Charles J. Jacobus

TEXAS REAL ESTATE LAW 11E

2

Chapter 3

Estates in Land — Statutory Estates

3

Statutory Estates

• Created by the Texas Constitution or by Texas statute

• They typify the degree, quantity, nature, and extent of an individual’s interest in his real estate.

• They attach to the real property as a result of the rights of the individual’s ownership of that real property.

• These statutory estates exist concurrently with the estates discussed in Chapter 2.

The four statutory estates are:

4

Statutory Estates

Texas Community Water CemeteryHomesteads Property Rights Lots

5

Homesteads

• A place used as a home or as a place to exercise the calling or business for a family or a single adult person

• It provides a secure place of which the family cannot be deprived.

• It provides certain exemptions for the Texas homeowner against his creditors.

• Only specific, allowed liens are enforceable against homesteads.

• One cannot encumber the homestead for any other purpose.

• To change the homestead laws requires an amendment to the Texas Constitution, which requires a vote of the people of Texas.

• Cannot waive or contract around the homestead protection.

6

Who Can Claim?

• Traditionally been interpreted to vest in individuals, not in business entities.

• Homestead may be placed in an inter vivos trust (after September 1, 2009) for tax or estate planning purposes and not lose the protection.

7

Article 16 Section 50 of the Texas Constitution

(a) The homestead of a family, or of a single adult person, shall be, and is hereby protected from forced sale, for the payment of all debts except for:

(1) the purchase money;(2) the ad valorem taxes due thereon;(3) an owelty of partition;(4) the refinance of a lien against a homestead;(5) work and material used in constructing new improvements;(6) home equity loans;(7) a reverse mortgage; or(8) a loan on a manufactured home converted to real property.

Please note that many of these exceptions apply only under very numerous and specific conditions!

8

Exceptions Made By Court Decisions

1. Forced sale for nonpayment of maintenance fund liens.

2. A lien existed prior to the property’s designation as homestead.

3. A conversion of property to homestead with intent to defraud one’s creditors, or when wrongfully obtained money has been used.

4. Renouncing homestead rights before the property is used as a homestead.

5. Homestead may be seized if the occupant violates drug laws.

6. The homestead may not be a yacht.

7. Homestead limited to $125,000 if the homestead claimant files bankruptcy within 1,215 days after acquiring the homestead.

9

Other Points Concerning the Texas Homestead

• Once vested it provides for total exemption from forced sale (no limit to value except as mentioned with bankruptcy).

• Neither spouse may sell or abandon the homestead without the consent of the other spouse.

• Proceeds from sale are exempt from creditors for six months.

IT TAKES ONE TO BUYBUT TWO TO SELL!

10

Limitations

Amount of Homestead; Uses

A rural homestead shall be not more than 200 acres, in one or more parcels and must include the home;

An urban homestead shall consist of a lot or contiguous lots amounting to not more than 10 acres of land, together with any improvements;

An urban homestead may be used both as a home and a place to exercise a calling or business of the homestead claimant;

Temporary renting of the homestead is allowed when no other homestead has been acquired.

11

How Do We Define An “Urban” Homestead?

The Texas Legislature defined urban homestead as real property:

1. located within the limits of a municipality or extraterritorial jurisdiction, or a plat in subdivision; and

2. served by police protection, paid or volunteer fire protection, and at least three of the following services provided by a municipality or under contract to a municipality:

(A) electric;(B) natural gas;(C) sewer;

(D) storm sewer;(E) water.

12

More Points on the Texas Homestead

• Can only claim one homestead.

• Creditors may force the sale of urban land that exceeds the exemption.

• To do the same on rural land requires a court trial.

• Creation requires no formal designation, simple possession as a home.

• If raw land one must intend to reside there as a homestead and performed some act showing intent to do so (clear lot or draw plans).

13

Termination

Death Alienation Abandonment

14

Death does not necessarily terminate homestead rights altogether.

The right to occupy the home passes to surviving spouses and adult, unmarried children thereby creating a life estate.

Also to minor children if asserted by a guardian or other representative.

Survivor of the survivor (i.e., second spouse) does not have these rights.

The home cannot be sold for any nonhomestead debts.

Death

15

Alienation

• Involves the sale of the house.

• In the event the family sells the house and buys a new home, the homestead is terminated in the old home and manifests itself in the new.

• If the family buys a new home and the old homestead is not sold, this does not necessarily terminate the old homestead, even if the old home is converted to rental property.

• In such a case, the creditors would have to prove abandonment of the old homestead.

• Any pretended sale of the • homestead is void.

16

Abandonment

• It is not very easy to abandon a homestead.

• It is a question of fact for the jury to decide rather than one of law.

• If married, the home cannot be abandoned without spouse’s consent.

• Acquisition of a new home is not necessarily abandonment of old.

