Absolute Auction

An auction in which (i) there is no fixed minimum price that limits bidding and (ii) the property is sold to the highest bid (regardless of how high or low that bid may be). The owner must sell at the winning bid, whether the dollar figure meets his/her expectations or not. If an owner expects to make $100,000 on the property, but the highest bid is $40,000, the owner must sell the property for $40,000 to that high bidder. Kentucky statutes require a “bonafide intention” when advertising and at the time of sale that ownership will be transferred to the highest bidder regardless of amount. In addition, Kentucky statutes require that the sale be “without reserve.” This means that the seller must specifically include an acknowledgement that neither he/she nor anyone acting on his/her behalf will bid or otherwise participate in the process of bidding.

Due to the finality of an absolute auction, it is essential that the auctioneer ensure that clear title is passed to the highest bidder. Some encumbrances such as easements, deed restrictions or property taxes will not prevent an absolute auction. However, unacceptable encumbrances, such as mortgages and other liens creating a security interest in the property, will prevent an absolute auction unless the holders of the same agree to release their interest. The holders of such unacceptable mortgage and lien encumbrances must sign the auction listing agreement, agreeing to release their claim to the property regardless of the final sales price. Such signatures then allow the auctioneer to pass clear title to the highest bidder.

Abstract of Title

A documentary summary regarding the history of a property’s title. Title Abstractors are persons who collect all documents relating to a piece of property. Such documents include: recordings, instruments, conveyances, interests, plats, deeds, proceedings, liens and encumbrances. Abstractors create a brief history of the documents affecting title to the property, but they do not give an opinion on the quality of the title. The documents and the brief history are then turned over to an attorney who reviews them. The attorney will either (i) render an opinion on the quality of the title; or, (ii) if the attorney works for a title insurance company, he/she will make the decision on whether to grant a title insurance policy on the property. In addition, mortgagees and purchasers of real property will often have an abstract prepared to show clear, good and marketable title.

Acknowledgement

A formal declaration made in the presence of an authorized officer, such as a notary public, by someone who signs a document and confirms that the signature is authentic. Examples of such declarations are: (i) the assertion of a factual basis for a claim (ii) the acceptance of responsibility and/or (iii) the receipt of something. A notary public will review the document/declaration, and thereafter certify that he/she knows or has verified the signer’s identity with sufficient evidence, that the signer was in his/her presence, and that the signer signed the document voluntarily and of his/her own free will. In addition, time and place (typically the county) of signature are often acknowledged on the document. Kentucky statutes require the words “acknowledged before me” within the notary certification of the acknowledgement.

Deeds of record often require such acknowledgements before a notary and must bear the notary’s signature, date, and the date the notary’s commission expires. An acknowledgement done for the purpose of transferring real estate requires additional language to the effect that a deed was executed for the purpose stated and, in the case of a non-individual (business entity), that the person signing has the authority to do so.

Act of God

Acts which are (i) unforeseeable (ii) unpreventable (iii) inevitable and (iv) caused by the forces of nature. Such acts cannot be prevented by due care and are irresistible, unexpected and unpredictable. For example, natural earthquakes, floods, lightning and/or hurricanes would qualify as acts of God.

Real estate contracts often have “Acts of God Clauses” which allow a party to default if the property is damaged by such acts. Generally, acts of God will not release an absolute contractual duty unless agreed upon and expressly stated in such a clause.

Addendum

An addition or supplement to a contract/document (a.k.a. a “rider” or “attachment”). For example, a rider or attachment to a contract may specify the type of financing a buyer must procure before purchase. Often times, documents in real estate transactions will reference addenda containing financing terms, required property inspections, interest calculations and/or acceleration of obligations. In addition, addenda may add, alter or delete terms. An addendum must either be signed or incorporated into an existing contract/document. To incorporate the addendum, there must be words of incorporation clearly manifesting that the addendum be part of the contract/document. These words should appear above the parties’ signatures.

Ad Valorem Tax

A yearly tax based on the value of the object being taxed. The tax is also known as the “property tax.” It is typically assessed by the Property Valuation Administrator and is based upon the total value of the property (100%). Cities, counties and school districts raise most of their tax revenue from ad valorem taxes imposed upon real estate.

