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Chapter 7 - Interests in Real Estate

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Chapters > Chapter 7
  • 7.1 Government Powers
  • 7.1a PETE Infographic
  • 7.2 Freehold Estates: Fee Simple Estate
  • 7.3 Freehold Estates: Life Estate
  • 7.3a Life Estates Infographic
  • 7.4 Water Rights
  • 7.4a Water Rights Infographic
  • Chapter 7 - Quiz

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Chapter 7 - Interests in Real Estate

At the completion of this chapter, students will be able to do the following:

1) List the four governmental powers in real estate.

2) Define a freehold estate.

7.1 Government Powers

Transcript

As a real estate professional, you should understand how various government powers come into play when it comes to real estate ownership. While you may not encounter these on a regular basis, you should have a basic understanding of each of these areas.

One acronym you can use to help you remember governmental powers in real estate is “PETE” – “P” stands for Police Power, “E” for Eminent Domain, “T” for Taxation, and “E” for Escheat.

Now, let’s explore each of these in more detail:

Police Power

Police Power refers to the right of the United States government to make laws, and to enforce those laws, to ensure the order, safety, health, morals and general welfare of citizens of the United States.

Under that broad umbrella, the government has the right to regulate how U.S. citizens use real property, and it does that through Police Powers.

One type of law that falls under Police Powers is zoning laws, which are the laws that separate or divide areas of land into different districts depending on their use. Zoning laws generally apply to large areas of land, rather than just individual pieces of real estate. Different areas or districts inside a municipality may be zoned for residential, commercial or industrial uses. City planning laws are another type of law that falls under Police Powers. City planning laws are closely related to zoning laws, and include laws about the electrical, sewer and other facilities that a municipality’s residents use.

For example, an entire section of a city may be zoned for residential use, so an industrial factory could not be built or operated in that area without changing the zoning laws. Without zoning laws, we might have residential houses on the same block as factories and commercial stores. Such a situation would likely cause aggravation to residents because of noise levels, parking shortages and traffic patterns. Zoning laws help keep businesses and factories to designated parts of the town.

Other examples of Police Powers include things like building codes and health standards. The government has a vested interest in making sure that public health, safety and welfare of U.S. citizens are protected. So, building codes and health standards provide minimum acceptable standards for compliance.

Building codes are different for residential real estate and for commercial or industrial properties, and depend to a certain extent on the intended use for the property. Building codes and health standards include everything from how wide doorways and stairwells must be, to the materials and methods used in construction. Things like plumbing codes, electrical standards, occupancy rules, parking and traffic impact, and even swimming pool regulations all fall under building codes. Adhering to building codes and health standards means that real estate is designed to safely be used for its intended purpose.

City or municipality inspectors have the right and duty to confirm that buildings meet applicable standards. If deficiencies are noted, Police Power gives them the authority to enforce those laws.

Finally, another kind of Police Power that impacts real estate is rent controls. Rent controls are designed to protect the public by putting an upper limit on the amount landlords can charge tenants to lease space. Rent controls either provide a ceiling, a maximum amount that can be charged in rent, or by providing controls around how much a landlord can increase rents. People renting real property in areas that are rent controlled can have peace of mind knowing that their housing will remain affordable and that their landlords cannot legally raise their rent beyond what’s allowed by rent control laws.

Now, let’s look at an example of police power:

Amy Baker bought a house in a quiet cul-de-sac in a residential neighborhood subdivision 10 years ago. A few months ago, Amy decided to go into business for herself as a commercial baker and wants to build an addition onto her home for a commercial kitchen and a 24/7 retail store, where her customers could buy her products.

Amy’s neighbors have real concerns about what this change would mean for their neighborhood, because of increased traffic, noise, esthetics, lighting, etc.

Fortunately for Amy’s neighbors (but unfortunately for Amy), her plans would likely violate the city’s zoning ordinances, which are designed to protect the residents of Amy’s neighborhood by making the area safe and comfortable for residential property owners and residents.

