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Eversheds Global Estate Management

USA

Real Estate Guide

Principles of ownership

Principles of ownership

Freehold/Ownership - freehold estates are characterized by the giving of possession under title or right, for example, possession granted by fee simple ownership or a life estate. This contrasts with non-freehold estates, which give possession and nothing more, the most common example of which is a lease. Common types of freehold ownership: 1. Fee Simple Absolute: Grants the owner full possessory rights in the property for an infinite period. The holder may sell, lease, bequest or divide his or her interest. The fee simple absolute is not terminated by intestate death; the property passes to the owner’s heirs. 2. Defeasible Fees: Grants the holder ownership for a possibly infinite period of time; however, the holder’s ownership can be terminated upon the happening of a specified event. This possible termination can be automatic (eg, a fee simple determinable) or require the action of the person or entity holding the reversionary interest (eg, a fee simple subject to condition subsequent and right of entry). 3. Life Estate: This grant of ownership is for an indefinite term, measured by the length of life of a designated person or persons. In sum, a life estate grants the holder the right of possession in and a right to use and/or derive benefit from the property, subject to limitations on the ability to commit waste or otherwise devalue the property.

Common hold/Usufruct - a commonhold ownership interest or “usufruct” is a legal right to use or benefit from property owned by another or which is under common ownership by others, so long as that use of derivation of benefit does not devalue the property. The most common structure giving rise to a usufruct in the United States is the life estate. See freehold/ownership.

Condominium ownership - the owners of a condominium individually own the interior space of their respective units, and hold an undivided interest with fellow owners in the exterior space and common areas of the property. This structure provides owners a great deal of latitude to use and modify the individually owned interior space, but places restrictions on the use and modifications of common elements. These limitations are typically contained in a master deed for the property. Generally speaking, because the holder of a condominium unit is considered to have fee ownership, the owner is free to transfer his or her interest in the property. However, due to the communal nature of such ownership, a few states allow for limited restraints of the alienation of condominium units. Even in those states though, restraints on alienation must be reasonable. The individual ownership structure allows each owner to finance his or her acquisition of a unit without creating a lien on the commonly held property. Each owner is individually responsible for the payment of taxes and other fees associated with the unit, as well as for his or her proportionate share of common expenses.

Utilisation right - not applicable.

Joint/Co-ownership - otherwise known as a concurrent estate, co-ownership is characterized by multiple owners having rights of possession and enjoyment in the same property simultaneously. No co-tenant has a right to exclusive possession of the property, and in certain circumstances, co-tenants can be required by court order to contribute to necessary repairs and tax and mortgage payments. Co-tenants have a general duty of fair dealing amongst each other. The most common forms of co-ownership are:

  1. Joint Tenancy: Featuring two or more co-tenants, the joint tenancy is distinguishable from other forms of co-ownership by the right of survivorship—when one co-tenant dies, the other co-tenants own the whole of the property free of the deceased co-tenant’s interest, notwithstanding an attempted bequest by the deceased co-tenant. The requirements for creating a joint tenancy vary from state to state, although traditionally, formation required identical interests and rights for all co-tenants, granted at the same time by the same written instrument. A joint tenancy may be terminated by a partition suit, or by the actions of a single co-tenant, for example:
    1. (a) a lifetime transfer by a co-tenant of its interest (this severs the joint tenancy only as to the transferred interest), but excepting judgment liens, mortgages and leases, and
    2. (b) a contract to convey a co-tenant’s interest that exists at the time of the co-tenant’s death, as such a contract would be enforceable in equity.
  2. 2. Tenancy by the Entirety: Generally speaking, a tenancy by the entirety is a joint tenancy between legal spouses. The tenancy by the entirety does not exist in community property jurisdictions, but in a number of other jurisdictions, it is created by a transfer of a property interest to spouses. Like joint tenancies, it features a right of survivorship, by which the surviving spouse holds the entire interest in the property free of the deceased spouse’s interest. Unlike joint tenancies, severance of a tenancy by the entirety is difficult—it can be severed by
    1. (a) death
    2. (b) divorce
    3. (c) mutual agreement of the spouses, or
    4. (d) action by a joint creditor of the spouses. As would be expected, the general rule is that one spouse cannot convey the property without the agreement of the other spouse.
  3. 3. Tenancy in Common: Unlike the other common forms of co-ownership, tenancies in common do not involve a right of survivorship—a co-tenant’s interest can pass intestate to the deceased co-tenant’s heirs without severing the co-tenancy. Owners have an undivided interest in the property and can transfer the interest freely. The only link between the co-tenants, barring express agreement, is the right to possession of the entire property. This form of co-ownership is favoured by courts—most jurisdictions will presume that a transfer of property to multiple owners creates a tenancy in common unless otherwise expressly stated.

