MacLeod – Property II – Spring 2011
VI. Entity Property
A. Entity Property: Possessory Rights
1.Leases
a. Lease Types
b. The Independent Covenants Model
c. Extensions of the Independent Covenants Model
d. The Model of Dependent Covenants
e. Transfers of Interests by a Tenant
i. Running Covenants – only covenants which “touch and concern” the land run with the land and are enforceable against the transferee.
1. “Touch and concern” – covenant must benefit the property, not the personal interests of the party.
2. A promise to pay money must restrict the funds to the benefit of the property to run with the land.
3. (So a security deposit, which can be returned to the depositor if there are no damages, would not benefit the land, and the covenant to return the SD does not run with the land.)
ii. Assignments and Subleases
1. To determine if it is a sublease or assignment
a. Interest Conveyed Test (common law) – sublease is carved out of (something less than) the original leasehold interest. Assignment is a complete transfer of all a tenant’s interests (the entire remaining term).
b. Intent Test (modern rule) – read instrument of conveyance to determine the intention of parties as to whether it is a sublease or assignment.
i. Where there is ambiguity, the best evidence is still the quantum of estate conveyed.
ii. Even in an intent jurisdiction, the Interest Conveyed Test constitutes an important approach.
c. Sublease
i. A transfer of less than all of the original tenant’s interest (carved out of the original leasehold interest).
ii. LL can only sue the original tenant for failure to pay rent.
iii. Sublessee not liable to LL for rent or for performance of any other covenant.
iv. Privity of estate and privity of contract still exist b/t LL and original tenant.
v. Privity of estate and privity of contract exists b/t original tenant and sublessee.
vi. Neither privity of estate nor privity of contract exist b/t LL and sublessee.
d. Assignment
i. Transfer of the all the tenant’s interest (entire remaining term).
ii. LL can sue the original tenant for breach of contract AND can sue the assignee for breach of the implied covenant to pay rent.
iii. Assignee is liable to LL for all covenants that run with the land. And LL liable to sublessee.
iv. Only privity of contract still exists b/t LL and original tenant. Privity of estate exists with the assignee occupying the estate.
e. Two problems arise when leasehold interests are transferred
i. Which covenants run with the land?
ii. What privities exist b/t lessor and lessee?
2. Novation – must have some statement that LL consents to the new lessee (would release original tenant of contract obligations)
3. Assumption – if LL does not consent, it is an assumption (original tenant would still be liable for express rental obligation)
4. Right of entry can be viewed by the court as a chose in action (way to enforce a debt or obtain money in damages) and not a property right.
iii. Consent Clauses – must have consent of LL for tenant to assign or sublease.
1. Residential Leases – almost always enforceable.
2. Commercial Leases
a. Common law – lessor may withhold consent for any reason
b. Minority approach – Where a commercial lease provides for assignment only with the prior consent of the lessor, such consent may be withheld only where the lessor has a commercially reasonable objection to the assignee or the proposed use.
2.Cooperatives, Condominiums, and Common-Interest Communities
a. Governance Questions
i. 3 Levels of Charter governing Common Interest Communities
1. Declaration or Master Deed – Title
a. Lays out the common scheme of development
b. Establishes the homeowners’ association as an authority to act as agent for the homeowners.
c. Places restrictions on management
d. Recorded instrument (not easily amended)
e. Addresses general matters
2. Bylaws – Management
a. Sometimes recorded (more easily amended)
b. Establishes authority of the association.
c. Sets out principles, rules, restrictions, on Association itself
d. Sometimes includes ex ante rules (dues, cost allocation)
3. Rules & regulations – Conduct
a. Never recorded
b. Requirements and prohibitions of specific issues (pets, occupancy, etc.) and contain rules applying to individual members of the assoc.
ii. When considering the enforceability of restrictions in any of 3 documents (master deed, bylaws, rules & regs), you must first determine whether you are operating under a condominium or cooperative.
iii. Condominiums
1. Condominium restrictions are presumptively enforceable.
2. Enforcement of RESTRICTIONS
a. “Unless Unreasonable” Test (Condo Assoc. restriction test) – start with a presumption of reasonableness and challenger must prove restriction is unreasonable by showing it does one of 4 things. Tie goes to the association.
i. Violates public policy
ii. Unconstitutional
iii. Arbitrary – bears no rational relationship to a legitimate purpose of the association.
iv.
urchase and Sale Agreement
1. Specific performance – must show up and close the deal
2. Return of the deposit
3. Damages
b. Instrument of Conveyance itself
i. Statute of Frauds – any transfer of an interest in real property must be…
1. In writing
2. Signed by the grantor
3. Delivered to the grantee
a. Delivery established constructively if evidence indicates grantor intended to pass title (a question of fact).
c. Merger – at closing, the purchase and sale agreement is merged into the deed. Once the buyer accepts the deed, the seller is no longer liable for breaches of any promise (express or implied) contained in the sale contract.
i. Limits on merger – merger does not defeat claims for
1. fraud by the seller, (not a promise contained in the sale contract)
2. breach of promises ancillary to the sales contract, or
3. breach of the implied warranty of workmanlike quality.
2.Caveat Emptor and Its Exceptions – caveat emptor: “buyer beware.” Buyer bears the risk that the land or structures will not serve the purpose for which the purchase is come forward. Seller is under no obligation to make warranties of fitness about the property or structures on it, except, of course, when such warranties are made.
a. Exceptions
i. Implied warranty of merchantable (or marketable) title – sale contract contains an implied warranty that property which is title free of reasonable doubt that does not subject the buyer to a substantial hazard of litigation.
ii. Where the seller has created a condition that materially impairs the value of the property and is peculiarly w/in the knowledge of the seller or unlikely to be discovered by a reasonably prudent purchaser, nondisclosure is a basis for rescission of the purchase & sale agreement. Must be rescinded b/f closing.
iii. Where seller is both builder and seller, there exists an implied warranty of workmanlike quality, under which a builder warrants to a buyer that the house is fit for habitation. Not merged into the deed and therefore survives closing.
