Real Estate Interests

Real Estate Interests

Legal interests in real estate seem simple upon first consideration – someone may own a home, and when they sell it, the buyer owns it. However, even such “simple” purchase and sale arrangements are often layered with other forms of legal interests being retained or changing hands, such as mortgage lien rights, easements, tenant rights and restrictive covenants. Holding an interest in property does not mean just one thing and even the descriptor of “ownership” fails to identify important differences among ownership types. Financial, tax and estate planning goals often are best accomplished by using forms of property transfers outside of traditional sale and purchase agreements and understanding such mechanisms is important to making efficient decisions about your real estate.

It is helpful to first present a framework for which to analyze the differences between types of interests. The classic real estate analogy to help frame the various rights and obligations of land ownership is the “bundle of sticks” thought exercise. First, imagine a bundle of sticks, where each stick represents a right or obligation regarding a particular piece of real property. One stick, for example, is the right to occupy the property, another may be the right to build or destroy structures on the property. When someone has all of the sticks, representing every conceivable right to the land, they are the “owner” in the truest sense of the word for the land associated with the sticks. However, individual sticks are often removed from the bundle and given to others – thus the rights to the property are divided among different people and entities. In fact, no individual holds all the sticks to any given bundle because certain property rights are held by the government. Some examples of this are: the right to tax, to prevent certain uses of the property through zoning and permitting requirements, and to forcibly acquire property through eminent domain. The remainder of the rights are typically divided in one of the following classifications of interest in real estate:

Fee Simple Interest. An owner in “Fee Simple” holds the most rights to real estate any individual can enjoy. They can occupy and use the property as they see fit, exclude anyone they do not want to be there, sell or rent to whomever they like, and build or tear down any structures so long as they comply with the governmental limits to such powers. Their use of the property exists currently and there is no time limit on such use.

Leasehold Interest. The first interest in real estate most people acquire is the leasehold to their first apartment. This interest is also referred to as a “Lessee” or “Tenant” interest. Lease rights vary tremendously based on the terms of the lease contract, but in general, ownership is retained by the landlord and the right to occupancy, use, and enjoyment for a set length of time is sold to the tenant for the price of rent. While the ownership of the property is retained by the Landlord, those occupancy rights are temporarily transferred away from them. This transfer of rights is what separates a “tenant” from a “guest.”  For example, despite being the “owner” of the property, Landlords generally do not have the right to sleep or live in the rented space, invite guests over or tell their tenants who is and is not allowed on the premises – these rights are retained by the Tenant for the duration of the lease.

Landlord Interest. The opposite of the leasehold interest, the Landlord, also known as the “Lessor,” retains the rights not traded for rental payments to the Tenant. This typically includes the rights to make decisions regarding the improvements on the property (although some leases allow Tenants wide discretion to remodel or even build improvements), the right to sell the property to others, or encumber it with a mortgage to finance other projects, and to have the property returned to them at the end of the lease.

Life Estate Interest. Life estate arrangements transfer the “sticks” associated with a property after the owner’s death to another party, often as a gift but sometimes as a sale, but keep the “sticks” for use during one’s life with the owner. The rights to use the property during life is called the “Life Estate Interest.” This typically involves the holder being able to live in the property rent free for the duration of their life. In theory, the “Life Estate interest” can be sold to a third party, but because it terminates on the death of the original holder (it does not reset to the lifespan of the buyer), few people are interested in purchasing such rights. Life Estate interest holders are usually required to pay the property taxes and keep the improvements in good repair to protect the value of the remainder interest holder’s rights. Granting a Life Estate is fundamentally different than naming someone in a will, as the legal ownership of the right to use the property after the grantor’s death irrevocably transfers to that individual and cannot be rescinded.

Remainder Interest. The opposite of the Life Estate Interest, the holder of the remainder interest has no current use or occupancy rights but will assume full ownership of the property when the Life Estate interest holder dies. They also have certain rights to ensure the Life Estate Interest holder keeps the taxes paid and the property in good condition, as failure to maintain the property damages their future rights. A remainder interest holder can sell their remainder interest to other parties. The value of such interests is typically determined by the life expectancy of the Life Estate interest holder.

Mortgage Liens. Banks and other financial institutions own interests in a huge number of properties in the form of mortgage liens. Individual lenders may also acquire such rights. When a bank lends you money to purchase a home, or sometimes for other reasons, they may “secure” that debt by placing a mortgage lien on the property. This grants a “conditional right,” meaning that if certain events happen, the right comes into effect. The main conditional right with a mortgage lien is the right to seize the property from the borrower if payments are not made or if the borrower attempts to transfer the property without their consent, which is frequently called the “due on sale clause.” Lenders require these liens be granted to them to ensure that they will receive their money back from the sale of the seized home in the event the borrower stops paying the loan.

