AN OVERVIEW OF REAL PROPERTY

INTRODUCTION TO REAL PROPERTY

Property is everything that can be owned by a person. There are two types of property: real
property and personal property. Real property is land and everything permanently attached to
land (such as buildings). Personal property is all other property. Since the Multistate Bar Exam
tests real property and not personal property, this summary only discusses real property.

The concept of owning real property is kind of strange. What does it mean to own a piece of
property? You can’t carry real property around with you. Nobody created the land. It just exists
and probably will continue to exist long after we are all gone.

When you think about owning real property, you should not think about it the same way you think
about owning a phone or TV. Instead, think about owning rights in real property. These rights
include:

• The right to possess the property now;

• The right to possess the property in the future;
• The right to exclude other people from the property;
• The right to sell the property;
• The right to give away the property by gift or in a will;
• The right to use the property as security for a loan; and
• The right to take things out of the property (such as oil, coal, or trees).

The study of real property law is divded up based on these rights. Estates in land primarily
involves the present right to possess the property and the future right to possess the property.
Landlord-tenant law involves the situation when one person has the present right to possess the
property and another person has all of the other rights in the property. Easements and licenses
involve the right to exclude others from the property. Profits involve the right to remove natural
resources from the property. Conveyancing involves the right to sell or give away the property.
Security interests, like mortgages, involve the right to use the property as security for a loan.

ESTATES IN LAND

An estate is a right or a group of rights to possess land. There are basically two types of estates:
(i) present estates, in which the owner of the estate has the present right to possess the land, and
(ii) future estates, in which the owner of the estate has or may have the right to possess the land
in the future.

Present Possessory Estates

There are three main types of present estates. Each estate gives its owner the right to possess
the property. These estates differ based on what type of event, if anything, can end the owner’s
right to possess the property. The three types of present possessory estates are (i) fee simple
absolute (no event can end the owner’s right to possess), (ii) defeasible fees (an event other than
2. REAL PROPERTY OVERVIEW
a person’s death can end the owner’s right to possess), and (iii) life estate (the death of a specific
person will end the owner’s right to possess).

Fee Simple Absolute

If one person owns all of the rights in a piece of real property, that person owns a fee simple
absolute. This owner has all of the present and future rights to possess the property; they can sell
it, give it away, devise it in a will, mortgage it, etc. If you hear something like “O owns Blackacre,”
assume that O owns a fee simple absolute in the property.

Defeasible Fees

Sometimes people try to put restrictions on property that will continue after the property is
conveyed (transferred) to another person. For example, O conveys Blackacre “to A for so long as
alcohol is never served on the property.” O wants A to have the property but also wants to
prevent A from serving alcohol on it. O accomplishes her goal by giving A a defeasible fee that
will give the property back to O if alcohol is served on the property.

There are three types of defeasible fees. When an event automatically divests the possessor (as
in the example above), the estate is a fee simple determinable. When the original owner gets an
option to divest the possessor when an event happens, the estate is a fee simple subject to
condition subsequent (for example, O conveys Blackacre “to A, but if alcohol is ever served on
the property, O shall have a right to re-take the property”). When an event divests the possessor
in favor of someone other than the grantor, the estate is a fee simple subject to an executory
interest (for example, O conveys Blackacre “to A, but if alcohol is ever served on the premises, to
B”).

Notice that all defeasible fees have a potentially unlimited duration. In all of the examples above,
A and A’s heirs could own Blackacre forever. They just have to comply with the condition of not
serving alcohol to keep the right of possession.

Life Estate

A life estate is a right to possess property until a person’s death. Usually, the relevant death is
that of the possessor. For example, if O conveys Blackacre to A for life, then to B, A has the right
to possess the property until their death, and then B will obtain a fee simple absolute in
Blackacre. But what if A sells their life estate to C? Then C will own the life estate, but the
relevant life will still be A’s, not C’s. So, when A dies, C will lose the property. A life estate for the
life of someone other than the possessor is called a life estate pur autre vie (Latin for “life of
another”).

Since life tenants (owners of life estates) have only a temporary right of possession, they have
duties to the owner of the future right of possession. They can’t do any act that would injure the
interests of the person who holds the future interest; such an injury is called “waste.” Life tenants
must not commit any of three types of waste.

