Charles J. Jacobus TEXAS REAL ESTATE LAW 11E. 2 Chapter 5 How Ownership is Held ownership in...
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Charles J. Jacobus TEXAS REAL ESTATE LAW 11E. 2 Chapter 5 How Ownership is Held ownership in severalty, tenancy in common, joint tenancy, partnerships,
2 Chapter 5 How Ownership is Held ownership in severalty,
tenancy in common, joint tenancy, partnerships, limited
partnerships, corporations, limited liability companies, and
trusts. Each type of ownership will be discussed in its purest,
most basic form to simplify its unique characteristics. The types
of ownership include:
Slide 3
3 Ownership in Severalty One person is the owner. He has sole
control over the use and possession of the property. Also has
unlimited liability for all causes of action.
Slide 4
4 Tenancy in Common Multiple ownership in Texas is presumed to
be a tenancy in common. Dened as an ownership by more than one, in
undivided interests. There is no requirement that the interests be
equal. All co-owners have the right of possession (unity of
possession ). All of the co-tenants do not have to occupy the real
estate at one time. A possession of one co-owner is deemed a
possession by all owners. Upon death a co-owners interest passes to
their heirs.
Slide 5
5 Tenancy in Common Rights of Parties When only one of the
co-owners is in possession, the relationship with the other
co-owners is construed to be one of landlord and tenant. If a
co-owner receives more than his proportionate share of rights, he
owes a duty to pay the other co-owners their share. If one of the
co-tenants incurs necessary expenses, he is entitled to
reimbursement from the other co-owners.
Slide 6
6 Tenancy in Common Liabilities A co-owner may encumber, sell,
or lease his respective interest as long as it does not adversely
affect the rights of the other co-owners. His obligation to
third-party creditors extends only to his interest. If a co-owner
loses his share, the creditor becomes a co-owner. If the property
is encumbered by a single mortgage the creditors can seek
collection from one or all of the co-owners, jointly or severally.
The co-owner who pays the debt has the right to reimbursement. If
the expenses are voluntarily paid without the consent of the other
co- tenants, the expenses are not reimbursable. Conicts among
co-owners may be resolved through suit for partition.
Slide 7
7 Joint Tenancy Dened as ownership of real estate by two or
more, with the parties having a right of survivorship. Right of
survivorship means that upon the death of one of the joint tenants,
his interest automatically passes to the other joint tenants. Joint
tenancy requires four unities: time, title, interest, and
possession.
Slide 8
8 Joint Tenancy - Creation Texas does not look favorably on
joint tenancies. Texas does not allow joint tenancies except where
created by an agreement in writing of the joint owners. In no event
is such an agreement assumed from the mere fact that the property
is held in joint ownership. Ownership passes to the surviving joint
tenant immediately upon the death of the other joint tenant.
Providing an avenue to avoid will contests and lengthy probate
proceedings.
Slide 9
9 Joint Tenancy - Liabilities Each of the joint tenants owes
the duty of care to the other(s) not to commit waste or arbitrarily
withhold economic benets of the other(s). Each joint tenant has a
liability of his fractional interest for debts. When a joint tenant
conveys or loses his interest, the new owner becomes a tenant in
common rather than a joint tenant. One owner may also partition his
interest in the event of a conict.
Slide 10
10 Community Property Right of Survivorship Spouses may create
community property with a right of survivorship. The agreement
shall include a phrase such as: 1. With right of survivorship. 2.
Will become the property of the survivor. 3. Will vest in and
belong to the surviving spouse. 4. Shall pass to the surviving
spouse. Except for the right of survivorship, the ownership,
management, and operation of the community property remains the
same. The agreement may be revoked. This statute consistently uses
the term may, and not will or shall. This form of ownership creates
so many problems it is seldom used.
Slide 11
11 Business Organizations In 2003, the Texas Legislature
established a whole new series of statutes for business
organizations called the Business Organizations Code.
www.capitol.state.tx.us
Slide 12
12 Business Organizations Power, Authority, and Formation The
code gives all domestic entities the power to: (1) sue, (2) be
sued, (3) make contracts, (4) lend money, (5) incur indebtedness,
and (6) other powers not specically excluded by the Code. Not-for
prot entities can acquire, own, hold mortgage and dispose of and
invest its funds in property for the use and benet of its members.
All business entities must le a certication of formation. A
domestic entity exists perpetually unless otherwise provided in the
governing documents to the entity.
Slide 13
13 Partnerships An association of two or more persons to carry
on as co-owners a business for prot. There are four basic
partnership entities that will be discussed: (1) general
partnerships, (2) joint ventures, (3) limited liability
partnerships, and (4) limited partnerships.
Slide 14
14 General Partnerships Creation No specic statutory guidelines
for the creation of a partnership; a written or oral agreement is
not necessarily essential. Normally inferred when the partners in
fact have a co-ownership with the intention of sharing prots or
losses in a business venture. Any property may be acquired in the
partnership name or the names of individual partners and all is
considered partnership property. Once acquired, property can be
conveyed only in the partnership name The purchase or conveyance of
property generally includes the name of the partnership and then
lists each of the partners individually. Each partner actually gets
three distinct rights: 1. The partners rights in specic partnership
property. 2. The partners interest in the partnership. 3. The
partners right to participate in management.