Registration - in most states, the formal means for giving notice of the transfer of an interest in, or the encumbering of title to, property is governed by recording statute. These statutes provide a means to notify the outside world of an action affecting title to property without requiring that notice be given to every entity that currently has or may later acquire an interest in the property. Typically, official records offices or registries of deeds are available in each county or in a City/Town Hall, and a document in the prescribed format and detailing an action affecting property is filed with the official records office in the locale where the property is physically located. Recording is not required, and in many states, the failure to record information regarding an interest in property does not invalidate the unrecorded interest as between the parties themselves. Instead, these statutes are designed to protect bona fide purchasers of property interests—those purchasers for value of an interest in property unaware of a preexisting interest in the same property are considered to have taken their interest free of the unrecorded, preexisting interest. If an instrument is properly recorded, there can be no bona fide purchaser, as all subsequent interest holders are presumed to be aware of preexisting interests in the property. In some cases, however, conveyances of certain estates, including leaseholds of a sufficient length, will be invalid as against third parties, regardless of actual knowledge, unless a document providing notice of the existence of such a conveyance is recorded. In nearly all cases, the recordable document must be executed by the party granting the interest in the property and must be acknowledged (before a notary public) by the grantor.

 

Restrictions on foreign ownership

Restrictions on foreign ownership

Many, if not most, states have no restrictions on foreign ownership; however, some states have certain limitations on the size of property that may be owned by non-US citizens (eg, 640 acres) or the maximum length of ownership (eg, five years). The federal government may have concerns about foreign ownership of certain lands containing precious resources or related to sensitive industries (eg, defence). Certain federal tax law applies to dispositions of real property by foreign companies and foreign individuals and requires the withholding and payment to the Internal Revenue Service of a certain portion of the sales proceeds.

 

Title to real estate

Title to real estate

Investigation of title - not applicable.

Transfer of title - with few exceptions, the transfer of title to property is accomplished by deed, the form and content of which is governed by statute from state to state. As a general rule, for a deed to be effective in transferring title from grantor to grantee, it must (a) be in writing, (b) include a description of the property being transferred, (c) include words evidencing the intent of the grantor to transfer the property, and (d) contain the signature of the grantor. Further, the deed typically is not effective until it has been delivered to the grantee. Some deeds contain covenants regarding the state of title to the property. Note, however, that absent a requirement by statute, deeds contain only those covenants, if any, expressly stated therein. The most common varieties of deed:

  1. General Warranty Deed: The grantor covenants against title defects created by both grantor and all previous titleholders. These usually include covenants (a) of seisin (ie, grantor has the interest he or she claims to convey), (b) of right to convey (ie, grantor has the power/authority necessary to convey), (c) of warranty, whereby grantor agrees to defend against the lawful claims of third parties, (d) for quiet enjoyment (ie, no third party will disturb grantee’s possession with a lawful claim to title, (e) for further assurances, whereby grantor agrees to perform any act reasonably necessary to perfect title in grantee, and (f) against encumbrances to title.
  2. Special Warranty Deed: The statutes of many states provide for a type of special warranty deed, whereby the grantor, by using the term “grant,” is implied to covenant that (a) prior to the date of the deed, the grantor has not conveyed the same or a lesser interest currently conveyed to another person, and (b) the estate is free from encumbrances made by the grantor.
  3. Quitclaim Deed: Acts a simple release of whatever interest, if any, that the grantor has in the property. By definition, it does not contain any covenants or warranties. In some states, (eg, Massachusetts) a Quitclaim deed is comparable to a Special Warranty deed in other states and a Release deed is comparable to a Quitclaim deed in other states.
  4. Nominee Trust: Title to land can also be transferred to a trust, wherein a trustee holds legal title to property for the benefit of a beneficiary, subject to the terms of the trust as set forth by the settlor (the creator of the trust). This form of property ownership provides a certain amount of anonymity for the beneficial owner of the property, as the owner of record title is listed as the trustee on behalf of certain undisclosed beneficiaries.