Affirmative (or voluntary) waste involves eliminating or reducing the natural resources on the
property. A life tenant cannot cut down the trees on a property and sell the lumber. A life tenant
also cannot open a new mine and remove the coal. But if there was a mine on the property
before the life tenant acquired it, the life tenant can continue to operate the mine.
 REAL PROPERTY OVERVIEW 3.
Permissive waste happens when the life tenant neglects to maintain the property by failing to do
things like make regular repairs, pay property taxes, or make interest payments on a mortgage.

Ameliorative waste happens when the life tenant makes changes to the property that increase
its value. In many situations, the people owning the future interests do not object to ameliorative
waste because they want the value of the property to increase. But imagine this situation: O, a
farmer whose family has owned farmland called Blackacre for six generations, dies, leaving
Blackacre to his wife, W, for life, then to his son, S. W decides to stop farming completely,
demolish the old farmhouse, and build a factory on the property. This would raise the value of the
property but would be ameliorative waste. S may want to continue the family farming tradition
regardless of whether the land is more valuable as something else.

Future Interests

For every present possessory estate (other than the fee simple absolute) there is a
corresponding future interest. The future interest is the right to possession that arises after the
present possessory estate ends. For example, if O conveys land to A for life, then to B, A has a
life estate and B has a future interest called a remainder. But, after A dies, B will no longer just
have a remainder; their remainder ripens (changes) into a fee simple absolute.

Reversionary Interests—Future Interests in Transferor

Reversionary interests follow defeasible fees. These interests are easy to identify because the
future interest is always held by the original grantor. If O conveys Blackacre “to A for so long as
Blackacre is used for religious purposes,” A has a fee simple determinable and O has a
possibility of reverter, which is one type of reversionary interest. If O conveys Blackacre “to A,
but if A ever stops using Blackacre for religious services, O shall have the right to reenter,” A has
a fee simple subject to a condition subsequent, and O has a right of entry (another type of
reversionary interest). Finally, if O simply conveys Blackacre to A for life, A has a life estate and O
has a reversion (the final type of reversionary interest).

Remainders

Remainders follow life estates (as long as the holder of the future interest is not the original
grantor—as in the previous example). If O conveys Blackacre “to A for life, then to B,” A has a life
estate, and B has a remainder.

People sometimes create more complicated remainders. For example, in the conveyance “to A
for life, then to B if B survives A,” A has a life estate and B has a contingent remainder. B’s
remainder will ripen into possession only if they live longer than A. In the conveyance “to A for
life, then to A’s children,” A has a life estate, but what do A’s children have? Assume A has two
children: B and C. B and C each have a remainder subject to open. B and C have remainders
because they are A’s children. But since A could have more children, we don’t know what
percentage of the property B and C will take. If A has one more child, D, before she dies, B, C,
and D will each take one-third of the property at the time of A’s death.

Executory Interests

There are only three types of future interests that can be created. Reversionary interests are
always held by the original grantor. Remainders always follow life estates. Thus, everything else
is an executory interest.
4. REAL PROPERTY OVERVIEW
The Rule Against Perpetuities

Sometimes people create combinations of present estates and future interests so complicated
that they cause unintended consequences. Imagine O conveys Blackacre, a single family home,
to A for life, then to the first of A’s children to reach age 60. Ten years after the conveyance,
Blackacre’s neighborhood has changed. It used to be a residential neighborhood, but now the
house is surrounded by factories that produce a lot of noise and vibration. A, who is 65, has three
children, ages 40, 38, and 32. A developer wants to buy Blackacre and turn it into a factory. A
and all three children want to sell. Can they do it? Assuming the Rule Against Perpetuities does
not apply, the answer is no. The future interests are too uncertain. First of all, we do not know
which of A’s children will be the first to reach age 60, so we do not know which one has to sign
the deed to sell the property. But even if all three sign, they still cannot convey the property.
Since A is still alive, he could have another child. Then, A and the first three children could all die,
and the final child could reach the age of 60. Since this hypothetical unborn child cannot sign the
deed, Blackacre cannot be sold, even though everyone involved wants it to be sold. The Rule
Against Perpetuities is designed to avoid this type of situation.

