Test 2: Encumbrances; Liens; Title Transfer and Recording; Leases

A third party’s interest in a real property that limits the interests of the freehold property owner.

An encumbrance is an interest in and right to real property that limits the legal owner’s freehold interest. In effect, an encumbrance is another’s right to use or take possession of a legal owner’s property, or to prevent the legal owner from enjoying the full bundle of rights in the estate.

They involve the property that contains the easement and a non-owning party.

An easement is an interest in real property that gives the holder the right to use portions of the legal owner’s real property in a defined way. One cannot own an easement over one’s own property. Easement rights may apply to a property’s surface, subsurface, or airspace, but the affected area must be defined. An easement may be affirmative, allowing a use, such as a right-of-way, or negative, prohibiting a use, such as an airspace easement that prohibits one property owner from obstructing another’s ocean view.

An easement appurtenant.

An easement appurtenant gives a property owner a right of usage to portions of an adjoining property owned by another party. The property enjoying the usage right is called the dominant tenement, or dominant estate. The property containing the physical easement itself is the servient tenement, since it must serve the easement use.

easement by necessity.

An easement by necessity is an easement appurtenant granted by a court of law to a property owner because of a circumstance of necessity, most commonly the need for access to a property. Since property cannot be legally landlocked, or without legal access to a public thoroughfare, a court will grant an owner of a landlocked property an easement by necessity over an adjoining property that has access to a thoroughfare.

an unauthorized physical intrusion of one property into another.

An encroachment is the unauthorized, physical intrusion of one owner’s real property into that of another. Examples of encroachments are: a tree limb extending into the neighbor’s property, violating his or her airspace; a driveway extending beyond the lot line onto the neighbor’s land; and a fence built beyond the property line.

a trespasser has been using an owner’s property for a certain period with the owner’s knowledge but without permission.

If someone uses another’s property as an easement without permission for a statutory period of time and under certain conditions, a court order may give the user the easement right by prescription, regardless of the owner’s desires. For a prescriptive easement order to be granted, the following circumstances must be true: the use has been occurring without permission or license; the owner knows or is presumed to have known of the use; and the use has been generally uninterrupted over the statutory prescriptive period.

how a property may be used and what improvements may be built on it.

A deed restriction is a limitation imposed on a buyer’s use of a property by stipulation in the deed of conveyance or recorded subdivision plat. A deed restriction may apply to a single property or to an entire subdivision. A developer may place restrictions on all properties within a recorded subdivision plat. Subsequent re-sales of properties within the subdivision are thereby subject to the plat’s covenants and conditions.

the creditor’s claim against the property as collateral security for the loan.

A lien is a creditor’s claim against personal or real property as security for a debt of the property owner. If the owner defaults, the lien gives the creditor the right to force the sale of the property to satisfy the debt. For example, a homeowner borrows $5,000 to pay for a new roof. The lender funds the loan in exchange for the borrower’s promissory note to repay the loan. At the same time, the lender places a lien on the property for $5,000 as security for the debt. If the borrower defaults, the lien allows the lender to force the sale of the house to satisfy the debt.

An equitable interest.

A lienor generally has an equitable interest in the property, but not legal ownership. The exception is a mortgage lien on a property in a title-theory state. In these states, the mortgage transaction conveys legal title to the lender, who holds it until the mortgage obligations are satisfied. During the mortgage loan period, the borrower has equitable title to the property.

Payment of the debt that is the subject of the lien and recording of the satisfaction.

A lien terminates on payment of the debt and recording of documents. Payment of the debt and recording of the appropriate satisfaction documents ordinarily terminate a lien. If a default occurs, a suit for judgment or foreclosure enforces the lien. These actions force the sale of the property.

involuntary general lien.

A general lien is one placed against any and all real and personal property owned by a particular debtor. An example is an inheritance tax lien placed against all property owned by the heir. A specific lien attaches to a single item of real or personal property and does not affect other property owned by the debtor. In addition, judgment liens are junior, involuntary liens.

Real estate tax lien.

The category of superior, or senior, liens ranks above the category of inferior, or junior, liens, meaning that superior liens receive first payment from the proceeds of a foreclosure. The superior category includes liens for real estate tax, special assessments, and inheritance tax. Other liens, including income tax liens, mortgage liens and judgment liens, are inferior.

subordinate the lien.

A lienor can change the priority of a junior lien by voluntarily agreeing to subordinate, or lower, the lien’s position in the hierarchy. This change is often necessary when working with a mortgage lender who will not originate a mortgage loan unless it is senior to all other junior liens on the property. The lender may require the borrower to obtain agreements from other lien holders to subordinate their liens to the new mortgage.