Kentucky statutes require the elected Valuation Administrator to maintain lists of all real property and, for tax purposes, evaluate the property’s “fair cash value.” The “fair cash value” is the price the property would bring in at a fair and voluntary sale. This total value can be based on the price in the deed (if the property has changed hands), or by inspection or photographs of structures/improvements on the land and their dimensions. In order to perform an interior inspection of the property for tax/valuation purposes, the permission of the owner/resident must first be sought.

Adverse Possession

The acquisition of property by a person who claims ownership of the property by actual, notorious, exclusive, open, and hostile use for at least 15 years. Typically for such claims to be successful, claimants must take overt actions to place other co-tenants or owners on notice of such claim or intent. The notice must be such that an ordinarily prudent and diligent person would be put on notice. Adverse possession will sometimes circumvent the necessity of a deed for the transfer of property.

An Example: Anne owns a 10 acre track of land, and has posted “no trespassing” signs on it. She visits the property once a year on average. Bob moves onto the land, builds a small residence, and stays for over 15 years. Anne sees he is on the property, but generally does nothing about it. After 15 years, Bob would have a claim to the portion of the property he was occupying during that time under the theory of adverse possession. He likely put Anne “on notice,” as he was located on her property and was not technically permitted to be there. His possession was actual (i.e. he was on the property); notorious (i.e. against the wishes of Anne by virtue of her ownership and the no trespassing signs); exclusive (i.e. he alone resided on the property for an extended period); open (i.e. he did not hide the fact he was present on the property) and hostile (i.e. against the wishes of Anne).

Agency

A relationship in which an agent acts as a fiduciary for and on behalf of a principal. A fiduciary is one who owes another the duties of good faith, trust, confidence, disclosure, diligence, loyalty and candor. A fiduciary is also one who must exercise a high standard of care in managing the principal’s property or money. A principal is one who authorizes another to act on his/her behalf. Agency relationships are most typically seen in the form of employer-employee relationships, but can take other forms as well.

An agency relationship may be created by express or implied contract or by operation of law. In contract, it forms when there is an objective manifestation of mutual consent that the agent will act under the control of the principal and for principal’s benefit. Under operation of law, agency can arise without the intention of the parties involved through theories of estoppel or apparent agency. Additionally, if an act is performed by one who is not authorized by the principal to act as an agent, the act may later be accepted by the parties through ratification or adoption.

An Example: Real estate agents act as fiduciaries/agents for their clients, who are the principals. A real estate agent must, therefore, exercise all the duties that a fiduciary owes to a principal (see list above). Breach of any of these duties by a real estate agent will typically result in sanctions by the Kentucky Real Estate Association. A real estate agent should, therefore, take care to understand the intricacies of living up to such duties.

Agency Disclosure

Agents must abide by the fiduciary duties of loyalty and disclosure, which go hand-in-hand. The agent must be entirely loyal to the principal’s interests. Therefore, if any act or deal made by the agent (in his/her agency capacity) would benefit the agent, he/she must disclose this fact to the principal and the principal must agree to such a benefit. The rational behind this type of disclosure is that the duty of loyalty implies restraint from self-dealing.

The duty of disclosure also requires that all material facts be divulged by the agent to the principal. A material fact is considered any information which is important and would have influenced the principal’s decisions or opinions in relation to a transaction. For example, in a real estate transaction, a few material facts that an agent would likely have to disclose to his/her principal (client) would be: (i) information concerning the real property and improvements made thereto (ii) the identity of other parties involved in the transaction (iii) the role the real estate broker will play in the transaction and (iv) the contents of all pertinent documents—including sales contracts and listing information.

Agent

A person/representative who acts on behalf of, and for the benefit of, a principal who authorizes such action. An agent owes his/her principal the duties of good faith, trust, confidence, disclosure, diligence, loyalty and candor (a.k.a. “fiduciary duties”). An agent also must exercise a high standard of care in managing the principal’s property or money. The relationship between an agent and a principal is commonly referred to as “agency,” or as a “fiduciary relationship.”