Now that we have explored Police Powers, the “P” in our “PETE” acronym, let’s look at the first “E” which stands for “Eminent Domain.”

Eminent Domain

Eminent domain refers to the right the United States federal and state governments have to take private land or private property for public use or economic development. When eminent domain powers are used, the property owner has the right to receive “just compensation” for the taking of their property. In this section, we will explore each element of this definition to give you a better understanding of eminent domain powers.

Most commonly, eminent domain applies when the government needs to build a new government building, construct or work on an existing roadway or utilities. If there are one or more pieces of private property that will be affected by the government’s plans, eminent domain allows the government to take that property under certain circumstances and conditions. In some areas, the laws require the government to make an offer to purchase the property first, before enforcing eminent domain.

Earlier, we stated that exercising eminent domain means the property owner is entitled to receive “just compensation.” But, what exactly does that mean? The requirement that the government taking the property must pay just compensation is intended to make sure the property owner is in the same position financially after his or her property is taken through eminent domain. In practice, just compensation often simply means “fair market value” for the property, taking into consideration the property’s highest and best use. Fair market value refers to what a willing buyer would pay a willing seller in a voluntary sale of the property, when both parties were fully informed about the features of the property and of the transaction itself.

Some states call eminent domain by different names. For example, in New York State, it is also known as “appropriation,” and in Louisiana, eminent domain is also called “expropriation.”

“Condemnation” is another word that can be used to describe eminent domain. However, don’t confuse this definition of condemnation with the word that means property is uninhabitable because there is something wrong with it. In the context of eminent domain authority, condemnation simply means that the government is formally taking title to the entire parcel of property, or to some portion of it.

No matter what it is called, eminent domain requires just compensation to the property owner.

An entire parcel of real property can be condemned using eminent domain; however eminent domain can also be used to take just a portion of the parcel. If this happens, the property owner may also be entitled to “severance” compensation.

The federal government has deferred to state governments, saying each state has the right to determine what constitutes public use for purposes of using eminent domain powers. Every state in the U.S. has this authority. Eminent domain can be delegated by law to cities or municipalities, or even in some cases to private companies or individuals.

However, the federal government can also exercise eminent domain powers. When it does so, it can actually take land and property directly through Congressional action. If Congress passes an act transferring property to the government, individual property owners can then sue the U.S. government for compensation through the court system.

So far, we have explored the use of eminent domain by the federal government, by states or municipalities. However, those entities can also delegate eminent domain authority to private individuals or entities in certain circumstances. These may include railroad companies, private utility companies, or any other private entity or person that may be able to establish that they need the property for “public” or “civic” uses.

Although eminent domain may be exercised by a private entity or individual, the U.S. Supreme Court has said that eminent domain may not be used “for the purposes of advancing the economic interest of private parties to be given ownership or use of the property taken.”

Here are a few examples of some of the uses property has been taken under eminent domain authority in the United States:

  • Constructing public buildings
  • Building or expanding a railway or roadway
  • Constructing aquaducts to provide drinking water to a city
  • Maintaining navigable waterways (like canals)
  • Producing war materials (aiding in defense readiness for the country)
  • Constructing airports
  • Establishing National Parks and National Forests
  • Preserving places of historic interest
  • Protecting the environment through nature preserves
  • Establishing national monuments

Property across the nation has been taken through eminent domain powers to be used to house and facilitate government services, provide for infrastructure and defense and provide public facilities and spaces used by citizens in communities around the country.

You may be asking yourself what happens in a situation where a property owner doesn’t agree with the government asserting eminent domain over their property. What rights or recourse does the property owner actually have? A property owner who objects to an eminent domain action can sue the government in court, challenging the action either by claiming either that the government’s intended use of the property does not constitute a “necessary public use,” or that just compensation hasn’t been offered or paid. This can be an uphill battle for property owners, however; remember that the government only needs to compensate the property owner for fair market value of the property. Property owners are not entitled to compensation for their inconvenience, for lost profits (in the case of a business affected by eminent domain authority), etc.

