Commercial and Residential
Real Estate FAQs
What is commercial financing in general?
Financing a property is the standard method by which individuals and businesses can purchase residential and commercial real estate without the need to pay the full price in cash up front from their own accounts at the time of the purchase. Financing for non-residential real estate is generally obtained from a bank, insurance company or other institutional lender to provide funds for the acquisition, development, and operation of a commercial real estate venture. Commercial financing loans are secured primarily by real estate and related assets owned by the debtor. Assets used to collateralize commercial finance loans, aside from the real estate, may include fixtures, equipment, bank and/or trade accounts, receivables, inventory, general intangibles, and supplies. Documents evidencing and securing the loan typically include: loan agreements, promissory notes, mortgages or deeds of trust, assignments of rents and leases, financing statements, environmental indemnity agreements, guaranties, subordination, non-disturbance and attornment agreements, estoppel certificates, and other ancillary documents.
An exchange is a real estate transaction in which a taxpayer sells real estate held for investment or for use in a trade or business and uses the funds to acquire replacement property. A 1031 exchange is governed by Code Section 1031 as well as various IRS Regulations and Rulings.
Section 1031 provides that “No gain or loss shall be recognized if property held for use in a trade or business or for investment is exchanged solely for property of like kind." The first provision of a federal tax code permitting non-recognition of gain in an exchange was Code Sec. 202(c) of the Revenue Act of 1921. Section 1031 has existed in the Internal Revenue Code since the first Code in 1939. It remains identical with only two additions in more than 75 years.
Section 1031 on its face appears to permit only a direct exchange of properties between two taxpayers. Following the decision in 1979 in Starker v. U.S. taxpayers were permitted to structure deferred exchanges in which the taxpayer sold the Relinquished Property to a buyer and acquired Replacement Property from a seller using the Realized Proceeds. Deferred exchanges are often called “Starker” exchanges. The Internal Revenue Service challenged deferred exchange but the Tax Court was liberal in allowing them and in 1991 the Internal Revenue Service adopted Regulations permitting them and governing their structure. [continue reading...]
What types of notes are used in commercial financing?
A cognovit note is a promissory note in which a debtor authorizes the creditor, in the event of a default or breach, to confess the debtor’s default in court and allows the court to immediately issue a judgment against the debtor. If the debtor defaults or breaches any of its loan obligations, the cognovit note also typically provides that the debtor agrees to jurisdiction in certain courts, waives any notice requirements, and authorizes the entry of an adverse judgment. Although the Supreme Court has held that cognovit notes are not necessarily illegal, most states have outlawed or restricted their use in consumer transactions and many states will not enforce them in commercial transactions.
What is the difference between a mortgage and a deed of trust?
A mortgage is a document that encumbers real property as security for the payment of a debt or other obligation. The term "mortgage" refers to the document that creates the lien on real estate and is recorded in the local office of deed records to provide notice of the lien secured by the creditor. The creditor or lender, also called either mortgagee (in a mortgage) or beneficiary (in a deed of trust), is the owner of the debt or other obligation secured by the mortgage. The debtor or borrower, also called the mortgagor (in a mortgage) or obligor (in a deed of trust), is the person or entity who owes the debt or other obligation secured by the mortgage and owns the real property which is the subject of the loan.
In almost all cases, the law of the state in which the property is located dictates whether a mortgage or deed of trust can be used. Although a deed of trust securing real property under a debt serves the same purpose and performs the same function as a mortgage, there are technical and substantive differences between the two. A deed of trust is executed by the debtor and property owner, to a disinterested third person identified as a trustee, who holds the ownership of the property in trust for the creditor; whereas, when a mortgage is used, title to the collateral remains in the debtor, and the mortgage creates a lien on the real estate in favor of the creditor. In some jurisdictions, the deed of trust enables the trustee to obtain possession of the real property without a foreclosure and sale, while others treat a deed of trust just like a mortgage. In the latter jurisdictions, the deed of trust is governed by the law applicable to mortgages. The deed of trust requires the trustee to reconvey the property back to the debtor when the debt has been paid in full. Assignment of the creditor’s interest does not result in a change of trustee; instead, only the note or other evidence of debt is transferred and the new owner of the loan acquires the prior lender’s beneficial interest in the trust.
What is an assignment of leases?
