Word of the Day

A legal proceeding whereby an innocent third party (stakeholder), such as an escrow agent or broker, can deposit with the court property or money that the party holds and that is subject to adverse claims so that the court can distribute it to the rightful claimant. 

The distribution of deposit or earnest money held in escrow is often a problem when the buyer and the seller are in dispute over the purchase contract. Generally, the escrow agent will not release the funds until all parties—including the broker—sign a cancellation of escrow form. If one of the parties refuses to cancel the escrow, then no one can recover the deposit money. If the escrow agent cannot get the parties to agree on the disposition of the deposit money, one recourse is to file an interpleader action asking the court to accept the money and distribute it to the rightful claimant.

The joining of two or more people in a specific business enterprise, such as the development of a con¬dominium project or a shopping center. The parties may pool their respective resources (such as money, expertise, property, or equipment). There must be an agreement, express or implied, to share in the losses or profits of the venture. Joint ventures are a business form of partnership and for tax purposes are treated as partnerships. The main difference between the two is that a joint venture is a special joining of the parties for a specific project with no intention on the part of the parties to enter into any continuing partnership relationship (a “one-shot partnership”). If the joint parties combine their efforts on several different projects, the relationship becomes more like a general partnership than a joint venture. Also, even though a partner can bind the partnership to a contract, one party to a joint-venture agreement cannot bind the other joint venturers to a contract.

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, 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 often insures against encroachments.

Legal notice that is presumed by law when factors exist that would make a reasonable person inquire further. For example, if someone is in possession of the property offered for sale, the purchaser is charged with knowing whatever facts an inspection of the property would have disclosed; purchasers therefore take title subject to the rights of the occupant.

A life insurance policy paid for by a company to cover the estimated cost of replacing a key person in the company; it may be either a life or a disability policy or a combination of both. Some lenders require key employee insurance when the borrower is a small corporation that relies primarily on the talents of one executive.

A relationship that implies a position of trust and confidence wherein one person is usually entrusted to hold or manage property or money for another. The term fiduciary describes the faithful relationship owed by an attorney to a client or by a broker (and salesperson) to a principal. The fiduciary owes complete allegiance to the client. The fiduciary owes to a principal the duties of loyalty, obedience, and full disclosure; the duty to use skill, care, and diligence; and the duty to account for all monies. When an agent breaches any of these fiduciary duties, the principal can usually bring civil action for money damages, sue to impress a constructive trust upon any secret profit, or compel the agent to forfeit any compensation. 

Because of the close personal relationship between broker (agent) and seller or buyer (principal), the broker often learns certain confidential information about the client and/or financial situation of the principal. In most states, this information cannot be disclosed by a broker, even after the transaction is completed and the fiduciary relationship terminated. One reason it is so difficult to represent both parties in a real estate transaction is the conflict of interest that arises for the broker, who has a duty to keep confidential that information learned from the principal and also a duty to disclose all pertinent information to the principal.

Good or clear salable title reasonably free from risk of litigation over possible de¬fects; also referred to as merchantable title. A marketable title is one that (1) is free from undisclosed encumbrances; (2) discloses no serious defects and does not depend on doubtful questions of law or fact to prove its validity; (3) will not expose a purchaser to the hazard of litigation or embarrassment in the peaceful enjoyment of the property; and (4) would be accepted by reasonably well-informed and prudent persons, acting on business principles and willful knowledge of the facts and their legal significance with the assurance that they could in turn sell or mortgage the property at market value.

Marketable title does not necessarily mean a perfect title, just one that is free from plausible or reasonable objections. A court of law would order the buyer to accept it if asked to decree specific performance of the sales contract. 

Title would not be marketable if there were a significant risk of litigation—the buyer cannot be forced to buy a lawsuit along with the property. An unmarketable title does not mean that the property cannot be transferred, but it does mean that certain defects in the title may limit or restrict its ownership, and the purchaser cannot be forced to accept a conveyance that is materially different from the one bargained for or “marketed” in the contract of sale.

