Real Estate Midterm_ Sydney Wells
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Fordham University *
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Jan 9, 2024
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Undergraduate MIDTERM EXAM
Fundamentals of Real Estate Law REAL 1002-01 (3.0 Credits)
Fall 2023
•
All work must be done independently.
•
Other than short quotes, do not copy material from text or otherwise. •
Short answer format. That means full sentences with punctuation and
complete thoughts. Answers that do not fully explain the reasoning behind your answer are “too short”.
•
Exam is in Word format. Insert answers below the question for ease of grading.
•
Partial credit is available.
•
NO AI answers. (Be careful as AI does not know the difference between laws in various countries.)
•
Exam due 11/07/2023
before 5:00 PM.
SHORT ANSWER QUESTIONS (WORTH 4 POINTS EACH)
1.
You are buying a house as an investment and plan to fix it up and sell it. The contract you signed states the sale includes “all real estate and fixtures but not personal property”. When you inspect pre-closing you notice that the seller has removed the wash machine in the basement and the ornate built-in bookcases in the living room. Do you have a right to claim they are in breach of contract?
a.
Yes you do have a claim. A fixture is an item that was once personal property but has become part of the real estate by its relationship to it whereas personal property is transferable by a bill of sale. So, because the built-in bookshelf would be considered a fixture due to it being built-in it creates a relationship with the real estate.
2.
You buy a parcel of land which adjoins a mountain spring. The water in the spring is pure and clean and tastes good. You decide to open a bottling plant on your land. Business is so good you are able to bottle and sell 5,000 gallons of water per day. As a result of your bottling, the stream starts to dry up downstream from your property. The neighbors complain. Do they have a claim? Explain?
a.
Yes they have a claim due to the environmental change that affects their real estate. The Natural Flow Doctrine is that each riparian owner possesses the right to the ordinary flow of water along the
owner’s land undiminished in quantity and unimpaired in quality. Bottling plant's water extraction with the result in the downstream portion of the stream drying up the water to the point that it significantly harms the downstream neighbors' ability to use the water for their reasonable purposes they may have a valid claim against you.
3.
You find a nice parcel of land in the countryside to build a twelve (12) home development. The land cost is $1,200,000. You expect each home to cost $300,000 to build and you can sell them each for $700,000. All your diligence looks good and you go to contract. When you read the Contract of Sale it notes that the seller owns a Life Estate. What does that mean and how does it affect your plans? Explain?
a.
A life estate is when an estate is granted to an individual for life but is measured by the life of the owners but also can be measured by the life of some other person. This affects your plans because
the land that was wanting to be bought is currently being occupied so construction may not begin until that person has died. Due to the life estate, once the contract is signed, the seller has to live there until they have passed away.
4.
You are able to overcome the issues involved with the acquisition of the land discussed in Question 3 above by also buying the remainder estate. You need to decide how best to take title (i.e., in your own name or an entity) and in what type of entity to develop the property . Briefly explain the concept of single purpose entity
and why this may be a better option than purchasing the property and developing the same in your individual
name. a.
A single purpose entity, or a limited liability company (LLC), is there is unlimited liability and owners are liable only up to the amount that they have invested and an LLC is also only taxed once where income is passed through and reported on an individual owners personal tax return. The liability protection with only being taxed once only on what the LLC’s assets are not the owners’ personal assets. So, whatever happens to the property (like going bankrupt for example) will not affect the owner’s personal assets.
5.
Again using the facts in Questions 3 and 4, what are the attributes and pros and cons to forming and then buying and developing the property as a “corporation”, a “partnership” and a “limited liability company”?
Explain.
a.
The attributes of a corporation are separate legal entities where there is limited liability. A corporation is run by the office. So, there is a vice president, a president, a board of directors which
is made up of officers and there are shareholders. The pros of a corporation is there is a limited risk
because the continuity of its stock is not interrupted because of changes in stock owners while also
being able to freely purchase real estate and a dower interest is not attached. However, a con of a corporation is that they have a double tax so profits are taxed once at the corporate level and then the profits of the individual shareholders are reported on their personal income tax returns where they get taxed again.
b.
The attributes of a partnership are the pass-through taxation and the flexibility of a partnership. It is made up of a majority vote or unanimous vote of partners for key decisions. Some pros for the partnership is that a partnership is not taxed on its income because the income flows through to the
partners and each partner is taxed individually. However, with a partnership there is full liability. Each partner is personally responsible for all partnership obligations and each partner’s property. Another con is the power of individual partners to make agreements binding the firm that may prove
harmful to the firm. Lastly, a death, withdrawal or bankruptcy will terminate the partnership automatically so a new agreement will have to be created.
c.