While you may not personally become involved in an eminent domain action as a real estate professional, it is nevertheless important for you to have a basic understanding of what the law provides, both for governmental entities and for individual property owners affected by eminent domain authority.

Let's look at an example of eminent domain authority in action that might help make a complex topic clearer:

The city of Metropolis wants to build a public park and monument in the center of the city. There are three homeowners whose homes are located in the area where the park would be located. The city approached the homeowners and offered to buy their homes for more than fair market value. Two of the homeowners agreed to the proposed purchase price and sold their homes. However, the third homeowner does not want to sell his home; it’s been in his family for generations. If he and the city are unable to come to agreement on the terms of a sale, the city could use eminent domain authority to take the property from the homeowner, and would only be required to pay him fair market value for his home. In this scenario, he will not only be forced to move; he will also receive less than his neighbors who agreed to the city's initial offer to buy their homes.

Another example that comes up from time to time is a reverse eminent domain situation, where a homeowner sues the government claiming they are entitled to just compensation because the government, in effect, seized their property. John has lived near the airport in Metropolis for years. However, Metropolis recently changed its runway configurations, and now John’s home is directly beneath the flight path for incoming and departing airplanes. Because of this, property values in his neighborhood have plummeted. John could sue for damages saying the government has, in effect, taken away his property rights. If he is successful in his suit, the government would have to buy his home at the fair market value before the airport changed its runway configuration and flight patterns.

Taxation

Let’s go back to our “PETE” acronym, which can help you remember four important types of governmental actions for real estate. So far, we have looked at the “P” by exploring Police Powers, and we learned about eminent domain, which is represented by the first “E” in “PETE.”

Now, we'll turn to the “T”, which stands for Taxation.

Odds are good that you are already familiar with the concept of taxation. After all, we pay taxes every day on the things we purchase at retail stores and restaurants. Our income is also taxed, and most people are required to file annual income tax returns.

Real estate is also taxed. Just as paying your income taxes or paying sales taxes on the things that you buy is not optional, property taxes are also required. Any person, corporation or other organization that owns real estate must pay property taxes every year.

The U.S. federal government cannot tax real property (the Constitution prohibits this.) However, state and local governments do have the authority to levy property taxes on property owners.

When people are considering buying new real estate, they are usually very interested in knowing how much they can expect to pay every year in property taxes. Property tax can vary widely in different parts of the country, and in some cases, in different parts of the same major metropolitan area. This is because different Counties or other taxing authorities have higher, or lower, tax rates than others.

So, the answer to the question “How much are property taxes?” really varies. The amount of property taxes a property owner will have to pay depends on the assessed value of the real estate and on where the property is located. In most states, the assessed value is determined by the most recent sale of the property, with an inflation adjustment added each year.

Sometimes, property owners grumble about the amount they have to pay in property taxes. While property taxes can sometimes seem like a big obligation, it is important to remember that they pay for a wide array of public services.

Your property tax dollars go to fund programs and services in your area. Some of the things your property tax dollars go to fund include:

  • Road construction and maintenance
  • Police services
  • Fire department services
  • Emergency responders
  • Public works department and services
  • Public parks
  • Recreational trails used for walking, hiking, skiing, etc.
  • State, city and/or county libraries
  • Traffic lights
  • Street lights
  • Sidewalks and gutters
  • Public schools
  • Salaries for local government officials and public service employees

If a property owner feels the amount of his or her property taxes is too high, he or she can appeal to the taxing authority. Property may be re-assessed which may end up lowering the amount of taxes due, however if the assessed property value comes back unexpectedly higher than the taxed amount, the property owner could find himself or herself facing a higher tax burden.

For people buying real estate with funds borrowed from a bank, Mortgage Company or other lender, the lender can include 1/12 (one twelfth) of the estimated annual property tax bill with each month’s mortgage payment. Money is set aside in an escrow account and the lender handles sending the tax payment to the County on a semi-annual or annual basis (or other frequency, depending on when tax payments are due.) Paying real estate taxes in this manner makes things easier for the property owner, who does not need to worry about coming up with a large sum of money when the tax bill due date arrives. This escrow process for real estate taxes operates the same way, where many lenders handle property insurance premiums.

