This article will concern dominant and servient tenements, members of the appurtenant easement. There must be a created easement for there to be a dominant and servient tenement.
First off, what is an easement? An easement is a right to use the land of another. The holder of an easement is not permitted to occupy or control the land on which the easement sits. The holder is only entitled to the use of the easement to fulfill a specific purpose; usually to get from point A to point B.
The parcel that benefits from the creation of the easement is known as the dominant tenement. Conversely, the parcel that is burdened by the creation of the easement is known as the servient tenement. These labels make sense: The dominant tenement enjoys full use and benefit of the easement, while the servient tenement withstands only the burden of the easement.
This article is presuming that we have two abutting parcels of land. This is necessary for the establishment of a dominant and servient tenement. By contrast, the easement in gross lacks a dominant tenement. The easement in gross works like this:
Rick Phillips is the owner of a mansion abutting Lake Michigan. Rick's property sits at the end of a cul-de-sac on Wolverine Drive. His brother, Dave, lives in a broke ass hut at the end of Wolverine Drive, a run down home worth approximately 20 grand. Rick's property and Dave’s property do not abut; there are 3 lots separating their properties. The problem is that Dave has no access to Lake Michigan. Rick decides to help out. He grants Dave an exclusive 15 foot easement over and across the westerly 15 feet of his property for the purpose of giving Dave lake access.
Dave is the only person who can utilize the easement, as it is exclusive. But notice that there is no dominant tenement here. In other words, there is no particular parcel of land that benefits from Dave's easement. This easement is personal to Dave.
By contrast, we have the appurtenant easement. For the appurtenant easement to exist, there must be a dominant and servient tenement. Here is how it works.
Blackacre, owned by Hercules, abuts the west side of a public road. Whiteacre, owned by Barry Sanders, abuts the west side of Blackacre. Whiteacre has no direct access to the public road. Now, let's assume that Hercules, owner of Blackacre, grants Barry, owner of Whiteacre, an easement over the southerly 15 feet of Blackacre for the purpose of giving Barry access to the public road. Well, after this grant, what do we have?
Blackacre will be the servient tenement, as the easement runs across Blackacre. Whiteacre will be the dominant tenement, as the easement benefits Whiteacre. This is an example of a true blue appurtenant easement. The benefit and the burden of the easement will run with the successive chain of title. It will automatically flow through to future owners or tenants unless and until the easement is properly terminated.
Easements can be created in a number of ways. Drafting of a separate easement agreement is one such way. Grants or reservations in deeds are another common vehicle. Unfortunately, easements created and recited in deeds can be elusive. In our example using Hercules and Barry, an abstractor may have to search extensive land surrounding Whiteacre to locate the deed creating Whiteacre’s access right to the public road.
dave
Thursday, February 16, 2012
Sunday, January 29, 2012
The Fee Simple Upon Condition Subsequent & The Right of Re-entry
Hello everyone. Last night I saw Larry the Cable Guy at the Palace. What a show!
In the previous posting concerning the fee simple determinable and the possibility of reverter, we learned that violation of a restriction defining the fee simple determinable estate acts to automatically cut short the interest of the fee simple owner.
Similarly, the fee simple upon condition subsequent also imposes a restriction that may act to cut short the interest of the fee simple owner. However, violation of the restriction defining the fee simple upon condition subsequent does not automatically divest the interest of the fee simple owner.
Refer to the Table of Corresponding Estates displayed in the beginning of this program. You will see that the fee simple upon condition subsequent, an estate of present possession, corresponds with the right of re-entry, an estate of future possession.
To reiterate, a fee simple is made defeasible in one of three ways: (1) by the creation of a fee simple determinable, (2) by the creation of a fee simple upon condition subsequent, and (3) by the creation of a fee simple subject to executory limitation. This chapter will examine the second of these; the fee simple upon condition subsequent.
*Calculus of Estates → fee simple upon condition subsequent + right of re-entry = fee simple absolute.
The fee simple absolute represents an entire line segment. The fee simple absolute line is broken by the conveyance of a fee simple upon condition subsequent.
What is a fee simple upon condition subsequent? The fee simple upon condition subsequent can be defined as a fee simple estate that is made defeasible by a condition attached to the conveyance, which condition, if violated, creates a non-automatic right in the original grantor to re-enter and take possession of the land.
Example: Let's say that Bill Smith is the owner of Blackacre in fee simple absolute. Bill Smith then conveys Blackacre to Shirley Thomas, on condition that the land is used for residential purposes, and if the land ever ceases to be so used, the grantor may re-enter and take possession.
Discussion
The above example creates a fee simple upon condition subsequent. The conveyance from Bill to Shirley creates a right of re-entry if the property is used for other than residential purposes. The language in the conveyance is the key. For a fee simple upon condition subsequent to be created, there must be specific words which would lead a reasonable person to conclude that a right of re-entry was intended. Our example uses the phrase “on condition that the land is used for residential purposes, and if the land ever ceases to be so used, the grantor may re-enter and take possession.” The body of this sentence contains two portions, which I have represented in bold, which makes clear that the grantor intended to create a fee simple upon condition subsequent.
Now, after the conveyance of the fee simple upon condition subsequent to Shirley Thomas, we must go back to the calculus of estates to determine what new estates have been created.
*Calculus of Estates → fee simple upon condition subsequent + ?? = fee simple absolute.
We call Bill's retained interest a right of re-entry. If Shirley violates the condition, Bill may re-enter. However, Bill is not required to re-enter. It is in the discretion of Bill to either enforce the condition or waive the breach of the condition. In our example, if blackacre is continuously used for residential purposes, there will be no breach. Absent breach, Bill, or Bill’s heirs, will never be able to execute the right of re-entry. Conversely, if there is a breach, Bill, or Bill’s heirs, will be entitled, but not required, to execute the right of re-entry.
The right of re-entry is an estate of future possession that is not certain to vest. For this reason, the right of re-entry is oftentimes referred to as an estate in expectancy. The holder of the right of re-entry is expecting, but not guaranteed, to regain ownership.
Examples creating a Fee Simple Upon Condition Subsequent & Right of Re-Entry
Conveyance #1: Dave Phillips, a single man, owner if fee simple absolute, conveys blackacre to Tammy Title, on condition that the land is used for educational purposes, and if the land ever ceases to be so used, Dave and his heirs may re-enter and repossess the subject property.
State of Title: Fee simple upon condition subsequent in favor of Tammy Title with right of re-entry in favor of Dave Phillips.
If the land is subsequently used for other than educational purposes, Dave’s right of re-entry will activate. He then has the option of enforcing the right of re-entry or ignoring the breach. If he successfully enforces such right, Tammy will be ousted and Dave will once again own in fee simple absolute.
*The above conveyance is that of a fee simple upon condition subsequent. The calculus of estates is satisfied, as the fee simple upon condition subsequent and the right of re-entry add up to a fee simple absolute.
Conveyance #2: Bill Smith, a single man, owner in fee simple absolute, conveys blackacre to Shirley Thomas, on condition that the land is used for residential purposes, and if the land ever ceases to be so used, the grantor may re-enter and take possession.
State of Title: Fee simple upon condition subsequent in favor of Shirley Thomas with right of re-entry in favor of Bill Smith.
If the land is subsequently used for other than residential purposes, Bill’s right of re-entry will activate. He then has the option of enforcing the right of re-entry or ignoring the breach. If he successfully enforces such right, Shirley will be ousted and Bill will once again own in fee simple absolute.
Conveyance #3: Samantha Jones, owner in fee simple absolute, conveys blackacre to Marcia Mayfield, on condition that no liquor will be sold on the subject property, and if this condition is violated, the grantor has the right to re-enter and take possession.
State of Title: Fee simple upon condition subsequent in favor of Marcia Mayfield with right of re-entry in favor of Samantha Jones.
If liquor is subsequently sold on the property, Samantha’s right of re-entry will activate. She then has the option of enforcing the right of re-entry or ignoring the breach. If she successfully enforces such right, Marcia will be ousted and Samantha will once again own in fee simple absolute.
Conveyance #4: Bob Jones, a single man, owner in fee simple absolute, conveys to Dave Phillips, as long as the property is used as an Olympic weightlifting facility, and if this condition is violated, the grantor and his heirs may re-enter.
State of Title: Fee simple upon condition subsequent in favor of Dave Phillips with right of re-entry in favor of Bob Jones.
If Dave attempts to turn the weightlifting facility into a book store, Bob’s right of re-entry will activate. He then has the option of enforcing the right of re-entry or ignoring the breach. If he successfully enforces such right, Dave will be ousted and Bob will once again own in fee simple absolute.
Discussion
The fee simple upon condition subsequent is a bit more flexible than the fee simple determinable. If the restriction defining the fee simple upon condition subsequent is violated, the interest of the holder of the fee simple upon condition subsequent may have its interest destroyed.
Now, if the holder of the right of re-entry wants to enforce such right, he will not have the right to immediate possession of blackacre. Instead, he must file suit for recovery of possession. This is in sharp contrast to the possibility of reverter, in which possession is absolute and immediate.
Although the fee simple determinable and fee simple upon condition subsequent establish bright line rules, the possibility of ambiguity always exists. In other words, if you cannot establish what estates have been created, by discerning the language of the original conveyance, a lawsuit may be necessary to establish such estates. Again, the importance of drafting documents properly cannot be overstated. Whether someone is attempting to create a fee simple determinable or a fee simple upon condition subsequent, the intention should be clearly set forth as a recital in the deed itself. In my opinion, a proper recital would completely eliminate grounds for a challenge based on ambiguity.
NOTE: If your customer requires the termination of either a fee simple upon condition subsequent or a right of re-entry, you must ask for guidance from your particular underwriter. Your underwriter will likely have a specific set of requirements for terminating such interests.
Next week I will be posting an article on the Federal Tax Lien. Please read.
Chow,
dave
In the previous posting concerning the fee simple determinable and the possibility of reverter, we learned that violation of a restriction defining the fee simple determinable estate acts to automatically cut short the interest of the fee simple owner.
Similarly, the fee simple upon condition subsequent also imposes a restriction that may act to cut short the interest of the fee simple owner. However, violation of the restriction defining the fee simple upon condition subsequent does not automatically divest the interest of the fee simple owner.
Refer to the Table of Corresponding Estates displayed in the beginning of this program. You will see that the fee simple upon condition subsequent, an estate of present possession, corresponds with the right of re-entry, an estate of future possession.
To reiterate, a fee simple is made defeasible in one of three ways: (1) by the creation of a fee simple determinable, (2) by the creation of a fee simple upon condition subsequent, and (3) by the creation of a fee simple subject to executory limitation. This chapter will examine the second of these; the fee simple upon condition subsequent.
*Calculus of Estates → fee simple upon condition subsequent + right of re-entry = fee simple absolute.
The fee simple absolute represents an entire line segment. The fee simple absolute line is broken by the conveyance of a fee simple upon condition subsequent.
