What types of proprietary interests in real estate can be created?
There are two broad categories of proprietary interest that can be created: freehold and leasehold estates.
- The owner of a freehold estate is generally free to use and enjoy the land as it chooses subject to any restrictions the parties to the transaction may impose on each other. The estate is for an infinite period of time. The State is ultimate intestate successor and is successor to the property of a dissolved corporation.
- The owner of a leasehold estate holds the property for the duration specified in the lease subject to payment of a rent and performance of covenants. The estate is for a finite period of time. Long leases e.g. 999 year leases are generally referred to as ownership leases while shorter leases e.g. 25 year leases are generally referred to as occupational leases.
In Ireland, there are 2 types of freehold estate – fee simple and fee farm grant (a freehold estate with characteristics of a leasehold estate such as the payment of a rent and compliance with covenants). Legislation in Ireland prohibits the creation of new fee farm grants from 1 December 2009 but does not affect fee farm grants already in existence.
Civil statutes in Mexico provide for the following proprietary interests:
Rights in rem
- Fee simple, which grants absolute ownership on real property for indefinite duration (perpetuity).
- Rights which limit absolute ownership on real property:
- Usufruct, whereby the owner of certain property conveys the right to use and enjoy such property to the beneficiary – “usufructuario” (including everything it may produce). If the beneficiary is an individual, the usufruct may be for a life-time term; for entities, the maximum term is limited to 20 years
- Use right (“derecho de uso”), which is similar to usufruct (right to use land) but with no right to benefit from the products of the real property.
Rights in personam
- Leasehold interests (landlord/tenant law)
- Beneficial interests under a real estate trust (the trustee would be the title holder to the property)
- Other in personam agreements between the owner and the corresponding beneficiary (eg. commodatum, which is the right to use real property for no consideration).
Dutch law has two categories of real estate rights: real rights and personal rights.
The most comprehensive real estate right is freehold. In that case the ownership of the real estate is not encumbered with any other real right. The owner has the exclusive right of use and the freedom to encumber the real estate at his discretion.
The entitlement may also be based on a real right other than freehold, such as a right of leasehold, a right of superficies or an apartment right. Unlike personal rights, such as lease, these rights are binding on third parties in the same manner as freehold.
A right of leasehold entitles the leaseholder to hold and to use another party’s real estate. It is customary to obligate the leaseholder to pay the landlord a periodical fee (the ground rent). A right of leasehold may be temporary, permanent or perpetual. A temporary right expires after a fixed period, agreed on beforehand (unless the parties agree on an extension).
A permanent right of leasehold is open‐ended, but is divided into periods. At the end of a period the right of leasehold continues, but the leasehold conditions may be amended.
A perpetual right of leasehold is open‐ended, without any time periods. A right of leasehold gives the parties a certain degree of freedom. The parties themselves can agree on the details of the right (duration, designated use, development or compensation when the right of leasehold ends). The right of leasehold can be mortgaged and, unless the landowner has stipulated otherwise, the leaseholder can transfer it without the landowner’s consent and/or can grant a sub‐leasehold.
Right of superficies
A right of superficies is similar to a right of leasehold in many respects. It offers the same freedom. An important difference is that a right of superficies gives the holder the right to own or to acquire structures, works and plants in, on or above the real estate, whereas a right of leasehold gives the holder the right to hold and to use the real estate.
In light of the difference referred to above, a right of superficies is often preferred to a right of leasehold, for instance when valuable machinery is located in another party’s real estate. Creating a right of superficies may also be useful if the owner of a building wishes to exclude the risk of soil pollution.
A right of superficies may be independent or dependent, for instance on another real right or a tenancy right. It is important to realise that a dependent right of superficies cannot be transferred and cannot be mortgaged, whereas an independent right can be transferred and mortgaged.