For commercial lending purposes, an assignment of leases assigns the debtor’s rights, as landlord under a lease or leases, to the creditor for the collection of rent as additional security for a debt or other obligation. The assignment grants to the creditor a security interest in the rent stream from any leases affecting a property, an important source of cash to pay the note in case of the borrower’s default. Assignments of leases are usually stated to be present and absolute transfers of the assignor’s rights under the leases, and the creditor then grants the debtor a license to collect rents and continue to operate as if its were the landlord under a lease until such time as an event of default has occurred. In the event of default, the creditor can terminate the license and step into the shoes of the debtor, as the landlord under the leases. The creditor would then proceed to collect rent and otherwise enforce the landlord’s rights under the leases, usually without a long court battle.
What is a UCC financing statement?
The Uniform Commercial Code ("UCC") is one of a number of uniform acts that have been drafted to harmonize the law of sales and other consumer and commercial transactions throughout the United States. Article 9 of the UCC governs the creation, perfection, and priority of security interests of a creditor, also called a secured party, in the personal property of a debtor, including fixtures. Like a mortgage lien, a security interest is a right in a debtor’s property that secures payment or performance of an obligation, created in a separate security agreement, or by additional terms right in the mortgage or deed of trust document. In order for the rights of the secured party to become enforceable against third parties, however, the secured party must "perfect" the security interest. Perfection is typically achieved by filing a document called a "financing statement" with a governmental authority, usually the recorder of the county in which the property (which is the security for the debt) is located, as well as with the secretary of state of the state in which the debtor entity is formed, subject to a number of rules applicable to natural persons and certain types of corporate debtors. Perfection is required in different places and in different manners, depending on the type of collateral. For example, perfection can be obtained by taking possession of certain types of collateral, such as accounts or certificates of title. Absent perfection of the security interest, the secured party may not be able to enforce its rights in the UCC collateral against third parties. A financing statement itself does not create the lien or security interest, but when properly filed, only gives notice of the security interest created in the security agreement. Different perfection rules apply to fixtures, extracted collateral and timber to be cut. A security interest grants the holder a right to take action with respect to the personal property that is subject to the security interest when an event of default occurs, including the right to take possession of and to sell the collateral apply the proceeds to the loan.
Why do lenders require environmental indemnity agreements?
An environmental indemnity agreement is an agreement by which a debtor indemnifies the creditor against any claims or losses arising from environmental contamination of the mortgaged property. Creditors want environmental indemnities to protect against loss or damage due to the creditor’s position as a lien holder or trustee where the creditor has not caused or contributed to, and is otherwise not operating, the mortgaged property. These indemnities are sometimes limited and sometimes have carve outs to exclude actions of the creditor or its agents.
When do I need a subordination, non-disturbance and attornment agreement?
A subordination, non-disturbance, and attornment agreement, also known as an "SNDA," embodies three basic agreements that identify and define the post-foreclosure or post-default relationship between a creditor and a tenant under a lease for mortgaged property where the debtor is the landlord. The "subordination" part of the agreement changes the priority interests of the parties to the agreement, such as by having the tenant of a mortgaged property, whose lease predated the mortgage, agree to accept a junior priority to the mortgage, allowing the landlord’s lender to terminate that lease in case of foreclosure. The "non-disturbance" element of the SNDA is an agreement by the creditor that if the creditor or other purchaser at foreclosure takes title to the property that is subject to the lease, the creditor or purchaser will not disturb the tenant’s right to possession, provided the tenant is not in default under the lease. The "attornment" element of the SNDA obligates the tenant to recognize the creditor or purchaser at foreclosure as the new landlord. The attornment is usually given by a tenant only if the creditor agrees to the non-disturbance (sometimes called a "right of quiet enjoyment") of its leasehold, as set forth above. For example, under an SNDA, a creditor who is the prevailing bidder at a foreclosure sale on a property on which the creditor holds a mortgage lien after an event of default by the debtor/landlord agrees not disturb the tenant’s possession in its leased space, so long as the tenant is not in default under its lease, and, in turn, the tenant agrees to recognize and treat the creditor or bidder as landlord.
What is an estoppel certificate?
An estoppel certificate is a signed statement by a party certifying certain statements of fact as correct as of the date of its execution. In a commercial financing context, the creditor often seeks estoppel certificates from existing tenants in a property to be mortgaged in order to confirm the major terms of a lease, and whether the tenant claims any defaults by its landlord. An estoppel certificate precludes a tenant from later claiming that a default or other condition of the lease exists which was not disclosed in the estoppel certificate.