• Must be a discontinuance of use, coupled with intent not to return.

• Any abandonment or waiver of the homestead requires clear and convincing evidence of informed consent.

• The courts put the burden of proving abandonment on the creditors.

• With a business homestead the sale of more than 50% of the business to another may result in the loss of the homestead claim.

17

Other Issues

Courts in Texas have consistently held that you cannot waive your homestead rights.

18

Refinancing

Homestead rights effectively preclude the homeowner from refinancing.

Lender can only foreclose liens for purchase money, taxes, and home improvements.

Few lenders are willing to use the home as security knowing they could not force the sale of the property to satisfy their debt.

Note can be renegotiated to a new interest rate, but the amount of the principal balance may never exceed the then-current balance.

Any increase in current balance is not purchase money, so lender forfeits the right to foreclose even though part of the note is purchase money.

19

Earnest Money Contracts

At one time, it was felt that specific performance would be forcing the sale of the homestead.

The Texas Supreme Court allows a specific performance suit.

20

New Home Construction

• If you own a house and build a new one, which is your homestead?

• If the second home is the homestead, homestead lien requirements would have to be followed.

• Some have felt that since the first home has not been sold or abandoned, it is still the homestead.

• The cases seem to indicate that intent to create a homestead can be very influential in creating homestead rights.

• It is prudent to assume that the • homestead construction lien • statutes should be complied with.

21

Judgment Liens

• Judgment and child support liens do not attach to homesteads.

• Title companies question whether or not property is homestead.

• Title company may require a declaratory judgment from a district court confirming the homestead character of the property.

• This causes problems and delays in closing.

• Recent cases have clarified the issue to the benefit of the homeowner.

• Also, a judgment debtor may file an affidavit in the county in which the homestead is located, and it serves as a release of the judgment lien.

• A purchaser or lender may rely on this affidavit, provided that the judgment creditor had not filed a contravening affidavit.

22

Ad Valorem Tax Issues

• Texas homesteads also have a protected interest for homestead occupants at least 65 years of age.

• They are not required to pay their ad valorem taxes during their period of occupancy (although interest will accrue).

• Taxes are deferred until the occupant dies, or the homestead is sold.

• This will be discussed in greater detail in Chapter 21 on taxation.

23

Owelty Issues

• A court may divide a property into shares of unequal value, and fix a lien on the larger share in favor of the party receiving the smaller.

• This difference is referred to as owelty.

• The owelty is recognized as being in the nature of purchase money.

• One co-tenant cannot defeat this right in the other by moving onto the property and asserting a homestead right therein.

24

Additional Homestead Rights

• One or more lots held for uses of sepulcher

• Personal property for a family that has an aggregate fair market value of not more than $60,000, or $30,000 for a single adult.

• Provided only if the personal property is eligible for exemption.

25

(1) home furnishings, including family heirlooms;(2) provisions for consumption;(3) farming or ranching vehicles and implements;(4) tools, equipment, books, and apparatus, including boats and motor vehicles used in a trade or profession;(5) wearing apparel;(6) jewelry not to exceed 25 percent of the total limitations;(7) two firearms;(8) athletic and sporting equipment, including bicycles;(9) a motor vehicle for each member of a family who holds a driver’s license;(10) the following animals and forage on hand for their consumption:

(A) two horses, mules, or donkeys and a saddle, blanket, and bridle for each;(B) 12 head of cattle;(C) 60 head of other types of livestock; and(D) 120 fowl;(11) household pets.

The following personal property is eligible for the exemption:

26

Community Property Rights

Texas is one of ten states that recognize community property rights.

Subject to some exceptions, every parcel of real property acquired after marriage becomes community property.

This is true even if the property is acquired by the spouses in another jurisdiction, so long as the division of the property occurs in Texas.

If community efforts, credit, or funds are used to maintain or improve the house, one spouse may be entitled to reimbursement.

27

Separate property is specifically designated by Texas law to cover:1. Property owned by a spouse prior to marriage;2. Property acquired by gift, devise, or descent during marriage;3. Recovery for personal injuries, except for loss of earning capacity;4. Military nondisability retirement benefits if married less than 10 years;

However, any income from separate property is community property.

This does not include the increase in value of separate property after marriage.

Separate Property

28

Contractual Separate Property

Persons about to marry and spouses, may by written instrument partition all or part of their property, then existing or to be acquired.

Spouses also may, by written instrument, agree that the income from separate property shall be the separate property of that spouse.

Spouses may agree in writing that all or part of their community property becomes the property of the surviving spouse on the death of a spouse.

MINE YOURS

29

Prenuptial Agreements

The Constitution now provides that written agreements prior to marriage (prenuptial) and after marriage (postnuptial), may:

1. Partition the spouse’s property to create separate property.

2. Establish income from separate property as separate property.

3. Establish that if a gift is presumed to include all the income that may arise from the gift.

4. Create a right of survivorship in the spouse’s community property.

These agreements are retroactive. So, if a prenup was signed prior to 1980, it was validated by the 1980 constitutional amendment!

