Category : Language of Real Estate

Language of Real Estate Uncategorized

Statute of frauds vs. Statute of limitations

Statute of frauds vs. Statute of limitations

The statute of frauds requires that certain contracts be in writing to be enforceable, whereas the statute of limitations sets time limits on the ability to file a lawsuit to enforce a right.

Statute of frauds — State law that requires certain contracts to be in writing and signed by the party to be charged (or held) to the agreement in order to be legally enforceable. Most state statutes of frauds are based on the original English Statute for Prevention of Frauds and Perjuries (1677). Statutes of frauds generally require that all contracts for the sale of land or any interest therein (and some listings) be written. Oral leases for a period not exceeding one year, however, are generally valid and enforceable. The law does not require a single, formal contract; the writing could consist of a memorandum of the contract or several items of correspondence, so long as the material terms agreed on are stated. In one case, the commission terms were jotted on the back of the broker’s business card and initialed by the seller. The writing can even be a subsequent confirmation of an earlier oral contract (“. . . this letter is to confirm our prior telephone understanding . . . ”).

It is generally held that a valid written agreement can be canceled by a subsequent oral agreement. This is so because the statute of frauds deals only with the making of a contract.

The parties to an oral real estate contract may have a valid contract (i.e., one containing all the essential elements), but the contract is not enforceable if it is not in writing. The statute of frauds relates to the remedy only and not to the inherent validity of the contract. Thus, the parties to a fully executed or performed oral agreement cannot thereafter assert the statute of frauds to seek rescission of the contract. The statute may only be pleaded as an affirmative defense to a lawsuit seeking enforcement of the oral contract.

The purpose of the statute of frauds is to prevent the perpetration of fraud by one seeking enforcement of an executory contract that was never in fact made; it is not designed to prevent the performance of oral contracts. Thus there are exceptions to the statute of frauds, mostly where the assertion of the statute of frauds as a defense against an oral contract would in itself amount to a fraud or result in unjust enrichment or unconscionable injury. In some instances, part performance of an oral agreement will take the case out of the statute of frauds. For example, a contract will be “taken out” of the statute of frauds if the buyer, in reliance on a seller’s oral promise to sell the property, pays part or all of the purchase price, enters into possession and makes substantial improvements on the property. In such a case of part performance, some courts refuse to allow the seller to assert the statute of frauds as a defense against the buyer’s action to force the seller to fulfill the terms of the oral agreement to sell.

The Uniform Commercial Code states that contracts for the sale of personal property in excess of $500 must be in writing. If a seller wishes to retain a fixture (regardless if under $500), this fact must be clearly stated in the contract, because a fixture is considered to be real estate.
https://www.realtown.com/words/statute-of-frauds

Statute of limitations — That law pertaining to the period of time within which certain actions must be brought to court. The law is intended to protect the vigilant against stale claims by requiring the prompt assertion of claims; thus an action must be brought (i.e., the complaint filed) within a specified time of the occurrence of the cause of action. After the time period expires, the claim is said to be “outlawed” and may not be enforced in court. The theory behind the statute of limitations is that there must be some end to the possibility of litigation. It is said that stale witnesses and stale records produce little truth and result in accidental justice, if any.

If a partial payment is made before the time period has expired, then the full period starts running anew. If the payment is made afterward, then the debt is not revived and remains outlawed or barred.

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Language of Real Estate Uncategorized

Leased Fee vs. Leasehold

Leased Fee vs. Leasehold

The leasehold is the lessee’s interest, whereas the leased fee is the landlord’s interest represented by the value of the remaining rent plus the reversion.

Leased Fee — The interest and rights of the lessor in real estate that the lessor has leased. The lessor has a right to receive rental income and a right to possess the property at the end of the lease. The value of the rental payments plus the remaining property value at the end of the lease period (the reversionary interest) is the leased fee interest, which may be sold or mortgaged subject to the rights of the tenant. In valuing the leased fee, the appraiser usually capitalizes the present value of the income received by the lessor and adds the reversionary value of the land, or land and building, at the expiration of the lease term (the annuity method of capitalization). The reversionary worth of the land is difficult to predict so it is usually calculated to be the same as its present value, discounted to its present worth by multiplying the value by the appropriate Inwood factor. https://www.realtown.com/words/leased-fee

Leasehold — A less-than-freehold estate that a tenant possesses in real property. Under a lease, the tenant possesses a leasehold, and the landlord possesses the reversion estate. (That is, when the lease terminates, the property reverts to the landlord.) Leasehold estates are generally classified as estates in personal property. Some states, however, provide for certain leasehold estates to be considered as real property while also retaining their characteristics as personal property. Under common law, an estate for years was termed a “chattel real” and classified as personal property. The four principal types of leasehold estates are the estate for years, the periodic tenancy (estate from year to year), the tenancy at will and the tenancy at sufferance. The estate for years runs for a specific period of time; the periodic tenancy runs for an indefinite number of time periods; the estate at will runs for an indefinite time; an estate at sufferance runs until the landlord takes some action.