An apartment right is a real right that confers on the party entitled an exclusive right of use of part of the real estate and a (undivided) share in the communal parts of that real estate. When an apartment right is acquired, the owner becomes a member by operation of law of the homeowners association of the building in question, whose objects are to promote the joint interests of the owners. The rights and obligations arising from that membership are set out in property division regulations that are recorded in a notarial deed of division. The division plan, depicting the private and the communal parts of the building, forms an integral part of the deed of division. An apartment right may be granted in leasehold or, subject to certain conditions, may be encumbered with a right of superficies. An apartment right may also be mortgaged.
Unlike the rights referred to above, a lease gives the tenant a personal right to use certain real estate. The lease is binding only between the landlord and the tenant. An exception to that rule is that the lease is transferred by operation of law when the landlord sells the real estate. The new owner becomes the landlord by operation of law.
All the real rights referred to above can be leased to a third party and therefore do not differ from a situation in which the landlord has the freehold.
Freehold interest (owning land and building) and ordinary fixed term lease are the most common legal interests in real estate in Norway. Leasehold (long term right of disposal) is not common in Norway.
A combination of leasing land and owning building (ground lease/no: festeforhold) is an alternative form of ownership, more typically used for residential purposes. This legal construction constitutes a significant risk in real estate transactions when the agreement with the land owner entitles the land owner to regulate the ground rent in accordance with the site value (see also Q5).
The full ownership right over real estate may be dismembered into certain proprietary interests, such as: (i) usufruct rights (the right of a third party to use and derive profit from real estate, with the nude ownership held by the original owner); (ii) usus or habituation right (such as the right of an individual to use the real estate of the nude owner, principally as dwelling, for as long as the individual is alive); (iii) superficies right (the right of a third party to use the surface of the land to construct buildings/to use the surface of the land underneath an owned building); (iv) easement or servitude right, meaning the right established in relation to a subservient land plot for the benefit of another land plot, such as person and vehicle access rights, utilities transit rights, etc
Real estate may either be:
- Privately owned by individuals and companies. Private property may also belong to two or more owners (common ownership).
- Publicly owned by the:
- Russian Federation;
Public ownership of land plots may also be non-delimited, which means that there is no specified owner of the public land. Municipalities may generally dispose of non-delimited public lands. Certain specifics of dealing with non-delimited public land may be established at the regional level, so the rules may vary from region to region.
Other titles to real estate
Rights that exist in addition to ownership include:
- The right of perpetual (indefinite) use of land plots (perpetual): applies to publicly owned lands. This title is a historical land possession that, if the title holder so wishes, may be converted into ownership or lease. Nowadays, this title is granted only to a limited group of public enterprises and state agencies.
- The right of economic jurisdiction over property (perpetual) held by state-owned enterprises and organisations (generally, the state is the property owner.)
- The right of operational management (perpetual) held by state-owned enterprises and organisations (generally, the state is the property owner.)
- The right of inheritable possession of a land plot for life (for individuals only) over publicly owned lands. Land plots with this title are historical possessions and are not currently granted by the state.
Leases are not treated as an in rem interest but as encumbrances of real estate and, as a general rule, they follow the property they encumber, irrespective of change of ownership, mortgage, etc. of the property. Leases are a common instrument in all segments of commercial real estate: offices, logistics, retail, industrial, as well as with respect to land.
A typical lease term is up to 49 years for land and 5 – 25 years for buildings and premises.
As an alternative to full title ownership, a long-term right of use to a property called site leasehold right (Sw: tomträtt) may be granted under Swedish law, legally constructed to essentially be comparable to ownership (from the site leaseholders perspective). A site leaseholder may grant leases and other usufructs on and mortgage the property in the same way as an owner with full title. A site leasehold is granted for a property in its entirety, generally for a longer time period (normally 20-60 years per term) against a yearly fee. Site leaseholds were introduced in order to enable public property owners, such as the state and municipalities, to retain the long-term market value increase of the land while still being able to distribute land for private interests (both residential and commercial). Site leaseholds can only be granted on publically owned land.