Land Contract Vendor. The Vendor of a land contract makes a contract with a purchaser or “Vendee” to sell specific land in exchange for a promissory note which is paid over time. In a traditional mortgage financed transaction, the seller is fully paid at closing from the money the borrower got from the bank and transfers the full interest at that time. In a land contract however, the payments are made directly to the Vendor over a number of years, and the title is retained until it is paid in full, at which point the Vendor is required under the contract to transfer the property by deed to the Vendee. Although title remains with the Vendor until the note is paid, for most practical purposes, the use and occupancy rights to the property transfer to the Vendee upon signing the Land Contract, at least for so long as the Vendee stays current on their payments.

Land Contract Vendee. The Vendee of a land contract agrees to purchase the property from the seller, or “Vendor.” The Vendee has a right to acquire the property when they have completed the payment schedule called for in the Land Contract. They typically have broad rights to use the property while paying off the debt, but also are typically required to maintain insurance and maintenance to protect the security of the Vendor. If they fail to make the payments, the Vendor may be able to seize the property back from them, as the legal title to the ownership never changed hands.

Easements. The owner of an easement right does not own the property it pertains to, but rather has specific rights to use that property for specific purposes. The most common form of easement is for access, also known as “ingress and egress easements.” If a lot is created that has no access to a public road because it is surrounded by other lots, it is common for the owner of that lot to negotiate for the purchase of an easement on someone else’s property for the right to travel across it to get to the road. Other common easements are for hunting or recreational use. Easements are presumed to be “appurtenant” to the land, meaning future owners automatically get the rights and obligations transferred to them when they buy the property. However, some easements are “in gross” meaning an individual owns the easement right (common with hunting easements). If an easement is vital to the use of a property, buyers should carefully ensure the rights will continue after the property changes hands.

Restrictive Covenants/Deed Restrictions. Where an easement is a right of another to use someone else’s property for a specific purpose, a restrictive covenant or deed restriction is the right of another to prohibit certain uses of a property by its owner. For example, the owner of a house on a hill may decide to sell some of their land at the bottom of the hill. Because they are worried about their view being blocked if the new owner builds a tall structure, they retain for themselves the “stick in the bundle” that represents the right to build structures over a certain height. The new owners take title to the land, but never obtain the right to build any structure that would block the view. The most common type of restrictive covenants are found in property developments, where the developer, to increase the value of the land or houses they are selling, puts use restrictions on all of the lots. While the value of a single property may be decreased if it comes with rules about what the owner cannot do with it i.e., “no barking dogs on the property” and “no non-running cars in the driveway,” the value may increase significantly if all the neighboring properties also are prohibited from owning barking dogs or leaving junk cars out front as buyers get the peace of mind in knowing their neighbors cannot do these things.

Option to Purchase. An option to purchase grants the legal right, but not the obligation, to acquire a property at a set price during a window of time. If exercised by the option holder, the owner is legally required to sell them the property. The owner may still occupy and enjoy the property during the interim and the option holder has no rights to the property unless they exercise the option. Options become more valuable if the land value increases, as the right to buy a property for $100,000 that has doubled in value since the option was granted obviously is quite valuable. Option rights are typically sold to purchasers when they express interest in a property they cannot currently acquire and want to secure their right to buy it in the future.

Right of First Refusal. A right of first refusal is a contractual right to have a property offered to be sold to the holder for a set price and terms before the owner can sell to anyone else. The right holder does not own the property or have any ability to force the sale, but if the seller wishes to sell, the right holder will be guaranteed a chance to buy the property themselves. The price is sometimes set to match the offer made by another party, requiring the right holder to match the outside offer to acquire the interest. Sometimes the terms call for a formula or appraisal-based price determination instead. Rights of First Refusal are often utilized in family land transactions when the real estate is sentimental in some way. For example, if two siblings inherit their family home, one sibling may wish to purchase it from the other to live in. That sibling may agree to the sale but only on the condition that before they could sell it to someone else, they would have to first offer it back to them.

If you have any questions about these types of interest in real estate, please do not hesitate to reach out to one of our experiences real estate attorneys.

What is the Foreign Investment in Real Property Tax Act?

What is the Foreign Investment in Real Property Tax Act?

