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© Cengage Learning 1
CHAPTER 2
REAL ESTATE LAW and SECURITY
INSTRUMENTS
OBJECTIVES OF CHAPTER
Upon successful completion of this chapter, students should be able to:
Define real property, personal property and fixture.
Distinguish between freehold and leasehold estates and identify
four types of freehold estates.
Describe three classifications of limited rights to real estate.
Explain five forms of joint or concurrent ownership.
Describe eight methods of voluntary and involuntary transfer of
land.
Distinguish between actual notice and constructive notice of
recording.
List the components of a valid mortgage instrument.
Distinguish between a mortgage and a deed of trust.
Explain how to change a mortgage and note.
© Cengage Learning 2
I. Introduction
A. Law and real estate inseparable
B. Awareness of law necessary for all
parties
II. English Common Law
A. Feudal system
B. Allodial system
III. Principles of Real Estate Law
A. Types of estates
1. freehold
2. Fee simple absolute
3. Defeasible fee simple
4. Fee tail
5. Life estate and legal life estates
6. Leasehold
B. Limited interests in real estate
1. Easement
2. Covenant
IV. Types of Ownership
A. Joint tenancy
B. Tenancy by the entirety
C. Tenants In common
D. Community Property
E. Tenancy in partnership
V. Transfer of Land
A. Voluntary transfers
B. Involuntary transfers
VI. Types of Deeds
A. Definitions
1. Essential elements of a deed
B. Recording of the Deed
1. Actual notice
As always, covering the history can be an interesting way
of explaining how our laws evolved. Try not to skip the
history sections as most instructors would- people tend to
engage.
It is important to understand how each type of estate
differs when preparing mortgages. Each state has its own
nuances, but students should at the very least know
fundamental differences (for an example the difference
between freehold and leasehold).
Types of ownership are the same in all states. These
should be covered in detail as they are used in all aspects
of residential real estate.
The essential elements of a deed are important. If all the
elements are not present then it may be null and void. A
sample deed is in the text and should be covered as an
example.
Teaching Tips
© Cengage Learning 3
SUGGESTED TRUE/FALSE QUIZ
1. Real estate law in the U.S. is
2. Constructive notice
3. Race statute
VII. Mortgage Law
A. Historical development
B. Equity of Redemption
VIII. U.S. Mortgage Law: Lien Theory vs. Title Theory
A. Mortgage Debt: The Note
B. Provisions of the Note
C. Security Interest
D. The mortgage instrument
E. Requirements for a mortgage
F. Deeds of Trust
G. Clauses to protect the rights of parties
1. Payment Clause
2. Prepayment Clause
3. Acceleration Clause
4. Default
IX. Foreclosure and Redemption
A. Equitable Right of Redemption
B. Foreclosure
1. Judicial proceedings
2. Power of sale
3. Strict foreclosure
4. Entry and possession
5. Deed in lieu
6. Statutory Right of Redemption
7. Deficiency Judgment
X. Transfers of mortgaged real estate
A. Free and clear
B. Subject to the mortgage
C. Assumption of the mortgage
XI. Changing a Mortgage
A. Assignment
B. Modification
C. Release of Mortgage
Discuss lien theory v. Title theory as it does affect
performance of a foreclosure action. More states on the
West Coast use Title Theory, while the East Coast prefers
Lien Theory.
The instructor should review the theory used for the
specific state where he/she is teaching.
Again, the a review of the Note and Mortgage in the book
will help explain the sections in each instrument. The class
should know which document contains different important
covenants, for example the interest rate, the terms of the
loan, default, escrows, etc.
The foreclosure process is a big topic and the timeline
should be reviewed at least loosely. Each state is different
but the Administration has created guidance as to how
lenders and consumers should handle the process.
The instructor might find it useful to take current, very
important events from the local news to use for
discussions.
© Cengage Learning 4
based upon the Constitution of the
U.S
2. The Feudal System of Land Tenure
never had any application in this
country.