Site leaseholds may only be terminated by the property owner (not by the site leaseholder) in certain legally stipulated instances, and a valid termination generally entitles the site leaseholder to compensation from the property owner. A site leasehold can be transferred freely without the consent of the property owner and the same formal requirements apply for the transfer of site leaseholds as when land is transferred.
The most common form of ownership is the freehold interest, which includes the ownership of the ground of a specific plot of land and of any construction on such plot. Such type of ownership is unlimited in time. There can be either one sole owner or several co-owners who own such real estate jointly and proportionally to their percentage of co-ownership.
The condominium type of ownership, the so-called Propriété par étage, is another common form of freehold ownership for apartments or mixed-use buildings that permits different owners to jointly own a specific plot of land, but with exclusive rights of ownership on specific parts of the building(s) constructed on such plot. It is commonly used by promoters to conduct large real estate developments as it permits the separate sale of each apartment, office and/or commercial space of a building to different buyers.
Finally, the building lease ownership (droit de superficie) is also a possible form of ownership but it is much less common in practice. It permits the dissociation of the ownership of the ground of a specific plot of land from the ownership of any construction on such plot, in a similar way to the leasehold ownership as it is known in Common law countries. The building lease ownership is limited in time. It is a long term easement registered on a specific plot in the land registry, which allows the beneficiary of such easement to construct and own a building on a plot of land owned by a different owner. If a building lease right is granted by the owner of a plot for a period exceeding thirty years, the building lease right can be registered at the land registry as a specific real estate independently from the plot on which the right is granted. This type of ownership is mostly used in industrial development zones for plots owned by the Confederation or other public authorities to support the development of certain industries in such zones.
The main and common way to hold a real estate is ownership. On the other hand there are some other rights in rem which serve the right owner to hold the real estate. These easement rights are usufruct, right of habitation, right of construction, right of way, right of natural resources, right of construction. These rights can be established by registration to the land registry records. Some of the most common rights can be listed as follows:
Usufruct (usage right) is the closest right to ownership in terms of the rights granted to its holder. A holder of usufruct right can possess and use the land but not dispose like the owner. On the other hand the usage of this right can be transferred to third parties.
Right of habitation allows the holder to use the real estate only for residential purposes. In other words, in case the real estate is an office or a land, the right of habitation can not be established. It is a highly personal right that cannot be neither leased nor transferred.
Right of construction allows the holder to construct a building on and/or under the real estate and to use the building during the term of the right.
Right of way can arise under the law or by means of a mutual agreement between the relevant parties. This right grants its owner the right to use the land of a neighbour for passing purposes.
Right of natural resources grants its holder the right to use natural resources, like water, which are situated underneath another person’s real estate.
Other than that, the right of encumbrance and liens are also accepted as rights in rem however they don’t grant a direct possession of the real estate its owner.
Additionally, rights arising from preliminary sale agreement or lease agreement, pre-emption rights, right of purchase, right of re-purchase are purely contractual rights. However such rights may be annotated to the relevant land registry and thereby be asserted against third parties.
There are three main proprietary interests:
- Freehold: where the owner owns the property in perpetuity. A freehold most commonly includes the land, the airspace above the land and any building on that land, but parties are free to agree other arrangements (for example a freehold could include only land and airspace within certain defined limits, or could just be of airspace or just of land),
- Commonhold: where a building is split into a number of units. The common parts of the building are owned in perpetuity by a commonhold association. The owner owns a unit in perpetuity (rather like a freehold interest) and is a member of the association. Though commonhold interests were introduced in 2004 and were intended for use with apartment blocks, few such interests have been created. Most apartments are instead owned through leasehold interests (see below).
- Leasehold: where the owner (tenant) is granted a lease of an agreed area for a fixed term. There is no minimum or maximum term and the lease can include renewal rights. Leases granted for more than seven years must be registered at the Land Registry. Subject to the terms of the lease, the tenant of a leasehold interest can, in turn, grant a further lease of all or part of the land/building (for a period less than the term of their lease). This means that chains of subsidiary leasehold interests can be created.
