(BQ) Part 2 book The legal environment of business has contents: Intellectual property, the law of administrative agencies, employment discrimination, environmental law, antitrust laws, rules governing the issuance and trading of securities
14 Law of Property: Real and Personal REAL PROPERTY INTERESTS IN REAL PROPERTY VOLUNTARY TRANSFER OF REAL PROPERTY INVOLUNTARY TRANSFER OF REAL PROPERTY RESTRICTIONS ON LAND USE PERSONAL PROPERTY GLOBAL DIMENSIONS OF PROPERTY LAW property A bundle of rights, in relation to others, to possess, use, and dispose of a tangible or intangible object 372 hen people hear the word property, they generally think of physical objects: land, houses, cars Property, however, is a bundle of rights and interests in relation to other persons with reference to a tangible or intangible object (Exhibit 14-1) The essence of the concept of property is that the state provides the mechanism to allow the owner to exclude other people By virtue of this right, persons with great amounts of property have an especially significant amount of power Because possessing property facilitates the acquisition of even more property, the identification of those who possess a disproportionate amount of property rights provides insight into the dynamics of influence and authority in our society Property rights are not the same in every society, nor are they static While reading this chapter, think about how property rights could be different and what impact that difference would have both on the legal environment of business and on society as a whole Because different types of property give their owners different rights, and because different bodies of law govern different types of property, we will discuss the three primary types of property in two separate chapters Initially, this chapter focuses on real property, that is, land and anything permanently attached to it The second half discusses personal property, both tangible (capable of being detected by the senses) and intangible (incapable of being detected by the senses) Chapter 15 shifts the focus to intellectual property, that is, things created primarily by mental rather than physical processes W CHAPTER 14 ᭜ Law of Property: Real and Personal 373 EXHIBIT 14-1 Property is often characterized as a bundle of rights All of the rights in the bundle are not always held by one person For example, when an owner leases a house to a tenant, the owner has transferred the rights to use and possess but has kept the rest of the rights Right to PROPERTY AS A BUNDLE OF RIGHTS Note: Notice that the rights of the holder decrease as one moves up the pyramid Use as a Security ease or L end Right to L Right to Us e Right to Sell Right to Possess Right to Destroy e Right to Donat CRITICAL THINKING ABOUT THE LAW Property is directly related to the power one has in society Some individuals argue that the government should offer more protection for property owners Others argue that in a fair country, citizens would have similar amounts of property because property provides a basis for so many other decisions Property rights actually exist as a matter of degree A property owner has some rights, but he or she must tolerate some restrictions on those rights The following questions will help you think critically about the link between property rights and power If a group of politicians passed a law to increase protection of property rights, what ethical norm probably led to this legislation? Clue: Review the list of ethical norms in Chapter Which ethical norm seems most likely to motivate increased protection of property? If a group of radical politicians proposed a law that reduced personal property protection and redistributed some property rights to the poor, what ethical norm was probably behind this action? Clue: Again, review the list of ethical norms In light of the variation in rights attached to the concept of property in different countries, the idea of property has ambiguity as one of its primary characteristics What could nations to eliminate any ambiguity associated with saying “This property is mine”? Clue: Take another look at the definition of property rights Real Property Real property is land and everything permanently attached to it One’s rights to a property depend on the type of interest one has in that property The law provides the means to convey or transfer that interest Although most conveyances real property Land and everything permanently attached to it 374 PART TWO ᭜ Private Law and the Legal Environment of Business are voluntary, the government may require involuntary conveyances to benefit the public and may place restrictions on the use of property to protect the public health, safety, and welfare DEFINITION OF REAL PROPERTY Many disputes have arisen over whether certain items are real or personal property The law says that an item that is attached to the land is a part of the realty What does “attached” mean? Usually, an item is considered attached if its removal would cause damage to the property Thus, built-in appliances are generally a part of the real property, whereas freestanding