If the buyer inserts a contract provision that the seller must deliver title “free from all defects or encumbrances,” the seller should be aware the buyer could probably reject title even if only a small or insignificant encroachment or defect existed. Unless the contract provides otherwise (in a “subject to” clause), any of the following could render title unmarketable: easements, restrictions, violations of restrictions, zoning ordinance violations, existing leases, encroachments (except slight ones), and outstanding mineral and oil rights.

Consent to a certain act, given after a full and fair disclosure of all facts needed to make a conscious choice. Only those with adequate reasoning facilities who can appreciate the implications and future consequences of an action can give informed consent.

A common expression used to convey the idea that something that was once permissible continues to be permissible despite changes in the controlling law. For instance, a developer with prior county planning approval to build on 10,000-square-foot minimum-size lots can be granted the right to build on such lots even if the current zoning regulations are amended to require 12,000-square-foot minimum-size lots. The developer is “grandfathered” under the originally approved subdivision plan. This situation is similar to nonconforming use.

Under state legislation regarding real estate pre-licensing educational requirements, current licensees may be “grandfathered,” or exempted, from such new requirements.

The right of a mortgagor, before a foreclosure sale, to reclaim property forfeited due to mortgage default. The mortgagor can redeem the property by paying the full debt plus interest and costs. Any attempt to have the mortgagor waive the equity of redemption is unenforceable and void as being contrary to public policy. Equity of redemption has been held to be an interest in real estate and is thus affected by the ordinary laws and rules concerning conveyances, including the statute of frauds.

Any right to redeem after a foreclosure sale must be created by state statute. In those states that permit a power of sale to be inserted in the mortgage document, most foreclosures of property are conducted pursuant to the nonjudicial foreclosure statute. Upon a foreclosure sale, the equity of redemption is terminated.

An agreement to reimburse or compensate someone for a loss. For example, a buyer of commercial property might require the seller to indemnify the buyer against claims caused by the discovery of hazardous substances on the property.

A residential mortgage loan that exceeds the loan amounts acceptable for sale to Fred¬die Mac and Fannie Mae. Also called nonconforming loans, they may carry higher interest rates and require a larger down payment. As such, they must be packaged and sold differently to underwriters.

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.

A comprehensive plan to guide the long-term physical devel­opment of a particular area.

Valuable additions made to property that amount to more than repairs, costing labor, and capital, intended to enhance the value of the property or extend the useful remaining life. Improvements of land include grading, sidewalks, sewers, streets, utilities, and the like. Improvements to land include buildings, fences, room additions, new roofs, and similar constructions. An improvement could also be an alteration of the land’s surface, such as an irrigation channel. 

Based on modern appraisal methods, the value of an improvement is generally determined by what it adds to the land in terms of production of income or amenities. A reasonable relationship should exist between a site and the character of the improvement placed on it. An over improvement, under improvement, or misplaced improvement detracts from the combined value of a lot and the building on it. 

For income tax purposes, improvements must generally be capitalized, with cost recovery deductions taken over a period of years, whereas maintenance and repairs that do not add to the value of the property can be deducted on income property as business expenses in the year incurred.

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.

To pledge specific real or personal property as security for an obligation without surrendering possession of it. For example, a long-term tenant could hypothecate the tenant’s leasehold rights as security for a loan. The lender could even use its rights in a receivable mortgage as collateral for some loan to the lender. 

In a typical house purchase, the buyers pay a portion of the purchase price with their own cash and borrow the balance from a lending institution. The lender requires the buyers to hypothecate the property or pledge it as security for repayment of the loan, which repayment is accomplished by use of a mortgage or trust deed. The borrowers retain the rights of possession and control, and the lender secures an underlying equitable right in the pledged property.