The Brazilian Civil Code lists proprietary interests as: (i) ownership; (ii) surface; (iii) easement or servitude; (iv) usufruct; (v) use; (vi) habitation; (vii) the right of the committed buyer of the property; (viii) pledge; (ix) mortgage; (x) antichresis; (xi) granting of special use for housing purposes; (xii) granting of right of use; and (xiii) surface and overhead rights/slab rights (in Portuguese, known as “direito de laje”);
In addition to the proprietary interests expressly described in the Civil Code, we have the right of first refusal of the tenant (in case of sale of the real property during the lease) and the conditional sale as guarantee (chattel mortgage) established in scattered legislation.
Acquisition of property interests on real estate created or transmitted inter-vivos can be accomplished by registering said deeds with the Real Estate Registry Office, except in the cases expressed in the Brazilian Civil Code.
We have listed some of the main property interests:
- Ownership: is the full property right on the real estate. The owner is entitled to use, enjoy and dispose of the real property, and the right to take it back from anyone that unfairly takes possession thereof. Under a practical perspective, leasing real estate to third parties is usually carried out by individuals or legal entities that own said property.
- Usufruct: the partial property right (of use) on a real property that is owned by another party. In the usufruct, the proprietary right is divided between two individuals/entities: the beneficial owner and the usufructuary. The usufructuary holds the rights to use and enjoy the real property and the obligation to preserve it. The beneficial owner, in turn, is the owner of the property without its elementary rights (bare property) and the expectation to have full property rights in the future, which occurs with the consolidation of the property (extinguishment or termination of the usufruct).
- Mortgage: is an in rem guarantee that is levied on the real estate. The debtor grants a right to the creditor on a real estate owned thereby or by a third party (as guarantor), so that such mortgage guarantees the payment of the debt. The ownership and possession of the real property remains with the debtor or the guarantor, who may receive the fruits thereof. Usually, the mortgage creditor has priority in receiving his credit before the other creditors.
- Chattel mortgage: the debtor, or chattel mortgagee, transfers to creditor, or chattel mortgagor, the fiduciary ownership of the real estate in order to guarantee the compliance with certain obligation (such as payment of debts). The chattel mortgagor holds the fiduciary ownership of the real estate up to full payment of the debt, when the asset will return to the debtor's possession and full ownership.
The main proprietary interests in real estate that can be created are:
Fee Estate: where the owner owns the real property, typically in perpetuity. The fee estate commonly includes the land, the development rights relating to airspace above the land, and any buildings or other improvements on that land, but the parties are free to agree to other arrangements. For example, a fee estate could include only land and airspace with certain defined limits or could only include an interest in land or airspace.
Leasehold Estate: where the tenant is granted a lease of an agreed area for a fixed term. With very few exceptions, there is no minimum or maximum term and the lease can include renewal rights. In some cases, a lease is granted in the entirety of the fee owner's estate, often referred to as a ground lease. Ground leases are typically for significantly longer terms than leases of designated space at a property. The tenant under a ground lease will typically seek to record a memorandum of the ground lease in order to put all interested parties on notice with respect to the tenant's interest in the property, and protect its interest from being subordinated to the rights and interests of subsequent purchasers of the property or interests therein. Subject to the terms of the lease, the tenant can, in turn, grant a lease of all or a portion of its leased premises (for a period not to exceed the term of its lease), which is referred to as a sublease.
Tenancies in Common: where a property is owned by more than one person (referred to as a "co-tenant"), with each co-tenant having an undivided interest in the entire property. A co-tenant's ownership interest in the property is reflected as a percentage and the ownership percentage among co-tenants need not be equal. Each co-tenant, however, has the same right to possess the property as the other co-tenants, regardless of ownership percentage. The parties to such arrangement often enter into a "tenancy in common agreement" which outlines their respective rights and responsibilities to each other with respect to the applicable property.
