April 18, 2023
Video transcript: Types of Estates (Overview)
Estates in land is one of the tough topics when it comes to learning real estate because of the vocabulary. What I'm going to do is start us off by showing us a graphic to get a sense of the categories of estates that we'll encounter. We're going to go through each one individually and make sure that we have a good grasp of the overall picture. We have essentially two types of estates: Freehold and Leasehold. Freehold is really about ownership. There are differing amounts of control you can legally have over property as an owner. The second major category is exactly how it sounds, leasehold is all about leases and landlord-tenant relationships. Now in both types of estates; freehold and leasehold there are further subcategories, which have to do with the rights granted under each form of holding property. For example, some forms allow occupancy of a property only after a specified event occurs, while others grant use of the property until death. We'll get into the details of these situations and their technical names in another video. The big takeaway in this video is there are two main types of estates: freehold and leasehold. Now, let's get into the subcategories.
We'll begin our discussion of the categories of estates with freehold estates. The two sub-categories are fee simple and life estates. This video will focus on the fee simple type. Fee simple can offer varying amounts of control of a property. We should start with the most common and the only type of ownership that is completely free and clear, which will allow you to do whatever you want to the property which is fee simple absolute ownership. Everything else that we cover will have some sort of restriction or limitation as to the use of the property, the ability to sell it or pass it on to heirs.
Fee simple absolute ownership is also called fee simple or fee. This type of ownership is the highest form of ownership available. It means the party who has fee simple absolute ownership possesses the entire bundle of rights. They have the right to possess, control, enjoy, and dispose of the property. The only limitation is any restriction imposed by the government. This type of ownership contains zero conditions in order to maintain that ownership. It is also able to be passed on to the heirs of the owner. This passing to heirs can be done with a will or passed by the laws of descent, if there isn't a will. This is what we most commonly think of when we think of real estate ownership. All the other types of ownership or estates in land are less common and contain limitations or conditions to the ownership of the property.
The other category of fee simple estates that does not come with the full bundle of rights is known as a conditional fee estate. Essentially this category is ownership that can be revoked or is only given provided certain conditions are met. The ownership is conditioned, that's where the conditional fee name comes from. There are two categories of conditions that we see with conditional fee estates and they are fee simple determinable and fee simple on condition subsequent.
Fee simple determinable. Fee Simple determinable is ownership that is limited based upon time. Fee simple determinable estates can contain conditional words like, “for so long as', “during', or “until'. For example, an owner chooses that they want to grant their son a home until February 21st, 2028 or until they graduate from university. This would be a property conveyed or granted by the owner, which would be classified as a fee simple determinable estate. Another example would be if the same owner granted the property to their son, so long as they rented the lower level and paid the proceeds to the grantor. This would be another example of fee simple determinable. Both examples have a condition attached. The first has a condition that the property is granted until a specific date of, February 21st 2028 or until they graduate from university, and the second has the condition that they must rent the property and remit the proceeds. A key feature with an estate that is fee simple determinable is what happens when the condition is not met or the time period specified expires. With a fee simple determinable property the property automatically reverts back to the original owner.
The second type of conditional fee estate, fee simple on condition subsequent is primarily differentiated by that requirement that the grantee, that's our original owner, take action in order to regain ownership. So the difference would be that in order for our original owner to regain the ownership after granting the conditional estate to their son, they would need to initiate a court action to have the property revert back to them. The phrasing of this type of conditional estate is slightly different and is often denoted by “provided that' or “on the express condition'. Unlike the fee simple determinable phrasing which includes time language such as “for as long as', “during' or “until' this doesn't have that, and as a result does not automatically revert back to the owner.
When we talk about estates there is some key vocabulary words that we need to be aware of and how they are applied. The two general concepts that have vocabulary we need to know are related to how an estate is granted upon death and when property is transferred. We'll start with the granting of property after death. When a property owner gives property to their heirs they can do it in two ways. The two ways are with a will and without a will. If a person dies with a will, we refer to that as dying testate. After death the will would dictate the disposition of property to their heirs. In the opposite situation, a person can die without a will. This person would be considered to have died intestate. If someone has died intestate property will be transferred according to the laws of descent where they live. For example, if a person who is married and lives in a community property state, then dies without a will, the property will likely transfer to the surviving spouse. You will see the terminology testate and intestate littered throughout discussions about estates in land because a transfer of property after death is one of the key parts of the bundle of rights. If a person were to die intestate, and have no heirs meaning the laws of descent wouldn't apply, their property would transfer to the government. The legal doctrine for this transfer to the government is known as escheat.
Next up, let's discuss the second concept and some of the vocabulary associated with it. With certain estates, especially conditional fee estates, property rights are revoked after a condition is met or violated. If a property is granted to someone for a period of time, there's a question about what happens at the end of that period of time. There's two options: it can be transferred back to the original grantor or can be transferred to an entirely different third-party. If the property goes back to the original grantor it's known as reversion. There can be specific language in a transfer of property, which causes the property to revert back to the original grantor, and this would be called a reverter clause. The reverter clause causes the property to revert back to the original owner. The original owner or grantor would be said to have a reversionary interest in the property because they would be the party who would receive the property after the condition was met or violated. Now, if the property is granted to a third party, that is a party that is not the original owner they're known as the remainderman. A remainderman can be present in a conditional fee estate, because it's not a requirement in a conditional fee estate that it revert back to the original grantor, it's perfectly allowed for that property to instead go to a third party known as a remainderman. Besides conditional fee estates you'll see the same language regarding remainderman in life estates.
To wrap up with a quick summary the things to remember are: if we die with a will we are dying testate. If we die without a will we are dying intestate. If we don't have any heirs then it will go to the government known as escheat. Now, keep in mind if a property is given back to an owner they would be seen as having a reversionary interest in the property and should there be specific language saying that the reversion was in place that is known as a reverter clause. Lastly, if the property does not go back to the original grantor, the third party receiving the property is known as the remainderman.