The Rule Against Perpetuities provides that no interest in property is valid unless it must vest, if at
all, not later than 21 years after one or more lives in being at the creation of the interest. The key
word is “vest.” Think of “vesting” as similar to “becoming certain.” Remember the three types of
future interests? All reversionary interests are vested, so the Rule Against Perpetuities does not
apply to them. All executory interests are unvested, so the Rule Against Perpetuities might apply.
Remainders are more complicated, but here is the basic rule: if the remainder is certain (for
example, “to A for life, then to B”), the Rule Against Perpetuities does not apply to it, but if the
remainder is uncertain (for example, “to A for life, then to B if she marries C”), the Rule Against
Perpetuities might apply to it.

So, is the conveyance in the previous example valid? A has a life estate, and each of A’s three
adult children have contingent remainders (because they have to be the first to reach age 60 to
take Blackacre after A dies). Since the children have contingent (uncertain) remainders, the Rule
Against Perpetuities might apply. So, are the children’s remainders certain to vest within 21 years
of a presently living person’s life? No. A could have a fourth child, A and the first three children
could die, more than 21 years could go by, and the fourth child could reach the age of 60. Thus,
the Rule Against Perpetuities applies, and the remainders are void.

Concurrent Estates

When two or more people own the right to possess property together, it is called a concurrent
estate. Each concurrent owner has a right to use and enjoy the entire property; no co-owner
can exclude another co-owner from any portion of the property.

Each co-owner has a duty to pay her share of costs to maintain the property, such as taxes and
repairs. Each co-owner also has the right to share in profits derived from the property, such as
when the property is rented to a third party. But if only one co-owner possesses the property, the
other co-owner cannot collect rent from the co-owner in possession.

If the relationship between the co-owners breaks down so badly that they cannot agree on the
use of the property, a court can dissolve the joint ownership. The court can either give each co-
owner a portion of the property (when fair and equitable) or require that the property be sold and
give each co-owner a portion of the revenue.
 REAL PROPERTY OVERVIEW 5.
Types of Concurrent Estates

There are three types of concurrent estates: tenancies in common, joint tenancies, and tenancies
by the entirety.

A tenancy in common is a concurrent estate with no right of survivorship. It is freely alienable,

inheritable, and subject to claims of the tenant’s creditors. Today, by statute, multiple grantees
are presumed to take as tenants in common. Imagine A and B each own a one-half interest in
Blackacre as tenants in common. A dies, leaving a will giving his interest in Blackacre to C. B and
C now each own a one-half interest in Blackacre as tenants in common.

A joint tenancy is a concurrent estate with a right of survivorship. The right of survivorship
means that if one joint tenant dies, their interest in the property automatically goes to the other
joint tenant. If A and B each own a one-half interest in Blackacre as joint tenants, and A dies,
leaving a will giving his interest in Blackacre to C, C gets nothing under the will. A could not give
away his interest in Blackacre in his will because he was a joint tenant. Instead, when A dies, his
interest in Blackacre vanishes, and B owns all of it because she had a right of survivorship as a
joint tenant. To create a joint tenancy, there must be what’s called “the four unities,” which means
that the joint tenants must take identical interests at the same time, by the same instrument, with
the same rights to possession. In the most states, joint tenancies must be expressly created by
using language like “to A and B as joint tenants with the right of survivorship” or “to A and B not
as tenants in common but as joint tenants.”

A joint tenant can convey her half of a joint tenancy, which severs the joint tenancy. If A and B are
joint tenants in Blackacre, and B sells her interest to C, A and C now own Blackacre as tenants in
common.

A tenancy by the entirety is basically a joint tenancy between spouses. Only people married to
each other can own property as tenants by the entirety. There is a right to survivorship. The
tenancy by the entirety differs from the joint tenancy in that tenants by the entirety cannot
unilaterally break a tenancy by the entirety. If A and B are tenants by the entirety in Blackacre
and B tries to sell her interest to C, that transaction is void because B cannot sell her half of
Blackacre without A agreeing to the sale.

LANDLORD AND TENANT

A leasehold can be created by a contract (known as a lease) that conveys a temporary right to
possession to property. Or a leasehold can be implied by law. There is always a landlord and a
tenant when a leasehold exists. The landlord, who is the property owner, gives away the
temporary right to possess the property but retains all of the other rights in the property. The
tenant acquires only the temporary right to possess the property.