The attributes to a limited liability company have attributes of both partnerships and corporate forms of ownership. The LLC is made up of owners called members and officers called managers. The LLC is run how a corporation is with the managers running it and decisions are determined by a majority vote. The LLC does not require at least one general partner with unlimited liability. Some pros are that the LLC is taxed like the partnership, the LLC does not have to adhere to certain corporate formalities and the LLC has limited liability. Some cons of a LLC is that the transfer of stock is a lot harder because the owner of an LLC must obtain approval of the other owners before ownership may be sold. 6.
Your development is successful. You teamed up with a local builder and sold-out all the homes. You locate another available property. This time the builder wants to be your partner and not your contractor. She wants a share in the profits. She suggests you buy the next property with her as “joint tenants”? What would
it mean as to your rights etc.? Explain.
a.
This means that we would equally split the right of possession of the entire property, or an undivided interest. If I wanted to sell the real estate at a later time, the builder would have to say yes as well and if I die before that time, my part of the estate will go to the builder. 7.
You are fabulously successful as a developer and decide it is time to buy a large and expensive apartment in Manhattan. You look at two different apartments. Both are large and spacious and each building has a full suite of amenities. One building is a cooperative and the other building is a Condominium. a.
See above, explain how a condominium works?
i.
A condominium is a multi-unit building or semi-detached town house type units. When owning a condominium, the individual is responsible for their own unit mortgages and they
can take advantage of a tax reduction. However, in a condominium you have to pay for amenities that may be lost.When selling a condominium, it can be sold for market value and it gives the right of first refusal to anyone at the fair market. When the owner dies, the condominium goes to the owner’s designee. When evicting a tenant from a condo, it can be very expensive and time consuming. b.
See above, explain how a coop works?
i.
A co-op is when the cooperative owner/tenant does not have a fee simple interest in the apartment but the owner has shares of stock in the corporation that owns the land and building, a blanket mortgage. A coop is vulnerable to others defaulting on blanket mortgages and when trying to be sold, must be approved by the board to purchase the coop at a stipulated price by the new tenant but the lease is long term. Also, when the tenant dies, the tenant’s desinee also needs the board's approval. But when it comes to taxes, there are limited deductions and there is a simpler eviction process.
8.
You are living the high life in Manhattan. Your new friends are jet-setters. One used to hang out with Anna Delvey. You all go clubbing. The table runs up a bar tab of $2,678. The next thing you know there is talk at
the table about leaving without paying the bill. “After all…” says one of your new friends, “we don’t have to pay, we never signed a contract”. You say, we need to pay. You friends ask why? Putting aside the moral issue, is there a contract? Explain. a.
Yes there is a contract. The first two elements of a contract are offer and acceptance. When stepping in the club and ordering foods and drinks, you are making an offer to the staff. When the drinks and food is being served, that is their acceptance of the offer. The third element of a contract
is consideration. Since the offer of providing service, drinks and food was accepted, the exchange is that the food, drinks and services will be paid for. The fourth element is capacity of binding. Yes, there may be alcohol involved , however, all parties are sober, stepping into a club and the first drink ordered is the first offer to the club. The last element is the legality. If the tab is not paid it is considered a crime so, once the offer of services for cash has been accepted, or served, legally you have to pay the tab.
9.
What are the elements of a contract? Explain each briefly?
a.
The first element of a contract is an offer. An offer is made by an offeror, who communicates the proposal to the offeree. The second component of a contract is acceptance. Acceptance is accepting the offer made by the offeror from the offeree however, should the offeree change the terms of the offer, this creates a counteroffer which then rejects the original offer and terminates it. The third element is consideration. Consideration is a promise or act bargained for and given in exchange for a promise, without consideration, the contract is unenforceable. The fourth element is
capacity for binding the contract. This means that all parties involved in signing the contract are not intoxicated or drunk or high, not under the age of 18 and are sane. The last element of a contract is
lawful. If the contract is thought to be contrary to public policy if it brachs the law, harms citizens or causes injury to the state, the contract will be terminated.
10.
Good thing you got away from those so-called friends. They were a bad lot. Business is good. You are expanding. You need to rent an office. You start looking at space. You locate an office. It is a sublease from a startup that lost its funding source and had to shut down operations. The space is 3,700 square feet. The rent under the start-up’s lease is $85 per foot and the rent under the proposed sublease to you is $57 per foot. The sublease term is 4 years (which is the remaining term of the sublease). Do you see any risks?
Explain the risks?
a.