Registration - in most states, the formal means for giving notice of the transfer of an interest in, or the encumbering of title to, property is governed by recording statute. These statutes provide a means to notify the outside world of an action affecting title to property without requiring that notice be given to every entity that currently has or may later acquire an interest in the property. Typically, official records offices or registries of deeds are available in each county or in a City/Town Hall, and a document in the prescribed format and detailing an action affecting property is filed with the official records office in the locale where the property is physically located. Recording is not required, and in many states, the failure to record information regarding an interest in property does not invalidate the unrecorded interest as between the parties themselves. Instead, these statutes are designed to protect bona fide purchasers of property interests—those purchasers for value of an interest in property unaware of a preexisting interest in the same property are considered to have taken their interest free of the unrecorded, preexisting interest. If an instrument is properly recorded, there can be no bona fide purchaser, as all subsequent interest holders are presumed to be aware of preexisting interests in the property. In some cases, however, conveyances of certain estates, including leaseholds of a sufficient length, will be invalid as against third parties, regardless of actual knowledge, unless a document providing notice of the existence of such a conveyance is recorded. In nearly all cases, the recordable document must be executed by the party granting the interest in the property and must be acknowledged (before a notary public) by the grantor.

Information on register - see "Registration" above.

Commercial leases - not applicable.

 

Structure of a real estate transaction

Structure of a real estate transaction

Negotiation of terms/Agreement - typically, commercial brokers/advisors representing the landlord and tenant will advise their clients on the material business terms (fixed rent, additional rent such as the share of real estate taxes and operating expenses, the length of the lease term, any options to extend the term, any landlord contribution to tenant leasehold improvements, etc.) that are incorporated into a non-binding Letter of Intent, pending the agreement of the attorneys for each party agreeing on the balance of the lease terms and the execution and delivery of a binding Lease document.

Heads of terms – not applicable.

Investigation of title - not applicable.

Purchase deed - see transfer of title (within "Title to real estate")

Contracts - in the case of a land sales contract, the contract likely must be in writing to comply with the “statute of frauds”, state law or common law that requires that agreements for the transfer of property be memorialized. Such contracts typically contain terms providing for inspection and due diligence periods during which time the condition of title is determined, and the financial and physical condition of the property is reviewed. The contract may also provide for a period during which the buyer may seek financing to cover the acquisition cost set forth by the contract. Such contracts also contain time for performance—in this case, time for completion of the transaction and the transfer of title—contract consideration (eg, purchase price), tax and other liability payments, and the type of deed by which title will be transferred. Land sale contracts often provide for various contingencies and allocate risks of loss, particularly in the event of casualty damage or loss of the subject property. In the absence of such a clause, the general rule is that the buyer bears the risk of the loss if such loss is not the fault of either party. However, some states provide by statute that the seller bears such risk. Most states hold that land sale contracts contain an implied warranty of marketable title: title a reasonably prudent buyer would be willing to accept. The conditions that render title unmarketable vary from state to state, but include defects in the record chain of title (like significant variation in the legal description of the property), title acquired by seller through adverse possession, encumbrances like mortgages and easements, and existing violations of local zoning ordinances. However, a buyer can waive any of the foregoing and accept title. In the event of a breach by buyer, the courts of most states will allow seller to keep a certain amount of the earnest money deposit made by buyer at the start of the transaction as liquidated damages. In the case of a breach by seller, courts of equity sometimes award specific performance (ie, require seller to transfer title to the property to buyer as contemplated by the contract).

Completion/closing - the completion and closing of a real estate transaction is heavily dependent on the nature of the transaction and the terms agreed to by the parties involved. Generally speaking, a real estate transaction will close after a series of conditions precedent negotiated between the parties are satisfied. Typically, these conditions are set forth in a contract delineating the interest to be conveyed (eg, leasehold, fee simple absolute). Common to such contracts is an agreement of the parties to a period for due diligence and inspection, during which time the potential grantee/tenant will complete physical inspections of the property to determine its condition. In a property sale, the potential grantee will also complete a title review, whereby the chain of title is inspected and the grantee determines whether any impediments exist to its contemplated use and ownership of the subject property, as well as an inspection of the financial condition of property (especially if it is income producing) and the contracts and leases burdening the property. Grantor/landlord may complete an investigation of the credit worthiness of grantee/tenant depending on the negotiated financial commitments between the parties. If both parties are satisfied with the results of their respective due diligence investigations, they will move forward to closing the transaction, perhaps subject to, in case of a purchase and sale agreement, a finance contingency period during which a potential grantee will seek financing to cover a portion of the purchase price of the property. The final stages of the transaction are highlighted by the satisfaction of conditions precedent, perhaps including, but not limited to, the assumption and assignment or disapproval of service contracts and leases (in the case of a sale), completion of the construction of improvements, issuance of a title insurance commitment (in the case of a sale), proration of outstanding tax and other liabilities, and the placement in escrow of any necessary executed agreements and funds. If both parties are satisfied and all conditions precedent have been met, closing will be authorized, the escrow agent will disburse funds, and the deed or lease transferring the interest will be recorded in the records of the official records office in the county where the property is located.