What is a fee simple upon condition subsequent? The fee simple upon condition subsequent can be defined as a fee simple estate that is made defeasible by a condition attached to the conveyance, which condition, if violated, creates a non-automatic right in the original grantor to re-enter and take possession of the land.
Example: Let's say that Bill Smith is the owner of Blackacre in fee simple absolute. Bill Smith then conveys Blackacre to Shirley Thomas, on condition that the land is used for residential purposes, and if the land ever ceases to be so used, the grantor may re-enter and take possession.
Discussion
The above example creates a fee simple upon condition subsequent. The conveyance from Bill to Shirley creates a right of re-entry if the property is used for other than residential purposes. The language in the conveyance is the key. For a fee simple upon condition subsequent to be created, there must be specific words which would lead a reasonable person to conclude that a right of re-entry was intended. Our example uses the phrase “on condition that the land is used for residential purposes, and if the land ever ceases to be so used, the grantor may re-enter and take possession.” The body of this sentence contains two portions, which I have represented in bold, which makes clear that the grantor intended to create a fee simple upon condition subsequent.
Now, after the conveyance of the fee simple upon condition subsequent to Shirley Thomas, we must go back to the calculus of estates to determine what new estates have been created.
*Calculus of Estates → fee simple upon condition subsequent + ?? = fee simple absolute.
We call Bill's retained interest a right of re-entry. If Shirley violates the condition, Bill may re-enter. However, Bill is not required to re-enter. It is in the discretion of Bill to either enforce the condition or waive the breach of the condition. In our example, if blackacre is continuously used for residential purposes, there will be no breach. Absent breach, Bill, or Bill’s heirs, will never be able to execute the right of re-entry. Conversely, if there is a breach, Bill, or Bill’s heirs, will be entitled, but not required, to execute the right of re-entry.
The right of re-entry is an estate of future possession that is not certain to vest. For this reason, the right of re-entry is oftentimes referred to as an estate in expectancy. The holder of the right of re-entry is expecting, but not guaranteed, to regain ownership.
Examples creating a Fee Simple Upon Condition Subsequent & Right of Re-Entry
Conveyance #1: Dave Phillips, a single man, owner if fee simple absolute, conveys blackacre to Tammy Title, on condition that the land is used for educational purposes, and if the land ever ceases to be so used, Dave and his heirs may re-enter and repossess the subject property.
State of Title: Fee simple upon condition subsequent in favor of Tammy Title with right of re-entry in favor of Dave Phillips.
If the land is subsequently used for other than educational purposes, Dave’s right of re-entry will activate. He then has the option of enforcing the right of re-entry or ignoring the breach. If he successfully enforces such right, Tammy will be ousted and Dave will once again own in fee simple absolute.
*The above conveyance is that of a fee simple upon condition subsequent. The calculus of estates is satisfied, as the fee simple upon condition subsequent and the right of re-entry add up to a fee simple absolute.
Conveyance #2: Bill Smith, a single man, owner in fee simple absolute, conveys blackacre to Shirley Thomas, on condition that the land is used for residential purposes, and if the land ever ceases to be so used, the grantor may re-enter and take possession.
State of Title: Fee simple upon condition subsequent in favor of Shirley Thomas with right of re-entry in favor of Bill Smith.
If the land is subsequently used for other than residential purposes, Bill’s right of re-entry will activate. He then has the option of enforcing the right of re-entry or ignoring the breach. If he successfully enforces such right, Shirley will be ousted and Bill will once again own in fee simple absolute.
Conveyance #3: Samantha Jones, owner in fee simple absolute, conveys blackacre to Marcia Mayfield, on condition that no liquor will be sold on the subject property, and if this condition is violated, the grantor has the right to re-enter and take possession.
State of Title: Fee simple upon condition subsequent in favor of Marcia Mayfield with right of re-entry in favor of Samantha Jones.
If liquor is subsequently sold on the property, Samantha’s right of re-entry will activate. She then has the option of enforcing the right of re-entry or ignoring the breach. If she successfully enforces such right, Marcia will be ousted and Samantha will once again own in fee simple absolute.
Conveyance #4: Bob Jones, a single man, owner in fee simple absolute, conveys to Dave Phillips, as long as the property is used as an Olympic weightlifting facility, and if this condition is violated, the grantor and his heirs may re-enter.
State of Title: Fee simple upon condition subsequent in favor of Dave Phillips with right of re-entry in favor of Bob Jones.
If Dave attempts to turn the weightlifting facility into a book store, Bob’s right of re-entry will activate. He then has the option of enforcing the right of re-entry or ignoring the breach. If he successfully enforces such right, Dave will be ousted and Bob will once again own in fee simple absolute.
Discussion
The fee simple upon condition subsequent is a bit more flexible than the fee simple determinable. If the restriction defining the fee simple upon condition subsequent is violated, the interest of the holder of the fee simple upon condition subsequent may have its interest destroyed.
Now, if the holder of the right of re-entry wants to enforce such right, he will not have the right to immediate possession of blackacre. Instead, he must file suit for recovery of possession. This is in sharp contrast to the possibility of reverter, in which possession is absolute and immediate.
Although the fee simple determinable and fee simple upon condition subsequent establish bright line rules, the possibility of ambiguity always exists. In other words, if you cannot establish what estates have been created, by discerning the language of the original conveyance, a lawsuit may be necessary to establish such estates. Again, the importance of drafting documents properly cannot be overstated. Whether someone is attempting to create a fee simple determinable or a fee simple upon condition subsequent, the intention should be clearly set forth as a recital in the deed itself. In my opinion, a proper recital would completely eliminate grounds for a challenge based on ambiguity.
NOTE: If your customer requires the termination of either a fee simple upon condition subsequent or a right of re-entry, you must ask for guidance from your particular underwriter. Your underwriter will likely have a specific set of requirements for terminating such interests.
Next week I will be posting an article on the Federal Tax Lien. Please read.
Chow,
dave
Tuesday, January 3, 2012
The Fee Simple Determinable & The Possibility of Reverter
The following is an excerpt from my book titled Phillips on Land Title Examination: Estates in Blackacre.
Chapter 3:
In the previous chapter concerning the life estate and the reversion, we learned that the grantor of a life estate retains a reversion in blackacre. This reversion is certain to vest upon the natural expiration of the concurrent life estate. The reversion is patient in that it waits for the death of the life tenant.
In contrast, the fee simple determinable imposes a restriction that may act to cut short the interest of the fee simple owner. If such restriction is violated, the fee simple owner immediately loses all rights.
Note: In these writings, I use the words “restriction” and “condition” interchangeably. Though there is a technical distinction between a condition and a restriction, most property practitioners treat them as if they are one in the same.
Refer to the Table of Corresponding Estates displayed in the beginning of this writing. You will see that the fee simple determinable, an estate of present possession, corresponds with the possibility of reverter, an estate of future possession.
At the end of the previous section regarding the life estate and the reversion, I asked the reader to consider the fee simple absolute as the mother ship of all our estates. The fee simple absolute is the purest form of land ownership. We learned that whenever a piece of the fee simple absolute is carved out, there is a creation of new estates.
A fee simple is made defeasible in one of three ways: (1) by the creation of a fee simple determinable, (2) by the creation of a fee simple upon condition subsequent, and (3) by the creation of a fee simple subject to executory limitation. This chapter will examine the first of these; the fee simple determinable.
*Calculus of Estates → fee simple determinable + possibility of reverter = fee simple absolute.
The fee simple absolute represents an entire line segment. The fee simple absolute line is broken by the conveyance of a fee simple determinable.
What is a fee simple determinable? A fee simple determinable is a fee simple estate that is made defeasible by a condition attached to the conveyance, which condition, if violated, triggers an automatic reversion to its original grantor. This automatic reversion makes the fee simple determinable a formidable estate. It automatically and immediately terminates the interest of the holder of the fee simple determinable.
Example: Let's say that Bill Smith is the owner of blackacre in fee simple absolute. Bill Smith then conveys blackacre to Shirley Thomas, so long as the land is used for residential purposes, and if the land ever ceases to be so used, the property shall automatically revert back to Bill Smith and his heirs, in fee simple absolute.
Discussion:
The above example creates a fee simple determinable. The conveyance from Bill to Shirley creates a right of automatic reversion if the property is used for other than residential purposes. The language in the conveyance is the key. For a fee simple determinable to be created, there must be specific words which would lead a reasonable person to conclude that an automatic reversion was intended. Our example uses the phrase “so long as the land is used for residential purposes, and if the land ever ceases to be so used, the property shall automatically revert back to Bill Smith and his heirs, in fee simple absolute.” The body of this sentence contains two portions, which I have represented in bold, which makes clear that the grantor intended to create a fee simple determinable.
Now, after the conveyance of the fee simple determinable to Shirley Thomas, we must go back to the calculus of estates to determine what new estates have been created.
*Calculus of Estates → Fee simple determinable + ?? = fee simple absolute.
We call Bill's retained interest a possibility of reverter. If Shirley violates the condition, the property will automatically revert back to Bill Smith in fee simple absolute. It is called a “possibility of reverter” because a breach of the condition attaching to the fee simple determinable is not certain to happen. In our example, if blackacre is continuously used for residential purposes, there will be no breach. Absent breach, Bill, or Bill’s heirs, will never be able to execute the possibility of reverter. Conversely, if there is a breach, Bill, or Bill’s heirs, will become the immediate owners of blackacre in fee simple absolute.
The possibility of reverter, being only a possibility, is often referred to as an estate in expectancy. The holder of the possibility of reverter is expecting, but not guaranteed, to regain ownership.
Examples Creating a Fee Simple Determinable & Possibility of Reverter:
Conveyance #1: Bill Smith, a single man, conveys blackacre to Shirley Thomas, so long as the land is used for residential purposes, and if the land ever ceases to be so used, the property shall automatically revert back to Bill Smith and his heirs, in fee simple absolute.
State of Title: Fee simple determinable in favor of Shirley Thomas with possibility of reverter in favor of Bill Smith.
If the land is subsequently used for other than residential purposes, Bill’s possibility of reverter will activate, automatically terminating the interest of Shirley. Bill will then own in fee simple absolute.
*The above conveyance is that of a fee simple determinable. The calculus of estates is satisfied, as the fee simple determinable and the possibility of reverter add up to a fee simple absolute.
Conveyance #2: Samantha Jones conveys blackacre to Marcia Mayfield, on condition that no liquor will be sold on the subject property, and if this condition is violated, the property shall immediately return to Samantha Jones.
State of Title: Fee simple determinable in favor of Marcia Mayfield with possibility of reverter in favor of Samantha Jones.
Note: The language in the above conveyance is different than that contained in the first example. However, we look to the words in the conveyance to establish the intent of the grantor. The portions on condition that and shall immediately return indicate that there is to be an automatic reversion upon breach. This would certainly establish that a fee simple determinable was intended and created.
