Here you have the second post in our new series presenting vital concepts from our unpublished easy-to-digest course content. This series showcases the basics for a DRE licensee to prepare a Broker Price Opinion (BPO), starting from defining property to conveyancing.
Why this article matters to your practice: Property pricing maxed out in early 2022, following a very long cycle of buyers and tenants chasing the rising price of property. Concern for an evaluation was dropped from the price-setting conversations. That has changed. Rational judgment – caution – has returned for most all prospective buyers and tenants. And with it, brokerage services, and the necessity of comparable market analysis (CMA) – the BPO, aka Appraisal.
Types of leasehold estates
Four categories of leasehold estates exist which establish rights of possession a tenant may acquire, own and transfer. These leasehold categories, called tenancies, are classified by the length of their term of possession:
- a fixed-term tenancy, simply known as a lease and legally called an estate for years;
- a periodic tenancy, commonly referred to as a rental;
- a tenancy-at-will, previously introduced as an estate at will; and
- a tenancy-at-sufferance, commonly called a holdover tenancy.
A fixed-term tenancy lasts for a specific length of time which is set by the lease agreement entered into by a landlord and tenant. On expiration of the lease term, the tenant’s right to possession automatically terminates without additional notice. The term may be continued by exercising an option to extend or renew or by negotiating an extension or new lease agreement. [See RPI Form 552]
Periodic tenancies also grant the right of possession for a specific length of time — such as a week, month or year — but do not terminate automatically. With a periodic tenancy, the landlord and tenant agree to automatic successive rental periods of the same length of time, such as in a month-to-month tenancy, until terminated by service of a written notice from either the landlord or the tenant.
In a tenancy-at-will (also known as an estate at will) the tenant acquires the right to possess the parcel from the fee owner. Tenancies-at-will may be terminated at any time by an advance notice from either the landlord or the tenant or as set by agreement. Tenancies-at-will do not have a fixed duration and are usually not in writing. A rent obligation typically does not exist.
A tenancy-at-sufferance occurs when a tenant retains possession of the premises after the term of the tenancy has terminated, the holdover situation.
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Cutting up the real estate
Crops and timber are ordinarily considered part of the parcel of real estate they grow on. However, industrial crops and standing timber sold under a purchase agreement and scheduled to be removed are considered personal property. [Calif. Commercial Code §9102(a)(44)]
Another example is cutting up the fee ownership by conveyance to one person for life, and on their death, the fee ownership goes to another as transferred by the fee owner. Time sharing is another example of the allocation of ownership by periods of time, such as the exclusive right to occupy a space for only three weeks during the year.
Title to a parcel can also be fractionalized by vesting title in the name of co-owners, such as tenants-in-common who each hold an undivided (fractional) ownership interest in the real estate.
Possession to real estate can be cut out of the fee ownership for a period of time. For instance, the fee owner of a parcel of real estate acting as a landlord conveys possession of the parcel to a tenant under a lease agreement for the fixed term for occupancy.
The landlord retains fee title to the parcel during the tenancy. When the tenancy expires or is otherwise terminated, say, by a declaration of forfeiture, the right to possession of the parcel reverts to the landlord.
Possession can also be cut up by creating divided interests in a parcel, as opposed to undivided interests. For example, an owner can lease a portion of their parcel to a tenant. The tenant, in turn, can sublease a portion of their space to yet another person, known as a subtenant.
An owner’s rights in a parcel of real estate extend beyond the mere physical aspects of the land, airspace and improvements located within the described boundaries of the parcel. An owner may use their interest held in a property as security for a debt by encumbering title with a security device, called a lien.
Liens, on an interest in real estate, secure payment or performance of a debt or other monetary obligation, including a:
- trust deed or improvement district lien;
- judgment lien; or
- local property tax lien.
On nonpayment of a lien amount, the lienholder can force the sale of the real estate interest encumbered by the lien to pay off and satisfy the lien.
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Real estate comprises components
The physical components of a parcel of real estate include:
- the land on the face of the earth;
- the air above the land;
- the ground below the land;
- anything affixed to the land, called improvements;
- any interest appurtenant to the land (incidental rights in an adjacent parcel); and
- anything which may not be removed from the land [CC §658]
For example, the rental of a boat slip includes the water and the land below it, both of which comprise the total of the rented real estate. Thus, landlord/tenant law controls the rental of the slip. [Smith v. Municipal Court (1988) 202 CA3d 685]
In the case of a condominium unit, the air space enclosed within the walls is the parcel of real estate. The structure itself, land and air space outside the unit are owned by the association or all the owners of the separate parcels within the condominium project, called a common interest development (CID). [CC §4125(b)]
Real estate boundaries
A parcel of real estate is located on the face of the earth based on its legal description.
A deed which describes a parcel by its street address, such as “879 Riverside Avenue, Riverside, CA 92507,” is considered sufficient to identify the real estate located at the street address, sometimes called a common description or common address. [Brudvig v. Renner (1959) 172 CA2d 522]
However, the best method for ensuring certainty — and the issuance of a policy of title insurance — for the conveyance of a parcel is to include the parcel’s legal description or a map designation, such as the parcel’s lot number.
Thus, a parcel may be described by reference to other documents, such as a subdivision map as it contains the metes and bounds description of the parcel conveyed. The subdivision document referenced in a deed is incorporated into the deed as the source of the metes and bounds legal description of the parcel conveyed. [Edwards v. Lewis (1938) 25 CA2d 168]
Using the parcel’s legal description, a surveyor locates and sets the corners and horizontal boundaries of the parcel.
The legal, horizontal boundary description of a parcel of real estate is documented in numerous locations, such as:
- deeds;
- public records of the county where the parcel is located;
- subdivision maps; and
- government surveys relating to the parcel.
Real estate is three-dimensional and reaches perpendicular to its horizontal boundary. In addition to the surface area between boundaries, the classic definition of real estate consists of the soil below to the core of the earth as well as the air space above to infinity.
All permanent structures, crops and timber within this inverse pyramid are included as part of the parcel of real estate. [CC §659]
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