So, what happens if someone doesn’t pay their property taxes? When a property owner does not have funds set aside in escrow to pay their property taxes (for example, when there is no mortgage on the property), he or she is responsible for paying property taxes in full when they’re due. If taxes are not paid as required, the taxing authority can place a lien against the property. This means that when the property is ultimately sold, the taxing authority will be paid the amount of taxes due before the property owner receives the sales proceeds.

In situations where property taxes are significantly delinquent or when the amount owed in back taxes reaches a certain threshold (as determined by each state, county or other taxing authority), the taxing authority may actually force a sale of the property in order to receive the tax dollars they are owed.

Mortgage borrowers who do not set aside funds in escrow for their property taxes should understand that most mortgage lenders consider a failure to pay property taxes as the equivalent of defaulting on the mortgage loan – this is serious as it can trigger foreclosure actions. Property tax liens have a higher authority over property than mortgage liens do, so lenders may take foreclosure actions to protect themselves against loss.

Some relief may be available to certain property owners, in the form of a property tax refund. Some states and local governments provide homeowners with property tax refunds in certain circumstances. For example, a homeowner may be eligible for a property tax refund if their income was below a specific level and if their property taxes increased by more than a certain percentage over the previous year. If property tax refunds are available in their state, homeowners may need to file a separate property tax return in addition to filing income tax returns.

Here is an example of property taxes:

Aaron and Ann Taxpayers own their home. They receive an annual property tax statement from their County. Their most recent statement values their home at $235,000, and calculated their property taxes for the year as $2,775.00.

Aaron and Ann have a mortgage loan and property taxes are escrowed for them and paid to the County by their lender. So, for the next year, their mortgage payments will include an extra $231.25 each month (which is one twelfth of $2,775.00). Their lender will hold these funds for them until the property taxes are due and payable, at which point the lender will send the tax payment directly to the County.

Escheat

Now, let’s turn to the last “E” in our “PETE” acronym, which stands for “escheat.” [pronunciation es-cheat]

Escheat is a fancy word that simply refers to property that was publicly owned reverting to the state when there are no identifiable heirs capable of assuming ownership of the property.

The government’s power to escheat property can come into play in a couple of different ways.

The first situation involves a property owner who owned their home or other real property individually, and who died without leaving a valid will and without leaving named beneficiaries (where available through a beneficiary deed or transfer on death deed). If that property owner did not have any identifiable heirs under state law, the property would escheat to the state.

Laws governing property ownership are designed to allow property owners to determine how their property will be disposed of or distributed during their lifetimes, and at their deaths. When someone creates a will, transfers their property into a trust or identifies beneficiaries for their real estate, they are controlling disposition of that property. However, someone who does not have identifiable heirs but fails to take such planning measures may unintentionally be naming the state as the beneficiary of their property.

Escheat is a measure of last resort. Each state’s intestacy laws govern how property will pass when a resident of that state dies without a will. Spouses and children are given priority. In many cases, descent and distribution laws provide a complex web designed to identify the nearest living heir entitled to inherit real estate and other property. Escheat only comes into play when it is impossible to identify or locate such heirs.

The second scenario is similar, and can come into play when property has been abandoned, and there are no identifiable owners or heirs for the property. In such a case, the state can exercise its authority to escheat the real estate, so the state would become the lawful owner of the parcel.

Here is an important point to keep in mind: while some of the governmental powers we have discussed in this section give authority to federal, state and local governments for privately-owned real estate, the power to escheat real property rests solely with state governments. Neither county or municipal governments, nor other individuals, have the authority to take property by escheat.

Here’s an example of how escheat laws may come into play:

George Bachelor owned his home and died intestate (without a will.) George was an only child who had never married or had children; his parents were also only children. After conducting a diligent search for identifiable heirs under the state’s intestacy laws of descent and distribution, the state was unable to identify any living heirs to inherit George’s estate (including his real estate.) In this scenario, ownership of George’s home would pass to the state under the state’s authority to escheat real property.