If liquor is subsequently sold on the land, Samantha’s possibility of reverter will activate, automatically terminating the interest of Marcia. Samantha will then own in fee simple absolute.
*The above conveyance is that of a fee simple determinable. The calculus of estates is satisfied, as the fee simple determinable and the possibility of reverter add up to a fee simple absolute.
Conveyance #3: Dave Phillips, a single man, conveys blackacre to Hercules, so long as the land is used as a training facility for property professionals, and if it ever ceases to be so used, the property shall revest in Dave Phillips.
State of Title: Fee simple determinable in favor of Hercules, with possibility of reverter in favor of Dave Phillips.
If Hercules turns blackacre into a restaurant, the condition will have been violated. As a result, Dave’s possibility of reverter will activate, automatically terminating the interest of Hercules. Dave will then own in fee simple absolute.
*The above conveyance is that of a fee simple determinable. The calculus of estates is satisfied, as the fee simple determinable and the possibility of reverter add up to a fee simple absolute.
Conveyance #4: Taylor Made, the world’s best female golfer, conveys blackacre to Dave Phillips, as long as he remains unmarried, and if he marries, then the property shall immediately return to Taylor Made.
State of Title: Fee simple determinable in favor of Dave Phillips, with possibility of reverter in favor of Taylor Made.
If Dave marries, Taylor’s possibility of reverter will activate, automatically terminating the interest of Dave. Taylor will then own in fee simple absolute.
*The above conveyance is that of a fee simple determinable. The calculus of estates is satisfied, as the fee simple determinable and the possibility of reverter add up to a fee simple absolute.
Discussion:
The fee simple determinable is very harsh. If the restriction defining the fee simple determinable is violated, the interest of the holder of the determinable fee is automatically destroyed. A violation of such restriction enables the holder of the possibility of reverter to immediately possess blackacre; no court proceedings are necessary.
Concerning Title Examination:
The first step in proper title examination is to identify, with particularity, the request of the customer. In other words, what is the transaction and who are the proposed parties?
I would suggest this to you: If your state of title discloses estates other than a fee simple absolute, stop and call your applicant. The purpose of your call is twofold: 1) you want to disclose to the customer the various estates, and 2) you want clarification as to how the customer wants to proceed.
You see, a simple conversation with the customer, usually a lender, can help to insure that you produce an accurate and functional title commitment.
(Scenario #1): The Applicant is the Holder of the Fee Simple Determinable.
As a general rule, a lender is probably not going to be excited about securing its loan to an estate held in fee simple determinable. The reason is this: if the lender is forced to foreclose on the mortgage, it would be left holding title to land that is subject to a possibility of reverter. An attempted enforcement of the possibility of reverter may subsequently eliminate the interest of the lender. As a result, the lender will most likely require the termination of the possibility of reverter. In this way, the lender, upon foreclosure, would be able to take title to the entire fee simple absolute.
Given this scenario, I would place the following requirement on Schedule B-I of the Commitment:
REQUIREMENT: Record a document properly terminating the possibility of reverter, as recited on Schedule A. (Documents submitted to satisfy this requirement are subject to underwriter approval. This Commitment is subject to further requirements and exceptions)
(Scenario #2): The Applicant is the Holder of the Possibility of Reverter.
If the holder of the possibility of reverter is your applicant, chances are best that the specified contingency contained in the fee simple determinable has been violated.
Given this scenario, I would place the following requirement on Schedule B-I of the Commitment:
REQUIREMENT: Submit to the Company satisfactory evidence to establish that the specified contingency contained in the fee simple determinable has, in fact, been violated, resulting in the activation of the possibility of reverter. (Documents submitted to satisfy this requirement are subject to underwriter approval. This Commitment is subject to further requirements and exceptions)
NOTE: If your customer requires the termination of either a fee simple determinable or a possibility of reverter, you must ask for guidance from your particular underwriter. Your underwriter will likely have a specific set of requirements for terminating such interests.
Summary:
A fee simple determinable corresponds with the possibility of reverter. The name says it all. There is a possibility of reverter in favor of the original grantor. The property will not revert back unless the condition attached to the fee simple determinable is violated. Compare this to the last section in which I discussed the life estate and the reversion. There, the reversion was certain to take effect upon the death of the current life estate holder.
The next section covers the fee simple upon condition subsequent and the right of re-entry. These estates are similar in function to the fee simple determinable and the possibility of reverter, but they offer the holder of the fee simple upon condition subsequent a little more breathing room in case of a breach of condition.
dave
Chapter 3:
In the previous chapter concerning the life estate and the reversion, we learned that the grantor of a life estate retains a reversion in blackacre. This reversion is certain to vest upon the natural expiration of the concurrent life estate. The reversion is patient in that it waits for the death of the life tenant.
In contrast, the fee simple determinable imposes a restriction that may act to cut short the interest of the fee simple owner. If such restriction is violated, the fee simple owner immediately loses all rights.
Note: In these writings, I use the words “restriction” and “condition” interchangeably. Though there is a technical distinction between a condition and a restriction, most property practitioners treat them as if they are one in the same.
Refer to the Table of Corresponding Estates displayed in the beginning of this writing. You will see that the fee simple determinable, an estate of present possession, corresponds with the possibility of reverter, an estate of future possession.
At the end of the previous section regarding the life estate and the reversion, I asked the reader to consider the fee simple absolute as the mother ship of all our estates. The fee simple absolute is the purest form of land ownership. We learned that whenever a piece of the fee simple absolute is carved out, there is a creation of new estates.
A fee simple is made defeasible in one of three ways: (1) by the creation of a fee simple determinable, (2) by the creation of a fee simple upon condition subsequent, and (3) by the creation of a fee simple subject to executory limitation. This chapter will examine the first of these; the fee simple determinable.
*Calculus of Estates → fee simple determinable + possibility of reverter = fee simple absolute.
The fee simple absolute represents an entire line segment. The fee simple absolute line is broken by the conveyance of a fee simple determinable.
What is a fee simple determinable? A fee simple determinable is a fee simple estate that is made defeasible by a condition attached to the conveyance, which condition, if violated, triggers an automatic reversion to its original grantor. This automatic reversion makes the fee simple determinable a formidable estate. It automatically and immediately terminates the interest of the holder of the fee simple determinable.
Example: Let's say that Bill Smith is the owner of blackacre in fee simple absolute. Bill Smith then conveys blackacre to Shirley Thomas, so long as the land is used for residential purposes, and if the land ever ceases to be so used, the property shall automatically revert back to Bill Smith and his heirs, in fee simple absolute.
Discussion:
The above example creates a fee simple determinable. The conveyance from Bill to Shirley creates a right of automatic reversion if the property is used for other than residential purposes. The language in the conveyance is the key. For a fee simple determinable to be created, there must be specific words which would lead a reasonable person to conclude that an automatic reversion was intended. Our example uses the phrase “so long as the land is used for residential purposes, and if the land ever ceases to be so used, the property shall automatically revert back to Bill Smith and his heirs, in fee simple absolute.” The body of this sentence contains two portions, which I have represented in bold, which makes clear that the grantor intended to create a fee simple determinable.
Now, after the conveyance of the fee simple determinable to Shirley Thomas, we must go back to the calculus of estates to determine what new estates have been created.
*Calculus of Estates → Fee simple determinable + ?? = fee simple absolute.
We call Bill's retained interest a possibility of reverter. If Shirley violates the condition, the property will automatically revert back to Bill Smith in fee simple absolute. It is called a “possibility of reverter” because a breach of the condition attaching to the fee simple determinable is not certain to happen. In our example, if blackacre is continuously used for residential purposes, there will be no breach. Absent breach, Bill, or Bill’s heirs, will never be able to execute the possibility of reverter. Conversely, if there is a breach, Bill, or Bill’s heirs, will become the immediate owners of blackacre in fee simple absolute.
The possibility of reverter, being only a possibility, is often referred to as an estate in expectancy. The holder of the possibility of reverter is expecting, but not guaranteed, to regain ownership.
Examples Creating a Fee Simple Determinable & Possibility of Reverter:
Conveyance #1: Bill Smith, a single man, conveys blackacre to Shirley Thomas, so long as the land is used for residential purposes, and if the land ever ceases to be so used, the property shall automatically revert back to Bill Smith and his heirs, in fee simple absolute.
State of Title: Fee simple determinable in favor of Shirley Thomas with possibility of reverter in favor of Bill Smith.
If the land is subsequently used for other than residential purposes, Bill’s possibility of reverter will activate, automatically terminating the interest of Shirley. Bill will then own in fee simple absolute.
*The above conveyance is that of a fee simple determinable. The calculus of estates is satisfied, as the fee simple determinable and the possibility of reverter add up to a fee simple absolute.
Conveyance #2: Samantha Jones conveys blackacre to Marcia Mayfield, on condition that no liquor will be sold on the subject property, and if this condition is violated, the property shall immediately return to Samantha Jones.
State of Title: Fee simple determinable in favor of Marcia Mayfield with possibility of reverter in favor of Samantha Jones.
Note: The language in the above conveyance is different than that contained in the first example. However, we look to the words in the conveyance to establish the intent of the grantor. The portions on condition that and shall immediately return indicate that there is to be an automatic reversion upon breach. This would certainly establish that a fee simple determinable was intended and created.
If liquor is subsequently sold on the land, Samantha’s possibility of reverter will activate, automatically terminating the interest of Marcia. Samantha will then own in fee simple absolute.
*The above conveyance is that of a fee simple determinable. The calculus of estates is satisfied, as the fee simple determinable and the possibility of reverter add up to a fee simple absolute.
Conveyance #3: Dave Phillips, a single man, conveys blackacre to Hercules, so long as the land is used as a training facility for property professionals, and if it ever ceases to be so used, the property shall revest in Dave Phillips.
State of Title: Fee simple determinable in favor of Hercules, with possibility of reverter in favor of Dave Phillips.
If Hercules turns blackacre into a restaurant, the condition will have been violated. As a result, Dave’s possibility of reverter will activate, automatically terminating the interest of Hercules. Dave will then own in fee simple absolute.
*The above conveyance is that of a fee simple determinable. The calculus of estates is satisfied, as the fee simple determinable and the possibility of reverter add up to a fee simple absolute.
Conveyance #4: Taylor Made, the world’s best female golfer, conveys blackacre to Dave Phillips, as long as he remains unmarried, and if he marries, then the property shall immediately return to Taylor Made.
State of Title: Fee simple determinable in favor of Dave Phillips, with possibility of reverter in favor of Taylor Made.
If Dave marries, Taylor’s possibility of reverter will activate, automatically terminating the interest of Dave. Taylor will then own in fee simple absolute.
*The above conveyance is that of a fee simple determinable. The calculus of estates is satisfied, as the fee simple determinable and the possibility of reverter add up to a fee simple absolute.