A risk would be if the landlord wants to evict the tenant then I would also be evicted. Due to the tenant having lost its funding source and having to shut down operations while also charging me less $ per square foot, then the tenant would get evicted before the 4 years. Once the landlord evicts the tenant then I am evicted also. Another risk would be if I wanted to change the space then
I would have to go through the tenant who would then have to go through the landlord which would take a lot more time. The last risk is that the 4 year remaining lease is a short term lease so, I would have to find another office space in a short amount of time. 11.
You did not sublease the space in Question 10, and now you are looking at another space. This space is also 3,700 square feet. The rent is also $57 per foot. But this lease is a direct lease with the landlord. The lease document states that the lease is subordinate to the lien of any mortgage on the building. What does this mean? Are there any risks? Explain.
a.
This means that if the property owner defaults on their mortgage and the property goes through foreclosure the mortgage holder’s rights and claims take priority over the tenant’s lease. The risk I would face is the possibility of a lease termination. If the property were to foreclose due to the lien, I
would have a new landlord who could terminate my lease or have a change in lease terms (such as
raising rent, new conditions, etc.) that would cause uncertainty. 12.
The negotiation of the lease described in Question 10 fell through. Back to the drawing board. This time you
hear about a tenant which wants to assign its lease. Their remaining lease term is 4 years and the rent under their lease is $57. That sounds good. How does a lease assignment work and how is it different from
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a sublease? Explain.
a.
A lease assignment is between a landlord (lessor) and the tenant (lessee) who have a lease but the
lessee finds a place that is cheaper/better and leaves but finds someone (assignee) to take over the rest of the lease. Once the landlord approves of the assignee, the assignee takes over the lease and pays the landlord directly for rent. A sublease is when the lessor has a contract with the lessee but then the lessee rents out the space to the subtenant (can increase rent, conditions, etc.).
The subtenant then pays the lessee (tenant) who then pays the lessor (landlord) whenever rent is due. In a sublease, if an eviction occurs because either rent was not paid, which if the subtenant does not pay the tenant has to cover it, rules broken, etc., both the tenant and the subtenant are evicted. So, a difference between the two is that in a sublease, the lessor only has the contract and
rents out to the lessee and the subtenant pays the tenant who then pays the lessor. Whereas in an assignment of a lease, the assignee does not have to pay the lessee but has to pay directly to the landlord, the assignee takes over the lease of the tenant and landlord.
13.
You own some vacant land on Long Island that borders the Southern State Parkway. You get a letter from the State of New York that the State of New York is starting a proceeding to take by eminent domain (condemnation) a strip of your land measuring 5 feet in width running parallel to the Southern State Parkway. The State intends to use the land to add another lane to Parkway. Explain condemnation and opine as to whether you believe the action of the state is legal?
a.
Condonation is the process of the government taking private property for a public purpose and in exchange the government gives fair compensation. In this case the condemnation is a strip of my land and in return I should receive market value of how much the land they took is worth. This would be legal if the State of New York gives me fair compensation for the land that they will be taking, if they do not, then they are violating my Fourth Amendment right (prohibits state government from taking private property without due process of law).
14.
Good news! You are buying another development site. A 2-acre parcel of vacant land. The contract to purchase states you need to pay 10% of the purchase price as a deposit. This deposit will be held in escrow
by the seller’s attorney. What is Escrow? Explain.
a.
An escrow is a third party account that is managed by an escrow agent, a third party who is the depositary of the escrow transaction. An escrow holds the money from a buyer and if everything goes right, it automatically goes to the seller but if it does not work out, it automatically goes back to
the buyer. Normally an escrow agent is a lawyer because the agent represents the interest of both the buyer and the seller. 15.
You read the contract you are about to sign, it says that in the event that the seller should default, the buyer may elect a refund of its down payment or to sue for specific performance. What is specific performance and in what situations does it apply?
a.
Specific performance is a court issue that mandates the seller to execute the deed in the buyer’s favor. When a buyer completes their requirements under a contract they are entitled to the deed but
if the seller does not convey the deed, a court can issue a specific performance. This is used when money cannot compensate for the injured party and the contract is unique or difficult to value.
16.
You close on the 2-acre parcel of vacant land. You are quickly approached by a local business. They install
signs on vacant land. The signs are portable and can be quickly installed and quickly removed. The business will pay you $50 per day to post a large sign on your property advertising a newly opened Duncan Donuts. In addition to the $50 per day, you get free donuts and coffee. You agree to the deal, but only if it is agreed that the sign will be removed on 10 days’ notice from you so that you can develop the land. What would be an appropriate document to sign to evidence this arrangement. Explain? a.
I think a licensing agreement is the best option because I am granting the local business permission to use my land for a specific purpose (to put signs up) and in return I ill be compensated
(with 50$ and free coffee and donuts). A licensing agreement outlines the rights and responsibilities
of both parties while also providing protection and clarity of the agreement (consideration, duration, termination, maintenance, etc.).