Now, let’s say that the lot and home next door to George’s house had been sitting abandoned for years; the owners couldn’t be located and real estate taxes hadn’t been paid. The state’s unclaimed property laws would allow the owners to come forward for a certain time period to reclaim their property. If they failed to come forward to reclaim the property, the property would escheat to the state.

Let’s Recap

In this lesson, we have explored a variety of governmental powers over real estate, including the government’s authority to make and enforce laws designed to protect the public (Police Powers); the government’s authority to seize privately-owned real property for public use with just compensation (Eminent Domain); the authority for state and local governments to levy real estate taxes on privately-owned real property (Taxation); and we looked at scenarios in which state governments have the authority to take ownership and control of property that has been abandoned or property for which there is no other identifiable heir (Escheat powers.)

Like the framework of other governmental laws and regulations we live under, these four types of government authority are designed to protect citizens by providing for government action in certain circumstances.

Key Terms

Condemnation
The act of taking private property for public use by a political subdivision upon payment to owner of just compensation.
Escheat
The reverting of property to the State when heirs capable of inheriting are lacking.
Eminent Domain
The right of the government to acquire property for necessary public or quasi-public use by condition; the owner must be fairly compensated.
Police Power
The right of the State to enact laws and enforce them for the order, safety, health, morals and general welfare of the public.
Tax
Enforced charge extracted of personal, corporations and organizations by the government to be used to support government services and programs.

7.1a PETE Infographic

Please spend a few minutes reviewing the Infographic below.

7.2 Freehold Estates: Fee Simple Estate

Transcript

The term “freehold estate” refers to the right to own land, or an interest derived from land, with no fixed time period associated with the ownership.

In this lesson, we’ll explore fee simple estates. A fee simple estate is a form of freehold estate, representing the greatest interest someone can have in real property.

When someone owns a fee simple estate, they have the unqualified right to possess, control and enjoy their property. Owners of a fee simple estate also have full rights to sell, transfer, mortgage, encumber or bequeath the property to others after their death. These rights are perpetual, meaning there is no fixed duration or time limit.

As a real estate professional, you may also hear or read about ownership in real property being held as “fee simple absolute.” This means that the property owner holds title with the full rights and benefits under a fee simple estate, holding the greatest possible interest in their real property.

There are three prongs, or requirements, for a fee simple estate. Think of fee simple absolute ownership as a three-legged stool – if any of these three requirements is not met, then ownership is something other than fee simple absolute:

The first prong is that fee simple absolute property must be “alienable.” This refers to the property owner’s right to transfer or sell the property to someone else. Fee simple absolute ownership must be alienable.

The second requirement or hallmark of a fee simple absolute estate is that the property must be “devisable.” When property is devisable, it means that the owner has the right to create a will or other testamentary document that transfers ownership of the real property to someone else when the owner dies.

Finally, the third leg of our three-legged stool is that fee simple absolute title must be “descendible.” This simply means that the rights of fee simple absolute ownership are inheritable, and will pass to subsequent owners. When the property owner wants to will property to someone else, giving them fee simple absolute title, it is usually not necessary to add specific language to the will. Instead, in most states today, it is presumed that the owner intended to transfer fee simple absolute ownership unless the will specifies lesser rights in the property for the heirs.

The only restrictions on fee simple absolute ownership are those provided by law or private restrictions such as covenants under a homeowner’s association agreement, or local zoning ordinances.

Now, let’s look at an example of fee simple absolute ownership in practice. This is the type of property ownership you are likely to encounter most during your career as a real estate professional.

Maggie owns a farmhouse in rural Georgia that has been passed in her family down for generations – she holds a fee simple estate. If she decides to take out a mortgage on the property, she has the right to do so. If she wants to partition the land and sell off a portion of it, she can do that too. She could sell all of her ownership rights, or she could continue holding onto them as the fee simple owner of her home.