Discussion:
The fee simple determinable is very harsh. If the restriction defining the fee simple determinable is violated, the interest of the holder of the determinable fee is automatically destroyed. A violation of such restriction enables the holder of the possibility of reverter to immediately possess blackacre; no court proceedings are necessary.
Concerning Title Examination:
The first step in proper title examination is to identify, with particularity, the request of the customer. In other words, what is the transaction and who are the proposed parties?
I would suggest this to you: If your state of title discloses estates other than a fee simple absolute, stop and call your applicant. The purpose of your call is twofold: 1) you want to disclose to the customer the various estates, and 2) you want clarification as to how the customer wants to proceed.
You see, a simple conversation with the customer, usually a lender, can help to insure that you produce an accurate and functional title commitment.
(Scenario #1): The Applicant is the Holder of the Fee Simple Determinable.
As a general rule, a lender is probably not going to be excited about securing its loan to an estate held in fee simple determinable. The reason is this: if the lender is forced to foreclose on the mortgage, it would be left holding title to land that is subject to a possibility of reverter. An attempted enforcement of the possibility of reverter may subsequently eliminate the interest of the lender. As a result, the lender will most likely require the termination of the possibility of reverter. In this way, the lender, upon foreclosure, would be able to take title to the entire fee simple absolute.
Given this scenario, I would place the following requirement on Schedule B-I of the Commitment:
REQUIREMENT: Record a document properly terminating the possibility of reverter, as recited on Schedule A. (Documents submitted to satisfy this requirement are subject to underwriter approval. This Commitment is subject to further requirements and exceptions)
(Scenario #2): The Applicant is the Holder of the Possibility of Reverter.
If the holder of the possibility of reverter is your applicant, chances are best that the specified contingency contained in the fee simple determinable has been violated.
Given this scenario, I would place the following requirement on Schedule B-I of the Commitment:
REQUIREMENT: Submit to the Company satisfactory evidence to establish that the specified contingency contained in the fee simple determinable has, in fact, been violated, resulting in the activation of the possibility of reverter. (Documents submitted to satisfy this requirement are subject to underwriter approval. This Commitment is subject to further requirements and exceptions)
NOTE: If your customer requires the termination of either a fee simple determinable or a possibility of reverter, you must ask for guidance from your particular underwriter. Your underwriter will likely have a specific set of requirements for terminating such interests.
Summary:
A fee simple determinable corresponds with the possibility of reverter. The name says it all. There is a possibility of reverter in favor of the original grantor. The property will not revert back unless the condition attached to the fee simple determinable is violated. Compare this to the last section in which I discussed the life estate and the reversion. There, the reversion was certain to take effect upon the death of the current life estate holder.
The next section covers the fee simple upon condition subsequent and the right of re-entry. These estates are similar in function to the fee simple determinable and the possibility of reverter, but they offer the holder of the fee simple upon condition subsequent a little more breathing room in case of a breach of condition.
dave
Monday, December 26, 2011
Subsurface Interests in Blackacre
Introduction:
Land consists of the surface and subsurface. The surface of land is typically the most functional layer. The surface is where the home or business rests. The surface is easily visible to the human eye. The surface is how we ambulate from point A to point B.
For all of these reasons, it is not surprising that many people never consider the fact that there is land lying beneath the surface layer - abundant land. In many instances, this subsurface land has no practical meaning. It simply functions as a part of the whole that supports the surface layer and structures constituting the real property.
But sometimes just the opposite is true. The subsurface of blackacre may be loaded with valuable oil, gas or minerals. In such an instance, the subsurface becomes extremely valuable to its owner and anyone else who can put their grubby paws on it.
In this writing, I will explore the different ways in which oil, gas and minerals can be transferred. They may be transferred by conveyance, giving the grantee an ownership interest similar to that of the fee simple. They may also be transferred by lease, such as the ever popular oil and gas lease. Either method acts to realize on the value that the subsurface has to offer. As you will learn with the oil and gas lease, the homeowner typically earns profit from its oil producing land via a lease agreement with an oil company. The oil company does all the physical work and, if oil is found, the owner receives its payment in the form of royalties. It’s really a win-win. Unless you are as strong as the Baby Hercules, I doubt many of us could drill our own oil well. Furthermore, most people never know they are sitting on oil rich land until a landman approaches them requesting a lease.
Section 1 – Severing the Interests.
A subsurface interest can be severed from a surface interest:
In the lion’s share of cases, the surface owner and subsurface owner are one in the same person. Conversely, it is possible for one person to own the surface of blackacre, while another owns all or only a portion of the subsurface.
Severance is accomplished in one of two ways: 1) by grant, or 2) by reservation. Reservation, by far, is the common way in which a severance is accomplished.
Example of severance by grant:
Dave Phillips, a single man, as owner of all of blackacre, conveys to Lael Bryant, all the oil, gas and mineral rights lying beneath blackacre.
This conveyance results in a severance of the surface and subsurface interests. Lael Bryant would now own the rights to all the oil, gas and mineral deposits, while Dave Phillips continues as owner of the surface. Oftentimes a “Mineral Deed” would be used to accomplish this task. However, any deed would suffice, as long as there exists a clear recital in the body of the deed evidencing the intention of the grantor.
Example of severance by reservation:
Melissa Woloch, as the owner of all of blackacre, conveys to Lisa Giraud, reserving unto the grantor, Melissa Woloch, and her heirs, all oil, gas and mineral rights.
This conveyance reaches the same conclusion as our first conveyance (a severance of the surface from a portion of the subsurface). The only difference is that our second example was by way of reservation, not an outright conveyance.
*Although a conveyance or reservation of oil, gas or mineral rights acts to convey ownership to its grantee, such ownership interest is not as strong as that of the fee simple absolute. As you will learn in Section 2, there are statutory provisions in Michigan that act to terminate subsurface interests if those interests are not preserved within a specified period of time. It’s sort of like “inverse adverse possession.”
Section 2 – Termination of Oil, Gas and Mineral Interests.
Once oil, gas or mineral interests are severed from the surface owner, the clock begins to tick. The owner of the subsurface interest must be attentive to its rights or suffer the consequences. Statutory provisions are typically invoked by a surface owner who is attempting to reestablish its ownership in the subsurface. It is not actually the surface owner who prevails under the statutes; rather it is the subsurface owner that loses under the statutes.
Obviously, the easiest way for a termination of a severed interest is for the subsurface owner to convey its interest back to the surface owner. Short of this, a surface owner must rely on statutory law in its attempt to regain ownership of the severed subsurface rights.
In this section I will be discussing two statutes: 1) the so-called Twenty Year Dormancy Act, and 2) the Marketable Record Title Act.
The Dormancy Act deals exclusively with severed oil and gas interests. Severed mineral interests are not subject to the Dormancy Act. Please keep this in mind, as many practitioners continue to screw this up.
The Marketable Record Title Act deals exclusively with severed mineral interests. Severed oil and gas interests are not subject to the Marketable Title Act. Please keep this in mind, as many practitioners continue to screw this up.
A proper analysis involves distinguishing these two acts. Property searchers and title examiners are never required, nor should they ever invoke a statute for the purpose of disregarding a severed interest. These statutes are used by underwriters and attorneys involved in the heat of battle. Searchers and examiners report the interest, underwriters and attorneys invoke the statutes.
The Twenty Year Dormancy Act: (Act 42 of 1963)
This act deals exclusively with termination of oil or gas interests in land.
This statute addresses the presumed abandonment of oil and gas interests owned by someone other than the surface owner. It allows for a (20) year period of dormancy, at which time the oil and/or gas interest will re-vest in the surface owner, as disclosed by (MCL 554.291) and (Land Title Standard 15.4).
Section 291 specifically states that the Dormancy Act will not apply if the owner of the oil or gas interest does any of the following within twenty (20) years after creation of the interest:
1) Sells the interest, or
2) Leases the interest, or
3) Mortgages the interest, or
4) Transfers the interest.
Additionally, a drilling permit issued within the last 20 years, or actual production or withdrawal of oil or gas from the lands will act to preserve the interest.
This list is not exhaustive, but it gives you the idea: move it or lose it.
NOTE: Numbers 1 through 4 must be filed for record at the register of deeds.
In lieu of the above, the owner of the oil or gas interest may file a simple claim of interest at the ROD to preserve their interest for an additional 20 year period (MCL 554.292).
Of course, someone attempting to invoke the Dormancy Act will have to do some additional legwork. After all, only certain things are required to be filed of public record. The issuance of a drilling permit, or the actual production or withdrawal of oil or gas would take further investigation and documentation.
Remember, the Dormancy Act only encompasses oil and gas interests that have been severed. It’s like a railroad switch: if you are dealing with severed oil and gas interests, you are dealing with the potential clash with the Dormancy Act.
The following segment concerns mineral interests. Mineral interests are not one and the same as oil and gas interests. As such, mineral interests are handled under a different statute: The Marketable Title Act.
The Marketable Record Title Act:
As used in this act, “mineral interest” means an interest in minerals in any land if the interest in minerals is owned by a person other than the owner of the surface of the land. Mineral interest does not include an interest in oil or gas or an interest in sand, gravel, limestone, clay, or marl.
(MCL 565.101) reads, in part: “Any person, having the legal capacity to own land in this state, who has an unbroken chain of title of record to any interest in land for 20 years for mineral interests and 40 years for other interests, shall at the end of the applicable period be considered to have a marketable record title to that interest . . . .”
Most in the industry are familiar with the concept of “40 year marketable title.” This frequently comes into play when we are dealing with a fee simple interest of the surface owner. So this statute makes it easy to apply to mineral interests. We simply put 20 years in the place of 40 and perform the proper analysis.
The Marketable Title Act differs dramatically from the Dormancy Act in one way. The Marketable Title Act looks to create an interest after the expiration of 20 years, while the Dormancy Act looks to terminate an interest after the expiration of 20 years.
Section 2: Summary
Subsurface interests can be severed from the surface. This is accomplished by grant or reservation. Once severed, simply identify what interest has been severed. If it is oil and or gas, it will be subject to the Dormancy Act. If it is a mineral interest, as defined by statute, it will be subject to the Marketable Title Act.
In transition, parties are not always interested in owning a subsurface interest. In the case of oil and gas production, an oil company wants access to property for the purpose of drilling and exploration. If oil is found, the oil company takes its share and remits a portion of the earnings to the homeowner in the form of a royalty payment.
Section 3 - The Oil and Gas Lease.
An oil company will aggressively approach a property owner when it believes that valuable oil or gas may be sitting beneath the owner’s surface. An “Oil and Gas Lease” is often procured by the oil company in an attempt to accomplish its goal.
Oftentimes, an oil company will procure numerous leases from numerous landowners in a common area. In this instance they may choose to pool the leases in a so-called “pooling agreement.” This allows the oil company much more freedom in its exploration.
Example: Lot 1 and Lot 8 are part of the same pooling agreement. The oil company begins drilling on Lot 1, which drilling extends underground to Lot 8. It is under Lot 8 that the oil is found. The cool thing about a pooling agreement is that regardless of the land on which the drilling is commenced, the underground exploration can extend tremendous distances under the surface. It’s like a giant arm probing beneath the surface.