Unlike other uses of land, the leasehold is a transfer of the exclusive right to possession, as opposed to the mere privilege to use the land. Thus, a hotel guest is different from a tenant. The significance between various types of authorized usages of property (licenses, easements, profits and leases) becomes important in terms of the remedies available upon breach of contract. The tenant in a leasehold can be removed from the property only by strict statutory eviction procedures, whereas a license usually can be revoked at any time.

The term or duration of the leasehold estate varies, depending on the purposes of use of the land. Many residential apartment leases are short term, that is, for one year or from month to month. Most ground leases usually run for 55 years, whereas some run for 75 years or longer. For FHA leasehold-mortgage purposes, leases must have a minimum term that exceeds the fixed rental term of the loan. These long-term leases are transferred by assignment of lease rather than by deed. Both the assignor and assignee of a leasehold estate must sign the assignment of lease, because the assignee assumes the obligations of the assignor under the lease.

Under common law, improvements constructed by the lessee on the leased premises would revert to the landlord at termination of the leasehold estate. Many ground leases, however, specifically provide in the reversion clause for the right of the lessee to remove all improvements at the end of the lease term. This provision simplifies the arrangement of financing and negotiation for lease extension or renewal.

The valuation of a leasehold interest is a complex procedure that involves the use of capitalization rates and present value tables to ascertain the present value of the lessee’s interest. In comparing properties for valuation purposes, leaseholds should be compared only with other leaseholds and not with fee simple properties.

In areas where leaseholds are popular, such as Hawaii and Maryland, it is common practice to make leasehold estates subject to a recorded declaration of restrictions, usually by reference in the lease to the book and page number of the declaration. A purchaser should examine the lease and all referenced documents well in advance of closing in order to ascertain exactly what he or she is buying.

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Language of Real Estate

Functional obsolescence vs. External obsolescence

Functional obsolescence vs. External obsolescence

Obsolescence is a cause of depreciation in a property. A loss in value resulting from some internal (i.e., functional) factor (e.g., poor design, outdated equipment) as opposed to an external factor (e.g., neighborhood change, highway relocation).

Functional obsolescence is a loss of value due to some structural defect such as outmoded plumbing or inadequately designed fixtures. An example of functional obsolescence is one bathroom in a 12 bedroom house.

External obsolescence is the diminished utility, or loss in value, from causes in the neighborhood but outside the property itself, such as a change in zoning, loss of job opportunities and other external detrimental conditions.

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Language of Real Estate

Eminent Domain vs Police Power

 Eminent Domain vs Police Power

When property is taken under eminent domain, there must be payment of just compensation, whereas a taking under the police power (such as zoning) does not require compensation.

Eminent Domain – The right of government (both state and federal), public corporations (school districts, sanitation districts), public utilities, and public service corporations (railroads, power companies) to take private property for a necessary public use, with just compensation paid to the owner. Generally, however, the law will not allow compensation for lost profits, inconvenience, loss of goodwill, and the like, although severance damages may be awarded for a loss in value to the remaining property that is not actually condemned. Through eminent domain, the state may acquire land (fee, leasehold, or easement) for streets, parks, public buildings, public rights-of-way, and similar uses. No private property is exempt from this exercise of government power.

If the owner and the government cannot negotiate a satisfactory voluntary acquisition of the property, the government can initiate a condemnation action to take the property. In such case, an owner’s main grounds for complaint would usually be that the intended use is not a sufficient public use or that the valuation given the property in the condemnation proceeding is unjust. Generally speaking, the courts will not permit a taking in fee if an easement will do; an entire piece cannot be taken if only a part is needed.

Eminent domain is an outright acquisition of property with payment of compensation. It is not an uncompensated regulation of the use of property (as in the case of restrictive zoning).

Upon the vesting of title in the government, all preexisting liens and encumbrances are extinguished; anyone affected by this change, such as mortgagees, must look to the award of condemnation money for satisfaction of their claims.

