Easement Allowing for Ingress and Egress May Also Include the Ability to Install Utilities

by Michael J. Stewart

SUMMARY - An easement agreement that stated that the easement area could be used for "ingress and egress" gave the holder of the easement the right not only to use the easement for vehicular and pedestrian access, but also allowed for the installation of utility lines.  The court held that because the easement did not specify a limited purpose for the access, such as "for pedestrian and vehicular travel only," the phrase "ingress and egress" allowed the easement holder the right to install utility lines in the easement area.  The court, in supporting its decision, found that it would be proper to define the purpose of the easement generally to include access for anything that could conveniently be transported through the easement corridor and that would normally be used in connection with the property such as utility services. 

In the case of PARC Holdings, Inc. T/A PARC Development, L.P. v. Paul J. Killian and Bonita F. Killian, 785 A.2d 106 (Pa. Super. Ct. 2001), app. den. 796 A.2d 984 (Pa. 2002), the Superior Court of Pennsylvania decided that an easement agreement that simply provided for "ingress and egress" gave the holder of the easement the right to place utility lines in the easement area.  PARC Holdings, Inc. ("PARC") was a successor-in-interest to the approximately 46-acre tract of land (the "46-Acre Tract") that it purchased from Angela Glaros in 1998.  Ms. Glaros acquired the 46-Acre Tract in 1990 from Crest Development Company ("Crest").  In addition to the 46-Acre Tract, Crest also owned a contiguous parcel consisting of approximately seven acres (the "Seven-Acre Tract").  The Killians had, in the past, approached Crest and expressed an interest in purchasing the Seven-Acre Tract.  When Crest decided to sell the 46-Acre Tract to Ms. Glaros (predecessor to PARC), it also agreed to sell the Seven-Acre Tract to the Killians.  Prior to the sale of the 46-Acre and Seven -Acre Tracts, a survey was completed, and it was discovered that the 46-Acre Tract would be "landlocked."  Therefore, when Crest sold the Seven-Acre Tract to the Killians it reserved a 50-foot easement over the Seven-Acre Tract for "ingress and egress" to and from the 46-Acre Tract.  PARC, after purchasing the 46-Acre tract from Ms. Glaros, attempted to develop the land for residential homes.  In order to accomplish such development, PARC needed to extend utilities across the easement area.  The Killians opposed the extension of the utilities and PARC filed suit.   

The trial court found that PARC had the "right to install utilities over, under or through the subject easement" and "that the Killians [were] prohibited from stopping or interfering with [PARC's] installation of utilities through the easement."  The Killians appealed.  The appeals court affirmed the decision of the trial court finding that PARC did in fact have the right to install utilities.  In making its decision the court disagreed with the Killians' argument that the term "ingress and egress" was unambiguous and limited the use of the easement simply to physical access.  The court reasoned that if the ability to install utilities was to be precluded in the easement area that it should have been clearly specified.   

COMMENTS - Parties drafting easement agreements need to consider the exact uses that they intend to permit.  The permitted uses and prohibited uses need to be clearly specified in the easement agreement. The failure of a party to clearly specify the permitted and prohibited uses may mean that a court will make the decision for them. 

Payment of Franchise and Excise Taxes by "Family-owned" Limited Liability Entities

by Kirk Snouffer

Tennessee law was revised in 1999 to make limited liability companies, limited liability partnerships, and other noncorporate entities in which individual members or partners have no personal liability ("limited liability entities"), subject to the payment of franchise and excise taxes.  However, there is an exception to this rule for a "family-owned" limited liability entity if substantially all of the income of the entity is passive investment income.  Tennessee law defines "passive investment income" as gross receipts from dividends, interest, royalties, rents, annuities, and sales or exchanges of stock or securities, to the extent of any gain realized.  If at least two-thirds of the gross receipts of a family-owned limited liability entity in a given tax year consist of passive investment income, that entity will not be subject to payment of franchise and excises taxes.  The determination of whether an entity is subject to tax is made on year-by-year basis.