If Maggie decides not to sell her home, she can leave it in her last will and testament to her husband, Glenn, who will assume all of the same ownership rights and responsibilities that Maggie had, taking title as fee simple absolute after Maggie’s death.

Now, we’ll examine another form of fee simple estate ownership, called “fee simple determinable.”

Fee simple determinable is sometimes also called “fee simple defeasible.” Under this type of ownership, the rights to use and enjoy real property end when a pre-defined event or condition occurs. At that point, full ownership rights and responsibilities revert back to the grantor, or to his or her heirs.

A fee simple determinable estate is created when conditions are specified in the property deed. So, the owner has all of the rights associated with a fee simple absolute estate, except for those specified in the property deed.

Fee simple determinable estates end, and the property owner loses their rights, when a specified condition is not met or is violated. If that happens, the person who granted the interest in the fee simple determinable estate will assume title and ownership again without having to take any kind of action.

In order to create a fee simple determinable estate, the deed must specify some durational terms, like:

“until…”

“during…”

“while…”

“so long as…” or

“as long as…”

To understand how fee simple determinable estates work in practice, it may be helpful to look at an example.

Rick owns 5 acres of undeveloped land on the edge of town, holding title as fee simple absolute. He would like to see the land used for a public park with trails and picnic areas. After discussions with the city, he enters into an agreement whereby he will sell his land to the city, which will hold title as long as the land is used for a public park.

As the owner, the city has the right to use, mortgage and develop the property. However, the terms of the property deed limit the use of the land.

The city takes title and develops a park enjoyed by citizens. However, 10 years later, the city is running out of space in its administration building and decides that the site of its newest public park would be a great place to build a new office complex for city workers.

Fortunately, the city’s legal department stopped this plan before it got too far. According to the terms of the deed, the city is only the owner of the property as long as it is used as a public park. Any other use would mean the ownership rights would revert back to Rick, or to his heirs.

Fee simple absolute ownership is very common. You may not encounter fee simple determinable estates, nearly as often, but it is important to understand what they are, so that you will know how they work, when you do encounter them.

Key Terms

Fee Simple Absolute
An inheritable estate in land providing the greatest interest of any form of title.
Fee Simple Determinable
An estate that will end automatically when the stated event or condition occurs. The interest will revert to the grantor or the heirs of the grantor.
Fee Simple Estate
The greatest interest that one can have in real property. An estate that is unqualified, of indefinite duration, freely transferable and inheritable.

7.3 Freehold Estates: Life Estate

Transcript

Life Estates are another form of freehold estates, typically created by a deed.

Where the owner of a fee simple estate has all of the rights that come with owning property, and holds those rights for an indeterminate period of time, life estates end at the death of some person. That is to say that with a life estate, the life estate holder retains a property interest for a lifetime.

There are many reasons for creating life estates, but some of the most common reasons include: allowing property to pass outside of probate court proceedings when an elderly homeowner dies, and protecting a portion of the property owner's assets from being considered "available" in a situation where medical assistance is needed. Of course, estate planning and medical assistance planning are complex, so clients should always be advised to consult with an attorney in their state to determine whether or not a life estate might be a way to help them meet their goals.

To understand how life estates work, it is important to understand that there are actually types of interests - the life estate and the remainder interest - and there are two parties with rights in a life estate: the life tenant, and the remaindermen.

The life tenant is the person who is entitled to certain rights during the measuring lifetime (the life estate rights). Typically, the measuring life is the same as the life tenant's lifetime, but not always. The life tenant retains the right to use the property, to use any crops (or other product of the land) - including the right to income from such crops, and the right to dispose of the life tenancy interest to someone else. The life tenant is entitled to exclusive use of the property during the period of the life estate, in any way that the owner of a fee simple estate could use their property.

However, the life tenant does not have the right to do anything that could impact the interest of the remaindermen. The remaindermen are the persons who will inherit the property, in fee simple, when the life estate ends. The remaindermen own the remainder interest in the property. Simply put, the remainder interest is a property interest that takes effect only after the termination of the prior estate (the life estate), so it is a future possessory interest in real estate.