A lessee is usually given the right to cancel his or her lease when a large portion of the leased premises is taken. Long-term leases usually provide for a condemnation award to be apportioned between lessor and lessee, according to the value of the parties’ respective estates.
https://www.realtown.com/words/eminent-domain

Police Power – The constitutional authority and inherent power of a state to adopt and enforce laws and regulations to promote and support the public health, safety, morals, and general welfare. Such laws must be uniform in operation and nondiscriminatory, and cannot be advantageous to any one particular person or group. In essence, it is an authority derived from individual state constitutions, which also vest the power in counties, cities, and municipalities to adopt and enforce appropriate local ordinances and regulations that are not in conflict with general laws. Some examples of police power are the right to tax, the right to regulate land use through a general plan and zoning, the right to require persons selling real estate to be licensed, the right to regulate pollution, environmental control, and rent control.

Traditional concepts of the police power have been broadened in recent years to include the furtherance of the aesthetic beauty of the community. For example, courts have upheld an ordinance restricting advertising in state parks, and have upheld the regulation of the appearance of a community through design review boards.

Also derived from police power is the right to damage or destroy private property (without compensation to the owner) when such an act is necessary to protect the public interest. This may happen, for example, when a condominium unit is on fire and the fire department must destroy an adjoining unit to extinguish the fire and save the rest of the building. Although the government would not be required to compensate an owner for such destruction, a valid claim may be filed against the insurance policy covering the burning unit or against the owner’s own policy. Although police power permits the state to regulate the use of an individual’s property in order to protect public health, safety, and welfare, such regulation has its limits. If it goes too far, it is recognized as a “taking” which requires that the state pay just compensation to the individual affected.
https://www.realtown.com/words/police-power

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Language of Real Estate Uncategorized

Riparian Rights vs. Littoral Rights

Riparian Rights vs. Littoral Rights

Riparian rights are those rights and obligations that are incidental to ownership of land adjacent to or abutting watercourses such as navigable streams and rivers, whereas littoral rights are a landowner’s claim to use of the body of water bordering his or her property as well as use of its shore area.

Riparian Rights —  Those rights and obligations that are incidental to ownership of land adjacent to or abutting on watercourses such as streams and rivers. Examples of such rights are the right of irrigation, swimming, boating, fishing and the right to the alluvium deposited by the water. Riparian rights do not attach except where there is a water boundary on one side of the particular tract of land claimed to be riparian. Such a real property right in water is a right of use, or a usufructuary right. It is the right held in common with other riparian owners to make reasonable use of the waters that flow past provided such use does not alter the flow of water or contaminate the water. In addition, an owner of land bordering on a nonnavigable stream owns the land under the watercourse to the center of the watercourse.

If the body of water is in movement, as a stream or river, the abutting owner is called a riparian owner. If the water is not flowing, as in the case of a pond, lake or ocean, the abutting owner is called a littoral owner. The word riparian literally means “riverbank.”

Littoral Rights — Those rights and obligations that are incidental to ownership of land bordering on the shore of a sea or ocean and thus affected by the tide currents. Littoral land is different from riparian land, which borders on the bank of a watercourse or stream.

Source: The Language of Real Estate

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Language of Real Estate

Variance vs Nonconforming Use

Mistaken Identity — Variance vs. Nonconforming Use
A variance is an exception to the existing zoning, whereas a nonconforming use (also known as a grandfather clause) arises when there is a change to the zoning but an existing use is still permitted to continue.

Variance — Permission obtained from governmental zoning authorities to build a structure or conduct a use that is expressly prohibited by the current zoning laws; an exception from the zoning laws. A variance gives some measure of elasticity to the zoning game.

To eliminate land speculation, many variances are granted conditioned upon the commencement of construction within a certain time period (for example, 12 months). There are use variances such as for apartment use in a single-family residential area. There is also an area or building variance where the owner attempts to get permission to build a structure larger than permitted.

The applicant usually must describe how the applicant would be deprived of the reasonable use of the land or building if it were used only for the purpose allowed in that zone; how the request is due to unique circumstances and not the general conditions in the neighborhood; and how the use sought will not alter the essential character of the locality or be contrary to the intent and purpose of the zoning code.

