Overview of Real Property Law in the United States

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Overview of Real Property Law
in the United States

Section I: Background and Introduction

This article will present an overview of real property law in the United States. The basic concepts underlying real property law are the same throughout the United States. However, there are numerous variations in the application of these concepts between states as well as between counties and cities within states. Consequently, the focus of this article will be on the law as applied in New York City, unless otherwise indicated. Furthermore, the discussion will in most instances deal with residential real property as opposed to commercial real property.
Section II: Forms of Ownership

A. Freehold Estates
The concept of estates in Anglo-American law arose out of the feudal system in England. The concept underlies our present system of real property law. Estates in land are interests which presently are or may become possessory and which are measured by a period of time. Possessory estates give the holder the right to immediate possession. Future interests are estates that will or may become possessory in the future. Estates in realty are further categorized as freehold or non-freehold. Freehold estates continue indefinitely or until the occurrence of some event. Non-freehold estates end on a particular date.
The largest estate permitted by law is the fee simple absolute. The holder of this estate has full possessory rights now and in the future for an infinite duration. There are no limitations on its inheritability, it cannot be divested and it will not end upon the happening of any event. However, the holder of the estate can sell it or any part of it during his lifetime and dispose of it by will at his death.
The following are several other possessory estates: Fee Simple Determinable, which conveys a fee simple but limits the use of the land; Life Estate, which is an estate whose duration is measured by the life or lives of one or more human being, and ends at the death of a person; Fee Tail, which is an estate that can endure forever but can only be passed to lineal descendants will end if and when the first fee tail tenant has no lineal descendants to succeed him or her in possession.
The most common form of ownership, when a homeowner purchases a home, is the fee simple absolute. Often, however, a condominium or cooperative is purchased. A condominium is a statutory creation which is characterized as real property. When one purchases a condominium he or she purchases one unit in fee simple and also obtain the right to use the common areas. Each unit has its own tax bill, deed, mortgage and ownership rights but shares in the maintenance of the common areas. A cooperative apartment house is owned by a corporation whose stock is owned by the tenants.
When one purchases a cooperative he or she buys shares of stock as well as a proprietary lease to a particular unit in a cooperative apartment house. Generally, the number of shares held by the shareholder depends on the size or value of the unit. The rights and obligations of the shareholder are defined by the by-laws and articles of incorporation of the corporation as well as the proprietary lease. There are usually one or several mortgages on the building and each tenant is responsible for his or her proportionate share thereof. Taxes, maintenance and repairs of the common areas are usually handled by the corporation.
B. Concurrent Estates
An estate in land in which two or more parties have a contemporaneous interest in the same realty is a concurrent estate.
i. Tenancy in Common: In a tenancy in common, each tenant has an undivided interest in the entire property. Each tenant has the right to possession of the whole property. There is no right of survivorship. Each tenant has a distinct proportionate interest in the property, which is alienable by inter vivos or testamentary transfer and passes by succession. There is a presumption that a conveyance to two or more persons is a tenancy in common.
ii. Joint Tenancy: In this type of tenancy each tenant owns an undivided share of the estate. There is a right of survivorship. Thus, on the death of one joint tenant the survivor retains an undivided right to the entire estate, which is not subject to the rights of the deceased co-tenant.
iii. Tenancy by the Entirety This is a marital estate which can only be created between a husband and wife. It is similar to a joint tenancy except that the right of survivorship cannot be destroyed, since severance by one tenant is not possible. An existing marriage is requisite for a tenancy by the entirety In many states there is a presumption that a tenancy by the entirety is created in any conveyance to a husband and wife. Half of the states, however have abolished this type of tenancy. In New York, the tenancy by the entirety exists as to realty but not personalty.
Section III: Leaseholds