Condominium Ownership: a type of fee estate where land and improvements are split into a number of units. Each unit is a distinct property and includes an undivided interest in the overall property's common elements. The condominium regime allows multiple owners to own and use distinct portions of a property while collectively sharing ownership of the common facilities of the property, for which each unit owner is responsible for paying a proportionate share of expenses (referred to as common charges). Unit owners typically have the right to sell, mortgage, lease or alter their unit, however, such rights may be limited in some way by the documents creating and governing the condominium.
Cooperative Ownership: where a corporation owns the property, and individual owners own shares of such corporation and are granted a "proprietary lease" leasing a particular unit of the property. The number of shares of the corporation that each owner holds is typically proportionate to the size of the unit leased to the cooperative shareholder. Similar to condominium ownership, cooperative shareholders have shared rights to use the property's common elements, for which each owner is responsible for paying a proportionate share of maintenance expenses. Cooperatives, however, often impose restrictions on the sale of unit (which is effectuated through a sale of shares and an assignment of the proprietary lease) as well as restrictions on the rights of a cooperative shareholder to alter their unit. The use of cooperative ownership structures are most commonly found in the Greater New York metropolitan area and the mid-west of the U.S.
The main types of in rem rights over real estate are: ownership (sole ownership, co-ownership and condominium ownership); the right to build; easements (servitudes) and the in rem right to use. All in rem rights need to be registered into the Land register after being established, or transferred, or changed.
Ownership is the right of the owner to possess, use and dispose of his/her/its property. The ownership is not limited by a specific term. The right of ownership may be acquired through legal transaction, through prescription or through other means provided by the law. The right of ownership shall be lost if another person acquires it or if the owner renounces it. An owner of an immovable property shall not perform such acts in its property which create obstacles, greater than the usual, for the use of an adjacent property.
The right of ownership may belong jointly to two or more persons - the state, municipalities and other entities and individuals. The shares of the persons shall be deemed equal until proven otherwise. Each joint owner shall participate in the benefits and burdens of the common property in proportion with his share. In case of co-ownership over a real estate one of the co-owners is allowed to transfer her/his title to a third person only after proving that she/he/it has made an offer to the other co-owners to buy it and they have refused to do so.
The owner may cede to another person the right to construct a building on its land, whereby the other person becomes owner of the building (right to build). The owner of the land may also transfer independently from the land the ownership of an already existing building. Ownership of a building independently from the underlying land may also be created through voluntary partition. The owner of a building may use the land to the extent that is necessary for the use of the building according to its purpose, unless the act with which the right is ceded contains another provision. The right to build may be limited by term. If so, after the expiration of said period the ownership of the building shall pass gratuitously to the owner of the land.
The right to use includes the right to use the property in accordance with its purpose and the right to the benefits thereof without causing any essential changes to it. The user cannot transfer his right. The user must pay the expenses related to the use, including taxes and other charges, maintain the property in the state in which it was received, and return the property to the owner after the termination of the right of use.
The easement (servitude) is an in rem right set up in favour of an owner of a property , with respect to another person’s property . The easement right is usually set up with respect to two adjacent properties, although it is not necessarily the rule. The easement right may be limited by term.
Leases, on the other hand, are contractual and not in rem rights. They are usually set up for a finite period of time.
Mortgages are established for securing an obligation (contractual, legal, financial). A creditor whose debt is secured by a mortgage shall be entitled to be satisfied preferentially from the mortgaged property's price, whoever its owner might be. Mortgages are considered by the Bulgarian legal doctrine as a form of security and are initially entered into the Land register for a period of validity of 10 years. After its expiration and if the debt is not paid, the mortgage validity may be repeatedly prolonged upon subsequent entries for another 10 years.
In rem interests are most frequently freeholds but long leasehold tenure with in rem interest are also well known and used when of particular interest, notably for ground leases that will promote a third-party’s financing of the development of a plot of land (e.g ‘construction lease’ (bail à construction) and ‘emphytheusis’ (bail emphythéotique)). Such leasehold tenures are long-term lease agreements between 18 and 99 years.