Because the life tenant's rights will revert to the remaindermen at the end of the life estate, he or she also has an obligation to make repairs and pay taxes and interest when due.

To help you better understand life estates, let's look at an example of a conventional life estate:

Joan is a widow who owns her home alone. Joan wants to pass her home to her two children when she dies, but she wants to stay in her home as long as possible. Joan and her children met with an estate planning attorney and determined that the best way to accomplish Joan's goals was to create a life estate. The attorney drafted and recorded a quitclaim deed that transferred ownership to Joan's two children, but retained a life estate in the property for Joan's lifetime.

After signing the deed, Joan is still responsible for paying property taxes and insurance, and for the upkeep of her home. Joan's children do not have any rights to the property yet, as long as Joan is alive.

However, if Joan decided she wanted to move to a condo two years later, her children would need to join her in executing a deed to sell the home, because they have what is called a "remainder interest" in her home.

Let's say instead that Joan decided to keep her home after all and died five years later. The life estate terminates at Joan's death. Her children held a remainder interest in the property, and will now become owners as tenants in common. It should not be necessary for Joan's home to go through a court proceeding to obtain clear title.

As mentioned earlier, most of the time, the measuring life for the life estate is the same as the owner's lifetime. In our example, Joan was the property owner who created and retained the life estate, based on her lifetime.

Sometimes, a life estate is based on someone else's lifetime. This is called a “per autre vie” life estate.

For example, John knew his friend Audrey needed somewhere to live, so he created a deed giving Audrey a life estate in a property he owned. Audrey, as the life tenant, has the right to live there, along with all of the other rights and benefits that come with holding a life estate. John created the life estate on someone else's life (Audrey's, in this case), so he created a “per autre vie” life estate.

In this example, John did not name anyone to assume ownership of the property when Audrey dies; that is, there are no named remaindermen. Instead, John created a future interest called a "reversionary interest" for himself (or for his estate). Ownership of the property would revert back to John at Audrey's death.

Key Terms

Life Estate
An estate or interest in real property, which is held for the duration of the life of some certain person. It may be limited by the life of the person holding it or by the life of some other person.
Life Tenant
The owner of a life estate.
Remainder
An estate which takes effect after the termination of the prior estate, such as a life estate. A future possessory interest in real estate.
Remainderman
A person who inherits or is entitled to inherit property upon the termination of the estate of the former owner.
Reversionary Interest
The interest which a person has in lands or other property, upon the termination of the preceding estate. A future interest.

7.3a Life Estates Infographic

Please spend a few minutes reviewing the Infographic below.

7.4 Water Rights

Transcript

Property owners whose land is adjacent to water have some rights in the water that flows through or over their property. These rights are generally referred to as water rights.

In this lesson, we will explore different types of water rights, and help you understand some key terms and concepts.

One type of water rights you may encounter as a real estate professional is known as “riparian rights.” Riparian rights are associated with a moving body of water. One way to easily remember this is to associate the “R” in “Riparian” with the word “River,” which is of course a moving body of water.

When a property owner has riparian rights, it means his or her land borders on a stream, river, or other moving waterway. Riparian rights mean that the property owner has the right to use and enjoy that water as long as such use or enjoyment does not injure the rights of other upstream or downstream property owners with riparian rights.

The riparian rights doctrine says that the water rights for moving bodies of water belong equally to all of the property owners whose land borders the water. A property owner who has riparian rights is also referred to as a “riparian owner.”

Let’s look at an example of riparian rights that might help you understand them better:

Jimmy owns property that is adjacent to the ABC River, which flows downstream. Jimmy’s neighbor Chuck has land that also borders the river, as does Chuck’s neighbor Kim’s property.

Jimmy, Chuck and Kim all have riparian rights in the ABC River, so any of them can use the river for fishing, boating or any other use that does not interfere with the rights of the other riparian owners.

If Jimmy decided he wanted to build a dam on the part of the river that is next to his land, he would be interfering with Chuck’s and Kim’s riparian rights, and they could take legal action against him.