If production of oil is accomplished, the various members (property owners) of the pooling agreement will be subject to a “Division Order.” This order is a mathematical equation designed to pay royalties to an owner whose land is producing.
Termination of the Oil and Gas Lease:
The lease itself will expire in one of three (3) ways:
1) By expiration of its primary term;
2) By voluntary release by the lessee; or
3) If under production, by cessation of production.
Now, if a lease is not properly released of record, it may be necessary for the owner to take advantage of Michigan’s statutory procedures to accomplish this task.
Statutory Termination of Oil and Gas Lease, as set forth in Act 81 of 1929, as follows:
The owner must serve upon the lessee, in person or by registered mail, or by publication, for three (3) consecutive weeks in the county where the land is situated. This notice must state that the surface owner considers the lease terminated (MCL 554.281)
The owner MUST wait 30 days after first giving notice before filing with the register of deeds an affidavit setting forth (see page 2 of 554.281), along with a copy of the notice served on the lessee.
If, within 30 days of filing of the affidavit, the register of deeds does not here from the lessee, the clerk shall record the affidavit and the oil and gas lease will be legally terminated.
A reading of the statute shows that there is a 60 day period between first giving notice to the lessee and the effectual termination of the oil and gas lease.
Summary:
You may find it interesting that Michigan ranks 17th in the United States in oil and gas production, nearly 2 billion dollars a year. It is serious business and very competitive business. That’s what we should all desire, the chance to compete.
This writing concerned the severance of oil, gas and mineral rights from the surface. Remember that a proper analysis requires first determining what interest has been severed and how was it severed. In other words, are you looking at a transfer of ownership or are you looking at a lease?
When analyzing interests, it is beneficial to use the following checklist:
First, establish what interest was actually transferred.
1) Is it a transfer in ownership of oil and gas? If the answer is affirmative, this transfer will be subject to the Dormancy Act.
2) Is it a transfer of mineral interests? If the answer is affirmative, this transfer will be subject to the Marketable Title Act.
3) Is it a transfer via an oil and gas lease? If the answer is affirmative, statutory provisions exist that give the owner or original lessor power to terminate the lease, of record, short of a voluntary termination from the original lessee.
And remember to distinguish the Dormancy Act, which acts to terminate an interest, from the Marketable Title Act, which acts to create an interest. Very important stuff regarding proper analysis.
Some of the information incorporated in this writing was obtained from a recent meeting of the Michigan Land Title Association (MLTA).
That completes my brief overview of subsurface interests.
dave
Land consists of the surface and subsurface. The surface of land is typically the most functional layer. The surface is where the home or business rests. The surface is easily visible to the human eye. The surface is how we ambulate from point A to point B.
For all of these reasons, it is not surprising that many people never consider the fact that there is land lying beneath the surface layer - abundant land. In many instances, this subsurface land has no practical meaning. It simply functions as a part of the whole that supports the surface layer and structures constituting the real property.
But sometimes just the opposite is true. The subsurface of blackacre may be loaded with valuable oil, gas or minerals. In such an instance, the subsurface becomes extremely valuable to its owner and anyone else who can put their grubby paws on it.
In this writing, I will explore the different ways in which oil, gas and minerals can be transferred. They may be transferred by conveyance, giving the grantee an ownership interest similar to that of the fee simple. They may also be transferred by lease, such as the ever popular oil and gas lease. Either method acts to realize on the value that the subsurface has to offer. As you will learn with the oil and gas lease, the homeowner typically earns profit from its oil producing land via a lease agreement with an oil company. The oil company does all the physical work and, if oil is found, the owner receives its payment in the form of royalties. It’s really a win-win. Unless you are as strong as the Baby Hercules, I doubt many of us could drill our own oil well. Furthermore, most people never know they are sitting on oil rich land until a landman approaches them requesting a lease.
Section 1 – Severing the Interests.
A subsurface interest can be severed from a surface interest:
In the lion’s share of cases, the surface owner and subsurface owner are one in the same person. Conversely, it is possible for one person to own the surface of blackacre, while another owns all or only a portion of the subsurface.
Severance is accomplished in one of two ways: 1) by grant, or 2) by reservation. Reservation, by far, is the common way in which a severance is accomplished.
Example of severance by grant:
Dave Phillips, a single man, as owner of all of blackacre, conveys to Lael Bryant, all the oil, gas and mineral rights lying beneath blackacre.
This conveyance results in a severance of the surface and subsurface interests. Lael Bryant would now own the rights to all the oil, gas and mineral deposits, while Dave Phillips continues as owner of the surface. Oftentimes a “Mineral Deed” would be used to accomplish this task. However, any deed would suffice, as long as there exists a clear recital in the body of the deed evidencing the intention of the grantor.
Example of severance by reservation:
Melissa Woloch, as the owner of all of blackacre, conveys to Lisa Giraud, reserving unto the grantor, Melissa Woloch, and her heirs, all oil, gas and mineral rights.
This conveyance reaches the same conclusion as our first conveyance (a severance of the surface from a portion of the subsurface). The only difference is that our second example was by way of reservation, not an outright conveyance.
*Although a conveyance or reservation of oil, gas or mineral rights acts to convey ownership to its grantee, such ownership interest is not as strong as that of the fee simple absolute. As you will learn in Section 2, there are statutory provisions in Michigan that act to terminate subsurface interests if those interests are not preserved within a specified period of time. It’s sort of like “inverse adverse possession.”
Section 2 – Termination of Oil, Gas and Mineral Interests.
Once oil, gas or mineral interests are severed from the surface owner, the clock begins to tick. The owner of the subsurface interest must be attentive to its rights or suffer the consequences. Statutory provisions are typically invoked by a surface owner who is attempting to reestablish its ownership in the subsurface. It is not actually the surface owner who prevails under the statutes; rather it is the subsurface owner that loses under the statutes.
Obviously, the easiest way for a termination of a severed interest is for the subsurface owner to convey its interest back to the surface owner. Short of this, a surface owner must rely on statutory law in its attempt to regain ownership of the severed subsurface rights.
In this section I will be discussing two statutes: 1) the so-called Twenty Year Dormancy Act, and 2) the Marketable Record Title Act.
The Dormancy Act deals exclusively with severed oil and gas interests. Severed mineral interests are not subject to the Dormancy Act. Please keep this in mind, as many practitioners continue to screw this up.
The Marketable Record Title Act deals exclusively with severed mineral interests. Severed oil and gas interests are not subject to the Marketable Title Act. Please keep this in mind, as many practitioners continue to screw this up.
A proper analysis involves distinguishing these two acts. Property searchers and title examiners are never required, nor should they ever invoke a statute for the purpose of disregarding a severed interest. These statutes are used by underwriters and attorneys involved in the heat of battle. Searchers and examiners report the interest, underwriters and attorneys invoke the statutes.
The Twenty Year Dormancy Act: (Act 42 of 1963)
This act deals exclusively with termination of oil or gas interests in land.
This statute addresses the presumed abandonment of oil and gas interests owned by someone other than the surface owner. It allows for a (20) year period of dormancy, at which time the oil and/or gas interest will re-vest in the surface owner, as disclosed by (MCL 554.291) and (Land Title Standard 15.4).
Section 291 specifically states that the Dormancy Act will not apply if the owner of the oil or gas interest does any of the following within twenty (20) years after creation of the interest:
1) Sells the interest, or
2) Leases the interest, or
3) Mortgages the interest, or
4) Transfers the interest.
Additionally, a drilling permit issued within the last 20 years, or actual production or withdrawal of oil or gas from the lands will act to preserve the interest.
This list is not exhaustive, but it gives you the idea: move it or lose it.
NOTE: Numbers 1 through 4 must be filed for record at the register of deeds.
In lieu of the above, the owner of the oil or gas interest may file a simple claim of interest at the ROD to preserve their interest for an additional 20 year period (MCL 554.292).
Of course, someone attempting to invoke the Dormancy Act will have to do some additional legwork. After all, only certain things are required to be filed of public record. The issuance of a drilling permit, or the actual production or withdrawal of oil or gas would take further investigation and documentation.
Remember, the Dormancy Act only encompasses oil and gas interests that have been severed. It’s like a railroad switch: if you are dealing with severed oil and gas interests, you are dealing with the potential clash with the Dormancy Act.
The following segment concerns mineral interests. Mineral interests are not one and the same as oil and gas interests. As such, mineral interests are handled under a different statute: The Marketable Title Act.
The Marketable Record Title Act:
As used in this act, “mineral interest” means an interest in minerals in any land if the interest in minerals is owned by a person other than the owner of the surface of the land. Mineral interest does not include an interest in oil or gas or an interest in sand, gravel, limestone, clay, or marl.
(MCL 565.101) reads, in part: “Any person, having the legal capacity to own land in this state, who has an unbroken chain of title of record to any interest in land for 20 years for mineral interests and 40 years for other interests, shall at the end of the applicable period be considered to have a marketable record title to that interest . . . .”
Most in the industry are familiar with the concept of “40 year marketable title.” This frequently comes into play when we are dealing with a fee simple interest of the surface owner. So this statute makes it easy to apply to mineral interests. We simply put 20 years in the place of 40 and perform the proper analysis.
The Marketable Title Act differs dramatically from the Dormancy Act in one way. The Marketable Title Act looks to create an interest after the expiration of 20 years, while the Dormancy Act looks to terminate an interest after the expiration of 20 years.
Section 2: Summary
Subsurface interests can be severed from the surface. This is accomplished by grant or reservation. Once severed, simply identify what interest has been severed. If it is oil and or gas, it will be subject to the Dormancy Act. If it is a mineral interest, as defined by statute, it will be subject to the Marketable Title Act.
In transition, parties are not always interested in owning a subsurface interest. In the case of oil and gas production, an oil company wants access to property for the purpose of drilling and exploration. If oil is found, the oil company takes its share and remits a portion of the earnings to the homeowner in the form of a royalty payment.
Section 3 - The Oil and Gas Lease.
An oil company will aggressively approach a property owner when it believes that valuable oil or gas may be sitting beneath the owner’s surface. An “Oil and Gas Lease” is often procured by the oil company in an attempt to accomplish its goal.
Oftentimes, an oil company will procure numerous leases from numerous landowners in a common area. In this instance they may choose to pool the leases in a so-called “pooling agreement.” This allows the oil company much more freedom in its exploration.
Example: Lot 1 and Lot 8 are part of the same pooling agreement. The oil company begins drilling on Lot 1, which drilling extends underground to Lot 8. It is under Lot 8 that the oil is found. The cool thing about a pooling agreement is that regardless of the land on which the drilling is commenced, the underground exploration can extend tremendous distances under the surface. It’s like a giant arm probing beneath the surface.