ones are not Sometimes, however, an item is not really permanently affixed to the land, but its functioning is said to be essential to the functioning of the structure In such cases, the courts usually find the item to be part of the real property fixture An item that is initially a piece of personal property but is later attached permanently to the realty and is treated as part of the realty Fixtures An item that is initially a piece of personal property but is later attached permanently to the realty is known as a fixture and is treated as part of the realty Thus, if a person rents another’s property and installs a built-in microwave oven, the oven is a fixture and becomes part of the realty The tenant may not remove the oven when he or she leaves There are two exceptions to this rule First, the parties may agree that specific fixtures will be treated as personal property To be enforceable, such an agreement must be in writing The second exception is for trade fixtures A trade fixture is a piece of personal property that is affixed to realty in conjunction with the lease of a property for a business When an entrepreneur opens an ice cream parlor in a leased building, the freezers he or she installs are trade fixtures These are treated as personal property because of a presumption that neither party intends such fixtures to become a permanent part of the realty The businessperson will need the freezers at any new location, and new business tenants will have different needs EXTENT OF OWNERSHIP water rights The legal ability to use water flowing across or underneath one’s property mineral rights The legal ability to dig or mine the minerals from the earth below the surface of one’s land Any concept of land obviously includes the surface of the land, but legally, more is included The landowner is entitled to the airspace above the land, extending to the atmosphere Ownership of land also includes water rights, the legal ability to use water flowing across or underneath one’s property Water rights, however, are somewhat restricted, in that one cannot divert water flowing across the property in such a manner as to deprive landowners downstream of the use of water from the stream Ownership of land usually also encompasses the land below the surface, including mineral rights, the legal ability to dig or mine the minerals from the earth These mineral rights, however, may be sold or given to someone other than the person who owns the surface of the land Interests in Real Property Not all interests in land are permanent The duration of one’s ownership depends on the type of estate one is said to hold The estate that one has also determines what powers one has in regard to using the land Exhibit 14-2 briefly summarizes these interests, which are described in detail in the following subsections CHAPTER 14 ᭜ Law of Property: Real and Personal EASEMENT—Irrevocable right to use a portion of someone else’s land for a specified purpose 375 EXHIBIT 14-2 ESTATES IN LAND LEASEHOLD ESTATE—Right to possess property for an agreed-upon period of time LIFE ESTATE—Right to possess property until death, subject to restriction against waste CONDITIONAL ESTATE—Comparable to a fee simple absolute, except that interest will terminate upon the happening or nonhappening of a specified condition FEE SIMPLE ABSOLUTE—Most all-encompassing interest Right to possess for life and to devise to heirs upon death FEE SIMPLE ABSOLUTE The most complete estate is the fee simple absolute When most people talk about owning property, they usually have in mind a fee simple absolute If one has a fee simple absolute, one has all rights to own and possess that land When the owner of a fee simple absolute interest dies, the interest passes to the owner’s heirs fee simple absolute The right to own and possess the land against all others, without conditions CONDITIONAL ESTATE The interest of a conditional estate is the same as that of a fee simple absolute, except that it is subject to a condition, the happening or nonhappening of which will terminate the interest For example, Rose may own a farm subject to the condition that Rose never grow cotton Once Rose grows cotton, the condition has occurred, and the land either reverts to the former owner or is transferred in accordance with the terms of the deed (the instrument that is used to convey real property) Conversely, a conditional estate could be set up so that the holder would own the farm as long as the primary crop planted every year was corn Failure to meet the condition would terminate the estate conditional estate The right to own and possess the land, subject to a condition whose happening (or nonhappening) will terminate the estate deed Instrument of conveyance of property LIFE ESTATE A life estate is the right to own and possess property until one dies The use of a life estate may be more restricted than that of a fee simple absolute The party who will take possession of the property upon the death of the holder of the life estate has an interest in making sure that the value of the property does not substantially decline as a result of neglect