Topic 9.6: Ownership Limitations and Restrictions

Learning Objectives

After successfully completing this topic, you will be able to
• list and describe the various types of governmental and private restrictions on ownership of real property, and
• distinguish among the various types of leases.

Government Restrictions

When a person owns real property in fee simple, the ownership is not absolute. That’s because the government has three major restrictions on that ownership, including
• police power,
• eminent domain,
• taxation, and
• escheat

Police power

Police poweris the broadest government restriction. It includes the government’s ability to close businesses because of an epidemic, change the property’s zoning which affects the owner’s use of the property, set building codes, and establish other restrictions.

Eminent Domain

Eminent domain (discussed earlier in this unit) is the power of the government to take private property for public use by paying the owner a fair price. If the owner agrees to an offer made by the government, then a normal transaction will take place and the owner will give a deed to the state. But if the owner objects to the transfer, or to the amount offered by the state, the state will file suit for condemnation. A judge will decide what amount must be paid.

Taxation

Property tax is a restriction reserved to state and local governments. Property taxes are the principal revenue of cities, counties, and school boards. If the property owner does not pay the taxes the government can foreclose on the property.

Escheat

If an owner dies with no will and has no heirs, the state will take the property by escheat.

Private Restrictions

When a person owns real property in fee simple, the ownership is not absolute. Not only are there government restrictions, there are four private restrictions on ownership including
• deed restrictions,
• easements,
• leases, and
• liens.

Deed Restrictions

An owner may give a deed to a buyer that says “This property may not be used for the sale of beer, wine, or liquor.” Deed restriction remain on the property forever, regardless of how many times it is transferred. Deed restrictions affect a particular property.

Restrictive covenants 

A different type of deed restriction is called a restrictive covenant. A developer of a subdivision often records such restrictions with the subdivision plat. The restrictions usually affect the entire subdivision, and include such items as “minimum 1200 square foot for all homes constructed,” or “no commercial structures.” Deed restrictions made years ago that discriminate against persons in a way that would violate the Fair Housing Act are void and unenforceable.

Easements

Easements “run with the land,” meaning they pass from owner to owner. They give rights to others for some specific use of the owner’s property. An easement does not include ownership or rights to possess the property.

Types of easements include
• easement appurtenant,
• easement by necessity,
• easement by prescription, and
• easement in gross.

Easement appurtenant

An easement appurtenant benefits an adjacent parcel of land, allowing its owner to use a neighbor’s property, such as an ingress easement.

Easement by necessity

An easement by necessity allows an owner to get to his or her landlocked property

Easement by prescription

An easement by prescription is the uninterrupted use of a roadway for 20 years without the owner’s permission.

Easement in gross

An easement in gross is not related to a specific adjoining parcel. An example would be a utility easement. Some easements are created by a court.

Encroachment

Encroachmentsare the unauthorized use of another person’s land by placing a structure (or tree) on part of that land. A common example is a fence across the property line. A property survey will show encroachments.

License

A license is a personal permission to use a property that does not transfer to future owners and that may be withdrawn at will. A license is not an easement. For example, Mary asked Jamal is she could walk across his side yard to get to the lake, and Jamal said that would be fine. Jamal sold his house later that year and the new owner blocked Mary’s access to the lake.

Leases

A lease is an agreement between a landlord and a tenant allowing the tenant to occupy the landlord’s property for a specific time. The document may use the term “lessor” for landlord, and “lessee” for tenant. An unwritten lease for one year or less is enforceable, but leases for more than one year must be written to be enforceable.

A leasehold is described in most real estate law texts as personal property because the tenant does not own the property. Florida’s real estate license law classifies leaseholds as real property so that the state can regulate licensees who lease property to others.

A landlord or tenant may use any lease agreement that they agree on. However, a real estate licensee can fill in the blanks only on lease forms that have been approved by the Florida Supreme court. Filling the blanks on any other form constitutes unauthorized practice of law. Attorneys may prepare enforceable leases that may or may not be on a Supreme Court-approved form.

Types of Leases

The five major lease types are gross, net, percentage, index, and ground leases.

