Fee Simple Ownership In Real Estate: What It Means And How It Impacts Homeowners
Buying real estate is always a risk, so it’s important to take many precautions when doing so. One thing to keep in mind is the importance of a clear title. Fortunately, this doesn’t come up in most U.S. home sales, because most American homeowners own their properties in fee simple absolute.
Let’s take a closer look at what “fee simple” means in the context of real estate and the effect the ownership rights it provides has on those who buy or sell property.
What Is Fee Simple Ownership?
In English law, fee simple ownership is a form of freehold ownership, in which land can be owned in common-law countries. Fee simple ownership is the highest possible ownership that one can have in real estate.
To further define the origins of the term, the word “fee” is derived from the word “fief,” meaning a feudal landholding. Feudal land tenures existed in England and involved a tenant and an overlord who were both engaged in a symbiotic relationship. This relationship meant that both sides had duties and services to provide to the property or the other person.
What Is Fee Simple Absolute Ownership?
The best form of real property ownership is fee simple absolute, sometimes called a freehold, which means that the owner or owners can do whatever they like with the property, subject only to encumbrances like liens, or local guidelines, such as zoning, taxation or criminal laws. Some examples of zoning limits are operating a retail store from a house strictly zoned as residential, and failure to pay local property taxes.
Fee simple absolute properties can be sold, developed or bequeathed as the owner sees fit. The good news is that the majority of homes being bought and sold fall into this category.
Fee Simple Vs. Fee Simple Absolute Properties
Sometimes the terms “fee simple” and “fee simple absolute” are used interchangeably, but be aware that legally – albeit rarely – there can be a slight difference between them.
Fee simple absolute owners of real estate can convey properties to heirs, but conditions are put in place that ensure the original owner’s wishes are respected. Let’s look at an example. An owner bequeaths an estate to his or her child on the condition that the child marries by the age of 30. The parent was a fee simple absolute owner, but the child is only a fee simple owner until the marriage takes place. If the child seeks to sell the property before their 30th birthday, they cannot convey the property in fee simple absolute to the potential buyer. Be warned that title searches from a title insurance company won’t necessarily protect the buyer from future claims by the estate or other heirs.
Fee Simple And Encumbrances
An encumbrance is a claim against a property that’s made by someone who isn’t the property's owner. As mentioned above, homeowners will most commonly come across encumbrances in the form of liens as well as easements, encroachments and deed restrictions, and some of these can have an effect on the fee simple rights of a homeowner.
For example, if a fee simple estate owner has a neighbor who has built a structure or put in a landscaping feature that goes over their property line, they are having their ownership rights encroached upon and are being prevented from having complete control over their own property. Properties encumbered by mortgage liens, on the other hand, will only be in that state until the mortgage is paid in full. Liens can also be imposed for failure to pay for improvements to the property (a mechanic’s lien) or taxes (a tax lien).
Encumbrances appear in title searches, so it’s imperative to make sure the title is clean, especially if you’re buying or selling a house.
Fee Simple Vs. Leasehold
When it comes to comparing fee simple and leasehold ownership, there are several key distinctions for homeowners to keep in mind.
Leasehold ownership occurs when a landowner enters into an agreement called a ground lease with a lessee. Leaseholds give lessees the right to occupy land, subject to the terms of the lease. The lease becomes an asset of the lessee or tenant, especially in long-term lease situations, but will never create an ownership in the property. Owners or landlords may limit uses of the property in a lease. For example, landlords can restrict pet ownership by tenants.
Condos, townhouses or co-ops – all common in large cities like New York City – are different from single-family houses, which are almost always owned in fee simple. The land beneath these structures is generally not owned by the condo or townhouse owner.
Fee Simple Ownership Vs. Other Ownership Types
Let’s define some other types of property ownership and see how they compare to fee simple estates.
- Fee simple defeasible ownership: When the ownership is dependent on specific conditions, and the contract is written with conveyance to show intent to transfer the property. If these specific conditions are not met, the property may be returned to the grantor.
- Fee simple determinable ownership: Similar to fee simple defeasible ownership, but the ownership interest automatically ends if the specific conditions laid out are or are not met, and the property immediately reverts back to the grantor.
- Fee simple ownership subject to condition subsequent: Similar to fee simple ownership, but it has a condition attached and is followed by a right of entry.
- Fee tail: When property owned in fee simple defeasible or fee simple subject to condition subsequent has been bequeathed to heirs generations ago.
- Life estate: When ownership rights last for the duration of the property owner’s lifetime and revert or are passed to another individual upon the owner’s death.
These types of ownership could give rise to claims of property ownership today. However, it’s important to note that these are relatively unusual cases of property ownership, and they can get very complicated and messy. Speak to a real estate attorney immediately if any of these ownership types affect a property you’re interested in buying.
The Bottom Line
If you’re a potential real estate investor looking to buy property, it’s important to remember the topics we covered today and beware of variations in state law. You should always make sure that the title is clear and reflects that the party selling the property owns it in fee simple absolute.
It’s also important to understand that experienced property attorneys are crucial to advising in complicated real estate situations. If you still have questions about property ownership or buying property, speak with one of our Home Loan Experts today!