3. The allodial system recognizes that an owner of real estate has title irrespective of
the sovereign and thus owns no duty to the sovereign.
4. When people talk about their ownership of land, they are legally talking about the
type of estate they have in real estate.
5. Fee Simple Absolute is the greatest interest a person can have in real estate and it
excludes any other interest.
6. A life estate is a freehold estate like the fee simple absolute but it is not
inheritable.
7. The most common type of joint ownership of real estate is tenants in common.
8. Community property is the law in all 50 states.
9. An involuntary conveyance occurs when a legal owner of real state loses title
contrary to the owner’s intention.
10. All state have a “race statute” that dictates that first of two innocent parties to
record will be protected.
11. A husband and wife typically own property as Tenants by the Entirety
© Cengage Learning 5
12. Two essential elements of a deed are the Description of real estate and the
signature of the grantee.
MULTIPLE CHOICE QUESTIONS. More than one answer may be correct –
select all correct answers. (Correct answers are italicized.)
1. How may more than two people take legal title to real property?
a. Tenants in Common
2. Eminent domain, adverse possession and foreclosure are all examples of:
d. Government conspiracy
3. An easement is
a. a covenant
© Cengage Learning 6
4. Which of the below are requirements for a valid mortgage instrument?
a. Interest rate
5. A prepayment clause
a. Is an acceleration clause
SUGGESTED SHORT ESSAY QUESTIONS.
1. If A sold land to B but B failed to record and C bought the same land
and recorded, what factor determines whether or not C is the rightful
owner?
ANSWER: The protection of C’s interest would depend on whether
or not there was actual notice. If C knew the land had already been
sold, and purchased it anyway, B would be the rightful owner. If C
© Cengage Learning 7
2. Explain the difference between the promissory note and the mortgage
instrument. What information must be included in a valid mortgage
instrument?
ANSWER: The promissory note is evidence of the borrower’s debt.
It sets forth the amount due, the interest rate, and payment schedule.
The mortgage instrument secures the debt by creating a lien in favor
3. If both security agreements are allowed in a jurisdiction, would using
a deed of trust, instead of a mortgage, be more advantageous to the
mortgagor or mortgagee? Why?
© Cengage Learning 8
ANSWER: A deed of trust favors the mortgagee. Since title to the
real estate has already been conveyed to a trustee, the lender can
4. Why would a mortgagor choose to deed the real estate to the lender in
lieu of foreclosure? What factors must a mortgagee weigh before
accepting the deed?
ANSWER: The mortgagor would not be subject to the embarrassment
of a foreclosure suit or be liable for a deficiency judgment. The
ANSWERS TO ORAL DISCUSSION POINTS
The discussion points at the end of each chapter are intended for
oral discussion in class. Suggested answers/points to emphasize for
the questions are found below.
© Cengage Learning 9
1. What is the term that is used in law to describe, “the greatest interest a
person can have in real estate”? Why is this interest not an absolute interest?
ANSWER: Every type of ownership has restraints or limitations on it. It
may be subject to easements, eminent domain, or adverse possession. The
2. What is a “conditional fee”? Give an example of how this transaction could
occur.
ANSWER: A freehold estate, which is similar to a fee simple absolute but
minus a "stick" (or a right) from the bundle of rights, is a conditional fee
3. What is a “legal life estate”? Do they exist today?
ANSWER: A life estate is a freehold estate like the fee simple absolute and
© Cengage Learning 10
The creation of a life estate is a tool often used in estate planning and is a
4. What is the most common form of joint ownership today in the United
States?
ANSWER: Ownership in land can be and usually is held by more than one
person. The most common type of joint or concurrent ownership is joint
5. What are the essential elements of deed that will allow for a valid transfer of
real estate?
ANSWER: All states have a law known as a statute of frauds requiring
written transfers of real estate. Today, technical words are not needed in a
© Cengage Learning 11
6. Identify the various means of mortgage foreclosure. Which exists in your
state?
ANSWER: The four modern methods of foreclosure, depending on the law