A proceeding to enforce a lien by forcing the sale or transfer of a secured property.

All liens can be enforced by the sale or other transfer of title of the secured property, whether by court action, operation of law, or through powers granted in the original loan agreement. The enforcement proceedings are referred to as foreclosure. Note that lienors already possess equitable title, so they do not need to undertake a legal proceeding to establish this.

file a foreclosure suit.

Judicial foreclosure occurs in states that use a two-party mortgage document (borrower and lender) that does not contain a ‘power of sale’ provision. Lacking this provision, a lender must file a foreclosure suit and undertake a court proceeding to enforce the lien.

strict foreclosure.

Strict foreclosure is a court proceeding that gives the lender title directly, by court order, instead of giving cash proceeds from a public sale. On default, the lender gives the borrower official notice. After a prescribed period, the lender files suit in court, whereupon the court establishes a period within which the defaulting party must repay the amounts owed. If the defaulter does not repay the funds, the court orders transfer of full, legal title to the lender.

A license, which terminates upon the owner’s death.

A license is a personal right that a property owner grants to another to use the property for a specific purpose (to reach the kindergarten school bus). Unlike a personal easement in gross, which terminates only on the death of the grantee (Betty Luanne, in this instance), a license is revocable at any moment, is not transferable and does not attach to the land. It ceases on the death of either party, or on the sale of the property.

Dominant tenement.

An easement appurtenant gives a property owner a right of usage to portions of an adjoining property owned by another party. The property enjoying the usage right is called the dominant tenement, or dominant estate. The property containing the physical easement itself is the servient tenement, since it must serve the easement use.

a deed restriction.

A private party who wants to control the quality and standards of a property can establish a deed restriction. Deed restrictions take precedence over zoning ordinances if they are more restrictive.

It involves a monetary claim against the value of a property.

A lien is a creditor’s claim against personal or real property as security for a debt of the property owner. If the owner defaults, the lien gives the creditor the right to force the sale of the property to satisfy the debt. Liens do not necessarily alter the property value. Liens can be involuntary as well as voluntary. Finally, liens attach to the property, but so do other encumbrances.

It is knowledge received or imparted through direct experience.

The term ‘notice’ is synonymous with ‘knowledge.’ A person who has received actual notice has actual knowledge of something. Receiving actual notice means learning of something through direct experience or communication. Thus, a document in itself cannot be actual notice. It is the seeing of the document that makes it actual notice.

It is knowledge one could have or should have obtained.

Constructive notice, or legal notice, is knowledge of a fact that a person could have or should have obtained. The foremost method of imparting constructive notice is by recordation of ownership documents in public records, specifically, title records. Since public records are open to everyone, the law generally presumes that when evidence of ownership is recorded, the public at large has received constructive notice of ownership.

grant, deed, and will.

Voluntary transfer, or voluntary alienation, is an unforced transfer of title by sale or gift from an owner to another party. If the transferor is a government entity and the recipient is a private party, the conveyance is a public grant. If the transferor is a private party, the conveyance is a private grant. A living owner makes a private grant by means of a deed of conveyance, or deed. A private grant that occurs when the owner dies is a transfer by will.

It gives constructive notice of ownership.

Recording is not necessary to make a deed valid. However, it is in the grantee’s best interests to do so. Recording the deed gives the public constructive notice of the grantee’s ownership.

granting clause.

The granting, or premises, clause is the only required clause. It contains the conveyance intentions; names the parties; describes the property; and indicates a nominal consideration.

general warranty deed.

The general warranty deed, or warranty deed for short, contains the fullest possible assurances of good title and protection for the grantee. The deed is technically a bargain and sale deed in which the grantor promises to defend against any and all claims to the title. The overall general warranty covenant is: ‘I own and will defend.’

To have an encumbrance removed if the lienholder cannot prove its validity.

Where there is a possibility that prior errors in deeds or other recorded documents might cloud (encumber) the title, the relevant parties execute a quitclaim deed to convey ‘any and all’ interest to the grantee. If a party responsible for encumbering title refuses to quitclaim the interest, the owner may file a quiet title suit. This requires the lienor to prove the validity of an interest. If the defendant is unable to do so, the court removes the cloud by decree.

A transfer tax based on the price of the property being conveyed.

State law usually requires payment of a documentary stamp tax on a conveyance of real property. The tax is based on the actual price of the property conveyed, thus enabling taxing authorities to ascertain current market value for ad valorem tax purposes. Payment of the tax is evidenced on the deed.

probate.

