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Rights and registration
What types of holding right over real estate are acknowledged by law in your jurisdiction?
Fee simple title and ground leasehold title are the most common forms of US commercial real estate ownership.
In fee simple title ownership, the ownership entity owns all rights, titles and interest in the real estate asset, including the right to free alienation of the asset. The fee simple estate is not limited in duration and there is no superior title-holding estate. A fee simple estate is subject only to liens and encumbrances that are superior to the estate by reason of an express grant of priority by the fee simple owner (eg, a mortgage or an easement that expressly encumbers the fee simple estate).
Where a fee simple owner wishes to convey a long-term interest in the real estate asset to a third party but retain the underlying fee title (typically for tax or inheritance reasons), the fee owner will commonly enter into a long-term ground lease that enables the third party to lease, develop and operate the real estate for the lessee’s account. Ground leases usually last for at least 49 years, and are often 99 years or longer.
US law also recognises many lesser estates in title, including:
- fee title for a term of years;
- fee title subject to termination upon a condition subsequent;
- life estate (ie, fee title for the life of an individual);
- future estates in land;
- leasehold estates; and
- easement interests.
Are rights to land and buildings on the land legally separable?
Yes, ownership of land and buildings are separable for tax purposes, in that the owner of a leasehold estate in land can be deemed the owner of a building for tax purposes provided that the land lessee expended the funds to build the building. However, if a leasehold estate in land is created, title to the building will typically revert to the landowner at the end of the land leasehold and cannot be removed from the land.
Which parties may hold and exercise rights over real estate? Are there restrictions on foreign ownership of property?
US real estate may be owned by:
- a natural person;
- a legally created domestic entity (eg, corporation, limited liability company, limited partnership or general partnership); or
- a foreign-domiciled persons or entity.
A foreign entity that owns real estate must typically register to do business in the state jurisdiction in which the property is located. Foreign entities that own real estate are subject to certain state law-reporting requirements regarding ownership, and foreign entities and persons are subject to US federal income tax under the Foreign Investors in Real Property Tax Act.
How are rights, encumbrances and other interests over real estate prioritised?
Interests over real estate are prioritised by both estate (regarding equity interests) and lien priority order (regarding debt interests). For equity ownership, a fee simple estate is superior to a leasehold estate, as well as to easements and other lesser fee estates described above.
Regarding debt, both fee owners and lessees may grant mortgages on their respective estates. Mortgages are prioritised by the first in line, first in right principle (eg, recorded first mortgages have absolute priority over second mortgages). Between a fee mortgage and a leasehold mortgage, the leasehold mortgage is subordinate in that the lessee – and the leasehold mortgage holder – must pay leasehold rent and perform leasehold covenants in order to maintain the leasehold that its mortgage encumbers.
A fee or leasehold owner may grant both a mortgage loan security interest and a mezzanine loan security interest on its real property estate. A mortgage is a debt instrument secured by the real property itself. A mezzanine loan is a debt instrument secured by a pledge of the ownership interests in an entity that owns real property. A mortgage is thus structurally superior to a mezzanine loan security interest.
Must real estate rights, interests and transactions be registered in your jurisdiction? What are the legal effects of registration?
Yes. All fee interests in real estate – and all mortgages – must be registered in the land records, which are maintained for each state and county throughout the United States. Notices of ground leases and major space leases are also recorded to ensure that the estates are recognised in title transfer or fee mortgage foreclosure cases. Mezzanine loan security interests are considered personal property, not real property, and are therefore perfected through filings in state and county records under the Uniform Commercial Code, rather than the land records.
What are the procedural and documentary requirements for entry into the national real estate register(s)? Can registration be completed electronically?
Title registries in the United States are maintained on a county (a subdivision of a state) basis. Registration processes differ from state to state and from county to county within each state. There is no single national title registry. Typically, an original executed document must be presented for recording. Modern counties maintain electronic registries of land records; less advanced counties have manual journals in which titles are recorded.
What information is recorded in the national real estate register(s) and to what extent is such information publicly available?
County real estate registers will show:
- memorandums of leases; and
- other title encumbrances.
Is there a state guarantee of title?
No. Title is typically insured by private title insurers after reviewing the county title records for the respective property. It is customary for a buyer or a lender in US real estate transactions to engage:
- a title insurer at the time of entering into the purchase contract to examine the local title registries to determine the ownership of real estate and any encumbrances of record; and
- a surveyor to determine land boundaries and locations of improvements and easements.
At the closing of title transactions, it is customary to purchase title insurance to insure that good title is acquired by the purchaser, subject only to identified encumbrances. Most mortgage lenders also require title insurance to insure that the lender’s mortgage is a first-priority lien on the real estate. The premiums for title insurance vary by state, as do the specific endorsements that title insurers can underwrite.
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