Nonconforming Use — A permitted use of real property that was lawfully established and maintained at the time of its original construction but that no longer conforms to the current zoning law. The nonconforming use might be the structure itself, the lot size, use of the land or use of the structure. The use will eventually be eliminated, although the nonconforming use status does not necessarily have to be discontinued upon the sale or lease of the property. By allowing the use to continue for a reasonable time, the government can assure itself that the use will not continue indefinitely and, at the same time, avoid having to pay just compensation for taking the property through condemnation.

When purchasing a nonconforming structure, a buyer should be made aware that in case of substantial destruction by fire or otherwise, the zoning statutes may prohibit reconstruction of the structure. In such a case, a buyer should discuss the possibilities of purchasing demolition insurance from an insurance agent. A nonconforming use can also terminate upon abandonment of the property.
https://www.realtown.com/words/nonconforming-use

Source: www.LanguageOfRealEstate.com

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Language of Real Estate

Void vs. Voidable

Void vs Voidable

A void contract lacks the essential elements to be valid, whereas a voidable contract is valid, except one of the parties has the ability to void it because of some wrongdoing.

Void — Having no legal force or binding effect; a nullity; not enforceable. A void agreement is no contract at all. A void contract need not be disaffirmed, nor can it be ratified. A contract for an illegal purpose (for example, gambling) is void. Under many state and local discrimination laws, any restrictive covenant that discriminates on the basis of race, sex, color, religion, marital status, or ancestry may be void (although the non-discriminating portions of the document in which it is contained may still remain valid).
https://www.realtown.com/words/void

Voidable — A contract that appears valid and enforceable on its face but is subject to rescission by one of the parties who acted under a disability. This includes such disabilities as being a minor or being under duress or undue influence; that which may be avoided or adjudged void but which is not, in itself, void. A voidable contract is one that is able to be voided. Voidable implies a valid act that may be rejected by an act of disaffirmance, rather than an invalid act that may be confirmed. For example, if a minor contracts to buy a diamond ring, the contract can be voided by the minor because of lack of sufficient age. If, however, the minor elects to enforce the contract, the contract is valid and the other party cannot assert the minor’s lack of age as a defense.

In cases of fraud against the buyer of real estate, the buyer may affirm or disaffirm the contract within a reasonable time after the truth is discovered. For the duration of a license suspension, a broker’s listing contracts are voidable because of his or her inability to perform contractual obligations.
https://www.realtown.com/words/voidable

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Language of Real Estate

Encroachment vs. Encumbrance

Note: This is the 9th post in our series of real estate words that are sometimes misunderstood, what we call cases of “Mistaken Identity.” To review prior posts in this series, please locate the Categories section on the right and click on Language of Real Estate. 

Encroachment vs. Encumbrance

An encroachment is an unauthorized intrusion of one property onto another, and it is an  encumbrance on both properties until court action or agrement resolves the issue.

Encroachment — An unauthorized invasion or intrusion of an improvement or other real property onto another’s property, thus reducing the size and value of the invaded property. Common examples of encroachments are the roof of a building that extends over the property line or the front of a building that extends over the building setback line or extends onto a neighbor’s property. Most encroachments are the result of carelessness or poor planning rather than bad intent, as in the case of a driveway or fence built without a survey to find the lot line.

Because an undisclosed encroachment could render a title unmarketable, its existence should be noted in the listing, and the contract of sale should be made subject to the existence of the particular encroachment.  An encroachment is a trespass if it encroaches on the land and a nuisance if it violates the neighbor’s airspace, as in the case of overhanging tree branches. The injured party can seek a judicial remedy in ejectment, quiet title, or injunction and damages.

A court can order removal of the encroachment. However, if the encroachment is insignificant, and the cost of its removal is great and its creation was unintentional, a court may decide to award money damages in lieu of ordering removal.   If there is any doubt as to possible encroachments, purchasers should obtain their own surveys when purchasing property, because an accurate land survey will disclose most encroachments. If a survey reveals encroachments not previously disclosed by the seller, the buyer may compel the seller to remove the encroachment (or to reduce the purchase price accordingly) and pay for the survey. In some cases, neighbors will sign an encroachment agreement, granting a license to continue the encroachment of a wall or fence onto a neighbor’s property.

Encroachments are not normally revealed in the chain of title and thus are not warranted against in a title insurance policy. Also, most standard title insurance policies do not insure against matters an accurate survey would reveal. An extended-coverage title policy usually insures against encroachments.
https://www.realtown.com/words/encroachment

Encumbrance — Any claim, lien, charge, or liability attached to and binding on real property that may lessen its value or burden, obstruct, or impair the use of a property but not necessarily prevent transfer of title; a right or interest in a property held by one who is not the legal owner of the property. Also spelled incumbrance.