There are three major types of leasehold estates: tenancies for years, periodic tenancies, and
tenancies at will.

Tenancies for Years

Any leasehold interest for a fixed period of time is a tenancy for years. It doesn’t matter how long
the period is—it could be for 10 days or 10 years. As long as the landlord and tenant have validly
agreed that the leasehold will last for a specific period of time, the interest is a tenancy for years.
6. REAL PROPERTY OVERVIEW
Tenancies for years are usually created with written leases between the landlord and tenant. The
Statute of Frauds requires all leases longer than one year to be in writing. A lease agreement
that violates the Statute of Frauds results in a periodic tenancy (see below).

Tenancies for years automatically end after the fixed period of time. But if one party violates
(breaches) the material (essential) terms of the lease, the other party can terminate the lease
early.

Periodic Tenancies

A periodic tenancy is a leasehold that continues for recurring periods of time, automatically
renewing at the end of each period unless notice of termination is given by one of the parties.
Periodic residential leases are most commonly month-to-month (one month at a time) and
periodic commercial (business) leases are most commonly year-to-year (one year at a time).

A periodic tenancy can be created by an express agreement, or it may be implied if a lease sets
no termination date but calls for periodic rent payments. For example, a periodic, month-to-month
tenancy is implied when the lease is silent about termination but requires rent be paid on the first
of every month. Finally, a periodic tenancy can arise by operation of law when: (i) a tenant for
years remains in possession after the termination date, or (ii) a lease for years is invalid (for
example, if it violates the Statute of Frauds).

Periodic tenancies are automatically renewed until proper notice of termination is given. Either
party can terminate a periodic tenancy by giving the other party proper notice (usually one full
period in advance for periodic tenancies shorter than year to year and at least six months in
advance under common law, or one month in advance under the modern view, for year-to-year
tenancies).

Tenancies at Will

Tenancies at will last until either party ends the leasehold. They are created when both parties
understand that either party can end the tenancy at any time. The majority of states require that a
party give the other notice of termination and a reasonable time to leave the property to
terminate a tenancy at will.

Duties and Remedies of the Parties to a Leasehold

A tenant’s primary duty is to pay rent. Failure to pay rent gives the landlord the right to terminate
the lease, collect any rent that is past due, and evict the tenant (force the tenant to leave the
property).

When a landlord wishes to evict a tenant, the landlord must follow the procedure in the state’s
forcible eviction statute. These statutes require landlords to file for eviction in court, giving
tenants notice and the ability to argue that eviction is not proper. Landlords cannot use self-help
methods to evict, such as by using force, changing the locks, or turning off the utilities—heat,
electricity, etc.

Covenant of Quiet Enjoyment and Implied Warranty of Habitability

These are two landlord promises that are implied in (that is, they are unwritten terms of) every
lease.
 REAL PROPERTY OVERVIEW 7.
The promises require landlords to make sure tenants are able to possess the entire property for
the entire time period in the lease. They also require landlords to make sure that the property
meets a minimum standard of quality. For residential leases, the property must usually satisfy the
local housing code (a set of minimum safety and quality requirements created by local
governments such as cities). For commercial leases, the condition of the property must not be so
bad as to deprive the tenant of use of the property (for example, flooding, or lack of heat in the
winter generally violate this standard).

If the landlord breaches the covenant of quiet enjoyment or the implied warranty of habitability,
the tenant may be able to terminate the lease, stop paying rent, and sue for money damages.

Discrimination

Landlords cannot discriminate based on race, ethnicity, religion, national origin, gender, or
disability. They also cannot terminate a lease or penalize a tenant in retaliation for the tenant
reporting discrimination, a housing code violation, or a safety violation to a government authority.

Assignments and Subleases

Tenants can usually transfer their rights under a lease to other people. When a tenant transfers
her rights for the entire amount of time left on the lease, it is called an assignment. When a
tenant transfers her rights under a lease for less than the amount of time remaining on the
lease, it is called a sublease.

