Sometimes practicing real estate is like living in the TV show, The Twilight Zone.
With apologies to Rod Serling … Imagine, if you will, the transfer of a farm where the seller will not allow the buyer to raise hogs. A farm with no hogs? Surely the buyer would be allowed to raise hogs if they chose to! The seller can’t dictate to the buyer what they can and cannot do with the property once closing has occurred and the title has been passed to the buyer, can they? Yes, they can.
Should the buyer and seller mutually agree to the terms of a contract the seller can place deed restrictions on the property. Sometimes these are referred to as Fee Simple Defeasible Estates or Qualified Fee Estates and there are two types: Condition Subsequent and Fee Simple Determinable. Let’s break them down.
Condition Subsequent simply means “here’s the condition, what subsequently will happen” in other words “If-Then or But-If.” If the buyer violates the condition, then the ownership of the property can revert to the seller who can take the property back. One can imagine a string is tied around the buyer’s title and if the buyer violates the restriction the seller has placed on the property then the seller can jerk the string and take the property back. Typically Condition Subsequent Estates indicate what a buyer is NOT allowed to do. For example: If the buyer drinks alcohol on the property, then they lose the estate and it will revert to the grantor. Using the opening example, if the buyer raises hogs then the property reverts to the seller (or to another if the grantor/seller so chooses).
In a Fee Simple Determinable estate, one can think that the use of the land is already determined. Typically, the words associated with this type of conveyance are “So long as…” For example: So long as you use this as a peach orchard you can keep the estate. In the event the buyer fails to properly maintain the peach orchard, they are in jeopardy of losing the estate and allowing ownership to revert to the seller.
Buyers who subsequently learn that their use of the property is somehow limited are not happy. The loss of ownership can be a tragic consequence for a buyer. Here are some practical tips to avoid these types of unexpected surprises for your clients.
- Review the deed. These types of provisions are deed restrictions and the deeds specifically contain the restrictive language.
- Be alert to keywords and phrases in the deed such as “Defeasible Fee” “Fee Simple Determinable” or “Condition Subsequent.”
- Make certain that clients know the importance of reviewing either the Attorney’s Opinion Letter of Title or the Preliminary Title Report to look for these types of restrictions
- Don’t make misrepresentations to clients that such things are probably not enforceable.
And what type of restriction can the seller put on the property? Virtually anything so long as it does not run afoul of the law, nor does the restriction have to be for the interest of the general public. I opened this blog post with the discussion of not allowing a buyer to raise hogs. As silly as this may seem this was part of a recent transaction at my firm. The seller indicated to the buyer that they could have a pet pig, but they were not allowed to raise hogs. Why? Who knows and it’s the seller’s right to place this restriction on the property regardless of how silly it may seem.
I suppose you’re wondering how long these last and what happens when the buyer ultimately sells the property. The answer is forever or until the original grantor or a court of law cuts the string. Which means any subsequent buyer would also have to abide by the restrictions established by the original grantor. As a real estate agent it is important to understand that these types of estates do exist and can have serious consequences should a buyer violate the restriction.
Of course, it goes without saying, but I’ll say it anyway, that an agent should always consult an attorney should they suspect a defeasible estate exists or their seller client wishes to convey property using a defeasible estate.
Terry Wilson, distinguished real estate instructor (DREI), is the lead instructor for Superior School of Real Estate in the Lake Norman area of North Carolina. Terry is the founder and CEO of Wilson Realty Co. LLC and the author and producer of Hiking the Real Estate Trail.