Legal Concepts in Real Estate: Mortgage Lending P&P 3 Edition/Updated Nov. 6, 2009

Chapter 9
Legal Concepts
in Real Estate
Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 1

Chapter 9: Legal Concepts in Real Estate
Overview
• These concepts detail:

–Legal relationships between parties
–How they affect property value
• Distinction between real property and
personal property
• In-depth discussion of the rights of
ownership

Overview
• These rules determine exactly what is

being sold—and what is being
mortgaged
• Other items covered:
– Public and private restrictions on property
– How those interferences with property rights
may affect value

Overview
Chapter 9 discusses:
• The essential elements of a valid contract
• Real property versus personal property
• The bundle of real property rights
• Public and private restrictions on real property

Key Terms
• Annexation • Contract
• Annexer • Deed restrictions
• Appurtenances • Easement
• Attachments • Eminent domain
• Building Codes • Encroachment
• Bundle of Rights • Escheat
• Civil law

Key Terms
• Fixtures • Real property

• Improvement • Tort
• Location survey • Trade fixtures
• Nuisance • Trespass
• Personal property • Waste
• Property • Zoning laws

Basic Civil Law Concepts
• Civil law is the body of law concerned with

the rights and liabilities of one individual in
relation to another
• These rights, responsibilities, and remedies
can be summed up in the three fundamental
categories of civil law:
1. Contracts
2. Torts
3. Property

Contract
• An agreement between two or more parties

to do, or not do, a certain thing
– A legally binding promise
• When two people enter into a contractual
relationship, they voluntarily take on legal
duties toward one another

Valid Contract Elements
– Competent parties, each side must have the

capacity to enter into a contract (which in
many states requires the legal age of
majority)
– Consideration, such as money or services to
be performed
– Mutual agreement, also known as meeting of
the minds, which requires offer and
acceptance of the terms of the contract

Tort
• A breach of standards of reasonable conduct
imposed by law that causes harm to another
• These legal duties are not voluntarily assumed
• Law requires everyone to take reasonable care
to avoid injuring another person or damaging
another’s property
• Tort law concerns the duties of reasonable
conduct imposed by law

Property Law
• Property is something that is owned

– Real or personal
– Includes the rights of ownership in it
• The rights of ownership allow the owner to
use, possess, transfer, or encumber the
property owned
• Property law includes rules about:
– Acquiring and losing ownership
– The rights and duties ownership carries with it

Legal Concepts
Affecting Property Value
• Never give legal advice unless you are a
lawyer
• Helpful to understand these concepts and
how they may affect the value of real estate
• Certain things are included with property:
– Real property and personal property
– Attachments and improvements
– Real property rights
– Appurtenances.
Legal Concepts
in Real Estate
Law classifies all property as:
• Real property
− Bundle of rights
− Also called realty
• Personal property
− Also called personalty or chattel

Real Property
• People think of land

• Also encompasses:
– Items attached to the land (attachments or
improvements)
– Rights that go with ownership of the land
(appurtenances)
– Limitations on the use of land (public and
private restrictions)

Attachments
Things connected to the land, whether

natural or man-made
• Grow on the land (natural: Trees and shrubs)
• Built on the land (man-made: Houses and
fences)
• All are generally considered real property

Fixtures
Man-made attachments
• Including any personal property attached to or
closely associated with real property in such a
way it has legally become part of the real
property
• Improvement

Annexation
• Legal term for attaching or affixing personal

property to real property
• Does not need to be mentioned in the
purchase agreement
• They are included by implication in the
description of the real estate

Legal Considerations
• What makes something real property vs.

personal property?
• Two questions most courts consider:
• What was the intention of the annexer?
• What was the purpose of the
annexation?

Annexer
• The person who owned the item as

personal property and brought it onto the
real property
– Did the annexer intend for the disputed item
to become part of the real property, or to
remain personal property?
– Did the annexer acquire the item to improve
the real property, or just for personal use?

Annexation
• Some personal property items are so

closely associated with the house they
become real property items
• They may not be physically attached to
the house
• Courts also take into account the
relationship of the parties involved

Trade Fixtures
• Any equipment or personal property a

tenant installs for business purposes
• Tenant is allowed to remove trade fixtures
before a lease ends
– Unless a written document forbids it

Uniform Commercial Code (UCC)
• A body of law that governs transactions

involving personal property
• Protects the:
– Vendor of the personal property
– New owner of the property
– Lender
– Seller

Uniform Commercial Code (UCC)
• Solves problems:
– By requiring the vendor to file
– Within ten days of installation
– With a financing statement with the office of the
county recorder in the county in which the land
is situated
• Vendors who fail to file in a timely manner
lose their rights against the owner

