Comprehend property ownership interest in real estate. Find out types of real property and the difference between possessory interest and non-possessory interest.
Updated: 11/21/2023
Property Ownership Interest in Real Estate | Overview & Types
Table of Contents
- Interest in Real Estate
- Real Property Interest: Possessory
- Non-possessory Interests in Real Estate
- Lesson Summary
Frequently Asked Questions
What is the interest called when someone has had an ownership interest in a property for the last three years?
Typically, an ownership interest that is limited to a term of a specified number of years is called a leasehold. Leasheolds can be for a term of years, for a periodic tenancy with automatic renewal, and it can also be a tenancy at will or at sufferance.
What are the two main types of property interests?
The two main types of property interests in real estate are possessory and non-possessory rights. Possessory interests allow the owner to have possession and control of the land. Possessory interests include a fee simple, a life estate and a leasehold. Non-possessory interest include easements, profits and future interests.
Does someone with a home mortgage have ownership interest?
A landowner whose property is encumbered by a mortgage does indeed have an ownership in the land and a possessory interest. Typically the mortgagor is in possession of the property. The mortgagee also has a property right, but it is a future right to take possession only in the case of a default on the mortgage.
Table of Contents
- Interest in Real Estate
- Real Property Interest: Possessory
- Non-possessory Interests in Real Estate
- Lesson Summary
Property rights in real estate are like a bundle of sticks that can be further divided. Someone who owns a bundle of sticks can sell the entire bundle to another person, or he can sell each stick separately. In the same way, when someone owns a plot of land, the owner has a bundle of rights: the right to possess it now and into the future, to further subdivide it, to drive through it, to build on it, to cut down trees and sell them as lumber, to graze cattle there or to plant crops, to hunt wild animals and to harvest minerals from under the ground. Each of those rights can be sold or given as a gift or left in a will to someone else. All the rights may be transferred away together or only just some of them separately. Ownership of land is divided into possessory and non-possessory interests. Interest in real estate can be present or future. Some property interests are limited to the fulfillment of a particular purpose, such as passage through land to get to another property, or the right to hunt on the land or to extract minerals from the ground beneath it. In the following sections we will talk about a few specific real property interests that can be owned and transferred.
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Possessory interests in real estate are those interests that allow a person to occupy and take possession of the premises. When someone has a possessory interest in real estate, that person can live there, stay there and control who enters and who may not enter the property.
Possessory interests include the fee simple absolute, life estate and leasehold. In the following sections we will discuss each in turn.
The Fee Simple Interests
If property ownership is like a bundle of sticks, the fee simple absolute is like owning all the sticks. This is ultimate ownership of the land, as it subsumes and implies any and all rights to the land. The owner in fee simple absolute is free to have exclusive possession of the land, with absolute control over who else may enter. The fee simple absolute owner may build on the land, dig up its minerals, cut down its trees and use them, grow crops, graze cattle, and landscape the property in any way desired. The owner may do whatever is legal to do on land in that jurisdiction. This ownership is absolute and not limited in time, and upon death the owner is free to leave the property in a will to anyone. With a fee simple absolute, there are no limitations on what the owner may do.
There are two other fee simple property interests that are not absolute. They are called conditional estates. Each of them involves a condition, which once met, the land can be reclaimed by another owner. A fee simple determinable is a complete property ownership interest that terminates automatically if a specified condition ceases to be met. For instance, a property owner may deed a piece of real estate to the Sierra Club "for so long as this property continues to be used as a wildlife sanctuary." The Sierra Club then has possession and control over the property, but the moment the property ceases to be a wildlife sanctuary, the property will automatically revert to the previous owners or their estate.
A "fee simple subject to a condition subsequent" is similar to the fee simple determinable, except that it does not end automatically once the condition is met. If the donor were to deed the property to the Sierra Club "so long as no buildings are erected on the property", then if buildings are erected on the property, the donor or the donor's heirs may reclaim the land, if they so choose. But if no one does anything to reclaim the property, the Sierra Club can continue to own the property, despite having erected buildings there.