If production of oil is accomplished, the various members (property owners) of the pooling agreement will be subject to a “Division Order.” This order is a mathematical equation designed to pay royalties to an owner whose land is producing.
Termination of the Oil and Gas Lease:
The lease itself will expire in one of three (3) ways:
1) By expiration of its primary term;
2) By voluntary release by the lessee; or
3) If under production, by cessation of production.
Now, if a lease is not properly released of record, it may be necessary for the owner to take advantage of Michigan’s statutory procedures to accomplish this task.
Statutory Termination of Oil and Gas Lease, as set forth in Act 81 of 1929, as follows:
The owner must serve upon the lessee, in person or by registered mail, or by publication, for three (3) consecutive weeks in the county where the land is situated. This notice must state that the surface owner considers the lease terminated (MCL 554.281)
The owner MUST wait 30 days after first giving notice before filing with the register of deeds an affidavit setting forth (see page 2 of 554.281), along with a copy of the notice served on the lessee.
If, within 30 days of filing of the affidavit, the register of deeds does not here from the lessee, the clerk shall record the affidavit and the oil and gas lease will be legally terminated.
A reading of the statute shows that there is a 60 day period between first giving notice to the lessee and the effectual termination of the oil and gas lease.
Summary:
You may find it interesting that Michigan ranks 17th in the United States in oil and gas production, nearly 2 billion dollars a year. It is serious business and very competitive business. That’s what we should all desire, the chance to compete.
This writing concerned the severance of oil, gas and mineral rights from the surface. Remember that a proper analysis requires first determining what interest has been severed and how was it severed. In other words, are you looking at a transfer of ownership or are you looking at a lease?
When analyzing interests, it is beneficial to use the following checklist:
First, establish what interest was actually transferred.
1) Is it a transfer in ownership of oil and gas? If the answer is affirmative, this transfer will be subject to the Dormancy Act.
2) Is it a transfer of mineral interests? If the answer is affirmative, this transfer will be subject to the Marketable Title Act.
3) Is it a transfer via an oil and gas lease? If the answer is affirmative, statutory provisions exist that give the owner or original lessor power to terminate the lease, of record, short of a voluntary termination from the original lessee.
And remember to distinguish the Dormancy Act, which acts to terminate an interest, from the Marketable Title Act, which acts to create an interest. Very important stuff regarding proper analysis.
Some of the information incorporated in this writing was obtained from a recent meeting of the Michigan Land Title Association (MLTA).
That completes my brief overview of subsurface interests.
dave
Friday, December 9, 2011
Michigan's Construction Lien Act: (Part 4)
This segment represents the final segment in a four part series analyzing the Michigan Construction Lien Act (CLA). I hope you find this compilation helpful.
Our original cast of characters:
Owner: Hercules
Contractor: Musclehead Building Corporation (Musclehead)
Subcontractor: Fritz Concrete Company (Fritz)
Insane Author: Dave Phillips of Lonely Boy, LLC
In review:
Part 1 concerned the Notice of Commencement (NOC). The NOC is typically posted on the property. It must also be recorded in a commercial context. Residential NOC's may be recorded, but is not required by statute. The NOC is just as its name implies. It is a notice to relevant parties that work is about to commence. If you are an interested party, the NOC contains relevant information, the most important being the listing of the designee.
Part 2 concerned the Notice of Furnishing (NOF). A subcontractor or supplier who contracts to provide an improvement to real property shall provide a NOF to the designee and the general contractor, if any, as named in the NOC within 20 days after furnishing the first labor or material. The NOF is how the owner learns of the presence of the subcontractor. A NOF must be filed before a lien will be effectual.
Part 3 concerned the Sworn Statement and Waiver (sworn statements and waivers). A sworn statement issued by a contractor will list all parties under contract with the contractor that are still owed money. Based upon this statement, the owner or other interested parties may obtain the proper waivers. The sworn statement must be furnished before money can be collected, or a complaint filed, in an attempt to enforce a lien filed pursuant thereto.
The Lien:
Musclehead has completed its work. It requests final payment and submits its sworn statement to Hercules. Unfortunately, Hercules is not in a position to make final payment. Evidently he lost a "quarter bounce" competition at the local Mr. B's in Royal Oak. This resulted in substantial loss of money and a loss of his lunch in the process.
Anyhow, Musclehead decides to file its lien in an attempt to protect its financial position. What are the criteria for filing?
(We start in MCL 570.1111)
(1) Notwithstanding section 109, the right of a contractor, subcontractor, laborer, or supplier to a construction lien created by this act shall cease to exist unless, within 90 days after the lien claimant's last furnishing of labor or material for the improvement, pursuant to the lien claimant's contract, a claim of lien is recorded in the office of the register of deeds for each county where the real property to which the improvement was made is located. A claim of lien shall be valid only as to the real property described in the claim of lien and located within the county where the claim of lien has been recorded.
(5) Each contractor, subcontractor, supplier, laborer, or agent of a group of laborers authorized under subsection (6) recording a claim of lien, within 15 days after the date of the recording, shall serve on the designee personally or by certified mail, return receipt requested, at the address shown on the notice of commencement, a copy of the claim of lien and a copy of any proof of service recorded in connection with the claim of lien. If a designee has not been named in the notice of commencement, or if the designee has died, service shall be made upon the owner or lessee named in the notice of commencement. If the service is made by certified mail, service is complete upon mailing. Proof of making the service shall be attached to any complaint, cross-claim, or counterclaim filed to enforce a construction lien.
The heart of Section 1 is that the lien claimant's right to a construction lien shall cease to exists unless it records its lien within 90 days after completing the work.
The heart of Section 5 is that the lien claimant must serve upon the designee or owner, a copy of the recorded lien, within 15 days of its recording. Proof of service must be attached to a complaint to foreclose. You see, serving the designee or owner with a copy of the lien is a condition precedent to lien foreclosure.
(We move to MCL 570.1116)
(1) The claim of lien of a contractor, subcontractor, supplier, or laborer may at any time be vacated and discharged if a bond, with the lien claimant as obligee, is filed with the county clerk for the county in which the property covered by the lien is located and a copy is given to the obligee lien claimant.
If a bond is properly positioned, there is no need for a lien. The clerk will notify the lien holder that a bond has been filed. The lien claimant has 10 days to object to the validity of the bond. If no objection is received, the clerk will record a certificate that a good and sufficient bond has been filed in accordance with the CLA. Once recorded, this acts to discharge the relevant lien.
(We move to MCL 570.1117)
(1) Proceedings for the enforcement of a construction lien and the foreclosure of any interests subject to the construction lien shall not be brought later than 1 year after the date the claim of lien was recorded.
(2) At the time of commencing an action for the enforcement of a construction lien through foreclosure, the plaintiff shall record a notice of lis pendens with respect to the action in the office of the register of deeds for the county in which the real property involved in the action is located.
I want to draw your attention to a point of detail. Section 1 tells us that proceedings to enforce the lien must be brought within one year of its recording. Section 2 tells us that a lis pendens must be filed concerning such actions. Many people, in reading these two sections, consider a lien as having expired after the one year period, unless a lis pendens is filed within this one year period. However, let me use an example to show how this assumption may be false:
Lien recorded January 1, 2010. A complaint to foreclose is filed December 15, 2010. But the lis pendens is not of record until January 20, 2011, after the one year period. Although there is no record activity within the one year frame, both segments of the statute have been satisfied. Action was commenced within the one year frame and a notice of lis pendens was recorded concerning the cause of action. Sneaky, but true.
(We move to 570.1119)
(3) A construction lien arising under this act shall take priority over all other interests, liens, or encumbrances which may attach to the building, structure, or improvement, or upon the real property on which the building, structure, or improvement is erected when the other interests, liens, or encumbrances are recorded subsequent to the first actual physical improvement.
(4) A mortgage, lien, encumbrance, or other interest recorded before the first actual physical improvement to real property shall have priority over a construction lien arising under this act. The priority of the mortgage shall exist as to all obligations secured by the mortgage except for indebtedness arising out of advances made subsequent to the first actual physical improvement. An advance made pursuant to the mortgage, but subsequent to the first actual physical improvement shall have priority over a construction lien if, for that advance, the mortgagee has received a contractor's sworn statement as provided in section 110, has made disbursements pursuant to the contractor's sworn statement, and has received waivers of lien from the contractor and all subcontractors, laborers, and suppliers who have provided notices of furnishing.
These two sections concern the doctrine of "relation back." It's a clever and sneaky little warrior that can catch many by surprise. In the context of the CLA, let me use an example to show how relation back works:
May 1, 2010, Musclehead begins work on Lot 1 of Phillips Subdivision.
June 1, 2010, Rocket Man Mortgage Company records its mortgage as to Lot 1.
September 1, 2010, Musclehead records its lien at the Oakland County ROD.
Relation Back: Although Rocket Man has recorded its mortgage prior to Musclehead's lien, Musclehead's lien will relate back to May 1, 2010, the first date of improvement, in establishing priority. Musclehead wins. This is exactly why a recorded Notice of Commencement must be reported. In essence, the NOC is a warning bell to a subsequent lienholder that the doctrine of relation back may be looming. Just my opinion.
I apologize for the lengthy writing, but please hang on; we're almost there.
(We move to 570.1128), the final section:
If any statement or claim of lien has been recorded in the office of a register of deeds, and the time within which proceedings to enforce the lien through foreclosure has elapsed without commencement of the proceedings, a person with an interest in the real property affected by the lien, or that person's agent or attorney, may make and present to the county clerk of the county in which the statement or claim of lien was recorded, an affidavit showing the time when the statement or claim of lien was recorded and the names of the parties to the statement or claim of lien. The county clerk shall examine the records of his or her office, and if it appears that proceedings to enforce the lien have not been commenced with the time provided by law, the county clerk shall execute and deliver to the owner a certificate of that fact, bearing the seal of the circuit court. The certificate may be recorded in the office of the register of deeds for the county where the statement or claim of lien was recorded, after which the statement or claim of lien shall have no effect.
This section simply cleans up the loose ends regarding attempted enforcement of a lien. It clears up all the issues I discussed concerning 570.1117. The certificate allows parties to move forward without the cloud of potential litigation.
Summary:
This concludes my overview of the CLA. I extracted portions of the CLA that I feel are relevant to most practitioners, excluding attorneys. Attorneys dealing with the CLA on a day to day basis have much more knowledge than I have. Therefore, this compilation is not designed to address the practice of law in this area.
The world of the CLA encompasses the Notice of Commencement, the Notice of Furnishing; the Sworn Statement; the Waiver; the recording of Lien; and the Lis Pendens. After an action to enforce a lien is filed, it becomes the issue of the Circuit Court. The CLA only functions to establish a valid lien. If the requirements of the CLA are not satisfied, there is no lien on which to collect or foreclose.
Post lien filing, the CLA establishes a one year expiration of the lien when no action to enforce has been commenced. The CLA also allows for the issuance of a certificate designed to properly end the life of the lien.