What is the effect of a guaranty?
Some creditors may require a guaranty of the loan by one or more of the members, investors, partners, or shareholders of a business organization which is the debtor. A guaranty is a promise of a third party to pay a debt or perform a duty under the loan documents if the debtor fails to do so. Depending on the creditor’s underwriting requirements and the transaction structure, a guaranty may be required to be secured by additional collateral owned by the guarantor, such as a mortgage or security interest in personal property or other assets of the guarantor which are independent of or separate from the real estate which is the primary security for the underlying loan. Guaranties are an added assurance to the creditor for payment and performance of the obligation under a debt, and provide another avenue for the creditor to pursue in the event of default by the debtor. Guaranties are intended to reduce the risk of the creditor and increase the likelihood of payment and performance. Guarantors can sometimes limit guaranties to a certain dollar amount less than the entire debt, and to have the guaranty reduced in some fashion as the debt obligation is repaid by the debtor.
What other collateral documents are common in a commercial loan closing?
Lenders may require other collateral documents in a commercial financing, typically to allow them to have the full benefit of the collateral in the event of a default. If the loan is for a construction project, the lender may require an assignment of the construction contract, architects contracts, permits, maintenance agreements, service agreements, agreements of sale, and other similar agreements that enable the debtor to develop and operate the property. These agreements may be viewed by the creditor as documents that they would like to have the benefit of in the event the debtor defaults under the loan and the creditor or third-party purchaser takes title to the property at foreclosure.
Why would the lender require a special purpose entity (also called "single purpose entities")?
For certain financing transactions, some creditors may require a debtor to become a special purpose entity or single purpose entity (SPE). Any type of business entity can be an SPE, although they are commonly formed as limited liability companies. SPEs are typically created to fulfill narrow, specific, or temporary objectives. Creditors often require that the debtor be an SPE to isolate financial risk by limiting the possibility of the bankruptcy of the debtor, including requirements to conduct its business under its own name as a separate entity, and only engage in business matters expressly permitted under the SPE’s basic documents which cannot be changed without the lender’s approval. The SPE (1) is also usually required to have at least one director, general partner, managing member, principal shareholder, or other similar controlling person (an "independent controlling person") who is independent of and not otherwise associated with the debtor and whom the lender intends (but is not contractually required) to protect the lender’s interest, and (2) is subject to organizational documents requiring a unanimous vote or consent, which vote includes the independent controlling person, before the debtor can decide on filing a petition in bankruptcy, dissolving, liquidating, consolidating, merging, or selling all or substantially all of the assets of the debtor. These requirements are sometimes referred to as bankruptcy-remote requirements since their goal is to make it difficult for the debtor to voluntarily file for bankruptcy.
What are non-recourse loans and non-recourse carve-outs?
A non-recourse loan is a secured loan that limits the creditor, in the event of default by the debtor, to proceed only against the collateral securing the loan to satisfy the debt and not the debtor’s other assets which are not specifically pledged as collateral, except in certain limited and negotiated circumstances which are called "carve-outs." Non-recourse carve-outs usually include an act or omission by the debtor that is a material obligation, such as failing to insure, or certain bad acts (often referred to as "bad-boy" acts) such as misappropriation or misapplication of funds from the property’s income, and violation of a clause forbidding sale. Depending on the assets of the debtor and whether the debtor is an SPE with no other assets but the property securing the debt, and whether there is a guarantor, the non-recourse carve-outs may be of little value.
What is the effect of a due on sale clause?
A due on sale clause is a provision in a note, mortgage, or deed of trust whereby the entire outstanding debt becomes immediately due and payable at the creditor’s option upon sale of the property acting as collateral for the loan. Typically, such provisions are used to prevent a subsequent buyer from assuming the existing debtor’s financing at less than existing market value.
Why do lenders charge prepayment premiums?
A prepayment premium, sometimes called a prepayment penalty or yield maintenance fee, is a provision in a commercial loan that assesses a fee, based on a stated formula, in the event a debtor pays a debt prior to its contractually stated maturity date. The prepayment premium is intended to compensate a creditor for its loss of anticipated revenue stream over the full term of the loan in the event of a prepayment.
What does title insurance do?