A real estate licensee’s term to indicate either a selected geographical area or a group of people from which to solicit real estate business and to which a real estate salesperson devotes special attention and study. A good salesperson learns everything there is to know about a particular geographical area, including all recent comparable sales, and tries to solicit real estate business, especially listings from this community. In a similar manner, licensees seek business from their “people farm.”

A real estate licensee’s term to indicate either a selected geographical area or a group of people from which to solicit real estate business and to which a real estate salesperson devotes special attention and study. A good salesperson learns everything there is to know about a particular geographical area, including all recent comparable sales, and tries to solicit real estate business, especially listings from this community. In a similar manner, licensees seek business from their “people farm.”

The formal decision of a court on the respective rights and claims of the parties to an action or suit. A judgment that has been entered and recorded with the county recorder usually becomes a general lien on the property of the defendant.

A purely statutory general lien on real and personal property belonging to a debtor. Usually the lien covers only property located within the county where the judgment is rendered; notices of the lien must be filed in other counties when the creditor wishes to extend the lien cover¬age. To collect the amount of the judgment, the court is asked to issue a legal document, called a writ of execution, directing the sheriff to seize and sell as much of the debtor’s property as is necessary to pay the debt and the expenses of the sale. A judgment lien differs from a mortgage in that a judgment lien does not have a specific parcel of real estate given as security at the time that the debtor-creditor relationship is created.

The law in the state where the real estate is located determines priority of liens. A judgment takes its priority as a lien on the debtor’s property on one or a combination of the following dates: (1) the date the judgment was entered by the court, (2) the date the judgment was filed for record in the recorder’s office, or (3) the date an execution was issued. Judgments are enforced through the issuance of an execution and the ultimate sale of the debtor’s real or personal property by a sheriff. When the property is sold to satisfy a debt, the debtor should demand a legal document known as a satisfaction judgment, which should be filed with either the clerk of the court or, in some states, with the recorder of deeds so that the record is cleared of the judgment.

A description of a piece of real property that is acceptable by the courts of the state where the property is located for use in real property conveyance documents. The description is usually complete enough so that an independent surveyor can locate and identify that specific parcel of land. Oral testimony is not admissible as a way of describing the property more fully, except in certain cases involving fraud or mistake. Such descriptions are usually based on the field notes of a surveyor or civil engineer. Methods of description are lot, block and subdivision; government survey; and metes and bounds.

Bona fide; an act is done in good faith if it is in fact done honestly, whether negligently or not. The recording laws are designed to protect a good-faith purchaser. Most antidiscrimination laws require a broker to transmit all good-faith offers to lease or buy. Many states add a requirement of good faith for a person to acquire title to someone else’s real property by adverse possession
. 
Sometimes an act done in “bad faith” is punishable as a crime. For instance, if an investor-borrower applies for an owner-occupant loan and lies about his intent to occupy, this type of falsehood is punishable as a misdemeanor under the National Banking Act.

A requirement to reveal fully and accurately all material facts, a requirement based on the theory that no fraud is committed if the purchaser has accurate and full information regarding the property to be purchased. A broker is under a legal obligation to disclose in full to a client all known, relevant facts affecting a proposed transaction. Many state subdivision and condominium laws, as well as the federal Interstate Land Sales Full Disclosure Act (concerning subdivisions), require a developer to disclose fully all material facts of a project to each prospective purchaser or lessee through required distribution of a public report.

Heirs are recipients of an inheritance from a deceased owner, whereas assigns are successors in interest to a property. The words heirs and assigns are customarily inserted in deeds and wills, and are considered to be words of limitation, not words of purchase. Words of limitation in a conveyance indicate what type of estate is created. Words of purchase indicate who takes the estate. For example, in a conveyance “to Harry Howe and his heirs,” the words to Harry Howe are words of purchase. The words and his heirs are words of limitation indicating a fee simple estate; they would not be present in the transfer of a life estate. Heirs and assigns are also generally responsible for the contracts of their predecessors, such as leases, options, mortgages, and contracts for deed. 