Thanks for reading, and please view my blog as often as possible. I have a lot of new ideas, such as audio recordings and numerous other topics. This might just be ready to explode.
dave
Our original cast of characters:
Owner: Hercules
Contractor: Musclehead Building Corporation (Musclehead)
Subcontractor: Fritz Concrete Company (Fritz)
Insane Author: Dave Phillips of Lonely Boy, LLC
In review:
Part 1 concerned the Notice of Commencement (NOC). The NOC is typically posted on the property. It must also be recorded in a commercial context. Residential NOC's may be recorded, but is not required by statute. The NOC is just as its name implies. It is a notice to relevant parties that work is about to commence. If you are an interested party, the NOC contains relevant information, the most important being the listing of the designee.
Part 2 concerned the Notice of Furnishing (NOF). A subcontractor or supplier who contracts to provide an improvement to real property shall provide a NOF to the designee and the general contractor, if any, as named in the NOC within 20 days after furnishing the first labor or material. The NOF is how the owner learns of the presence of the subcontractor. A NOF must be filed before a lien will be effectual.
Part 3 concerned the Sworn Statement and Waiver (sworn statements and waivers). A sworn statement issued by a contractor will list all parties under contract with the contractor that are still owed money. Based upon this statement, the owner or other interested parties may obtain the proper waivers. The sworn statement must be furnished before money can be collected, or a complaint filed, in an attempt to enforce a lien filed pursuant thereto.
The Lien:
Musclehead has completed its work. It requests final payment and submits its sworn statement to Hercules. Unfortunately, Hercules is not in a position to make final payment. Evidently he lost a "quarter bounce" competition at the local Mr. B's in Royal Oak. This resulted in substantial loss of money and a loss of his lunch in the process.
Anyhow, Musclehead decides to file its lien in an attempt to protect its financial position. What are the criteria for filing?
(We start in MCL 570.1111)
(1) Notwithstanding section 109, the right of a contractor, subcontractor, laborer, or supplier to a construction lien created by this act shall cease to exist unless, within 90 days after the lien claimant's last furnishing of labor or material for the improvement, pursuant to the lien claimant's contract, a claim of lien is recorded in the office of the register of deeds for each county where the real property to which the improvement was made is located. A claim of lien shall be valid only as to the real property described in the claim of lien and located within the county where the claim of lien has been recorded.
(5) Each contractor, subcontractor, supplier, laborer, or agent of a group of laborers authorized under subsection (6) recording a claim of lien, within 15 days after the date of the recording, shall serve on the designee personally or by certified mail, return receipt requested, at the address shown on the notice of commencement, a copy of the claim of lien and a copy of any proof of service recorded in connection with the claim of lien. If a designee has not been named in the notice of commencement, or if the designee has died, service shall be made upon the owner or lessee named in the notice of commencement. If the service is made by certified mail, service is complete upon mailing. Proof of making the service shall be attached to any complaint, cross-claim, or counterclaim filed to enforce a construction lien.
The heart of Section 1 is that the lien claimant's right to a construction lien shall cease to exists unless it records its lien within 90 days after completing the work.
The heart of Section 5 is that the lien claimant must serve upon the designee or owner, a copy of the recorded lien, within 15 days of its recording. Proof of service must be attached to a complaint to foreclose. You see, serving the designee or owner with a copy of the lien is a condition precedent to lien foreclosure.
(We move to MCL 570.1116)
(1) The claim of lien of a contractor, subcontractor, supplier, or laborer may at any time be vacated and discharged if a bond, with the lien claimant as obligee, is filed with the county clerk for the county in which the property covered by the lien is located and a copy is given to the obligee lien claimant.
If a bond is properly positioned, there is no need for a lien. The clerk will notify the lien holder that a bond has been filed. The lien claimant has 10 days to object to the validity of the bond. If no objection is received, the clerk will record a certificate that a good and sufficient bond has been filed in accordance with the CLA. Once recorded, this acts to discharge the relevant lien.
(We move to MCL 570.1117)
(1) Proceedings for the enforcement of a construction lien and the foreclosure of any interests subject to the construction lien shall not be brought later than 1 year after the date the claim of lien was recorded.
(2) At the time of commencing an action for the enforcement of a construction lien through foreclosure, the plaintiff shall record a notice of lis pendens with respect to the action in the office of the register of deeds for the county in which the real property involved in the action is located.
I want to draw your attention to a point of detail. Section 1 tells us that proceedings to enforce the lien must be brought within one year of its recording. Section 2 tells us that a lis pendens must be filed concerning such actions. Many people, in reading these two sections, consider a lien as having expired after the one year period, unless a lis pendens is filed within this one year period. However, let me use an example to show how this assumption may be false:
Lien recorded January 1, 2010. A complaint to foreclose is filed December 15, 2010. But the lis pendens is not of record until January 20, 2011, after the one year period. Although there is no record activity within the one year frame, both segments of the statute have been satisfied. Action was commenced within the one year frame and a notice of lis pendens was recorded concerning the cause of action. Sneaky, but true.
(We move to 570.1119)
(3) A construction lien arising under this act shall take priority over all other interests, liens, or encumbrances which may attach to the building, structure, or improvement, or upon the real property on which the building, structure, or improvement is erected when the other interests, liens, or encumbrances are recorded subsequent to the first actual physical improvement.
(4) A mortgage, lien, encumbrance, or other interest recorded before the first actual physical improvement to real property shall have priority over a construction lien arising under this act. The priority of the mortgage shall exist as to all obligations secured by the mortgage except for indebtedness arising out of advances made subsequent to the first actual physical improvement. An advance made pursuant to the mortgage, but subsequent to the first actual physical improvement shall have priority over a construction lien if, for that advance, the mortgagee has received a contractor's sworn statement as provided in section 110, has made disbursements pursuant to the contractor's sworn statement, and has received waivers of lien from the contractor and all subcontractors, laborers, and suppliers who have provided notices of furnishing.
These two sections concern the doctrine of "relation back." It's a clever and sneaky little warrior that can catch many by surprise. In the context of the CLA, let me use an example to show how relation back works:
May 1, 2010, Musclehead begins work on Lot 1 of Phillips Subdivision.
June 1, 2010, Rocket Man Mortgage Company records its mortgage as to Lot 1.
September 1, 2010, Musclehead records its lien at the Oakland County ROD.
Relation Back: Although Rocket Man has recorded its mortgage prior to Musclehead's lien, Musclehead's lien will relate back to May 1, 2010, the first date of improvement, in establishing priority. Musclehead wins. This is exactly why a recorded Notice of Commencement must be reported. In essence, the NOC is a warning bell to a subsequent lienholder that the doctrine of relation back may be looming. Just my opinion.
I apologize for the lengthy writing, but please hang on; we're almost there.
(We move to 570.1128), the final section:
If any statement or claim of lien has been recorded in the office of a register of deeds, and the time within which proceedings to enforce the lien through foreclosure has elapsed without commencement of the proceedings, a person with an interest in the real property affected by the lien, or that person's agent or attorney, may make and present to the county clerk of the county in which the statement or claim of lien was recorded, an affidavit showing the time when the statement or claim of lien was recorded and the names of the parties to the statement or claim of lien. The county clerk shall examine the records of his or her office, and if it appears that proceedings to enforce the lien have not been commenced with the time provided by law, the county clerk shall execute and deliver to the owner a certificate of that fact, bearing the seal of the circuit court. The certificate may be recorded in the office of the register of deeds for the county where the statement or claim of lien was recorded, after which the statement or claim of lien shall have no effect.
This section simply cleans up the loose ends regarding attempted enforcement of a lien. It clears up all the issues I discussed concerning 570.1117. The certificate allows parties to move forward without the cloud of potential litigation.
Summary:
This concludes my overview of the CLA. I extracted portions of the CLA that I feel are relevant to most practitioners, excluding attorneys. Attorneys dealing with the CLA on a day to day basis have much more knowledge than I have. Therefore, this compilation is not designed to address the practice of law in this area.
The world of the CLA encompasses the Notice of Commencement, the Notice of Furnishing; the Sworn Statement; the Waiver; the recording of Lien; and the Lis Pendens. After an action to enforce a lien is filed, it becomes the issue of the Circuit Court. The CLA only functions to establish a valid lien. If the requirements of the CLA are not satisfied, there is no lien on which to collect or foreclose.
Post lien filing, the CLA establishes a one year expiration of the lien when no action to enforce has been commenced. The CLA also allows for the issuance of a certificate designed to properly end the life of the lien.
Thanks for reading, and please view my blog as often as possible. I have a lot of new ideas, such as audio recordings and numerous other topics. This might just be ready to explode.
dave
Sunday, December 4, 2011
Michigan's Construction Lien Act: (Part 3)
In this article, part 3 of a series concerning the Michigan Construction Lien Act, I will be discussing two segments that are closely related: 1) Sworn Statement, and 2) Waiver of Construction Lien. These are often collectively referred to as "Sworn Statements and Waivers."
Before I begin, I would like to remind the reader of a few things. Remember that a contractor contracts directly with the owner. The subcontractor contracts with the contractor to perform a portion of the contractor's overall contract with the owner. There may exist multiple mini-contracts between multiple parties, all designed to satisfy the original contract between the general contractor and the owner.
Section 570.1110 contains the statutory provisions regarding the sworn statement.
The sworn statement is a very practical device that is used to identify all contracting parties that remain unpaid as of the date the sworn statement is issued. The owner may rely on the statement, as issued by the contractor or subcontractor.
The contractor or subcontractor must supply a sworn statement to the owner when a request for payment is made.
The typical scenario is this: The general contractor has completed a portion of the overall contract with the owner and is now requesting partial payment from the owner. To accomplish this, the general contractor will prepare and submit a sworn statement to the owner. The sworn statement will display to the owner who is still owed money, if any that be.
Now, don't forget, there may be one or more subcontractors on the job. If the subcontractors have engaged contracts of their own, each subcontractor will have to supply a sworn statement as well. The owner wants to know who, if any, remain unpaid.
The owner wants to avoid construction lien(s) being placed on their property. They do this by utilizing Section 570.1115, which contains the statutory provisions regarding waiver of construction lien.
A lien claimant who receives FULL payment for his or her contract shall provide to the owner, lessee, or designee a full unconditional waiver of lien.
A lien claimant who receives PARTIAL payment for his or her contract shall provide to the owner, lessee, or designee a partial unconditional waiver of the lien for the amount which the lien claimant has received, if the owner, lessee, or designee requests the partial unconditional waiver.
A partial conditional waiver of lien or a full conditional waiver of lien shall be effective upon payment of the amount indicated in the waiver.
As disclosed, waivers come in the following forms:
1) Full unconditional waiver;
2) Full conditional waiver;
3) Partial unconditional waiver; and
4) Partial conditional waiver.
The conditional waivers are conditioned on the payment of a specific amount of money. When that money is paid, the lien rights will be waived up to the date of waiver.