A court proceeding called probate generally settles a decedent’s estate, whether the person has died testate (having left a valid will) or intestate (having failed to do so).

It will escheat to the state or county by escheat.

If an intestate decedent has no heirs, the estate escheats, or reverts, to the state or county after all claims and debts have been validated and settled.

Eminent domain.

Various government and public entities can transfer private property to the public sphere by the power of eminent domain. The transfer is involuntary, even though the owner receives compensation. For example, a city government wants to widen a highway to accommodate growth. The government uses eminent domain to condemn and purchase all properties abutting the thoroughfare in order to complete the construction project.

openly possessing and claiming the property without the owner’s consent.

To claim legal title, the adverse possessor must be able to show a claim of right or color of title as reason for the possession; have notorious possession, which is possession without concealment; maintain a consistent claim of hostile possession, which is a claim to ownership and possession regardless of the owner’s claims or consent; occupy the property continuously for a statutory period of time; in some states, pay taxes.

The buyer.

Title records protect the buyer by revealing whether a property has marketable title, one free of undesirable encumbrances. The buyer is legally responsible for knowing the condition of title, since it is a matter of public record.

a clouded title.

Chain of title refers to the succession of property owners of record dating back to the original grant of title from the state to a private party. If there is a missing link in the chronology of owners, or if there was a defective conveyance, the chain is said to be broken, resulting in a clouded title to the property.

standard owner’s title insurance policy.

An owner’s policy may have standard coverage or extended coverage. Standard coverage protects against title defects such as incompetent grantors, invalid deeds, fraudulent transaction documents, and defects in the chain of title. Extended coverage protects against liabilities that may not be of public record, including fraud, unrecorded ownership claims, unintentional recording errors, and unrecorded liens.

voluntary alienation.

Voluntary alienation is an unforced transfer of title by sale or gift from an owner to another party.

A quitclaim deed.

A quitclaim deed transfers real and potential interests in a property, whether an interest is known to exist or not. The grantor makes no claim to any interest in the property being conveyed and offers no warrants to protect the grantee. Where there is a possibility that prior errors in deeds or other recorded documents might cloud (encumber) the title, the relevant parties execute a quitclaim deed to convey ‘any and all’ interest to the grantee.

pass to the heirs by the laws of descent and distribution.

In this circumstance, the estate, including real property, will pass to lawful heirs according to the state’s laws of descent and succession or distribution. These laws apportion the estate without regard to the wishes of the heirs or the intentions of the decedent. Escheat, by which the state takes the property, applies only if there are no legal heirs.

declined because possession was secretive.

One of the preconditions for a claim of ownership based on adverse possession is notorious possession, or possession without concealment. Even if the length of possession in this case meets the statutory requirement, the drifter’s secretiveness would invalidate the claim.

free of undisclosed defects and encumbrances.

Marketable title is, by definition, one that is free and clear of undesirable and unknown encumbrances, claims, clouds, or other defects. Attorney’s abstracts and title certificates do not guarantee that a title is marketable.

Estate at will.

Three of the four principal types of leasehold estate are: the estate for years, which has a specific lease term; the estate from period-to-period, where the lease term of a specific period automatically renews; and the estate at will, which has no specified lease term. The fourth principal type, the estate at sufferance, is a tenancy without consent that therefore also has no specific term.

for specified reasonable purposes.

A tenant has the sole right to occupy and use the premises without interference from outside parties, including the landlord. The landlord may enter the premises for specified purposes such as inspections, but the interference must be reasonable and limited. In addition, the landlord can do nothing outside of the lease’s express provisions that would impair the tenant’s enjoyment of income deriving from use of the premises.

compliance with the rules and regulations of the building.

The lease defines the tenant’s obligations, which principally are to pay the rent on time; maintain the property’s condition; and comply with the rules and regulations of the building.

providing required building support and services.

The lease defines the landlord’s obligations, which principally are to provide the necessary building support and services, and maintain the condition of the property. It is the tenant’s responsibility to obtain insurance and to determine the fairness of the rent.

the tenant’s estate is still obligated under the lease.

A valid lease creates obligations that survive the death of the landlord or tenant, with certain exceptions. A tenant’s estate remains liable for payment of rent if the tenant dies; the landlord’s estate remains bound to provide occupancy despite the landlord’s death.

The remaining tenant is responsible for the full rent obligation.