17.
Before long, a neighboring property owner comes to your office. She explains that she wants to develop the
land behind your land but in order to do so the Town requires that she have a second access to the road for emergency vehicles to enter and exit. The problem is that her property has only a single access point. She asks if she can buy a strip of land from you. You say you cannot agree because you need all your land for
development of your new strip shopping center. She says she is willing to pay you for the right. Any ideas? Explain.
a.
I would grant her an easement. An easement is the right to use another’s real property for a particular purpose. I would allow her to use a road that I have created for my shopping center for emergency vehicles and in return I would have her pay me compensation for the use of the road.
18.
The real estate tax bill just arrived in your office. What happens if you do not pay it? Explain.
a.
When a real estate tax bill is not paid, you will get a notice of delinquency. This notice informs you that your taxes are overdue, the amount that's owed and the consequences. Then the bill starts to earn interest on the unpaid tax amount, increasing the total amount you owe. After a while, a tax lien is created on the real estate. Lastly, if the bill is still not paid, the foreclosure process is started and then finally enforced.
19.
What is the statute of frauds? What does it require?
a.
The state of fraud is a document with the intention to protect against fraud and perjury and is normally in writing. The statute of frauds consists of the names of the parties to the contract, a description of the property (address, acreage, square footage, etc.), the purchase price, other essential terms and conditions of the sale and the signature of the party against whom enforcement
is sought but some states do require the signature of the party seeking to enforce the transaction).
QUESTION 20 and 21 are worth 10 points each.
20.
You are at lunch and see the owner of a strip shopping center that you understand is on the market to be sold. You inquire with the owner whether it is still for sale. He says it is. You ask him how much. He says $1,500,000. You believe it is worth $3,000,000 . So you say “I will buy it for that price”. You quickly write up a contract of sale with all the elements necessary for it to be enforceable and you both sign it over lunch. You wire transfer $150,000 to the bank account of the seller and it is received. All is good. You start to work
on the purchase. You order a title report (cost $5,000). You order an environmental report (cost $20,000). You start speaking with banks about a loan (legal fees and bank deposit $5,000). Two weeks later you get a
phone call from Ms. Kelly. She says that she is the attorney for the seller. She tells you the contract is void as her client has a drug problem and is now in rehab and he was high on drugs and drinking when he met you and signed the contract. She also tells you that while he owns the shopping center mentioned in the contract as “The Dollar General Shopping Center”, the one he is selling is next door and is called the “Dollar Tree Shopping Center”. So, in any event the wrong property is referenced and the whole thing is a big mistake. She is sorry and will send back the $150,000 deposit. (By the way the Dollar Tree Shopping Center
is smaller and only worth $1,000,000). What are your thoughts about this? Explain?
a.
I would sue for specific performances such as a loss of bargain or for the lost profit. When a contract of sale is written up, all of the elements of the real estate need to be included. One of those descriptions is the real estate property itself so the two weeks between reviewing the contract
of sale there was enough time to correct the mistake and would have been able to review that it was the Dollar General not the Dollar Tree. There were 2 weeks to understand the consequences of her own actions. Now, for the drug problem. The first thing the attorney for the seller would have to prove is that for those 2 weeks, the seller was under the influence of drugs the whole time. The contract is only voidable if the drugged person is unable to appreciate the nature and consequences of their own actions, well there was 2 weeks to review the contract which is an adequate amount of time. 21.
On October 10th, you order a new compressor (a component of an air conditioning system) for an office building you own in Memphis, Tennessee. The cost is $75,000. You explain to the manufacturer that it needs to be installed before April 15
th
which begins the cooling season. If the compressor is not installed, the
building will get hot and the tenants cannot do their work. The windows in the building do not open. Tennessee gets very hot starting in the spring. The leases with your tenants all state that the landlord will provide cooling starting on April 15 and if not provided the tenants need not pay rent. The compressor finally
arrives on June 15. You lost a month’s rent ($200,000). You send the supplier of the compressor a bill for $200,000 with a note stating if not paid, you will sue. He texts you back. “Oh…the old Hadley v. Baxendale
”. What does he mean? Explain?
a.
He means that if the special circumstances under which the contract was actually made where communicated by the plaintiffs to the defendants, and thus known to both parties, the damages resulting from the breach of such a contract, which they would reasonably contemplate, would be the amount of injury which would ordinarily follow from a breach of contract under these special circumstances so known and communicated. The difference is that you informed the manufacturer of the consequences of not having the air conditioning in time so I am entitled to more than loss of bargain.
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