Life Estates
Another type of real property interest is the life estate. An owner in fee simple absolute can choose to deed land to one person for life, and the remainder, upon the death of that person, to someone else. For instance, if John Smith is married to his second wife Mary, but has a daughter Jennifer, from a previous marriage, and his home is separate property acquired before this marriage, he may want to leave the home to Mary as a life estate, and have the remainder go to Jennifer, upon Mary's death. In that case, Mary will have a life estate in the property, but she has no right to determine who will get it upon her death. John has already given what remains of the bundle of sticks after Mary's death to Jennifer.
Many people want to deed a life estate to their children and the remainder to the grandchildren, to ensure the property is not sold or given to someone else before the death of their children. However, the common law Rule in Shelley's Case provides that if property is deeded to one person with a remainder "to his heirs", that is just a fee simple absolute. A better practice is to name the people who are to receive the remainder, if the purpose is to make sure the life tenant does not dispose of the property before the heirs can inherit it.
Leaseholds
A leasehold is a possessory interest in real property that is limited in time for a particular duration. A lease can be in terms of weeks, months, years, or it can be at will or at sufferance. A lease does not transfer title to real estate, the way a deed does. Instead, it is a contract that spells out the rights and duties of each party. The landlord is the land owner and the tenant receives all rights temporarily through the landlord. During feudal times, the tenant owed the landlord an oath of fealty, but today most landlords will settle for being paid rent. Most leases are written contracts, but in every jurisdiction there are also laws concerning tenancies at will or at sufferance that do not involve a written document.
Leasholds can be divided into the following types:
- Estate for Years -- The duration of this type of lease is for a term of calendar units: days, weeks, months or years. The lease start and end dates are described, as specified by the property owner. The owner is called the landlord, and the person receiving the leasehold rights is the tenant.
- Periodic Tenancy -- This type of lease is for a definite period of time, but it renews automatically if not terminated by one of the parties. Such leases will typically run month-to-month unless either the landlord or the tenant gives the other party a notice of termination.
- Tenancy at Will -- In this leasing arrangement, either party can terminate the lease at will, although many state laws require them to give notice of one rent period before termination. In a tenancy at will there is usually a start date and a periodic payment of rent specified in the contract, but the end of the lease is left indeterminate.
- Tenancy at Sufferance -- Here the tenant has not received a written lease to be renewed, but the landlord "suffers" him to continue living there. This often happens when a lease ends on a specific date and the tenant does not move out and continues to pay rent.
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Non-Possessory interests in real estate are ownership rights that do not involve an immediate and exclusive right of possession. One such non-possessory right that we have mentioned above is the remainder interest after a life estate. This is called a future interest. As you may recall, John Smith was married to Mary Smith, but she was his second wife. He has a daughter named Jennifer from a previous marriage. John gives a life estate in his homestead to his wife Mary. He leaves the remainder to Jennifer. Mary gets a possessory interest for her lifetime. Jennifer receives a future interest in the property, which at the moment is non-possessory. But as soon as Mary dies, Jennifer will have a fee simple absolute, if that is what her father John had when he transferred his rights to the property. So a future interest in land is non-possessory until the condition happens that makes it a possessory interest.
However, there are other non-possessory interests in land that are not future interests. Three of those are easements, profits and licenses. We will discuss them in detail below.
Easements
An easement is just a right to pass through the land in order to get to another property that is accessible only through the property where the easement allows passage. For instance, if Mary's neighbor John has the right to pass through a gravel road on her land to get to his own property, then he has an easement on her land. He is not permitted to set up camp on the road. John's right is just to pass through. Easements are often specified in deeds. An easement can be sold or transferred to another. The owner of the land the easement runs through cannot terminate the easement. In other words, the easement is just one stick out of the bundle of sticks that comes with full ownership. Once it is transferred, it no longer belongs to the possessory owner of the property.
Profit as a Non-possessory Interest
A profit is a non-possessory right to harvest something off the land of another. For instance, if Mary has a profit allowing her to drill for oil on John's land, she has the right to enter the land and do what is necessary to drill for oil, but she is not allowed to do anything else while there. A profit is a right in property that can be further transferred. The owner of the property cannot terminate the profit. In other words, a profit is another of the rights an owner of a fee simple absolute has. But once transferred, it no longer belongs to the possessory owner of the land.