Gross Lease

The tenant in a gross lease pays a fixed lease rate. The landlord pays expenses like taxes, maintenance and insurance. Most residential leases are gross leases. The landlords in many commercial leases, being concerned about costs getting out of control, insert pass-through clauses in the lease that will pass increases in taxes and utilities to the tenant.

Net Lease

The tenant in a net lease pays a fixed lease rate, but also pays other expenses of the property, including property taxes, maintenance, and insurance. This type of lease is very common in commercial and office properties. Property owners like net leases because the return on their  investment is easy to measure; there are no variables. It doesn’t matter to the owner whether taxes or energy costs increase, because the owner will get paid the same rent.

There are a variety of net leases, including single net (N), double net (NN), and triple net (NNN). In a single net lease, the tenant pays property taxes. A double net lease requires the tenant to pay property taxes and insurance. A triple net lease adds common area maintenance to the list of expenses paid by the tenant.

Another type of lease is called an absolute net (or bonded) lease. This lease essentially absolves the landlord of any financial responsibility for the property. Tenants must cover everything that the triple net lease covers in addition to damages, repairs, and construction. Absolute net leases are only used with long-term tenants with excellent credit.

Percentage Lease

A percentage lease, used for retail stores in a shopping mall, requires the tenant to pay a minimum (base) rent plus a percentage of the gross sales over the threshold  specified in the lease. The tenant is usually okay with this because the base rent is normally lower than the market rent, because overage rent is a variable expense and because the increased sales also generate greater profits to the business. Landlords like percentage leases because the increase in sales volume (either by increased business or by inflation), increases the rent.

Example of Percentage Lease If a tenant’s base rent is $100,000 annually and the percentage for the overage is 4%, the sales threshold would be $2.5 million ($100,000 Ă· .04). If the store’s sales for the last year were $3.2 million, it has exceeded the threshold by $700,000.  
The additional rent would be $28,000 ($700,000 Ă— .04), and the total rent would be $128,000.

Index Lease

An index lease, also called a graduated or variable lease, ties the property’s rent to some published index like the Consumer Price Index (CPI). The CPI measures the costs of many goods and services in a “market basket” and compares that cost to the cost of those same items in a previous year.

Example of Index Lease In June, 2020, the Consumer Price Index was 257.8. The same index in June of 2019 was 256.1.   The index was 1.0066 x the 2019 CPI (257.8 Ă· 256.1).   If an index lease dated June 1, 2019 required a payment of $10,000 monthly, the lease would increase in June, 2020 to $10,066 monthly (1.0066 x $10,000).

Ground Lease

The owner of a parcel of land might wish to lease that land to a developer who plans to build an office building. The lease is called a ground lease. The lease is a long-term absolute net lease. It’s also possible that the lease rate be tied to an index to account for inflation.

Assignment of Lease

An assignment of a lease is a transfer of the tenant’s rights under the lease. The assignor is the current tenant while the assignee becomes the new tenant, taking over all the leased premises. The new tenant pays the monthly rent directly to the landlord. If the assignor is not released from liability under the lease by the landlord, the assignor remains liable. But, if the new tenant fails to pay as required by the lease, the assignor (old tenant) can be sued by the landlord for back rent.

Sublease 

A sublease is different from an assignment of lease. A sublease can include less than the entire leased premises, while an assignment that transfers the entire lease must be for all the premises.

A sublease is a new lease agreement between the tenant as sublessor and a new tenant as sublessee for all or part of the leased premises. The original lease remains in place, unaffected by the sublease. This means that the old tenant remains liable for monthly rent under the original lease. The old tenant collects rent from the subtenant under the sublease. The amount could be more, less or the same as the rent due under the main lease.

The first tenant has become the “middleman” in the property occupancy rights. This is sometimes called a “sandwich lease.” The landlord is on top, the first tenant is in the middle, and the new tenant is on the bottom.