Just as in the context of residential real estate, title insurance protects the insured, who can be the property owner and/or the mortgage lender, from loss due to undisclosed defects in title to real property and, for creditors, from loss due to the invalidity or unenforceability of its mortgage lien. Title insurance will defend against a lawsuit attacking the title as it is insured, or reimburse the insured for the actual monetary loss incurred, up to the dollar amount of insurance provided by the policy. Most policies contain a number of exceptions to the insurance policy, either specific exceptions for recorded liens, or general exceptions for issues the policy does not cover, including defects known to the insured, arising out of governmental documents not otherwise recorded, or arising out of creditors’ rights. Most title policies insure the title against both recorded and unrecorded claims, subject to stated exceptions. Coverage for unrecorded risks is beneficial because of the difficulty or impossibility of ascertaining all such risks. Many states have rating bureaus that regulate the types of policies, policy endorsements, and rates that apply to title insurance in a given jurisdiction. A creditor usually will require title insurance to insure the lien of its mortgage. Depending on the type and characteristics of the property and the loan, the creditor may also seek certain endorsements to the title policy covering a particular risk of concern to the creditor, such as insolvency. Those endorsements will affect the pricing for the policy. Endorsements may insure a whole variety of risks, including but not limited to zoning, usury, environmental liens, mineral rights, and other matters too numerous to list here. Certain endorsements are also only available in certain states or for certain types of properties or loans.
What choices of borrower’s entity are available?
A property owner must decide whether it will own property in an individual name or in an entity. Entity options include the joint venture, general partnership, limited partnership, limited liability partnership (LLP), limited liability limited partnership (LLLP), "subchapter C" corporation, "subchapter S" corporation, limited liability company (LLC), business trust, land trust, or real estate investment trust. The choice of entity for purposes of commercial financing is one that will be dependent on many factors, including tax considerations, identities of the owners, whether there will be preferred returns, who will operate the project, state law, and the like. The decision as to whether to use an entity and, if so, which entity to use can be complicated and should be made with the assistance of competent tax, accounting and legal advisors.
What is a leasehold mortgage?
A fee mortgage is a mortgage lien on the fee estate, or absolute ownership interest, in real property (sometimes called a fee simple estate), given by the fee owner of that land. In the event of foreclosure on the fee estate, the creditor will foreclose on the entire property, and the prevailing bidder at foreclosure will be entitled to full ownership of the fee estate. A leasehold mortgage is a mortgage secured by the debtor/tenant’s possessory interest in the leasehold estate. In the event of foreclosure, the creditor can foreclose only on the leasehold estate, and the prevailing bidder at foreclosure will be entitled only to those benefits conferred by the lease for the balance of the leasehold term. It should be noted that there may be limitations in different jurisdictions on the mortgageability of a leasehold estate. A lender taking a leasehold mortgage may require the fee owner to "subordinate the fee," meaning that the fee owner agrees that in case of default of the leasehold mortgage, the lender may foreclose the entire fee interest in the property. The fee owner may have incentive to make this subordination when substantial improvements are to be made to the property by a tenant and the landlord/fee owner stands to gain value in the property as a result; in other cases the subordination agreement requires the lender to pay a stated amount to the fee owner in case of foreclosure.
What are junior liens?
A junior lien is a lien on real property that is subordinate in priority, either by time or by agreement, to another (a "superior" or "senior") lien. Oftentimes, the same creditor that extended the first financing will also provide additional financing, secured by a lien that is to be secondary or subordinate to the first loan. Often, a senior lien document will prohibit the borrower from executing junior liens, because junior liens could complicate the foreclosure process.
What are participation loans?
Sometimes an institutional lender participates with other lenders in making a single mortgage loan to a single debtor; this is a participation loan. Participation loans are a way for smaller banks to take a piece of a larger loan transaction thereby spreading risk. Also, a loan amount may be too large for any one creditor under its lending regulations, and other lenders are needed to fulfill the additional financing requirements. A lender can also make the loan individually and later sell "participations" in that loan to other investors or financial institutions. Either the loan agreement or a separate participation agreement will define which lender has authority to enforce the loan terms.
When are intercreditor and subordination agreements used?
Intercreditor agreements are entered into between two or more creditors who have extended loans to a single debtor, to define the relationship between the creditors and include provisions relating to advances of loan proceeds by the creditors, equitable priority of the creditors with respect to payments from the debtor, and who will act (and how they may act) in the event of default by the debtor. A subordination agreement changes the priority interests in a mortgaged property of one party, who has priority, to another party, who otherwise would be subordinate were it not for the subordination agreement.