or abuse by the holder of the life estate Thus, the life-estate holder is not allowed to waste the property, and cannot use the property in such a way as to destroy its value to future holders Nor can the life tenant neglect to make necessary repairs to the property to prevent its destruction or deterioration life estate The right to own and possess the land until one dies FUTURE INTEREST A person’s present right to possession and ownership of land in the future is a future interest The present future interest and usually exists in conjunction with a life estate or a condi- right to possess and own the tional estate For example, Sam owns a life estate in Blueberry Farm, and, upon land in the future 376 PART TWO ᭜ Private Law and the Legal Environment of Business Sam’s death, fee simple absolute ownership of the land will pass to Jane Jane has a future interest in Blueberry Farm As a result of her interest, she may sue Sam to enjoin him from engaging in waste of the property LEASEHOLD ESTATES leasehold The right to possess property for an agreed-upon period of time stated in a lease lease The contract that transfers possessory interest in a property from the owner (lessor) to the tenant (lessee) A leasehold is not an ownership interest It is a possessory interest One who has a leasehold is entitled to exclude all others, including the property owner under most circumstances, for the period of the lease and is entitled to use the property for any legal purpose that is not destructive of other occupiers’ rights or prohibited by the terms of the lease The lease is the contract that transfers the possessory interest It generally specifies the property to be leased, the amount of the rent payments and when they are due, the duration of the leasehold, and any special duties or rights of either party It is signed by both parties The owner of the property is the lessor, or landlord The holder of the lease is the lessee, or tenant Although the rights and obligations of the landlord and the tenant may be altered by the lease, some states have statutes requiring landlords to keep the premises in good repair and allowing tenants to withhold their rent if the landlord fails to so The landlord may enter the property only in an emergency, with permission of the tenant to make repairs, or with notice to the tenant near the end of the leasehold to show the property to a potential tenant If the tenant fails to make the agreed-upon rental payments, the landlord may bring an action to evict the tenant Unless prohibited by the lease, a tenant may move out of the property and sublease it to another party The initial tenant, however, still remains liable to the landlord for payment of rent due for the entire term of the lease EASEMENTS easement An irrevocable right to use some portion of another’s land for a specific purpose An easement is an irrevocable right to use some portion of another’s land for a specific purpose The party holding the easement does not own the land in question but has only the right to use it Easements generally arise in one of three ways: express agreement, prescription, or necessity An easement by express agreement arises when the landowner expressly agrees to allow the holder of the easement to use the land in question for the agreed-upon purpose For example, a utility company may have an easement to run power lines across one’s property The easement should be described on the deed to the property or recorded in the county office that keeps property records to protect the holder of the easement when the property is sold An easement by prescription arises under state law When one openly uses a portion of another’s property for a statutory period of time, an easement arises In many states, the time period is 25 years An easement by necessity arises when a piece of property is divided and, as a result, one portion is landlocked The owner of the landlocked portion has an easement to cross the other parcel for purposes of entrance to and exit from the land LICENSE license A temporary, revocable right to be on someone else’s property A license is a temporary, revocable right to be on someone else’s property When one opens a business, the public is given a license to enter the property to purchase the good or services provided by the business CHAPTER 14 ᭜ Law of Property: Real and Personal 377 CO-OWNERSHIP We have been referring to the holders of interest in land in the singular Ownership of land may also be held by multiple persons, as well as by business organizations Whenever there is ownership by multiple parties, it is important to know what type of ownership exists, because different forms confer different rights on the owners The three types of co-ownership are tenancy in common, joint tenancy, and tenancy by the entirety Regardless of which type of tenancy exists, all tenants have the equal right to occupy all the property Their other interests are described here and are summarized in Table 14-1 Tenancy in common is the most common form of joint ownership Owners may own unequal shares of the property, may sell their interest without consent