The difference between assignments and subleases matters because when an assignment
happens, the new tenant is liable for rent directly to the landlord, but under a sublease, the new
tenant is liable for rent only to the old tenant. In other words, if there is a sublease and the
landlord does not receive rent, they cannot sue the new tenant directly. They can, however, evict
the new tenant and sue the old tenant for the rent. Regardless of whether there is an assignment
or a sublease, the original tenant remains liable to the landlord for rent when rent is not paid by
the new tenant.

RIGHTS IN THE LAND OF ANOTHER PERSON—EASEMENTS, PROFITS, COVENANTS, AND

SERVITUDES

So far, we have only considered rights to possess property. We have considered both present
rights to possession and future rights to possession. But there are many nonpossessory rights in
real property. Some of these nonpossessory rights are easements, profits, covenants, and
servitudes.

Easements

The holder of an easement has the right to use another person’s tract of land for a special
purpose. Imagine A owns Blackacre, and B owns Whiteacre, a piece of land next to Blackacre. B
likes to fish on a lake near the properties, but to access the lake, B must cross Blackacre. A gives
B the right to cross Blackacre to get to the lake. B now has an easement. Notice that B does not
own any rights to possess Blackacre, now or in the future. Instead, B holds the right to use
Blackacre for a special purpose: to access the lake.
8. REAL PROPERTY OVERVIEW
The Two Main Types of Easements: Appurtenant and In Gross

Many easements benefit the holder of the easement in her use and enjoyment of another piece
of property. In the example above, B’s easement to cross Blackacre to get to the lake is valuable
to her mainly because she owns Whiteacre. This type of easement is called an easement
appurtenant. The piece of property that is burdened by the easement (here, Blackacre) is the
servient tenement, and the piece of property that is benefited by the easement (here, Whiteacre)
is the dominant tenement.

Other easements benefit the holder of the easement in a way that is unrelated to the ownership
of other property. Imagine A still owns Blackacre, and an electricity company now wants to run
wires over a portion of the property. A agrees and gives the electricity company the right to run
the wires over the property. The electricity company holds an easement over Blackacre. But this
easement is not an easement appurtenant because it does not benefit the electricity company in
its use and enjoyment of another piece of land. Therefore, this is an easement in gross.

The main difference between these two types of easements is how they are transferred. An
easement appurtenant stays with the dominant tenement. So, if B sells Whiteacre to C, C
becomes the holder of the easement over Blackacre even if the deed from B to C did not
mention the easement. However, since the electric company’s easement in gross is not
associated with the electric company’s ownership of any land, the electric company can sell the
easement itself.

Creation of Easements

Easements can be created in several ways. The first is expressly, which means it is created by a
deed or other written instrument. The electricity company and A in the example above might
enter a written contract for the purchase of an easement to run power lines over Blackacre.
Alternatively (or in addition), A might execute a deed conveying the easement to the company.
Note that the Statute of Frauds requires both contracts relating to and conveyances of interests
in land to be evidenced by a signed writing. Thus, express easements require a writing, and
grants of easements are generally invalid.

Of course, as always, there are exceptions to the writing requirement. When a landowner
conveys a portion of his property to another person, easements are sometimes implied if the use
existed prior to the conveyance of the appurtenant property or is necessary for the grantee to
access a road or utility. Changing the example we’ve been working with slightly, imagine A used
to own both Blackacre and Whiteacre. When he owned both properties, he regularly used a well-
worn path from Whiteacre leading to the lake. When A sold Whiteacre to B, he advertised the
land as having lake access. But the document (“deed”) A used to convey Whiteacre to B did not
indicate that an easement was being conveyed. In this situation, a court would likely find that B
has an implied easement to use the path to access the lake because A was using the path before
the property was divided and because the easement is reasonably necessary for B to enjoy
Whiteacre as he probably intended when purchasing it.

Finally, an easement is created by prescription when the special use happens without
permission for a long period of time. Again, imagine A owns Blackacre, which has access to a
lake, and B owns Whiteacre, which is next to Blackacre but does not have access to the lake.
Assume no express or implied easement exists, but B has regularly crossed Blackacre to access
the lake for 20 years. After failing to prevent B from crossing Blackacre for that long, A loses the
 REAL PROPERTY OVERVIEW 9.
right to do so, and B gains an easement by prescription. The amount of time necessary depends
on the statute of limitations, but the most common period of time required is 20 years.