Liens

A lien secures the payment of a debt. The order of payment of liens in case of foreclosure is determined by the lien priority. The owner of the property is the lienee and the person who is owed the debt is the lienor or lien holder. A lien is recorded with the clerk of the court. When property is sold, the buyer will require that all liens be paid off (extinguished) so that the buyer will own the property “free and clear.” Liens can be voluntary or involuntary.

Voluntary Liens

A voluntary lien is recorded with the agreement of the property owner. The two types of voluntary liens are mortgage liens and vendors’ liens.
• A mortgage lien is used when an owner wishes to borrow money, usually to acquire the property. The priority of the lien is based on the date the mortgage was recorded.
• A vendor’s lien occurs when a buyer does not pay the seller the full down payment when purchasing the property. This lien is not necessarily written, but can be enforced only against the original buyer, not against future buyers unless the debt is written as a mortgage. The priority date is the day the mortgage is recorded.

Involuntary Liens

Involuntary liens are placed on the public record without the sellers’ agreement. Examples include judgment liens, income tax liens, estate tax liens, property tax liens, special assessment liens, and construction liens.

Classifications 

Liens on real property are classified into two main types: general and specific.

General Liens

General liens attach to all real property owned in the county by an individual where the lien is recorded. The general liens attach to all new properties owned by the debtor. Judgment liens, income tax liens, and estate tax liens are general liens.

Judgment liens

A judgment is a court ruling that gives a creditor the right to take possession of a debtor’s property if the debtor fails to pay the lien. Judgment liens are valid for five years from the original filing date. Florida law allows judgment liens to be filed a second time to extend the lien’s validity five more years. Judgment liens attach to all property of a debtor in the county where it is recorded. The lien priority date is effective on the date the court records the judgment.

Income tax liens

The IRS can record a lien against the property of a taxpayer who owes money. The priority is the date of filing of the lien. The lien is effective on the date it is filed.

Estate tax liens

When a person dies, the IRS places a lien on the decedent’s real property to secure the payment of any estate tax due. This estate tax lien is effective as of the decedent’s date of death.

Specific Liens  

Specific liens attach only to certain real property in the county where the lien is recorded. The lien is not against a person; it’s against a property.

Property tax liens

Property tax liens are based on the value of the property. They are first in priority, and come before all other liens.

Special assessment liens

Special assessment liens are a one-time charge for costs of construction on properties that have been improved by the government, like sidewalks. They are second in priority to property taxes.

Mortgage lien

A mortgage lien is the pledge of property as collateral for a loan. The lien priority is based on the date the mortgage is recorded.

Vendors

A vendor’s lienprotects a seller when the full amount of the purchase price has not been paid. It is not necessary that the debt be written.

Construction (mechanics/materialman’s) 

A construction lien allows a laborer (or a material supplier) to place a lien on property for non-payment when their work or material has improved it. It must be filed with the clerk of the court within thirty days after the last labor is performed.

The priority date of the lien is retroactive to the first day that work was performed or material delivered. A construction lien is effective for 1 year and will expire unless the lien is foreclosed.

Satisfaction of lien

Once a lien has been paid, the property owner should have a document signed and acknowledged showing the lien has been paid. When recorded with the clerk, the lien showing as satisfied.

Lien Priority

The priority of liens becomes very important if the property owner is in default on a senior lien and the property must be sold to satisfy the debt. If a person has a construction lien on the property with the lien date of September 22 of this year and the lender on the first mortgage successfully forecloses on the property, the property will be sold. If the property sells for $212,789, which liens will be paid?

The lien payoffs are as follows:

                                                Amt Owed      Paid at Sale    Unpaid after Sale

Property taxes:                       $    2,754         $    2,754        

1st Mortgage                           $198,345         $198,345        

2nd Mortgage                           $  19,435         $  11,690         $  7,745

construction lien                     $  21,659         $       0             $21,659

             Total                          $242,193         $212,789         $29,404

Superior liens

Superior liens automatically take priority over all other liens
• Property tax lien
• Special assessment lien
• Federal estate tax lien

Junior liens

Junior liens are based on the date of recording in the public records:
• Mortgage liens
• Judgment liens
• Vendors’ liens
• Income tax liens