When you are buying real estate there are many different documents that need to be executed at closing. One of those documents is the FIRPTA Affidavit. Although this document is only executed by the Seller, it is still important that the Buyer understands the implications of FIRPTA in real estate transactions and the execution of the FIRPTA Affidavit.

FIRPTA is the abbreviation for the Foreign Investment in Real Property Tax Act and was created to ensure any foreign person or entity pays the necessary taxes when they sell property in the United States. This law was enacted because the U.S. Internal Revenue Service (IRS) was concerned that foreign persons would sell their real estate and then leave the country without paying the tax due on the sale. Therefore, the IRS determined the best solution was to have the Buyer be responsible for making sure the tax is collected. The reasoning for this is, the Buyer will still be in the country after the sale and they have an identifiable asset, the purchased property, that the IRS could attach a lien to if necessary.

Therefore, under FIRPTA, the Buyer of the real estate must either pay, or withhold as a tax, up to 15% of the total amount realized in the sale if the Seller is considered a foreign person. If it is determined that the Seller is a foreign person and the Buyer has not paid or withheld the tax amount, then the Buyer could be held liable by the IRS for the unpaid tax. Furthermore, if the Buyer has not paid the tax or withheld the appropriate amount, a tax lien could be placed on the property.

Considering the potential liability to the Buyer, it is important that the parties execute the appropriate documents at closing to comply with FIRPTA. If the Seller is a non-foreign person, then he or she will often execute the FIRPTA Affidavit at closing. This affidavit is a sworn statement by the Seller, under penalties of perjury, that states the Seller is a non-foreign person in accordance with FIRPTA. In the event the Seller is a foreign person, the Buyer will need to withhold the required amount in compliance with FIRPTA.

Although FIRPTA was enacted to prevent foreign Sellers from leaving the country without paying the taxes from the sale, it has resulted in an increase in potential liability for the Buyers of real estate from foreign Sellers. Therefore, it is beneficial for the Buyer to understand the implications of FIRPTA and seek the advice and assistance from a real estate attorney in real estate transactions that involve a foreign Seller.

If you have any questions on this act please contact one of our experienced real estate attorneys, they would be happy to assist you.

Joint Tenancy vs. Tenants in Common, What is the Difference?

Joint Tenancy vs. Tenants in Common, What is the Difference?

When buying real estate in Wisconsin, one of the items you will need to consider is how you would like to take title of the property. If you are buying the property as an individual, then this is usually not an issue; however, this item will play an important role if you buy the property with one or more co-owners. You will need to consider whether you will be joint tenants or tenants in common. Both ownership types have different aspects and characteristics, so it will be important to consider the facts and circumstances pertaining to your situation.

In the case of joint tenants, each will have an equal interest in the whole property for the duration of the joint tenancy period, regardless of different or unequal contributions at the start of the joint tenancy. Additionally, joint tenants have a right of survivorship, therefore, upon the death of one of the joint tenants, the survivor becomes the sole owner of the property.

In contrast, tenants in common each have an undivided interest in the whole property for the duration of the tenancy. Tenants in common do not need to have equal interests in the whole property. Therefore, if there is a difference in the contribution amounts, then you may take that into consideration to determine the ownership interest each tenant in common receives. Additionally, there is no right of survivorship for tenants in common. Therefore, upon the death of a tenant in common, their ownership interest will be passed to their heirs at law under Wisconsin law and/or pass via their instructions within their estate planning documents.

Because there are differences between these types of ownerships, it will be important to consider how you want to take title. You should determine if you want your ownership interests to be equal or unequal, considering any differences in the amounts contributed by each co-owner. You may also want to consider how you would want the title to pass upon the death of a co-owner. Do you want the survivor to become the sole owner or would you like your interest in the property to pass to your heirs?

Under Wisconsin Law, it is assumed that co-owners of a property own as tenants in common, unless the intention of creating a joint tenancy is expressed in the document of title, instrument of transfer or bill of sale. Furthermore, under Wisconsin law, it is assumed that tenants in common each own an equal undivided interest in the whole property, unless the intent to have different undivided ownership amounts is expressed in the document of title, instrument of transfer or bill of sale.

As a result of the differences between joint tenants and tenants in common, it may be helpful to seek the advice of a real estate attorney before purchasing the property. An attorney would be able to analyze your situation and your intentions for the property and advise you on the best manner to take title with a co-owner. Moreover, an attorney will be able to assist you in expressing the appropriate language on the document of title, instrument of transfer or bill of sale to honor your intentions and prevent future issues regarding the ownership of the property. If you have questions, do not hesitate to reach out to one of our real estate attorneys.