Slide 15
15 Rights to specic property cannot be conveyed without consent
of all. A person cannot become a partner without the consent of
all. The relationship of the partners is termed a duciary
relationship. Each partner can bind the partnership to any
obligations. Any single partner may convey title to property in the
partnership. Any partner can incur a debt or other obligation for
the partnership. Each of the partners is liable jointly and
severally for all obligations. All are bound by the partners acts,
even if they are wrongful. General Partnerships Creation
Slide 16
16 General Partnerships Advantages Pooling of resources and
liabilities so that no one partner bears the brunt of all the
losses. All losses as well as all prots, are passed through
directly to each of the partners individually. Income taxes are
paid on the personal level only. Depreciation allowances, capital
gains tax treatment, tax-free exchange, and installment sale benets
pass to the individual partners.
Slide 17
17 General Partnerships Disadvantages Joint and several
liability. One radical partner can create liability or even
bankrupt the whole. The risk is often too high for the benets
obtained. A partner must always monitor what all of the other
partners are doing.
Slide 18
18 Joint Ventures Is a partnership, more appropriately called a
joint adventure. Two or more partners jointly pursue a specied
project. Legally, a joint venture is governed by the same rules as
partnerships. Establishment of a joint venture requires four basic
elements: (1) community of interest in the venture; (2) agreement
to share prots; (3) agreement to share losses; and (4) mutual right
of control or management. Often involve two partners, a nancial
partner and a managing partner. Joint ventures are usually very
sophisticated transactions. There is a high duciary duty to the
other joint venturers.
Slide 19
19 Limited Liability Partnerships A partner in a registered
limited liability partnership is not individually liable for debts
and obligations of the partnership arising from errors, omissions,
negligence, incompetence, or malfeasance committed in the course of
partnership business by another partner, or a representative of the
partnership, not working under the supervision or direction of the
rst partner at the time the errors, omissions, negligence,
incompetence, or malfeasance occurred.
Slide 20
20 Limited Partnerships A very effective tool for real estate
ownership and investment. Often considered the standard form of
investment for private investors. One of the more stable means of
ownership. Law is reasonably well settled and is generally
understood. Has one or more general partners and one or more
limited partners. Limited partners are not bound by the obligations
of the partnership to third parties.
Slide 21
21 Limited Partnerships Creation Need a certicate of limited
partnership and the partnership agreement. The limited partnership
agreement can be written or oral. The certicate must be in writing
and led with the Secretary of State. The certicate must be signed
by all general partners. www.sos.texas.gov
Slide 22
22 Limited Partnerships Liabilities General partner has all the
liabilities as if in a general partnership. Limited partners are
not bound by any of the obligations of the partnership. Only risk
the limited partner takes is the loss of his contribution. Limited
partners cannot get a return on their investment until all
obligations of the partnership have been met.
Slide 23
23 Limited Partnerships Advantages The main advantage is the
limited liability of the limited partners. Tax benets are an
additional advantage to limited partnerships. Limited partner gets
all the tax benets with virtually no liability. Liability
Shield
Slide 24
24 Limited Partnerships Disadvantages First is the total
reliance by the limited partners on the general partners. Second is
that limited partnerships can be considered securities and so
regulated. Third is that in ling a certicate of limited
partnership, there is a certain amount of personal disclosure that
some partners wish to avoid. Fourth is that limited partners may
not take part in management (with a few limited exceptions).
Slide 25
25 Corporations Organization Three basic classes of individuals
are involved shareholders, directors, and ofcers. Shareholders are
the owners and ultimately control through the bylaws, and by voting
their shares. They also elect the board of directors. The
corporation is managed by the board of directors. The ofcers of the
corporation are elected by the board of directors. The ofcers
perform day-to-day functions as determined by the board of
directors.
Slide 26
26 Corporations Creation Created by ling a charter with the
Secretary of State. Must pay a corporate franchise tax each year.
If a corporation is formed in another state, it is a foreign
corporation. A foreign corporation must register with the Secretary
of State Vast majority of major corporations are organized in
Delaware. An attorney well versed in corporate and real estate law
is needed!
Slide 27
27 Corporations Corporate Real Estate Granted the specic power
to purchase and sell real property. There is a difference between
selling property of a corporation and the sale of all of the
corporations assets. Sale of property may be accomplished by the
signature of the president, vice president, or attorney-in-fact. A
deed conveying a corporations real property must be authorized by a
resolution of the board of directors. If the sale of the real
estate consists of all of the assets of the corporation a
resolution by the shareholders is required.
Slide 28
28 Corporations Corporate Liability The primary purpose
incorporation is for the insulation from liability of the
shareholders and individuals organizing the corporation. The
liability of the assets of the corporation is the only exposure.