Scope of Easements

The scope of an easement is determined by the grant or conditions that created it. For example,
the scope of an easement by necessity is determined by the extent of the necessity. While the
scope of any easement may change to accommodate reasonable present and future needs, use
beyond the legal scope of the easement is called surcharge and can be enjoined. Typically
surcharge occurs when an easement is granted for an individual to use, but the owner of the
dominant tenement either subdivides their parcel into many or begins using their parcel for a
business that attracts many customers, such as a restaurant or club. Note that the servient owner
can seek an injunction but cannot terminate the easement based on overuse.

Termination of Easements

In general, easements last indefinitely unless the deeds creating them included a termination
date or condition. The holder of an easement can release (extinguish) the easement by
executing a release document and giving it to the owner of the servient tenement.

Easements are extinguished automatically if one person becomes the owner of both the
dominant and the servient tenements. It would not make sense for a person to own an easement
over her own property. The easement is not revived if the parcels are separated again later.

Easements can also be terminated by abandonment, but the easement holder must physically
demonstrate an intent to abandon an easement (for example, by building a fence across a path).

Licenses

You may have recognized that easements are fairly difficult to create and fairly difficult to
extinguish. Licenses are similar to easements, except they are very easy to create and even
easier to terminate. A license can be revoked at any time.

A license is a revocable right to go on someone else’s land. A houseguest has a license. The
guest has a right to be on the property, but the owner can revoke that right at any time. Invalid
agreements to create easements (for example, when they violate the Statute of Frauds) create
licenses.

Profits

Profits entitle the holder to take resources (timber, coal, oil, sand, etc.) from another person’s
land. It is common for an owner of unused land to sell a profit in the land. The buyer of the profit
does not buy the land itself, only the right to take the resources out of the land.

Real Covenants and Equitable Servitudes

Real covenants and equitable servitudes are promises related to land. The promises often stay
with the land (“run with the land”) even when ownership of the relevant land changes.
10. REAL PROPERTY OVERVIEW
Imagine O converts a farm they own into 10 lots. As O sells each lot, O requires each new owner
to sign a written agreement promising to use the lot for single-family residential purposes only. A,
one of the buyers, later sells their condo to X, who begins to build a donut shop on their lot. B,
another one of the buyers from O, sues X, hoping to force them to either pay damages or stop
building. A court will hold that X is bound by the promise, even though X never promised to do
anything. A made the promise, and the promise ran with the land, so when X bought A’s
property, X was bound by the promise. Notice that B can enforce the promise even though he
was not a party to the original promise (between O and A) either. B purchased his property from
O, and both the benefit of the promise and the burden of the promise can run with the land.

Now, the promise in our example is both a real covenant running with the land and an equitable
servitude. If a party, like B, is seeking an injunction to keep X from building anything other than a
residence, they will try to enforce the promise by proving the elements of an equitable servitude.
If they are seeking money damages, they will have to prove the elements of a real covenant,
which involves showing relationships among the various parties in addition to the elements of an
equitable servitude.

ADVERSE POSSESSION

One of the rights a property owner has is the right to exclude others from the property. When a
person takes possession of land he does not own, the true owner can file an ejectment
proceeding in court, asking the court to force the person to leave the property. But what if the
true owner never files an ejectment proceeding? The answer is that if the true owner waits too
long, he loses his right to file the ejectment proceeding, and the person in possession becomes
the new owner of the land. When this happens, it is called acquiring title by adverse possession.
There are four requirements for adverse possession.

Actual and Exclusive Possession

An adverse possessor must physically occupy the property (live on it or possess it regularly). The
adverse possessor cannot share possession with anyone else, whether that be the true owner or
a third party.

Open and Notorious Possession

The possession must be sufficiently apparent to put the true owner on notice that the adverse
possessor is there. Adverse possession is not something that happens in secret. It must be fairly
obvious to the world that the adverse possessor is in possession of the property.