 

Wisconsin’s Home Improvement Code Protects Homeowners When Remodeling

Wisconsin’s Home Improvement Code Protects Homeowners When Remodeling

There has been a significant increase in home remodeling projects since the pandemic began over a year ago, and many people choose to hire a contractor to assist them. Not all contractors provide written contracts with the details of the project, such as total costs, start and completion dates, and the type and quantity of materials to be used. The lack of a written agreement sometimes leads to disputes after the project begins and may lead to arguments about payment at the end of the project. Fortunately for homeowners, Wisconsin has the Home Improvement Practices administrative code sections which set forth requirements and penalties if contractors fail to follow the rules. These rules can be found in Chapter ATCP 110 of the Administrative Code. The rules require a contract, and all changes to that contract, to be in writing and signed by the contractor and the homeowner if (1) the contractor requires money up front, prior to completing the project, or (2) if the contractor solicits a homeowner’s business away from the contractor’s regular place of business, by mail or telephone, or with brochures or circulars delivered or left at someone’s home.

The requirements under the code are applicable if the project involves “Home Improvement” which the code defines as follows:

“Home improvement” means the remodeling, altering, repairing, painting, or modernizing of residential or non-commercial property, or the making of additions thereto, and includes, but is not limited to, the construction, installation, replacement, improvement, or repair of driveways, sidewalks, swimming pools, terraces, patios, landscaping, fences, porches, garages, basements and basement waterproofing, fire protection devices, heating and air conditioning equipment, water softeners, heaters and purifiers, wall-to-wall carpeting or attached or inlaid floor coverings, and other changes, repairs, or improvements made in or on, attached to, or forming a part of, the residential or non-commercial property. The term extends to the conversion of existing commercial structures into residential or non-commercial property. “Home improvement” does not include the construction of a new residence or the major renovation of an existing structure.

As you can see, home improvement is defined in very broad terms. You should note that it does not apply to construction of a new residence or the major renovation of an existing structure.

If a written contract is required under the code based on the circumstances described earlier, the contract must contain the following information:

  • The contractor’s name and address, and the name and address of the contractor’s sales representative or agent.
  • A description of the work to be done and the principal materials to be used. If the contractor promises to install specific products or materials, the contract must clearly describe those products or materials.
  • The total price, including finance charges. If the contract is for time and materials, it must clearly disclose the hourly labor charge.
  • The dates by which, or the time period within which, the contractor will begin and complete the work.
  • A description of any mortgage or security interest created in connection with the sale or financing of the home improvement.
  • All warranties that the contractor makes for labor, services, products or materials furnished in connection with the home improvement.
  • A description of every document incorporated in the home improvement contract.
  • Insurance coverage included in the home improvement contract, if any.

Additional provisions in the Home Improvement Code require the contractor to provide the customer with a written notice advising that the customer has a right to receive lien waivers. The code also requires that the contractor inform the customer of all building and construction permit requirements, and the contractor must refrain from starting work until the permits have been issued.

Should a contractor fail to comply with these code requirements, a homeowner has several potential remedies including the following:

  1. Cancel the contract;
  2. Demand return of any payments which the contractor has not yet earned;
  3. Demand delivery of all materials the homeowner already paid for;
  4. Demand an accounting of all payments that were made by the homeowner;
  5. The homeowner may be able to recover twice the amount of any damages they sustain as a result of the contractor’s violation of the Home Improvement Code;
  6. A homeowner may be able to recover actual attorneys’ fees that they incur in pursuing claims against the contractor for violations of this code.

If a homeowner is in a position where they believe they have sustained damages because a contractor failed to comply with the Home Improvement Code, it is advisable that they consult with a litigation attorney to discuss their options.

 

What is a Title Commitment?

What is a Title Commitment?

In almost every real estate transaction title work will be ordered and a title commitment will be provided to the parties to review prior to closing. A title commitment is a document that provides information pertaining to the property that is subject to the transaction. It will list out the various requirements, exceptions, and details of the title policy that will be issued for the property after closing. Since the title commitment provides valuable information pertaining to the property that a buyer may not otherwise know, it is extremely important to carefully review the title commitment before closing.

There are three sections of a title commitment that should be carefully reviewed. The first section is Schedule A. In this section, you will see information such as the type and amount of the policy, the proposed insured, the interest that the policy will cover, the current owner of the property and the legal description of the property. When reviewing this section, you will want to make sure the current owner and the seller are the same person/entity, the correct property is described and the proposed insured is listed exactly how the buyer plans on taking title. If there are any discrepancies, you will want to have the title commitment revised prior to closing and the title policy being issued.