Freeholds can be owned by one or several owners. The property is then considered an indivisible or a co-owned property. Co-ownership exists where parts of property are for the collective use of the co-owners. It is ruled by the legal co-ownership regime which governs the rights and financial obligations of the co-owners and the operating conditions of the co-ownership.
Ownership of freeholds can also be extended to volumes (similar to ‘flying freehold’ under English law) which enable a property to be ‘sliced’ into different volumes each held by a different owner independently of the others. When ‘sliced’ into different volumes, no part of the property will be for collective use and the relationship between the parties will be governed by the laws of contract as described in the ‘volume division deed’.
Apart from leasehold interests, other types of proprietary interests include easements, leases (for a term more than 3 years), tenancies (for a term less than 3 years), mortgages and beneficial interests under a trust.
There are the following types of proprietary interests:
- Ordinary ownership: this entails full ownership over a real estate asset with the owner having the right to fully and exclusively enjoy and dispose of the asset.
- Co-ownership: Co-ownership exists when various persons are joint owners of a real estate asset. Co-owners have equal rights to use the entire asset and they have to contribute to the necessary expenses in proportion to their respective interests in the property. There is a right of partition ("acción de división") of the common property, as long as such a partition does not render the property useless. In this latter case, the property would have to be sold and the proceeds distributed among the co-owners in proportion to their shares. On the other hand, co-owners have a legal right of repurchase ("retracto de comuneros") over the shares of the other co-owners, in the event that the latter wish to dispose of such shares. This right must be exercised within nine days of learning of the sale or of the registration of the sale by any third party at the Land Registry, whichever happens first.
The co-ownership may be set up by voluntary act (e.g. by purchasing a property jointly) or, more commonly, by testamentary provision.
In general terms, any act of mere administration may be carried out by a majority decision of the co-owners, but all acts involving an "alteration" to the property (e.g. sale, encumbrance) will need unanimous consent. On the other hand, the law permits the coowners to enter into an agreement stipulating that they will not divide the property for a term not exceeding ten years, extendable by agreement of the parties.
- Horizontal property: the so-called "horizontal property" (propiedad horizontal) regime is a very common form of co-ownership of property in Spain, which combines full ownership and common ownership. By means of the horizontal property regime a multi-story building is divided into several different units, fully owned by different persons, each of them representing a separate piece of the property, title to which may be recorded individually and separately at the Land Registry. The common areas serving the separate units (i.e. corridors, stairways, lobby, elevators, gardens, services, etc.) are owned jointly by all owners of the units under a condominium of owners ("comunidad de propietarios") regime.
The "comunidad de propietarios/propiedad horizontal" regime must be set up by a document (normally executed before a Notary) which will divide the property or development into separate units and will describe both the entire property or development and each of the individual units. For the document to be enforceable vis-à-vis third parties it must be registered at the Land Registry.
In contrast to the position under the co-ownership ("comunidad de bienes") regime, the members of the "comunidad de propietarios" do not have a right to request the partition of the property, since it has in effect already been divided up. On the other hand, they may sell separately or otherwise encumber their property in the respective units and the new owner will be subject to the same rights and obligations as the previous owner in relation to the enjoyment of the unit and the common areas.
In order for the owners to manage the common property, they may (and normally do) approve the by-laws ("Estatutos") establishing the general rules which govern the condominium. The by-laws must be registered at the Land Registry if they are to be enforceable vis-à-vis third parties. According to the law, the condominium of owners are managed by the owners' assembly which will have to approve most actions (repairs, improvements, services, etc.) and service charges. The owners must elect a Chairman from amongst their members and may appoint a professional manager, with no requirement for the manager to be an owner of one of the units in the building (usually an independent professional is appointed), and whose main obligations are to supervise the upkeep of the common areas and to prepare and submit for the assembly's approval the budget for annual expenses.
Condominiums of owners are not only frequent in the case of residential buildings but also in the case of commercial properties, such as shopping centres or retail parks.