Another type of water rights is referred to as “littoral rights.” This type of water right gives a property owner whose land borders a body of water like a lake, ocean or sea, the right to reasonable use and enjoyment of the shore, and the water, the property borders on.

Where riparian rights are associated with a moving body of water like a river or stream, littoral rights are associated with a still body of water, like a lake. Generally, littoral rights refer to rights for navigable lakes and oceans. When you are trying to remember the difference between riparian and littoral rights, it may help to associate the “L” in the word “Littoral” with the word “Lake” – which is one type of a still body of water.

Property owners with littoral water rights own the land underneath the water, up to the mean low water mark or 100 rods below the mean high water mark for tidal waters, whichever is less. The land in between the low water and high water marks is reserved for public use.

Let’s look at another example.

Nick just bought a lake home with an extensive shoreline. Nick has the right to use that shoreline in any way he wants because of the littoral rights that come with the property, as long as his use will not interfere with other property owners’ rights.

He has the right to put in a boat dock, build a boathouse on the shore, and to use and enjoy the shoreline and the water.

Water rights are attached to the land, and not to the specific owner. So, when a parcel of property with water rights is sold or transferred, the new owner will also receive the water rights that are appurtenant to the land.

Although water rights attach to the land, there are several ways that those rights can be increased – or decreased.

First, water rights can be changed by natural forces in a few different ways.

When accretion occurs, it means that the soil or sand level is naturally increased, which can serve to decrease the water level on the property owner’s land. Another word you may hear in this context is “alluvium”, which refers to a natural and gradual increase of the earth on a shore of a lake or an ocean, or on the bank of a river or stream resulting from the action of the water.

Another term you may hear is “accession.” Accession can refer to accretion or alluvium, but it can also refer to the soil or sand level being increased (and a corresponding decrease in water rights) through man-made efforts.

While the terms we just discussed are probably unfamiliar to you, chances are good that you have heard of this next term before. Erosion is another factor that can affect property owners’ water rights. Erosion is simply the wearing away of land, gradually, through natural forces, including acts of water, wind, or even glacial ice.

Erosion is the opposite of accretion or alluvium, in which water rights were decreased because land rights were increased through natural forces. When erosion occurs, there is actually less land adjacent to the water.

Finally, let’s introduce one more term related to water rights: avulsion.

As we just discussed, erosion is the gradual loss of land through natural forces. In contrast, avulsion is a sudden and perceptible loss of that land by action of water. For example, if a river’s waters suddenly change course, property owners may find that avulsion has decreased their land adjacent to the river.

Other types of water rights you may encounter as a real estate professional include the rights to groundwater basins. Property owners have the rights to draw water from those basins. The extent to which property owners have rights over ground waters beneath their land is largely determined by the state where the property is located.

Key Terms

Accretion
Accession by natural forces, e.g., alluvium.
Alluvium
The gradual increase of the earth on a shore on an ocean or bank of a stream resulting from the action of the water.
Accession
An addition to property through the efforts of man or by natural forces.
Avulsion
A sudden and perceptible loss of land by the action of water as by a sudden change in the course of a river.
Erosion
The wearing away of land by the act of water, wind, or glacial ice.
Littoral Rights
The right of a property owner whose land borders on a body of water, such as a lake, ocean or sea, to reasonable use and enjoyment of the shore and water the property borders on.
Riparian Rights
The right of a landowner whose land borders on a stream or watercourse to use and enjoy the water which is adjacent to or flows over the owner’s land provided such use does not injure other riparian owners.

7.4a Water Rights Infographic

Please spend a few minutes reviewing the Infographic below.

Chapter 7 - Quiz

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Chapters > Chapter 7
  • 7.1 Government Powers
  • 7.1a PETE Infographic
  • 7.2 Freehold Estates: Fee Simple Estate
  • 7.3 Freehold Estates: Life Estate
  • 7.3a Life Estates Infographic
  • 7.4 Water Rights
  • 7.4a Water Rights Infographic
  • Chapter 7 - Quiz

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