How is mezzanine financing different from other commercial loans?
If the owner’s equity and lender’s loan together are insufficient for the financial needs of a property, a borrower may sometimes also seek out one or more additional lenders to finance the project. Many creditors have become increasingly hostile to secondary financing involving a junior mortgage lien on property on which they hold a mortgage. Mezzanine loans are a form of junior financing that does not secure the real or personal property assets of the debtor covered by the first mortgage, but rather is a loan secured with a pledge of the ownership interests in the debtor. Mezzanine loans are often arranged in a highly structured financing, contemporaneously with the first mortgage loan. In case of default of the mezzanine loan, the lender takes over the ownership of the borrower entity, not the property itself. This structure is usually comprised of SPEs to satisfy the creditors as to bankruptcy-remoteness and ensure the collateral value. An intercreditor agreement will usually be required in mezzanine loan transactions.
What does "equitable subordination" mean?
Subordination in banking and finance refers to the order of priorities in interests in various assets, and priority is ordinarily determined by statute and order of recording. Bankruptcy courts in the United States, as well as most courts of general jurisdiction in the various states, have the power and authority, as courts of equity, to alter the apparent priority of liens in order to subordinate senior claims on the assets of a debtor to the claims of junior claimants based on equitable principles. This remedy is called "equitable subordination." Equitable subordination can be used to subordinate both secured and unsecured interests. Equitable subordination is an extraordinary remedy, and courts have generally held that the following conditions must be satisfied before it will be imposed: (1) the senior creditor must have engaged in some kind of inequitable conduct; (2) the misconduct must have resulted in injury to the subordinate creditors of the bankrupt or conferred an unfair advantage on the prior creditor; and (3) with respect to an insolvency proceeding, equitable subordination of the claim must not be inconsistent with the provisions of the Bankruptcy Code.
What impact does the deletion of the "creditors’ rights" exclusion have on a title insurance policy?
When a title insurer issues its policy with an endorsement removing the creditors’ rights exclusion or exception, it is not clear that the insured will, in fact, have coverage if the insured transfer is later challenged as fraudulent or preferential, or when the insured lender’s mortgage lien is the subject of a claim for equitable subordination. Other exclusions in the policy, however, may apply and form the basis for a denial of the insured’s claim. It also is not clear that the policy affords coverage against a creditors’ rights challenge, even when the policy includes an endorsement that deletes the creditors’ rights exclusion. In many claim situations, therefore, the insurer will be forced to pay for the insured’s defense if there is no creditors’ rights exclusion or exception in the policy to confirm that no coverage against this risk was intended. This can be very costly for the insurer.
What is a foreclosure?
A creditor can foreclose, or "shut out," the interests of the debtor in the event of default under the debt or other obligation. Foreclosures are a method the creditor can use to seize the mortgaged property acting as collateral for the obligation, terminating the debtor’s equity of redemption, and either take ownership and possession of the land or sell the rights to a third party and use the proceeds of that sale to pay down or pay off the debt. Some jurisdictions recognize non-judicial foreclosure sales held without supervision of a court; other jurisdictions only recognize judicial foreclosures. Foreclosures are one of the remedies available to a creditor in the event of default under a mortgage instrument.
How does a lender exercise a power of sale?
A power of sale is a clause, sometimes permitted by local law to be inserted into mortgages or deeds of trust, that grants the creditor or trustee the right to sell the property upon certain defaults without court authority. When a mortgage gives the creditor the power, and state law does not prevent its exercise, the creditor can arrange for a non-judicial sale of the interests of the defaulted debtor. A sale conducted in accordance with a power of sale provision is a public sale, and statutes governing such provisions regulate the conduct of the sale and the method of giving notice. The purchaser in theory obtains the same rights in the property he would enjoy had he purchased at a judicial sale, since the creditor is selling the title as it existed when the mortgage or deed of trust containing the power of sale was given. Nevertheless, the costlier, slower, and more cumbersome judicial sale is frequently preferred because, among other reasons, it creates a permanent court record of the events leading to the transfer of the mortgagor’s interest, including a judgment, while the purchaser at a non-judicial sale may have only the recitals in the deed of transfer to establish such purchaser’s rights to title. A judicial foreclosure also typically reduces or eliminates a debtor’s redemption rights, which has the effect of finalizing sale results more quickly than in the case of a foreclosure under a power of sale provision.