30

Contractual Community Property

Spouses may agree that separate property be converted to community property.

Agreement is enforceable without consideration, must be in writing and (1) signed by both spouses, (2) identify the property being converted, and (3) specify that the property is being converted.

The mere transfer of a spouse’s separate property to the name of the other spouse or to the name of both spouses is not sufficient to convert the property to community property.

The agreement is not enforceable if it is proved that the spouse did not: (1) execute the agreement voluntarily or (2) receive a fair and reasonable disclosure of the legal effect.

31

New Community Property Rules

Creates an equitable interest in a spouse’s separate property if there is (1) an enhancement in value during the marriage of the separate property due to financial contribution made with community property funds or (2) if community property funds are used to discharge all or part of the debt on the separate property owned by the spouse during the marriage.

The interest created is a proportional value determined by the amount of payments made the community versus the amount of payments made by the separate property contributions.

On termination of marriage, the court is required to impose an equitable lien on property to secure a claim arising by this equitable interest.

Separate Property PaymentsCommunity Property Payments

32

Management and Control of Community Property

All community property is generally considered to be of joint control and cannot be conveyed without the joinder of the other spouse.

However, provisions now allow sole control community property where a spouse may manage, control, and dispose of real estate as if he or she were single.

33

Liabilities

It is important to remember that in the marital community, any interest in real estate may be subject to joint control, and both spouses should be aware of any real estate transaction affecting community property.

34

Common-Law Marriage

A common-law marriage can exist if the following elements are present:1. There is an agreement, express or implied, to be husband and wife.2. The couple are living together in cohabitation as man and wife.3. The parties hold each other out to the public as husband and wife.

There is no authority establishing how long cohabitation must exist.

Direct evidence of agreement is not required . Circumstantial evidence.

This becomes a very complex matter in the event of death.

Texas law resists dissolving marriage without formal proceedings.

Any proceedings to assert common law marriage must begin not later than the second anniversary after the date the relationship ended.

When does “the relationship” end? What is the “relationship”?

When in doubt the broker should secure both signatures!

35

Water Rights

The concept of water rights has undergone dramatic changes over the past few years.

The Texas Commission on Environmental Quality (TCEQ) regulates every drop of water in the State.

Ground Water has become an estate in land, now defined as real property.

Water rights are now transferred from one landowner to another and may be a significant part of the negotiation upon sale.

The legislature even enacted laws to provide for value to be attributed to water rights in condemnation proceedings.

Particularly in large acreage transactions, the water rights are negotiated as aggressively as oil and gas rights.

In general terms, water rights fall into two categories, ground water and surface water.

36

Surface Water Rights

There have been three common-law theories of water rights:

Riparian Rights Prior Appropriation Littoral Rights

All water rights are held by the state.

37

Ownership of Waterways

The Texas Water Code specifies that the water of the ordinary flow, underflow, and tides of every flowing river, natural stream, and lake, and of every bay or arm of the Gulf of Mexico; and the storm water, flood water, and rainwater of every river, natural stream, canyon, ravine, depression, and watershed in the state are the property of the state.

The state may authorize the use of state water, which may be acquired by the process of appropriation.

Once the permit has been obtained, the right to use the state water under that permit is limited not only to the amount specifically appropriated, but also to the priority of purposes specified in the appropriation.

38

Ground Water

The majority of water in Texas is ground water, and is a real property interest.

Includes percolating water, underground flow, artesian water and well water.

Ground water is owned by the owner of the property with two exceptions: (1) the landowner only has the right to pump the water and (2) regulatory programs of underground water conservation districts.

The right to use the ground water by the landowner is the Rule of Capture, which means that the owner of the land can pump unlimited quantities of water from under the land.

It is also severable and can be reserved by the owner in a sale.

The ground water, however, is subject to state regulations.

39

Cemetery Lots

Texas state law requires that all cemeteries have a perpetual care fund for the administration and maintenance of the cemetery.

Perpetual care funds are established as charitable trusts, which are specifically exempt from the Rule against Perpetuities.

40

Questions for Discussion

1. List the eight debts under Article 16, Section 50 of the Texas Constitution that would allow the forced sale of a Texas homestead.

2. List the seven exceptions that may allow the forced sale of a Texas homestead that have been established by court decisions.

3. Texas is a community property state. What property may be held as separate property in Texas?

4. Texas is one of the two community property states that recognize the validity of common-law marriage. What are the requirements to form a marriage by common law in Texas?

5. With regards to surface water in Texas, define the concepts of riparian rights, littoral rights, and prior appropriation and identify who ultimately owns the surface water in Texas. Also identify who owns the ground water in Texas.