale Foreclosure This is foreclosure by Statute: Acceleration clause may be included in mortgage A provision to authorize acceleration and lender has power to conduct sale to satisfy the debt Favors the lender

Recording 32-21-4-1 (IN recording statute) IN is a race notice jurisdiction First to file prevails Is the first to file a BFP (BIOC)? For value without notice of prior conveyance BFP must have notice Actual notice can be express or implied. Inquiry notice exists when there is something going on that would make a reasonable person ask appropriate questions. Record notice is present when a prior transfer appears in the recorded chain of title. (This is a constructive notice) Constructive notice is a term sometimes used to describe record notice and sometimes used to describe injury notice and sometimes both.

Garza v. Lorch Morgan acknowledged a $60k debt to Garza Garza did not record (there was no legal description either); Morgan executed a quitclaim deed to Lorch Lorch had a title search and obtained a title insurance, paid off liens and recorded the deed; Lorch informed Garza of his ownership, Garza claimed that Lorch had constructive or actual notice, that the deed transfer between Morgan and Lorch was fraudulent Note: recording first is not enough, must also be a BFP (IN) Garza took a title from antecedent debt so he was not a BFP The BFP is not the issue here, what is at issue is the fact that Garza never filed (recorded) Garza received legal description of the real estate within 15 days and had ample time to record, so there is no claim Lorch may have had constructive knowledge of Garza’s lien, but it did do a title search (reasonable inquiry)

Key Bank v. NBD Bank Londermill executed a promissory note ($2M) secured by a mortgage given to NBD; Contained an error at their recording; Londermill conveyed to Frazier; this deed contained a correct legal description; Frazier quitclaimed a parcel including a portion of the Toole real estate to “Tracy” Londermill; this deed contained another (different) error but was recorded in the claim of the title regardless of the error; Tracy later executed a promissory note in favor of Key Bank but contained the same error; Tracy filed for Chapter 7, Key Bank initiated foreclosure, Trial court found the errors, determined the NBD’s mortgage had priority, and Key Bank’s mortgage nulled Key Bank’s mortgage was valid because the description, although wrong, could have identified the land, and it was properly recorded within the chain of title Priority (BFP) Record notice outside chain of title does not provide a constructive notice Actual notice could be implied when a person had the means of obtaining knowledge but did not Here there is no way for Key Bank to search the records and find the preexisting deed Thus Key Bank had priority over NBD because it took the mortgage as a BFP for value and without notice, and was recorded

U.S. Bank v. Integrity Doctrine of negligence misrepresentation; Issue: whether a title company, after issuing an incorrect title commitment which the recipient (lender) relied upon to its detriment, owes a duty (in tort) to the recipient to which it certified clear title Integrity argued that there is no independent tort cause of action under IN law Indy Public Library v. Charlier (pure economic loss unaccompanied by personal injuries are not held liable under tort) Exceptions: malpractice, breach of fiduciary duty Here: misrepresentation Other jurisdictions are split on this IN does accept this as an exception to the pure economic loss rule and allows action on pure economic loss on the theory of misrepresentation Note that because Ins Co is out of business, title insurance could not pay out Also: the K claim was not raised properly by U.S. Bank and wasn’t an issue here

DTS Property Review Session II