Air Space Rights

Rights to control, use, or occupy all or a portion of the airspace above real property. For example, all floors above the ground floor in a condominium high rise would be three-dimensional air space to which the owners of condominium units would have rights. Historically, property owners had air space rights reaching to the heavens. However, modern law restricts ownership to that which the owner may reasonably put to use. Often taken for granted, such rights may be further restricted by zoning, eminent domain and governmental regulations for flight routes. Owners may restrict the use of their airspace, or may lease or sell such rights for the use of billboards or power lines. However, the owner should be wary of the surface use necessary for any such structures.

American Arbitration Association

A non-profit national association that maintains certified arbitrators to hear commercial disputes and provide alternative dispute resolution services. Because arbitration has become an increasingly popular alternative form of dispute resolution, and is often a mandatory clause in most real estate contracts, the AAA (American Arbitration Association) provides a valuable panel of arbitrators from which to choose.

Anchor Tenant

The main tenant of a commercial center. For example, a grocery store would likely be the anchor tenant for smaller surrounding shops (i.e. hair salons, movie rental stores) in a commercial center/strip mall. Larger commercial centers may have several anchor tenants surrounded by smaller boutique stores.

Annexation

Efforts on the part of an incorporated city or other municipality to expand its boundaries to include other specified areas. For example, the city of Louisville may annex surrounding suburbs or other unincorporated parts of the county into the city. Unincorporated suburbs often resist such a move because of increased taxes; while cities push for the increased land mass and tax base. State law governs such transactions and typically requires a public ballot by the city and the area to be annexed.

Annexation also means the point at which a fixture becomes a part of the real property to which it is attached. A fixture is a good that would pass in a real estate deed, but that retains its separate status as personal property (i.e. a stove, refrigerator, furnace, light fixture, etc.).

Apartment

A dwelling unit within a larger structure. Apartments generally consist of rental housing, and exist as part of a multi-family building or a complex with a common entrance and/or hallway. Apartments may run from one-room studios to several room units. Apartment buildings may vary from a one story buildings with few units to high-rise complexes with hundreds of units.

Appraisal

An estimate of the fair market value of property, often given in the form of an opinion by an appraiser. Appraisals may be used for several purposes, including (i) determination of the amount of hazard or risk insurance to carry on a property (ii) determination of a selling price for property (iii) valuation of property for tax purposes and (iv) differentiation of the value of land from other property improvements.

Appraiser

One who estimates the fair market value of land, and gives the estimate in the form of an opinion called an appraisal. Appraisers should be impartial and disinterested in order to determine a fair value. Often times, appraisers appear as experts in court. For example, an appraiser may testify as to the value of a property in an eminent domain case or in a faulty construction/breach of contract case.

Appurtenance

Something belonging to a larger whole. For example, a fence or fountain on a piece of property is likely an appurtenance belonging to the land. Typically, appurtenances add value and/or enjoyment to property.

Appurtenant Easements

An easement (i.e. generally, a right of way) created for the benefit for another tract of land. The easement runs with the benefited tract to any subsequent owners of the tract. This easement lies outside the plot lines of a tract of land, but is considered to be part of the same.

An Example: Anne owns tract A of property. Bob owns tract B of property. Bob’s property is connected to a public lakefront beach, while Anne’s is not. To reach the beach, Anne can either cross Bob’s lawn on a small backyard path, or drive two (2) miles to the nearest public beach entrance. Anne could ask Bob to make the pathway an appurtenant easement, which would be a benefit to Anne’s property, even though it lays outside her plot lines. This benefit would then pass to any subsequent owners of tract A.

Arbitration

A form of alternative dispute resolution outside the traditional court system. Such dispute resolution involves a neutral decision maker (a.k.a. an “arbitrator”), agreed upon by the parties, and a semi-formal process. Witnesses are presented and cross-examined, exhibits are presented, statements are made, and a decision is rendered. Arbitration is becoming more popular in sale and purchase contracts. Arbitrators’ decisions are final and not appealable to a court of law.

Arbitrator

A neutral decision maker who resolves disputes between parties by way of arbitration. Arbitrators’ decisions are final and not appealable. Local and national organizations such as the American Arbitration Association maintain lists of qualified arbitrators from which parties can choose. Often, local real estate contracts will require an arbitrator be approved by a local real estate association.