Adverse (Hostile)

The possession must be without the owner’s permission. If O owns Blackacre and says to A,
“you can live on Blackacre for a while,” and A ends up living there for 20 years, would it be fair to
give the property to A? No. O did not neglect his right to file an ejectment proceeding in court.
He did A a favor by giving him permission to live on Blackacre. So, an adverse possessor can
acquire title to (become the new owner of) land only if the possession is without the true owner’s
permission.
 REAL PROPERTY OVERVIEW 11.
Continuous for the Statutory Period

Intermittent periods of possession are insufficient to gain title by adverse possession. The
adverse possessor must possess the property for the entire period of time necessary without any
significant breaks. The necessary time period is established by statute and is typically 20 years.

CONVEYANCING

There are two ways for a property owner to convey their rights in the property to another person:
they can sell it or give it away as a gift. Selling real property is a two-stage process. The first
stage involves a land sale contract, and the second stage involves delivering a deed. Giving
away real property as a gift is a one-stage process; only a deed is required.

Land Sale Contracts

Imagine O owns Blackacre and is willing to sell Blackacre to A for $100,000. O and A will both
sign a land sale contract in which they agree that at some time in the future (usually about 60
days), O will give all of his rights in Blackacre to A and A will give $100,000 to O. This is the first
of the two-step sale of land process. The second step occurs when O and A actually exchange
title to the property for money.

Why is the first step necessary? If O and A have already agreed to exchange title to Blackacre for
$100,000, why wait? The answer is that as a practical matter, land sales are complicated. There
are numerous things that must happen between the time the land sale contract is signed and the
time when the deed is exchanged for money (called the “closing” date).

Marketable Title

There is an implied promise in every land sale contract that the title to property is free from doubt
and possible litigation. If the seller cannot convey all the rights to all of the property, title is
considered “unmarketable,” and the buyer may cancel the land sale contract. Easements, future
interests, mortgages and other liens can all make title unmarketable. The seller might use the
time between the contract date and the closing date to fix any problems with title, but they may
also use the proceeds of the sale to clear the defects at the time of closing (when the deed is
transferred in exchange for the money).

Mortgages

Most people do not have an extra $100,000 in a bank account. Instead, they rely on a mortgage,
which is a loan from a bank to help pay for the real property secured by the property itself. The
bank is protected because if the buyer doesn’t pay the loan, the bank may sell the property to
pay off the loan. A buyer usually uses the time between the contract date and the closing date to
convince a bank to agree to provide a mortgage loan to help pay for the property. If the seller
used a mortgage when they purchased the property, they will typically arrange to have the
existing mortgage paid from the proceeds of the sale.
12. REAL PROPERTY OVERVIEW
Enforceability of Land Sale Contracts

Once the land sale contract is signed, the buyer becomes obligated to pay the purchase price
and the seller becomes obligated to transfer her rights in the land to the buyer. Failure by either
party to perform these obligations is a breach of contract, and a court may order the breaching
party to pay money damages to the other party or to perform the contract.

The Statute of Frauds requires land sale contracts be evidenced by a signed writing. Oral land
sale contracts violate the Statute of Frauds and are unenforceable.

Deeds

A deed is a document that conveys (transfers) rights to real property. Deeds must be signed by
the transferor, must identify the transferor and the transferee, and must describe the land.

A deed effectively conveys real property only when it is delivered to and accepted by the
transferee. Acceptance is usually presumed but watch out for delivery issues. For example, if an
old man creates a deed conveying his house to his friend, signs it and puts it in his own desk
drawer, the deed is not yet effective because it has not been delivered. If the old man dies with
the deed still in his drawer, the friend does not receive the house.

Warranty Deeds

Some deeds include warranties (promises) that the transferor (the grantor) makes to the new
owner of the property (the grantee). When an owner uses a warranty deed to convey real
property, they promise that they have title to the property, they have the right to convey the
property to others, there are no encumbrances (liens, easements, etc.) on the property, and that if
the validity of the title is challenged in a lawsuit, they will defend the validity of the title in court.

Quitclaim Deeds

Quitclaim deeds convey the property but make no promises. A person who executes a quitclaim
deed conveys whatever interest the person happens to own in the property. Quitclaim deeds are
commonly used when people give away property as gifts.