Multiple tenants who sign a single lease are jointly and severally responsible for fulfilling lease obligations. Thus, if one renter abandons an apartment, the other renters remain liable for rent.

sublease.

Subletting (subleasing) is the transfer by a tenant, the sublessor, of a portion of the leasehold interest to another party, the sublessee, through the execution of a sublease. The sublease spells out all of the rights and obligations of the sublessor and sublessee, including the payment of rent to the sublessor. The sublessor remains primarily liable for the original lease with the landlord. The subtenant is liable only to the sublessor.

net lease.

A net lease requires a tenant to pay for utilities, internal repairs, and a proportionate share of taxes, insurance, and operating expenses in addition to rent. In effect, the landlord ‘passes through’ actual property expenses to the tenant rather than charging a higher rent level. Net leases vary as to exactly what expenses the tenant is responsible for. The purest form of net lease requires tenants to cover all expenses, including major repairs and property taxes.

either party giving proper notice.

In the absence of an explicit term with beginning and ending date, a court will generally construe the lease to be a tenancy at will, cancelable upon proper notice.

a hotel.

State laws based on URLTA generally do not apply to transient occupancies, such as hotel and motel rentals, proprietary leases in cooperatives, or to occupancy in a residence that is under a contract for deed.

An owner-developer wants to retain ownership of the land portion of the improved real property.

Ground leases are primarily used when an owner wishes to lease raw land to an agricultural or mining interest; when unimproved property is to be developed and the owner wants to retain ownership of the land; when the developer or future users of the property do not want to own the land; or when the owner of an improved property wishes to sell an interest in the improvements while retaining ownership of the underlying land.

a tenancy from period-to-period.

URLTA sets standards for improving oral, vague, or unbalanced lease agreements. In the case of an unclear lease expiration date, the lease is generally deemed to be a periodic tenancy.

a temporary possessory interest.

A lease is both an instrument of conveyance and a contract between principal parties to uphold certain covenants and obligations. As a conveyance, a lease conveys an interest, called the leasehold estate, but does not convey legal title to the property. For this reason, a leasehold is also called a less-than-freehold estate.

gross lease.

2.49 A gross lease, or full service lease, requires the landlord to pay the property’s operating expenses, including utilities, repairs, and maintenance, while the tenant pays only rent. Rent levels under a gross lease are higher than under a net lease, since the landlord recoups expense outlays in the form of added rent.

A leased fee estate.

In conveying the leasehold estate, the landlord acquires a leased fee estate, which entails the rights to: receive rent; re-possess the property following the lease term; and monitor the tenant’s obligations to maintain the premises.

occupy the property.

The legal essence of a valid lease is that it conveys an exclusive right to use and occupy a property for a limited period of time in exchange for rent and the return of the property after the lease term is over.

The buyer acquires title subject to the lease, which remains in effect.

The landlord may sell, assign, or mortgage the leased fee interest. However, transferring and encumbering the leased property do not extinguish the obligations and covenants of a lease. Buyers and creditors, therefore, must take their respective interests subject to the terms of the lease.

When either party gives proper notice.

In the absence of an explicit term with beginning and ending date, a court will generally construe the lease to be a tenancy at will, cancelable upon proper notice.

Except for a Tenancy at Will, oral leases are unenforceable.

The original tenant retains primary responsibility for performance of the original lease contract.

In a sublease– a transfer of a portion of the leasehold– the sublessor (original tenant) remains primarily liable for the original lease with the landlord. The subtenant is liable only to the sublessor.

Whenever there are insufficient funds to retire a defaulted and foreclosed mortgage loan, a deficiency
judgment may be ordered – if allowed by law – to make up the difference. To comply with the judgment,
the borrower must raise additional funds from other sources to make up the difference between the
outstanding loan balance and the proceeds from the foreclosure sale.

Adverse possession is only possible if the possession is open, continuous for the statutory period, and the
possessor claims ownership.

When deeds, tax stamps, and liens are recorded, the public is given notice of the property’s indebtedness
and encumbrances. In turn, any future buyer can visualize what must be done to clear title and convey
marketable title..

Many states allow a broker in specified circumstances to file a broker’s lien against a property following
the closing of a transaction. Here, the party who is obligated to pay the broker a commission refuses to
pay. The broker’s lien, once filed, attaches to the real estate interest owned by the obligated party.

The conventional transaction principles are the buyer and the seller. In a short sale, the loan must typically
be modified so that the parties can feasibly proceed with the sale. Any time the loan must be modified, the
lender assumes a primary role in the negotiations, and must in turn approve of the loan modifications made.