A leasehold is an estate in land. It is a non-freehold estate, capable of a definitively ascertainable period of possession. The tenant has an interest in the premises which is presently possessory and the landlord has a future interest.
A. Types of Tenancies
The major types of tenancies are listed below:
i. Periodic Tenancy: This is a tenancy that continues for successive periods from year to year or fractions thereof. There is no definite termination date and it continues until terminated by either the landlord or tenant. It is terminated by proper notice, which is usually statutorily prescribed. This tenancy may be created by express agreement or by operation of law.
ii. Tenancy at Will: The landlord and tenant both have the right to terminate the tenancy at will. The parties must have an agreement or understanding that either party can terminate at any time. The tenancy has no stated duration and lasts as long as the landlord and tenant desire. In most states, the acceptance by the landlord of regular rent will cause the courts to consider the tenancy to be a periodic tenancy. No notice was required to terminate a tenancy at will at common law. However, in most states, statutes require notice of termination to be given at least one month in advance.
iii. Tenancy for Years: This tenancy continues for a fixed period of time and has certain beginning and termination dates. Since the parties know when the tenancy will end, the term expires at the end of the period without notice required by either party.
iv. Holdover Tenant: A tenant who was rightfully in possession and holds over at the end of the tenancy is called a tenant at sufferance. This tenancy lasts until the tenant is evicted by the landlord or until the landlord elects to hold the tenant to an additional term.
v. Statute of Frauds: In most states today, the Statute of Frauds requires a lease to be in writing and signed by the party to be charged if it is greater than one year. An oral lease for a greater period creates a tenancy at will.
B. Rent Regulations
The types of rent regulations in existence, if any, vary between different states, as well as between cities and counties within the same state. The New York State Division of Housing and Community Renewal is responsible for the system of rent regulation in New York City. The two major forms of rent regulation in New York City are rent control and rent stabilization. Rent control applies to apartments in buildings constructed prior to 1947 which have not been vacant since 1971. Apartments in buildings constructed after 1946 and containing six or more units, unless subject to an exception, are subject to rent stabilization. Furthermore, apartments in buildings constructed prior to 1947 which became vacant after 1971 are also rent stabilized. Rent stabilization uses leases to regulate rents while rent control uses statutes.
Section IV. Acquiring Title to Property