Recording

Government offices (usually county clerks’ offices) keep records of every conveyance of land.
They keep these records to make sure it is clear who owns what land. Imagine O owns Blackacre
and sells it to A for $100,000. One week later (and before A has had a chance to move into
Blackacre) O sells Blackacre to B for $100,000. O leaves the country with the $200,000. Who
owns Blackacre? A will argue that O owned Blackacre when he sold it to A and owned nothing
when he tried to sell it to B, so A is the true owner. But B will argue that it would have been
impossible for her to know that A, not O, owned Blackacre when she paid for it. Without a
recording system, there is no good answer to this problem.

Recording systems require buyers of real property to record their deeds if they want to be
protected from claims to the property by subsequent buyers. In the example, A should have
recorded his deed when he bought the property from O. B should have checked the records
before paying O, which would have revealed the deed to A. B then would have refused to buy
 REAL PROPERTY OVERVIEW 13.
Blackacre from O, knowing that O had already sold it to A. If A recorded his deed, but B failed to
check the records, B would be at fault, so A would own Blackacre. If A failed to record their deed,
A would be at fault, and B would own Blackacre.

Different states have different recording statutes, which fall into three categories: notice, race-
notice, and race.

In a notice state, a new purchaser wins as long as she had no notice of the prior deed to
someone else. The purchaser is responsible for inspecting the records and the land itself before
buying it. A court will assume that the purchaser had whatever knowledge these inspections
would have revealed.

In a race-notice state, a new purchaser wins title as long as they (i) have no notice of the prior
deed and (ii) record their deed first. In the example above, A fails to record his deed to
Blackacre. B buys Blackacre from O with no notice of the deed to A. A then records his deed
before B records their deed. In a race-notice state, A wins.

In a race state, whoever records first wins. Notice is irrelevant. Very few states have race
statutes.

SECURITY INTERESTS IN REAL PROPERTY

Lenders that want to ensure they are repaid the money they lend to others frequently use
security interests in real property for that purpose. Imagine A wants to buy Blackacre, which costs
$100,000. A has only $20,000, so he goes to Bank and asks for a loan for the remaining
$80,000. Bank agrees to give A the loan but only if the loan is secured by Blackacre. This
arrangement allows A to buy Blackacre and also helps ensure Bank gets paid what it is owed
because if A fails to make the mortgage payments, Bank can force a public sale of Blackacre and
use the proceeds of the sale to recover the money lent to A.

Foreclosure

A mortgagor (the borrower—A in the example above) defaults if they breach the terms of the
mortgage agreement (usually by failing to make the regular mortgage payments). When that
happens, the mortgagee (the bank or lending institution—Bank in the example above) has the
right to initiate foreclosure proceedings. All states allow judicial foreclosure, under which the
property is sold at a public sale under the supervision of the court. Some states also allow less
formal foreclosure processes, such as simply allowing the mortgagee to sell the property if the
mortgagee determines that the mortgagor defaulted.

Proceeds of a Foreclosure Sale

If a foreclosure sale produces more money than the mortgagee is owed by the mortgagor, the
mortgagee is reimbursed and the mortgagor receives any extra. If the sale produces less money
than the mortgagee is owed, the money goes to the mortgagee, and the mortgagee can also sue
the mortgagor for the difference (the “deficiency”).

There can be more than one mortgage on a piece of real property, and they are paid in order of
priority, depending on which mortgage is being foreclosed. Generally, the priority of a mortgage
is determined by the time it was placed on the property. When a mortgage is foreclosed, the
14. REAL PROPERTY OVERVIEW
buyer at the sale will take title as it existed when the mortgage was placed on the property. Thus,
foreclosure will terminate interests placed on the property after the mortgage being foreclosed
but will not affect senior interests. Those senior mortgages will stay on the property even after it
is sold.

Suppose the most senior mortgage is the one foreclosed. Higher priority mortgages get fully paid
before lower priority mortgages receive any proceeds from a sale. Imagine O conveys three
mortgages on Blackacre in the following order: (i) an $80,000 mortgage to Bank 1, (ii) a $30,000
mortgage to Bank 2, and (iii) a $5,000 mortgage to Bank 3. A defaults on all three mortgages,
and Blackacre is sold in a foreclosure sale for $100,000. Bank 1 will receive $80,000 because it
has the first priority mortgage. Bank 2 will receive the remaining $20,000 because it has second
priority. Bank 3 will receive nothing. Both Bank 2 and Bank 3 have the right to sue A for the
amounts they are still owed.