of the other owners, and may have their interest attached by a creditor Upon the death of the tenant in common, his or her heirs receive the property interest Under joint tenancy, all are co-owners of equal shares and may sell their shares without the consent of other owners Their interest can be attached by creditors Upon the death of a joint tenant, his or her interest is divided equally among the remaining joint owners Tenancy by the entirety exists only when co-owners are a married couple One cannot sell his or her interest without the consent of the other, and creditors of only one cannot attach the property Upon the death of one, full ownership of the property passes to the surviving spouse Upon divorce, tenancy by the entirety automatically becomes tenancy in common CONDOMINIUMS AND COOPERATIVES Two forms of co-ownership that have become increasingly popular over the past 20 years are condominiums and cooperatives Condominiums In a condominium ownership interest, the owner acquires title to a “unit” within a building, along with an undivided interest in the land, buildings, and improvements of the “common areas” of the development When the condominium is developed, a Declaration of Covenants, Conditions, and Restrictions (called CC&Rs) is filed This document contains the architectural and use restrictions for the condominium development, assessments, and instructions for forming the condominium association that will manage the condominium The association has the power, as provided in the CC&Rs, to levy assessments against the unit owners in order to manage, maintain, insure, repair, and replace the common areas The association likewise has the authority to fine unit owners who not comply with the CC&Rs The following case illustrates the type of conflict that often arises out of this form of ownership Type Division of Ownership Rights of Owners’ Creditors Ownership of Property upon Death Tenancy in common Joint tenancy Equal or unequal shares Equal shares Can attach interest Transferred to heirs Can attach interest Tenancy by the entirety Equal shares Cannot attach interest Divided among other joint tenants Goes to surviving spouse co-ownership Ownership of land by multiple persons or business organizations; all tenants have an equal right to occupy all of the property tenancy in common Form of co-ownership of real property in which owners may have equal or unequal shares of the property, may sell their shares without the consent of the other owners, and may have their interest attached by creditors joint tenancy Form of co-ownership of real property in which all owners have equal shares in the property, may sell their shares without the consent of the other owners, and may have their interest attached by creditors tenancy by the entirety Form of co-ownership of real property, allowed only to married couples, in which one owner cannot sell without the consent of the other, and the creditors of only one owner cannot attach the property TABLE 14-1 JOINT OWNERSHIP 378 PART TWO CASE ᭜ Private Law and the Legal Environment of Business 14-1 Burton Stevens v Elk Run Homeowners’ Association, Inc Supreme Court of Wyoming 90 P.3d 1162 (2004) W hen Burton Stevens placed a portable hot tub on the deck of his townhouse, he was asked to remove it by the Elk Run Homeowners’ Association Stevens refused and Elk Run filed suit against Stevens to have the hot tub removed The district court ruled in favor of the homeowners’ association and ordered the hot tub removed Stevens appealed Justice Kite Facts In 1993, a developer filed a Declaration of Covenants, Conditions and Restrictions (the covenants) and a plat for the Elk Run Townhouses development in Jackson The covenants indicated [that] each townhouse was located on a separate lot, allowing for fee simple ownership of each townhouse by an individual owner The covenants also established the Homeowners’ Association and provided that the individual lot owners were members of it The members were to elect a management committee to govern the affairs of the association The covenants defined “common areas” as areas “designated as such on the applicable plat(s) for the project.” The plat identified decks, entryways, and parking areas as “limited common areas.” Other applicable provisions of the covenants stated: Certain Additional Restrictions The following additional restrictions are applicable to the lots and common areas Each reference to “owners” includes their tenants and invitees a Keeping Outside Areas Clean and Sightly The Owners shall not place or store anything within the common areas without the prior written consent of the Management Committee or its designee except in a facility specifically designated or approved for their storage All owners shall keep their residences and their lots in a reasonably clean, safe, sightly and tidy condition b Obstructing Common Areas Owners shall not obstruct common areas Owners shall not place or store anything within the common areas without the prior written consent of the Management Committee or its designee except in a facility specifically designated or approved