A. Finding the Property
Real estate is often purchased and sold with the assistance of a real estate broker. Brokers may be employed to sell property, in which case their duty is to act honestly toward the principal and obtain the highest price possible. They may also be employed by a purchaser to locate property, in which case their duty is to secure the property at the lowest possible price. The broker's duty is a general one of an agent to principal. A broker's contract is not required to be in signed and in writing in many states including New York, as the Statue of Frauds only applies to direct transfers of realty, and not actions to enforce brokerage contracts.
It is a general rule that the broker becomes entitled to a commission when they completes the services they are hired to perform. In the event that the brokers are employed to obtain purchasers, they are entitled to their commission when they introduce a person to the principal who is ready, willing and able to purchase on the terms requested. Accordingly, it is advisable for the person who hires brokers to enter into an agreement with them whereby it is agreed the broker will not be entitled to a commission until the transaction and closing are fully completed. There are various types of brokerage agreements which are as follows;
i. Non-exclusive Agreement: This is also known as an open listing. Under this type of agreement several brokers may be hired by the owner. A broker is only entitled to commission when a buyer is procured;
ii. Exclusive Agency Agreement: Under this type of agreement the seller can only hire one broker. The owner, however, can sell or lease the property without a broker, in which case the owner is not liable to the broker his or her commissions;
iii. Exclusive Right to Sell: Under this type of agreement, the broker has the exclusive right to sell, and receives a commission if the sale is consummated by him or herself or the owner.
iv. Multiple Listings: This is an arrangement among a group of brokers whereby a participating broker can sell property that is exclusively listed with any of the other participating brokers. The "listing broker" obtains the listings and the "selling broker" sells the property. These two brokers split the commission and the listing service receives a small fee.
v. Net Listings: This is an agreement whereby the seller indicates a specific price for which the property is to be sold. The broker's commission is the difference between that price and the sales price received. These types of listings are prohibited in New York.
B. Contract of Sale
The first step in a real estate sale is the contract. The contract defines the rights and liabilities of the seller and purchaser. The contract must be in writing, signed by the parties involved and must contain all material terms.
The specific procedures for the signing and negotiating of a contract of sale, as well as the formalities to be followed at the closing where the actual transfer of the deed occurs, vary between states as well as between counties and cities within states. The procedures described in this article reflect the procedures generally followed in New York State.
The seller's counsel generally prepares and negotiates the initial contract. In order to determine the specific parameters of the contract, he or she obtains and reviews the following documents: the deed, survey, title insurance policy, promissory notes or mortgages on the property, certificates of occupancy, tax bills, fuel and utility bills, leases, permits for elevator, pools, etc.
The purchaser's counsel reviews and negotiates the contract and insures that the seller is obligated to convey good and marketable title. Purchaser's counsel must review the contract, deed, title search and title insurance policy, as well as the documents referred to in the title policy, such as survey, certificate of occupancy, real property tax bill, heating, cooling and electric bills. In New York City it is common practice for attorneys to prepare the contract, whereas in upstate New York brokers usually prepare the contract, with a right to cancel, and it is not reviewed by an attorney prior to execution.
A survey is reviewed by the purchaser's attorney to evaluate boundaries of the property, its physical features, building improvements and any encroachments.
The purchaser should arrange for an inspection of the premises by an engineer, architect, contractor or home inspection company prior to the signing of the contract, or, in the alternative, the contract should set forth the consequences if defects are found with the premises. The purchaser must also consider various factors, such as the date on which the property may be occupied, the terms of the mortgage presently on the property and whether it is to be discharged, assumed by the purchaser or whether the purchaser will take possession of the property subject to it. The purchaser's attorney should also investigate the zoning ordinances and restrictions to see if the property can be used for the purchaser's intended purpose. It is necessary to verify that there is a certificate of occupancy on file, to examine the certificate of occupancy to determine if there have been any alterations, and if so, to insure that there has been compliance with all applicable building codes and regulations.
The purchaser's counsel should obtain the heating, cooling and insulation costs of the building as well as the legal grade of the street, and should also review any applicable laws and/or regulations such as multiple dwelling laws. There are also a number of environmental land use laws that should be investigated.
The contract generally provides for the apportionment of outstanding expenses at closing. Closing apportionments are adjustments to income, expenses or charges, usually to the date of closing. The expenses are generally apportioned so that the seller pays its expenses prior to closing and the purchaser pays the expenses subsequent to the conveyance of the deed. The contract is often contingent on the purchaser obtaining financing within a certain time period.
If the sale involves a co-op or condominium, the contract will be somewhat different as a result of different considerations involved.
Additionally, other factors must be considered by counsel when the property involved is commercial in nature. Some of these considerations are service contracts, mortgages and ground leases, spaces leases, management contracts, and employee unions. Additionally, the possibility of environmental problems related to the property must be considered. Persons owning, transferring or developing real property can be held liable if hazardous substances are found on the property. Liability is imposed by Federal legislation as well as various state laws.Waste Disposal Sites (ECL 1301 et seq), which is most similar to CERCLA and generally deals with remedial programs, as well as identification and reporting of hazardous substances. Counsel for a purchaser and/or lender should review all documentation and public records to determine if there are hazardous substances on the property. Purchaser's counsel should incorporate environmental provisions into the contract of sale, such as requiring seller to; test the property, provide reports from experts and the government, provide escrows for clean-up of hazardous substances and to reduce the sales price in the event hazardous substances are located on the property. In certain cases, particularly if the prior use of the property indicates there is a likelihood that hazardous substances may have been present on the property, an inspection by an environmental expert may be prudent.
C. Risk of Loss
The common law rule with regard to risk of loss is that if the property is destroyed between the time the contract is signed and the time of transfer of the deed, and such destruction is not the fault of either party, then as a result of the doctrine of equitable conversion, equitable title was passed to the buyer upon signing the contract. Consequently, the risk of loss has passed to the buyer. However, some states, including New York, have adopted the Uniform Vendor and Purchasers Risk Act, which puts the risk of loss on the seller until the buyer takes title or possession.
D. Title To The Property
A purchaser of real estate has the right to receive marketable title to real property unless he agrees otherwise. In New York City, a purchaser generally obtains a title examination and title insurance through a title company. In other locations such as upstate New York, it is somewhat common to rely on an abstract of title and not to obtain title insurance. If the purchase is financed through a bank, the bank will generally require title insurance. The total cost of a title insurance policy varies depending on several factors including, the amount insured and the searches requested.
E. Deed
The actual transfer of title to real property generally occurs by a deed. It usually occurs at a closing where it is executed, acknowledged and delivered. There are various types of deeds. The principal types are quitclaim deed, warranty deed with full covenants, and bargain and sale deed. A quitclaim deed contains no covenants by the grantor. A warranty deed with full covenants contains covenants by the grantor of seisen, of right to convey, against encumbrances, of further assurances, and of quiet enjoyment and warranty. A general warranty deed warrants title against defects arising before as well as during the time the grantor has title. A special warranty deed contains the same covenants, but only warrants against defects arising during the time the grantor has title. A bargain and sale deed contains the basic covenants against grantor's acts.
A deed must be in writing, it must identify the parties and the land involved and it must be acknowledged and delivered.
F. Recordation
In order to protect a purchaser or lender from the subsequent rights of third parties over the real estate, it is essential to record the relevant documents by filing in a public recording office. Generally the recordation of contracts, deeds and mortgages occurs at the county level. Significant differences with regard to recording procedures and requirements exist from county to county.
i. Contracts: There is no requirement that a real estate contract be recorded, and quite often it is not recorded. However, if an executory contract is recorded, the purchaser may enforce his right to performance against a person who after the recording, purchases or acquires by exchange, the same realty or any part thereof from the seller's devisees or distributees.
ii. Deeds: There are three major types of recording statutes that may protect subsequent bona fide purchasers of land by putting them on notice of competing interests in land. Most states have adopted one of the three types of statutes. 1) Notice Statutes invalidate the purchase of a subsequent bona fide purchaser with actual or constructive notice of another grantee. Approximately half of the states have adopted notice statutes. 2) Race Statutes: Under these types of statutes whoever records first regardless of notice is deemed to be the legitimate owner of the property. 3) Race Notice Statutes: Under these statutes a subsequent bona fide purchaser is only protected if he or she records before the other person claiming on the interest and without notice of that interest.
Most recording statutes provide that the deed must be acknowledged before a notary public to be recorded. There are differences from jurisdiction to jurisdiction as to the formalities required for recordation. Approximately half of the states including New York are "race-notice" jurisdictions. Every prior conveyance not recorded is void as against any such person who subsequently purchases in good faith without notice and whose conveyance contract or assignment is fully recorded.
G. The Closing
The closing is the ceremony at which the property transaction is consummated. Closing practices are dictated by custom, which varies from region to region. Generally, all necessary parties are present, their identity is verified, the documents are finalized, financial calculations and adjustments are reviewed and documents, money and information are exchanged. The closing usually takes place at the office of the seller's attorney but occasionally at the office of the lenders' counsel. There are various costs which are payable at closing, which vary according to jurisdiction. Costs typically paid by a purchaser include fees to record the deed and the mortgage, utility bills, escrow fees, attorneys fee for the bank attorney, taxes, special assessments, financing charges, inspection fees, origination fees, rent payable if possession is taken before closing and adjustments.
H. Financing:
Purchasers of real property obtain financing from various sources. Mortgages are commonly used to finance the acquisition of real property, since the lender receives a lien that may be enforced on the default of the purchaser. The buyer retains title to the property unless the mortgage lien is foreclosed. The lender, who may be the seller or a third party, can enforce the mortgage by foreclosing the lien. The borrower can redeem the property by reinstatement or payment of the loan prior to foreclosure. Certain states are considered "title theory states" and treat title to mortgaged premises as being in the mortgagee. Other states are considered "lien theory states" and consider that the legal title to the mortgaged premises remains in the mortgagor and the mortgagee merely has a lien on the property. A mortgage loan can be structured in a variety of ways and can have fixed or adjustable rates.
Purchasers of condominiums also obtain financing from various sources. Commonly, as with the purchase of a home, a mortgage which can be foreclosed upon is held as security for the loan.
The loans which are obtained by purchasers of cooperative apartments are generally secured by pledges of the purchaser's stock in the entity and an assignment of the proprietary leases.
Section V. Purchase of Land by Non-Nationals