License as a Non-possessory Interest
A license is another non-possessory right, but unlike the easement and the profit, it is not transferrable to anyone else, and it can be terminated by the owner of the land. An example is a license to hunt. If John gives Mary a license to hunt for deer on his land for one season of deer hunting, Mary can use that license to enter the land and hunt deer that season. She cannot sell this right or leave it to her heirs in a will. She is more like a tenant and less like an owner. She also is not allowed to do anything but hunt deer while she is there.
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Ownership in real property is like a bundle of sticks. An owner who starts out with the entire bundle can sell or give away all of the sticks or just some of them, keeping the rest. Property interests in real estate can be divided into possessory interests and non-possessory interests. A fee simple absolute is like owning the entire bundle of sticks. It means the owner has possession and control of the land, the right to build on it, chop down trees, grow crops, hunt wildlife and harvest minerals. A life estate is the right to possess the land during one's lifetime, but the property reverts to someone else upon death. A leasehold is the right to possess the property for a specified term of years or months, and a tenancy at will is the right to stay on the property as long as both parties agree. An easement is a non-possessory right to pass through the land to get to some other property accessible only through this passage. A profit is a non-possessory right to harvest something from the land. The owner of the land in fee simple absolute has all those rights; but anything that can be owned can be sold or given away, or left in a will for someone else to inherit. Each of the rights in the bundle has value and can be disposed of separately.
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Video Transcript
Possessory Interests
When we talk about ownership interests in real property, we're actually talking about many different types of ownership. Ownership interests come in various forms and, depending on the type of interest, a landowner's rights may be limited. Let's start by exploring some of the possessory interests possible when owning land. A possessory interest is the intent and right of a party to occupy or exercise control over a particular plot of land. This is the type of ownership most of us think about when we think about land ownership. There are three main types of possessory interests: fee simple absolute, life estate, and leasehold. Let's start with the greatest possible interest in land.
Fee Simple Absolute
A fee simple absolute is an ownership interest that includes all rights in the land. Just as the name suggests, this type of estate represents absolute ownership of the land. A fee simple absolute owner may do whatever he or she chooses with the land. The owner can use the land, destroy the land, give the land to someone else, and take items from the land. The landowner is limited only by zoning and building codes or other governmental restrictions.
The landowner can deed or will the entire fee simple estate to another person. This means that, should the landowner die without a will, the fee simple absolute ownership will automatically pass to the owner's heirs. Sometimes, a fee simple interest isn't absolute. There are times when a fee simple interest is granted, but the interest comes with certain conditions. These are known as conditional estates. Let's look at two examples.
A fee simple determinable is an ownership interest that automatically ends when a specified event occurs. For example, let's say that I grant my farm to a local agricultural college. My deed says that I grant my land to the university 'as long as it is used for educational purposes.' This means that, if the university stops using the land for educational purposes, the grant automatically ceases, and I own the land again. Or, if I'm deceased, my heirs will own the land.
This is similar to a fee simple subject to a condition subsequent. In this type of ownership interest, a landowner may reclaim the land if a specified event occurs. Notice that, unlike the fee simple determinable, the ownership interest doesn't automatically terminate. For example, let's say that I grant my land to the university, but specify that 'if corn ceases to be grown on the land, I can reclaim the land.' So, if the university decides not to grow corn, I can reclaim the land, or my heirs may reclaim the land if I'm deceased.
Life Estate
Let's turn to another form of possessory interest. A life estate is a land interest that expires upon the death of a specified person. For example, let's say that I grant my land as a life estate to my stepsister Susie. This means that Susie can occupy, possess, and enjoy the property during her lifetime, just as if it were a fee simple. However, Susie's ownership interest in the land will automatically stop upon her death. Rather than passing to her heirs, the land will pass back to me. Or, if I'm deceased, the land will pass to my heirs. Susie can't will the property to another person.
Life estates aren't common, but this type of interest can be helpful for estate planning purposes. Let's say that I'm married to Marvin. I want Marvin to be able to live on and enjoy my land after my death, so I grant him a life estate. However, after Marvin's death, I want my land to go to my heirs, rather than Marvin's heirs. The life estate assures that the land will revert to me, or to my heirs, upon Marvin's death. If I granted Marvin a fee simple, then the land would go to Marvin's heirs upon Marvin's death.