Post completion - after completion any documentary transfer tax must be paid and the buyer/tenant’s interest should be recorded to effect public notice. Certified copies of all recorded documents should be provided to grantee, and originals of all deal documents should be returned to the parties, by the escrow agent if applicable.

Leases - many aspects of residential leases are covered by applicable state laws (eg, relating to the provision of utilities, minimum standards of habitability, repair obligations, maximum amounts of security deposits and the amount of rent that a Landlord may collect in advance). Some cities have residential rent controls. Generally, leases of commercial property (office, retail, industrial) are primarily subject to the allocation of rights and responsibilities between the parties that are negotiated by the Landlord and Tenant based on the prevailing market conditions (subject to the inclusion of certain implied covenants and obligations that may have been determined by state courts interpreting state laws applicable to commercial tenancies).

Transfer of ownership of leased property (alienation) - the succeeding owner takes title subject to the existing tenancies of which it has actual or constructive notice. The new owner will usually request that at least the larger tenants, if not all, sign estoppel letters in which the tenants certify as to the length of the term, the amount of rent, the existence of any defaults and other pertinent information.

Governance of lease signature/administration – not applicable.

 

Usual commercial lease terms

Usual commercial lease terms

Summary of available lease types - leases of office space in multi-tenant buildings are typically from three-ten years (sometimes with extension options) and, in many instances are leased on a “gross” basis (ie, there is a fixed annual rent and the tenant pays its pro-rata share of the increases in the building’s real estate taxes and operating expenses. Space in a single-occupancy building for a lease term of more than ten years are typically leased on “net” basis (ie the tenant pays for 100% of the building’s annual expenses). The real estate may involve a long-term ground lease (up to 99 years) between the fee owner/landlord of vacant land and a developer/tenant building a shopping centre or an office building who, in turn, would (sub)lease to occupying (sub)tenants.

Alterations/modifications - alterations are usually permitted with the Landlord’s prior consent and review of plans and specifications especially if the alterations affect the building’s structural elements or utility systems. No consent is usually required to install a Tenant’s movable trade fixtures like cubicles, display cases or shelving.

Assignment and sub/under letting - landlords typically require prior, written consent to a proposed assignment of the Tenant’s interest in the Lease and for a subletting. Landlords usually waive the consent requirement in connection with an assignment or subletting involving an affiliated (parent, subsidiary or brother) entity or in connection with a merger or sale of all or substantially all of the Tenant’s assets provided the successor entity has a comparable net worth after the event. The original tenant remains liable under the Lease unless the Landlord is convinced that the credit of the successor is satisfactory. Sometimes the Landlord will reserve the right to recapture the portion of the space that Tenant proposes to sublet or the entire space if an assignment is proposed.

Destruction/reinstatement - landlords will repair (usually to the extent of insurance proceeds received) after a fire or other casualty and fixed rent will abate until the repairs are completed. In most instances Tenants will be required to insure the value of their leasehold improvements. If the repairs are not completed after an agreed period, then either Landlord or Tenant may terminate the Lease.

Disposal/return of the premises – a Tenant is required to surrender the leased premises to Landlord in the same condition as they were at the commencement of the term except for reasonable wear and tear and damage by fire or other casualty and subject to leaving any alterations in place that Landlord did not designate for removal either at the time of giving its consent to the alteration or at a later date before the end of the term.

Duration of lease - the length of the lease term is subject to negotiation between the Landlord and the Tenant based on market conditions. Tenants typically request one or more options to extend the term.

Forfeiture/irritancy - if the Tenant defaults in its obligations under the Lease beyond the expiration of negotiated grace, notice and cure periods, the Landlord may elect to terminate the Lease. Some US jurisdictions recognize the principle of the Tenant’s obligation to pay rent being independent of the Landlord’s obligation to perform its duties so the Tenant may have to continue to pay rent despite a Landlord default and bring a separate court action to receive damages. Tenants typically claim a breach of the Landlord’s (express or implied) covenant of quiet enjoyment or a constructive eviction if the Landlord has not cured its default. Many times a Tenant will be required to give written notice to the Landlord’s mortgage lender prior to any attempted termination by the Tenant.

Insurance - a Landlord usually provides casualty insurance on the building, loss of rent insurance and commercial general liability coverage and recovers a contribution of the cost of insurance from the tenants. Tenants are required to maintain their own multi-million dollar general liability insurance that is primary and that names the Landlord as an additional insured (so the Landlord is covered even if it is negligent in causing damage or an injury). Tenants must also fully insure their own personal property. Landlords and Tenants will typically mutually waive subrogation rights against each other and let their own insurance carriers respond to the damage even if the damage was caused by the other party’s negligence.