Bundle of Rights
• Real property rights
• Rights include:
– Possession
– Enjoyment
– Disposal
– Exclusion
• Owner—if one secures the entire bundle of rights from
another
• Fee simple—the greatest estate one can have in real
property

Appurtenances
• Rights that go with real property
– When real property is sold, appurtenant rights
are ordinarily sold along with it
• Fee simple ownership includes other
appurtenances:
– Access rights
– Surface rights
– Subsurface rights
– Mineral rights
– Some water rights
– Limited air rights
Bundle of Rights
• It's possible for the owner to transfer only
some of the rights of ownership
• A lender must know if
– The entire bundle of rights is being
transferred
– There are restrictions or past transactions
that may limit the current transfer of
ownership
• May have a great effect on the value of the
real property
Public and Private

Restrictions
Governments have four powers (remember
P E T E):
1. Police power
2. Eminent domain
3. Taxation
4. Escheat

Zoning Laws
• Passed to protect the health, safety, and welfare of the
community
• Land use controls may limit development
• Other zoning ordinances may also restrict:
– How and where the building may be constructed on the
property
– Minimum lot size
– Building height limits
– Setback and side yard rules
– Permitted building density, off-street parking requirements
– Other things that a local government may feel are
necessary

Building Codes
• Can include fire, plumbing, electrical, etc.

• In most states, minimum building standards set
by state law
• Local government can require additional, stricter
standards
• The lender must consider whether the proposed
highest and best use for the property can be
achieved economically

Environmental Protection Laws
• Regulations can involve blocking or

restricting land use where environmental
concerns exist
• Sometimes, this conflicts with landowners’
usage

Eminent Domain
• Affects real estate because:

– Government involvement in fair market
pricing
– It makes adjacent land more or less valuable,
depending on a proposed use
• Remember, eminent domain is the right;
condemnation is the action

Taxation, Special
Assessments, and Escheat
• Taxation
– Property taxes (ad valorem taxes)
– Low taxes might encourage real estate activity
– High taxes could have the opposite effect
• Special assessments
– Charges levied only against properties that benefit from
a public improvement
• Escheat
– When property reverts to the state after a person
without a valid will and without heirs dies

Private Restrictions
• Can be imposed by a former owner or

developer
• May or may not have an impact on land
value, depending on their purpose and
severity
• The two main types are:
1. Deed restrictions
2. Easements

Deed Restrictions
• Limitations on real property use, imposed by
a former owner through language included in
the deed
– AKA restrictive covenants
– “Run with the land"
– Enforceable against future property owners
• Usually these restrictions make a new owner
promise not to use property in a particular
way

Covenants, Conditions,
and Restrictions (CC&Rs)
• A declaration is often placed in the deed by
the original subdivider of land, although they
can also be added later
• Keeps the subdivision attractive and protect
the market value of properties

Easement
• A right to use another person's real property for

a particular purpose
– Can be public or private
• Important: Easements restrict how a parcel of
land may be used because, usually, a structure
cannot be put on an easement
• The easement creates limited rights for the
easement holder

Easements
• Can be put into a deed before a transfer of

property occurs
• Can be created separately as an
agreement between the parties
• An easement that grants access is referred
to as a right of way (ROW)
• Easements may have a negative impact on
value if they severely limit buildable site
area

Trespass
• Certain activities interfere with a property

owner’s bundle of rights
• Trespass—Physical invasion of land by
another person with no lawful right to enter.
– Interferes with the owner's possessory interest
in the land

Encroachment
Occurs when a physical object intrudes onto

neighboring property, often due to a mistake
regarding boundary
• Legal synonym for trespass,
• Only used in reference to objects
• Trespass refers to people

Nuisance
• Involves interference with the quiet

enjoyment of land from the outside, so
it does not involve interference with
possessory rights
• AKA external obsolescence
• Can affect property values in the entire
neighborhood
• To be actionable, a nuisance must be
more than a single occurrence
Waste
• Use or abuse of property in any way that

would permanently damage or reduce its
market value
• Property owner is contractually obligated
in the mortgage to take steps to preserve
the property and prevent waste

Summary
• Civil law is body of law concerned with rights and liabilities
of one individual in relation to another. Contracts, torts,
and property are the fundamental concepts of civil law. A
contract is an agreement between two or more parties to
do, or not do, a certain thing. Contract law concerns
voluntarily assumed duties. A tort is a breach of standards
of reasonable conduct imposed by law that causes harm to
another. Tort law concerns the duties of reasonable
conduct imposed by law. Property is something owned,
real or personal, and includes the rights of ownership. The
rights of ownership allow the owner to use, possess,
transfer, or encumber the property owned. Property law
concerns the rights and duties inherent in ownership.

Summary
2. Real property is land and everything

attached or appurtenant to it. Real
property rights are defined in terms of a
bundle of rights that are conferred by
ownership. These rights are the right of
use, the right of enjoyment, and the right
of disposal. If one secures the entire
bundle of rights from another, that person
is said to be the owner.