The definition of passive income does not include gains derived from the sale of real estate or any other investment (assets other than stock or securities).  Any gains realized upon a sale of real estate or other nonexempt items will be included in the entity’s gross receipts and may result in the entity being subject to franchise and excise taxation in the year of sale.  Owners of family entities with passive activity income should remember that the sale of real estate or other assets may cause the entity to have to pay Tennessee franchise and excise tax in the year of sale.

Recent Real Estate Legislation of Interest

by Mike St. Charles 

Residential Leases.  The Uniform Residential Landlord and Tenant Act was amended to allow a landlord to terminate a tenant's utilities if the lease agreement requires the utilities to be put in the name of the tenant and the tenant fails to do so within ten days after taking occupancy of the leased premises.  A landlord must exercise this right within 45 days after occupancy.  Please note that the Uniform Residential Landlord and Tenant Act only applies to a select number of counties in Tennessee, including Davidson, Hamilton, Knox and Shelby.  The text of the new law is:

66-28-521. If a written rental agreement requires the tenant to have utility services placed in the tenant's name and the tenant fails to do so within ten (10) days of occupancy of the rented premises, the landlord may have such utility services terminated if the existing utility service is in the name of the landlord. The provisions of this section shall not apply unless the landlord has exercised the right to terminate utility services within forty-five (45) days of occupancy by the tenant.

Real Estate Brokers.  Real estate licensees (brokers and agents) are protected against claims relating to surveys, termite inspections, home inspections and other home inspection expert reports as long as they do not sign the reports.  Of course, the law does not protect the licensee from the failure to disclose adverse facts of which the licensee has actual knowledge or for intentional  misrepresentations. 

The text of the new law is:

Tennessee Code Annotated, Section 66-5-208, is amended by inserting the following language as a new subsection (d) and by redesignating the remaining subsection accordingly:

(d)(1) No cause of action may be instituted against a real estate licensee for information contained in any reports or opinions prepared by an engineer, land surveyor, geologist, wood destroying inspection control expert, termite inspector, mortgage broker, home inspector, or other home inspection expert. A real estate licensee may not be the subject of any action and no action may be instituted against a real estate licensee for any information contained in the form prescribed by Tennessee Code Annotated, Section 66-5-210 [the Tennessee Residential Property Condition Disclosure form], unless the real estate licensee is signatory to such.

(2) Nothing in this subsection shall be construed to exempt or excuse a real estate licensee from making any of the disclosures required by Sections 66-5-206 [license's obligations to inform owner and purchaser of owner's disclosure obligations], 62-13-403 [licensee's duties to all parties] or 62-13-405 [written disclosure obligation] , nor shall it be construed to remove, limit or otherwise affect any remedy provided by law for such a failure to disclose.

Manufactured Housing.  Recent legislation provides a method of determining whether manufactured housing is considered part of the real estate. The law provides for the filing of an affidavit, that the affidavit must be signed by all parties with a legal ownership interest in the manufactured housing and the real estate stating whether the improvement has or has not become a fixture. 

The text of the law regarding the form of affidavit is:

Section 55-3-138. (a) If a manufactured home is affixed to a parcel of real property, as provided in the affidavit of affixation, and the legal ownership of the manufactured home and real property is identical, the owner may surrender the certificate of the title of such manufactured home to the Department of Safety for cancellation by providing the following documentation:
(1) The certificate of the title to the manufactured home, or each separate certificate of title if the manufactured home consists of more than one (1) unit, duly endorsed or otherwise showing the release of any lien holders noted on the certificate of title; or if the manufactured home is a new home not covered by a certificate of title, the manufacturer's statement or certificate of origin;
(2) A copy of the deed or other instrument of conveyance of legal ownership to the real property to which the manufactured home has become affixed conveying a fee simple or other legal ownership interest in the subject real property and which has been certified by the office of the register of deeds of the county in which the real property is located; and
(3) A certified copy of an affidavit of affixation executed by all persons who have such a legal ownership interest in the manufactured home and the real property to which the manufactured home has become affixed stating that the manufactured home is affixed to the real property described in the deed or other instrument which has been duly recorded in the office of the register of deeds of the county in which the real property and manufactured home is located.
(b) The affidavit of affixation shall contain the following information:
(1) The names of all of the legal owners of the manufactured home and real property to which the manufactured home and real property to which the manufactured home has become affixed;
(2) The year built, manufacturer's name, model name or model number, serial number, length and width of the manufactured home;
(3) The physical address of the real property to which the manufactured home has become affixed;
(4) The legal description of the real property to which the manufactured home has become affixed;
(5) A statement that the manufactured home is to be taxed as an improvement to the real property;
(6) The name and mailing addresses of any lien holders holding consensual security interests in the manufactured home or whose liens have been noted upon any certificate of title covering the manufactured home;
(7) The decal number of the permit decal affixed to the manufactured home by virtue of Section 68-126-406 or any successor statute, indicating that the manufactured home has been set up in accordance with the uniform standards code adopted in Title 68, Chapter 126, Part 2, or if no decal has been affixed to the manufactured home, a statement that:
(A) All permits required by applicable governmental authorities have been obtained;
(B) The foundation system for the manufactured home complies with all laws, rules, regulations and codes and manufacturer's specifications applicable to the manufactured home becoming a permanent structure upon the real property; and
(C) The wheels and axles have been removed.
(8) A statement that the manufactured home is permanently connected to a septic or sewer system and other utilities such as electricity, water and gas;
(9) A statement of the preparer of the affidavit of affixation as required by Section 66-24-115 or any successor statute; and
(10) Due acknowledgement of the signature of each affiant as required by Title 66, Chapter 22 or any successor statute.
Any affidavit of affixation containing the foregoing shall be recorded by the appropriate county register of deeds. A copy of the affidavit shall be filed with the assessor of property in order to assist in locating and identifying manufactured home for property tax purposes.
(c) Recordation of the affidavit of affixation containing the terms set forth in subsection (b) shall be prima facie evidence that the manufactured home has become affixed to the real property as an improvement to real property and shall satisfy the requirements of 11 USC Section 1322(b)(2) or any successor statute, to the extent the manufactured home constitutes the owner's principal residence.

Title Insurance and Quitclaim Deeds

by Mark Turner

Tennessee imposes a tax on the transfer of real property.  The tax is equal to $3.70 per $1,000 of value.  Thus, the transfer of real property with a fair market value of $300,000 would result in a tax of $1,110.  The law provides for certain exceptions to the imposition of the tax.  If a quitclaim deed is used instead of a warranty deed, the tax is based on the actual consideration paid for the transfer of the real property and not the fair market value of the property.

A quitclaim deed simply passes to the grantee whatever title the grantor has in the property, without any warranty of title.  Quitclaim deeds are often used in estate planning and in business planning involving related entities.  For example, parents may transfer real property to a family limited partnership for estate planning purposes, or a parent corporation may transfer real property to a subsidiary corporation for business planning purposes.  In each of these situations, a quitclaim deed may be used.

While the use of a quitclaim deed may eliminate or reduce the transfer tax, it may present a problem with respect to title insurance coverage.  If a title problem is discovered after the property has been transferred by a quitclaim deed, the grantee will have no claim against the grantor, because the quitclaim deed contains no warranties of title.  In essence, the grantee takes title to the property on an "as is" basis.  Even if one of the former owners had title insurance, the current owner may be out of luck.  The insurance company may be able to avoid any liability under the former owner's policy, even if the title is defective, because the new owner only received the title the former owner had to the property.

The risk that a new property owner assumes by taking title pursuant to a quitclaim deed can sometimes be mitigated by obtaining title insurance.  Some title insurance companies will issue an endorsement to an existing policy when transfers are between or among related parties.  However, some title insurers will not issue an endorsement so a new owner may have to obtain a new title insurance policy.  The premium for the new policy could exceed the amount of transfer tax saved by using a quitclaim deed.

SUMMARY:  The use of a quitclaim deed for estate planning and related party transfers is an effective method of reducing the cost of the transaction by avoiding the payment of a transfer tax on the fair market value of the property.  However, the use of a quitclaim deed may adversely affect title insurance on the property.  If title insurance is a consideration in the transaction, the parties will need to consult the title insurance agency and obtain either an endorsement or a new title insurance policy.  If a new policy is obtained, the cost of the new policy should be compared against the payment of a transfer tax using a warranty deed.

If you have questions about these articles or any other real estate matters, please contact a member of our Real Estate Practice Group.