Today's topic is Life Estates. Let's first get the technical definition before we dive into what it means. A life estate is an estate for the duration of the lifetime of one or more persons. To break it down a bit, when we're talking about an estate in the context of real estate, we mean a property. The land and buildings as well as the rights to go along with it. The second important part of the definition is how it limits the duration of the transfer. A life estate is limited to the length of a person's life and that person whose life is the measuring stick can be just about anyone. For example, it could be for the lifetime of the current owner whose transferring the property and creating the life estate. It could also be the person receiving the use of the property, known as the life tenant. Or lastly, it could even be a third-party. The third-party could be anyone who's not the life tenant or the person granting the life estate. It could even be the current president of the United States. There's an important vocabulary term to be aware of, that applies to this situation. Pur autre vie, it's an old French term that I can virtually guarantee that I've mispronounced. It means “for another's life." It's used when the life tenancy will be based on a third parties life. In my example, the life of the current president.
Consider the following situation, Person A owns a property and they decide they're going to create a life estate and grant Person B the right to possess and enjoy the property for as long as Person B is alive. We got that down, we know the person whose life, the length of the transfer we will be using, Person B. But, we haven't addressed is what happens after Person B dies. Two things can happen to the property; it can go back to the original grantor of the life estate, Person A, or it can go to another party. These two options introduce two key terms, we need to know, estate in remainder and estate in reversion. When the property goes back to the original grantor of the life estate its known as an estate in reversion, because it's reverting back to his original owner or their heirs. That leaves us with the times the property goes to someone else, other than the original grantor of the life estate. Anytime the property transfer to anyone, other than the original grantor, it's an estate in remainder. Also the person who receives the property, when it isn't reverting back to the original grantor its known as the remainder man. Now that's a lot of vocabulary to digest regarding estates in land.
I'll take a minute to look at a quick example we will label all of the important people and the vocabulary. In this example, Person A grant a life estate to Person B for the duration of Person C's life. That means, Person B is the life tenant, since they are the one receiving the estate. Also because its based on a third parties life, Person C it's known as pur autre vie. What comes next is, where does the property go after Person C dies? After Person C passes away, all rights to the property are to be transferred to Person D, making this an estate in remainder and Person D the remainderman. If the property was transferred back to Person A, and not to Person D then it would be an estate in reversion. Since it would be reverting back to the original grantor. Now life estates are not easy, unless you understand the vocabulary, so focus on getting your definitions correct and it'll make it all a lot simpler. Thanks for watching, I certainly hope you learned a bit about life estates.
Leasehold estates grant fewer rights than freehold estates do. Boiling down the leasehold estates into common language, what we're talking about is the landlord-tenant relationship. The person who holds the leasehold is what we would commonly refer to as the tenant or lessee. The owner of the property who is granting the right to occupy the property, we call them landlord or lessor. The relationship is one where the landlord is conveying the right to occupy for a specified period of time. An important technical detail is that the lease itself is actually considered the personal property of the tenant. There are four different leasehold types: estate for years, periodic tenancy, estate at will, and estate at sufferance. We'll go through each, in order. An estate for years is a lease for a fixed period of time. The weird part about this type of estate is even though we call it a estate for years it does not have to be delineated in years. The only important part is that it's for a fixed period of time. The tenant during the period of the lease is occupying the property legally. This is an important point to make when we look at one of the other types of estates within the leasehold category. So, let me give an example of a estate for years. If an owner enters into a rental agreement with a tenant for a length of 9 months. This would be considered an estate for years because it is for a fixed period of time.
Next up, periodic tenancy. A periodic tenancy is a lease where there's no termination date that is set. You have a specific lease period, such as one day, one week or one year but it doesn't terminate at that point. Instead, it will continue until either party gives notice of termination. The lease will continue to be renewed at the same increment of time as previously specified. For example, if a property is rented on a month-to-month basis. This is the most common example what you'll see in the real world. What happens a lot is that a landlord will grant a tenant the right to occupy the property every month and the lease will automatically continue until either one of the landlord or the lessee decides to terminate the relationship. They'll both, of course, have to follow the rules for proper notice.
The two leasehold types we just talked about, the estate for years and a periodic tenancy are ways that leases can be formed between a landlord and tenant. The next two categories deal with what happens after the lease ends. An estate at will is usually temporary and allows a tenant to occupy the property for an unspecified period of time and is done with the permission of the landlord. The tenant cannot assign this right to occupy the property to anybody else it is only between the landlord and the tenant. If either party were to pass away during the time of an estate at will it would terminate. An example of an estate at will is if a tenant is in a yearly lease agreement with the landlord and the lease has expired. Let's say that the tenant continues to pay the same rate that they were paying during the period of the lease, with the permission of the landlord, while they try to negotiate a new agreement. That would make it an estate at will.
The last of our leasehold estates is known as an estate at sufferance. As a real estate professional this is the one you hope that you never encounter. An estate at sufferance or tenancy at sufferance happens when at the end of a rental agreement the tenant refuses to leave. If the tenant stays after the legal rental agreement is over they're known as a holdover tenant and we have an situation of estate at sufferance. At this point the landlord would need to pursue legal options for eviction. An example of an estate at sufferance is a tenant who has a lease from January 1st until September 31st, pays the rent every month on time, but then does not leave the property after getting proper notice from the landlord to vacate at the end of the lease on September 31st. Beginning November 1st, that would be the first day of this property being an estate at sufferance. You might think the tenant at this point would be a trespasser, but the key difference here is that the tenant at one point was in a proper legal agreement to occupy the property.