for such storage c Architectural Control Except as otherwise expressly provided herein, no building, fence, wall, driveway, excavation or improvement of any kind shall be commenced, erected or maintained upon the property, nor shall any exterior addition to or change or alteration therein be made (including without limitation any closing in of a porch or balcony) by any owner other than Declarant, until the plans and specifications showing the nature, kind, shape, height, materials, and location of the same shall have been submitted to and approved in writing by the Management Committee, as to harmony of external design and location in relation to surrounding structures and topography, and in relationship to the quality and appearance of the project Mr Stevens acquired Lot 12 of the Elk Run Townhouses Addition in 1998 His warranty deed stated that the property was subject to “taxes, reservations, covenants, encroachments, conditions, restrictions, rights-of-way and easements of sight and/or record.” After moving into his townhouse, Mr Stevens placed a portable hot tub on his exterior deck The Homeowners’ Association requested that Mr Stevens remove the hot tub from his deck, but he refused Discussion Mr Stevens argues that the district court erred by granting summary judgment in favor of the Homeowners’ Association He claims that the district court misinterpreted the covenants as requiring management committee approval prior to the placement of a portable hot tub on an exterior deck We turn first to Mr Stevens’ argument that the district court erred by determining that paragraph 12(g) (architectural control) applied to the placement of a portable hot tub on his deck The district court held that, under paragraph 12(g), Mr Stevens was required to secure management committee approval before placing the hot tub on his deck because the deck was an improvement to the townhouse unit and placement of the hot tub amounted to a change and alteration of the deck We not agree with the district court’s conclusion on this issue When we read paragraph 12(g) in its entirety and within the context of the whole declarations document, we believe that the terms “alteration” and “change” clearly and unambiguously denote a degree of permanence The declarant included “closing in of a porch or balcony” as an example of the type of alterations or changes which fall within the paragraph 12(g) The paragraph also specifically refers to buildings, fences, walls, and driveways Each of these examples is a permanent and enduring modification to the premises Placing a portable hot tub on a deck does not affect the structure of the deck or townhouse The hot tub could be moved by simply unplugging it and draining the water Consequently, a portable hot tub is not the type of permanent CHAPTER 14 alteration or change addressed by the plain language of paragraph 12(g) The district court’s decision to the contrary was incorrect The district court also relied on paragraphs 12(a) and (b) of the covenants in concluding that management committee approval was required before the hot tub could be placed on the deck Paragraphs 12(a) and (b) address keeping outside areas clean, sightly, and free of obstructions Owners are prohibited from placing or storing “anything within the common areas without the prior written consent of the Management Committee or its designee except in a facility specifically designated or approved for their storage.” Mr Stevens claims that paragraphs 12(a) and (b) not apply because his deck is designated on the plat as a ᭜ Law of Property: Real and Personal 379 “limited common area” rather than a “common area.” The plain and ordinary meaning of the term “limited common area” is an area reserved for an owner’s exclusive use, but subject to observation by others and, consequently, regulation by a homeowner’s association Clearly, the grantor intended to include limited common areas like decks, entryways and parking areas within the regulation of paragraph 12(a) and (b) The obvious purpose of the provisions is to keep any areas that could be observed by the general public and other townhouse owners neat, orderly, and free of obstacles Therefore, we hold that paragraphs 12(a) and (b) apply to decks Affirmed in favor of Plaintiff, Elk Run Homeowners’ Association CRITICAL THINKING ABOUT THE LAW Despite the effort homeowners’ associations put into specifying what can and cannot be done on common areas or limited common areas, disputes about whether particular actions by homeowners are in conformity with the rules governing the residents or the homeowners are common The courts, as in this case, pay close attention to the provisions in the agreement signed by the homeowner at the time of purchase What reasons does the court use in this case to find that the district court partially erred in its finding of summary judgment for the plaintiff? Clue: Look at the portion of the decision where the court discussed the contents of paragraph 12(g) Could Stevens have avoided trouble by placing his hot tub outside the sight of the other homeowners? Clue: What is the content of 12(a) and (b) that Stevens violated? Cooperatives Whereas condominiums often involve developments consisting of multiple buildings, each of which contains two or more units, cooperatives are more commonly used for ownership interests in apartment buildings In a cooperative, the investor resident acquires stock in the corporation that owns the facility and receives a permanent lease on one unit of the facility A board of directors is generally elected from among the unit owners to manage the facility All unit owners are bound by rules established by the cooperative’s board of directors Commonly, the cooperative will provide that a member may be evicted for violation of the rules, and upon eviction, the cooperative will repurchase the evicted member’s unit Voluntary Transfer of Real Property The value of property is heightened by the owner’s ability to transfer that property In general, the owner may transfer the property to anyone for any amount of consideration or for no consideration He or she may transfer all or any portion of the property To transfer property, however, the owner must follow the proper procedures These are execution, delivery, acceptance, and (to protect the recipient of the property) recording (Exhibit 14-3) Unless something to the contrary is stated, it is presumed that a conveyance of ownership is the conveyance of a fee simple absolute 380 PART TWO ᭜ Private Law and the Legal Environment of Business EXHIBIT 14-3 Execution of the Deed STEPS IN A CONVEYANCE Delivery of the Deed by the Grantor Acceptance of the Deed by the Grantee Recording of the Deed EXECUTION The first step in a voluntary transfer is the execution of a deed The deed, as shown in Exhibit 14-4, is the instrument of conveyance A properly drafted deed: Identifies the grantor (the person conveying the property) and the grantee (the person receiving the property) Contains words that express the grantor’s intent to convey the property Identifies the type and percentage of ownership States the price paid for the property, if any Contains a legal description of the physical boundaries of the property (not the street address) Specifies any easements or restrictions on use of the land Identifies any warranties or promises made by the grantor in conjunction with the conveyance Once the properly drafted deed has been signed by the grantor and the grantee, it is said to have been executed Many states require the signing of the deed to be witnessed or notarized (witnessed by an official of the state who certifies that she or he saw the parties sign the deed and was provided evidence that the signatories were who they purported to be) general warranty deed A deed that promises that the grantor owns the land and has the right to convey it and that the land has no encumbrances other than those stated in the deed General Warranty Deed Two basic types of deeds are normally used to transfer ownership of property The first, a general warranty deed, is preferred by grantees because it contains certain warranties or promises by the grantor Although such covenants may vary slightly from state to state, they generally include the following: The covenant of seisin—a promise that the grantor owns the interest that he or she is conveying The covenant of the right to convey—a promise that the grantor has the right to convey the property The covenant against encumbrances—a promise that there are no mortgages or liens against the property that are not stated in the deed The covenant for quiet enjoyment—a promise that the grantee will not be disturbed by anyone who has a better claim to title of the property and a promise to defend the grantee’s title against such claims or to reimburse the grantee for any money spent in the defense or settlement of such claims The covenant of further assurances—the promise that the grantor will provide the grantee with any additional documents that the grantee needs to perfect his or her title to the property CHAPTER 14 ᭜ Law of Property: Real and Personal 381 EXHIBIT 14-4 A SAMPLE GENERAL WARRANTY DEED Quitclaim Deed The other type of deed, which is more desirable from the grantor’s perspective, is the quitclaim deed With such a deed, the grantor simply transfers to the grantee the interest that the grantor owns in the property being conveyed The grantor makes no additional covenants Obviously, most grantees would be very reluctant to accept a quitclaim deed quitclaim deed A deed that simply transfers to the grantee the interest that the grantor owns in the property ... due, the duration of the leasehold, and any special duties or rights of either party It is signed by both parties The owner of the property is the lessor, or landlord The holder of the lease is the. .. without the consent of the other, and the creditors of only one owner cannot attach the property TABLE 14-1 JOINT OWNERSHIP 378 PART TWO CASE ᭜ Private Law and the Legal Environment of Business. .. argued that the law allowed him to remove dirt and 3 92 PART TWO ᭜ Private Law and the Legal Environment of Business vegetation because it improved the flow of water, the original purpose of the easement