Summary
3. Attachments to real property are part of the

real property. The two types of attachments are
natural attachments (plants and trees), and
man-made attachments (fences or buildings).
Man-made attachments are called fixtures. A
major fixture, such as a building, is called an
improvement. Unless otherwise agreed,
attachments are transferred with the land;
personal property is not. Difficulties can arise
over what is considered real property and what
is considered personal property.
Summary
4. A fixture is personal property attached to or

closely associated with real property such that it
has legally become part of the real property. In
deciding whether an item is a fixture, a court
looks at the intention of the annexer, the nature
of the item, manner of annexation, the purpose
for which it was annexed, the relationship of the
parties, and any written agreement. Written
agreements always take precedence. Trade
fixtures are an exception to the general fixture
rules. Since they are installed by a tenant for
use in business, trade fixtures may be removed
when the lease period is over.

Summary
5. Public and private restrictions on land can affect

value. Public restrictions: four powers of government:
police power, eminent domain, taxation, escheat
(P E T E). Government restrictions via police power
that can impact land value include zoning, building
codes, and environmental laws. Private restrictions
on ownership are deed restrictions (restrictive
covenants, CC&Rs) and easements; often used by
original subdivider, but can also be added later. They
must touch and concern the land to be legal (e.g.,
minimum house size).
Summary
6. An appurtenance is a right that goes with or

relates to real property, including air, water,
mineral, and support rights. These rights are
ordinarily transferred with the land, but may be
severed and sold separately. Trespass,
encroachment, and nuisance are three kinds of
interference with these rights. Waste is use or
abuse of property in any way that would
permanently damage or reduce its market value.
This will likely be limited by the lender in the
mortgage documents.
Quiz
1. Which is NOT a primary focus of civil

law?
a. compensating a tort victim
b. determining ownership rights
c. enforcing a contract
d. punishing a criminal

Quiz
2. In determining whether an item is a

fixture, the most important test is the
a. intention of the annexer.
b. physical attachment to realty.
c. relationship of the parties.
d. size of the item.

Quiz
3. Trade fixtures
a. are considered the landlord’s personal
property.
b. are considered real property and can’t be
removed by the tenant.
c. can be removed by the tenant before the
lease expires.
d. can’t be removed unless the lease
specifically states they are personal
property.
Quiz
4. The bundle of rights conferred with

real property ownership includes the
a. right of enjoyment.
b. right of disposal.
c. rights of enjoyment and disposal.
d. rite of passage.

Quiz
5. Which is NOT a police power of

government?
a. building codes
b. environmental laws
c. restrictive covenants
d. zoning laws

Quiz
6. The government's constitutional power

to take private property for public use,
so long as the owner is paid just
compensation, is called
a. condemnation.
b. confiscation.
c. eminent domain.
d. immediate possession.

Quiz
7. Private restrictions on land can include

all of the following EXCEPT
a. deed restrictions.
b. easements.
c. eminent domain.
d. restrictive covenants.

Quiz
8. An easement granting access to

property is referred to as
a. DHA.
b. FHA.
c. POW.
d. ROW.

Quiz
9. In looking for encroachments, a lender

is most likely to order a(n)
a. appraisal.
b. location survey.
c. survey.
d. title search.

Quiz
10. A _____________ must occur outside

of the property.
a. encroachment
b. nuisance
c. trespass
d. waste

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Chapter 9

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 1

• These concepts detail:

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 2

• These rules determine exactly what is

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 3

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 4

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 5

• Fixtures • Real property

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 6

Basic Civil Law Concepts

• Civil law is the body of law concerned with

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 7

• An agreement between two or more parties

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 8

Valid Contract Elements

– Competent parties, each side must have the

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 9

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 10

• Property is something that is owned

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 11

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 13

• People think of land

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 14

Things connected to the land, whether

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 15

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 16

• Legal term for attaching or affixing personal

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 17

• What makes something real property vs.

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 18

• The person who owned the item as

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 19

• Some personal property items are so

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 20

• Any equipment or personal property a

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 21

Uniform Commercial Code (UCC)

• A body of law that governs transactions

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 22

Uniform Commercial Code (UCC)

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 23

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 24

Public and Private

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 27

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 28

• Can include fire, plumbing, electrical, etc.

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 29

Environmental Protection Laws

• Regulations can involve blocking or

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 30

• Affects real estate because:

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 31

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 32

• Can be imposed by a former owner or

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 33

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 34

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 35

• A right to use another person's real property for

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 36

• Can be put into a deed before a transfer of

Mortgage Lending P&P 3rd Edition/Updated Nov. 6, 2009 37

• Certain activities interfere with a property