Rent review - rent increases are subject to negotiation between the Landlord and the Tenant and subject to market conditions. There may be annual (or other periodic) increases at a fixed rate or the rent may increase according to increases in the Consumer Price Index.

Repair/decoration/furnishing - lease of whole building: If the Tenant leases the entire property, it is generally referred to as a “triple net” lease, ie, the Tenant is responsible for making all repairs (including structural) at its expense, although there may be some allocation of the costs of the roof and HVAC system (heating, ventilation and air conditioning) repairs. Lease of part of a building: If the Tenant leases only a portion of the entire building, the Tenant is customarily only responsible for non-structural repairs to the interior of the leased space and for any special equipment or systems that exclusively serve the Tenant (eg a supplementary air conditioning system). The Landlord will make all building structural repairs (eg roof, walls, beams, and common utility systems and common areas, such as a garage or parking lot) and charge the Tenant’s their pro-rata share (based on the rentable area of the building and their leased space) of the common repair costs.

Service charges - not applicable.

Termination/break clauses - depending upon market conditions, it may be possible to negotiate early termination rights (eg, if the Landlord cannot satisfy the Tenant’s need for expansion space or after a specified date if the Tenant pays a negotiated fee plus reimbursement of the unamortized brokerage commissions and leasehold improvement costs). Landlords sometimes reserve the right to relocate Tenants to comparable space in the building (to retain flexibility to satisfy the expansion needs of existing tenants or for future tenants needing a large amount of contiguous space). If there is a “recapture” right, a Landlord would have the option of terminating the Lease for all or a portion of the Tenant’s space if the Tenant is seeking to assign the Lease or sublet.

 

Increasing covenant strength

Increasing covenant strength

Lease deposit - commercial landlords typically require a Letter of Credit instead of a cash security deposit since if the Tenant becomes bankrupt the letter of credit, unlike the Tenant’s cash payment, is the issuing bank’s obligation and, in most instances, is not reachable by the trustee in bankruptcy. The amount of the security deposit will depend on the Tenant’s financial condition and the amount of any Landlord expenditure for brokerage fees and leasehold improvements. The amount of the security deposit may increase or decrease over time based on financial tests or it may reduce over time if there hasn’t been any Tenant default.

Surety - some Landlords require that a Tenant provide an additional company or individual guarantor of the Tenant’s Lease obligations. If the Lease is assigned by the Tenant (eg, in connection with the sale of the Tenant’s business), the Tenant will attempt to obtain a release of the guarantor if the new tenant/assignee is financially strong or it provides a substitute guarantor.

Warranty - not applicable in the context of increasing covenant strength.

Rent deposit/bank guarantee - see above.

 

Taxes

Taxes

On sale/acquisition of real estate - many jurisdictions impose a documentary transfer tax, which often is assessed against the documents affecting the transfer at recordation (eg the deed or lease). Some jurisdictions exempt the grant of short-term interests, like leases for fewer than a certain number of years or easements of a definable period, from this tax, as such transactions are not considered transfers under applicable tax statutes.

Immovable property tax - some states take into account the fixtures added to or removed from property during periods following the completion of construction or the transfer of ownership of property, and include the value added or removed in the calculation of assessed property value for purposes of real property taxation. Similarly, the fair market value of property upon which many local and state taxes are based often takes into account the value of fixtures thereon.

Income tax - is payable on rental income. However a landlord can claim expenses against the tax based on the cost of maintenance of the building and, in certain cases the interest on associated loans. Allowances may also be made for depreciation on plant, equipment and other elements of the building.

Land tax - real property taxation is governed by local governments within the United States. The tax is typically calculated based on the fair market value of the property in question, such value being determined by a local official charged with assessing the property. While the assessment and collection of property taxes is overseen by local government, many states impose restrictions or limits on how such real property is taxed. The tax, once assessed, becomes a legally enforceable lien against title until paid. Local governments also tax the value of equipment, furnishings and other personal property in a commercial space.

Lease tax - the income derived by a Landlord from rent collected under the lease will be taxed at the federal and state levels. See income tax.

Local tax - see land tax.

Mortgage - while not pervasive, a few jurisdictions have assessed taxes on mortgages secured by real property. Typically, the value of the mortgage is assessable to the mortgagee, but the standard practice in these instances is to pass the tax on to the mortgagor, per the terms of the mortgage and related loan documents.

Other taxes - not applicable.

Property lease tax - see lease tax and income tax.

Value added tax - not applicable.