Leasehold
The last type of possessory interest is called a leasehold estate. A leasehold, or lease, is an interest in real property that grants possession for a particular duration. The lease can last for one year, can last for many years, can be week-to-week, or can be month-to-month. The duration doesn't matter, as long as it's specified in some way. A leasehold doesn't grant actual title to the land. Therefore, the lease owner can't will the property to someone else. Rather than a deed or title, the lease owner will have a lease agreement that dictates the rights and obligations of both the lease owner and the property owner. The lease will terminate and the property owner will regain all rights if one or both parties violate a term of the lease agreement.
Leases are quite common. There are four main types of leases:
- Estate for years. In this type of lease, the duration of the lease is specified as a certain period using calendar time. The lease both starts and ends on a particular date, as set out by the property owner.
- Periodic tenancy. In this type of lease, the exact duration of the entire lease isn't specified, though the lease is for a definite period of time that automatically renews. These leases usually run month-to-month or week-to-week until either the lease owner or the property owner gives notice of termination.
- Tenancy at will. In this type of lease, either party can terminate the lease at any time and for any reason, though most states require that notice of termination be given to the other party. The lease start date is specified but the end date is indeterminate.
- Tenancy at sufferance. In this type of lease, a specified lease date has expired, but the tenant remains on the property. This type of leasehold begins as an estate for years, but then converts into a periodic tenancy. For example, I lease an apartment through January 1, but I fail to find another apartment by January 2. So, I remain in my current apartment and my lease converts to a month-to-month until I either sign a new lease with my current landlord or I terminate the lease by giving notice and moving out.
Future Interest
Now, let's take a look at a non-possessory interest. A non-possessory interest is an interest in real estate that doesn't include a current right to possess the land. There are several different types of non-possessory interests in real property.
One type of non-possessory interest is known as a future interest. As the name suggests, this type of interest is a legal right to receive full ownership of a property at some point in the future. The future interest becomes a current interest on a particular date or upon the occurrence of some event. For example, let's say that my will leaves my land to my stepsister Susie, but only after the death of my husband, Marvin. Susie holds a future interest in my land. She'll receive full ownership, but doesn't hold a current right to possess my land.
Sometimes, people use future interests for tax reasons. For example, let's say that I donate my land to the university, but with the condition that I'll continue to use the land for the rest of my life. I have a life estate in the land, and I can now claim a charitable tax deduction for my donation of the land, even though the university won't possess the land until my death.
Non-Possessory Estates
There are several other types of non-possessory interests in real property. Remember that a non-possessory interest is an interest in real property that doesn't include a current right to possess the land. Instead, a non-possessory interest includes the right of one person to use land that belongs to another person. A non-possessory interest holder doesn't have title to the land. The true property owner continues to fully own the land. There are three main types of non-possessory interests:
- The first is an easement. This type of interest means that one party has the limited right to use another party's land. For example, my neighbor might have an easement to use my private road, which runs across my land, in order to access her parcel of land.
- The second is a profit. This type of interest means that one party has a possessory interest in some aspect of another party's land. For example, let's say that my neighbor is a profit holder of the corn crops on my land. She may access my land and take the corn, even though she doesn't have title to my land.
- The third is a license. This type of interest means that one party has the right to access another party's land for a specific purpose. For example, let's say that my brother has a hunting license on my land. This means that he can access my land and hunt on it, even though he doesn't have title to my land.
Lesson Summary
Let's review. When we talk about ownership interests in real property, we're actually talking about many different types of ownership. Ownership interests can be possessory or non-possessory interests. A possessory interest is the intent and right of a party to occupy or exercise control over a particular plot of land. A non-possessory interest doesn't include a current right to possess the land. Some common possessory interests include fee simple absolute, life estate, and leasehold. Some common non-possessory interests include future interests, easements, profits, and licenses. It's important to know which type of ownership interest a party has because the type of ownership interest dictates the rights of the owner.
Learning Outcomes
At the end of this lesson, you'll have the ability to:
- Differentiate between possessory interests and non-possessory interests
- Describe the three types of possessory interests
- Compare and contrast fee simple absolute, fee simple determinable, and fee simple subject to a condition subsequent ownership interests
- Explain the four types of leases
- Define future interest
- Summarize the three main types of non-possessory interests
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Property Ownership Interest in Real Estate | Overview & Types
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