Lecture 2 Revision - Important Concepts

Real Estate Ownership Structures

Doctrine of Tenure (spatial)

All land is held by way of grant from the Crown (or in modern language from the State)

• Crown gives you the land but still has the right to take it back

Historical perspective

• Under English law, following the Norman invasion of 1066, all property was vested in the Crown.
• Under the feudal system all lend was held from Crown various forms of service were required of the lords who occupied the land these included military, spiritual and socage (payment) and system of Subinfeudation.
• Land is granted in fee simple is held in perpetuity from the crown without any annual payment due to the crown subject to reservations held by the crown (eg minerals and a right to take back possession of the land under a limited set of circumstances)

Doctrine of Estates (temporal) (estates in possession)

All land tenure gives the owner the right of possession for specific duration (an estate can be a future interest – ie vested vs contingent)

• Freehold – uncertain duration
  • Fee simple (akin to absolute ownership)
  • Fee tail (historical – inheritance limited to certain descendants)
  • Life Estate (granted for duration of a person’s life – remainder/reversion)
• Leasehold – certain duration

  • NOTES: the space can be held for a period of time. What is the estate, and how long do you have to own the estate?

  • contingent estate: getting a property contingent on a contract/agreement
  • freehold estate - specific, but uncertain. IF you own a block of land and it is yours, you own it until you pass away or sell it etc.
    • Estate in fee simple is absolute and you have no constraint transferring or disposing it by a will
    • Fee tail was abolished about 100 years ago
    • Freehold life estate, can own the property until they die, and it is then inherited by someone else
      • Owned by the 'remainder man'
      • reversionary interest is who is left with after the life estate is gone
      • Interest that is linked to the death of a person
  • Leasehold: for a certain duration, for a defined period. If the interest of the land is for a certain duration,

Freehold

• Fee Simple Absolute in Possession.
  • Not subject to determination it is held in perpetuity without limit. In possession refers to an immediate estate that can be held now.
  • The alternative is a remainder interest or life interest which is dependent on the life of an individual.
• Land title was originally based on deeds; a written, witnessed record of ownership (trail of contracts).
• In Queensland this has been replaced by the Torrens title system which provides for a system of registration.
  • Your title is indefeasible if it is registered. If there is a title with a name on it they own it
• Each registered title is indefeasible.

Leasehold

Crown leases – State grant of leasehold tenure (approx. 75% of Queensland is leasehold land)\

• agricultural or mining projects
• Maintain good habits in the early settlement; make it a condition of the agreement to make building of certain size, etc.
• give farmers leases and make certain amounts of land cleared every year

Private leases (between an owner of fee-simple and a lessee or a lessee and a sub-lessee)

• A written agreement or contract between two parties which creates a tenancy.
• A tenant is a person(s) holding land under a landlord in leasehold tenure, usually a contractual tenancy for a certain period under which is paid an annual rent as a consideration for the right to exclusive possession.
• Essential elements of leasehold tenure are
  • Privity of estate (same land held by both parties)
  • Privity of Contract (both parties have contractual obligations with each other).
  • NOTE: can't always get a copy of a lease, does not have to be registered.
  • Where there is an agreement between two people, this creates a tenancy. Lessee, lessor. The person who gives something is the 'or'. The person receiving (the benefit) is the 'ee'

Types of Leasehold Tenure

• Tenant for a term
  • Specific tenancies
  • Periodic tenancies
    • NOTE 5-year, or month-to-month?
• Tenant at Will
  • Ongoing until immediately termination by either party
    • both parties have the ability to terminate with two weeks notice
• Tenant at Sufferance
  • One who comes in by right and holds over without right (not a trespasser)
  • Bound by terms of previous lease
    • If you are on a property without an agreement, you are a tenant at Sufferance. Still bound by the terms of the previous lease

Rights and Obligations under Leasehold Tenure

• Written contract is the primary source of rights and obligations between the parties
• Part VIII of the Property Law Act 1974 (QLD)
  • s 105 - tenant’s obligation to pay rent, keep in repair etc.
  • s 107 - landlord’s right to enter, repair etc
• Common law - implied terms and conditions
  • Tenant right - quiet enjoyment
  • Landlord obligation - non derogation of grant
    • Double-edge sword - when you rent property, you will be told the purpose in which you can rent it
      • E.g. rent the 25th floor of an office building. Landlord turned off all the lifts. Non-derogation of grant
      • Allowed to use the land for the purpose and nothing else.

Doctrine of Waste

Owners of limited estates (ie less than fee-simple) are limited in their use of the land (ie cant do things to degrade its value) to protect future interests

• If you diminish future interest property they have a right to sue

Licences

• A licence is a contractual right and merely gives the licensees the right to use the premises for a given purpose and to do something rightfully on the land which would otherwise be a trespass.
• A lease conveys an estate in the land to the tenant, a licence passes no estate in the land to the licensees.
• A lease when granted cannot be revoked (subject to termination rights for breach) - but the grantor of a licence may revoke it at any time, upon reasonable notice.
• A lease can be assigned to a third party in the absence of express stipulation to the contrary; a licence (unless coupled with an interest in land) cannot be assigned.
• If it doesn't give you exclusive possession of the property for a period of time, it is a licence
• Normally a clause in the agreement the the new owner would take over all the leases and licences originally.
• Example: lease a building but licence the car park. Rocklea markets, buy fruit and veg, plus retail vendors. 4x4 blocks would be yearly licences.

Native Title

• In 1993 the States and Commonwealth passed various Native Title Acts to validate prior Crown grants and define a process for claiming and recognising native title to lands and waters in Australia.
  • Validated the exercise of prerogative power (ie grant of fee simple) that extinguished native title
  • For native title rights to be recognized continued observation and connect needs to be established (difficult threshold test).
  • Native title is best described as a bundle of rights related to land (hunting, fishing, gathering, spiritual or cultural connection)
  • Native title is inalienable (cannot be sold – only extinguished in whole or part)

RISK MANAGEMENT

Market Risks:

• Affect almost all properties in the submarket, but often to a different degrees
• Partial protection from long term leases - rents with fixed or CPI increases
• Risks from market imbalances can arise form:
  • Changes in supply - overbuilding
  • Overconfidence in investors or lenders- lower yields and unstable prices
  • Changes in demand for goods and services which dominate the regional economy
• Results:
  • Declining rents
  • High vacancies
  • Rising yields

Financial Risk

• Arise from the financing of the property. Typically financial risks augment other risks and are the main reason property investments may become "insolvent". Risks:
• Volatility associated with leverage
• Costs of loan default
• Interest rate increases
• Inability to refinance expiring loans

Challenge of real estate risk - refinance a loan

• don't get a 25 year loan. If you are unlucky, you have not been able to refinance an expiring loan
  • bank may default it

Property Risk

• Risks that affect the property investment but not the market as a whole. May damage location, building and tenants

Risks:

• Location - rental and capital value impact: trading potential of a retail store impacted by reduced pedestrian access
• Building failure - unexpected running costs, claims against owners allowing containing uses etc
• Soundness of 'covenant' of tenant - checks on financial stability of a tenant prior to purchasing a property
• Many building risks can be insured against