A written listing of real property in which the seller agrees to appoint only one broker to sell the property for a specified period of time. The two types of exclusive listings are the exclusive agency and the exclusive right to sell. Generally, exclusive listings must stipulate a definite termination date and may not include a rollover clause. A listing for an indefinite period is frowned on by the courts, is illegal in many states, and is generally poor practice. This is to protect sellers who, unaware that the listing is still in effect after the end of the initial listing period because they failed to give a cancellation notice, may list the property with another broker and thus find themselves liable for the payment of two full commissions.

• Buyer and seller are typically motivated.
• Both parties are well-informed or well-advised, and they are acting in what they con¬sider their own best interest.

An estate or unit of interest in real estate that is owned by two or more natural persons, all owning equal shares with rights of survivorship. The basic idea of a joint tenancy is unity of own¬ership; title is held as though all owners collectively constituted one person, a fictitious entity. The death of one joint tenant does not destroy the owning unit—it only reduces by one the number of persons who jointly own the unit. The remaining joint tenants receive the deceased tenant’s interest by the right of survivorship. Thus, the decedent’s interest cannot be transferred by will or descent. As each successive joint tenant dies, the remaining tenants acquire the interest of the deceased. The last survivor takes title in severalty, fully inheritable at the survivor’s death by heirs and devisees.

Some form of joint tenancy is recognized in most states, although several states have opted to eliminate the right of survivorship as a distinguishing characteristic. Sometimes called the “poor man’s will,” the fact that one holds title to property as a joint tenant is no reason for a person not to make a will. Joint tenancy does avoid a formal probate proceeding, however.

Traditionally, four unities are required to create a joint tenancy: unity of title, unity of time, unity of interest, and unity of possession. All unities must be present when title is acquired by one deed, executed and delivered at one time that conveys equal interests to all the grantees, who hold undivided possession of the property as joint tenants.

A joint tenancy can be created only by grant or purchase (by a deed of conveyance) or by devise (will)—it cannot be created by operation of law. The grantees or devisees must be specifically named as joint tenants. In most states, a deed or will that is unspecific about the grantees’ or devisees’ tenancy will pass title to the parties as tenants in common. Typical wording used to create a joint tenancy may be as follows: “To Morton Charles and Seymour Berkowitz, and to the survivor of them, and his or her heirs and assigns as joint tenants, with rights of survivorship, and not as tenants in common.”

Debtors cannot protect themselves from creditors’ claims by taking title to property in joint tenancy. The creditor has every right to attach the debtor’s interest in jointly held property and force a partition. However, if the joint tenant dies before the creditor seizes that tenant’s interest then the creditor loses his interest because the surviving tenant takes the property free from the claims of the decedent’s creditors. On the other hand, a creditor of the surviving joint tenant has substantially increased his security.

One principal advantage of joint tenancy is avoiding the delay and expense of probate proceed¬ings because the surviving joint tenant immediately becomes the sole owner of the property. The current value of the property is not included in the total value of the estate on which probate fees are assessed. In addition, the survivor holds the property free from the debts of the deceased joint tenant and from heirs against her interest.

Joint tenants give up the right to dispose of their individual interests by will, thus precluding the use of estate planning to minimize the estate taxes. Although not subject to probate proceedings, joint tenancies are subject to gift taxes, income taxes, and inheritance taxes, in addition to federal estate taxes. A purchaser should discuss these tax consequences with experienced tax counsel before deciding whether to hold title to the property in joint tenancy. In addition, joint tenancy or tenancy by the entirety may not be appropriate for people with children from a prior marriage.
 