Residential Real Estate FAQs
Common Issues With Residential Real Estate
What are some key issues for me to consider when reviewing a contract to purchase a home?
Few people realize that the purchase contract is the most important step in purchasing a home. The details of this agreement determine what you buy or sell and how you buy it or sell it. Before signing, read the agreement carefully and consider the following (not a complete list of issues but intended to give the reader a good start on things to consider):
Is the purchase contingent on matters such as the availability of financing on acceptable terms or the sale of the house which the buyer presently owns?
Exactly what land, buildings and furnishings are included in the offer? Are appliances, certain fixtures and other personal property included in the purchase price?
When can the buyer take possession?
Is the seller required to provide good, marketable title? Marketable title is title that can be readily marketed (sold) to a reasonably prudent purchaser aware of the facts and their legal meaning concerning liens and encumbrances.
Who pays for the examination of the title to the property in the event the offer is accepted? Who pays for the abstract of title or title insurance?
Concerns with Title
1. What is a title examination or abstract? A title examination is a study of the records related to the ownership history of the property and sometimes of other matters related to ownership interests in the property. An abstract of title is a collection of public records relating to the ownership of a parcel of real estate. During the examination a title examiner reviews the applicable title information to determine who owns the lands, whether there are any defects in or claims against the ownership and whether any action is needed to make sure the purchaser obtains good record title to the property at closing.
2. What is title insurance, and why is it needed? A title insurance policy insures the status of title in the name of the owner of the policy. Title insurance policies are issued by title insurance companies. The title company contracts with the insured person named in the policy to protect against financial loss related to the title, as well as the cost of defending the title in court. The title company searches and examines documents related to the ownership of and items affecting the property prior to issuing a policy. It provides a source of indemnification to the named insured if he or she is damaged by a negligent or bad title search or examination and also from hidden defects that would not be discovered in a title search. For instance, a title defect resulting from a forgery would not be revealed in a search or examination of the public records but would be covered by the title insurance policy.
Prior to issuance of the title insurance policy at closing, a title commitment will be prepared. You may or may not be afforded the opportunity to see this document prior to closing, but you should make every effort to review it prior to closing. You should make sure to have your attorney (if you have one) review it as well. While there are many important parts to a title commitment, at a minimum you should be familiar with the following: (i) Schedule A identifies the type of policy being issued, the names of the proposed insureds and the current owners, and the legal description of the property; and (ii) Schedule B contains a list of items that must be satisfied in order for the title company to issue the policy of insurance and also contains a list of title matters (called "exceptions") that will be excluded from coverage, such as statutory real estate taxes and easements for utilities servicing the property unless deleted from the title commitment at the time of closing. If there are objectionable items in the commitment, you need to try to have them removed by the title insurance company before closing.
Manner in Which Title Is Taken and Held
How should title be held? Make sure you carefully identify all parties taking title and how title is to be held. The following are examples of typical methods of holding title:
Sole Owner. Under this approach, title is taken in the name of only one individual grantee and is freely transferable or subject to encumbrance by that grantee, subject to dower and/or homestead rights described below.
Example: John Doe, a single man, grantor, to Jane Smith, a single woman, grantee.
Joint Ownership with Right of Survivorship. Title can be taken in multiple names under this approach. Each joint tenant owns an undivided interest in the entire property. The “survivorship” language means that if one joint tenant dies, that person’s interest automatically is transferred to the remaining joint tenants. Any joint tenant may freely transfer his or her fractional interest in the property during his or her lifetime, but any such transfer will terminate the survivorship aspects of the joint survivorship tenancy to the extent of the interest transferred. Equal ownership shares are presumed unless the deed states otherwise. For example, if there are two grantees, each grantee will own a one-half interest unless the deed specifies otherwise.
A joint tenancy is created and exists only if four essential characteristics exist: (1) unity of joint ownership and control; (2) the interests held must be the same; (3) the interests must originate in the same instrument; and (4) the interests must commence at the same time. If all or any of these characteristics do not exist, the owners will own the property as tenants in common.
Example: John Doe, a single man, grantor, to Able Smith, Jane Baker and Charles Jones as joint tenants with right of survivorship.
