When purchasing real property, a prospective purchaser must pay attention to the way the property is owned by the seller because the seller is only able to transfer what he owns to the purchaser. There are two questions that a potential purchaser should ask regarding ownership of the property: (i) what is the seller’s right with respect to possession of the property, and (ii) is the property owned by more than one individual? The answers to these questions will inform the purchaser about the rights that the seller is able to convey, as well as whether additional parties should be included in the conveyance documents. This article outlines various issues presented by both questions and provides practical suggestions for potential purchasers with respect to these issues.
A seller usually has a present right to possess the property, although it is possible to have a future right to possess property. A discussion of future rights is beyond the scope of this article. This article focuses on two present rights that may be sold: fee simple and life estates. If the seller owns title to the property in fee simple, the seller generally owns absolute title to property, free and clear of any claims against the title (with a few general exceptions), for a potentially unlimited duration. For more information on title, please see the article entitled “Title Review: What You Don’t Know Can Hurt You.” A life estate is a present right to possess and use the property until the death of the owner of the life estate or third party specified in the conveyance document.
Both fee simple and life estates may end earlier than their normal time of termination if they are made “determinable.” Fee simple and life estates that are determinable automatically end upon the occurrence of the condition specified in the conveyance document. For example, the seller has title to the property in fee simple determinable if the seller’s deed provides that the property is conveyed to the seller “for so long as the property is not used as a rental property.” If the property is used as a rental property after the date the seller acquired the property, the seller’s ownership of the property is automatically terminated without action of the prior owner.
Fee simple and life estates may be subject to a condition subsequent, meaning that the right to use and possess the property may be terminated by the prior owner if a condition specified in the conveyance document occurs in the future. For example, the seller has fee simple title subject to a condition subsequent if the seller’s deed provides that the property is conveyed to the seller “subject to the condition that the property not be used as a rental property.” If the property is used as a rental property after the seller acquired the property, the previous owner has the right to terminate the seller’s ownership of the property (note that, unlike a determinable estate, an estate subject to a condition subsequent does not automatically terminate but requires action by the previous property owner).
Unless the deed used to convey the property to the seller contained qualifying language or conditions, the seller most likely has title to the property in fee simple absolute. Most purchasers obtain a policy of title insurance, and the title commitment issued by the title company prior to closing should specify whether the seller has fee simple title to the property. For more information on title review and title insurance, please see the article entitled “Title Review: What You Don’t Know Can Hurt You.” As a practical matter, most property is owned in fee simple absolute; however, purchasers should protect their investments by verifying the nature of a seller’s ownership before purchasing property. If property is not owned by the seller in fee simple absolute, the purchaser should verify the nature of the seller’s ownership to determine whether the seller’s (and ultimately the purchaser’s) right to use and possess the property may be terminated in the future.
Property may be owned by one individual or by two or more individuals. In this article, the term “individual” refers to both natural people and business entities, such as trusts, corporations and limited liability companies. If real estate is owned by more than one individual, each owner may need to consent to the conveyance of the property to the purchaser.
Washington is a community property state. Community property is defined generally as property received by a husband and wife during the marriage, with the exception of inheritances, specific gifts to one of the spouses, property owned by a spouse prior to the marriage, all of which is separate property of a spouse. A husband and wife each have an equal ownership interest in community property. In certain circumstances, couples in long-term relationships may have quasi-community property interests in real property, meaning that Washington courts often apply the community property rules to such couples and their property notwithstanding the fact that they are not legally married. A discussion of community property rules and quasi-community property is beyond the scope of this article, and this article focuses on general concepts related to spouses and community property. In Washington, each spouse must consent to the sale of real property that is characterized as community property, and each spouse must sign the deed conveying such property to the purchaser. Generally, if one spouse fails to execute the deed and has not otherwise consented (or is not deemed to have consented) to the transaction, the non-signing spouse may elect to void the transaction (meaning that the conveyance of the property to the purchaser is invalidated). If the transaction is invalidated by a non-consenting spouse, the purchaser will receive a refund of the purchase proceeds and will not own the property. A prospective purchaser should verify whether the seller is married or in another type of long-term relationship. If so, the purchaser should proceed carefully to make sure that each person with an interest in the property consents to the transaction and executes the deed if necessary. The title commitment generally discloses whether the property is owned by one individual or by a husband and wife, and the purchaser should verify with the title insurance company whether the title insurance policy protects the purchaser against community property issues that are not disclosed in the public records. For a discussion of the importance of obtaining a title insurance policy when purchasing property, see the article entitled “Title Review: What You Don’t Know Can Hurt You.”
Real property may be owned by two or more individuals as tenants-in-common or joint tenants (both forms of co-tenancy ownership). A discussion of the creation of the foregoing forms of co-tenancy ownership, as well as whether a third form of co-tenancy ownership known as tenancy by the entirety exists in Washington, is beyond the scope of this article. In a tenant-in-common ownership, each tenant-in-common has an equal right to use and possess the property, although their ownership interests are not required to be equal (i.e., one co-tenant may own a life estate and another co-tenant may have an interest in fee simple). When a tenant-in-common dies, his interest in the property passes to his heirs. Joint tenants own the property at the same time in equal shares, and each joint tenant has an equal right to possess and use the property. Generally, when a joint tenant dies, his interest in the property automatically becomes the property of the surviving joint tenant. Generally speaking, a tenant-in-common and a joint tenant may convey their interests in the property to a third party. A prospective purchaser should be aware that if all of the co-tenants fail to convey their interests in the property to the purchaser, it is very likely that the purchaser will not own the entire property. The title commitment generally discloses whether the property is owned by one individual or by multiple individuals as joint tenants or tenants-in-common. For a discussion of the importance of obtaining a title insurance policy and conducting title review when purchasing property, see the article entitled “Title Review: What You Don’t Know Can Hurt You.” If the property is owned by more than one individual, the purchaser should make sure that each co-owner consents to the transaction and conveys his or her interest in the property to the purchaser.
Prospective purchasers should verify the nature of the seller’s ownership of the property to make sure that the seller is able to transfer absolute ownership of the property to the purchaser and that all parties with ownership interests convey their interests to the purchaser. If you have questions concerning a seller’s ownership of property or general questions regarding the issues discussed in this article, please feel free to contact April Anderson.
Lukins & Annis, P.S. // OFFICES IN: SPOKANE, COEUR D'ALENE, MOSES LAKE
Telephone: (509) 455-9555 or (208) 667-0517