Arm’s Length Transaction

A transaction in which the parties are not closely involved or related, and are presumed to have equal bargaining power. Such transactions do not involve confidential relationships or fiduciary duties between the parties. The parties act for their own benefit and best interests. Transactions between relatives, or a corporation and its subsidiary, would not be arm’s length.

Asbestos

A material used for insulation in older buildings to generally wrap pipes, boilers, floor tiles and coat ceilings. Once lauded for its flame retardant properties, this material crumbles after aging, is highly carcinogenic and causes cancer when its particles are inhaled. As such, its use is highly restricted and the discovery of asbestos in a building will significantly decrease its property value due to the liability risk for personal injury. Removal of asbestos is expensive, but necessary.

Assessed Valuation

The value of property for tax purposes that an assessor or administrator gives and to which the tax rate applies.

Assessment

The amount of tax due on a property, factored by applying the current tax rate to the value of the property. Assessments are made for Ad Valorem taxes.

An Example: The tax rate is $1.00 for every $100 of value. Anne’s property is valued at $90,000. As such, she would be assessed a tax of $900.

Assign

The act of transferring one’s property or contractual rights to another. The person or party transferring the rights is known as the “assignor.” The person or party receiving the rights is known as the “assignee.” One typically assigns his/her rights relating to mortgages, leases and/or deeds.

Assignee

The person or party to whom property or contractual rights are transferred. Sometimes a contract may limit the type of assignee to whom property or contract rights may be transferred, within reasonable limits.

Assignment

A process whereby one party transfers his/her property or contractual rights to another.

Assignor

A person or party who transfers property or contractual rights to another. For example, one who gives away all his/her rights in a lease to another person is an assignor.

Assignment of Lease

The situation when a tenant transfers the entire unexpired remainder of his/her lease (including all rights and privileges) to another. This is distinguished from a sublease where only a portion of the lease term is transferred. When the transfer occurs, the new tenant acquires all of the rights and privileges of the original tenant, and the original tenant remains liable on the lease, unless released by the landlord.

Assignment of Rents Clause

A mortgage provision or separate contractual agreement that entitles the lender of the mortgage to collect rents from the mortgaged premises if the borrower defaults. Such a provision may be contained within a rider or addendum to the mortgage.

An Example: Anne, the owner of an apartment complex, obtains a mortgage on the property through Bank. Bank attached an addendum to the mortgage which included an assignment of rents clause. The clause states that in the case of default by Anne, the Bank can collect rent directly from the tenants of the complex.

At Will Employment

An employment agreement subject to the discretion of each party, so that each may be able to terminate the employment without cause. Most employment in Kentucky is considered “at will” employment.

Attorn

The act of agreeing to be the tenant of a new landlord. For example, when a landlord sells an apartment complex to another, current tenants may be required to “attorn” the new landlord. This term also refers to any transfer of something (money, property, goods, etc.) to another.

Attorney’s Opinion of Title

An opinion letter from an attorney regarding the value of title to a property. The basis of the opinion comes from information provided through a title abstract. Such a letter will generally point out any problem or encumbrance found in a title examination. A title insurance company typically uses the opinion letter in deciding whether to grant or deny an insurance policy on the property.

Attornment

A tenant’s agreement to remain the tenant of a new landlord who acquires the property.

Attractive Nuisance

An appealing and attractive feature on real property that is potentially hazardous and opens the owner to liability. Because the appealing feature attracts people to the nuisance, the owner must take extra care to avoid liability for harm to trespassers (especially foreseeable harm to small children).

An Example: Anne owns property containing a swimming pool in the back yard. There are several small children in the neighborhood who try to sneak into the pool when Anne is not paying attention. The pool likely constitutes an attractive nuisance, and Anne may need to install superior fencing to keep out trespassers.

Auction

A way to sell and market property in order to obtain the highest price by obtaining bids verbally or through other forms of communication. The property is sold to the highest bidder. Auctioning real property may require an auctioneer’s and a real estate license.

Auction Agreement

An agreement entered into between the owner of property and an auctioneer, providing that the auctioneer will hold the auction on agreed upon terms, (including payment of the auctioneer and the process of the auction).

Auctioneer

One designated to conduct an auction. Generally, this person must possess an auctioneer’s license and a real estate license. An auctioneer acts as the seller’s agent during the auction, and later acts as the purchaser’s agent after the auction is completed.