Tenants by the Entirety. Title can be taken as tenants by the entireties only by a validly married husband and wife. This form of ownership does not exist in all states. The words “husband and wife” in the grantee’s name makes this choice. If a transfer of this type is attempted but the grantees are not validly married, or if they become divorced, the title reverts to tenants in common. As tenants by the entirety, neither tenant may transfer his or her interest to a third party or encumber the property without both parties joining in the deed or mortgage. Upon the death of one party, the property automatically becomes the sole property of the surviving spouse. This is a common form of ownership among married couples, except in community property states. In community property states, the husband and wife presumptively acquire the property as community property and hold it as tenants in common or as joint tenants with right of survivorship.
Example: John Doe, a single man, grantor, to John Jones and Jane Jones, husband and wife.
Tenants in Common. Title held as tenants in common, like joint tenants, allows title of the entire property to be held in multiple names. Title is also freely transferable or subject to encumbrance (as to the transferring tenant’s own interest) by each tenant. However, there is no right of survivorship in the surviving tenants upon one tenant’s death. Also, note that equal percentage ownership is presumed unless the deed specifically states otherwise. For example, unless the deed states otherwise, if there are three grantees, each grantee will own a one-third interest. It is always best to state each co-owner’s percentage ownership interest in the deed to avoid any uncertainty or misunderstandings.
Example: John Doe, a single man, grantor, to Jane Smith, Sam Wilson and Tom Baker, in equal shares as tenants in common.
Or John Doe, a single man, grantor, to Jane Smith as to ½ interest, Sam Wilson as to ¼ interest and Tom Baker as to ¼ interest, as tenants in common.
Title Conveyed in Trust for the Benefit of the Purchasers. Under this approach, legal (record) title is transferred to a trustee (for example, the grantee would be "John Doe, as trustee under agreement dated June 1, 2005"). Care should be taken in using this approach since there are more complex concerns involved.
Special Marital Property Issues. This is one issue where you must find out if the state in which the property is located has special rules that will require a different statement of ownership or will automatically grant interests in ownership between spouses. California, Arizona and Wisconsin are examples of “marital property” or “community property” states, where statutes have an impact on the way in which title is held. The grantee’s interest must be accurately described with terms required by that state’s law.
Different Forms of Deeds
What is the difference between a General Warranty Deed, Special (Limited) Warranty Deed, and Quit Claim Deed?
General Warranty Deed. A general warranty deed guarantees the grantor’s good title before the conveyance, and that warranty continues after the conveyance. The usual guarantees or warranties by the seller are: good title, freedom from encumbrance other than as specifically identified, and right of possession to the buyer as against all others. The warranty includes any claims arising during or prior to the grantor’s ownership.
Special (or Limited) Warranty Deed. A special warranty deed, sometimes referred to as a limited warranty deed (and some states may have a different name for this form of deed), provides less extensive warranties than the grantee receives from a general warranty deed. Under a special warranty deed, the grantor warrants only against claims arising during the period of the grantor ownership but does not warrant against any claims arising prior to the grantor’s ownership of the property.
Quit Claim Deed. A quit claim deed contains no warranties of any kind and conveys only the interest, if any, held by the grantor (for example, if the grantor actually had no interest to convey, the quitclaim deed would not vest any ownership in the grantee). The quit-claim deed is not typically used for residential real estate purchase transactions.
Sheriff’s Deed. A sheriff’s deed is a deed granted at the end of a mortgage foreclosure, in which the sheriff, under the order of the court in the foreclosure case, grants ownership of the property to the successful bidder at the sheriff’s sale. These deeds are quitclaim deeds and carry no warranty because the bidder at the sheriff’s sale takes title “subject to all legal encumbrances” including any flaws in the foreclosure procedure.
Fiduciary Deed. A fiduciary deed is a deed granted by a trustee or other fiduciary (often a court-appointed individual or entity) who conveys title to property pursuant to that grantor’s authority under a trust agreement or as the result of a court-supervised proceeding.
What is a survey, and why should I pay for one?