There are two general classifications of encumbrances: those that affect the title, such as judgments, mortgages, mechanics’ liens, and other liens, which are charges on property used to secure a debt or obligation; and those that affect the physical condition of the property, such as restrictions, encroachments, and easements.   A covenant against encumbrances guarantees that there are no encumbrances against the property except those specifically disclosed. If no encumbrances are disclosed as exceptions in the contract of sale, the buyer may proceed with the purchase on the assumption that none exist. Encumbrances should be noted on the deed following the property description. https://www.realtown.com/words/encumbrance

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Language of Real Estate

Gross Lease vs. Net Lease

Gross Lease vs. Net Lease

In a gross lease, the tenant pays a single amount and the landlord pays the expenses, whereas in a net lease the tenant pays a net amount to the landlord and the tenant pays the expenses.

Gross Lease

A lease of property under which the lessee pays a fixed rent and the lessor pays the taxes, insurance, and other charges regularly incurred through ownership; also called a fixed or flat lease. In a net lease, the lessee pays some or all of the operating expenses. Most residential and commercial office leases are gross leases. Most residential ground leases and commercial and industrial building leases are net leases. https://www.realtown.com/words/gross-lease

Net Lease

A lease, usually commercial, in which the lessee not only pays the rent for occupancy but also pays maintenance and operating expenses such as taxes, insurance, utilities, and repairs. The rent paid is ‘net’ to the lessor. This kind of lease is popular with investors who want to obtain a steady stream of income without having to handle the problems associated with management and maintenance. Commercial or industrial leases, ground leases, and long-term leases are typically net leases.

Because the common interpretations given to the term net lease are so broad, it is essential to review the lease document to determine what expenses the tenant is to pay. In a true net lease, the tenant is responsible for expenses relating to the premises exactly as if the tenant were the owner. Examples of such expenses are real estate taxes; special assessments; insurance premiums; all maintenance charges, including labor and materials; cost of compliance with governmental health and safety regulations; payment of claims for personal injury or property damage; and even costs of structural, interior, roof, and other repairs.  It is helpful to distinguish between the net rent, called base rent, and the total of base rent and expenses, called effective rent.

Strictly speaking, the term triple-net lease is redundant because ‘net lease’ adequately describes the situation. Rather than rely on labels, however, the parties must examine the provisions of the lease to discover the extent of the tenant’s responsibilities.  https://www.realtown.com/words/net-lease

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Language of Real Estate

Estoppel Certificate vs. Reduction Certificate

Estoppel Certificate vs. Reduction Certificate

The estoppel certificate (also called a certificate of no defense) is issued by the mortgagor to establish the amount of the debt and whether any defenses exist, whereas the reduction certificate is issued by the lender to someone who is about to assume the loan and states the remaining loan balance.

Estoppel Certificate — A legal instrument executed by a mortgagor setting forth the exact unpaid balance of a mortgage, the current rate of interest and the date to which interest has been paid. It further states that the mortgagor has no defenses or offsets against the mortgagee at the time of the execution of the certificate. Once the mortgagor has executed a certificate of no defense, the mortgagor cannot thereafter claim that he or she did not owe the amount indicated in the certificate.

Also called a certificate of no defense, the estoppel certificate is most frequently used when the mortgagee is selling the mortgage to a third party and the purchaser wants to be assured of the amount and terms of the mortgage and that the mortgagor acknowledges the full amount of the debt. Most mortgage documents contain a clause obligating the mortgagor to execute a certificate of no defense upon written notice from the mortgagee.
https://www.realtown.com/words/certificate-of-no-defense

Reduction Certificate — An instrument that shows the current amount of the unpaid balance of a mortgage, the rate of interest, and the date of maturity. A reduction certificate is normally required from a mortgagee when a prospective purchaser is to assume or to take title subject to an existing mortgage. The mortgagee, then, cannot later claim that the mortgage amount or terms were different from those stated in the certificate.

A reduction certificate is similar to a certificate of no defense except that it is executed by the mortgagee. The reduction certificate is useful because only the original amount of the loan is a matter of public record. Any reduction of principal is known only between the parties. The instrument is usually acknowledged, but need not be recorded. It is also called a statement of condition from the lender, or a beneficiary statement in a deed of trust situation.
https://www.realtown.com/words/reduction-certificate

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