There is absolutely no personal liability to third parties dealing
with the corporation. Stockholders Officer Board of Directors
Slide 29
29 Advantages of Corporate Ownership Primary is the insulation
from liabilities of all individuals concerned. As long as there is
no fraud or material misrepresentation, there is no personal
liability on the part of the shareholders, ofcers, or directors.
There are times when courts will impose personal liability. When
this is done, it is referred to as piercing the corporate veil. In
Texas, this is relatively difcult to achieve. Liability Shield
Slide 30
30 Disadvantages of Corporate Ownership One of the biggest
drawbacks is the problem of double taxation. Income of the
corporation is taxed as are dividends to shareholders. Also, the
tax benefits of real estate do not pass to the shareholders. Not
considered the best form of ownership for real estate purposes. It
is not always clear to outsiders as to who has the authority to
negotiate contracts, attend closings, and sign papers. Corporations
can never operate as fast as individuals or partnerships.
Slide 31
31 S Corporations For income tax purposes it is treated like a
partnership. The income and losses for the S corporation pass
directly through to the shareholders. No double taxation
disadvantage as with regular corporations. The number of allowable
shareholders has been increased to 75 (it used to be 35). Married
couples are treated as one shareholder. It is imperative to seek
competent legal and tax advice to help the S corporation.
Slide 32
32 Limited Liability Companies If a person is harmed, there
should be an ability to recover from the wrongdoer. Yet many juries
are awarding signicant sums of money. Plaintiffs are pursuing
personal liability for ofcers and directors. LLC creates limited
liability, informal management procedures, and pass-through
taxation. Seems to combine the best of corporation and partnership
ownership.
Slide 33
33 Limited Liability Companies Creation Articles of
organization are signed and filed with the Secretary of State.
Member or manager of an LLC is not liable for debts, obligations,
or liabilities. A membership interest is considered to be personal
property. Member has no interest in specic LLC property.
Slide 34
34 Operations of a Limited Liability Company Name must include
the word limited or abbreviation Ltd. or L.L.C. It must maintain
the registered ofce and registered agent. All property owned by the
LLC shall be held in the name of the LLC. Some investors form a
separate LLC for each property but that could be very expensive in
the long run. Texas creating a new form of LLC called a Texas
Series LLC. It allows an investor to hold assets and liabilities
within separate investments as a separate series under the umbrella
of one LLC.
Slide 35
35 Ownership by Trusts Organization In Texas, there are three
major types of trust ownership. (1) testamentary or inter vivos
trusts, (2) land trusts, and (3) real estate investment trusts.
Trusts have a trustor, who establishes the trust. Ownership and
control of the trust are held by the trustee. Assets are held for
the true owners, the beneciaries of the trust. Once a trust has
been established, it is usually irrevocable. The income is taxed as
it is distributed to the beneciaries. The trustee individually is
not liable for debts or obligations of the trust. The trustee has a
duciary obligation to administer the trust properly.
Slide 36
36 Testamentary and Inter Vivos Trusts Normally set up for the
beneciaries of an estate. The Rule against Perpetuities dictates
that the period that the trust may exist is limited to
approximately 21 years after the death of the trustor. Can be set
up so that it will not be taxed, and the income and benets of that
trust will be managed professionally. The corpus of the estate may
then vest in the beneciaries and may also provide for their
well-being, expenses, and standard of living. If a trustee has
mismanaged the assets or acted in bad faith, the beneciaries have a
cause of action against the trustee.
Slide 37
37 Land Trusts An individual buys land as a trustee for a group
of investors. Management and ownership will vest in only one
person, the trustee. Same duciary capacity exists between the
trustee and beneciaries. Just calling a person trustee does not
create a trust. Property Code gives trustee absolute power to deal
with real property. Very functional and expedient way of owning and
controlling real estate May be subject to a wide variety of
interpretations by the Texas courts. This type of ownership does
maintain the secrecy of all beneciaries.
Slide 38
38 Real Estate Investment Trusts Enables the ownership and
development of large real estate interests For the benet of large
numbers of small investors. Promoter or developer is the trustor.
Assets of the trust are the investors cash. Beneciaries are the
investors. Generally administered by a board of trustees who are
professional real estate consultants.
Slide 39
39 Unincorporated Associations A non-prot association is an
unincorporated organization, other than one created by a trust,
consisting of three or more persons joined by mutual consent for a
common, non-prot purpose. May hold title in its own name, and can
transfer and encumber real estate, or be beneciary of a trust,
contract, or will. A separate legal entity from its members for
purposes of determining and enforcing rights, duties, and
liabilities in contract and in tort. A person is not liable for a
breach of a nonprot associations contract, tortious act, or
omission merely because that person is a member.
Slide 40
40 Questions for Discussion 1. What is ownership in severalty?
2. What are ten basic elements of a tenancy in common? 3. What are
ten basic elements of a joint tenancy? 4. Name the four basic
partnership entities in Texas and list three important aspects of
each. 5. Three basic classes of individuals are involved in the
organization of all corporations: shareholders, directors, and
ofcers. Explain the role of each.