A survey is a drawing of the property which should show any improvements to the property (such as buildings, driveways and the like), the boundary lines of the property, and any encroachments affecting the property (whether items encroaching on the property by third parties or encroachments by the property against a neighboring property). What details are included in a survey depends entirely on what was required of the surveyor in the contract hiring the surveyor, and what is implied by the certification the surveyor gives on the face of the survey. Surveyors have the ability, if asked, to certify many things, such as: (i) whether the improvements are all located within the boundary lines; (ii) in which flood zone the property is located; (iii) whether the structures are in compliance with applicable setback and height laws; or (iv) whether the property has access to a public right of way. Encroachments on the property may include: (i) utilities (such as water, cable, electricity, and telephone lines) and easements for them; (ii) another party’s right to enter upon your property (such as a common driveway that the property may share with a neighboring property); or (iii) structures not being conveyed with the purchase of the property that are on the property and should not be (such as the fence belonging to a neighboring property owner). Residential lenders usually require that a survey be obtained prior to closing, because a survey is the only document in a closing which confirms that the legal description in the deed matches the piece of property the buyer expects to receive with that deed. In some instances, if the current owner of the property has a recent survey of the property the lender will accept such survey (or perhaps a current recertification of the prior survey so long as there are no new substantial improvements to the property) and new survey costs may be reduced.
What is an easement? What are my rights and obligations under an easement?
Purpose of an Easement. An easement is an interest in land which is owned by a person who is not the owner of the whole parcel, such as the right to use or control a portion of the parcel, or an area above or below it, for a specific limited purpose (such as to cross it for access to a public road, to share a common drive with a neighboring property, or to install and maintain utility wires or lines). The land benefiting from an easement is called the dominant estate; the land burdened by an easement is called the servient estate. Unlike a lease or license, an easement may last forever, but it usually does not give the holder the right to exclusively possess, take from, improve, or sell the land. Some common easements may include: (i) a right-of-way; (ii) a right of entry; (iii) a right to the support of land and buildings; (iv) a right of light and air; or (v) a right to water. The owner of the servient estate is normally free to use his or her property as he or she chooses, provided that use does not impair the rights of the holder of the dominant estate to use the land covered by the easement.
Easements Benefiting the Land. You may have an easement over someone else’s property for several reasons. One of the most common reasons may be for access to a public right of way for a property which otherwise might be landlocked. Check your survey or ask your title company if you are unsure of the purpose of any identified easement. Also, make sure that every easement benefiting your property over someone else’s property is reflected with the legal description included with Schedule A of your title insurance policy. One of the items insured by an owner’s policy of title insurance is legal access to the insured property.
Easements Burdening the Land. If someone else has a properly recorded easement over my property, what are my obligations and rights with respect to that easement?
Your obligations to the party benefiting (dominant estate) from the easement over the property you are purchasing (servient estate) depend on the written agreement creating the easement.
If the survey of the property reflects a path labeled “easement” but no document is of record creating the easement, you will want to inquire as to where the surveyor obtained the information about this easement. If the unrecorded easement is shown on the survey, the title company will likely list this unrecorded easement on your title policy as an exception to coverage. That means that if someone were to claim the right to use this easement, your title insurance would not pay to resolve this issue.
What is an escrow and an escrow agent? What does it mean to have funds or documents in escrow?
An escrow agent is typically a third party designated to hold an item (usually funds, but sometimes certain documents, such as a deed and/or mortgages) for a certain time or until the occurrence of a condition, at which time the escrow agent is to hand over the item to another party. Typically the escrow agent will be the title company, and the funds and documents that they are holding include any deposits made under the contract to purchase the property, as well as the deed and the mortgage instruments. In many home purchase contracts, the initial deposit or earnest money will be held by an escrow agent until the closing. In some states, the entire closing happens through an escrow agent, with all funds and documents being collected and distributed in the manner required by specific and detailed written escrow instructions.
How does the buyer know how the land surrounding the property will be used?
Typically, the seller does not guarantee how the area surrounding the property will be used. Some purchase agreements ask the seller to warrant what the seller knows about surrounding property uses that might interfere with the use of the home, but many do not. If a buyer is concerned, he or she should contact the property appraiser or tax collector for the county in which the property is located and determine who owns the surrounding land, or speak to the zoning or planning department of your local municipality prior to purchasing the property to understand how surrounding uses may affect you. The title commitment only discloses information about the property being purchased and does not attempt to inform the buyer about surrounding uses. Sometimes a survey will identify the owners of any immediately adjacent parcels. The purchaser needs to take responsibility for finding out what uses may affect him or her. The buyer can ask the neighboring property owners if they know of plans to develop land surrounding the property. The buyer may also wish to talk with the building or zoning office of the local municipality to confirm the zoning of surrounding property so as to know what kinds of uses might be made in the future, although zoning can be changed.