Summary:
Sworn statements and waivers are highly utilized by title agencies involved in the new construction market. For example, an original construction loan may be for an amount of 5 million dollars. The title underwriter will only insure to the amount actually disbursed on the date the the original loan policy is issued. Let's assume that only $500,000.00 of this 5 million was disbursed on March 1, 2010. When the bank disburses additional money, it will seek to have a "date-down" endorsement attached to its original loan policy. This endorsement simply increases the amount of the coverage to the current amount disbursed. It also moves the policy date forward.
The title underwriter will not issue such endorsement until its agency has procured all necessary sworn statements and waivers. In this way, it can be comfortable that a party performing work on the property will not maintain a lien superior to that of the newly disbursed amount.
Sworn statements and waivers are designed to assist the parties in their dealings with one another. It offers a way for all parties to be dealt with fairly. As with anything, it is never a problem until it is a problem. Lack of honesty and sloppy paper work often contribute to problems between the parties.
The next section in this series will concern the construction "lien" itself. I hope to conclude this series in that article. I will also be offering an overall summary of the Construction Lien Act that I hope will leave the reader with a general understanding of its function.
Take care,
dave
Before I begin, I would like to remind the reader of a few things. Remember that a contractor contracts directly with the owner. The subcontractor contracts with the contractor to perform a portion of the contractor's overall contract with the owner. There may exist multiple mini-contracts between multiple parties, all designed to satisfy the original contract between the general contractor and the owner.
Section 570.1110 contains the statutory provisions regarding the sworn statement.
The sworn statement is a very practical device that is used to identify all contracting parties that remain unpaid as of the date the sworn statement is issued. The owner may rely on the statement, as issued by the contractor or subcontractor.
The contractor or subcontractor must supply a sworn statement to the owner when a request for payment is made.
The typical scenario is this: The general contractor has completed a portion of the overall contract with the owner and is now requesting partial payment from the owner. To accomplish this, the general contractor will prepare and submit a sworn statement to the owner. The sworn statement will display to the owner who is still owed money, if any that be.
Now, don't forget, there may be one or more subcontractors on the job. If the subcontractors have engaged contracts of their own, each subcontractor will have to supply a sworn statement as well. The owner wants to know who, if any, remain unpaid.
The owner wants to avoid construction lien(s) being placed on their property. They do this by utilizing Section 570.1115, which contains the statutory provisions regarding waiver of construction lien.
A lien claimant who receives FULL payment for his or her contract shall provide to the owner, lessee, or designee a full unconditional waiver of lien.
A lien claimant who receives PARTIAL payment for his or her contract shall provide to the owner, lessee, or designee a partial unconditional waiver of the lien for the amount which the lien claimant has received, if the owner, lessee, or designee requests the partial unconditional waiver.
A partial conditional waiver of lien or a full conditional waiver of lien shall be effective upon payment of the amount indicated in the waiver.
As disclosed, waivers come in the following forms:
1) Full unconditional waiver;
2) Full conditional waiver;
3) Partial unconditional waiver; and
4) Partial conditional waiver.
The conditional waivers are conditioned on the payment of a specific amount of money. When that money is paid, the lien rights will be waived up to the date of waiver.
Summary:
Sworn statements and waivers are highly utilized by title agencies involved in the new construction market. For example, an original construction loan may be for an amount of 5 million dollars. The title underwriter will only insure to the amount actually disbursed on the date the the original loan policy is issued. Let's assume that only $500,000.00 of this 5 million was disbursed on March 1, 2010. When the bank disburses additional money, it will seek to have a "date-down" endorsement attached to its original loan policy. This endorsement simply increases the amount of the coverage to the current amount disbursed. It also moves the policy date forward.
The title underwriter will not issue such endorsement until its agency has procured all necessary sworn statements and waivers. In this way, it can be comfortable that a party performing work on the property will not maintain a lien superior to that of the newly disbursed amount.
Sworn statements and waivers are designed to assist the parties in their dealings with one another. It offers a way for all parties to be dealt with fairly. As with anything, it is never a problem until it is a problem. Lack of honesty and sloppy paper work often contribute to problems between the parties.
The next section in this series will concern the construction "lien" itself. I hope to conclude this series in that article. I will also be offering an overall summary of the Construction Lien Act that I hope will leave the reader with a general understanding of its function.
Take care,
dave
Friday, November 25, 2011
Michigan's Construction Lien Act: (Part 2)
In this article, part 2 of a series concerning the Michigan Construction Lien Act, I will be discussing the Notice of Furnishing (NOF).
In part 1, we had established that Fritz Concrete Company (Fritz) was a qualified subcontractor. It had contracted directly with Musclehead Building Corporation (Musclehead), the general contractor.
Fritz had obtained a copy of the Notice of Commencement (NOC) from Hercules. The next step is for Fritz to provide a NOF to the designee or owner named in the NOC, or to the general contractor, Musclehead.
Fritz decides to provide a copy of the NOF to Hercules, the property owner.
Chapter 570.1109 sets forth the rules concerning the NOF, which are:
(1) Except as otherwise provided in sections 108, 108a, and 301, a subcontractor or supplier who contracts to provide an improvement to real property shall provide a notice of furnishing to the designee and the general contractor, if any, as named in the notice of commencement at the address shown in the notice of commencement, either personally or by certified mail, within 20 days after furnishing the first labor or material. If a designee has not been named in the notice of commencement, or if the designee has died, service shall be made upon the owner or lessee named in the notice of commencement. If service of the notice of furnishing is made by certified mail, service is complete upon mailing. A contractor is not required to provide a notice of furnishing to preserve lien rights arising from his or her contract directly with an owner or lessee.
So, according to this Section, Fritz must supply the NOF to Hercules within 20 days after furnishing the first labor or material.
Question: Why does Fritz have to supply a NOF to Hercules?
Answer: It's all about notification. Remember, Fritz contracted directly with Musclehead, not with Hercules. As a result, the most logical way for Hercules to learn of the existence of Fritz is by use of the NOF. Fritz will notify Hercules directly that it is performing work on Hercules's project. Additionally, the general contractor, Musclehead, is not required by statute to supply a NOF to Hercules, because Musclehead contracted directly with Hercules. Hercules knows that Musclehead is fully involved.
Question: What happens if Fritz fails to supply a NOF to Hercules?
Answer: We look to section 1109(6) for the answer:
(6) The failure of a lien claimant, to provide a notice of furnishing within the time specified in this section shall not defeat the lien claimant's right to a construction lien for work performed or materials furnished by the lien claimant before the service of the notice of furnishing except to the extent that payments were made by or on behalf of the owner or lessee to the contractor pursuant to either a contractor's sworn statement or a waiver of lien in accordance with this act for work performed or material delivered by the lien claimant. This subsection does not apply to a laborer.
In part 3 of this series, I will be discussing the "sworn statement and waivers" that is so critical in understanding the Construction Lien Act. For now, just understand that if Fritz fails to supply a timely NOF, it may defeat Fritz's ability to file a successful lien for work performed if Hercules is relying on a "sworn statement" issued by Musclehead, that does not recite the interest of Fritz.
The NOF must be supplied to the owner, designee, or general contractor. A party in interest cannot file a valid lien until this NOF is supplied. This makes good sense: after all, how can a property owner be subject to a lien when they don't even know the lien claimant exists? If you stop and think about it, it's all really common sense.
So, what have we covered so far? Part 1 concerned the Notice of Commencement. The NOC is a notice from the owner of the subject property that work is about to commence. Any person or entity working the job can rely on the NOC for the filing of the NOF. The NOF is a notice to the owner of the subject property that a particular entity, other than the general contractor, has begun work on the job.
Please click on this site next week for a discussion of the "sworn statement and waiver."
dave
In part 1, we had established that Fritz Concrete Company (Fritz) was a qualified subcontractor. It had contracted directly with Musclehead Building Corporation (Musclehead), the general contractor.
Fritz had obtained a copy of the Notice of Commencement (NOC) from Hercules. The next step is for Fritz to provide a NOF to the designee or owner named in the NOC, or to the general contractor, Musclehead.
Fritz decides to provide a copy of the NOF to Hercules, the property owner.
Chapter 570.1109 sets forth the rules concerning the NOF, which are:
(1) Except as otherwise provided in sections 108, 108a, and 301, a subcontractor or supplier who contracts to provide an improvement to real property shall provide a notice of furnishing to the designee and the general contractor, if any, as named in the notice of commencement at the address shown in the notice of commencement, either personally or by certified mail, within 20 days after furnishing the first labor or material. If a designee has not been named in the notice of commencement, or if the designee has died, service shall be made upon the owner or lessee named in the notice of commencement. If service of the notice of furnishing is made by certified mail, service is complete upon mailing. A contractor is not required to provide a notice of furnishing to preserve lien rights arising from his or her contract directly with an owner or lessee.
So, according to this Section, Fritz must supply the NOF to Hercules within 20 days after furnishing the first labor or material.
Question: Why does Fritz have to supply a NOF to Hercules?
Answer: It's all about notification. Remember, Fritz contracted directly with Musclehead, not with Hercules. As a result, the most logical way for Hercules to learn of the existence of Fritz is by use of the NOF. Fritz will notify Hercules directly that it is performing work on Hercules's project. Additionally, the general contractor, Musclehead, is not required by statute to supply a NOF to Hercules, because Musclehead contracted directly with Hercules. Hercules knows that Musclehead is fully involved.
Question: What happens if Fritz fails to supply a NOF to Hercules?
Answer: We look to section 1109(6) for the answer:
(6) The failure of a lien claimant, to provide a notice of furnishing within the time specified in this section shall not defeat the lien claimant's right to a construction lien for work performed or materials furnished by the lien claimant before the service of the notice of furnishing except to the extent that payments were made by or on behalf of the owner or lessee to the contractor pursuant to either a contractor's sworn statement or a waiver of lien in accordance with this act for work performed or material delivered by the lien claimant. This subsection does not apply to a laborer.
In part 3 of this series, I will be discussing the "sworn statement and waivers" that is so critical in understanding the Construction Lien Act. For now, just understand that if Fritz fails to supply a timely NOF, it may defeat Fritz's ability to file a successful lien for work performed if Hercules is relying on a "sworn statement" issued by Musclehead, that does not recite the interest of Fritz.
The NOF must be supplied to the owner, designee, or general contractor. A party in interest cannot file a valid lien until this NOF is supplied. This makes good sense: after all, how can a property owner be subject to a lien when they don't even know the lien claimant exists? If you stop and think about it, it's all really common sense.
So, what have we covered so far? Part 1 concerned the Notice of Commencement. The NOC is a notice from the owner of the subject property that work is about to commence. Any person or entity working the job can rely on the NOC for the filing of the NOF. The NOF is a notice to the owner of the subject property that a particular entity, other than the general contractor, has begun work on the job.
Please click on this site next week for a discussion of the "sworn statement and waiver."
dave
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