Lesson 1: Chapter 8 - Forms of Real Estate Ownership Flashcards
3 Basic Ways Fee Simple Estates can be held
- In severalty, where the title is held by one individual or entity.
- In co-ownership, where title is held by two or more individuals or entities.
- In trust, where a third individual holds title for the benefit of another.
Severalty
Ownership in severalty occurs when property is owned by one individual or corporation. The severalty owner has sole rights to the ownership and sole discretion to sell, will, lease, or otherwise transfer part or all of the ownership rights to another person or entity.
When a husband or wife owns property in severalty, state law may affect how ownership is held.
In Illinois: Sole ownership of property is quite common in Illinois, and title held in severalty presents no unique legal problems. However, when either a husband or a wife owns property in severalty, lenders, grantees, and title insurers in Illinois usually require that the spouse sign in order to release any potential homestead rights. This is true for both listing and sales contracts.
Co-Ownership
When title to one parcel of real estate is held by two or more individuals, those parties are called “co-owners” or “concurrent owners”. Most states commonly recognize various forms of co-ownership. Individuals may co-own property as tenants in common, joint tenants, or tenants by the entirety, or they may co-own “community property” in states recognizing community property.
In Illinois: Illinois recognizes co-ownership and most traditional forms of co-ownership except for community property (Illinois is a marital property state). Illinois also recognizes ownership in trust, in partnership, and by commercial entities such as corporations and limited liability companies.
Tenancy in Common
A parcel of real estate may be owned by two or more people as tenants in common. In tenancy in common, each tenant holds an undivided fractional interest in the property. A tenant in common may hold, for example, one-half or one-third interest in a property. The physical property however, is not divided into a specific half or third. Hence, it is called an undivided fractional interest.
The co-owners have unity of possession, meaning they are entitled to possession of the whole property. It is the ownership interest, not the property that is divided.
Because the co-owners own separate interests, they can sell, convey, mortgage or transfer their individual interests without the consent of the other co-owners.
When one co-owner dies, the tenant’s undivided interest passes according to the co-owner’s will or living trust.
In Illinois: when a single deed is used, lack of description of each tenant’s share means all tenants hold equal, undivided shares. In Illinois, the law presumes that two or more owners hold title as tenants in common if the deed does not state specifically how title is to be held.
Joint Tenancy
Most states recognize some form of joint tenancy in property owned by two or more people. The feature that distinguishes a joint tenancy from a tenancy in common is “unity of interest”.
Title is held as though all the owners, collectively constitute one unit. Joint tenancy includes the “right of survivorship”.
Upon the death of a joint tenant, the deceased’s interest transfers directly to the surviving joint tenant(s). A will has no effect on the transfer of property. Essentially there is one less owner. The joint tenancy continues until only one owner remains.
Right of Survivorship
Upon the death of a joint tenant, the deceased’s interest transfers directly to the surviving joint tenant(s). A will has no effect on the transfer of property. Essentially there is one less owner.
Creating Joint Tenancies
A joint tenancy can be created only by the intentional act of conveying a deed or giving the property by will. It cannot be implied or created by operation of law. The deed must specifically state the parties’ intention to create a joint tenancy, and the parties must be explicitly identified as joint tenants.
In Illinois: Illinois allows a sole owner to execute a deed to herself and others “as joint tenants and not as tenants in common” in order to create a valid joint tenancy.
Four “unities” that are required to create a joint tenancy
- Unity of possession: all joint tenants hold an undivided right to possession of the property.
- Unity of interest: all joint tenants hold equal ownership interests in the property.
- Unity of time: all joint tenants acquire their interests at the same time.
- Unity of title: all joint tenants acquire their interests by the same deed.
Terminating Joint Tenancies
A joint tenancy is destroyed when any one of the four unities of joint tenancy is terminated. Joint tenants are free to convey their interest in the jointly held property, but doing so destroys the unities of time and title. The new owner cannot become a joint tenant in the original joint tenancy and will hold interest as a tenant in common. Rights of other joint tenants however, are unaffected.
In Illinois: In the 1983 Illinois Supreme Court case “Minonk State Bank v Gassman”, the court held that a joint tenant may unilaterally sever the tenancy by conveying her interest to herself as a tenant in common, even without the consent of her co-owners. As a result, any owner holding property in a joint tenancy may elect, at any time, to become a tenant in common. At such time, that particular owner may will her interest to heirs or sell it. Any joint tenancy may also be severed by mutual agreement of all cotenants, by conveyance to third parties, or through a partition suit in the courts.