Covenants are unconditional promises contained in contracts, the breach of which entitles a person to damages. Conditions, on the other hand, are contingencies, qualifications, or occurrences upon which an estate or property right (like a fee simple) would be gained or lost. Covenants are indicated by words such as promise, undertake, agree; conditions are indicated by words such as if, when, unless, and provided. Because both are limitations only and do not create obligations, failure of the condition to occur will not entitle either party to damages against the other party. Covenants are unconditional promises contained in contracts, the breach of which entitles a person to damages. Conditions, on the other hand, are contingencies, qualifications, or occurrences upon which an estate or property right (like a fee simple) would be gained or lost. Covenants are indicated by words such as promise, undertake, agree; conditions are indicated by words such as if, when, unless, and provided. Because both are limitations only and do not create obligations, failure of the condition to occur will not entitle either party to damages against the other party.

Recently sold or leased properties that are similar to a particular property being evaluated and are used to indicate a value for the subject property. “Comps” need not be identical to the subject in physical characteristics or location, but the highest and best use, land-to-building ratio, terms of the sale, and the market conditions should be similar, or relatively easy to adjust for comparison.

    In addition to adjustments for financing, time, and conditions of sale, adjustments may be necessary for differences in location and all features that are recognized by the market as having value.

In general terms, the more recent the sale and the fewer the dissimilarities, the better the comparable. Comps must also fit the definition of value to be applied. Distressed properties are not arm’s length. Sales of distressed properties generally do not fit the definition of market value. The appraiser must carefully select only those comparables that actually fit the definition of value being used.
 

An offer to buy submitted to a seller with the understanding that the seller has already accepted a prior offer; a secondary offer. Sometimes the seller accepts the backup offer contingent on the failure of the sales transaction on the part of the first purchaser within a specified period of time. The seller must be careful in how she proceeds, however, when the time for buyer’s performance under the first contract has expired. Rather than just immediately treat the contract as terminated and arrange to convey the property to the backup buyer, the seller should make sure that the seller has fully performed, or made a full and adequate tender of such performance, to the first purchaser. Otherwise, the seller may be contractually bound to convey the same property to two different buyers. The best practice is to obtain a release from the first purchaser. 

The real estate agent should be cautious about encouraging the seller-client to breach any existing contract in order to accept a better second offer. The agent might be sued by the first buyer for the tort of intentional interference with contract. 

Buyers should consider reserving the right to withdraw from the accepted backup offer at any time prior to notice that the seller has canceled the first contract. This gives the buyer some flexibility in continuing to look for other properties.

An agreement made by a landlord as a concession to a prospective tenant, in which the landlord agrees to take over the tenant’s existing lease in return for the tenant’s agreement to lease space in the landlord’s commercial building (office building, industrial park).

The loss of land as a result of its being washed away by a sudden or violent action of nature. A riparian owner generally does not lose title to land lost by avulsion—the boundary lines stay the same no matter how much soil is lost, and the former owner can reclaim the lost land. In contrast, the riparian owner loses title to land washed away by erosion, which is the gradual and imperceptible washing away of soil.

• In appraisal, the increases or decreases to the sales price of a comparable property to arrive at an indicated value for the property being appraised. Adjustments may be made for several reasons. The first adjustment is for seller concessions or conditions of sale; then for financing terms. Another is for time of sale if there has been a change in market conditions since the comparable sale. Adjustments are then made for location and dissimilarities between the physical characteristics of the subject and the comparable property. The indicated value is increased or decreased for each difference or dissimilarity. 

• In real estate closings, the credits and debits of a settlement statement, such as real property tax, insurance, and rent prorations.

Many legal documents, such as leases and contracts for deed, contain a transfer clause that states in effect that the property may be transferred only with the owner’s consent, “which consent shall not be unreasonably withheld.” There is no acceptable definition of what is unreasonable. For example, it might be reasonable for a lessor to refuse to transfer a lease to a new tenant whose business would directly compete with another tenant in the same shopping center complex (i.e., poor tenant mix).

In a contract for deed situation, it would generally be unreasonable for the vendor to refuse an assignment or to demand a share in the profits where the assignee is as good a credit risk, if not better, as the assignor-vendee.

To avoid lawsuits, it would be best to set forth some criteria for reasonable consent in the transfer clause itself.