The next section in the title commitment will be Schedule B-I. This section lists out all the requirements that must be satisfied before the title company will issue the title policy. Typically, you will see requirements such as a warranty deed transferring the property to the buyer, satisfactions of previous mortgages, etc. Additionally, if either of the parties are entities, there will likely be a requirement of documentation authorizing the entity to perform this transaction. It is important you understand both your requirements, as well as the other party’s requirements, so that all requirements are met prior to closing so that the transaction can proceed smoothly.

The last section in the title commitment that you should review is Schedule B-II. This section lists out the exceptions to coverage provided by the title policy. There are two types of exceptions that will be listed in this section. The first type is the general exceptions. These exceptions are in every title commitment and can often be removed if certain actions are taken. The other type of exceptions are the specific exceptions. These are exceptions that are specifically connected to the property in the transaction. One example of a specific exception would be a prior mortgage on the property. Assuming the mortgage would be satisfied at closing, this exception would then be removed from the title commitment. Because these exceptions can cause a lack of coverage in the future if an issue arises, it is crucial that the buyer review each exception.

Taking into consideration the importance of the title commitment in the execution of a real estate transaction, it will be helpful to seek the advice of a real estate attorney prior to closing. A real estate attorney will be able to review each section of the title commitment and determine if there are any discrepancies or items that need to be revised. Moreover, an attorney will be able to analyze each exception to the title policy and advise you on the impact each exception has on the property. Overall, seeking the help of a real estate attorney to review the title commitment prior to closing can facilitate a smooth transaction and prevent future issues that may arise as a result of an overlooked item on the title commitment.

 

Defective Home Construction? Know Your Rights and Responsibilities

Defective Home Construction? Know Your Rights and Responsibilities

Are you thinking it is time to build your new dream home or do some remodeling to your existing home?  Are you a busy homebuilder just trying to keep up?  In either case, you should be aware of a Wisconsin statute that sets out procedures for addressing defects that arise as a result of construction and remodeling projects.

Wisconsin Statute 895.07 was created for claims against contractors and suppliers related to the construction or remodeling of a dwelling.  A dwelling is defined by the statute to mean more than just a new home.  A dwelling includes other existing structures on a residential premise, such as driveways, sidewalks, swimming pools, patios, terraces, fences, porches, garages and basements.

Wisconsin law provides that prior to entering into a written contract to construct or remodel a dwelling (or as soon as possible but before starting work if the contract is oral) a contractor shall give notice to the consumer of his or her rights under Section 895.07.  The specific language to be used may be found in Wisconsin Statute 101.148.

Should defects arise as a result of the project, Section 895.07(2) requires the consumer to give the contractor written notice describing the defects complained of no later than 90 working days before commencing action, such as a lawsuit or arbitration.  This notice must include a description of evidence that the consumer knows of, including expert reports, that substantiate the nature and cause of the defects.

Within 15 working days of receiving the consumer’s notice, the contractor has one of five options for responding.  Those options include: 1) offering to repair or remedy the defect at no cost to the consumer; 2) offering to pay money to settle the claim; 3) offering a combination of repair work and money; 4) rejecting the claims in total; or 5) proposing to inspect the property.

If the contractor chooses to inspect the property, the consumer must provide access within 15 working days.  Following the inspection, the contractor has 10 working days to respond to the consumer identifying one of the remaining four options listed above that the contractor chooses.

Contractors often use a host of suppliers for dwelling construction and remodeling work.  It may be the case that one of these suppliers bears responsibility for the defects.  In that case, the contractor may assert a contribution claim against the supplier.  Section 895.07 provides a procedure for making contribution claims.  The contractor must provide notice to the supplier within five days after receiving a consumer’s claim unless the contractor has taken no action to repair the defect, performed no destructive testing, not permitted the consumer to take action to repair the defect, has not interfered with or altered the property subject to the claim, and has not precluded the supplier from offering to remedy the defect or make repairs.

As a contractor, if you failed to give the notice required by Section 101.148 and are sued for construction defects, the court must stay the legal action and order the parties to comply with the notice requirements and the procedures in Sections 101.148 and 895.07.

Whether a consumer or a contractor, we hope your construction and remodeling projects go smoothly.  However, when that is not the case our litigation team at Anderson O’Brien is here to help.

 

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