Minonk State Bank v Gassman
In Illinois: In the 1983 Illinois Supreme Court case “Minonk State Bank v Gassman”, the court held that a joint tenant may unilaterally sever the tenancy by conveying her interest to herself as a tenant in common, even without the consent of her co-owners. As a result, any owner holding property in a joint tenancy may elect, at any time, to become a tenant in common. At such time, that particular owner may will her interest to heirs or sell it. Any joint tenancy may also be severed by mutual agreement of all cotenants, by conveyance to third parties, or through a partition suit in the courts.
Termination of Co-Ownership by Partition Suit
Co-owners who wish to terminate their co-ownership may file an action in court (called a “partition suit” or “suit to partition”) to partition the property.
Partition
Partition is legal way to dissolve the relationship when the parties do not voluntarily agree to its termination. If the court determines that the land cannot be divided physically into separate parcels without destroying its value, the court will order the real estate sold. The proceeds of the sale will then be divided among the co-owners according to their fractional interests.
In Illinois: An Illinois partition suit may be filed by one or more of the owners in the circuit court of the county in which the subject parcel is located. The court appoints commissioners who must, if possible, divide the property by legal description among the owners in title. If such a division cannot be made without harming the rights of the co-owners, the commissioners must report a valuation of the property. The property is then offered for public sale at a price not less than two-thirds of the value as set by the commissioners.
All defendants to the suit (the co-owners who object to the partition) are required to pay their proportionate share of court costs and the lawyer fees of the plaintiff.
Tenancy by the Entirety
Some states, including Illinois, allow husbands and wives to use a special form of co-ownership called tenancy by the entirety for their personal residence. The term “entirety” refers to the fact that the owners are considered one individible unit: Under early common law, a married couple was viewed as one “legal person”. In this form of ownership, each spouse has an equal, undivided interest in the property. A husband and wife who are tenants by the entirety have rights of survivorship.
In Illinois: To create a tenancy by the entirety, the deed must indicate that the property is to be owned “not as joint tenants or tenants in common, but as tenants by the entirety.”
Illinois Religious Freedom Protection and Civil Union Act
Provides persons entering into a civil union with the “obligations, responsibilities, protections, and benefits as are afforded or recognized by the law of Illinois to spouses. Civil union partners are able to hold title real property as tenants by the entirety. Illinois also now recognizes same sex marriage which also offers the benefits of tenancy by the entirety.
Tenancy by the Entirety Can be Terminated By:
- A court-ordered sale of the property to satisfy a judgment against the husband and the wife as joint debtors (the tenancy is dissolved so that the property can be sold to pay the judgment.
- The death of either spouse (the surviving spouse becomes sole owner in severalty).
- Agreement between both parties through the execution of a new deed.
- Or divorce, which leaves the parties as tenants in common.
Community Property
Community property consists of all other property, both real and personal, acquired by either spouse during the marriage. Any conveyance or encumbrance of community property requires the signatures of both spouses. When one spouse dies, the survivor automatically owns one-half of the community property. The other half is distributed according to the deceased spouse’s will. If a community property spouse dies without a will, the other half is inherited by the surviving spouse or by the decedent’s other heirs, depending on state law. Community property does not provide an automatic right of survivorship as do joint tenancy and tenancy by the entirety.
Community property laws are based on the idea that a husband and a wife are equal partners in the marriage and therefore any property acquired during a marriage is considered to be obtained by mutual effort.
In Illinois: Illinois is not a community property state. It’s a marital property state.
Separate Property
Is real or personal property that was owned solely by either spouse before the marriage. It also includes property acquired by gift or inheritance during the marriage, as well as any property purchased with separate funds during the marriage. Any income earned from a persons separate property belongs to that individual.
Marital Property
As a marital property state, Illinois has certain similarities to community property states but with important differences. Illinois too breaks property down into two major categories based on marital status: marital property and nonmarital property. Illinois law recognizes that a husband and a wife acquire joint rights in all property acquired after the date of marriage for the duration of the marriage. Illinois labels such property as “marital property”, all of which will be divided between the two parties in the event of a divorce.
Nonmarital Property
Property that was acquired before the marriage or by gift or inheritance at any time, even during the marriage. If nonmarital property is exchanged for other property, or it increases in value, or if it returns income, the exchange, increase or income also would be considered nonmarital property.
If nonmarital property is commingled with marital property however, a presumption of transmutation is created, the resulting “mixed” property is presumed to be marital property.
Illinois Marriage and Dissolution of Marriage Act
Gives the courts flexibility in determining the precise division of marital property. This is a difference from community property states, which often impose a strict 50-50 division unless prenuptial agreement is in place.