Generally, the regulation of the rights of individuals who are not citizens ("Non-Nationals") of the United States to hold real property is left to the states. Under New York law, for instance, a Non-National may take, hold, convey and devise real property. There are not many federal restrictions on Non-Nationals owning or investing in real property in the United States. A few of these are as follows: The Agricultural Foreign Investment Disclosure Act of 1978 (FIDA); The International Investment Survey Act of 1976 (IISA); The Foreign Investment in Real Property Tax Act of 1980 (FIRPTA).
Section VI. Planning and Development Controls

The primary controls on planning and development are zoning ordinances, which regulate the allowable uses of land. These ordinances vary from municipality to municipality. A municipality can establish a certain zone where only certain uses of property are allowed, and where the size and location of structures are regulated, as long as the zoning regulations are pursuant to a comprehensive plan. One common type of zoning ordinance separates residential and non-residential uses of property. If a property owner desires to use property for a purpose restricted by a zoning ordinance he or she would generally have to apply for a "variance". A variance is generally granted where adherence to the requirements of the zoning ordinance would result in "practical difficulties or unnecessary hardship and where the requested relief would preserve the public safety and welfare and achieve substantial justice."
Section VII. For More Information

This article was prepared by Beck & Arad, LLP, a New York-based law firm dedicated to serving the needs of domestic and international business clients. The content of this article was designed to provide general information on the subject matter covered. No legal or other professional advice is being rendered. Any liability or loss incurred as a consequence, directly or indirectly from the use or application of the information contained herein, is specifically disclaimed.
For further information about this article or Beck & Arad, LLP, please contact Philip Beck or Graham Arad at:
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